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Article by DailyStocks_admin    (07-14-08 09:29 AM)

Filed with the SEC from July 3 to July 9:

Investors Capital Holdings (ICH)
Robino Stortini Holdings, a hedge fund managed by Charles Robino and Michael Stortini, said it will seek effective or actual control of the company, either alone or with members of the company's management. The hedge fund will consider purchasing all or a portion of Investors Capital's common shares held by its controlling stockholder in a negotiated transaction, or try to obtain a majority stake through a tender offer. ICH has both broker-dealer and investment advisory servicing arms. Robino Stortini also said that it will keep the financial-services holding company public. Robino Stortini met with ICH's controlling stockholder last month to discuss a buyout proposal, but the company's management didn't wish to proceed further with a transaction. Robino Stortini holds 761,404 shares (11.7% of the total outstanding).



Incorporated in 1995, ICH is a financial services holding company that operates primarily through its subsidiary, ICC, in two segments of the financial services industry:

* Broker-dealer services in support of trading and investment in securities such as corporate stocks and bonds, U.S. Government securities, municipal bonds, mutual funds, variable annuities and variable life insurance, including provision of market information, internet trading and portfolio tracking facilities and records management, and
* Investment advisory services , including asset management of individual clients through our Registered Investment Advisor, Investors Capital Advisory Services (“ICA”).

Financial information pertaining to the Company for the fiscal years ended March 31, 2008 and 2007 is included in Part II of this document including, without limitation, financial statements and supplementary data in Item 8 thereof. See Part II, Item 8, Footnote 13 – “Segment Information” for information concerning each of the segments of the Company’s business with respect to the fiscal years ended March 31, 2008 and 2007, including revenues from external customers, a measure of profit or loss, and total assets.


Investors Capital Corporation

Investors Capital Corporation ("ICC") is a securities broker-dealer that is registered with the Financial Industry Regulatory Agency ("FINRA"), the Securities and Exchange Commission ("SEC"), the Municipal Securities Rule Making Board ("MSRB") and the Securities Investor Protection Corporation ("SIPC"). Headquartered in Lynnfield, Massachusetts, the wholly-owned subsidiary of ICH also is duly registered and doing business as a broker-dealer in all 50 states, the Commonwealth of Puerto Rico and the District of Columbia. ICC makes available multiple investment products and provides support, technology and back-office services to a network of approximately 689 independent registered representatives ("representatives"). Commissions derived from the provision of services and products by ICC's registered representatives represented approximately 97.9% and 97.4% of the Company's total revenues for the fiscal years ended March 31, 2008 and 2007.

Broker-Dealer Representatives

Our representatives sell investment products that are securities under federal and state law. Accordingly, they are required to qualify and register as representatives with our broker-dealer subsidiary under federal and state law. Depending upon their activities, they also may be required to qualify and register as investment adviser representatives. Our in-house training programs for representatives emphasize the long-range aspects of financial planning and investment products. We believe that the continuing education and support we provide to our registered representatives enables them to better inform and serve their clients.

Continuing to add productive registered representatives is an integral part of our growth strategy. We seek to recruit primarily experienced registered representatives. During the fiscal year ended March 31, 2008, our average revenue per registered representative increased more than 11.9% to $129,332 compared to the previous fiscal year. Once recruited, we focus on enhancing our representatives' professional knowledge, skills and value to their clients.

In addition to a variety of valuable products and services, we offer prospective representatives an attractive commission payout and, if desired, the independence of owning and operating their own offices. Approximately 22 of our independent representatives work in Company-provided regional investment centers (see “-- Investment Center Model”, below). The remainder of our representatives generally pay substantially all of the costs associated with their offices and operations, while we concentrate on providing technical, regulatory, supervisory, compliance and other support services to our independent investment professionals. This allows expansion of our operations with relatively minimal capital outlay.

