UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-QSB/A

 

 

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2007

 

OR

 

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

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 Main Street North, 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

[   ]

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

[   ]

No

[X]

 

 

As of April 30, 2007, there were 14,317,146 common shares of the issuer outstanding.

 

 

Transitional Small Business Disclosure Format (check one):

 

Yes

[   ]

No

[X]


 

 

 

Explanatory Note

 

Integrity Mutual Funds, Inc. (the "Company") is filing this Amendment No. 1 to its Form 10‑QSB for the quarter ended March 31, 2007, as filed on May 14, 2007 (the "Original Filing"), solely to correct an inadvertent error in the certifications filed as Exhibits 31.1 and 31.2 to the Original Filing.  There are no other changes to the Original Filing.

 

For the convenience of the reader, this Amendment No. 1 sets forth the entire Form 10-QSB which was prepared and relates to the Company as of March 31, 2007.  However, this Amendment No. 1 only amends and restates the certificates described above and no attempt has been made to modify or update other disclosures presented in the Original Filing.  Accordingly, except for the above-mentioned certificates, this Amendment No. 1 continues to speak as of the date of the Original Filing, and does not reflect events occurring after such date and does not modify or update those disclosures affected by subsequent events.  Forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that have become known to us after the date of the original filing (other than the current restatements described above), and such forward looking statements should be read in their historical context.


 

FORM 10-QSB

 

INTEGRITY MUTUAL FUNDS, INC.

 

INDEX

 

 

PART I

FINANCIAL INFORMATION

Page #

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets -

 

 

March 31, 2007 and December 31, 2006

3

 

 

 

 

Condensed Consolidated Statements of Operations -

 

 

Three months ended March 31, 2007 and 2006

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows -

 

 

Three months ended March 31, 2007 and 2006

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

9

 

 

 

Item 3.

Controls and Procedures

15

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

15

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

 

 

 

Item 3.

Defaults Upon Senior Securities

16

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

16

 

 

 

Item 5.

Other Information

16

 

 

 

Item 6.

Exhibits

16

 

 

 

 

SIGNATURES

17


 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS

 

 

 

(Unaudited)

 

 

March 31,

December 31,

 

2007

2006

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

$

1,586,038

$

1,851,249

 

Securities available-for-sale

 

-

 

213

 

Accounts receivable

 

2,244,184

 

1,793,645

 

Income taxes receivable

 

1,800

 

780

 

Deferred tax asset

 

109,214

 

5,833

 

Prepaids

 

82,367

 

88,894

 

 

 

 

 

 

 

Total current assets

$

4,023,603

$

3,740,614

 

 

 

 

 

PROPERTY AND EQUIPMENT

$

2,039,450

$

1,989,312

 

Less accumulated depreciation

 

(833,368)

 

(811,854)

 

 

 

 

 

 

 

Net property and equipment

$

1,206,082

$

1,177,458

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Deferred sales commissions

$

213,581

$

168,686

 

Goodwill

 

10,902,411

 

9,792,801

 

Deferred tax asset

 

360,964

 

335,995

 

Other assets (net of accumulated amortization

 

190,380

 

250,576

 

of $339,104 for 2007 and $253,961 for 2006)

 

 

 

 

 

 

 

Total other assets

$

11,667,336

$

10,548,058

 

 

 

 

 

TOTAL ASSETS

$

16,897,021

$

15,466,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

(Unaudited)

 

 

March 31,

December 31,

 

2007

2006

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Service fees payable

$

126,574

$

115,225

 

Accounts payable

 

475,287

 

261,767

 

Other current liabilities

 

1,939,996

 

1,600,772

 

Current portion of long-term debt

 

203,312

 

22,344

 

 

 

 

 

 

 

Total current liabilities

$

2,745,169

$

2,000,108

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Notes payable

$

375,111

$

380,651

 

Subordinated commercial notes

 

561,000

 

561,000

 

Subordinated corporate notes

 

2,000,000

 

2,000,000

 

Convertible debentures

 

950,000

 

950,000

 

Other long-term liabilities

 

1,082,902

 

198,507

 

Less current portion of long-term debt

 

(203,312)

 

(22,344)

 

 

 

 

 

 

 

Total long-term liabilities

$

4,765,701

$

4,067,814

 

 

 

 

 

 

TOTAL LIABILITIES

$

7,510,870

$

6,067,922

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

Series A preferred stock - 5,000,000 shares authorized, $.0001 par value;

$

305

$

 

305

 

3,050,000 and 3,050,000 shares issued and outstanding, respectively

 

Additional paid in capital - series A preferred stock

 

1,524,695

 

1,524,695

 

Common stock - 1,000,000,000 shares authorized, $.0001 par value;

 

 

1,432

 

 

 

1,372

 

