Investors Capital 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.    20549

_____________

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December  31, 2013

Commission File Number: 333-43664

INVESTORS CAPITAL HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

DELAWARE	04-3284631
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Six Kimball Lane, Suite 150

Lynnfield, Massachusetts    01940

(Address of principal executive offices)

(781) 593-8565

(Registrant's telephone number, including area code)

  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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]     No [  ]

  Indicate by check mark whether the registrant is an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer  [  ]	Accelerated filer  [  ]
Non-accelerated filer  [  ]	Smaller reporting company  [X]
(Do not check if a smaller reporting company)

  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [  ]          No [X]

  There were 7,093,161 shares outstanding of the issuer’s common stock, par value $.01 per share, as of February 7, 2014.

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Table of Contents

PART I

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PART II

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PART I        FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
		December 31, 2013	March 31, 2013
Assets
Current Assets
Cash and cash equivalents	$	6,366,036	$           6,589,698
Deposit with clearing organization, restricted		175,000	175,000
Accounts receivable and other receivables		5,733,003	7,160,553
Loans receivable from registered representatives (current), net of allowance		725,518	593,730
Prepaid income taxes		209,069	136,972
Securities owned at fair value		300,255	258,903
Prepaid expenses		456,937	722,427
		13,965,818	15,637,283
Property and equipment, net		73,777	194,446
Long Term Assets
Loans receivable from registered representatives		1,055,541	893,703
Non-qualified deferred compensation investment		2,406,202	1,771,044
Cash surrender value life insurance policies		225,525	176,402
		3,687,268	2,841,149
Other Assets
Deferred tax asset, net		1,584,213	1,059,480
Capitalized software, net		69,101	107,590
Other asset		56,704	56,704
		1,710,018	1,223,774
TOTAL ASSETS	$	19,436,881	$         19,896,652
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	1,532,097	$           1,327,691
Accrued expenses		1,272,311	1,818,379
Commissions payable		3,981,906	3,279,921
Notes payable		92,718	1,488,876
Unearned revenue		1,210,812	188,651
Securities sold, not yet purchased, at fair value			28,946
		8,089,844	8,132,464
Long-Term Liabilities
Non-qualified deferred compensation plan		2,673,015	1,968,691
Subordinated borrowings		2,000,000	2,000,000
		4,673,015	3,968,691
Total liabilities		12,762,859	12,101,155
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000 shares authorized;
7,100,608 issued and 7,096,723 outstanding at December 31, 2013
7,101,427 issued and 7,097,542 outstanding at March 31, 2013		71,004	71,013
Additional paid-in capital		12,899,697	12,594,370
Accumulated deficit		(6,266,544)	(4,839,751)
Less: Treasury stock, 3,885 shares at cost		(30,135)	(30,135)
Total stockholders' equity		6,674,022	7,795,497
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	19,436,881	$         19,896,652
See notes to condensed consolidated financial statements.

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INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)		THREE MONTHS ENDED
		December 31,
		2013		2012
Revenue:
Commissions	$	18,583,079	$	15,510,183
Advisory fees		4,917,295		4,162,082
Other fee income		904,314		935,375
Other revenue		444,071		158,722
Total revenue		24,848,759		20,766,362
Expenses:
Commissions and advisory fees		19,591,094		16,125,987
Compensation and benefits		1,664,710		1,484,416
Regulatory, legal and professional services		2,371,820		1,378,066
Brokerage, clearing and exchange fees		425,632		385,100
Technology and communications		265,261		337,495
Advertising, marketing and promotion		576,439		188,808
Occupancy and equipment		116,092		170,539
Other administrative		238,046		409,092
Interest		2,986		3,588
Total operating expenses		25,252,080		20,483,091
Operating (loss) income		(403,321)		283,271
(Benefit) provision for income taxes		(117,627)		149,555
Net (loss) income	$	(285,694)	$	133,716
Basic net (loss) income  per share	$	(0.04)	$	0.02
Diluted net (loss) income  per share	$	(0.04)	$	0.02
Weighted average shares used in basic per share calculations		6,729,264		6,647,700
Weighted average shares used in diluted per share calculations		6,729,264		6,647,700
See notes to condensed consolidated financial statements.

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INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)		NINE MONTHS ENDED
		December 31,
		2013		2012
Revenue:
Commissions	$	53,740,490	$	47,378,076
Advisory fees		13,895,844		12,252,067
Other fee income		1,437,442		1,611,705
Other revenue		1,135,781		649,804
Total revenue		70,209,557		61,891,652
Expenses:
Commissions and advisory fees		56,202,416		48,862,794
Compensation and benefits		5,016,183		4,524,385
Regulatory, legal and professional services		6,241,110		3,231,325
Brokerage, clearing and exchange fees		1,174,598		1,087,898
Technology and communications		982,034		961,713
Advertising, marketing and promotion		1,364,345		661,505
Occupancy and equipment		337,620		534,839
Other administrative		733,556		847,870
Interest		145,468		17,390
Total operating expenses		72,197,330		60,729,719
Operating (loss) income		(1,987,773)		1,161,933
(Benefit) provision for income taxes		(560,977)		486,316
Net (loss) income	$	(1,426,796)	$	675,617
Basic net (loss) income  per share	$	(0.21)	$	0.10
Diluted net (loss) income  per share	$	(0.21)	$	0.10
Weighted average shares used in basic per share calculations		6,711,816		6,628,389
Weighted average shares used in diluted per share calculations		6,711,816		6,628,389
See notes to condensed consolidated financial statements.

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INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended December 31,
		2013		2012
Cash flows from operating activities:
Net (loss) income	$	(1,426,796)	$	675,617
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization		168,211		246,056
Deferred taxes, net		(524,733)		650,915
Stock-based compensation		290,980		121,256
Unrealized gain (loss) in marketable securities		(29,719)		16,252
Non-qualified deferred compensation investment		49,858		45,033
Market adjustment cash surrender value life insurance policy		(31,123)		(4,222)
Charge to commission expense (forgivable loans)		228,961		181,599
Allowance for bad debt expense				12,708
Change in operating assets and liabilities:
Accounts receivable and Other receivables		1,427,550		(988,063)
Prepaid expenses and other		284,802		(81,637)
Loans receivable from registered representatives		(522,587)		(236,116)
Income taxes		(72,097)		(18,938)
Accounts payable		204,406		(219,452)
Securities, net		-		(26,052)
Accrued expenses		(546,068)		17,689
Commissions payable		701,985		124,245
Unearned revenue		1,022,161		1,086,636
Net cash provided by operating activities		1,225,791		1,603,526
Cash flows from investing activities:
Acquisition of property and equipment		(9,054)		(67,937)
Cash surrender value life insurance policies		(18,000)		-
Trading investments		(40,580)		-
Net cash used in investing activities		(67,634)		(67,937)
Cash flows from financing activities:
Excess tax benefit related to stock awards		14,339		32,336
Payments on note payable		(1,396,158)		(1,554,251)
Net cash used in financing activities		(1,381,819)		(1,521,915)
Net (decrease) increase in cash and cash equivalents		(223,662)		13,674
Cash and cash equivalents, beginning of period		6,589,698		4,537,713
Cash and cash equivalents, end of period	$	6,366,036	$	4,551,387
Supplemental disclosures of cash flow information:
Interest paid	$	104,218	$	14,569
Income taxes paid	$	19,524	$	-
See notes to condensed consolidated financial statements.