Compensation to Representatives

Commission payouts to our registered representatives are negotiated and currently average 82.4% of the gross dealer concession generated from the sale of securities. Pursuant to the terms of our agreements with our registered representatives, and as permitted by current FINRA rules, we provide our representatives, or their named beneficiaries, with continuing commissions on pre-existing business in the event of their retirement from the securities industry or death. Representatives grant to us the right to offset against commissions certain losses we may sustain as a result of their actions, omissions and errors. Our agreements with our representatives are terminable by either party with 15 days prior written notice, and do not contain either a confidentiality or non-compete provision.

Support to Representatives

We provide a variety of services and products to our representatives to enhance their professionalism and productivity.

Technology Resources. Advanced technology, including client and corporate websites, enable our representatives and their clients to perform many tasks on-line, including:

* Opening of new accounts
* Monitoring of existing accounts
* Updating of client accounts
* Initiating and executing trading activities
* Viewing and downloading commission data
* Locating and exploring financial products
* Downloading client data
* Researching reports or inquiries on companies, securities and other pertinent financial topics

Approved Investment Products. We allow our representatives to offer a wide variety of approved investment products to their clients that are sponsored by well-respected, financially sound companies. We believe that this is critical to the success of our registered representatives and the Company. We follow a selective process in determining approved products to be offered to clients by our representatives, and we periodically review the product list for continued maintenance or removal of approved status.

Marketing. We provide advertising and public relations assistance to our representatives that enhance their profile, public awareness, and professional stature in the public's eye, including FINRA-approved marketing materials, corporate and product brochures and client letters.

Supervision/Compliance. We maintain strong broker-dealer and investment adviser compliance programs. In addition to an eighteen-member home office staff that includes two dedicated compliance attorneys, we retain experienced field supervisors in FINRA-recognized Offices of Supervisory Jurisdiction across the country that are charged with compliance responsibilities for defined groups of registered representatives. Along with our Regional and home office supervisors, these field supervisors closely supervise and monitor the activities of our representatives to enhance their compliance with applicable laws, rules and regulations. Our compliance efforts are further enhanced by in-house computer systems and programs, including routine internal audits to ensure our compliance with anti-money laundering standards and other regulations under the USA Patriot Act.

Our representatives seek and value assistance in the area of compliance. Keeping in step with the latest industry regulations, our compliance department provides to our representatives, among other things:

* Advertising and sales literature review
* Field inspections, followed up with written findings and recommendations
* Online continuing education training on topics such as Anti-Money Laundering detection
* Weekly faxes and monthly conference calls on selected compliance topics
* Assistance with customer complaints and regulatory inquiries
* Workshops, seminars and in-house publications on various compliance matters
* Regional and national meetings
* Interpretation of rules and regulations and general compliance training

Clearing. We utilize the services of a third-party clearing firm to clear our transactions on a fee-for-service basis. Our clearing firm processes most of the non-check and application securities transactions for our account and the accounts of our clients. Services of our clearing firm include billing and credit extension as well as control, receipt, custody and delivery of customer securities and funds. We pay a transaction charge for these services, relying on the operational capacity and the ability of our clearing firm for the orderly processing of security transactions. Engaging the processing services of a clearing firm exempts us from the application of certain capital reserve requirements and other complex regulatory requirements imposed by federal and state securities laws.

Broker-Dealer Revenue

Direct participation programs predominantly involve equity investments in limited partnerships and real estate investment trusts ("REITS"). The decrease in sales of this product type was directly correlated to the sub-prime lending crisis and its effect on the real estate market since REITS comprise 32.8% of this revenue category. As with other broker dealer products, sales commissions on REITS and oil and gas programs are comprised of a gross dealer concession on the invested amount.

Commission revenue from our mutual funds and variable annuity products continues to make up most of our revenue; however, this relationship may not continue as our revenue mix becomes more diversified, particularly with a strong increase in brokerage sales. We believe there may be a trend in the future for commissions from stocks and bonds, as a percentage of total commissions, to increase due to our continued efforts to recruit representatives who are duly licensed to execute securities trades for their clients.


