FORM 10-QSB
U. S. Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes X No
As of April 26, 2002, there were 6,632,240 shares of common stock of the
registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
FORM 10-QSB
ND HOLDINGS, INC.
INDEX
Part I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations-
Three months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows-
Three months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis or Plan
Of Operations
Part II OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 13
PART I. FINANCIAL INFORMATION
ITEM 1. ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
-----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 642,221 $ 1,834,683
Cash segregated for the exclusive
benefit of customers 281,286 298,536
Securities available-for-sale 131,394 128,556
Accounts receivable 1,009,946 509,490
Prepaids 98,597 111,678
-----------------------------
Total current assets $ 2,163,444 $ 2,882,943
-----------------------------
PROPERTY AND EQUIPMENT $ 2,081,169 $ 2,049,236
Less accumulated depreciation (638,422) (607,597)
-----------------------------
Net property and equipment $ 1,442,747 $ 1,441,639
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 1,402,912 $ 1,459,536
Covenant not to compete (net of accumulated
amortization of $136,249 for 2002 and
$122,624 for 2001) 81,751 95,376
Investment adviser's agreements (net of
amortization of $1,754,816 for 2002
and $1,754,816 for 2001) 4,350,657 4,350,657
Goodwill (net of amortization of $107,002,
prior to adoption of SFAS 142) 2,944,122 826,416
Other (net of amortization of $70,286 for
2002 and $64,382 for 2001) 185,684 158,225
------------------------------
Total other assets $ 8,965,126 $ 6,890,210
-----------------------------
TOTAL ASSETS $ 12,571,317 $ 11,214,792
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 88,611 $ 89,525
Accounts payable 44,902 65,836
Other current liabilities 852,430 464,756
Deferred tax liability 299,185 273,434
Current portion of long-term debt 953,436 952,773
-----------------------------
Total current liabilities $ 2,238,564 $ 1,846,324
-----------------------------
LONG-TERM LIABILITIES
Note payable $ 720,904 $ 474,375
Subordinate debentures 645,000 645,000
Debenture certificates 940,000 940,000
Corporate notes 962,000 962,000
Less current portion (953,436) (952,773)
-----------------------------
Total long-term liabilities $ 2,314,468 $ 2,068,602
-----------------------------
TOTAL LIABILITIES $ 4,553,032 $ 3,914,926
-----------------------------
MINORITY INTEREST IN SUBSIDIARY 406,601 411,029
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 20,000,000 shares
authorized, no par value; 6,677,240 and 6,462,240
shares issued and outstanding, respectively $ 8,748,025 $ 8,550,178
Committed common stock 500,000 -
Receivable - unearned ESOP shares (96,090) (97,093)
Gain on allocation of ESOP shares 38,741 38,615
Accumulated deficit (1,575,569) (1,596,862)
Accumulated other comprehensive loss (3,423) (6,001)
-----------------------------
Total stockholders' equity $ 7,611,684 $ 6,888,837
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,571,317 $ 11,214,792
=============================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
ND HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
-------------------------
OPERATING REVENUES
Fee income $ 784,318 $ 761,477
Commissions 2,719,740 1,220,181
Internet revenues 145,789 167,465
-------------------------
Total revenue $ 3,649,847 $ 2,149,123
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 454,177 $ 471,999
Commission expense 2,401,999 945,037
General and administrative expenses 509,778 437,821
Sales commissions amortized 114,470 151,221
Depreciation and amortization 50,357 145,998
-------------------------
Total operating expenses $ 3,530,781 $ 2,152,076
-------------------------
OPERATING INCOME (LOSS) $ 119,066 $ (2,953)
-------------------------
OTHER INCOME (EXPENSES)
Investment and other income $ 16,441 $ 47,578
Interest expense (75,744) (78,782)
-------------------------
Net other income (expense) $ (59,303) $ (31,204)
-------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE $ 59,763 $ (34,157)
DEFERRED INCOME TAX BENEFIT (EXPENSE) $ (25,751) (16,301)
-------------------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST $ 34,012 $ (50,458)
MINORITY INTEREST IN SUBSIDIARY $ 4,428 3,554
-------------------------
NET INCOME (LOSS) AFTER MINORITY INTEREST $ 38,440 $ (46,904)
=========================
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.01)
AVERAGE COMMON SHARES OUTSTANDING 7,091,550 6,618,907
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
ND HOLDINGS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------------