14,317,146 and 13,717,146 shares issued and outstanding, respectively

 

Additional paid in capital - common stock

 

10,208,617

 

9,967,973

 

Receivable - unearned ESOP shares

 

(60,397)

 

(62,072)

 

Accumulated deficit

 

(2,288,501)

 

(2,034,055)

 

Accumulated other comprehensive loss

 

-

 

(10)

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS' EQUITY

$

9,386,151

$

9,398,208

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

16,897,021

$

15,466,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

2007

2006

 

OPERATING REVENUES

 

 

 

 

 

Fee income

$

1,957,526

$

1,469,220

 

Commissions

 

6,313,872

 

4,878,444

 

 

 

 

 

 

 

Total revenue

$

8,271,398

$

6,347,664

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

Compensation and benefits

$

1,276,306

$

938,370

 

Commission expense

 

6,129,591

 

4,631,686

 

Sub-advisory expenses

 

283,352

 

182,011

 

Distribution expenses

 

158,692

 

94,506

 

General and administrative expenses

 

519,556

 

477,331

 

Sales commissions amortized

 

105,185

 

73,728

 

Depreciation and amortization

 

106,657

 

28,795

 

 

 

 

 

 

 

Total operating expenses

$

8,579,339

$

6,426,427

 

 

 

 

 

OPERATING LOSS

$

(307,941)

$

(78,763)

 

 

 

 

 

OTHER INCOME (EXPENSES)

 

 

 

 

 

Interest and other income

$

34,981

$

14,402

 

Interest expense

 

(81,085)

 

(83,800)

 

 

 

 

 

 

 

Net other expenses

$

(46,104)

$

(69,398)

 

 

 

 

 

LOSS BEFORE INCOME TAX BENEFIT

$

(354,045)

$

(148,161)

 

 

 

 

 

INCOME TAX BENEFIT

 

122,474

 

30,097

 

 

 

 

 

NET LOSS

$

(231,571)

$

(118,064)

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE:

 

 

 

 

 

Basic

$

(.02)

$

(.01)

 

Diluted

$

(.02)

$

(.01)

 

 

 

 

 

AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

13,961,402

 

13,575,522

 

Diluted

 

13,961,402

 

13,575,522

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

 

 

 

 

 

2007

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

$

(231,571)

$

(118,064)

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

106,657

 

28,795

 

 

Sales commissions amortized/charged off

 

105,185

 

73,728

 

 

Recruiting expense - stock

 

-

 

7,000

 

 

Loss on sale of available-for-sale securities

 

11

 

-

 

 

Compensation expense - options

 

5,100

 

61,600

 

 

(Increase) decrease in:

 

 

 

 

 

 

Accounts receivable

 

(450,539)

 

(343,099)

 

 

Income taxes receivable

 

(1,020)

 

2,412

 

 

Prepaids

 

6,527

 

17,735

 

 

Deferred tax asset

 

(128,350)

 

(31,843)

 

 

Deferred sales commissions capitalized, net of CDSC collected

 

(150,080)

 

(93,124)

 

 

Other assets

 

(24,947)

 

150

 

 

Increase (decrease) in:

 

 

 

 

 

 

Service fees payable

 

11,349

 

18,939

 

 

Accounts payable

 

213,520

 

35,775

 

 

Other liabilities

 

219,199

 

344,512

 

 

Net cash provided (used) by operating activities

$

(318,959)

$

4,516

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of property and equipment

$

(50,138)

  $

(9,528)

 

 

Purchase of available-for-sale securities

 

(2)

 

(2)

 

 

Sale of available-for-sale securities

 

215

 

-

 

 

Purchase of goodwill

 

(50,216)

 

-

 

 

Net cash used by investing activities

$

(100,141)

$

(9,530)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Redemption of common stock

$

-

$

(488)

 

 

Issuance of common stock

 

60,604

 

-

 

 

Short-term borrowing

 

120,025

 

-

 

 

Reduction of notes payable

 

(5,540)

 

(60,269)

 

 

Repayments from ESOP

 

1,675

 

1,673

 

 

Preferred dividends paid

 

(22,875)

 

(22,875)

 

 

Redemption of convertible debentures

 

-

 

(250,000)

 

 

Net cash provided (used) by financing activities

$

153,889

$

(331,959)

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

$

(265,211)

$

(336,973)

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

$

1,851,249

 

1,537,391

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,586,038

$

1,200,418

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH

 

 

 

 

 

 

INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Change in unrealized gain (loss) on available-for-sale securities

$

10

$

(5)

 

 

Increase (decrease) in goodwill

 

1,059,394

 

(2,409)

 

 

Increase (decrease) in other long-term liabilities

 

884,394

 

(2,409)

 

 

Increase (decrease) in common stock

 

175,000

 

-

 

 

Recruiting expense - stock

 

-

 

7,000

 

 

Compensation expense - options

 

5,100

 

61,600

 

 

Preferred stock dividends declared

 

22,875

 

22,875

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2007 and 2006

 

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, 2006, of Integrity Mutual Funds, Inc., as filed with the SEC.  The condensed consolidated balance sheet at December 31, 2006, 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 three months ended March 31, 2007, are not necessarily indicative of operating results for the entire year.

