FORM 10-QSB/A
-------------
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
U.S. SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
INTEGRITY MUTUAL FUNDS, 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 April 25, 2003, there were 12,966,543 shares of common stock of
the registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
1
FORM 10-QSB/A
INTEGRITY MUTUAL FUNDS, INC.
INDEX
Part I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations-
Three months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows-
Three months ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Plan of Operation 8
Part II OTHER INFORMATION
Item 2 Material Changes in Instruments Defining the Rights
of Shareholders 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I. FINANCIAL INFORMATION
Item 1. INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
-----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,280,263 $ 1,007,619
Cash segregated for the exclusive benefit
of customers 181,358 319,275
Securities available-for-sale 103,474 109,456
Accounts receivable 909,954 1,111,989
Prepaids 71,493 90,604
-----------------------------
Total current assets $ 2,546,542 $ 2,638,943
-----------------------------
PROPERTY AND EQUIPMENT $ 2,156,591 $ 2,134,719
Less accumulated depreciation (757,768) (730,093)
-----------------------------
Net property and equipment $ 1,398,823 $ 1,404,626
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 1,051,722 $ 1,159,165
Covenant not to compete (net of accumulated amortization
of $190,750 for 2003 and $177,125 for 2002) 27,250 40,875
Goodwill 7,234,317 7,234,317
Other assets (net of accumulated amortization
of $94,479 for 2003 and $89,749 for 2002) 216,074 215,983
------------------------------
Total other assets $ 8,529,363 $ 8,650,340
-----------------------------
TOTAL ASSETS $ 12,474,728 $ 12,693,909
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 78,179 $ 77,723
Accounts payable 19,998 26,499
Other current liabilities 910,726 1,131,440
Short-term borrowing 555,592 555,592
Current portion of long-term debt 17,268 17,298
-----------------------------
Total current liabilities $ 1,581,763 $ 1,808,552
-----------------------------
LONG-TERM LIABILITIES
Notes payable $ 456,749 $ 461,311
Subordinate debentures 595,000 595,000
Corporate notes 962,000 962,000
Subordinated commercial notes 561,000 561,000
Convertible debenture 250,000 250,000
Deferred tax liability 119,605 170,000
Less current portion (17,268) (17,298)
-----------------------------
Total long-term liabilities $ 2,927,086 $ 2,982,013
-----------------------------
TOTAL LIABILITIES $ 4,508,849 $ 4,790,565
-----------------------------
MINORITY INTEREST IN SUBSIDIARY 343,699 355,371
-----------------------------
TEMPORARY CAPITAL - 1,000,000 shares of common stock, $.0001 par
value; put option price of $.50 per share;
see Note 4 $ 500,000 $ 500,000
-----------------------------
STOCKHOLDERS' EQUITY
Common stock - 1,000,000,000 shares authorized, $.0001 par value;
12,966,543 and 12,470,480 shares issued and outstanding,
respectively, after the 2:1 forward split effective July 1, 2002 $ 8,323,125 $ 8,325,179
Receivable - unearned ESOP shares (87,171) (88,845)
Gain on allocation of ESOP shares 35,778 36,350
Accumulated deficit (1,117,147) (1,198,551)
Accumulated other comprehensive loss (32,405) (26,160)
-----------------------------
Total stockholders' equity $ 7,122,180 $ 7,047,973
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,474,728 $ 12,693,909
=============================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2002
-------------------------
OPERATING REVENUES
Fee income $ 714,439 $ 784,318
Commissions 2,705,026 2,719,740
Internet revenues 117,802 145,789
-------------------------
Total revenue $ 3,537,267 $ 3,649,847
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 439,445 $ 454,177
Commission expense 2,381,338 2,401,999
General and administrative expenses 426,081 509,778
Sales commissions amortized 90,858 114,470
Depreciation and amortization 46,030 50,357
-------------------------
Total operating expenses $ 3,383,752 $ 3,530,781