2002 2001
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 38,440 $ (46,904)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 50,357 145,998
Sales commissions amortized/charged off 114,470 151,221
Minority interest (4,428) (3,554)
(Increase) decrease in:
Cash segregated for customers 17,250 160,689
Accounts receivable (500,456) 14,710
Prepaids 13,081 (2,630)
Deferred sales commissions capitalized (57,847) (32,594)
Other assets (33,362) 17,308
Increase (decrease) in:
Service fees payable (914) 4,367
Accounts payable (20,934) (13,731)
Deferred tax 25,751 16,301
Other liabilities 387,673 (2,698)
---------------------------------
Net cash provided by operating activities $ 29,081 $ 408,483
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (31,933) $ (19,279)
Purchase of available-for-sale securities (261) (534)
Purchase of goodwill (1,117,707) -
---------------------------------
Net cash used by investing activities $ (1,149,901) $ (19,813)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (52,152) (34,750)
Purchase of treasury stock - (1,030,526)
Subordinate debenture issue - 100,000
Reduction of notes payable (3,471) 60
Gain on allocation of ESOP shares 128 38,451
ESOP loan - (100,000)
Repayments from ESOP 1,003 -
Dividends paid (17,150) -
---------------------------------
Net cash used by financing activities $ (71,642) $(1,026,765)
---------------------------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS $(1,192,462) $ (638,095)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,834,683 2,600,157
---------------------------------
CASH AND CASH EQUIVALENTS
AT END OF QUARTER $ 642,221 $ 1,962,062
=================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Change in unrealized gain (loss) on
securities available-for-sale $ 2,578 $ (7,625)
Purchase of goodwill with common stock 250,000 -
Purchase of goodwill with committed common stock 500,000 -
Purchase of goodwill with long-term liability 250,000 -
Gain on allocation of ESOP shares 128 38,451
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
ND HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2002 and 2001
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. 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, 2001 of ND Holdings, Inc., as filed with the
Securities and Exchange Commission. The Condensed Consolidated Balance
Sheet at December 31, 2001, contained herein, was derived from audited
financial statements, but does not include all disclosures included in the
Form 10-KSB and applicable under accounting principals generally accepted in
the United States of America. Certain information and footnote disclosures
normally included in interim financial statements prepared in accordance
with accounting principals generally accepted in the United States of
America 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 three months ended March 31,
2002 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 2001 and 2000
were 0% and 96%, respectively.
Effective for 2001, the Company is amortizing deferred sales commissions over
5 years for income tax purposes. Previously, the Company was expensing
deferred sales commissions as incurred. The Company will continue to
capitalize and amortize the commissions for financial reporting purposes
over 8 years (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 2001 condensed consolidated financial statements have
been reclassified to conform with the 2002 presentation. These
reclassifications had no effect on the Company's net income.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
ND Holdings, Inc. derives a substantial portion of its revenues and net income
from providing investment management, distribution, shareholder services,
accounting and related services to the Funds and others from its subsidiaries.
ARM Securities Corporation (ARM Securities), acquired effective May 1, 2000,
and Capital Financial Services, Inc. (CFS), acquired effective January 1, 2002,
provide another substantial portion of revenues through sales of mutual funds
and variable and fixed insurance products.
6
The Company organizes its business units into three reportable segments: mutual
fund services, internet services, and broker-dealer services. The mutual fund
services segment acts as investment adviser, distributor and provider of
administrative service to sponsored and nonproprietary mutual funds. The
internet services segment provides internet service for the Minot and
surrounding area. The broker-dealer segment distributes shares of
nonproprietary mutual funds and insurance products.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
businesses were acquired as a unit and the management at the time of the
acquisition were retained.
