FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
U.S. SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 November 5, 1999, there were 7,411,187 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-
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations-
Three months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Operations-
Nine months ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows-
Nine months ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis or Plan of Operation
Part II OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders 11
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)
September 30 December 31,
1999 1998
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,594,051 $ 1,042,179
Securities available-for-sale 104,376 101,000
Accounts receivable 356,116 324,075
Prepaids 42,098 48,808
Deferred tax benefit - 138
-----------------------------
Total current assets $ 2,096,641 $ 1,516,200
-----------------------------
PROPERTY & EQUIPMENT $ 1,365,497 $ 1,295,904
Less accumulated depreciation (353,164) (284,606)
-----------------------------
Net property & equipment $ 1,012,333 $ 1,011,298
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 2,666,017 $ 3,328,634
Investment advisory agreements (net of
amortization of $1,065,981 and $841,585) 5,114,363 4,896,754
Other assets 157,403 138,174
-----------------------------
Total other assets $ 7,937,783 $ 8,363,561
-----------------------------
TOTAL ASSETS $ 11,046,757 $ 10,891,060
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 117,108 $ 99,245
Accounts payable 39,158 8,656
Other current liabilities 45,807 42,219
Short-term borrowings - 350,000
Deferred tax liability 65,854 -
Current portion of long-term debt 10,390 57,750
-----------------------------
Total current liabilities $ 278,317 $ 557,870
-----------------------------
LONG-TERM LIABILITIES
Notes payable $ 653,093 $ 327,750
Investment certificates - 30,000
Debenture certificates 950,000 950,000
Corporate notes 770,000 -
Less current portion (10,390) (57,750)
-----------------------------
Total long-term liabilities $ 2,362,703 $ 1,250,000
-----------------------------
TOTAL LIABILITIES $ 2,641,020 $ 1,807,870
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 20,000,000 shares
authorized, no par value; 7,350,187 and
7,951,187 shares issued and outstanding,
respectively $ 9,693,944 $ 10,253,246
Accumulated deficit (1,288,207) (1,170,055)
-----------------------------
Total stockholders' equity $ 8,405,737 $ 9,083,191
-----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 11,046,757 $ 10,891,060
=============================
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 924,156 $ 874,316
Commissions 405,509 214,939
-------------------------
Total revenue $ 1,329,665 $ 1,089,255
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 255,112 $ 211,045
Commission expense 327,143 171,454
General and administrative expenses 220,415 246,210
Sales commissions amortized 152,079 160,058
Depreciation and amortization 105,092 108,467
-------------------------
Total operating expenses $ 1,059,840 $ 897,235
-------------------------
OPERATING INCOME $ 269,825 $ 192,020
-------------------------
OTHER INCOME (EXPENSE)
Investment and other income $ 31,988 $ 11,701
Interest expense (53,629) (25,641)
-------------------------
Net other income (expense) $ (21,641) $ (13,940)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 248,184 $ 178,081
DEFERRED INCOME TAX EXPENSE $ 126,108 121,518
-------------------------
NET INCOME $ 122,076 $ 56,563
=========================
NET INCOME PER SHARE: $ .02 $ .01
AVERAGE COMMON SHARES OUTSTANDING 7,430,687 8,089,020
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</FN>
</TABLE>
4
<PAGE>
<TABLE>
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 2,759,935 $ 2,621,592
Commissions 873,552 676,115
-------------------------
Total revenue $ 3,633,487 $ 3,297,708
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 738,899 $ 622,363
Commission expense 737,023 494,843
General and administrative expenses 801,290 915,613
Sales commissions amortized 447,065 467,751
Depreciation and amortization 304,042 325,402
-------------------------
Total operating expenses $ 3,028,318 $ 2,825,973
-------------------------
OPERATING INCOME $ 605,169 $ 471,735
-------------------------
OTHER INCOME (EXPENSE)
Investment and other income $ 92,793 $ 35,227
Interest expense (135,724) (80,280)
-------------------------
Net other income (expense) $ (42,931) $ (45,053)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 562,238 $ 426,682
DEFERRED INCOME TAX EXPENSE $ 306,935 282,979
-------------------------
NET INCOME BEFORE
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 255,303 $ 143,703
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