The Company’s investment advisory business has been centered in ICA since 2004. EPA no longer has any licensed representatives other than its principals, and limited its business to providing access to advisory services supplied by third parties until it completed a transfer of all assets to ICA on May 1, 2008 and subsequently withdrew its advisory registration.

ICA has been encouraging movement away from centralized delivery of advisory services to a more personalized delivery system that emphasizes close, technology-enabled interaction between independent representative and customer that can lead to more agile decision making, enhanced customer satisfaction and program participation. In support of this business model, ICA has focused on recruiting additional registered investment adviser representatives and increasing the qualifications, technical competence and motivation of existing representatives.

The success of these initiatives is reflected in the fact that revenue from asset management services grew by $3.74 million or 55.2 % to $10.50 million for the fiscal year ended March 31, 2008, which represented approximately 11.5% of total Company revenues for that period.

Investment Advisor Representatives

Each of our investment adviser representatives must satisfy the state licensing requirements in the states in which they operate prior to their clients utilizing our investment advisory services. As of March 31, 2008 approximately 407 independent investment adviser representatives registered with the various state securities departments were affiliated with ICA, for an 11.5% increase over the year earlier complement.

Asset Allocation Strategy

Registered investment advisers (“RIA”) often provide advisory services through our representative-directed program where the asset allocation is performed directly by the independent representative. Our asset allocation strategy is based on the principle that, by investing in a combination of asset classes, risk may be reduced while seeking enhanced returns. Combining asset classes that typically do not fluctuate in tandem may lower the volatility of the customer's investment portfolio while providing the potential for increased long-term returns. The Company utilizes the following steps in implementing our asset allocation strategy for each individual customer:

* We determine the customer's risk tolerance, investment goals, age, time horizon, investment experience and financial and personal circumstances using detailed questionnaires that are completed during personal interviews. Based upon these data, we recommend an overall investment allocation consisting of a suggested percentage of stocks, bonds, cash and/or other investment products.
* Should the customer agree with the recommended overall investment allocation, we then select what we believe to be appropriate investment vehicles for the particular customer from a universe of mutual funds, variable annuities and individual securities and other investment products.
* Following implementation of the portfolio, we monitor portfolio performance, communicate the model's performance to the client quarterly, and make portfolio changes based upon performance, the customer's financial situation, goals and risk tolerance and other relevant factors.

Fee-Based Compensation Structure

In conformity with the requirements of the Investment Advisers Act of 1940, compensation for our investment advisory services consists of an annual fee calculated as a percentage of total assets under management rather than a transaction-based commission or performance fee.


The Company operates retail investment centers in Topsfield, MA, Bedford, NH, Manhattan, NY and Coral Gables, FL. Unlike the arrangement the Company has with its typical independent contractor representative, the Company funds the overhead operational cost of the investment centers and staffs the locations with registered representatives. The investment center representatives are typically on a lower payout schedule intended to offset the overhead costs incurred by the Company. The Company’s continued investment in this business model is contingent on achieving sustained growth and acceptable profit margins.


In certain states a licensed insurance entity is required in order for ICC representatives to sell life insurance and annuity to their clients. Accordingly, the Company operates ICC Insurance Agency, Inc., a wholly-owned subsidiary of ICH that is duly licensed for such purposes in all states in which such licensing is required. All revenue realized by this entity flows through as revenue to ICC.


Investors Capital Holdings Securities, Inc., ("ICH Securities") is a wholly-owned subsidiary of ICH formed to hold cash for tax benefit purposes at the state (Massachusetts) level.


