UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2003 COMMISSION FILE NO. 1-16349 ----------- INVESTORS CAPITAL HOLDINGS, LTD. (Exact name of registrant in its charter) ------------ MASSACHUSETTS (State or other jurisdiction of 04-3284631 incorporation or organization) (IRS Employer Identification No.) 230 Broadway Lynnfield, Massachusetts 01940 (781) 593-8565 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value The American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ----------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes|_| No |X| The aggregate market value of the shares of the registrant's common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant's most recently completed second fiscal quarter, was $4,627,378. As of June 16, 2003, there were outstanding 5,717,380 shares of Common Stock, $0.01 par value per share of the registrant. Documents Incorporated by Reference Certain portions of the registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held on August 12, 2003 are incorporated by reference in Items 11 through 13 of Part III, and Item 15 of Part IV, of this Annual Report on Form 10-K. Contents Forward-Looking Statements................................................................................................... 1 PART I....................................................................................................................... 1 ITEM 1. Business............................................................................................................. 1 ITEM 2. Properties........................................................................................................... 7 ITEM 3. Legal Proceedings.................................................................................................... 7 ITEM 4. Submission of Matters to a Vote of Security Holders.................................................................. 7 PART II...................................................................................................................... 8 ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................ 8 ITEM 6. Selected Financial Data.............................................................................................. 8 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 10 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................................... 16 ITEM 8. Financial Statements and Supplementary Data.......................................................................... 17 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................................. 38 PART III..................................................................................................................... 38 ITEM 10. Directors and Executive Officers of the Registrant.................................................................. 38 ITEM 11. Executive Compensation.............................................................................................. 39 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...................... 39 ITEM 13. Certain Relationships and Related Transactions...................................................................... 39 ITEM 14. Controls and Procedures............................................................................................. 39 PART IV...................................................................................................................... 40 ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 40 INVESTORS CAPITAL HOLDINGS, LTD. Forward-Looking Statements The statements, analyses, and other information contained herein relating to trends in the operations and financial results of Investors Capital Holdings, Ltd. (the "Company"), the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the risks that (1) losses may be incurred if our investment professionals fail to comply with regulatory requirements; (2) the loss of either Theodore E. Charles or Timothy B. Murphy may adversely affect our business and financial condition through the loss of significant business contacts, which would have to be replaced; (3) customer fraud could harm our earnings and profits by requiring us to expend time, money and incur actual loss, exposing us to the potential for arbitration; (4) investment professional and employee fraud and misconduct could harm our profits and earnings by causing us to expend time, money and incur actual loss, with the latter exposing us to the potential for litigation; (5) without implementation of adequate internal controls, our ability to make money could be severely restricted by regulatory sanctions being applied against our broker-dealer subsidiary, and could result in us paying substantial fines and limit our ability to make money; (6) involvement in material legal proceedings could have a significant impact on our earnings and profits if we are found liable for such claims; (7) a change in our clearing firm could result in the inability of our customers to transact business in a timely manner due to delays and errors in the transfer of their accounts, which, on a temporary basis, could affect our earnings and profits. Readers are also directed to other risks and uncertainties discussed, as well as to further discussion of the risks described above, in other documents filed by the Company with the United States Securities and Exchange Commission. The Company specifically disclaims any obligation to update or revise any forward- looking information, whether as a result of new information, future developments, or otherwise. PART I ITEM 1. Business. Overview Incorporated in July of 1995, Investors Capital Holdings, Ltd. ("ICH") is a financial services holding company that operates primarily through its subsidiaries in two segments of the financial services industry. These two segments provide for the offering of (1) services related to corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, variable annuities, variable life insurance, market information, internet online trading and portfolio tracking and records management and (2) financial planning services, investment advisory and asset management services and the management of a retail mutual fund. Financial information pertaining to (" ICH") for each of the three fiscal years ended March 31, 2003, 2002 and 2001 is included in the selected financial data in Item 6 of this document. Support to our Representatives Investors Capital Corporation. Investors Capital Corporation, an NASD registered broker-dealer also registered with the Securities and Exchange Commission is headquartered in Lynnfield, Massachusetts and is a wholly-owned subsidiary of Investors Capital Holdings, Ltd. Doing business in all 50 states, Puerto Rico and the District of Columbia, Investors Capital Corporation makes available multiple investment products, and provides support, technology and back-office service to its network of approximately 958 registered representatives. Our representatives sell investment products that are securities under federal and state law. Accordingly, they are required to, and are registered as, representatives with our broker-dealer subsidiary. Similar registrations may be required by these persons as investment adviser representatives under federal and state law. Our in-house training program for these representatives emphasizes the long-range aspects of financial planning and investment products. We believe that through the continuing education we provide to our registered representatives, our clients can become better informed, and therefore, better serviced. This entity generated approximately 93% of Investors Capital Holdings' total revenues for the fiscal year ended March 31, 2003. We seek to recruit primarily experienced, productive registered representatives by offering them an attractive commission payout and the independence of owning and operating their own offices. Generally, each such office pays substantially, if not all, of the costs associated with its establishment and operation. We provide technical, regulatory, supervisory, compliance and other support services to our independent investment professionals. This allows expansion of our operations with relative minimal capital outlay by our firm. Continuing to add experienced, productive registered representatives is an integral part of our growth strategy. The commission payouts to our registered representatives are negotiable and currently average approximately 85% of the gross dealer concession generated from the sale of securities. Pursuant to the terms of our agreement with our registered representatives, and as permitted by current NASD rules, we provide our representatives, or their named beneficiaries, with continuing commissions on pre-existing business in the event of their retiring from the securities industry or death. Also, in this agreement, each of our representatives grants to us the right to offset against commissions any losses we sustain as a result of their actions, omissions and errors. Our agreement with our representatives is terminable by either party with 15 days prior written notice, and does not contain either a confidentiality or non-compete provision. Our products and services provided to our representatives include: Technology Resources: Utilizing the latest in technology, our representatives are able to perform the following activities on-line: Opening of new accounts; Monitoring of existing accounts; Trading; Locating and exploring approved products; Downloading client data; and Researching reports or inquiries on companies, securities and other pertinent financial topics. 1 Product Choices: Allowing our representatives to choose from a wide variety of investment products sponsored by well-respected and financially sound companies is critical to our registered representatives' success as well as ours. We follow a selective process in determining approved products to be offered to clients by our representatives. In addition, we continuously monitor the product list as deemed necessary. Marketing: Producing compliance and NASD-approved marketing materials to be used by our representatives enhances their professional stature in the public's eye. The marketing resources produced by Investors Capital Corporation include: Corporate and product brochures; Technology resources; Client letters; Seminars; and Advertising and public relations. Focus. Our focus is on representatives who offer their clients assistance in attaining their long-range financial goals. Utilizing primarily experienced representatives, our client list is widely diversified in terms of goals, financial resources and geography. During the fiscal year ended March 31, 2003, the average revenue per registered representative was $33,300 as compared to $23,700 for our fiscal year ended March 31, 2002. Additionally, on March 31, 2003, we had a total of 958 representatives in our national network, as compared to 1,103 for the same period last year. Supervision. Our broker-dealer subsidiary's compliance staff includes individuals with significant industry experience. Six of these individuals, including two experienced compliance attorneys, are located in the home office. The remaining compliance individuals, most of whom have significant industry experience, termed Offices of Supervisory Jurisdiction by the NASD, are field supervisors situated across the country and are charged with compliance responsibilities for a defined group of registered representatives. By positioning these compliance individuals in the field, we are able to more closely scrutinize and monitor the activities of our representatives thereby ensuring, as much as possible, their compliance with the requisite rules and regulations. Such a field supervisor is assigned to each new registered representative affiliated with our broker-dealer subsidiary. Our in-house computer systems and programs further assist us in compliance matters. As compliance is an area for which representatives seek and value assistance to keep abreast of, and in step with, the latest industry regulations, our compliance department provides, among other things: Advertising and sales literature review; Field inspections followed up with written findings and recommendations; Weekly faxes and monthly conference calls on selected compliance topics; Assistance with customer complaints and regulatory inquiries; Workshops and in-house publications on various compliance matters; and Regional and national meetings. Clearing. We utilize the services of another broker-dealer to clear our transactions. Our clearing agreement is on a fee-for-service basis. Our clearing firm processes most of the securities transactions for our account and the accounts of our clients. Services of our clearing firm include billing and credit extension, control and receipt and custody and delivery of securities, for which we pay a transaction charge. We rely on the operational capacity and the ability of our clearing firm for the orderly processing of transactions. In addition, by engaging the processing services of a clearing firm, certain capital reserve requirements and other complex regulatory requirements imposed by federal and state securities laws are not applicable to us. 2 Broker-Dealer Revenue. Revenue generated from our broker-dealer subsidiary's activities can be broken into the following percentages for a three-year comparative review for fiscal years ended March 31: 2003 2002 2001 ---- ---- ---- Commissions from the sale of mutual funds and unit investment trusts: 25% 34% 34% Commissions from the sale of variable annuities and variable life insurance: 49% 48% 50% Commissions from the sale of individual stocks and bonds: 13% 9% 10% Commissions from the sale of direct participation programs: 5% 1% 1% Other miscellaneous commission and fee income: 8% 8% 5% Investment Advisory Services Eastern Point Advisors, Inc. Our investment adviser subsidiary provides investment advisory and asset management services directly to the investing public through its managed asset programs. These programs involve managed portfolios of load and no-load mutual funds, variable and fixed annuities and/or individual securities, and are provided to the public through approximately 295 investment adviser representatives . As of March 31, 2003, we had approximately $116 million under management in these managed asset programs with average weekly contributions of new money in excess of $1 million since January of 2000. The maximum annual fee charged for these services is 2.75%, which is paid by the customer in quarterly installments. Eastern Point Advisors contributes approximately 7% of Investors Capital Holdings' total revenues. Eastern Point Advisors, Inc. Plan Market Value --------------------------------- ------------ Aetna Life Insurance and Annuity Co. $ 1,626,725 American Skandia Annuity Company 10,960,062 Conseco Variable Annuity 10,699,511 ING Variable Annuity 8,384,420 Jackson National Life Insurance Co. 4,025,347 Lincoln Benefit Life Insurance Co. 831,385 Manulife 314,799 Mass Mutual 1,366,879 Midland National 756,675 Nationwide Life Insurance Co. 418,709 Pershing Securities Managed Asset Plan 64,868,636 Resources Trust 1,601,508 Security Benefit Life 57,006 SEI Trust Company 9,440,688 US Allianz 341,487 US Allianz Fixed 442,398 ------- Total Assets Under Management: $116,136,235 ============ In addition, our investment adviser subsidiary is the investment adviser to our retail mutual fund, the Eastern Point Advisors Twenty Fund. Until recently, this mutual fund was marketed to the public solely by registered representatives of Investors Capital Corporation. Recently, our investment adviser subsidiary has begun making its portfolios available to other broker-dealers. We have signed selling agreements to make our managed asset programs available to registered representatives of certain other broker-dealers, as well as to allow our mutual fund to be marketed by investment professionals affiliated with certain selected broker-dealers in addition to Investors Capital Corporation. These wholesaling activities increase the exposure of both the managed asset programs and the mutual fund. As of March 31, 2003, Eastern Point Advisors had approximately $5.9 million under management in this mutual fund. The annual fee charged by Eastern Point Advisors to the fund for its services is 1.50%, which is paid monthly. As of March 31, 2003 we had approximately 295 investment adviser representatives registered with the various state securities departments. These investment adviser representatives are typically registered representatives of our wholly-owned brokerage subsidiary. Licensing requirements for these investment adviser representatives are dictated by the state in which they conduct business. As such, prior to their clients utilizing our investment advisory services, each investment adviser representative must satisfy the requisite state licensing requirements which are typically the NASD Series 6 or 7 securities license coupled with a Series 65 or 66 license. 