NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31,
201
4
and
201
3
NOTE 1 - NATURE OF OPERATIONS
Incorporated in 199
5
under Massachusetts law and redomesticated under Delaware law in 2007, Investors Capital Holdings, Ltd. ("ICH") is a holding company whose wholly-owned subsidiaries assist a nationwide network of independent registered representatives ("representatives") in providing a diversified line of financial services to the public including securities brokerage, investment advice, asset management, financial planning and insurance. Our subsidiaries include the following:
|
|
·
|
|
Investors Capital Corporation ("ICC") is duly registered under the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 and applicable state law to provide broker-dealer and investment advisory services nationwide. ICC’s national network of independent financial representatives is licensed to provide these services through ICC under the regulatory purview of the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”) and state securities regulators. ICC executes and clears its public customer accounts on a fully disclosed basis through Pershing, LLC (“Pershing”). ICC, doing business as Investors Capital Advisors (“ICA”), also provides investment advisory services.
|
|
|
·
|
|
ICC Insurance Agency, Inc. facilitates the sale of insurance and annuities by our representatives.
|
|
|
·
|
|
In
vestors Capital Holdings Securities Corporation ("ICH Securities") holds cash, cash
equivalents, interest income and dividend income for ICH.
|
|
|
·
|
|
Advisor Direct, Incorporated (“AD”) is a Broker-Dealer registered with the SEC and is a member of FINRA.
AD
is registered to operate as a (k)(1) Broker-Dealer where principal transactions are limited to mutual funds and/or variable annuities only.
On January 25, 2013, Investors Capital Holdings, Ltd. (“ICH”) acquired all the assets of
AD
for a cash purchase price of
$32,500
and simultaneously changed its name from LifeVest Financial, Inc. to AD. AD is a wholly-owned subsidiary of ICH.
|
Significant Transactions
On October 27, 2013, ICH executed a definitive merger agreement (the “Merger Agreement”) with RCS Capital Corp (“RCAP”), pursuant to which RCAP will acquire ICH and its subsidiaries, including ICC, for a total consideration of approximately
$52.5
million comprised of cash and RCAP stock. The closing of the transaction is subject to customary closing conditions, including FINRA approval of the proposed change in control for ICC, as well as both regulatory and shareholder approval of the transaction by ICH stockholders.
The Merger Agreement was amended on March
03
, 2014. Under the Merger Agreement, as amended, Merger Sub
,
a Zoe Acquisition, LLC, a wholly-owned subsidiary of RCAP
,
will merge with and into ICH (the “Merger”), with the Company surviving the merger as a subsidiary of
RCAP
.
RCAP
expects that ICH, once the Merger is consummated, will operate independently of
RCAP
’
S
wholesale and retail broker-dealer subsidiary, Realty Capital Securities, LLC, and function as a separate business unit alongside RC
AP
’
S
existing operating subsidiaries.
The transaction is expected to close in July 2014.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below to assist the reader to better understand the consolidated financial statements and other data contained herein.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ICC, ICC Insurance Agency, Inc.,
Advisor Direct, Inc.
and ICH Securities. All significant inter-company items and transactions have been eliminated in the consolidation.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, if any, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates deal with the valuation of securities and other assets revenue recognition, litigation reserves and allowance for doubtful accounts receivable and involve a particularly high degree of judgment and complexity. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue recognition policies are summarized below.
Mutual Funds/Variable Annuities.
Revenue from the sale of mutual funds and variable annuities is recognized as of the date the check and application is accepted by the investment company.
Brokerage.
The Company earns commissions through stock purchase and sale transactions, mutual fund purchases, government and corporate bonds transactions, fee-based managed accounts and ticket charges. The Company also earns revenue in the form of 12b-1 fees and interest on account balances. The earnings process is substantially complete at trade date in accordance with the rules of FINRA and the SEC.
The Company also receives credit
adjustments
for clearing charge
s
that are netted against any clearing charges the Company may incur for the period. These adjustments are recognized as income in the period received unless otherwise noted by the clearing Company.
Unrealized gains and losses are recorded at the time that the Company reconciles its trading positions with the market value. The unrealized gains or losses are adjusted to market until the position is settled or the trade is cancelled.
Advisory Fees.
The Company’s
managed accounts advisory fees are based on the amount of assets managed per agreement negotiated between
its
independent representatives and their clients. These revenues are recorded quarterly as and when billed based on the fair market value of assets managed throughout the quarter. Any portion remaining uncollected due to account adjustments after account rebalancing is charged against earnings at quarter end.
Administration Fees.
Administration fees for services rendered to the Company’s representatives respecting annual FINRA license renewals and Error and Omissions (“E&O”) insurance are recognized as revenue upon registration of the representative with FINRA and listing of the registered representative with the E&O insurance carrier. The funds received from the registered representative are initially recorded as unearned revenue. The amounts collected in excess of the E & O insurance premium and/or fees due FINRA, if any, are recognized as revenue. Fees collected to maintain books and records are deferred and recognized ratably throughout the year.
Other Revenue.
Revenue from marketing associated with product sales is recognized quarterly based on production levels. Marketing event revenues are recognized at the commencement of each event offset by its costs.
Revenue from ICC’s technology platform, Capital Connect, is recognized monthly based on a representative’s selected package, which provides them access to a portal, in addition to receiving IT support. The service terminates immediately if a representative is no longer with the firm or it is temporarily suspended, in either case, there will be no additional fees to be recognized as income.
Cash and Cash Equivalents
For purposes of reporting cash flow, cash and cash equivalents includes cash in checking and savings accounts, cash at its clearing firm and short-term investments with original maturities of 90 days or less.
Customer Accounts
The Company's customer accounts are reported by the various custodians on a fully disclosed basis.
Financial Instruments
The Company’s financial assets and liabilities are reported in the statements of financial condition at readily ascertainable fair value or at carrying amounts that approximate fair value as these financial instruments generally have short maturity periods. The fair value of securities owned and trading securities sold, not yet purchased are equal to the carrying value. Changes in the fair value of these securities are reflected in the results of operations.
Marketable Securities
The Company classifies
its
short-term investments as trading, available for sale, or held to maturity. The Company's marketable securities consist of fixed income instruments and mutual funds and have been classified by management as trading. Accordingly, realized and unrealized gains and losses at year-end are included in the earnings of the Company. The fair market values of these securities are determined based on quoted market prices.
The Company conducts its principal trading through two designated trading accounts. One of these accounts is used to facilitate fixed income trading on a same day buy-sell basis. The second account is used to facilitate fixed income trading for representatives and may carry positions overnight. These securities are normally held in the account for no longer than 30 days and are recorded at fair market value.
