ITEM 1. Business
Overview
Incorporated in 1995, ICH is a financial services holding company that operates primarily through its wholly-owned broker-dealer and registered investment advisor subsidiary, Investors Capital Corporation (“ICC”). ICC provides to investors:
·
Broker-dealer services primarily in support of trading and investment in securities such as corporate stocks and bonds, U.S. Government securities, municipal bonds, mutual funds, variable annuities, alternative investments and variable life insurance, including provision of market information, internet trading and portfolio tracking facilities and records management, and
·
Investment advisory services, including asset management, conducting business as Investors Capital Advisory Services (“ICA”).
Financial information pertaining to the Company for the fiscal years ended March 31, 2013 and 2012 is included in Part II of this document including, without limitation, financial statements and supplementary data in Item 8 thereof. See Part II, Item 8, Footnote 15 - “Segment Information” for information concerning each of the segments of the Company’s business with respect to the fiscal years ended March 31, 2013 and 2012, including revenues from external customers, a measure of profit or loss, and total assets.
Broker-Dealer Services
Investors Capital Corporation
ICC is registered as a securities broker-dealer with the Financial Industry Regulatory Authority ("FINRA"), the SEC, the Municipal Securities Rule Making Board ("MSRB") and the Securities Investor Protection Corporation ("SIPC"). Headquartered in Lynnfield, Massachusetts, the wholly-owned subsidiary of ICH also is duly registered and
			
		
doing business as a broker-dealer in all 50 states, the Commonwealth of Puerto Rico and the District of Columbia. ICC provides multiple investment products and provides support, technology and back-office services to a network of producing (non-staff) independent registered representatives, of which there were 440 at March 31, 2013. Broker-dealer commissions and investment advisory fees generated by ICC's registered representatives represented the bulk of the Company's total revenues for the fiscal year ended March 31, 2013.
Advisor Direct
On January 24, 2013 ICH acquired a shell broker-dealer and received FINRA approval for this new broker/dealer subsidiary, Advisor Direct, Incorporated. AD is a Broker-Dealer registered with the SEC and is a member of FINRA. AD operates as a (k)(1) Broker-Dealer where principal transactions are limited to mutual funds and/or variable annuities only and has a minimum net capital of $5,000. AD had no principal transactions since the acquisition date and it remains a shell broker-dealer.
Broker-Dealer Representatives
Our independent representatives are duly registered under federal and state law to offer and provide broker-dealer services to investors through ICC. Depending upon their activities, they also may be required to qualify and register as investment advisor representatives (see “INVESTMENT ADVISORY SERVICES”, below). Our training programs for representatives emphasize the long-range aspects of financial planning and investment. We believe that the continuing education and support we provide to our registered representatives enable them to better inform and serve their clients.
Attracting and retaining experienced, productive registered representatives is an integral part of our growth strategy. Once recruited, we focus on enhancing our representatives' professional knowledge, skills and value to their clients.
We offer prospective representatives an attractive commission payout and the independence of owning and operating their own offices. Our representatives generally pay the costs associated with their offices and operations, while we concentrate on providing technical, regulatory, supervisory, compliance and other support services to our independent investment professionals. This allows expansion of our operations with relatively minimal capital outlay.
Compensation to Representatives
Commission payouts to our registered representatives are negotiated and generally represent a percentage of the gross dealer concession generated by them. Representatives grant to us the right to offset against commissions certain losses we may sustain as a result of their actions, errors or omissions. Our agreements with our representatives are terminable by either party with or without cause.
Support to Representatives
We provide a variety of services and products to our representatives to enhance their professionalism and productivity.
Technology Resources. Our technology offerings, including a client and enterprise website, enable our representatives and/or their clients to perform many tasks on-line, including:
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Opening of new accounts
·
Monitoring of existing accounts
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Updating of client accounts
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Initiating and executing trading activities
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Viewing and downloading commission data
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Locating and researching financial products
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Downloading client data
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e-Delivery of statements and confirmations
·
Researching reports or inquiries on companies, securities and other financial topics
Approved Investment Products. Our representatives offer a wide variety of ICC-approved investment products to their clients that are sponsored by well-respected, financially sound companies. We follow a selective process in determining
			
		
approved products to be offered to clients by our representatives, and we periodically review the product list for continued maintenance or removal of approved status.
Marketing. We provide advertising and public relations assistance to our representatives to enhance their profile, public awareness and professional stature in the public's eye, including FINRA-approved marketing materials, corporate and product brochures, client letters and website assistance.
Supervision/Compliance. We maintain comprehensive broker-dealer and investment advisor compliance programs. Our home office licensing, compliance and risk management staffs include three dedicated attorneys. We also retain experienced supervisors in FINRA-recognized Offices of Supervisory Jurisdiction at our home office and in the field offices across the country that are charged with compliance responsibilities for defined groups of registered representatives including, in particular, newly-affiliated representatives.
In this period of rapid regulatory change, we closely supervise and monitor the activities of our representatives to manage risk and enhance compliance with applicable laws, rules and regulations including anti-money laundering and other programs required by the USA Patriot Act. Our compliance efforts are increasingly assisted by computer systems, programs and reports, including routine internal auditing of trading and investment activity.
Our representatives seek and value assistance in the area of compliance. Keeping in step with the latest industry regulations, our compliance department provides to our representatives, among other things:
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Advertising and sales literature review
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Field inspections, followed up with written findings and remediation programs
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In-house publications, conference calls, webinars, workshops, seminars and other communications on compliance topics
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Assistance with customer complaints and regulatory inquiries
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Training at regional and national meetings
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IT tools designed to enhance compliance review and communication
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Interpretation of rules and regulations and general compliance training
Clearing. We have a fully disclosed clearing agreement with Pershing LLC, a subsidiary of Bank of New York Mellon, on a fee-for-service basis to provide orderly processing and clearing of most of our brokerage securities transactions. Services provided by Pershing include billing and credit extension, as well as control, receipt, custody and delivery of customer securities and funds.
Investment Advisory Services
Investors Capital Advisory Services
The Company’s investment advisory business is conducted through our broker-dealer subsidiary, ICC, doing business as Investors Capital Advisory Services (“ICA”).
We provide investment advisory services, including asset allocation and portfolio rebalancing, with our various programs. These services, for the most part, are conducted through our online brokerage platform. Other allocation services are performed directly by fund companies. ICA offers several advisory wrap programs that provide managed advisory accounts for our advisors’ clients, as follows:
A-MAP Suite of Advisory Wrap Programs- Rep-As-Portfolio Manager Program
ICA’s suite of A-MAP Program, including A-MAP, A-MAP AT, & A-MAP FT, enables the advisor to assist a client in creating a personalized investment portfolio. The advisor acts as the portfolio manager, with full investment discretion. A-MAP and A-MAP AT are programs where a platform fee is charged by ICA for its services as a registered investment advisor (“RIA”). A-MAP- FT is a program where ICA charges a flat fee in lieu of a platform fee for its services as an RIA.
Fund Select Advisory Wrap Program- Rep-As-Portfolio Manager Program
Fund Select is an advisory program where the advisor creates and manages a customized portfolio constructed primarily
			
		
of mutual funds.
F-MAP Advisory Wrap Program - Firm managed ETF and Mutual Fund Wrap Program
F-MAP program utilizes a model portfolio established ICA which creates, manages, rebalances, reallocates, and reports on portfolios that consist of but are not limited to: no-load or load-waived mutual funds, ETF's, and/or variable annuities.
S-MAP Advisory Wrap Program - Separate Account Wrap Program
S-MAP is an advisory program where ICA has entered into agreements with Sub-Advisors who are selected by the representatives to provide advisory services to their clients. The S-MAP portfolios are not managed by ICA; rather they are managed by the Sub-Advisor on a discretionary basis.
Investment Advisor Representatives
Each of our investment advisor representatives must satisfy licensing requirements of the states in which they operate prior to providing investment advisory services. As of March 31, 2013, 339 independent investment advisor representatives registered with the various state securities departments were affiliated with ICA, which is consistent with the year earlier.
Asset Allocation Strategy
Our investment advisor representatives often provide advisory services through our representative-directed program where the asset allocation is performed directly by the independent representative. Our asset allocation strategy is based on the principle that, by investing in a combination of asset classes, risk may be reduced while seeking enhanced returns. Combining asset classes that typically do not fluctuate in tandem may lower the volatility of the customer's investment portfolio while providing the potential for long-term returns. In implementing a personalized asset allocation strategy for each customer:
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The customer's risk tolerance, investment goals, age, time horizon, investment experience and financial and personal circumstances are determined using detailed questionnaires that are completed during personal interviews. Based upon these data, an overall investment allocation among stocks, bonds, cash and/or other investment products is fashioned.
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Specific investment vehicles believed to be appropriate for the particular customer and investment allocation are selected from a universe of Company-approved mutual funds, variable annuities, individual securities and other investment products.
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Following investment in the selected securities, portfolio performance is monitored and periodically communicated to the client, and changes to the portfolio are made from time to time based upon performance, the customer's financial situation, goals and risk tolerance and other relevant factors.
Fee-Based Compensation Structure
In conformity with the requirements of the Investment Advisors Act of 1940 (the “Advisors Act”), compensation for our investment advisory services consists of an annual fee, assessed and earned quarterly, as a percentage of assets under management rather than a transaction-based commission or performance fee.
Insurance Operations
In certain states a licensed insurance entity is required for ICC representatives to sell life insurance and annuity products to their clients. Accordingly, the Company operates ICC Insurance Agency, Inc., a wholly-owned subsidiary of ICH that is duly licensed for such purposes in states in which such licensing is required. All revenue realized by this entity flows through as revenue to ICC.
ICH Securities
			
