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 September 30, 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 October 31, 2007, there were 14,455,943 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 September 30, 2007, as filed on November 13, 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 September 30, 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 -
	September 30, 2007 and December 31, 2006	3
	Condensed Consolidated Statements of Operations -
	Three Months Ended September 30, 2007 and 2006	5
	Condensed Consolidated Statements of Operations -
	Nine Months Ended September 30, 2007 and 2006	6
	Condensed Consolidated Statements of Cash Flows -
	Nine Months Ended September 30, 2007 and 2006	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Controls and Procedures	18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
	SIGNATURES	20

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS

 

 

			(Unaudited)
			September 30,				December 31,
			2007				2006
CURRENT ASSETS
	Cash and cash equivalents	$		2,619,834	$	1,851,249
	Securities available-for-sale			-		213
	Accounts receivable			2,536,330		1,793,645
	Income taxes receivable			-		780
	Deferred tax asset			-		5,833
	Prepaids			70,822		88,894
	Total current assets	$		5,226,986	$	3,740,614
PROPERTY AND EQUIPMENT		$		2,139,557	$	1,989,312
	Less accumulated depreciation			(876,491)		(811,854)
	Net property and equipment	$		1,263,066	$	1,177,458
OTHER ASSETS
	Deferred sales commissions	$		244,595	$	168,686
	Goodwill			10,914,587		9,792,801
	Deferred tax asset			247,275		335,995
	Other assets (net of accumulated amortization			221,593		250,576
	of $382,891 for 2007 and $253,961 for 2006)
	Total other assets	$		11,628,050	$	10,548,058
TOTAL ASSETS		$		18,118,102	$	15,466,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

					(Unaudited)
					September 30,				December 31,
					2007				2006
CURRENT LIABILITIES
		Service fees payable		$		127,669	$	115,225
		Accounts payable				439,359		261,767
		Income taxes payable				153,571		-
		Other current liabilities				2,481,483		1,600,772
		Current portion of long-term debt				895,085		22,344
		Total current liabilities		$		4,097,167	$	2,000,108
LONG-TERM LIABILITIES
		Notes payable		$		364,242	$	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				1,035,950		198,507
		Less current portion of long-term debt				(895,085)		(22,344)
		Total long-term liabilities		$		4,016,107	$	4,067,814
TOTAL LIABILITIES				$		8,113,274	$	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;				1,446		1,372
			14,455,943 and 13,717,146 shares issued and outstanding, respectively
		Additional paid in capital - common stock				10,284,271		9,967,973
		Receivable - unearned ESOP shares				(57,052)		(62,072)
		Accumulated deficit				(1,748,837)		(2,034,055)
		Accumulated other comprehensive loss				-		(10)
	TOTAL STOCKHOLDERS' EQUITY			$		10,004,828	$	9,398,208
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY				$		18,118,102	$	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
					September 30,
				2007		2006
OPERATING REVENUES
	Fee income	$	2,094,858				$	1,823,206
	Commissions		8,102,345					5,192,070
	Total revenue	$	10,197,203				$	7,015,276
OPERATING EXPENSES
	Compensation and benefits	$	998,321				$	1,144,177
	Commission expense		7,867,335					5,125,003
	Sub-advisory expenses		219,886					245,277
	General and administrative expenses		571,825					560,241
	Sales commissions amortized		110,672					80,894
	Depreciation and amortization		27,445					27,801
	Total operating expenses	$	9,795,484				$	7,183,393
OPERATING INCOME (LOSS)		$	401,719				$	(168,117)
OTHER INCOME (EXPENSES)
	Interest and other income	$	159,397				$	87,287
	Interest expense		(83,670)					(94,377)
	Net other income (expenses)	$	75,727				$	(7,090)
INCOME (LOSS)  BEFORE INCOME TAX BENEFIT (EXPENSE)		$	477,446				$	(175,207)
INCOME TAX BENEFIT (EXPENSE)			(193,095)					56,406
NET INCOME (LOSS)		$	284,351				$	(118,801)
NET INCOME (LOSS) PER SHARE:
	Basic	$	.02				$	(.01)
	Diluted	$	.01				$	(.01)
AVERAGE COMMON SHARES OUTSTANDING:
	Basic		14,507,171					13,754,430
	Diluted		21,412,398					13,754,430