Advertising
The Company expenses all promotional costs as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the related assets, over a period of
three
to
seven
years.
Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.
Routine repairs and maintenance are expensed as incurred.
The Company reviews the carrying value
of
its property and equipment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from its use and eventual disposition. In cases where an asset is not in use and subsequently disposed of, the Company recognizes a loss on disposal that is equal to the carrying value at the time of disposal offset against any proceeds received. The Company reported loss
es
on its disposal of property and equipment of
$0
and
$
65,786
respectively, fo
r the years ended March 31, 2014
and 201
3
.
Income Taxes
The Company uses the asset and liability method to account for income taxes, which requires recognition of deferred tax assets, subject to valuation allowances, and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or loss in the period that includes the enactment date.
Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of deferred compensation, legal accruals, differences between depreciation expenses, and a net operating loss for financial statement purposes versus tax return purposes.
The Company has assessed the realizability of its deferred tax assets to determine whether or not a valuation allowance was required for some or all of its deferred tax assets. The Company also considered its current period reporting results and compared these results to its annual projection. Management
anticipates
it will achieve profitability and future taxable income
.
If future operations exceed current projections, management may conclude such valuation allowance is no longer needed. Conversely, if future operating results do not meet current projections, it is possible that an additional valuation
allowance may be needed in future periods.
US GAAP requires that the impact of tax positions be recognized in the financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position. The Company’s management has determined that the Company has no uncertain tax positions requiring recognition as of March 31, 201
4
.
The Company files federal and state income tax returns. The statute of limitations for the federal tax return is three years, and for state tax returns is between a range of three and six years; therefore
,
federal tax returns before March 31, 201
1
are not subject to examination and certain state tax returns before March 31, 2011 and March 31, 2008 are not subject to examination.
The Company had returns under examination as of March 31, 2014.
Earnings Per Share
The Company reports net income (loss) per share. Diluted earnings per share do not include the effect of stock options as it has an anti-dilutive effect on earnings per share (See Note 1
7
). Basic and diluted net income per common share are determined by dividing net income by the weighted average number of common shares outstanding during the period.
Stock Based Awards
The Company grants stock based awards to employees, directors, and registered representatives after the awards are approved by the board of directors. These awards are incentive driven and based on performance. (See NOTE 1
6
BENEFIT PLANS)
Segment Reporting
The Company makes disclosures about products and services, and major customers. See “Note 1
2
, Segment Information”.
Accounts Receivable – Allowance for Doubtful Accounts
The Company’s policies for determining whether a receivable is considered uncollectible are as follows:
Trade
r
eceivables
from brokers and clearing organizations.
As prescribed by the SEC, trade receivables usually settle within three days.
The balances shown as receivable from and payable to brokers and clearing organizations represent amounts due in connection with the Company’s normal transactions involving trading of securities. Management considers all receivables to be collectible; therefore, no allowance for doubtful accounts has been provided.
Loans to representatives.
Management performs periodic evaluations and provides an allowance based on the assessment of specifically identified unsecured receivables and other factors, including the representative's payment history and production levels. Once it is determined that it is both probable that a loan has been impaired, typically due to the termination of the relationship, and the amount of loss can reasonably be estimated, the portion of the loan balance estimated to be uncollectible is so classified.
See “Note 3, Loans to Registered Representatives”.
Valuation of Securities and Other Assets
Substantially all financial instruments are reflected in the consolidated financial statements at fair value or amounts that approximate fair value. These
may
include cash
and
cash equivalents; securities purchased under agreements to resell; deposits with clearing organizations; securities owned; and securities sold but not yet purchased. Certain
financial instruments are classified as trading, available for sale, and held to maturity. The realized gains and losses are recorded in the income statement in the period in which the transactions occurred. The related unrealized gains and losses
would be
reflected in other comprehensive income depending on the underlying purpose of the instrument.
Where available, the Company uses prices from independent sources such as listed market prices, or broker or dealer price quotations. Fair values for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In addition, even where the value of a security is derived from an independent market price or broker or dealer quote, certain assumptions may be required to determine the fair value.
T
he Company generally assumes that the size of positions in securities that the Company holds would not be large enough to affect the quoted price of the securities if the Company were to sell them, and that any such sale would happen in an orderly manner. However, the actual value realized upon disposition could be different from the current carrying value.
Internal Use of Software
The costs of internally developed software that qualify for capitalization are capitalized as fixed assets and subsequently amortized over the estimated useful life of the software, which is generally three years. The costs of internally developed software are included in fixed assets at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and
management authorizes and commits to funding the project. The Company does not capitalize projects where it believes that the future economic benefits are less than probable.
Reclassifications
Certain amounts in 201
3
were reclassified to provide comparison with 201
4
classifications. There was no impact to previously reported Net income (loss) or Net income (loss) per share.
Recent Accounting Pronouncements
There were no recent accounting pronouncements to be applied for the fiscal years ended March 31,
2014 and 2013
.
Subsequent Events
The Company has evaluated subsequent events through the date the financial statements were available to be filed. There were no material subsequent events requiring adjustment to or disclosure in these financial statements.
NOTE 3 –
Loans to Registered Representatives
ICC has granted loans to certain registered representatives. These loans are primarily given to newly recruited representatives to assist in the transition process.
These loans are generally forgivable over a multi-year term,
generally
one
to
five
years
, and forgiveness is based on the condition that the representative remains licensed with the Company and the achievement of specified performance goals
. Upon forgiveness, the loans are charged to commission expense. Loans charged to commission expense totaled
$
308,194
and
$181,599
for the fiscal years ended March 31, 2014 and 2013, respectively
.
Some loans to registered representatives are not subject to a forgiveness contingency. These loans, as well as loans that have failed the forgiveness contingency, are repaid to the Company by deducting a portion of the representatives’ commission payouts throughout the commission cycle until the loans are repaid.
Interest charged on these loans to representatives
range from
4.25
% to
8
.25
% annually. Loans to registered representatives included in receivables from employees and registered representatives are as follows at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Forgivable loans
|
$
|
1,614,006
|
$
|
1,115,765
|
|
Other loans
|
|
378,931
|
|
604,264
|
|
Less: allowance
|
|
-
|
|
(232,596)
|
|
Total loans
|
$
|
1,992,937
|
$
|
1,487,433
|
Included in other loans is a loan receivable from a registered representative in connection with a regulatory matter settled with the Massachusetts Securities Division on
October 27, 2010
. This representative has agreed to reimburse the Company for certain amounts paid by the
Company with respect to this regulatory matter. The amount due on this receivable at March 31, 2014 and 2013 was $
276,503
and
$330,587
, respectively.