(net of income taxes) 373,455 -
-------------------------
NET INCOME (LOSS) AFTER
CUMULATIVE EFFECT (118,152) 143,703
=========================
NET INCOME (LOSS) PER SHARE: $ (0.02) $ 0.02
AVERAGE COMMON SHARES OUTSTANDING 7,624,964 8,114,687
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</FN>
</TABLE>
5
<PAGE>
<TABLE>
ND HOLDINGS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
-------------------------
1999 1998
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 930,034 $ 717,464
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment $ (69,593) $ (23,589)
Purchase of investment advisory agreement (287,493) -
Other asset (increases) decreases (22,605) (109,666)
Redemption of investment in
Illinois Municipal fund - 96,877
--------------------------
Net cash used by investing activities $ (379,691) $ (36,378)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term borrowings (350,000) -
Proceeds from long-term debt 200,000 398,000
Payments on long-term debt $ (29,169) $ (427,165)
Proceeds from corporate notes 770,000 -
Investment certificates redeemed (30,000) (65,100)
Proceeds from issuing common stock (net of
issue cost) - 11,870
Redemption of common stock (559,302) (113,663)
-------------------------
Net cash provided (used) by financing activities $ 1,529 $ (196,058)
-------------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS $ 551,872 $ 485,028
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,042,179 351,603
-------------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,594,051 $ 836,631
=========================
NON-CASH ACTIVITY
Purchase of investment advisory agreement
with debt $ 154,512 $ -
=========================
<FN>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
</FN>
</TABLE>
6
<PAGE>
ND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
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). These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
the footnotes thereto contained in the Annual Report on Form 10-KSB for the
year ended December 31, 1998 of ND Holdings, Inc., as filed with the SEC. The
Condensed Consolidated Balance Sheet at December 31, 1998, contained herein,
was derived from audited financial statements, but does not include all
disclosures included in the Form 10-KSB 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.
In the opinion of Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which are of a normal recurring
nature only) necessary for a fair presentation of the financial statements.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of operating results for the entire year.
NOTE 2 - INCOME TAXES
The Company's effective tax rate differs from the U. S. Statutory rate
primarily due to nondeductible amortization expenses incurred as a result
of the Ranson acquisition. The Company's effective tax rates for 1998 and
1997 were 62% and 64%, respectively. The effective rate will continue to
reflect the nondeductible amortization associated with the investment
advisory agreement acquired in the Ranson acquisition, which has a remaining
life of 16 years. Amortization of the non-compete agreement was complete at
December 31, 1998. Accordingly, the effective tax rate for 1999 and forward
will potentially decrease because amortization of the non-compete agreement
was nondeductible for income tax purposes.
Effective for 1999 and 1998, the Company is expensing deferred sales
commissions as incurred for income tax purposes. The Company will continue
to capitalize and amortize the commissions for financial reporting purposes
(exception Integrity Fund of Funds). The effects of the change will create
timing differences between when the commissions are deducted for income tax
purposes and expensed as amortization for financial reporting purposes.
Deferred tax assets or deferred tax liabilities will result from these timing
differences.
NOTE 3 - ACCOUNTING CHANGE
In 1998, the Financial Accounting Standards Board (FASB) ruled that costs
incurred by an investment advisor for the distribution of shares of a fund
that did not have a 12b-1 plan and contingent deferred sales charges ("CDSC")
had to be expensed rather than capitalized. The ruling was effective for
costs incurred after July 23, 1998.
As part of the ruling, costs previously capitalized were to be charged off
to expense and reported as a cumulative effect adjustment when the Company
adopted Statement of Position (SOP) 98-5 "Reporting On the Costs of Start-Up
Activities."
Effective January 1, 1999, the Company adopted SOP 98-5 resulting in a
cumulative effect of an accounting change adjustment of $373,455, net of
income tax effect.
NOTE 4 - RECLASSIFICATION
Certain amounts in the 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on the Company's net income.