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

					(Unaudited)
					Nine Months Ended
					September 30,
				2007		2006
OPERATING REVENUES
	Fee income	$	6,109,570				$	5,038,135
	Commissions		22,799,266					14,681,006
	Total revenue	$	28,908,836				$	19,719,141
OPERATING EXPENSES
	Compensation and benefits	$	3,245,240				$	2,936,363
	Commission expense		21,901,738					14,331,318
	Sub-advisory expenses		743,712					633,722
	General and administrative expenses		1,921,688					1,647,780
	Sales commissions amortized		326,595					238,001
	Depreciation and amortization		195,267					85,366
	Total operating expenses	$	28,334,240				$	19,782,550
OPERATING INCOME (LOSS)		$	574,596				$	(153,409)
OTHER INCOME (EXPENSES)
	Interest and other income	$	302,289				$	199,924
	Interest expense		(248,598)					(259,877)
	Net other income (expenses)	$	53,691				$	(59,953)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)		$	628,287				$	(213,362)
INCOME TAX BENEFIT (EXPENSE)			(274,445)					63,363
NET INCOME (LOSS)		$	353,842				$	(149,999)
NET INCOME (LOSS) PER SHARE:
	Basic	$	.02				$	(.02)
	Diluted	$	.02				$	(.02)
AVERAGE COMMON SHARES OUTSTANDING:
	Basic		14,308,664					13,676,009
	Diluted		18,436,152					13,676,009

 

 

 

 

 

 

 

 

 

 

 

 

 

SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

							(Unaudited)
							Nine Months Ended
							September 30,
						2007		2006
CASH FLOWS FROM OPERATING ACTIVITIES
		Net income (loss)			$	353,842			$	(149,999)
		Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Depreciation and amortization			193,567				85,366
			Sales commissions amortized/charged off			326,234				237,375
			Recruiting expense - stock			-				7,000
			Loss on sale of available-for-sale securities			11				-
			Compensation expense - options			77,700				129,200
		(Increase) decrease in:
			Accounts receivable			(742,685)				(372,538)
			Income taxes receivable			780				154,246
			Prepaids			18,072				24,511
			Deferred tax asset			94,553				(36,802)
			Deferred sales commissions capitalized, net of CDSC collected			(402,143)				(232,451)
			Other assets			(99,947)				3,451
		Increase (decrease) in:
			Service fees payable			12,444				33,424
			Accounts payable			177,592				123,159
			Income taxes payable			153,571				-
			Other liabilities			760,626				364,143
				Net cash provided by operating activities	$	924,217			$	370,085
CASH FLOWS FROM INVESTING ACTIVITIES
		Purchase of property and equipment			$	(150,245)			$	(31,945)
		Purchase of available-for-sale securities				(2)				(5)
		Sale of available-for-sale securities				215				-
		Purchase of goodwill				(109,343)				-
				Net cash used by investing activities	$	(259,375)			$	(31,950)
CASH FLOWS FROM FINANCING ACTIVITIES
		Redemption of common stock			$	-			$	(953)
		Issuance of common stock				63,672				-
		Short-term borrowing				120,085				301,866
		Reduction of short-term borrowing				-				(100,000)
		Reduction of notes payable				(16,409)				(158,025)
		Repayments from ESOP				5,020				5,020
		Preferred dividends paid				(68,625)				(68,625)
		Redemption of convertible debentures				-				(250,000)
				Net cash provided (used) by financing activities	$	103,743			$	(270,717)
NET INCREASE IN CASH AND CASH EQUIVALENTS					$	768,585			$	67,418
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					$	1,851,249				1,537,391
	CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	2,619,834			$	1,604,809
	SUPPLEMENTAL SCHEDULE OF NONCASH
	INVESTING AND FINANCING ACTIVITIES:
		Change in unrealized gain (loss) on available-for-sale securities			$	11			$	(2)
		Increase (decrease) in goodwill				1,012,443				(24,941)
		Increase (decrease) in other long-term liabilities				837,443				(24,941)
		Increase (decrease) in common stock				175,000				-
		Recruiting expense - stock				-				7,000
		Compensation expense - options				77,700				129,200
		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)