-------------------------
OPERATING INCOME (LOSS) $ 153,515 $ 119,066
-------------------------
OTHER INCOME (EXPENSES)
Interest and other income $ 24,592 $ 16,441
Interest expense (74,878) (75,744)
-------------------------
Net other income (expense) $ (50,286) $ (59,303)
-------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) $ 103,229 $ 59,763
INCOME TAX BENEFIT (EXPENSE) $ (33,500) (25,751)
-------------------------
NET INCOME (LOSS) BEFORE MINORTIY INTEREST $ 69,729 $ 34,012
MINORITY INTEREST IN SUBSIDIARY $ 11,672 4,428
-------------------------
NET INCOME (LOSS) AFTER MINORITY INTEREST $ 81,401 $ 38,440
=========================
NET INCOME (LOSS) PER SHARE:
Basic $ .01 $ .00
Diluted $ .01 $ .00
AVERAGE COMMON SHARES OUTSTANDING, AFTER 2:1
FORWARD STOCK SPLIT EFFECTIVE JULY 1, 2002:
Basic 13,286,732 14,183,100
Diluted 13,757,320 14,468,814
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2002
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 81,401 $ 38,440
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 46,030 50,357
Sales commissions amortized/charged off 90,858 114,470
Minority interest (11,672) (4,428)
(Increase) decrease in:
Cash segregated for customers 137,917 17,250
Accounts receivable 202,035 (500,456)
Prepaids 19,111 13,081
Deferred sales commissions capitalized,
net of CDSC collected 16,585 (57,847)
Other assets (4,822) (33,362)
Increase (decrease) in:
Service fees payable 456 (914)
Accounts payable (6,501) (20,934)
Deferred tax (50,395) 25,751
Other liabilities 29,286 387,673
---------------------------------
Net cash provided by operating activities $ 550,289 $ 29,081
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (21,872) $ (31,933)
Purchase of available-for-sale securities (262) (261)
Purchase of goodwill 0 (1,117,707)
---------------------------------
Net cash used by investing activities $ (22,134) $ (1,149,901)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (252,053) (52,152)
Reduction of notes payable (4,562) (3,471)
Repayments from ESOP 1,673 1,003
Return of capital - (17,150)
Gain on allocation of ESOP shares (569) 128
---------------------------------
Net cash used by financing activities $ (255,511) $ (71,642)
---------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ 272,644 $ (1,192,462)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,007,619 1,834,683
---------------------------------
CASH AND CASH EQUIVALENTS
AT END OF QUARTER $ 1,280,263 $ 642,221
=================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Change in unrealized gain (loss) on
securities available-for-sale (6,245) 2,578
Gain on allocation of ESOP shares (569) 128
Purchase of goodwill with common stock 0 250,000
Purchase of goodwill with committed common stock 0 500,000
Purchase of goodwill with long-term liability 0 250,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2003 and 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Integrity
Mutual Funds, 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, 2002 of Integrity
Mutual Funds, Inc., as filed with the SEC. The condensed consolidated balance
sheet at December 31, 2002, contained herein, was derived from audited
financial statements, but does not include all disclosures included in the
Form 10-KSB and applicable under accounting principles generally accepted in
the United States of America. Certain information and footnote disclosures
normally included in interim financial statements prepared in accordance with
accounting principles 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,
2003 are not necessarily indicative of operating results for the entire year.
NOTE 2 - INCOME TAXES
The Company is amortizing deferred sales commissions over 5 years for income
tax purposes. The Company amortizes the commissions for financial reporting
purposes over 8 years (exception Integrity Fund of Funds, which are expensed).
The effects of these differences 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 2002 condensed consolidated financial statements have
been reclassified to conform with the 2003 presentation. These
reclassifications had no effect on the Company's net income.
