<PAGE>
Dear Shareholders,
Both the optimists and the pessimists can find comfort in the latest batch
of economic data. For the optimists, the economy's inflation threatening
growth has lost momentum, lessoning one of the biggest concerns in the
financial markets. In April, job-creation downshifted measurably, retail
sales fell, businesses started with higher inventories, and factories cut
production. Wholesale prices fell for the fourth consecutive month, and the
consumer price index edged up 0.1 percent keeping it on track to increase by
less than 3 percent again this year.
The pessimists look at the same data and put an entirely different spin on
things. They contend that the slowdown was inevitable from the first
quarter's robust six percent pace. Beneath the surface, growth resurgence
will rise with the tight labor market and a jobless rate hovering at a 24 year
low. Also supporting their views are climbing wages, and an upbeat household
sector as indicated by consumer confidence.
For the time being, the Federal Reserve is siding with the optimists. In the
past, this may have provoked a negative reaction in the financial markets, as
investors would worry that the Central Bank was relaxing its anti-inflation
policy. But Chairman Allan Greenspan and his colleagues have built up
formidable inflation-fighting credentials.
During the first half of the year the Fund utilized a partial hedge. Futures
contracts in U.S. Treasury Bonds were employed. In the first quarter as
interest rates rose this had the effect of minimizing share price erosion. In
the second quarter as interest rates retreated share price increases were
tempered. The overall effect to the Fund in the first six months was a
greater degree of share price stability.
Looking into our crystal ball, we feel that the economy's current slowdown
is more likely to be temporary. That prospect increases the odds of a rate
hike by the Federal Reserve in the coming months. As such, we remain
concerned (and have positioned the portfolio accordingly) that a modest
increase in rates may be needed to prevent unbridled growth.
Diversification remains an important strategy for the Fund. Among our
purchases during the first half of 1997 were bonds issued by housing
authorities, retirement homes, school districts, hospitals and utilities.
Over the remaining half of the year, management intends to maintain the
portfolio quality while diversifying throughout the State. Reasonable
tax-exempt income and preservation of capital remain as the chief objectives
of the Fund.
Sincerely,
Robert E. Walstad Monte Avery
President Chief Portfolio Stragetist
SHAREHOLDER REPORTS REVISED
- ---------------------------
Your fund's annual report is your best source for tracking the progress of
your investment. This report includes several changes that have been made in
<PAGE>
an effort to provide additional information to you. In addition, the cover
letter includes commentary from your fund's portfolio manager on what might be
expected in the coming months. Specifically, your report now includes:
* Terms you'd need to know related to your fund
* A look at your fund's portfolio composition
* The quality and years to maturity of the fund's underlying investments
* A look at your fund's average annual total returns
Terms & Definitions
- -------------------
Average Annual Total Return
A standardized measurement of the return (yield and appreciation) earned
by the fund on an annual basis.
Contingent Deferred Sales Charge (CDSC)
A charge applied at the time of the redemption of which assumes
redemption at the end of the period.
Coupon Rate or Face Rate
The rate of interest annually payable based on the face amount of the
bond; expressed as a percentage.
Duration
A measurement of a security or a portfolio's price volatility based on
maturity, callability and coupon rate. The larger the number, the
greater the price change for a given interest rate change.
Lehman Brother's Municipal Bond Index
An unmanaged list of long-term, fixed-rate, investment-grade, tax-exempt
bonds representative of the municipal bond market. The index does not
take into account brokerage commissions or other costs, may include bonds
different from those in the fund, and may pose different risks than the
fund.
Market Value
Actual (or estimated) price at which a bond trades in the market place.
Maturity
A measure of the term or life of a bond in years. When a bond "matures",
the issuer repays the principal.
Net Asset Value (NAV)
The value of all your fund's assets, minus any liabilities, divided by
the number of outstanding shares, not including any initial or contingent
deferred sales charge.
Quality Ratings
A designation assigned by independent rating companies to give a relative
indication of a bonds' credit worthiness. "AAA", "AA" and "A" indicate
highest quality. Ratings can range from a high of "AAA" to a low of "D".
