May 1, 1998
ND Tax-Free Fund
1 North Main
Minot, ND 58703
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, DC 20549
Re: ND Tax-Free Fund, Inc.
File Numbers 33-25138 and 811-5681
Post-Effective Amendment No. 13 to Registration Statement on
Form N-1A under the Securities Act of 1933 and the
Investment Company Act of 1940
Gentlemen:
On behalf of ND Tax-Free Fund, Inc., we a filing pursuant to Rule 472
under the securities Act of 1933 (the "1933 Act") the Post-effective
Amendment No. 8 to the Registration Statement on Form N-1A under the
1933 Act and Investment Company Act of 1940 which was declared effective
by the Securities and Exchange Commission on January 3, 1989, and has
been marked to indicate changes effected in the Registration Statement.
Thank you.
Sincerely,
/s/ Robert E. Walstad
Robert E. Walstad
President
ND Tax-Free Fund, Inc.
As filed with the Securities and Exchange Commission
May 1, 1998
File Nos. 33-25138 and 811-5681
_____________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 13 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15
ND TAX-FREE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1 North Main, Minot, North Dakota 58703
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(701) 852-5292
Robert E. Walstad
President
ND Tax-Free Fund, Inc.
1 North Main
Minot, North Dakota 58703
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
X immediately upon filing pursuant to paragraph (b)
-----------
___________ on (date) pursuant to paragraph (b)
___________ 60 days after filing pursuant to paragraph (a)
___________ on (date) pursuant to paragraph (a)(1)
___________ 75 days after filing pursuant to paragraph (a)(2)
___________ on (date) pursuant to paragraph (a)(2) of
Rule 485.
If appropriate, check the following box:
___________ this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
ND TAX-FREEFUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(A)
<TABLE>
<CAPTION>
PART A
ITEM
NUMBER PROSPECTUS CAPTION
<S> <C> <C>
1. Cover Page......................................... Cover Page
2. Synopsis........................................... FEE AND EXPENSE TABLE
and SYNOPSIS
3. Condensed Financial Information.................... FINANCIAL HIGHLIGHTS
4. General Description of Registrant.................. GENERAL DESCRIPTION OF
THE FUND
5. Management of the Fund............................. MANAGEMENT
5A. Management's Discussion of Fund Performance........ Included in Annual Report
6. Capital Stock and Other Securities................. SHARES
7. Purchase of Securities Being Offered............... PURCHASE OF SHARES
8. Redemption or Repurchase........................... REDEMPTION OF SHARES
9. Pending Legal Proceedings.......................... Inapplicable
PART B
ITEM STATEMENT OF ADDITIONAL
NUMBER INFORMATION CAPTION
10. Cover Page......................................... Cover Page
11. Table of Contents.................................. TABLE OF CONTENTS
12. General Information and History.................... Inapplicable
13. Investment Objectives and Policies................. INVESTMENT POLICIES
AND TECHNIQUES
14. Management of the Fund............................. MANAGEMENT OF THE FUND
15. Control Persons and Principal Holders of Securities CONTROL PERSONS AND
PRINCIPAL HOLDERS
OF SECURITIES
16. Investment Advisory and Other Services............. INVESTMENT ADVISORY
AND OTHER SERVICES
17. Brokerage Allocation and Other Practices........... PORTFOLIO TRANSACTIONS
18. Capital Stock and Other Securities................. Included in Prospectus
19. Purchase, Redemption and Pricing of Securities
Being Offered...................................... PURCHASE AND
REDEMPTION OF SHARES
20. Tax Status......................................... DIVIDENDS AND TAXES
21. Underwriters....................................... UNDERWRITER
22. Calculation of Performance Data.................... CALCULATION OF
PERFORMANCE DATA
23. Financial Statements............................... FINANCIAL STATEMENTS
</TABLE>
<PAGE>
PART C
ITEM
NUMBER PAGE
<TABLE>
<C> <S> <C>
24. Financial Statements and Exhibits.............................. C-1
25. Persons Controlled by or Under Common Control with Registrant.. C-2
26. Number of Holders of Securities................................ C-2
27. Indemnification................................................ C-2
28. Business and Other Connections of Investment Adviser........... C-3
29. Principal Underwriters......................................... C-3
30. Location of Accounts and Records............................... C-4
31. Management Services............................................ C-4
32. Undertakings................................................... C-4
33. Signature Page................................................. C-4
</TABLE>
<PAGE>
[LOGO OF INTEGRITY ND TAX FREE FUND]
ND TAX-FREE FUND, INC.
1 North Main . Minot, North Dakota 58703 . (701) 852-5292
P.O. Box 759 Minot, North Dakota 58702
(800) 276-1262 Marketing Fax (701) 838-4902
(800) 601-5593 Transfer Agent (701) 852-2548
PROSPECTUS MAY 1, 1998
ND Tax-Free Fund, Inc. (the "Fund"), is an open-end, non-diversified,
management investment company. 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
objective by investing primarily in tax-exempt securities issued by the State of
North Dakota and its political subdivisions, agencies, and instrumentalities
which are within the four highest grades of either Moody's Investors Service,
Inc., or Standard & Poor's Corporation or of comparable quality (See "Investment
Objective and Policies.").
Shares of the Fund are offered with no initial sales charge. A contingent
deferred sales charge is assessed on certain redemptions, however (See
"Contingent Deferred Sales Charge."). See "Distribution Plan" for information
about commissions paid to dealers who sell shares and Fund payments to
compensate for these and other distribution expenses and services.
This Prospectus contains information about the Fund that a prospective
investor should know before investing and should be retained for future
reference. More detailed information concerning the Fund is contained in the
Statement of Additional Information dated May 1, 1997 , which has been
filed with the Securities and Exchange Commission and is incorporated into
this Prospectus by reference. A free copy of the Statement of Additional
Information may be obtained by contacting the Fund at the address or telephone
number at the top of the page.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fee and Expense Table...............2
Synopsis............................3
Financial Highlights................5
General Description of the Fund.....6
Management.........................12
Shares.............................13
Purchase of Shares.................16
Redemption of Shares...............18
Performance Data...................21
</TABLE>
Mutual fund shares are not deposits or obligations of, or guaranteed by any
depository institutions. Shares are not insured by the FDIC, Federal Reserve
Board or any other agency, and are subject to investment risks, including
possible loss of principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FEE AND EXPENSE TABLE
The purpose of the FEE AND EXPENSE TABLE is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see MANAGEMENT, PURCHASE OF SHARES, and REDEMPTION OF SHARES.
___________________________________
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........................ None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)............. None
Maximum Deferred Sales Load (as a percentage of redemption proceeds)............................... 4.00%(1)
Redemption Fees.................................................................................... None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees (After Fee Waivers)................................................................ 0.59% (2)
12b-1 Fees (3) (After Fee Waivers)................................................................. 0.50% (2)(3)
Other Expenses ................................................................................... 0.26%
--------
Total Fund Operating Expenses (After Fee Waivers) ................................................. 1.35% (2)
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
EXAMPLE (4)
You would pay the following expenses on a $1,000
investment, assuming (a) 5% annual return and (b)
redemption at the end of each time period: $54 $73 $84 $162
You would pay the following expenses on the same investment, assuming no
redemption: $14 $43 $74 $162
</TABLE>
____________________________________
(1) 4% is the maximum contingent deferred sales charge ("charge") which may
be assessed upon redemption of shares. As more fully explained under "Contingent
Deferred Sales Charge," a charge is assessed, with certain exceptions, against
shares which are redeemed within the first five years of their purchase. The
charge varies from a maximum of 4% for shares which are redeemed within the
first two years, down to 1% for shares redeemed within the fifth year, after
which no further charge is assessed, in accordance with the following schedule:
<TABLE>
<CAPTION>
Year of Purchase 1 2 3 4 5 6 & Following
---------------- --- --- --- --- --- -------------
<S> <C> <C> <C> <C> <C> <C>
Contingent Deferred Sales Charge 4% 4% 3% 2% 1% 0
</TABLE>
(2) The Fund's investment adviser and underwriter have voluntarily agreed
to waive fees in order to keep Total Fund Operating Expenses at or below 1.35%
through April 30, 1999. Under the Fund's Investment Advisory Agreement and Rule
12b-1 Plan, the Fund's investment adviser and underwriter are entitled to fees
equal, on an annual basis, to 0.60% and 0.85%, respectively, of the Fund's
average daily net assets.
(3) Because the Fund pays 12b-1 fees, long-term shareholders may pay more
in distribution expenses than the economic equivalent of the maximum front-end
sales charges permitted by the NASD.
2
(4) The example is based upon percentages in the table above and should
not be considered a representation of past or future expenses. Actual Expenses
may be greater or lesser than those shown. If the fee waivers are removed, the
expenses contained in the example will increase. The Securities and Exchange
Commission requires the use of an assumed 5% annual return. The example assumes
the reinvestment of all dividends and distributions. All dollar figures have
been rounded to the nearest dollar.
SYNOPSIS
INVESTMENT OBJECTIVE; PERMITTED INVESTMENTS
The Fund is an open-end, non-diversified, management investment company.
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 objective by investing primarily in
tax-exempt securities issued by the State of North Dakota and its political
subdivisions, agencies, and instrumentalities which are within the four highest
grades of either Moody's Investors Service, Inc., or Standard & Poor's
Corporation or of comparable quality. There is no assurance that the Fund's
objective will be achieved. The Fund may also purchase and sell put and call
options and financial futures contracts and options thereon. See "Investment
Objective and Policies" and "Other Investment Practices."
INVESTMENT ADVISER AND UNDERWRITER
ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. Under the
Investment Advisory Agreement, the Fund has agreed to pay the Investment Adviser
an annual fee, payable monthly, of 0.60% of the Fund's average daily net assets.