3 Asset Allocation Strategy. Eastern Point Advisor's asset allocation strategy, utilized by approximately 2,535 investors as of March 31, 2003, is based on the principle that, by investing in a combination of asset classes, we may reduce risk while seeking to provide enhanced returns. Thus, by combining asset classes that typically do not move in tandem, the volatility of the customer's investment portfolio may be lowered while, at the same time, provide the opportunity for possible increased long-term returns. In implementing this asset allocation strategy for each individual: customer, we utilize the following three steps: Based upon a customer's ascertained tolerance for risk, investment goals, age, time horizon, investment experience and financial and personal situation, determined through the use of detailed questionnaires completed during personal interviews, we will recommend an overall investment allocation consisting of a suggested percentage of stocks, bonds and cash. Should the customer agree with the recommended overall investment allocation, we will then select what we believe to be the appropriate investment vehicles for the particular customer from the universe of mutual funds, variable annuities and individual securities. Following implementation of the recommended portfolio, our investment adviser subsidiary monitors the performance of the portfolio, communicates the model's performance to the client at least quarterly and makes any necessary changes based upon performance, changes in a customer's financial situation, goals or risk tolerance or any other factor relevant to the composition of the customer's portfolio. Fee-Based Compensation Structure. As required by the Investment Advisers Act of 1940, compensation is based on an annual fee calculated as a percentage of total assets under management rather than a transaction-based commission or performance fee. Insurance Operations ICC Insurance Agency, Inc., our wholly-owned insurance agency subsidiary, facilitates the sale by our registered representatives of variable life insurance and variable annuities. In certain states, in order to transact variable life and annuity business, a separately licensed insurance entity is required. This is the role filled by ICC Insurance Agency. This entity is properly licensed in all states in which such licensing is required. One hundred percent of all funds realized by this entity flow through as revenue to our broker-dealer subsidiary. Mutual Fund The Eastern Point Advisors Twenty Fund. The Eastern Point Advisors Twenty Fund, formally known as the Investors Capital Twenty Fund, is our growth-oriented mutual fund, which became available for sale on October 19, 1999. We created this mutual fund to complement our existing product lines with the rationale that our mutual fund would provide investors with a convenient way to meet their financial goals and, at the same time, provide new sales opportunities for representatives of our broker-dealer subsidiary. The Eastern Point Advisors Twenty Fund invests in a portfolio of common stocks believed to offer capital appreciation potential. As such, the Fund may be more suitable for those investors who seek capital appreciation and are willing to accept a significant degree of volatility and risk. The Eastern Point Advisors Twenty Fund utilizes a non-diversified portfolio of 20 to 30 common stocks of companies of any size, regardless of industry or sector, which may include smaller emerging companies. As of March 31, 2003, the Eastern Point Advisors Twenty Fund had assets of $5,909,265. Class A Shares of the Eastern Point Advisors Twenty Fund carry a maximum one-time, up-front sales charge to the investor of 5.75%. This sales charge decreases as the dollar amount of the investor's investment increases. Class C Shares have no such up-front sales charge but, in addition to annual management fees, carry a 1.00% per year annual fee. Our Strategy Key elements to achieve our corporate objectives include: Increase brand awareness. We plan to increase our brand recognition to attract new clients. We are implementing a comprehensive marketing plan to attract more clients and experienced representatives, build market awareness, educate the investing public and develop brand name recognition and loyalty. We intend to accomplish this strategy through direct marketing, advertising through our marketing department, use of our web site, a public relations program, live seminars, print advertising and television air time. In addition, we have committed to opening company-operated offices in selected strategic geographic locations across the country. In this regard, we have already opened investment centers in Topsfield, Massachusetts and Pittsburgh, Pennsylvania, and are in the planning stage of opening centers in California and Florida. Expand client relationships. We intend to expand our relationships with representatives and investors by increasing our sales and marketing efforts. We plan to target sophisticated and experienced investors and financial institutions of all sizes, including professional money managers and registered investment advisers. Because these participants typically execute more trades per year than traditional retail investors and expect lower commissions, real-time access to information and quick order execution, the market for their business is currently underserviced. We believe that we can profitably fill this market niche. 4 Provide value-added services to our clients. We will continue to provide our clients with access to a pool of well-trained representatives, access to up-to-date market and other financial information and direct access to our trade desk that is online with various stock exchanges and institutional buyers and sellers. We will also continue to provide trading before and after traditional market hours to our clients. Create technologically innovative solutions to satisfy clients' needs. We intend to continue our active efforts in pursuing additional technologies to service the rapidly evolving financial services industry. Specifically, we are developing our web site to enable our clients to trade equity securities more efficiently via the internet, monitor the history and current status of their accounts at any time on-line and access all types of financial and other information to enhance their situations. Also, we have developed personalized Internet web sites for our representatives. These personalized sites provide the clients of our representatives, through the use of passwords and firewalls, a secure and private interface directly to our proprietary web site. This allows these clients to do market research, buy and sell securities on-line, monitor their accounts and utilize financial calculators. Build and expand our corporate presence. We intend to expand our branch office locations to strategically situated metropolitan locations throughout the United States. We have expanded in Massachusetts and Pennsylvania, and intend to expand in California and Florida. We also continue to explore strategic alliances, acquisitions and other opportunities to provide our clients with the best possible services and products. Expand our product and service offering through strategic relationships. We will continue to actively pursue alliances with various companies to increase trading volume, capitalize on cross-selling opportunities, create additional markets for our asset management programs and mutual fund sales, take advantage of emerging market trends and create operational efficiencies and further enhance our name recognition. We have no present agreements, plans, arrangements or understandings regarding any acquisitions and have not identified any specific criteria that such acquisitions must meet. Competition Our competitors vary in size, scope and breadth of services offered. We encounter direct competition from numerous other brokerage firms that have electronic brokerage services and full research capabilities. We also encounter competition from established, full-commission brokerage firms, as well as insurance companies with securities brokerage subsidiaries, financial institutions, mutual fund sponsors and others who utilize financial planning representatives paying their own office costs and expenses. Competitors utilizing similar representatives include Linsco Private Ledger and Commonwealth Financial, and various insurance companies with securities brokerage subsidiaries. Also, as demand for discounted brokerage services increases, our market is becoming more competitive. In particular, we anticipate that competition for electronic brokerage services will intensify as investor demand for such services increases. We also recognize and intend to capitalize on the fact that when investing large amounts of money, investors typically prefer personal attention from an experienced industry professional rather than inexpensive internet access to trading. Some of our competitors have significantly greater financial, technical, marketing and other resources, and certain of our competitors also offer a wider range of services and financial products and have greater name recognition and more extensive client bases. These competitors may be able to respond more quickly to new or changing opportunities, technologies, and client requirements, and may be able to undertake more extensive promotional activities, offer more attractive terms to clients and adopt more aggressive pricing policies. Moreover, current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties or may consolidate to enhance their services and products. We believe that our ability to compete depends upon many factors both within and outside our control, including: Our ability to attract and retain a network of investment professionals; The effectiveness, ease of use, performance and features of our technology and services; Client perceptions of the effectiveness of our services and technology; The price and quality of our services; 5 Our ability to service our clients effectively and efficiently; The timing and acceptance of our new products and services and enhancements to existing products and services developed by us or our competitors; and Our reputation in the financial services industry. Mutual Funds. Mutual funds are continuously being introduced to the investing public. These funds are being offered by new, as well as existing, mutual fund companies. Many of our mutual fund competitors have greater financial, technical, marketing and distribution resources. We believe that we can become competitive through our sales force and through selling agreements with other broker-dealers. How We Are Regulated Broker-Dealer Regulation. The securities industry is subject to extensive regulation under both federal and state law. The SEC is the federal agency responsible for administering the federal securities laws. In general, broker-dealers are required to register with the SEC under the Securities Exchange Act of 1934, as amended. Our wholly-owned subsidiary, Investors Capital Corporation is a broker-dealer registered with the SEC. Under the Securities Exchange Act of 1934, every registered broker-dealer that does business with the public is required to be a member of and is subject to the rules of the NASD. The NASD has established conduct rules for all securities transactions among broker-dealers and private investors, trading rules for the over-the-counter markets and operational rules for its member firms. The NASD conducts examinations of member firms, investigates possible violations of the federal securities laws and its own rules and conducts disciplinary proceedings involving member firms and associated individuals. The NASD administers qualification testing for all securities principals and registered representatives for its own account and on behalf of the state securities authorities. We are also subject to regulation under state law. We are currently registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia. The SEC and other regulatory bodies in the United States have rules with respect to net capital requirements that affect our broker-dealer subsidiary. These rules are designed to ensure that broker-dealers maintain adequate regulatory capital in relation to their liabilities, types of securities business conducted and the size of their customer business. These rules have the effect of requiring that a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Failure to maintain the required net capital may subject a firm to suspension or revocation of its registration with the SEC and suspension and expulsion by the NASD and other regulatory bodies, and ultimately may require its liquidation. The rules could restrict underwriting, trading activities, our ability to withdraw capital, pay dividends, pay interest on and repay the principal of any debt, among other matters, that could be affected. Registered Investment Adviser Regulation. The Investment Advisers Act of 1940 regulates the registration of and the compensation that may be charged by an SEC registered investment adviser. Investment advisers are subject to the same oversight by the SEC and the various states as are broker-dealers. Investment advisers are required to register with the SEC, except those that are only required to register with the appropriate state regulatory agency, are required to periodically file reports and are subject to periodic or special examinations. Rules promulgated under the Advisers Act govern advertisements by investment advisers and the custody or possession of funds or securities of a client. Most states require registration by investment advisers unless an exemption is available and impose annual registration fees. Some states also impose minimum capital requirements. There can be no assurance that compliance with existing and future requirements and legislation will not be costly and time consuming or otherwise adversely impact our business in this area. As a registered investment adviser under the Investment Advisers Act of 1940, our wholly-owned subsidiary, Eastern Point Advisors, is subject to regulations which cover various aspects of its business, including compensation arrangements. Under the Advisers Act, every investment advisory agreement with clients must expressly provide that such contract may not be assigned by the adviser without the consent of the client. Under the Investment Company Act of 1940, every investment adviser's agreement with a registered investment company must provide for the agreement's automatic termination in the event it is assigned. Under both the Advisers Act and the Investment Company Act, an investment advisory agreement is deemed to have been assigned when there is a direct or indirect transfer of the Agreement, including a direct assignment or a transfer of a "controlling block" of the adviser's voting securities or, under certain circumstances, upon the transfer of a "controlling block" of the voting securities of its parent corporation. A transaction is not, however, an assignment under the Advisers Act or the Investment Company Act if it does not result in a change of actual control or management of the investment adviser. Any assignment of Eastern Point Advisors' investment advisory agreements would require, as to any registered investment company client, the approval of a majority of its shareholders, and as to other advisory clients, the consent of such clients to such assignments. 