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INVESTORS CAPITAL HOLDINGS LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
Management's Discussion and Analysis reviews our consolidated financial
condition as of December 31, 2011 and March 31, 2011, the consolidated results
of operations for the three and nine months ended December 31, 2011 and 2010
and, as appropriate, factors that may affect future financial performance. The
discussion should be read in conjunction with the condensed consolidated
financial statements and related notes included elsewhere in this Form
10-Q. Unless context requires otherwise, as used in this Management's Discussion
and Analysis (i) the "current period" means the three and nine months ended
December 31, 2011, (ii) the "prior period" means the three and nine months ended
December 31, 2010, (iii) an increase or decrease compares the current period to
the prior period, and (iv) non-comparative amounts refer to the current period.
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act. Forward-looking statements relate to expectations, beliefs,
projections, future plans, strategies, anticipated events, trends and other
matters that are not historical facts and may include words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," "will,"
"should," "may," and other similar expressions. These forward-looking statements
reflect our current views about future events and are subject to risks,
uncertainties and changes in circumstances that might cause future events,
achievements or results to differ materially from those expressed or implied by
the forward-looking statements. Readers are directed to discussions of risks and
uncertainties that may be found in this report and other documents filed by the
Company with the SEC. We specifically disclaim any obligation to update or
revise any forward-looking information, whether as a result of new information,
future developments or otherwise.
OVERVIEW
We are a financial services holding company that, through our subsidiaries,
provides brokerage, investment advisory, insurance and related services. We
operate in a highly regulated and competitive industry that is influenced by
numerous external factors such as economic conditions, marketplace liquidity and
volatility, monetary policy, global and national political events, regulatory
developments, competition and investor preferences. Our revenues and net
earnings may be either enhanced or diminished from period to period by these and
other external factors.
OUR BUSINESS
We operate primarily through our subsidiary, ICC, as a broker-dealer and,
doing business as ICA, as a registered investment advisor, with a national
network of independent financial representatives.
Broker-Dealer Services
We provide broker-dealer services in support of trading and investment by our
representatives' customers in securities, including, without limitation,
corporate equity and debt securities, U.S. Government securities, municipal
securities, mutual funds, limited partnerships and other alternative
investments, variable annuities and variable life insurance. We also provide
related services such as market information, Internet brokerage, portfolio
tracking facilities and records management.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
Investment Advisory Services
We provide investment advisory services, including asset allocation and
portfolio rebalancing, for our representative's customers through ICA.
Recruitment and Support of Representatives
A key component of our business strategy is to recruit well-established,
productive representatives who provide superior service to their
clients. Additionally, we assist our representatives in developing and expanding
their business by providing a variety of support services and a diversified
range of investment products for their clients. We focus on providing
substantial added value to our representatives' practices, enabling them to be
more productive, particularly in high margin lines such as advisory services and
brokerage.
Support provided to assist representatives in pursuing consistent, profitable
sales growth takes many forms, including automated trading systems, targeted
financial assistance and a network of communication links with investment
product companies. Regional and national conventions provide forums for
interaction to improve product knowledge, sales and client satisfaction. In
addition, we provide our representatives with programs and tools to grow their
businesses both through new client acquisition and advancement of existing
client relationships. These programs enhance our ability to attract and retain
productive representatives.
OUR PROCESS
Online Brokerage
Registered representatives have direct market access to submit security
transactions for their clients through the use of an online brokerage platform
for trade execution serviced by Pershing acting as our clearing firm.
Check and Application
Check and application revenue is obtained through a process where a check and
a product application is delivered to us for processing that includes principal
review and submission to the variable annuity, mutual fund, direct participation
or other investment product company. Investments in technology are facilitating
our migration over time from a paper intensive to a more paperless process. This
shortens the transaction cycle, reduces errors and creates greater efficiencies.
Bond Brokerage
Our fixed-income brokerage desk uses a network of regional and primary dealers
to execute trades across a broad array of fixed income asset classes. The desk
also utilizes dealer-only electronic services that allow the desk to offer
inventory and to execute trades. Our fixed income traders work with our
representatives to develop portfolios for clients.
