FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
U.S. SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 24, 2003, there were 13,308,715 shares of common stock of
the registrant outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
1
FORM 10-QSB
INTEGRITY MUTUAL FUNDS, INC.
INDEX
Part I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets-
September 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations-
Three months ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Operations-
Nine months ended September 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows-
Nine months ended September 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis or
Plan of Operations 10
Item 3 Controls and Procedures 17
Part II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Material Changes in Instruments Defining the Rights
of Shareholders 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
2
Part I. FINANCIAL INFORMATION
Item 1. INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
-----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,135,867 $ 1,007,619
Cash segregated for the exclusive benefit of customers 0 319,275
Securities available-for-sale 24,122 109,456
Accounts receivable 1,065,212 1,111,989
Prepaids 63,361 90,604
-----------------------------
Total current assets $ 2,288,562 $ 2,638,943
-----------------------------
PROPERTY AND EQUIPMENT $ 1,827,302 $ 2,134,719
Less accumulated depreciation (563,048) (730,093)
-----------------------------
Net property and equipment $ 1,264,254 $ 1,404,626
-----------------------------
OTHER ASSETS
Deferred sales commissions $ 831,188 $ 1,159,165
Covenant not to compete (net of accumulated amortization
of $177,125 for 2002) - 40,875
Goodwill 8,583,256 7,234,317
Other assets (net of accumulated amortization
of $103,939 for 2003 and $89,749 for 2002) 428,553 215,983
------------------------------
Total other assets $ 9,842,997 $ 8,650,340
-----------------------------
TOTAL ASSETS $ 13,395,813 $ 12,693,909
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Service fees payable $ 81,338 $ 77,723
Accounts payable 20,630 26,499
Other current liabilities 1,249,574 1,131,440
Short-term borrowing 0 555,592
Current portion of long-term debt 1,194,181 17,298
-----------------------------
Total current liabilities $ 2,545,723 $ 1,808,552
-----------------------------
LONG-TERM LIABILITIES
Notes payable $ 1,347,465 $ 461,311
Subordinated debentures 595,000 595,000
Corporate notes 962,000 962,000
Subordinated commercial notes 561,000 561,000
Convertible debentures 250,000 250,000
Deferred tax liability 108,715 170,000
Other long-term liabilities 211,145 -
Less current portion of long-term debt (1,194,181) (17,298)
-----------------------------
Total long-term liabilities $ 2,841,144 $ 2,982,013
-----------------------------
TOTAL LIABILITIES $ 5,386,867 $ 4,790,565
-----------------------------
MINORITY INTEREST IN SUBSIDIARY - 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;
13,308,715 and 12,470,480 shares issued and outstanding,
respectively, after the 2:1 forward split effective July 1, 2002 $ 8,510,653 $ 8,325,179
Receivable - unearned ESOP shares (83,825) (88,845)
Gain on allocation of ESOP shares 34,942 36,350
Accumulated deficit (952,232) (1,198,551)
Accumulated other comprehensive loss (592) (26,160)
-----------------------------
Total stockholders' equity $ 7,508,946 $ 7,047,973
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,395,813 $ 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
September 30,
-------------------------
2003 2002
-------------------------
OPERATING REVENUES
Fee income $ 790,142 $ 741,660
Commissions 2,782,267 3,003,093
-------------------------
Total revenue $ 3,572,409 $ 3,744,753
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 500,374 $ 425,881
Commission expense 2,402,412 2,647,404
General and administrative expenses 416,488 433,806
Sales commissions amortized 89,349 117,804
Depreciation and amortization 25,872 26,010
-------------------------
Total operating expenses $ 3,434,495 $ 3,650,905
-------------------------
OPERATING INCOME $ 137,914 $ 93,848
-------------------------
OTHER INCOME (EXPENSES)
Interest and other income (expense) $ (4,578) $ 19,432
Interest expense (68,988) (75,945)
-------------------------
Net other income (expense) $ (73,566) $ (56,513)
-------------------------
INCOME BEFORE INCOME TAX BENEFIT (EXPENSE) $ 64,348 $ 37,335