Total Return
Measures both the net investment income and any realized and unrealized
appreciation or depreciation of the underlying investments in its
portfolio for the period, assuming the reinvestment of all dividends. It
represents the aggregate percentage or dollar value change over the
period.
<PAGE>
PERFORMANCE AND COMPOSITION
- ---------------------------
Portfolio Quality Ratings
(based on Total Long-Term Investments
- -------------------------------------
[pie chart]
AAA 39.3%
AA 24.4%
A 19.8%
BBB 5.6%
NR 10.9%
(non-rated)
Quality ratings reflect the financial strength of the issuer. They are
assigned by independent rating services such as Moody's Investors Services
and Standard & Poor's. Non-rated bonds have been determined to be of
appropriate quality for the portfolio by ND Money Management, Inc. the
investment advisor
Portfolio Market Sectors
(as a % of Net Assets)
- ------------------------
[pie chart]
Insured 38.8%
Housing 24.1%
Healthcare 20.4%
Real Estate 8.2%
Financial 5.4%
Electric 1.8%
Other 1.3%
Market sectors are breakdowns of the Fund's portfolio holdings into specific
investment classes.
COMPARATIVE INDEX GRAPH
- -----------------------
[line graph]
Comparison of change in value of a $10,000 investment in the
ND Tax Free Fund and the Lehman Brother's Municipal Bond Index
Lehman Brothers's
w/o CDSC Municipal Bond Index
--------------------------------------
1/3/1989 $10,000 $10,000
1989 $10,291 $11,080
1980 $11,109 $11,887
1991 $12,006 $13,331
1992 $12,718 $14,508
1993 $13,529 $16,289
1994 $13,262 $15,448
1995 $14,413 $18,146
1996 $15,367 $18,949
6/30/1997 $15,943 $19,557
Market sectors are breakdowns of the Fund's portfolio holdings into specific
investment classes.
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities
index measures the performance of a theoretical portfolio. Unlike a fund,
<PAGE>
the index is unmanaged; there are no expenses that affect the results. In
addition, few investors could purchase all of the securities necessary to
match the index. And, if they could, they would incur transaction costs
and other expenses.
KEY STATISTICS
- --------------
12-31-96 NAV(share value) $ 9.19
06-30-97 NAV $ 9.23
Average Maturity 20.9 years
Average Duration 5.8 years
Number of Issues 88
Total Net Assets $91,453
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------
For periods ending June 30, 1997
- ---------------------------------------------------
1 year 5 year Since Inception
- ---------------------------------------------------
6.68%* 4.74% 5.56%
*The 1 year return does not include the effect of the 4% maximum Contingent
Deferred Sales Charges. It would have been 2.68% if it had. Returns are
historical and are not a guarantee of future results. The Fund's share price,
yields and total returns will vary, so that shares, when redeemed, may be
worth more or less than their original cost.
