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, 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 October 27, 2000, there were 7,449,687 shares of common stock of
the registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
FORM 10-QSB/A
ND HOLDINGS, INC.
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations-
Three months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Operations-
Nine months ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows-
Nine months ended September 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
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,759,166 $ 1,934,739
Cash segregated for the exclusive benefit
of customers 686,071 0
Securities available-for-sale 147,000 100,000
Accounts receivable 625,341 350,266
Prepaids 47,551 46,127
-----------------------------
Total current assets $ 3,265,129 $ 2,431,132
-----------------------------
PROPERTY AND EQUIPMENT $ 2,023,181 $ 1,690,186
Less accumulated depreciation (551,173) (421,853)
-----------------------------
Net property and equipment $ 1,472,008 $ 1,268,333
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 2,004,623 $ 2,500,616
Covenant not to compete ( net of accumulated
amortization of $354,499 for 2000 and
$313,624 for 1999) 163,501 204,376
Investment advisor's agreements (net of accumulated
amortization of $1,372,820 for 2000 and
$1,142,210 for 1999) 4,765,683 5,007,371
Goodwill (net of accumulated amortization of $35,710
for 2000 and $8,373 for 1999) 988,803 494,019
Other assets 191,303 167,126
------------------------------
Total other assets $ 8,113,913 $ 8,373,508
-----------------------------
TOTAL ASSETS $ 12,851,050 $ 12,072,973
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 87,948 $ 105,951
Accounts payable 64,770 47,921
ARM acquired payable 173,750 0
Other current liabilities 394,346 219,258
Short-term borrowings 0 200,000
Deferred tax liability 268,087 85,752
Current portion of long-term debt 11,917 11,082
-----------------------------
Total current liabilities $ 1,000,818 $ 669,964
-----------------------------
LONG-TERM LIABILITIES
Note payable $ 583,162 $ 613,047
Debenture certificates 940,000 950,000
Corporate notes 962,000 962,000
Subordinate Debentures 490,000 0
Less current portion (11,917) (11,082)
-----------------------------
Total long-term liabilities $ 2,963,245 $ 2,513,965
-----------------------------
TOTAL LIABILITIES $ 3,964,063 $ 3,183,929
-----------------------------
MINORITY INTEREST IN SUBSIDIARY 447,700 469,063
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 20,000,000 shares
authorized, no par value; 7,464,687 and
7,615,187 shares issued and outstanding,
respectively $ 9,732,068 $ 9,858,309
Receivable - unearned ESOP shares 0 (100,890)
Accumulated deficit (1,292,781) (1,337,438)
-----------------------------
Total stockholders' equity $ 8,439,287 $ 8,419,981
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,851,050 $ 12,072,973
=============================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-2-
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 770,643 $ 924,156
Commissions 1,219,502 405,509
Internet revenues 168,609 0
-------------------------
Total revenue $ 2,158,754 $ 1,329,665
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 395,735 $ 255,112
Commission expense 968,119 327,142
General and administrative expenses 420,037 220,415
Sales commissions amortized 146,172 152,079
Depreciation and amortization 149,786 105,092
-------------------------
Total operating expenses $ 2,079,849 $ 1,059,840
-------------------------
OPERATING INCOME $ 78,905 $ 269,825
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 57,558 $ 31,987
Interest expense (70,584) (53,628)
-------------------------
Net other income (expense) $ (13,026) $ (21,641)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 65,879 $ 248,184
DEFERRED INCOME TAX EXPENSE $ (69,194) (126,108)
-------------------------
NET INCOME (LOSS) BEFORE MINORTIY INTEREST $ (3,315) $ 122,076
MINORITY INTEREST IN SUBSIDIARY $ 12,352 0
-------------------------
NET INCOME (LOSS) AFTER MINORITY INTEREST $ 9,037 $ 122,076
=========================
NET INCOME (LOSS) PER SHARE: $ 0 $ .02
AVERAGE COMMON SHARES OUTSTANDING 7,527,409 7,624,964
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-3-
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
OPERATING REVENUES
Fee income $ 2,378,275 $ 2,759,935
Commissions 2,364,406 873,552
Internet revenues 504,907 0
-------------------------
Total revenue $ 5,247,588 $ 3,633,487
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 1,042,337 $ 738,898
Commission expense 1,890,965 737,023
General and administrative expenses 1,195,418 801,290
Sales commissions amortized 440,158 447,065
