FORM 10-QSB/A
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 June 30, 2000
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 4, 2000, there were 7,519,687 shares of common stock of
the registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
1
FORM 10-QSB/A
ND HOLDINGS, INC.
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations-
Three months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Operations-
Six months ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows-
Six months ended June 30, 2000 and 1999 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 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
2
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,314,700 $ 1,934,739
Cash segregated for the exclusive benefit
of customers 1,204,497 0
Securities available-for-sale 142,000 100,000
Accounts receivable 658,890 350,266
Prepaids 34,928 46,127
-----------------------------
Total current assets $ 3,355,015 $ 2,431,132
-----------------------------
PROPERTY AND EQUIPMENT $ 1,978,623 $ 1,690,186
Less accumulated depreciation (505,485) (421,853)
-----------------------------
Net equipment $ 1,473,138 $ 1,268,333
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 2,160,025 $ 2,500,616
Covenant not to compete ( net of accumulated
amortization of $340,874 for 2000 and
$313,624 for 1999) 177,126 204,376
Investment advisor's agreements (net of
amortization of $1,296,117 for 2000 and
$1,142,210 for 1999) 4,853,631 5,007,371
Goodwill (net of amortization of $27,295
for 2000 and $8,373 for 1999) 997,219 494,019
Other assets 204,544 167,126
------------------------------
Total other assets $ 8,392,545 $ 8,373,508
-----------------------------
TOTAL ASSETS $ 13,220,698 $ 12,072,973
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 87,891 $ 105,951
Accounts payable 48,755 47,921
ARM acquired payable 908,736 0
Other current liabilities 469,932 219,258
Short-term borrowings 56,213 200,000
Deferred tax liability 198,893 85,752
Current portion of long-term debt 11,537 11,082
-----------------------------
Total current liabilities $ 1,781,957 $ 669,964
-----------------------------
LONG-TERM LIABILITIES
Note payable $ 607,372 $ 613,047
Debenture certificates 940,000 950,000
Corporate notes 962,000 962,000
Less current portion (11,537) (11,082)
-----------------------------
Total long-term liabilities $ 2,497,836 $ 2,513,965
-----------------------------
TOTAL LIABILITIES $ 4,279,793 $ 3,183,929
-----------------------------
MINORITY INTEREST IN SUBSIDIARY 460,052 469,063
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 20,000,000 shares
authorized, no par value; 7,561,187 and
7,615,187 shares issued and outstanding,
respectively $ 9,782,670 $ 9,858,309
Receivable - unearned ESOP shares 0 (100,890)
Accumulated deficit (1,301,817) (1,337,438)
-----------------------------
Total stockholders' equity $ 8,480,853 $ 8,419,981
-----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 13,220,698 $ 12,072,973
=============================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
June 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 783,100 $ 924,342
Commissions 1,047,908 226,759
Internet revenues 173,065 0
-------------------------
Total revenue $ 2,004,073 $ 1,151,101
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 352,701 $ 240,399
Commission expense 836,464 202,206
General and administrative expenses 424,420 285,079
Sales commissions amortized 146,668 149,621
Depreciation and amortization 148,907 100,626
-------------------------
Total operating expenses $ 1,909,160 $ 977,931
-------------------------
OPERATING INCOME $ 94,913 $ 173,170
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 53,639 $ 32,682
Interest expense (56,279) (48,327)
-------------------------
Net other income (expense) $ (2,640) $ (15,645)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 92,273 $ 157,525
DEFERRED INCOME TAX EXPENSE $ (52,794) (91,166)
-------------------------
NET INCOME (LOSS) BEFORE MINORTIY INTEREST $ 39,479 $ 66,359
MINORITY INTEREST IN SUBSIDIARY $ (2,051) 0
-------------------------
NET INCOME (LOSS) AFTER MINORITY INTEREST $ 37,428 $ 66,359
=========================
NET INCOME (LOSS) PER SHARE: $ 0 $ .01
AVERAGE COMMON SHARES OUTSTANDING 7,540,437 7,722,103
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 1,607,632 $ 1,835,779
Commissions 1,144,903 468,043
Internet revenues 336,299 0
-------------------------
Total revenue $ 3,088,834 $ 2,303,822
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 646,602 $ 483,787
Commission expense 922,846 409,880
General and administrative expenses 775,381 580,875
Sales commissions amortized 293,985 294,986
Depreciation and amortization 291,663 198,951
-------------------------
Total operating expenses $ 2,930,477 $ 1,968,479
-------------------------
OPERATING INCOME $ 158,357 $ 335,343
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 92,049 $ 60,805