Key elements to achieve our corporate objectives include:

* Increase brand awareness; expand business presence. We plan to increase our brand recognition to attract new clients and representatives. We are executing a comprehensive marketing plan to attract more clients and experienced representatives, build market awareness, educate the investing public and maintain customer loyalty through direct marketing, advertising through our marketing department, use of our web site, various public relations programs, web and live seminars, print advertising, radio, and television.
* Provide value-added services to our clients. We provide our clients with access to a pool of well-trained representatives, access to up-to-date market and other financial information, and direct access to our trade desk that is online with various stock exchanges and institutional buyers and sellers. We will also continue to provide trading before and after traditional market hours to our clients.
* Create technologically innovative solutions to satisfy client needs. We continue to pursue additional technologies to service the rapidly evolving financial services industry. We are enhancing our web site to augment our clients’ ability to trade equity securities efficiently via the Internet, to monitor on-line the history and current status of their accounts at any time, and to access financial and other pertinent information. Also, we have developed personalized Internet web sites for our representatives to provide their clients, through the use of passwords and firewalls, a secure and private interface directly to our proprietary web site. This allows these clients to perform market research, buy and sell securities on-line, monitor their accounts and utilize financial calculators.
* Provide technological solutions to our representatives . We believe that it is imperative that we continue to possess state-of-the-art technology so that our employees and independent registered representatives can effectively facilitate, measure and record business activity in a timely, accurate and efficient manner. By continuing our commitment to provide a highly capable technology platform to process business, we believe that the Company can achieve economies of scale and potentially reduce the need to hire additional personnel.

* Expand our product and service offering through strategic relationships. We continue to pursue business alliances to increase trading volume, capitalize on cross-selling opportunities, create additional markets for our asset management programs and mutual fund sales, take advantage of emerging market trends, create operational efficiencies and further enhance our name recognition.


Our competitors vary in size, scope and breadth of services offered. We encounter direct competition from numerous established full-commission and discount brokerage firms that have electronic brokerage services and full research capabilities. We also encounter competition from insurance companies with securities brokerage subsidiaries, financial institutions, mutual fund sponsors and others, including in particular those who utilize financial planning representatives who bear their own office expenses.

Many competitors have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and more extensive client bases.

We believe that our ability to compete in the broker-dealer and investment advisory segments of our business depends upon many factors both within and outside our control, including:

* Our ability to attract and retain a network of experienced investment professionals
* The effectiveness, ease of use, performance and features of our technology and services and overall client satisfaction
* The price and quality of our services
* The volatility and performance of financial markets and the world economy
* Our ability to service our clients effectively and efficiently
* Our reputation in the financial services industry
* Our ability to foster compliance with applicable laws and regulations by employees and independent representatives


Check and Application

The majority of transactions are conducted through a check and application process where a client check and an investment company’s product application is delivered to us for processing. Our review includes principal review and submission to the investment company or clearing firm.

Online Trading

Through the use of our remote electronic-entry trading platform, registered representatives can efficiently submit a wide range of equity trades online. Trades are reviewed by our principal and our clearing firm before processing.

Bond Trading

The Company’s fixed-income trading 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 several dealer-only electronic services that allow the desk to offer inventory and to efficiently execute trades.

Asset Allocation

Asset Allocation services are available through ICA, the Company’s federally registered investment adviser subsidiary. The allocation services, for the most part, are executed through our online trading platform. Other allocation services are performed with the fund company directly.


Broker-Dealer Regulation

The securities industry is subject to extensive regulation under both federal and state law. The SEC is the federal agency responsible for administering the federal securities laws that apply to broker-dealers. ICC is a broker-dealer registered with the SEC. In addition to complying with the voluminous and complex rules set out in the Securities Exchange Act of 1934 and the rules promulgated thereunder, every registered broker-dealer that conducts business with the public is required to be a member of and subject to the rules of FINRA.

FINRA has established conduct rules for securities transactions among broker-dealers and private investors, trading rules for the over-the-counter markets and operational rules for its member firms. FINRA conducts examinations of member firms, investigates possible violations of the federal securities laws and its own rules and conducts disciplinary proceedings involving member firms and associated individuals. FINRA administers qualification testing for all securities principals and registered representatives for its own account and on behalf of the state securities authorities. We are also subject to regulation under state law. We are currently registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia.