6 Regulations Applicable to the Use of the Internet. Due to the increasing popularity and use of the internet and other online services, various regulatory authorities are considering laws and/or regulations with respect to the internet or other online services covering issues such as user privacy, pricing, content copyrights and quality of services. In addition, the growth and development of the market for online commerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. Also, the recent increase in the number of complaints by online traders could lead to more stringent regulations of online trading firms and their practices by the SEC, NASD and other regulatory agencies. The applicability to the internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes and personal privacy is also uncertain and may take years to resolve. Finally, as our services are available over the internet in multiple states, and as we have numerous clients residing in these states, these jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each such state. While Investors Capital Corporation is currently registered as a broker-dealer in all 50 states, Puerto Rico and the District of Columbia, we are qualified to do business as a foreign corporation in only a few states. Failure by our company to qualify as a broker-dealer in other jurisdictions or as an out-of-state or "foreign" corporation in a jurisdiction where it is required to do so could subject us to taxes and penalties for the failure to qualify. Our business could be harmed by any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the applications of existing laws and regulations to the internet and other online services. Employees As of March 31, 2003, we had 46 full-time employees, the majority of which are located at our principal office in Lynnfield, Massachusetts. No employee is covered by a collective bargaining agreement or is represented by a labor union. We consider our employee relations to be excellent. We also enter into independent contractor arrangements with other individuals on an as-needed basis to assist with programming and developing proprietary technologies. ITEM 2. Properties. Our principal executive offices are located in a 7,600 square foot facility at 230 Broadway, Lynnfield, Massachusetts. This facility is comprised of several office condominiums owned by different entities, which lease the office space to the Company. A portion of the space which is leased to the Company, including Investors Capital Corporation and Eastern Point Advisors, is owned by Arlsburg Trust, the trustee of which is the principal stockholder of Holdings, and Investors Realty, LLC, the principal member of whom is the principal stockholder of Holdings. The remainder is leased from an unrelated entity. The combined current annual rent was $182,723 and is comparable to current market rates for similar space in our geographic area. The leases expire in March 2005. In addition, the Company leases office space from the Arlsburg Trust for its investment center located in Topsfield, Massachusetts. Rent expense for the investment center was $36,000 for the year ended March 31, 2003. ITEM 3. Legal Proceedings. The Company operates in a highly litigious and regulated business and, as such, is a defendant or codefendant in various lawsuits and arbitrations incidental to its securities business. The Company is vigorously contesting the allegations of the complaints in these cases and believes that there are meritorious defenses in each. Counsel is unable to respond concerning the likelihood of an outcome, whether favorable or unfavorable, because of inherent uncertainties routine in these matters. Currently, there are a total of thirteen lawsuits and/or arbitrations filed against the Company. For the majority of claims, the Company's errors and omissions (E&O) policy limits the maximum exposure in any one case to $75,000, and in certain of these cases, the Company has the contractual right to seek indemnity from related parties. As such, Management, in consultation with counsel, believes that resolution of all such litigation is not expected to have a material adverse effect on the consolidated financial results of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders of Investors Capital Holdings, Ltd. during the fourth quarter of the fiscal year covered by this report. 7 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. Investors Capital Holdings' common stock began trading on The American Stock Exchange (AMEX) under the symbol "ICH" on February 8, 2001. Prior to such date, there was no established public trading market for the common stock. As of June 16, 2003, exclusive of shares held in street name, there were approximately 62 stockholders of record and 5,717,380 shares outstanding. The following table presents the high and low closing prices for the common stock of Investors Capital Holding, Ltd. on the AMEX for the period indicated. High Low ---- --- Fiscal 2003 For the period from April 1, 2002 through June 30, 2002................................. $2.35 $1.75 For the period from July 1, 2002 through September 30, 2002............................. $2.00 $1.75 For the period from October 1, 2002 through December 31, 2002........................... $2.40 $1.70 For the period from January 1, 2003 through March 31, 2003.............................. $2.05 $1.63 Fiscal 2002 For the period from April 1, 2001 through June 30, 2001................................. $6.00 $3.11 For the period from July 1, 2001 through September 30, 2001............................. $3.75 $2.20 For the period from October 1, 2001 through December 31, 2001........................... $3.49 $2.50 For the period from January 1, 2002 through March 31, 2002.............................. $2.99 $2.00 Fiscal 2001 For the period from February 8, 2001 through March 31, 2001............................. $8.00 $5.55 Investors Capital Holdings, Ltd. did not pay dividends for the year ended March 31, 2003. Future dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of the Company and the impact of regulatory restrictions. See Regulation and Management's Discussion and Analysis--Liquidity and Capital Resources, included elsewhere in this Form 10-K. ITEM 6. Selected Financial Data. The following table sets forth certain selected historical consolidated financial data. The selected income statement data for each of the years in the three year period ended March 31, 2003 and balance sheet data as of March 31, 2003 and 2002 have been derived from our audited consolidated financial statements and related notes, included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, also included elsewhere in this Form 10-K. The following selected income statement data for the years ended March 31, 2000 and 1999 and balance sheet data as of March 31, 2001, 2000 and 1999 have been derived from our audited consolidated financial statements not included herein. The following selected consolidated financial data has been prepared in accordance with GAAP. For the Year Ended March 31, 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Income Statement Data: Commission and advisory fee income........... $34,289,460 $28,880,521 $29,806,144 $23,892,296 $15,724,649 Net income (loss)............................ $115,891 $4,137 $ (104,306) $90,325 $107,255 Net income (loss) per share, basic........... $.02 $0.00 $ (0.02) $.02 $.02 Net income (loss) per share, diluted......... $.02 $0.00 $ (0.02) $.02 $.02 Weighted average common shares outstanding, basic........................ 5,717,380 5,717,931 4,789,007 4,609,491 4,573,296 Weighted average common shares outstanding, diluted ..................... 5,790,060 5,818,695 4,789,007 4,782,491 4,746,296 Cash dividends declared per share............ $ - $ - $ - $ - $ - 8 As of March 31, 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Balance Sheet Data: Total assets........................ $10,642,940 $10,114,532 $10,612,301 $4,100,065 $2,863,542 Shareholders' equity................ $ 8,248,640 $ 8,057,066 $ 8,122,573 $1,846,713 $1,497,123 Shares outstanding.................. 5,717,380 5,717,380 5,708,311 4,645,311 4,573,671 Equity per share at end of period... $1.44 $1.41 $1.42 $.40 $.33 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis reviews our consolidated financial condition as of March 31, 2003 and 2002, the consolidated results of operations for the years ended March 31, 2003, 2002 and 2001 and, where appropriate, factors that may affect future financial performance. The discussion should be read in conjunction with the consolidated financial statements and related notes, included elsewhere in the Form 10-K. Forward-Looking Statements The statements, analyses, and other information contained herein relating to trends in the operations and financial results of Investors Capital Holdings, Ltd. (the "Company"), the markets for the Company's products, the future development of the Company's business, and the contingencies and uncertainties to which the Company may be subject, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions, are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management's current expectations and beliefs concerning future events and their effects on the Company. The Company's actual results may differ materially from the results anticipated in these forward-looking statements. These forward-looking statements are subject to risks and uncertainties including, but not limited to, the risks that (1) losses may be incurred if our investment professionals fail to comply with regulatory requirements; (2) the loss of either Theodore E. Charles or Timothy B. Murphy may adversely affect our business and financial condition through the loss of significant business contacts, which would have to be replaced; (3) customer fraud could harm our earnings and profits by requiring us to expend time, money and incur actual loss, exposing us to the potential for arbitration; (4) investment professional and employee fraud and misconduct could harm our profits and earnings by causing us to expend time, money and incur actual loss, with the latter exposing us to the potential for litigation; (5) without implementation of adequate internal controls, our ability to make money could be severely restricted by regulatory sanctions being applied against our broker-dealer subsidiary, and could result in us paying substantial fines and limit our ability to make money; (6) involvement in material legal proceedings could have a significant impact on our earnings and profits if we are found liable for such claims; (7) a change in our clearing firm could result in the inability of our customers to transact business in a timely manner due to delays and errors in the transfer of their accounts, which, on a temporary basis, could affect our earnings and profits. Readers are also directed to other risks and uncertainties discussed, as well as to further discussion of the risks described above, in other documents filed by the Company with the United States Securities and Exchange Commission. The Company specifically disclaims any obligation to update or revise any forward- looking information, whether as a result of new information, future developments, or otherwise. Overview We are a financial services holding company that, through our subsidiaries, provides investment advisory, insurance, financial planning and related services. We operate in a highly regulated and competitive industry, that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition and investor preferences. Our revenues and net earnings may be either enhanced or diminished from period to period by any one of or by a multiple of these external factors. In addition, the passage of the Graham-Leach-Bliley Act in November of 1999 repealed depression-era laws that separated commercial, investment banking and insurance activities. Such repeal may result in the intensification of the environment in which we compete by increasing the number of companies doing business in the financial services arena. Critical Accounting Policies The consolidated financial statements are prepared in accordance with generally accepted accounting principles generally accepted in the United States. The Company believes that of its significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material effect on the consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company. 