Interest expense (110,658) (82,095)
-------------------------
Net other income (expense) $ (18,609) $ (21,290)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 139,748 $ 314,053
DEFERRED INCOME TAX EXPENSE $ (113,141) (180,826)
-------------------------
NET INCOME (LOSS) BEFORE MINORTIY INTEREST AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 26,607 $ 133,227
MINORITY INTEREST IN SUBSIDIARY $ 9,011 0
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
(net of tax effect) 0 (373,455)
-------------------------
NET INCOME (LOSS) AFTER MINORITY INTEREST AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 35,618 $ (240,228)
=========================
NET INCOME (LOSS) PER SHARE: $ 0 $ (.03)
AVERAGE COMMON SHARES OUTSTANDING 7,540,437 7,722,103
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
ND HOLDINGS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 35,618 $ (240,228)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 291,663 198,951
Sales commissions amortized/charged off 293,985 892,512
Minority interest (9,011) 0
(Increase) decrease in:
Accounts receivable (207,942) (42,218)
Prepaids 11,199 4,175
Deferred sales commissions capitalized 46,606 (318,464)
Other assets (45,538) (25,956)
ESOP Receivable 100,890 0
Increase (decrease) in:
Service fees payable (18,057) 27,177
Accounts payable (160,997) 24,420
Other liabilities 10,440 15,740
Deferred tax 113,141 (60,116)
---------------------------------
Net cash provided by operating activities $ 461,997 $ 475,993
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (288,436) $ (51,258)
Purchase of available-for-sale securities (42,000) 0
Purchase of goodwill (465,908) 0
Purchase of investment advisory agreement $ 0 $ (287,493)
---------------------------------
Net cash used by investing activities $ (796,344) $ (338,751)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (75,639) (391,766)
Proceeds from long term notes 0 200,000
Reduction of notes payable (205,675) (376,630)
Redemption of debenture/investment certificates (10,000) (30,000)
Proceeds from corporate notes 0 770,000
ARM obligations, net 5,622 0
---------------------------------
Net cash provided (used) by financing activities $ (285,692) $ 171,604
---------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (620,039) $ 308,846
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,934,739 1,042,179
---------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,314,700 $ 1,351,025
=================================
NON-CASH INVESTING ACTIVITY
Purchase of investment advisory agreement with debt $ 154,512
Purchase of goodwill with short term borrowing $ 56,213
</TABLE>
6
ND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2000 and 1999
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, 1999 of ND Holdings, Inc., as filed with the SEC. The
Condensed Consolidated Balance Sheet at December 31, 1999, 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 the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are of a
normal recurring nature) necessary for a fair presentation of the financial
statements. The results of operations for the six months ended June 30, 2000
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 1999, 1998 and
1997 were 63%, 62% and 64%, respectively. The effective rate will continue to
reflect the nondeductible amortization associated with the investment
adviser's agreement acquired in the Ranson acquisition, which has a remaining
life of 16 years.
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, which are expensed). 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 may result from these timing differences.
NOTE 3 - RECLASSIFICATION
Certain amounts in the 1999 condensed consolidated financial statements have
been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on the Company's net income.
NOTE 4 - ACQUISITION
On May 25, 2000, the Company acquired ARM ("ARM") Securities Corporation, a
broker dealer with approximately 60 registered representatives located in
several midwestern states and California. ARM markets mainly mutual funds and
annuities, and at year-end 1999 handled client assets in excess of $1 billion.
The acquisition was accounted for as a stock purchase in which the Company paid
$1,007,893 in cash and $56,213 in short term borrowing. The operations and
financial position of ARM were accounted for in the condensed consolidated
financial statements of the Company beginning May 1, 2000. The excess purchase
price over the estimated fair value of the equity of ARM was $502,000, which
has been recorded as goodwill and is being amortized using the straight-line
method over 40 years. In addition, the Company paid various other costs
totaling $20,121 to complete the acquisition. These costs are also being
amortized using the straight-line method over 40 years.
7
The following are audited numbers from December 31,1999 for ARM Securities
Corporation.