The SEC and other regulatory bodies in the United States have rules with respect to net capital requirements that affect our broker-dealer subsidiary. These rules are designed to ensure that broker-dealers maintain adequate capital in relation to their liabilities, types of securities business conducted and the size of their customer business. These rules have the effect of requiring that a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Failure to maintain the required net capital may subject a firm to suspension or revocation of its registration with the SEC and suspension and expulsion by the FINRA and other regulatory bodies, and ultimately may require its liquidation. The rules could restrict underwriting, trading activities, our ability to withdraw capital, pay dividends, pay interest on and repay the principal of any debt, among other matters.

Registered Investment Adviser Regulation

The Investment Advisers Act of 1940 (the "Advisers Act"), and the rules promulgated thereunder, regulate the registration and compensation of investment advisers. Investment advisers are deemed to be fiduciaries for their clients and, as such, are held to a high standard of conduct. Investment advisers are subject to a similar level of oversight by the SEC and the various states as are broker-dealers. Investment advisers are required to register with the SEC and/or appropriate state regulatory agencies, are required to periodically file reports, and are subject to periodic or special examinations. Rules promulgated under the Advisers Act govern many aspects of the investment advisory business, such as advertisements by investment advisers and the custody or possession of funds or securities of a client. Most states require registration by investment advisers unless an exemption is available and impose annual registration fees. Some states also impose minimum capital requirements. There can be no assurance that compliance with existing and future requirements and legislation will not be costly and time consuming or otherwise adversely impact our business in this area.

Regulations Applicable to the Use of the Internet

Due to the established popularity and use of the internet and other online services, various regulatory authorities are considering laws and/or regulations with respect to the internet or other online services covering issues such as user privacy, pricing, content copyrights and quality of services. In addition, the growth and development of the market for online commerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online.

The recent increase in the number of complaints by online traders could lead to more stringent regulations of online trading firms and their practices by the SEC, FINRA and other regulatory agencies. The applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes and personal privacy is also uncertain and may take years to resolve. Finally, as our services are available over the internet in multiple states, and as we have numerous clients residing in these states, these jurisdictions may claim that we are required to qualify to conduct business as a foreign corporation in each such state. While ICC currently is registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia, we are qualified to conduct business as a foreign corporation in only a few states. Failure by our company to qualify as a broker-dealer in other jurisdictions or as an out-of-state or "foreign" corporation in a jurisdiction where it is required to do so could subject us to taxes and penalties for the failure to qualify. Our business could be harmed by any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the applications of existing laws and regulations to the Internet and other online services.


As of March 31, 2008, we had 112 full-time employees, the majority of whom are located at our principal office in Lynnfield, Massachusetts. No employee is covered by a collective bargaining agreement or is represented by a labor union. We consider our employee relations to be excellent. We also enter into independent contractor arrangements on an as-needed basis to assist with various aspects of our business including programming and developing proprietary technologies.



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.


The Company operates primarily through its 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

The Company provides broker-dealer services in support of trading and investment by its representatives’ customers in corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, variable annuities and variable life insurance, including provision of market information, internet brokerage, portfolio tracking facilities and records management.

Investment Advisory Services

The Company provides investment advisory services, including asset allocation and portfolio rebalancing, for its representative’s customers. In the past, investment advisory services were performed by both ICC and EPA. Over the last few years, the Company has consolidated its investment advisory services into ICA, and intends to wind up and dissolve EPA during the first quarter of the fiscal year ending March 31, 2009.

Recruitment and Support of Representatives

A key component of our business strategy is to recruit well-established, productive representatives who generate revenues in high margin services and products. 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. The Company focuses 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 and profitable sales growth takes many forms, including: hi-tech 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, a dedicated business development unit focuses on providing 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.


Check and Application

The majority of transactions are conducted through a check and application process where a check and an investment company's product application is delivered to us or through our field supervisory principal for processing that includes principal review and submission to the investment company or clearing firm. Investments in technology have allowed the firm to move from a paper intensive to a virtually paper free process. This has shortened the transaction cycle, reduced errors and created greater efficiencies. The firm continues to invest in technologies that provide more efficient processes resulting in improved productivity.

