**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

**Form 10-K**

[X] ANNUAL REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year endedDecember 31, 2010

Commission file number:000-25958

**CAPITAL FINANCIAL HOLDINGS, INC.**

*(Exact name of registrantas specified in its charter)*

| **North Dakota**                                                  | **45-0404061**                       |
|-------------------------------------------------------------------|--------------------------------------|
| *(State or other jurisdiction  of incorporation or organization)* | *(IRS Employer Identification  No.)* |

**1 Main Street NorthMinot, North Dakota 58703***(Address of principal executive offices)*

| Registrant's telephone number, including area code:         | (701) 837-9600                 |
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| Securities registered pursuant to Section 12(b) of the Act: | None                           |
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| Securities registered pursuant to Section 12(g) of the Act: | Common Stock; $.0001 par value |

 

 

| Indicate by check mark if the registrant is a well-known seasoned  issuer, as defined in Rule 405 of the Securities Act.                                                                                                                                                                                                                          |   | Yes               | X      | No                    |
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| Indicate by check mark if the registrant is not required to  file reports pursuant to Section 13 or Section 15(d) of the Act.                                                                                                                                                                                                                     |   | Yes               | X      | No                    |
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| Indicate by check mark whether the registrant (1) has filed  all reports required to be filed by Section 13 or 15(d) of the Exchange Act of  1934 during the preceding 12 months (or for such shorter period that the registrant  was required to file such reports), and (2) has been subject to such filing requirements  for the past 90 days. | X      | Yes               |   | No                    |
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| Indicate by check mark if disclosure of delinquent filers pursuant  to Item 405 of Regulation S-K is not contained herein, and will not be contained,  to the best of registrant's knowledge, in definitive proxy or information statements  incorporated by reference in Part III of this Form 10-K or any amendment to this  Form 10-K.         |   |              | X      |
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| Indicate by check mark whether the registrant is a large accelerated  filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer," and "smaller  reporting company" in Rule 12b-2 of the Exchange Act. (Check one):                                   |
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| Large accelerated filer                                                                                                                                                                                                                                                                                                                           |   | Accelerated filer |   | Non-accelerated filer |   | Smaller Reporting Company | X |
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| Indicate by check mark whether the registrant is a shell company  (as defined in Rule 12b-2 of the Act)                                                                                                                                                                                                                                           |   | Yes               | X      | No                    |
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Aggregate market value of voting and non-voting common equityheld by non-affiliates of the registrant as of February 28, 2011: $1,077,468.

On February 28, 2011, there were 14,455,943 shares of the issuer'scommon equity outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Company's definitive Proxy Statement for theAnnual Meeting of Shareholders to be held on June 9, 2011, are incorporated by referencein certain sections of Part III.

**10-K**

**CAPITAL FINANCIAL HOLDINGS, INC.**

**INDEX**

|     |                                                                                                          | Page  # |
|----------|---------------------------------------------------------------------------------------------------------------|---------|
| PART I   |                                                                                                          |
|     |                                                                                                          |    |
| Item 1.  | Business                                                                                                      | 5       |
| Item 1A. | Risk Factors                                                                                                  | 8       |
| Item 1B. | Unresolved Staff Comments                                                                                     | 9       |
| Item 2.  | Properties                                                                                                    | 9       |
| Item 3.  | Legal Proceedings                                                                                             | 9       |
|     |                                                                                                          |    |
| PART II  |                                                                                                          |
|     |                                                                                                          |    |
| Item 4.  | Market for Registrant's Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities | 9       |
| Item 5.  | Selected Financial Data                                                                                       | 10      |
| Item 6.  | Management's Discussion and Analysis of Financial Condition  and Results of Operations                        | 10      |
| Item 6A. | Quantitative and Qualitative Disclosures About Market Risk                                                    | 15      |
| Item 7.  | Financial Statements and Supplementary Data                                                                   | 15      |
| Item 8.  | Changes In and Disagreements with Accountants on Accounting  and Financial Disclosure                         | 15      |
| Item 8A. | Controls and Procedures                                                                                       | 15      |
| Item 8B. | Other Information                                                                                             | 17      |
|     |                                                                                                          |    |
| PART III |                                                                                                          |
|     |                                                                                                          |    |
| Item 9.  | Directors, Executive Officers and Corporate Governance                                                        | 17      |
| Item 10. | Executive Compensation                                                                                        | 17      |
| Item 11. | Security Ownership of Certain Beneficial Owners and Management  and Related Stockholder Matters               | 17      |
| Item 12. | Certain Relationships and Related Transactions, and Director  Independence                                    | 17      |
| Item 13. | Principal Accounting Fees and Services                                                                        | 18      |
|     |                                                                                                          |    |
| PART IV  |                                                                                                          |
|     |                                                                                                          |    |
| Item 14. | Exhibits, Financial Statement Schedules                                                                       | 18      |
|     |                                                                                                          |    |
|     | SIGNATURES                                                                                                    | 19      |

**Special Note Regarding Forward Looking Statements**

When used herein, in future filings by the Company with the Securitiesand Exchange Commission ("SEC"), in the Company's press releases, and in other Company-authorizedwritten or oral statements, the words and phrases "can be," "expects," "anticipates,""may affect," "may depend," "believes," "estimate," or similar expressions are intendedto identify "forward-looking statements" within the meaning of the Private SecuritiesLitigation Reform Act of 1995. The Company cautions readers not to place undue relianceon any such forward-looking statements, which speak only as of the date made. Suchstatements are subject to certain risks and uncertainties, including those set forthin this "Forward-Looking Statements" section, which could cause actual results forfuture periods to differ materially from those presently anticipated or projected.The Company does not undertake and specifically disclaims any obligation to updateany forward-looking statement to reflect events or circumstances after the dateof such statements.

Until July 31, 2009 the Company derived substantially all ofits revenues from two sources; commission revenue earned in connection with salesof shares of mutual funds, insurance products, and various other securities andfees relating to management of, and provision of services to mutual funds. Followingthe disposition of the Mutual Fund Services Segment, the Company has two operatingsubsidiaries, Capital Financial Services, Inc. ("CFS" or the "broker-dealer subsidiary")a FINRA member broker-dealer and Capital Energy Resources, Inc. ("CER" or the "oiland gas subsidiary).

The Company is a financial services holding company that, throughits broker dealer subsidiary, provides brokerage, investment advisory, insuranceand related services. The Company operates in a highly regulated and competitiveindustry that is influenced by numerous external factors such as economic conditions,marketplace liquidity and volatility, monetary policy, global and national politicalevents, regulatory developments, competition, and investor preferences. The Company'srevenues and net earnings may be either enhanced or diminished from period to periodby such external factors. The Company remains focused on continuing to reduce redundantoperating costs, upgrade operating efficiency, recruit quality representatives andgrow our revenue base. The Company provides broker-dealer services in support oftrading and investment by its representatives' customers in corporate equity anddebt securities, U.S. Government securities, municipal securities, mutual funds,private placement alternative investments, variable annuities and variable lifeinsurance. The Company also provides investment advisory services for its representative'scustomers. In the past, investment advisory services were performed by both CapitalFinancial Services, Inc. on an individual client basis and Integrity Money Management,Inc. on behalf of the mutual fund segment; services through Integrity Money Management,Inc. were discontinued as a result of the disposition of the Mutual Funds ServiceSegment effective July 31, 2009.

A key component of the broker-dealer subsidiary's business strategyis to recruit well-established, productive representatives who generate substantialrevenues from an array of investment products and services. Additionally, the broker-dealersubsidiary assists its representatives in developing and expanding their businessby providing a variety of support services and a diversified range of investmentproducts for their clients.

Forward-looking statements include, but are not limited to, statementsabout the Company's:

|   |   |                                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Business strategies and investment policies,                                                                                                                                         |
|   |   |                                                                                                                                                                                 |
|   | • | Possible or assumed future results of operations and operating  cash flows,                                                                                                          |
|   |   |                                                                                                                                                                                 |
|   | • | Financing plans and the availability of short-term borrowing,                                                                                                                        |
|   |   |                                                                                                                                                                                 |
|   | • | Competitive position,                                                                                                                                                                |
|   |   |                                                                                                                                                                                 |
|   | • | Potential growth opportunities,                                                                                                                                                      |
|   |   |                                                                                                                                                                                 |
|   | • | Recruitment and retention of the Company's key employees,                                                                                                                            |
|   |   |                                                                                                                                                                                 |
|   | • | Potential operating performance, achievements, productivity  improvements, efficiency and cost reduction efforts,                                                                    |
|   |   |                                                                                                                                                                                 |
|   | • | Likelihood of success and impact of litigation,                                                                                                                                      |
|   |   |                                                                                                                                                                                 |
|   | • | Expected tax rates,                                                                                                                                                                  |
|   |   |                                                                                                                                                                                 |
|   | • | Expectations with respect to the economy, securities markets,  the market for merger and acquisition activity, the market for asset management  activity, and other industry trends, |
|   |   |                                                                                                                                                                                 |
|   | • | Competition, and                                                                                                                                                                     |
|   |   |                                                                                                                                                                                 |
|   | • | Effect from the impact of future legislation and regulation  on the Company.                                                                                                         |

The following factors, among others, could cause actual resultsto differ materially from forward-looking statements, and future results could differmaterially from historical performance:

|   |   |                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------|
|   | • | General political and economic conditions which may be less  favorable than expected;                      |
|   |   |                                                                                                       |
|   | • | The effect of changes in interest rates, inflation rates, the  stock markets, or other financial markets;  |
|   |   |                                                                                                       |
|   | • | Unfavorable legislative, regulatory, or judicial developments;                                             |
|   |   |                                                                                                       |
|   | • | Adverse findings or rulings in arbitrations, litigation or  regulatory proceedings;                        |
|   |   |                                                                                                       |
|   | • | Incidence and severity of catastrophes, both natural and man-made;                                         |
|   |   |                                                                                                       |
|   | • | Changes in accounting rules, policies, practices, and procedures  which may adversely affect the business; |
|   |   |                                                                                                       |
|   | • | Terrorist activities or other hostilities which may adversely  affect the general economy.                 |

**PART I**

**Item 1. Business**

**OVERVIEW**

Capital Financial Holdings, Inc. derives the majority of itsrevenues and net income from sales of mutual funds, insurance products, and variousother securities through Capital Financial Services, Inc. ("CFS"), the Company'sbroker-dealer subsidiary.

The Company organizes its current business units into two reportablesegments: broker-dealer services and oil and gas activities. The broker-dealer servicessegment distributes securities and insurance products to retail investors througha network of registered representatives. The oil and gas activities segment willseek opportunities in petroleum and natural gas exploration and production.

The Company has been engaged in the financial services businesssince 1987. The Company was incorporated September 22, 1987, as a North Dakota corporationby Robert E. Walstad, founder and Chairman Emeritus of the Company. The Company'sprincipal offices are located at 1 Main Street North, Minot, North Dakota 58703.As of December 31, 2010, the Company had 22 full-time employees consisting of officers,securities distribution, data processing, compliance, accounting, and clerical supportstaff.

**BUSINESS DEVELOPMENT**

On April 22, 2005, the Company acquired the management rightsto the IPS Millennium Fund and the IPS New Frontier Fund from IPS Advisory, Inc.("IPS Advisory"), and merged them into a new Integrity Fund called the IntegrityGrowth & Income Fund. The two funds had combined assets of approximately $57million at the time of acquisition. The purchase agreement called for total considerationof approximately 656,000 common shares of the Company. The Company provided IPSAdvisory with 250,000 common shares upon closing. The remaining consideration ofapproximately 406,000 common shares, which was subject to adjustment based on retentionof assets in the fund, was to be issued as follows: 203,000 common shares at theone-year anniversary of the closing date, and 203,000 common shares at the two-yearanniversary of the closing date. The shares are subject to a put option, which allowsthe holders of the shares to put them back to the Company at a price equal to themarket price of the Company's shares as of the closing date, which was $.36 pershare. The put option is exercisable with respect to one-third of the shares peryear starting on the third anniversary of the closing date. The Company will alsoprovide IPS Advisory with a stock option incentive bonus based on growth in assetsin the Fund based on the following schedule: 150,000 options on the Company's commonshares if assets of the Fund reach $100 million and 150,000 options on the Company'scommon shares if the assets of the Fund reach $200 million. The options will havea strike price of $.65 per share and mature 10 years from the closing date. Thesecurities issued in connection with this transaction were issued on a private placementbasis. In April of 2006, the one-year anniversary payment of 158,603 common shareswas made, which reflected the assets of the acquired funds at the one-year anniversary.In June of 2007, the two-year anniversary payment of 138,797 common shares was made,which reflected the assets of the acquired funds at the two-year anniversary. InApril 2010 the put option mentioned above expired, which resulted in the liabilityof this acquisition to be reduced to $0.

On March 7, 2007, the Company acquired certain assets of UnitedHeritage Financial Services, Inc. (UHFS), a wholly owned subsidiary of United HeritageFinancial Group, Inc., of Meridian, Idaho. UHFS had approximately 120 independentregistered representatives who became part of Capital Financial Services, Inc. (CFS),the retail brokerage division of the Company. Pursuant to the agreement, in exchangefor receipt of the assets of UHFS set forth above, the Company agreed to issue 500,000 restricted CFH shares and pay a deferred cash earnout payment totaling a maximum of $900,000, to be paid in 21 quarterly installments.On March 7, 2007, the Company issued 500,000 restricted common shares to UHFS. Asa result of this issuance of shares, $175,000 was recorded by the Company as goodwillrelating to the purchase of the assets. As of December 31, 2010, the Company hadmade fifteen quarterly installment payments totaling $330,736. The liability relatingto this acquisition is valued at approximately $244,615 as of December 31, 2010,and has also been recorded by the Company as goodwill. Due to the goodwill impairmentcharge that was recorded (see "Recent Developments" note), as of December 31, 2010,the total goodwill recorded relating to this acquisition was $656,906.

**THE COMPANY'S SUBSIDIARIES**

Capital Financial Holdings, Inc. derives the majority of itsrevenues and net income from sales of mutual funds, insurance products, and variousother securities through Capital Financial Services, Inc. ("CFS"), the Company'sbroker-dealer subsidiary.

The Company organizes its current business units into two reportablesegments: broker-dealer services and oil and gas activities. The broker-dealer servicessegment distributes securities and insurance products to retail investors througha network of registered representatives. The oil and gas activities segment willseek opportunities in petroleum and natural gas exploration and production.

***Capital Financial Services, Inc.***

CFS is a full-service brokerage firm. CFS is registered withthe SEC as an investment advisor and broker-dealer and also with FINRA as a broker-dealer.CFS specializes in providing investment products and services to independent investmentrepresentatives, financial planners, and investment advisors and currently supportsover 280 investment representatives and investment advisors.

***Capital Energy Resources, Inc.***

CER is an oil and gas operating company that will seek opportunitiesin petroleum and natural gas exploration and production.

**DESCRIPTION OF BUSINESS**

***Brokerage Commissions***

CFS's primary source of revenue is commission revenue in connectionwith sales of shares of mutual funds, insurance products, and various other securities.CFS receives commission and Rule 12b-1 servicing revenue generated from the saleof investment products originated by its registered representatives. CFS also receivesinvestment advisory revenue as a registered investment advisor. CFS pays a portionof the revenue generated to its registered representatives and retains the balance.

**REGULATION**

Virtually all aspects of the Company's businesses are subjectto various complex and extensive federal and state laws and regulations. Regulatedareas include, but are not limited to, the effecting of securities transactions,the financial condition of the Company's subsidiaries, record-keeping and reportingprocedures, relationships with clients, and experience and training requirementsfor certain employees. The Company's subsidiary is registered with various federaland state government agencies, including the SEC, as well as FINRA, a self-regulatoryindustry organization, as described below.

CFS is a registered broker-dealer, subject to extensive regulationand periodic examinations by the SEC, FINRA, and state agencies in those statesin which CFS conducts business. As a broker-dealer, CFS is subject to the Net CapitalRule promulgated by the SEC under the Exchange Act. This rule requires that a broker-dealermust maintain certain minimum net capital and that its aggregate indebtedness maynot exceed specified limitations.