7
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 including 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 four (4) separate portfolios including
The Kansas Municipal Fund, The Kansas Insured Intermediate Fund,
The Nebraska Municipal Fund, and The Oklahoma Municipal Fund. The Illinois
Municipal Fund was closed during July 1999 and ND Holdings, Inc. was the only
shareholder. 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 ND Resources, Inc.("ND Resources") to fund
groups in the United States. As of November 5, 1999 ND Resources was providing
services to one outside fund group.
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
As of September 30, 1999 1998 % Change
- --------------------------------------------------------------------------
FIXED INCOME Tax-Free Funds $ 336.0 $ 329.0 2.1%
EQUITY Fund of Funds $ 20.4 $ 18.7 9.1%
- --------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS-end of period $ 356.4 $ 347.7 2.5%
- --------------------------------------------------------------------------
Investors Research Fund $ 20.1 $ 0.0 N/A
- --------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 376.5 $ 347.7 8.3%
==========================================================================
Average for the nine month period $ 380.1 $ 347.2 9.5%
==========================================================================
The Company's revenues depend primarily upon the amount of assets under its
management/service. Assets under management/service 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/service were $376.5 million at September
30, 1999, an increase of $1.8 million (.5%) from December 31, 1998 and an
increase of $28.8 million (8.3%) from September 30, 1998. The increase in
assets under management/service during the nine month period ended September
30, 1999, was primarily the result of the reorganization of Lancaster Nebraska
Tax-Free Fund (Lancaster) into the Nebraska Municipal Fund during May 1999.
The increase from September 1998 is primarily the result of the
Lancaster/Nebraska Municipal Fund reorganization and the addition of Investors
Research Fund in November 1998.
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 % September 30 %
1999 1998 Change 1999 1998 Change
- -------------------------------------------------------------------------------
Net Income (Loss) Before
Cumulative Effect $122,076 $ 56,563 116% $255,303 $143,703 78%
Earnings per share
Primary $ 0.02 $ 0.01 $ 0.03 $ 0.02 50%
Fully-diluted $ 0.02 $ 0.01 $ 0.03 $ 0.02 50%
Operating margin 20% 18% 17% 14%
- -------------------------------------------------------------------------------
Net Income (Loss) After
Cumulative Effect $122,076 $ 56,563 116% $(118,152) $143,703 (182%)
Earnings per share
Primary $ 0.02 $ 0.01 $ (0.02) $ 0.02 (200%)
Fully-diluted $ 0.02 $ 0.01 $ (0.02) $ 0.02 (200%)
Operating margin 20% 18% 17% 14%
- -------------------------------------------------------------------------------
Net income before cumulative effect, during the third quarter and nine months
ended September 30, 1999, increased as compared to the same period in 1998.
The increase is primarily due to an 88.7% increase in commission revenues for
the quarter and a 29.2% increase for the year to date.
Operating revenues
Total operating revenues for the quarter ended September 30, 1999 were
$1,329,665, an increase of 22.1% from September 30, 1998 due to an 88.7%
increase in commission income. For the nine months ended September 30, 1999,
operating revenues were a 10.2% increase from the same period in 1998.
This increase resulted from a 29.2% increase in commission income and a 5.3%
increase in fee income generated by increased assets under management/service.
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 and Ranson Capital, the Company's two
broker-dealer subsidiaries, Integrity Fund of Funds CDSC's and commissions
earned by ND Capital acting as agent to the Funds for the purchase of
certain investment securities. Commission income increased 88.7% from $214,939
for the quarter ended September 30, 1998 to $405,509 for the same period this
year. Commission income for the nine months ended September 30, 1999, were up
29.2% from the same period in 1998. The third quarter and year to date
increase is attributable primarily to increased commissions earned from
underwriting fees, broker-dealer fees and CDSC's.
Operating expenses
Total operating expenses for the quarter ended September 30, 1999 were
$1,059,840, an increase of 18.1% from the quarter ended September 30, 1998.
The 1999 nine months ended operating expenses were a 7.2% increase from the
same period 1998. The variances relate to several of the major expense
categories as described in the paragraphs that follow.