		
ICH Securities was established to hold cash for Company for income tax benefit purposes at the Massachusetts state level.
Our Strategy
Key elements of our strategy to achieve our corporate objectives include:
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Attract, recurit and retain high quality financial professionals. Our business model stresses recruitment and retention of capable, experienced independent financial professionals possessing the professional qualifications, knowledge and judgment to provide superior broker-dealer and investment advisory services to their customers. Our recruitment efforts are supported by advertising, targeted direct mail and telemarketing.
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Provide technologically innovative solutions to independent financial advisors. We continue to pursue additional technologies to service the rapidly evolving financial services industry. We believe that it is vital for our independent financial advisors utilize state of the art technology to effectively facilitate their business activity. With an on-going commitment to provide highly capable technology platform, we believe our independent advisors can leverage these tools to drive efficiency and economies of scale.
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Provide value-added services to our clients. We provide our clients with access to a pool of well-trained representatives, access to up-to-date market and other financial information, and direct access to our trade desk that is online with various stock exchanges and institutional buyers and sellers. We have focused initiatives on education, compliance and product support, as well as practice management programs to assist an advisor in their efforts to growth their business’ production. Also, we assist our representatives in developing personalized Internet web sites to provide their clients with a secure and private interface directly to our proprietary client web site.
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Grow recurring revenues. We recognize the trend toward increased investment advisory business and are focused on building our fee based investment advisory business when it serves the interests of our clients. We define recurring revenue to include our advisory fees, trailing commissions and certain other fees. The advisory fees are the largest component and not dependent upon transaction volumes. While advisory accounts generate substantially lower first year revenue than most commission products, the recurring nature of advisory fees provides stability and a foundation for accelerating future revenue growth.
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Increase brand awareness. We strive to increase our brand recognition to attract new clients and representatives by building market awareness, educating the investing public and maintaining customer loyalty through direct marketing, advertising through our marketing department, use of our web site, various public relations programs, web and live seminars, and/or advertising media such as print, radio and television.
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Expand our product and service offering through strategic relationships. We continue to pursue business alliances to increase trading volume, capitalize on cross-selling opportunities, create additional markets for our asset management programs, mutual fund sales and fixed insurance products, take advantage of emerging market trends, create operational efficiencies and further enhance our name recognition.
Competition
Our competitors vary in size, resources and breadth of services offered. We encounter direct and indirect competition from numerous established financial services companies, including firms that offer full-commission and discount brokerage, investment advisory, and financial planning services, increasingly based on the independent representative model. Many of our competitors are owned by insurance companies, banks and other large financial institutions.
Many competitors, alone or in conjunction with their parent corporations, have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and more extensive client bases.
			
		
We seek to compete through the quality of our registered representatives, a premier level of service to our representatives, and the breadth and depth of brokerage and advisory products and services we offer. We believe that our ability to compete depends upon many factors both within and outside our control, including:
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Our ability to attract and retain a network of experienced investment professionals
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The effectiveness, ease of use, performance and features of our technology and services
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The price and quality of our services and overall client satisfaction
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The volatility and performance of financial markets and the world economy
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Our ability to service our clients effectively and efficiently
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Our reputation in the financial services industry
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Our ability to foster compliance with applicable laws and regulations by employees and independent representatives
How We Are Regulated
Broker-Dealer Regulation
The securities industry is subject to extensive regulation under both federal and state law. The SEC is the federal agency responsible for administering the federal securities laws that apply to broker-dealers. ICC is a broker-dealer registered with the SEC. In addition to complying with the voluminous and complex rules set out in applicable statutes, including the Securities Act of 1933 and Securities Exchange Act of 1934 (as amended, the “Securities Act” and “Exchange Act”, respectively), The Dodd- Frank Act of 2010 and rules regulations promulgated thereunder, every registered broker-dealer that conducts business with the public is required to be a member of and subject to the jurisdiction and rules of FINRA.
FINRA has established numerous rules applicable to broker-dealers, including conduct rules for securities transactions among broker-dealers and private investors, trading rules for the over-the-counter markets and operational rules for its member firms. FINRA conducts examinations of member firms, investigates possible violations of the federal securities laws and its own rules and conducts disciplinary proceedings involving member firms and associated individuals. FINRA administers qualification testing for all securities principals and registered representatives for its own account and on behalf of the state securities authorities. We are also subject to regulation under state law. We are currently registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia.
The SEC and other regulatory bodies in the United States have rules with respect to net capital requirements that affect our broker-dealer subsidiary. These rules are designed to ensure that broker-dealers maintain adequate capital in relation to their liabilities, depending upon the types of securities business conducted and the size of their customer business. These rules have the effect of requiring that a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Failure to maintain the required net capital may subject a firm to suspension or revocation of its registration with the SEC and suspension and expulsion by the FINRA and other regulatory bodies, and ultimately may require its liquidation. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory bodies and changes in the interpretation or enforcement of existing laws and rules often directly affects the method of operation and profitability of broker-dealers. The SEC and the self-regulatory bodies may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers, employees or registered representatives.
Registered Investment Advisor Regulation
The Advisors Act, and the rules promulgated thereunder, regulates the registration and compensation of investment advisors. Investment advisors are deemed to be fiduciaries for their clients and, as such, are held to a high standard of conduct. Investment advisors are subject to regulation and oversight by the SEC and the various states. Investment advisors are required to register with the SEC and/or appropriate state regulatory agencies, are required to periodically file reports, and are subject to periodic or special examinations. Rules promulgated under the Advisors Act govern many aspects of the investment advisory business, such as advertisements by investment advisors and the custody or possession of funds or securities of a client. Most states require registration by investment advisors, unless an exemption is available, and impose annual registration fees. Some states also impose minimum capital requirements. There can be no assurance that compliance with existing and future requirements and legislation will not be costly and time consuming or otherwise adversely impact our business in this area.
			
		
Regulations Applicable to the Use of the Internet
Due to the established popularity and use of the Internet and other online services, various regulatory authorities have adopted or are considering laws and/or regulations with respect to the internet or other online services covering issues such as user privacy, pricing, content copyrights and quality of services. In addition, the growth and development of the market for online commerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online.
The recent increase in the number of complaints by online traders could lead to more stringent regulations of online trading firms and their practices by the SEC, FINRA and other regulatory bodies. The applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes and personal privacy is also uncertain and may take years to resolve. Finally, as our services are available over the Internet in multiple states, and as we have numerous clients residing in these states, these jurisdictions may claim that we are required to qualify to conduct business as a foreign corporation in each such state. While ICC currently is registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia, we are qualified to conduct business as a foreign corporation in only a few states. Failure by our company to qualify as a broker-dealer in other jurisdictions or as an out-of-state or "foreign" corporation in a jurisdiction where it is required to do so could subject us to taxes and penalties for the failure to qualify. Our business could be harmed by any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the applications of existing laws and regulations to the Internet and other online services.
Employees
As of March 31, 2013, we had 59 full-time employees, the majority of whom are located at our principal office in Lynnfield, Massachusetts. No employee is covered by a collective bargaining agreement or is represented by a labor union. We consider our employee relations to be excellent. We also enter into independent contractor arrangements on an as-needed basis to assist with various aspects of our business.
Available information
The Company is subject to the informational requirements of the Securities Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information filed with the SEC by the Company can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC located at http://www.sec.gov.
Our website address is http://www.investorscapital.com. We make available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website is not part of this or any other report we file with or furnish to the SEC. All such documents are also available in print at no charge to any shareholder who requests them in writing to Robert Foney, Manager Corporate Communications, Six Kimball Lane, Lynnfield, MA 01940.
Executive Officers Of The COMPANY
The following sets forth, as of June 17, 2013, certain information with respect to each of the executive officers of ICH:
Timothy B. Murphy, age 48, has served as a director of the Company since July 1995. A founder of the Company, Mr. Murphy has served as President and Chief Executive Officer since August 2009. He served as Executive Vice President and Chief Financial Officer of the Company from its inception until August and December 2009, respectively, and as President of ICC since its inception. He entered the securities industry in 1991 as an operations manager in the Boston regional office of Clayton Securities. By 1994, he was serving as compliance officer of BayBanks Brokerage and a vice president of G.R. Stuart & Company, another brokerage firm. Mr. Murphy holds various securities licenses including series 4, 7, 24, 27, 53, 63 and 65.
			
		
Kathleen L. Donnelly, age 41, was promoted to Chief Financial Officer of the Company effective January 1, 2009 and serves as its principal financial officer. Prior to this appointment, Ms. Donnelly was employed by ICC as Corporate Accountant where she managed the Company’s Sarbanes-Oxley compliance readiness program and provided internal budgeting and financial analysis services. From 1997 through 2006, she was an Audit Manager with UHY LLP (formerly Brown & Brown, LLP), the Company’s independent public accountants prior to the appointment of Marcum, LLP. Ms. Donnelly is a Certified Public Accountant.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
ITEM 2.
ITEM 2. Properties.
Our principal executive offices are located within a 14,045 square foot facility at Six Kimball Lane, Lynnfield, MA. The Company relocated its offices on December 1, 2012 and has subsequently resolved litigation with its prior lessor and landlord, specific to the leased tenancy at 230 Broadway Lynnfield, MA.
On October 19, 2012 the Company entered into a lease at Six Kimball Lane, also in Lynnfield, MA. This lease, which is for a term of sixteen months, expires March 31, 2014. The rent expense for the 230 Broadway Lynnfield, MA location during the fiscal year ended March 31, 2013 was $156,493 and for the Six Kimball Lane property was $84,270.
We believe that our existing property is adequate for current operating requirements of our business; however additional space will be needed as staffing increases.
ITEM 3.
ITEM 3. Legal Proceedings.
The Company operates in a highly litigious and regulated business, and the Company often is made a defendant in arbitrations and other legal proceedings that are incidental to our securities business. The Company typically vigorously contests the allegations of the complaints and believes that there are meritorious defenses in these matters. From time to time the Company also is the subject of regulatory investigations and proceedings. Counsel often is unable to confidently predict the likelihood of an outcome, whether favorable or unfavorable, in such matters because of routine and inherent uncertainties.
The Company maintains Errors and Omissions (“E&O”) insurance to protect itself from potential damages and/or legal costs associated with certain litigation and arbitration proceedings and, as a result, in the majority of cases, the Company’s exposure is limited to $100,000 or $1,000,000 aggregate (effective January 2013 for only certain alternative investment products related to defense costs and indemnities) in any one case, subject to policy limitations and exclusions. Thereafter the $1,000,000 aggregate threshold, the Company’s exposure on these same investments is limited to $150,000 and a 10 percent coinsurance. For all other investment products, the Company’s exposure is $100,000 per claim.
The Company also maintains a fidelity bond to protect itself from potential damages and/or legal costs related to fraudulent activities pursuant to which the Company’s exposure is usually limited to $350,000, subject to policy limitations and exclusions.
ITEM 4.
ITEM 4. [REMOVED AND RESERVED]
PART II
ITEM 5.
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
			