<PAGE>
<TABLE>
<CAPTION>
Schedule of Investments June 30, 1997 (Unaudited)
Name of Issuer
Percentages represent the market value Rating Coupon Principal Market
of each investment category to total net assets (Unaudited) Moody's/S&P Rate Maturity Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH DAKOTA MUNICIPAL BONDS (98.7%)
FINANCIAL (5.4%)
ND Municipal Bond Bank A1/NR 6.300% 10/01/15 $ 530,000 $ 570,582
ND Municipal Bond Bank A1/NR 6.250 10/01/14 3,825,000 4,087,395
ND Building Auth. Lease Rev. A/A 5.500 08/15/14 300,000 296,823
-----------
$ 4,954,800
-----------
GENERAL OBLIGATION (0.1%)
Wahpeton PSD #37 G.O. A/NR 6.000% 05/01/16 $ 100,000 $ 104,113
-----------
HEALTH CARE (20.4%)
Bismarck (St. Vincent Nurs. Home) Hlth. Rev. NR/NR 8.500% 06/01/09 $ 175,000 $ 182,826
Bismarck (Marillac Manor II) Ret. Facs. Rev. NR/NR 8.625 02/01/10 675,000 712,645
Bismarck (Marillac Manor) Ret. Facs. Rev. NR/NR 7.700 02/01/16 250,000 275,570
Burleigh Cty. (St. Vincent Nurs. Home) Rev. NR/NR 7.000 06/01/19 500,000 550,100
Burleigh Cty. (Missouri Slope Ctr.) Rev. Ref. NR/NR 7.000 11/01/07 500,000 532,215
Burleigh Cty. (Missouri Slope Care Fdn.) Rev. Ref. NR/NR 7.250 06/01/12 500,000 542,095
Carrington, Catholic Health Corp. (Ctr.) Rev. A1/A+ 6.250 11/15/15 500,000 533,460
Devils Lake (Lake Region Luth. Home) Rev. NR/NR 6.500 10/01/13 250,000 258,907
Devils Lake (Catholic Health Corp.) Rev. A1/A+ 6.250 11/15/07 1,125,000 1,187,752
Dickinson, Catholic Health Corp. (St. Josephs) Rev. A1/A+ 7.200 06/01/14 1,015,000 1,038,345
Dickinson (BHS L/T Care) Hlth. Care Facs. Rev. A1/NR 7.625 02/15/20 1,210,000 1,310,841
Dickinson (BHS L/T Care) Hlth. Care Facs. Rev. A1/NR 7.500 02/15/10 600,000 650,034
Dickinson (St. Luke' Hosp.) Cong. Housing NR/NR 7.250 05/01/22 500,000 505,295
Fargo (St. Lukes Hosp.) Facs. Ref. Rev. NR/A+ 6.500 06/01/15 4,000,000 4,274,040
Hazen (Sakakawea Med. Ctr.) Hlth. Care Facs. Rev. NR/NR 6.750 05/01/16 500,000 519,395
Jamestown (Heritage Center) Cong. Hsg. Rev. NR/NR 8.500 09/01/06 200,000 220,270
Lisbon (Parkside Luth. Home) Nurs. Home Rev. NR/NR 7.500 06/01/12 500,000 250,000
Ward Cty. (St. Joseph's Hosp.) Rev. NR/BBB- 7.500 11/01/15 1,000,000 1,103,240
Ward Cty. (St. Joseph's Hosp.) Rev. NR/BBB- 7.250 11/01/06 1,000,000 1,077,820
Ward Cty. (St. Joseph's Hosp.) Rev. NR/BBB- 7.250 11/01/06 1,000,000 1,077,820
Ward Cty. (St. Joseph's Hosp.) Rev. NR/BBB- 7.500 11/01/15 1,450,000 1,599,698
Ward Cty. (St. Joseph's Hosp.) Rev. NR/BBB- 8.875 11/15/24 200,000 216,500
-----------
$18,618,868
-----------
HOUSING (24.1%)
Morton Cty. Hsg. Auth. Multifam. Hsg. Rev. NR/NR 6.750% 03/01/21 $ 500,000 $ 499,880
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.375 07/01/17 505,000 520,251
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.850 07/01/01 225,000 238,212
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 8.000 07/01/13 260,000 279,568
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.900 07/01/10 152,000 163,552
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 8.050 01/01/24 780,000 831,800
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.750 07/01/24 715,000 759,301
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.250 07/01/10 305,000 324,868
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.300 07/01/24 1,190,000 1,260,805
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 7.000 07/01/23 1,015,000 1,084,040
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 6.800 07/01/23 2,955,000 3,101,184
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 6.700 07/01/13 385,000 403,553
