UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
MARCH 31, 2004
COMMISSION FILE NO. 1-16349
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INVESTORS CAPITAL HOLDINGS, LTD.
(Exact name of registrant in its charter)
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MASSACHUSETTS
(State or other jurisdiction of 04-3284631
incorporation or organization) (IRS Employer Identification No.)
230 Broadway
Lynnfield, Massachusetts 01940
(781) 593-8565
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value The American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes|_| No |X|
The aggregate market value of the shares of the registrant's common equity
held by non-affiliates, computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter, was $6,839,470.
As of June 15, 2004, there were 5,731,921 shares of Common Stock outstanding,
$0.01 par value per share of the registrant.
Documents Incorporated by Reference
Certain portions of the registrant's definitive proxy statement for the
Annual Meeting of Stockholders to be held on August 10, 2004 are incorporated by
reference in Items 11 through 13 of Part III, and Item 15 of Part IV, of this
Annual Report on Form 10-K.
www.investorscapital.com
Investor Relations Contact: Darren Horwitz
1
Contents
Forward-Looking Statements................................................................................................... 3
PART I....................................................................................................................... 4
ITEM 1. Business............................................................................................................. 4
ITEM 2. Properties........................................................................................................... 10
ITEM 3. Legal Proceedings.................................................................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................................. 11
PART II...................................................................................................................... 11
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................ 11
ITEM 6. Selected Financial Data.............................................................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 12
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.......................................................... 19
ITEM 8. Financial Statements and Supplementary Data.......................................................................... 19
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................. 42
PART III..................................................................................................................... 43
ITEM 10. Directors and Executive Officers of the Registrant.................................................................. 43
ITEM 11. Executive Compensation.............................................................................................. 44
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...................... 44
ITEM 13. Certain Relationships and Related Transactions...................................................................... 44
ITEM 14. Controls and Procedures............................................................................................. 44
ITEM 15. Principal Accountant Fees and Services.............................................................................. 44
PART IV...................................................................................................................... 45
ITEM 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 45
2
INVESTORS CAPITAL HOLDINGS, LTD.
Forward-Looking Statements
The statements, analyses, and other information contained herein relating to
trends in the operations and financial results of Investors Capital Holdings,
Ltd. (the "Company"), the markets for the Company's products, the future
development of the Company's business, and the contingencies and uncertainties
to which the Company 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. The Company's 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, the risks that (1) losses may be incurred if our
investment professionals fail to comply with regulatory requirements; (2) the
loss of either Theodore E. Charles or Timothy B. Murphy may adversely affect our
business and financial condition through the loss of significant business
contacts, which may be difficult to replace; (3) customer fraud could harm our
earnings and profits by requiring us to expend time, money and incur actual
loss, exposing us to the potential for arbitration; (4) investment professional
and employee fraud and misconduct could harm our profits and earnings by causing
us to expend time, money and incur actual loss, with the latter exposing us to
the potential for litigation; (5) without implementation of adequate internal
controls, and maintenance thereof, our ability to be profitable could be
severely restricted by regulatory sanctions being applied against our
broker-dealer subsidiary, and could result in us paying substantial fines and
limit our ability to be profitable; (6)involvement in material legal proceedings
could have a significant impact on our earnings and profits if we are found
liable for such claims; (7) a change in our clearing firm could result in the
inability of our customers to transact business in a timely manner due to delays
and errors in the transfer of their accounts, which, on a temporary basis, could
affect our earnings and profits.
Readers are also directed to other risks and uncertainties discussed, as well
as to further discussion of the risks described above, in other documents filed
by the Company with the United States Securities and Exchange Commission. The
Company specifically disclaims any obligation to update or revise any
forward-looking information, whether as a result of new information, future
developments, or otherwise.
3
PART I
ITEM 1. Business
Overview
Incorporated in July of 1995, Investors Capital Holdings, Ltd. ("ICH") is a
financial services holding company that operates primarily through its
subsidiaries in two segments of the financial services industry. These two
segments provide for the offering of (1) services related to corporate equity
and debt securities, U.S. Government securities, municipal securities, mutual
funds, variable annuities, variable life insurance, market information, internet
online trading and portfolio tracking and records management and (2) financial
planning services, investment advisory and asset management services and the
management two retail mutual funds. Financial information pertaining to ("ICH")
for each of the three fiscal years ended March 31, 2004, 2003 and 2002 is
included in the selected financial data in Item 6 of this document.
Support to our Representatives
Investors Capital Corporation. Investors Capital Corporation, ("ICC") a
National Association of Securities Dealers ("NASD") registered broker-dealer, is
also registered with the Securities and Exchange Commission ("SEC"), the
Municipal Securities Rule Making Board ("MSRMB") and the Securities Investor
Protection Corporation ("SIPC"). ICC is headquartered in Lynnfield,
Massachusetts and is a wholly-owned subsidiary of ICH. Conducting business in
all 50 states, the Commonwealth of Puerto Rico and the District of Columbia. ICC
makes available multiple investment products, and provides support, technology
and back-office service to its network of approximately 870 independent
registered representatives ("representatives"). Our representatives sell
investment products that are securities under federal and state law.
Accordingly, they are required to, and are registered as, representatives with
our broker-dealer subsidiary. Similar registrations may be required by these
persons as investment adviser representatives under federal and state law. Our
in-house training program for these representatives emphasizes the long-range
aspects of financial planning and investment products. We believe that through
the continuing education we provide to our registered representatives, our
clients can become better informed, and therefore, better served. ICC generated
approximately 95% of Investors Capital Holdings' total revenues for the fiscal
year ended March 31, 2004.
We seek to recruit primarily experienced, productive registered
representatives by offering them an attractive commission payout and the
independence of owning and operating their own offices. Generally, each office
pays substantially, if not all, of the costs associated with its establishment
and operation. We provide technical, regulatory, supervisory, compliance and
other support services to our independent investment professionals. This allows
expansion of our operations with relatively minimal capital outlay. Continuing
to add experienced, productive registered representatives is an integral part of
our growth strategy.
The commission payouts to our registered representatives are negotiable and
currently average approximately 82% of the gross dealer concession generated
from the sale of securities. Pursuant to the terms of our agreement with our
registered representatives, and as permitted by current NASD rules, we provide
our representatives, or their named beneficiaries, with continuing commissions
on pre-existing business in the event of their retirement from the securities
industry or death. Also, in this agreement, each of our representatives grants
to us the right to offset against commissions any losses we sustain as a result
of their actions, omissions and errors. Our agreement with our representatives
is terminable by either party with 15 days prior written notice, and does not
contain either a confidentiality or non-compete provision.
Our products and services provided to our representatives include:
Technology Resources: Utilizing the latest in technology, our
representatives are able to perform the following activities on-line:
Opening of new accounts,
Monitoring of existing accounts,
Updating of client accounts,
Trading,
Viewing and downloading commission data,
Locating and exploring approved products,
Downloading client data;
and Researching reports or inquiries on companies, securities and other
pertinent financial topics.
4
Product Choices: Allowing our representatives to choose from a wide
variety of investment products sponsored by well-respected and financially
sound companies is critical to our registered representatives' success as
well as that of the Company. We follow a selective process in determining
approved products to be offered to clients by our representatives. In
addition, we continuously monitor the product list.
Marketing: Producing compliance and NASD-approved marketing materials to
be used by our representatives enhances their professional stature in the
public's eye. The marketing resources produced by Investors Capital
Corporation include:
Corporate and product brochures;
Technology resources;
Client and corporate websites;
Client letters;
Seminars; and
Advertising and public relations.
Focus: Our focus is on representatives who offer their clients assistance in
attaining their long-range financial goals. Utilizing primarily experienced
representatives, our client list is widely diversified in terms of goals,
financial resources and geography. During the fiscal year ended March 31, 2004,
the average revenue per registered representative was $54,936 as compared to
$35,557 for our fiscal year ended March 31, 2003. Additionally, on March 31,
2004, we had a total of 870 representatives in our national network, as compared
to 958 for the same period last year.
Supervision: Our broker-dealer subsidiary's compliance staff includes
individuals with significant industry experience. Six of these individuals,
including two experienced compliance attorneys, are located in the home office.
The remaining compliance individuals, most of whom have significant industry
experience, termed Offices of Supervisory Jurisdiction by the NASD, are field
supervisors situated across the country and are charged with compliance
responsibilities for a defined group of registered representatives. By
positioning these compliance individuals in the field, we are able to more
closely scrutinize and monitor the activities of our representatives thereby
ensuring, as much as possible, their compliance with the requisite rules and
regulations. Such a field supervisor is assigned to each new registered
representative affiliated with our broker-dealer subsidiary. Our in-house
computer systems and programs further assist us in compliance matters. In
addition, our Compliance area routinely conducts internal audits of our
Anti-Money Laundering Program to ensure our compliance with all current
regulations under the USA Patriot Act issued October 21,2001.