		
ICH's common stock has been trading on NYSE AMEX / Alternext US (“Amex”) (formerly, The American Stock Exchange) under the symbol "ICH" since February 8, 2001. Prior to such date, there was no established public trading market for the common stock. As of June 12, 2013, there were 7,101,427 shares outstanding and 245 registered holders thereof.
The following table presents the high and low closing prices for the common stock of ICH on the Amex for the periods indicated:
						
						
High
Low
Fiscal Year Ended March 31, 2013:
January 1, 2013 through March 31, 2013
$4.01
$3.46
October 1, 2012 through December 31, 2012
$4.25
$3.50
July 1, 2012 through September 30, 2012
$4.24
$3.76
April 1, 2012 through June 30, 2012
$4.25
$4.00
						
						
Fiscal Year Ended March 31, 2012:
January 1, 2012 through March 31, 2012
$4.25
$3.57
October 1, 2011 through December 31, 2011
$5.05
$3.80
July 1, 2011 through September 30, 2011
$6.39
$4.78
April 1, 2011 through June 30, 2011
$6.48
$5.09
Cash Dividends
The Company did not pay any dividends on its common stock during the fiscal years ended March 31, 2013 and 2012.
We have no current intentions of paying dividends on shares of our common stock for the foreseeable future. In addition, the terms of our bank loan agreement with Commerce Bank & Trust Company restrict our ability to pay dividends. Future dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of the Company and the impact of regulatory restrictions. For further information regarding restrictions on our ability to transfer funds to our stockholders, see Part I, Item 1. “Business - How We Are Regulated” and Part II, Item 7. “Management's Discussion and Analysis - Liquidity and Capital Resources” in this Form 10-K.
Securities Authorized for Issuance Under Compensation Plans
The following table presents information as of March 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
						
						
						
						
Equity Compensation Plan Information
						
						
						
						
						
						
						
						
						
						
						
Number of securities
						
Number of securities
						
remaining available for
						
to be issued
Weighted-average
future issuance under
						
upon exercise of
exercise price of
equity compensation plans
						
outstanding options,
outstanding options,
(excluding securities
Plan category
						
warrants and rights
warrants and rights
reflected in column (a))
						
(a)
(b)
(c)
Equity compensation
						
						
						
						
plans not approved
						
						
						
by security holders
						
150,000
$1.00
none
						
						
						
						
Total
						
150,000
$1.00
none
						
						
						
						
			
		
See “Footnote 19 - Benefit Plans” to the Company’s Financial Statements, contained in Part II, Item 8 of this Form 10-K, for a description of the material features of each compensation plan under which equity securities of the Company’s are authorized for issuance that was adopted without the approval of security holders.
recent sales of unregistered securities
None.
ITEM 6.
ITEM 6. selected financial data.
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis reviews our consolidated financial condition as of March 31, 2013 and 2012, the consolidated results of operations for the years ended March 31, 2013 and 2012 and, where appropriate, factors that may affect future financial performance. The discussion should be read in conjunction with the accompanying consolidated financial statements and related notes. Unless context requires otherwise, as used in this Management's Discussion and Analysis (i) the "current period" means the fiscal year ended March 31, 2013, (ii) the "prior period" means the fiscal year ended March 31, 2012, (iii) an increase or decrease compares the current period to the prior period, and (iv) all non-comparative amounts refer to the current period.
Forward-Looking Statements
The statements, analyses, and other information contained herein relating to trends in our operations and financial results, the markets for our products, the future development of our business, and the contingencies and uncertainties to which we may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company. Our actual results may differ materially from the results anticipated in these forward-looking statements.
These forward-looking statements are subject to risks and uncertainties including, but not limited to, those described and discussed in this report and other documents filed by the Company with the United States Securities and Exchange Commission (the “SEC”). We specifically disclaim any obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise.
Overview
We are a financial services holding company that, through our subsidiaries, provides brokerage, investment advisory, insurance and related services. We operate in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition and investor preferences. Our revenues and net earnings may be either enhanced or diminished from period to period by these and other external factors.
			
		
OUR BUSINESS
We operate primarily through our subsidiary, ICC, as a broker-dealer and, doing business as ICA, as a registered investment advisor, with a national network of independent financial representatives.
Broker-Dealer Services
We provide broker-dealer services in support of trading and investment by our representatives’ customers in securities, including corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, limited partnerships and other alternative investments, variable annuities and variable life insurance. We also provide related services such as market information, Internet brokerage, portfolio tracking facilities and records management.
Investment Advisory Services
We provide investment advisory services, including asset allocation and portfolio rebalancing, for our representative’s customers through ICA. We offer various accounts, some of which are managed by our financial advisors, and other that are managed by third parties. The advisor managed accounts offers various account structures, including fee-based and “wrap fee” accounts. For financial advisors who prefer not to act as portfolio manager, third party management options are available. The type of portfolios may include separately managed accounts, mutual funds and other model portfolios.
Recruitment and Support of Representatives
A key component of our business strategy is to recruit well-established, productive representatives who provide superior service to their clients. Additionally, we assist our representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients. We focus on providing substantial added value to our representatives’ practices, enabling them to be more productive.
Support provided to assist representatives in pursuing consistent, profitable sales growth takes many forms, including automated trading systems and other technology solutions, targeted financial assistance and a network of communication links with investment product companies. Regional and national conventions provide forums for interaction to improve product knowledge, sales and client satisfaction. In addition, we provide our representatives with programs and tools to grow their businesses both through new client acquisition and advancement of existing client relationships. These programs enhance our ability to attract and retain productive representatives.
Critical Accounting Policies
In General
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company believes that of its significant accounting policies (detailed in Footnote 2 - Summary of Significant Accounts Policies to the Company’s Consolidated Financial Statements contained herein), those dealing with valuation of securities and other assets, revenue recognition and allowance for doubtful accounts receivable involve a particularly high degree of judgment and complexity. Our accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts can and do differ from estimates and the difference can have a material effect on the consolidated financial statements. Therefore, understanding these policies is important to understanding the reported results of operations and the financial position of the Company.
Off-Balance Sheet Risk
We execute securities transactions on behalf of our customers. If either the customer or counter-party fails to perform, we, by agreement with our clearing broker, may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance sheet risk by monitoring the market value of securities held or given as
			
		
collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing firm requires that we reduce positions when necessary. We also complete credit evaluations where there is thought to be credit risk.
Reserves
We record reserves related to legal proceedings in "accrued expenses" in the consolidated balance sheet. The determination of these reserve amounts requires significant judgment on the part of management. We consider many factors including, but not limited to: the amount of the claim; the amount of the loss in the client's account; the basis and validity of the claim; the possibility of wrongdoing on the part of one of our employees or representatives; previous results in similar cases; and legal precedents. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the consolidated financial statements and is recognized as a charge or credit to earnings in that period. The assumptions made by management in determining the estimates of reserves may be incorrect and the actual costs upon disposition of a legal proceeding may be greater or less than the reserved amount.
Risk Management
Risk is an inherent part of our business and activities. Risk management is critical to our financial strength and profitability and requires robust auditing, constant communications, sound judgment and knowledge of financial regulations, trends and the economy as a whole. We take a holistic approach to governance, risk management and compliance.
Management and staff, at all levels, take a proactive role in the risk management process. The principal risks involved in our business activities include market, operational, regulatory and legal risks.
Market Risk
Market risk is the risk attributable to common macroeconomic factors such as gross domestic product, employment, inflation, interest rates, budget deficits and consumer sentiment. Consumer and producer sentiment is critical to our business. The level of consumer confidence determines their willingness to spend, especially in the financial markets. It is the willingness to spend in the financial markets that is key to our business. A shift in spending in this area, often caused by market volatility, could negatively impact us. In addition, declines in market values negatively impact investment advisory revenues that are based upon the value of assets under management. We constantly monitor these economic trends in order to enhance and broaden our product line to mitigate potential negative impact of such trends.
Operational Risk
Operational risk refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes. Managing these risks is critical, especially in a rapidly changing environment with increasing transaction volume. Failure to manage these risks could result in material financial loss to the Company. To mitigate these risks, the Company has developed policies and procedures designed to identify and manage operational risk. These policies and procedures are reviewed and updated on a continuing basis by a broad-based Risk Committee that meets weekly to ensure that risk is minimized.
Regulatory and Legal Risk
Regulatory and legal risk includes non-compliance with applicable legal and regulatory requirements and the risk of customer claims that could result in adverse judgments against us. We are subject to extensive regulation in the various jurisdictions in which we operate. We maintain procedures to address issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer information and funds, the granting of credit, collection activities, money-laundering and record keeping. However, compliance procedures, no matter how stringent and comprehensive, can only limit, but not completely prevent, the institution of regulatory and legal proceedings, the institution, outcomes and consequences of which often cannot be reasonably foreseen or quantified in advance.
In the normal course of business, we continue to be the subject of numerous civil actions and arbitrations arising out of customer complaints concerning our activities as a broker-dealer, investment advisor, employer or otherwise. As
			
		
experienced generally in the industry today, the volume of such complaints has generally trended upward over time, particularly in conjunction with market losses incurred by customers during the most recent financial downturn.
Effects of Inflation
Our assets primarily are liquid in nature and not significantly affected by inflation. Management believes that the replacement cost of property and equipment will not materially affect operating results. However, the rate of inflation can affect our expenses, including, without limitation, employee compensation and benefits, communications and occupancy, which may not be readily recoverable through charges for services provided.
KEY INDICATORS OF FINANCIAL PERFORMANCE
We periodically review and analyze our financial performance across a number of measurable factors considered to be particularly useful in understanding and managing our business. Key metrics in this process include productivity and practice diversification of representatives, top line commission and advisory services revenues, operating expenses, legal costs, taxes, earnings per share and adjusted EBITDA (as defined below).
PRODUCTIVITY AND PRACTICE DIVERSIFICATION OF REPRESENTATIVES
Management believes that continual improvement in the overall quality of our independent representatives is a key to achieving growth in revenues and earnings. We believe that upgrading the business practices of our representatives not only grows revenue, but assists in limiting the cost of overhead functions and representative noncompliance. We strive to continually improve the overall quality of our force of representatives by:
·
assisting representatives to improve their skills and practices,
·
recruiting established, high-quality representatives, and
·
terminating low-quality representatives.
			