SEGMENT INFORMATION
-------------------
As of, Mutual Fund Internet Broker-Dealer
First Quarter Ended Services Services Services Total
-------------------------------------------------------------------------------------------------
MARCH 31, 2002
Revenues from
external customers $ 928,302 $ 145,789 $ 2,575,756 $ 3,649,847
Intersegment
revenues 58,026 514 - 58,540
Interest expense 75,744 - - 75,744
Depreciation and
Amortization 23,621 25,620 1,116 50,357
Segment profit (loss) 62,157 (9,036)* (19,109) 38,440
Segment assets 11,592,106 765,206 1,354,500 13,711,812
Expenditures for
segment assets 31,320 613 - 31,933
* Before minority interest adjustment of $4,428
-------------------------------------------------------------------------------------------------
MARCH 31, 2001
Revenues from
external customers $ 915,763 $ 167,466 $ 1,065,894 $ 2,149,123
Intersegment
Revenues 1,800 455 - 2,255
Interest expense 78,782 - - 78,782
Depreciation and
Amortization 108,423 37,575 - 145,998
Segment profit (loss) (95,554) (7,254)* 52,350 (46,904)
Segment assets 10,580,024 935,384 1,252,921 12,768,329
Expenditures for
segment assets 8,840 7,664 2,775 19,279
* Before minority interest adjustment of $3,554
-------------------------------------------------------------------------------------------------
7
RECONCILIATION OF SEGMENT INFORMATION
As of Three Months
Ended March 31, 2002 March 31, 2001
Revenues
--------
Total revenues for reportable segments $ 3,708,387 $ 2,151,378
Elimination of intersegment revenues (58,540) (2,255)
-------------- --------------
Consolidated total revenue $ 3,649,847 $ 2,149,123
============== ==============
Profit
------
Total reportable segment profit $ 38,440 $ (46,904)
============== ==============
Assets
Total assets for reportable segments $ 13,711,812 $ 12,768,329
Elimination of intercompany receivables (1,140,495) (1,095,579)
-------------- --------------
Consolidated assets $ 12,571,317 $ 11,672,750
A substantial portion of the Company's revenues depend 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.
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.
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
As of March 31, 2002 2001 % Change
--------------------------------------------------------------------------
FIXED INCOME Tax-Free Funds $ 304.0 $ 298.9 1.7%
EQUITY Funds of Funds $ 15.2 $ 16.2 (6.2)%
--------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS-end of period $ 319.2 $ 315.1 1.3%
--------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 319.2 $ 315.1 1.3%
==========================================================================
Average for the period $ 320.0 $ 321.7 (0.5)%
==========================================================================
Assets under the Company's management/service were $319.2 million at March 31,
2002, an increase of $0.9 million (0.3%) from December 31, 2001 and an
increase of $4.1 million (1.3%) from March 31, 2001.
8
RESULTS OF OPERATIONS
The Company reported net income of $38,440 for the three months ended March 31,
2002 compared to a net loss of $46,904 for the three months ended March 31,
2001.
OPERATING REVENUES
Total operating revenues for the three months ended March 31, 2002 were
$3,649,847, an increase of 69.8% from March 31, 2001. The increase is
primarily attributable to the commission revenues of $1,672,832 from Capital
Financial Services, Inc. (CFS), acquired effective January 1, 2002.
Fee income for the three months ended March 31, 2002 was an increase of 3.0%
compared to March 31, 2001. The increase is primarily the result of fee income
of $50,446 from CFS, acquired effective January 1, 2002, offset by 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.
Commission income increased 122.9% to $2,719,740 for the three months ended
March 31, 2002 compared to $1,220,181 for the three months ended March 31,
2001. The increase is primarily attributable to commission income of
$1,672,832 from CFS, acquired effective January 1, 2002, and an increase in
sales of the municipal bond funds.
Internet revenues decreased 12.9% to $145,789 for the three months ended
March 31, 2002 compared to $167,465 for the three months ended March 31, 2001.
The decrease is primarily attributable to a decreased customer base. Magic
Internet Services, Inc. was added to the consolidated group October 1, 1999.
The Company holds a 51% interest in the corporation.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 2002 were
$3,530,781, an increase of 64.1% from March 31, 2001. The 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 three months ended March 31, 2002
were $454,177, a decrease of 3.8% from March 31, 2001. The decrease in
compensation and benefits is primarily attributable to the Mutual Fund Services
employee compensation and benefits decrease of $47,158.