Asset Allocation
Asset allocation services are made available through ICA. Our services include
the design, selection and rebalancing of investment portfolios on behalf of our
representatives' clients. We also provide tools, services and guidance that
enable our representatives to provide these investment services directly to
their clients. These services, for the most part, are conducted through our
online brokerage platform. Other allocation services are performed directly by
fund companies.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
CRITICAL ACCOUNTING POLICIES
In General
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"). The Company believes that of its significant accounting policies and
litigation and regulatory matters to the Company's condensed consolidated
financial statements contained herein), those dealing with revenue recognition,
allowance for doubtful accounts receivable, taxes and accrual of legal expenses
involve a particularly high degree of complexity, uncertainty and judgment. Our
accounting policies require estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in the condensed
consolidated financial statements. By their nature, estimates involve judgment
based upon available information. Actual results or amounts can and do differ
from estimates and the differences can have a material effect on the condensed
consolidated financial statements. Therefore, understanding these policies is
important to understanding the reported results of operations and the financial
position of the Company.
Off Balance Sheet Risk
We execute securities transactions on behalf of our customers on a
fully-disclosed basis. If either the customer or a counter-party fails to
perform, we, by agreement with our clearing broker, may be required to discharge
the obligations of the non-performing party. In such circumstances, we may
sustain a loss if the market value of the security is different from the
contract value of the transaction. We seek to control off-balance sheet risk by
monitoring the market value of securities held or given as collateral in
compliance with regulatory and internal guidelines. Pursuant to such guidelines,
our clearing company requires that we reduce positions when necessary. We also
complete credit evaluations where there is thought to be credit risk.
Reserves
We record reserves related to legal proceedings in "accrued expenses" in the
condensed consolidated balance sheet. The determination of these reserve amounts
requires significant judgment on the part of management. Management considers
many factors including, but not limited to: the amount of the claim; the amount
of the loss in the client's account; the basis and validity of the claim; the
possibility of wrongdoing on the part of an employee or representative of the
Company; previous results in similar cases; and legal precedents. Each legal
proceeding is reviewed with counsel in each accounting period and the reserve is
adjusted as deemed appropriate by management. Any change in the reserve amount
is recorded in the condensed consolidated financial statements and is recognized
as a charge/credit to earnings in that period. The assumptions made by
management in determining the estimates of reserves may be incorrect and the
actual costs upon settlement of a legal proceeding may be greater or less than
the reserved amount. See "Note 6, Litigation and Regulatory Matters".
KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT
Management periodically reviews and analyzes our financial performance across
a number of measurable factors considered to be particularly useful in
understanding and managing our business. Key metrics in this process include
productivity and practice diversification of representatives, top line
commission and advisory services revenues, operating expenses, legal costs,
taxes, earnings per share and adjusted EBITDA.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
PRODUCTIVITY OF REPRESENTATIVES
Management believes that improving the overall quality of our independent
representatives is a key to achieving growth in revenues and earnings. We
believe that upgrading the business practices of our representatives not only
grows revenue, but assists in limiting the cost of overhead functions and
representative noncompliance. We strive to continually improve the overall
quality of our force of representatives by:
· assisting representatives to improve their skills and practices,
· recruiting established, high quality representatives, and
· terminating low quality representatives.
A key metric that we use to assess the average quality of our producing
(non-staff) representatives is per capita rep-generated revenue based on a
rolling 12-month period. Data for the 12-month periods ended December 31, 2011
and 2010 are presented below:
Twelve months ended Increase/ % Increase/
December 31, December 31,
2011 2010 decrease decreaseRep-generated revenue:
Commission $ 65,164,622 $ 66,469,044 $ (1,304,423 ) -2.0 %
Advisory 16,016,335 14,671,427 1,344,908 9.2 %
Other fee income 720,160 1,113,314 (393,154 ) -35.3 %
$ 81,901,116 $ 82,253,785 $ (352,669 ) -0.4 %
Number of producing representatives (1) 480 582 (102 ) -17.5 %
Average revenue per representative $ 170,627 $ 141,330
$ 29,298 20.7 %
(1) Number of representatives does not include terminated
representatives.