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INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

(UNAUDITED)

Note 1 – Organization AND Basis of Presentation

  Incorporated in 1995 under Massachusetts law and redomesticated under Delaware law in 2007, Investors Capital Holdings, Ltd. ("ICH") is a holding company whose wholly-owned subsidiaries assist a nationwide network of independent registered representatives ("representatives") in providing a diversified line of financial services to the public including securities brokerage, investment advice, asset management, financial planning and insurance. Our subsidiaries include the following:

· Investors Capital Corporation ("ICC") is duly registered under the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 and applicable state law to provide broker-dealer and investment advisory services nationwide.  ICC’s national network of independent financial representatives is licensed to provide these services through ICC under the regulatory purview of the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”) and state securities regulators.  ICC executes and clears its public customer accounts on a fully disclosed basis through Pershing, LLC (“Pershing”).  ICC, doing business as Investors Capital Advisors (“ICA”), also provides investment advisory services.

· ICC Insurance Agency, Inc. (“ICCIA”) facilitates the sale of insurance and annuities by our representatives.

· Investors Capital Holdings Securities Corporation ("ICH Securities") holds cash, cash equivalents, interest income and dividend income for ICH.

· Advisor Direct, Incorporated (“AD”) is a wholly-owned subsidiary. On January 24, 2013, Investors Capital Holdings, Ltd. acquired all the assets of a shell broker-dealer for the cash purchase price of $32,500. AD is a Broker-Dealer registered with the SEC and is a member of FINRA. AD is registered to operate as a (k)(1) Broker-Dealer where principal transactions are limited to mutual funds and/or variable annuities only. 

  On October 2, 2013, RCS Capital Corporation (NYSE: RCAP) (“RCAP”) and Investors Capital Holdings, LTD. (“ICH”) announced its entry on October 1, 2013 into a letter of intent (the “Letter of Intent”) under which RCAP expects to acquire ICH for aggregate consideration of approximately $52.2 million, or for a share purchase price of $7.25 for each share of ICH common stock outstanding, on a fully diluted basis.  On October 27, 2013, the Company executed a definitive merger agreement (the “Merger Agreement”) with RCAP, pursuant to which RCAP will acquire ICH and its subsidiaries, including Investors Capital Corporation, for a total consideration of approximately $52.5 million comprised of cash and RCAP stock. The definitive merger agreement between RCAP and ICH will require that ICH pay RCAP a $3 million termination fee, in certain specific circumstances, should the merger not be consummated and ICH consummates a business combination transaction with another party other than RCAP.  In addition, ICH has agreed to a 45-day exclusivity period subject to reimbursement of certain expenses of RCAP.  The closing of the transaction is subject to customary closing conditions, including FINRA approval of the proposed change in control for ICC, approval of the transaction by ICH stockholders and registration of the Class A common stock of RCAP to be issued as merger consideration. The transaction is expected to close in the first half of 2014.

BASIS OF PRESENTATION:

The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of

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management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Because of the nature of the Company’s business, interim period results may not be indicative of full year or future results.

  The accompanying interim unaudited condensed consolidated financial statements of Investors Capital Holdings, Ltd. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Quarterly Report on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these financial statements contain all of the adjustments necessary for a fair presentation of the results of the interim periods presented. Operating results for the three months and nine months period ended December  31, 2013 are not necessarily indicative of the results that may be expected for the year ending March 31, 2014. The balance sheet at March 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statement presentation. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended March 31, 2013 filed with the SEC, for additional disclosures and a description of accounting policies.

  There have been no material changes from the critical accounting policies set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our annual report on Form 10-K for the year ended March 31, 2013. Please refer to those sections for disclosures regarding the critical accounting policies related to our business

Certain prior year items have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on previously reported results of operations. All significant intercompany balances and transactions have been eliminated.    The Company has evaluated subsequent events through the date of this filing. 

Note 2 - Loans to Registered Representatives

  ICC has granted loans to certain registered representatives with the stipulation that the loans will be forgiven if the representatives remain licensed with the Company for an agreed upon period of time, generally one to five years, and/or meet specified performance and/or revenue targets.  Upon forgiveness, the loans are charged to commission expense for financial reporting purposes. Loans charged to commission expense totaled $10,750 and $7,240, for the three months period ended December 31, 2013 and 2012, respectively and $228,961 and $181,599 for the nine months period ended December 31, 2013 and 2012, respectively.

    Some loans to registered representatives are not subject to a forgiveness contingency.   These loans, as well as loans that have failed the forgiveness contingency, are repaid to the Company by deducting a portion of the representatives’ commission payouts throughout the commission cycle until the loans are repaid. 

  Interest charged on these loans to representatives range from 4.25% to 8.25% annually.  Loans to registered representatives are as follows:

		December 31, 2013	March 31, 2013
Forgivable loans	$	1,451,948	$	1,115,765
Other loans		507,590		604,264
Less:  allowance		(178,479)		(232,596)
Total loans	$	1,781,059	$	1,487,433

  Included in other loans is a loan receivable from a registered representative in connection with a regulatory matter settled with the Massachusetts Securities Division on October 27, 2010. This representative has agreed to reimburse the Company for certain amounts paid by the Company with respect to this regulatory matter. The amount due on this receivable at December 31, 2013 and March 31, 2013 was $291,141 and $330,587, respectively. 

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NOTE 3 - INCOMETAXES

  The Company uses the asset and liability method to account for income taxes, which requires recognition of deferred tax assets, subject to valuation allowances, and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or loss in the period that includes the enactment date.

The Company, in preparing its income tax provision, bases the calculation on its annual projection of income or loss from operations. The annual projection is reconciled on a quarterly basis to changes in estimates, and at year end the calculation is based on the reported results of operations. Certain expenses are not deductible for tax purposes, creating permanent differences that increase or decrease the income tax provision and effective income tax rate.

 Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of representative deferred compensation, legal settlement accruals, differences between depreciation expenses, and a state net operating loss for financial statement purposes versus tax return purposes.    

 The Company assesses the realizability of its deferred tax assets to determine whether or not a valuation allowance was required for some or all of its deferred tax assets.  The Company considered negative evidence, including its current cumulative loss position for financial reporting purposes over the past three fiscal years, and positive evidence, including its recent earnings and history of taxable income in three of the past five years and its projections of taxable income in the future.  The Company also considered that its GAAP losses generated in prior fiscal years included certain significant non-deductible and other non-recurring expenses.

   Management concluded that due to the lack of predictability of financial markets, recent instability along with the ongoing regulatory and legal risks and their related defense costs inherent in our industry necessitate we maintain a valuation allowance of approximately $0.5 million.  If future operations exceed current projections, management may conclude such valuation allowance is no longer needed.  Conversely, if future operating results do not meet current projections, it is possible that an additional valuation allowance may be needed in future periods.

   The Company recognizes and measures its unrecognized tax benefit or expense.  The Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of unrecognized tax expense or benefit is adjusted when new information is available or when an event occurs that requires a change.   The Company recognizes the accrual of any interest and penalties related to unrecognized tax expense in income tax expense. No interest or penalties were recognized for the three months and nine months period ended December  31, 2013 and 2012.  The Company does not have any tax positions as of December 31, 2013 for which it is reasonably possible that the total amounts of unrecognized tax benefit or expense will significantly increase or decrease within twelve months of the reporting date.        

NOTE 4 – FAIR VALUE MEASUREMENTS

        The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.

  The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

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· Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities the Company have the ability to access.