10 Valuation of Securities and Other Assets Substantially all financial instruments are reflected in the consolidated financial statements at fair value or amounts that approximate fair value, these include: cash, cash equivalents, and securities purchased under agreements to resell; deposits with clearing organizations; securities owned; and securities sold but not yet purchased. Unrealized gains and losses related to these financial instruments are reflected in net earnings or other comprehensive income in accordance with FASB 115, depending on the underlying purpose of the instrument. Where available, the Company uses prices from independent sources such as listed market prices, or broker or dealer price quotations. Fair values for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In addition, even where the value of a security is derived from an independent market price or broker or dealer quote, certain assumptions may be required to determine the fair value. For instance, the Company generally assumes that the size of positions in securities that the Company holds would not be large enough to affect the quoted price of the securities if the Company were to sell them, and that any such sale would happen in an orderly manner. However, these assumptions may be incorrect and the actual value realized upon disposition could be different from the current carrying value. Reserves The Company records reserves related to legal proceedings in "accrued expenses". The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client's account; the basis and validity of the claim; the possibility of wrongdoing on the part of an employee of the Company; previous results in similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions of management in determining the estimates of reserves may be incorrect and the actual disposition of a legal proceeding could be greater or less than the reserve amount. Results of Operations Fiscal Year Ended March 31, 2003 Compared with Fiscal Year Ended March 31, 2002 Consolidated operating income of $311,978 for the year ended March 31, 2003 increased by $464,183, or 305.0%, as compared to the consolidated operating loss of $152,205 for the year ended March 31, 2002. This increase in consolidated operating income, after the elimination of all inter-segment revenues and expenses, was attributable to a $646,451 increase in operating income provided by Investors Capital Corporation (ICC) and a $10,099 increase in operating income from Investors Capital Holdings, Ltd. (ICH), on a stand alone basis. Offsetting these increases was a decrease of $192,367 in operating income provided by Eastern Point Advisors, Inc. (EPA). The $646,451 increase in operating income provided by ICC was attributable to an increase of $488,642 in the combined gross margin on our mutual fund /variable annuity and brokerage business, a $255,306 increase in fee income and a $238,989 decrease in legal settlements. These increases in operating income were offset by a $292,944 increase in gross salaries. The remaining variance of $43,542 was the result of miscellaneous items. The $192,367 decrease in operating income provided by EPA was attributable to a $127,280 decrease in the gross margin, a $60,575 increase in fee income and an increase of $144,855 in gross salaries. The remaining variance of $19,193 resulted from miscellaneous items. Consolidated commissions and advisory fee income of $34,289,460 for the year ended March 31, 2003 increased by $5,408,939, or 18.7%, as compared to consolidated commissions and advisory fee income of $28,880,521 for the year ended March 31, 2002. This increase in gross revenues, after the elimination of all inter-segment revenues and expenses, was attributable to a $5,784,417 increase in gross revenues provided by ICC, which was offset by a decline of $375,478 in advisory fee income provided by EPA. The increase of $5,784,417 in gross revenues provided by ICC was driven by increases of $3,830,713 from mutual fund/variable annuity commissions, $902,507 from commissions generated from stock trades, $677,583 from underwriting fees, $198,331 from E&O insurance and $188,728 from 12b-1 commissions. The remaining $13,445 decrease was the result of miscellaneous items. The $375,478 decrease in advisory fee income provided by EPA was mainly the result of market conditions and a decision to terminate certain selling agreements that were not favorable to the Company. Consolidated commissions and advisory fee expense of $28,040,831 for the year ended March 31, 2003 increased by $4,731,695, or 20.3%, as compared to consolidated commissions and advisory fee expense of $23,309,136 for the year ended March 31, 2002. This increase, after the elimination of all inter-segment revenues and expenses, was attributable to a $5,040,467 increase in commission expense incurred by ICC and a $308,772 decrease in advisory fee expense incurred by EPA. The increase of $5,040,467 in commission expense incurred by ICC was the result of the overall increase in gross commissions from the sale of mutual funds/variable annuities. The decrease of $308,772 generated by EPA was the result of the decline in advisory fee income. 11 Consolidated administrative expenses of $5,440,681 for the year ended March 31, 2003 increased by $282,391, or 5.5%, as compared to consolidated administrative expenses of $5,158,290 for the year ended March 31, 2002. This increase, after the elimination of all inter-segment revenues and expenses, was attributable to a $125,345 increase in administrative expenses incurred by ICC, a $115,099 increase incurred by EPA and a $41,947 increase in administrative expenses incurred by ICH. The increase of $125,345 in administrative expenses incurred by ICC was mainly driven by a $292,944 increase in gross salaries, which was offset by a decrease of $238,989 in legal settlements. The remaining $71,390 variance was the result of miscellaneous items. The increase of $115,099 in administrative expenses incurred by EPA was mainly driven by an increase of $144,855 in gross salaries. The remaining $29,756 variance was attributable to miscellaneous items. Consolidated selling expenses of $495,970 for the year ended March 31, 2003 decreased by $69,330, or 12.3%, as compared to consolidated selling expenses of $565,300 for the year ended March 31, 2002. This decrease, after the elimination of all inter-segment revenues and expenses, was attributable to a $52,046 decline in selling expenses generated by ICH, a $27,846 decrease in selling expenses incurred by ICC and a $10,562 increase in selling expenses incurred by EPA. The decrease of $52,046 was due to a reclassification of expenses to the "administrative" category. Consolidated net other expense of $14,296 for the year ended March 31, 2003 increased by $295,887, or 105.0%, as compared to consolidated net other income of $281,591 for the year ended March 31, 2002. The increase was mainly attributable to a $250,000 charge to earnings as a result of a fine imposed by the National Association of Securities Dealers (NASD). Consolidated income taxes of $181,791 for the year ended March 31, 2003 increased by $56,542, or 45.1%, as compared to consolidated income taxes of $125,249 for the year ended March 31, 2002. This increase in income tax expense was attributable to the increased profitability of the Company. Consolidated net income of $115,891 for the year ended March 31, 2003 increased by $111,754, or over 100.0%, as compared to consolidated net income of $4,137 for the year ended March 31, 2002. This $111,754 increase in net earnings, after the elimination of all inter-segment revenues and expenses, was attributable to a $259,925 increase in net income provided by ICC. Offsetting this increase was a $98,848 decrease in net income generated by EPA and a $49,323 decrease in net income provided by ICH. The $259,925 increase in net income provided by ICC was attributable to the $255,306 increase in fee income as well at the increase in gross margins. The $98,848 decrease in net income from EPA was attributable to the increase in salary expense. The $49,323 decrease in net income provided by ICH was attributable to gains and losses on investments. Fiscal Year Ended March 31, 2002 Compared with Fiscal Year Ended March 31, 2001 Consolidated operating loss of $152,205 for the year ended March 31, 2002 decreased by $16,305, or 9.7%, as compared to the consolidated operating loss of $168,510 for the year ended March 31, 2001. This decrease in consolidated operating loss, after the elimination of all inter-segment revenues and expenses, was attributable to a $253,503 increase in operating income provided by Investors Capital Corporation (ICC) and a $121,522 increase in operating income provided by Eastern Point Advisors (EPA). Offsetting these increases was a decrease of $358,720 in operating income provided by Investors Capital Holdings, Ltd (ICH), on a stand-alone basis. The $253,503 increase in operating income provided by ICC was attributable to an increase of $151,876 in income earned from promotional events throughout the year as well as a $116,279 increase in fees charged for an insurance policy. The remaining $14,652 decrease was the result of miscellaneous items. The $121,522 increase in operating income provided by EPA was mainly attributable to a $94,476 decrease in expenses associated with the discontinuation of the Investors Capital Internet and Technology Fund. The remaining $27,046 increase resulted from a general reduction in various expenses as part of an effort to streamline our operations. The $358,720 decrease in operating income provided by ICH was attributable to an increase of $130,388 in legal and accounting, a $100,000 increase associated with the amortization of the Company's subsidiary, ICC Insurance Agency, an increase of $61,445 in printing costs and a $59,328 increase in investor and public relations costs. The remaining $7,559 decrease was comprised of miscellaneous items. Consolidated commissions and advisory fee income of $28,880,521 for the year ended March 31, 2002 decreased by $925,623, or 3.1%, as compared to consolidated commissions and advisory fee income of $29,806,144 for the year ended March 31, 2001. This decrease in gross revenues, after the elimination of all inter-segment revenues and expenses, was attributable to a $777,309 decrease in revenues provided by ICC, a $139,470 decrease in advisory fee income provided by EPA and an $8,844 decrease in other income provided by ICH. The decrease of $777,309 in gross revenues provided by ICC was mainly driven by a decrease of $480,184 in one-time commissions earned from the initial public offering which occurred last year. The remaining $297,125 decrease was attributable to an overall decline in commissions earned from the sale of mutual fund and variable annuity products as the market under-performed compared to the previous year. The $139,470 decrease in advisory fee income provided by EPA was mainly the result of market conditions and a decision to terminate certain selling agreements that were not favorable to the Company. 12 Consolidated commissions and advisory fee expense of $23,309,136 for the year ended March 31, 2002 decreased by $1,252,532, or 5.1%, as compared to consolidated commissions and advisory fee expense of $24,561,668 for the year ended March 31, 2001. This decrease, after the elimination of all inter-segment revenues and expenses, was attributable to a $1,171,215 decrease in commission expense incurred by ICC and an $81,317 decrease in advisory fee expense incurred by EPA. The decrease of $1,171,215 in commission expense incurred by ICC was the result of the decrease in one-time commissions earned from the sale of mutual funds and variable annuity products as well as the decrease in commissions earned from the initial public offering in the previous year. As the commissions earned on these revenues decrease, the payout associated with these revenues decreases proportionately. Consolidated administrative expenses of $5,158,290 for the year ended March 31, 2002 increased by $680,084, or 15.2%, as compared to consolidated administrative expenses of $4,478,206 for the year ended March 31, 2001. This increase, after the elimination of all inter-segment revenues and expenses, was attributable to a $529,890 increase in administrative expenses incurred by ICC and a $312,576 increase in administrative expenses incurred by ICH. Offsetting these increases was a decrease of $162,382 in administrative expenses incurred by EPA. The increase of $529,890 in administrative expenses incurred by ICC was mainly driven by a $438,024 increase in legal expense related to the settlement of various NASD arbitrations. The remaining $91,866 increase was driven by an overall increase in payroll and payroll related expenses. The increase of $312,576 in administrative expenses incurred by ICH was driven by an increase of $130,388 in legal and accounting expense, a $100,000 increase associated with the amortization of the Company's subsidiary, ICC Insurance Agency, and a $61,445 increase in printing costs. The remaining $20,743 increase was attributable to miscellaneous items. The decrease of $162,382 in administrative expenses incurred by EPA was driven by a $94,476 decrease in expenses associated with the discontinuation of the Investors Capital Internet and Technology Fund as well as a $69,744 decrease in printing expense. The offsetting increase of $1,838 was due to miscellaneous items. Consolidated selling expenses of $565,300 for the year ended March 31, 2002 decreased by $369,480, or 39.5%, as compared to consolidated selling expenses of $934,780 for the year ended March 31, 2001. This decrease, after the elimination of all inter-segment revenues and expenses, was attributable to a $389,487 decrease in selling expenses incurred by ICC and a $17,293 decrease in selling expenses incurred by EPA. Offsetting these decreases was a $37,300 increase in selling expenses incurred by ICH. The decrease of $389,487 in selling expenses incurred by ICC was driven by a decrease of $172,847 in advertising costs and a $151,876 increase in income earned from promotional events throughout the year. The remaining $64,764 decrease was the result of various cost cutting measures put in place throughout the year. Consolidated income taxes of $125,249 for the year ended March 31, 2002 increased by $111,249, or 794.6%, as compared to consolidated income taxes of $14,000 for the year ended March 31, 2001. This increase in income tax expense was mainly attributable to an increase in permanent differences in which certain expenses are deductible for book purposes but not deductible for tax purposes. Consolidated net income of $4,137 for the year ended March 31, 2002 increased by $108,443, or 104.0%, as compared to consolidated net loss of $104,306 for the year ended March 31, 2001. This $108,443 increase in net earnings, after the elimination of all inter-segment revenues and expenses, was attributable to a $239,116 increase in net income provided by ICC and a $103,696 increase in net income provided by EPA. Offsetting these increases was an increase in net loss of $234,369 provided by ICH. The $239,116 increase in net income provided by ICC was attributable to an increase of $151,876 in income earned from promotional events throughout the year as well as an increase of $116,279 in fees charged for an insurance policy. The offsetting decrease of $29,039 was due to miscellaneous items. The $103,696 increase in net income provided by EPA was attributable to a $94,476 decrease in expenses associated with the discontinuation of the Investors Capital Internet and Technology Fund as well as a $69,744 decrease in printing expense. The offsetting decrease of $60,524 was attributable to a lower gross margin resulting from unfavorable market conditions and the termination of certain selling agreements. The $234,369 increase in net loss provided by ICH was attributable to an increase of $130,388 in legal and accounting expense, a $100,000 increase associated with the amortization of the Company's subsidiary, ICC Insurance Agency, a $70,635 increase in income tax expense, a $61,445 increase in printing costs and a $59,328 increase in investor and public relations costs. Offsetting these increased costs was an increase in interest income of $170,335 resulting from availability of IPO proceeds for an entire year. The remaining $17,092 was the result of miscellaneous items. Liquidity and Capital Resources We believe that return on equity primarily is based on the use of capital in an efficient manner. Historically, we have financed our operations primarily through private equity and internally generated cash flow and not by incurring debt. As of March 31, 2003, cash and cash equivalents totaled $7,088,659 as compared to $6,337,445 as of March 31, 2002. Working capital as of March 31, 2003 was $7,702,618 as compared to $7,276,218 as of March 31, 2002. Our ratio of current assets to current liabilities was 4.42 to 1 as of March 31, 2003 as compared to 4.53 to 1 as of March 31, 2002. As of March 31, 2003, our net capital ratio for the broker-dealer was 1.98 to 1 as compared to 1.74 to 1 for our fiscal year ended March 31, 2002. 