NOTE
4
-
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED AT FAIR VALUE
S
ecurities owned consist
s
of marketable securities recorded at fair value. Securities sold, but not yet purchased represent
s
obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.
As of
March 31, 201
4
and 20
1
3
, the Company’s
securities o
wned and
securities s
old
not yet p
urchased at fair value consisted of the following securities:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
Sold, Not Yet
|
|
|
|
|
Owned
|
|
|
Purchased
|
|
Mutual funds
|
|
$
|
307,109
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
307,109
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
|
|
Sold, Not Yet
|
|
|
|
|
Owned
|
|
|
Purchased
|
|
Equities
|
|
$
|
354
|
|
$
|
28,946
|
|
Mutual funds
|
|
|
258,549
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
258,903
|
|
$
|
28,946
|
NOTE
5
- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is engaged in various trading and brokerage activities whose counterparties primarily include the general public. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. Securities sold, but not yet purchased, represent obligations of the Company to purchase the security in the market at the prevailing prices to the extent that the Company does not already have the securities in possession. Accordingly, these transactions result in off-balance sheet risk when the Company's satisfaction of the obligations exceeds the amount recognized in the balance sheet. The risk of default depends on the creditworthiness of the counterparty of the issuer of the instrument. It is the Company's policy to review, as necessary, the credit standings of each counterparty with which it conducts business.
Commissions receivable from one source were
25
% and
36%
of total receivables for the years ended March 31, 2014 and 2013, respectively.
At March 31, 201
4
, the carrying amount of the Company’s cash and cash equivalents was
$
4,481,769
of which $250,000 was covered by the Federal Deposit
Insurance
Corporation (“FDIC”).
The Company’s cash and cash equivalents as of March 31, 201
4
also includes $
1,651,682
at its clearing
firm
of which $500,000 was fully insured by the Securities Investor Protection Corporation (“SIPC”).
At March 31, 2013, the carrying amount of the Company’s cash and cash equivalents was
$6,589,698
of which $250,000 was covered by the Federal Deposit
Insurance
Corporation (“FDIC”).
The Company’s cash and cash equivalents as of March 31, 2013 also includes
$2,701,440
at its clearing
firm
of which $500,000 was fully insured by the Securities Investor Protection Corporation (“SIPC”).
NOTE
6
– FAIR VALUE MEASUREMENTS
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the
market, income or cost approach are used to measure fair value.
The fair v
alue hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
|
|
·
|
|
Level 1
- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities the Company has the ability to access.
|
|
|
·
|
|
Level 2
- Inputs are inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly.
|
|
|
·
|
|
Level 3
- Inputs include unobservable inputs for the asset or liability and rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. (The unobservable inputs should be developed based on the best information available in the circumstances and may include the Company’s own data.)
|
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following table presents the Company's fair value hierarchy for those financial assets measured at fair value as of March 31, 201
4
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
307,109
|
|
$
|
307,109
|
|
$
|
-
|
|
$
|
-
|
|
Total assets
|
$
|
307,109
|
|
$
|
307,109
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value as of
March 31, 201
3
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
258,549
|
|
$
|
258,549
|
|
$
|
-
|
|
$
|
-
|
|
|
Equities
|
|
354
|
|
|
354
|
|
|
-
|
|
|
-
|
|
|
Total assets
|
$
|
258,903
|
|
$
|
258,903
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
$
|
28,946
|
|
$
|
28,946
|
|
$
|
-
|
|
$
|
-
|
|
|
Total liabilities
|
$
|
28,946
|
|
$
|
28,946
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Marketable Trading and Investment Securities Owned
The fair value of marketable trading and investment securities owned is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price.
Valuation of Trading Securities Sold, Not Yet Purchased
As a broker-dealer, the Company is engaged in various securities trading and brokerage activities as principal. In the normal course of business, the Company sometimes sells securities they do not currently own and will therefore be obligated to purchase such securities at a future date. This obligation is recorded on the balance sheet at fair value based on quoted market prices of the related securities and will result in a trading loss if the fair value increases and a trading gain if the fair value decreases between the balance sheet and date of purchase.
Valuation of Mutual Funds
The fair value of mutual funds is determined based on quoted market prices. Securities traded on a national exchange are stated at the last reported sales price on the day of valuation; other securities traded in over-the-counter market and listed securities for which no sale was reported on that date are stated as the last quoted bid price.
NOTE
7
- PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Equipment
|
|
$ 1,968,017
|
|
$ 1,962,486
|
|
Leasehold improvements
|
|
112,866
|
|
111,825
|
|
Furniture and fixtures
|
|
387,004
|
|
387,004
|
|
|
|
2,467,887
|
|
2,461,315
|
|
Accumulated depreciation and amortization
|
|
(2,421,958)
|
|
(2,266,869)
|
|
Property and equipment, net
|
|
$ 45,929
|
|
$ 194,446
|
|
|
|
|
|
|
Depreciation expense was
$
158,613
and
$234,083
for the year’s ended March 31, 201
4
and 201
3
, respectively.
NOTE
8
- NOTES PAYABLE
At March 31, 201
4
and 201
3
, notes payable consisted of debt to finance insurance premiums. These notes are referenced in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
Lender
|
|
Premium
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity Date
|
|
2014
|
AFCO
|
|
Directors and Officers, Liability, Fidelity Bond
|
|
$
|
280,699
|
|
1.99%
|
|
February 17, 2015
|
|
|
Premium Financing
|
|
Errors and Omissions
|
|
|
1,072,909
|
|
1.89%
|
|
November 30, 2014
|
|
|
|
|
|
|
$
|
1,353,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
AFCO
|
|
Directors and Officers, Liability, Fidelity Bond
|
|
$
|
280,693
|
|
1.99%
|
|
February 17, 2014
|
|
|
Premium Financing
|
|
Errors and Omissions
|
|
|
1,208,183
|
|
1.99%
|
|
November 30, 2013
|
|
|
|
|
|
|
$
|
1,488,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31, 201
4
and 201
3
there was
no
long-term debt outstanding.
NOTE
9
– SUBORDINATED
BORROWINGS
The lender, consisting of the Company’s clearing firm, have, under a Subordinated Debt Agreement and related Rider, subordinated its rights of collection of principal and claims to all other present and future senior creditors of the Company prior to the expiration of the agreement. The subordinated borrowings are covered by an agreement approved by FINRA on March 8, 2013 and are thus available for computing net capital under the SEC’s uniform net capital rule. To the extent that such borrowin
gs are required for the Company’s continued compliance with minimum net capital requirements, they may not be repaid.