Depreciation and amortization 441,449 304,043
-------------------------
Total operating expenses $ 5,010,327 $ 3,028,319
-------------------------
OPERATING INCOME $ 237,261 $ 605,168
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 149,606 $ 92,793
Interest expense (181,241) (135,724)
-------------------------
Net other income (expense) $ (31,635) $ (42,931)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 205,626 $ 562,237
DEFERRED INCOME TAX EXPENSE $ (182,335) (306,935)
-------------------------
NET INCOME (LOSS) BEFORE MINORTIY INTEREST AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 23,291 $ 255,302
MINORITY INTEREST IN SUBSIDIARY $ 21,363 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 $ 44,654 $ (118,153)
=========================
NET INCOME (LOSS) PER SHARE: $ .01 $ (.02)
AVERAGE COMMON SHARES OUTSTANDING 7,527,409 7,624,964
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-4-
ND HOLDINGS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 44,654 $ (118,152)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 441,449 304,043
Sales commissions amortized/charged off 440,158 1,044,591
Minority interest (21,363) 0
(Increase) decrease in:
Accounts receivable (275,075) (32,041)
Prepaids (1,424) 6,710
Deferred sales commissions capitalized 55,836 (381,974)
Other assets (37,485) (33,694)
ESOP Receivable 100,890 0
Increase (decrease) in:
Service fees payable (18,000) 17,863
Accounts payable (144,982) 30,503
Other liabilities (65,146) 3,588
Deferred tax 182,336 65,992
---------------------------------
Net cash provided by operating activities $ 701,848 $ 907,429
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (332,995) $ (69,593)
Purchase of available-for-sale securities (47,000) 0
Purchase of goodwill (532,295) 0
Purchase of investment advisory agreement $ 0 $ (287,493)
---------------------------------
Net cash used by investing activities $ (912,290) $ (357,086)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (126,241) (559,302)
Proceeds from long term notes 0 200,000
Reduction of notes payable (208,634) (379,169)
Redemption of debenture/investment certificates (10,000) (30,000)
Proceeds from corporate notes 0 770,000
Proceeds form subordinate debentures 490,000 0
ARM obligations, net (110,255) 0
---------------------------------
Net cash provided (used) by financing activities $ 34,870 $ 1,529
---------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (175,572) $ 551,872
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,934,739 1,042,179
---------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,759,167 $ 1,594,051
=================================
NON-CASH INVESTING ACTIVITY
Purchase of investment advisory agreement with debt $ (21,252) $ 154,512
</TABLE>
-5-
ND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 nine months ended September 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 on January 5, 1996. 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, which
was paid in August 2000. 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 $30,295 to complete
the acquisition. These costs are also being amortized using the straight-line
method over 40 years.
ND HOLDINGS, INC. AND SUBSIDIARIES AND ARM SECURITIES CORPORATION
CONSOLIDATED PRO-FORMA FINANCIAL INFORMATION (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 1999
<TABLE>
<CAPTION>
In Thousands
ND Holdings,
Inc. and ARM Securities Pro-forma Pro-forma
Subsidiaries Corporation Adjustments Consolidated
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,330 $ 11,750 $(10,450) a $ 2,630
Expenses 1,208 11,750 (10,447) b 2,511
----------------------------------------------------------
Net $ 122 $ 0 $ (3) 119
FOR THE NINE MONTHS ENDED SEPTEMBER 2000
In Thousands
ND Holdings,
Inc. and ARM Securities Pro-forma Pro-forma
Subsidiaries Corporation Adjustments Consolidated
----------------------------------------------------------
Revenues $ 5,248 $ 3,880 $ (2,588) a $ 6,540
Expenses 5,203 3,880 (2,578) b 6,505
----------------------------------------------------------
Net $ 45 $ 0 $ (10) 35
FOR THE NINE MONTHS ENDED SEPTEMBER 1999
In Thousands
ND Holdings,
Inc. and ARM Securities Pro-forma Pro-forma
Subsidiaries Corporation Adjustments Consolidated
----------------------------------------------------------
Revenues $ 3,633 $ 48,976 $(45,619) a $ 6,990
Expenses 3,751 48,976 (45,609) b 7,118
----------------------------------------------------------
Net $ (118) $ 0 $ (10) (128)
<FN>
a) Reduction for revenues not acquired in the acquisition, ARM Financial
Group's proprietary products.
b) Reduction for commission expense and management fees related to above
revenues net of amortization of goodwill of $532,295 over a period of 40 years.