NOTE 4 - BUSINESS ACQUISITIONS
On January 15, 2002, the Company acquired 100% of the equity stock of Capital
Financial Services, Inc. ("CFS"), a full-service brokerage firm based in
Madison, Wisconsin. CFS is registered with the SEC as an investment advisor
and broker-dealer and also with the NASD as a broker-dealer. CFS specializes
in providing investment products and services to independent investment
representatives, financial planners, and investment advisors and currently
supports approximately 90 investment representatives and investment advisors.
The purchase consideration, taking into effect the 2 for 1 (2:1) forward stock
split effective July 1, 2002, was composed of $1,140,000 in cash, 1,500,000
shares of the Company common stock to be issued in three (3) annual
installments beginning at the date of purchase, a $250,000 convertible
debenture to be issued one year from the purchase date, as well as 500,000
options to purchase common stock of the Company at an option strike price of
$0.50 per share. Because there is no market for the Company's options and the
strike price is above the market price, the options have been determined to
have negligible value.
6
Pursuant to the terms of the purchase agreement whereby CFS was acquired,
1,500,000 shares of $.0001 par value common stock of the Company will be issued
in three (3) annual installments beginning at the date of purchase. The shares
will have a put right, whereby the installment shares may be put back to the
Company at the rate of up to 250,000 shares per year for three (3) consecutive
years at a price of $0.50 per share. The put right may be exercised at any
time within the ninety (90) day period following the first, second, and third
anniversaries of the purchase. The put rights are non-accumulative and each
installment will expire if not exercised during the scheduled redemption
period. In January of 2003, the put option on the first installment of shares
was exercised. As a result, the Company paid $250,000 to repurchase 500,000
shares.
Also pursuant to the terms of the purchase agreement whereby CFS was acquired,
on January 15, 2003, the Company issued convertible debentures divided among
the prior shareholders of CFS in the total amount of $250,000. The debenture
principal will be payable January 15, 2006 and will pay interest on the
principal sum from January 15, 2003 at the rate of four percent (4%) per annum
on a semi-annual basis beginning on July 15, 2003 and thereafter on January
15th and July 15th of each year until the principal balance is paid. All
payments will be applied first to interest and any remainder to reduction of
principal. The debenture will be convertible as follows: beginning on the
date of issuance and until the principal is paid in accordance with the terms
of this agreement, the holder of this convertible debenture shall have the
option to convert all or any portion of this convertible debenture to no par
value common stock of the Company at the rate of one share for each one dollar
of convertible debenture (2 shares per $1.00 converted) issued by the debenture
holder.
The primary reasons for the acquisition were to acquire a full-service retail
brokerage distribution system as well as to acquire the investment advisory
service operations of CFS. The primary factors contributing to the purchase
price were the presence of an established group of approximately 90 investment
representatives and investment advisors, the existing relationship with a
reputable clearing firm, the fact that approximately 95% of the business of
CFS is processed as packaged products, i.e. mutual funds and insurance
products, and to capture the revenue stream of approximately $6.4 million.
The estimated fair value of the equity of CFS was recorded at $78,392. The
excess purchase price over the estimated fair value of the equity of CFS was
$2,117,711, which has been recorded as goodwill.
The operations and financial position of CFS were accounted for in the
condensed consolidated financial statements of the Company beginning January 1,
2002.
NOTE 5 - ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consisted of the following as of:
March 31, 2003 December 31, 2002
------------- -----------------
Amortized Intangible Assets
---------------------------
Carrying amount
Covenant not to compete $ 218,000 $ 218,000
--------------------------------------
Accumulated amortization 190,750 177,125
--------------------------------------
Aggregate Amortization Expense
------------------------------
For the three month period ended
March 31, 2003 $ 13,625
For the year ended
December 31, 2002 $ 54,500
The remaining unamortized balance of $27,250 will be expensed in 2003.