Online Brokerage

Registered representatives can efficiently submit a wide range of security investments online through the use of our remote electronic-entry brokerage platform.

Bond Brokerage

The Company's 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 several 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. This area provides an investment alternative for investors who have become interested in retirement income, and it has potential for growth during an interest rate favorable environment.

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 advisers’ 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 the fund company.


In General

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company believes that of its significant accounting policies (detailed in Footnote 2 to the Company’s Consolidated Financials Statements contained herein), those dealing with valuation of securities and other assets, revenue recognition and allowance for doubtful accounts receivable involve a particularly high degree of judgment and complexity. Our accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material effect on the 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. If either the customer or 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 firm requires that we reduce positions when necessary. We also complete credit evaluations where there is thought to be credit risk .


The Company records reserves related to legal proceedings in "accrued expenses" in the consolidated balance sheet. The determination of these reserve amounts requires significant judgment on the part of management. Many factors are considered including, but not limited to: the amount of the claim; the amount of the loss , if any, 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 consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions of management in determining the estimates of reserves may be incorrect and the actual costs upon disposition of a legal proceeding could be greater or less than the reserved amount.


Risk is an inherent part of the Company's business and activities. Risk management is critical to the Company's financial strength and profitability and requires robust auditing, constant communications, sound judgment and knowledge of financial trends and the economy as a whole.

Senior management takes an active role in the risk management process. The principal risks involved in the Company's business activities are market, operational, regulatory and legal.

Market Risk

Market risk is the risk attributable to macroeconomic factors such as gross domestic product, employment, inflation, interest rates, budget deficits and consumer sentiment. Consumer and producer sentiment is critical to our business. The level of consumer confidence determines their willingness to spend, especially in the financial markets. It is this willingness to spend in the financial markets that is key to our business. A shift in spending in this area could negatively impact us. However, senior management is constantly monitoring these economic trends in order to enhance and broaden our product line to mitigate potential negative impact of such trends.

Operational Risk

Operational risk refers to the risk of loss resulting from the Company's operations, including, but not limited to, improper or unauthorized execution processing of transactions, deficiencies in the Company's technology or financial or financial operating systems and inadequacies or breaches in the Company's control processes. Managing these risks is critical, especially in a rapidly changing environment with increasing transaction volume. Failure to manage these risks could result in material financial loss to the Company. To mitigate these risks, the Company had developed specific policies and procedures designed to identify and manage operational risk. These policies and procedures are reviewed and updated on a continuing basis to ensure that this risk is minimized.

Regulatory and Legal Risk

Regulatory and legal risk includes non-compliance with applicable legal and regulatory requirements and the risk of a large number of customer claims that could result in adverse judgments against the Company. The Company is subject to extensive regulation in the various jurisdictions in which it operates, and we maintain a panoply of procedures to address issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, money-laundering and record keeping. However, compliance procedures, no matter how stringent and comprehensive, can only limit, but not totally prevent, the institution of regulatory and legal proceedings, the outcomes and consequences of which cannot now be reasonably foreseen or quantified.

Effects of Inflation

The Company's assets primarily are liquid in nature and not significantly affected by inflation. Management believes that the replacement cost of property and equipment will not materially affect operating results. However, the rate of inflation can affect our expenses, including, without limitation, employee compensation and benefits, communications and occupancy, which may not be readily recoverable through charges for services provided.


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 average production per representative, top line commission and advisory services revenues, gross margins, operating expenses, legal costs and earnings per share.


Management believes that upgrading the overall quality of our independent representatives is a key to achieving robust growth in revenues and net income. Our experience has been that upgrading the technical qualifications and business practices of our representatives not only generates more revenue, but assists in limiting the cost of overhead functions and representative errors and misconduct. We strive to continually improve the overall quality of our force of representatives by:

* recruiting high quality representatives,
* terminating low quality representatives, and
* assisting representatives to improve their skills and practices.