See "Investment Adviser."
ND Capital, Inc. (the "Underwriter"), is the Fund's principal underwriter.
See "Purchase of Shares."
PURCHASES AND REDEMPTIONS
Shares may be purchased from investment dealers who have sales agreements
with the Underwriter or from the Underwriter at the public offering price, which
is the net asset value next determined after the Fund receives an order. The
minimum initial investment is $1,000 ($100 for the Monthomatic Investment Plan),
and subsequent investments must be at least $50. See "Purchase of Shares." No
sales charge is imposed when shares are purchased. However, a contingent
deferred sales charge is imposed if certain shares are redeemed within five
years after their purchase. See "Redemption of Shares."
INVESTORS IN THE FUND
The Fund is designed for persons who are seeking a high level of income
exempt from federal and North Dakota income taxes from a portfolio consisting
primarily of investment grade Municipal Securities. Dividends derived from
earnings of North Dakota state and local government issues are exempt from North
Dakota income taxes. Through an investment in shares of the Fund, investors
receive the benefits of professional management and liquidity. In addition, the
Fund offers the economic advantages of block purchases of securities and relief
from administrative details, such as accounting for distributions and the
safekeeping of securities. The Fund's yield and net asset value will fluctuate.
3
DIVIDENDS
The Fund declares daily dividends of its net investment income on shares
for which it has received payment. The Fund distributes income dividends monthly
and distributes any net realized short-term and long-term capital gains
annually. Investors may elect to have income and capital gains dividends
automatically reinvested in shares of the Fund. See "Dividends and Taxes."
ORGANIZATION; SHARE ATTRIBUTES; MEETINGS
The Fund is organized as a corporation under the laws of the State of North
Dakota and is authorized to issue a total of 100,000,000 shares, all of one
class and one series, with a par value of $.001 per share. Shares are fully paid
and nonassessable when issued, are redeemable and freely transferable, and have
equal rights and preferences in all matters, including voting. There are no
subscription, preemptive, or conversion rights. Regular meetings of shareholders
need not be held unless required under the North Dakota Business Corporation Act
or the Investment Company Act of 1940. Special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act.
SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of different risks, some
of which are described under "Investment Objective and Policies" and "Other
Investment Practices." As with other mutual funds, there can be no assurance
that the Fund will achieve its objective.
4
FINANCIAL HIGHLIGHTS
Selected per share data and ratios in the table have been derived
from the financial statements of the Fund which have been audited by Brady,
Martz & Associates, P.C. ("Brady, Martz"), the Fund's independent public
accountant The Fund's complete, current audited finanical statements,
including Brady, Martz' report thereon, are contained in the Statement of
Additional Information Further information about the Fund's performance is
contained in the 1997 Annual Report to shareholders. Copies of the Statement
of Additional Information and 1997 Annual Report may be obtained from the
Fund upon request and without charge.
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.19 $ 9.09 $ 8.83 $ 9.52 $ 9.49
----------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .43 .46 $ .47 $ .48 $ .52
Net realized and unrealized gain (loss) on investments
and futures transactions (.05) .13 .28 (.67) .05
----------------------------------------------------------------
Total Income(Loss) From Investment Operations $ .38 $ .59 $ .75 $ (.19) $ .57
----------------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.43) $ (.46) $ (.47) $ (.48) $ (.52)
Distributions in excess of net investment income (.05) (.03) (.02) (.02) (.02)
----------------------------------------------------------------
Total Distributions $ (.48) $ (.49) $ (.49) $ .50) $ (.54)
----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
================================================================
Total Return 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A) 5.94%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $88,435 $91,631 $94,532 $91,865 $85,042
Ratio of net expenses (after expense assumption) to
average net assets 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B) 1.01%(B)
Ratio of net investment income to average net assets 4.70% 5.00% 5.20% 5.19% 5.39%
Portfolio turnover rate 13.18% 12.92% 8.02% 5.55% 18.59%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B)
During the periods indicated above, ND Holdings, Inc. assumed expenses
of $50,649, $40,861, $3,799, $31,115, and $30,707, 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%, and
1.05%, respectively.
5
GENERAL DESCRIPTION OF THE FUND
ORGANIZATION AND CLASSIFICATION
The Fund is an open-end, non-diversified, management investment company,
which is a type of company commonly known as a "mutual fund." The Fund was
incorporated under the laws of the State of North Dakota on October 7, 1988.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current
income exempt from federal and North Dakota income taxes as is consistent with
the preservation of capital. There are market and investment risks with any
security, and the value of an investment in the Fund will fluctuate over time.
Normally, the value of the Fund's investments will vary inversely with changes
in interest rates. There can be no assurance that the Fund's objective will be
achieved.
The Fund will seek to achieve its objective by investing in a portfolio of
obligations issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies, and instrumentalities, the interest from which is exempt from federal
income taxes ("Municipal Securities"). The Fund may also purchase and sell
options on securities, index options, financial futures contracts, and options
on financial futures contracts, which may produce taxable capital gains, in
connection with attempts to hedge its portfolio investments and not for
speculation.
The Fund will generally invest substantially all of its assets in
securities on which the interest is exempt from both federal and North Dakota
income taxes. As a matter of fundamental policy, the Fund will, under normal
market conditions, invest at least 80% of its net assets in Municipal Securities
which generate interest that is not subject to the alternative minimum tax. All
of the Fund's assets will consist of (1) Municipal Securities which are rated at
the time of purchase within the four highest grades of either Moody's Investors
Service, Inc. (Aaa, Aa, A, or Baa) or Standard & Poor's Corporation (AAA, AA, A,
or BBB) or which are unrated but, in the opinion of the Investment Adviser, are
of comparable quality, (2) temporary investments in high quality taxable short-
term, fixed income investments, as described in the paragraph which follows and
in the Statement of Additional Information under "Temporary Investments," (3)
options and financial futures as described under "Other Investment Practices,"
and (4) cash. Municipal Securities within the four highest grades of Moody's and
Standard & Poor's are generally considered to be "investment grade." Those rated
Baa by Moody's and BBB by Standard & Poor's (and equivalent for unrated
securities) may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. The Fund will promptly dispose of a bond whose rating drops below
investment grade or is reduced in credit quality with respect to unrated
securities. The characteristics of the rating categories are described in the
Statement of Additional Information under "Appendix-Ratings of Investments." As
indicated under "Dividends and Taxes," the Fund may invest in "private activity"
bonds. The Fund may also purchase participation interests in Municipal
Securities from various financial institutions, including banks, insurance
companies, and broker-dealers. See "Municipal Securities" in the Statement of
Additional Information.
For temporary defensive purposes, the Fund may invest in any of the
following short-term, fixed-income obligations, the interest on which is subject
to federal income taxes: obligations of the United States Government, its
agencies, or instrumentalities; debt securities rated within the three highest
grades of Moody's Investors Service, Inc., or Standard & Poor's Corporation;
commercial paper rated in the highest two grades by either of those rating
services (P-1, P-2, or A-1, A-2, respectively); certificates of deposit of
domestic banks with assets of $25 million or more; and Municipal Securities or
any of the foregoing tempo-
6
rary investments subject to short-term repurchase agreements. When the Fund
invests in accordance with this policy, it may do so without any percentage
limitations.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds that are Municipal Securities are in most cases revenue bonds
and do not generally involve the pledge of the credit of the issuer of such
bonds. There are, of course, variations in the degree of risk of Municipal
Securities, both within a particular classification and between classifications,
depending upon numerous factors. See "Municipal Securities" in the Statement of
Additional Information.
The average weighted maturity of the Fund's debt securities is expected to
range between 15 and 25 years.
Any policy or restriction which involves a maximum percentage of securities
or assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. Changes due to market action
will not cause a violation of a policy or restriction.
The Fund will not normally engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
considered advisable in view of prevailing or anticipated market conditions and
the Fund's investment objective. Accordingly, the Fund may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
in anticipation of a decline in interest rates. In addition, a security may be
sold and another of comparable quality purchased at approximately the same time
to take advantage of what the Investment Adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of Municipal Securities or
changes in the investment objectives of some investors. Frequency of portfolio
turnover will not be a limiting factor should the Investment Adviser deem it
desirable to purchase or sell securities.
The Fund has adopted certain investment restrictions which are presented in
the Statement of Additional Information and which, together with the investment
objective and policies of the Fund, cannot be changed without approval by
holders of a majority of its outstanding shares. As defined in the Investment
Company Act of 1940, this means the lesser of the vote of (a) 67% of the
outstanding shares of the Fund present at a meeting where more than 50% of the
outstanding shares are present in person or by proxy; or (b) more than 50% of
the outstanding shares of the Fund.
Because North Dakota's economy is primarily dependent upon agriculture and
energy and mineral resources, various factors which influence these segments,
such as weather conditions, regulatory policies, world prices, the value of the
dollar, and international relations, could affect the ability of issuers of
North Dakota Municipal Securities to make interest and principal payments.
Other Investment Practices
OPTIONS TRANSACTIONS
The Fund may write (sell) covered call options and secured put options on
up to 25% of its net assets and may purchase put and call options, provided that
no more than 5% of its net assets may be invested in
7
premiums on such options. The Fund will engage in options transactions only in
Municipal Securities and temporary investments.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying security at the exercise price
during the option period.
During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and
the buyer a loss in the amount of the premium. If the secured put writer has to
buy the underlying security because of the exercise of the put option, the
secured put writer incurs an unrealized loss to the extent that the current
market value of the underlying security is less than the exercise price of the
put option, minus the premium received.
