<Page>
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, 2002
COMMISSION FILE NUMBER: 1-16349
INVESTORS CAPITAL HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3284631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 BROADWAY
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 [ ]
Number of shares outstanding of our only class of common stock as of February
14, 2003:
5,717,380
<Page>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2002 2002
------------ ----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ................................ $ 7,877,053 $ 6,337,445
Investments in available-for-sale securities ............. 42,810 56,291
Marketable securities, at market value ................... 8,542 2,364
Securities not readily marketable, at estimated fair value 47,500 10,000
Investment in unconsolidated affiliate ................... 66,061 89,697
Deposit with clearing organization, restricted ........... 175,000 175,000
Accounts receivable ...................................... 2,231,737 2,101,200
Loans receivable from registered representatives ......... 110,839 199,996
Receivables from officers ................................ 112,592 136,078
Prepaid expenses ......................................... 98,534 193,682
Deferred income tax asset, net ........................... 57,101 31,930
Premises and equipment, net .............................. 512,509 531,296
Other assets ............................................. 319,897 249,553
----------- ----------
TOTAL ASSETS ........................................ $11,660,175 $10,114,532
=========== ===========
</Table>
See Notes to Condensed Consolidated Financial Statements.
1
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2002 2002
------------- ---------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable ................................................. $ 756,000 $ 79,016
Commissions payable ........................................... 1,380,558 1,136,676
Accounts payable .............................................. 514,173 379,320
Accrued expenses .............................................. 366,545 303,816
Securities sold, not yet purchased, at market value ........... 36,067 9,530
Income taxes payable .......................................... 167,629 149,108
------------ ------------
TOTAL LIABILITIES ........................................ 3,220,972 2,057,466
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 10,000,000 shares;
issued 5,721,265 shares at December 31, 2002 and March 31,
2002; outstanding 5,717,380 shares at December 31, 2002 and
March 31, 2002 ............................................. 57,213 57,213
Additional paid-in capital .................................... 8,160,858 8,135,347
Retained earnings (deficit) ................................... 252,639 (61,634)
Treasury stock, at cost (3,885 shares) ........................ (30,135) (30,135)
Accumulated other comprehensive loss .......................... (1,372) (43,725)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................. 8,439,203 8,057,066
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................................. $ 11,660,175 $ 10,114,532
============ ============
</Table>
See Notes to Condensed Consolidated Financial Statements.
2
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
2002 2001
----------- -----------
COMMISSION AND ADVISORY FEE INCOME ............................. $ 8,124,745 $ 7,361,650
COST OF COMMISSION AND ADVISORY FEES ........................... 6,631,808 5,822,097
----------- -----------
GROSS PROFIT ................................................... 1,492,937 1,539,553
----------- -----------
SELLING AND ADMINISTRATIVE EXPENSES (INCOME):
Administrative .............................................. 1,437,930 1,144,931
Selling ..................................................... (70,880) (129,558)
----------- -----------
TOTAL SELLING AND ADMINISTRATIVE EXPENSES ............... 1,367,050 1,015,373
----------- -----------
OPERATING INCOME ............................................... 125,887 524,180
----------- -----------
OTHER INCOME (EXPENSE):
Interest income ............................................. 88,456 62,610
Interest expense ............................................ (6,519) (1,719)
Other income ................................................ 8,592 13,496
----------- -----------
NET OTHER INCOME ....................................... 90,529 74,387
----------- -----------
INCOME BEFORE TAXES ............................................ 216,416 598,567
PROVISION FOR INCOME TAXES ..................................... 95,909 253,892
----------- -----------
NET INCOME ..................................................... $ 120,507 $ 344,675
=========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Net income .................................................. $ .02 $ .06
SHARE DATA:
WEIGHTED AVERAGE SHARES USED IN BASIC EARNINGS
PER COMMON SHARE CALCULATIONS ............................... 5,717,380 5,704,426
PLUS: INCREMENTAL SHARES FROM ASSUMED CONVERSION OF STOCK OPTIONS 82,036 96,996
----------- -----------
WEIGHTED AVERAGE SHARES USED IN DILUTED EARNINGS
PER COMMON SHARE CALCULATIONS ............................... 5,799,416 5,801,422
=========== ===========
</Table>
See Notes to Condensed Consolidated Financial Statements.