 

NOTE 2 - INCOME TAXES

 

The Company sponsors several mutual funds.  Deferred sales commissions relating to some of its sponsored mutual funds are amortized over five years for income tax purposes and amortized over eight years for financial reporting purposes.  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.

 

The Company has completed various acquisitions in recent years, whereby the Company acquired the management rights to several mutual funds.   These management rights have been classified as goodwill at the time of acquisition.  The Company amortizes certain goodwill for tax purposes. The Company tests goodwill for impairment annually for book purposes, during the second quarter of each fiscal year.  The annual test is done at the reporting unit level using a fair value approach, in accordance with the provisions of SFAS No. 142.  Deferred tax assets or deferred tax liabilities may result from these timing differences.

 

In December of 2005, the Company adopted FASB Statement No. 123R, "Share-Based Payment" (See Note 6 - Stock Warrants, Stock Splits, and Stock Options.)  As a result, the Company expenses stock-based employee compensation for book purposes on the grant date, but does not expense them for tax purposes until such options are exercised.  Deferred tax assets are a result of these timing differences.

 

The Company has federal and state operating loss carryforwards that will expire over the next six to twenty years if unused, as well as a capital loss carryforward that will expire in 2008 if unused.  Deferred tax assets are a result of these timing differences.

 

NOTE 3 - RECLASSIFICATION

 

Certain amounts in the 2006 condensed consolidated financial statements have been reclassified to conform to the 2007 presentation.  These reclassifications had no effect on the Company's net income.


 

NOTE 4 - BUSINESS ACQUISITIONS

 

On April 22, 2005, the Company acquired the management rights to the IPS Millennium Fund and the IPS New Frontier Fund from IPS Advisory, Inc. ("IPS Advisory"), and merged them into a new Integrity Fund called the Integrity Growth & Income Fund.  The two funds had combined assets of approximately $57 million at the time of acquisition.  The purchase agreement called for total consideration of approximately 656,000 common shares of the Company.  The Company provided IPS Advisory with 250,000 common shares upon closing.  The remaining consideration of approximately 406,000 common shares, which was subject to adjustment based on retention of assets in the fund, was issued as follows:  203,000 common shares at the one-year anniversary of the closing date, and 203,000 common shares at the two-year anniversary of the closing date.  The shares are subject to a put option, which allows the holders of the shares to put them back to the Company at a price equal to the market price of the Company's shares as of the closing date, which was $.36 per share.  The put option is exercisable with respect to one-third of the shares per year starting on the third anniversary of the closing date.  The Company will also provide IPS Advisory with a stock option incentive bonus based on growth in assets in the Fund based on the following schedule:  150,000 options on the Company's common shares when assets of the Fund reach $100 million and 150,000 options on the Company's common shares when the assets of the Fund reach $200 million.  The options will have a strike price of $.65 per share and mature 10 years from the closing date.  The securities issued in connection with this transaction were issued on a private placement basis. In April of 2006, the one-year anniversary payment of approximately 158,603 common shares was made, which reflected the assets of the acquired funds at the one-year anniversary.  The liability relating to this acquisition is valued at approximately $197,000.

 

On March 7, 2007, the Company acquired certain assets of United Heritage Financial Services, Inc. (UHFS), a wholly owned subsidiary of United Heritage Financial Group, Inc., of Meridian, Idaho.  UHFS had approximately 120 independent registered representatives who became part of Capital Financial Services, Inc. (CFS), the retail brokerage division of the Company.  Pursuant to the agreement, in exchange for receipt of the assets of UHFS set forth above, the Company agreed to issue 500,000 restricted IMFD shares and pay a deferred cash earn out payment totaling a maximum of $900,000, to be paid in 21 quarterly installments.  On March 7, 2007, the Company issued 500,000 restricted common shares to United Heritage Financial Group, Inc.  As a result of this issuance, $175,000 was recorded by the Company as goodwill relating to the purchase of the assets.  The liability relating to this acquisition is valued at approximately  $888,000 and was also recorded by the Company as goodwill.