Compensation and benefits.
Total compensation and benefits for the quarter ended September 30, 1999
were $255,112, an increase of 20.9% from the quarter ended September 30, 1998.
The 1999 nine months ended September 30, 1999 expenses were up 18.7% compared
To the same period in 1998. The increase resulted primarily from an increase
In employees and normal increases in compensation and to a lesser extent health
insurance expense whereby the Company is incurring a higher cost for 1999 as
compared to 1998.
Commission Expense
Total commission expense for the quarter ended September 30, 1999 was
$327,143, an increase of 90.8% from the quarter ended September 30, 1998.
The increase is directly related to the increase in commission income.
The nine months ended commission expense is up 48.9% compared to the same
period in 1998. The increase is primarily due to the increase in commission
income and to a lesser extent the direct expensing of commissions on the
Integrity Fund of Funds.
8
<PAGE>
General and administrative expenses
Total general and administrative expenses for the quarter ended September
30, 1999 were $220,415, a decrease of 10.5% from the quarter ended
September 30, 1998. The nine months ended September 30, 1999 general and
administrative expenses were down 12.5% for the same period in 1998.
The primary variance relates to 1998 legal and accounting expenses related
to a routine SEC examination, not present in 1999.
Sales commissions amortized
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 decreased over 4% in the quarter and nine month periods ended
September 30, 1999 over the same periods in 1998. The decrease in 1999 is due
to the Integrity Fund of Funds discontinuing amortization of their sales
commissions and expensing them as incurred.
Depreciation and amortization
Depreciation and amortization decreased from 1998 by 3.1% and 6.6%
respectively for the quarter and nine month periods ended September 30, 1999
The decrease is primarily due to a covenant not to compete, accounting for
$100,000 of annual amortization, that was fully amortized at December 31, 1998.
Other income (expenses)
Total other income, net of other expenses was ($21,641) for the quarter ended
September 30, 1999 compared to ($13,940) for the same period in 1998. For the
nine months ended September 30, 1999, other income net of expenses was
($42,931) compared with ($45,052) for the same period in 1998. Interest and
other income increased 173.4% for the quarter and 163.4% for the nine months
ended September 30, 1999 compared to the same periods in 1998. The increases
are primarily due to net rental income obtained from the purchase of the office
building in December 1998, and to a lessor extent, interest earned on higher
levels of cash and cash equivalents. Interest expense was $53,629 for the
quarter ended September 30, 1999 compared to $25,641 for the same period in
1998. For the nine months ended September 30, 1999, interest expense was
$135,724 compared to $80,280 for the same period in 1998. The increase in
interest expense is a result of increased debt for a mortgage placed on the
office building purchased in December, 1998 and a corporate notes offering of
April 6, 1999.
Description of the Year 2000 (Y2K) Problem
The Y2K problem refers to a flaw in the way dates have traditionally been
entered into computer systems. Some computer systems and software have
accepted entry of two digit years with the expectation that the year "00"
refers to the year 1900, not the year 2000. This prevents the computer from
properly recognizing dates after the year 1999. Y2K compliance indicates
that procedures have been adopted to assure all dates entered, stored,
calculated and reported by computer systems are valid.
Company action addressing the Y2K problem
The information and data processing systems used by ND Holdings, Inc. and its
subsidiaries are managed and maintained by ND Resources, Inc. ND Resources
has the responsibility to assure that data processing performed for its parent
company and subsidiaries, as well as data processing performed for and between
outside clients, will not be adversely affected by the Y2K problem.
ND Resources has completed an inventory and assessment of all systems
potentially affected by the Y2K problem. Remediation and testing of
individual system components was expected to be completed by the second
quarter of 1999. Outside vendors have been identified and contacted
regarding Y2K compliance.
Impact of the Y2K problem on the company
ND Holdings, Inc. does not anticipate a material impact on the company's
financial condition due to Y2K compliance issues. The company's information
systems have been designed to be Y2K compliant. Internal company staff and
resources are being utilized to address Y2K remediation and testing. ND
Resources is in close contact with outside vendors and service providers, to
assure that a third party's failure to provide service does not disrupt normal
business operations.