The 20.7% growth in per capita rep-generated revenue reflects organic revenue
growth and market appreciation, and continued recruitment of new representatives
with higher levels of production complimented by periodically divesting
non-producing and non-profitable registered representatives.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010
RESULTS OF OPERATIONS
Percentage of Revenue Percent
Quarter Ended December 31, Quarter Ended December 31, Change
2011 2010 2011 2010 2011 vs. 2010
Revenue:
Commissions $ 14,404,727 $ 17,015,065 75.7 % 79.4 % -15.3 %
Advisory fees 3,797,760 3,721,341 20.0 % 17.4 % 2.1 %
Other fee income 567,444 528,451 3.0 % 2.5 % 7.4 %
Other revenue 265,766 161,400 1.4 % 0.8 % 64.7 %
Total revenue 19,035,697 21,426,257 100.0 % 100.0 % -11.2 %
Expenses:
Commissions and advisory fees 14,751,775 16,600,763 77.5 % 77.5 % -11.1 %
Compensation and benefits 2,031,820 2,157,884 10.7 % 10.1 % -5.8 %
Regulatory, legal and
professional services 721,595 549,546 3.8 % 2.6 % 31.3 %
Brokerage, clearing and
exchange fees 471,905 481,837 2.5 % 2.2 % -2.1 %
Technology and communications 326,890 311,178 1.7 % 1.5 % 5.0 %
Marketing and promotion 170,039 406,945 0.9 % 1.9 % -58.2 %
Occupancy and equipment 208,095 232,802 1.1 % 1.1 % -10.6 %
Other administrative 354,725 366,757 1.9 % 1.7 % -3.3 %
Interest 10,527 3,472 0.1 % 0.0 % 203.2 %
Total expenses 19,047,371 21,111,184 100.2 % 98.6 % -9.8 %
Operating (Loss) income (11,674 ) 315,073 -0.1 % 1.5 % -103.7 %
Provision (benefit) for income
taxes (440,160 ) (30,601 ) -2.3 % -0.1 % 1338.4 %
Net income $ 428,486 $ 345,674 2.3 % 1.6 % 24.0 %
Adjusted EBITDA $ 250,524 $ 449,892 1.3 % 2.1 % -44.3 %
Adjustments to conform Adjusted EBITDA to GAAP
Net income:
Income tax benefit 656,705 384,448 3.4 % 0.0 % 100.0 %
Interest expense (10,527 ) (3,472 ) -0.1 % 0.0 % 203.2 %
Income tax expense (216,545 ) (353,847 ) -1.1 % -1.7 % 38.8 %
Depreciation and amortization (97,995 ) (89,360 ) -0.5 % -0.4 % 9.7 %
Non-recurring professional
fees (133,818 ) 0 -0.7 % 0.0 % N/A
Non-cash compensation (19,858 ) (41,987 ) -0.1 % -0.2 % -52.7 %
Net income $ 428,486 $ 345,674 2.3 % 1.6 % 24.0 %
ADJUSTED EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA"), as
adjusted by eliminating other non-cash expense such as stock-related
compensation, gains or losses on sales of assets, and various non-recurring
items such as expenses incurred in connection with a secondary stock offering
that closed on August 2, 2011 ("adjusted EBITDA"), is a key metric we use in
evaluating our financial performance. We consider adjusted EBITDA important in
monitoring and evaluating our financial performance on a consistent basis across
multiple time periods. We also use adjusted EBITDA as an important measure,
among others, to analyze and evaluate financial and strategic planning
decisions.
Adjusted EBITDA is considered a non-US GAAP financial measure as defined by
Regulation G promulgated by the SEC under the Securities Act. Adjusted EBITDA
should be considered in conjunction with, rather than as a substitute for,
important US GAAP financial measures including pre-tax income, net income and
cash flows from operating activities. Items excluded from adjusted EBITDA are
significant and necessary components to the operations of our business;
therefore, adjusted EBITDA should only be used as a supplemental measure of our
operating performance.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
Our EBITDA, as adjusted, decreased 50.3% in 2011 compared to 2010 as a result of
a larger loss in 2011 compared to 2010.
REVENUE
An 11.2% decrease in revenues reflected a decrease in Commission revenue
primarily resulting from a decline in transactions processed through our trade
desk. The decline in brokerage revenue was most attributed to a market that has
been trading flat with no consistency in volume and price increases. Trading has
slowed due to economic uncertainty, the ongoing debt crisis in Europe, and
continued recession all of which have impacted the equities market.
Revenues from advisory fees increased slightly due to growth in asset values
augmented by an increase in investment contributions. Our advisor-directed
managed assets program, A-MAP, where investment advisory services are provided
directly by our independent representatives, continues to contribute the
majority of advisory services revenue.
Other fee income, primarily comprised of licensing and annual administrative
fees, as well as financial planning fees, increased slightly.
The increase in other revenue, which consists of net marketing revenues and
interest income, resulted primarily from the scheduling of our top producer's
conference in different reporting periods, third quarter in the prior period
versus second quarter in the current period. Also, there was a decrease in
marketing allowances from product sponsor programs reflecting a decline in sales
volumes of alternative investment products.