September 30, 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 nine months ended September 30, 2007, are not necessarily indicative of operating results for the entire year.

 

NOTE 2 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

The Company adopted the Financial Accounting Standards Board's Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The adoption of FIN 48 did not have a significant effect on the Company's consolidated financial statements.

 

Statement of Financial Accounting Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," was issued in September of 2006.  SFAS No. 157 provides a definition of fair value and establishes a framework for measuring fair value.  SFAS No. 157 clarifies the definition of fair value in an effort to eliminate inconsistencies in the application of fair value under generally accepted accounting principles.  Additional disclosure focusing on the methods used to determine fair value is also required.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively.  The Company does not expect that the adoption of SFAS No. 157 will have a material impact on the Company's financial position and results of operations.

 

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 - 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 5 - 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 158,603 common shares was made, which reflected the assets of the acquired funds at the one-year anniversary.  In June of 2007, the two-year anniversary payment of 138,797 common shares was made, which reflected the assets of the acquired funds at the two-year anniversary.  The liability relating to this acquisition is valued at approximately $197,000 as of September 30, 2007 and has been recorded by the Company as goodwill.

 

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 $839,000 as of September 30, 2007, and has also been recorded by the Company as goodwill.

 

NOTE 6 - GOODWILL

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 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		-		1,152,569		1,152,569
Goodwill acquisition price adjustment during the period (see Note 5)		(1,443)		(29,340)		(30,783)
Impairment losses		-		-		-
Balance as of September 30, 2007	$	7,312,606	$	3,601,981	$	10,914,587

 

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 2007.  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 7 - 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 nine months ended September 30, 2007 and 2006, were as follows:

 

		2007		2006
Compensation costs	$	77,700	$	129,200
Less:  deferred tax benefit		30,440		50,680
Compensation costs, net of taxes	$	47,260	$	78,520

 

 

Option activity for the twelve months ended December 31, 2006 and the nine months ended September 30, 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	130,000		.86		.60
	Exercised	-		-		-
	Canceled	-		-		-
Outstanding on September 30, 2007		5,888,113	$	.54	$	.28	$	714,100

 

Exercisable options at December 31, 2006 and September 30, 2007 were 5,758,113 and 5,888,113, respectively.

 

NOTE 8 - DEBT

 

Long-term debt at September 30, 2007 and December 31, 2006 was as follows:

 

A summary of the terms of the current long-term debt agreements follows:

 

First Western Bank - In June of 1999, the Company converted its outstanding balance of $500,000 borrowed on its bank line-of-credit to long-term debt.  The debt was refinanced in October of 2005 and currently carries an interest rate of 7.25%, with monthly payments of $4,105.  On October 1, 2010, the remaining balance will be due in full. 

 

Subordinate Commercial Notes - In July of 2002, the Company approved a $1 million intra-state subordinate commercial note offering limiting the sale in North Dakota, to North Dakota residents only.  The subordinate commercial notes do not represent ownership in the Company.  As of September 30, 2007, $561,000 in subordinate commercial notes was outstanding.  The subordinate commercial notes carry an interest rate of 9% per annum, payable semi-annually, and mature June 30, 2008.  The Company can call the subordinate commercial notes at par anytime after July 1, 2003.