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

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

  The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.  The following tables present the Company's fair value hierarchy for those financial assets and liabilities measured at fair value as of December 31, 2013 and March 31, 2013, respectively:

Fair Value Measurements on Recurring Basis December 31, 2013
Assets:		Total		Level 1		Level 2		Level 3
Securities owned at fair value
Mutual funds	$	298,476	$	298,476	$	-	$	-
Equities		-		-		-		-
Asset backed securities		1,779		-		1,779		-
Total Assets	$	300,255	$	298,476	$	1,779	$	-
Liabilities:
Securities sold, not yet purchased  at fair value
Exchange traded funds	$	-	$	-	$	-	$	-
Equities						-		-
Total Liabilities	$	-	$	-	$	-	$	-

Fair Value Measurements on Recurring Basis March 31, 2013
		Total		Level 1		Level 2		Level 3
Assets:
Securities owned at fair value
Mutual funds	$	256,509	$	256,509	$	-	$	-
Equities		354		354		-		-
Asset backed securities		2,040		-		2,040		-
Total assets	$	258,903	$	256,863	$	2,040	$	-
Liabilities:
Securities sold, not yet purchased  at fair value
Equities		28,946		28,946		-		-
Total Liabilities	$	28,946	$	28,946	$	-	$	-

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NOTE 5 – Non-Qualified Deferred Compensation Plan

   Effective December 2007, the Company established the Investors Capital Holdings, Ltd. Deferred Compensation Plan (the “NQ Plan”) as well as a Rabbi Trust Agreement for this Plan, for which ICC is the NQ Plan’s sponsor.  The unfunded NQ Plan enables eligible ICC’s Representatives to elect to defer a portion of earned commissions, as defined by the NQ Plan.  The asset represents the representatives’ invested contributions of deferred commissions, investment gains and losses as well as insurance charges while the liability is comprised of the participant deferrals, unrealized gains and losses and any distributions.  The total amount of deferred compensation was $150,114  and $123,749 for the three months period ended December 31, 2013 and 2012, respectively and $452,451 and $338,181 for the nine months period ended December 31, 2013 and 2012, respectively.

NOTE 6 - LITIGATION AND REGULATORY MATTERS

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to arbitrations and other legal actions and proceedings brought on behalf of various claimants, some of which seek material and/or indeterminable amounts. Certain of these actions and proceedings are based on alleged violations of securities, consumer protection, labor and other laws and may involve claims for substantial monetary damages asserted against the Company and its subsidiaries.  Also, the Company and its subsidiaries are subject to regulatory examinations, information gathering requests, inquiries, investigations and formal administrative proceedings that may result in fines or other negative impact on the Company.  ICC, as a duly registered broker/dealer and investment advisor, is subject to regulation by the SEC, FINRA, NYSE-Amex, and state securities regulators.  

  The Company maintains Errors and Omissions (“E&O”) insurance to protect itself from potential damages and/or legal costs associated with certain litigation and arbitration proceedings and, as a result, in the majority of cases, the Company’s exposure is limited to $100,000,  or $1,000,000 aggregate  (effective January 2014 for only certain alternative investment products related to defense costs and indemnities) in any one case, subject to policy limitations and exclusions. Thereafter the $1,000,000 aggregate threshold, the Company’s exposure on these same investments is limited to $150,000 and a ten (10) percent coinsurance. For all other investment products, the Company’s exposure is $100,000 per claim.

   The Company also maintains a fidelity bond to protect itself from potential damages and/or legal costs related to fraudulent activities pursuant to which the Company’s exposure is usually limited to a $350,000 deductible per case, subject to policy limitations and exclusions.

   The Company recognizes a legal liability when management believes it is probable that a liability has been incurred and the amount can be reasonably estimated.  Conclusions on the likelihood that a liability has been incurred and estimates as to the amount of the liability are based on consultations with the Company’s General Counsel who, when situations warrant, may engage and consult external counsel to assist with the evaluation and handle certain matters.  Legal fees for defense costs are expensed as incurred and classified as professional services within the consolidated statements of income.

   As of December 31, 2013 and March 31, 2013, the Company had accrued professional fees relating to the Company’s defense in various legal matters and estimated probable settlement costs of approximately $1,201,600 and $1,534,660, respectively, included in accrued expenses and accounts payable on the consolidated balance sheet.

   It is possible that some of the matters could require the Company to pay damages or make other payments or establish accruals in amounts that could not be estimated and/or could exceed those accrued as of December 31, 2013.  Key components of the accrual include claims arising from alleged poor performance of certain alternative investments in real estate investments trusts that have experienced bankruptcy or other financial difficulties during or in connection with the recent recession and credit crisis.

Note 7 - Stock Based Compensation

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  The Company periodically issues common stock to employees, directors, officers, representatives and other key individuals in accordance with the provisions of the shareholder approved equity compensation plans. The Company measures and recognizes compensation expense for all share-based awards made to representatives, officers, employees and directors based on estimated fair values. 

Stock Awards

  Shares of stock granted under the Company’s equity incentive plans (the “Equity Plans”) as of December 31, 2013 have been either fully vested at the date of grant or subject to vesting over time periods varying from one to seven years after the date of grant, unvested shares being subject to forfeiture in the event of termination of the grantee’s relationship with the Company, other than for death or disability.  The compensation cost associated with these stock grants is recognized over the vesting period of the shares and is calculated as the market value of the shares on the date of grant.  Stock grants have been recorded as deferred compensation, which is a component of paid-in capital within stockholders’ equity on the Company’s Condensed Consolidated Balance Sheets.

  The following activity occurred during the three months ended December 31, 2013 and 2012:

			Weighted Ave	Weighted Average
	Shares		Stock Price	Vested Life		Fair Value
Non-vested at October 1, 2013	388,818	$	3.83	2.30 years	$	1,489,173
Granted
Less: vested	(21,359)	$	3.95		$	(84,368)
Less: canceled
Non-vested at December 31, 2013	367,459	$	3.83	2.07 years	$	1,407,368
			Weighted Ave	Weighted Average
	Shares		Stock Price	Vested Life		Fair Value
Non-vested at October 1, 2012	47,502	$	4.33	1.95 years	$	205,684
Granted
Less: vested	(7,805)	$	4.36		$	(34,030)
Less: canceled	(2,494)	$	4.32		$	(10,774)
Non-vested at December 31, 2012	37,203	$	4.33	1.76 years	$	161,089

  The Company’s net loss for the three months ended December 31, 2013 includes $0.05 million of compensation costs related to the Company’s grants of restricted stock to employees, $0.01 million for grants to directors and $0.03 million for grants to independent representatives under the Plans. In the prior period, the Company’s net income included $0.01 million in stock compensation to directors, and $0.03 million in stock compensation to independent representatives under the Equity Plans.

 The following activity occurred during the nine months ended December 31, 2013 and 2012:

			Weighted Ave	Weighted Average
	Shares		Stock Price	Vested Life		Fair Value $
Non-vested at April 1,2013	440,437	$	3.85	2.74 years	$	1,695,682
Granted
Less: vested	(72,159)	$	3.94		$	(284,306)
Less: canceled	(819)	$	4.46		$	(3,653)
Non-vested at December 31,2013	367,459	$	3.83	2.07 years	$	1,407,368

10

			Weighted Ave	Weighted Average
	Shares		Stock Price	Vested Life		Fair Value $
Non-vested at April 1, 2012	77,402	$	4.41	2.54 years	$	341,343
Granted	-		-			-
Less: vested	(32,929)	$	4.45		$	(146,534)
Less: canceled	(7,270)	$	4.69		$	(34,096)
Non-vested at December 31,2012	37,203	$	4.33	1.76 years	$	161,089

 The Company’s net loss for the nine months ended December 31, 2013 includes $0.15 million of compensation costs related to the Company’s grants of restricted stock to employees, $0.03 million for grants to directors and $0.10 million for grants to independent representatives under the Plans.  In the prior period, the Company’s net income included $0.03 million in stock compensation to directors, and $0.09 million in stock compensation to independent representatives under the Equity Plans.    