Audited
Year ended
December 31, 1999
Revenues 51,799,861
Expenses 51,799,861
-------------
Net 0
As of August 14, 2000, the Company is awaiting Regulation S-X reporting per the
purchase agreement from ARM Financial Group, Inc., the former parent of ARM
Securities Corporation, therefore a proforma statement is unavailable at this
time.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
ND Holdings, Inc. is a holding company which operates in three business
segments, 1) as an investment adviser and provider of administrative service
to sponsored and non-proprietary mutual funds, 2) as an internet service
provider for the Minot and surrounding area and 3) as a broker dealer.
As of and for the six months ended June 30, 2000 (in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Segment 1 Segment 2 Segment 3
Revenues 1,848 336 905
Assets, net 6,904 942 586
Net Income (Loss) (19) (18) 72
</TABLE>
The Company provides 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, Inc. 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. 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 August 4, 2000, ND Resources was
providing services to one outside fund group.
8
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
<TABLE>
<CAPTION>
As of June 30, 2000 1999 % Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME Tax-Free Funds $ 297.2 $ 342.9 (13.3)%
EQUITY Fund of Funds $ 22.4 $ 22.3 .4%
--------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS-end of period $ 319.6 $ 365.2 (12.5)%
--------------------------------------------------------------------------
Investors Research Fund $ 21.1 $ 22.2 (5.0)%
--------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 340.7 $ 387.4 (12.1)%
==========================================================================
Average for the six month period $ 347.8 $ 380.1 (8.5)%
==========================================================================
</TABLE>
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, purchases and redemptions of mutual fund shares and
investment performance, which may depend on general market conditions. Assets
under the Company's management/service were $340.7 million at June 30, 2000,
decrease of $23.4 million (-6.4%) from December 31, 1999 and a decrease of
$46.7 million (-12.1%) from June 30, 1999. June 2000's decrease in assets
under management/service compared to June 1999 was primarily the result of a
decrease in the net asset value (share price) of the fixed income funds and a
continuing shift by investors from tax-free income funds to equity funds.
According to the Investment Company Institute's "Trends in Mutual Fund
Activity" report, total net assets held in tax-free income funds fell 9% from
$298.6 billion to $271.6 billion during calendar 1999 while the Company's
fixed income tax-free assets under management fell just 7%.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Income After Minority Interest
and Cumulative Effect $ 37,428 $ 66,359 $ 35,618 $ (240,228)
Earnings per share
Primary $ 0.00 $ 0.01 $ 0.00 (0.03)
Fully-diluted $ 0.00 $ 0.01 0.00 (0.03)
-------------------------------------------------------
</TABLE>
Net income (loss) after minority interest during the second quarter ended
June 30, 2000 decreased as compared to the same quarter in the previous fiscal
year.
Net income (loss) after minority interest and cumulative effect during the six
months ended June 30, 2000 increased as compared to the same quarter in the
previous fiscal year primarily due to the net activity 1999's cumulative effect
of an accounting change of $373,455 offset by a 12% increase in 2000's
operating expense that are discussed in detail in the operating expense
paragraphs that follow.
9
OPERATING REVENUES
Total operating revenues for the second quarter ended June 30, 2000 were
$2,004,073, an increase of 74.1% from June 30, 1999. The increase is the net
result of the revenues of ARM and Magic Internet, $904,666 and $173,065
respectively offset by $141,242 loss in fee revenues due to a decrease in
assets under management/service.
Total operating revenues for the six months ended June 30, 2000 were
$3,088,834, an increase of 34.1% from June 30, 1999. The increase is the net
result of the revenues of ARM and Magic Internet, $904,666 and $336,298
respectively, offset by $228,147 loss in fee revenues due to a decrease in
assets under management/service.
Fee income for the second quarter ended June 30, 2000 was a decrease of 15.3%
compared to June 30, 1999. The decrease is the result of the loss in fee
revenue due to the decrease in assets under management/service and to a lesser
extent from the reduction in fees charged to Class A shares converted from
Class B shares. Beginning January 2000, ND Tax-Free Fund, Inc., Montana Tax-
Free Fund, Inc., and South Dakota Tax-Free Fund, Inc. issued another class of
shares, Class A shares Front End Sales Load (FESLs). These shares are subject
to a maximum front-end sales load of 4.25% scaled down to .75% minimum as the
investment amount increases. Shares subject to the CDSC (Class B shares) would
automatically convert to Class A shares (and would no longer be subject to the
higher Rule 12b-1 fees) approximately 8 years after the date on which such
Class B shares were purchased. The conversion would be made based on the
relative net asset values of Class A and Class B shares, without imposing any
load, fee or other charge. This trend will continue as more Class B shares are
converted to Class A shares.