As part of its options transactions, the Fund may also use index options
which are traded on national stock exchanges. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of the index, and,
therefore, the Fund bears the risk that a loss on an index option would not be
completely offset by movements in the price of such securities. As discussed
below with respect to futures contracts, the use of index options on a taxable
security may involve a greater risk of an imperfect correlation between price
movements in the Municipal Securities being hedged and the movements in the
level of the index. Because index options are settled in cash, a call writer
cannot determine the amount of its settlement obligations in advance and, unlike
call writing on specific securities, cannot provide in advance for, or cover,
its potential settlement obligations by acquiring and holding the underlying
securities.
FINANCIAL FUTURES TRANSACTIONS
The Fund may engage in various interest rate hedging transactions using
financial instruments with a high degree of correlation to the fixed-income
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts in such financial instruments (e.g., futures contracts in
U.S. Treasury securities) and interest rate related indices (municipal bond
indices) and put and call options on such futures contracts and on such
financial instruments. Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the undertaking of a contractual obligation to
deliver
8
the securities or the cash value of an index called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index at a specified price during a specified
delivery period. Although some financial futures contracts call for making or
taking delivery of the underlying securities, in most cases these obligations
are closed out before delivery. The closing of such a contractual obligation is
accomplished by purchasing or selling an identical offsetting futures contract.
Such a transaction cancels the obligation under the original contract to make or
take delivery. Other financial futures contracts, such as futures contracts on a
securities index, by their terms call for cash settlements.
At the time the Fund enters into a futures contract, it is required to
deposit with its Custodian a specified amount of cash or eligible securities
called "initial margin." The initial margin required for a futures contract is
set by the exchange on which the contract is traded. Subsequent payments, called
"variation margin," to and from the broker are made on a daily basis as the
market price of the futures contract fluctuates.
The Fund may engage in financial futures transactions as an attempt to
hedge against the effects of fluctuations in interest rates and other market
conditions. For example, if the Fund owned long-term Municipal Securities and
interest rates were expected to rise, it could sell futures contracts or a
Municipal Securities Index. If interest rates did increase, the value of the
Municipal Securities in the Fund would decline, but this decline would be offset
in whole or in part by an increase in the value of the Fund's futures contracts.
If, on the other hand, long-term interest rates were expected to decline, the
Fund could hold short-term Municipal Securities and benefit from the income
earned by holding such securities, while at the same time the Fund could
purchase futures contracts on a Municipal Securities Index. Thus, the Fund could
take advantage of the anticipated rise in the value of long-term Municipal
Securities without actually buying them. The futures contracts and short-term
Municipal Securities could then be liquidated and the cash proceeds used to buy
long-term Municipal Securities.
There are risks associated with the use of financial futures contracts,
because there may be an imperfect correlation between the price movements of the
futures contracts and price movements of the securities which the Fund owns or
intends to purchase. The Fund could lose money on the financial futures
contracts and also on the price of such securities. The degree of difference in
price movements between futures contracts and the securities being hedged
depends upon such things as variations in speculative market demand for futures
contracts and debt securities and differences between the securities being
hedged and the securities underlying the futures contracts, e.g., interest
rates, tax status, maturities, and creditworthiness of issuers. While interest
rates on taxable securities generally move in the same direction as interest
rates on Municipal Securities, there are frequently differences in the rate of
such movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the Municipal Security being hedged than when using a
financial futures contract on a Municipal Security or a Municipal Securities
Index. If a liquid secondary market did not exist when the Fund wished to close
out a financial futures contract, it would not be able to do so and would have
to continue making daily cash payments of variation margin in the event of
adverse price movements. If the Investment Adviser's judgment about the general
direction of interest rates or markets is wrong, the overall performance will be
poorer than if no such contracts had been used. The costs incurred in connection
with futures transactions would also reduce the Fund's yield. In addition,
futures markets have daily market price movement limits for many futures
contracts which may further inhibit the Investment Adviser's ability to manage
the Fund's portfolio. Futures contracts held by the Fund may be illiquid during
periods when daily market price movement limits have been reached. As a result,
net assets of the Fund may be impacted negatively until normal futures trading
resumes or until the Fund's futures contracts are closed out.
9
The Fund may also purchase and write call and put options on financial
futures contracts in an attempt to hedge against the effects of fluctuations in
interest rates and other market conditions. A call option gives the purchaser
the right to buy, and the writer the obligation to sell, the underlying futures
contract at the exercise price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying futures contract at the exercise price during the option period. Upon
exercise, the writer (seller) of the option delivers the futures contract to the
holder (buyer) at the exercise price. An option purchased by the Fund may expire
worthless in which case the Fund would lose the premium paid for it.
The Fund may engage in futures transactions only on commodities or
securities exchanges or boards of trade. The Fund will not engage in
transactions in financial futures contracts or related options for speculation,
but only as an attempt to hedge against changes in interest rates or market
conditions affecting the values of securities which the Fund owns or intends to
purchase. Although the successful use of futures contracts and options
techniques requires skills different from those needed to select portfolio
securities, the Investment Adviser has experience in the use of these
techniques.
To the extent necessary to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option, or
entering into a delayed delivery purchase, the Fund will maintain in a
segregated account with its Custodian cash or liquid high-grade debt securities
equal to the value of such contracts. The amount held by the Custodian is less
than the amount held by any futures commission agent as initial margin and will
be marked to market daily.
DELAYED DELIVERY TRANSACTIONS
The Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions involve a
commitment by the Fund to purchase securities with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. The
value of fixed income securities to be delivered in the future will fluctuate as
interest rates vary. Because the Fund is required to set aside cash or liquid
high-grade debt securities to satisfy its commitments to purchase when-issued or
delayed delivery securities, management of the Fund's investments may be limited
if commitments to purchase when-issued or delayed delivery securities were to
exceed 25% of the value of its total assets.
To the extent the Fund engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage or to speculate in interest rate changes. The
Fund will only make commitments to purchase securities on a when-issued or
delayed delivery basis with the intention of actually acquiring the securities,
but the Fund reserves the right to sell these securities before the settlement
date if deemed advisable.
BORROWING
The Fund may borrow money for temporary or emergency purposes and then only
in amounts not exceeding the lesser of 10% of its total assets valued at cost or
5% of its total assets valued at market, and, in any event, only if immediately
thereafter there is an asset coverage of at least 300%. The Fund will not
purchase portfolio securities when outstanding borrowings exceed 5% of total
assets. Interest paid on borrowed funds will decrease the net earnings of the
Fund. The Fund may mortgage, pledge, or hypothecate its assets in an amount not
exceeding 10% of its total assets to secure temporary or emergency borrowing.
The policies set forth in this paragraph are fundamental and may not be changed
without the approval of a majority of the Fund's shares.
10
DIVERSIFICATION AND CONCENTRATION POLICIES
The Fund is a non-diversified investment company under the Investment
Company Act of 1940. This means that more than 5% of the Fund's assets may be
invested in the obligations of any issuer. Inasmuch as a relatively high
percentage of the Fund's assets may be invested in the obligations of a limited
number of issuers, the Fund's portfolio securities may be more susceptible to
any single economic, political, or regulatory occurrence than the portfolio
securities of a diversified investment company.
Because of the relatively small number of issuers of North Dakota Municipal
Securities, the Fund is more likely to invest a higher percentage of its assets
in the securities of a single issuer than an investment company which invests in
a broad range of tax-exempt securities. This practice involves an increased risk
of loss to the Fund if the issuer is unable to make interest or principal
payments or if the market value of such securities declines.
The Fund will not invest 25% or more of its total assets in any industry.
Governmental issuers of North Dakota Municipal Securities are not considered
part of any "industry." However, North Dakota Municipal Securities backed only
by the assets and revenues of non-governmental users will for this purpose be
deemed to be issued by such non-governmental users, in which case the 25%
limitation would apply to such obligations. Accordingly, no more than 25% of the
Fund's assets will be invested in obligations deemed to be issued by non-
governmental users in any one industry and in taxable obligations of issuers in
the same industry. In addition, the Fund may invest more than 25% of its net
assets in industrial development bonds whose revenue sources are from similar
types of projects, for example, education, electric utilities, health care,
housing, transportation, or water, sewer, and gas utilities. There may be
economic, business, or political developments or changes that affect all
securities of a similar type, such as proposed legislation affecting the
financing of certain projects, shortages or price increases of necessary
materials, or declining market needs for such projects. Therefore, developments
affecting a single issuer, industry, or securities financing similar types of
projects could have a significant effect on the Fund's performance.
SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of different risks, some
of which are described under "Investment Objective and Policies" and "Other
Investment Practices." As with other mutual funds, there can be no assurance
that the Fund will achieve its objective.
11
MANAGEMENT
BOARD OF DIRECTORS
Responsibility for overall management of the Fund rests with its Board of
Directors.
INVESTMENT ADVISER
ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser
subject to the authority of the Board of Directors. The Investment Adviser is a
wholly-owned subsidiary of ND Holdings, Inc., a North Dakota venture capital
corporation. The Investment Adviser was incorporated under North Dakota law on
August 19,1988, and also serves as investment adviser for Montana Tax-Free
Fund, Inc., South Dakota Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.
The address of the Investment Adviser is 1 North Main, Minot, North Dakota
58703.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes at its own expense all necessary administrative
services, office space, equipment, and clerical personnel for managing the
investments and effecting the portfolio transactions of the Fund. In addition,
the Investment Adviser pays the salaries and fees of all officers and directors
of the Fund who are affiliated persons of the Investment Adviser.