Federal and state laws and regulations, and the rules of FINRA,grant broad powers to such regulatory agencies and organizations. These includethe power to limit, restrict, or prevent the Company from carrying on its businessif it fails to comply with such laws, regulations and rules. Other possible sanctionsthat may be imposed include the suspension of individual employees, restrictionson the Company expanding its business or paying cash dividends, the revocation ofthe investment advisor or broker dealer expulsions, censures, and/or fines.

Since 1993, FINRA rules have limited the amount of aggregatesales charges which may be paid in connection with the purchase and holding of investmentcompany shares sold through broker-dealers. Congress and the SEC presently are consideringamendments to Rule 12b-1 and other statutory provisions and rules that regulatethe distribution of mutual fund shares. The effect of the rule amendments and otherlegislative or regulatory actions might be to limit the amount of fees that couldbe paid pursuant to a fund's 12b-1 Plan in a situation where a fund has no, or limited,new sales for a prolonged period of time, as well as the imposition of other limitson the use of fund assets to pay for distribution.

**COMPETITION**

The Company derives substantially all of its revenues from commissionrevenue earned in connection with sales of shares of mutual funds, insurance productsand various other securities, and also receives investment advisory revenue.

The Company participates in retail brokerage, a highly competitiverelated sector of the financial services industry. The Company competes directlywith full-service stock brokerage firms, insurance companies, banks, regional broker-dealers,other independent broker-dealers, and other financial institutions, as well as investmentadvisory firms. Each of these competitors offer to the public many of the same investmentproducts and services offered by the Company. Further, other broker-dealers providingthe same services heavily recruit the representatives and advisors transacting businessthrough the Company. This competition forces the Company to maintain high levelsof support services and commission payouts for these representatives and advisors.These high levels of services and payouts could have a materially adverse effecton the Company's earnings.

**RECENT DEVELOPMENTS**

The Company tests goodwill for impairment annually during thesecond quarter of each fiscal year. If an event occurs or circumstances change thatwould more likely than not reduce fair value of a reporting unit below its carryingvalue, goodwill is evaluated for impairment between annual tests. As a result ofongoing volatility in the financial industry and a reduction in the calculated fairmarket value of its wholly owned subsidiary Capital Financial Services, Inc., theCompany performed an interim goodwill impairment test for the quarter ended December31, 2010. On February 25, 2011, the Company determined that it will incur a goodwillimpairment charge for the fourth quarter of the fiscal year ended December 31, 2010of $753,518 related to the Broker-Dealer segment. This charge resulted from an interimtest for impairment under the FASB accounting and reporting standards for goodwilland other intangible assets, prompted by the ongoing volatility in the financialindustry and an opinion of fair market value provided by a third party. The Companywill not be required to make any current or future cash expenditures as a resultof the impairment. The impairment charge will be reflected in the Company's financialstatements as of and for the fourth quarter and fiscal year ended December 31, 2010.

In the Company's third quarter filing it reported capitalizedcosts of $154,865, in the Oil & Gas segment. These costs have been fully expensed,by the Company, as of December 31, 2010. A termination request has been receivedby CER, requesting termination of the Joint Participation Agreement between CERand Nakota Energy LLC. If this agreement is terminated CER would no longer haverights to the leases, in which CER had paid acquisition costs. It was determinedby the Company that until the outcome of this termination is finalized these capitalizedcosts would be expensed.

On September 24, 2010 the Company announced the resignation ofBradley P. Wells, the Company's Chief Executive Officer and Chief Financial Officerand Treasurer. On October 13, 2010 the Company then announced, effective October6, 2010, that Jacqueline L. Case had been appointed as the Company's interim Presidentand acting Executive Officer, and Valarie A. Hoskin had been appointed as the Company'sinterim Chief Financial Officer and Treasurer to replace Bradley P. Wells.

On March 25, 2010 the Board of Directors approved pursuant tothe Bylaws of the Company, a reduction in the number of directors from five to four.In accordance with the Bylaws of the Company when the number of directors is reduced,the current directors continue to serve until the expiration of their terms andtherefore the number of directors will remain at five until the Annual Meeting ofShareholders of the Company.

On March 25, 2010 Mr. Vance Castleman announced his retirementfrom the Board of Directors effective upon the Annual Meeting of Shareholders ofthe Company. As a result, Mr. Castleman will not be a director nominee at the AnnualMeeting of Shareholders.

In March of 2009 the Company entered into a Definitive Agreement(the "Agreement") with Corridor Investors, LLC ("Buyer"), pursuant to which Buyeragreed to purchase from Seller, and Seller agreed to sell to Buyer: (i) all of theissued and outstanding shares of each of three subsidiaries of the Company, IntegrityFund Services, Inc., a share transfer agency, Integrity Funds Distributor, Inc.,a FINRA member broker dealer and Integrity Mutual Funds, Inc. of Nevada, a non-operatingentity (the "Companies'); (ii) all of Seller's right, title and interest in andto certain tangible assets and (iii) the sale of certain assets of Integrity MoneyManagement, Inc. related to its mutual fund advisory business. The purpose of theAgreement was to facilitate a change in advisor as well as to transfer, togetherwith the operating subsidiaries, the combined mutual fund service business of theSeller currently provided to The Integrity Funds, Integrity Managed Portfolios,ND Tax-Free Fund, Inc., Montana Tax-Free Fund, Inc. and Integrity Fund of Funds,Inc. ("the Funds"), which are investment companies registered with the Securitiesand Exchange Commission ("SEC") under the Investment Company Act of 1940. As perthe Agreement, closing occurred; the Buyer paid $1,525,480 (60 BPS of the aggregatenet assets, totaling $254,246,596 as of July 30, 2009) to the Company. On August5, 2010 the Company received $227,200 (10 BPS of the aggregate net assets, totaling$227,199,779 as of July 30, 2010), the first of the three additional payments consistingof 10 BPS of the aggregate net assets as of July 30, 2010, 2011 and 2012. With theclosing and transfer of entities, the Company is no longer involved in the mutualfund service business. The Company continues to operate as a Broker-Dealer throughits wholly owned subsidiary Capital Financial Services, Inc. As a result of thetransfer, post closing of the transaction, Integrity Fund Services, Inc., IntegrityFunds Distributor, Inc. and Integrity Money Management, Inc., which constitute themutual fund division of the Company, will be reflected in the Company's future consolidatedfinancial statements as a discontinued operation.

The Company tests goodwill for impairment annually during thesecond quarter of each fiscal year. If an event occurs or circumstances change thatwould more likely than not reduce fair value of a reporting unit below its carryingvalue, goodwill is evaluated for impairment between annual tests. As a result ofongoing volatility in the financial industry and a significant reduction in assetsunder management in the Company's sponsored mutual funds at the time, the Companyperformed an interim goodwill impairment test for the quarter ended December 31,2008. On February 24, 2009, the Company determined that it would incur a goodwillimpairment charge for the fourth quarter of the fiscal year ended December 31, 2008of $5,312,606 in the Mutual Fund Services segment. This charge resulted from aninterim test for impairment under the FASB accounting and reporting standards forgoodwill and other intangible assets, prompted by a significant reduction in assetsunder management and ongoing volatility in the financial service industry duringthe fourth quarter of 2008. The Company was not required to make any current orfuture cash expenditures as a result of the impairment. The impairment charge wasreflected in the Company's financial statements as of and for the fourth quarterand fiscal year ended December 31, 2008.

**AVAILABILITY OF SEC REPORTS**

All SEC reports may be viewed and copied at the SEC's PublicReference Room at 100 F Street NE, Washington, DC 20549, on official business daysduring the hours of 10 a.m. to 3 p.m. local time. Information on the operation ofthe Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.The Commission maintains an Internet site (http://www.sec.gov) that contains reports,proxy and information statements, and other information regarding issuers that fileelectronically with the Commission.

All SEC reports are also made available on the Company's websiteat http://capitalfinancialholdings.com. These reports, including annual reportson Form 10-K and 10-KSB, quarterly reports of Form 10-Q and 10-QSB, and currentreports on Form 8-K, are available on the same day they are filed with the SEC.

**Item 1A. Risk Factors**

Not Applicable as a Smaller Reporting Company.

**Item 1B. Unresolved Staff Comments**

None

**Item 2. Properties**

The Company operates the majority of its business out of itslocation at 1 Main Street North, Minot, North Dakota, which the Company owns. Asof December 31, 2010, the building has a $277,772 mortgage.

**Item 3. Legal Proceedings**

The Company operates in a legal and regulatory environment thatexposes it to potentially significant litigation risks. As a result, the Companyis involved in various disputes and legal proceedings, including litigation, arbitrationand regulatory investigations, including a number of investigatory matters and legalproceedings arising out of customer allegations related to past commissioned salesof alternative investment products. In 2007 through the first quarter of 2009 asubstantial amount (approximately 10% to 20%) of the Company's sales of commissionedproducts were in private placements of alternative products, two of which as ofDecember 31, 2009 (Medical Capital Corporation and related issuer entities and ProvidentRoyalties, LLC and related issuer entities) were placed in receivership by actionof the United States Securities and Exchange Commission and issuers of certain otheralternative products sold by the Company are in Chapter 11 Bankruptcy or may havefinancial difficulties. Additionally, difficult economic conditions in general andthe stock market decline have contributed to decline in broker-dealer subsidiaryclient portfolio values. As a result of such alleged failings of alternative productsand the uncertainty of client recovery from the various product issuers, the Companyis subject to regulatory scrutiny and a number of recently instituted legal or arbitrationproceedings, including two recently instituted proceedings seeking certificationas class actions which name the Company as one of a number of defendants and allegevarious securities or conduct violations, one with respect to private placementsof Medical Capital Corporation and related issuer entities for which the broker-dealersubsidiary placed approximately $100 million of debt securities and the other withregard to private placements of Provident Royalties, LLC and related issuer entitiesfor which the broker-dealer subsidiary placed approximately $60 million of debtsecurities. The Company intends to vigorously contest the allegations of the variousproceedings and believes that there are multiple meritorious legal and fact baseddefenses in these matters. Such cases are subject to many uncertainties, and theiroutcome is often difficult to predict, including the impact on operations or onthe financial statements, particularly in the earlier stages of a case. The Companymakes provisions for cases brought against it when, in the opinion of managementafter seeking legal advice, it is probable that a liability exists, and the amountcan be reasonably estimated. The current proceedings are subject to uncertaintiesand as such, the Company is unable to estimate the possible loss or a range of lossthat may result from each individual matter. There is a contemplated settlementregarding both Medical Capital Corporation and Provident Royalties, LLC, by whichthe Company would contribute monies to a settlement fund. The contemplated settlement,in the amount of $200,000, was recorded in the books of the company as a liability,though the settlement is subject to approval by a number of entities, and thereis no assurance that the settlement will be completed.

**PART II**

**Item 4. Market for Registrant'sCommon Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

***Information about the Company's Common Stock***

The Company's Common Shares are traded on the OTC Bulletin Boardunder the symbol CPFH. The Company's common shares began trading on the OTC BulletinBoard on November 7, 1997. On May 31, 2002, the shareholders of the Company approveda two for one (2:1) share split of the issued and outstanding common shares of theCompany, which took effect on July 1, 2002. On December 31, 2010, the closing priceof the Company's Common Shares on the OTC Bulletin Board was $.07 per share. AtFebruary 28, 2010, there were approximately 733 shareholders of record.

The following table sets forth the high and low closing pricesfor the Company's common stock. The quotations reflect inter-dealer prices, withoutretail mark-up, mark-down, or commission, and may not represent actual transactions.

|           | **2010**        | **2009**        |
|----------------|-----------------|-----------------|
|           | **Fiscal Year** | **Fiscal Year** |
|           | ** **      | ** **      | ** ** | ** ** |
| **Quarter**    | **High**        | **Low**         | **High** | **Low** |
|           |            |            |   |   |
| First Quarter  | .190            | .130            | .280 | .150 |
| Second Quarter | .190            | .110            | .240 | .140 |
| Third Quarter  | .200            | .090            | .230 | .150 |
| Fourth Quarter | .130            | ..050           | .240 | .120 |

The Company has not paid a dividend with respect to its commonstock, nor does the Company anticipate paying dividends in the foreseeable future.

***The Company has issued the following securities in thepast quarter without registering the securities under the Securities Act:***

None

***Smaller Reporting Company Repurchases of Equity Securities:***

| **Period**    | **Total Number of Shares  Purchased** | **Average Price Per  Share** | **Total Number of Shares  Purchased as Part of Publicly Announced Plans or Programs** | **Approximate Dollar  Value of Shares that May Yet Be Purchased Under the Plans or Programs** |
|---------------|---------------------------------------|------------------------------|---------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| October 2010  | -                                     | -                            | -                                                                                     | $597,754                                                                                      |
| November 2010 | -                                     | -                            | -                                                                                     | $597,754                                                                                      |
| December 2010 | -                                     | -                            | -                                                                                     | $597,754                                                                                      |
| Total         | -                                     | -                            | -                                                                                     | $597,754                                                                                      |

**Item 5. Selected FinancialData**

Not Applicable as a Smaller Reporting Company.

**Item 6. Management's Discussionand Analysis of Financial Condition and Results of Operations**

The following information is provided in connection with, andshould be read in conjunction with, the consolidated financial statements and notesincluded in this Annual Report on Form 10-K.

**GENERAL**

Capital Financial Holdings, Inc. derives the majority of itsrevenues and net income from sales of mutual funds, insurance products, and variousother securities through Capital Financial Services, Inc. ("CFS"), the Company'sbroker-dealer subsidiary.

The Company organizes its current business units into two reportablesegments: broker-dealer services and oil and gas activities. The broker-dealer servicessegment distributes securities and insurance products to retail investors througha network of registered representatives. The oil and gas activities segment willseek opportunities in petroleum and natural gas exploration and production.

**RESULTS OF OPERATIONS**

The following table sets forth, for the periods indicated, amountsincluded in the Company's Consolidated Statements of Operations and the percentagechange in those amounts from period to period.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |       |       |       |       |       |                         |                         |
|  
Fee income

$

975,010

$

1,062,492

$

1,551,245

(8)%

(32)%

 
Commission income

 

17,746,472

 

16,096,513

 

25,869,214

10%

(37)%

 
Other income

 

670,325

 

743,769

 

975,877

(10)%

(46)%

 
Total revenue

$

19,391,807

$

17,902,774

$

28,396,336

8%

(37)%

 

 

 

 

 

 

 

 

 

**OPERATING EXPENSES**

 

 

 

 

 

 

 

 

 
Compensation and benefits

$

1,350,094

$

1,786,179

$

2,089,297

(24)%

(15)%

 
Commission expense

 

16,566,033

 

15,223,613

 

24,390,850

9%

(38)%

 
Goodwill impairment expense

 

753,518

 

-

 

-

100%

-

 
General and administrative expenses

 

1,423,353

 

1,036,490

 

1,125,767

37%

(8%)

 
Geological & geophysical costs

 

66,310

 

-

 

-

100%

-

 
Depreciation and amortization

 

75,381

 

100,369

 

115,487

(25)%

(13)%

 
Total operating expenses

$

20,234,689

$

18,146,651

$

27,721,401

12%

(35)%

 

 

 

 

 

 

 

 

 

**OPERATING INCOME (LOSS)**

$

(842,882)

$

(243,877)

$

674,935

246%

(136)%

 

 

 

 

 

 

 

 

 

**OTHER EXPENSES**

 

 

 

 

 

 

 

 

 
Loss on investment

$

-

$

(31,876)

$

-

(100)%

100%

 
Interest expense

 

(80,880)

 

(212,552)

 

(302,369)

(62)%

(30)%

 
Net other expenses

$

(80,880)

$

(244,428)

$

(302,369)

(67)%

(19)%

 

 

 

 

 

 

 

 

 

**INCOME (LOSS) OF CONTINUING OPERATIONS BEFORE INCOME TAX  BENEFIT (EXPENSE)**

$

(923,762)

$

(488,305)

$

372,566

89%

(231)%

 

 

 

 

 

 

 

 

 

**INCOME TAX BENEFIT (EXPENSE)**

$

40,581

$

191,416

$

(146,046)

(79)%

231%

 

 

 

 

 

 

 

 

 

**NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS**

$

(883,181)

$

(296,889)

$

226,520

197%

(231)%

 

 

 

 

 

 

 

 

 

**DISCONTINUED OPERATIONS**

 

 

 

 

 

 

 

 

Income (Loss) from operations of discontinued operations (net  of tax)

$

-

$

(125,211)

$

1,576,389

100%

(107)%

Goodwill impairment expense

 

-

 

-

 

(5,312,606)

-

(100)%

Gain (Loss) on disposal of discontinued operations

 

(111,601)

 

228,402

 

-

(149)%

100%

Net discontinued operations

$

(111,601)

$

103,191

$

(3,736,217)

(208)%

103%

 

 

 

 

 

 

 

 

 

**NET LOSS**

$

(994,782)

$

(193,698)

$

(3,509,697)

(414)%

94%

 

 

 

 

 

 

 

 

 

**NET INCOME (LOSS) OF CONTINUING OPERATIONS PER COMMON SHARE:**

 

(.07)

 

(.03)

 

.01

 

 

 

 

 

 

 

 

 

 

 

**NET LOSS PER COMMON SHARE:**

 

(.07)

 

(.02)

 

(.25)

 

 

**Year Ended December 31, 2010, compared with Year EndedDecember 31, 2009:**

**Operating Revenues**—Total operating revenues for 2010 were$19,391,807, an increase of 8% from $17,902,774 in 2009. The increase resulted fromincreased commission income relating to CFS, the Company's broker-dealer division.