3
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2001
----------- -----------
COMMISSION AND ADVISORY FEE INCOME ............................. $25,622,137 $20,870,056
COST OF COMMISSION AND ADVISORY FEES ........................... 21,006,125 16,814,353
----------- -----------
GROSS PROFIT ................................................... 4,616,012 4,055,703
----------- -----------
SELLING AND ADMINISTRATIVE EXPENSES:
Administrative .............................................. 3,882,996 3,876,360
Selling ..................................................... 290,801 393,568
----------- -----------
TOTAL SELLING AND ADMINISTRATIVE EXPENSES ............... 4,173,797 4,269,928
----------- -----------
OPERATING INCOME (LOSS) ........................................ 442,215 (214,225)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income ............................................. 235,055 199,330
Interest expense ............................................ (10,913) (25,648)
Other (expense) income ...................................... (60,784) 33,758
----------- -----------
NET OTHER INCOME ....................................... 163,358 207,440
----------- -----------
INCOME (LOSS) BEFORE TAXES ..................................... 605,573 (6,785)
PROVISION FOR INCOME TAXES ..................................... 291,300 46,392
----------- -----------
NET INCOME (LOSS) .............................................. $ 314,273 $ (53,177)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ........................................... $ .05 $ (.01)
SHARE DATA:
WEIGHTED AVERAGE SHARES USED IN BASIC EARNINGS
PER COMMON SHARE CALCULATIONS ............................... 5,717,380 5,705,712
PLUS: INCREMENTAL SHARES FROM ASSUMED CONVERSION OF STOCK OPTIONS 74,623 --
----------- -----------
WEIGHTED AVERAGE SHARES USED IN DILUTED EARNINGS
PER COMMON SHARE CALCULATIONS ............................... 5,792,003 5,705,712
=========== ===========
</Table>
See Notes to Condensed Consolidated Financial Statements.
4
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
<Table>
<Caption>
Accumulated
Common Stock Additional Retained Other
----------- --------- Paid-In Earnings Treasury Comprehensive
Shares Amount Capital (Deficit) Stock Loss Total
----------- --------- ---------- --------- -------- ------------- ---------
BALANCE AT OCTOBER 1, 2001............. 5,708,311 $42,258 $8,141,198 $(463,623) $(30,135) $(46,799) $7,642,899
Comprehensive income:
Net income............................. 344,675
Net unrealized gain on securities...... 5,345
Comprehensive income................. 350,020
--------- ------- ---------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 2001........... 5,708,311 $42,258 $8,141,198 $(118,948) $(30,135) $(41,454) $7,992,919
========= ======= ========== ========== ========= ======== ==========
BALANCE AT OCTOBER 1, 2002............. 5,721,265 $57,213 $8,142,447 $ 132,132 $(30,135) $ (3,311) $8,298,346
Stock options granted.................. 18,411 18,411
Comprehensive income:
Net income.......................... 120,507
Net unrealized gain on securities...... 1,939
Comprehensive income................. 122,446
--------- ------- ---------- --------- -------- -------- ----------
BALANCE AT DECEMBER 31, 2002........... 5,721,265 $57,213 $8,160,858 $ 252,639 $(30,135) $(1,372) $8,439,203
========= ======= ========== ========== ========= ======== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
5
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
<Table>
<Caption>
Accumulated
Common Stock Additional Retained Other
-------- ------- Paid-In Earnings Treasury Comprehensive
Shares Amount Capital (Deficit) Stock Loss Total
-------- ------- --------- ---------- -------- ------------ -----------
BALANCE AT APRIL 1, 2001 ................. 5,708,311 $42,258 $8,151,760 $ (65,771) $-- $ (5,674) $8,122,573
Net costs related to initial public
offering ............................... (10,562) (10,562)
Purchases of treasury stock .............. (30,135) (30,135)
Comprehensive loss:
Net loss ................................. (53,177)
Net unrealized loss on securities ........ (35,780)
Comprehensive loss ..................... (88,957)
--------- ------- ---------- ---------- ------- ---------- ---------
BALANCE AT DECEMBER 31, 2001 ............. 5,708,311 $42,258 $8,141,198 $(118,948) $(30,135) $(41,454) $7,992,919
========== ======== ========== ========== ======== ======== ==========
BALANCE AT APRIL 1, 2002 ................. 5,721,265 $57,213 $8,135,347 $ (61,634) $(30,135) $(43,725) $8,057,066
Stock options granted .................... 25,511 25,511
Comprehensive income:
Net income ............................... 314,273
Net unrealized gain on securities ........ 42,353
Comprehensive income ................... 356,626