INCOME TAX BENEFIT (EXPENSE) (9,991) 8,389
-------------------------
NET INCOME FROM CONTINUING OPERATIONS $ 54,357 $ 45,724
DISCONTINUED OPERATIONS
Loss from operation of discontinued internet
segment (net of tax) $ - $ (15,401)
Loss from disposal of internet segment
(net of tax) (4,316) -
-------------------------
Loss from discontinued operations (net of tax) $ (4,316) $ (15,401)
-------------------------
NET INCOME $ 50,041 $ 30,323
=========================
NET INCOME (LOSS) PER SHARE:
Basic earnings per share
Continuing operations $ .00 $ .00
Discontinued operations $ (.00) $ (.00)
Diluted earnings per share
Continuing operations $ .00 $ .00
Discontinued operations $ (.00) $ (.00)
AVERAGE COMMON SHARES OUTSTANDING, AFTER 2:1
FORWARD STOCK SPLIT EFFECTIVE JULY 1, 2002:
Basic 13,962,551 13,781,072
Diluted 14,477,703 14,204,149
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2003 2002
-------------------------
OPERATING REVENUES
Fee income $ 2,184,030 $ 2,323,538
Commissions 7,862,580 8,652,208
-------------------------
Total revenue $10,046,610 $10,975,746
-------------------------
OPERATING EXPENSES
Compensation and benefits $ 1,346,701 $ 1,300,627
Commission expense 6,755,872 7,630,246
General and administrative expenses 1,159,520 1,333,778
Sales commissions amortized 290,880 348,311
Depreciation and amortization 76,316 75,739
-------------------------
Total operating expenses $ 9,629,289 $10,688,701
-------------------------
OPERATING INCOME $ 417,321 $ 287,045
-------------------------
OTHER INCOME (EXPENSES)
Interest and other income $ 79,441 $ 56,772
Interest expense (219,586) (227,480)
-------------------------
Net other income (expense) $ (140,145) $ (170,708)
-------------------------
INCOME BEFORE INCOME TAX EXPENSE $ 277,176 $ 116,337
INCOME TAX EXPENSE (132,321) (21,208)
-------------------------
NET INCOME FROM CONTINUING OPERATIONS $ 144,855 $ 95,129
DISCONTINUED OPERATIONS
Loss from operation of discontinued internet
segment (net of tax) $ (19,178) $ (23,267)
Gain from disposal of internet segment
(net of tax) 11,197 -
-------------------------
Loss from discontinued operations (net of tax) $ (7,981) $ (23,267)
-------------------------
NET INCOME $ 136,874 $ 71,862
=========================
NET INCOME (LOSS) PER SHARE:
Basic earnings per share
Continuing operations $ .01 $ .01
Discontinued operations $ (.00) $ (.00)
Diluted earnings per share
Continuing operations $ .01 $ .01
Discontinued operations $ (.00) $ (.00)
AVERAGE COMMON SHARES OUTSTANDING, AFTER 2:1
FORWARD STOCK SPLIT EFFECTIVE JULY 1, 2002:
Basic 13,588,661 13,964,808
Diluted 14,103,813 14,387,885
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2003 2002
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 136,874 $ 71,862
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 118,542 152,653
Sales commissions amortized/charged off 263,338 348,311
Loss on sale of available-for-sale securities 13,243
Minority interest 19,889 (22,355)
(Increase) decrease in:
Cash segregated for customers 319,275 20,851
Accounts receivable 44,174 (410,942)
Prepaids 26,800 47,763
Deferred sales commissions capitalized,
net of CDSC collected 64,639 (161,599)
Other assets (16,760) (58,479)
Increase (decrease) in:
Service fees payable 3,615 (7,831)
Accounts payable 24,562 (36,839)
Deferred tax (166,324) (46,784)
Other liabilities (12,096) 290,514
---------------------------------
Net cash provided by operating activities $ 839,771 $ 187,125
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (60,207) $ (73,018)
Purchase of available-for-sale securities (761) (794)
Proceeds from sale of available-for-sale securities 98,419 0
Purchase of other assets (1,143,274) 0
Proceeds from sale of subsidiary 337,875 0
Purchase of goodwill (3,223) (1,117,711)
---------------------------------
Net cash used by investing activities $ (771,171) $ (1,191,523)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (24,526) (161,744)
Reduction of short-term debt (805,592) 0
Increase in notes payable 886,154 (9,607)
Subordinated commercial note issue - 511,000
Short-term borrowing - 650,040
Repayments from ESOP 5,020 6,575
Return of capital - (17,150)
Redemption of subordinated debenture - (50,000)
Redemption of debenture - (940,000)
Loss on allocation of ESOP shares (1,408) (1,638)
---------------------------------
Net cash provided (used) by financing activities $ 59,648 $ (12,524)