***Fee Income***—Fee income for 2010 was $975,010, an8% decrease from $1,062,492 in 2009. The decrease was due to a reduction in feesreceived by CFS due to a reduction in assets under management in CFS' registeredinvestment advisor.

The Company earns investment advisory fees in connection withCFS' registered investment advisor. The Company pays the registered representativesa portion of this fee income as commission expense and retains the balance. Thesefees constituted 5% of the Company's consolidated revenues in 2010.

***Commission Income***—Commission income includes CFS.The Company pays the registered representatives a percentage of this income as commissionexpense and retains the balance. Commission income for 2010 was $17,746,472, a 10%increase from $16,096,513 in 2009. The increase was due primarily to an increasein commissions received by CFS due to market conditions. Future market conditionswill continue to impact commission levels. Commission revenues constituted 92% ofthe Company's consolidated revenues in 2010.

***Other Income***—Other income for 2010 was $670,325a 10% decrease from $743,769 in 2009. Other income is comprised primarily of duediligence and marketing allowances received by CFS. Other income constituted 4%of the Company's consolidated revenues in 2010.

***Operating Expenses***—Total operating expenses for2010 were $20,234,689 a 12% increase from $18,146,651 in 2009. The increase resultedfrom the net increases in the expense categories described in the paragraphs below.

The table below displays the expenses relating to the Oil &Gas activities for the years ending December 31, 2010, 2009 and 2008:

 

 

2010

 

2009

 

2008

Geological & geophysical expenses

$

66,310

$

-

$

-

Depreciation expense

$

261

$

-

$

-

General & administrative expenses

$

63,143

$

-

$

-

Compensation & benefit expenses

$

59,608

$

-

$

-

Total oil & gas expenses

$

189,322

$

-

$

-

***Compensation and Benefits***—Compensation and benefitsexpense for 2010 was $1,350,094, a 24% decrease from $1,786,179 in 2009. The decreaseresulted primarily from a reduction in incentive overrides paid to certain employeesfor the recruitment of new registered representatives in CFS, as well as a reductionin the number of employees over the past twelve months.

***Commission Expense***—Commission expense for 2010was $16,566,033, an 8% increase from $15,223,613 in 2009. The increase correspondswith the increase in commission income.

***Goodwill Impairment Expense***—Goodwill impairmentexpense for 2010 was $753,518, a 100% increase from $0 in 2009. The Company testsgoodwill for impairment annually during the second quarter of each fiscal year.If an event occurs or circumstances change that would more likely than not reducefair value of a reporting unit below its carrying value, goodwill is evaluated forimpairment between annual tests. As a result of ongoing volatility in the financialindustry and a reduction in the calculated fair market value of its wholly ownedsubsidiary Capital Financial Services, Inc., the Company performed an interim goodwillimpairment test for the quarter ended December 31, 2010. On February 25, 2011, theCompany determined that it will incur a goodwill impairment charge for the fourthquarter of the fiscal year ended December 31, 2010 of $753,518 related to the Broker-Dealersegment. This charge resulted from an interim test for impairment under the FASBaccounting and reporting standards for goodwill and other intangible assets, promptedby the ongoing volatility in the financial industry and an opinion of fair marketvalue provided by a third party. The Company will not be required to make any currentor future cash expenditures as a result of the impairment. The impairment chargewill be reflected in the Company's financial statements as of and for the fourthquarter and fiscal year ended December 31, 2010.

***General and Administrative Expenses***—Total generaland administrative expenses for 2010 were $1,423,353, an increase of 37% from $1,036,490in 2009. The increase was due primarily to an increase in licensing fees and legalexpenses paid by CFS.

**Geological & Geophysical Costs**—Total Geological &Geophysical costs for 2010 were $66,310, an increase of 100% from $0 in 2009. Theincrease was due to the oil and gas division being opened in February of 2010.

***Depreciation and Amortization***—Depreciation andamortization for 2010 was $75,381, a 25% decrease from $100,369 in 2009. The decreasewas due to the disposal of assets associated with the mutual fund division sale.

***Interest Expense***—Interest expense was $80,880 for2010, a 62% decrease from $212,552 in 2009. The decrease was due primarily to areduction in outstanding debt due to redemptions of the company's subordinated corporatenotes processed on June 23rd and July 31st, totaling $500,000, and also the company'sdecision to call the remaining notes, totaling $1,500,000, processed on September30, 2009.

**Year Ended December 31, 2009, compared with Year EndedDecember 31, 2008:**

**Operating Revenues**—Total operating revenues for 2009 were$17,902,774, a decrease of 37% from $28,396,337 in 2008. The decrease resulted primarilyfrom decreased commission and fee income relating to CFS, the Company's broker-dealerdivision.

***Fee Income***—Fee income for 2009 was $1,062,492,a 32% decrease from $1,551,245 in 2008. The decrease was due to a reduction in feesreceived by CFS due to a reduction in assets under management in CFS' registeredinvestment advisor.

The Company earns investment advisory fees in connection withCFS' registered investment advisor. The Company pays the registered representativesa portion of this fee income as commission expense and retains the balance. Thesefees constituted 6% of the Company's consolidated revenues in 2009.

***Commission Income***—Commission income includes CFS.The Company pays the registered representatives a percentage of this income as commissionexpense and retains the balance. Commission income for 2009 was $16,096,513, a 37%decrease from $25,869,214 in 2008. The decrease was due primarily to a decreasein commissions received by CFS due to market conditions. Future market conditionswill continue to impact commission levels. Commission revenues constituted 90% ofthe Company's consolidated revenues in 2009.

***Other Income***—Other income for 2009 was $743,769,a 24% decrease from $975,877 in 2008. Other income is comprised primarily of duediligence and marketing allowances received by CFS. Other income constituted 4%of the Company's consolidated revenues in 2009.

***Operating Expenses***—Total operating expenses for2009 were $18,146,651 a 35% decrease from $27,721,401 in 2008. The decrease resultedfrom the net decreases in the expense categories described in the paragraphs below.

***Compensation and Benefits***—Compensation and benefitsexpense for 2009 was $1,786,179, a 15% decrease from $2,089,297 in 2008. The decreaseresulted primarily from a reduction in incentive overrides paid to certain employeesfor the recruitment of new registered representatives in CFS, as well as a reductionin the number of employees over the past twelve months.

***Commission Expense***—Commission expense for 2009was $15,223,613, a 38% decrease from $24,390,850 in 2008. The decrease correspondswith the decreases in fee and commission income.

***Goodwill Impairment Expense***—Goodwill impairmentexpense for 2009 was $0, a 100% decrease from $5,312,606 in 2008. The Company testsgoodwill for impairment annually during the second quarter of each fiscal year.If an event occurs or circumstances change that would more likely than not reducefair value of a reporting unit below its carrying value, goodwill is evaluated forimpairment between annual tests. As a result of ongoing volatility in the financialindustry and a significant reduction in assets under management in the Company'ssponsored mutual funds, the Company performed an interim goodwill impairment testfor the quarter ended December 31, 2008. On February 24, 2009, the Company determinedthat it would incur a goodwill impairment charge for the fourth quarter of the fiscalyear ended December 31, 2008 of $5,312,606 in the Mutual Fund Services segment.This charge resulted from an interim test for impairment under the FASB accountingand reporting standards for goodwill and other intangible assets, prompted by asignificant reduction in assets under management and ongoing volatility in the financialservice industry during the fourth quarter of 2008. The Company was not requiredto make any current or future cash expenditures as a result of the impairment. Theimpairment charge was reflected in the Company's financial statements as of andfor the fourth quarter and fiscal year ended December 31, 2008.

***General and Administrative Expenses***—Total generaland administrative expenses for 2009 were $1,036,490, a decrease of 8% from $1,125,767in 2008. The decrease was due primarily to a reduction in the distributions beingpaid to outside wholesalers during the time that Capital Financial Holdings, Inc.owned the mutual fund division.

***Depreciation and Amortization***—Depreciation andamortization for 2009 was $100,369, a 13% decrease from $115,487 in 2008. The decreasewas due to the disposal of assets associated with the mutual fund division sale.

***Interest Expense***—Interest expense was $212,552for 2009, a 30% decrease from $302,369 in 2008. The decrease was due primarily toa reduction in outstanding debt due to redemptions of the company's subordinatedcorporate notes processed on June 23rd and July 31st, totaling $500,000, and alsothe company's decision to call the remaining notes, totaling $1,500,000, processedon September 30, 2009.

**FINANCIAL CONDITION**

On December 31, 2010, the Company's assets aggregated $8,707,621,a decrease of 8% from $9,500,728 in 2009, due to increases in cash and cash equivalents,accounts receivable, prepaids, deferred tax asset and other assets, offset by decreasesin income tax receivables, long-term assets, goodwill, and net property and equipment.Stockholder's equity was $5,457,729 on December 31, 2010, compared to $6,494,044on December 31, 2009.

On December 31, 2009, the Company's assets aggregated $9,500,728,a decrease of 24% from $12,532,431 in 2008, due to increases in income taxes receivableand long-term assets, offset by decreases in cash and cash equivalents, accountsreceivable, goodwill, prepaids, net property and equipment, and other assets. Stockholdersequity was $6,494,044 on December 31, 2009, compared to $6,708,250 on December 31,2008.

Cash provided by operating activities was $204,833 for the yearended December 31, 2010, as compared to net cash used by operating activities of$162,907 for the year ended December 31, 2009 and net cash provided by operatingactivities of $739,023 for the year ended December 31, 2008.

Net cash provided by investing activities was $211,125 for theyear ended December 31, 2010, as compared to net cash provided by investing activitiesof $1,424,096 for the year ended December 31, 2009 and net cash used by investingactivities of $131,326 for the year ended December 31, 2008. During the twelve monthsended December 31, 2010, the cash provided by investing activities were the proceedsfrom the first of three installment payments received from Corridor Investors, LLC(See Note 18-Discontinued Operations), minus office and computer equipment purchasedduring this time frame.

Net cash used by financing activities was $198,495 for the yearended December 31, 2010, as compared to net cash used by financing activities of$2,132,559 for the year ended December 31, 2009, and net cash used by financingactivities of $910,839 for the year ended December 31, 2008. During the year endedDecember 31, 2010, the Company paid out $91,500 in preferred stock dividends, repaid$30,130 of bank debt and paid $76,865 relating to the acquisition of certain assetsof United Heritage Financial Services in 2007.

**LIQUIDITY AND CAPITAL RESOURCES**

On December 31, 2010, the Company held $2,186,201 in cash andcash equivalents, as compared to $1,968,738 on December 31, 2009, and $2,840,108on December 31, 2008. Liquid assets, which consist of cash and cash equivalents,totaled $2,186,201 at December 31, 2010, as compared to $1,968,738 on December 31,2009, and $2,840,108 on December 31, 2008. The Company is required to maintain certainlevels of cash and liquid securities in its broker-dealer subsidiary to meet regulatorynet capital requirements.

The Company currently has no lines of credit available.

The Company has historically relied upon sales of its equitysecurities and debt instruments, as well as bank loans, for liquidity and growth.Management believes that the Company's existing liquid assets, along with cash flowfrom operations, will provide the Company with sufficient resources to meet itsordinary operating expenses during the next twelve months. Significant, unforeseenor extraordinary expenses may require the Company to seek alternative financingsources, including common or preferred share issuance or additional debt financing.

In addition to the liabilities coming due in the next twelvemonths, management expects that the principal needs for cash may be to acquire additionalfinancial services firms, broker recruitment, asset acquisition opportunities forthe Company's new oil and gas operations subsidiary, repurchase shares of the Company'scommon stock, and service debt. Management also expects to realize increases inconsultant expenses as well as increased compliance and legal costs with respectto its broker dealer subsidiary related to regulatory and litigation matters.

**Item 6. Quantitative and QualitativeDisclosures About Market Risk**

Not Applicable as a Smaller Reporting Company.

**Item 7. Financial Statementsand Supplementary Data**

The financial statements required by this item, the accompanyingnotes thereto, and the reports of independent registered public accounting firmare included as part of this Form 10-K immediately following the signatures page,beginning on page F-1.

**Item 8. Changes In and Disagreementswith Accountants on Accounting and Financial Disclosure**

None.

**Item 8A. Controls and Procedures**

The Company's management, including the Company's Interim ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness of thedesign and operation of the Company's disclosure controls and procedures (as definedin Rule 13a-14(c) and Rule 15c-14(c) under the Exchange Act) as of the end of theperiod covered by this report, pursuant to Rule 13a-15(b) of the Exchange Act. Basedupon that evaluation, the Interim Chief Executive Officer and Chief Financial Officerhave concluded that the Company's disclosure controls and procedures are effectiveas of December 31, 2010, and that information required to be disclosed by the Companyin reports that it files or submits under the Exchange Act is recorded, processedand summarized, and reported within the time periods specified by the SEC's rulesand forms.

Disclosure controls and procedures are the controls and otherprocedures that are designed to ensure that information required to be disclosedin the reports that the Company files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC'srules and forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to be disclosedin the reports that the Company files or submits under the Exchange Act is accumulatedand communicated to management, including the Interim Chief Executive Officer andInterim Chief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

There were no significant changes in the Company's internal controlsor in other factors that could significantly affect these controls subsequent tothe date of their evaluation, including any corrective actions with regard to significantdeficiencies or material weaknesses.

**MANAGEMENT'S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Management of Capital Financial Holdings, Inc. (together withits consolidated subsidiaries, the "Company"), is responsible for establishing andmaintaining adequate internal control over financial reporting. The Company's internalcontrol over financial reporting is a process designed under the supervision ofthe Company's principal executive and principal financial officers to provide reasonableassurance regarding the reliability of financial reporting and the preparation ofthe Company's financial statements for external reporting purposes in accordancewith United States generally accepted accounting principles.

As of December 31, 2010, management conducted an assessment ofthe effectiveness of the Company's internal control over financial reporting, basedon the framework established in Internal Control - Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO). Basedon this assessment, management has determined that the Company's internal controlover financial reporting as of December 31, 2010, is effective.

The Company's internal control over financial reporting includespolicies and procedures that pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect transactions and acquisitions and dispositionsof assets; provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with United States generallyaccepted accounting principles, and that receipts and expenditures are being madeonly in accordance with authorizations of management and the directors of the Company;and provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of Company assets that could have a material effecton the Company's financial statements.

This annual report does not include an attestation report ofthe Company's registered public accounting firm regarding internal control overfinancial reporting. Management's report was not subject to attestation by the Company'sregistered public accounting firm pursuant to final rules of the Securities andExchange Commission that permit the Company to provide only management's reportin this annual report.