--------- ------- ---------- ---------- ------- ---------- ---------
BALANCE AT DECEMBER 31, 2002 ............. 5,721,265 $ 57,213 $8,160,858 $ 252,639 $(30,135) $(1,372) $8,439,203
========== ======== ========== ========== ======== ======== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
6
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 314,273 $ (53,177)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 85,353 81,316
Change in deferred taxes ..................................... (25,171) (22,148)
Realized loss on securities .................................. 55,834 --
Unrealized loss (gain) on investments ........................ 16,136 (30,371)
Stock option compensation .................................... 25,511 --
Change in marketable securities .............................. (6,178) 15,769
Realized gain on investment in unconsolidated affiliates ..... -- (656)
Increase in accounts receivable .............................. (130,537) (622,809)
Decrease in prepaid expenses and other assets ................ 18,290 104,134
Decrease in prepaid income taxes ............................. -- 88,123
Increase in taxes payable .................................... 18,521 45,834
Increase (decrease) in accounts payable and other liabilities 161,390 (216,239)
Increase in accrued expenses ................................. 62,729 4,686
Increase in commissions payable .............................. 243,882 124,097
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ...... 840,033 (481,441)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (66,566) (209,460)
Decrease (increase) in loans receivable from registered
representatives .................................................. 89,157 (139,574)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....... 22,591 (349,034)
--------- ---------
</Table>
See Notes to Condensed Consolidated Financial Statements.
7
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2002 2001
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to initial public offering ................... -- (10,562)
Purchases of treasury stock ................................ -- (30,135)
Note payable ............................................... 756,000 685,000
Payments on note payable ................................... (79,016) (454,262)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........... 676,984 190,041
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. 1,539,608 (640,434)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 6,337,445 7,180,340
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 7,877,053 $ 6,539,906
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ................................................ $ 10,913 $ 25,648
=========== ===========
Income taxes paid ............................................ $ 297,950 $ --
=========== ===========
Transfer of security to securities not readily marketable from
receivable from officers ............................... $ 30,000 $ --
=========== ===========
</Table>
See Notes to Condensed Consolidated Financial Statements.
8
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Investors Capital Holdings, Ltd. (the Company) 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.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, these
unaudited condensed consolidated financial statements contain all adjustments,
consisting of only normal and recurring adjustments, necessary for a fair
presentation of the financial position and results of operations. Operating
results for the three-month and nine-month periods ended December 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ended March 31, 2003. The balance sheet at March 31, 2002 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial statements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's annual audited financial statements as of March
31, 2002 included in the Company's Form 10-KSB for the year ended March 31, 2002
filed with the Securities and Exchange Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to be
consistent with the current year's statement presentation.
9
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SEGMENT INFORMATION
The Company's reportable segments include investment services offered
through Investors Capital Corporation (ICC) and asset management services
offered through Eastern Point Advisors, Inc. (EPA). This investment services
segment includes securities, insurance, financial planning and related
services. ICC earns commissions as a broker for its customers in the
purchase and sale of securities on major exchanges. Asset management
services generate recurring annual revenue from fees received on the
management of customer accounts. EPA provides asset management and portfolio
design services to a mutual fund and a variety of investors.