Stock Option Grants

  The following table summarizes information regarding the Company's employee and director fixed stock options as of December 31, 2013 and, 2012:

Employee
	2013		2012
Fixed Options		Weighted-Average		Weighted-Average
	Shares	Exercise Price	Shares	Exercise Price
Outstanding at beginning of period	150,000	$1.00	150,000	$1.00
Granted			-
Canceled			-
Exercised			-
Outstanding at end of period	150,000	$1.00	150,000	$1.00
Options exercisable at period end	150,000		150,000
Weighted-average fair value of
options granted during the period	-		-

    The intrinsic value of the stock options was $928,500 at December 31, 2013 and $390,000 at December 31, 2012.

  The following table summarizes further information about employee and Directors' fixed stock options outstanding as of December 31, 2013:  

	Options Outstanding				��        Options Exercisable
	Range of Exercise Prices	Number Outstanding	Weighted-Average RemainingContractual Life		Exercise Price	Number Exercisable		Weighted-Average Exercise Price
$	1.00	150,000		$	1.00	150,000	$	1.00

Note 8 - Segment Information

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   Operating segments are defined as components of a business about which separate financial information is available that is regularly evaluated by management in deciding how to allocate resources and in assessing performance. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.

   The Company's has two operating segments, the independent broker-dealer provided by ICC and AD, and asset management and investment advisory services provided by ICA.  ICCIA conducts the sale of insurance products and reports that activity at ICC.

  The segments are strategic business units that are managed separately. They operate under different regulatory systems, provide different services and require distinct marketing strategies and varied technological and operational support. They also have differing revenue models; ICC earns transactional commissions and various fees in connection with the brokerage of securities for its customers. ICCIA generates commissions from insurance products. ICA generates recurring revenue from fees earned on the value of assets under management.  Lastly, AD is eligible to receive commissions on principal transactions of mutual funds and/or variable annuities only. AD, acquired on January 24, 2013, is operational but had no principal transactions during the current period.

   The Company accounts for inter-segment services and transfers as if the services or transfers were to third parties, that is, at current market prices. In presenting segment data, all corporate overhead items are allocated to the segments, and inter-segment revenue, expense, receivables and payables are eliminated. Currently it is impractical to report segment information using geographical concentration.

  Management allocates all expenses separately to the parent and ICC, including allocation of costs associated with shared personnel, based upon time studies and a determination of which entities are the beneficiaries of the services rendered by the personnel. Within ICC, expenses are further allocated between the two segments, ICC and ICA, as follows: overhead expenses pro rata to revenue, direct full-time and time-shared employee costs based on the segments being served, and other personnel-related expenses pro rata to head count. There was no allocation of expenses for AD as there was only direct costs for regulatory and professional services in maintaining its shell broker-dealer status. The Company will be allocating expenses for AD for administrative, record-keeping, and compliance purposes pursuant to the expense sharing agreement between, ICH, ICC, and AD, filed with FINRA in February 2014.

    In addition, ICC reimburses ICH in the form of a management fee for ICH-incurred overhead expenses that are necessary for ICC to effectively conduct its operations. This overhead primarily is in the nature of salaries and professional and legal fees incurred to obtain such services as audit engagements, legal advice, and industry expertise.   The Company periodically reviews the effect that these agreements described above may have on the firm’s net capital.

   Segment reporting primarily based on revenue components is as follows for the three months ended: 

		December 31, 2013
		Commissions	Advisory	ICH	ICH Securities		Totals
Non-interest revenue	$	19,808,832	4,963,844	(16,841)		$	24,755,835
Revenue from transaction with
other operating segments:	$	249,984				$	249,984
Interest and dividend income, net	$	92,917		2	5	$	92,924
Depreciation and amortization	$	46,465	917			$	47,382
Income (loss) from operations	$	(1,340,390)	1,769,022	(831,958)	5	$	(403,321)
Period end total assets	$	17,249,914	699,280	3,234,919	10,369	$	21,194,482
Corporate items and eliminations	$			(1,757,601)		$	(1,757,601)
		December 31, 2012

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		Commissions		Advisory		ICH		ICH Securities		Totals
Non-interest revenue	$	16,471,237	$	4,212,060	$	(14,649)	$	-	$	20,668,648
Revenue from transaction with
other operating segments:	$	245,588		-				-	$	245,588
Interest and dividend income, net	$	97,706		-		3		6	$	97,715
Depreciation and amortization	$	80,872		1,167		-		-	$	82,039
Income (loss) from operations	$	(226,066)		526,885		(17,554)		6	$	283,271
Period end total assets	$	14,256,786		587,996		2,832,933		10,343	$	17,688,058
Corporate items and eliminations	$	-		-		(1,617,168)		-	$	(1,617,168)

+

 Segment reporting primarily based on revenue components is as follows for the nine months ended: 

		December 31, 2013
		Commissions		Advisory		ICH		ICH Securities		Totals
Non-interest revenue	$	55,977,212		14,048,485		(49,714)			$	69,975,983
Revenue from transaction with
other operating segments:	$	882,248							$	882,248
Interest and dividend income, net	$	233,554				4		16	$	233,574
Depreciation and amortization	$	167,294		917					$	168,211
Income (loss) from operations	$	(3,982,057)		2,948,312		(954,044)		16	$	(1,987,773)
Period end total assets	$	17,249,914		699,280		3,234,919		10,369	$	21,194,482
Corporate items and eliminations	$					(1,757,601)			$	(1,757,601)
		December 31, 2012
		Commissions		Advisory		ICH		ICH Securities		Totals
Non-interest revenue	$	49,270,354	$	12,421,432	$	(45,022)	$	-	$	61,646,764
Revenue from transaction with
other operating segments:	$	742,063		-		-		-	$	742,063
Interest and dividend income, net	$	244,866		-		3		19	$	244,888
Depreciation and amortization	$	244,889		1,167		-		-	$	246,056
Income (loss) from operations	$	(233,098)		1,704,281		(309,269)		19	$	1,161,933
Period end total assets	$	14,256,786		587,996		2,832,933		10,348	$	17,688,063
Corporate items and eliminations	$	-		-		(1,617,168)		-	$	(1,617,168)

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ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

  Management's Discussion and Analysis is a review, a discussion, and an analysis of our consolidated financial condition as of December 31, 2013 and March 31, 2013, the consolidated results of operations for the three months and nine months period ended December 31, 2013 and 2012 and, as appropriate, factors that may affect future financial performance. The discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.  Unless context requires otherwise, as used in this Management’s Discussion and Analysis (i) the “current period” means the three months and nine months period ended December 31, 2013, (ii) the “prior period” means the three months and nine months period ended December 31, 2012, (iii) an increase or decrease compares the current period to the prior period, and (iv) non-comparative amounts refer to the current period.

FORWARD-LOOKING STATEMENTS

  This report contains certain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts and may include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements. Readers are directed to discussions of risks and uncertainties that may be found in this report and other documents filed by the Company with the SEC. We specifically disclaim any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

Overview

  We are a financial services holding company that, through our subsidiaries, provides brokerage, investment advisory, insurance and related services. We operate in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition and investor preferences. Our revenues and net earnings may be either enhanced or diminished from period to period by these and other external factors.

OUR BUSINESS

 We operate primarily through our subsidiary, ICC, as a broker-dealer and, doing business as ICA, as a registered investment advisor, with a national network of independent financial representatives. ICCIA facilitates the sale of insurance products.AD, also a broker-dealer subsidiary, is limited to principal transactions in mutual funds and/or variable annuities only.AD had no principal transactions during the current period. Our principal business location, executive offices, and administration offices are located at Six Kimball Lane, Suite 150, Lynnfield, MA 01940 and it is referred to as our Home office.