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 March 31, 2003, we had net capital of $1,214,481 as compared to net capital of $1,136,646 as of March 31, 2002. This resulted in excess net capital of $1,053,988 and $1,004,696, respectively, for the applicable years. 13 Net cash provided by operating activities was $798,354 for the year ended March 31, 2003 as compared to net cash used in operating activities of $15,651 and $325,681 for the years ended March 31, 2002 and 2001, respectively. The $814,005 increase in 2003 compared to 2002 resulted primarily from an increase in commissions received and an increase in liabilities. The $310,030 increase in 2002 as compared to 2001 was primarily the result of a decrease in commissions payable. This decrease in commissions payable resulted from the automation of the commission payment system in the previous year, which pays commissions on a timelier basis. Net cash used in investing activities was $30,225, $420,405 and $139,592 for the years ended March 31, 2003, 2002 and 2001, respectively. The decrease in cash used of $390,180 in 2003 compared to 2002 resulted from a decline in spending on fixed assets and an increase in cash from the collection of loans receivable from registered representatives. The increase in cash used of $280,813 in 2002 compared to 2001 was the result of granting loans to our registered representatives during the current year in addition to an increase in the purchase of fixed assets needed to enhance our infrastructure. Net cash used in financing activities was $16,915 for 2003 and $406,839 for 2002. Net cash provided by financing activities was $6,801,010 for 2001. The $389,924 decrease in cash used in 2003 as compared to 2002 resulted primarily from not having to finance our E&O policy in 2003 as had been done in previous years. The $7,207,849 increase resulted from our Company's initial public offering on February 8, 2001. Risk Management Risks are an inherent part of the Company's business and activities. Management of these risks is critical to the Company's financial strength and profitability and requires communication, judgment and knowledge of financial trends and the economy as a whole. Senior management takes an active role in the risk management process. The principal risks involved in the Company's business activities are market, operational, regulatory and legal. Market Risk Market risk is the risk attributable to common macroeconomic factors such as gross domestic product, employment, inflation, interest rates, budget deficits and Sentiment. Consumer and producer sentiment is critical to our business. The level of consumer confidence determines their willingness to spend, especially in the financial markets. It is this willingness to spend in the financial markets that is key to our business. A shift in spending in this area could negatively impact us. However, senior management is constantly monitoring these economic trends in order to enhance our product line to offset any potential negative impact. Operational Risk Operational risk refers to the risk of loss resulting from the Company's operations, including, but not limited to, improper or unauthorized execution processing of transactions, deficiencies in the Company's technology or financial or financial operating systems and inadequacies or breaches in the Company's control processes. Managing these risks is critical, especially in a rapidly changing environment with increasing transaction volume. Failure to manage these risks could result in financial loss to the Company. To mitigate these risks, the Company had developed specific policies and procedures designed to identify and manage operational risk. These policies and procedures are reviewed and updated on a continuing basis to ensure that this risk is minimized. Regulatory and Legal Risk Regulatory and legal risk include non-compliance with applicable legal and regulatory requirements and the risk of a large number of customer claims that could result in adverse judgments against the Company. The Company is subject to extensive regulation in all jurisdictions in which it operates. In this regard, the Company has instituted comprehensive procedures to address issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, money-laundering and record keeping. 14 Effect of Recently Issued Accounting Pronouncements Please refer to Note 2 "Accounting Policies" of the notes to the consolidated financial statements contained herein. Effects of Inflation Investors Capital Holdings' assets are primarily liquid in nature and are not significantly affected by inflation. Management believes that the replacement cost of property and equipment will not materially affect operating results. However, the rate of inflation affects our expenses, including employee compensation and benefits, communications and occupancy, which may not be readily recoverable through charges for services provided. 15 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is contained in "Managements's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Market Risk" of this Form 10-K. 16 ITEM 8. Financial Statements and Supplementary Data. To the Board of Directors and Stockholders of Investors Capital Holdings, Ltd. and Subsidiaries Lynnfield, Massachusetts INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Investors Capital Holdings, Ltd. and Subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two-year period ended March 31, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated statement of operations, changes in stockholders' equity and cash flows of Investors Capital Holdings, Ltd. and Subsidiaries for the year ending March 31, 2001 were audited by other auditors whose report dated May 29, 2001 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Capital Holdings, Ltd. and Subsidiaries as of March 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended March 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. /s/SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts SHATSWELL, MacLEOD & COMPANY, P.C. May 15, 2003 17 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- March 31, 2003 and 2002 ----------------------- 2003 2002 ---------------- ---------------- ASSETS Cash and cash equivalents $ 7,088,659 $ 6,337,445 Investments in available-for-sale securities 42,195 56,291 Marketable securities, at market value 132,471 2,364 Securities not readily marketable, at estimated fair value 47,500 10,000 Investment in unconsolidated affiliate 64,495 89,697 Deposits with clearing organization, restricted 175,000 175,000 Accounts receivable 1,946,565 2,101,200 Loans receivable from registered representatives 95,389 199,996 Receivables from officers 104,088 136,078 Prepaid expenses 195,702 193,682 Deferred income tax asset, net -- 31,930 Property and equipment, net 525,174 531,296 Income taxes receivable 60,113 -- Other assets 165,589 249,553 -------------- -------------- Total assets $10,642,940 $10,114,532 =========== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes payable $ 62,101 $ 79,016 NASD settlement payable 250,000 -- Commissions payable 1,130,539 1,136,676 Accounts payable 438,572 379,320 Accrued expenses 377,783 303,816 Deferred income tax liability, net 28,032 -- Securities sold, not yet purchased, at market value 107,273 9,530 Income taxes payable -- 149,108 ------------- -------------- Total liabilities 2,394,300 2,057,466 ------------- -------------- Stockholders' equity: Common stock, $.01 par value, authorized 10,000,000 shares; issued 5,721,265 shares at March 31, 2003 and 2002; outstanding 5,717,380 shares at March 31, 2003 and 2002 57,213 57,213 Additional paid-in capital 8,169,292 8,135,347 Retained earnings (accumulated deficit) 54,257 (61,634) Treasury stock, at cost (3,885 shares at March 31, 2003 and 2002) (30,135) (30,135) Accumulated other comprehensive loss (1,987) (43,725) ------------- -------------- Total stockholders' equity 8,248,640 8,057,066 ------------- ------------- Total liabilities and stockholders' equity $ 10,642,940 $ 10,114,532 ============= ============== The accompanying notes are an integral part of these consolidated financial statements. 18 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- Commission and advisory fee income $ 34,289,460 $ 28,880,521 $ 29,806,144 Cost of commission and advisory fees 28,040,831 23,309,136 24,561,668 ------------ --------------- -------------- Gross profit 6,248,629 5,571,385 5,244,476 ------------ --------------- -------------- Selling and administrative expenses: Administrative 5,440,681 5,158,290 4,478,206 Selling 495,970 565,300 934,780 ------------ --------------- -------------- Total selling and administrative expenses 5,936,651 5,723,590 5,412,986 ------------ --------------- -------------- Operating income (loss) 311,978 (152,205) (168,510) ------------ ---------------- --------------- Other income (expense): Interest income 311,068 268,228 138,596 Interest expense (14,117) (30,982) (21,576) Other (expense) income (311,247) 44,345 (38,816) ------------ --------------- -------------- Net other (expense) income (14,296) 281,591 78,204 ------------ ---------------- ------------- Income (loss) before taxes 297,682 129,386 (90,306) Provision for income taxes 181,791 125,249 14,000 ------------ --------------- -------------- Net income (loss) $ 115,891 $ 4,137 $ (104,306) ============ =============== ============== Earnings (loss) per common share Basic and diluted earnings (loss) per common share: Net income (loss) $ 0.02 $ 0.00 $ (0.02) ============ ============== =============== Share data: Weighted average shares used in basic earnings (loss) per common share calculations 5,717,380 5,717,931 4,789,007 Plus: Incremental shares from assumed conversion of stock options 72,680 100,764 -- ------------ --------------- -------------- Weighted average shares used in diluted earnings (loss) per common share calculations 5,790,060 5,818,695 4,789,007 ============ =============== ============== The accompanying notes are an integral part of these consolidated financial statements. 19 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended March 31, 2003, 2002 and 2001 ------------------------------------------ Retained Accumulated Common Stock Additional Earnings Other -------------------- Paid-in (Accumulated Treasury Comprehensive Shares Amount Capital Deficit) Stock Income (Loss) Total -------------------- ------------ -------------- ---------- --------------- ----------- Balance, March 31, 2000 4,645,311 $31,628 $1,744,602 $ 38,535 $ -- $ 31,948 $1,846,713 Additional capital 1,063,000 10,630 6,407,158 6,417,788 Comprehensive loss: Net loss (104,306) Net unrealized losses (37,622) Comprehensive loss (141,928) --------- ------- ---------- ----------- ---------- ----------- ----------- Balance, March 31, 2001 5,708,311 42,258 8,151,760 (65,771) -- (5,674) 8,122,573 Costs related to initial public offering (1,458) (1,458) Common stock adjustment 12,954 14,955 (14,955) -- Purchases of treasury stock (30,135) (30,135) Comprehensive loss: Net income 4,137 Net unrealized losses (38,051) Comprehensive loss (33,914) --------- ------- ---------- ----------- ---------- ----------- ----------- Balance, March 31, 2002 5,721,265 57,213 8,135,347 (61,634) (30,135) (43,725) 8,057,066 Stock-based compensation 33,945 33,945 Comprehensive income: Net income 115,891 Net unrealized gains 41,738 Comprehensive income 157,629 --------- ------- ---------- ---------- --------- ---------- ---------- Balance, March 31, 2003 5,721,265 $57,213 $8,169,292 $ 54,257 $(30,135) $ (1,987) $8,248,640 ========= ======= ========== ========= ======== ========== ========= Reclassification disclosure: Net unrealized gains on available-for-sale securities for the year ended March 31, 2003 were $14,906. Such amount has been adjusted to $41,738 to reflect a reclassification of the loss of $55,834 on the sale of a security, with no tax effect. Net unrealized losses on available-for-sale securities for the year ended March 31, 2002 were $37,426. Such amount has been adjusted to $38,051 to reflect a reclassification of the gain of $656 on the sale of a security, with no tax effect. For net unrealized gains (losses) on available-for-sale securities, no reclassification adjustment was necessary and there was no income tax effect for the year ended March 31, 2001 because there were no sales of such securities in that year. Accumulated other comprehensive loss as of March 31, 2003, 2002 and 2001 consists of net unrealized holding losses on available-for-sale securities, net of taxes. The accompanying notes are an integral part of these consolidated financial statements. 20 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- 2003 2002 2001 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ 115,891 $ 4,137 $ (104,306) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 140,954 133,932 79,382 Change in deferred taxes 59,962 (44,930) 6,000 Unrealized loss on investments -- -- 65,644 Loss on securities positions, net 48,334 -- -- Gain on sale of available-for-sale security -- (656) -- Change in marketable securities (130,107) 13,405 -- Realized loss (gain) on investment in unconsolidated affiliates 25,202 (14,241) -- Decrease (increase) in accounts receivable 154,635 (91,948) (193,134) Decrease (increase) in prepaid expenses, receivables from officers and other assets 83,934 (27,509) 4,628 (Increase) decrease in prepaid income taxes (60,113) 88,123 50,862 (Decrease) increase in taxes payable (149,108) 149,108 -- Increase (decrease) in accounts payable and other liabilities 156,995 (250,941) 93,192 Increase (decrease) in accrued expenses 73,967 54,242 (5,819) (Decrease) increase in commissions payable (6,137) 3,575 (322,130) Stock-based compensation 33,945 -- -- NASD settlement payable 250,000 -- -- Other -- (31,948) -- ---------- ---------- --------- Net cash provided by (used in) operating activities 798,354 (15,651) (325,681) ---------- ---------- --------- Cash flows from investing activities: Purchases of property and equipment (134,832) (225,639) (121,220) Purchase of securities -- -- (18,372) Proceeds from sale of available-for-sale security -- 5,230 -- Decrease (increase) in loans receivable from registered representatives 104,607 (199,996) -- ---------- ---------- --------- Net cash used in investing activities (30,225) (420,405) (139,592) ---------- ---------- --------- Cash flows from financing activities: Proceeds from the issuance of common stock -- -- 10,630 Additional paid-in capital -- -- 6,407,158 Costs related to initial public offering -- (1,458) -- Purchases of treasury stock -- (30,135) -- Proceeds from notes payable -- 773,668 558,225 Payments on notes payable (16,915) (1,148,914) (175,003) ---------- ---------- --------- Net cash (used in) provided by financing activities (16,915) (406,839) 6,801,010 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents 751,214 (842,895) 6,335,737 Cash and cash equivalents at beginning of year 6,337,445 7,180,340 844,603 ---------- ---------- --------- Cash and cash equivalents at end of year $7,088,659 $6,337,445 $7,180,340 ========== ========== ========== 21 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- 2003 2002 2001 ------------- ----------- --------- Supplemental disclosures: Interest paid $ 14,117 $ 30,982 $21,576 Income taxes paid (received) 331,050 (67,052) 72,200 Noncash activity: Transfer from receivables from officers to securities not readily marketable 30,000 -- -- The accompanying notes are an integral part of these consolidated financial statements. 