Fee income for the six months ended June 30, 2000 was a decrease of 12.4%
compared to June 30, 1999. The decrease is the result of the loss in fee
revenue due to the decrease in assets under management/service and to a lesser
extent from the reduction in fees charged to Class A shares converted from
Class B shares.
Commission income increased 362.1%, to $1,047,908 for the second quarter ended
June 30, 2000 from $226,759 for the same period last year. The increase is a
net result of commission revenues of ARM, $904,666 offset by $83,517 loss in
commission income due to a continuing shift by investors from tax-free fixed
income funds to equity funds.
Commission income increased 144.6%, to $1,144,903 for the six months ended
June 30, 2000 from $468,043 for the same period last year. The increase is a
net result of commission revenues of ARM, $904,666 offset by $227,806 loss in
commission income due to a continuing shift by investors from tax-free fixed
income funds to equity funds.
Internet revenues were $173,065 for the second quarter ended June 30, 2000 and
$336,299 for the six months ended June 30, 2000. Magic Internet Services, Inc.
was added to the consolidated group October 1, 1999. The Company owns a 51%
interest in the corporation.
OPERATING EXPENSES
Total operating expenses for the second quarter and six months ended June 30,
2000 were $1,909,160 and $2,930,477 respectively, an increase of 95.2% and
48.9%, from the same periods ended June 30, 1999. The 95.2% and 48.9%
increase is a result of the net activity in the major expense categories as
described in the paragraphs that follow.
COMPENSATION AND BENEFITS
Total compensation and benefits for the second quarter ended June 30, 2000
were $352,701, an increase of 46.7% from June 30, 1999. The increase is
primarily attributable to ARM and Magic Internet employee compensation and
benefits of $51,800 and $40,267 respectively.
10
Total compensation and benefits for the six months ended June 30, 2000 were
$646,602, an increase of 33.7% from June 30, 1999. The increase is primarily
attributable to ARM and Magic Internet employee compensation and benefits of
$51,800 and $83,883 respectively.
COMMISSION EXPENSE
Total commission expense for the second quarter ended June 30, 2000 was
$836,464, an increase of 313.7% from June 30, 1999. The increase is a net
result of ARM commission expense of $713,833 and a $79,575 decrease in
commission expense relative to commission income.
Total commission expense for the six months ended June 30, 2000 was $922,846,
an increase of 125.2% from June 30, 1999. The increase is a net result of ARM
commission expense of $713,833 and a $200,867 decrease in commission expense
relative to commission income.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the second quarter ended June 30,
2000 were $424,420, an increase of 48.9% from June 30, 1999. The increase is
attributable to ARM and Magic Internet's general and administrative costs of
$36,186 and $104,791 respectively. The preexisting general and administrative
costs were slightly down, 1.0% from 1999.
Total general and administrative expenses for the six months ended June 30,
2000 were $775,381, an increase of 33.5% from June 30, 1999. The increase is
attributable to ARM and Magic Internet's general and administrative costs of
$36,186 and $205,531. The preexisting general and administrative costs were
slightly down 8.1% from 1999, primarily service fee expense directly related to
the reduction in fee income.
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 and Ranson Managed Portfolios. Amortization of deferred
sales commissions were relatively unchanged in the second quarter and six
months ended June 30, 2000 over the same period in 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 48.0% for the second quarter ended
June 30, 2000 and 46.6% for the six months ended June 30, 2000 compared to
the same period 1999, primarily due to assets acquired for Magic Internet in
October 1, 1999.