7
NOTE 6 - GOODWILL
The changes in the carrying amount of goodwill for the three month period ended
March 31, 2003 are as follows:
Mutual Fund Internet Broker-Dealer
Services Services Services Total
-----------------------------------------------------------------------------------------
Balance as of January 1, 2003 $ 4,350,656 $ 427,034 $ 2,456,627 $ 7,234,317
Goodwill acquired during the period - - - -
Impairment losses - - - -
Balance as of March 31, 2003 $ 4,350,656 $ 427,034 $ 2,456,627 $ 7,234,317
-----------------------------------------------------------------------------------------
The above segments are tested for impairment on an annual basis in the second
quarter and any impairment adjustments are reflected at that time. The initial
application of SFAS No. 142 and the transitional impairment test was completed
in the second quarter of 2002 and resulted in no impairment adjustment for all
segments.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
Integrity Mutual Funds, Inc. derives a portion of its revenues and net income
from providing investment management, distribution, shareholder services,
accounting and related services to the Funds and others. 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.
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 Minot and the
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
acquisitions were retained.
Segment Information
-------------------
As of, Mutual Fund Internet Broker-Dealer
First Quarter Ended Services Services Services Total
--------------------------------------------------------------------------------------------------
March 31, 2003
Revenues from
external customers $ 892,320 $ 117,802 $ 2,527,145 $ 3,537,267
Intersegment
Revenues - 514 - 514
Interest expense 74,118 - 760 74,878
Depreciation and
Amortization 23,763 21,105 1,162 46,030
Segment profit (loss) (84,528) (23,822) * 178,079 81,401
Segment assets 11,517,616 664,118 1,577,008 13,758,742
Expenditures for
segment assets 19,947 1,925 - 21,872
* Before minority interest adjustment of $11,672
--------------------------------------------------------------------------------------------------
8
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
--------------------------------------------------------------------------------------------------
Reconciliation of Segment Information
As of Three Months
Ended March 31, 2003 March 31, 2002
Revenues
Total revenues for reportable segments $ 3,537,781 $ 3,708,387
Elimination of intersegment revenues (514) (58,540)
------------ ------------
Consolidated total revenue $ 3,537,267 $ 3,649,847
============ ============
Profit
Total reportable segment profit $ 81,401 $ 38,440
============ ============
Assets
Total assets for reportable segments $ 13,758,742 $ 13,711,812
Elimination of intercompany receivables (1,284,014) (1,140,495)
------------ ------------
Consolidated assets $ 12,474,728 $ 12,571,317
============ ============
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.
9
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
As of March 31, 2003 2002 % Change
--------------------------------------------------------------------------
FIXED INCOME Tax-Free Funds $ 284.6 $ 304.0 (6.4)%
EQUITY Fund of Funds $ 6.8 $ 15.2 (55.3)%
--------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS - end of period $ 291.4 $ 319.2 (8.7)%
--------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 291.4 $ 319.2 (8.7)%
==========================================================================
Average for the three month period $ 292.3 $ 320.0 (8.7)%
==========================================================================
Assets under the Company's management/service were $291.4 million at March
31, 2003, a decrease of $4.6 million (-1.6%) from December 31, 2002 and a
decrease of $27.8 million (8.7%) from March 31, 2002.
RESULTS OF OPERATIONS
Three months ended
March 31,
-------------------
2003 2002
--------------------------
Net income (loss) after
minority interest $ 81,401 $ 38,440
Earnings per share
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
--------------------------
Net income (loss) after minority interest for the first quarter ended March 31,
2003 was net income of $81,401 compared to net income of $38,440 for the same
quarter in the previous fiscal year.
OPERATING REVENUES
Total operating revenues for the first quarter ended March 31, 2003 were
$3,537,267, a decrease of 3.1% from March 31, 2002. The decrease is primarily
the result of a decrease in assets under management/service.
Fee income for the first quarter ended March 31, 2003 was a decrease of 8.9%
compared to March 31, 2002. The decrease is primarily the result of a 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 an additional class of shares, Class A shares
subject to Front End Sales Loads (FESLs). These shares are subject to a maximum
front-end sales load of 4.25% scaled down to a .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.