Contingency planning
ND Holdings, Inc. has developed contingency plans for Y2K related problems
affecting internal information systems, outside service providers and
infrastructure (power, communications, etc.).
Financial Condition
At September 30, 1999, the Company's assets aggregated $11,046,757, an
increase from $10,891,060, at December 31, 1998. The increase is a net result
of proceeds from a corporate note offering less the payment of short-term
debt. Stockholders' equity totaled $8,405,737 compared to $9,083,191 at
December 31, 1998. The decrease was due in part to the repurchase of
$559,302 of the Company's own Common Stock. The Company's repurchase
activity is pursuant to a program approved by its Board of Directors in
November 1997 to repurchase up to $2,000,000 of its Common Stock from time to
time in the open market. Additionally, a ruling made by the FASB required
the expensing of the costs incurred by an investment advisor in connection
with the distribution of shares of a fund absent both 12b-1 fees and CDSC
charges. The ruling affects the Company's costs incurred for the
distribution of Integrity Fund of Funds only. FASB's ruling resulted in
the Company's having to report a cumulative effect of an accounting change
adjustment of $373,455 to expense previously capitalized costs, net of tax
effect. The adjustment decreased the Company's assets and stockholders
equity.
Cash provided by operating activities increased 29.6% from $717,464 in the nine
months ended September 30, 1998 to $930,034 for the same period 1999. For the
nine months ended September 30, 1999, the Company used net cash of $379,691
for investment activities, primarily for the purchase of the advisory
agreement to manage the Lancaster Nebraska Tax-Free Fund, and to a lesser
extent, the purchase of equipment and other assets. Net cash provided by
financing activities during the nine months of 1999 was $1,529. The nine
month activity included the pay down of short-term debt ($350,000),
long-term debt ($29,169), the redemption of investment certificates ($30,000)
and the repurchase of 601,000 shares of its Common Stock for an aggregate
consideration of $559,302, offset by proceeds from corporate notes ($770,000)
and proceeds from a line of credit ($200,000).
Liquidity and Capital Resources
The Company held $1,594,051 in cash and cash equivalents at September 30, 1999,
as compared to $1,042,179 at December 31, 1998. Liquid assets, which consist
of cash and cash equivalents, securities available-for-sale and current
receivables increased to $2,054,543 at September 30, 1999 from $1,467,254 at
December 31, 1998, primarily the result of proceeds from an April 6, 1999
corporate note offering, strictly limited to bona fide North Dakota residents
and cash provided by investment activities.
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 November 5, 1999 had $1,500,000 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,
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 8,000 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,
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.
Sales of fund shares with FESLs, except Integrity Fund of Funds, 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 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
On October 1, 1999, the Company acquired 51% of Magic Internet Service, an
internet service provider company that is based in Minot. A new subsidiary,
Magic Internet Service, Inc., was created to offer similar and enhanced
internet provider services to current customers and shareholders and
prospective shareholders of its mutual funds.
As of November 5, 1999, $156,000 in proceeds has been received from the
Corporate Note offering extension approved by the Board on September 17, 1999.
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 November 5, 1999
- -----------------------------------
Robert E. Walstad Date
President and Chairman of the Board
(CFO and CAO)
12
<PAGE>
ND HOLDINGS, INC. AND SUBSIDIARIES
Exhibit Index to Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 1999
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 SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1594
<SECURITIES> 104
<RECEIVABLES> 356
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2097
<PP&E> 1365
<DEPRECIATION> 353
<TOTAL-ASSETS> 11047
<CURRENT-LIABILITIES> 278
<BONDS> 0
0
0
<COMMON> 9694
<OTHER-SE> (1288)
<TOTAL-LIABILITY-AND-EQUITY> 11047
<SALES> 2760
<TOTAL-REVENUES> 3633
<CGS> 0
<TOTAL-COSTS> 3028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 562
<INCOME-TAX> 307
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 373
<CHANGES> 0
<NET-INCOME> (118)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