		
Productivity
A key metric that we use to assess the average quality of our producing (non-staff) representatives is per capita rep-generated revenue based on a 12-month period. Data for the 12-month periods ended March 31, 2013 and 2012 are presented below:
We believe that the 8.1% increase in per capita rep-generated revenue reflects recruitment of established, higher producing representatives, offsetting retired or terminated lower producing representatives. The Company is focused on driving revenue growth through both recruitment and organic growth in productivity from our existing representative base.
Practice Diversification
We encourage diversification in the investments products and services recommended or selected by our independent representatives for their clients through recruitment, education and training. This enables our representatives to more fully serve the investment and security needs of their clients, particularly in volatile markets. We believe that representatives who offer diversified investment products and sophisticated services to their clients will generate transaction and fee-based business and recurring revenues that will help us weather volatile and down markets.
Comparison of Fiscal Years Ended March 31, 2013 and 2012
The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this report.
RESULTS OF OPERATIONS
			
		
Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted by eliminating other non-cash expense such as stock-related compensation, gains or losses on sales of assets, and various non-recurring items such as material expenses incurred in connection with a secondary stock offering that closed on August 2, 2011 (“adjusted EBITDA”), is a key metric we use in evaluating our financial performance. We consider adjusted EBITDA important in monitoring and evaluating our financial performance on a consistent basis across multiple time periods. We also use adjusted EBITDA as an important measure, among others, to analyze and evaluate financial and strategic planning decisions.
Adjusted EBITDA is considered a non-US GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act. Adjusted EBITDA should be considered in conjunction with, rather than as a substitute for, important US GAAP financial measures including pre-tax income, net income and cash flows from operating activities. Items excluded from adjusted EBITDA are significant and necessary components to the operations of our business; therefore, adjusted EBITDA should only be used as a supplemental measure of our operating performance.
Our EBITDA, as adjusted, increased by $1.9 million in 2013 compared to 2012 as a result of an increase in net income
			
		
in 2013 as compared to a net loss in 2012.
Revenues
Revenues increased by 4.7% or by $3.8 million, showing growth in all segments. Commission’s revenue increased by $2.1 million or 3.4% and advisory fees increased by 2.8% reflecting successful recruitment of higher-producing representatives. Top line revenues also benefited from improved financial markets which attributed to an increase in recurring revenues, and revenue earned from sales of mutual funds, variable annuities, and direct participation programs.
Revenues from advisory fees increased due to asset values growth, complimented by an increase in investment contributions in a continued shift by our existing representatives for more advisory business. Our advisor-directed managed assets program, A-MAP, where investment advisory services are provided directly by our independent representatives, continues to be the largest portion of our advisory services revenue. Our advisor managed program continues to contribute the majority of advisory fee revenue; however, revenues decreased in the A-MAP program. This decrease, along with a decrease in our F- MAP program revenues, was offset by an increase in revenues and assets under management in our A-MAP FT program, another advisor managed program which is provided for a flat fee rate. We expect advisory revenues to increase in the near term due to newly-added assets from new representatives, as well as shift by existing representatives to advisory services.
The Company continues to commit resources to bolster growth in this revenue segment. The Company is targeting its recruiting to attract new advisors, as well as enhancing practice management offerings so all advisors grow their business. Strategic marketing efforts consistent with the firm’s goal of determinedly growing its revenues through recruiting and organically through enhanced business development, will be implemented to further differentiate us within the independent broker dealer channel.
Other fee income increased as a result from fees for renewals, errors and omissions, and technology fees.
The increase in other revenue, which consists of net marketing revenues and interest income, resulted primarily from the rise in marketing allowances earned from product sponsor programs. The increase stems from the growth in sales volumes of sponsored investment products.
Expenses
Total expenses increased slightly mostly as a result of increases in commissions and advisory fees paid to our representatives and regulatory, legal and professional fees. Offsetting these increases was decreases in compensation and benefits, brokerage and commissions, and occupancy and equipment.
Commissions and advisory fees paid to our representatives are directly linked to revenues generated by our representatives and the payouts are tied to their productivity levels. Accordingly, much of the $2.6 million or 4.02%
			
		
increase in commissions and advisory fees reflects the corresponding increase in commission and advisory fee revenue. The percentage payout to our representatives increased by 0.06% as compared to last year’s payout percentage.
Regulatory, legal and professional expenses increased primarily as a result of a $1.6 million increase in legal fees and settlements, of which $0.3 million was related to defense costs for the property lease litigation with our former Chairman. Offsetting this increase, was a $0.8 million decrease in professional and legal fees related to the filing of an S-3 registration in 2012 for the sale of ICH shares held by our former Chairman and majority stockholder from the prior year.
We will continue to incur legal fees and settlement costs as we operate in a litigious, regulated industry. In addition, from time to time regulatory agencies and self-regulatory organizations institute investigations into industry or firm practices that also may result in the imposition of financial or other sanctions. We invest significant resources to mitigate litigation and regulatory exposure by promoting sound operational procedures, on-going surveillance processes and obtaining comprehensive insurance coverage.
The decrease in compensation and benefits is attributable to the cost management initiatives the Company implemented in January 2012, including salary reductions with a reduction in force, offset by one-time separation costs associated with former employees, increased health benefit costs as well as an annual incentive plan bonus paid of $0.5 million to employees. In addition, the final payment was made in August 2012 to our former Chairman satisfying the terms of a one-year post-retirement consulting agreement, whereas in the prior period his salary and portion of consulting fees totaled $0.4 million. Also, in the prior period and as part of the terms of his retirement agreement, was $0.6 million non-cash compensation to the former Chairman resulting from a transfer of the cash surrender value of a life insurance policy.
Costs for brokerage, clearing, and exchange fees declined in savings from the termination of a quarterly reporting service contract.
Costs associated with occupancy and equipment decreased from the expiration of operating leases for locations in Miami and Topsfield, MA in the prior period, offset by an increase in leasehold improvement disposals and furniture, equipment and leasehold improvements required as part of the relocation of our home office at Six Kimball Lane, Lynnfield, MA.
OPERATING AND NET INCOME
The Company reported $0.6 million in operating income as compared to $2.7 million in operating loss for the prior period. The Company’s net income totaled $0.4 million, or $0.06 per basic and diluted net loss per share, compared to a net loss totaled $2.3 million, or $0.36 per basic and diluted net loss per share for the prior period.
The Company’s current period improved performance and profitability can be attributed to rebounding market that impacted recurring revenues, retention and growth of our experienced representatives in addition to an increase in other fee income offset by the decrease in controllable expenses, like compensation; however, the Company needs to remain competitive in an increasing regulatory environment by retaining and growing the number of representatives. The increase in the costs to recruit, transition loans, waive fees, and advertise, induced the Company to close a two million dollar subordinated loan agreement to be used for recruitment purposes. Also the Company is well aware of decreasing margins to remain competitive in the recruitment of advisors and the increase administrative costs to support the quality customer service to the representative.
In an ever changing financial service sector the Company remains optimistic that it will achieve the required growth needed to offset the increase in legal fees and settlement costs that continue to negatively impact the results of operations. The Company will remain focused on the retention of its representative force with enhanced technology, practice management initiatives, compliance education, and quality customer service. In addition, the Company will begin their new fiscal year with its goal of aggressively recruiting new representatives to the firm and at the same time retaining and improving the business of its existing representatives.
Liquidity and Capital Resources
Our primary source of liquidity remains cash flows from operations, primarily from our broker-dealer and investment advisory business. Decisions on the allocation of capital include projected profitability and available cash flows, risk management and regulatory capital requirements. A key to this approach is ensuring that industry-standard controls are effective to support our operations and those of our representatives while ensuring sufficient liquidity.
			
		
As of March 31, 2013, cash and cash equivalents totaled $6.6 million as compared to $4.5 million as of March 31, 2012. Working capital as of March 31, 2013 was $7.5 million as compared to $4.2 million as of March 31, 2012. The ratio of current assets to current liabilities was 1.92 to 1 as of March 31, 2013 as compared to 1.61 to 1 as of March 31, 2012.
Cash provided by operating activities provided $2.5 million in cash for the year ended March 31, 2013 as compared to $1.8 million of cash provided for the year ended March 31, 2012.
In comparing cash flow from operating activities for fiscal year ended March 31, 2013 to fiscal year ended March 31, 2012, cash flows increased by $0.7 million largely due to the Company’s current period profits as compared to a net loss in the prior period, offset by a change in accounts receivable accounts held at our clearing firm. In addition, there were changes in liabilities in accounts payable, commissions payable, and accrued legal expenses that increased operating cash from operating activities.
Cash provided by investing activities during the current period primarily consisted of $0.2 million used in the acquisition of property and equipment whereas in the prior period there was the collection on a note receivable which provided an increase to cash flows of $0.6 million.
Financing activities provided $2.0 million due to the subordinated loan agreement with its clearing firm in the current period, offset by principal payments on a short-term note obligation to finance insurance premiums. Cash used for this purpose in both the current and prior periods was $2.3 million and $2.2 million, respectively, for the years ended March 31, 2013 and 2012.
The Company’s ability to generate positive cash flows will depend on its future results of operations. The Company is continuously striving to mitigate operational and legal risks in a stringent regulatory environment along with aiming to increase its market share through its retention and recruiting efforts. The Company is also motivated in keeping its controllable expenses in line with its revenue base by means of operational efficiency.
The Company did not experience the non-recurring expenses it incurred in the prior year related to the S-3 registration and other costs in facilitating the retirement of the former Chairman of the Board which negatively impacted the Company’s ability to generate positive cash flow in the prior year; however, management believes that the Company will achieve its market share and revenue growth goals that will help generate the needed capital resources from its core operations in the near future.
REGULATORY NET CAPITAL
ICC is subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires our broker-dealer subsidiary to maintain minimum net capital. As of March 31, 2013, ICC computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances. Repayment or prepayment of subordinated debt, if any, and withdrawal of equity from retiring partners or officers is subject to net capital not falling below 5% of aggregate debits or 120% of minimum net capital requirement.
As of March 31, 2013, ICC had net capital of $4.43 million (i.e., an excess of $4.18 million) as compared to net capital of approximately $1.43 million (i.e., an excess of $1.18 million) as of March 31, 2012. The increase in net capital primarily was due to profitability as well as subordinated debt.
			
		
ITEM 8.
ITEM 8. Financial Statements And Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Investors Capital Holdings, Ltd. and Subsidiaries
Lynnfield, MA
We have audited the accompanying consolidated balance sheets of Investors Capital Holdings, Ltd. and subsidiaries (the “Company”) as of March 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included a consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Capital Holdings, Ltd. and subsidiaries, at March 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Marcum, LLP
Boston, Massachusetts
June 20, 2013
			
		
			
		
						
						
						
						
						
						
			
		
The accompanying notes are an integral part of these consolidated financial statements.
			