</FN>
</TABLE>
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, distributor 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 nine months ended September 30, 2000 (in thousands)
<TABLE>
<CAPTION>
Segment 1 Segment 2 Segment 3
---------------------------------------------------
<S> <C> <C> <C>
Revenues 2,754 505 1,989
Assets, net 6,831 917 691
Net Income (Loss) (41) (43) 129
</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 five (5) open-end investment companies
including ND Tax-Free Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., Integrity Fund of Funds, Inc. and Integrity Small-Cap 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 October 27, 2000,
ND Resources was providing services to one outside fund group.
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
<TABLE>
<CAPTION>
As of September 30, 2000 1999 % Change
--------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME Tax-Free Funds $ 296.8 $ 336.0 (11.7)%
EQUITY Fund of Funds $ 22.2 $ 20.4 8.8%
--------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS-end of period $ 319.0 $ 356.4 (10.5)%
--------------------------------------------------------------------------
Investors Research Fund $ 20.1 $ 20.1 (0.0)%
--------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 339.1 $ 376.5 (9.9)%
==========================================================================
Average for the nine month period $ 345.6 $ 380.1 (9.1)%
==========================================================================
</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 $339.1 million at September 30,
2000, decrease of $25.0 million (-6.9%) from December 31, 1999 and a decrease
of $37.4 million (-9.9%) from September 30, 1999. September 2000's decrease
in assets under management/service compared to September 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 Nine months ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Income Loss After Minority
Interest and Cumulative Effect $ 9,036 $ 122,076 $ 44,654 $ (118,152)
Earnings per share
Primary $ 0.00 $ 0.02 $ 0.00 (0.02)
Fully-diluted $ 0.00 $ 0.02 0.00 (0.02)
-------------------------------------------------------
</TABLE>
Net income (loss) after minority interest during the third quarter ended
September 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
nine months ended September 30, 2000 increased as compared to the same period
in the previous fiscal year primarily due to 1999's cumulative effect of an
accounting change of $373,455.
Operating revenues
Total operating revenues for the third quarter ended September 30, 2000 were
$2,158,754, an increase of 62.4% from September 30, 1999. The increase is
the net result of the revenues of ARM and Magic Internet, $1,084,226 and
$168,609 respectively offset by $153,513 loss in fee revenues due to a
decrease in assets under management/service and $270,233 loss in commission
income earned by the broker/dealers.
Total operating revenues for the nine months ended September 30, 2000 were
$5,247,588, an increase of 44.4% from September 30, 1999. The increase is the
net result of the revenues of ARM and Magic Internet, $1,988,892 and $504,907
respectively, offset by $381,660 loss in fee revenues due to a decrease in
assets under management/service and $498,038 loss in commission income earned
by the broker/dealers.
Fee income for the third quarter ended September 30, 2000 was a decrease of
16.6% compared to September 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 nine months ended September 30, 2000 was a decrease of
13.8% compared to September 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 200.7%, to $1,219,502 for the third quarter ended
September 30, 2000 from $405,509 for the same period last year. The increase
is a net result of commission revenues of ARM, $1,084,226 offset by $270,233
loss in commission income due to an extraordinary 1999 commission sale and to
a lesser extent a continuing shift by investors from tax-free fixed income
funds to equity funds.
Commission income increased 170.7%, to $2,364,406 for the nine months ended
September 30, 2000 from $873,552 for the same period last year. The increase
is a net result of commission revenues of ARM, $1,988,892 offset by $498,038
loss in commission income due to an extraordinary 1999 commission sale and to
a lesser extent a continuing shift by investors from tax-free fixed income
funds to equity funds.