Segment data presented includes the allocation of all corporate
overhead to each segment. Inter-segment revenue and expense, and receivables
and payables, are eliminated between segments. Information concerning
operations in the Company's segments of business is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2001
------------ ------------
NON-INTEREST REVENUES:
ICC .............................. $ 7,564,027 $ 6,702,293
EPA .............................. 560,718 659,357
----------- -----------
TOTAL ....................... $ 8,124,745 $ 7,361,650
=========== ===========
REVENUES FROM TRANSACTIONS WITH
OTHER OPERATING SEGMENTS:
ICC .............................. $ 146,609 $ 130,037
EPA .............................. 62,833 55,730
Intersegment elimination ......... (209,442) (185,767)
----------- -----------
TOTAL ....................... $ - $ -
=========== ===========
INTEREST INCOME:
ICC .............................. $ 45,086 $ 32,152
ICH .............................. 43,370 30,458
----------- -----------
TOTAL ....................... $ 88,456 $ 62,610
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE:
ICC .............................. $ 27,748 $ 27,686
EPA .............................. 1,464 1,926
----------- -----------
TOTAL ....................... $ 29,212 $ 29,612
=========== ===========
</Table>
10
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SEGMENT INFORMATION (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2001
------------ ------------
INCOME TAX EXPENSE (BENEFIT):
ICC ..................... $ 126,703 $ 238,580
EPA ..................... (43,941) (12,188)
ICH ..................... 13,147 27,500
------------ ------------
TOTAL .............. $ 95,909 $ 253,892
============ ============
INCOME (LOSS):
ICC ..................... $ 322,665 $ 476,214
EPA ..................... (2,344) 37,663
ICH ..................... (199,814) (169,202)
------------ ------------
TOTAL .............. $ 120,507 $ 344,675
============ ============
PERIOD END TOTAL ASSETS:
ICC ..................... $ 5,419,935 $ 4,133,350
EPA ..................... 747,591 672,967
ICH ..................... 5,492,649 5,852,446
------------ ------------
TOTAL .............. $ 11,660,175 $ 10,658,763
============ ============
</Table>
11
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SEGMENT INFORMATION (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
------------------------------
2002 2001
------------ -------------
NON-INTEREST REVENUES:
ICC .............................. $ 23,809,256 $ 18,826,596
EPA .............................. 1,812,881 2,043,460
------------ ------------
TOTAL ....................... $ 25,622,137 $ 20,870,056
============ ============
REVENUES FROM TRANSACTIONS WITH
OTHER OPERATING SEGMENTS:
ICC .............................. $ 425,991 $ 406,677
EPA .............................. 182,568 174,290
Intersegment elimination ......... (608,559) (580,967)
------------ ------------
TOTAL .................... $ -- $ --
============ ============
INTEREST INCOME:
ICC .............................. $ 121,983 $ 69,261
ICH .............................. 113,072 130,069
------------ ------------
TOTAL ....................... $ 235,055 $ 199,330
============ ============
DEPRECIATION AND AMORTIZATION EXPENSE:
ICC .............................. $ 80,798 $ 75,190
EPA .............................. 4,555 6,126
------------ ------------
TOTAL ....................... $ 85,353 $ 81,316
============ ============
</Table>
12
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SEGMENT INFORMATION (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------------
2002 2001
------------ -------------
INCOME TAX EXPENSE (BENEFIT):
ICC ..................... $ 318,836 $ 32,251
EPA ..................... (66,966) (50,419)
ICH ..................... 39,430 64,560
------------ ------------
TOTAL .............. $ 291,300 $ 46,392
============ ============
INCOME (LOSS):
ICC ..................... $ 818,779 $ 426,918
EPA ..................... 81,929 98,721
ICH ..................... (586,435) (578,816)
------------ ------------
TOTAL .............. $ 314,273 $ (53,177)
============ ============
PERIOD END TOTAL ASSETS:
ICC ..................... $ 5,419,935 $ 4,133,350
EPA ..................... 747,591 672,967
ICH ..................... 5,492,649 5,852,446
------------ ------------
TOTAL .............. $ 11,660,175 $ 10,658,763
============ ============
</Table>
13
<Page>
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LEGAL PROCEEDINGS
On January 3, 2001, an action was brought against our broker-dealer
subsidiary by 21st Century Group, Inc. in the Circuit Court of Sarasota, Florida
seeking common law indemnification in the amount of $160,208. This
indemnification action stems from an April 7, 1999 judgment against 21st Century
for that amount rendered by the same court in the case of Crabrill v. 21st
Century Group, Inc. vs. Investors Capital Corp. Our broker-dealer subsidiary was
named as a third-party defendant in this case which we successfully defended and
the case against us was dismissed. As such, we believe this January 3, 2001
action is wholly without merit on grounds of estoppel and res judicata and are
awaiting a determination on our anticipated motion for summary judgment.