Commission income decreased 0.5%, to $2,705,026 for the first quarter ended
March 31, 2003 from $2,719,740 for the same period in 2002. The decrease is
primarily the result of slower market conditions.
10
Internet revenues were $117,802 for the first quarter ended March 31, 2003, a
19.2% decrease from March 31, 2002. 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 three months ended March 31, 2003 were
$3,383,753, a decrease of 4.2% from the same period ended March 31, 2002. The
4.2% decrease 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 first quarter ended March 31, 2003 were
$439,445, a decrease of 3.2% from March 31, 2002. The decrease is primarily
the net effect of an increase in Mutual Fund Services employee compensation and
benefits of $37,091 offset by a decrease in Broker-Dealer Services employee
compensation and benefits of $50,158.
COMMISSION EXPENSE
Total commission expense for the first quarter ended March 31, 2003 was
$2,381,338, a decrease of 0.9% from March 31, 2002. The decrease is related
to the decrease in commission income.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the first quarter ended March 31,
2003 were $426,081, a decrease of 16.4% from March 31, 2002. The decrease is
primarily attributable to consolidation efficiencies relating to CFS, acquired
effective January 1, 2002.
SALES COMMISSIONS AMORTIZED
Amortization of deferred sales commissions for the first quarter ended March
31, 2003 decreased 20.6% from March 31, 2002. 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. The
Company uses an amortization life of eight 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 decreased 8.6% for the first quarter ended
March 31, 2003 compared to the same period in 2002. Effective January 1,
2002, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 - Goodwill and Other Intangible Assets. Under SFAS 142, the Company
no longer amortizes its goodwill and certain 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, 2003.
OTHER INCOME (EXPENSES)
Interest and other income increased approximately $8,000 during the first
quarter ended March 31, 2003 compared to the same period in 2002.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities was $550,289 during the three month period
March 31, 2003 compared to $29,081 during the three month period ended March
31, 2002. A significant factor contributing to this variance is a decrease in
accounts receivable as compared to December of 2002 due to a Keyman insurance
accrual that was received in January of 2003. Depreciation and amortization
decreased 8.6% for the three months ended March 31, 2003 from the same period
in 2002.
Net cash used by investing activities for the three months ended March 31,
2003 decreased to $22,134 from $1,149,901 for the three months ended March 31,
2002. The 2002 activity included remodeling of the second floor of the
company's office building, investment in disaster recovery computer systems,
and goodwill related to the acquisition of CFS.
Net cash used by financing activities during the three months ended March 31,
2003 was $255,511. The major financing activity for the period was the payment
of $250,000 to repurchase 500,000 shares pursuant to the put privilege that
was exercised by the previous owners of Capital Financial Services, Inc.
At March 31, 2003, the Company held $1,280,263 in cash and cash equivalents,
as compared to $1,007,619 at December 31, 2002. Liquid assets, which consist
of cash and cash equivalents, securities available-for-sale and current
receivables increased to $2,293,690 at March 31, 2003 from $2,229,064 at
December 31, 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 and the issuance of long-term subordinated commercial
notes, 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
or financial services firms, acquire the management rights to additional
outside mutual funds, repurchase shares of the Company's common stock, and
service debt.
On September 1, 2002, $940,000 of debentures matured. This need for cash was
met by securing an interim bank loan agreement. This bank loan is being
supplanted by the issuance of new long-term subordinated commercial notes.
As of April 25, 2003, the Company had issued $561,000 in subordinated
commercial notes.
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 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.
12
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, commission 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
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, Inc. and Integrity Small-Cap Fund of
Funds, Inc. 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, Inc. and Integrity Small-Cap Fund of Funds, Inc.) 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.