Internet revenues were $168,609 for the third quarter ended September 30, 2000
and $504,907 for the nine months ended September 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 third quarter and nine months ended September
30, 2000 were $2,079,849 and $5,010,327 respectively, an increase of 96.2% and
65.5%, from the same periods ended September 30, 1999. The 96.2% and 65.5%
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 third quarter ended September 30,
2000 were $395,735, an increase of 55.1% from September 30, 1999. The
increase is primarily attributable to ARM and Magic Internet employee
compensation and benefits of $87,010 and $43,138 respectively.
Total compensation and benefits for the nine months ended September 30, 2000
were $1,042,337, an increase of 41.1% from September 30, 1999. The increase
is primarily attributable to ARM and Magic Internet employee compensation and
benefits of $138,810 and $127,020 respectively.
Commission expense
Total commission expense for the third quarter ended September 30, 2000 was
$968,119, an increase of 195.9% from June 30, 1999. The increase is a net
result of ARM commission expense of $851,143 offset by $210,167 decrease in
commission expense relative to commission income.
Total commission expense for the nine months ended September 30, 2000 was
$1,890,965,an increase of 156.6% from September 30, 1999. The increase is a
net result of ARM commission expense of $1,564,976 offset $411,033 decrease
in commission expense relative to commission income.
General and administrative expenses
Total general and administrative expenses for the third quarter ended September
30, 2000 were $420,037, an increase of 90.6% from September 30, 1999. The
increase is attributable to ARM and Magic Internet's general and
administrative costs of $75,303 and $105,624 respectively. The preexisting
general and administrative costs up, 8.5% from 1999 primarily due to loan
preparation fees related to an expired loan availability.
Total general and administrative expenses for the nine months ended
September 30, 2000 were $1,195,418, an increase of 49.2% from September 30,
1999. The increase is attributable to ARM and Magic Internet's general and
administrative costs of $111,489 and $311,155. The preexisting general and
administrative costs were down 3.6% from 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 and Ranson Managed Portfolios. Amortization of deferred
sales commissions were relatively unchanged in the third quarter and nine
months ended September 30, 2000 over the same period in 1999.
Depreciation and amortization
Depreciation and amortization increased 42.5% for the third quarter ended
September 30, 2000 and 45.2% for the nine months ended September 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 39.8% increase in the third
quarter ended September 30, 2000 compared with the same period in 1999.
Interest and other income is 79.9% higher for the third quarter ended
September 30, 2000 compared to the same period in 1999 due to interest income
earned on cash invested. Interest Expense is 31.6% higher for the third quarter
ended September 30, 2000 compared to the same period in 1999 due to the
interest accrued for $490,000 in Subordinate Debentures issued starting
July 1, 2000.
Total other income, net of other expenses is a 26.3% increase in the nine
months ended September 30, 2000 compared with the same period in 1999.
Interest and other income is 61.2% higher for the nine months ended September
30, 2000 compared to the same period in 1999 due to interest income earned on
cash invested. Interest Expense is 33.5% higher for the nine months ended
September 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 and $490,000 in Subordinate Debentures issued starting July 1, 2000.
Liquidity and Capital Resources
Net cash from operating activities were $701,848 during the nine months period
September 30, 2000, a decrease of 22.7% from $907,429 during the nine months
period ended September 30, 1999. Depreciation and amortization are a 45.1%
increase for the nine months ended September 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 nine months ended
September 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 nine
months ended September 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 $144,982 for the nine months ended September 30,
2000.
Net cash used by investing activities for the nine months ended September 30,
2000 increased to $912,289 from $357,086 for the nine months ended September
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 provided by financing activities during the nine months ended
September 30, 2000 was $34,869. The financing activities for the period were
a net of paying debt of $208,634, the redemption of $126,241 of Company Common
Stock, $110,256 reduction in ARM obligations and a $10,000 redemption of a
debenture offset by proceeds of $490,000 from a subordinate debenture
offering.
At September 30, 2000, the Company held $1,759,167 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 increased to $2,531,507 at September 30, 2000 from
$2,385,005 at December 31, 1999, the net effect of acquiring ARM, and the
subordinate debenture offering 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
October 27, 2000 had $1,000,000 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.
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.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed Form 8-K/A on November 9, 2000.
Acquisition of ARM Securities Corporation.
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 13, 2000
-----------------------------------
Robert E. Walstad Date
President and Chairman of the Board
(CFO and CAO)
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