Our representatives seek and value assistance in the area of compliance, and
in keeping step with the latest industry regulations, our compliance department
provides, among other things:
Advertising and sales literature review; Field inspections, followed up with
written findings and recommendations; Weekly faxes and monthly conference calls
on selected compliance topics; Assistance with customer complaints and
regulatory inquiries; Workshops and in-house publications on various compliance
matters; and Regional and national meetings.
Clearing: We utilize the services of another broker-dealer to clear our
transactions. Our clearing agreement is on a fee-for-service basis. Our clearing
firm processes most of the securities transactions for our account and the
accounts of our clients. Services of our clearing firm include billing and
credit extension, and control, receipt, custody and delivery of securities. The
Company pays a transaction charge for these services, relying on the operational
capacity and the ability of our clearing firm for the orderly processing of
security transactions. In addition, by engaging the processing services of a
clearing firm, certain capital reserve requirements and other complex regulatory
requirements imposed by federal and state securities laws are not applicable.
Broker-Dealer Revenue: Revenue generated from the activities of our
broker-dealer subsidiaries is broken into the following percentages for fiscal
years ended March 31:
2004 2003 2002
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Commissions from the sale of mutual funds and unit investment trusts: 20% 25% 34%
Commissions from the sale of variable annuities and variable life insurance: 38% 49% 48%
Commissions from the sale of individual stocks and bonds: 25% 13% 9%
Commissions from the sale of direct participation programs: 8% 5% 1%
Other miscellaneous commission and fee income: 9% 8% 8%
5
Investment Advisory Services
Eastern Point Advisors, Inc., (EPA) our investment adviser subsidiary,
provides investment advisory and asset management services directly to the
investing public through its managed asset programs. These programs involve
managed portfolios of load and no-load mutual funds, variable and fixed
annuities and/or individual securities. They are provided to the public through
approximately 338 investment adviser representatives. As of March 31, 2004, we
had a total of $136.6 million under management. The maximum annual fee charged
for these services is 3.0%, which is paid by the customer in quarterly
installments. Eastern Point Advisors contributes approximately 5.2% of Investors
Capital Holdings' total revenues. The following table describes assets under
management specifically related to accounts managed by EPA.
Eastern Point Advisors, Inc. Market Value
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American Skandia Annuity Company $ 21,827,151
ING Variable Annuity 8,793,648
Jackson National Life Insurance Co. 3,424,376
Jefferson National Life 9,662,111
Lincoln Benefit Life Insurance Co. 956,001
Manulife 215,892
Mass Mutual Life Insurance Co. 1,478,951
Midland National 446,066
Nationwide Life Insurance Co. 1,088,182
Pershing Securities Managed Asset Plan 15,108,585
Resources Trust 1,232,708
SEI Trust Company 4,961,547
US Allianz Annuity Company 1,551,813
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Assets Under Management: $ 70,747,031
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Investors Capital Corporation,(ICC) in November 2003, became a registered
investment advisor, Investors Capital Advisor,(ICA). (ICA) retained assets from
Eastern Point Advisors, (EPA) in March of 2004. These assets under management
totaled $65,938,586 and are invested in the Pershing Securities Managed Asset
Plan Platform.
In addition, our investment adviser subsidiary is the investment adviser to
our retail mutual funds, the Eastern Point Advisors Twenty Fund and the Eastern
Point Advisors Rising Dividend Growth Fund. Until recently, these mutual funds
were marketed to the public solely by registered representatives of Investors
Capital Corporation. Recently, EPA has begun making its portfolios available to
other broker-dealers. We have entered into selling agreements making our managed
asset programs available to registered representatives of certain other
broker-dealers, as well as to allow our mutual funds to be marketed by
investment professionals affiliated with certain selected broker-dealers in
addition to Investors Capital Corporation. These wholesaling activities increase
the exposure of both the managed asset programs and the mutual funds.
As of March 31, 2004, Eastern Point Advisors had approximately $8.5 million
under management in the Twenty Fund and $1.4 million under management in the
Rising Dividend Fund. The annual fee for services charged by Eastern Point
Advisors to the Twenty Fund is 1.50% and .75% to the Rising Dividend Fund. These
fees are paid monthly.
As of March 31, 2004 we had approximately 338 investment adviser
representatives registered with the various state securities departments. These
investment adviser representatives are typically registered representatives of
our wholly-owned brokerage subsidiary. Licensing requirements for these
investment adviser representatives are dictated by the state in which they
conduct business. As such, prior to their clients utilizing our investment
advisory services, each investment adviser representative must satisfy the
requisite state licensing requirements which are typically the NASD Series 6 or
7 securities license coupled with a Series 65 or 66 license.
Asset Allocation Strategy: Eastern Point Advisor's asset allocation
strategy, and Investors Capital Advisor,(ICA) utilized by approximately 2,171
investors as of March 31, 2004, is based on the principle that, by investing in
a combination of asset classes, risk may be reduced while seeking to provide
enhanced returns. Thus, by combining asset classes that typically do not move in
tandem, the volatility of the customer's investment portfolio may be lowered
while, at the same time, providing the opportunity for possible increased
long-term returns. In implementing this asset allocation strategy for each
individual customer, the Company utilizes the following three steps:
6
With the use of detailed questionnaires completed during personal
interviews, we determine a customer's ascertained tolerance for risk,
investment goals, age, time horizon, investment experience, and financial
and personal circumstances. Based upon these facts, we will recommend an
overall investment allocation consisting of a suggested percentage of
stocks, bonds and cash.
Should the customer agree with the recommended overall investment
allocation, we will then select what we believe to be the appropriate
investment vehicles for the particular customer from a universe of mutual
funds, variable annuities and individual securities.
Following implementation of the recommended portfolio, our investment
adviser subsidiary monitors the performance of the portfolio, communicates
the model's performance to the client quarterly basis minimally and makes
any necessary changes based upon performance, changes in a customer's
financial situation, goals or risk tolerance or any other factor relevant
to the composition of the customer's portfolio.
Fee-Based Compensation Structure: As required by the Investment Advisers Act
of 1940, compensation is based on an annual fee calculated as a percentage of
total assets under management rather than a transaction-based commission or
performance fee.
Insurance Operations
ICC Insurance Agency, Inc., our wholly-owned insurance agency subsidiary,
facilitates the sale of variable life insurance and variable annuities by our
registered representatives. In certain states, a separately licensed insurance
entity is required in order to transact variable life and annuity business. This
entity is properly licensed in all states in which such licensing is required.
One hundred percent of all funds realized by this entity flow through as revenue
to our broker-dealer subsidiary.
Mutual Funds
The Eastern Point Advisors Twenty Fund: The Eastern Point Advisors Twenty
Fund, formally known as the Investors Capital Twenty Fund, is our
growth-oriented mutual fund, which became available for sale on October 19,
1999. We created this mutual fund to compliment our existing product lines with
the rationale that our mutual fund would provide investors with a convenient way
to meet their financial goals and, at the same time, provide new sales
opportunities for representatives of our broker-dealer subsidiary.
The Eastern Point Advisors Twenty Fund invests in a portfolio of common
stocks believed to offer capital appreciation potential. As such, the Fund may
be more suitable for those investors who seek capital appreciation and are
willing to accept a significant degree of volatility and risk. The Eastern Point
Advisors Twenty Fund utilizes a non-diversified portfolio of 20 to 30 common
stocks of companies of any size, regardless of industry or sector, which may
include smaller emerging companies. As of March 31, 2004, the Eastern Point
Advisors Twenty Fund had assets of $8,544,212.
Class A Shares of the Eastern Point Advisors Twenty Fund carry a maximum
one-time, up-front sales charge to the investor of 5.75%. This sales charge
decreases as the dollar amount of the investor's investment increases. Class C
Shares have no such up-front sales charge but, in addition to annual management
fees, carry a 1.00% per year annual fee.
The Eastern Point Advisors Rising Dividend Fund: The Eastern Point Advisors
Rising Dividend Growth Fund, is our second growth-oriented mutual fund, which
became available on March 5, 2004. EPA created this mutual fund to extend our
existing products and enhance our mutual fund offerings while providing
investors with another vehicle to effectively manage their assets.
The Eastern Point Advisors Rising Dividend Growth Fund invests in sustainable
companies that provide every indication that they maintain the financial
stability to prosper in all kinds of economic climates. The fund's objective is
long-term growth of capital and current income investing in common stocks of
domestic and foreign companies that have increased their dividend payments to
shareholders at least each year for the past ten years.