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 6.800 07/01/25 1,540,000 1,606,682
North Dakota (HFA) Single Family Mortgage Program Aa/A+ 6.950 07/01/25 1,985,000 2,103,921
North Dakota (HFA) Finance Program Aa/NR 6.750 07/01/25 3,210,000 3,384,303
North Dakota (HFA) Finance Program Aa/NR 6.300 01/01/15 905,000 926,738
North Dakota (HFA) Finance Program Aa/NR 6.250 07/01/15 160,000 162,246
North Dakota (HFA) Home Mortgage Program Aa/NR 6.300 07/01/16 500,000 514,570
North Dakota (HFA) Housing Finance Program Aa/NR 6.400 01/01/28 300,000 307,755
North Dakota (HFA) Home Mortgage Program Aa/NR 6.150 07/01/27 535,000 531,373
North Dakota (HFA) Home Mortgage Program Aa3/NR 6.100 07/01/28 2,000,000 1,996,980
North Dakota (HFA) Housing Finance Agcy. Aa3/NR 5.850 07/01/28 1,000,000 999,940
-----------
$22,001,522
POLLUTION CONTROL (1.8%)
Mercer Cty. (Ottertail Power) PCR Ref. Aa3/AA- 6.900% 02/01/19 $ 500,000 $ 553,670
Mercer Cty. (Basin Electric) PCR Rev. A/A 7.000 01/01/19 985,000 1,072,635
-----------
$ 1,626,305
-----------
REAL ESTATE (8.2%)
Burleigh Cty. (Univ. of Mary) Facs. Rev. NR/NR 5.750% 12/01/11 $ 1,000,000 $ 991,560
Burleigh Cty. (Univ. of Mary) Facs. Rev. NR/NR 5.875 12/01/15 1,000,000 992,610
Fargo, Park District (Golf Course) Rev. NR/NR 7.300 11/01/06 130,000 139,446
Fargo, Park District (Golf Course) Rev. NR/NR 7.350 11/01/07 110,000 118,064
Fargo, Park District (Golf Course) Rev. NR/NR 7.250 11/01/10 190,000 206,306
Grand Forks Regional Airport Authority Rev. A/NR 7.500 10/01/09 225,000 233,820
Grand Forks Regional Airport Authority Rev. A/NR 7.500 10/01/10 240,000 249,408
Grand Forks (Cirrus Proj.) Sales Tax Rev. A1/NR 5.900 05/01/17 695,000 699,796
Jamestown (College) Facility Rev. NR/NR 6.625 10/01/14 800,000 851,168
ND St. Brd. of Hgr. Ed. (MSU) Student Svcs. Ref. NR/NR 6.750 08/01/05 755,000 804,966
ND St. Brd. of Hgr. Ed. (MSU) Student Svcs. Ref. NR/NR 5.500 08/01/13 400,000 401,260
University of ND (G.F.) Lease Financing COP A/A- 7.300 09/01/10 1,425,000 1,539,086
Wahpeton (Town Centre. Sqr.) Multifam. Hsg. Ref. NR/NR 8.500 02/01/14 250,000 257,915
-----------
$ 7,485,405
-----------
INSURED/GUARANTEED (38.8%)
*Bismarck (MedCenter One) Ref. & Imp. (BIGI) Aaa/AAA 7.500% 05/01/13 $ 1,500,000 $ 1,617,135
Bismarck (St. Alexius Med. Ctr.) Ref. (AMBAC) Aaa/AAA 6.900 05/01/06 400,000 437,880
Central Cass Cty., PSD#17 G.O. Sch. Bldg. (MBIA) Aaa/AAA 6.500 05/01/13 430,000 475,451
Central Cass Cty., PSD#17 G.O. Sch. Bldg. (MBIA) Aaa/AAA 6.500 05/01/14 460,000 511,115
Fargo (MeritCare Obl. Group) Hlth. System Aaa/AAA 5.550 06/01/16 500,000 501,370
Fargo (MeritCare Obl. Group) Hlth. System Aaa/AAA 5.375 06/01/27 1,315,000 1,274,196
Grand Forks (United Hosp.) Facs. Rev. (MBIA) Aaa/AAA 6.625 12/01/10 830,000 909,589
Grand Forks (United Hosp.) Facs. Rev. (MBIA) Aaa/AAA 6.500 12/01/06 750,000 816,630
Grand Forks (United Hosp.) Facs. Rev. (MBIA) Aaa/AAA 6.250 12/01/19 1,000,000 1,073,730
*Grand Forks (United Hosp.) Facs. Rev. (MBIA) Aaa/AAA 6.450 12/01/23 1,525,000 1,660,222
Grand Forks (Aurora Project) Sales Tax Rev. (MBIA) Aaa/AAA 5.625 12/15/29 1,500,000 1,501,065
Mercer Cty. (Mont.-Dak. Utilities) PCR (FGIC) Aaa/AAA 6.650 06/01/22 7,000,000 7,731,570
Mercer Cty. (NW Public Service) PCR Ref. (MBIA) Aaa/AAA 5.850 06/01/23 4,600,000 4,701,384
Mercer Cty. (Basin Electric) PCR (AMBAC) Aaa/AAA 6.050 01/01/19 5,425,000 5,684,423
Morton Cty. (Mont.-Dak. Utilities) PCR (FGIC) Aaa/AAA 6.650 06/01/22 600,000 662,706