EXPENSES
Total expenses decreased by $2.11 million, or 9.8%, principally as a result of
decreases in compensation and benefits, marketing and promotion and from
commissions and advisors fees paid to our representatives, offset primarily from
an increase in regulatory, legal and professional fees.
The decrease in compensation and benefits is attributable to a decrease in
headcount on our business development and ICA teams.
Commissions and advisory fees paid to our representatives typically are
calculated as percentages of revenue generated by them; accordingly, much of the
$1.9 million decrease in commissions and advisor fees reflects a corresponding
decrease in commission and advisory fee revenue.
The 31.3% increase in regulatory, legal and professional expenses was driven
principally by legal costs incurred and for non-recurring professional fees
related to the secondary offering; however, legal costs incurred pertaining to
our industry were consistent with the prior period.
We will continue to incur legal fees and settlement costs as we operate in a
litigious, regulated industry. In addition, from time to time regulatory
agencies and self-regulatory organizations institute investigations into
industry or firm practices that also may result in the imposition of financial
or other sanctions. We invest significant resources to mitigate litigation and
regulatory exposure by promoting sound operational procedures and obtaining
comprehensive insurance coverage.
Marketing and promotion decreased as a result of the discontinuation of
promotional advertisements and general marketing expenses. Additionally, there
was a decrease in travel related expenses.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
OPERATING AND NET LOSS
The Company reported a decrease in income from operations of 103.7% in
comparing the current period's quarter to the same quarter in the prior period.
The decrease in income from operations was mostly attributed to the decrease in
commissionable revenue from equities. The drop off in commissionable revenue
from equities which led to a decrease in operating income can be attributed to
investor's lack of participation in the financial markets. In turn these
decisions affected our business results.
With the speculation that a full economic recovery is delayed, our clients
remain uncertain; therefore there are fewer transactions and new
investments. This continued uncertainty in the economy, along with the political
and regulatory trends lessened new investments in equities. As a result the
Company has experienced a decrease in trading volume which translates into less
net revenue.
The Company will continue to apply resources to sustain our recruiting and
technology initiatives, to proactively address growing costs of compliance,
while further implementing cost controls to lessen exposure to operating losses.
The Company had reduced variable spending and will continue to explore other
cost cutting initiatives to further align expenses to revenue and bolster net
income.
The Company reported a $0.01 million operating loss as compared to operating
income of $0.32 million for the prior period. The Company's net income totaled
$0.43 million, or $0.07 net income per basic and $0.06 net income per diluted
share, compared to a net income of $0.35 million, or $0.05 net income per basic
and diluted share, for the prior period. The 24% increase in net income for the
comparative periods can be attributed to the income tax benefit explained below.
INCOME TAXES
We had an income tax benefit of $0.44 million for the three months ended
December 31, 2011 as compared to a $0.03 million income tax benefit for the
prior period. The income tax benefit of $0.44 million relates to the revised
annual projected operating loss. After consideration of all the evidence, both
positive and negative, management has determined that a valuation allowance at
December 31, 2011 is not necessary to fully offset the deferred tax assets based
on the likelihood of future realization.