The Rising Dividend Growth Fund focuses on companies with solid histories,
strong finances and positive prospects. Typical portfolios consist of
approximately 20-50 holdings of companies with stockholder oriented management
teams, who manage debt well, and have reasonable stock prices and solid growth
rates. As of March 31, 2004, the Eastern Point Advisors Rising Dividend Growth
Fund had assets of $1,397,917.
Our Strategy
Key elements to achieve our corporate objectives include:
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Increase brand awareness: We plan to increase our brand recognition to
attract new clients and representatives. We are implementing a comprehensive
marketing plan to attract more clients and experienced representatives, build
market awareness, educate the investing public and retain customer loyalty. We
intend to accomplish this strategy through direct marketing, advertising through
our marketing department, use of our web site, various public relations
programs, web and live seminars, print advertising, radio and television air
time. In addition, we have committed to opening company-operated offices in
selected strategic geographic locations across the country. In this regard, we
have already opened an investment center in Topsfield, Massachusetts and
recruiting centers in New York City and Florida.
Expand client relationships: We intend to expand our relationships with
representatives and investors by increasing our sales and marketing efforts. We
plan to target sophisticated and experienced investors and financial
institutions of all sizes, including professional money managers and registered
investment advisers. Because these participants typically execute more trades
per year than traditional retail investors and expect lower commissions, need
real-time access to information and quick order execution, the market for their
business is currently serviced inadequately. We believe that we can profitably
fill this market niche.
Provide value-added services to our clients: We will continue to provide our
clients with access to a pool of well-trained representatives, access to
up-to-date market and other financial information, and direct access to our
trade desk that is online with various stock exchanges and institutional buyers
and sellers. We will also continue to provide trading before and after
traditional market hours to our clients.
Create technologically innovative solutions to satisfy clients' needs: We
intend to continue our active efforts in pursuing additional technologies to
service the rapidly evolving financial services industry. Specifically, we are
developing our web site to enable our clients to trade equity securities more
efficiently via the Internet, monitor on-line the history and current status of
their accounts at any time and access all types of financial and other
information to enhance their situations. Also, we have developed personalized
Internet web sites for our representatives. These personalized sites provide the
clients of our representatives, through the use of passwords and firewalls, a
secure and private interface directly to our proprietary web site. This allows
these clients to perform market research, buy and sell securities on-line,
monitor their accounts and utilize financial calculators.
Build and expand our corporate presence: We intend to expand our branch
office locations to strategically situated metropolitan locations throughout the
United States. We have expanded in Massachusetts, New York and Pennsylvania, and
intend to expand in California and Florida. We also continue to explore
strategic alliances, acquisitions and other opportunities to provide our clients
with the best possible services and products.
Expand our product and service offering through strategic relationships: We
will continue to actively pursue alliances with various companies to increase
trading volume, capitalize on cross-selling opportunities, create additional
markets for our asset management programs and mutual fund sales, take advantage
of emerging market trends and create operational efficiencies and further
enhance our name recognition. We have no present agreements, plans, arrangements
or understandings regarding any acquisitions and have not identified any
specific criteria that such acquisitions must meet.
Competition
Our competitors vary in size, scope and breadth of services offered. We
encounter direct competition from numerous other brokerage firms that have
electronic brokerage services and full research capabilities. We also encounter
competition from established, full-commission brokerage firms, as well as
insurance companies with securities brokerage subsidiaries, financial
institutions, mutual fund sponsors and others who utilize financial planning
representatives paying their own office costs and expenses. Competitors
utilizing similar representatives include Linsco Private Ledger and Commonwealth
Financial Network, and various insurance companies with securities brokerage
subsidiaries.
Also, as demand for discounted brokerage services increases, our market is
becoming more competitive. In particular, we anticipate that competition for
electronic brokerage services will intensify as investor demand for such
services increases. We also recognize and intend to capitalize on the fact that
when investing large amounts of money, investors typically prefer personal
attention from an experienced industry professional rather than inexpensive
Internet access to trading.
Some of our competitors have significantly greater financial, technical,
marketing and other resources, and certain of our competitors also offer a wider
range of services and financial products and have greater name recognition and
more extensive client bases. These competitors may be able to respond more
quickly to new or changing opportunities, technologies, and client requirements,
and may be able to undertake more extensive promotional activities, offer more
attractive terms to clients and adopt more aggressive pricing policies.
Moreover, current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties or may
consolidate to enhance their services and products.
8
We believe that our ability to compete depends upon many factors both
within and outside our control, including:
Our ability to attract and retain a network of experienced investment
professionals; The effectiveness, ease of use, performance and features
of our technology and services; Client perceptions of the effectiveness
of our services and technology; The price and quality of our services;
The volatility of financial markets and the world economy; Our ability
to service our clients effectively and efficiently; The timing and
acceptance of our new products and services and enhancements to
existing products and services developed by us or our competitors; and
Our reputation in the financial services industry.
Mutual Funds: Mutual funds are continuously being introduced to the investing
public. These funds are being offered by new, as well as existing, mutual fund
companies. Many of our mutual fund competitors have greater financial,
technical, marketing and distribution resources. We believe that we can become
competitive through our sales force and through selling agreements with other
broker-dealers.
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. Our wholly-owned
subsidiary, Investors Capital Corporation is a broker-dealer registered with the
SEC. Under the Securities Exchange Act of 1934, every registered broker-dealer
that conducts business with the public is required to be a member of and is
subject to the rules of the NASD.
The NASD has established conduct rules for all securities transactions among
broker-dealers and private investors, trading rules for the over-the-counter
markets and operational rules for its member firms. The NASD 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. The NASD 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
regulatory capital in relation to their liabilities, types of securities
business conducted and the size of their customer business. These rules have the
effect of requiring that a substantial portion of a broker-dealer's assets be
kept in cash or highly liquid investments. Failure to maintain the required net
capital may subject a firm to suspension or revocation of its registration with
the SEC and suspension and expulsion by the NASD and other regulatory bodies,
and ultimately may require its liquidation. The rules could restrict
underwriting, trading activities, our ability to withdraw capital, pay
dividends, pay interest on and repay the principal of any debt, among other
matters.
Registered Investment Adviser Regulation: The Investment Advisors Act of 1940
("Advisors Act") regulates the registration of and the compensation that may be
charged by an SEC registered investment adviser. Investment advisers are subject
to the same oversight by the SEC and the various states as are broker-dealers.
Investment advisers are required to register with the SEC, except those that are
only required to register with the appropriate state regulatory agency, are
required to periodically file reports and are subject to periodic or special
examinations. Rules promulgated under the Advisers Act govern advertisements by
investment advisers and the custody or possession of funds or securities of a
client. Most states require registration by investment advisers unless an
exemption is available and impose annual registration fees. Some states also
impose minimum capital requirements. There can be no assurance that compliance
with existing and future requirements and legislation will not be costly and
time consuming or otherwise adversely impact our business in this area.
As a registered investment adviser under the Investment Advisors Act of 1940,
our wholly-owned subsidiary, Eastern Point Advisors, is subject to regulations
which cover various aspects of its business, including compensation
arrangements. Under the Advisers Act, every investment advisory agreement with
clients must expressly provide that such contract may not be assigned by the
adviser without the consent of the client. Under the Investment Company Act of
1940, every investment adviser's agreement with a registered investment company
must provide for the agreement's automatic termination in the event it is
assigned. Under both the Advisers Act and the Investment Company Act, an
investment advisory agreement is deemed to have been assigned when there is a
direct or indirect transfer of the Agreement, including a direct assignment or a
transfer of a "controlling block" of the adviser's voting securities or, under
certain circumstances, upon the transfer of a "controlling block" of the voting
securities of its parent corporation. A transaction is not, however, an
assignment under the Advisers Act or the Investment Company Act if it does not
result in a change of actual control or management of the investment adviser.
Any assignment of Eastern Point Advisors' investment advisory agreements would
require, as to any registered investment company client, the approval of a
majority of its shareholders, and as to other advisory clients, the consent of
such clients to such assignments.
9
Regulations Applicable to the Use of the Internet: Due to the increasing
popularity and use of the internet and other online services, various regulatory
authorities are considering laws and/or regulations with respect to the internet
or other online services covering issues such as user privacy, pricing, content
copyrights and quality of services. In addition, the growth and development of
the market for online commerce may prompt more stringent consumer protection
laws that may impose additional burdens on those companies conducting business
online.
Also, 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, NASD and other regulatory agencies. The applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes and personal
privacy is also uncertain and may take years to resolve. Finally, as our
services are available over the Internet in multiple states, and as we have
numerous clients residing in these states, these jurisdictions may claim that we
are required to qualify to conduct business as a foreign corporation in each
such state. While Investors Capital Corporation is currently 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, 2004, we had 56 full-time employees, the majority of which
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 with other individuals on an as-needed basis
to assist with programming and developing proprietary technologies.