ND (HFA) Multifam. Ref. (FNMA guaranteed) Aaa/AAA 6.200 12/01/20 825,000 844,091
ND Building Auth. Ref. Lease Rev. (AMBAC) Aaa/AAA 6.000 06/01/10 1,700,000 1,825,715
ND Building Auth. Lease Rev. (CGIC) Aaa/AAA 6.000 12/01/13 500,000 531,350
*North Dakota Student Loan Rev. (AMBAC) Aaa/AAA 7.750 07/01/02 1,060,000 1,119,381
North Dakota Student Loan Rev. (AMBAC) Aaa/AAA 6.300 07/01/12 100,000 103,439
North Dakota Student Loan Rev. (AMBAC) Aaa/AAA 6.350 07/01/13 250,000 259,308
North Dakota Student Loan Rev. (AMBAC) Aaa/AAA 6.400 07/01/14 400,000 415,164
North Dakota St. Water Commission Rev. (AMBAC) Aaa/AAA 5.750 07/01/27 250,000 249,977
University of ND (G.F.) Hsg. & Aux. Rev. (AMBAC) Aaa/AAA 7.850 04/01/14 340,000 361,563
Valley City, Western Hlth. Care Fac. Rev. (BIGI) Aaa/AAA 7.625 01/01/19 200,000 209,542
-----------
$35,477,996
-----------
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST: $86,734,397) $90,269,009
-----------
SHORT-TERM SECURITIES (0.9%)
Goldman Sachs Institutional Liquid Assets Tax-Exempt Diversified Portfolio $ 281,060
Federated Intermediate Municipal Trust #78 531,391
-----------
TOTAL SHORT-TERM SECURITIES (COST: 809,918) $ 821,451
-----------
TOTAL INVESTMENTS IN SECURITIES (Cost: $87,544,315) $91,081,460
OTHER ASSETS LESS LIABILITIES 371,373
-----------
NET ASSETS $91,452,833
===========
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Statements June 30, 1997 (Unaudited)
Statement of Assets and Liabilities June 30, 1997(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost:$87,544,315) $ 91,081,460
Accrued dividends receivable 3,667
Accrued interest receivable 1,515,446
Receivable for fund shares sold 30,000
Variation margin on futures 572,031
--------------
Total Assets $ 93,202,604
--------------
LIABILITIES
Bank overdraft $ 131,586
Dividends payable 380,271
Accrued expenses 103,527
Security purchases payable 1,004,875
Payable for fund shares redeemed 129,512
--------------
Total Liabilities $ 1,749,771
--------------
NET ASSETS $ 91,452,833
==============
Net asset value per share, 9,908,210 shares outstanding $ 9.23
==============
Statement of Operations for the six months ended June 30, 1997(Unaudited)
INVESTMENT INCOME
Interest $ 2,735,507
Dividends 19,132
--------------
Total Investment Income $ 2,754,639
--------------
EXPENSES
Investment advisory fees $ 274,838
Distribution fees (12b-1) 227,885
Custodian fees 6,919
Transfer agent fees 49,686
Accounting service fees 32,824
Audit and legal fees 7,930
Directors fees 3,190
Insurance 4,126
Printing and postage 9,883
License, fees, and registrations 3,155
--------------
Total expenses $ 620,436
Less expenses waived or absorbed
by the Fund's manager 26,100
--------------
Total Net Expenses $ 594,336
--------------
NET INVESTMENT INCOME $ 2,160,303
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ (32,354)
Futures transactions 818,657
Net change in unrealized appreciation (depreciation) of:
Investments (66,696)
Futures (99,588)
--------------
Net Realized and Unrealized Gain (Loss) On Investments And
Futures $ 620,019
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,780,322
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Statements June 30, 1997
Statement of Changes in Net Assets
For the six months ended June 30, 1997 and the year ended December 31, 1996
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Six Months For the Year
Ended June 30, Ended
1997 (Unaudited) December 31,1996
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 2,160,303 $ 4,648,578