The income tax rates for the two periods do not bear a customary comparative
relationship, given the operating losses incurred, primarily as a result of an
increase in permanent differences, for income tax purposes, created by various
accruals for each of the periods presented, particularly regulatory assessments,
costs that were associated with our registration statement on Form S-3 filing
and related transactions, and non-deductible compensation paid to our former
Chairman.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
COMPARISON OF THE NINE MONTHS ENDED DECEMBER 31, 2011 AND 2010
RESULTS OF OPERATIONS
Percentage of Revenue Percent
Nine Months Ended December 31, Nine Months Ended December 31, Change
2011 2010 2011 2010 2011 vs. 2010
Revenue:
Commissions $ 46,979,821 $ 49,926,984 77.5 % 79.5 % -5.9 %
Advisory fees 12,063,849 11,025,114 19.9 % 17.6 % 9.4 %
Other fee income 779,407 861,998 1.3 % 1.4 % -9.6 %
Other revenue 825,260 984,697 1.4 % 1.6 % -16.2 %
Total revenue 60,648,337 62,798,793 100.0 % 100.0 % -3.4 %
Expenses:
Commissions and advisory fees 48,077,932 49,223,674 79.2 % 78.3 % -2.3 %
Compensation and benefits 6,794,661 6,206,962 11.2 % 9.9 % 9.5 %
Regulatory, legal and
professional services 3,006,836 2,669,855 5.0 % 4.3 % 12.6 %
Brokerage, clearing and
exchange fees 1,496,876 1,570,861 2.5 % 2.5 % -4.7 %
Technology and communications 1,000,638 914,590 1.6 % 1.5 % 9.4 %
Marketing and promotion 813,428 1,043,976 1.3 % 1.7 % -22.1 %
Occupancy and equipment 666,335 688,643 1.1 % 1.1 % -3.2 %
Other administrative 982,372 807,661 1.6 % 1.3 % 21.6 %
Interest 27,468 14,587 0.0 % 0.0 % 88.3 %
Total expenses 62,866,546 63,140,809 103.5 % 100.6 % -0.4 %
Operating loss (2,218,209 ) (342,016 ) -3.7 % -0.5 % 548.6 %
Provision (benefit) for income
taxes (513,621 ) (33,218 ) -0.8 % -0.1 % 1,446.3 %
Net loss $ (1,704,588 ) $ (308,798 ) -2.8 % -0.5 % 452.0 %
Adjusted EBITDA $ (485,835 ) $ 76,612 -0.8 % 0.1 % -734.2 %
Adjustments to conform Adjusted EBITDA to GAAP Net
loss:
Income tax benefit 514,966 140,225 0.8 % 0.2 % 267.2 %
Interest expense (27,468 ) (14,587 ) 0.0 % 0.0 % 88.3 %
Income tax expense (1,345 ) (107,007 ) 0.0 % -0.2 % -98.7 %
Depreciation and amortization (295,376 ) (315,667 ) -0.5 % -0.5 % -6.4 %
Non-recurring professional
fees (753,650 ) 0 -1.2 % 0.0 % N/A
Transfer of beneficial
interest to former Chairman (568,095 ) 0 -0.9 % 0.0 % N/A
Non-cash compensation (87,785 ) (88,374 ) -0.1 % -0.1 % -0.7 %
Net loss $ (1,704,588 ) $ (308,798 ) -2.8 % -0.5 % 452.0 %
ADJUSTED EBITDA
See information, above, regarding the relevance, calculation and use of
adjusted EBITDA set forth in the comparison of the three month periods ended
December 31, 2011 and 2010.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
REVENUE
Although our total revenues declined by 3.4% for the nine month comparative
period, our advisory fees increased by 9.4 % as a result of the appreciation in
total assets and newly-added advisory assets. The decline in top line revenues
can be most attributed to the decline in commissions from trading for reasons
stated in the three month period discussion.
Other fee income declined as a result of collecting fewer fees in the current
period for technology, license exams, and account transfer fees.
The decrease in other revenue resulted primarily from a decrease in marketing
allowances from product sponsor programs, reflecting a decline in sales volumes
of alternative investment products. Lastly, we attribute reduced interest
income to the current low interest rate environment.
EXPENSES
Total expenses decreased by $0.27 million, or 0.4 %, primarily due the
decrease in commissions and advisory fees in addition to the decrease in
marketing and promotion expenses for reasons consistent with those explained in
the three month period discussion above. Offsetting those decreases were
increases to compensation and benefits, regulatory, legal and professional
services and other administrative expenses. For the most part the other expenses
were consistent with that of the prior nine month period.
The increase in compensation and benefits was due primarily to $0.57 million
in non-cash compensation provided to our former Chairman resulting from a
transfer of a life insurance policy in connection with his retirement upon
closing of the secondary offering.
The increase in regulatory legal and professional services was primarily the
result of a $0.34 million increase in non-recurring costs incurred in connection
with our secondary offering offset by a $0.30 million decrease related to a
regulatory fine in the prior period. Professional fees rose by $0.23 million for
defense in various claims and arbitrations.
The increase in other administrative expenses was the result of allowance for
bad debts from loans to registered representatives, as well as a premium
increase in our directors and officers' policies.
OPERATING AND NET LOSS
Results of operations were jointly impacted by both the associated costs of
our S-3 registration for our secondary offering as well as costs incurred for
litigation and regulatory actions that reflect a more demanding regulatory
environment in the aftermath of recent significant market disruptions. The
Company continues to experience a slower than planned revenue growth,
specifically with commissionable revenue.
The Company reported a $2.22 million operating loss as compared to $0.34
million of operating loss for the prior period. The Company's net loss totaled
$1.70 million, or $0.26 net loss per basic and diluted share, compared to net
loss of $0.31 million, or $0.05 net loss per basic and diluted share, for the
prior period.