22 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 1 - NATURE OF OPERATIONS - ----------------------------- Investors Capital Holdings, Ltd., (the Company) (ICH) and its wholly-owned subsidiaries, Investors Capital Corporation (ICC), Eastern Point Advisors, Inc. (EPA) and ICC Insurance Agency, Inc. are engaged throughout the United States in the financial services industry as general securities brokers and asset managers. ICC is a registered broker-dealer under the Securities Exchange Act of 1934. EPA is a Federally Regulated Advisor subject to the Securities and Exchange Commission under the Investment Adviser's Act of 1940. NOTE 2 - ACCOUNTING POLICIES - ---------------------------- The significant accounting policies of the Company are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ICC, EPA and ICC Insurance Agency, Inc. All significant inter-company items and transactions have been eliminated in the consolidation. REVENUE RECOGNITION: Securities transactions and related commission revenues and expenses are recorded on a settlement date basis. The Company earns an advisory fee based on a client's managed portfolio value on portfolios managed by EPA. These fees are recorded under the accrual method. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flow, cash and cash equivalents includes cash in checking and savings accounts, cash at a clearing broker-dealer and short-term investments with original maturities of three months or less. FINANCIAL INSTRUMENTS: The financial instruments of the Company are reported in the consolidated balance sheets at market or fair values, or at carrying amounts that approximate fair values because of the short maturity of the instruments, except loans receivable. The fair values for loans receivable are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. As of March 31, 2003, the carrying amount and fair value of loans receivable from registered representatives were $95,389 and $95,389, respectively. 23 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 2 - ACCOUNTING POLICIES (Continued) - --------------------------------------- INVESTMENT SECURITIES: The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. -- Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements. -- Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings but are reported as a net amount (less expected tax) in a separate component of capital until realized. -- Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings. Declines in the fair value of available-for-sale and held-to-maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Marketable securities are valued at market value, and securities not readily marketable are valued at fair value as determined by management. PREMISES AND EQUIPMENT: Furniture, equipment and leasehold improvements are stated at cost. Maintenance and repairs are charged to operations. Depreciation is provided utilizing the straight-line method over their useful lives, generally seven years. BUSINESS DEVELOPMENT: The Company expenses all promotional costs as incurred and advertising costs upon first exhibition of the advertisement. Substantially all business development costs relate to advertising. Business development expenses amounted to $253,146, $346,681 and $311,905 for the years ended March 31, 2003, 2002 and 2001, respectively. INCOME TAXES: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the asset and liability approach, deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. 24 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 2 - ACCOUNTING POLICIES (Continued) - --------------------------------------- STOCK BASED COMPENSATION: At March 31, 2003, the Company has three stock-based compensation plans which are described more fully in Note 15. The Company accounts for transactions with employees under those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost has been recognized for employee transactions related to its fixed stock option plans. Transactions with nonemployees, in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based transactions with employees. For the Years Ended March 31, ------------------------------------- 2003 2002 2001 ----------- -------- ------------ Net income (loss), as reported $115,891 $ 4,137 $(104,306) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (13,458) (9,233) (7,121) ------- ------- --------- Pro forma net income (loss) $102,433 $(5,096) $(111,427) ======== ======= ========= Earnings (loss) per share: Basic - as reported $0.02 $0.00 $(0.02) Basic - pro forma $0.02 $0.00 $(0.02) Diluted - as reported $0.02 $0.00 $(0.02) Diluted - pro forma $0.02 $0.00 $(0.02) SEGMENT REPORTING: The Company makes disclosures about products and services, geographic areas, and major customers in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." RECENT ACCOUNTING PRONOUNCEMENTS: 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. 25 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 2 - ACCOUNTING POLICIES (Continued) - --------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS: (Continued) 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 acquired 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 was effective as follows: All of the provisions of SFAS No. 142 were applied in fiscal years beginning after December 15, 2001, to all goodwill and intangible assets recognized in the Company's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. The adoption of SFAS No. 142 did not have a material impact on the consolidated financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," but retains the basic recognition and measurement model for assets held for use and held for sale. The provisions of SFAS No. 144 are required to be adopted starting with fiscal years beginning after December 15, 2001. This Statement did not have a material impact on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement did not have a material impact on the Company's consolidated financial statements. 26 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 2 - ACCOUNTING POLICIES (Continued) - --------------------------------------- RECLASSIFICATIONS: Certain amounts from the prior years have been reclassified for consistency with the current year's presentation. NOTE 3 - NET CAPITAL - -------------------- ICC is subject to the Securities and Exchange Commission's regulations and operating guidelines, which require ICC to maintain a specified amount of net capital, as defined, and a ratio of aggregate indebtedness to net capital, as defined, not exceeding 15 to 1. ICC's net capital as computed under 15c3-1 was $1,214,481 at March 31, 2003 which resulted in excess net capital of the required net capital of $160,493 in the amount of $1,053,988. The ratio of aggregate indebtedness to capital at March 31, 2003 was 1.98 to 1. ICC's net capital as computed under 15c3-1 was $1,136,646 at March 31, 2002 which resulted in excess net capital of the required net capital of $131,950 in the amount of $1,004,696. The ratio of aggregate indebtedness to capital at March 31, 2002 was 1.74 to 1. NOTE 4 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED - ----------------------------------------------------- Securities owned and sold, not yet purchased, consist of available-for-sale securities and investment securities at market values. The carrying amount and fair value of investments in available-for-sale securities are as follows: Losses In Accumulated Other Amortized Comprehensive Cost Income Fair Value March 31, 2003 --------- ------------- ------------ Equity securities $ 44,182 $ 1,987 $42,195 ========= ======== ======= March 31, 2002 Equity securities $100,016 $ 43,725 $56,291 ======== ======= ======= The carrying amount of investment securities at market values are as follows: Sold, Not Yet March 31, 2003 Owned Purchased --------- ---------- Corporate bond $ 49,066 $ -- Unit investment trust -- 28,587 Equity securities 83,405 78,686 ---------- ---------- $132,471 $107,273 ======== ======== March 31, 2002 Equity securities $ 2,364 $ 9,530 ========== ========== 27 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 4 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED (Continued) - ---------------------------------------------------------------- The securities owned are securities owned temporarily by the Company for the convenience of customers of the Company. Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the Company. These securities at estimated fair values consist of the following: March 31, 2003 Equity securities $47,500 ======= March 31, 2002 Equity securities $10,000 ======= NOTE 5 - INVESTMENT IN UNCONSOLIDATED AFFILIATE - ----------------------------------------------- As of March 31, 2003 and 2002, the Company had an investment totaling $64,495 and $89,697, respectively in an unconsolidated affiliate. As of March 31, 2001, the investment holdings consisted of Eastern Point Advisors Twenty Fund and Investors Capital Internet and Technology Fund. During the year ended March 31, 2002, the Company sold its investment in Investors Capital Internet and Technology Fund and the fund was liquidated as described in Note 20. These investments were accounted for under the equity method of accounting for investments because the Company had the ability to exercise significant influence over the funds. An investor using the equity method initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the investor's share of income of the investee and is reduced to reflect the investor's share of losses of the investee or dividends received from the investee. The investor's share of the income or losses of the investee is included in the investor's net income as the investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses, also are applicable to the equity method. As of March 31, 2003, the Company held a 1.1% ownership in the Eastern Point Advisors Twenty Fund which had a market value of $64,495. NOTE 6 - TRANSACTIONS WITH RELATED PARTIES - ------------------------------------------ The Company leases office space from the Arlsburg Trust, the trustee of whom is the principal stockholder of the Company and Investors Realty, LLC, the principal member of whom is the principal stockholder of the Company. Rent expense for these leases amounted to $175,799, $175,799 and $163,019 for the years ending March 31, 2003, 2002 and 2001, respectively. 28 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 6 - TRANSACTIONS WITH RELATED PARTIES (Continued) - ------------------------------------------------------ One of the members of the Board of Directors is also a registered representative and he earned commission income from the Company in the years ending March 31, 2003, 2002 and 2001 of $186,418, $66,828 and $0, respectively. Loans Receivable From Registered Representatives - These loans consist of promissory notes, which bear interest at the rate of 3.94% per annum, and are payable within 18 or 24 months of the date of the note, in weekly installments. The notes are secured by various pledges of brokerage accounts and/or personal assets of the registered representatives. As of March 31, 2003 these loans amounted to $95,389 and $18,141 of these loans are to a registered representative who is also a Director of the Company. The Company is owed money from senior executives. As of March 31, 2003 and 2002 the balances owed amounted to $104,088 and $136,078, respectively. Investors Marketing Services, Inc. is jointly owned by the Company's principal stockholder, Theodore E. Charles and his spouse, Janice M. Charles. This entity performs a fulfillment function for subsidiaries of the Company by preparing, collating and mailing registration kits to registered representatives, and creates graphics and other art work for various marketing materials produced for these subsidiaries. It also prepares the assembly, shipping and postage of literature pertaining to the subsidiaries. For the years ended March 31, 2003, 2002 and 2001, the cost paid for these services was $60,130, $62,982 and $221,091, respectively. Included in accounts receivable at March 31, 2003 is $200,226 due to EPA from the Eastern Point Advisors 20 Fund (the "Fund"). As compensation for its services EPA receives, on a monthly basis, an investment advisory fee calculated at the annual rate of 1.5% of the Fund's average daily net assets. EPA has voluntarily agreed to waive its advisory fees or reimburse other Fund expenses so that the Fund's annual operating expenses will not exceed 5.00% for Class A shares and 5.75% for Class C shares, of the average daily net assets of the respective class. The waiver may be terminated by EPA at any time. EPA has three years to recoup any expenses it pays for on behalf of the Fund, or the receivable relating to that year will have to be written off by EPA. A summary of outstanding amounts for waived fees since the inception of the Fund, and the related Fund year are as follows as of March 31, 2003: Reimbursable Fund Amount Year End Expiration Date -------- ----------------------- --------------------- $ 54,929 2000 September 30, 2003 13,090 2001 September 30, 2004 73,893 2002 September 30, 2005 58,314 2003 September 30, 2006 --------- $200,226 ======== The amount outstanding for the 2000 Reimbursable Fund Year End of $54,929, consists of $109,858 of waived fees less $54,929 that the Company has reserved for as uncollectible. Management of the Company feels, based upon a reduction in future estimated administrative costs associated with a change in the Fund's administrator under a service agreement effective May 1, 2002, that the entire receivable from the Fund will be recovered by EPA. 29 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 7 - PROPERTY AND EQUIPMENT, NET - ------------------------------------ Property and equipment consisted of the following at March 31: 2003 2002 ----------- ----------- Equipment $543,042 $483,786 Furniture and fixtures 234,626 179,110 Leasehold improvements 198,868 178,808 --------- --------- 976,536 841,704 Accumulated depreciation and amortization (451,362) (310,408) --------- --------- Property and equipment, net $525,174 $531,296 ======== ======== NOTE 8 - NOTES PAYABLE - ---------------------- At March 31, 2003 and 2002 notes payable consisted of debt to finance insurance premiums. The annual rate of interest on the outstanding loan at March 31, 2003 was 6% and the loan matures on November 8, 2003. NOTE 9 - NATIONAL ASSOCIATION OF SECURITIES DEALERS SETTLEMENT - -------------------------------------------------------------- Subsequent to a National Association of Securities Dealers (NASD) examination, NASD, on April 9, 2003, accepted a Letter of Acceptance, Waiver and Consent ("AWC") submitted by the Company, in which the Company agreed to be censured and fined $250,000. Without admitting or denying the alleged violations, the Company agreed to the findings by NASD that certain supervisory deficiencies existed between January 2000 and July 2002. The acceptance of the AWC concludes the matter. As a result, the Company recorded a $250,000 liability and related expense for the NASD fine in its financial statements for the year ending March 31, 2003. NOTE 10 - INCOME TAXES - ---------------------- The components of income taxes are as follows for the years ended March 31: 2003 2002 2001 ----------- ----------- ---------- Current tax expense (benefit): Federal $ 71,420 $125,095 $(21,000) State 50,409 45,084 18,000 ---------- ---------- --------- 121,829 170,179 (3,000) --------- --------- ---------- Deferred tax expense (benefit): Federal 45,373 (42,400) 14,000 State 10,469 (2,530) 3,000 Increase in valuation allowance 4,120 -- -- ----------- -------------- -------------- 59,962 (44,930) 17,000 ---------- --------- --------- Total income taxes $181,791 $125,249 $ 14,000 ======== ======== ======== Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of net operating loss carryforwards, unrealized gains, mutual fund start up costs and differences between depreciation expense for financial statement purposes versus tax return purposes. 