Under the Investment Advisory Agreement, the Fund has agreed to pay the
Investment Adviser an annual fee, payable monthly, of 0.60% of the Fund's
average daily net assets. The Fund incurred advisory fees of $544,971 ,
or 0.60%of the Fund's average net assets, for the fiscal year ended
December 31, 1997 .
W. Dan Korgel, portfolio manager, is primarily responsible for the
day-to-day management of the Fund's portfolio under the supervision and
direction of Robert E. Walstad, president of the Fund. Mr. Korgel has been
portfolio manager of the Fund since April 1988 and has served in a similar
capacity for three related funds, Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc., since July 1993, March
1994, and from December 1994 through December 1995, respectively. Mr. Walstad
is also president of Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund,
Inc., and Integrity Fund of Funds, Inc., and has supervised and directed the
management of their portfolios since they commenced operations.
CUSTODIAN,TRANSFER AGENT, AND ACCOUNTING SERVICES AGENT
First American Bank West, 20 First Street SW, Minot, North Dakota 58701,
serves as Custodian for the Fund's portfolio securities and cash. ND Resources,
Inc. ("Resources"), a wholly-owned subsidiary of ND Holdings, Inc., 1 North
Main, Minot, North Dakota 58703, is the Fund's Transfer Agent. As Transfer
Agent, Resources performs many of the Fund's clerical and administrative
functions, for which it is paid a monthly fee ranging from .16 of 1% of the net
asset value of all outstanding Fund shares up to $10 million down to .09 of 1%
for net assets in excess of $500 million. Resources also provides internal
accounting and related services for the Fund, for which it is paid a
monthly fee of $2,000 plus 0.05% of the Fund's average daily net assets on an
annual basis for the first $50 million down to 0.01% for net assets in excess
of $500 million.
12
EXPENSES
The expenses of the Fund are deducted from its total income before
dividends are paid. These expenses include, but are not limited to,
organizational expenses; taxes; interest; brokerage fees and commissions, if
any; fees and expenses of directors and officers of the Fund who are not
officers or directors of the Investment Adviser; Securities and Exchange
Commission fees and state securities laws fees; charges of custodians and
transfer and dividend disbursing agents; insurance premiums; outside auditing
and legal expenses; costs of maintenance of the Fund's existence; costs
attributable to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of the
shareholders of the Fund and of the officers and Board of Directors of the Fund;
and any extraordinary expenses. In addition, the Fund pays distribution fees
pursuant to the terms of a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940.
PORTFOLIO TRANSACTIONS
The Investment Adviser may consider a number of factors in determining
which brokers to use for the Fund's portfolio transactions. These factors
include, but are not limited to, research services, reasonableness of
commissions, quality of services and execution, and sales of Fund shares. For
further details, see "Portfolio Transactions" in the Statement of Additional
Information.
In effecting purchases and sales of the Fund's portfolio securities, the
Investment Adviser and the Fund may place orders with and pay brokerage
commissions to brokers which are affiliated with the Fund, the Investment
Adviser, the Distributor or selected dealers participating in the offering of
the Fund's shares. Subject to rules adopted by the Securities and Exchange
Commission, the Fund may also purchase municipal securities from other members
of underwriting syndicates of which the Underwriter or other affiliates of the
Fund are members.
SHARES
SHARE ATTRIBUTES
The Fund is authorized to issue a total of 100,000,000 shares, all of one
class and one series, with a par value of $.001 per share. All shares, when
issued, are fully paid and non-assessable and are redeemable and freely
transferable. All shares are common shares and have equal rights and preferences
in all matters, including voting. Cumulative voting, a form of proportional
representation, is permitted in the election of directors. Under cumulative
voting, a shareholder may cumulate votes either by casting for one candidate a
number of votes equal to the number of directors to be elected multiplied by the
number of votes represented by the shares entitled to vote or by distributing
all of those votes on the same principle among any number of candidates. There
are no subscription, preemptive, or conversion rights.
SHAREHOLDER MEETINGS
It is probable that the Fund will not hold regular meetings of
shareholders. The Fund's Bylaws provide that regular meetings of shareholders
may be held on an annual or other less frequent basis but need not be held
unless required by law. Under the North Dakota Business Corporation Act, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or share holders holding 5% or more of
the voting power of all shares entitled to vote may demand a regular meeting by
written notice of demand given to the president or secretary of the Fund.
Within thirty days after -
13
receipt of the demand, the Board of Directors must cause a regular meeting of
shareholders to be called, or if the Board fails to do so, the shareholder or
shareholders making the demand may call the meeting by giving notice as
prescribed by law. All necessary expenses of the notice and the meeting must
be paid by the Fund.
In addition to regular meetings, special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act. Meetings of shareholders will also be held
whenever required in order to comply with the Investment Company Act of 1940;
however, the Fund does not intend to hold annual shareholder meetings.
Shareholders have the right to remove directors.
DIVIDENDS AND TAXES
DIVIDENDS
All the net investment income of the Fund is declared daily as a dividend
on shares for which the Fund has received payment. Net investment income of the
Fund consists of all interest income earned on portfolio assets less all
expenses of the Fund. Income dividends will be distributed monthly, and
dividends of net realized short-term and long-term capital gains, if any, will
normally be paid out once a year after the end of the Fund's fiscal year. The
Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and long-
term capital gains as the Board of Directors of the Fund determines appropriate
under the then current circumstances. In particular, and without limiting the
foregoing, the Fund may make additional distributions of net investment income
or capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code of 1986, as amended
(the "Code").
The Fund has adopted a policy whereby, it distributes
to shareholders an amount in excess of the Fund's net investment income and net
realized capital gains. Such excess distributions will result in a return of
capital to shareholders. For the fiscal year ended December 31, 1997, 9.61% of
total Fund distributions constituted a return of capital. The Fund may or may
not continue this policy.
Income and capital gain dividends, if any, will be credited to shareholder
accounts in full and fractional Fund shares at net asset value on the
reinvestment date, except that upon written request to the Transfer Agent, a
shareholder may select one of the following options:
(1) To receive income dividends in cash and capital gain dividends in
shares at net asset value;
(2) To receive both income and capital gain dividends in cash; or
(3) To receive both income and capital gain dividends in shares of
Integrity Fund of Funds, Inc. ("Integrity"), at net asset value. If you select
this option, you must first open a new account with Integrity with a minimum
investment of $100.
Cash dividends and reinvested dividends will be paid or reinvested,
as the case may be, on the last day of the month. Share certificates are
issued for full and fractional shares and only upon a request by the
shareholder to the Transfer Agent.
A check will be generated on the date on which distributions are
payable for dividends to be received in cash. A shareholder can expect to
receive this check within seven days. If the U.S. Postal Service cannot
deliver the check or if the check remains uncashed for six months, a letter
will be sent to the shareholder. If the shareholder has not cashed the check or
called within a month and if the shareholder has shares in his or her account,
14
the check will be reinvested in the shareholder 's account at the then-current
net asset value. If the shareholder has a zero balance, we will contact the
shareholder by phone or contact his or her broker. If the shareholder has
misplaced or lost the check, we will then issue a new check.
Distribution checks may be sent to parties other than the investor. The
Transfer Agent of the Fund will accept a letter from the shareholder. Please
attach a voided check if payable to your bank account (signature guarantee is
not required). If payable to a person or address other than the person or
address under which the shares are registered, a signature guarantee is
required.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code and, if so qualified, will not be liable for federal
income taxes to the extent its earnings are distributed. The Fund intends to
meet the requirements of the Code applicable to regulated investment companies
distributing tax-exempt interest dividends, and, therefore, dividends
representing net interest received on Municipal Securities will not be
includable by shareholders in their gross income for federal income tax
purposes, except to the extent such interest is subject to the alternative
minimum tax as discussed hereinafter. Dividends representing taxable net
investment income (such as net interest income from temporary investments
in obligations of the United States), net short-term capital gains, and
gains on the sale of market discount bonds purchased after April 30, 1993, if
any, are taxable to shareholders as ordinary income, and long-term capital gain
dividends are generally taxable to shareholders as long-term capital gains,
regardless of how long the shares have been held and whether received in cash
or shares. In the case of shareholders who are individuals, estates, or trusts,
the Fund will designate the portion of each capital gain dividend that must be
treated as mid-term capital gain (subject to a maximum federal tax rate of 28%)
and the portion that must be treated as long-term capital gain (subject to a
maximum federal tax rate of 20%). Dividends declared by the Fund in October,
November, or December to shareholders of record as of a date in one of those
months and paid before the following January are treated as paid on December 31
of the calendar year declared for federal income tax purposes. All taxpayers
are required to disclose on their federal income tax returns the amount of
tax-exempt interest earned during the year, including exempt-interest dividends
from the Fund.
A capital gains dividend received shortly after the purchase of shares
reduces the net asset value of the shares by the amount of the dividend and,
although in effect a return of capital, will be taxable to the shareholder. If
the net asset value of shares were reduced below the shareholder's cost by
dividends representing gains realized on sales of securities, such dividends
would be a return of investment though taxable as stated above. In addition,
shareholders may lose the tax-exempt status on accrued income if shares are
redeemed before a dividend is declared.
Gain or loss realized on the sale or exchange of shares in the Fund
will be treated as capital gain or loss, provided that (as is usually the case)
the shares represented a capital asset in the hands of the shareholder. For
corporate shareholders, such gain or loss will be long-term gain or loss if the
shares were held more than one year. For shareholders who are individuals,
estates, or trusts, the gain or loss will be considered long-term if the share-
holder has held the shares for more than 18 months and mid-term if the share-
holder has held the shares for more than one year but not more than 18
months.
Net interest on certain "private activity bonds" issued on or after August
8, 1986, is treated as an item of tax preference and may, therefore, be subject
to both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury, exempt-
interest dividends from the Fund are to be treated as interest on "private
activity bonds" in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions.