**Item 8B. Other Information**

None.

**PART III**

**Item 9. Directors, ExecutiveOfficers and Corporate Governance**

The information required by this Item will be contained in ourdefinitive Proxy Statement for our 2011 Annual Meeting of Shareholders and suchinformation is incorporated herein by reference.

**Item 10. Executive Compensation**

The information required by this Item will be contained in ourdefinitive Proxy Statement for our 2011 Annual Meeting of Shareholders and suchinformation is incorporated herein by reference.

**Item 11. Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters**

The information required by this Item will be contained in ourdefinitive Proxy Statement for our 2011 Annual Meeting of Shareholders and suchinformation is incorporated herein by reference.

**Item 12. Certain Relationshipsand Related Transactions, and Director Independence**

The information required by this Item will be contained in ourdefinitive Proxy Statement for our 2011 Annual Meeting of Shareholders and suchinformation is incorporated herein by reference.

**Item 13. Principal AccountingFees and Services**

The information required by this Item will be contained in ourdefinitive Proxy Statement for our 2011 Annual Meeting of Shareholders and suchinformation is incorporated herein by reference.

**PART IV**

**Item 14. Exhibits**

The following exhibits are filed herewith or incorporated herein  by reference as set forth below:

 

 

 

 

3.1

Restated Articles of Incorporation of the Company (incorporated  by reference to Exhibit 3.1 contained in the Company's Quarterly Report on Form  10-QSB, (File No. 0-25958), filed with the Commission on November 10, 2004 and  amended on June 5, 2009).

 

 

 

 

3.2

Amended Bylaws of the Company (incorporated by reference to  Exhibit 3.2 contained in the Company's Quarterly Report on Form 10-QSB, as amended  (File No. 0-25958), filed with the Commission on August 11, 2006).

 

 

 

 

4.1

Specimen form of Common Stock Certificate (incorporated by  reference to Exhibit 4.1 contained in the Company's Registration Statement on  Form S-1, as amended (File No.33-96824), filed with the Commission on September  12, 1995).

 

 

 

 

4.2

Certificate of designation of Series A Convertible Preferred  Shares (incorporated by reference to Exhibit 4.1 contained in the Company's Quarterly  Report on Form 10-QSB, (File No. 0-25958), filed with the Commission on November  10, 2004).

 

 

 

 

4.3

Instruments defining rights of holders of securities: (See  Exhibit 3.1 & 3.2)

 

 

 

 

 

 

 

14.1

Code of Ethics (incorporated by reference to Exhibit 14.1 contained  in the Company's Annual Report on Form 10-KSB, filed with the Commission on March  28, 2006).

 

 

 

 

21.1

Subsidiaries of the Company (incorporated by reference to Exhibit  21.1 contained in the Company's Annual Report on Form 10-KSB, filed with the Commission  on March 28, 2005).

 

 

 

 

31.1

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

 

 

 

 

31.2

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

 

 

 

 

32.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley  Act and 18 U.S.C. Section 1350.

 

 

 

 

32.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley  Act and 18 U.S.C. Section 1350.

* Indicates Management Contract or Compensatory Plan.

**SIGNATURES**

In accordance with Section 13 or 15(d) of the Exchange Act, theRegistrant has caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

CAPITAL FINANCIAL HOLDINGS, INC.

 

 

 

 

Date: March 23, 2011

By /s/ Jacqueline L. Case

 

Jacqueline L. Case

 

Interim President & Executive Officer

 

(Principal Executive Officer)

In accordance with the Exchange Act, this report has been signedbelow by the following persons on behalf of the registrant and in the capacitiesand on the dates indicated.

Date: March 23, 2011

By /s/ Valarie A. Hoskin

 

Valarie A. Hoskin

 

Chief Financial Officer

 

(Principal Financial Officer)

 

Date: March 23, 2011

By /s/ Jeffrey A. Cummer

 

Jeffrey A. Cummer

 

Chairman

 

 

Date: March 23, 2011

By /s/ Myron D. Thompson

 

Myron D. Thompson

 

Director

 

 

Date: March 23, 2011

By /s/ Gregory G. Philipps

 

Gregory G. Philipps

 

Director

 

 

Date: March 23, 2011

By /s/ Vaune M. Cripe

 

Vaune M. Cripe

 

Director

**CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES**

MINOT, NORTH DAKOTA

CONSOLIDATED FINANCIAL STATEMENTS

AS OF

DECEMBER 31, 2010, 2009 AND 2008

AND

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

**CAPITAL FINANCIAL HOLDINGS, INC., AND SUBSIDIARIES**TABLE OF CONTENTS

 

Pages

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

F-1

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Consolidated Balance Sheets 

F-2 - F-3

 

 

Consolidated Statements of Operations 

F-4 - F-5

 

 

Consolidated Statements of Stockholders' Equity

F-6

 

 

Consolidated Statements of Cash Flows

F-7 - F-8

 

 

Notes to Consolidated Financial Statements

F-9 - F-26

 

 

ADDITIONAL INFORMATION

 

 

 

Report of Independent Registered Public Accounting Firm

F-27

 

 

Selected Financial Data

F-28

 

 

Quarterly Results of Consolidated Operations (Unaudited)

F-29

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and DirectorsofCapital Financial Holdings, Inc. and SubsidiariesMinot, North Dakota

We have audited the accompanying consolidated balance sheetsof Capital Financial Holdings, Inc. and Subsidiaries as of December 31, 2010 and2009 and the related consolidated statements of operations, stockholders' equityand cash flows for the years ended December 31, 2010, 2009 and 2008. These consolidatedfinancial statements are the responsibility of the Company's management. Our responsibilityis to express an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits providea reasonable basis for our opinion.

In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the consolidated financial positionof Capital Financial Holdings, Inc. and Subsidiaries as of December 31, 2010 and2009, and the results of their consolidated operations and their consolidated cashflows for the years ended December 31, 2010, 2009 and 2008 in conformity with accountingprinciples generally accepted in the United States of America.

BRADY, MARTZ & ASSOCIATES, P.C.Minot, North Dakota USA

March 23, 2011

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2010 AND 2009

**ASSETS**

 

2010

2009

 

 

 

 

 

**CURRENT ASSETS**

 

 

 

 

 
Cash and cash equivalents

$

1,973,938

$

1,968,738

 
Accounts receivable (net of allowance for doubtful  accounts of $24,000 for 2010 and 2009)

 

1,432,575

 

1,242,630

 
Income taxes receivable

 

57,900

 

173,502

 
Deferred tax asset - current

 

68,683

 

45,032

 
Current portion of long-term receivable

 

211,969

 

254,247

 
Prepaids

 

38,809

 

27,849

 
 

 

 

 

 

 
Total current assets

$

3,783,874

$

3,711,998

 
 

 

 

 

 

 

 

 

 

 

**LONG-TERM ASSETS**

 

 

 

 

 
LT receivable-MF Division Sale

$

423,938

$

762,740

 
Less: current portion shown above

 

(211,969)

 

(254,247)

 

 

 

 

 

Total long-term assets

$

211,969

$

508,493

 

 

 

 

 

**PROPERTY AND EQUIPMENT**

$

1,727,320

$

1,711,245

 
Less accumulated depreciation

 

(606,753)

 

(536,395)

 
 

 

 

 

 

 
Net property and equipment 

$

1,120,567

$

1,174,850

 
 

 

 

 

 

**OTHER ASSETS**

 

 

 

 

 
Goodwill

$

2,574,413

$

3,431,641

 
Severance escrow

 

212,263

 

-

 
Deferred tax asset - non-current

 

579,084

 

474,755

 
Other assets (net of accumulated amortization

 

225,451

 

198,991

 
of $214,444 for 2010 and $209,422 for 2009)

 
 

 

 

 

 

 
Total other assets

$

3,591,211

$

4,105,387

 

 

 

 

 

**TOTAL ASSETS**

$

8,707,621

$

9,500,728

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (CONTINUED)

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

2010

2009

**CURRENT LIABILITIES**

 

 

 

 

 
Accounts payable 

$

331,895

$

103,726

 
Commissions payable

 

1,298,078

 

1,115,134

 
Other current liabilities

 

147,532

 

54,765

 
Current portion of long-term debt

 

229,522

 

278,117

 
 

 

 

 

 

 
Total current liabilities 

$

2,007,027

$

1,551,742

 

 

 

 

 

**LONG-TERM LIABILITIES**

 

 

 

 

 
Note payable

$

277,772

$

307,902

 
Convertible promissory note

 

950,000

 

950,000

 
Other long-term liabilities

 

244,615

 

475,157

 
Less current portion of long-term debt

 

(229,522)

 

(278,117)

 
 

 

 

 

 

 
Total long-term liabilities

$

1,242,865

$

1,454,942

 

 

 

 

 

**TOTAL LIABILITIES**

$

3,249,892

$

3,006,684

 

 

 

 

 

**STOCKHOLDERS' EQUITY**

 

 

 

 

 
Series A Preferred stock - 5,000,000 shares authorized, $.0001  par value;

$

305

$

305

 
3,050,000 and 3,050,000 shares issued and outstanding, respectively

 
Additional paid in capital - series A preferred stock

 

1,524,695

 

1,524,695

 
Common stock - 1,000,000,000 shares authorized, $.0001 par  value;

 

1,446

 

1,446

 
14,455,943 and 14,455,943 shares issued and outstanding, respectively

 
Additional paid in capital - common stock

 

10,446,302

 

10,396,335

 
Accumulated deficit 

 

(6,515,019)

 

(5,428,737)

 

 

 

 

 

**TOTAL STOCKHOLDERS' EQUITY**

$

5,457,729

$

6,494,044

 

 

 

 

 

**TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**

$

8,707,621

$

9,500,728

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

2010

2009

2008

**OPERATING REVENUES**

 

 

 

 

 

 

 
Fee income

$

975,010

$

1,062,492

$

1,551,245

 
Commission income

 

17,746,472

 

16,096,513

 

25,869,214

 
Other income

 

670,325

 

743,769

 

975,877

 
Total revenue

$

19,391,807

$

17,902,774

$

28,396,336

 

 

 

 

 

 

 

**OPERATING EXPENSES**

 

 

 

 

 

 

 
Compensation and benefits

$

1,350,094

$

1,786,179

$

2,089,297

 
Commission expense

 

16,566,033

 

15,223,613

 

24,390,850

 
Goodwill impairment expense

 

753,518

 

-

 

-

 
General and administrative expenses

 

1,423,353

 

1,036,490

 

1,125,767

 
Geophysical & geological costs

 

66,310

 

-

 

-

 
Depreciation and amortization

 

75,381

 

100,369

 

115,487

 
Total operating expenses

$

20,234,689

$

18,146,651

$

27,721,401

 

 

 

 

 

 

 

**OPERATING INCOME (LOSS)**

$

(842,882)

$

(243,877)

$

674,935

 

 

 

 

 

 

 

**OTHER EXPENSES**

 

 

 

 

 

 

 
Loss on investment

$

-

$

(31,876)

$

-

 
Interest expense

 

(80,880)

 

(212,552)

 

(302,369)

 
Net other expenses

$

(80,880)

$

(244,428)

$

(302,369)

 

 

 

 

 

 

 

**INCOME (LOSS) OF CONTINUING OPERATIONS BEFORE INCOME TAX  BENEFIT (EXPENSE)**

$

(923,762)

$

(488,305)

$

372,566

 

 

 

 

 

 

 

**INCOME TAX BENEFIT (EXPENSE)**

 

40,581

 

191,416

 

(146,046)

 

 

 

 

 

 

 

**NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS**

$

(883,181)

$

(296,889)

$

226,520

 

 

 

 

 

 

 

**DISCONTINUED OPERATIONS**

 

 

 

 

 

 

 
Income (Loss) from operation of discontinued mutual fund  segment (net of tax)

$

-

$

(125,211)

$

1,576,389

 
Goodwill impairment expense

 

-

 

-

 

(5,312,606)

 
Gain (Loss) on disposal of mutual fund segment 

 

(111,601)

 

228,402

 

-

 
Total discontinued operations (net of tax)

$

(111,601)

$

103,191

$

(3,736,217)

 

 

 

 

 

 

 

**NET LOSS**

$

(994,782)

$

(193,698)

$

(3,509,697)

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

CONSOLIDATED STATEMENTSOF OPERATIONS (CONTINUED)

**NET INCOME (LOSS) OF CONTINUING OPERATIONS PER COMMON SHARE:**

 

 

 

 

 

 

 
Basic

$

(.07)

$

(.03)

$

.01

 
Diluted

$

(.07)

$

(.03)

$

.01

 

 

 

 

 

 

 

**SHARES USED IN COMPUTING NET INCOME (LOSS) OF CONTINUING  OPERATIONS PER COMMON SHARE:**

 

 

 

 

 

 

 
Basic

 

14,638,937

 

14,541,585

 

14,519,372

 
Diluted

 

14,638,937

 

14,541,585

 

17,587,107

 

 

 

 

 

 

 

**NET INCOME (LOSS) OF DISCONTINUED OPERATIONS PER COMMON  SHARE:**

 

 

 

 

 

 

 
Basic

$

(.01)

$

.00

$

(.26)

 
Diluted

$

(.01)

$

.01

$

(.26)

 

 

 

 

 

 

 

**SHARES USED IN COMPUTING NET INCOME (LOSS) OF DISCONTINUED  OPERATIONS PER COMMON SHARE:**

 

 

 

 

 

 

 
Basic

 

14,638,937

 

14,541,585

 

14,519,372

 
Diluted

 

14,638,937

 

17,591,585

 

14,519,372

 

 

 

 

 

 

 

**NET LOSS PER COMMON SHARE:**

 

 

 

 

 

 

 
Basic

$

(.07)

$

(.02)

$

(.25)

 
Diluted

$

(.07)

$

(.02)

$

(.25)

 

 

 

 

 

 

 

**SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE:**

 

 

 

 

 

 

 
Basic

 

14,638,937

 

14,541,585

 

14,519,372

 
Diluted

 

14,638,937

 

14,541,585

 

14,519,372

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

Amounts

 

Shares

 
 

 

2010

 

2009

 

2008

 

2010

2009

2008

 
**Preferred stock and additional paid-in capital**

 

 

 

 

 

 

 

 

 

 

 
Balance, beginning of year

$

1,525,000

$

1,525,000

$

1,525,000

 

3,050,000

3,050,000

3,050,000

 
Preferred stock issued

 

-

 

-

 

-

 

-

-

-

 
Balance, end of year

$

1,525,000

$

1,525,000

$

1,525,000

 

3,050,000

3,050,000

3,050,000

 
 

 

 

 

 

 

 

 

 

 

 

 
**Common stock and additional paid-in capita**l

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 
Balance, beginning of year

$

10,397,780

$

10,375,474

$

10,286,346

 

14,455,943

14,455,943

14,455,943

 
Common stock issued

 

49,968

 

57,097

 

90,000

 

-

-

-

 
Purchase of common stock

 

-

 

(34,791)

 

(872)

 

-

-

-

 
Balance, end of year

$

10,447,748

$

10,397,780

$

10,375,474

 

14,455,943

14,455,943

14,455,943

 
 

 

 

 

 

 

 

 

 

 

 

 
**Accumulated deficit**

 

 

 

 

 

 

 

 

 

 

 
Balance, beginning of year

$

(5,428,737)

$

(5,143,539)

$

(1,542,342)

 

 

 

 

 
Net loss

 

(994,782)

 

(193,698)

 

(3,509,697)

 

 

 

 

 
Preferred dividends

 

(91,500)

 

(91,500)

 

(91,500)

 

 

 

 

 
Balance, end of year

$

(6,515,019)

$

(5,428,737)

$

(5,143,539)

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 
**ESOP activity**

 

 

 

 

 

 

 

 

 

 

 
Balance, beginning of year

$

-

$

(48,685)

$

(55,379)

 

 

 

 

 
Repayments from ESOP

 

-

 

48,685

 

6,694

 

 

 

 

 
Balance, end of year

$

-

$

-

$

(48,685)

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

**Total stockholders' equity**

$

5,457,729

$

6,494,044

$

6,708,250

 