30 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 10 - INCOME TAXES (Continued) - ---------------------------------- Net deferred tax assets (liabilities) within each tax jurisdiction consisted of the following at: March 31, 2003 -------------------------------------------- Asset Liability Net ---------- --------- ----------- Federal $ 40,667 $44,461 $ (3,794) State 12,556 10,190 2,366 Valuation allowance - realized losses on investments (26,604) -- (26,604) --------- ------- -------- Total $ 26,619 $54,651 $(28,032) ======== ======= ======== March 31, 2002 -------------------------------------------- Asset Liability Net --------- --------- --------- Federal $ 57,411 $33,011 $ 24,400 State 17,725 10,195 7,530 --------- -------- --------- Total $ 75,136 $43,206 $ 31,930 ======== ======= ======== A reconciliation of the provision for income taxes with amounts determined by applying the statutory federal income tax rate to income before income taxes. Year Ended March 31, --------------------------------------------- 2003 2002 2001 --------- --------- --------- Tax at U.S. statutory rate $101,212 $ 43,992 $ (7,000) State taxes, net of federal benefit 40,179 28,085 21,000 Unallowable expenses 36,280 53,172 -- Change in valuation allowance 4,120 -- -- --------- -------- ------- Provision for income taxes $181,791 $125,249 $14,000 ======== ======== ======= NOTE 11 - SEGMENT INFORMATION - ----------------------------- The accounting policies of the segments are described in the summary of significant accounting policies. The Company evaluates performance based on profit and loss from operations after income taxes. The Company accounts for intersegment services and transfers as if the services or transfers were to third parties, that is, at current market prices. The Company's reportable segments are strategic business units that offer different services. They are managed separately because each business requires different technology and marketing strategies. The Company's reportable segments include support services by the parent company ICH, investment services offered through ICC and asset management services offered through EPA. The investment services segment includes securities, insurance, financial planning and related services. ICH incurs expenses on behalf of and to support ICC and EPA. ICC earns commissions as a broker for its customers in the purchase and sale of securities on major exchanges. Asset management services generates recurring annual revenue from fees received on the management of customer accounts. EPA provides asset management and portfolio design services to one mutual fund and a variety of investors. 31 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 11 - SEGMENT INFORMATION (Continued) - ----------------------------------------- Segment data presented includes the allocation of all corporate overhead to each segment. Intersegment revenues and expenses, and receivables and payables, are eliminated between segments. Information concerning operations in the Company's segments of business is as follows at or for the years ended March 31: 2003 2002 2001 ---------------- ---------------- ---------------- Non-interest revenues: ICC, investment services $31,911,884 $26,127,467 $26,904,776 EPA, asset management services 2,377,576 2,753,054 2,892,524 ICH, support services -- -- 8,844 ----------- ----------- ----------- Total $34,289,460 $28,880,521 $29,806,144 =========== =========== =========== Revenues from transactions with other operating segments: ICC $ 625,969 $ 532,677 $ 344,260 EPA 268,273 228,290 147,540 Intersegment elimination (894,242) (760,967) (491,800) ----------- ----------- ----------- Total $ 0 $ 0 $ 0 =========== ============ ============ Interest and dividend income: ICC $ 159,787 $ 103,977 $ 132,283 ICH 151,281 164,251 6,313 ----------- ----------- ----------- Total $ 311,068 $ 268,228 $ 138,596 =========== =========== =========== Depreciation and amortization expense: ICC $ 134,668 $ 122,054 $ 73,811 EPA 6,286 11,878 5,571 ----------- ----------- ----------- Total $ 140,954 $ 133,932 $ 79,382 =========== =========== =========== Income tax expense (benefit): ICC $ 269,812 $ 115,050 $ 92,000 EPA (150,682) (57,436) (75,000) ICH 62,661 67,635 (3,000) ----------- ----------- ----------- Total $ 181,791 $ 125,249 $ 14,000 =========== =========== =========== Income (loss): ICC $ 917,780 $ 657,855 $ 418,739 EPA 43,455 142,303 38,607 ICH (845,344) (796,021) (561,652) ----------- ----------- ----------- Total $ 115,891 $ 4,137 $ (104,306) =========== =========== =========== Year-end total assets: ICC $ 4,651,859 $ 4,096,506 $ 2,422,255 EPA 602,160 718,649 800,406 ICH 5,388,921 5,299,377 7,389,640 ----------- ----------- ----------- Total $10,642,940 $10,114,532 $10,612,301 =========== =========== =========== 32 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 12 - CONCENTRATIONS OF CREDIT RISK - --------------------------------------- The Company is engaged in various trading and brokerage activities whose counterparties primarily include the general public. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the credit worthiness of the counterparty or issuer of the instrument. It is the Company's policy to review, as necessary, the credit standings of each counterparty with which it conducts business. At March 31, 2003, the carrying amount of the Company's cash and cash equivalents, including a time deposit, was $7,088,659 and the bank statement balance was $6,266,149. Of the bank statement balance, $100,000 was covered by federal depository insurance and $6,166,149 was covered by the Depositors Insurance Fund of Massachusetts. The Company's cash and cash equivalents as of March 31, 2003 also include $1,157,101 at its clearing broker-dealer of which $500,000 is fully insured by the Securities Investor Protection Corporation (SIPC). At March 31, 2002, the carrying amount of the Company's cash and cash equivalents, including a time deposit, was $6,337,445 and the bank statement balance was $6,311,508. Of the bank statement balance, $263,073 was covered by federal depository insurance and $6,048,435 was covered by the Depositors Insurance Fund of Massachusetts. The Company's deposits at March 31, 2002 also included $470,303 at its clearing broker-dealer that was fully insured by the Securities Investor Protection Corporation (SIPC). NOTE 13 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- The Company is obligated under various lease agreements covering offices and equipment. These agreements are considered to be operating leases. The terms expire between fiscal year 2004 and 2007. Options to renew for additional terms are included under the office lease agreements. The total minimum rental due in future periods under these existing agreements is as follows as of March 31, 2003: Year ending March 31, 2004 $226,130 Year ending March 31, 2005 201,292 Year ending March 31, 2006 25,493 Year ending March 31, 2007 969 -------- Total minimum lease payments $453,884 ======== Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes. The total lease expense amounted to $233,397 for fiscal year 2003, $227,993 for fiscal year 2002 and $213,882 for fiscal year 2001. NOTE 14 - LITIGATION - -------------------- The Company operates in a highly litigious and regulated business and as such is a defendant or co-defendant in various lawsuits and arbitrations incidental to its securities business. The Company is vigorously contesting the allegations of the complaints in these cases and believes that there are meritorious defenses in each. Counsel is unable to respond concerning the likelihood of an outcome, whether favorable or unfavorable, because of inherent uncertainties routine in these matters. Currently, there are a total of thirteen lawsuits and/or arbitrations filed against the Company seeking a total of approximately $1.9 million. For the majority of claims, the Company's errors and omissions (E&O) policy limits the maximum exposure in any one case to $75,000. In certain of these cases the Company has the contractual right to seek indemnity from related parties. 33 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 15 - STOCK COMPENSATION PLANS - ---------------------------------- As of September 1, 1994, the Company issued a stock option plan (the "1994 Plan") which provided for the granting of options to an officer of the Company to purchase shares of the common stock of the Company. Following a three for two stock split in 1997, a maximum of 150,000 shares of common stock could be issued under the 1994 Plan. The number of options and grant date were determined at the discretion of the Company's Board of Directors. Options outstanding under the 1994 Plan are exercisable and have no stated maturity. As of October 1, 1997, the Board of Directors issued the 1996 Incentive Stock Option Plan (the "1996 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive options and the aggregate number of shares to be delivered under the 1996 Plan could not exceed 300,000 shares. Each grant of options, the number of options granted and the vesting schedules of such options subject thereto were determined by the Board. The stock options outstanding are fully vested after two years from grant date, are exercisable for an additional three years after vesting and are forfeited 30 days after termination. As of March 12, 2001, the Board of Directors issued the 2001 Equity Incentive Plan (the "2001 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive options to purchase shares of the common stock of the Company and the aggregate number of shares to be delivered under the 2001 Plan shall not exceed 250,000 shares. Each grant of options, the number of options granted and the vesting schedules of such options subject thereto shall be determined by the Board. The stock options outstanding are fully vested after two years from grant date, are exercisable for an additional three years after vesting and are forfeited 30 days after termination. A summary of the status of the Company's employee and Directors' fixed stock options as of March 31, 2003, 2002 and 2001 and changes during the years ending on those dates is presented below: 2003 2002 2001 ---------------------------- ---------------------------- -------------------------- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------- -------- ------------------- -------- ---------------- ------- ---------------- Outstanding at beginning of year 218,731 $2.82 230,600 $3.08 168,000 $1.25 Granted 10,000 1.91 -- -- 62,600 8.00 Forfeited (21,022) 4.01 (11,869) 8.00 -- -- -------- -------- --------- Outstanding at end of year 207,709 2.65 218,731 2.82 230,600 3.08 ======= ======= ========= Options exercisable at year-end 197,709 168,000 168,000 Weighted-average fair value of options granted during the year $0.88 -- $0.91 The fair value of options granted to employees in 2003, 2002 and 2001 is estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions: 2003 2002 2001 ------- ---- -------- Dividend yield 0% -- 0% Volatility 50% -- 21% Risk-free interest rate 2.78% -- 5.75% Expected life in years 5 -- 5 34 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 15 - STOCK COMPENSATION PLANS (Continued) - ---------------------------------------------- The following table summarizes information about employee and Directors' fixed stock options outstanding as of March 31, 2003: Options Outstanding Options Exercisable ------------------------------------------------------------- ------------------------------------ Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices as of 3/31/03 Contractual Life Exercise Price as of 3/31/03 Exercise Price - --------------- ------------- -------------------- --------------------- ------------- ------------------- $1.00 150,000 No Stated Maturity $1.00 150,000 $1.00 8.00 47,709 2.38 8.00 47,709 8.00 1.91 10,000 4.81 1.91 -- -------- -------- 207,709 2.80 (1) 2.65 197,709 2.69 ======= ======= (1) Includes only stock options with stated maturity. A summary of the status of the Company's registered representatives' fixed stock options as of March 31, 2003, 2002 and 2001 and changes during the years ending on those dates is presented below: 2003 2002 2001 ---------------------------- ----------------------------- --------------------------- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------- -------- ------------------- -------- ----------------- ------- ------------- Outstanding at beginning of year 232,196 $7.72 254,500 $7.91 5,000 $3.34 Granted 86,483 2.00 10,000 3.90 249,500 8.00 Forfeited (22,657) 6.80 (32,304) 8.00 -- -- -------- -------- -------- Outstanding at end of year 296,022 6.12 232,196 7.72 254,500 7.91 ======= ======= ======= Options exercisable at year-end 200,197 5,000 5,000 Stock-based compensation for grants to registered representatives amounted to $33,945 and was calculated using the Black-Scholes option-pricing model as of March 31, 2003. The fair value per share was $0.77, $0.31 and $0.08 for grants during the years ending March 31, 2003, 2002 and 2001, respectively. The following assumptions were applied at March 31, 2003 to grants for the years ending March 31: 2003 2002 2001 --------- ---- ---- Dividend yield 0% 0% 0% Volatility 53% 53% 54% Risk-free interest rate 2.36% 1.93% 1.93% Expected life in