FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25958
ND HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
North Dakota 45-0404061
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1 North Main, Minot, North Dakota, 58703
(Address of principal executive offices)
(701) 852-5292
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
As of August 7, 1998, there were 8,093,687 shares of common stock of
the registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
FORM 10-QSB
ND HOLDINGS, INC.
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations-
Three months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Operations-
Six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows-
Six months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II OTHER INFORMATION
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
2
<PAGE>
<TABLE>
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 581,442 $ 351,603
Securities available-for-sale 97,877 101,329
Accounts receivable 325,017 342,134
Prepaids 28,768 27,825
Deferred tax benefit 235,436 405,343
-----------------------------
Total current assets $ 1,268,540 $ 1,228,234
-----------------------------
EQUIPMENT
Equipment $ 582,011 $ 562,776
Less accumulated depreciation (260,363) (239,337)
-----------------------------
Net equipment $ 321,648 $ 323,439
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 3,455,532 $ 3,341,858
Covenant not to compete (net of
amortization of $250,000 and $200,000) 50,000 100,000
Investment advisor's agreements (net of
amortization of $698,127 and $554,668) 5,040,212 5,183,671
Other assets 147,367 128,958
------------------------------
Total other assets $ 8,693,111 $ 8,754,487
-----------------------------
TOTAL ASSETS $ 10,283,299 $ 10,306,160
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 101,622 $ 101,486
Accounts payable 59,565 16,208
Note payable 4,834 0
Investment certificates 40,000 0
Current portion of long-term debt 0 78,192
Other current liabilities 37,470 36,714
-----------------------------
Total current liabilities $ 243,491 $ 232,600
-----------------------------
LONG-TERM LIABILITIES
Note payable $ 0 $ 430,970
Investment certificates 0 105,100
Debenture certificates 950,000 552,000
Less current portion 0 (78,192)
-----------------------------
Total long-term liabilities $ 950,000 $ 1,009,878
-----------------------------
TOTAL LIABILITIES $ 1,193,491 $ 1,242,478
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 20,000,000 shares
authorized, no par value; 8,097,187 and
8,153,187 shares issued and outstanding,
respectively $ 10,379,609 $ 10,460,130
Accumulated deficit (1,287,678) (1,397,777)
Unrealized gain (loss)on securities
available for sale (2,123) 1,329
-----------------------------
Total stockholders' equity $ 9,089,808 $ 9,063,682
-----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 10,283,299 $ 10,306,160
=============================
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
3
<PAGE>
<TABLE>
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Three Months Ended
June 30,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 873,406 $ 904,401
Commissions 106,585 79,690
-------------------------
Total revenue $ 979,991 $ 984,091
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 197,136 $ 191,284
Commission expense 63,607 29,120
General and administrative expenses 424,977 384,000
Sales commissions amortized 118,568 133,418
Depreciation and amortization 108,876 107,470
-------------------------
Total operating expenses $ 913,163 $ 845,292
-------------------------
OPERATING INCOME $ 66,828 $ 138,799
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 12,368 $ 6,492
Interest expense (25,022) (33,756)
-------------------------
Net other income (expense) $ (12,654) $ (27,264)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 54,174 $ 111,535
DEFERRED INCOME TAX EXPENSE $ (52,858) (82,737)
-------------------------
NET INCOME $ 1,347 $ 28,798
=========================
NET INCOME PER SHARE: $ - $ -
AVERAGE COMMON SHARES OUTSTANDING 8,107,687 8,131,747
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</TABLE>
4
<PAGE>
<TABLE>
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 1,747,276 $ 1,780,080
Commissions 246,408 151,907
-------------------------
Total revenue $ 1,993,684 $ 1,931,987
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 411,319 $ 381,153
Commission expense 108,621 57,525
General and administrative expenses 669,403 699,356
Sales commissions amortized 269,936 261,277
Depreciation and amortization 216,935 214,940
-------------------------
Total operating expenses $ 1,676,213 $ 1,614,251
-------------------------
OPERATING INCOME $ 317,471 $ 317,736
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 23,526 $ 13,028
Interest expense (54,639) (58,106)
-------------------------
Net other income (expense) $ (31,113) $ (45,078)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 286,358 $ 272,658
DEFERRED INCOME TAX EXPENSE $ (176,262) (187,725)
-------------------------
NET INCOME $ 110,097 $ 84,933
=========================
NET INCOME PER SHARE: $ 0.01 $ 0.01
AVERAGE COMMON SHARES OUTSTANDING 8,127,519 8,129,415
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</TABLE>
5
<PAGE>
<TABLE>
ND HOLDINGS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Six Months Ended
June 30
-------------------------
1998 1997