Available information:
We file our annual report on Form 10-K, quarterly reports on Form 10-Q,
periodic information on Form 8-K, our proxy statement, and other required
information with the SEC. Shareholders may read and copy any materials on file
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. Shareholders may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet web-site, http://www.sec.gov, that contains reports,
proxy and information statements and other information with respect to our
filings.
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
Securities Exchange Act of 1934, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. All documents
are also available in print at no charge to any shareholder who requests them in
writing to Darren Horwitz, Manager Corporate Communications, Investor Relations,
230 Broadway East, Lynnfield, MA 01940.
ITEM 2. Properties:
Our principal executive offices are located in a 9,068 square foot facility
at 230 Broadway East, Lynnfield, Massachusetts 01940. This facility is comprised
of several office condominiums owned by different entities, which lease the
office space to the Company. A portion of the space which is leased to the
Company, including Investors Capital Corporation and Eastern Point Advisors, is
owned by Arlsburg Trust, the trustee of which is the principal stockholder of
Holdings, and Investors Realty, LLC, the principal member of whom is the
principal stockholder of Holdings. The remainder is leased from an unrelated
entity. The combined current annual rent was $233,858 and is comparable to
current market rates for similar space in our geographic area. The leases expire
in March 2005. In addition, the Company leases office space from the Arlsburg
Trust for its investment center located in Topsfield, Massachusetts. Rent
expense for the investment center was $36,000 for the year ended March 31, 2004.
On December 1, 2003, Investors Capital Corporation leased at fair market value
an additional 1,832 square feet of office space from Investors Realty, LLC.
10
ITEM 3. Legal Proceedings:
The Company operates in a highly litigious and regulated business and, as
such, is a defendant or codefendant in various lawsuits and arbitrations
incidental to its securities business. The Company is vigorously contesting the
allegations of the complaints in these cases and believes that there are
meritorious defenses in each. Counsel is unable to respond concerning the
likelihood of an outcome, whether favorable or unfavorable, because of inherent
uncertainty routine in these matters. Currently, there are various lawsuits
and/or arbitrations filed against the Company. For the majority of claims, the
Company's errors and omissions (E&O) policy limits the maximum exposure in any
one case to $75,000, and in certain of these cases, the Company has the
contractual right to seek indemnity from related parties. As such, Management,
in consultation with counsel, believes that resolution of all such litigation is
not expected to have a material adverse effect on the consolidated financial
results of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders:
No matter was submitted to a vote of security holders of Investors Capital
Holdings, Ltd. during the fourth quarter of the fiscal year covered by this
report.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters:
Investors Capital Holdings' common stock began trading on The American Stock
Exchange (AMEX) under the symbol "ICH" on February 8, 2001. Prior to such date,
there was no established public trading market for the common stock. As of June
15, 2004, exclusive of shares held in street name, there were 62 stockholders of
record and 5,731,921 shares outstanding.
The following table presents the high and low closing prices for the common
stock of Investors Capital Holding, Ltd. on the AMEX for the period indicated.
High Low
---- ---
Fiscal 2004
For the period from April 1, 2003 through June 30, 2003................................. $3.01 $1.80
For the period from July 1, 2003 through September 30, 2003............................. $3.58 $2.78
For the period from October 1, 2003 through December 31, 2003........................... $5.70 $3.15
For the period from January 1, 2004 through March 31, 2004.............................. $6.14 $5.00
Fiscal 2003
For the period from April 1, 2002 through June 30, 2002................................. $2.35 $1.75
For the period from July 1, 2002 through September 30, 2002............................. $2.00 $1.75
For the period from October 1, 2002 through December 31, 2002........................... $2.40 $1.70
For the period from January 1, 2003 through March 31, 2003.............................. $2.05 $1.63
Fiscal 2002
For the period from April 1, 2001 through June 30, 2001................................. $6.00 $3.11
For the period from July 1, 2001 through September 30, 2001............................. $3.75 $2.20
For the period from October 1, 2001 through December 31, 2001........................... $3.49 $2.50
For the period from January 1, 2002 through March 31, 2002.............................. $2.99 $2.00
Fiscal 2001
For the period from February 8, 2001 through March 31, 2001............................. $8.00 $5.55
Investors Capital Holdings, Ltd. did not pay dividends for the year ended
March 31, 2004. 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. See Regulation and
Management's Discussion and Analysis--Liquidity and Capital Resources, included
elsewhere in this Form 10-K.
11
ITEM 6. Selected Financial Data:
The following table sets forth certain selected historical consolidated
financial data. The selected income statement data for each of the years in the
three year period ended March 31, 2004, 2003 and 2002 and balance sheet data as
of March 31, 2004 and 2003 have been derived from our audited consolidated
financial statements and related notes included elsewhere in this Form 10-K and
should be read in conjunction with those financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations, also
included elsewhere in this Form 10-K. The following selected income statement
data for the years ended March 31, 2001 and 2000 and balance sheet data as of
March 31, 2002, 2001 and 2000 are derived from our audited consolidated
financial statements not included herein. The following selected consolidated
financial data has been prepared in accordance with generally accepted
accounting principles generally accepted in the United States. Due to certain
reclassifications, commission and advisory fee income has changed; however, this
reclassification did not change the outcome of the financials for the
comparative years mentioned above.
For the Year Ended March 31,
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Income Statement Data:
Total Revenues............................... $48,964,074 $34,797,047 $29,519,260 $30,086,799 $23,976,988
Operating Income (loss) $1,439,657 $311,799 $160,368 $(68,730) $186,455
Operating Income (loss) per share, basic $.25 $.06 $.03 $(.01) $.04
Operating Income (loss) per share, diluted $.25 $.05 $.03 $(.01) $.04
Net income (loss)............................ $790,413 $115,891 $4,137 $(104,306) $90,325
Net income (loss) per share, basic........... $.14 $.02 $0.00 $(0.02) $.02
Net income (loss) per share, diluted......... $.14 $.02 $0.00 $(0.02) $.02
Weighted average common shares
outstanding, basic........................ 5,720,843 5,717,380 5,717,931 4,789,007 4,609,491
Weighted average common shares
outstanding, diluted ..................... 5,877,075 5,790,060 5,818,695 4,789,007 4,782,491
Cash dividends declared per share............ $ - $ - $ - $ - $ -
As of March 31,
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Total assets........................ $13,388,879 $10,642,940 $10,114,532 $10,612,301 $4,100,065
Shareholders' equity................ $ 9,404,939 $ 8,248,640 $ 8,057,066 $ 8,122,573 $1,846,713
Shares outstanding.................. 5,727,713 5,717,380 5,717,380 5,708,311 4,645,311
Equity per share at end of period... $1.64 $1.44 $1.41 $1.42 $.40
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis reviews our consolidated financial
condition as of March 31, 2004 and 2003, the consolidated results of operations
for the years ended March 31, 2004, 2003 and 2002 and, where appropriate,
factors that may affect future financial performance. The discussion should be
read in conjunction with the consolidated financial statements and related
notes, included elsewhere in the Form 10-K.
Forward-Looking Statements
The statements, analyses, and other information contained herein relating to
trends in the operations and financial results of Investors Capital Holdings,
Ltd. (the "Company"), the markets for the Company's products, the future
development of the Company's business, and the contingencies and uncertainties
to which the Company 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. The Company's 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, the risks that (1) losses may be incurred if our
investment professionals fail to comply with regulatory requirements; (2) the
loss of either Theodore E. Charles or Timothy B. Murphy may adversely affect our
business and financial condition through the loss of significant business
contacts, which would have to be replaced; (3) customer fraud could harm our
earnings and profits by requiring us to expend time, money and incur actual
loss, exposing us to the potential for arbitration; (4) investment professional
and employee fraud and misconduct could harm our profits and earnings by causing
us to expend time, money and incur actual loss, with the latter exposing us to
the potential for litigation; (5) without implementation of adequate internal
controls and the maintenance thereof, our ability to make money could be
severely restricted by regulatory sanctions being applied against our
broker-dealer subsidiary, and could result in us paying substantial fines and
limit our ability to make money; (6) involvement in material legal proceedings
could have a significant impact on our earnings and profits if we are found
liable for such claims; (7) a change in our clearing firm could result in the
inability of our customers to transact business in a timely manner due to delays
and errors in the transfer of their accounts, which, on a temporary basis, could
affect our earnings and profits. Readers are also directed to other risks and
uncertainties discussed, as well as to further discussion of the risks described
above, in other documents filed by the Company with the United States Securities
and Exchange Commission. The Company specifically disclaims any obligation to
update or revise any forward-looking information, whether as a result of new
information, future developments, or otherwise.