As of March 31, 201
4 and March 31, 2013
, the balance of subordinated borrowings was $
2,000,000
, respectively
.
The Company’s subordinated borrowings mature on
March 8, 2016
. The interest rate on all subordinated
borrowings is prime plus
five
percent (
8.25
% at March 31, 2013), payable
monthly.
Interest expense totaled
$165,000
for the year ended
M
arch 31, 2014, including accrued interest of $
41,250
included in the Consolidated Balance Sheet.
The Company has met each covenant as of March 31, 2014.
NOTE 1
0
–
LINE OF CREDIT
The Company has a line of credit (“Line”) with maximum borrowings of $
1,000,000
at the Bank’s base lending rate (
5.00
% per year as of March 31, 201
4
). The Line
was renewed
on November 22, 201
3
, and is subject to annual renewal and contains a customary minimum debt service covenant.
There is no outstanding balance at March 31, 201
4
.
The
Company had the same lending terms and arrangement in the prior year and there was
no
outstanding balance
at March
31, 201
3
.
NOTE 1
1
-
INCOME
TAXES
The (benefit) provision for income taxes is as follows for the fiscal years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
(275,496)
|
|
|
State
|
|
|
-
|
|
|
4,682
|
|
|
|
|
$
|
|
|
$
|
(270,814)
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(607,705)
|
|
$
|
461,001
|
|
|
State
|
|
|
(178,438)
|
|
|
29,529
|
|
|
|
|
|
(786,143)
|
|
|
490,530
|
|
|
Change in valuation allowance
|
|
|
241,177
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(544,966)
|
|
$
|
219,716
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are the result of timing differences between book and taxable income and consist primarily of deferred compensation, legal accruals, differences between depreciation expenses, and a net operating loss for financial statement purposes versus tax return purposes.
Net deferred tax assets (liabilities) within each tax jurisdiction consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
Asset
|
|
Liability
|
|
Valuation Allowance
|
|
Net deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$ 1,961,177
|
|
$ (276,929)
|
|
$ -
|
|
$ 1,684,248
|
|
State
|
703,710
|
|
(53,639)
|
|
-
|
|
650,071
|
|
Valuation allowance
|
-
|
|
-
|
|
(729,874)
|
|
(729,874)
|
|
Total
|
$ 2,664,887
|
|
$ (330,568)
|
|
$ (729,874)
|
|
$ 1,604,445
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
Asset
|
|
Liability
|
|
Valuation Allowance
|
|
Net deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$ 1,136,234
|
|
$ (62,037)
|
|
$ -
|
|
$ 1,074,197
|
|
State
|
493,828
|
|
(19,848)
|
|
-
|
|
473,980
|
|
Valuation allowance
|
-
|
|
-
|
|
(488,697)
|
|
(488,697)
|
|
Total
|
$ 1,630,062
|
|
$ (81,885)
|
|
$ (488,697)
|
|
$ 1,059,480
|
The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
Accruals and reserves
|
$
|
406,346
|
$
|
533,124
|
|
Deferred compensation
|
|
1,176,853
|
|
926,715
|
|
Depreciation and other
|
|
59,569
|
|
(15,478)
|
|
Charitable contributions
|
|
25,365
|
|
73,633
|
|
Net operating losses
|
|
708,886
|
|
112,068
|
|
Other liabilities
|
|
(42,700)
|
|
(81,885)
|
|
Total deferred tax assets, net, before valuation allowance
|
|
2,334,319
|
|
1,548,177
|
|
Valuation allowance
|
|
(729,874)
|
|
(488,697)
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
$
|
1,604,445
|
$
|
1,059,480
|
The total income tax provision (benefit) differs from the income tax at the statutory federal income tax rate due to the following:
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rate
|
$
|
(998,936)
|
|
$
|
199,397
|
|
State taxes, net of federal benefit
|
|
(125,130)
|
|
|
83,633
|
|
Merger transaction costs
|
|
318,398
|
|
|
-
|
|
Unallowable expenses
|
|
18,164
|
|
|
20,150
|
|
Change in valuation allowance
|
|
241,177
|
|
|
-
|
|
Other adjustments
|
|
1,361
|
|
|
(83,464)
|
|
Provision (benefit) for income taxes
|
$
|
(544,966)
|
|
$
|
219,716
|
The Company assesses the realizability of its deferred tax assets to determine whether or not a valuation allowance was required for some or all of its deferred tax assets. The Company considered both positive and negative evidence. Positive evidence, includes the Company’s recent history of taxable income in three of the past
six
years (2013, 2011 and 2010) which was the most significant factor used by the Company in the determination of whether a valuation allowance was required against recorded deferred tax assets. Also, the Company determined that its US GAAP losses over the prior fiscal years
including this current year
resulted from significant non-recurring and certain significant non-deductible expenses which the Company believes is further positive evidence that mitigates the negative evidence evaluated. Negative evidence, specifically the three years’ cumulative GAAP losses totaling
$3.0
million includes
$1.3
million of expenses in 2012
and
$
1.2
million in 2014,
which were non-recurring in nature. The Company excluded these items in determining a partial valuation allowance was sufficient.
The Company recorded a
$0.5
million partial valuation allowance
initially
in March 31, 2012, after weighing all the positive and negative evidence, and that most of the GAAP
and taxable
losses had been related to
both non-recurring and non-deductible items related to a
change of ownership. The Company did not release the partial valuation in fiscal year end
ed
March 31, 2013 after reporting both GAAP and taxable income
, and t
he partial valuation allowance
remained unchanged during fiscal year ended March 31, 2013.
T
he Company
considered factors
to determine whether to record a full release of the partial valuation allowance, or adjust that valuation allowance to represent the net operating loss of approximately $112,000. In consideration of qualitative factors of continued cumulative US GAAP losses, despite the current period’s profitability and taxable income, the Company made a final judgment not to reduce the partial valuation allowance at March 31, 2013.
For the year ended March 31, 201
4
,
based on
the Company
’s
review
of
all the p
ositive and negative evidence, t
he Company
recorded a
valuation allowance
of
$0.73
million
which approximates t
he
net operating loss
of
$0.71 million
. N
et operating loss carryforwards totaling
$
4.96
million will expire through 2034 and are subject to limitations pursuant to Section 382 of the Internal Revenue Code.