Net realized gain (loss) on investments and futures 786,303 3,142,612
Net unrealized appreciation (depreciation) on investments and futures (166,284) (1,799,734)
-----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 2,780,322 $ 5,991,456
-----------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (2,160,303) $ (4,648,578)
Distributions in excess of net investment income (227,885) (303,489)
Distributions from net realized gain on investment transactions 0 0
-----------------------------------------
Total Dividends and Distributions $ (2,388,188) $ (4,952,067)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 2,722,291 $ 3,336,320
Proceeds from reinvested dividends 1,595,488 3,190,615
Cost of shares redeemed (4,888,223) (10,466,886)
-----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions $ (570,444) $ (3,939,951)
-----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (178,310) $ (2,900,562)
NET ASSETS, BEGINNING OF PERIOD 91,631,143 94,531,705
-----------------------------------------
NET ASSETS, END OF PERIOD $ 91,452,833 $ 91,631,143
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements June 30, 1997 (Unaudited)
Note 1. ORGANIZATION
ND Tax-Free Fund, Inc. (the Fund) is registered under the Investment Company
Act of 1940 as a non-diversified, open-end management investment company. The
Fund incorporated under the laws of the State of North Dakota on October 7,
1988, and commenced operations on January 3, 1989. The Fund's objective is to
provide as high a level of current income exempt from federal and North Dakota
income taxes as is consistent with preservation of capital. The Fund will
seek to achieve this by investing primarily in a portfolio of North Dakota
tax-exempt securities.
Shares of the Fund are offered with no initial sales charge. Shares may be
subject to a contingent deferred sales charge, if those shares are redeemed
within five years of purchase.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment security valuation - Investments in securities traded on national
securities exchanges are valued at the last reported sales price at the close
of each business day. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith by the
portfolio management team. The Fund follows industry practice and records
security transactions on the trade date.
The Fund concentrates its investments in a single state. This concentration
may result in the Fund investing a relatively high percentage of its assets in
a limited number of issuers.
Federal and state income taxes - The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies, and to distribute all of its net investment income
and any net realized gain on investments, to its shareholders. Therefore, no
provision for income taxes is required. The Fund has available at June 30,
1997, a net capital loss carryforward totaling $4,439,627, which may be used
to offset capital gains realized during subsequent years through December 31,
2003.
Distributions to shareholders - Dividends from net investment income, declared
daily and payable monthly, are reinvested in additional shares of the Fund at
net asset value or paid in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar year.
Investment income - Dividend income is recognized on the ex-dividend date and
interest income is recognized daily on an accrual basis. Premiums and
discounts on securities purchased are amortized using the effective interest
method over the life of the respective securities, unless callable, in which
case they are amortized to the earliest call date.