12
Overview
We are a financial services holding company that, through our subsidiaries,
provides investment advisory, insurance, financial planning 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 any
one of or by a multiple of these external factors. In addition, the passage of
the Graham-Leach-Bliley Act in November of 1999 repealed depression-era laws
that separated commercial, investment banking and insurance activities. Such
repeal may result in the intensification of the environment in which we compete
by increasing the number of companies doing business in the financial services
arena.
Critical Accounting Policies
The 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, those described
below involve a high degree of judgment and complexity. These critical
accounting policies require estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in the consolidated
financial statements. Due to their nature, estimates involve judgment based upon
available information. Actual results or amounts could differ from estimates and
the difference could have a material effect on the consolidated financial
statements. Therefore, understanding these policies is important in
understanding the reported results of operations and the financial position of
the Company.
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, and securities purchased under agreements to
resell; deposits with clearing organizations; securities owned; and securities
sold but not yet purchased. In accordance with FAS 115, certain financial
instruments are classified as trading and available for sale. The realized gains
and losses are recorded in the income statement in the period in which the
transactions occurred. The unrealized gains and losses related are reflected in
other comprehensive income depending on the underlying purpose of the
instrument. 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, these assumptions may be incorrect and the actual
value realized upon disposition could be different from the current carrying
value.
Off Balance Sheet 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 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
receivables from one source were 49% and 26% of total receivables for the years
ended March 31, 2004 and 2003, respectively.
13
Receivable From and Payable to Brokers and Clearing Organizations
The balances shown as receivable from and payable to brokers and clearing
organizations represent amounts due in connection with the Company's normal
transactions involving trading of securities. Management considers all
receivables to be collectible, therefore no allowance for doubtful accounts has
been provided.
Reserves
The Company records reserves related to legal proceedings in "accrued
expenses" in the consolidated balance sheet. The determination of these reserve
amounts requires significant judgment on the part of management. Management
considers many factors including, but not limited to: the amount of the claim;
the amount of the loss in the client's account; the basis and validity of the
claim; the possibility of wrongdoing on the part of an employee of the Company;
previous results in similar cases; and legal precedents and case law. Each legal
proceeding is reviewed with counsel in each accounting period and the reserve is
adjusted as deemed appropriate by management. Any change in the reserve amount
is recorded in the consolidated financial statements and is recognized as a
charge/credit to earnings in that period. The assumptions of management in
determining the estimates of reserves may be incorrect and the actual
disposition of a legal proceeding could be greater or less than the reserve
amount.
Results of Operations
Fiscal Year Ended March 31, 2004 Compared with Fiscal Year Ended March 31, 2003
Total revenue of $48,964,074 increased by $14,167,027 or 40.7% for the fiscal
year ended March 31, 2004, compared with total revenue of $34,797,047 for the
fiscal year ended March 31, 2003. Consolidated commissions, advisory, and other
fee income of $47,793,903 for the year ended March 31, 2004, increased by
$13,729,865 or 40.3%, compared with a balance of $34,064,038 for the year ended
March 31, 2003. This elevation can be attributed to a $13,578,074 increase in
revenues provided by Investors Capital Corporation (ICC) and a $151,791 increase
in advisory fee income provided by Eastern Point Advisors (EPA). The overall
increase was driven by the $8,887,194 million in commissions generated from the
sale of mutual funds and variable annuities during the year. In addition,
$4,842,671 of additional commissions was generated from the brokerage business
and other fees.
Net marketing revenues of $836,428 increased by $353,240 or 73.1% for year
ended March 31,2004, compared to $483,188 for fiscal year end March 31,2003 due
to more mutual fund and, variable annuity companies, and other types of
organizations participating in our marketing programs. Finally, other income
improved by $83,922 or 33.6% due to an increase in cash balances from operations
which generated a rise in interest and dividend income.
The significant increase in sales volume can be attributed to enhanced
marketing efforts in recruiting and business development. The marketing
department focused its attention on attracting a sophisticated representative
who can provide a more diversified and broader product base to clients.
Additionally, the marketing team assisted the representatives in taking
advantage of current market conditions through various workshops, regional and
national meetings, and seminar training programs.
Consolidated commissions and advisory fees of $39,295,954 for the year ended
March 31, 2004, increased by $11,255,123 or 40.1% compared to $28,040,831 for
the year ended March 31, 2003. This change can be attributed to an increase of
$11,168,592 in commission expenses incurred by ICC and an increase of $86,531 in
advisory fee expenses incurred by EPA. The increase in commission expense is the
result of an improvement in gross revenues as noted above. Cost of sales
increased proportionately with sales on a percentage basis resulting in a
comparative ratio of about one-to-one, 80.3% in 2004 and to 80.6% in 2003.
The Company realized consolidated operating income of $1,439,657 for the year
ended March 31, 2004, compared with operating income of $311,799 for the year
ended March 31, 2003. This 361.7% increase in consolidated operating income can
be attributed to additional business generated by the brokerage firm (ICC) which
has led to an improvement in operating income provided by the subsidiary. This
increase was offset by a decline in operating income provided by the Company's
subsidiary, Eastern Point Advisors (EPA).
14
Operating income improved as gross profit rose by $2,911,904 or 43.1% versus
the previous twelve-month period. In contrast, selling and administrative
expenses increased by $1,784,046 or 27.7% substantiating the $1,127,858 increase
in operating income. A breakdown of gross profit by product type, depicting both
the dollar and percentage contribution, is presented in the following table.
% of
Gross Profit Gross Profit 2004-2003 2004 2004
Product Type $ increase (decrease) increase change % Margin Change $ Gross Margin % Gross Margin
- ------------------------------------------------------------------------------------------------------------------
Commissions-mutual $1,155,335 39.7% 36.7% $4,299,936 44.5%
funds & variable
annuities
- ------------------------------------------------------------------------------------------------------------------
Commissions-trading 1,416,086 48.6% 132.6% 2,484,005 25.7%
- ------------------------------------------------------------------------------------------------------------------
Commissions -Insurance 137,590 4.7% 384.8% 173,347 1.8%
Products
- ------------------------------------------------------------------------------------------------------------------
Commissions-
Underwriting (106,396) (3.6)% (77.0)% 31,861 .3%
- ------------------------------------------------------------------------------------------------------------------
Advisory Services & 78,407 2.7% 7.34% 1,147,176 11.8%
Administration Fees
- ------------------------------------------------------------------------------------------------------------------
Licensing Revenue (225,295) (7.7)% (39.8)% 340,283 3.5%
- ------------------------------------------------------------------------------------------------------------------
Net Marketing Revenue 353,240 12.1% 73.1% 836,428 8.7%
- ------------------------------------------------------------------------------------------------------------------
Other Income &
Revenues 102,937 3.5% 40.8% 355,084 3.7%
- ------------------------------------------------------------------------------------------------------------------
Total $2,911,904 100% N/A $9,668,120 100%
- ------------------------------------------------------------------------------------------------------------------
Contributions from mutual funds, variable products, and trading activities
represented 88.3% of the total increase while net marketing revenues comprised
12.1% of the amount. An annual margin increase of $1,155,335 or 36.7% was
realized from sales of mutual funds and variable annuity products. Trading
activities increased on a marginal basis by $1,416,086 or 132.6% between fiscal
years ended 2004 and 2003. Net marketing revenues rose by $353,240 or 73.1% over
the same time period.
The margin retention of 13% for mutual funds and variable annuities was
relatively consistent with that of the prior year. However, retention from
trading products increased by 5%, 22% as compared to 17%, between the fiscal
years 2004 and 2003 respectively. This increase stems from the increased sale of
trade products with better margins.
Overall, increased sales volume from trading has a positive impact on the
margins. Basis points from account balances held at the clearing firm, other
transaction fees, and reduced clearing costs are directly related to the
improving margins from higher sales volume.
Volume increases from the selling of mutual funds and variable
annuities elevated the profit margin by $1,155,335 and comprised 39.7% of the
total increase in profit margin. Due to the sales volume of these products,
mutual funds and variable annuity products constitute 44.5% of the overall
profit margin while trading activity represents 25.7%. The remainder of the
profit margin is comprised of advisory services, 11.8%; net marketing revenues,
8.7%; and licensing, insurance products, underwriting and other income and
revenues, 9.3%.