 

NOTE 5 - GOODWILL

 

The changes in the carrying amount of goodwill for the three-month period ended March 31, 2007, are as follows:

 

 

   Mutual Fund

  Services

   Broker-Dealer

         Services

      Total

 

Balance as of January 1, 2007

$

7,314,049

$

2,478,752

$

9,792,801

Goodwill acquired during the period

 

-

 

1,113,634

 

1,113,634

Goodwill acquisition price adjustment during the period (see Note 4)

 

(4,024)

 

-

 

(4,024)

Impairment losses

 

-

 

-

 

-

Balance as of March 31, 2007

$

7,310,025

$

3,592,386

$

10,902,411

 

The Company tests goodwill for impairment annually, during the second quarter of each fiscal year, at the reporting unit level using a fair value approach, in accordance with the provisions of SFAS No. 142.  The annual testing resulted in no impairment charges to goodwill in 2006.  If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests.

 

NOTE 6 - STOCK WARRANTS, STOCK SPLITS, AND STOCK OPTIONS

 

In December of 2005, the Company adopted FASB Statement No. 123R, "Share-Based Payment," ("SFAS No. 123R") which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.  The Company adopted SFAS No. 123R using the modified retroactive restatement method, which requires the restatement of all periods presented to reflect stock-based employee compensation cost under the fair value-based accounting method for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 1994.  Total compensation costs and deferred tax benefits recognized for stock-based compensation awards for the three-month periods ended March 31, 2007 and 2006, were as follows:

 

 

 

2007

 

2006

Compensation costs

$

5,100

$

61,600

Less:  deferred tax benefit

 

2,000

 

24,150

Compensation costs, net of taxes

$

3,100

$

37,450

 


 

Option activity for the twelve-month period ended December 31, 2006 and the three-month period ended March 31, 2007 was as follows:

 

 

   Number of

    Options

Weighted Average Exercise Price per Share

Weighted Average Grant Date Fair Value

Aggregate

Intrinsic Value

 

 

Outstanding on January 1, 2006

5,248,113

$

.53

$

.27

$

0

 

Granted

510,000

 

.49

 

.26

 

 

 

Exercised

-

 

-

 

-

 

 

 

Canceled

-

 

-

 

-

 

 

Outstanding on December 31, 2006

5,758,113

$

.53

$

.27

$

608,000

 

Granted

10,000

 

.50

 

.51

 

 

 

Exercised

-

 

-

 

-

 

 

 

Canceled

-

 

-

 

-

 

 

Outstanding on March 31, 2007

5,768,113

$

.53

$

.27

$

1,765,100

 

Exercisable options at December 31, 2006 and March 31, 2007 were 5,758,113 and 5,768,113, respectively.

 

NOTE 7 - DEBT

 

The Company has received a new operating line of credit from First Western Bank & Trust in the amount of $1 million.  In March of 2007, the Company received a $120,025 advance on the line of credit.  The Company currently has approximately $880,000 still available through the line of credit, which carries an interest rate of 8.00%.  The Company anticipates that the proceeds received from the line of credit will be used primarily to pay for sales costs in the Funds.

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

GENERAL

 

Integrity Mutual Funds, Inc., derives a portion of its revenues and net income from providing investment management, distribution, shareholder services, fund accounting, and other related administrative services to the open-end investment companies known as "Integrity Mutual Funds," "Integrity Managed Portfolios," and "The Integrity Funds," hereinafter collectively referred to as "the Funds."  Integrity Mutual Funds currently consists of three open-end investment companies, including ND Tax-Free Fund, Inc., Montana Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.  Integrity Managed Portfolios currently consists of one open-end investment company containing six separate series, including the Kansas Municipal Fund, Kansas Insured Intermediate Fund, Nebraska Municipal Fund, Oklahoma Municipal Fund, Maine Municipal Fund, and New Hampshire Municipal Fund.  The Integrity Funds currently consists of one open-end investment company containing seven separate series, including Integrity Value Fund, Integrity Small Cap Growth Fund, Integrity Health Sciences Fund, Integrity Technology Fund, Integrity High Income Fund, Integrity Growth & Income Fund, and Integrity All Season Fund.  Capital Financial Services, Inc. ("CFS"), the Company's broker-dealer subsidiary, provides another substantial portion of revenues through sales of mutual funds, insurance products, and various other securities.

 

The Company organizes its current business units into two reportable segments: mutual fund services and broker-dealer services. The mutual fund services segment provides investment advisory, distribution, shareholder services, fund accounting, and other related administrative services to the Funds. The broker-dealer services segment distributes securities and insurance products to retail investors through a network of registered representatives.

 

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 was retained.