---------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 128,248 $ (1,016,922)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,007,619 1,834,683
---------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,135,867 $ 817,761
=================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gain (loss) on
securities available-for-sale 25,567 (24,200)
Loss on allocation of ESOP shares (1,408) (1,638)
Purchase of goodwill with temporary capital 0 750,000
Purchase of goodwill with long-term liability 0 250,000
Purchase of other assets with common stock 210,000 0
Disposal of minority interest 335,482 0
Reduction in other assets 0 (63,254)
Reduction in common stock 0 (63,254)
Increase in other assets 629,476 0
Increase in short-term debt (418,331) 0
Increase in long-term debt (211,145) 0
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2003 and 2002
NOTE 1 - BASIS OF PRESENTATION
On June 3, 2003, the Company announced the consolidation of its two wholly
owned broker dealer firms, Capital Financial Services, Inc. (CFS) and ARM
Securities Corporation (ARM) into one firm - Capital Financial Services, Inc.
The consolidation was designed to increase operating efficiency and promote
cost savings. Capital Financial Services, Inc. is a full-service brokerage
firm that specializes in providing investment products and services to
independent investment representatives, financial planners, and investment
advisors.
Effective July 10, 2003, the names of the Company's wholly-owned subsidiaries,
ND Resources, Inc. and ND Money Management, Inc. were changed to
Integrity Fund Services, Inc. and Integrity Money Management, Inc.,
respectively.
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 annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America, but not required for interim reporting purposes, have been
condensed or omitted.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are of a
normal recurring nature) necessary for a fair presentation of the financial
statements. The results of operations for the nine months ended September
30, 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 135 investment representatives and investment
advisors.
7
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.
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 500,000 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 $.0001 par value common stock of the Company at the
rate of two shares 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.
On May 30, 2003, the Company acquired 100% of the equity stock of
Abbington Capital Management, Inc. The purchase consideration was composed
of 700,000 shares of the Company common stock determined to have a total
value of $210,000. The common stock is to be issued pursuant to the
following delivery schedule: 200,000 shares at closing, 200,000 shares on
August 31, 2003, 200,000 shares on December 31, 2003, and 100,000 shares on
April 30, 2004. As a part of the transaction, the Company received a license
for the Portfolio Manager's Stock Selection Matrix, a quantitative investment
model for managing equity portfolios.
8
On May 23, 2003, the Company acquired 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 purchase agreement called
for total consideration of approximately $285,000. The majority of the
purchase price, or approximately $160,000, was paid upon closing. The
remaining consideration of approximately $125,000, which is subject to
adjustment based on retention of assets in the funds, is to be paid as
follows: $62,500 at the one year anniversary of the closing date, and $62,500
at the two year anniversary of the closing date. The total purchase price will
be paid by using available cash on hand.
On September 19, 2003, the Company acquired the management rights to the
four stock funds in the Willamette Family of Funds. The four funds have
combined assets of approximately $60 million. The purchase agreement called
for total consideration of approximately $1,400,000. The majority of the
purchase price, or approximately $900,000 was paid upon closing. The
remaining consideration of approximately $500,000, which is subject to
adjustment based on retention of assets in the funds, is to be paid as
follows: $350,000 within 5 business days of the one year anniversary of the
closing date, and $150,000 within 5 business days of the two year
anniversary of the closing date. The total purchase price will be paid by
utilizing a commercial bank loan and lines of credit as well as available
cash on hand.
