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)