The Company recognizes and measures its unrecognized tax benefit or expense. The Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of unrecognized tax expense or benefit is adjusted when new information is available or when an event occurs that requires a change. The Company recognizes the accrual of any interest and penalties related to unrecognized tax expense in income tax expense.
No
interest or penalties were recognized in 2014 and 2013.
The Company does not have any tax positions as of March 31, 2014 for which it is reasonably possible that the total amounts of unrecognized tax benefit or expense will significantly increase or decrease within twelve months of the reporting date. The Company applied the “more-likely-than-not” recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits.
NOTE 1
2
- SEGMENT INFORMATION
Operating segments are defined as components of a business about which separate financial information is available that is regularly evaluated by management in deciding how to allocate resources and in assessing performance. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses.
The Company's has two operating segments, the independent broker-dealer provided by ICC and AD, and asset management and investment advisory services provided by ICA. ICCIA conducts the sale of insurance products and reports that activity at ICC.
The segments are strategic business units that are managed separately. They operate under different regulatory systems, provide different services and require distinct marketing strategies and varied technological and operational support. They also have differing revenue models; ICC earns transactional commissions and various fees in connection with the brokerage of securities for its customers. ICCIA generates commissions from insurance products. ICA generates recurring revenue from fees earned on the value of assets under management. Lastly, AD
is eligible to receive commissions on principal transactions of mutual funds and/or variable annuities only.
AD, acquired on
January 24, 2013,
is operational but had no principal transactions during the current period.
The Company accounts for inter-segment services and transfers as if the services or transfers were to third parties, that is, at current market prices. In presenting segment data, all corporate overhead items are allocated to the segments, and inter-segment revenue, expense, receivables and payables are eliminated. Currently it is impractical to report segment information using geographical concentration.
Management allocates all expenses separately to the parent and ICC, including allocation of costs associated with shared personnel, based upon time studies and a determination of which entities are the beneficiaries of the services rendered by the personnel. Within ICC, expenses are further allocated between the two segments, ICC and ICA, as follows: overhead expenses pro rata to revenue, direct full-time and time-shared employee costs based on the segments being served, and other personnel-related expenses pro rata to head
count.
The Company allocated expenses
to
AD for administrative, record-keeping, and compliance purposes pursuant to the expense sharing agreement between, ICH,ICC, and AD,
f
iled with FINRA in January 2014.
There
were
$2,880
in
allocat
ed
expenses
from ICC to
AD
,
and
$10,013
in
direct costs
from ICH
to AD
for regulatory and professional services in maintaining its shell broker-dealer status.
In addition, ICC reimburses ICH in the form of a management fee for ICH-incurred overhead expenses that are necessary for ICC to effectively conduct its operations. This overhead primarily is in the nature of salaries and professional and legal fees incurred to obtain such services as audit engagements, legal advice, and industry expertise. The Company periodically reviews the effect that these agreements described above may have on the firm’s net capital.
Segment reporting primarily based on revenue components is as follows for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
Commissions
|
|
Advisory
|
|
ICH
|
|
ICH Securities
|
|
Total
|
|
Non-interest revenue
|
$ 74,349,498
|
|
$ 19,030,574
|
|
$ (76,213)
|
|
$ -
|
|
$ 93,303,859
|
|
Revenue from transaction with
|
|
|
|
|
|
|
|
|
|
|
other operating segments
|
1,089,608
|
|
-
|
|
-
|
|
-
|
|
$ 1,089,608
|
|
Interest and dividend income, net
|
310,524
|
|
-
|
|
6
|
|
19
|
|
$ 310,549
|
|
Depreciation and amortization
|
209,014
|
|
916
|
|
-
|
|
-
|
|
$ 209,930
|
|
Income (loss) from operations
|
(3,574,353)
|
|
1,997,912
|
|
(1,349,622)
|
|
19
|
|
$ (2,926,044)
|
|
Year-end total assets
|
17,123,833
|
|
696,163
|
|
2,752,599
|
|
10,372
|
|
$ 20,582,967
|
|
Corporate items and eliminations
|
-
|
|
-
|
|
(2,212,347)
|
|
-
|
|
$ (2,212,347)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
Commissions
|
|
Advisory
|
|
ICH
|
|
ICH Securities
|
|
Total
|
|
Non-interest revenue
|
$ 67,950,846
|
|
$ 16,669,329
|
|
$ (63,410)
|
|
$ -
|
|
$ 84,556,765
|
|
Revenue from transaction with
|
|
|
|
|
|
|
|
|
|
|
other operating segments
|
871,397
|
|
-
|
|
-
|
|
-
|
|
$ 871,397
|
|
Interest and dividend income, net
|
328,598
|
|
-
|
|
3
|
|
24
|
|
$ 328,625
|
|
Depreciation and amortization
|
320,064
|
|
1,167
|
|
-
|
|
-
|
|
$ 321,231
|
|
Income (loss) from operations
|
(1,131,659)
|
|
2,160,308
|
|
(442,665)
|
|
24
|
|
$ 586,008
|
|
Year-end total assets
|
17,489,215
|
|
1,231,714
|
|
2,440,116
|
|
10,353
|
|
$ 21,171,398
|
|
Corporate items and eliminations
|
-
|
|
-
|
|
(1,274,746)
|
|
-
|
|
$ (1,274,746)
|
NOTE 1
3
- COMMITMENTS AND CONTINGENCIES
Operating Leases
On October 19, 2012 the Company entered into a lease for
14,045
square feet and began occupying that space as our new Headquarters on December 1, 2012. This lease, which originally was for a term of
sixteen
months with expiration on March 31, 2014, has been amended to a
three
year extension, expiring on March 31, 2017. Also, on March 1, 2014, the Company amended the lease for additional space, for a total of
14,336
square feet.
The Company was awarded a retroactive abatement of certain rental payments, including condo fees and real estate taxes based on a May 30, 2013 court order. In June 2014, the Company settled this litigation with the lessor of its former home office space for $175,000.
The total minimum, non-cancelable rent payments due in future periods under these existing operating leases are as follows for the year ended March 31:
|
|
|
|
|
|
|
|
2015
|
350,555
|
|
|
|
2016
|
362,501
|
|
|
|
2017
|
314,106
|
|
|
|
Thereafter,
|
-
|
|
|
|
|
$ 1,027,162
|
Rent expense under the operating leases was
$2
14,565
and
$2
83,470
for the years ended March 31, 201
4
and 201
3
, respectively, and is included in occupancy costs in the statement of income.