NOTE 5 - DISCONTINUED OPERATIONS
Effective June 26, 2003, the Company sold its 51% ownership in Magic
Internet Services, Inc. The purchase consideration for the Company's 51%
ownership consisted of $337,875, which the Company received at closing, as
well as an additional maximum payment of $36,975 to be received 90 days after
closing. The additional payment was subject to adjustment based on terms of
the contract. The Company received a final payment of $29,621.55 in October
of 2003 resulting in a final adjusted gain (net of tax) from the sale of stock
of subsidiary of $11,197.
The results of Magic Internet Services, Inc. are reported in the
Company's Consolidated Statements of Operations separately as discontinued
operations. In accordance with GAAP, the Consolidated Balance Sheets have not
been restated.
Summarized financial information for discontinued operations is as follows:
June 26, 2003 September 30, 2002
---------------------------------------------------------------------------------------
Total revenues, net of interest expense $ 233,845 $ 417,321
---------------------------------------------------------------------------------------
Loss from discontinued operations, net of tax $ (19,178) $ (23,267)
Gain from sale of stock of subsidiary, net of tax $ 11,197 $ 0
---------------------------------------------------------------------------------------
Loss from discontinued operations, net of tax $ (7,981) $ (23,267)
---------------------------------------------------------------------------------------
June 26, 2003 December 31, 2002
-------------------------------------------------------------------------------------
Total assets $ 753,006 $ 784,066
Total liabilities 68,532 55,988
-------------------------------------------------------------------------------------
Net assets of discontinued operations $ 684,474 $ 728,078
-------------------------------------------------------------------------------------
NOTE 6 - ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consisted of the following as of:
9
June 30, 2003 December 31, 2002
------------- -----------------
Amortized Intangible Assets
---------------------------
Carrying amount
Covenant not to compete $ - $ 218,000
--------------------------------------
Accumulated amortization - 177,125
--------------------------------------
Aggregate Amortization Expense
------------------------------
For the nine month period ended
September 30, 2003 $ -
For the year ended
December 31, 2002 $ 54,500
The carrying amount of the covenant not to compete was included in the sale of
Magic Internet Services, Inc.
NOTE 7 - GOODWILL
The changes in the carrying amount of goodwill for the nine month period ended
September 30, 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 1,772,750 - 3,223 1,775,973
Goodwill disposed of during the period - (427,034) - (427,034)
Impairment losses - - - -
Balance as of September 30, 2003 $ 6,123,406 $ - $ 2,459,850 $ 8,583,256
-----------------------------------------------------------------------------------------
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 annual
impairment assessments were completed on June 30, 2003 and resulted in no
impairment adjustments.
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 Integrity Mutual Funds. Capital
Financial Services, Inc. (CFS) provides another substantial portion of revenues
through sales of mutual funds and variable and fixed insurance products.
The Company organizes its current business units into two reportable
segments: mutual fund services, and broker-dealer services. The mutual fund
services segment acts as investment adviser, distributor and provider of
administrative service to sponsored mutual funds. The broker-dealer segment
distributes shares of nonproprietary mutual funds and insurance products.
As disclosed in Note 5, the Company has classified the results of operations
of Magic Internet Services, Inc. (the Internet Services segment) as
discontinued operations. The information below has been revised to exclude the
Internet Services segment related to Magic Internet Services, Inc.
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.