15
Exempt-interest dividends, except to the extent of interest from "private
activity bonds," are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
alternative minimum taxable income with certain adjustments will be a tax
preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.
Individuals whose modified adjusted gross income exceeds a base amount
will be subject to federal income tax on up to 85% of their Social Security
benefits. Modified adjusted gross income includes adjusted gross income,
one-half of Social Security benefits, and tax-exempt interest, including
exempt-interest dividends from the Fund.
Dividends to the extent of interest received on North Dakota state and
local government issues are exempt from North Dakota state income taxes in the
hands of shareholders that are corporations, individuals, estates, or trusts.
Dividends that are categorized as long-term capital gains for federal income
tax purposes will be treated similarly for shareholders that are individuals,
estates, or trusts that use the simplified, optional method of computing North
Dakota tax as a percentage of federal income tax liability (i.e., the North
Dakota "short form"). For individuals, estates, or trusts that use the regular
method of computing North Dakota taxable income, however, long-term capital
gains are taxed by North Dakota at the same rates as ordinary income.
Dividends paid by the Fund that are attributable to interest received on
North Dakota state and local government issues are not exempt from North Dakota
tax in the hands of shareholders that are banks or other entities subject to
the North Dakota tax on financial institutions.
The Fund is required by law to withhold 31% of taxable dividends and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a Social Security
number) and in certain other circumstances.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction. In addition, the statement will show
the details of prior transactions in the account during the calendar year.
Information for federal income tax purposes will be provided after the end of
the calendar year.
NET ASSET VALUE
The net asset value per share is determined by calculating the total value
of the Fund's assets, which will normally be composed mainly of investment
securities, deducting total liabilities, and dividing the result by the number
of shares outstanding. Fixed income securities are valued using a matrix
system which estimates market values from yield data relating to
instruments or securities with similar characteristics . Exchange-traded
options are valued at the last sale price unless there is no sale price, in
which event the options will be valued at the mean between the current closing
bid and asked prices. Financial futures are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. Other securities, including restricted securities, and other assets are
valued at fair value as determined in good faith by the Board of Directors. If
an event were to occur, after the value of an instrument was so established but
before the net asset value per share was determined, which was likely to
materially change the net asset value, then that instrument would be valued
using fair value considerations by the Board of Directors or its delegates.
On each day the New York Stock Exchange is open for trading, the net asset
value is determined as of the close of the Exchange (normally, 3:00 p.m.
Minot, North Dakota, time).
16
PURCHASE OF SHARES
GENERAL INFORMATION
The Fund's principal underwriter is ND Capital, Inc. (the "Underwriter"), 1
North Main, Minot, North Dakota 58703. Shares may be purchased from investment
dealers who have sales agreements with the Underwriter or from the Underwriter
at the public offering price, which is the net asset value next determined after
the Fund receives an order. If you do not have a dealer, the Fund can refer you
to one. The minimum initial investment is $1,000 ($100 for the Monthomatic
Investment Plan), and the minimum subsequent investment is $50, but such minimum
amounts may be changed at any time in the Fund's discretion. The Fund reserves
the right to redeem Fund accounts that are reduced to a value of less than
$1,000 (for any reason other than fluctuation in the market value of the Fund's
portfolio securities). Should the Fund elect to exercise this right, the
investor will be notified before such redemption is processed that the value of
the investor's account is less than $1,000 and that the investor will have sixty
days to increase the account to at least the $1,000 minimum amount before the
account is redeemed. The Fund allocates net interest income to those shares for
which the Fund has received payment. The Fund receives the entire public
offering price of all shares sold.
Orders for the purchase of shares will be confirmed at a price based on the
net asset value next determined after receipt of the order by the Fund. However,
orders received by dealers prior to the determination of net asset value (See
"Net Asset Value.") and received by the Fund prior to the close of its business
day will be confirmed at a price based on the net asset value effective on that
day. Dealers are obligated to transmit orders promptly.
No sales charge is imposed when shares are purchased. However, a contingent
deferred sales charge is imposed if certain shares are redeemed within five
years after their purchase. See "Redemption of Shares." The Underwriter will pay
a sales commission to investment dealers and to its salesmen who sell Fund
shares. The Underwriter may also provide additional promotional incentives to
dealers who sell Fund shares. In some instances, these incentives may be offered
only to certain dealers who have sold or may sell significant amounts of shares.
The Fund reserves the right to withdraw all or any part of the offering
made by this Prospectus and to reject purchase orders. Also, from time to time,
the Fund may temporarily suspend the offering of its shares to new investors.
During the period of such suspension, persons who are already shareholders of
the Fund normally will be permitted to continue to purchase additional shares
and to have dividends reinvested.
In order to facilitate redemptions and to eliminate the need for
safekeeping, the Transfer Agent will not issue certificates for shares unless
requested to do so. A shareholder may obtain a certificate by writing to the
Transfer Agent at the address on the cover of the Prospectus.
Shareholders should direct their inquiries to the Fund at the address and
telephone number shown on the cover page of the Prospectus or to the investment
dealer from which they received the Prospectus.
Robert E. Walstad and Peter A. Quist, who are directors and the president-
treasurer and vice president-secretary, respectively, of the Fund, are also the
only two directors and officers of the Underwriter. The Underwriter is a
subsidiary of ND Holdings, Inc., a North Dakota venture capital corporation.
17
MONTHOMATIC INVESTMENT PLAN
A shareholder may purchase additional Fund shares through an automatic
investment program (minimum initial investment is $100) . With the
Monthomatic Investment Plan ("Monthomatic"), monthly investments (minimum $50)
are made automatically from the shareholder's account at a bank, savings and
loan association, or credit union into the shareholder's Fund account. By
enrolling in Monthomatic, the shareholder authorizes the Fund and its agents to
either draw checks or initiate Automated Clearing House debits against the
designated account at a bank or other finanical institution. Such account must
have check or draft writing privileges. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Underwriter for appropriate forms.
A shareholder may terminate the Monthomatic by sending written
notice to the Transfer Agent at the address shown on the back cover of the
Prospectus. Termination by a shareholder will become effective within 7 days
aafter the Transfer Agent has received the request. The Fund may immediately
terminate a shareholder's Monthomatic in the event that any item is
unpaid by the shareholder's financial institution. The Fund may terminate or
modify this privilege at any time.
DISTRIBUTION PLAN
Although Fund shares are sold without an initial sales charge, the
Underwriter pays a sales commission equal to 33/4% (1% on sales of $1 million or
more) of the amount invested to dealers who sell shares (excluding sales to
investors exempt from the contingent deferred sales charge). In recognition of
services provided to shareholders, the Underwriter may also make service
payments to dealers at the annual rate of up to 0.25% of the average net assets
(computed as described under "Net Asset Value") which are attributable to
shareholders of the Fund for whom such dealers are designated as the dealers of
record. Among the various services which dealers provide shareholders are
answering shareholder inquiries with respect to the Fund on an ongoing basis,
assisting in redeeming shares, interpreting confirmations, statements, and
other documents, and communicating with the Fund and its Transfer Agent and
Custodian.
To compensate the Underwriter for its services and expenses in distributing
shares, including the foregoing payments, the Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940. The Plan provides for monthly payments by the Fund to the Underwriter at
the annual rate of 0.85% of the average daily net assets of the Fund. The Plan
must be approved annually by the Fund's Board of Directors and may be terminated
at any time by a majority vote of the directors who are not "interested persons"
of the Fund and have no direct or indirect financial interest in the opera
tion of the Plan or in the Distribution Agreement or in any other agreement
related to the Plan (the "Qualified Directors") or by vote of a majority of the
outstanding shares of the Fund. If the Plan is terminated and not continued, the
Underwriter is not legally entitled to any payments for amounts expended but not
yet recovered. The Plan may not be amended so as to increase materially
the amount of the fee unless approved by a vote of at least a majority of the
outstanding shares of the Fund. In addition, no material amendment to the Plan
may be made unless approved by the Fund's Board of Directors. In addition to
reimbursing the Underwriter for commissions previously paid to dealers and
related financing costs (together with amounts received from contingent
deferred sales charges), the Plan also provides the Underwriter with reasonable
compensation for its services and other expenses. Other expenses incurred by
the Underwriter may include allocable overhead expenses, such as salaries,
rent, printing, and communications.
18
During periods of substantial sales of shares, the commissions paid by the
Underwriter to dealers may, together with other distribution expenses, exceed
the amount of Plan payments it receives. This is likely to be the case in the
early years of the Fund's operations. In other periods, the payments under the
Plan may exceed the amount of commissions and other distribution expenses paid
by the Underwriter, which has the effect of reimbursing the Underwriter for
distribution expenses incurred in prior periods. Payments made to the
Underwriter under the Plan are not dependent upon expenses incurred, and in any
given year the Underwriter may have fewer expenses than the amount of the
payments, thus creating a "profit."
EXCHANGE PRIVILEGE
By contacting the Transfer Agent, a shareholder may exchange some or all of
his shares in any of the funds underwritten by ND Capital, Inc. or Ranson
Capital Corporation at net asset value, subject to these conditions: (1) The
length of time of the investment will be carried forward to the Fund. (2) If
you paid a front-end sales charge, no contingent deferred sales charge will
be imposed in the event you redeem any or all of your shares. (3) If the
original fund is subject to a contingent deferred sales charge ("CDSC"), the
CDSC will be carried forward into the Fund and will be applied in the event
you redeem any or all of your shares.