Futures contracts - The Fund may purchase and sell financial futures contracts
to hedge against changes in the values of tax-exempt municipal securities the
Fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of
a particular index or a certain amount of U.S. Government or municipal
securities at a set price on a future date. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount of cash or
securities equal to the minimum "initial margin" requirement of the futures
<PAGE>
exchange on which the contract is traded. Subsequent payments
("variation margin") are made or received by the Fund, dependent on the
fluctuations in the value of the underlying index. Daily fluctuations in
value are recorded for financial reporting purposes as unrealized gains or
losses by the Fund. When entering into a closing transaction, the Fund will
realize, for book purposes, a gain or loss equal to the difference between
the value of the futures contracts sold and the futures contracts to buy.
Unrealized appreciation (depreciation) related to open futures contracts is
required to be treated as realized gain (loss) for Federal income tax
purposes.
Certain risks may arise upon entering into futures contracts. These risks
may include changes in the value of the futures contracts that may not
directly correlate with changes in the value of the underlying securities.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 3. SHARE TRANSACTIONS
As of June 30, 1997, there were 100,000,000 shares of $.001 par authorized;
9,908,210 and 9,970,201 were outstanding at June 30, 1997 and December 31,
1996, respectively.
Transactions in capital shares were as follows:
Shares
----------------------------------------
For the Six Months For The Year
Ended Ended
June 30, 1997 December 31, 1996
----------------------------------------
Shares sold 295,554 366,454
Shares issued on reinvestment
of dividends 173,116 349,952
Shares redeemed (530,661) (1,148,695)
----------------------------------------
Net increase (decrease) (61,991) (432,289)
========================================
Note 4. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
ND Money Management, Inc., the Fund's investment adviser, ND Capital, Inc.,
the Fund's underwriter, and ND Resources, Inc., the Fund's transfer and
accounting services agent, are subsidiaries of ND Holdings, Inc., the Fund's
sponsor.
The Fund has engaged ND Money Management, Inc., to provide investment advisory
and management services to the Fund. The Investment Advisory Agreement
provides for fees to be computed at an annual rate of 0.60% of the Fund's
average daily net assets. The Fund has recognized $274,838 of investment
advisory fees for the six months ended June 30, 1997. The Fund has a payable
to ND Money Management, Inc. of $45,937 at June 30, 1997 for investment
advisory fees. Certain officers and directors of the Fund are also officers
and directors of the investment adviser.
<PAGE>
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1
under the 1940 Act, whereby the Fund shall pay at the annual rate of 0.85% of
the average daily net assets of the Fund to ND Capital, Inc. (Capital), its
principal underwriter, for expenses incurred in the distribution of the Fund's
shares. Pursuant to the Plan, Capital is entitled to reimbursement each month
for its actual expenses incurred in the distribution and promotion of the
Fund's shares, including the printing of prospectuses and reports used for
sales purposes, expenses of preparation and printing of sales literature and
other such distribution related expenses, including any distribution or
service fees paid to securities dealers who have executed a dealer sales
agreement with Capital. Capital will be reimbursed at a rate not to exceed
0.85% of the average daily net assets of the Fund for the prior month. The
Fund has recognized $227,885 of 12b-1 fee expenses after partial waiver for
the six months ended June 30, 1997. The Fund has a payable to Capital of
$38,281 at June 30, 1997 for 12b-1 fees. In addition, the Fund has engaged
Capital as agent for the purchase of certain investment securities. For the
six months ended June 30, 1997 commissions earned by Capital totaled $19,438
and are included in the cost basis of the securities acquired.
ND Resources, Inc., (the transfer agent), provides shareholder services for a
monthly fee equal to an annual rate of 0.16% of the Fund's first $10 million
of net assets, 0.13% of the Fund's net assets on the next $15 million, 0.11%
of the Fund's net assets on the next $15 million, 0.10% of the Fund's net
assets on the next $10 million, and 0.09% of the Fund's net assets in excess
of $50 million. The Fund has recognized $49,686 of transfer agency fees for
the six months ended June 30, 1997. ND Resources, Inc. also acts as the Fund's
accounting services agent for a monthly fee equal to the sum of a fixed fee of
$2,000, and a variable fee equal to 0.05% of the Fund's average daily net
assets on an annual basis for the Fund's first $50 million and at a lower
rate on the average daily net assets in excess of $50 million. The Fund
has recognized $32,824 of accounting service fees for the six months ended
June 30, 1997.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $8,170,787 and $5,104,565,
respectively, for the six months ended June 30, 1997.