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 441,240 $ 201,725
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment adviser's agreement $ 0 $ (4,029)
Purchase of equipment (19,235) (16,384)
Other asset (increases) decreases (18,409) (3,361)
--------------------------
Net cash used by investing activities $ (37,644) $ (23,774)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt $ (426,136) $ 0
Proceeds from long-term debt 398,000 0
Payments on long-term debt 0 (144,240)
Proceeds from issuing common stock (net of
issue cost) 11,870 62,739
Redemption of common stock (92,391) 0
Investment certificates redeemed (65,100) (51,000)
-------------------------
Net cash provided (used) by financing activities $ (173,757) $ (132,501)
-------------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS $ 229,839 $ 45,450
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 351,603 167,912
-------------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 581,442 $ 213,362
=========================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</TABLE>
6
<PAGE>
ND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of ND
Holdings, Inc., a North Dakota corporation, and its subsidiaries
(collectively, the "Company"), included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). In the opinion of
management, all adjustments necessary (of a normal recurring nature
only) to present fairly the financial position of the Company as of
June 30, 1998 and results of operations and cash flows for the
stated periods have been included. The Condensed Consolidated
Balance Sheet at December 31, 1997, contained herein, was derived
from audited financial statements, but does not include all
disclosures included in the Form 10-K and applicable under
generally accepted accounting principles. Certain information and
footnote disclosures normally included in interim financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. The results of operations for the
six months ended June 30, 1998 are not necessarily indicative of
operating results for the entire year.
NOTE 2 - INCOME TAXES
Estimated effective annual income tax rates differ from statutory
rates, primarily due to nondeductible amortization expenses.
NOTE 3 - RECLASSIFICATION
Certain amounts in the 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on the Company's net income.
7
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
ND Holdings, Inc. ("the Company") is a holding company primarily engaged,
through various subsidiaries, in providing investment management,
distribution, shareholder services, fund accounting and other related
administrative services to the open-end investment companies known as
"Integrity Mutual Funds" and "Ranson Managed Portfolios," hereinafter
collectively referred to as "the Funds." Integrity Mutual Funds currently
consists of four (4) open-end investment companies: ND Tax-Free Fund, Inc.,
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund and Integrity Fund
of Funds, Inc. Ranson Managed Portfolios consists of one open-end
investment company containing five (5) separate portfolios including
The Kansas Municipal Fund, The Kansas Insured Intermediate Fund,
The Nebraska Municipal Fund, The Oklahoma Municipal Fund and The Illinois
Municipal Fund. Currently, ND Holdings is the only shareholder of The Illinois
Municipal Fund. Sales of Fund shares are marketed principally in Montana,
Kansas, Oklahoma, North Dakota, Nebraska and South Dakota. In addition,
the Company has commenced marketing shareholder services, fund
accounting and other administrative services offered by its subsidiary,
ND Resources, Inc.("ND Resources") to fund groups in the United States.
ASSETS UNDER MANAGEMENT
By Investment Objective
In Millions
As of June 30, 1998 1997 % Change
- --------------------------------------------------------------------------
FIXED INCOME
Tax-Free $ 324.4 $ 315.7 2.8%
Taxable (Corporate/Government) 0.0 2.5 (100.0)%
- --------------------------------------------------------------------------
TOTAL FIXED INCOME $ 324.4 $ 318.2 1.9%
- --------------------------------------------------------------------------
EQUITY
Fund of Funds $ 21.7 $ 15.9 36.5%
- --------------------------------------------------------------------------
TOTAL EQUITY $ 21.7 $ 15.9 36.5%
- --------------------------------------------------------------------------
TOTAL ALL MUTUAL FUNDS-end of period $ 346.1 $ 334.1 3.6%
==========================================================================
Average for the period $ 347.9 $ 336.3 3.5%
==========================================================================
The Company's revenues depend primarily upon the amount of assets under its
management. Assets under management can be affected by the addition of new
funds to the group, the acquisition of another investment management company,
purchase and redemption of mutual fund shares and investment performance,
which may depend on general market conditions. Assets under the Company's
management were $346.1 million at June 30, 1998, a decrease of $3.8 million
(1.1%) from December 31, 1997 and an increase of $12.0 million (3.5%) from
June 30, 1997. The decrease in assets under management during the six month
period ended June 30, 1998, was the result of a decline in the net asset value
(share price) of the fixed income funds and net redemption of fixed income
funds.