  On October 2, 2013, RCS Capital Corporation (NYSE: RCAP) (“RCAP”) and Investors Capital Holdings, LTD. (“ICH”) announced its entry on October 1, 2013 into a letter of intent (the “Letter of Intent”) under which RCAP expects to acquire ICH for aggregate consideration of approximately $52.2 million, or for a share purchase price of $7.25 for each share of ICH common stock outstanding, on a fully diluted basis.  On October 27, 2013, the Company executed a definitive merger agreement (the “Merger Agreement”) with RCAP, pursuant to which RCAP will acquire ICH and its subsidiaries, including Investors Capital Corporation, for a total consideration of approximately $52.5 million comprised of cash and RCAP stock.  The definitive merger agreement between RCAP and ICH will require that ICH pay RCAP a $3 million termination fee, in certain specific circumstances, should the merger not be consummated and ICH consummates a business combination transaction with another party other than RCAP.  In addition, ICH has agreed to a 45-day exclusivity period subject to reimbursement of certain expenses of RCAP.  The closing of the transaction is subject to customary

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closing conditions, including FINRA approval of the proposed change in control for ICC, approval of the transaction by ICH stockholders and registration of the Class A common stock of RCAP to be issued as merger consideration. The transaction is expected to close in the first half of 2014.

Broker-Dealer Services

  We provide broker-dealer services in support of trading and investment by our representatives’ customers in securities, including corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, limited partnerships and other alternative investments, variable annuities and variable life insurance.  We also provide related services such as market information, Internet brokerage, portfolio tracking facilities and records management.

Investment Advisory Services

  We provide investment advisory services, including asset allocation and portfolio rebalancing, with our various programs.  These services, for the most part, are conducted through our online brokerage platform. Other allocation services are performed directly by fund companies. ICA offers several advisory wrap programs that provide managed advisory accounts for our advisors’ clients, as follows:

A-MAP Suite of Advisory Wrap Programs- Rep-As-Portfolio Manager Program

ICA’s suite of A-MAP Program, including A-MAP, A-MAP AT, & A-MAP FT, enables the advisor to assist a client in creating a personalized investment portfolio. The advisor acts as the portfolio manager, with full investment discretion. A-MAP and A-MAP AT are programs where a platform fee is charged by ICA for its services as a registered investment advisor (“RIA”). A-MAP- FT is a program where ICA charges a flat fee in lieu of a platform fee for its services as an RIA. 

Fund Select Advisory Wrap Program- Rep-As-Portfolio Manager Program

Fund Select is an advisory program where the advisor creates and manages a customized portfolio constructed primarily of mutual funds.

F-MAP Advisory Wrap Program – Firm managed ETF and Mutual Fund Wrap Program

F-MAP program utilizes a model portfolio established ICA which creates, manages, rebalances, reallocates, and reports on portfolios that consist of but are not limited to: no-load or load-waived mutual funds, ETF's, and/or variable annuities.

S-MAP Advisory Wrap Program – Separate Account Wrap Program

S-MAP is an advisory program where ICA has entered into agreements with Sub-Advisors who are selected by the representatives to provide advisory services to their clients. The S-MAP portfolios are not managed by ICA; rather they are managed by the Sub-Advisor on a discretionary basis.

Recruitment and Support of Representatives

  A key component of our business strategy is to recruit well-established, productive representatives who provide superior service to their clients.  Additionally, we assist our representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients.  We focus on providing substantial added value to our representatives’ practices, enabling them to be more productive, particularly in high margin lines such as advisory services and brokerage. 

  Support provided to assist representatives in pursuing consistent, profitable sales growth takes many forms, including automated trading systems, targeted financial assistance and a network of communication links with investment product companies.  Regional and national conventions provide forums for interaction to improve product knowledge, sales and client satisfaction.  In addition, we provide our representatives with programs and tools to grow their businesses both through new client acquisition and advancement of existing client relationships.  These programs enhance our ability to attract and retain productive representatives.

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CRITICAL ACCOUNTING POLICIES

In General

  Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Company believes that of its significant accounting policies and litigation and regulatory matters to the Company’s condensed consolidated financial statements contained herein), those dealing with revenue recognition, allowance for doubtful accounts receivable, taxes and accrual of legal expenses involve a particularly high degree of judgment and complexity. Our accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the condensed consolidated financial statements. By their nature, estimates involve judgment based upon available information. Actual results or amounts can and do differ from estimates and the differences can have a material effect on the condensed consolidated financial statements. Therefore, understanding these policies is important to understanding the reported results of operations and the financial position of the Company.

Off Balance Sheet Risk

   We execute securities transactions on behalf of our customers on a fully-disclosed basis. If either the customer or a counter-party fails to perform, we, by agreement with our clearing broker, may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing company requires that we reduce positions when necessary.   We also complete credit evaluations where there is thought to be credit risk.

Reserves

   We record reserves related to legal proceedings in “accrued expenses” in the condensed consolidated balance sheet. The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client’s account; the basis and validity of the claim; the possibility of wrongdoing on the part of an employee or representative of the Company; previous results in similar cases; and legal precedents. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the condensed consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions made by management in determining the estimates of reserves may be incorrect and the actual costs upon settlement of a legal proceeding may be greater or less than the reserved amount.  See “Note 6, Litigation and Regulatory Matters”.

KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT

  Management periodically reviews and analyzes our financial performance across a number of measurable factors considered to be particularly useful in understanding and managing our business.  Key metrics in this process include productivity and practice diversification of representatives, top line commission and advisory services revenues, operating expenses, legal defense and settlement costs, taxes, earnings per share and adjusted EBITDA.

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PRODUCTIVITY OF REPRESENTATIVES

  Management believes that improving the overall quality of our independent representatives is a key to achieving growth in revenues and earnings.  We believe that upgrading the business practices of our representatives not only grows revenue, but assists in limiting the cost of overhead functions and representative noncompliance.  We strive to continually advance the overall quality of our representatives by:

· attracting productive and profitable representatives, and

· supporting representatives further develop their skills and practices, and

· terminating low quality representatives.

  A key metric that we use to assess the average quality of our producing (non-staff) representatives is per capita rep-generated revenue based on a rolling 12-month period.  Data for the 12-months ended December 31, 2013 and 2012 are presented below:

		Twelve Months Ended				Change
		December 31, 2013		December 31, 2012		Dollar	Percentage
Rep-generated revenue:
Commission	$	71,940,220	$	63,843,194	$	8,097,026	12.7%
Advisory		18,053,107		16,146,716		1,906,391	11.8%
Other fee income		1,527,219		1,452,893		74,326	5.1%
	$	91,520,546	$	81,442,803	$	10,077,743	12.4%
Number of representatives		441		454		(13)	-2.9%
Average revenue per representative	$	207,530	$	179,389	$	28,140	15.7%

  The continued growth in the per capita rep-generated revenue is a direct result of our dedicated strategy of attracting and recruiting new advisors, the favorable market conditions and our enhanced practice management program. 