Consolidated administrative expenses of $7,197,279 for the year ended March
31, 2004 increased by $1,681,314 or 30.5%, compared with expenses of $5,515,965
for the year ended March 31, 2003. This increase is a result of a $1,040,412
elevation in compensation and benefits based on the acquisition of additional
personnel to accommodate growth. An increase of $285,661 in stock compensation
to registered representatives is included within the compensation and benefits
amount. Regulatory, legal, and professional fees increased by $197,288 or 23.7%
due to added exposure to risk from a volatile market in the last couple of
years. Other administrative expenses increased by $414,694 or 58.5% as a result
of increased business. These other administrative expense increase consisted of
general office supplies, computer maintenance, postage and delivery, and
start-up costs for the new mutual fund "The Rising Dividend Growth Fund."
As another factor of growth, the ratio of administrative expenses to profit
margin has declined to 74.4% for fiscal year ended March 31, 2004 from 81.6% for
fiscal year ended March 31, 2003. The Company is reaping the benefits from the
use of fixed costs applied to new business activity. Resources committed in
technology and web-based reporting has guided the automation process of the
business. More independent registered representatives are taking advantage of
the technology. Through trading technology, representatives can process their
own trades. This enables the brokerage firm to receive the benefits of
"economies of scale" from fixed trading costs. The Company is able to process
more transactions while maintaining stable administrative costs.
Consolidated selling expenses were $1,031,184 for the year ended March 31,
2004, an amount that increased by $102,732 or 11.1% from the similar expenses of
$928,452 for the year ended March 31, 2003. This increase can be attributed to a
rise in advertising costs by $131,813 and a decline in communication costs by
$29,081.
15
ICC and EPA bear the administrative and selling expenses for ICH in the form
of management fees paid to ICH. These management fees, contained within the
following chart, have been eliminated during consolidation in the accompanying
financial statements.
2004 2003
- --------------------------------------------------------------------------------
ICC $920,714 $625,969
- --------------------------------------------------------------------------------
EPA 394,592 268,273
- --------------------------------------------------------------------------------
Total $1,315,306 $894,242
- --------------------------------------------------------------------------------
The Company recorded consolidated income taxes of $609,918 for the year ended
March 31, 2004, compared with taxes of $181,791 for the year ended March 31,
2003. This increase of $428,127 or 235.5% can be attributed to the Company's
increase in profitability during the same period.
The Company generated consolidated net income of $790,413 for the year ended
March 31, 2004, compared with income of $115,891 for the year ended March 31,
2003. This increase of $674,522 or 582% in net income can be attributed to an
elevation of operating income over the one-year period. This fluctuation led to
a rise of income before taxes of $1,102,649 or 370.4% percent from fiscal year
ended 2003 through fiscal year ended 2004.
The Company's profitability improvement resulted primarily from ICC. Total
revenues increased considerably over the same period, which led to a higher
annual gross profit. In addition, operating expenses did not increase
proportionately with gross profit, resulting in the improved annual net income.
Fiscal Year Ended March 31, 2003 Compared with Fiscal Year Ended March 31,
2002
The Company generated consolidated operating income of $311,799 for the
year ended March 31, 2003 compared with operating income of $160,368 for the
year ended March 31, 2002. This $151,431 or 94.4% increase in consolidated
operating income can be attributed to a $551,606 contribution to the margin
primarily from mutual funds and variable annuities offset by a $400,175 increase
in operating expenses primarily from compensation and benefits.
Operating income has improved due to an 8.9% annual increase in gross profit.
The rise in gross profit corresponds with a 6.6% annual build-up in selling and
administrative expenses. A breakdown of gross profit by product type, depicting
both the dollar and percentage contribution, is presented in the following
table.
Gross Profit 2003-2002
Product Type $ increase (decrease) % of Gross Profit Increase % Margin Change
- ------------------------------------------------------------------------------------------------------------------
Commissions-mutual funds & $467,424 85% 17%
variable annuities
- ------------------------------------------------------------------------------------------------------------------
Commissions-trading (47,942) (9%) (4%)
- ------------------------------------------------------------------------------------------------------------------
Commissions -Insurance
Products 35,757 6% N/A
- ------------------------------------------------------------------------------------------------------------------
Commissions-Underwriting 138,257 25% N/A
- ------------------------------------------------------------------------------------------------------------------
Advisory Services & (68,846) (12%) (6%)
Administration Fees
- ------------------------------------------------------------------------------------------------------------------
Licensing Revenue 148,566 27% 36%
- ------------------------------------------------------------------------------------------------------------------
Net Marketing Revenue (61,183) (11%) (11%)
- ------------------------------------------------------------------------------------------------------------------
Other income & Revenues (60,427) (11%) (19%)
- ------------------------------------------------------------------------------------------------------------------
Total $551,606 100% N/A
- ------------------------------------------------------------------------------------------------------------------
Revenues from consolidated commissions, advisory fee, and other fee income
of $34,064,038 for the year ended March 31, 2003 increased by $5,401,722 or
18.8%, compared with similar revenue of $28,662,316 for the year ended March 31,
2002. This growth in commission, advisory fee, and other fee revenue can be
attributed to a $5,777,199 increase in revenues provided by ICC, and to a
$375,477 decrease in advisory fee revenue produced through EPA. The overall
increase in ICC results from $3,595,568 in commissions generated from the sale
of mutual funds and variable annuities during the year. In addition, $1,275,909
in commissions revenue from trading and $905,722 additional income from
underwriting, licensing and other revenue was generated from the brokerage
business in fiscal year 2003.
Consolidated Net marketing revenues of $483,188 for the year ended March
31,2003 decreased by $61,183 or 11.2% compared with similar revenues of $544,371
for the year ended March 31,2002. Interest, dividends, and other income of
$249,821 for the year ended March 31, 2003 decreased by $62,752 or 20.1%
compared with similar income of $312,573 for the year ended March 31, 2002.
Marketing revenue decreased as a result of the decrease in marketing sponsorship
revenue from mutual fund and variable annuity companies. In the prior year, more
fund companies participated in this program.
16
Consolidated total revenue of $34,797,047 for the year ended March 31,2003
increased by $5,277,787 or 17.9% compared with similar revenues of $29,519,260
for the year ended March 31,2002. This expansion in sales volume can be
attributed to an increase in sales from mutual funds, variable annuities and
trading products as mentioned above. The registered representatives were able to
increase their business with the support of the marketing team. The marketing
team's efforts in matching mutual fund company products with the financial needs
of a particular representative's client have proven to be successful in a
volatile and unstable market. The Company will continue to commit resources to
improving and developing our representatives' business opportunities.
Consolidated commissions and advisory fee expenses of $28,040,831 for the
year ended March 31, 2003 increased by $4,726,181 or 20.3% compared with similar
expenses of $23,314,650 for the year ended March 31, 2002. This increase can be
attributed to a $5,034,954 increase in commission expense incurred by ICC and a
$308,773 reduction in advisory fee expense achieved by EPA. The boost in
commission expense is the result of a rise in gross revenues as noted above.
Cost of sales increased proportionately with sales on both a percentage basis
to 80.6% from 79.0% and on a ratio basis ( about one-to-one).
Consolidated administrative expenses of $5,515,965 for the year ended March
31, 2003 increased by $677,605 or 14.0% compared with similar expenses of
$4,838,360 for the year ended March 31, 2002. This increase is due primarily to
an elevation of $674,461 in compensation and benefits expenses.
Consolidated selling expenses of $928,452 for the year ended March 31, 2003
decreased by $277,430 or 23% compared with similar expenses of $1,205,882 for
the year ended March 31, 2002. This fluctuation is the result of a decrease of
$139,761 in advertising-related expenses and a decrease of $137,669 in
communication-related expenses. This overall decline includes reductions of
selling expenses through ICC, EPA, and ICH by $152,820, $44,624, and $79,986
respectively.
It should be noted that both ICC and EPA bear the administrative and selling
expenses of the parent company, ICH in the form of management fees paid to the
parent. These management fees have been eliminated in the accompanying financial
statements and are listed in the following table.
2003 2002
- --------------------------------------------------------------------------------
ICC $625,969 $532,677
- --------------------------------------------------------------------------------
EPA 268,273 228,290
- --------------------------------------------------------------------------------
Total $894,242 $760,967
- --------------------------------------------------------------------------------
The Company incurred consolidated income taxes of $181,791 for the year ended
March 31, 2003 compared with consolidated income taxes of $125,249 for the year
ended March 31, 2002. This increase of $56,542 or 45.1% can be attributed to the
Company's improvement in profitability during the year.
The Company realized consolidated net income of $115,891 for the year ended
March 31, 2003 compared with consolidated net income of $4,137 for the year
ended March 31, 2002. The Company's profitability resulted primarily from
increases in mutual fund sales and variable annuity sales realized through the
brokerage firm, ICC. Total revenues increased considerably during the fiscal
year, which has resulted in a higher gross profit. The growth in net earnings by
$111,754 or 2,701% can be attributed to an increase of $166,633 in net income
provided by ICC, a decrease of $138,830 in net income incurred by EPA, and an
increase of $83,951 in net income produced by ICH. The ICH net income
improvement is the result of management fees paid to the parent from its two
subsidiaries, ICC and EPA.