years 4.25 3.15 3% The following table summarizes information about representatives' fixed stock options outstanding as of March 31, 2003: Options Outstanding Options Exercisable ----------------------------------------------------------- ------------------------------------ Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices as of 3/31/03 Contractual Life Exercise Price as of 3/31/03 Exercise Price - --------------- ------------- -------------------- ------------------ ------------- ------------------- $8.00 200,197 2.50 $8.00 200,197 $8.00 3.90 10,000 3.17 3.90 -- -- 2.00 85,825 4.25 2.00 -- -- -------- -------- 296,022 3.03 6.12 200,197 8.00 ======= ======= 35 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 16 - EARNINGS PER COMMON SHARE - ----------------------------------- Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. Options to purchase common stock totaling 353,731 and 277,927 at March 31, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share as their effect would have been antidilutive. NOTE 17 - RETIREMENT PLAN - ------------------------- The Company has a 401(k) retirement plan that covers all employees with at least three months of service. Employees employed on the plan's effective date did not have to satisfy the service requirement. The Company's contribution was based on matching 100% of the first 3% of salary deferral elected by each eligible employee. Effective May 29, 2001 the Company's contribution was increased to matching 100% of the first 6% of salary deferral, with matching dollars to be in the form of the Company's common stock. The Company's contribution expense for the years ended March 31, 2003, 2002 and 2001 was $88,804, $72,692 and $27,649, respectively. NOTE 18 - DEFERRED COMPENSATION PLAN - ------------------------------------ On March 20, 2001, at a special meeting of the Board of Directors, the Board adopted a non-qualified deferred compensation plan for the principal stockholder, President and Chief Executive Officer, Theodore E. Charles effective April 1, 2001. Under the terms of this plan, Mr. Charles will annually defer $100,000 of his salary in return for the Company's unsecured promise to pay him a retirement benefit upon his retirement on or after attaining age 60. The amount of this retirement benefit will be determined solely by the investment performance of the amount deferred by Mr. Charles and invested by the Company. This retirement benefit will be paid to Mr. Charles, at his election, either in a lump sum or in installments over a period of 10 years. Should Mr. Charles die prior to reaching retirement, his designated beneficiary will receive a pre-retirement death benefit calculated in exactly the same manner. This non-qualified deferred compensation plan is one in which Mr. Charles is electing to defer current salary. There are no additional corporate funds being contributed to the plan. In the year ending March 31, 2003 Mr. Charles elected to receive the entire deferred balance owed to him by the Company in a lump sum and is no longer deferring his compensation. NOTE 19 - EMPLOYMENT AGREEMENTS - ------------------------------- The Company entered into employment agreements with its President and Chief Financial Officer. The employment agreements provide for continued payments of specified compensation and benefits for specified periods. The employment agreements also provide for severance benefits if the President or Chief Financial Officer resign for just cause, as defined in the employment agreements, just cause including a significant decrease by the Board of Directors of their duty or authority. Severance benefits include, among other things, 60 months base salary for the President and 36 months base salary for the Chief Financial Officer. 36 INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES ------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Continued) ----------- Years Ended March 31, 2003, 2002 and 2001 ----------------------------------------- NOTE 20 - LIQUIDATION OF INVESTORS CAPITAL INTERNET AND TECHNOLOGY FUND - ----------------------------------------------------------------------- The Eastern Point Advisors (formerly Investors Capital) Funds' Board of Trustees voted to liquidate the Investors Capital Internet and Technology Fund as of May 31, 2001. The Board determined that because of the small asset size of the Fund and the costs involved, it was in the best interests of the shareholders to cease operations. Sales of new shares were discontinued as of April 23, 2001. Eastern Point Advisors is a Delaware Business Trust. Eastern Point Advisors, Inc., a subsidiary of the Company, was the investment advisor to Investors Capital Internet and Technology Fund. 37 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III ITEM 10. Directors and Executive Officers of the Registrant. The following table presents information about each of our executive officers and directors. All directors hold office until the next annual meeting of stockholders or until successors have been duly elected and qualified. There are no arrangements or understandings between any director and any other person pursuant to which he or she was selected as a director. NAME AGE POSITION(S) HELD DIRECTOR SINCE Theodore E. Charles.............. 59 President, Chairman of the Board, Chief Executive Officer, and July 1995 Director Timothy B. Murphy................ 37 Executive Vice President, Treasurer, Chief Financial Officer, and July 1995 Director C. David Weller.................. 46 Vice President, General Counsel, and Assistant Secretary -- Janice M. Charles................ 51 Secretary -- David R. Smith................... 41 Director March 2000 Stephen Parker................... 69 Director March 2001 James F. Twaddell................ 64 Director April 2001 C. Troy Shaver, Jr............... 56 Director December 2001 THEODORE E. CHARLES, founder of Holdings in July of 1995, serves as chairman of the board, chief executive officer and president. Mr. Charles also serves as the chief executive officer of Investors Capital Corporation and Eastern Point Advisors. In addition, he is the founder and co-owner of two other unconsolidated companies: Investors Marketing Services, Inc. in June of 1989 and Eastern Point Distributors, LLC, in April of 1999. Mr. Charles received his Bachelors degree from Ithaca College, Ithaca, New York in May of 1964. He also has graduate hours from the University of Hartford, Hartford, Connecticut and St. Lawrence University, Canton, New York. Mr. Charles was previously a life insurance agent with National Life of Vermont. He currently holds various securities licenses, including the series 6, 63, 7 and 24. Mr. Charles is a member of the Financial Planning Association and has been since 1985. He was formerly Chairman of the Shareholder Advisory Board of Life USA Insurance Company and is a former member of the Board of Trustees of the Museum Council, Museum of Fine Arts in Boston. Mr. Charles is married to Janice M. Charles. TIMOTHY B. MURPHY is also a July 1995 founder of Holdings and currently serves as treasurer, chief financial officer and a director. Since August of 1994, Mr. Murphy has also served as president of Investors Capital Corporation. In addition, since January of 1995 Mr. Murphy has been president of Eastern Point Advisors. He entered the securities industry in May of 1991 as an operations manager, assisting brokers in the Boston regional office of Clayton Securities. From February through August of 1994, he was a compliance officer of Baybanks Brokerage in Burlington, Massachusetts and a vice president of G.R. Stuart & Company, a brokerage firm located in Maynard, Massachusetts. Mr. Murphy earned a Bachelor of Science degree in Finance from Babson College, Wellesley, Massachusetts in May 1986. He holds various securities licenses, including the series 4, 7, 24, 27, 53, 63 and 65. Mr. Murphy is a member of the New England Securities Compliance Group and past member of the National Society of Compliance Professionals. DAVID R. SMITH is a founding partner and Managing Director of Charter Financial Publishing Network in Shrewsbury, New Jersey. Founded in March 2000, CFPN publishes, markets and distributes information for the financial services industry. He is co-founder of, and currently oversees sales, marketing and circulation for FINANCIAL ADVISOR magazine, along with other newsletters, books and investment charts distributed by CFPN. He was previously Senior Vice President of Dow Jones Financial Publishing Corporation, where he served as Publisher of DOW JONES INVESTMENT ADVISOR and Associate Publisher of DOW JONES ASSET MANAGEMENT magazines since October of 1987. Mr. Smith attended Hobart College in Geneva, New York from August of 1982 through January of 1983 and graduated from Monmouth College in West Long Branch, New Jersey in June of 1985. 38 STEPHEN PARKER was formerly a vice president of Allmerica Financial, a Fortune 500 financial services firm located in Worcester, Massachusetts. He was also president of Allmerica Investment Management Company (AIMCO), the Registered Investment Advisory Company (RIA). Prior to joining Allmerica Investments, Mr. Parker was chairman and chief executive officer of Freedom Capital Management, a subsidiary of John Hancock, with $2.7 billion under management including 12 mutual funds. Mr. Parker has held positions of president and CEO of Interact Management, Inc., an affiliate of the Colonial Group; and Moseley Securities, a regional brokerage firm. Mr. Parker has been a director of the Securities Industry Association (SIA), has served on many committees, and has all series of Securities Registrations. He is a graduate of Harvard University, with a B.A. in Economics. JAMES F. TWADDELL was a member of the corporate finance team of Schneider Securities, an active underwriter of small and medium sized companies. He is also Chairman of the Trainer Wortham First Mutual Fund. Mr. Twaddell is the former Chairman and Director of the National Investment Bankers Association (NIBA). He is also a former member of the National Association of Securities Dealers (NASD) Business District committee. Prior to entering the financial services industry, Mr. Twaddell served in the foreign service office of the U.S. State Department. He has served on the board of directors of numerous public companies. He is a 1961 graduate of Brown University with a B.A. in American Civilization. C. TROY SHAVER, JR. is the Vice Chairman of GoldK, Inc., a full-service retirement company and a leading provider of online retirement plans. He is also President and CEO of GoldK Investment Services, Inc., the division which enables GoldK to offer a self-directed brokerage option in a 401(k) plan. Prior to joining GoldK, Mr. Shaver was President of State Street Research Investment Services Inc., President and CEO of John Hancock Funds, Inc. and Executive Vice President and Director of Oppenheimer Management Corporation. He held similar roles at State Street Research, Hancock and Oppenheimer dealing with mutual funds and the development and restructuring of strategies for sales, marketing, distribution and customer service. He is a 1969 graduate of Dartmouth College with a B.A. in Geology. ITEM 11. Executive Compensation. The information required by Item 11 is set forth in the Proxy Statement and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 12 is set forth in the Proxy Statement and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. The information required by Item 13 is set forth in the Proxy Statement and is incorporated herein by reference. ITEM 14. Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 39 PART IV ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Exhibits. Exhibit Number Description -------- ----------- 3.1 Articles of Organization, as amended. Incorporated by reference to the Company's registration statement on Form SB-2 File #333-43664. 3.2 By-laws. Incorporated by reference to the Company's registration statement on Form SB-2 File #333-43664. 4.1 Form of Stock Certificate of the Company. Incorporated by reference to the Company's registration statement on Form SB-2 File #333-43664. 10.1 Employment agreement with Theodore E. Charles. Incorporated by reference to the Company's registration statement on Form SB-2 File #333-43664. 10.2 Employment agreement with Timothy B. Murphy. Incorporated by reference to the Company's registration statement on Form SB-2 File #333-43664. Any exhibit not included with this Form 10-K when furnished to any shareholder of record will be furnished to such shareholder upon written request and payment of up to $.25 per page plus postage. Such requests should be directed to Investors Capital Holdings, LTD., 230 Broadway East, Lynnfield, MA 01940-2320. (b) Reports on Form 8-K. There were no reports on Form 8-K required to be filed during the fourth quarter of Fiscal 2003. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INVESTORS CAPITAL HOLDINGS, LTD. By: /s/ Timothy B. Murphy ------------------------------ Chief Financial Officer Date: June 30, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Theodore E. Charles Chairman, President, Chief Executive Officer and Director June 30, 2003 - ---------------------------------------- (Principal Executive Officer) Theodore E. Charles President and Director /s/ Timothy B. Murphy Executive Vice President, Treasurer, Chief Financial June 30, 2003 - ---------------------------------------- Officer and Director (Principal Financial and Accounting Timothy B. Murphy Officer) /s/ David R. Smith Director June 30, 2003 - ---------------------------------------- David R. Smith /s/ Stephen Parker Director June 30, 2003 - ---------------------------------------- Stephen Parker /s/ James F. Twaddell Director June 30, 2003 - ---------------------------------------- James F. Twaddell /s/ C. Troy Shaver, Jr. Director June 30, 2003 - ---------------------------------------- C. Troy Shaver, Jr. 41 CERTIFICATION I, Theodore E. Charles, certify that: 1. I have reviewed this annual report on Form 10-K of Investors Capital Holdings, Ltd.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 functions): 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 annual report whether 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: June 30, 2003 By: /s/ Theodore E. Charles - --------------------------------------- Theodore E. Charles Chairman, President and Chief Executive Officer and Director 42 CERTIFICATION I, Timothy B. Murphy, certify that: 1. I have reviewed this annual report on Form 10-K of Investors Capital Holdings, Ltd.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 have: d) 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 annual report is being prepared; e) 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 annual report (the "Evaluation Date"); and f) presented in this annual 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 functions): c) 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 d) 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 annual report whether 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: June 30, 2003 By: /s/ Timothy B. Murphy - ------------------------------------- Timothy B. Murphy Executive Vice President, Treasurer, Chief Financial Officer and Director 43