 

Subordinate Corporate Notes  - In May of 2005, the Company approved a $2 million intra-state subordinate corporate note offering limiting the sale in North Dakota, to North Dakota residents only.  The subordinate corporate notes do not represent ownership in the Company.  As of September 30, 2007, $2,000,000 in subordinate corporate notes was outstanding.  The subordinate corporate notes carry an interest rate of 9.25% per annum, payable annually, and mature January 1, 2011.  The Company can call the subordinate corporate notes at par anytime after December 1, 2007.

 

Convertible Promissory Note  - 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 shall be equal to $0.50 per share.  The entire principal amount of this note shall be automatically converted into common shares at the conversion price on October 15, 2016.   

 

Future Payments on Acquisitions - see Note 5 - Business Acquisitions

 

NOTE 9 - EARNINGS PER SHARE

 

Basic earnings per share are computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common shares had been converted to common shares.  The following reconciles amounts reported in the financial statements:

 

	Three Months Ended September 30, 2007							Three Months Ended September 30, 2006
		Numerator	Denominator		Per Share Amount		Numerator		Denominator		Per Share Amount
Net Income (Loss)	$	284,351				$	(118,801)
Less:  Preferred Stock Dividends		(22,875)					(22,875)
Income Available to Common Shareholders - Basic Earnings per Share	$	261,476	14,507,171	$	.02	$	(141,676)		13,754,430	$	(.01)
Effect of Dilutive Securities:
Convertible Promissory Note Interest (net of taxes)		9,263	1,900,000				-		-
Preferred Stock Dividends		22,875	3,050,000				-		-
Stock Options and Warrants		-	1,955,227				-		-
Income Available to Common Shareholders - Diluted Earnings per Share	$	293,614	21,412,398	$	.01	$	(141,676)		13,754,430	$	(.01)

 

	Nine Months Ended September 30, 2007							Nine Months Ended September 30, 2006
		Numerator	Denominator		Per Share Amount		Numerator		Denominator		Per Share Amount
Net Income (Loss)	$	353,842				$	(149,999)
Less:  Preferred Stock Dividends		(68,625)					(68,625)
Income (Loss) Available to Common Shareholders - Basic Earnings per Share	$	285,217	14,308,664	$	.02	$	(218,624)		13,676,009	$	(.02)
Effect of Dilutive Securities:
Convertible Promissory Note Interest (net of taxes)		27,788	1,900,000				-		-
Preferred Stock Dividends		-	-				-		-
Stock Options and Warrants		-	2,227,488				-		-
Income (Loss) Available to Common Shareholders - Diluted Earnings per Share	$	313,005	18,436,152	$	.02	$	(218,624)		13,676,009	$	(.02)

 

Options and warrants to purchase 2,671,113 common shares at exercise prices between $0.825 and $1.43 were outstanding at September 30, 2007, but were not included in the computation of diluted earnings per share for the quarter ending September 30, 2007.  Options to purchase 573,113 common shares at exercise prices between $1.00 and $1.43 were outstanding at September 30, 2007, but were not included in the computation of diluted earnings per share for the nine-month period ending September 30, 2007.  The options and warrants were not included in the calculations because their exercise prices were greater than the average market price of the common shares during those periods.

 

The Company had outstanding, at September 30, 2007, 3,050,000 Series A preferred shares.  The preferred shares are entitled to receive a cumulative dividend at a rate of 6% per year, payable quarterly.  The preferred shares are convertible to the Company's common shares at the rate of one share of common shares for one share of Series A preferred shares at any time after issuance.

 

Additionally, the Company had outstanding at September 30, 2007, a $950,000 convertible promissory note.  The unsecured note carries an interest rate of 6.5% per year, 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 common shares of the Company at a conversion price of $0.50 per share.  The entire principal amount of this note shall be automatically converted into common shares at the conversion price on October 15, 2016.