Each exchange involves the redemption of fund shares to be exchanged and
the purchase of Fund shares. As a result, any gain or loss on the redemption of
fund shares exchanged is reportable on the shareholder's federal income tax
return. The exchange privilege may be changed or discontinued upon 60 days'
written notice to shareholders and is available only to shareholders in states
where such exchanges may be legally made. A shareholder considering an exchange
should obtain and read the prospectus of the Fund and consider the differences
between it and the fund whose shares he owns before making an exchange.
For further information on how to exercise the exchange privilege, contact
the Transfer Agent.
REDEMPTION OF SHARES
REDEMPTIONS
Any shareholder may require the Fund to redeem shares. All registered owners
must sign a Letter of Instruction which needs to be Signature Guaranteed if the
request is over $50,000 and sent to the Transfer Agent at the address shown on
the back cover of the prospectus. When certificates for shares have been
issued, they must be mailed to or deposited with the Transfer Agent, along with
a duly endorsed stock power with signatures guaranteed over $50,000 and
accompanied by a written request for redemption. Signatures must be guaranteed
by a commercial bank, trust company, savings and loan association, or member
firm of a national securities exchange. A notary public may not provide a
signature guarantee. The redemption request and stock power must be signed
exactly as the account is registered including any special capacity of the
registered owner. The redemption price will be the net asset value next
determined following receipt of a properly executed request with any required
documents, less any applicable contingent deferred sales charge, as described
below. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed letter of instructions accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is requested to redeem
shares for which it may not yet have received good payment (e.g., cash or
certified check on a United States bank), it may delay the mailing of a
redemption check until such time as it has assured itself that good payment
has been collected for the purchase of such shares (which will generally be
within 15 calendar days).
19
CONTINGENT DEFERRED SALES CHARGE
Except as otherwise provided below, a contingent deferred sales charge
("charge") is imposed only if a shareholder redeems shares purchased within the
preceding five years. Shares acquired by reinvestment of dividends may be
redeemed without charge even though acquired within five years. In addition, a
number of shares having a value equal to any net increase in the value of all
shares purchased by the shareholder during the preceding five years will be
redeemed without a contingent deferred sales charge. Subject to the foregoing
exclusions, the amount of the charge is determined as a percentage of the
original purchase price of the redeemed shares and will depend on the number of
years the dollar amount being redeemed was invested, according to the following
table:
YEAR SINCE REDEMPTION PERCENTAGE CONTINGENT
AMOUNT WAS INVESTED DEFERRED SALES CHARGE
First............................4.0%
Second...........................4.0%
Third............................3.0%
Fourth...........................2.0%
Fifth............................1.0%
Sixth and following............No Charge
If the initial amount of purchase is $1 million or more, the charge is
reduced to 1% and only applies during the first year of purchase. In addition,
purchases totaling $1 million or more made within 13 months of the initial
purchase date qualify for this exception, provided that the purchaser notifies
the Fund in writing at the time of the initial purchase of his or her intent to
purchase $1 million or more within 13 months and subsequently satisfies this
condition. Any shares purchased and sold within the 13-month period will be
deducted in computing total purchases, and the charge applies for one year after
purchases total a minimum of $1 million.
All purchases are considered made on trade date . In determining whether a
contingent deferred sales charge is payable on any redemption, the Fund will
first redeem shares not subject to any charge. Thereafter, in determining the
applicable percentage rate, the amount of dollars redeemed will be charged
against the aggregate cost of shares purchased in each
year, beginning with the shares purchased earliest. This will result in a
shareholder paying the lowest possible contingent deferred sales charge rate.
For an example illustrating the operation of the contingent deferred sales
charge, see "Purchase and Redemption of Shares" in the Statement of Additional
Information.
The Fund may sell shares without a contingent deferred sales charge to
directors, officers, and employees (including retirees) of the Fund, of ND
Holdings, Inc., of ND Money Management, Inc., and of ND Capital, Inc., for
themselves or their spouses, children, or parents and parents of spouse, or to
any trust, pension, or profit-sharing, or other benefit plan for only such
persons at net asset value and in any amount. The Fund may also sell shares
without a contingent deferred sales charge to broker-dealers having sales
agreements with ND Capital, Inc., and registered representatives and other
employees of such broker-dealers, including their spouses and children; to
financial institutions having sales agreements with ND Capital, Inc., and
employees of such financial institutions, including their spouses and children;
and to any broker-dealer, financial institution, or other qualified firm which
receives no commissions for selling shares to its clients.
ND Capital, Inc., receives the entire amount of any contingent deferred
sales charges assessed.
20
REINSTATEMENT PRIVILEGE
You may reinvest up to the amount of your redemption proceeds free of all
sales charges. An investor using this privilege a year or more after such
investor redeemed shares of the Fund must file a new account application and
provide proof that such investor was a shareholder of the Fund. The Fund
reserves the right to modify or terminate this privilege at any time. You will
receive the net asset value per share the day your check arrives at the Fund. If
you were charged a contingent deferred sales charge on your redemption, the
amount you were charged will be reinstated as additional shares upon repurchase
in proportion to the reinvestment amount of your redemption proceeds.
SYSTEMATIC WITHDRAWL PLAN
A shareholder who owns shares with an aggregate value of $5,000 or more may
establish a Systematic Withdrawal Plan (the "Plan"). Under the Plan, a
shareholder may redeem at net asset value, subject to any applicable contingent
deferred sales charge (see Contingent Deferred Sales Charge above), the number
of full and fractional shares that will produce whatever monthly, quarterly,
semi-annual, or annual payments (minimum $50 per payment) are selected. No
additional charge is made for this service.
A shareholder who participates in the Monthomatic Investment Plan is
ineligible to participate in the Plan. If payments exceed reinvested dividends
and distributions, a shareholder's shares will be reduced and eventually
depleted. The Plan may be terminated at any time by a shareholder of the
Fund.
PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent yield,
and total return figures.
Yield reflects the income per share deemed earned by the Fund's portfolio
investments. Yield is determined by dividing the net investment income per share
deemed earned during the preceding 30-day period by the offering price per share
on the last day of the period and annualizing the result. Tax equivalent yield
shows the yield from a taxable investment which would produce an after-tax yield
equal to that of a fund that invests in tax-exempt securities. lt is computed by
dividing the tax-exempt portion of the Fund's yield (as calculated above) by one
minus a stated income tax rate and adding the product to the portion (if any) of
the Fund's yield that is not tax-exempt. Yields are calculated according to
accounting methods that are standardized for all stock and bond funds. Because
yield calculation methods differ from the methods used for other accounting
purposes, the Fund's yield may not equal its distribution rate, the income paid
to an investor's account, or the income reported in the Fund's financial
statements.
Total return is the percentage change in the value of a
hypothetical investment that has occurred in the indicated time period, taking
into account the imposition of various fees, and assuming the reinvestment of
all dividends and distributions. Cumulative total return reflects the Fund's
performance over a stated period of time. Average annual total return reflects
the hypothetical annually compounded return that would have produced the same
cumulative total return if the Fund's performance had been constant over the
entire period. In calculating cumulative and average annual total return, the
maximum contingent deferred sales charge is deducted from the hypothetical
investment. Such total return quotations may be accompanied by quotations
which do not reflect contingent deferred sales charges, and which therefore
will be higher.
21
The Fund may also include in advertisements performance rankings
compiled by independent organizations such as Lipper Analytical Services and
publications which monitor the performance of mutual funds. Performance
information may be quoted numerically or may be represented in a table, graph,
or other illustration.
All performance figures are based on historical results and are not
intended to indicate future performance. A more detailed description of the
foregoing performance figures and their methods of computation is contained in
the Fund's Statement of Additional Information under CALCULATION OF PERFORMANCE
DATA.
22
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23
ND
TAX-FREE
FUND, INC.
1 North Main
Minot, ND58703
(701) 852-5292
DIRECTORS
Lynn W. Aas
Minot, ND
Orlin W. Backes
Minot, ND
Arthur A. Link
Bismarck, ND
Peter A. Quist
Bismarck, ND
Robert E. Walstad
Minot, ND
INVESTMENT ADVISER
ND Money Management, Inc.
1 North Main
Minot, ND 58703
PRINCIPAL UNDERWRITER
ND Capital, Inc.
1 North Main
Minot, ND 58703
CUSTODIAN
First American Bank West
20 First Street SW
P.O. Box 1548
Minot, ND 58702
TRANSFER AGENT
ND Resources, Inc.
1 North Main Minot, ND 58703
P.O. Box 759 Minot, ND 58702
INDEPENDENT PUBLIC ACCOUNTANT
Brady, Martz & Associates, P.C.
24 West Central Avenue
Minot, ND 58701
ND TAX-FREE
FUND, INC.
A mutual fund for investors
seeking high current income
exempt from federal and
North Dakota income taxes
==================
PROSPECTUS
MAY 1, 1998
[LOGO OF INTEGRITY ND TAX FREE FUND APPEARS HERE]
INTEGRITY MUTUAL FUNDS
ACCOUNT APPLICATION ND TAX-FREE FUND, INC.
Mail To: ND TAX-FREE FUND, INC.
P.O. BOX 759, MINOT, ND 58702-0759
If you have any questions on this form or any Shareholder Services questions,
phone (800) 601-5593.
________________________________________________________________________________
1. ACCOUNT REGISTRATION (Please print) - First Name, Middle Initial and Last
Name
____ INDIVIDUAL ____JOINT* *Joint tenants with rights of survivorship,
unless you specify otherwise.
_________________________________ _____________________________________________
Name Joint Owner's Name
____GIFT OR TRANSFER TO A MINOR (UGMA/UTMA)
____________________________________________as custodian for___________________
Custodian's name Minor's name
_________________ under the_______
State
Uniform Gifts/Transfers to Minors Act
____TRUST*
____________________________________as trustee(s) of____________________________
Trustee's name Name of trust agreement
________________________
Date of trust agreement
*Please include copy of first and last page of trust agreement.