RESULTS OF OPERATIONS
Six months ended
June 30 %
1998 1997 Change
- ---------------------------------------------------------------------
Net Income $110,097 $ 84,933 30%
Earnings per share
Primary $ 0.01 $ 0.01 0%
Fully-diluted $ 0.01 $ 0.01 0%
Operating margin 16% 16%
- ---------------------------------------------------------------------
Net income during the six months ended June 30, 1998 increased as compared to
the same period in the previous fiscal year primarily due to an increase in
investment management fees as a result of an increase in fee rates charged to
Funds and, to a lesser extent a 3.5% increase in average assets under
management.
For the six months ended June 30, 1997, the Company waived or reimbursed
fund fees and expenses (including transfer agent fees, accounting service fees
custodian fees, professional services fees and directors/trustees fees)
pursuant to voluntary fee waiver and expense reimbursement arrangements. The
Company incurred and paid each Fund's expenses (with such expenses being
reflected as general and administrative expenses on the Company's consolidated
income statement). Each fund's expenses were periodically paid by the
applicable fund in an amount equal to the fund's gross expenses net of
expenses voluntarily absorbed by the Company (with the net payments being
reflected as fee income on the Company's consolidated income statement).
Commencing in 1998, Fund expenses are incurred and paid directly by the Funds.
The Company is fulfilling its voluntary waiver and reimbursement arrangements
through voluntary waivers of investment advisory and/or Rule 12b-1 fees and
reimbursement of expenses. While this change in procedure will not
have any impact on the Company's consolidated net income, it has caused
consolidated revenues and expenses to be lower for the six months ended
June 30, 1998 than they otherwise would have been in the absence of such
procedural change. Had this change been adopted on January 1, 1997,
fee income for the six months ended June 30, 1997 would have been
$1,457,101, a decrease of $322,979 and general and administrative expenses
would have been $376,377, a decrease of $322,979.
Operating revenues
Total operating revenues for the six months ended June 30, 1998 were
$1,993,684 an increase of 24% from June 30, 1997 after giving effect to the
procedural change. The increase resulted primarily from reduced fee waivers,
and to a lesser extent from increased assets under management.
Commission income includes underwriting fees associated with sales of the
front-end sales load funds, ("FESL's") commissions earned by registered
representatives of ND Capital, the Company's broker-dealer subsidiary, and
commissions earned by ND Capital acting as agent to the Funds for the purchase
of certain investment securities. Commission income increased 62% from $151,907
for the first six months of 1997 to $246,408 for the same period this year.
The increase is attributable primarily to an increase in the commissions
earned by registered representatives of ND Capital and to a lesser extent from
commissions earned by ND Capital acting as agent for the purchase or sale of
certain investment securities. ND Capital has temporarily ceased acting as
agent to the fixed-income funds for the purchase of investment securities in
1998.
Operating expenses
Total operating expenses for the six months ended June 30, 1998 reported
were $1,676,213, an increase of 30% from June 30, 1997 after giving effect
to the procedural change. The increase is a result of increases in several of
the major expense categories as described in the paragraphs that follow.
Compensation and benefits.
Total compensation and benefits for the six months ended June 30, 1998
were $411,319, an increase of 8% from June 30, 1997. The increase resulted
primarily from an increase in employees in preparation of offering
Transfer Agent and accounting services to outside fund groups
and normal increases in compensation and benefits for cost of living
adjustments.
Commission Expense
Total commission expense for the six months ended June 30, 1998 was
$108,621, an increase of 89% from June 30, 1997. The increase is directly
related to the increase in commission income.
8
<PAGE>
Total general and administrative expenses for the six months ended June 30,
1998 were $669,403, an increase of 78% from June 30, 1997 after giving effect
to the procedural change. The majority of the increase is a result of
additional legal and accounting expenses related to a routine SEC examination.
Additional marketing costs in an effort to increase Fund growth, additional
interest expense because of the recently completed debenture offering and
normal increases in operating costs were additional factors.
Sales commissions paid to brokers and dealers in connection with the sale of
shares of the Funds sold without a FESL are capitalized and amortized on a
straight line basis over a period not exceeding nine years, which
approximates the period of time during which deferred sales commissions are
expected to be recovered from distribution plan payments received from
various Funds and management's estimate of the average life of investors'
accounts in the Integrity Mutual Funds. Amortization of deferred sales
commissions increased 3% in the first six months of 1998 over the same
period in 1997.
Depreciation and amortization remained relatively unchanged in the first six
months of 1998 compared with the prior year period. A covenant not to
compete, accounting for $100,000 of annual amortization will be fully
amortized at December 31, 1998.