 

The Series A preferred shares were not included in the computation of diluted earnings per share for the nine months ended September 30, 2007, because their effect was anti-dilutive.

 

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 Small Cap Growth Fund, Integrity Health Sciences Fund, Integrity Technology Fund, Integrity High Income Fund, Integrity Growth & Income Fund, Integrity Total Return 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.

 

Segment Information

 

	Mutual Fund		Broker-Dealer
As of, and for the three months ended:	Services		Services		Total

 

September 30, 2007

Revenues from external customers	$	1,616,092	$	8,581,111	$	10,197,203
Inter-segment revenues		-		42,536		42,536
Interest expense		83,670		-		83,670
Stock-based employee compensation		27,600		-		27,600
Sales commissions amortized		110,672		-		110,672
Depreciation and amortization		24,625		2,820		27,445
Income (loss) before income tax benefit (expense)		(18,419)		495,865		477,446
Income tax benefit (expense)		1,342		(194,437)		(193,095)
Net income (loss)		(17,077)		301,428		284,351

 

September 30, 2006

Revenues from external customers	$	1,641,481	$	5,373,795	$	7,015,276
Inter-segment revenues		-		38,014		38,014
Interest expense		94,377		-		94,377
Stock-based employee compensation		45,600		-		45,600
Sales commissions amortized		80,894		-		80,894
Depreciation and amortization		26,850		951		27,801
Income (loss) before income tax benefit (expense)		(424,730)		249,523		(175,207)
Income tax benefit (expense)		154,206		(97,800)		56,406
Net income (loss)		(270,524)		151,723		(118,801)

 

 

	Mutual Fund		Broker-Dealer
As of, and for the nine months ended:	Services		Services		Total

 

September 30, 2007

Revenues from external customers	$	5,260,332	$	23,648,504	$	28,908,836
Inter-segment revenues		-		111,053		111,053
Interest expense		248,598		-		248,598
Stock-based employee compensation		77,700		-		77,700
Sales commissions amortized		326,595		-		326,595
Depreciation and amortization		187,946		7,321		195,267
Income (loss) before income tax benefit (expense)		(603,026)		1,231,313		628,287
Income tax benefit (expense)		208,255		(482,700)		(274,445)
Net income (loss)		(394,771)		748,613		353,842
Segment assets		13,961,261		4,235,233		18,196,494
Expenditure for segment assets		110,782		39,463		150,245

 

September 30, 2006

Revenues from external customers	$	4,718,975	$	15,000,166	$	19,719,141
Inter-segment revenues		-		77,091		77,091
Interest expense		259,877		-		259,877
Stock-based employee compensation		129,200		-		129,200
Sales commissions amortized		238,001		-		238,001
Depreciation and amortization		83,000		2,366		85,366
Income (loss) before income tax benefit (expense)		(883,620)		670,258		(213,362)
Income tax benefit (expense)		326,063		(262,700)		63,363
Net income (loss)		(557,557)		407,558		(149,999)
Segment assets		12,834,470		2,636,104		15,470,574
Expenditure for segment assets		21,888		10,057		31,945

 

Reconciliation of Segment Information

 

			For the Three Months Ended
	September 30, 2007					September 30, 2006
Revenues:
Total revenues for reportable segments		10,239,739			7,053,290
Elimination of inter-company revenues		(42,536)			(38,014)
Consolidated total revenues	$	10,197,203		$	7,015,276
Profit:
Total reportable segment income (loss)	$	284,351		$	(118,801)

 

			For the Nine Months Ended
	September 30, 2007			September 30, 2006
Revenues:
Total revenues for reportable segments		29,019,889			19,796,232
Elimination of inter-company revenues		(111,053)			(77,091)
Consolidated total revenues	$	28,908,836		$	19,719,141
Profit:
Total reportable segment income (loss)	$	353,842		$	(149,999)
Assets:
Total assets for reportable segments	$	18,196,494		$	15,470,574
Elimination of inter-company receivables		(78,392)			(78,392)
Consolidated assets	$	18,118,102		$	15,392,182