 

Segment Information

 

 

       Mutual Fund

 

        Broker-Dealer

 

 

As of, and for the three months ended:

      Services

 

       Services

 

                 Total

 

March 31, 2007

Revenues from external customers

$

1,873,133

$

6,398,265

$

8,271,398

Inter-segment revenues

 

-

 

25,948

 

25,948

Interest expense

 

81,085

 

-

 

81,085

Stock-based employee compensation

 

5,100

 

-

 

5,100

Sales commissions amortized

 

105,185

 

-

 

105,185

Depreciation and amortization

 

104,620

 

2,037

 

106,657

Income (loss) before income tax benefit (expense)

 

(545,997)

 

191,952

 

(354,045)

Income tax benefit (expense)

 

197,674

 

(75,200)

 

122,474

Net income (loss)

 

(348,323)

 

116,752

 

(231,571)

Segment assets

 

13,892,685

 

3,082,728

 

16,975,413

Expenditure for segment assets

 

22,719

 

27,419

 

50,138

 

March 31, 2006

Revenues from external customers

$

1,470,061

$

4,877,603

$

6,347,664

Inter-segment revenues

 

-

 

11,825

 

11,825

Interest expense

 

83,800

 

-

 

83,800

Stock-based employee compensation

 

61,600

 

-

 

61,600

Sales commissions amortized

 

73,728

 

-

 

73,728

Depreciation and amortization

 

28,078

 

717

 

28,795

Income (loss) before income tax benefit (expense)

 

(309,723)

 

161,562

 

(148,161)

Income tax benefit (expense)

 

93,397

 

(63,300)

 

30,097

Net income (loss)

 

(216,326)

 

98,262

 

(118,064)

Segment assets

 

12,914,652

 

2,360,043

 

15,274,695

Expenditure for segment assets

 

8,952

 

576

 

9,528

 

Reconciliation of Segment Information

 

 

         For the Three Months Ended

 

          March 31, 2007

         March 31, 2006

Revenues:

 

 

 

 

Total revenues for reportable segments

 

8,297,346

 

6,359,489

Elimination of inter-company revenues

 

(25,948)

 

(11,825)

Consolidated total revenues

$

8,271,398

$

6,347,664

 

 

 

 

 

Profit:

 

 

 

 

Total reportable segment loss

$

(231,571)

$

(118,064)

 

 

 

 

 

Assets:

 

 

 

 

Total assets for reportable segments

$

16,975,413

$

15,274,695

Elimination of inter-company receivables

 

(78,392)

 

(78,392)

Consolidated assets

$

16,897,021

$

15,196,303

 

A substantial portion of the Company's revenues depends upon the amount of assets under its management. Assets under management can be affected by the addition of new funds to the group, the acquisition of another investment management company, purchases and redemptions of mutual fund shares, and investment performance, which may depend on general market conditions.


 

ASSETS UNDER MANAGEMENT

 

By Investment Objective

 

 

 

 

 

 

 

As of March 31,

        2007

          2006

% Change

 

FIXED INCOME

 

 

 

 

 

Tax-Free Funds

$

206,582,433

$

212,246,909

(2.7)%

Taxable Funds (Corporate/Government)

 

166,402,467

 

76,372,537

117.9 %

 

 

 

 

 

 

TOTAL FIXED INCOME FUNDS

$

372,984,900

$

288,619,446

29.2 %

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Equity Funds

$

69,116,585

$

98,245,853

(29.6)%

Fund of Funds

 

11,905,290

 

6,130,226

94.2 %

 

 

 

 

 

 

TOTAL EQUITY FUNDS

$

81,021,875

$

104,376,079

(22.4)%

 

 

 

 

 

 

TOTAL ASSETS UNDER MANAGEMENT

$

454,006,775

$

392,995,525

15.5 %

 

 

 

 

 

 

Average for the three month periods

$

451,680,683

$

392,380,471

15.1 %

 

Assets under the Company's management were $454,006,775 at March 31, 2007, an increase of 2.7% from $442,008,564 at December 31, 2006, and an increase of 15.5% from $392,995,525 at March 31, 2006.

 

RESULTS OF OPERATIONS

 

 

Three months ended

March 31,

 

 

 

 

2007

2006

Net loss

$

(231,571)

$

(118,064)

Loss per share:

 

 

 

 

Basic

$

(.02)

$

(.01)

Diluted

$

(.02)

$

(.01)

 

The Company reported a net loss for the quarter ended March 31, 2007, of $231,571, compared to a net loss of $118,064 for the same quarter in 2006.

 

Operating revenues

 

Total operating revenues for the quarter ended March 31, 2007 were $8,271,398, an increase of 30.3% from $6,347,664 for the quarter ended March 31, 2006.  The increase results from increased fee income received from the Funds, as well as increased commission and fee income relating to CFS.

 

Fee Income

 

Fee income for the quarter ended March 31, 2007 was $1,957,526, an increase of 33.2% from $1,469,220 for the quarter ended March 31, 2006.  The increase was due to fees derived from asset growth resulting from new sales in certain of the Funds.  The increase was also due to fees derived from additional assets under management in CFS' registered investment advisor, resulting from recruiting efforts during 2006. 