10
SEGMENT INFORMATION
-------------------
As of, Mutual Fund Broker-Dealer
Third Quarter Ended Services Services Total
-----------------------------------------------------------------------------------------
SEPTEMBER 30, 2003
Revenues from
external customers $ 966,390 $ 2,606,019 $ 3,572,409
Interest expense 68,988 - 68,988
Depreciation and
Amortization 24,671 1,201 25,872
Income (loss) from continued
Operations (121,368) 175,725 54,357
-----------------------------------------------------------------------------------------
SEPTEMBER 30, 2003
Revenues from
external customers $ 936,093 $ 2,808,660 $ 3,744,753
Intersegment
Revenues 71,269 - 71,269
Interest expense 75,945 - 75,945
Depreciation and
Amortization 24,869 1,141 26,010
Income (loss) from continued
Operations 42,363 3,361 45,724
-----------------------------------------------------------------------------------------
As of,
Nine Months Ended
SEPTEMBER 30, 2003
Revenues from
external customers $ 2,768,384 $ 7,278,226 $ 10,046,610
Interest expense 218,825 761 219,586
Depreciation and
Amortization 72,760 3,556 76,316
Income (loss) from continued
Operations (451,541) 596,396 144,855
Segment assets 12,704,772 1,492,905 14,197,677
Expenditures for
segment assets 58,927 1,280 60,207
-----------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
Revenues from
external customers $ 2,966,498 $ 8,009,248 $ 10,975,746
Intersegment
Revenues 186,942 - 186,942
Interest expense 227,480 - 227,480
Depreciation and
Amortization 72,371 3,368 75,739
Income (loss) from continued
operations 98,294 (3,165) 95,129
Segment assets 11,946,054 1,179,933 13,125,987
Expenditures for
segment assets 71,095 1,923 73,018
-----------------------------------------------------------------------------------------
RECONCILIATION OF SEGMENT INFORMATION
As of Three Months Ended
September 30, 2003 September 30, 2002
Revenues
--------
Total revenues for reportable segments $ 3,572,409 $ 3,816,022
Elimination of intersegment revenues - (71,269)
------------------- -------------------
Consolidated total revenue $ 3,572,409 $ 3,744,753
=================== ===================
Profit
------
Total reportable segment profit $ 50,041 $ 30,323
=================== ===================
11
As of Nine Months Ended
September 30, 2003 September 30, 2002
Revenues
--------
Total revenues for reportable segments $ 10,046,610 $ 11,162,688
Elimination of intersegment revenues - (186,942)
------------------- -------------------
Consolidated total revenue $ 10,046,610 $ 10,975,746
=================== ==================
Profit
------
Total reportable segment profit $ 136,874 $ 71,862
==================== ===================
Assets
------
Total assets for reportable segments $ 14,197,677 $ 12,795,457
Assets of discontinued segment $ - $ 708,417
Elimination of intercompany receivables (801,864) (1,140,495)
-------------------- ------------------
Consolidated assets $ 13,395,813 $ 12,363,379
==================== ==================
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," "Ranson Managed
Portfolios," and "The Integrity Funds," hereinafter collectively referred to
as "the Funds." Integrity Mutual Funds currently consists of four (4) open-end
investment companies including ND Tax-Free Fund, Inc., Montana Tax-Free Fund,
Inc., South Dakota Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.
Ranson Managed Portfolios consists of one open-end investment company
containing four (4) separate portfolios including The Kansas Municipal Fund,
The Kansas Insured Intermediate Fund, The Nebraska Municipal Fund, and The
Oklahoma Municipal Fund. The Integrity Funds consists of one open-end
investment company containing six (6) separate portfolios including
Integrity Equity Fund, Integrity Income Fund, Integrity Value Fund,
Integrity Small Cap Growth Fund, Integrity Health Sciences Fund, and Integrity
Technology Fund.
ASSETS UNDER MANAGEMENT/SERVICE
By Investment Objective
In Millions
As of September 30, 2003 2002 % Change
--------------------------------------------------------------------------
FIXED INCOME
Tax-Free Funds $ 269.9 $ 292.8 (7.8)%
Corporate Bond Fund 1.0 0.0
--------------------------------------------------------------------------
TOTAL FIXED INCOME $ 270.9 $ 292.8 (7.5)%
--------------------------------------------------------------------------
EQUITY
Fund of Funds $ 6.9 $ 10.8 (36.1)%
Equity Funds 71.8 0.0
--------------------------------------------------------------------------
TOTAL EQUITY 78.7 10.8 628.7 %
--------------------------------------------------------------------------
TOTAL SPONSORED MUTUAL FUNDS - end of period $ 349.6 $ 303.6 15.2 %
--------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT/SERVICE $ 349.6 $ 303.6 15.2 %
==========================================================================
Average for the nine month period $ 298.8 $ 313.6 (4.7)%
==========================================================================
12
Assets under the Company's management/service were $349.6 million at
September 30, 2003, an increase of $53.6 million (18.1%) from December 31,
2002 and an increase of $46.0 million (15.2%) from September 30, 2002.