Other income (expenses)
Total other income, net of other expenses was ($31,113) in the first six months
of 1998 compared with ($45,078) for the same period in 1997. Investment income
increased to $23,526 for the first six months of 1998 compared to $13,028 for
the same period in 1997, due to a higher level of cash and cash equivalents.
Interest expense was $54,639 for the first six months of 1998. Interest
expense for the same period in 1997 was $58,106. The decrease in interest
expense is a result of reductions in debt from the prior years level.
Following routine books and records examinations by the SEC in 1997, ND Money
Management Inc. (ND Money Management), Ranson Capital Corporation (Ranson
Capital), the company's portfolio management subsidiaries, and the Funds
received comment letters from the SEC staff that outlined various compliance
issues. ND Money Management, Ranson and the Funds, responded to the SEC's
comments June 1, 1998, and are currently awaiting a response from the SEC.
There can be no assurance at this time that the resolution of one or more of
the SEC's comments would not have a material adverse effect on the business or
financial condition of the Company. The Company has incurred and anticipates
that it will continue to incur, additional legal and compliance costs in the
future to ensure ongoing compliance with applicable regulatory requirements,
although the extent of such additional costs is not presently determinable.
The Company has assessed the impact of year 2000 issues on its computer
systems and applications and believes that its systems are year 2000
compliant. Currently, the Company is in the process of evaluating the
readiness of vendors upon which it relies, such as custodian banks and
the National Securities Clearing Corporation. As a result, management
is not in a position to fully estimate the costs associated with year 2000
issues and their impact on the Company's business or financial condition.
Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company's assets aggregated $10,283,299, a decrease
of 0.22% from $10,306,160, at December 31, 1997. Stockholders' equity
totaled $9,089,808 compared to $9,063,682 at December 31, 1997.
The Company held $581,442 in cash and cash equivalents at June 30, 1998, as
compared to $351,603 at December 31, 1997. Liquid assets, which consist of
cash and cash equivalents, securities available-for-sale and current
receivables increased to $1,004,335 at June 30, 1998 from $795,066 at December
31, 1997, primarily the result of current year's income before income taxes
and the remaining debenture offering proceeds not used to payoff bank loans,
pay commissions or retire company stock.
Net cash from operating activities was $441,240 during the six month period
ended June 30, 1998, an increase of 119% from $201,725 during the six month
period ended June 30, 1997. The increase was attributable to the increase in
income before income taxes and a decrease in accounts receivable and accounts
payable of approximately $198,000 for the six months ended June 30, 1998 as
compared to June 30, 1997.
Net cash used by investing activities for the six months ended June 30,
1998 was up $15,000 for the same period June 30, 1997. The increase is
primarily due to capitalized fees paid in connection with the Company's
debenture offering. These fees are part of the Company's other assets.
Net cash used by financing activities during the six months ended June 30,
1998 was $173,757. The primary financing activities for the period were the
completion of the intra-state debenture offering resulting in proceeds of
$398,000 during the six months ended June 30, 1998, payoff of the Company's
bank loan for $425,881, payments on investment certificates of $65,100 and
the redemption of $92,391 of Company stock. The debenture offering was closed
effective February 22.
Although the Company has historically relied upon sales of its Common Stock
and debt instruments for liquidity and growth, management believes that the
Company's existing liquid assets, together with the expected continuing cash
flow from operations and its borrowing capacity under its line of credit,
which at August 7, 1998 had $1,000,000 in available borrowings, will provide
the Company with sufficient resources to meet its cash requirements during
the next several months. Management expects that the principal needs for
cash may be to advance sales commissions on Funds subject to contingent
deferred sales charges, acquire additional investment management firms,
purchase property currently being leased, repurchase shares of the Company's
Common Stock and service debt.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in
other Company-authorized written or oral statements, the words and phrases
"can be", "expects," "anticipates," "may affect," "may depend," "believes,"
"estimate" or similar expressions are intended to identify "forward-looking
- -statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The Company cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties, including those set
forth in this "Forward-Looking Statements" section, that could cause actual
results for future periods to differ materially from those presently
anticipated or projected. The Company does not undertake and specifically
disclaims any obligation to update any forward-looking statement to reflect
events or circumstances after the date of such statements.
The Company derives substantially all of its revenues from fees relating to
the management of, and provision of services to, the Funds. The fees earned
by the Company are generally calculated as a percentage of assets under
management. If the Company's assets under management decline, or do not
grow in accordance with the Company's plans, fee revenues and earnings would
be materially adversely affected. Assets under management may decline because
redemptions of Fund shares exceed sales of Fund shares, or because of a
decline in the market value of securities held by the Funds, or a combination
of both.