 

The Company receives fees for providing investment advisory services to the Funds.  In some cases, all or a portion of the investment advisory fees received by the Company are paid to outside investment advisors for advisory services provided to the Funds.  These fees constituted 7% of the Company's consolidated revenues for the quarter ended March 31, 2007. 

 

The Company also earns investment advisory fees in connection with CFS' registered investment advisor.  The Company pays the registered representatives a portion of this fee income as commission expense and retains the balance.  These fees constituted 4% of the Company's consolidated revenues for the quarter ended March 31, 2007.


 

The Company receives fees from the Funds for providing transfer agency, fund accounting, and other administrative services.  These fees constituted 8% of the Company's consolidated revenues for the quarter ended March 31, 2007.

 

The Company earns Rule 12b-1 fees in connection with the distribution of Fund shares.  A portion of these fees are paid out to other broker-dealers, with the remaining amount retained by the Company to pay for expenses related to the distribution of the Funds.  These fees constituted 5% of the Company's consolidated revenues for the quarter ended March 31, 2007.

 

Commission Income

 

Commission income includes CFS commissions and 12b-1 fees associated with the sale of mutual funds, insurance products, and various other securities.  The Company pays the registered representatives a percentage of this income as commission expense and retains the balance.  Commission income also includes underwriting fees associated with sales of Fund shares subject to front-end sales loads ("FESLs"), and the dealer commission associated with sales of Fund shares subject to FESLs, which is paid out to other broker-dealers as commission expense.  Commission income for the quarter ended March 31, 2007 was $6,313,872, an increase of 29.4% from $4,878,444 for the quarter ended March 31, 2006.  The increase was due primarily to recruiting efforts for new registered representatives in CFS during 2006.  Commission revenues constituted 76% of the Company's consolidated revenues for the quarter ended March 31, 2007.

 

Operating expenses

 

Total operating expenses for the quarter ended March 31, 2007 were $8,579,339, an increase of 33.5% from $6,426,427 for the quarter ended March 31,2006.  The increase resulted primarily from increased commission expense, which corresponds to increases in fee and commission income.

 

Compensation and benefits

 

Compensation and benefits expense for the quarter ended March 31, 2007 was $1,276,306, an increase of 36.0% from $938,370 for the quarter ended March 31, 2006.  The increase results primarily from increased incentive overrides paid to certain employees for the recruitment of new registered representatives in CFS, the addition of new employee-status wholesalers in the Company's mutual fund segment, and a separation agreement entered into by the Company.

 

The Company compensates a team of employee-status individuals to wholesale the Funds to non-affiliated registered representatives and financial advisors.  Employee-status individuals are paid a base salary, plus an incentive override on sales.  The incentive overrides paid to the wholesalers are calculated on gross sales for each individual can be expected to increase in proportion to an increase in gross sales.  Currently, the wholesaling team consists of eleven wholesalers, nine of which are employee-status.  Management expects to continue to maintain and support the wholesaling team at or near current levels in 2007.

 

On January 24, 2007, the Company announced the retirement of Robert E. Walstad, the Company's founder, chief executive officer and chairman of the board of directors, effective February 1, 2007.  In connection with Mr. Walstad's retirement, the Company entered into a separation agreement with Mr. Walstad.  Under the terms of the separation agreement, subject to Mr. Walstad meeting his obligations thereunder in all respects, Mr. Walstad is entitled to receive a cash payment in the amount of $274,500, options to purchase 60,000 common shares, and certain commission payments.  The $274,500 separation payment was expensed in February of 2007.

 

Commission expense

 

Commission expense for the quarter ended March 31, 2007 was $6,129,591, an increase of 32.3% from $4,631,686 for the quarter ended March 31, 2006. The increase corresponds with the increases in fee and commission income.

 

Sub-advisory expenses

 

Total sub-advisory expenses for the quarter ended March 31, 2007 were $283,352, an increase of 55.7% from $182,011 for the quarter ended March 31, 2006.  The increase was due to higher levels of sub-advisory fees paid due to asset growth resulting from new sales in certain of the Funds.  Sub-advisory fees are paid to outside investment advisors for advisory services provided to some of the Funds.  The amounts of sub-advisory fees paid out are expected to increase as the net asset levels in certain of the Funds continue to increase.

 

Distribution expenses

 

Total distribution expenses for the quarter ended March 31, 2007 were $158,692, an increase of 67.9% from $94,506 for the quarter ended March 31, 2006.  The increase was due to increased sales activity and higher levels of sales in certain of the Funds.

 

The Company compensates two independent contractors to wholesale the Funds to non-affiliated registered representatives and financial advisors.  Contracted individuals are paid on a straight commission basis.  The incentive overrides paid to the wholesalers are calculated on gross sales for each individual and can be expected to increase in proportion to an increase in gross sales.  Employee status and contracted wholesalers are allowed a monthly expense account to cover costs required to support their sales effort.  Currently, the wholesaling team consists of eleven wholesalers, two of which are independent contractors.  Management expects to continue to maintain and support the wholesaling team at or near current levels in 2007.