A key metric that we use to assess the average quality of our representatives is average revenue generated per representative. Average revenue per representative increased by 11.9%, reflecting management’s continued emphasis on recruiting and retaining established, productive representatives.


Revenues rose $10.93 million, or 13.7%, to $90.99 million, led by a $7.27 million or 10.3% increase in commissions and a $3.74 million or 55.2% increase in advisory services revenue. Growth in revenue from brokerage and advisory services continues to be complimented by expanding revenues from other commission sources such as mutual funds and variable annuities.


Commissions from variable annuities continued to comprise the largest component of commission revenue, increasing by $4.4 million, or 16.15% . However, brokerage revenues, which posted the largest commission increase of 19.05%, are fast approaching parity with revenues from variable annuities. Commissions from direct sales of mutual funds were relatively flat, reflecting a continuing trend towards conducting mutual fund sales through our trading platform (which revenues are included in “Brokerage” revenues below).

Commission revenues from direct participation programs decreased by $1.13 million or 9.8 % primarily as a result of a significant drop in investments in Real Estate Investment Trusts (“REITs”). Management believes that the drop in REIT activity largely resulted from a decline in the real estate market triggered by a credit contraction due, in major part, to a freeze-up of sub-prime mortgage markets. An increase in commissions from our oil and gas programs, spurred by oil price increases, was not sufficient to fully offset the decrease in commissions from REIT sales.

We continue to emphasize recruitment and retention of representatives who seek to leverage our sophisticated technology platforms which allow us to more efficiently conduct business while increasing total volume. As discussed below, the recent trend of higher growth from fee-based advisory services, compared to commission-based services, reflects concerted efforts by management to diversify and grow revenues in the high margin advisory services marketplace.

Advisory Fees

Responding to industry trends and increasing client demand, the firm has endeavored to assist our representatives in transitioning more of their business to advisory services. We do not dictate the general nature or extent of advisory services our representatives provide for their clients. However, we continue to make concerted efforts to attract our representatives to our expanded line of proprietary advisory services programs through education, seminars, tradeshows and direct telemarketing.

Fees from our advisor-directed managed assets program, A-MAP, where investment advisory services are provided directly by our independent representatives, continue to be the leading source of advisory services revenue. Revenues from this program, which have been contributing an increasing proportion of advisory services revenue, grew by $2.49 million or 55.8% to $6.95 million compared to $4.46 million for the prior period. Supported by our Net Exchange Pro and Pershing direct on-line mainframe brokerage platforms, A-MAP is popular with our representatives because of the opportunities it provides to deliver superior asset management services and overall investment performance at a lower cost. Resulting transactional cost savings have been passed on to our representatives’ clients in the form of lower fees for improved service.

Other Fee Income

Other fee income, primarily comprised of licensing and financial planning fees, increased by 12.6% when comparing the current year to the prior year. This increase stems mostly from planning fees as more of our qualified representatives are providing consulting services to better assist clients in managing their portfolios.

Marketing Revenue

Net marketing revenues decreased by 9.2% primarily due to a decrease in marketing support for the Company’s Regional Event Program, which was packaged with the Partnership Program in the current year. Going forward management is considering limiting these regional events to four symposiums per year.

Other Income

Other income, consisting primarily of interest and dividends and gains/losses on investments, decreased by 9.8% . The majority of the decrease came from a $0.15 million permanent impairment of a private placement investment and $0.05 million decrease in interest income from a decrease in cash held at bank accounts. This decrease was offset by a $ 0.14 million increase in interest earned on account balances due to an increase in the average daily balance in our trading accounts.



Results reported for the current nine-month period compared to the year ago nine-month period are discussed below to the extent that explanations for comparative variances in year to date results differ from the explanations for comparative quarterly results discussed above. Please refer to the comparative quarterly results analysis for a general explanation of variances concerning the current nine-month period that are not discussed below.