Our broker-dealer subsidiary, Investors Capital Corporation, is engaged in
a material NASD Arbitration in which one of our registered representatives is
alleged to have made misrepresentations in the sale of unsecured promissory
notes in a Florida company that has since filed for bankruptcy protection. This
arbitration, Paul and Irmgard Jung and Wilhelm Trefz vs. Investors Capital
Corporation and Kenneth J. Saunders originally was filed with the NASD on April
17, 2002 in Boca Raton, Florida. Damages are alleged in the amount of
approximately $221,455. Recent developments have enabled Investors Capital
Corporation to reasonably estimate its total possible financial exposure in the
case to be no greater than $40,000.
The Company is involved in an action filed with the Commonwealth of
Massachusetts Commission against Discrimination on August 3, 2000. This action
alleges that the petitioner was discriminated against by the Company on the
basis of sex and seeks damages in the amount of $275,000. Legal Counsel is
unable at this time to assess the likelihood of an unfavorable outcome and an
estimate of potential damages.
Our broker-dealer subsidiary, Investors Capital Corporation, is engaged in
a material litigation in which a former registered representative is alleged to
have made misrepresentations in the sale of unsecured promissory notes in a now
defunct Utah company that is currently under regulatory investigation. The
product at issue was not approved by nor sold through Investors Capital
Corporation. This arbitration, Ruth Arvizo, et al vs. Investors Capital
Corporation, et al, was originally filed in California Superior Court on August
26, 2002 in Los Angeles County. Damages are alleged in the amount of
approximately $200,000. At this time, legal counsel is unable to assess neither
the likelihood of an unfavorable outcome nor an estimate of potential damages.
Our broker-dealer subsidiary, Investors Capital Corporation, is engaged in
a material arbitration in which a former registered representative is alleged to
have made misrepresentations in the sale of an unsecured promissory note. The
product at issue was not approved by nor sold through Investors Capital
Corporation. This arbitration, Erma Foster vs. Investors Capital Corporation,
was received in December 2002. Damages are alleged in the amount of
approximately $113,000. At this time, legal counsel is unable to assess neither
the likelihood of an unfavorable outcome nor an estimate of potential damages.
14
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 2001
The Company had consolidated operating income of $125,887 for the three
months ended December 31, 2002 as compared to consolidated operating income of
$524,180 for the three months ended December 31, 2001. This decrease in
consolidated operating income of $398,293, or 76.0%, after the elimination of
all inter-company revenues and expenses, was attributable to a $278,054 decrease
in operating income provided by the Company's subsidiary, Investors Capital
Corporation (ICC), a $71,645 decrease in operating income provided by the
Company's subsidiary Eastern Point Advisors (EPA) and a $48,594 decrease in
operating income provided by Investors Capital Holdings, Ltd (ICH), on a
stand-alone basis. All of these decreases were mainly attributable to increases
in selling and administrative expenses.
Consolidated commissions and advisory fee income of $8,124,745 for the
three months ended December 31, 2002 increased by $763,095, or 10.4%, as
compared to consolidated commissions and advisory fee income of $7,361,650 for
the three months ended December 31, 2001. This increase in gross revenues, after
the elimination of all inter-company revenues and expenses, was attributable to
an $861,734 increase in revenues provided by ICC and a $98,639 decrease in
advisory fee income provided by EPA. The $861,734 increase in revenues provided
by ICC was attributable to a $606,941 increase in revenues from variable
annuities and mutual funds, as well as a $303,278 increase in revenues generated
by our investment banking line of business. Offsetting these increases was a net
decrease of $48,485 generated from various other fees. The $98,639 decrease in
advisory fee income generated by EPA was the result of a reduction in the value
of assets under management.
Consolidated commissions and advisory fee expense of $6,631,808 for the
three months ended December 31, 2002 increased by $809,711, or 13.9%, as
compared to consolidated commissions and advisory fee expense of $5,822,097 for
the three months ended December 31, 2001. This increase, after the elimination
of all inter-company revenues and expenses, was attributable to an $899,856
increase in commission expense incurred by ICC and a $90,145 decrease in
advisory fee expense incurred by EPA. This increase in commission expense and
decrease in advisory fee expense was a direct result of the associated increase
in commission revenue and decrease in advisory fee income as mentioned above.