 

General and administrative expenses

 

Total general and administrative expenses for the quarter ended March 31, 2007 were $519,556, an increase of 8.8% from $477,331 for the quarter ended March 31, 2006.  The increase was due primarily to increased 12b-1 service fees paid to broker-dealers selling the Funds.

 

Sales commissions amortized

 

Sales commissions amortized during the quarter ended March 31, 2007 were $105,185, an increase of 42.7% from $73,728 for the quarter ended March 31, 2006.  The increase was due primarily to increased sales in certain of the Funds.

 

Sales commissions paid to broker-dealers in connection with the sale of shares of the Funds sold without a front-end sales load ("FESL"), which include B and C shares, are capitalized and amortized on a straight-line basis over a period not exceeding eight years, which approximates the period of time during which deferred sales commissions are expected to be recovered from distribution plan payments received from the Funds and from potential contingent deferred sales charges ("CDSC"s) received from shareholders of the Funds.  CDSCs received by the Company are recorded as a reduction of unamortized deferred sales commissions.  In accordance with Statement of Position 98-5, the commissions paid for the sale of Integrity Fund of Funds, Inc.'s shares have been expensed as incurred.  The CDSCs received from early redemptions from Integrity Fund of Funds, Inc. have been recorded as revenue.  Sales commissions amortized can be expected to increase if sales of shares of Funds sold without a FESL increase.

 

Depreciation and amortization

 

Depreciation and amortization expense for the quarter ended March 31, 2007 was $106,657, an increase of 270.4% from $28,795 for the quarter ended March 31, 2006.  The increase was due to accelerated amortization of computer software costs.

 

Liquidity and capital resources

 

Net cash used by operating activities was $318,959 for the quarter ended March 31, 2007, as compared to net cash provided by operating activities of $4,516 during the quarter ended March 31, 2006.

 

Net cash used by investing activities was $100,141 for the quarter ended March 31, 2007, compared to net cash used by investing activities of $9,530 for the quarter ended March 31, 2006.  During the quarter ended March 31, 2007, the Company purchased additional computer equipment and also purchased certain assets from United Heritage Financial Services, Inc.

 

Net cash provided by financing activities was $153,889 for the quarter ended March 31, 2007, compared to net cash used by financing activities of $331,959 for the quarter ended March 31, 2006.  During the quarter ended March 31, 2007, the Company received $60,000 in connection with the exercise of 100,000 outstanding warrants, and a $120,025 advance on a new revolving line of credit with First Western Bank.

 

At March 31,2007, the Company held $1,586,038 in cash and cash equivalents, as compared to $1,851,249 at December 31, 2006.  Liquid assets, which consist of cash and cash equivalents and securities available-for-sale, were $1,586,038 at March 31, 2007, as compared to $1,851,462 at December 31, 2006.  The Company is required to maintain certain levels of cash and liquid securities in its broker-dealer subsidiaries to meet regulatory net capital requirements.

 

In January of 2006, the Company repaid $250,000 in convertible debentures that matured pursuant to its acquisition of CFS, which was paid by using available cash.  In May of 2006, an existing loan with First Western Bank & Trust was modified.  Prior to the modification, the loan had a balance of approximately $628,000.  The modification called for a $301,866 cash injection to the outstanding balance of the loan.  After the modification, the loan carried an interest rate of 8.25%, and based on the monthly payments of $23,200, would have been paid in full in May of 2010.  In June of 2006, the Company paid off its $100,000 revolving line of credit with Wells Fargo Bank, which was paid by utilizing a portion of the proceeds received from the $301,866 cash injection.  In October of 2006, the Company issued a $950,000 convertible promissory note to PawnMart, Inc., in a private placement.  The unsecured note carries an interest rate of 6.5% per annum, payable semi-annually, and matures on October 15, 2016.  The holder of the note has the right, at any time after October 15, 2009, to convert the note in whole or in part, into $0.0001 par value common shares of the Company.  The conversion price is equal to $0.50 per share.  The entire principal amount of the note will automatically convert into common shares at the conversion price on October 15, 2016.  Approximately $845,000 of the $950,000 in convertible promissory note proceeds was used to pay off the existing loan with First Western Bank & Trust mentioned above.

 

The Company has received a new operating line of credit from First Western Bank & Trust in the amount of $1 million.  In March of 2007, the Company received a $120,025 advance on the line of credit.  The Company currently has approximately $880,000 still available through the line of credit, which carries an interest rate of 8.00%.  The Company anticipates that the proceeds received from the line of credit will be used primarily to pay for sales costs in the Funds.