 

 

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 September 30,
	2007	2006	% Change

 

FIXED INCOME
Tax-Free Funds	$	199,795,932	$	211,374,142	(5.5)%
Taxable Funds (Corporate/Government)		159,403,734		123,235,706	29.3 %
TOTAL FIXED INCOME FUNDS	$	359,199,666	$	334,609,848	7.3 %
EQUITY
Equity Funds	$	55,773,419	$	84,357,640	(33.9)%
Fund of Funds		14,043,270		7,675,260	83.0 %
TOTAL EQUITY FUNDS	$	69,816,689	$	92,032,900	(24.1)%
TOTAL ASSETS UNDER MANAGEMENT	$	429,016,355	$	426,642,748	0.6 %
Average for the Nine Month Periods	$	441,967,205	$	402,373,071	9.8 %

 

Assets under the Company's management were $429,016,355 at September 30, 2007, a decrease of 2.9% from $442,008,564 at December 31, 2006, and an increase of 0.6% from $426,642,748 at September 30, 2006.

 

RESULTS OF OPERATIONS

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net income (loss)	$	284,351	$	(118,801)	$	353,842	$	(149,999)
Income (loss) per share:
Basic	$	.02	$	(.01)	$	.02	$	(.02)
Diluted	$	.01	$	(.01)	$	.02	$	(.02)

 

The Company reported net income for the quarter ended September 30, 2007, of $284,351, compared to a net loss of $118,801 for the same quarter in 2006.  The Company reported net income for the nine months ended September 30, 2007 of $353,842, compared to a net loss of $149,999 for the same period in 2006.

 

Operating revenues

 

Total operating revenues for the quarter ended September 30, 2007 were $10,197,203, an increase of 45.4% from $7,015,276 for the quarter ended September 30, 2006.  Total operating revenues for the nine months ended September 30, 2007 were $28,908,836, an increase of 46.6% from $19,719,141 for the nine months ended September 30, 2006.  The increases result 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 September 30, 2007 was $2,094,858, an increase of 14.9% from $1,823,206 for the quarter ended September 30, 2006.  Fee income for the nine months ended September 30, 2007 was $6,109,570, an increase of 21.3% from $5,038,135 for the nine months ended September 30, 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 and 2007. 

 

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 6% of the Company's consolidated revenues for the nine months ended September 30, 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 5% of the Company's consolidated revenues for the nine months ended September 30, 2007.

 

The Company receives fees from the Funds for providing transfer agency, fund accounting, and other administrative services.  These fees constituted 6% of the Company's consolidated revenues for the nine months ended September 30, 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 4% of the Company's consolidated revenues for the nine months ended September 30, 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 September 30, 2007 was $8,102,345, an increase of 56.1% from $5,192,070 for the quarter ended September 30, 2006.  Commission income for the nine months ended September 30, 2007 was $22,799,266, an increase of 55.3% from $14,681,006 for the nine months ended September 30, 2006.  The increase was due primarily to recruiting efforts for new registered representatives in CFS during 2006 and 2007.  Commission revenues constituted 79% of the Company's consolidated revenues for the nine months ended September 30, 2007.

 

Operating expenses

 

Total operating expenses for the quarter ended September 30, 2007 were $9,795,484, an increase of 36.4% from $7,183,393 for the quarter ended September 30, 2006.  Total operating expenses for the nine months ended September 30, 2007 were $28,334,240, an increase of 43.2% from $19,782,550 for the nine months ended September 30, 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 September 30, 2007 was $998,321, a decrease of 12.7% from $1,144,177 for the quarter ended September 30, 2006.  Compensation and benefits expense for the nine months ended September 30, 2007 was $3,245,240, an increase of 10.5% from $2,936,363 for the nine months ended September 30, 2006.  The increase for the nine-month period results primarily from increased incentive overrides paid to certain employees for the recruitment of new registered representatives in CFS, the addition of 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 and can be expected to increase in proportion to an increase in gross sales.  Currently, the wholesaling team consists of eight wholesalers, four 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 September 30, 2007 was $7,867,335, an increase of 53.5% from $5,125,003 for the quarter ended September 30, 2006. Commission expense for the nine months ended September 30, 2007 was $21,901,738, an increase of 52.8% from $14,331,318 for the nine months ended September 30, 2006. The increases correspond with the increases in fee and commission income.