		
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 2012 and 2011
			
		
The accompanying notes are an integral part of these consolidated financial statements.
			
		
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2013 and 2012
NOTE 1 - NATURE OF OPERATIONS
Incorporated in 1995 under Massachusetts law and redomesticated under Delaware law in 2007, Investors Capital
			
		
Holdings, Ltd. ("ICH") is a holding company whose wholly-owned subsidiaries assist a nationwide network of independent registered representatives ("representatives") in providing a diversified line of financial services to the public including securities brokerage, investment advice, asset management, financial planning and insurance. Our subsidiaries include the following:
·
Investors Capital Corporation ("ICC") is duly registered under the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 and applicable state law to provide broker-dealer and investment advisory services nationwide. ICC’s national network of independent financial representatives is licensed to provide these services through ICC under the regulatory purview of the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”) and state securities regulators. ICC executes and clears its public customer accounts on a fully disclosed basis through Pershing, LLC (“Pershing”). ICC, doing business as Investors Capital Advisors (“ICA”), also provides investment advisory services.
·
ICC Insurance Agency, Inc. facilitates the sale of insurance and annuities by our representatives.
·
Investors Capital Holdings Securities Corporation ("ICH Securities") holds cash, cash equivalents, interest income and dividend income for ICH.
·
Advisor Direct, Incorporated (“AD”) is a wholly-owned subsidiary. On January 24, 2013, Investors Capital Holdings, Ltd. acquired all the assets of a shell broker-dealer for the cash purchase price of $32,500 with no goodwill created. AD is a Broker-Dealer registered with the SEC and is a member of FINRA. AD is registered to operate as a (k)(1) Broker-Dealer where principal transactions are limited to mutual funds and/or variable annuities only.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below to assist the reader to better understand the consolidated financial statements and other data contained herein.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ICC, ICC Insurance Agency, Inc., Advisor Direct, Inc. and ICH Securities. All significant inter-company items and transactions have been eliminated in the consolidation.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, if any, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates deal with the valuation of securities and other assets revenue recognition, litigation reserves and allowance for doubtful accounts receivable and involve a particularly high degree of judgment and complexity. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue recognition policies are summarized below.
Mutual Funds/Variable Annuities. Revenue from the sale of mutual funds and variable annuities is recognized as of the date the check and application is accepted by the investment company.
Brokerage. The Company earns commissions through stock purchase and sale transactions, mutual fund purchases, government and corporate bonds transactions, fee-based managed accounts and ticket charges. The Company also earns revenue in the form of 12b-1 fees and interest on account balances. The earnings process is substantially complete at trade
			
		
date in accordance with the rules of FINRA and the SEC.
The Company also receives credit adjustments for clearing charges that are netted against any clearing charges the Company may incur for the period. These adjustments are recognized as income in the period received unless otherwise noted by the clearing Company.
Unrealized gains and losses are recorded at the time that the Company reconciles its trading positions with the market value. The unrealized gains or losses are adjusted to market until the position is settled or the trade is cancelled.
Advisory Fees. Our managed accounts advisory fees are based on the amount of assets managed per agreement negotiated between our independent representatives and their clients. These revenues are recorded quarterly as and when billed based on the fair market value of assets managed throughout the quarter. Any portion remaining uncollected due to account adjustments after account rebalancing is charged against earnings at quarter end.
Administration Fees. Administration fees for services rendered to the Company’s representatives respecting annual FINRA license renewals and Error and Omissions (“E&O”) insurance are recognized as revenue upon registration of the representative with FINRA and listing of the registered representative with the E&O insurance carrier. The funds received from the registered representative are initially recorded as unearned revenue. The amounts collected in excess of the E & O insurance premium and/or fees due FINRA, if any, are recognized as revenue. Fees collected to maintain books and records are deferred and recognized ratably throughout the year.
Other Revenue. Revenue from marketing associated with product sales is recognized quarterly based on production levels. Marketing event revenues are recognized at the commencement of each event offset by its costs. Revenue from ICC’s technology platform, Capital Connect, is recognized monthly based on a representative’s selected package, which provides them access to a portal, in addition to receiving IT support. The service terminates immediately if a representative is no longer with the firm or it is temporarily suspended, in either case, there will be no additional fees to be recognized as income.
Cash and Cash Equivalents
For purposes of reporting cash flow, cash and cash equivalents includes cash in checking and savings accounts, cash at its clearing firm and short-term investments with original maturities of 90 days or less.
Customer Accounts
The Company's customer accounts are reported by the various custodians on a fully disclosed basis.
Financial Instruments
The Company’s financial assets and liabilities are reported in the statements of financial condition at readily ascertainable fair value or at carrying amounts that approximate fair value as these financial instruments generally have short maturity periods. The fair value of securities owned and trading securities sold, not yet purchased are equal to the carrying value. Changes in the fair value of these securities are reflected in the results of operations.
Marketable Securities
The Company classifies their short-term investments as trading, available for sale, or held to maturity. The Company's marketable securities consist of fixed income instruments and mutual funds and have been classified by management as trading. Accordingly, realized and unrealized gains and losses at year-end are included in the earnings of the Company. The fair market values of these securities are determined based on quoted market prices.
The Company conducts its principal trading through two designated trading accounts. One of these accounts is used to facilitate fixed income trading on a same day buy-sell basis. The second account is used to facilitate fixed income trading for representatives and may carry positions overnight. These securities are normally held in the account for no longer than 30 days and are recorded at fair market value.
Advertising
			
		
The Company expenses all promotional costs as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the related assets, over a period of three to seven years. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. Routine repairs and maintenance are expensed as incurred.
The Company reviews the carrying value on its property and equipment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from its use and eventual disposition. In cases where an asset is not in use and subsequently disposed of, the Company recognizes a loss on disposal that is equal to the carrying value at the time of disposal offset against any proceeds received. The Company reported losses on its disposal of property and equipment of $65,786 and $14,542 respectively, for the years ended March 31, 2013 and 2012.
Income Taxes
The Company uses the asset and liability method to account for income taxes, which requires recognition of deferred tax assets, subject to valuation allowances, and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or loss in the period that includes the enactment date.
Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of deferred compensation, legal accruals, differences between depreciation expenses, and a net operating loss for financial statement purposes versus tax return purposes.
The Company has assessed the realizability of its deferred tax assets to determine whether or not a valuation allowance was required for some or all of its deferred tax assets. The Company also considered its current period reporting results and compared these results to its annual projection. Management anticipates it will achieve profitability and future taxable income; however, it has concluded that the sustained uncertainty in the global economy and its impact on the U.S. financial markets along with the ongoing legal risks and related defense costs inherent in the industry necessitated a valuation allowance in the amount of approximately $0.5 million as of March 31, 2013 and 2012.
If future operations exceed current projections, management may conclude such valuation allowance is no longer needed. Conversely, if future operating results do not meet current projections, it is possible that an additional valuation
allowance may be needed in future periods.
US GAAP requires that the impact of tax positions be recognized in the financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position. The Company’s management has determined that the Company has no uncertain tax positions requiring recognition as of March 31, 2013. The Company files federal and state income tax returns. The statute of limitations for these jurisdictions is generally three to six years. The Company had no returns under examination as of March 31, 2013.
Earnings Per Share
The Company reports net income (loss) per share. Diluted earnings per share do not include the effect of stock options as it has an anti-dilutive effect on earnings per share (See Note 19). Basic and diluted net income per common share are determined by dividing net income by the weighted average number of common shares outstanding during the period.
Stock Based Awards
The Company grants stock based awards to employees, directors, and registered representatives after the awards are approved by the board of directors. These awards are incentive driven and based on performance. (See NOTE 19 BENEFIT PLANS)
			
		
Segment Reporting
The Company makes disclosures about products and services, and major customers. See “Note 15, Segment Information”.
Accounts Receivable - Allowance for Doubtful Accounts
The Company’s policies for determining whether a receivable is considered uncollectible are as follows:
Trade Receivables. As prescribed by the SEC, trade receivables usually settle within three days. If a trade error occurs, the Company pursues remedies to collect on the trade error. The Company does not record a receivable resulting from a trade error that is in litigation or whose outcome is otherwise not reasonably determinable. In such a case, the Company applies any proceeds from settlements or insurance against any trade losses incurred.
Loans to representatives. Management performs periodic evaluations and provides an allowance based on the assessment of specifically identified unsecured receivables and other factors, including the representative's payment history and production levels. Once it is determined that it is both probable that a loan has been impaired, typically due to the termination of the relationship, and the amount of loss can reasonably be estimated, the portion of the loan balance estimated to be uncollectible is so classified. See “Note 3, Loans to Registered Representatives”.
Valuation of Securities and Other Assets
Substantially all financial instruments are reflected in the consolidated financial statements at fair value or amounts that approximate fair value. These include cash; cash equivalents; securities purchased under agreements to resell; deposits with clearing organizations; securities owned; and securities sold but not yet purchased. Certain financial instruments are classified as trading, available for sale, and held to maturity. The realized gains and losses are recorded in the income statement in the period in which the transactions occurred. The related unrealized gains and losses are reflected in other comprehensive income depending on the underlying purpose of the instrument. The Company records its private equity holdings at cost as the Company does not exercise significant influence over these equity investments.
Where available, the Company uses prices from independent sources such as listed market prices, or broker or dealer price quotations. Fair values for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In addition, even where the value of a security is derived from an independent market price or broker or dealer quote, certain assumptions may be required to determine the fair value. For instance, the Company generally assumes that the size of positions in securities that the Company holds would not be large enough to affect the quoted price of the securities if the Company were to sell them, and that any such sale would happen in an orderly manner. However, the actual value realized upon disposition could be different from the current carrying value.
Internal Use of Software
The costs of internally developed software that qualify for capitalization are capitalized as fixed assets and subsequently amortized over the estimated useful life of the software, which is generally three years. The costs of internally developed software are included in fixed assets at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project. The Company does not capitalize projects where it believes that the future economic benefits are less than probable.
Reclassifications
Certain amounts in 2012 were reclassified to provide comparison with 2013 classifications. There was no impact to previously reported Net income (loss) or Net income (loss) per share.
Recent Accounting Pronouncements
Comprehensive Income. In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05,
			