17

COMPARISON OF THE THREE MONTHS ENDED DECEMBER  31, 2013 AND 2012

Results of Operations

	Quarter Ended December 31,		Change
	2013	2012	Dollar	Percentage
Revenue:
Commission	$           18,583,079	$         15,510,183	$      3,072,896	19.8%
Advisory fees	4,917,295	4,162,082	755,213	18.1%
Other fee income	904,314	935,375	(31,061)	-3.3%
Other income	444,071	158,722	285,349	179.8%
Total revenue	24,848,759	20,766,362	4,082,397	19.7%
Expenses:
Commissions and advisory fees expense	19,591,094	16,125,987	3,465,107	21.5%
Compensation and benefits	1,664,710	1,484,416	180,294	12.1%
Regulatory, legal and professional	2,371,820	1,378,066	993,754	72.1%
Brokerage, clearing and exchange fees	425,632	385,100	40,532	10.5%
Technology and communications	265,261	337,495	(72,234)	-21.4%
Advertising, marketing and promotion	576,439	188,808	387,631	205.3%
Occupancy and equipment	116,092	170,539	(54,447)	-31.9%
Other administrative	238,046	409,092	(171,046)	-41.8%
Interest	2,986	3,588	(602)	-16.8%
Total expenses	25,252,080	20,483,091	4,768,989	23.3%
Operating (loss) income	(403,321)	283,271	(686,592)	-242.4%
(Benefit) provision for income taxes	(117,627)	149,555	(267,182)	-178.7%
Net (loss) income	$               (285,694)	$              133,716	(419,410)	-313.7%
Adjusted EBITDA:	$                509,235	$              406,491	$         102,744	25.3%
Adjustments to conform adjusted EBITDA to GAAP net (loss) income :
Benefit (provision) for  income taxes	117,627	(149,555)	267,182	-178.7%
Interest expense	(2,986)	(3,588)	602	-16.8%
Depreciation and amortization	(47,382)	(82,039)	34,657	-42.2%
Non-recurring professional fees	(758,342)	-	(758,342)	-100.0%
Non-cash compensation	(93,096)	(30,353)	(62,743)	206.7%
Forgivable loans charged to commission expense	(10,750)	(7,240)	(3,510)	48.5%
Net (loss) income	$               (285,694)	$              133,716	$        (419,410)	-313.7%

ADJUSTED EBITDA

    Earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted by eliminating other non-cash expense, gains or losses on sales of assets, and various non-recurring items (“adjusted EBITDA”), is a key metric we use in evaluating our financial performance.  Adjusted EBITDA eliminates items that we believe are not part of our core operations, are non-recurring items of revenue or expense, or do not involve a cash outlay, such as stock-related compensation. We consider adjusted EBITDA important in monitoring and evaluating our financial performance on a consistent basis across multiple time periods. We also use adjusted

18

EBITDA as an important measure, among others, to analyze and evaluate financial and strategic planning decisions.

  Adjusted EBITDA is considered a non-US GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act.  Adjusted EBITDA should be considered in conjunction with, rather than as a substitute for, important US GAAP financial measures including pre-tax income, net income and cash flows from operating activities.  Items excluded from adjusted EBITDA are significant and necessary components to the operations of our business; therefore, adjusted EBITDA should only be used as a supplemental measure of our operating performance.

  Third  quarter  adjusted EBITDA, was $0.5 million in income, an increase of 25.3% from a $0.4 million income Adjusted EBITDA in the comparative quarter. This increase is primarily due to $0.8 million in non-recurring professional fees related to the Merger Agreement in the current period.

REVENUE

    Revenue increased by $4.1 million, or by 19.7%, primarily due to an increase in top line revenue from commissions and advisory as the Company is focused on growth, both organically through targeted business development, advisor recruitment and improved market conditions.

   Commissions revenue grew 19.8%, or $3.1 million primarily as a result of additional direct business, reflecting an increase in investments from our representative’s clients.  Advisory services revenue increased 18.1% as the total assets under administration grew, benefiting from an improved stock market as compared to last year at this time and additional assets invested.

   Our advisor managed program continues to contribute the majority of advisory fee revenue.  Revenue decreased in the A-MAP program and revenue remained relatively flat for the F-MAP programs. These changes were offset by an increase in revenue and assets under management in our A-MAP FT program, another advisor managed program which includes a flat fee structure. These changes resulted both from new assets as well as from the continued shift of assets by our advisors into fee base programs that meet their clients’ needs.    

  Other fee income, which consists primarily of licensing fees, annual administrative fees, and technology fees, was consistent with the same three month period last year.

  Other revenue, which consists of net marketing revenues from strategic partners and interest income,  increased primarily from marketing allowances for product sales offset by a decrease in marketing allowances for sponsorship of events. 

EXPENSES

  Expenses increased by $4.8 million, or 23.3%, principally as a result of increases in commissions and advisory fees compensated to our independent representatives on increased sales volume, advertising and marketing costs for practice management and recruiting, as well as increase in professional fees and legal and settlement costs. There were also increases in compensation and benefits. Offsetting these increases was a decrease in occupancy and equipment and technology and communications.  

  Commissions and advisory fees paid to our representatives represent a percentage of revenue of our broker-dealer; accordingly, the ratio of commissions and advisor fees payout is directly correlated to increased top line revenue in the current period as compared to the prior period. Accordingly, when the independent registered representatives increase their business, both our revenues and expenses increase as our representatives earn additional compensation based on the revenue produced. For the three months comparative period December 31, 2013 versus 2012, the payout ratio increased due to enhanced compensation to recently recruited represtatives .

 Regulatory, legal and professional expenses increased by 72.1% as the increase was driven principally by the $0.8 million in legal and professional costs related to the Merger Agreement between RCAP and ICH. Legal fees and settlement costs related to securities litigation were consistent with the prior period; however in the current period our reserves for estimated settlement costs have increased. While the Company had fewer cases

19

that settled in the current  period versus the prior period, a higher deductible amount per case applies.   These settlements continue to stem largely on claims made from the sales of alternative investment products prior to the recession, coupled with an increase in the Company’s deductible specifically for the alternative investment products.

 We will continue to incur legal fees, settlement costs and E&O premiums as we operate in a litigious, regulated industry. In addition, from time to time regulatory agencies and self-regulatory organizations institute investigations into industry or firm practices, that also may result in the imposition of financial or other sanctions. We deliberately apply resources to mitigate litigation and regulatory exposure by promoting operational procedures and obtaining comprehensive insurance coverage.

  The increase in compensation and benefits is attributable to the Company’s salaries returning to base pay levels in the current period as compared to salary reductions in the prior period, offset by increased non-cash compensation expense of $0.1 million, or 206.7% for the vesting of non-restricted stock grants made to ICC employees and representatives, and independent ICH Board of Directors awarded February, 2013.

   Advertising, marketing and promotion costs doubled as the result of advertisements in trade publications to promote our brand awareness and our targeted recruiting campaigns.  General marketing and advertising increased to promote ICC’s 2013 Broker Dealer of the Year award, as well as outside recruiting costs.

   Costs associated with occupancy and equipment decreased primarily as a result of reduced depreciation and amortization incurred in the current period as compared to  the write off of leasehold improvements in our Home office relocation in the prior period.

   Other administrative costs decreased by 41.8%, principally due to one-time home office relocation costs incurred in the prior period.    

    We had an income tax benefit of $0.1 million for the three months ended December 31, 2013 as compared to $0.2 million income tax provision for the prior period. The income tax rates for the 2013 and 2012 periods do not bear a customary relationship to effective tax rates primarily as a result of the increase in the permanent differences created by non-deductible fees related to the merger for each of the periods presented, where applicable. 

FINANCIAL RESULTS SUMMARY

    The Company’s operating loss was largely attributed to the Merger Agreement between RCAP and ICH as the significant increase in revenues did not offset the $0.8 million in merger related professional costs; however, we achieved our largest quarterly revenue in our Company’s history.  The Company, through its growth initiatives, its recruiting efforts, along with improved market conditions, was able to achieve notable revenue growth and will continue its efforts to sustain this growth. 

    The Company’s net loss was $0.3 million, or $0.04 per basic net loss per share, compared to net income of $0.1 million, or $0.02 basic and diluted net income per share, for the prior period.