RESULTS OF OPERATIONS
Unless otherwise noted, the following discussions relate only to results
from continuing operations.
Three months ended Nine months ended
September 30, September 30,
------------------ ----------------
2003 2002 2003 2002
------------------------------------------------
Net income (loss) from
Continuing operations $ 54,357 $ 45,724 $ 144,855 $ 95,129
Net income (loss) from
Discontinued operations $ (4,316) $ (15,401) $ (7,981) $ (23,267)
Net income (loss) $ 50,041 $ 30,323 $ 136,874 $ 71,862
Earnings per share
Basic:
Continuing operations $ 0.00 $ 0.00 $ 0.01 $ 0.01
Discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Net income (loss) $ 0.00 $ 0.00 $ 0.01 $ 0.01
Diluted:
Continuing operations $ 0.00 $ 0.00 $ 0.01 $ 0.01
Discontinued operation $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Net income (loss) $ 0.00 $ 0.00 $ 0.01 $ 0.01
------------------------------------------------
Net income (loss) for the third quarter ended September 30, 2003 was net income
of $50,041 compared to net income of $30,323 for the same quarter in the
previous fiscal year.
Net income (loss) for the nine months ended September 30, 2003 was net income
of $136,874 compared to net income of $71,862 for the same period in the
previous fiscal year.
OPERATING REVENUES
Total operating revenues for the third quarter ended September 30, 2003 were
$3,572,409, a decrease of 4.6% from September 30, 2002. Total operating
revenues for the nine months ended September 30, 2003 were $10,046,610, a
decrease of 8.5% from September 30, 2002. The decreases are primarily the
result of lower commission income.
Fee income for the third quarter ended September 30, 2003 was an increase
of 6.5% compared to September 30, 2002. The increase is primarily the result
of an increase in average monthly assets under management/service 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 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.
Fee income for the nine months ended September 30, 2003 decreased 6.0%
compared to September 30, 2002. The decrease is primarily the result of a
decrease in average monthly assets under management/service and to a lesser
extent from the reduction in fees charged to Class A shares converted from
Class B shares.
13
Commission income decreased 7.4%, to $2,782,267 for the third quarter ended
September 30, 2003 from $3,003,093 for the same period in 2002. Commission
income decreased 9.1%, to $7,862,580 for the nine months ended September 30,
2003 from $8,652,208 for the same period in 2002. The decreases are primarily
the result of general market conditions and specific product availability.
OPERATING EXPENSES
Total operating expenses for the third quarter and nine months ended
September 30, 2003 were $3,434,495 and $9,629,289, respectively, a decrease
of 5.9% and 9.9% from the same periods ended September 30, 2002. The 5.9%
and 9.9% decreases are a result of the net activity in the major expense
categories as described in the paragraphs that follow.
COMPENSATION AND BENEFITS
Total compensation and benefits for the third quarter ended September 30,
2003 were $500,374, an increase of 17.5% from September 30, 2002. Total
compensation and benefits for the nine months ended September 30, 2003 were
$1,346,701, an increase of 3.5% from September 30, 2002. The increases result
primarily from the addition of several new employees to the Company and to a
lesser extent from normal annual compensation adjustments.
COMMISSION EXPENSE
Total commission expense for the third quarter ended September 30, 2003 was
$2,402,412, a decrease of 9.3% from September 30, 2002. Total commission
expense for the nine months ended September 30, 2003 was $6,755,872, a
decrease of 11.5% from September 30, 2002. The decreases are related to the
decreases in commission income.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the third quarter ended September
30, 2003 were $416,488, a decrease of 4.0% from September 30, 2002. Total
general and administrative expenses for the nine months ended September 30,
2003 were $1,159,520, a decrease of 13.1% from September 30, 2002.