 

The Company has historically relied upon sales of its equity securities and debt instruments, as well as bank loans for liquidity and growth. Management believes that the Company's existing liquid assets, along with cash flow from operations, will provide the Company with sufficient resources to meet its ordinary operating expenses during the next twelve months.  Significant unforeseen or extraordinary expenses may require the Company to seek alternative financing sources, including common or preferred share issuance or additional debt financing.

 

In addition to the liabilities coming due in the next twelve months, management expects that the principal needs for cash may be to advance sales commissions on Funds subject to CDSCs, 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.  Management also expects to realize increases in expenses associated with regulatory compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including increased legal, audit, staff, and consultant expenses.

 

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 subject to CDSCs provide distribution revenue, over time, in the form of 12b-1 payments and, if shares are redeemed within five years, CDSCs.  However, the Company pays commissions on sales of Fund shares subject to CDSCs, reflects such commissions as deferred sales commissions 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 subject to CDSCs increases over time relative to sales of shares subject to FESLs, current distribution expenses may increase relative to current distribution revenues in certain periods, which would negatively impact the Company's cash flow 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 shares subject to CDSCs if sales of Fund shares subject to CDSCs increase significantly.

 

FORWARD-LOOKING STATEMENTS

 

When used herein, in future filings by the Company with the Securities and Exchange Commission ("SEC"), 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, which 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.

 

The Company derives substantially all of its revenues from two sources; commission revenue earned in connection with sales of shares of mutual funds, insurance products, and various other securities; and 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.  If the Company's assets under management decline, or do not grow in accordance with the Company's plans, fee revenues and earnings would be materially adversely affected.  Assets under management 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.

 

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 that offer shares to the investing public in the United States.  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 that 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 fund 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 fact that the investments of some Funds are geographically concentrated within a single state makes the market value of such investments particularly vulnerable to economic conditions within that 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.

 

The following factors, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance:

 

·         General political and economic conditions which may be less favorable than expected;

·         The effect of changes in interest rates, inflation rates, the stock markets, or other financial markets;

·         Unfavorable legislative, regulatory, or judicial developments;

·         Incidence and severity of catastrophes, both natural and man-made;

·         Changes in accounting rules, policies, practices, and procedures which may adversely affect the business;

·         Terrorist activities or other hostilities that may adversely affect the general economy.

 

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) and Rule 15d-15(e) under 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 have concluded that the Company's disclosure controls and procedures are effective as of March 31, 2007, and that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed and summarized, and reported within the time periods specified by the SEC's rules and forms.

 

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

 

None 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company has issued the following securities in the past quarter without registering the securities under the Securities Act:

 

In March of 2007, the Company issued 500,000 common shares to United Heritage Financial Group, Inc. in connection with its purchase of certain assets of United Heritage Financial Services, Inc.  As a result of this issuance, $175,000 was recorded by the Company as goodwill relating to the purchase of the assets.  The securities were issued on a private placement basis, exempt from registration under federal securities laws pursuant to Section 4(2) of the Securities Act of 1933, as amended, and any state registration requirements, and are subject to resale restrictions on unregistered securities.

 

Also in March of 2007, warrants to purchase 100,000 common shares were exercised by Ancora Partners LLC.  The warrants have a strike price of $0.60 per share.  The securities were issued on a private placement basis, exempt from registration under federal securities laws pursuant to Section 4(2) of the Securities Act of 1933, as amended, and any state registration requirements, and are subject to resale restrictions on unregistered securities.

 

Small Business Issuer Repurchases of Equity Securities:

 

Period

Total Number of Shares Purchased

Average Price Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs

January 2007

-

-

-

$597,754

February 2007

-

-

-

$597,754

March 2007

-

-

-

$597,754

Total

-

-

-

$597,754

 

Item 3.

Defaults Upon Senior Securities

 

None

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

None

 

Item 5.

Other Information

 

None

 

Item 6.

Exhibits

 

Exhibits

 

10.1

Separation Agreement - Robert E. Walstad (incorporated by reference to Exhibit 10.8(f) contained in the Company's Annual Report on Form 10-KSB, (File No. 0-25958), filed with the Commission March 16, 2007) *

31.1

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act

31.2

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a) and 15d-14(a) of the Exchange Act

32.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350

32.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350

 

 

 

* Indicates Management Contract or Compensatory Plan

 


 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

INTEGRITY MUTUAL FUNDS, INC.

 

 

 

Date:

December 14, 2007

By /s/ Mark R. Anderson

 

 

 

 

 

Mark R. Anderson

 

 

Chief Executive Officer,

 

 

President, and Director

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Date:

December 14, 2007

By /s/ Heather Ackerman

 

 

 

 

 

Heather Ackerman

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)