20

COMPARISON OF THE NINE MONTHS ENDED DECEMBER  31, 2013 AND 2012

	Nine Months Ended December 31,		Change
	2013	2012	Dollar	Percentage
Revenue:
Commission	$          53,740,490	$            47,378,076	$      6,362,414	13.4%
Advisory fees	13,895,844	12,252,067	1,643,777	13.4%
Other fee income	1,437,442	1,611,705	(174,263)	-10.8%
Other income	1,135,781	649,804	485,977	74.8%
Total revenue	70,209,557	61,891,652	8,317,905	13.4%
Expenses:
Commissions and advisory fees expense	56,202,416	48,862,794	7,339,622	15.0%
Compensation and benefits	5,016,183	4,524,385	491,798	10.9%
Regulatory, legal and professional	6,241,110	3,231,325	3,009,785	93.1%
Brokerage, clearing and exchange fees	1,174,598	1,087,898	86,700	8.0%
Technology and communications	982,034	961,713	20,321	2.1%
Advertising, marketing and promotion	1,364,345	661,505	702,840	106.2%
Occupancy and equipment	337,620	534,839	(197,219)	-36.9%
Other administrative	733,556	847,870	(114,314)	-13.5%
Interest	145,468	17,390	128,078	736.5%
Total expenses	72,197,330	60,729,719	11,467,611	18.9%
Operating (loss) income	(1,987,773)	1,161,933	(3,149,706)	-271.1%
(Benefit) provision for income taxes	(560,977)	486,316	(1,047,293)	-215.4%
Net (loss) income	$          (1,426,796)	$                 675,617	(2,102,413)	-311.2%
Adjusted EBITDA:	$             (307,730)	$              1,728,234	$    (2,035,964)	-117.8%
Adjustments to conform adjusted EBITDA to GAAP net (loss) income :
Benefit (provision) for  income taxes	560,977	(486,316)	1,047,293	-215.4%
Interest expense	(145,468)	(17,390)	(128,078)	736.5%
Depreciation and amortization	(168,211)	(246,056)	77,845	-31.6%
Non-recurring professional fees	(846,423)	-	(846,423)	-100.0%
Non-cash compensation	(290,980)	(121,256)	(169,724)	140.0%
Forgivable loans charged to commission expense	(228,961)	(181,599)	(47,362)	26.1%
Net (loss) income	$          (1,426,796)	$                 675,617	$    (2,102,413)	-311.2%

ADJUSTED EBITDA

  See information, above, regarding the relevance, calculation and use of adjusted EBITDA set forth in the comparison of the three month periods ended December 31, 2013 and 2012.

REVENUE 

 Revenues for the nine months ended December 31, 2013 grew by 13.4 % or by $8.3 million primarily from top line revenue growth in commissions and advisory fees.  Facilitating this growth are continued efforts to attract new independent representatives, improved market conditions, and dedicated practice management initiatives.

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   Commissions grew 13.4 %, or $6.4 million, while advisory fees grew by $1.6 million, or 13.4%, which comprise approximately 20% of total revenues.  Also, revenues from strategic partners, included in other income, grew by more than 131.1% as a direct result of specific product sales offset by a 235.4% decrease in sponsorship for marketing events.  The Company is focused on expansion and increasing its market share through marketing efforts to attract independent representatives to the firm along with retaining representatives by its 5-star service model and practice management and development initiatives.

 Expenses increased by $11.5 million or by 18.9 %.   The increased expense is primarily from commissions and advisory fees paid to our registered representatives on increase in sales volume, coupled with an increased payout ratio. There were also increases in advertising and marketing costs for practice management, recruiting and promotion of our brand.

 Legal defense and settlement costs almost doubled, totaling $6.2 million and continue to negatively impact our operating results. The significant increases in legal and professional pertain to a case we settled for $0.7 million from sales in alternative investments in addition to the $0.8 million in merger related costs. The remaining increase pertains to legal settlements primarily related to sales of alternative investments. 

  Compensation and benefits increased by 10.9 %, or $0.5 million due to the Company’s salaries returning to base pay levels in the current fiscal year as compared to salary reductions in the prior period.  Also, the Company had new strategic hires in the marketing and compliance departments, as well as non-cash compensation for restricted stock grants awarded in February 2013 resulting in additional compensation of $0.2 million.

 Interest expense increased by $0.13 million as a result of quarterly interest charges for ICC’s subordinated loan which was funded in March, 2013. 

   The other expense categories had minor fluxes when comparing nine months ended December 31, 2013 versus nine months ended December 31, 2012 or the changes were consistent with that of the three months  ended analyses. 

FINANCIAL RESULTS SUMMARY

   While revenues are increasing to historic levels, it was outpaced by both actual settlement costs and reserves for settling of pending litigation. Legal settlements along with the merger costs attributed to the operating loss in the current period.  Legal settlements stemming from products sold prior to the recent recessions have significantly impacted our results of operations for several reporting periods.  Management’s strategy and ultimately success for resolving these cases, along with its sustained organic and recruiting growth initiatives, will be necessary to improve the Company’s operating and net income results going forward.

Liquidity and Capital Resources

  Our primary source of liquidity remains cash flows from operations, primarily from our broker-dealer and investment advisory business. Decisions on the allocation of capital include projected profitability and available cash flows, risk management and regulatory capital requirements. A key to this approach is ensuring that industry-standard controls are effective to support our operations and those of our representatives while ensuring sufficient liquidity.

  As of December 31, 2013, cash and cash equivalents totaled $6.4 million as compared to $6.6 million as of March 31, 2013. Working capital as of December 31, 2013 was $5.9 million as compared to $7.5 million as of March 31, 2013. The ratio of current assets to current liabilities was 1.7 to 1 as of December 31, 2013, as compared to 1.9 to 1 as of March 31, 2013.

  Operations provided $1.2 million in cash for the current period, as compared to $1.6 million of operating cash provided in the prior period. When comparing the current period cash flow to the prior period cash flow   from operating activities the significant changes were from current period’s net loss versus the prior period’s net income, from account balances held at our clearing firm, from the change in the deferred tax asset, and

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significant changes in accounts payable, accrued legal expenses, and accounts receivable and other receivables related to settlements, including a $1.0 million in a receivable for a related insurance recovery. 

  For our current level of operating activities, we believe that our operations and current capital resources will be sufficient to fund our working capital needs for the next twelve months. These needs are to grow top line revenue organically through practice management initiatives and by continuing to  recruit advisors to the firm. 

  Net cash flows used in investing activities in the current period were consistent with net cash flows used in the prior period. Net cash flows in investing activities represent purchases in equipment, contributions on an executive life insurance policy, and proceeds from other investments.

  Cash flows for financing activities in the current period decreased slightly when compared to the prior period as we paid $1.4 million and $1.6 million in loan payments to finance E&O insurance premiums, respectively, for the periods ended December 31, 2013 and 2012. The Company has a line of credit (“line”) with specific financial covenants with its financial institution. Although there were no borrowings, the Company did achieve the required operating results to meet those covenants.

REGULATORY NET CAPITAL

  Cash disbursements can have a material impact on our registered broker dealer’s regulatory net capital. ICC is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1) which requires our broker-dealer subsidiary to maintain minimum net capital.  As of March 31, 2011 and going forward, ICC computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances. Repayment or prepayment of subordinated debt, currently $2,000,000, and withdrawal of equity from retiring partners or officers is subject to net capital not falling below 5% of aggregate debits or 120% of minimum net capital requirement.

   As of December 31, 2013, ICC had net capital of $3.49 million (i.e., an excess of $3.24 million) as compared to net capital of approximately $4.43 million (i.e., an excess of $4.18 million) as of March 31, 2013. 