The decreases are primarily attributable to consolidation efficiencies
relating to CFS, acquired effective January 1, 2002.
SALES COMMISSIONS AMORTIZED
Amortization of deferred sales commissions for the third quarter ended
September 30, 2003 decreased 24.2% from September 30, 2002. Amortization of
deferred sales commissions for the nine months ended September 30, 2003
decreased 16.5% from September 30, 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 coincides with conversion of Class B shares to Class A shares as
previously stated.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 0.5% for the third quarter ended
September 30, 2003 and increased 0.8% for the nine months ended September 30,
2003 compared to the same periods 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
September 30, 2003.
14
OTHER INCOME (EXPENSES)
Interest and other income (expenses) decreased $24,010 and increased $22,669
for the third quarter and nine months ended September 30, 2003 compared to the
same periods in 2002. These changes result primarily to reimbursements and
expenses relating to the CFS annual sales and compliance meeting.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities was $839,771 during the nine month period
September 30, 2003 compared to $187,125 during the nine month period ended
September 30, 2002. A significant factor contributing to this variance is
a decrease in deferred sales commissions capitalized, net of CDSC collected,
compared to December 31, 2002.
Net cash used by investing activities for the nine months ended September 30,
2003 was $771,171 compared to net cash used by investing activities of
$1,191,523 for the nine months ended September 30, 2002. The 2003 activity
included proceeds from the sale of available-for-sale securities, proceeds from
the sale of Magic Internet Services, Inc., and the acquisition of management
rights to two CNB Funds and four stock funds in the Willamette Family of Funds.
The 2002 activity included the purchase of goodwill related to the acquisition
of CFS.
Net cash provided by financing activities during the nine months ended
September 30, 2003 was $59,648. The major financing activities for the period
were 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., the payment of $555,592 to pay off the balance on a
commercial bank short-term borrowing, as well as proceeds of $900,025 received
from a long-term commercial bank loan.
At September 30, 2003, the Company held $1,135,867 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 decreased to $2,225,201 at September 30, 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, a long-term commercial bank loan and lines of credit,
proceeds generated from potential private offerings of preferred or common
stock, and proceeds generated from potential transactions with private lenders,
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.
At September 30, 2003, total current liabilities exceeded total current assets
by $257,000. Current liabilities include $962,000 of corporate notes that
mature June 30, 2004. This cash requirement may be met by utilizing existing
cash, a long-term commercial bank loan and lines of credit, proceeds generated
from potential private offerings of preferred or common stock, proceeds
generated from potential transactions with private lenders, or any combination
thereof.
15
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 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.
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 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.
16
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 of the tax-free 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 tax-free 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.
Item 3 CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective as of
September 30, 2003.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies or material weaknesses.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The North Dakota Attorney General Office and the North Dakota Securities
Commission have raised issues concerning the Company's status as a North Dakota
venture capital corporation, as well as reporting requirements with respect to
certain investments made by the Company. To date, no legal action has been
filed by the North Dakota Attorney General Office or the North Dakota
Securities Commission. The Company is in continuing discussions concerning
these issues. A potential consequence of this matter may include a requirement
to reorganize the Company as a regular business corporation. Such
reorganization, if undertaken, would require a meeting and consent of the
Company's shareholders. Since this matter is in preliminary stages, no
opinion as to the potential consequences can be provided.
17
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 6,500,000 to approximately 13,000,000.
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
Effective as of May 1, 2003, Mark Anderson was hired to fill the positions
of President and Chief Operating Officer of the Company, replacing Robert
Walstad. Mr. Walstad will continue as Chief Executive Officer and Chairman of
the Company's board of directors. Also effective as of May 1, 2003, the
Company hired Jerry Szilagyi as Senior Vice President for Business Development.