 

 

 

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

2010

2009

2008

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(994,782)

$

(193,698)

$

(3,509,697)

Adjustments to reconcile net loss to net cash provided (used)  by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation 

 

70,357

 

85,302

 

115,488

 
Amortization 

 

5,022

 

15,067

 

-

 
Goodwill impairment expense

 

753,518

 

-

 

5,312,606

 
Loss on investment

 

-

 

31,876

 

-

 
Sales commissions amortized

 

-

 

-

 

151,693

 
Gain on allocation of ESOP shares

 

-

 

(34,791)

 

-

 
(Gain) Loss on disposal of discontinued operations

 

111,601

 

(228,402)

 

-

 
Loss on disposal of assets

 

-

 

67,860

 

-

Effects on operating cash flows due to changes in:

 

 

 

 

 

 

 
Accounts receivable 

 

(189,945)

 

316,543

 

632,453

 
Income taxes receivable

 

115,602

 

(145,321)

 

(28,181)

 
Prepaids

 

(10,960)

 

46,975

 

(5,057)

 
Deferred sales commissions capitalized, net of CDSC collected

 

-

 

-

 

13,433

 
Deferred tax asset

 

(127,979)

 

405,541

 

(840,426)

 
Other assets

 

(31,482)

 

31,657

 

(587)

 
Commissions Payable

 

182,944

 

(98,056)

 

(695,308)

 
Accounts payable

 

228,169

 

(266,772)

 

(340,747)

 
Income taxes payable

 

-

 

-

 

(20,512)

 
Other liabilities 

 

92,768

 

(196,688)

 

(46,135)

 
 

 

 

 

 

 

 

Net cash provided (used) by operating activities 

$

204,833

$

(162,907)

$

739,023

 

 

 

 

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of investment

$

-

$

(76,876)

$

-

Purchase of property and equipment 

 

(16,075)

 

(24,508)

 

(131,326)

Proceeds on sale of mutual fund division

 

-

 

1,525,480

 

-

Long-term receivable

 

227,200

 

-

 

-

 

 

 

 

 

 

 

Net cash provided (used) by investing activities 

$

211,125

$

1,424,096

$

(131,326)

 

 

 

 

 

 

 

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

CONSOLIDATED STATEMENTSOF CASH FLOWS (CONTINUED)

 

2010

2009

2008

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments from ESOP

$

-

$

48,685

$

6,694

Redemption of common stock 

 

-

 

-

 

(872)

Reduction of long-term liability

 

(76,865)

 

(63,450)

 

(129,872)

Reduction of short-term borrowing

 

-

 

-

 

(110,085)

Dividends paid

 

(91,500)

 

(91,500)

 

(91,500)

Reduction of notes payable

 

(30,130)

 

(26,294)

 

(24,204)

Redemption of commercial notes

 

-

 

-

 

(561,000)

Reduction of subordinate corporate notes

 

-

 

(2,000,000)

 

-

 

 

 

 

 

 

 

Net cash used by financing activities 

$

(198,495)

$

(2,132,559)

$

(910,839)

 

 

 

 

 

 

 

**NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**

$

217,463

$

(871,370)

$

(303,142)

**CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**

 

1,968,738

 

2,840,108

 

3,143,250

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

$

2,186,201

$

1,968,738

$

2,840,108

 

 

 

 

 

 

 

**SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION**

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 
Interest

$

80,880

$

382,135

$

327,951

 
Income taxes

$

31,929

$

276,768

$

510,349

 
 

 

 

 

 

 

 

**RECONCILIATION OF CASH AND CASH EQUIVALENTS**

 

 

 

 

 

 

 
Cash

$

1,973,938

$

1,986,738

$

2,840,108

 
Severance escrow

 

212,263

 

-

 

-

 
Net Cash

$

2,186,201

$

1,986,738

$ 

2,840,108

** **

 

 

 

 

 

 

**SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING  ACTIVITIES**

 

 

 

 

 

 

 
Increase in long-term receivable

$

-

$

762,740

$

-

 
Decrease in goodwill

$

103,710

$

109,140

$

59,161

 
Decrease in other long-term liabilities

$

153,677

$

166,237

$

149,161

 
Increase in common stock

$

49,967

$

57,097

$

90,000

 
Preferred stock dividends declared

$

22,875

$

22,875

$

22,875

 
Goodwill impairment expense

$

753,518

$

-

$

5,312,606

SEE NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2010, 2009 AND 2008

NOTE 1—**NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

The nature of operations and significantaccounting policies of Capital Financial Holdings, Inc., (formerly known as IntegrityMutual Funds, Inc.) and its Subsidiaries are presented to assist in understandingthe Company's consolidated financial statements.

**Nature of operations**—CapitalFinancial Holdings, Inc., and its Subsidiaries (the "Company") was established inSeptember 1987 as a North Dakota corporation. The Company derives its revenue frominvestment advisory fees as well as commissions earned from sales of mutual funds,insurance products, and various other securities through it's Subsidiary CapitalFinancial Services, Inc. Headquartered in Minot, North Dakota, the Company is marketingits services throughout the United States.

**Principles of consolidation**—Theconsolidated financial statements include the accounts of Capital Financial Holdings,Inc., and its wholly owned subsidiaries Capital Financial Services, Inc. ("CFS")and Capital Energy Resources, Inc. ("CER"). All significant inter-company transactionsand balances have been eliminated in the accompanying consolidated financial statements.

**Concentrations**—Capital FinancialHoldings, Inc. derives the majority of its revenues and net income from sales ofmutual funds, insurance products, and various other securities through CFS, theCompany's broker-dealer subsidiary. The company's revenues are largely dependenton the sales activity of registered representatives operating as independent contractors.Accordingly, fluctuations in financial markets and the composition of assets undermanagement impact revenues and results of operations.

**Accounting Principles**—The companyhas elected to use the Successful Efforts accounting method for the oil & gasdivision. Under this method, all expenses related to Geological & Geophysicaloperations are fully expensed on the income statement of the company, and all Acquisitioncosts, i.e. lease costs, are capitalized on the company's balance sheet.

**Use of estimates**—The preparationof consolidated financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the consolidated financial statementsand the reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

**Revenue recognition**—Commissionincome and the related clearing expenses are recorded on a trade-date basis as securitiestransactions occur. The revenue earned from 12b-1 and advisory fees is recognizedin the period earned.

**Stock-based compensation**—InDecember of 2005, the Company adopted the Financial Accounting Standards Board ("FASB")accounting and reporting standards for share-based payment which requires the measurementand recognition of compensation expense for all share-based payment awards madeto employees and directors, including employee stock options, based on estimatedfair values.

**Cash and cash equivalents**—TheCompany's policy is to record all liquid investments with original maturities ofthree months or less as cash equivalents. Liquid investments with maturities greaterthan three months are recorded as investments.

**Clearing Deposits**—The Companyhas "Deposit Accounts" with each of its Clearing Firms, as set forth in each ofthe Clearing Agreements. Upon termination or expiration of these agreements, theClearing Firms would deliver the balance of these accounts to the Company.

**Accounts receivable**—The Company'sreceivables consist primarily of concessions related to registered representativeactivity. Management evaluates the need for an allowance for doubtful accounts byidentifying troubled accounts and using historical experience. Accounts receivableare written off when management deems them uncollectible. Recoveries of accountsreceivable previously written off are recorded when received. The Company does notcharge interest on its receivables.

**Goodwill**—The Company accountsfor goodwill under the FASB accounting and reporting standards for goodwill andother intangible assets, which requires that goodwill and indefinite-lived otherintangible assets deemed to have an indefinite useful life be assessed annuallyfor impairment using fair value measurement techniques.

**Property and equipment**—Propertyand equipment is stated at cost less accumulated depreciation computed on straight-lineand accelerated methods over estimated useful lives as follows:

Equipment

5-7 years

Building

40 years

**Other assets**—Other assets includedebt issue costs and other miscellaneous assets. Debt issue costs are amortizedover the life of the corresponding debt.

**Advertising**—Costs of advertisingand promotion are expensed as incurred. Advertising and promotion costs aggregated$11,252 in 2010, $27,903 in 2009 and $116,303 in 2008.

**Earnings per common share**—Basicearnings per common share was computed using the weighted average number of sharesoutstanding of 14,638,937 in 2010, in 14,541,585 2009 and 14,519,372 in 2008. Dilutedearnings per common share is computed using the weighted average number of sharesoutstanding adjusted for share equivalents arising from unexercised stock warrants,stock options, and written put options. The weighted average shares outstandingused in computing diluted earnings per common share were 14,638,937 in 2010, in14,541,585 2009 and 14,519,372 in 2008.

**Income taxes**—The Company filesa consolidated income tax return with its wholly owned subsidiaries. The amountof deferred tax benefit or expense is recognized as of the date of the consolidatedfinancial statements, utilizing currently enacted tax laws and rates. Deferred taxbenefits or expenses are recognized in the financial statements for the changesin deferred tax assets between years. The Company's policy is to evaluate the likelihoodthat its uncertain tax positions will prevail upon examination based on the extentto which those positions have substantial support within the Internal Revenue Codeand Regulations, Revenue Rulings, court decisions, and other evidence. It is theopinion of management that the Company has no significant uncertain tax positionsthat would be subject to change upon examination. The federal income tax returnsof the Company are subject to examination by the IRS, generally for three yearsafter they were filed.

**Severance Escrow**—The Companyhas put into place a contingent Severance Benefit Package for its employees. Thepackage has an expiration date of August 1, 2011. The funds for this package havebeen placed into an account specifically designated for these funds.

**Reclassification**—Certain amountsfrom 2009 and 2008 have been reclassified to conform to the 2010 presentation. Thesereclassifications had no effect on the Company's net income.

**Recent Accounting Developments**—InJuly 2009, the FASB launched the FASB Accounting Standards Codification (the Codification)as the single source of Generally Accepted Accounting Principals ("GAAP"). Whilethe Codification did not change GAAP, it introduced a new structure to the accountingliterature and changed references to accounting standards and other authoritativeaccounting guidance. The Codification was effective for the firm for the third quarterof fiscal 2009 and did not have an effect on the Company's financial condition,results of operations or cash flows.

In December 2007, the FASB issuedamended accounting principles related to business combinations, which changed theaccounting for transaction costs, certain contingent assets and liabilities, andother balances in a business combination. In addition, in partial acquisitions,when control is obtained, the amended principles require that the acquiring companymeasure and record all of the target's assets and liabilities, including goodwill,at fair value as if the entire target company had been acquired. These amended accountingprinciples applied to the Company's business combinations beginning in the firstquarter of fiscal 2009. Adoption did not affect the Company's financial condition,results of operations or cash flows, but may have an effect on accounting for futurebusiness combinations.

In December 2007, the FASB issuedamended accounting principles related to noncontrolling interests in consolidatedfinancial statements, which require that ownership interests in consolidated subsidiariesheld by parties other than the parent (i.e., noncontrolling interests) be accountedfor and presented as equity, rather than as a liability or mezzanine equity. Theseamended accounting principles were effective for the Company's financials beginningin the first quarter of the 2009 fiscal year. Adoption did not have a material effecton the Company's financial condition, results of operations or cash flows.

In June 2008, the FASB issued amendedaccounting principles related to determining whether an instrument (or embeddedfeature) is indexed to an entity's own stock. These amended accounting principlesprovide guidance about whether an instrument (such as the Company's outstandingcommon stock warrants) should be classified as equity and not subsequently recordedat fair value. The Company adopted these amended accounting principles in the firstquarter of the 2009 fiscal year. Adoption did not affect the Company's financialcondition, results of operations or cash flows.

In April 2009, the FASB issued amendedaccounting principles related to recognition and presentation of other-than-temporaryimpairments. These amended principles prescribe that only the portion of an other-than-temporaryimpairment on a debt security related to credit loss is recognized in current periodearnings, with the remainder recognized in other comprehensive income, if the holderdoes not intend to sell the security and it is more likely than not that the holderwill not be required to sell the security prior to recovery. Previously, the entireother-than-temporary impairment was recognized in current period earnings. The Companyadopted these amended accounting principles in the second quarter of the 2009 fiscalyear. Adoption did not have a material effect on the Company's financial condition,results of operations or cash flows.

In January 2010, the FASB issued ASUNo. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosuresabout Fair Value Measurements." ASU No. 2010-06 provides amended disclosure requirementsrelated to fair value measurements. ASU No. 2010-06 is effective for financial statementsissued for reporting periods beginning after December 15, 2009 for certain disclosuresand for reporting periods beginning after December 15, 2010 for other disclosures.Since these amended principles require only additional disclosures concerning fairvalue measurements, adoption did not affect the Company's financial condition, resultsof operations or cash flows.

In December 2008, the SEC issued afinal rule, "Modernization of Oil and Gas Reporting." This rule revised some ofthe oil and gas reporting disclosures in Regulation S-K and Regulation S-X underthe Securities Act and the Securities Exchange Act of 1934, as amended (the "ExchangeAct"), as well as Industry Guide 2. Effective December 31, 2009, the Financial AccountingStandards Board ("FASB") issued revised guidance that substantially aligned theoil and gas accounting disclosures with the SEC's final rule. The amendments weredesigned to modernize and update oil and gas disclosure requirements to align themwith current practices and changes in technology. Additionally, this new accountingstandard requires that entities use 12-month average natural gas and oil priceswhen calculating the quantities of proved reserves and performing the full-costceiling test calculation. The new standard also clarified that an entity's equity-methodinvestments must be considered in determining whether it has significant oil andgas activities. The disclosure requirements were effective for registration statementsfiled on or after January 1, 2010 and for annual financial statements filed on orafter December 31, 2009; however, the FASB provided a one-year deferral of the disclosurerequirements if an entity became subject to the requirements because of a changeto the definition of significant oil and gas activities. We have incurred acquisitioncosts and geological and geophysical costs during the twelve month period endedDecember 31, 2010, under our wholly owned subsidiary, CER.

NOTE 2—**CASH AND CASH EQUIVALENTS**

Cash and cash equivalents at December31, 2010 and 2009 consist of the following:

 

Current Maturity

Current Interest Rate

 

 

 

 

 

Amount

 

 

2010

2009

Cash in checking

Demand

-

$

1,006,858

$

852,483

Cash in escrow

Demand

0.21%

 

212,263

 

-

Cash in savings

Demand

0.70%

 

967,080

 

1,116,255

 

 

 

 

$

2,186,201

$

1,968,738

NOTE 3—**PROPERTY AND EQUIPMENT**

Property and equipment at December31, 2010 and 2009, consists of the following:

 

2010

2009

 

Office furniture and equipment

$

314,615

$

301,631

 

Building and land

 

1,412,705

 

1,409,614

 

 

$

1,727,320

$

1,711,245

 

Accumulated depreciation and amortization

 

(606,753)

 

(536,395)

 

 

$

1,120,567

$

1,174,850

Depreciation expense totaled $75,381,$85,302 and $98,667 in 2010, 2009 and 2008, respectively.

NOTE 4—**BUSINESS ACQUISITIONS**

**Purchase Combinations—**

On April 22, 2005, the Company acquiredthe management rights to the IPS Millennium Fund and the IPS New Frontier Fund fromIPS Advisory, Inc. ("IPS Advisory"), and merged them into a new Integrity Fund calledthe Integrity Growth & Income Fund. The two funds had combined assets of approximately$57 million at the time of acquisition. The purchase agreement called for totalconsideration of approximately 656,000 common shares of the Company. The Companyprovided IPS Advisory with 250,000 common shares upon closing. The remaining considerationof approximately 406,000 common shares, which was subject to adjustment based onretention of assets in the fund, was to be issued as follows: 203,000 common sharesat the one-year anniversary of the closing date, and 203,000 common shares at thetwo-year anniversary of the closing date. The shares are subject to a put option,which allows the holders of the shares to put them back to the Company at a priceequal to the market price of the Company's shares as of the closing date, whichwas $.36 per share. The put option is exercisable with respect to one-third of theshares per year starting on the third anniversary of the closing date. The Companywill also provide IPS Advisory with a stock option incentive bonus based on growthin assets in the Fund based on the following schedule: 150,000 options on the Company'scommon shares if assets of the Fund reach $100 million and 150,000 options on theCompany's common shares if the assets of the Fund reach $200 million. The optionswill have a strike price of $.65 per share and mature 10 years from the closingdate. The securities issued in connection with this transaction were issued on aprivate placement basis. In April of 2006, the one-year anniversary payment of 158,603common shares was made, which reflected the assets of the acquired funds at theone-year anniversary. In June of 2007, the two-year anniversary payment of 138,797common shares was made, which reflected the assets of the acquired funds at thetwo-year anniversary. In April 2010 the put option mentioned above expired, whichresulted in the liability of this acquisition to be reduced to $0.