____CORPORATION/OTHER ENTITY*
____________________________________ _________________________________________
Name of corporation Type of organization (i.e., corporation,
or other entity non-profit, partnership, etc.)
*Please attach a copy of the corporate resolution showing the
person(s) authorized to act on this account.
____TOD (Transfer on Death)* *Transfer on Death form available upon request.
_______________________________________________________________________________
2. ADDRESS_________________________ CITY, STATE, ZIP___________________
TELEPHONE NUMBER________________________
_______________________________________________________________________________
3. INITIAL INVESTMENT
Check enclosed for $__________________ . Minimum initial investment is $1,000
($100 in Monthomatic Plan); subsequent $50.
Make check payable to: ND TAX-FREE FUND, INC.
_______________________________________________________________________________
4. DIVIDENDS Choose how you wish to receive dividends. IF NO BOX IS CHECKED,
OPTION A WILL BE ASSIGNED.
A. ____ All income and capital gains dividends reinvested into my account.
B. ____ All income dividends in cash and capital gains reinvested in my
account. Complete cash dividends section below.
C. ____ All income and capital gains dividends paid to me in cash.
Complete cash dividends section below.
D. ____ All income and capital gains dividends reinvested in Integrity
Fund of Funds account #____________________________________.
Please send cash dividends to: _______ Account registration address OR
_______Special payee as follows:
Name____________________________________________________________________________
Address_____________________________ City, State, Zip___________________________
Account number (if applicable)__________________ Attach voided check if payable
to your bank account (Signature Guarantee not required).
* If payable to person or address other than registration, PLEASE Signature
Guarantee here:
________________________________________________________________________________
5. SYSTEMATIC INVESTMENT PROGRAM (MONTHOMATIC) COMPLETE THE FOLLOWING IF YOU ARE
ESTABLISHING A SYSTEMATIC INVESTMENT PROGRAM.
I authorize the Fund's Agent to draw checks or initiate Automated Clearing
House ("ACH") debits against the bank account provided below in the amount of
$________________________ (minimum $50).
Please check one: beginning on the _____5th OR the _____20th
_____________________ (indicate month).
Name of Depositor___________________ Bank Account Number_______________________
(As shown on bank records)
Name of Bank________________________ Address of Bank___________________________
(The account must have check or draft writing privileges)
City________________________________ State, Zip________________________________
As a convenience to us, we hereby request and authorize you to honor and charge
to our account (i) checks drawn on our account by ND Tax-Free Fund,
Inc. , and payable to the order of the Fund, and (ii) Automated Clearing
House ("ACH")debit entries initiated by any of us through ND Tax-Free Fund
, Inc. , for the account of the Fund, provided in either case that there are
sufficient collected funds in said account to pay the same upon presentation.
We agree thatyour rights with respect to each such check or ACH debit shall be
the same as if either were signed personally by each of us. This authority is
to remain ineffect until revoked by us in writing to you, and until you
actually receive such notice, we agree that you shall be fully protected in
honoring any suchchecks or ACH debits. We further agree that if any check or
ACH debit bedishonored, whether with or without cause and whether intentionally
or inadvertently, you shall be under no liability whatsoever.
Signature(s) of depositor(s):* Date:___________________ *Sign exactly as
shown on bank records
X_________________________________ X___________________________________________
Signature Signature
Please attach a VOIDED check to ensure correct encoding.
6. SYSTEMATIC WITHDRAWAL PLAN (Note: All distributions from the Fund must be
reinvested.)
Systematic Withdrawal (available only for accounts of $5,000 or more) - Redeem
sufficient shares or dollars on the 1st of the month and send check to the owner
listed above: ____Monthly ____Quarterly ____Semiannually ____ Annually
for $______________ or ____________ shares (minimum $50). The first redemption
is to take place on the 1st of ______________________________ (Indicate month).
If systematic withdrawal checks are payable to person or address other than as
registered above, make check payable to:
Name____________________________________________________________________________
Address_____________________________________ City, State, Zip___________________
Account Number (if applicable)______________ Attach voided check if payable to
your bank account (Signature Guarantee not required).
If payable to person or address other than registration, PLEASE Signature
Guarantee here:
________________________________________________________________________________
7. YOUR SIGNATURE AND TAX CERTIFICATIONS
See enclosed substitute instructions and important notice. The Fund reserves the
right to refuse to open an account without either a certified taxpayer
identification number ("TIN") or a certification of foreign status. Failure to
provide the tax certifications in this section may result in backup withholding
on payments relating to your account and/or in your inability to qualify for
treaty withholding rates.
Please Fill In
______________________________________ OR ______________________________________
Social Security Number Employer Identification Number
(In UGMA/UTMA Minor's SSN)
I am a citizen of: ____ U.S. ____ My country of residence for tax purposes is:
____U.S. Other_____________________________
Check one of the following:
______ The number shown above is my correct TIN. I am not subject to backup
withholding due to underreporting of interest or dividend income either
because no notification has been received from the IRS or because the
IRS has notified me that I am no longer subject to backup withholding.
(If you are subject to backup withholding, please cross out the second
sentence.)
______ Awaiting TIN. A TIN has not been issued to me, but I am in the process
of applying for a TIN from either the appropriate Internal Revenue
Service Center or Social Security Administration Office. I understand
that if I do not provide a TIN to the Fund within 60 days, the Fund is
required to commence backup withholding until I provide a certified TIN.
I am not subject to backup withholding due to underreporting of interest
or dividend income either because no notification has been received from
the IRS or because the IRS has notified me that I am no longer subject
to backup withholding. (If you are subject to backup withholding, please
cross out the third sentence.)
______ Exempt Recipient. I am an Exempt Recipient. The instructions give a list
of the most common Exempt Recipients. (You should still provide a TIN.)
______ Exempt Foreign Person. I am an Exempt Foreign Person as explained in the
instructions.
Under the penalties of perjury, I certify that (1) the information provided on
this application is true, correct, and complete, (2) I have read the prospectus
for the Fund in which I am investing and agree to the terms thereof, and (3) I
am of legal age or an emancipated minor.
Date______________________________________________
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
X______________________________________ X_______________________________________
Signature Signature
________________________________________________________________________________
8. BROKER/DEALER USE ONLY (Please print)
We hereby submit this application for the purchase of shares of ND Tax-Free
Fund, Inc., indicated within the terms of our selling agreement with ND
Holdings, Inc., and with the prospectus for ND Tax-Free Fund, Inc.
Firm Name______________________________ Branch Address_______________________
Representative's Name__________________ _____________________________________
Representative's Number________________ Representative's Phone Number________
Branch Number_______________________
________________________________________________________________________________
9. ADDITIONAL INFORMATION
Each time there is a transaction in a Shareholder Account, the shareholder and
representative will receive a confirmation statement showing the current
transaction.
All correspondence regarding Shareholder Accounts should be addressed to ND
Resources, Inc., P.O. Box 759, Minot, ND 58702. If you have any questions, call
(800) 601-5593.
Fund exchanges are acceptable within Integrity Mutual Funds. The account
being exchanged must bear the same account registration or must be accompanied
by a Signature Guarantee if the account value is over $50,000. A Letter of
Instruction stating from what fund to what fund is needed to do any exchange
and must be signed by all registered owners.
Phone orders: Payment for share purchases by telephone should be received within
three business days. Payment must be received within 7 days of the order or the
trade may be canceled, and the dealer or broker placing the trade will be liable
for any losses. It is a dealer's or broker's responsibility to promptly forward
payment and registration instructions (or completed applications) to the
Transfer Agent for shares being purchased.
When a client is requesting to change his account registration, a Letter of
Instruction should be sent to the Transfer Agent. It should specify exactly
what change is to be made and must be signed by all registered owners. If the
account value is over $50,000, the signatures must also be Signature
Guaranteed.
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
ND TAX-FREE FUND, INC.
1 NORTH MAIN
MINOT, NORTH DAKOTA 58703
(701) 852-5292
(800) 601-5593 Transfer Agent
(800) 276-1262 Marketing
This Part B Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectus of ND Tax-Free Fund, Inc.
(the "Fund"), dated May 1, 1998 . The Prospectus may be obtained without
charge from the Fund.
______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investments.......................................... B-2
Investment Policies and Techniques................... B-4
Investment Restrictions.............................. B-7
Management of the Fund............................... B-9
Control Persons and Principal Holders of Securities.. B-11
Investment Advisory and Other Services............... B-11
Portfolio Transactions............................... B-14
Purchase and Redemption of Shares.................... B-14
Underwriter.......................................... B-15
Dividends and Taxes.................................. B-16
Calculation of Performance Data...................... B-18
Tax-Free Versus Taxable Income....................... B-20
Appendix--Ratings of Investments..................... B-20
Financial Statements................................. F-1
</TABLE>
INVESTMENTS
MUNICIPAL SECURITIES
Municipal Securities (as defined in the Prospectus) are debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, bridges, highways,
housing, hospitals, mass transportation, schools, streets, and water and sewer
works. Other public purposes for which Municipal Securities may be issued
include refunding of outstanding obligations, obtaining funds for general
operating expenses, and obtaining funds to loan to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port, or parking facilities, air or
water pollution control facilities, and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal. Such obligations,
which may include lease arrangements, are included within the term Municipal
Securities if the interest paid thereon qualifies as exempt from federal income
tax. Other types of industrial development bonds, the proceeds of which are used
for the construction, equipment, repair, or improvement of privately-operated
industrial or commercial facilities, may constitute Municipal Securities,
although the current federal tax laws place substantial limitations on the size
of such issues.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development bonds that are Municipal Securities are in most cases revenue bonds
and do not generally involve the pledge of the credit of the issuer of such
bonds. There are, of course, variations in the degree of risk of Municipal
Securities, both within a particular classification and between classifications,
depending upon numerous factors.