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Commitments and Contingencies

Operating leases.    On October 19, 2012 the Company entered into a lease for 14,045 square feet and began occupying that space on December 1, 2012 in Lynnfield, MA.  This lease, which originally was for a term of sixteen months with expiration on March 31, 2014, has been amended to a three year extension,  expiring on March 31, 2017. There was no change as to the rentable area of 14,045 square feet being leased; however, the lease calls for a “right of first refusal for additional space’ within that three year period contiguous with our space.

 The total minimum rental due in future periods under these existing agreements as of December 31, 2013 are as follows:

2014	$              100,745
2015	345,027
2016	356,681
2017	331,995
2018	24,000
	$           1,158,448

Total lease expense for office space approximated $0.06 and $0.06 million for the three months ended and $0.15 and $0.18 million for the nine months ended December 31, 2013 and 2012, respectively.  

 Subsequent to March 31, 2013, the Company was released from its commercial lease agreement for its prior home office location at 230 Broadway, Lynnfield, MA.  The Company is actively pursuing damages in this matter.

Contingent transition loans.  The Company offers loans and transition assistance to representatives mainly for recruiting or retention purposes. These commitments are contingent upon certain events occurring, including, but not limited to, the representatives joining the Company and meeting certain production requirements.  As of December  31, 2013 and March 31,2013, there were $0.25 million and $0.0 million outstanding commitments, respectively.

ITEM 4.  CONTROLS AND PROCEDURES

Report of Management on Internal Control Over Financial Reporting

  Disclosure controls are procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as the Company's are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

  As of December 31, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act.  Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period, and to ensure that information required to be disclosed in such reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions required regarding required disclosure.

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  There have been no changes in our internal controls over financial reporting that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company operates in a highly litigious and regulated business, and the Company often is made a defendant in arbitrations and other legal proceedings that are incidental to our securities business.  The Company typically vigorously contests the allegations of the complaints and believes that there are meritorious defenses in these matters.  From time to time the Company also is the subject of regulatory investigations and proceedings.  Counsel often is unable to confidently predict the likelihood of an outcome, whether favorable or unfavorable, in such matters because of routine and inherent uncertainties.

 The Company maintains Errors and Omissions (“E&O”) insurance to protect itself from potential damages and/or legal costs associated with certain litigation and arbitration proceedings and, as a result, in the majority of cases, the Company’s exposure is limited to $100,000 or $1,000,000 aggregate  (effective January 2013 for only certain alternative investment products related to defense costs and indemnities) in any one case, subject to policy limitations and exclusions. Thereafter the $1,000,000 aggregate threshold, the Company’s exposure on these same investments is limited to $150,000 and a 10 percent coinsurance. For all other investment products, the Company’s exposure is $100,000 per claim.

 The Company also maintains a fidelity bond to protect itself from potential damages and/or legal costs related to fraudulent activities pursuant to which the Company’s exposure is usually limited to $350,000, subject to policy limitations and exclusions.

ITEMS 2 – 5. 

 None.

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ITEM 6.  EXHIBITS

Exhibit

Exhibit
Number	Description	Location
2.1	Agreement and Plan of Merger by and among RCS Capital Corporation and ICH	(19)(Exh 2.1)
3.1	Certificate of Incorporation	(2)(Exh. 3.1)
3.2	By-Laws	(2)(Exh. 3.2)
4.1	Form of Stock Certificate	(2)(Exh. 4.1)
10.1	Employment Agreement with Theodore E. Charles (3)	(9)(Exh. 10.2)
10.1	Voting agreement by and among  Timothy B. Murphy and RCS Capital	(19)(Exh 10.1)
	Corporation, Zoe Acquisition, LLC and Parent ("Merger Sub")
10.2	Employment Agreement with Timothy B. Murphy (3)	(9)(Exh. 10.1)
10.3	The 1994 Stock Option Plan (3)	(4)(Exh. 10.3)
10.4	The 1996 Stock Incentive Plan (3)	(2)(Exh. 10.3)
10.5	The 2001 Equity Incentive Plan (3)	(5)(Exh. 4.4)
10.6	The 2005 Equity Incentive Plan (3)	(6)(Exh. 4.5)
10.7	Form of June 2006 Stock Grant Agreement (3)	(7)(Exh. 10.8)
10.8	Form of February 2009 Stock Grant Agreement (3)	(7)(Exh. 10.9)
10.9	Consulting Agreement with Theodore E. Charles (3)	(9)(Exh. 10.3)
10.10	Registration Agreement with Theodore E. Charles et. al	(10)(Exh. 10.1)
10.11	Agreement between the Company and Theodore E. Charles	(11)(Exh. 10.1)
10.12	Amended and Restated Equity and Cash Bonus Incentive Plan  with	(13)(Exh. 5.02)
	Timothy B. Murphy and Kathleen L. Donnelly
10.13	Amended and Restated Equity and Cash Bonus Incentive Plan  with	(14)(Exh. 5.02)
	Timothy B. Murphy and Kathleen L. Donnelly (voluntarily declined)
10.14	Amended and Restated Equity and Cash Bonus Incentive Plan	(16)(Exh. 5.02)
10.15	Subordinated Loan Agreement and Rider A, dated March 8, 2013, between	(17)(Exh. 10.15)
	the Company and Pershing, LLC
23.1	Consent of MARCUM LLP	(17)
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)	(1)
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)	(1)
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350	(1)
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350	(1)
99.1	Earnings Press Release and Management Presentation	(15)(Exh.99.1)
99.1	RCS Capital Corporation Signs Letter of Intent to Acquire Investors	(18)(Exh. 99.1)
	Capital Holdings, Ltd.
99.1	Investors Capital Holdings, Ltd. and RCS Capital Corporation Sign Definitive	(19)(Exh. 99.1)
	Merger Agreement
99.2	RCS Capital Corporation Announces Agreement to Acquire Investors Capital	(19)(Exh. 99.2)
	Holdings, Ltd.
101.INS	XBRL Taxonomy Instance Document	(1)
101.SCH	XBRL Taxonomy Extension Schema Document	(1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	(1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase	(1)
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	(1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	(1)

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(1) Filed herewith.

(2) Incorporated by reference to the indicated exhibit to the Registrant's Quarterly Report on Form 10-Q filed November 14, 2007.

(3) A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.

(4)  Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed June 30,2005.

(5) Incorporated by reference to the indicated exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-117807) filed July 30, 2004.

(6) Incorporated by reference to the indicated exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-134885) filed June 9, 2006.

(7)  Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed June 30,2008.

(8)  Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed September 26, 2007.

(9)  Incorporated by reference to the indicated exhibit to the Registrant’s Report on Form 8-K filed April 21, 2010.

(10) Incorporation by reference to the indicated exhibit of the Registrant’s Current Report on Form 8-K filed March 7, 2011.

(11) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K file July 5, 2011.

(12) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed September 9, 2011.

(13) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed November 1, 2011.

(14) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed November 29, 2011.

(15) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed February 8, 2013.

(16) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed February 21, 2013.

(17) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 10-K filed June 20, 2013.

(18) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed October 2, 2013.

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(19) Incorporated by reference to the indicated exhibit to the Registrant’s Current Report on Form 8-K filed October 28, 2013.

Any exhibit not included with this Form 10-Q when furnished to any shareholder of record will be furnished to such shareholder upon written request and payment of up to $0.25 per page plus postage. Such requests should be directed to Rebecca Hice, Assistant Corporate Secretary, Investors Capital Holdings, Ltd., Six Kimball Lane, Suite 150, Lynnfield, MA 01940.

SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INVESTORS CAPITAL HOLDINGS, LTD.

By:	/s/ Kathleen L. Donnelly
	Chief Accounting Officer
	(Duly authorized officer)
	Date: February 14, 2014

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