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Consolidated administrative expenses of $1,437,930 for the three months
ended December 31, 2002 increased by $292,999, or 25.6%, as compared to
consolidated administrative expenses of $1,144,931 for the three months ended
December 31, 2001. This increase, after the elimination of all inter-company
revenues and expenses, was attributable to a $179,579 increase in administrative
expenses incurred by ICC, a $63,076 increase in administrative expenses incurred
by EPA and a $50,344 increase in administrative expenses incurred by ICH. The
increase of $179,579 in administrative expenses incurred by ICC was driven by an
increase of $100,988 in salaries and wages, a $22,985 increase in office expense
and a $21,569 increase in legal and lawsuit related expenses. The remaining
$34,037 increase was generated from various other expenses. The $63,076 increase
incurred by EPA was mainly attributable to a $55,614 increase in salaries and
wages. The remaining $7,462 increase was generated from various other expenses.
The $50,344 increase from ICH was driven by an increase of $28,656 in insurance
expense, as well as an $18,411 increase in stock option expense. The increase
insurance expense resulted from a transfer of policies from ICC to ICH. The
remaining $3,277 increase was attributable to various other expenses.
Consolidated selling expenses (income) of $(70,880) for the three months
ended December 31, 2002 decreased by $58,678, or 45.3%, as compared to
consolidated selling expenses (income) of $(129,558) for the three months
ended December 31, 2001. This decrease, after the elimination of all
inter-company revenues and expenses, was attributable to a $60,353 increase
in selling expenses incurred by ICC, a $1,750 decrease in selling expenses
incurred by ICH and a $75 increase in selling expenses incurred by EPA. The
$60,353 increase in selling expenses incurred by ICC was mainly attributable
to a $46,000 decrease in income derived from seminars, conferences and
conventions, as income from our marketing efforts is offset against total
selling expenses. In addition, compliance related expenses increased by
$25,384. Offsetting these increases was an $11,031 decrease in various other
selling expenses.
The Company had consolidated income taxes of $95,909 for the three months
ended December 31, 2002 as compared to consolidated income taxes of $253,892 for
the three months ended December 31, 2001. This decrease of $157,983, or 62.2%,
in income taxes was attributable to the Company's decreased profitability from
the same period last year.
The Company had consolidated net income of $120,507 for the three months
ended December 31, 2002 as compared to consolidated net income of $344,675 for
the three months ended December 31, 2001. This $224,168, or 65.0%, decrease in
net earnings, after the elimination of all inter-company revenues and expenses,
was attributable to a $153,549 decrease in net income provided by ICC, a $40,007
decrease in net income provided by EPA and a $30,612 decrease in net income
provided by ICH. All of these decreases were mainly attributable to increases in
selling and administrative expenses.
NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
2001
The Company had consolidated operating income of $442,215 for the nine
months ended December 31, 2002 as compared to a consolidated operating loss of
$214,225 for the nine months ended December 31, 2001. This increase in
consolidated operating income of $656,440, or 306.4%, after the elimination of
all inter-company revenues and expenses, was attributable to a $665,023 increase
in operating income provided by the Company's subsidiary, Investors Capital
Corporation (ICC), a $24,770 increase in operating income provided by the
Investors Capital Holdings, Ltd (ICH), on a stand-alone basis, and a $33,353
decrease in operating income provided by the Company's subsidiary Eastern Point
Advisors (EPA). The $665,023 increase in operating income provided by ICC was
attributable to an increase of $560,876 in the gross profit in this segment of
the business largely due to an increase in mutual fund and variable annuity
sales. In addition, selling and administrative expenses decreased by $104,147.
The $24,770 increase in operating income provided by ICH was the result of a
decline in selling and administrative expenses resulting from an overall effort
to reduce expenses. The $33,353 decrease in operating income generated by EPA
was mainly the result of an increase in salaries and wages.
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Consolidated commissions and advisory fee income of $25,622,137 for the
nine months ended December 31, 2002 increased by $4,752,081 or 22.8%, as
compared to consolidated commissions and advisory fee income of $20,870,056 for
the nine months ended December 31, 2001. This increase in gross revenues, after
the elimination of all inter-company revenues and expenses, was attributable to
a $4,982,660 increase in revenues provided by ICC and a $230,579 decrease in
advisory fee income provided by EPA. The $4,982,660 increase in revenues
provided by ICC was attributable to an increase of $3,770,163 in revenues
generated from the sales of variable annuities and mutual funds, a $377,703
increase in underwriting fees, a $359,063 increase in listed commissions, a
$267,684 increase in over the counter commissions and a $188,697 increase in
fees generated from errors and omissions insurance. The remaining increase of
$19,350 resulted from miscellaneous transactions.