13
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 2: Material Changes in Instruments Defining the Rights of Shareholders
On May 31, 2002, the shareholders of the Company approved an amendment of the
Company's Articles of Incorporation which increased the authorized common
shares of the Company from 20,000,000 shares of no par common stock to
1,000,000,000 shares of $.0001 par value common stock. On May 31, 2002, the
shareholders also approved an amendment of the Company's Articles of
Incorporation which authorized 100,000,000 shares of $.0001 par value
preferred stock. Preferred shares have a preference over the common shares
with respect to future dividends, voting rights, and liquidation in the event
of dissolution. The Board of Directors may establish a class or series,
setting forth the designation of the class or series and fixing the relative
rights and preferences of the class or series of the preferred shares. The
increase in the authorized shares of common stock and the authorization for
preferred stock will not have any immediate effect on the rights of existing
shareholders, however, the Board of Directors will have the authority to issue
authorized shares of common stock and create classes of preferred stock within
the authorized limits of preferred stock without requiring future shareholder
approval of such issuances, except as may be required by applicable law or
regulations, the Company's governing documents or the rules of any stock
exchange, Nasdaq, or any automated inter-dealer quotation system on which the
Company's common stock may then be traded. The Company's shareholders can,
therefore, experience a reduction in their ownership interest in the Company
with respect to earnings per share (if any), voting, liquidation value, and
book and market value if the additional authorized shares are issued. The
holders of the Company's common stock have no preemptive rights, which means
that current shareholders do not have a prior right to purchase any new issue
of common stock in order to maintain their proportionate ownership in the
Company.
On May 31, 2002, the shareholders of the Company approved a two for one (2:1)
forward stock split of the issued and outstanding common stock of the Company
which took effect on July 1, 2002. The forward stock split increased the
number of issued and outstanding shares of common stock of the Company as of
July 1, 2002 from approximately 6,700,000 to approximately 13,400,000. Except
for changes in the number of shares of stock issued and outstanding, the rights
and privileges of holders of shares of common stock remain the same, both
before and after the forward stock split. Commencing on July 1, 2002, each
currently outstanding common stock certificate was deemed for all corporate
purposes to evidence ownership of the increased number of shares resulting from
the forward stock split. New stock certificates reflecting the number of
shares resulting from the stock split will be issued only as currently
outstanding certificates are transferred or upon request of individual
shareholders.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
On July 11, 2002, the Company introduced an offering of subordinated commercial
notes, strictly limited to bona fide North Dakota residents, with a maximum of
$1,000,000. As of April 25, 2003, the Company had issued $561,000 in
subordinated commercial notes.
On April 28, 2003, Mark Anderson was hired to fill the positions of President
and Chief Operating Officer of the Company.
14
On March 24, 2003, the Company announced an agreement with Canandaigua National
Bank and Trust Company of Canandaigua, New York, to acquire the management
rights to the CNB Funds which include the $13 million Canandaigua Equity Fund,
a large-cap growth fund, and the $1 million Canandaigua Bond Fund. The
transaction is expected to close in May of 2003. The purchase agreement calls
for total consideration of approximately $225,000, contingent upon shareholder
and regulatory approval. The majority of the purchase price will be paid
within 10 days of the closing date of the transaction using available cash on
hand.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 22 for a descriptive response to this
item.
(b) Reports on Form 8-K
None
15
INTEGRITY MUTUAL FUNDS, 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.
Date: May 13, 2003 By /s/ Robert E. Walstad
------------------------
Robert E. Walstad
Chief Executive Officer,
President, and Director
(Principal Executive Officer)
(Acting Chief Financial Officer)
16
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CERTIFICATION
I, Robert E. Walstad, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Integrity Mutual
Funds, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual
report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 29, 2003 By /s/ Robert E. Walstad
------------------------
Robert E. Walstad
Chief Executive Officer,
President, and Director
(Principal Executive Officer)
(Acting Chief Financial Officer)
17
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
Exhibit
-------
99 CEO/CFO Certification of Periodic Financial Reports
1