The Company offers loans and transition assistance to representatives mainly for recruiting or retention purposes. These commitments are contingent upon certain events occurring, including, but not limited to, the representatives joining the Company and meeting certain production requirements. As of March 31, 201
4
and 201
3
, there were
$160,000
and
$0
outstanding commitments
, respectively
.
NOTE 1
4
- LITIGATION AND REGULATORY MATTERS
In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to arbitrations and other legal actions and proceedings brought on behalf of various claimants, some of which seek material and/or indeterminable amounts. Certain of these actions and proceedings are based on alleged violations of securities, consumer protection, labor and other laws and may involve claims for substantial monetary damages asserted against the Company and its subsidiaries. Also, the Company and its subsidiaries are subject to regulatory examinations, information gathering requests, inquiries, investigations and formal administrative proceedings that may result in fines or other negative impact on the Company. ICC, as a duly registered broker/dealer and investment advisor, is subject to regulation by the SEC, FINRA, NYSE-Amex,
and state securities regulators
.
The Company maintains Errors and Omissions (“E &O”) insurance to protect
it
from potential damages and/or legal costs associated with certain litigation and arbitration proceedings.
Effective
January
01,
2012 to
December 31
, 2012
,
for claims related to alternative investments
the Company’s exposure was limited to
$250,000
in any one case
, and
for all other investment products, the Company’s exposure was limited to
$100,000
in any one case, subject to policy limitations and exclusions.
Effective
January
01,
201
3 to March
31, 2014
, for claims related to alternative investment products, the Company’s exposure is limited to
$1,000,000
in aggregate defense and indemnity costs, subject to policy terms and conditions. Thereafter, following satisfaction of this aggregate deductible, the Company’s exp
osure on claims for these same type of investments is $150,000 per claim, plus an additional
10%
co-insurance on amounts exceeding
$150,000
.
For all other investment products, the Company’s exposure is $100,000 per
claim.
The Company also maintains a fidelity bond to protect itself from potential damages and/or legal costs related to fraudulent activities pursuant to which the Company’s exposure is usually limited to a
$350,000
deductible per case, subject to policy limitations and exclusions.
The Company recognizes a legal liability when management believes it is probable that a liability has been incurred and the amount can be reasonably estimated. Conclusions on the likelihood that a liability has been incurred and
estimates as to the amount of the liability are based on consultations with the Company’s General Counsel who, when situations warrant, may engage and consult external counsel to assist with the evaluation and handle certain matters. Legal fees for defense costs are expensed as incurred and classified as professional services within the consolidated statements of income.
The Company measures the gross amount of probable and reasonably estimated losses for claim settlements, then applies applicable insurance coverage to determine the net liability or range of estimated loss, respectively. ICH records accruals for claim settlements based on the net liability, which would not exceed the applicable insurance deductible amount. The accrual for the net liability is reported in accrued expenses in the Balance Sheet. Specifically, contingent liabilities are generally limited to applicable insurance deductible amounts. The Company’s insurance carrier generally confirms coverage at the inception of a claim, and the carrier assumes responsibility for direct payment for the final disposition or settlement of the matter, following the Company’s satisfaction of the applicable deductible.
As of March 31, 2014 and
March 31, 2013, the Company had accrued professional fees relating to the Company’s defense in various legal matters and estimated probable settlement costs of approximately
$1,670,000
and
$1,53
5,000
, respectively, included in accrued expenses and accounts payable on the consolidated balance sheet.
It is possible that some of the matters could require the Company to pay damages or make other payments or establish accruals in amounts that could not be estimated as of
March 31, 2014
. Key components of the accrual include claims arising from alleged poor performance of certain alternative investments in real estate investments trusts that have experienced bankruptcy or other financial difficulties during or in connection with the recent recession and credit crisis
.
The following are details
of claims the Company considered
individually
material for
the
year ended March 31, 2014
:
•
Mangiarelli vs. ICC.
According to the statement of claim dated
in
November 2012
, Mr. and Mrs. Mangiarelli asserted that
certain ICC
registered representative
(“ICC Rep”)
failed to disclose important material facts about their investments in REITS and LLC’s. Claimants state
ICC Rep
violated both federal and state security laws and breached in fiduciary responsibilities.
G
eneral allegations
of unsuitability and failure to supervise
were also noted in the statement of claim
.
ICC filed affirmative defenses in February, 2013
that the claimant’s
risk exposure compared to their net worth was moderate and investment objective was for long term growth.
The applicable insurance defense and indemnity deductible applicable to this matter is
$250,000
which is the Company’s maximum exposure for this claim. The Company accrued
$250,000;
less fees incurred
,
which reduce
s
the deductible.
•
Demarkey vs. ICC
.
According to the statement of claim
,
a certain ICC
registered representative solicited Mr. Demarkey to invest
in a
real estate investment trust. The claimant asserts he was misinformed of the investment that it was both speculative and involved a high degree of risk.
ICC filed its preliminary answer stating that the claimant was interested in a 1031 exchange in order to diversify
. The applicable insurance defense and indemnity deductible applicable to this matter is
$250,000
which is the Company’s maximum exposure for this claim. The Company accrued
$250,000;
less fees incurred which reduce the deductible.
With respect to claims where loss exposure is reasonably possible, but not yet probable, the range of individual claim amounts is from
$50,000
to
$68
1
,000
, unless claims have indeterminable amounts. The estimated range of loss, net of insurance coverage, is from
$0
-
$
930,000
, in the aggregate, for all claims where a contingent loss is reasonably possible at March 31, 2014.
The following are details of claims the Company considered individually material for year ended March 31, 2013:
|
|
|
|
|
|
•
|
Andersen vs ICC. This FINRA arbitration was initiated by the filing of a Statement of Claim by Claimant, Jane Comer, as Personal Representative of the Estate of Michael R. Andersen (“Decedent”). Claimant alleged that ICC and its former
ICC
Registered Representative, were liable to Decedent for losses associated with his investments in several alternative
investments.
|
|
|
|
Claimant sought damages in the amount between
$500,000
and
$1,000,000;
punitive damages; attorney’s fees; costs; and interest. The applicable insurance defense and indemnity deductible applicable to this matter is $
250,000
which is the Company’s maximum exposure for this claim. The Company
had
accrued
$250,000;
less fees incurred which reduce
d
the deductible.
|
|
|
|
|
|
|
•
|
Stickel vs. ICC. Claimant alleged that ICC and
the Registered Representative
were liable to her for losses associated with
certain
. The Statement of Claim, dated May 2012, contained counts for unsuitability, misrepresentation and negligent supervision. The applicable insurance defense and indemnity deductible applicable to this matter is
$250,000
which is the Company’s maximum exposure for this claim. The Company accrued
$250,000
, less fees incurred which reduce
d
the deductible.