INCOME TAXES
We had an income tax benefit of $ 0.51 million for the nine months ended
December 31, 2011 as compared to a $0.03 income tax benefit for the prior
period. The income tax rates for the 2011 and 2010 periods do not bear a
customary relationship for reasons discussed in the comparative three month
period discussion, above.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity remains cash flows from operations, primarily
from our broker-dealer and investment advisory businesses. Decisions on the
allocation of capital include projected profitability and available cash flows,
risk management and regulatory capital requirements. A key to this approach is
ensuring that industry-standard controls are effective to support our operations
and those of our representatives while ensuring sufficient liquidity.
As of December 31, 2011, cash and cash equivalents totaled $4.48 million as
compared to $4.59 million as of March 31, 2011. Working capital as of December
31, 2011 was $4.22 million as compared to $5.61 million as of March 31, 2011.
The ratio of current assets to current liabilities was to 1.74 as of December
31, 2011, as compared to 1.70 to 1 as of March 31, 2011.
Operations provided $1.40 million in cash for the current period, as compared to
$0.49 million of operating cash provided in the prior period, principally due to
the change in accounts receivable offset from payments on legal settlements in
the current period that were accrued for at fiscal yearend March 31, 2011.
Net cash flows used in investing activities in the current period represent
purchases in equipment, collection of principal payments on a note receivable,
capitalization of software for internal use, and contributions to executive life
insurance policies. Net cash flows used in the current period were consistent
with cash flows used in the prior period for investing activities.
Cash flows for financing activities in both the current and prior periods were
for financing E&O insurance premiums. We paid $1.41 million and $1.08 million in
loan repayments, respectively, for the periods ended December 31, 2011 and 2010.
REGULATORY NET CAPITAL
Cash disbursements can have a material impact on our registered broker
dealer's regulatory net capital. ICC is subject to the SEC Uniform Net Capital
Rule (Rule 15c3-1) which requires our broker-dealer subsidiary to maintain
minimum net capital. As of March 31, 2011 and going forward, ICC computes net
capital requirements under the alternative method, which requires firms to
maintain minimum net capital, as defined, equal to the greater of $250,000 or 2%
of aggregate debit balances. Repayment or prepayment of subordinated debt, if
any, and withdrawal of equity from retiring partners or officers is subject to
net capital not falling below 5% of aggregate debits or 120% of minimum net
capital requirement.
Prior to March 31, 2011, ICC was subject to minimum net capital of $100,000
and a ratio of aggregate indebtedness to net capital (a "net capital ratio") not
to exceed 15 to 1. Under the rule, indebtedness generally included all money
owed by ICC, and net capital included ICC cash and assets that are easily
converted into cash. SEC rules also prohibit "equity capital" (which, under the
Net Capital Rule, includes subordinated loans) from being withdrawn, cash
dividends from being paid and other specified actions of similar effect from
being taken, if, among other specified contingencies, ICC's net capital ratio
would exceed 10 to 1 or if ICC would have less than 120% of its minimum required
net capital.
As of December 31, 2011, ICC had net capital of $1.55 million (i.e., an excess
of $1.30 million) as compared to net capital of approximately $2.84 million
(i.e., an excess of $2.59 million) as of March 31, 2011. The decrease in net
capital primarily was due to legal and professional fees incurred for our
secondary offering, as well as legal defense, settlement costs, and a
regulatory settlement that have impacted this year's operating results.
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Investors Capital Holdings, Ltd. Report Quarter Ended December 31, 2011
on form 10-Q
COMMITMENTS AND CONTINGENCIES
As of December 31, 2011, we are obligated under various lease agreements
covering locations in Topsfield and the Company's principal offices in
Lynnfield, Massachusetts. These agreements are considered to be operating
leases. The terms of the leases expire March 31, 2012 and March 31, 2015,
respectively. Certain leases contain provisions for escalation of minimum lease
payments contingent upon increases in real estate taxes.
The total minimum rental due in future periods under these existing agreements
is as follows as of December 31, 2011 for the years ending:
March 31,
2012 $ 97,091
2013 283,922
2014 276,354
2015 282,214
2016 24,000
2017 and thereafter 24,000
$ 987,581
Total lease expense for office space approximated $0.08 and $0.08 million the
three months ended and $0.25 and $0.25 million for the nine months ended
December 31, 2011 and 2010, respectively.
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