On March 7, 2007, the Company acquiredcertain assets of United Heritage Financial Services, Inc. (UHFS), a wholly ownedsubsidiary of United Heritage Financial Group, Inc., of Meridian, Idaho. UHFS hadapproximately 120 independent registered representatives who became part of CapitalFinancial Services, Inc. (CFS), the retail brokerage division of the Company. Pursuantto the agreement, in exchange for receipt of the assets of UHFS set forth above,the Company agreed to issue 500,000 restricted CFH shares and pay a deferred cashearn out payment totaling a maximum of $900,000, to be paid in 21 quarterly installments.On March 7, 2007, the Company issued 500,000 restricted common shares to UHFS. Asa result of this issuance of shares, $175,000 was recorded by the Company as goodwillrelating to the purchase of the assets. As of December 31, 2010, the Company hadmade fifteen quarterly installment payments totaling $330,736. The liability relatingto this acquisition is valued at approximately $244,615 as of December 31, 2010,and has also been recorded by the Company as goodwill. Due to the goodwill impairmentcharge that was recorded (see Note 12-Goodwill), as of December 31, 2010, the totalgoodwill recorded relating to this acquisition was $656,906.

NOTE 5—**LONG-TERMDEBT**

Long-term debt at December 31, 2010and 2009 was as follows:

 
 

 

Current Portion

 

 

 
 

Rate

2010

2009

Long-term debt: 

 

 

 

 

 

 

 

 
First Western Bank

6.50%

$

32,032

$

277,772

$

307,902

 
Convertible promissory note

6.50%

 

-

 

950,000

 

950,000

 
Future payments on acquisitions

 

 

197,490

 

244,615

 

475,157

 
 

 

 

 

 

 

 

 

 
Totals

 

$

229,522

$

1,472,387

$

1,733,059

 
Summaries of the terms of the currentlong-term debt agreements follow:

**First Western Bank**—In Juneof 1999, the Company converted its outstanding balance of $500,000 borrowed on itsbank line-of-credit to long-term debt. The debt was refinanced in September of 2009and currently carries an interest rate of 6.50%, with monthly payments of $4,105.On October 1, 2014, the remaining balance will be due in full.

**Subordinate Commercial Notes**—TheCompany approved a $1 million intra-state subordinate commercial note offering limitingthe sale in North Dakota, to North Dakota residents only. The subordinate commercialnotes did not represent ownership in the Company. The subordinate commercial notescarried an interest rate of 9% per annum, payable semi-annually. On June 30, 2008,the subordinate commercial notes matured and the liability was paid in full.

**Subordinate Corporate Notes**—TheCompany approved a $2 million intra-state subordinate corporate note offering limitingthe sale in North Dakota, to North Dakota residents only. The subordinate corporatenotes did not represent ownership in the Company. On June 23, 2009 and July 30,2009 redemptions were processed, totaling $200,000 and $300,000 respectively. OnSeptember 30, 2009 the Company elected pursuant to the terms of its Corporate Noteobligations to call and prepay its remaining $1,500,000 Corporate Note obligation.This amount consists of all of outstanding Corporate Notes originally due January1, 2011. By prepaying the Corporate Notes from available cash, the current assetposition of the Company was reduced by $1,591,613 and the Corporate Note liabilityof the same amount was eliminated. There was no prepayment charge or other costto the Company associated with the prepayment.

**Convertible Promissory Note**—InOctober of 2006, the Company issued a $950,000 convertible promissory note to PawnMart,Inc., in a private placement. The unsecured note carries an interest rate of 6.5%per annum, payable semi-annually, and matures on October 15, 2016. The holder ofthe note has the right, at any time after October 15, 2009, to convert the notein whole or in part, into $0.0001 par value common shares of the Company. The conversionprice shall be equal to $0.50 per share. The entire principal amount of this noteshall be automatically converted into common shares at the conversion price on October15, 2016.

The aggregate amount of required futurepayments on the above long-term debt at December 31, 2010, is as follows:

Year ending December 31,

2011

$

229,522

2012

 

139,865

2013

 

153,000

Thereafter

 

950,000

 

 

 

Total due

$

1,472,387

NOTE 6—**INCOME TAXES**

The provision for income taxes isbased on earnings before income taxes reported for financial statement purposesand consisted of the following:

 

2010

2009

2008

Current income tax benefit (expense):

 

 

 

 

 

 

 
Federal

$

-

$

-

$

(329,803)

 
State

 

(17,358)

 

(13,096)

 

(86,812)

 
Total current tax benefit (expense)

$

(17,358)

$

(13,096)

$ 

(416,615)

Deferred tax benefit (expense):

 

 

 

 

 

 

 
Federal

$

51,334

$

181,198

$

239,724

 
State

 

6,605

 

23,314

 

30,845

 
Total deferred tax benefit (expense)

$

57,939

$

204,512

$

270,569

 

 

 

 

 

 

 

Total provision for income tax

 

 

 

 

 

 

 
benefit (expense)

$

40,581

$

191,416

$

(146,046)

Deferred taxes arise because of differenttax treatment between financial statement accounting and tax accounting, known as"temporary differences." The Company records the tax effect of these temporary differencesas "deferred tax assets" (generally items that can be used as a tax deduction orcredit in future periods) and "deferred tax liabilities" (generally items for whichthe Company has received a tax deduction and has not yet been recorded in the consolidatedstatement of operations).

Deferred tax assets (liabilities)were comprised of the following:

 

2010

2009

2008

Deferred tax asset:

 

 

 

 
Net operating and capital  loss carry forwards

$

68,687

$

52,139

$

20,767

 
Goodwill impairment adjustment

 

75,371

 

-

 

995,920

 
Stock option compensation

 

583,374

 

583,374

 

583,374

 
 

 

 

 

 

 

 

 
Total deferred tax assets

$

727,432

$

635,513

$

1,600,061

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 
Accumulated depreciation

$

25,723

$

37,502

$

74,545

 
Accumulated amortization

 

53,942

 

78,224

 

540,371

 
Total deferred tax liabilities

$

79,665

$

115,726

$

614,916

 

 

 

 

 

 

 

Net deferred tax asset

$

647,767

$

519,787

$

985,145

 

Net deferred tax asset - current

$

68,683

$

45,032

$

-

Net deferred tax asset - non-current

 

579,084

 

474,755

 

985,145

Net deferred tax asset

$

647,767

$

519,787

$

985,145

A reconciliation of the difference between the expected incometax benefit (expense) computed at the U.S. statutory income tax rate of 35% andthe Company's income tax expense is shown in the following table:

 

2010

2009

2008

Federal tax benefit (expense) at statutory rates

$

323,317

35%

$

(105,000)

(35%)

$

1,360,000

35%

State tax benefit (expense), net of federal tax effect

 

46,188

5%

 

(15,000)

(5%)

 

194,000

5%

Tax impact of goodwill impairment expense

 

(293,872)

(32%)

 

-

-

 

(1,086,621)

(28%)

Net tax impact of discontinued operations

 

-

-

 

311,416

104%

 

(522,816)

(14%)

Other

 

(35,052)

(4%)

 

-

-

 

(90,609)

(2%)

 

 

 

 

 

 

 

 

 

 

Actual tax benefit (expense)

$

40,581

4%

$

191,416

64%

$

(146,046)

(4%)

Included in "other" are amounts separatelyallocated to stockholder's equity to recognize the related tax effect of the changein net unrealized gain or loss on securities available for sale, ESOP plan activity,and effects of stock-based employee compensation and other adjustments for the yearsended December 31, 2010, 2009 and 2008.

The Company has an estimated net operatingloss carryover of approximately $200,000 that will expire, if unused, in 2030.

NOTE 7—**STOCK WARRANTS, STOCK SPLITS,AND STOCK OPTIONS**

The Company has authorized 2,100,000perpetual warrants to certain organizers, directors, officers, employees and shareholdersof the Company. All of these warrants were issued between 1987 and 1990 and wereaccounted for in accordance with the provisions of Accounting Principles Board ("APB")Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expensewas recorded for these warrants as the exercise price exceeded the market priceof the stock at the date of issue. The Company plans to continue to apply APB OpinionNo. 25 in accounting for these warrants. These warrants, at the date of issue, allowedfor the purchase of shares of stock at $2.00 per share. The exercise prices of thesewarrants were adjusted to reflect stock splits of 2 for 1 in 2002, and 11 for 10in 1990 and 1989. 2,000 warrants (adjusted for the 2 for 1 stock split in 2002)were exercised in 1997, leaving an outstanding balance of 2,098,000 warrants asof December 31, 2010.

In addition to the warrants discussedabove, the Company has also issued warrants to purchase 600,000 common shares inMarch of 2004 at an exercise price of $.60 per share. These options are consideredto be fully vested and have a contractual expiration date of September 1, 2010.100,000 warrants were exercised in 2007, leaving an outstanding balance of 500,000warrants as of December 31, 2010.

The Company had entered into employmentagreements with past employees of the Company. Upon execution of these employmentagreements, a one-time granting of stock options took effect. These options arefully vested and have a perpetual life. Each employment contract stated the strikeprice for which options were granted. In addition, the contracts granted optionswhen the employees reach specified performance goals.

The Company has also issued optionsto directors as well as various other employees and past employees. The optionsgranted to employees were granted in connection with reaching certain performancegoals. These options are considered to be fully vested and have a contractual lifeof ten years.

As part of the acquisition of CapitalFinancial Services, Inc., 500,000 options were granted in January of 2002 at a strikeprice of $.50. These options are fully vested and expire ten years from the acquisitiondate.

The Company plans to issue additionalcommon shares if any of its outstanding options are exercised. There have been nooptions exercised to date.

In December of 2005, the Company adoptedthe FASB accounting and standards for fair value recognition provisions for stock-basedemployee compensation. There were no compensation costs or deferred tax benefitsrecognized for stock-based compensation awards for the twelve months ended December31, 2010.

Option activity for the  last three years was as follows:

Number of Options

Weighted Average Exercise  Price per Share

Weighted Average Grant  Date Fair Value

Aggregate Intrinsic  Value

 

 

Outstanding on January 1,  2008

5,888,113

$

.54

$

.28

$

1,081,950

 
Granted

-

 

-

 

-

 

 

 
Exercised

-

 

-

 

-

 

 

 
Canceled

-

 

-

 

-

 

 

Outstanding on December  31, 2008

5,888,113

$

.54

$

.28

$

-

 
Granted

-

 

-

 

-

 

 

 
Exercised

-

 

-

 

-

 

 

 
Canceled

-

 

-

 

-

 

 

Outstanding on December  31, 2009

5,888,113

$

.54

$

.28

$

-

 
Granted

-

 

-

 

-

 

 

 
Exercised

-

 

-

 

-

 

 

 
Canceled

-

 

-

 

-

 

 

Outstanding on December  31, 2010

5,888,113

$

.54

$

.28

$

-

Exercisable options at the end of 2010, 2009, and 2008 were 5,888,113,respectively. The following table summarizes information concerning options outstandingand exercisable as of December 31, 2010:

Range of Exercise Prices

Number Outstanding

Weighted Average Remaining  Contractual Life (Years)

Weighted Average Exercise  Price

Number Exercisable

Weighted Average Exercise  Price

$ .00 to $ .49

1,380,000

Perpetual

$

.42

1,380,000

$

.42

$ .50 to $ .99

3,935,000

6*

$

.52

3,935,000

$

.52

$1.00 to $1.50

573,113

3*

$

1.01

573,113

$

1.01

$ .00 to $ 1.50

5,888,113

4.5*

$

.54

5,888,113

$

.54

* Excludes options with a perpetuallife

NOTE 8—**EMPLOYEE BENEFIT PLANS**

The Company sponsors a 401(K) planfor all its employees. Effective January 1, 2005, the Company implemented a matchof up to 4% of employee deferrals. Plan expenses paid for by the Company were $4,937,$10,639, and $11,807 for the years ended December 31, 2010, 2009, and 2008, respectively.The matching contributions paid by the Company were $40,629, $77,820 and $105,669for the years ended December 31, 2010, 2009 and 2008, respectively.

The Company established an employeestock ownership plan ("ESOP") effective January 1, 1999. Pursuant to the ESOP, eachyear the Company would determine the amount to contribute to the plan. Contributionswere made at the discretion of the Board of Directors. To be eligible to participatein the plan, an employee must have had completed one year of service and have attainedage 21. The ESOP plan was closed by the company, effective December 31, 2009, andthe shares have been issued to each plan member.

During 2001, the ESOP purchased 208,000shares of the Company's common stock, at a weighted average price of $.48 per share.The purchase was funded with a loan of $100,000 from the Company, which was collateralizedby the unallocated Company shares owned by the ESOP. As of December 31, 2009 thisloan had been paid in full and all shares purchased by this loan had been allocatedto employees.

Total ESOP contribution expense recognizedwas $0, $18,231 and $8,813 for the years ended December 31, 2010, 2009, and 2008,respectively.

NOTE 9—**NET CAPITAL REQUIREMENTS**

The Company's broker-dealer subsidiaryCapital Financial Services, Inc. is a member firm of the Financial Industry RegulatoryAuthority (FINRA) and is registered with the Securities and Exchange Commission(SEC) as a broker-dealer. Under the Uniform Net Capital Rule (Rule 15c3-1 underthe Securities Exchange Act of 1934), the subsidiary is required to maintain a minimumnet capital and a ratio of aggregate indebtedness to net capital, as defined, ofnot more than 15 to 1. At December 31, 2010, this subsidiary had net capital of$518,183; a minimum net capital requirement of $112,454; excess net capital of $405,730and a ratio of aggregate indebtedness to net capital of 3.26 to 1. This subsidiaryis exempt from the reserve requirements of Rule 15c3-3.

NOTE 10—**OPERATING SEGMENTS**

Capital Financial Holdings, Inc. derivesthe majority of its revenues and net income from sales of mutual funds, insuranceproducts, and various other securities through Capital Financial Services, Inc.("CFS"), the Company's broker-dealer subsidiary.

The Company organizes its currentbusiness units into two reportable segments: broker-dealer services and oil andgas activities. The broker-dealer services segment distributes securities and insuranceproducts to retail investors through a network of registered representatives. Theoil and gas activities segment will seek opportunities in petroleum and naturalgas exploration and production.

The Company's reportable segmentsare strategic business units that offer different products and services. They aremanaged separately because each business requires different technology and marketingstrategies. The accounting policies of each of these segments are the same as thosedescribed in Note 1.