Liquidity and Capital Resources
We believe that return on equity primarily is based on the use of capital in
an efficient manner. Historically, we have financed our operations primarily
through private equity and internally generated cash flow and not by incurring
debt.
As of March 31, 2004, cash and cash equivalents totaled $8,112,567 as
compared to $7,090,643 as of March 31, 2003. Working capital as of March 31,2004
was $8,567,385 as compared to $7,418,985 as of March 31, 2003. Our ratio of
current assets to current liabilities was 3.20 to 1 as of March 31, 2004 as
compared to 4.35 to 1 as of March 31, 2003.
As of March 31, 2004, our net capital ratio for the broker-dealer was 2.38 to
1 as compared to 1.98 to 1 for our fiscal year ended March 31, 2003. The SEC
Uniform Net Capital Rule (Rule 15c3-1) requires that we maintain a net capital
of $100,000 and a ratio of aggregate indebtedness to net capital not to exceed
15 to 1. This SEC requirement is also referred to as the "net capital ratio" or
the "net capital rule." Indebtedness generally includes all money owed by a
company, and net capital includes cash and assets that are easily converted into
cash. SEC rules also prohibit "equity capital," which, under the net capital
rule, includes the subordinated loans from being withdrawn or cash dividends
from being paid if our net capital ratio would exceed 10 to 1 if we would have
less than our minimum required net capital. As of March 31, 2004, we had net
capital of $1,778,941 as compared to net capital of $1,214,481 as of March 31,
2003. This resulted in excess net capital of $1,497,286 and $1,053,988,
respectively, for the applicable years.
17
Net cash provided by operating activities was $1,199,491 for the year ended
March 31, 2004 as compared to net cash provided in operating activities of
$515,211 and used $10,419 for the years ended March 31, 2003 and 2002,
respectively. The $684,280 increase in 2004 compared to 2003 resulted primarily
from an increase in net income. The $525,630 increase in 2003 as compared to
2002 was primarily the result of payment on our accounts receivable and loans to
officers and an increase in net income. In addition, changes in our investments
in marketable securities and unconsolidated affiliates completed the increase to
cash flow From operating activities comparatively for years ended March 31,2003
to March 31,2002.
Net cash used in investing activities was $90,152, $30,226 and $425,636 for
the years ended March 31, 2004, 2003 and 2002, respectively. The increase in
cash used of $59,926 in 2004 compared to 2003 resulted from a decline in
spending on fixed assets and a decrease in cash collections from the loans
outstanding to registered representatives as compared to last year.
The decrease in cash used of $395,410 in 2003 compared to 2002 was the result
of cash payments on our loans from registered representatives for growing the
company's business and a decrease in spending on fixed assets.
Net cash used in financing activities was $87,415 for 2004 and net cash
provided was $268,213 for 2003. Net cash used in 2002 was $406,840. The $355,628
increase in cash used in 2004 as compared to 2003 resulted primarily from
payments on the $250,000 note to the NASD for acceptance of a fine. Finally, the
$675,053 cash increase in cash provided from financing activities comparatively
for years ended March 31,2003 to March 31,2002 was the result of the financing
to pay the NASD fine and the decrease in cash outlays for our E & O policy. We
managed the timing of collection for our E & O policy for year ended March
31,2003 versus year ended March 31,2002.
Risk Management
Risks are an inherent part of the Company's business and activities.
Management of these risks is critical to the Company's financial strength and
profitability and requires communication, judgment and knowledge of financial
trends and the economy as a whole.
Senior management takes an active role in the risk management process. The
principal risks involved in the Company's business activities are market,
operational, regulatory and legal.
Market Risk
Market risk is the risk attributable to 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 this willingness to spend in
the financial markets that is key to our business. A shift in spending in this
area could negatively impact us. However, senior management is constantly
monitoring these economic trends in order to enhance our product line to offset
any potential negative impact.
Operational Risk
Operational risk refers to the risk of loss resulting from the Company's
operations, including, but not limited to, improper or unauthorized execution
processing of transactions, deficiencies in the Company's technology or
financial or financial operating systems and inadequacies or breaches in the
Company's control processes. Managing these risks is critical, especially in a
rapidly changing environment with increasing transaction volume. Failure to
manage these risks could result in material financial loss to the Company. To
mitigate these risks, the Company had developed specific policies and procedures
designed to identify and manage operational risk. These policies and procedures
are reviewed and updated on a continuing basis to ensure that this risk is
minimized.
Regulatory and Legal Risk
Regulatory and legal risk include non-compliance with applicable legal and
regulatory requirements and the risk of a large number of customer claims that
could result in adverse judgments against the Company. The Company is subject to
extensive regulation in all jurisdictions in which it operates. In this regard,
the Company has instituted comprehensive procedures to address issues such as
regulatory capital requirements, sales and trading practices, use of and
safekeeping of customer funds, credit granting, collection activities,
money-laundering and record keeping.
18
Effect of Recently Issued Accounting Pronouncements
Please refer to Note 2 "Accounting Policies" of the notes to the consolidated
financial statements contained herein.
Effects of Inflation
Investors Capital Holdings' assets are primarily liquid in nature and are 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 affects our expenses, including employee
compensation and benefits, communications and occupancy, which may not be
readily recoverable through charges for services provided.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is present in our business due to price changes in equities,
changes in interest rates, and credit ratings in debt instruments. We are also
exposed to market risk as a result of asset management of a client's portfolio.
Market risk is present in our normal business activity as a result of our
involvement as principal in the execution of trading activity and delivery of
fixed and variable investment products. We conduct our business as a brokerage
and advisory firm clearing through another broker dealer on a fully disclosed
basis to minimize our market risk. Additional information pertaining to market
risk is contained in "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" under the caption " Risk Management" of
this Form 10-K.
ITEM 8. Financial Statements and Supplementary Data.
To the Board of Directors and Stockholders of Investors Capital Holdings,
Ltd. and Subsidiaries Lynnfield, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Investors
Capital Holdings, Ltd. and Subsidiaries (the "Company") as of March 31, 2004,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2004 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, 2004,
and the consolidated results of their operations and their cash flows for year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Brown & Brown, LLP
Boston, MA
May 20, 2004
19
To the Board of Directors and Stockholders of Investors Capital Holdings, Ltd.
and Subsidiaries Lynnfield, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Investors
Capital Holdings, Ltd. and Subsidiaries as of March 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the two-year period ended March 31, 2003
and 2002.
These consolidated 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. The consolidated statement of
operations, changes in stockholders' equity and cash flows of Investors Capital
Holdings, Ltd. and Subsidiaries for the year ending March 31, 2001 were audited
by other auditors whose report dated May 29, 2001 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall consolidated 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 as of March 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for each
of the years in the two-year period ended March 31, 2003 and 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
--------------------------------------
West Peabody, Massachusetts SHATSWELL, MacLEOD & COMPANY, P.C.
May 15, 2003
20
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
2004 2003
------------ ------------
Assets
Current Assets
Cash and cash equivalents .................................... $ 8,112,567 $ 7,090,643
Deposit with clearing organization, restricted ............... 175,000 175,000
Accounts receivable .......................................... 3,785,423 1,940,450
Investments in available-for-sale securities ................. 56,339 42,195
Income taxes receivable ...................................... -- 60,113
Marketable securities, at market value ....................... 17,422 132,471
Prepaid expenses ............................................. 310,270 195,702
------------ ------------
12,457,021 9,636,574
Property and equipment, net ....................................... 503,316 525,174
Long-Term Investments
Equity investments, at cost .................................. 40,000 47,500
Investment in unconsolidated affiliate ....................... 85,820 64,495
------------ ------------
125,820 111,995
Other Assets
Other assets ................................................. 99,295 169,720
Deferred tax asset, net ...................................... 69,721 --
Receivables from officers .................................... 64,400 104,088
Loans receivable from registered representatives ............. 69,306 95,389
------------ ------------
302,722 369,197
TOTAL ASSETS ............................................ $ 13,388,879 $ 10,642,940
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable ............................................. $ 570,236 $ 403,444
Accrued expenses ............................................. 435,067 377,783
Notes payable ................................................ 78,999 97,229
NASD settlement payable (current portion) .................... 54,375 101,321
Commissions payable .......................................... 2,078,196 1,130,539
Income taxes payable ......................................... 582,721 --
Securities sold, not yet purchased, at market value .......... 90,042 107,273
------------ ------------
3,889,636 2,217,589
Long-Term Liabilities
NASD settlement payable ...................................... 94,304 148,679
Deferred income tax liability, net ........................... -- 28,032
------------ ------------
94,304 176,711
Total liabilities ....................................... 3,983,940 2,394,300
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000
shares authorized; 5,731,598 issued and 5,727,713 outstanding
in 2004; 5,721,265 issued and 5,717,380 outstanding in 2003 . 57,316 57,213
Additional paid-in capital ................................... 8,520,931 8,169,292
Retained earnings ............................................ 844,670 54,257
less: Treasury stock, 3,885 shares at cost ................. (30,135) (30,135)
Accumulated other comprehensive income (loss) ................ 12,157 (1,987)
------------ ------------
Total stockholders' equity ............................ 9,404,939 8,248,640
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................................ $ 13,388,879 $ 10,642,940
============ ============
See Notes to Condensed Consolidated Financial Statements.