COMMISSION EXPENSE
Total commission expense for the three months ended March 31, 2002 was
$2,401,999, an increase of 154.2% from March 31, 2001. The increase is
primarily attributable to commission expense of $1,568,183 from CFS, acquired
effective January 1, 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months ended March 31,
2002 were $509,778, an increase of 16.4% from March 31, 2001. The increase is
attributable to general and administrative expenses of $155,095 relating to
CFS, acquired effective January 1, 2002, offset by lower consulting expenses.
9
SALES COMMISSIONS AMORTIZED
Amortization of deferred sales commissions for the three months ended March 31,
2002 were a decrease of 24.3% from March 31, 2001. 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.
Effective January 1, 2001, the Company accelerated the amortization life to
eight years from nine years which best approximates management's estimate of
the average life of investor's accounts in the Integrity Mutual Funds and
Ranson Managed Portfolios and coincides with conversion of Class B shares to
Class A shares as previously stated.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three months ended March 31, 2002 were
$50,357, a decrease of 65.5% from March 31, 2001. The primary reason for the
decrease was that effective January 1, 2002, the company adopted Statements of
Financial Accounting Standards (SFAS) No. 142 - Goodwill and Other Intangible
Assets. Under SFAS 142, the Company no longer amortizes its goodwill,
investment advisory agreements and other intangibles over their estimated
useful life. Rather, they will be subject to at least an annual assessment for
impairment by applying a fair value based test. There were no impairment
adjustments made during the quarter ended March 31, 2002.
OTHER INCOME (EXPENSES)
Interest and other income is 65.4% lower for the three months ended March 31,
2002 compared to the same period in 2001 due to reduced interest income earned
on cash invested. Interest Expense is 3.9% lower for the three months ended
March 31, 2002 compared to the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities was $29,081 during the three months
ended March 31, 2002, a decrease of 92.9% from $408,483 during the three months
ended March 31, 2001. The most significant factor contributing to this
variance is the commission accrual relating to the CFS acquisition effective
January 1, 2002.
Net cash used by investing activities for the three months ended March 31, 2002
was $1,149,901, compared to $19,813 for the three months ended March 31, 2001.
For both the three months ended 2002 and 2001 cash was used for capital
expenditures. Additionally, in 2002, cash was used for the acquisition of CFS.
Net cash used by financing activities during the three months ended March 31,
2002 was $71,642 compared to $1,026,765 for the three months ended March 31,
2001. Net cash used for the three months ended March 31, 2002 consisted
principally of $52,152 for redemption of the Company's common stock, and a
$17,150 distribution to the shareholders of Magic Internet Services, Inc. Net
cash used for the three months ended March 31, 2001 consisted principally of
$100,000 in proceeds from an issue of Subordinated Debentures net of $34,750
for redemption of the Company's common stock, $100,000 loaned to the ESOP,
and $1,030,526 to purchase 799,947 shares from the Company's shareholders
through a tender offer.
At March 31, 2002, the Company held $642,221 in cash and cash equivalents,
as compared to $1,834,683 at December 31, 2001. Liquid assets, which consist
of cash and cash equivalents, securities available-for-sale and current
receivables decreased to $1,783,561 at March 31, 2002 from $2,472,729 at
December 31, 2001, primarily the result of the acquisition of CFS effective
January 1, 2002
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 will provide the Company with sufficient resources to meet
10
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 or financial services 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 acquisitions of ARM and CFS, 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 and CFS 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 or CFS'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 loan 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
11
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 and Integrity Small-Cap 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 and Integrity Small-Cap 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 eight 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.
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
On April 12, 2002, an Offer of Settlement previously submitted by ND
Money Management, Inc. and Ranson Capital Corporation, wholly owned
investment advisor subsidiaries of the Company, together with Robert
Walstad and Monte Avery (the "Respondents") with respect to pending
SEC issues arising from a routine 1997 SEC books and records audit,
was accepted by the SEC. Pursuant to the terms of the order issued by
the SEC in accordance with the settlement, without admitting or
denying liability, the Respondents agreed pay civil money penalties
totaling $40,000, to accept censure, to cease and desist from any
current of future violations of certain provisions of the Advisors
Act and the Investment Company Act and undertake remedial practices,
including the retaining of an independent consultant to provide a
review and recommendations regarding the Respondent's regulatory
compliance procedures.
12
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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 April 26, 2002
-----------------------------------
Robert E. Walstad Date
CEO and Chairman of the Board
(CFO and CAO)