As of, and for the year ended, December31, 2010:

 

 

 

Holding

 

Oil & Gas

 

Broker-Dealer

 

 

 

 

Company

 

Activities

 

Services

 

Total

 

Revenues from external customers

$

182,069

$

3,209

$

19,206,529

$

19,391,807

 

Inter-segment revenues

 

-

 

-

 

1081

 

1,081

 

Interest expense

 

80,880

 

-

 

-

 

80,880

 

Depreciation and amortization

 

47,983

 

262

 

27,136

 

75,381

 

Income (loss) before income  tax benefit (expense)

 

(1,303,886)

 

(186,114)

 

566,238

 

(923,762)

 

Income tax benefit (expense)

 

189,581

 

73,000

 

(222,000)

 

40,581

 

Net income (loss) before  discontinued operations

 

(1,114,306)

 

(113,113)

 

344,238

 

(883,181)

 

Discontinued operations

 

(111,601)

 

-

 

-

 

(111,601)

 

Net income (loss) after  discontinued operations

 

(1,225,907)

 

(113,113)

 

344,238

 

(994,782)

 

Segment assets

 

5,081,755

 

813,886

 

2,811,980

 

8,707,621

 

Expenditure for segment  assets

 

3,090

 

2,612

 

10,373

 

16,075

As of, and for the year ended, December31, 2009:

 

 

 

Holding

 

Oil & Gas

 

Broker-Dealer

 

 

 

 

Company

 

Activities

 

Services

 

Total

 

Revenues from external customers

$

54,420

$

-

$

17,848,354

$

17,902,774

 

Inter-segment revenues

 

-

 

-

 

26,726

 

26,726

 

Interest Expense

 

212,552

 

-

 

-

 

212,552

 

Depreciation and amortization

 

75,386

 

-

 

24,983

 

100,369

 

Income (loss) before income  tax benefit (expense)

 

(1,056,186)

 

-

 

567,881

 

(488,305)

 

Income tax benefit (expense)

 

414,016

 

-

 

(222,600)

 

191,416

 

Net income (loss) before  discontinued operations

 

(642,170)

 

-

 

345,281

 

(296,889)

 

Discontinued operations

 

103,191

 

-

 

-

 

103,191

 

Net income (loss) after  discontinued operations

 

(538,979)

 

-

 

345,281

 

(193,698)

 

Segment assets

 

7,172,931

 

-

 

2,327,797

 

9,500,728

 

Expenditure for segment  assets

 

13,882

 

-

 

10,626

 

24,508

As of, and for the year ended, December31, 2008:

 

 

 

Holding

 

Oil & Gas

 

Broker-Dealer

 

 

 

 

Company

 

Activities

 

Services

 

Total

 

Revenues from external customers

$

12,520

$

-

$

28,383,816

$

28,396,336

 

Inter-segment revenues

 

-

 

-

 

29,588

 

29,588

 

Interest expense

 

302,369

 

-

 

-

 

302,369

 

Depreciation and amortization

 

95,730

 

-

 

19,757

 

115,487

 

Income (loss) before income  tax benefit (expense)

 

(1,304,207)

 

-

 

1,676,773

 

372,566

 

Income tax benefit (expense)

 

511,254

 

-

 

(657,300)

 

(146,046)

 

Net income (loss) before  discontinued operations

 

(792,953)

 

-

 

1,019,473

 

226,520

 

Discontinued operations

 

(3,736,217)

 

-

 

-

 

(3,736,217)

 

Net income (loss) after  discontinued operations

 

(4,529,170)

 

-

 

1,019,473

 

(3,509,697)

 

Segment assets

 

8,619,220

 

-

 

3,913,211

 

12,532,431

 

Expenditure for segment  assets

 

80,956

 

-

 

50,370

 

131,326

**Reconciliation of Segment Information**

 

2010

2009

2008

 

Revenues

 

 

 

 

 

 

 

Total revenues for reportable  segments

$

19,392,888

$

17,929,500

$

28,425,924

 

Elimination of inter-company  revenues

 

(1,081)

 

(26,726)

 

(29,588)

 

Consolidated total revenue

$

19,391,807

$

17,902,774

$

28,396,336

 

 

 

 

 

 

 

 

 

Profit

 

 

 

 

 

 

 

Total reportable segment  profit (loss)

$ 

(994,782)

$

(193,698)

$

(3,509,697)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Total assets for reportable  segments

$

8,891,013

$

9,579,120

$

12,610,823

 

Elimination of inter-company  receivables

 

(183,392)

 

(78,392)

 

(78,392)

 

Consolidated assets

$

8,707,621

$

9,500,728

$

12,532,431

The Mutual Fund segment has been reportedin Note 18-Discontinued Operations, for the years ended December 31, 2009 and 2008.

In the Company's third quarter filingit reported capitalized costs of $154,865, in the Oil & Gas segment. These costshave been fully expensed, by the Company, as of December 31, 2010. A terminationrequest has been received by CER, requesting termination of the Joint ParticipationAgreement between CER and Nakota Energy LLC. If this agreement is terminated CERwould no longer have rights to the leases, in which CER had paid acquisition costs.It was determined by the Company that until the outcome of this termination is finalizedthese capitalized costs would be expensed.

NOTE 11—**OPERATING LEASES**

The Company had various leases foroffice equipment that were to expire over the next several years through 2012. Thetotal rent expense for these leases was $20,545, $42,700, and $44,000 for December31, 2010, 2009 and 2008 respectively.

In October of 2010 the Company signednew lease agreements for office equipment, which were meant to replace the existinglease agreements. These new lease agreements are set to expire in April of 2014.

The following is a schedule by yearsof future minimum rental payments on operating leases as of December 31, 2010.

 

Years ending December 31,

 

 

 

2011

$

17,442

 

2012

 

17,442

 

2013

 

17,442

 

2014

 

8,721

 

Total minimum future rental payments

$

61,047

NOTE 12—**GOODWILL**

The changes in the carrying amountof goodwill for the years ended December 31, 2010, 2009, and 2008, are as follows:

 

Capital Financial Holdings,  Inc.

Broker-Dealer Services

Total

 

 

Balance as of January 1, 2008

$

7,312,606

$

3,599,942

$

10,912,548

 

Goodwill acquired during the period

 

-

 

-

 

-

 

Goodwill acquisition price adjustment during the period (see  Note 4)

 

-

 

(59,161)

 

(59,161)

 

Impairment losses

 

(5,312,606)

 

-

 

(5,312,606)

 

Balance as of December 31, 2008

$

2,000,000

$

3,540,781

$

5,540,781

 

Goodwill acquired during the period

 

-

 

-

 

-

 

Goodwill acquisition price adjustment during the period (see  Note 4)

 

-

 

(109,140)

 

(109,140)

 

Reduction in Goodwill as a result of mutual fund segment sale

 

(2,000,000)

 

-

 

(2,000,000)

 

Balance as of December 31, 2009

$

-

$

3,431,641

$

3,431,641

 

Goodwill acquired during the period

 

-

 

-

 

-

 

Goodwill acquisition price adjustment during the period (see  Note 4)

 

-

 

(103,710)

 

(103,710)

 

Impairment losses

 

-

 

(753,518)

 

(753,518)

 

Balance as of December 31, 2010

$

-

$

2,574,413

$

2,574,413

The Company tests goodwill for impairmentannually during the second quarter of each fiscal year. If an event occurs or circumstanceschange that would more likely than not reduce the fair value of a reporting unitbelow its carrying value, goodwill will be evaluated for impairment between annualtests.

In December of 2010, as a result ofongoing volatility in the financial industry and a reduction in the estimated fairmarket value of the Company's wholly owned subsidiary Capital Financial Services,Inc., the Company determined it was necessary to perform an interim goodwill impairmenttest. At that time the Company recorded a non-cash goodwill impairment loss of $753,518in the Broker-Dealer Services segment. The fair value of that reporting unit wasestimated by using an independent third-party appraisal.

In December of 2008, as a result ofongoing volatility in the financial industry and a significant reduction in assetsunder management in the Company's sponsored mutual funds, the Company determinedit was necessary to perform an interim goodwill impairment test. At that time theCompany recorded a non-cash goodwill impairment loss of $5,312,606 in the MutualFund Services segment. The fair value of that reporting unit was estimated by usingan independent third-party appraisal.

NOTE 13—**FAIR VALUE DISCLOSURES**

FASB ASC 820 defines fair value, establishesa framework for measuring fair value, and establishes a fair value hierarchy whichprioritizes the inputs to valuation techniques. Fair value is the price that wouldbe received to sell an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. A fair value measurement assumesthat the transaction to sell the asset or transfer the liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market. Valuation techniques that are consistent with the market,income or cost approach, as specified by FASB ASC 820, are used to measure fairvalue.

The fair value hierarchy prioritizesthe inputs to valuation techniques used to measure fair value in three broad levels:

 

 

 

 

•

Level 1 inputs are quoted prices (unadjusted) in active markets  for identical assets or liabilities the Company has the ability to access.

 

 

 

 

•

Level 2 inputs are inputs (other than quoted prices included  within level 1) that are observable for the asset or liability, either directly  or indirectly.

 

 

 

 

•

Level 3 are unobservable inputs for the asset or liability  and rely on management's own assumptions about the assumptions that market participants  would use in pricing the asset or liability. (The unobservable inputs should be  developed based on the best information available in the circumstances and may  include the Company's own data.)

The application of valuation techniquesapplied to similar assets and liabilities has been consistently applied. The followingis a description of the valuation methodologies used for instruments measured atfair value:

Certain assets and liabilities aremeasured at fair value on a nonrecurring basis; that is, the instruments are notmeasured at fair value on an ongoing basis but are subject to fair value adjustmentsin certain circumstances (for example, when there is evidence of impairment).

On February 12, 2009, CFS enteredinto a settlement agreement with a client, which resulted in CFS purchasing theclient's investment in the Omega 2007 Drilling Program 1, LP. This limited partnershipcarries a "presentment" feature which will allow CFS to sell the investment to theGeneral Managing Partner of the limited partnership; and this feature will becomeavailable three years from the date of the first income distribution, which wasDecember of 2007. The fair market value of this $76,876 investment is estimatedto be $45,000; however this amount could fluctuate with the prices of oil and naturalgas. CFS will continue to carry the investment on its books at the $45,000 valueuntil the "presentment" feature can be utilized.

 

Carrying Value at December  31, 2010

Year ended December  31, 2010

 

Total

Level 1

Level 2

Level 3 Other Investment

Total Losses

Other Investment

$

45,000

$

-

$

-

$

45,000

$

-

 

 

 

 

Carrying Value at December  31, 2009

Year ended December  31, 2009

 

Total

Level 1

Level 2

Level 3 Other Investment

Total Losses

Beginning Balance

$

-

$

-

$

-

$

-

$

-

Purchases: Other Investment

 

76,876

 

-

 

-

 

76,876

 

 

Loss impairment included in net earnings

 

(31,876)

 

-

 

-

 

(31,876)

 

 

Other Investment

$

45,000

$

-

$

-

$

45,000

$

31,876

The loss of $31,876 represents theoriginal purchase price of the investment minus its current fair market value.

Reconciliation of Level 3 Balances:

 

 

 

Balance 1-1-09

$

-

Purchase of other investment

 

76,876

Impairment loss on other investment

 

(31,876)

Balance 12-31-09

 

45,000

Impairment loss on other investment

 

-

Balance 12-31-10

$

45,000

The following table presents the assetsand liabilities carried on the balance sheet by caption and by level within thecodification hierarchy (as described above) as of December 31, 2010 and 2008, forwhich a nonrecurring change in fair value has been recorded during the year endedDecember 31, 2010 and 2008.

 

Carrying Value at December  31, 2008

Year ended December  31, 2008

 

Total

Level 1

Level 2

Level 3

Total Losses

 

 

 

 

 

 

 

 

 

 

 

Goodwill

$

2,000,000

$

-

$

-

$

2,000,000

$

5,312,606

Losses of $5,312,606 represent animpairment charge related to the goodwill of the Mutual Fund Services segment. Thefair value of the goodwill was estimated by utilizing an independent third-partyappraisal (See Note 12 - Goodwill).

 

Carrying Value at December  31, 2010

Year ended December  31, 2010

 

Total

Level 1

Level 2

Level 3

Total Losses

 

 

 

 

 

 

 

 

 

 

 

Goodwill

$

2,574,413

$

-

$

-

$

2,574,413

$

753,518

Losses of $753,518 represent an impairmentcharge related to the goodwill of the Broker-Dealer segment. The fair value of thegoodwill was estimated by utilizing an independent third-party appraisal (See Note12—Goodwill).

Reconciliation of Level  3 Balances:

 

 

 

Balance 1-1-08

$

10,912,547

Impairment loss on goodwill

 

(5,312,606)

Reduction in goodwill related to UHFS acquisition (See Note  4-Business Acquisitions)

 

(59,160)

Balance 12-31-08

 

5,540,781

Reduction in goodwill caused by mutual fund division sale

 

(2,000,000)

Reduction in goodwill related to UHFS acquisition (See Note  4-Business Acquisitions)

 

(109,140)

Balance 12-31-09

 

3,431,641

Impairment loss on goodwill

 

(753,518)

Reduction in goodwill related to UHFS acquisition (See Note  4-Business Acquisitions)

 

(103,710)

Balance 12-31-10

$

2,574,413 

See Note 12—Goodwill for a reconciliationof goodwill balances.

NOTE 14—**EARNINGS PER SHARE**

Basic earnings per share are computedby dividing earnings available to common stockholders by the weighted average numberof common shares outstanding during the period. Diluted earnings per share reflectper share amounts that would have resulted if dilutive potential common stock hadbeen converted to common stock. The following reconciles amounts reported in thefinancial statements:

 
For the Year Ended December  31, 2010

 

 

Income (Numerator)

Shares (Denominator)

 

Per Share Amount

Loss from continuing operations

$

(883,181)

 

 

 

Less: preferred stock dividends

 

(91,500)

 

 

 

Loss available to common stockholders -  Basic earnings per share

 

(974,681)

14,638,937

 

(.07)

Effect of dilutive securities:

 

 

 

 

 

Options and warrants

 

-

-

 

 

Loss available to common stockholders -   Diluted earnings per share

$

(974,681)

14,638,937

 

(.07)

 

 
For the Year Ended December  31, 2009

 

 

Income (Numerator)

Shares (Denominator)

 

Per Share Amount

Loss from continuing operations

$

(296,889)

 

 

 

Less: preferred stock dividends

 

(91,500)

 

 

 

Loss available to common stockholders - Basic earnings per  share

 

(388,389)

14,541,585

 

(.03)

Effect of dilutive securities:

 

 

 

 

 

Options and warrants

 

-

-

 

 

Diluted earnings per share

$

(388,389)

14,541,585

 

(.03)

 

 
For the Year Ended December  31, 2008

 

 

Income (Numerator)

Shares (Denominator)

 

Per Share Amount

Income from continuing operations

$

226,520

 

 

 

Less: preferred stock dividends

 

(91,500)

 

 

 

Income available to common stockholders - Basic earnings per  share

 

135,020

14,519,372

$

.01

Effect of dilutive securities:

 

 

 

 

 

Options and warrants

 

-

17,735

 

 

Preferred stock dividends

 

91,500

3,050,000

 

 

Income available to common stockholders - Diluted earnings  per share

$

226,520

17,587,107

$

.01

Options and warrants to purchase 8,486,113common shares at exercise prices between $0.35 and $1.43 were outstanding at December31, 2010, but were not included in the computation of earnings per share for theyear ended December 31, 2010. The options and warrants were not included in thecalculation because their exercise prices were greater than the average market priceof the common shares during the period.

In December of 2003, the Company issued3,050,000 Series A preferred shares for total proceeds of $1,525,000. The holdersof the Series A preferred shares are entitled to receive cumulative dividends ata rate of 6% per year, payable quarterly. These dividends are in preference andpriority to any payment of any dividend on the Company's common shares. The holdersof the Series A preferred shares are also entitled to a liquidation preference of$.50 per share. The Series A preferred shares are convertible to the Company's commonshares at the rate of one share of common shares for one share of Series A preferredshares at any time after issuance. At any time after five years from issuance, theCompany has the right to redeem any or all of the Series A preferred shares aftera sixty day notice upon payment of the liquidation preference of $.50 per shareto the holders, for a total of $1,525,000.

The Series A preferred shares werenot included in the computation of diluted earnings per share for the year endedDecember 31, 2010, because their effect was anti-dilutive.

Additionally, the Company had outstandingat December 31, 2010, a $950,000 convertible promissory note. The unsecured notecarries an interest rate of 6.5% per year, payable semi-annually, and matures onOctober 15, 2016. The holder of the note has the right, at any time after October15, 2009, to convert the note in whole or in part, into common shares of the Companyat a conversion price of $0.50 per share. The entire principal amount of this noteshall be automatically converted into common shares at the conversion price on October15, 2016.

The convertible promissory note wasnot included in the computation of diluted earnings per share for the year endedDecember 31, 2010, because the conversion price was greater than the average marketprice of the common shares during those periods.