		
Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, the new rule will require an entity to present net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years beginning after December 15, 2011 and for interim periods within those years The Company has adopted this rule as of April 01, 2012. While the adoption of this new guidance will change the presentation of comprehensive income, it did not have a material impact on the Company’s results of operations or financial position (See Consolidated Statements of Operations).
Subsequent Events
The Company has evaluated subsequent events through the date the financial statements were available to be filed. There were no material subsequent events requiring adjustment to or disclosure in these financial statements.
NOTE 3 - Loans to Registered Representatives
ICC has granted loans to certain registered representatives. These loans are primarily given to newly recruited representatives to assist in the transition process. These notes have various schedules for repayment or forgiveness. Forgiveness is granted if the representative remains licensed with the Company for an agreed upon period of time, generally one to five years, and/or meet specified performance goals. Upon forgiveness, the loans are charged to commission expense. Loans charged to commission expense totaled $181,599 and $291,874 for the fiscal years ended March 31, 2013 and 2012, respectively.
Some loans to registered representatives are not subject to a forgiveness contingency. These loans, as well as loans that have failed the forgiveness contingency, are repaid to the Company by deducting a portion of the representatives’ commission payouts throughout the commission cycle until the loans are repaid.
Interest charged on these loans to representatives range from 3.00% to 9.00% annually. Loans to registered representatives included in receivables from employees and registered representatives are as follows at March 31:
Included in other loans is a loan receivable from a registered representative in connection with a regulatory matter settled with the Massachusetts Securities Division on October 27, 2010. This representative has agreed to reimburse the Company for certain amounts paid by the Company with respect to this regulatory matter. The amount due on this receivable at March 31, 2013 and 2012 was $330,587 and $391,560, respectively.
NOTE 4 - NOTE RECEIVABLE
On October 24, 2005, the Company entered into an agreement (the “Transition Agreement”) with Dividend Growth Advisors, LLC (“DGA”). The Company agreed to terminate its Investment Advisory Agreement with Eastern Point Advisors Funds Trust (the “Trust”) effective October 18, 2005 and to permit the appointment by the Trust of DGA to succeed the Company as the Trust’s investment advisor.
On February 28, 2012, the Company received $499,475 in principal and accrued interest in full satisfaction and repayment of the Note. The Note had provided for a principal amount of $747,617 and quarterly payments of interest
			
		
accruing thereon at 5.5%. The terms of this note were modified, effective March 3, 2010 to extend the maturity by four years to October 31, 2014 and require annual principal payments of $100,000.
NOTE 5 - SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED AT FAIR VALUE
Trading and investment securities owned consist of both marketable securities and not readily marketable securities and are recorded at fair value. Securities sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.
As of March 31, 2013 and 2012, the Company’s proprietary trading and investment accounts consisted of the following securities:
Included in the category mutual funds is an investment called the Goldman Sachs Rising Dividend Growth Fund, formerly The Rising Dividend Growth Fund. On December 31, 2011 the Company reclassified this investment as an investment held for trading. As of March 31, 2013 the Company’s intent is to still trade this investment that has a fair value of $256,509 and $227,986 as of March 31, 2013 and 2012, respectively.
NOTE 6 - INVESTMENTS
The Company recognized a $50,000 loss as of March 31, 2012 due to a permanent decline in the market value of an investment classified as held to maturity.
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is engaged in various trading and brokerage activities whose counterparties primarily include the general public. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. Securities sold, but not yet purchased, represent obligations of the Company to purchase the security in the market at the prevailing prices to the extent that the Company does not already have the securities in possession. Accordingly, these transactions result in off-balance sheet risk when the Company's satisfaction of the obligations exceeds the amount recognized in the balance
			
		
sheet. The risk of default depends on the creditworthiness of the counterparty of the issuer of the instrument. It is the Company's policy to review, as necessary, the credit standings of each counterparty with which it conducts business.
Commissions receivable from one source were 36% and 10% of total receivables for the years ended March 31, 2013 and 2012, respectively.
At March 31, 2013, the carrying amount of the Company’s cash and cash equivalents was $6,589,698 of which $250,000 was covered by the Federal Deposit Trust Corporation (“FDIC”). The Company’s cash and cash equivalents as of March 31, 2013 also includes $2,701,440 at its clearing broker-dealer of which $500,000 was fully insured by the Securities Investor Protection Corporation (“SIPC”).
At March 31, 2012, the carrying amount of the Company’s cash and cash equivalents was $4,537,713 of which $250,000 was covered by the Federal Deposit Trust Corporation (“FDIC”). The Company’s cash and cash equivalents as of March 31, 2012 also includes $702,751 at its clearing broker-dealer of which $500,000 was fully insured by the Securities Investor Protection Corporation (“SIPC”).
NOTE 8 - FAIR VALUE MEASUREMENTS
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
·
Level 1 - Inputs are unadjusted quoted prices 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 - Inputs include 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 inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following table presents the Company's fair value hierarchy for those financial assets and liabilities measured at fair value as of March 31, 2013:
			
		
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value as of March 31, 2012:
₁ Amount labeled as Mutual funds are included in Non-qualified Deferred compensation investment on the Consolidated Balance Sheet.
Valuation of Marketable Trading and Investment Securities Owned
The fair value of marketable trading and investment securities owned is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price.
Valuation of Trading Securities Sold, Not Yet Purchased
As a broker-dealer, the Company is engaged in various securities trading and brokerage activities as principal. In the normal course of business, the Company sometimes sells securities they do not currently own and will therefore be obligated to purchase such securities at a future date. This obligation is recorded on the balance sheet at fair value based on quoted market prices of the related securities and will result in a trading loss if the fair value increases and a trading gain if the fair value decreases between the balance sheet and date of purchase.
Valuation of Mutual Funds
The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price.
NOTE 9 - RELATED-PARTY TRANSACTIONS
			
		
From time to time the Company may enter into transactions with related parties which occur in the normal course of business and are deemed to be transacted at “arm’s length” by management.
The Company leases office space from a related party, the owner of which was the principal stockholder of ICH and Chairman of the Board of Directors. Rent expense, including condo fees, for these leases amounted to $201,077 and $343,697 for the years ending ended March 31, 2013 and 2012, respectively, and is included in occupancy costs on the consolidated statements of operations.
The Company engages in transactions with a related party, whose owner is the spouse of the Company’s former principal stockholder, in connection with the promotion and servicing of fixed insurance products produced by the Company’s independent representatives. Payments made by the Company to IMS Insurance, when combined with payments received by the Company from IMS Insurance were immaterial for the year ended March 31, 2012 and there were no related party transactions with IMS insurance for the year ended March 31, 2013.
The Company bills a broker dealer, whose owner is the spouse of the Company’s former principal stockholder and Chairman of the Board of Directors, ticket charges for executing its trades and being the introducing broker. Amounts billed for the years ended March 31, 2012 were immaterial. Also, for the year ended March 31, 2012, the Company earned referral fees for the transfer of representatives to this broker dealer. The fees earned were immaterial. There were no related party transactions for ticket charges or referral fees for the year ended March 31, 2013.
On August 2, 2011, the Company completed its secondary stock offering at a price of $4.25 per share of 3,608,820 shares of its common stock owned by its former Chairman of the Board and principal stockholder, Theodore E. Charles, members of his family, family trusts and a controlled charitable foundation (the “selling stockholders”). Upon the closing of the offering, (i) Mr. Charles retired as an officer and director of the Company, (ii) his employment agreement with the Company was terminated due to retirement, (iii) his consultant agreement with the Company was amended to shorten the term to one year and reduce certain employment benefits and (iv) The Company awarded Mr. Charles, the former Chairman, non-cash compensation of $0.57 million representing the cash surrender value on title to an existing life insurance policy.
NOTE 10- PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at March 31:
Depreciation expense was $234,083 and $315,138 for the year’s ended March 31, 2013 and 2012, respectively.
NOTE 11 - NOTES PAYABLE
At March 31, 2013 and 2012, notes payable consisted of debt to finance insurance premiums. These notes are referenced in the table below:
			
		
For the years ended March 31, 2013 and 2012 there was no long-term debt outstanding.
NOTE 12 - SUBORDINATED BORROWINGS
The lender, consisting of the Company’s clearing firm, have, under a Subordinated Debt Agreement and related Rider, subordinated its rights of collection of principal and claims to all other present and future senior creditors of the Company prior to the expiration of the agreement. The subordinated borrowings are covered by an agreement approved by FINRA on March 8, 2013 and are thus available for computing net capital under the SEC’s uniform net capital rule. To the extent that such borrowings are required for the Company’s continued compliance with minimum net capital requirements, they may not be repaid. As of March 31, 2013, the balance of subordinated borrowings was $2,000,000.
The Company’s subordinated borrowings mature on March 8, 2016. The interest rate on all subordinated borrowings is prime plus five percent (8.25% at March 31, 2013), payable monthly. The Company had no subordinated borrowings for the year ended March 31, 2012.
NOTE 13 - LINE OF CREDIT
The Company has a line of credit (“Line”) with maximum borrowings of $1,000,000 at the Bank’s base lending rate (5.00% per year as of March 31, 2013). The Line became effective on November 22, 2012, and is subject to annual renewal and contains a customary minimum debt service covenant. There is no outstanding balance at March 31, 2013. The Company had the same lending terms and arrangement in the prior year and there was no outstanding balance at March 31, 2012.
NOTE 14 - INCOME TAXES
The (benefit) provision for income taxes is as follows for the fiscal years ended March 31:
			
		
Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of deferred compensation, legal accruals, differences between depreciation expenses, and a net operating loss for financial statement purposes versus tax return purposes.
Net deferred tax assets (liabilities) within each tax jurisdiction consisted of the following at:
The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
			