|
|
|
|
|
|
|
•
|
Giraldo vs. ICC. This FINRA arbitration was initiated by the filing of a Statement of Claim by Claimants, Bernardo and Suzel Giraldo. Claimants alleged that ICC and its former Registered Representative were liable for losses associated with their investment. The applicable insurance defense and indemnity deductible applicable to this matter is
$250,000
which is the Company’s maximum exposure for this claim. The Company accrued
$250,000
, less fees incurred which reduce
d
the deductible.
|
With respect to claims where loss exposure is reasonably possible, but not yet probable, the range of individual claim amounts are from
$100,000
to
$2,000,000
, unless claims have indeterminable
amounts. The estimated range of loss is from
$0
–
$1,200,000
, in the aggregate, for all reasonably possible claims at March 31, 2013.
Many of
these
cases were either subsequently settled or dismissed during fiscal year ended March 31, 2014
.
NOTE 1
5
- NET CAPITAL REQUIREMENTS
ICC is subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires that our broker-dealer subsidiary maintain minimum net capital. As of March 31, 2012, ICC computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of
$250,000
or
2%
of aggregate debit balances. Repayment or prepayment of subordinated debt and withdrawal of equity from retiring partners or officers is subject to net capital not falling below
5%
of aggregate debits or
120%
of minimum net capital requirement
As of March 31, 2014, ICC had
net capital of
$2.28
million (i.e., an excess of
$2.03
million) as compared to net capital of approximately
$4.43
million (i.e., an excess of
$4.18
million) as of March 31, 2013. The decrease in net capital
is attributed to
an increase in non-allowable assets
specifically
for loans to representative
s
, as well as
payments of non-recurring expenses related to the Merger Agreement
coupled with
as numerous l
itigation and claims
settlements
.
AD is a registered broker-dealer and, accordingly, is subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the Company to maintain minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1.
AD operates as a (k)(1) Broker Dealer limiting its principal transactions to mutual funds and variable annuities with a minimum net capital of
$5,000
.
As of March 31, 2014,
the Company had net capital of
$26,795
(an excess of
$21,795
). The Company’s net capital ratio for March 31, 2014 was
1.40
to 1.
NOTE 1
6
- BENEFIT PLANS
The 1994 Stock Option Plan
As of September 1, 1994, the Company adopted a stock option plan (the "1994 Plan") that provided for the granting of options to Timothy Murphy, the Company’s CEO, to purchase shares of the common stock of the Company for $
1.00
per share. Following a
three
for two stock split in 1997, a maximum of
150,000
shares of common stock were issuable and granted under the 1994 Plan. The number of options and grant date were determined at the discretion of the Company's Board of Directors (the "Board"). Options outstanding under the 1994 Plan are fully exercisable and have no stated expiration.
The 1996 Incentive Stock Plan
As of October 1, 1997, the Board adopted the 1996 Incentive Stock Plan (the "1996 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive stock options and stock grants, and the aggregate number of shares to be delivered under the 1996 Plan cannot exceed
300,000
.
As of March 31, 201
4
and 201
3
, there were
no
options outstanding
.
As of March 31,
2014 and
2013, the Company had granted a total of
218,750
shares of stock under the 1996 Plan.
The 2001 Equity Incentive Plan
As of March 12, 2001, the Board adopted the 2001 Equity Incentive Plan (the "2001 Plan"). Key employees, directors and the Company's registered representatives are eligible to receive stock grants and/or stock options to purchase shares of the common stock of the Company. The aggregate number of shares issuable under the 2001 Plan cannot exceed
250,000
. The numbers of shares subject to each stock grant or stock option and any vesting requirements are determined by the Board.
As of March 31, 201
4 and 2013
,
no
shares of stock have been granted under the 2001 Plan.
The 2005 Equity Incentive Plan- Amended and Restated Equity and Cash Bonus Plan (the “Amended Plan”)
The Investors Capital Holdings, Ltd. 2005 Equity Incentive Plan was adopted by the Board on May 17, 2005, and was approved by vote of the Company’s stockholders at a September 21, 2005 meeting, and amended on October 11, 2011 (the “Amended Plan”). The purpose of the Amended Plan is (i) to attract and retain employees, directors, officers, representatives and other individuals upon whom the responsibilities of the successful administration, management, planning and/or organization of the Company may rest, and whose present and potential contributions to the welfare of the Company, a parent corporation or a subsidiary are of importance (“Key Contributors”), and (ii) to motivate Key Contributors with a view toward enhancing profitable growth of the Company over the long term. Under the Amended Plan Plan, the Company is authorized to award options to purchase common stock, and shares of common stock, to employees, independent representatives and others (e.g. Board members) who have contributed to or are expected to contribute to the Company, its businesses and prospects. Restricted stock customarily are granted by the Company in connection with initial employment or under various retention plans. Options may, but need not, be designated as incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986. As of March 31, 201
4
, the Company had not granted any options under the plan and had no current plans to do so.
The Company did grant
416,715
of restricted shares of stock under the Amended plan to employees, directors, and representatives in February 2013.
Restricted shares of stock granted under the Amended Plan have been either fully vested at date of grant or subject to vesting over time periods varying from
one
to
seven
years after the date of grant, unvested shares being subject to forfeiture in the event of termination of the grantee’s relationship with the Company, other than for death or disability. The compensation cost associated with restricted stock grants is recognized over the vesting period of the shares and is calculated as the market value of the shares on the date of grant.
Restricted shares have been recorded as deferred compensation, which is a component of paid-in capital within stockholders’ equity on the Company’s Consolidated Balance Sheets.
Under the Amended Plan
58,201
shares remain as authorized and are available for issuance and
9
41,799
shares have been issued.
Stock compensation for the years ended March 31, 201
4
and 201
3
for restricted shares issued under all Plans was
$361,469
and
$172,780
, respectively.