Consolidated commissions and advisory fee expense of $21,006,125 for the
nine months ended December 31, 2002 increased by $4,191,772, or 24.9%, as
compared to consolidated commissions and advisory fee expense of $16,814,353 for
the nine months ended December 31, 2001. This increase, after the elimination of
all inter-company revenues and expenses, was attributable to a $4,421,784
increase in commission expense incurred by ICC and a $230,012 decrease in
advisory fee expense incurred by EPA. The increase of $4,421,784 in commission
expense incurred by ICC and the decrease of $230,012 in advisory fee expense
incurred by EPA was a direct result of the associated increase in commission
revenue and decrease in advisory fee income as mentioned above.
Consolidated administrative expenses of $3,882,996 for the nine months
ended December 31, 2002 increased by $6,636, or 0.2%, as compared to
consolidated administrative expenses of $3,876,360 for the nine months ended
December 31, 2001. This increase, after the elimination of all inter-company
revenues and expenses, was attributable to a $35,015 increase in administrative
expenses incurred by EPA, a $25,403 increase in administrative expenses incurred
by ICH and a $53,782 decrease in administrative expenses incurred by ICC.
Consolidated selling expenses of $290,801 for the nine months ended
December 30, 2002 decreased by $102,767, or 26.1%, as compared to consolidated
selling expenses of $393,568 for the nine months ended December 31, 2001. This
decrease, after the elimination of all inter-company revenues and expenses, was
attributable to a $50,365 decrease in selling expenses incurred by ICC, a
$50,173 decrease in selling expenses incurred by ICH and a $2,229 decrease in
selling expenses incurred by EPA. These decreases were driven by a general
reduction in various expenses as part of the cost cutting measures put in place
during the past fiscal year.
The Company had consolidated income taxes of $291,300 for the nine months
ended December 31, 2002 as compared to consolidated income taxes of $46,392 for
the nine months ended December 30, 2001. This increase of $244,908, or 527.9%,
in income taxes was attributable to the Company's increased profitability from
the same period last year.
The Company had consolidated net income of $314,273 for the nine months
ended December 31, 2002 as compared to a consolidated net loss of $53,177 for
the nine months ended December 31, 2001. This $367,450, or 691.0%, increase in
net earnings, after the elimination of all inter-company revenues and expenses,
was attributable to a $391,861 increase in net income provided by ICC, a $16,792
decrease in net income provided by EPA and a $7,619 decrease in net income
provided by ICH. The $391,861 increase in net income provided by ICC was
attributable to an increase in gross profit in this segment of the business
largely due to an increase in variable annuity and mutual fund sales and an
effort to reduce selling and administrative expenses.
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LIQUIDITY AND CAPITAL RESOURCES
We believe that return on equity is primarily based on the use of capital
in an efficient manner. Historically, we have financed our operations primarily
through an initial public offering, private equity and internally generated cash
flow.
As of December 31, 2002, cash and cash equivalents totaled $7,877,053 as
compared to $6,337,445 as of March 31, 2002. Working capital as of December 31,
2002 was $7,606,797 as compared to $7,276,218 as of March 31, 2002.
As of December 31, 2002, our net capital ratio for the broker-dealer was
2.18 to 1 as compared to 1.6 to 1 as of December 31, 2001. The SEC 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 December 31, 2002, we had net capital of $1,380,255 as compared to net
capital of $1,226,421 as of December 31, 2001. This resulted in excess net
capital of $1,179,946 and $1,095,368, respectively, for the applicable periods.
Net cash provided by operating activities was $840,033 for the nine months
ended December 31, 2002 as compared to net cash used for operating activities of
$481,441 for the nine months ended December 31, 2001. This increase in cash flow
provided by operating activities resulted from a timing difference in the
collection of premiums for errors and omissions insurance. As of December 31,
2002, the entire premium was collected for calendar year 2003, whereas only a
small portion of the calendar year 2002 premium was collected as of December 31,
2001. In addition, the Company was much more profitable during the nine months
ended December 31, 2002 as compared to the same period last year.