Note 6. INVESTMENT IN SECURITIES
At June 30, 1997, the aggregate cost of securities for federal income tax
purposes was $87,544,315, and the net unrealized appreciation of investments
based on the cost was $3,537,145, which is comprised of $3,839,671 aggregate
gross unrealized appreciation and $302,526 aggregate gross unrealized
depreciation.
<PAGE>
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
For the Six
Months Ended
June 30, 1997 1996 1995 1994 1993 1992
(Unaudited)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.19 $ 9.09 $ 8.83 $ 9.52 $ 9.49 $ 9.47
----------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .22 $ .46 $ .47 $ .48 $ .52 $ .59
Net realized and unrealized gain (loss) on investments
and futures transactions .06 .13 .28 (.67) .05 .04
----------------------------------------------------------------
Total Income(Loss) From Investment Operations $ .28 $ .59 $ .75 $ (.19) $ .57 $ .63
----------------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.22) $ (.46) $ (.47) $ (.48) $ (.52) $ (.59)
Distributions in excess of net investment income (.02) (.03) (.02) (.02) (.02) (.02)
----------------------------------------------------------------
Total Distributions $ (.24) $ (.49) $ (.49) $ (.50) $ (.54) $ (.61)
----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.23 $ 9.19 $ 9.09 $ 8.83 $ 9.52 $ 9.49
================================================================
Total Return 6.16%(A)(B) 6.62%(A) 8.68%(A) (2.07)%(A) 5.94%(A) 6.62%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $91,453 $91,631 $94,532 $91,865 $85,042 $61,429
Ratio of net expenses (after expense assumption) to
average net assets 1.30%(B)(C) 1.13%(C) 1.05%(C) 1.06%(C) 1.01%(C) 0.95%(C)
Ratio of net investment income to average net assets 4.72%(B) 5.00% 5.20% 5.19% 5.39% 5.91%
Portfolio turnover rate 5.70% 12.92% 8.02% 5.55% 18.59% 17.35%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) Ratio was annualized
(C) During the periods indicated above, ND Holdings, Inc. assumed expenses
of $26,100, $40,861, $3,799, $31,115, $30,707, and $66,030,
respectively. If the expenses had not been assumed, the annualized
ratios of total expenses to average net assets would have been 1.36%,
1.18%, 1.05%, 1.10%, 1.05%, and 1.08%, respectively.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 87,544,315
<INVESTMENTS-AT-VALUE> 91,081,460
<RECEIVABLES> 1,549,113
<ASSETS-OTHER> 572,031
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,202,604
<PAYABLE-FOR-SECURITIES> 1,004,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 744,896
<TOTAL-LIABILITIES> 1,749,771
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 9,908,210
<SHARES-COMMON-PRIOR> 9,970,201
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,439,627)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,537,145
<NET-ASSETS> 91,452,833
<DIVIDEND-INCOME> 19,132
<INTEREST-INCOME> 2,735,507
<OTHER-INCOME> 0
<EXPENSES-NET> (594,336)
<NET-INVESTMENT-INCOME> 2,160,303
<REALIZED-GAINS-CURRENT> 786,303
<APPREC-INCREASE-CURRENT> (166,284)
<NET-CHANGE-FROM-OPS> 2,780,322
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,160,303)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (227,885)
<NUMBER-OF-SHARES-SOLD> 295,554
<NUMBER-OF-SHARES-REDEEMED> 530,661
<SHARES-REINVESTED> 173,116
<NET-CHANGE-IN-ASSETS> (178,310)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 274,838
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 620,436
<AVERAGE-NET-ASSETS> 91,539,186
<PER-SHARE-NAV-BEGIN> 9.19
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> (.02)
<PER-SHARE-NAV-END> 9.23
<EXPENSE-RATIO> 1.30<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets, annualized.
</FN>
</TABLE>