		
The total income tax provision (benefit) differs from the income tax at the statutory federal income tax rate due to the following:
The Company assesses the realizability of its deferred tax assets to determine whether or not a valuation allowance was required for some or all of its deferred tax assets. The Company considered negative evidence, including its current cumulative loss position for financial reporting purposes over the past three years, and positive evidence, including current period earnings, its recent history of taxable income in three of the past five years and its projections of taxable income in the future. The Company also considered that its GAAP losses over the prior two fiscal years included certain significant non-deductible and other expenses which management believes to be non-recurring.
These non-recurring expenses include costs incurred in the fiscal year ended March 31, 2012 related to the retirement of the former Chairman and the sale of his shares of the Company in a secondary offering and regulatory fines incurred in prior periods. Based on the foregoing, management has concluded that it is more likely than not that the Company will realize a significant portion of its deferred tax assets, including approximately $0.3 million that will be realized in the current year based on a carry-back of net operating losses against taxable income in prior periods and approximately $1.7 million that management believes to be more likely than not to be realized as result of projected taxable income in future periods. However, management has concluded that the sustained uncertainty in the global economy and its impact on the U.S. financial markets along with the ongoing compliance and legal risks and related defense costs inherent in our industry necessitate we maintain the valuation allowance of approximately $0.5 million established at March 31, 2012. If future operations exceed current projections, management may conclude such valuation allowance is no longer needed. Conversely, if future operating results do not meet current projections, it is possible that an additional valuation allowance may be needed in future periods.
The Company recognizes and measures its unrecognized tax benefit or expense. The Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of unrecognized tax expense or benefit is adjusted when new information is available or when an event occurs that requires a change. The Company recognizes the accrual of any interest and penalties related to unrecognized tax expense in income tax expense. No interest or penalties were recognized in 2013 and 2012. The Company does not have any tax positions as of March 31, 2013 for which it is reasonably possible that the total amounts of unrecognized tax benefit or expense will significantly increase or decrease within twelve months of the reporting date.
For the year ended March 31, 2013, the Company will have taxable income however there remains a three year-cumulative tax loss. The Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits.
NOTE 15 - SEGMENT INFORMATION
			
		
Operating segments are defined as components of a business about which separate financial information is available that is regularly evaluated by management in deciding how to allocate resources and in assessing performance. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.
The Company's has two operating segments, the independent broker-dealer provided by ICC and AD, and asset management and investment advisory services provided by Investors Capital Advisory. The segments are strategic business units that are managed separately. They operate under different regulatory systems, provide different services and require distinct marketing strategies and varied technological and operational support. They also have differing revenue models; ICC earns transactional commissions and various fees in connection with the brokerage of securities for its customers, whereas ICA generates recurring revenue from fees that are based on the value of assets under management.
The Company accounts for inter-segment services and transfers as if the services or transfers were to third parties, that is, at current market prices. In presenting segment data, all corporate overhead items are allocated to the segments, and inter-segment revenue, expense, receivables and payables are eliminated. Currently it is impractical to report segment information using geographical concentration.
Management allocates all expenses separately to the parent and ICC, including allocation of costs associated with shared personnel, based upon time studies and a determination of which entities are the beneficiaries of the services rendered by the personnel. Within ICC, expenses are further allocated between the two segments, ICC and ICA, as follows: overhead expenses pro rata to revenue, direct full-time and time-shared employee costs based on the segments being served, and other personnel-related expenses pro rata to head count.
In addition, ICC reimburses ICH in the form of a management fee for ICH-incurred overhead expenses that are necessary for ICC to effectively conduct its operations. This overhead primarily is in the nature of salaries and professional and legal fees incurred to obtain such services as audit engagements, legal advice, and industry expertise.
The Company periodically reviews the effect that these agreements described above may have on the firm’s net capital.
			
		
			
		
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On October 19, 2012 the Company entered into a lease for 14,045 square feet and began occupying that space on December 1, 2012 in Lynnfield, MA. This lease, which is for a term of sixteen months, expires March 31, 2014. Subsequent to March 31, 2013, the Company was released from its commercial lease agreement for its prior home office location at 230 Broadway, Lynnfield, MA.
The total minimum rental due in future periods under these existing agreements as of March 31, 2013 are as follows:
Rent expense under the operating leases was $283,469 and $386,525 for the years ended March 31, 2013 and 2012, respectively, and is included in occupancy costs in the statement of income.
The Company offers loans and transition assistance to representatives mainly for recruiting or retention purposes. These commitments are contingent upon certain events occurring, including, but not limited to, the representatives joining the Company and meeting certain production requirements. As of March 31, 2013 and 2012, there were no such outstanding commitments.
NOTE 17 - LITIGATION AND REGULATORY MATTERS
In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to arbitrations and other legal actions and proceedings brought on behalf of various claimants, some of which seek material and/or indeterminable amounts. Certain of these actions and proceedings are based on alleged violations of securities, consumer protection, labor and other laws and may involve claims for substantial monetary damages asserted against the Company and its subsidiaries. Also, the Company and its subsidiaries are subject to regulatory examinations, information gathering requests, inquiries, investigations and formal administrative proceedings that may result in fines or other negative impact on the Company. ICC, as a duly registered broker/dealer and investment advisor, is subject to regulation by the SEC, FINRA, NYSE-Amex, and state securities regulators.
The Company maintains Errors and Omissions (“E&O”) insurance to protect itself from potential damages and/or legal costs associated with certain litigation and arbitration proceedings and, as a result, in the majority of cases, the Company’s exposure is limited to $100,000 or $1,000,000 aggregate (effective January 2013 for only certain alternative investment products related to defense costs and indemnities) in any one case, subject to policy limitations and exclusions. Thereafter the $1,000,000 aggregate threshold, the Company’s exposure on these same investments is limited to $150,000 and a 10 percent coinsurance. For all other investment products, the Company’s exposure is $100,000 per claim.
The Company also maintains a fidelity bond to protect itself from potential damages and/or legal costs related to fraudulent activities pursuant to which the Company’s exposure is usually limited to a $350,000 deductible per case, subject to policy limitations and exclusions.
The Company recognizes a legal liability when management believes it is probable that a liability has been incurred and the amount can be reasonably estimated. Conclusions on the likelihood that a liability has been incurred and estimates as to the amount of the liability are based on consultations with the Company’s General Counsel who, when situations warrant, may engage and consult external counsel to assist with the evaluation and handle certain matters. Legal fees for defense costs are expensed as incurred and classified as professional services within the consolidated statements of income.
			
		
As of March 31, 2013 and March 31, 2012, the Company had accrued expenses of approximately $1,534,660 and $1,217,300, respectively, in legal fees and estimated probable settlement costs relating to the Company’s defense in various legal matters. It is possible that some of the matters could require the Company to pay damages or make other payments or establish accruals in amounts that could not be estimated and/or could exceed those accrued as of March 31, 2013. Key components of the accrual included (i) claims arising from alleged poor performance of certain alternative investments in real estate investments trusts that have experienced bankruptcy or other financial difficulties during or in connection with the recent global credit crisis and (ii) costs incurred in the settlement of regulatory matters concerning sales practices respecting certain other investment products.
NOTE 18- NET CAPITAL REQUIREMENTS
ICC is subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires that our broker-dealer subsidiary maintain minimum net capital. As of March 31, 2012, ICC computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances. Repayment or prepayment of subordinated debt and withdrawal of equity from retiring partners or officers is subject to net capital not falling below 5% of aggregate debits or 120% of minimum net capital requirement
Prior to March 31, 2011, ICC was subject to minimum net capital of $100,000 and a ratio of aggregate indebtedness to net capital (a “net capital ratio”) not to exceed 15 to 1. Under the rule, indebtedness generally includes all money owed by ICC, and net capital includes ICC cash and assets that are easily converted into cash. SEC rules also prohibit "equity capital" (which, under the net capital rule, includes subordinated loans) from being withdrawn, cash dividends from being paid and other specified actions of similar effect from being taken, if, among other specified contingencies, ICC’s net capital ratio would exceed 10 to 1 or if ICC would have less than 120% of its minimum required net capital.
As of March 31, 2013, ICC had net capital of $4.43 million (i.e., an excess of $4.18 million) as compared to net capital of approximately $1.43 million (i.e., an excess of $1.18 million) as of March 31, 2012. The decrease in net capital primarily was due to legal fees and settlement costs in addition to regulatory fines that have impacted this year’s results and cash flow from operations.
NOTE 19 - BENEFIT PLANS
The 1994 Stock Option Plan
As of September 1, 1994, the Company adopted a stock option plan (the "1994 Plan") that provided for the granting of options to Timothy Murphy, the Company’s CEO, to purchase shares of the common stock of the Company for $1.00 per share. Following a three for two stock split in 1997, a maximum of 150,000 shares of common stock were issuable and granted under the 1994 Plan. The number of options and grant date were determined at the discretion of the Company's Board of Directors (the "Board"). Options outstanding under the 1994 Plan are fully exercisable and have no stated expiration.
The 1996 Incentive Stock Plan
As of October 1, 1997, the Board adopted the 1996 Incentive Stock Plan (the "1996 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive stock options and stock grants, and the aggregate number of shares to be delivered under the 1996 Plan cannot exceed 300,000. As of March 31, 2012 and 2011, there were no options outstanding. As of March 31, 2013, the Company had granted a total of 218,750 shares of stock under the 1996 Plan.
The 2001 Equity Incentive Plan
As of March 12, 2001, the Board adopted the 2001 Equity Incentive Plan (the "2001 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive stock grants and/or stock options to purchase shares of the common stock of the Company. The aggregate number of shares issuable under the 2001 Plan cannot exceed 250,000. The numbers of shares subject to each stock grant or stock option and any vesting requirements are determined by the Board. As of March 31, 2013, no shares of stock have been granted under the 2001 Plan.
			