OTHER INCOME (EXPENSES)
Total other income, net of other expenses is a 83.1% increase in the second
quarter ended June 30, 2000 compared with the same period in 1999. Interest
and other income is 64.1% higher for the second quarter ended June 30, 2000
compared to the same period in 1999 due to interest income earned on cash
invested. Interest Expense is 16.5% higher for the second quarter ended
June 30, 2000 compared to the same period in 1999 due to the interest accrued
for $962,000 in Corporate Notes issued starting in the second quarter of 1999.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities were $461,997 during the six month period
June 30, 2000, an increase of 2.9% from $475,993 during the six month period
ended June 30, 1999. Depreciation and amortization are a 46.6% increase for
the six months ended June 30, 2000 over the same period in 1999. The primary
reason is an increase in assets acquired in regards to Magic Internet Services,
Inc.. Sales commissions amortized for the six months ended June 30, 2000 were
slightly lower than the same period in 1999 exclusive of the effect in 1999
of a cumulative effect of an accounting change of $578,648 (before tax
benefit). Accounts receivable increased for the six months ended June 30, 2000
for 12b-1 commissions earned not yet received. The significant decrease in
deferred sales commissions capitalized is directly related to the shift by
investors from tax-free income funds to equity funds. Accounts payable
decreased $160,997 for the six months ended June 30, 2000.
Net cash used by investing activities for the six months ended June 30, 2000
increased to $796,344 from $338,751 for the six months ended June 30, 1999.
The 2000 increase includes remodeling of the second floor of the company's
office building, investment in Class A shares for the ND Tax-Free Fund, Inc.,
Montana Tax-Free Fund, Inc. and South Dakota Tax-Free Fund, Inc., and goodwill
for the acquisition of ARM. The 1999 activity was primarily for the purchase
of the investment advisory agreement for Lancaster Nebraska Tax-Free Fund.
Net cash used by financing activities during the six months ended June 30,
2000 was $285,692. The financing activities for the period were a net of
paying debt of $205,675, the redemption of $75,639 of Company Common Stock,
and redemption of a debenture.
At June 30, 2000, the Company held $1,314,700 in cash and cash equivalents,
as compared to $1,934,739 at December 31, 1999. Liquid assets, which consist
of cash and cash equivalents, securities available-for-sale and current
receivables decreased to $2,115,590 at June 30, 2000 from $2,385,005 at
December 31, 1999, the net effect of acquiring ARM, offset by paying off debt
and the purchase of property and equipment.
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 borrowing capacity under its line of credit, which at
August 4, 2000 had $2,000,000 in available borrowings, will provide the Company
with sufficient resources to meet its cash requirements during the next twelve
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.
12
Prior to the acquisition of ARM, the Company derived 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/service. If the Company's assets under
management/service decline, or do not grow in accordance with the Company's
plans, fee revenues and earnings would be materially adversely affected.
Assets under management/service 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.
ARM revenues are generated from commissions (FESLs) and regular service fees
received from various mutual fund and insurance companies. If sales of mutual
funds or annuities decline, commissions revenues and earnings would be
adversely affected. If ARM's assets under service decline, service fee revenues
and earnings would be adversely affected. Lower securities market levels may
reduce sales of mutual funds or annuities, and assets under service may
contract thus reducing service fee revenues and earnings
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 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.
13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 12, 2000, the following
proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting
of shareholders and until their successors are elected and qualified.
<TABLE>
<CAPTION>
Number of Votes Cast for
<S> <C>
Vance A. Castleman 5,222,104
Daniel L. Feist 5,368,240
Lyle E. McLain 5,368,240
Peter A. Quist 5,344,145
Myron D. Thompson 5,368,240
Robert E. Walstad 5,313,803
Richard H. Walstad 5,344,145
2. To approve appointment of Brady Martz & Associates, P.C. as independent
auditor for the Company for the fiscal year ending December 31, 2000.
For 5,366,340
Abstain 47,760
</TABLE>
ITEM 5: OTHER INFORMATION
On July 1, 2000 - the Company introduced an offering of subordinated
debentures, strictly limited to bona fide North Dakota residents, maximum of
$1,000,000. As of August 4, 2000, the Company had issued $425,000.
On July 5, 2000 - the Company launched the Integrity Small-Cap Fund of Funds.
The Fund is similar to the Integrity Fund of Funds in that it will invest in
other mutual funds, but will focus on funds that invest primarily in small-
cap stocks. The funds will offer investors the ability to invest in each
fund, in both funds or transfer between the funds.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed Form 8-K on June 9, 2000.
Acquisition of ARM Securities Corporation
14
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 14, 2000
-----------------------------------
Robert E. Walstad Date
President and Chairman of the Board
(CFO and CAO)
15