Revenues increased by $11.33 million or 19.6% for the nine-month comparative period as top line revenue grew 16.7 % in commissions and 52.2% in advisory fees over the same time frame a year ago.


Brokerage revenue experienced the largest percentage growth while commissions from variable annuity sales continued to be the leading revenue component. This current growth trend in brokerage revenue is indicative of our refined business model of attracting highly sophisticated representatives who can potentially flow through a well diversified book of business.

Advisory Fees

The 52.2% growth in advisory fees was aided by a $1.78 million increase in revenue from our A-MAP program, reflecting our efforts to service and improve a quality product at reduced fees.

Other Fee Income

Other fee income increased by 16.0% or $0.10 million compared to the year ago period. The growth in other fee income reflects an increase in planning fees as more of our qualified representatives are providing consulting services to better assist clients in managing their portfolios.

Marketing Revenue

Marketing revenues grew by 9.1 % or $0.09 million over the prior period. This growth is primarily due to the increase in marketing support revenue resulting from product sales.

Other Income

Other Income grew by 16.2% or $0.09 million over the year ago period reflecting an increase in interest income.

Check and Application

Gross profit from our direct business (check and application) continued to make the largest contribution to margins, registering a $0.66 increase; however, it decreased slightly as a percentage of total gross margin due to more rapid growth in brokerage gross margins.

Brokerage Services

Brokerage services profit margin grew by 45.2% or $1.49 million, including a $1.10 million increase in margin from commissionable brokerage activities.

Advisory Services

Advisory services profit margin grew by $0.31 million or 22.6% led by a $0.36 million or 47.1% rise in gross margin generated by our A-MAP rep-directed managed assets program.

Commission and Advisory Fees Expenses

Commission and advisory fees expenses during the current nine-month period were $55.34 million versus $46.45 million in the prior period. As a percentage of revenue generated by representatives (i.e., commissions, advisory fees and other fees), commission and advisory expenses decreased slightly from 82.6% to 82.1% . These expenses include commissions to representatives, clearing costs and other direct costs that are necessary to produce revenue. Management continuously monitors these costs as they have a substantial effect on our profit margin.


Operating expenses decreased by 4.1% primarily due to a substantial decrease in regulatory, legal and professional services.

Compensation and Benefits

Compensation and benefits rose by 8.3% due to the hiring of additional personnel as well as the award of approximately $0.80 million in bonuses and incentive stock, the net effect of which was partially offset by prior period restricted stock awards to key management and staff.

Regulatory, Legal and Professional

The 60.1% decrease in this expense category stems principally from a steep decline in legal fees incurred in our defense and settlement of the Massachusetts Proceedings which approximated $2.20 million in the prior period. The Company also received in the current period insurance proceeds reimbursing certain prior period arbitration settlement costs.


The Company’s advertising expenses increased by 80.7% over the prior period as management has been aggressively placing advertisements in financial service periodicals to enhance recruitment of independent representatives and promote our provision of quality broker/dealer customer services to our independent financial representatives


Communication expenses rose by 119.6% principally due to commitment of resources to two conferences for representatives held in the current period to stimulate revenue growth in advisory services and from our top producers. In addition the company committed resources to enhancement of our website to communicate to our representatives updates on the industry’s rules and regulations and to add a portfolio consolidation tool.


Occupancy expenses increased by 21.6% in the current period versus the year ago nine-month period reflecting the opening of new investment centers along with the acquiring of additional fixed assets

Other Administrative

Other administrative expenses increased in the current period by 13.1% versus the prior period primarily due to a FINRA fine regarding our EMAIL domain.


The Company experienced a profit turnaround for the nine-month period in comparison to the prior period. We continued to grow top line revenues in the high margin areas while reducing operating expenses, primarily in legal expenses. Management believes that the $1.87 million improvement in after tax net results in the current period compared to the prior period demonstrates the viability of our current business model, which stresses recruitment of high-producing representatives and reduction of regulatory risk that has negatively impacted the firm in the past.

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