		
The 2005 Equity Incentive Plan- Amended and Restated Equity and Cash Bonus Plan (the “Amended Plan”)
The Investors Capital Holdings, Ltd. 2005 Equity Incentive Plan was adopted by the Board on May 17, 2005, and was approved by vote of the Company’s stockholders at a September 21, 2005 meeting, and amended on October 11, 2011 (the “Amended Plan”). The purpose of the Amended Plan is (i) to attract and retain employees, directors, officers, representatives and other individuals upon whom the responsibilities of the successful administration, management, planning and/or organization of the Company may rest, and whose present and potential contributions to the welfare of the Company, a parent corporation or a subsidiary are of importance (“Key Contributors”), and (ii) to motivate Key Contributors with a view toward enhancing profitable growth of the Company over the long term. Under the Amended Plan Plan, the Company is authorized to award options to purchase common stock, and shares of common stock, to employees, independent representatives and others (e.g. Board members) who have contributed to or are expected to contribute to the Company, its businesses and prospects. Restricted stock customarily are granted by the Company in connection with initial employment or under various retention plans. Options may, but need not, be designated as incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986. As of March 31, 2013 and 2012, the Company had not granted any options under the plan and had no current plans to do so.
Restricted shares of stock granted under the Amended Plan have been either fully vested at date of grant or subject to vesting over time periods varying from one to seven years after the date of grant, unvested shares being subject to forfeiture in the event of termination of the grantee’s relationship with the Company, other than for death or disability. The compensation cost associated with restricted stock grants is recognized over the vesting period of the shares and is calculated as the market value of the shares on the date of grant. Restricted shares have been recorded as deferred compensation, which is a component of paid-in capital within stockholders’ equity on the Company’s Consolidated Balance Sheets. Under the Amended Plan 48,968 shares remain as authorized and are available for issuance and 951,032 shares have been issued.
Stock compensation for the years ended March 31, 2013 and 2012 for restricted shares issued under all Plans was $172,780 and $147,040, respectively.
The following activity under the Amended Plan occurred during the fiscal year ended March 31, 2013:
The following activity under the 2005 Plan occurred during the fiscal year ended March 31, 2012:
The Company's results for the fiscal year ended March 31, 2013 and 2012, respectively includes $17,145 and $26,463 of compensation costs related to vesting of restricted stock grants to employees and $155,635 and $120,577 of restricted stock grants to directors, consultants and independent representatives, under the 2005 Plan.
As of March 31, 2013 there was $1,695,682 of unrecognized compensation cost related to grants under the 2005 Plan, and $341,343 of unrecognized compensation as of March 31, 2012 under the 2005 Plan.
			
		
Stock Option Grants
A summary of the status of the Company's employee, representative and Directors' fixed stock options as of March 31, 2013 and 2012, and changes during the fiscal years ended on those dates, is presented below:
The intrinsic value of the above stock options was $412,500 and $448,500 at March 31, 2013 and 2012, respectively.
Retirement Plan: The Company has a 401(k) Profit Sharing Plan that allows participation by all employees with at least three months of service. The Company did not make any discretionary contribution for the years ended March 31, 2013 and 2012.
Non-Qualified Deferred Compensation Plan: Effective December 2007, the Company established the Investors Capital Holdings, Ltd. Deferred Compensation Plan (the “NQ Plan”) as well as a Rabbi Trust Agreement for this Plan, for which ICC is the NQ Plan’s sponsor. The unfunded NQ Plan enables eligible ICC’s Representatives to elect to defer a portion of earned commissions, as defined by the NQ Plan. The asset represents the representatives’ invested contributions of deferred commissions, investment gains and losses as well as insurance charges while the liability is comprised of the participant deferrals, unrealized gains and losses and any distributions. The total amount of deferred compensation was $475,352 and $390,137 for the years ended March 31, 2013 and 2012, respectively
NOTE 20 - EARNINGS PER COMMON SHARE
Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the dilutive effect of all stock options and other items outstanding during the period that could potentially result in the issuance of common stock, as well as any adjustment to income that would result from the assumed issuance. As of March 31, 2013, there were 150,000 stock options and 463,990 shares of unvested restricted stock outstanding which were excluded from the diluted loss per share calculation since they were anti-dilutive. As of March 31, 2012, there were 150,000 stock options and 97,929 shares of unvested restricted stock outstanding which were excluded from the diluted loss per share calculation since they were anti-dilutive.
NOTE 21 - UNAUDITED QUARTERLY RESULTS
The unaudited quarterly amounts may differ due to the reclassifications. Refer to Note 2 - Summary of Significant Accounting Policies.
			
		
			
		
ITEM 9.
ITEM 9. Changes In And Disagreements With Accountant On Accounting And Financial Disclosure.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company's disclosure controls and procedures are designed to do.
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Report of Management on Internal Control Over Financial Reporting
The Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2013.
Remediation of Material Weaknesses in Internal Control
Not applicable.
No Attestation Report by Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding
			
		
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a permanent exemption from the internal control audit requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in Internal Controls Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
Incorporation by Reference
Item 10
Item 10 - “Directors, Executive Officers and Corporate Governance”, Item 11
Item 15. Exhibits And Financial Statement Schedules.
Documents Filed as a Part of this Report:
Page
1. Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . .. . . . . . . . . . ………... . . . . . 20
Consolidated Balance Sheets as of March 31, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Operations for the years ended March 31, 2013 and 2012 . . . . . . . . . . . . . 22
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31,
2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows for the years ended March 31, 2013 and 2012 . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-31
2. Financial Statement Schedules:
No financial schedules are listed since they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto.
			
		
3. Exhibits:
						
						
Exhibit
Description
Location
Number
						
						
						
						
3.1
Certificate of Incorporation
(2)(Exh. 3.1)
3.2
By-Laws
(2)(Exh. 3.2)
						
						
4.1
Form of Stock Certificate
(2)(Exh. 4.1)
						
						
10.1
Employment Agreement with Theodore E. Charles (3)
(9)(Exh. 10.2)
10.2
Employment Agreement with Timothy B. Murphy (3)
(9)(Exh. 10.1)
10.3
The 1994 Stock Option Plan (3)
(4)(Exh. 10.3)
10.4
The 1996 Stock Incentive Plan (3)
(2)(Exh. 10.3)
10.5
The 2001 Equity Incentive Plan (3)
(5)(Exh. 4.4)
10.6
The 2005 Equity Incentive Plan (3)
(6)(Exh. 4.5)
10.7
Form of June 2006 Stock Grant Agreement (3)
(7)(Exh. 10.8)
10.8
Form of February 2009 Stock Grant Agreement (3)
(7)(Exh. 10.9)
10.9
Consulting Agreement with Theodore E. Charles (3)
(9)(Exh. 10.3)
10.10
Registration Agreement with Theodore E. Charles et. al
(10)(Exh. 10.1)
10.11
Agreement between the Company and Theodore E. Charles
(11)(Exh. 10.1)
10.12
Amended and Restated Equity and Cash Bonus Incentive Plan with
(13)(Exh. 5.02)
Timothy B. Murphy and Kathleen L. Donnelly
						
10.13
Amended and Restated Equity and Cash Bonus Incentive Plan with
(14)(Exh. 5.02)
Timothy B. Murphy and Kathleen L. Donnelly (voluntarily declined)
						
10.14
Amended and Restated Equity and Cash Bonus Incentive Plan
(16)(Exh. 5.02)
10.15
Subordinated Loan Agreement and Rider A, dated March 8, 2013, between the Company and Pershing, LLC
(1)
						
						
14.1
Code of Business Conduct and Ethics
(8)(Exh. 5.05)
14.2
Amendments to the Registrant's Code of Ethics
(12)(Exh. 5.05)
						
						
21.1
Subsidiaries of Investors Capital Holdings, Ltd. as of March 31, 2013
(1)
23.1
Consent of MARCUM LLP
(1)
						
						
31.1
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)
(1)
31.2
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)
(1)
32.1
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
(1)
32.2
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
(1)
						
						
99.1
Earnings Press Release and Management Presentation
(15)(Exh.99.1)
						
						
101.INS
XBRL Taxonomy Instance Document
(1)
101.SCH
XBRL Taxonomy Extension Schema Document
(1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
(1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase
(1)
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
(1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(1)
			
		
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Registrant's Quarterly Report on Form 10-Q filed November 14, 2007.
(3) A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
(4) Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed June 30,2005.
(5) Incorporated by reference to the indicated exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-117807) filed July 30, 2004.
(6) Incorporated by reference to the indicated exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-134885) filed June 9, 2006.
(7) Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed June 30,2008.
(8) Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed September 26, 2007.
(9) Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed April 21, 2010.
(10) Incorporation by reference to the indicated exhibit of the Registrant’s Current Report on Form 8-K filed March 7, 2011.
(11) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K file July 5, 2011.
(12) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed September 9, 2011.
(13) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed November 1, 2011.
(14) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed November 29, 2011.
(15) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed February 8, 2013.
(16) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed February 21, 2013.
Any exhibit not included with this Form 10-K when furnished to any shareholder of record will be furnished to such shareholder upon written request and payment of up to $0.25 per page plus postage. Such requests should be directed to Rebecca Hice, Assistant Corporate Secretary, Investors Capital Holdings, Ltd., Six Kimball Lane, Suite 150, Lynnfield, MA 01940.
			
		
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INVESTORS CAPITAL HOLDINGS, LTD.
By: /s/ Timothy B. Murphy
Chief Executive Officer
Date: June 20, 2013
Pursuant to the requirements of the Securities Act of 1933, this Annual Report on Form 10-K has been signed by the following persons in the capacities and as of the dates indicated.
						
						
						
						
Signature
						
Capacity(ies)
						
Date
						
						
						
						
/s/ Timothy B. Murphy
						
Principal Executive Officer
						
June 20, 2013
Timothy B. Murphy
						
						
						
						
						
						
						
						
/s/ Kathleen L. Donnelly
						
Principal Financial and Accounting Officer
						
June 20, 2013
Kathleen L. Donnelly
						
						
						
						
						
						
						
						
/s/ William Atherton
						
Chairman
						
June 20, 2013
William Atherton
						
						
						
						
						
						
						
						
/s/ Robert Martin
						
Director
						
June 20, 2013
Robert Martin
						
						
						
						
						
						
						
						
/s/ Robert Mazzarella
						
Director
						
June 20, 2013
Robert Mazzarella
						
						
						
						
						
						
						
						
/s/ Donnie E. Ingram
						
Director
						
June 20, 2013
Donnie E. Ingram
						
						
						
						
						
						
						
						
/s/ Blaise Aguiree
						
Director
						
June 20, 2013
Blaise Aguiree
						
						
						
						
						
						
						
						
/s/ James Crosson
						
Director
						
June 20, 2013
James Crosson
						
						
						
						
			
		
EXHIBIT INDEX
(Exhibits being initially filed with this Form 10-K)
10.15 Subordinated Loan Agreement and Rider A, dated March 8, 2013, between the Company and Pershing, LLC
21.1 Subsidiaries of Investors Capital Holdings, Ltd. as of March 31, 2013
23.1 Consent of MARCUM LLP
31.1 Certification of Timothy B. Murphy pursuant to Rule 13a-14(a)
31.2 Certification of Kathleen L. Donnelly pursuant to Rule 13a-14(a)
32.1 Certification of Timothy B. Murphy pursuant to 18 U.S.C. Section 1350
3.2
Certification of Kathleen L. Donnelly pursuant to 18 U.S.C. Section 1350
101.INS XBRL Taxonomy Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy ExtensionLabels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document