The follo
wing activity under the Amended Plan occurred during the fiscal year ended March 31, 201
4
:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Ave
|
Weighted Average
|
|
|
|
|
|
Shares
|
Stock Price
|
Vested Life
|
Fair Value $
|
|
|
Non-vested at April 1, 2013
|
|
440,437
|
$ 3.85
|
2.74 years
|
$ 1,695,682
|
|
|
Granted
|
|
-
|
$ -
|
|
$ -
|
|
|
Less: vested
|
|
(94,771)
|
$ 3.94
|
|
$ (373,398)
|
|
|
Less: canceled
|
|
(9,236)
|
$ 4.05
|
|
$ (37,406)
|
|
|
Non-vested at March 31, 2014
|
|
336,430
|
$ 3.81
|
1.86 years
|
$ 1,281,798
|
|
The following activity under the
Amended
Plan occurred during the fiscal year ended March 31, 201
3
:
|
|
|
|
|
|
|
|
|
|
|
Weighted Ave
|
Weighted Average
|
|
|
|
|
Shares
|
Stock Price
|
Vested Life
|
Fair Value $
|
|
Non-vested at April 1, 2012
|
|
77,402
|
$4.41
|
2.54 years
|
$ 341,343
|
|
Granted
|
|
420,000
|
$3.81
|
|
$ 1,600,200
|
|
Less: vested
|
|
(49,374)
|
$4.31
|
|
$ (212,802)
|
|
Less: canceled
|
|
(7,591)
|
$4.67
|
|
$ (35,450)
|
|
Non-vested at March 31, 2013
|
|
440,437
|
$3.85
|
2.74 years
|
$ 1,695,682
|
The Company's results for the fiscal year ended March 31, 201
4
and 201
3
, respectively includes
$
205,740
and
$17,145
of compensation costs related to vesting of restricted stock grants to employees and
$
155,729
and
$155,635
of restricted stock grants to directors, consultants and independent representatives, under the 2005 Plan.
As of March 31, 201
4
there was
$
1,281,798
of unrecognized compensation cost related to grants under the 2005 Plan, and
$1,695,682
of unrecognized compensation as of March 31, 201
3
under the 2005 Plan.
Stock Option Grants
A summary of the status of the Company's employee, representative and Directors' fixed stock options as of March 31, 201
4
and 201
3
, and changes during the fiscal years ended on those dates, is presented below:
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Fixed Options
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
|
Shares
|
Exercise Price
|
|
Shares
|
Exercise Price
|
|
Outstanding at beginning of year
|
|
150,000
|
$
1.00
|
|
150,000
|
$
1.00
|
|
Granted
|
|
-
|
|
|
-
|
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Outstanding at year end
|
|
150,000
|
$
1.00
|
|
150,000
|
$
1.00
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
150,000
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
|
|
|
|
|
|
|
|
options granted during the year
|
|
-
|
|
|
-
|
|
The intrinsic value of the above stock options was
$
921,000
and
$
412,500
at March 31, 201
4
and 201
3
, respectively.
Retirement Plan:
The Company has a 401(k) Profit Sharing Plan that allows participation by all employees with at least three months of service.
The Plan covers substantially all employees who have met employment guidelines.
Effective January 1, 2014, the Company instituted a safe harbor contribution. The Company matched
100%
of the eligible participant’s contribution up to
3%
of the participant’s qualifying wages and then
50%
of the next
2
% of participant’s contribution. The Company’s matching contributions, included in compensation and benefits, was approximately
$
41,000
, for the year ended March 31, 2014.
The Company did not make any discretionary contribution
s
for the
prior fiscal year
.
Non-Qualified Deferred Compensation Plan
:
Effective December 2007, the Company established the Investors Capital Holdings, Ltd. Deferred Compensation Plan (the “NQ Plan”) as well as a Rabbi Trust Agreement for this Plan, for which ICC is the NQ Plan’s sponsor
. The
funded
NQ
Plan enables eligible ICC’s Representatives to elect to defer
a portion of earned commissions, as defined by the NQ Plan. The asset represents the representatives’ invested contributions of deferred commissions, investment gains and losses as well as insurance charges while the liability is comprised of the participant deferrals, unrealized gains
and
losses and any distributions. The total amount of deferred compensation was
$
683,002
a
nd
$
475,352
for the years ended March 31, 201
4
and 201
3
, respectively
NOTE
17
-
EARNINGS PER COMMON SHARE
Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the dilutive effect of all stock options and other items outstanding during the period that could potentially result in the issuance of common stock, as well as any adjustment to income that would result from the assumed issuance. As of March 31, 201
4
, there
were
150,000
stock options and
354,883
shares of unvested restricted stock outstanding which were excluded from the diluted
loss
per share calculation since they were anti-dilutive. As of March 31, 201
3
, there were
150,000
stock options and
463,990
shares of unvested restricted stock outstanding which were
included
in
the
diluted
net income
per
share calculation
resulting in no change on earnings per share.
NOTE
18
-
UNAUDITED QUARTERLY RESULTS
The unaudited quarterly amounts may differ due to the reclassifications. Refer to Note 2 – Summary of Significant Accounting Policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
September 30, 2013
|
|
December 31, 2013
|
|
March 31, 2014
|
|
Revenues
|
$
|
23,082,996
|
$
|
22,277,804
|
$
|
24,848,759
|
$
|
23,404,852
|
|
Expenses
|
|
23,753,102
|
|
23,192,147
|
|
25,252,080
|
|
24,343,122
|
|
Operating income (loss)
|
|
(670,106)
|
|
(914,343)
|
|
(403,321)
|
|
(938,274)
|
|
Net income (loss)
|
|
(359,579)
|
|
(781,518)
|
|
(285,694)
|
|
(954,287)
|
|
Basic earnings income (loss) per share
|
|
(0.05)
|
|
(0.12)
|
|
(0.04)
|
|
(0.14)
|
|
Diluted earnings (loss) per share
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
September 30, 2012
|
|
December 31, 2012
|
|
March 31, 2013
|
|
Revenues
|
$
|
20,802,525
|
$
|
20,322,765
|
$
|
20,766,362
|
$
|
22,993,737
|
|
Expenses
|
|
20,353,503
|
|
19,893,125
|
|
20,483,091
|
|
23,569,666
|
|
Operating loss
|
|
449,022
|
|
429,640
|
|
283,271
|
|
(575,929)
|
|
Net (loss) income
|
|
261,682
|
|
280,220
|
|
133,716
|
|
(309,326)
|
|
Basic earnings (loss) income per share
|
|
0.04
|
|
0.04
|
|
0.02
|
|
(0.04)
|
|
Diluted earnings (loss) per share
|
|
0.04
|
|
0.04
|
|
0.02
|
|
NA
|
NOTE
19
-SUB
SEQUENT
EVENT
S
On May 9, 2014
150,000
options were exercised
for
150,000
common shares of ICH, b
y ICH’s CEO
at
a fair market value of
$7.13
per share. These
options
were issued in 199
4
.