21
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
March 31,
2004 2003 2002
------------ ----------- -----------
Revenues:
Commission, advisory & other fee income $47,793,903 $34,064,038 $28,662,316
Marketing revenue 836,428 483,188 544,371
Other income 333,743 249,821 312,573
----------- ----------- -----------
Total Revenue 48,964,074 34,797,047 29,519,260
Commission and advisory fees 39,295,954 28,040,831 23,314,650
----------- ----------- -----------
Gross profit 9,668,120 6,756,216 6,204,610
----------- ----------- -----------
Operating expenses:
Advertising 611,435 479,622 619,383
Communications 419,749 448,830 586,499
----------- ----------- -----------
Selling 1,031,184 928,452 1,205,882
----------- ----------- -----------
Compensation and Benefits 4,569,398 3,528,986 2,854,525
Regulatory, legal and professional 1,028,901 831,613 804,173
Occupancy 474,998 446,078 440,092
Other administrative expenses 1,123,982 709,288 739,570
----------- ----------- -----------
Administrative 7,197,279 5,515,965 4,838,360
----------- ----------- -----------
Total Operating Expenses 8,228,463 6,444,417 6,044,242
----------- ----------- -----------
Operating income 1,439,657 311,799 160,368
----------- ----------- -----------
Other expense:
Interest expense 39,326 14,117 30,982
----------- ----------- -----------
Total other expense 39,326 14,117 30,982
----------- ----------- -----------
Income before taxes 1,400,331 297,682 129,386
Provision for income taxes 609,918 181,791 125,249
----------- ----------- -----------
Net income $ 790,413 $ 115,891 $ 4,137
=========== =========== ===========
Earnings per common share
Basic and diluted earnings per common share:
Net income $ 0.14 $ 0.02 $ 0.00
=========== =========== ===========
Share data:
Weighted average shares used in basic earnings per
common share calculations 5,720,843 5,717,380 5,717,931
Plus: Incremental shares from assumed exercise of stock options 156,232 72,680 100,764
----------- ----------- -----------
Weighted average shares used in diluted earnings per
common share calculations 5,877,075 5,790,060 5,818,695
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
22
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended March 31, 2004, 2003 and 2002
------------------------------------------
Retained Accumulated
Common Stock Additional Earnings Other
-------------------- Paid-in (Accumulated Treasury Comprehensive
Shares Amount Capital Deficit) Stock Income (Loss) Total
-------------------- ---------- ------------ ---------- --------------- -----------
Balance, March 31, 2001 5,708,311 42,258 8,151,760 (65,771) -- (5,674) 8,122,573
Costs related to initial
public offering (1,458) (1,458)
Common stock adjustment 12,954 14,955 (14,955) --
Purchases of treasury stock (30,135) (30,135)
Comprehensive loss:
Net income 4,137
Net unrealized losses (38,051)
Comprehensive loss (33,914)
--------- --------- ---------- --------- -------- ---------- ----------
Balance, March 31, 2002 5,721,265 57,213 8,135,347 (61,634) (30,135) (43,725) 8,057,066
Stock-based compensation 33,945 33,945
Comprehensive income:
Net income 115,891
Net unrealized gains 41,738
Comprehensive income 157,629
--------- --------- ---------- --------- -------- ---------- ----------
Balance, March 31, 2003 5,721,265 $57,213 $8,169,292 $ 54,257 $(30,135) $ (1,987) $8,248,640
Stock-based compensation 319,606 319,606
Stock issued employees 10,000 100 31,400 31,500
Exercised stock options 333 3 633 636
Comprehensive income:
Net Income 790,413
Net Unrealized gains 14,144
Comprehensive income 804,557
--------- --------- ---------- ---------- -------- ----------- -----------
Balance, March 31, 2004 5,731,598 $57,316 $8,520,931 $ 844,670 $(30,135) $ 12,157 $9,404,939
========= ========= ========== ========== ======== ========== ==========
Reclassification disclosure:
Net unrealized gains on available-for-sale securities for the year ended
March 31, 2003 were $14,906. Such amount has been adjusted to $41,738 to reflect
a reclassification of the loss of $55,834 on the sale of a security, with no tax
effect. Net unrealized losses on available-for-sale securities for the year
ended March 31, 2002 were $37,426. Such amount has been adjusted to $38,051 to
reflect a reclassification of the gain of $656 on the sale of a security, with
no tax effect.
Accumulated other comprehensive loss as of March 31, 2004, 2003 and 2002
consists of net unrealized holding losses on available-for-sale securities, net
of taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
23
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------
Years Ended March 31, 2004, 2003 and 2002
-----------------------------------------
2004 2003 2002
----------- ---------- ----------
Cash flows from operating activities:
Net income....................................................... $790,413 $115,891 $ 4,137
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 138,093 140,954 133,932
Realized loss on securities.................................. - 55,834 (31,947)
Change in deferred taxes..................................... (97,753) 59,962 (44,930)
Stock option compensation.................................... 319,606 33,945 -
Change in marketable securities.............................. 97,818 30,737 (77,667)
Unrealized gain on investments............................... 7,500 - -
Income loss on investment in unconsolidated affiliates....... (21,325) 25,202 90,334
Change in operating assets and liabilities
Decrease (increase) in accounts receivable................... (1,844,973) 160,750 (91,949)
Increase in prepaid expenses and other assets................ (44,143) (22,789) (156)
Decrease in income taxes receivable.......................... 60,113 (60,113) 88,124
Decrease (increase) in loans receivable from officers........ 39,688 31,990 (26,751)
Increase (decrease) in taxes payable......................... 582,721 (149,108) 149,108
Increase (decrease) in accounts payable ..................... 166,792 (75,876) (160,471)
Increase(decrease) in accrued expenses....................... 57,284 173,969 (45,758)
Increase (decrease) in commissions payable................... 947,657 (6,137) 3,575
Net cash provided by operating activities................ 1,199,491 515,211 (10,419)
Cash flows from investing activities:
Purchases of property and equipment.............................. (116,235) (134,832) (225,640)
Decrease in loans receivable from registered representatives..... 26,083 104,606 (199,996)
----------- ---------- ----------
Net cash used in investing activities..................... (90,152) (30,226) (425,636)
----------- ---------- ----------
See Notes to Consolidated Financial Statements.
24
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
2004 2003 2002
Cash flows from financing activities: ---------- ---------- ----------
Note Payable:
(Payments) Increases on Note Payable.......................... (18,230) 18,213 (375,245)
(Payments) Increases on notes payable and NASD settlement..... (101,321) 250,000
Additional paid in capital:
Issuance of employee stock ................................... 31,400
Exercise of stock options ............................. 633
Additional public offering cost (16,414)
Common stock:
Issuance of employee stock ................................... 100
Exercise of stock options ................................... 3
Adjustment common stock to par value 14,954
Treasury stock purchases .................................... (30,135)
------------ ----------- -----------
Net cash (used in) provided by in financing activities..... (87,415) 268,213 (406,840)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 1,021,924 753,198 (842,895)
Cash and cash equivalents, beginning of period........................... 7,090,643 6,337,445 7,180,340
------------ ----------- -----------
Cash and cash equivalents, end of period................................. $8,112,567 $7,090,643 6,337,445
============ =========== ===========
Supplemental disclosures of cash flow information:
Interest paid....................................................... $39,326 $14,117 $30,982
============ =========== ===========
Income taxes paid (received)........................................ $124,000 $331,050 $(67,052)
============ =========== ===========
Transfer of security to securities not readily marketable from
receivable from officers...................................... $-- $30,000 $--
============ =========== ===========
See Notes to Condensed Consolidated Financial Statements.
25
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended March 31, 2004, 2003 and 2002
-----------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Investors Capital Holdings, Ltd., (the Company or "ICH") and its wholly-owned
subsidiaries, Investors Capi