 

Sub-advisory expenses

 

Total sub-advisory expenses for the quarter ended September 30, 2007 were $219,886, a decrease of 10.4% from $245,277 for the quarter ended September 30, 2006.  Total sub-advisory expenses for the nine months ended September 30, 2007 were $743,712, an increase of 17.4% from $633,722 for the nine months ended September 30, 2006.  The increase for the nine-month period 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 certain of the Funds.  The amounts of sub-advisory fees paid out can be expected to increase as the net asset levels in certain of the Funds continue to increase.

 

General and administrative expenses

 

Total general and administrative expenses for the quarter ended September 30, 2007 were $571,825, an increase of 2.1% from $560,241 for the quarter ended September 30, 2006.  Total general and administrative expenses for the nine months ended September 30, 2007 were $1,921,688, an increase of 16.6% from $1,647,780 for the nine months ended September 30, 2006.  The increase was due primarily to increased distribution costs resulting from increased sales activity and higher levels of sales in certain of the Funds, as well as increased 12b-1 service fees paid to broker-dealers selling the Funds.

 

The Company compensates four 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 wholesalers are allowed a monthly expense account to cover costs required to support their sales effort.  Currently, the wholesaling team consists of eight wholesalers, four of which are independent contractors.  Management expects to continue to maintain and support the wholesaling team at or near current levels in 2007.

 

Sales commissions amortized

 

Sales commissions amortized during the quarter ended September 30, 2007 were $110,672, an increase of 36.8% from $80,894 for the quarter ended September 30, 2006.  Sales commissions amortized during the nine months ended September 30, 2007 were $326,595, an increase of 37.2% from $238,001 for the nine months ended September 30, 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.  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 September 30, 2007 was $27,445, a decrease of 1.3% from $27,801 for the quarter ended September 30, 2006.  Depreciation and amortization expense for the nine months ended September 30, 2007 was $195,267, an increase of 128.7% from $85,366 for the nine months ended September 30, 2006.  The increase was due to accelerated amortization of computer software costs.

 

Liquidity and capital resources

 

Net cash provided by operating activities was $924,217 for the nine months ended September 30, 2007, as compared to net cash provided by operating activities of $370,085 during the nine months ended September 30, 2006.

 

Net cash used by investing activities was $259,375 for the nine months ended September 30, 2007, compared to net cash used by investing activities of $31,950 for the nine months ended September 30, 2006.  During the nine months ended September 30, 2007, the Company purchased additional computer equipment, as well as certain assets from United Heritage Financial Services, Inc.

 

Net cash provided by financing activities was $103,743 for the nine months ended September 30, 2007, compared to net cash used by financing activities of $270,717 for the nine months ended September 30, 2006.  During the nine months ended September 30, 2007, the Company received $60,000 in connection with the exercise of 100,000 outstanding warrants, and received a $120,025 advance on a new revolving line of credit with First Western Bank.  Also during the nine months ended September 30, 2007, the Company paid out $68,625 in preferred stock dividends and repaid $16,409 of notes payable.

 

At September 30, 2007, the Company held $2,619,834 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 $2,619,834 at September 30, 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 an 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 over 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 September 30, 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 over financial reporting during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

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:

 

None

 

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
July 2007	-	-	-	$597,754
August 2007	-	-	-	$597,754
September 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

 

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

 

 

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)