Net cash provided by investing activities was $22,591 for the nine months
ended December 31, 2002 as compared to cash used of $349,034 for the nine months
ended December 31, 2001. This increase in cash flow provided by investing
activities mainly resulted from a reduction in spending on plant, property and
equipment and a reduction in loans made to registered representatives as
compared to the same period last year.
Net cash provided by financing activities was $676,984 for the nine months
ended December 31, 2002 as compared to $190,041 for the nine months ended
December 31, 2001. This increase in cash flow provided by financing activities
was mainly the result of a timing difference in payments on the Company's errors
and omissions insurance policy. The Company's errors and omissions insurance
policy for calendar year ending December 31, 2001 was financed over the entire
year, whereas, the same policy for calendar year ending December 31, 2002 was
paid in full during the quarter ended March 31, 2002.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement replaces
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and rescinds SFAS Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The adoption of
this Statement did not have a material impact on the Company's financial
position or results of operations.
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In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
Statement addresses financial accounting and reporting for business combinations
and supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." Under Opinion 16, business combinations were accounted
for using one of two methods, the pooling-of-interests method or the purchase
method. All business combinations in the scope of SFAS No. 141 are to be
accounted for using one method--the purchase method. The provisions of SFAS No.
141 apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later.
The adoption of SFAS No. 141 had no immediate effect on the Company's
financial statements since it had no pending business combinations as of June
30, 2001 or as of the date of the issuance of these consolidated financial
statements. If the Company consummates business combinations in the future, any
such combinations that would have been accounted for by the pooling-of-interests
method under Opinion 16 will be accounted for under the purchase method and the
difference in accounting could have a substantial impact on the Company's
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
required goodwill and other intangible assets and supercedes APB Opinion No. 17,
"Intangible Assets." The initial recognition and measurement provisions of SFAS
No. 142 apply to intangible assets which are defined as assets (not including
financial assets) that lack physical substance. The term "intangible assets" is
used in SFAS No. 142 to refer to intangible assets other than goodwill. The
accounting for a recognized intangible asset is based on its useful life. An
intangible asset with a finite useful life is amortized; an intangible asset
with an indefinite useful life is not amortized. An intangible asset that is
subject to amortization shall be reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is
defined as the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed. SFAS No. 142
further provides that goodwill shall be tested for impairment at a level of
reporting referred to as a reporting unit. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value.
SFAS No. 142 is effective as follows:
All of the provisions of SFAS No. 142 shall be applied in fiscal years
beginning after December 15, 2001, to all goodwill and intangible assets
recognized in an entity's statement of financial position at the beginning of
that fiscal year, regardless of when those previously recognized assets were
initially recognized.
The effect of SFAS No. 142 on the Company's consolidated financial
statements was immaterial.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123." This Statement provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. These alternative methods are effective
for consolidated financial statements for fiscal years ending after December
15, 2002. The Company has no present intention to change to the fair value
based method. As a consequence, the alternative methods amendment will only
affect the Company's consolidated financial statements until and if the
Company changes to such method. SFAS No. 148 also has new disclosure
provisions that will affect the Company's consolidated financial statements.
The Company will be required to make more prominent disclosures in both
annual and interim consolidated financial statements about its method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. These new disclosure requirements will be effective
beginning with the Company's consolidated financial statements for the year
ending March 31, 2003 and beginning with its interim consolidated financial
statements as of June 30, 2003.
EFFECTS OF INFLATION
The Company's 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material or significant changes to the litigation
described in Note 3.
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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.
Date: February 14, 2003 By: /s/ Timothy B. Murphy
------------------------------
Timothy B. Murphy
Chief Financial Officer
20
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CERTIFICATION
I, Theodore E. Charles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Investors Capital
Holdings, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
BY: /S/ THEODORE E. CHARLES
------------------------------
Theodore E. Charles
Chief Executive Officer
21
<Page>
CERTIFICATION
I, Timothy B. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Investors Capital
Holdings, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
BY: /S/ TIMOTHY B. MURPHY
------------------------------
Timothy B. Murphy
Chief Financial Officer
22