NOTE 15—**COMPREHENSIVE INCOME (LOSS)**

Comprehensive loss is reported onthe accompanying consolidated statement of shareholders' equity as a component ofretained earnings (accumulated deficit) and consists of net loss and other gainsand losses affecting shareholders' equity that, under accounting principles generallyaccepted in the United States of America, are excluded from net loss. For the Company,such items consist primarily of unrealized gains and losses on available-for-saleequity investments.

The following summary sets forth thecomponents of other comprehensive loss, net of tax, accumulated in shareholders'equity:

 
For the Year Ended December  31, 2010

Net Loss

$

(994,782)

Other Comprehensive Income  (Loss), net of tax:

 

 

Unrealized gain (loss) on  securities

 

-

Total Comprehensive Loss

$

(994,782)

 

 
For the Year Ended December  31, 2009

Net Loss

$

(193,698)

Other Comprehensive Income  (Loss), net of tax:

 

 

Unrealized gain (loss) on  securities

 

-

Total Comprehensive Loss

$

(193,698)

 

 
For the Year Ended December  31, 2008

Net Loss

$

(3,509,697)

Other Comprehensive Income  (Loss), net of tax:

 

 

Unrealized gain on securities

 

-

Total Comprehensive Loss

$

(3,509,697)

NOTE 16—**RISKS AND UNCERTAINTIES**

The Company has a concentration ofcredit risk for cash deposits at various financial institutions. These depositsmay at times exceed amounts covered by insurance provided by the U.S. Federal DepositInsurance Corporation (FDIC). The Company has not experienced any losses in suchaccounts.

NOTE 17—**RELATED PARTY TRANSACTIONS**

Mr. Jeffrey A. Cummer was electeda director of Capital Financial Holdings, Inc. on June 1, 2006. Mr. Cummer is presidentand senior portfolio manager of SMH Capital Advisors, Inc. During 2008, CapitalFinancial Holdings, Inc. paid monthly sub-advisory fees to SMH Capital Advisors,Inc. for advisory services provided to some of the Funds. On March 4, 2008, SMHCapital Advisors was notified that the Board of Trustees of The Integrity Fundshad approved the termination of the sub-advisory agreements between Integrity MoneyManagement, Inc., and SMH Capital Advisors. Sub-advisory payments made to SMH CapitalAdvisors, Inc. totaled $0 in 2010, $0 in 2009 and $246,248 in 2008.

In May of 2006, Xponential, Inc. issueda tender offer to purchase up to 3,000,000 shares of Capital Financial Holdings,Inc. common shares at a purchase price of $0.40 per share. At the close of the tenderoffer, Xponential, Inc. had obtained 1,323,642 shares, representing approximately9.76% of the outstanding Capital Financial Holdings Inc. common shares. Mr. Cummeris Chief Executive Officer and Chairman of the Board of Xponential, Inc.

In October of 2006, Capital FinancialHoldings Inc. issued a $950,000 convertible promissory note to PawnMart, Inc., ina private placement. The unsecured note carries an interest rate of 6.5% per annum,payable semi-annually, and matures on October 15, 2016. The holder of the note hasthe right, at any time after October 15, 2009, to convert the note in whole or inpart, into $0.0001 par value common shares of the Company. The conversion priceshall be equal to $0.50 per share. The entire principal amount of this note shallbe automatically converted into common shares at the conversion price on October15, 2016. PawnMart, Inc. is a wholly owned subsidiary of Xponential, Inc. Mr. Cummeris Chairman of the Board and Executive Vice President of PawnMart, Inc. Interestpayments made to PawnMart, Inc. relating to this note totaled $61,750 in 2010, 2009and 2008, respectively.

Mr. Steven D. Lysne was elected adirector of Capital Financial Holdings, Inc. on May 27, 2005. On February 11, 2008,Steven D. Lysne announced his resignation from the Board of Directors effectiveupon the Annual Meeting of Shareholders of the Company. Mr. Lysne is CEO and generalmanager of SRT Communications, Inc. Capital Financial Holdings, Inc. pays SRT Communications,Inc. for telephone and internet services. Payments made to SRT Communications, Inc.totaled $45,156 in 2010, $63,702 in 2009, and $79,563 in 2008.

NOTE 18—**DISCONTINUED OPERATIONS**

On March 6, 2009, Capital FinancialHoldings, Inc. (the "Company") entered into a Definitive Agreement (the "Agreement")with Corridor Investors, LLC ("Buyer"), pursuant to which Buyer agreed to purchasefrom Seller, and Seller agreed to sell to Buyer: (i) all of the issued and outstandingshares of each of three subsidiaries of the Company, Integrity Fund Services, Inc.,a share transfer agency, Integrity Funds Distributor, Inc., a FINRA member brokerdealer and Integrity Mutual Funds, Inc. of Nevada, a non-operating entity (the "Companies');(ii) all of Seller's right, title and interest in and to certain tangible assetsand (iii) the sale of certain assets of Integrity Money Management, Inc. relatedto its mutual fund advisory business. The purpose of the Agreement was to facilitatea change in advisor as well as to transfer, together with the operating subsidiaries,the combined mutual fund service business of the Seller currently provided to TheIntegrity Funds, Integrity Managed Portfolios, ND Tax-Free Fund, Inc., Montana Tax-FreeFund, Inc. and Integrity Fund of Funds, Inc. ("the Funds"), which are investmentcompanies registered with the Securities and Exchange Commission ("SEC") under theInvestment Company Act of 1940. As of July 31, 2009, the required Fund shareholderapproval from the various Funds had been received to consummate the change in advisoralong with the transfer of the mutual fund service to the Buyer. As per the Agreement,at closing on July 31, 2009, the Buyer paid $1,525,480 (60 BPS of the aggregatenet assets, totaling $254,246,596 as of July 30, 2009) to the Company. The Companyreceived $227,200 for the first of the three installments consisting of 10 BPS ofthe aggregate net assets as of July 30, 2010. The Company had originally estimatedthis receivable at $762,740 based on the aggregate net assets as of July 30, 2009.Due to a reduction in the net aggregate assets of the funds, this estimate was reducedto $651,138. The difference of $111,601 has been reflected as a revision of thisestimate and recorded as a loss on discontinued operations in the current year statementof operations. The Company will receive two additional payments over the next twoyears, consisting of 10 BPS of the aggregate net assets as of July 30, 2011 and2012. With the closing and transfer of entities, the Company is no longer involvedin the mutual fund service business. The Company continues to operate as a Broker-Dealerthrough its wholly owned subsidiary Capital Financial Services, Inc. As a resultof the transfer, post closing of the transaction, Integrity Fund Services, Inc.,Integrity Funds Distributor, Inc. and Integrity Money Management, Inc., which constitutesthe mutual fund division of the Company, will be reflected in the Company's futureconsolidated financial statements as a discontinued operation.

The results of the mutual fund segmentare reported in the Company's Consolidated Statements of Operations separately asdiscontinued operations. In accordance with GAAP, the Consolidated Balance Sheetshave not been restated.

Summarized financial information fordiscontinued operations is as follows:

Mutual Fund Segment

 

 

 

 

 

 

 

 

 

December 31, 2010

 

December 31, 2009

 

December 31, 2008

Revenues

$

- 

$

2,058,425 

$

4,152,890

Income from operation of discontinued mutual fund segment

 

- 

 

560,864 

 

1,053,573

Goodwill impairment expense

 

-

 

-

 

(5,312,606)

Gain (Loss) on disposal of discontinued operations

 

(111,601) 

 

228,402 

 

- 

Discontinued operations before taxes

 

(111,601)

 

789,266

 

(4,259,033)

Tax benefit (expense) of discontinued operations

 

-

 

(686,075)

 

522,816

Total gain (loss) on discontinued operations, net of tax

$

(111,601)

$

103,191

$

(3,736,217)

NOTE 19—**LITIGATION**

The Company operates in a legal andregulatory environment that exposes it to potentially significant litigation risks.As a result, the Company is involved in various disputes and legal proceedings,including litigation, arbitration and regulatory investigations, including a numberof investigatory matters and legal proceedings arising out of customer allegationsrelated to past commissioned sales of alternative investment products. In 2007 throughthe first quarter of 2009 a substantial amount (approximately 10% to 20%) of theCompany's sales of commissioned products were in private placements of alternativeproducts, two of which as of December 31, 2009 (Medical Capital Corporation andrelated issuer entities and Provident Royalties, LLC and related issuer entities)were placed in receivership by action of the United States Securities and ExchangeCommission and issuers of certain other alternative products sold by the Companyare in Chapter 11 Bankruptcy or may have financial difficulties. Additionally, difficulteconomic conditions in general and the stock market decline have contributed todecline in broker-dealer subsidiary client portfolio values. As a result of suchalleged failings of alternative products and the uncertainty of client recoveryfrom the various product issuers, the Company is subject to regulatory scrutinyand a number of recently instituted legal or arbitration proceedings, includingtwo recently instituted proceedings seeking certification as class actions whichname the Company as one of a number of defendants and allege various securitiesor conduct violations, one with respect to private placements of Medical CapitalCorporation and related issuer entities for which the broker-dealer subsidiary placedapproximately $100 million of debt securities and the other with regard to privateplacements of Provident Royalties, LLC and related issuer entities for which thebroker-dealer subsidiary placed approximately $60 million of debt securities. TheCompany intends to vigorously contest the allegations of the various proceedingsand believes that there are multiple meritorious legal and fact based defenses inthese matters. Such cases are subject to many uncertainties, and their outcome isoften difficult to predict, including the impact on operations or on the financialstatements, particularly in the earlier stages of a case. The Company makes provisionsfor cases brought against it when, in the opinion of management after seeking legaladvice, it is probable that a liability exists, and the amount can be reasonablyestimated. The current proceedings are subject to uncertainties and as such, theCompany is unable to estimate the possible loss or a range of loss that may resultfrom each individual matter. There is a contemplated settlement regarding both MedicalCapital Corporation and Provident Royalties, LLC, by which the Company would contributemonies to a settlement fund. The contemplated settlement, in the amount of $200,000,was recorded in the books of the company as a liability, though the settlement issubject to approval by a number of entities.

NOTE 20—**SUBSEQUENT EVENTS**

There have not been any significantevents that have occurred subsequent to the Company's year end. Subsequent eventshave been evaluated through the date these financial statements were subject tobe issued.

ADDITIONAL INFORMATION

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRMON ADDITIONAL INFORMATION**

To the Stockholders and DirectorsCapital Financial Holdings, Inc. and SubsidiariesMinot, North Dakota

Our report on our audit of the basic consolidated financial statementsof Capital Financial Holdings, Inc. and Subsidiaries for the years ended December31, 2010, 2009 and 2008, appears on page F-1. Those audits were made for the purposeof forming an opinion on such consolidated financial statements taken as a whole.The information on page F-28, related to the 2010, 2009 and 2008 consolidated financialstatements, is presented for purposes of additional analysis and is not a requiredpart of the basic consolidated financial statements. Such information has been subjectedto the auditing procedures applied in the audits of the basic consolidated financialstatements, and, in our opinion, the information is fairly stated in all materialrespects in relation to the basic consolidated financial statements for the yearsended December 31, 2010, 2009 and 2008, taken as a whole.

We also have previously audited, in accordance with standardsof the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of Capital Financial Holdings, Inc. and Subsidiaries as of December31, 2008, 2007 and 2006, and the related consolidated statements of operations,stockholders' equity, and cash flows for each of the two years in the periods endedDecember 31, 2007 and 2006, none of which is presented herein, and we expressedunqualified opinions on those consolidated financial statements. In our opinion,the information on page F-28 relating to the 2008, 2007, and 2006 consolidated balancesheets and statements of operations is fairly stated in all material respects inrelation to the basic consolidated financial statements from which it has been derived.

BRADY, MARTZ & ASSOCIATES,P.C.Minot, North Dakota USA

March 23, 2011

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**SELECTED FINANCIAL DATA *FOR THE YEARS ENDED DECEMBER 31, AS INDICATED

 

 

 

 

 

 

 

2010

2009

2008

2007

2006

Operating revenue

$

19,391,807

$

17,902,774

$

32,549,226

$

38,842,231

$

27,020,574

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

$

(842,882)

$

(243,877)

$

(3,584,098)

$

1,349,602

$

298,310

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense) 

$

40,581

$

(274,759)

$

376,770

$

(434,702)

$

(11,091)

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

$

(.07)

$

(.02)

$

(.25)

$

.03

$

(.01)

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share 

$

(.07)

$

(.02)

$

(.25)

$

.03

$

(.01)

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

8,707,621

$

9,500,728

$

12,532,431

$

18,114,830

$

15,466,130

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations

$

1,363,522

$

1,733,059

$

3,989,040

$

4,853,277

$

4,090,158

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

$

5,457,729

$

6,494,044

$

6,708,250

$

10,213,625

$

9,398,208

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

$

0

$

0

$

0

$

0

$

0

*Excludes discontinued operations of the mutual fund division.

**CAPITAL FINANCIAL HOLDINGS,INC., AND SUBSIDIARIES**QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (UNAUDITED)*

 

**Quarter Ended**

 

**3-31-10**

**6-30-10**

**9-30-10**

**12-31-10**

Revenues

$

4,535,563

$

5,155,622

$

4,714,262

$

4,986,360

Operating income (loss)

 

(35,148)

 

165,226

 

(63,080)

 

(909,882)

Other expense

 

(20,391)

 

(20,268)

 

(20,198)

 

(20,023)

Income tax benefit (expense)

 

(44,772)

 

(105,695)

 

9,476

 

181,573

Net income (loss)

 

(100,311)

 

39,263

 

(154,942)

 

(778,792)

 

 

 

 

 

 

 

 

 

Per Share 

 

 

 

 

 

 

 

 

 
Operating income (loss)

 

(.00)

 

.01

 

.00

 

(.06)

 
Other expense

 

(.00)

 

(.00)

 

(.00)

 

(.00)

 
Income tax benefit (expense)

 

(.00)

 

(.01)

 

(.00)

 

(.01)

 

** **

**Quarter Ended**

 

**3-31-09**

**6-30-09**

**9-30-09**

**12-31-09**

Revenues

$

5,114,009

$

5,389,687

$

4,588,517

$

4,584,615

Operating income (loss)

 

(42,296)

 

366,741

 

2,926

 

(31,259)

Other expense

 

(67,688)

 

(66,035)

 

(58,151)

 

(52,554)

Income tax benefit (expense)

 

(37,157)

 

(92,206)

 

(378,147)

 

21,153

Net income (loss)

 

(147,141)

 

208,499

 

(192,496)

 

(62,560)

 

 

 

 

 

 

 

 

 

Per Share 

 

 

 

 

 

 

 

 

 
Operating income (loss)

 

(.00)

 

.02

 

(.00)

 

(.00)

 
Other expense

 

(.01)

 

(.01)

 

(.01)

 

(.01)

 
Income tax benefit (expense)

 

(.00)

 

(.01)

 

(.03)

 

(.00)

 

 

**Quarter Ended**

 

**3-31-08**

**6-30-08**

**9-30-08**

**12-31-08**

Revenues

$

9,487,056

$

9,260,788

$

7,660,078

$

6,141,304

Operating income (loss)

 

568,758

 

678,592

 

305,406

 

(5,136,853)

Other expense

 

(82,824)

 

(82,074)

 

(69,255)

 

(68,216)

Income tax benefit (expense)

 

(201,647)

 

(259,997)

 

(107,001)

 

945,415

Net income (loss)

 

284,287

 

336,521

 

129,149

 

(4,259,654)

 

 

 

 

 

 

 

 

 

Per Share, Basic

 

 

 

 

 

 

 

 

 
Operating income (loss)

 

.04

 

.05

 

.02

 

(.36)

 
Other expense

 

(.01)

 

(.01)

 

(.01)

 

(.01)

 
Income tax benefit (expense)

 

(.01)

 

(.02)

 

(.01)

 

.07

(1) For calculating per share amounts, basic and diluted commonshare are not materially different.

The above financial information is unaudited. In the opinionof management, all adjustments (which are of a normal recurring nature) have beenincluded for a fair presentation.

*Excludes discontinued operations of the mutual fund division. |