In seeking to sell Fund shares, and market its other services, the Company
operates in the highly competitive financial services industry. The Company
competes with approximately 6,800 open-end investment companies which offer
their shares to the investing public in the United States. In addition, the
Company also competes with the financial services and other investment
alternatives offered by stock brokerage and investment banking firms,
insurance companies, banks, savings and loans associations and other financial
institutions, as well as investment advisory firms. Most of these competitors
have substantially greater resources than the Company. The Company sells Fund
shares principally through third party broker-dealers. The Company competes
for the services of such third party broker-dealers with other sponsors of
mutual funds who generally have substantially greater resources than the
Company. Banks in particular have increased, and continue to increase, their
sponsorship of proprietary mutual funds distributed through third party
distributors. Many broker-dealer firms also sponsor their own proprietary
mutual funds which may limit the Company's ability to secure the distribution
services of such broker-dealer firms. In seeking to sell Fund shares, the
Company also competes with increasing numbers of mutual funds which sell
their shares without the imposition of sales loads. No-load mutual funds
are attractive to investors because they do not have to pay sales charges on
the purchase or redemption of such mutual funds' shares. This competition
may place pressure on the Company to reduce the FESLs and CDSCs charged upon
the sale or redemption of Fund shares. However, reduced sales loads would
make the sale of Fund shares less attractive to the broker-dealers upon whom
the Company depends for the distribution of Fund shares. In the alternative,
10
<PAGE>
the Company might itself be required to pay additional fees, expenses,
commissions or charges in connection with the distribution of Fund shares
which could have a material adverse effect on the Company's earnings. The
ability of the Company to sell Fund shares may also be affected by general
economic conditions including, amongst other factors, changes in interest
rates and the inflation rate. Interest and inflation rate changes may
particularly impact the flow of money into mutual funds which invest in
fixed-income securities. Each of the Funds except Integrity Fund of Funds
invests substantially all of its assets in fixed-income securities.
General economic conditions, including interest and inflation rate changes,
may also adversely affect the market value of the securities held by the
Funds, thus negatively impacting the value of assets under management, and
hence the fees earned by the Company. The fact that the investments of each
Fund (except Integrity Fund of Funds) are geographically concentrated within
a single state makes the market value of such investments particularly
vulnerable to economic conditions within such state. In addition, the states
in which the investments of the Funds as a group are concentrated are
themselves concentrated in certain regions of the United States. The
Company's fee revenues may therefore be adversely affected by economic
conditions within such regions.
The Company also operates in a heavily-regulated environment. Following
routine books and records examinations by the SEC in 1997, ND Money
Management, Ranson Capital, two of the Company's subsidiaries, and the Funds
received comment letters from the SEC staff that outlined various compliance
issues. ND Money Management, Ranson Capital and the Funds, responded to the
SEC's comments June 1, 1998, and are currently awaiting a response from
the SEC. The Company incurred additional costs in order to comply with
existing regulatory requirements. The need to comply with any future
regulatory requirements may place further regulatory burdens on the Company
and require the Company to incur additional costs. These additional costs
may have a material adverse effect on the Company's earnings.
Sales of Fund shares with FESLs provide current distribution revenue to the
Company in the form of the Company's share of the FESLs and distribution
revenue over time in the form of 12b-1 payments. Sales of Fund shares with
CDSCs provide distribution revenue over time in the form of 12b-1 payments
and, if shares are redeemed within 5 years, CDSCs. However, the Company pays
commissions on sales of Fund shares with CDSCs, reflects such commissions as
a deferred expense on its balance sheet and amortizes such commissions over
a period of up to nine years, thereby recognizing distribution expenses.
Therefore, to the extent that sales of Fund shares with CDSCs increases over
time relative to sales of shares with FESLs, current distribution expenses
may increase relative to current distribution revenues in certain periods,
which would negatively impact the Company's earnings in such periods. In
addition, the Company may need to find additional sources of funding if
existing cash flow and debt facilities are insufficient to fund commissions
payable to selling broker-dealers on CDSC shares.
Item 5: Other Information
On July 1, 1998 the Company hired a Controller to fill the open position from
May 14, 1998. A nine-person management staff has assumed the Chief Operating
Officer responsibilities.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27 Financial Data Schedule
(b) Reports on Form 8-K
None
11
<PAGE>
ND HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Robert E. Walstad August 11, 1998
- -----------------------------------
Robert E. Walstad Date
President and Chairman of the Board
12
<PAGE>
ND HOLDINGS, INC. AND SUBSIDIARIES
Exhibit Index to Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
EXHIBITS
EX-27 Financial Data Schedule
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
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