On May 23, 2003, the Company acquired the management rights to the CNB Funds
which included the $13 million Canandaigua Equity Fund, a large-cap growth
fund, and the $1 million Canandaigua Bond Fund. The purchase agreement
called for total consideration of approximately $285,000. The majority of
the purchase price, or approximately $160,000, was paid upon closing.
The remaining consideration of approximately $125,000, which is subject to
adjustment based on retention of assets in the funds, is to be paid as
follows: $62,500 at the one year anniversary of the closing date, and
$62,500 at the two year anniversary of the closing date. The total purchase
price will be paid by using available cash on hand.
18
On May 30, 2003, a plan was adopted that granted the members of the Company
board of directors 1,000 of the Company's common shares annually as additional
compensation beginning in the year 2003. Further, each member is to be
granted an additional 1,000 shares for each year that the member has served
on the Board since the Company's inception. No shares have yet been issued.
On June 3, 2003, the Company announced the consolidation of its two wholly
owned broker dealer firms, Capital Financial Services, Inc. (CFS) and ARM
Securities Corporation (ARM) into one firm - Capital Financial Services, Inc.
The consolidation was designed to increase operating efficiency and promote
cost savings. Capital Financial Services, Inc. is a full-service brokerage
firm that specializes in providing investment products and services to
independent investment representatives, financial planners, and investment
advisors.
On September 19, 2003, the Company acquired the management rights to four
stock funds in the Willamette Family of Funds. The four funds had combined
assets of approximately $60 million. The purchase agreement called for total
consideration of approximately $1,400,000. The majority of the purchase
price, or approximately $900,000, was paid upon closing. The remaining
consideration of approximately $500,000, which is subject to adjustment based
on retention of assets in the funds, is to be paid as follows:
$350,000 within 5 business days of the one year anniversary of the closing
date, and $150,000 within 5 business days of the two year anniversary of the
closing date. The total purchase price will be paid by utilizing a
commercial bank loan and lines of credit as well as available cash on hand.
On July 1, 2003, the Company announced it had signed an agreement with Forum
Financial Group of Portland, Maine to acquire management rights to the Maine
and New Hampshire Tax-Saver Bond Funds. The two funds have combined assets of
approximately $50 million. The agreement, which is subject to shareholder and
regulatory approval, is expected to close in December of 2003. The purchase
agreement calls for total consideration of approximately $875,000, which may
be paid using proceeds generated from a potential private offering of
preferred or common stock, or proceeds generated from a potential
transaction with private lenders. Approximately $500,000 of the purchase price
will be paid on the closing date, with the remaining portion of the purchase
price to be placed in an escrow account that will be paid out on the first
anniversary of the closing date subject to adjustment based on retention of
assets in the funds.
Effective July 10, 2003, the names of the Company's wholly-owned subsidiaries,
ND Resources, Inc. and ND Money Management, Inc. were changed to Integrity
Fund Services, Inc. and Integrity Money Management, Inc., respectively.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits on page 21 for a descriptive response to this
item.
(b) Reports on Form 8-K
Form 8-K dated September 11, 2003 - Item 4: Change in Registrant's
Certifying Public Accountant for the Integrity Funds (formerly known
as the Canandaigua Funds.)
Form 8-K/A dated September 24, 2003 - Item 4: Change in Registrant's
Certifying Public Accountant for the Integrity Funds (formerly known
as the Canandaigua Funds.)
19
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: November 13, 2003 By /s/ Robert E. Walstad
------------------------
Robert E. Walstad
Chief Executive Officer,
Chairman, and Director
(Principal Executive Officer)
Date: November 13, 2003 By /s/ Heather Ackerman
------------------------
Heather Ackerman
Chief Financial Officer
20
INTEGRITY MUTUAL FUNDS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
Exhibit
-------
EX-31.1 CEO Certification of Periodic Financial Reports
EX-31.2 CFO Certification of Periodic Financial Reports
EX-32.1 CEO Certification of Periodic Financial Reports
EX-32.2 CFO Certification of Periodic Financial Reports
21
1