The yields on Municipal Securities are dependent upon a variety of factors,
including general money market conditions, general conditions of the Municipal
Securities market, size of particular offering, maturity of the obligation, and
rating of the issue. The ratings of Moody's Investors Service, Inc., and
Standard & Poor's Corporation represent their opinions as to the quality of the
Municipal Securities which they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon, and rating
may have different yields, while Municipal Securities of the same maturity and
coupon with different ratings may have the same yield. The Fund will not
purchase or hold more than 5% of its net assets in securities rated below
investment grade.
The Fund may purchase participation interests in Municipal Securities (such
as industrial development bonds) from financial institutions. A participation
interest gives the Fund an undivided interest in the Municipal Securities in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Securities. These instruments may be variable or fixed
rate.
B-2
Not more than 5% of the net assets of the Fund will be invested in
participation interests in Municipal Securities during the coming year.
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Litigation challenging the validity under state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which litigation could
ultimately affect the validity of those Municipal Securities or the tax-free
nature of the interest thereon.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest in any of the
following short-term, fixed-income obligations, the interest on which is subject
to federal income taxes: obligations of the United States Government, its
agencies, or instrumentalities; debt securities rated within the three highest
grades of Moody's Investors Service, Inc., or Standard & Poor's Corporation;
commercial paper rated in the highest two grades by either of those rating
services (P-l, P-2 or A-l, A-2, respectively); certificates of deposit of
domestic banks with assets of $25,000,000 or more; and Municipal Securities or
any of the foregoing temporary investments subject to short-term repurchase
agreements. When the Fund invests in accordance with this policy, it may do so
without percentage limits. A repurchase agreement is an instrument under the
purchaser acquires ownership of a security from a broker-dealer or bank that
agrees to repurchase the security at a mutually agreed upon time and price
(which price is higher than the purchase price), thereby determining the yield
during the holding period. Maturity of the securities subject to repurchase may
exceed one year. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund might incur expenses in enforcing its rights and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Dividends from interest income from temporary
investments may be taxable to shareholders as ordinary income. See "Dividends
and Taxes" in the Prospectus. For a description of the ratings of commercial
paper and other debt securities permitted as temporary investments, see
"Appendix--Ratings of Investments."
B-3
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
The Fund may engage in futures and options transactions in accordance with
its investment objective and policies. The Fund intends to engage in such
transactions if it appears advantageous to the Investment Adviser to do so in
order to pursue its investment objective, to hedge against the effects of
fluctuating interest rates, and to stabilize the value of its assets. The use of
futures and options, possible benefits, and attendant risks are discussed below,
along with information concerning certain other investment policies and
techniques.
FINANCIAL FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the future delivery
of a financial instrument, such as a security, or the cash value of a security
index. This investment technique is designed primarily to hedge (i.e., protect)
against anticipated future changes in interest rates or market conditions which
otherwise might adversely affect the value of securities which the Fund holds or
intends to purchase. A "sale" of a futures contract means the undertaking of a
contractual obligation to deliver the securities or the cash value of an index
called for by the contract at a specified price during a specified delivery
period. A "purchase" of a futures contract means the undertaking of a
contractual obligation to acquire the securities or cash value of an index at a
specified price during a specified delivery period. At the time of delivery in
the case of fixed income securities pursuant to the contract, adjustments are
made to recognize differences in value arising from the delivery of securities
with a different interest rate than that specified in the contract. In some
cases, securities called for by a futures contract may not have been issued at
the time the contract was written. The Fund will not enter into any futures
contracts or options on futures contracts if the aggregate of the contract value
of the outstanding options written by the Fund would exceed 50% of the total
assets of the Fund.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. All transactions in the futures
market are made, offset, or fulfilled through a clearing house associated with
the exchange on which the contracts are traded. The Fund will incur brokerage
fees when it purchases or sells contracts and will be required to maintain
margin deposits. Futures contracts entail risks. If the Investment Adviser's
judgment about the general direction of interest rates or markets is wrong, the
overall performance may be poorer than if no such contracts had been made.
There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the debt securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than
B-4
engage in closing transactions because of the resultant reduction in the
liquidity of the futures market. In addition, from the point of view of
speculators, the margin requirements in the futures market are less onerous than
margin requirements in the cash market. Thus, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends by the Investment Adviser may still not result in a successful hedging
transaction. If this should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase and write call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the futures contract to the holder
at the exercise price. The Fund would be required to deposit with its Custodian
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it. Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by the Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
OPTIONS ON SECURITIES
The Fund may write (sell) covered call options as long as it owns
securities which are acceptable for escrow purposes and may write secured put
options, which means that as long as the Fund is obligated as a writer of a put
option, it will invest an amount not less than the exercise price of the put
option in Municipal Securities or temporary investments. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the option period. A put
option gives the purchaser the right to sell, and the writer has the obligation
to buy, the underlying security at the exercise price during the option period.
The premium received for writing an option will reflect, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the price volatility of the underlying
security, the option period, supply and demand, and interest rates. The Fund may
write or purchase spread options, which are options for which the exercise price
may be a fixed dollar spread or yield spread between the security underlying the
option and another security that is used as a bench mark. The exercise price of
an option may be below, equal to, or above the current market value of the
underlying security at the time the option is written. The buyer of a put who
also owns the related securities is protected by ownership of a put option
against any decline in that security's price below the exercise price less the
amount paid for the option. The ability to purchase put options allows the Fund
to protect capital gains in an appreciated security it owns without being
required to actually sell that security. At times, the Fund would like to
establish a position in a security upon which call options are available. By
purchasing a call option, the Fund is able to fix the cost of acquiring the
securities, this being the cost of the call plus the exercise price of the
B-5
option. This procedure also provides some protection from an unexpected downturn
in the market, because the Fund is only at risk for the amount of the premium
paid for the call option which it can, if it chooses, permit to expire.
OPTIONS ON SECURITIES INDICES
The Fund also may purchase and write call and put options on securities
indices in an attempt to hedge against market conditions affecting the value of
securities that the Fund owns or intends to purchase and not for speculation.
Through the writing or purchase of index options, the Fund can achieve many of
the same objectives as through the use of options on individual securities.
Options on securities indices are similar to options on a security except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash, and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its Custodian eligible securities equal in value to 100% of the
exercise price, in the case of a put, or the contract value, in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess.
Options on futures contracts and index options involve risks similar to
those risks relating to transactions in financial futures contracts described
above. Also, an option purchased by the Fund may expire worthless, in which
case the Fund would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS
The Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions involve a
commitment by the Fund to purchase securities with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. When
the Fund enters into a delayed delivery purchase, it becomes obligated to
purchase securities and it has all the rights and risks attendant to ownership
of a security, although delivery and payment occur at a later date. The value
of fixed income securities to be delivered in the future will fluctuate as
interest rates vary. At the time the Fund makes the commitment to purchase a
security on a when-issued or delayed delivery basis, it will record the
transaction and reflect the amount due and the value of the security in
determining its net asset value. The Fund generally has the ability to close
out a purchase obligation on or before the settlement date, rather than to
purchase the security.
To the extent the Fund engages in when-issued or delayed delivery
purchases, it will do so
B-6
for the purpose of acquiring portfolio securities consistent with the Fund's
investment objective and policies and not for the purpose of investment leverage
or to speculate in interest rate changes. The Fund will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but the Fund reserves the right
to sell these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS
To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option, or
entering into a delayed delivery purchase, the Fund will maintain in a
segregated account with its Custodian cash or liquid high-grade debt securities
equal to the value of such contracts. The amount held by the Custodian is less
than the amount held by any futures commission agent as initial margin and will
be marked to market daily.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and to avoid "commodity pool operator" status,
the Fund will use futures and options positions only (a)for "bona fide hedging
purposes" (as defined in CFTC regulations) or (b)for other purposes so long as
aggregate initial margins and premiums required in connection with non-hedging
positions do not exceed 5% of the liquidation value of the investment company
portfolio. The Fund will not engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt to
hedge against changes in market conditions affecting the values of securities
which the Fund holds or intends to purchase.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which, together with
the investment objective and policies, cannot be changed without approval by
holders of a majority of its outstanding voting shares. As defined in the
Investment Company Act of 1940, this means the lesser of the vote of (a) 67% or
more of the outstanding shares of the Fund present at a meeting where more than
50% of the outstanding shares are present in person or by proxy; or (b) more
than 50% of the outstanding shares of the Fund. The Fund may not:
(l) Purchase securities or make investments other than in accordance with its
investment objectives and policies.
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or the State of North Dakota or its political
subdivisions, agencies, or instrumen-
B-7
talities) if as a result of such purchase 25% or more of the Fund's total assets
would be invested in any industry.
(3) Make loans, except in accordance with its investment objectives and
policies.
(4) Borrow money except for temporary or emergency purposes and then only in
amounts not exceeding the lesser of 10% of its total assets valued at cost, or
5% of its total assets valued at market, and, in any event, only if immediately
thereafter there is an asset coverage of at least 300%; or mortgage, pledge, or
hypothecate its assets in an amount exceeding 10% of its total assets to secure
temporary or emergency borrowing.
(5) Make short sales of securities.
(6) Write, purchase, or sell puts, calls, or combinations thereof, except in
accordance with its investment objective and policies.
(7) Purchase or retain the securities of any issuer if any of its officers or
directors or of the Investment Adviser owns beneficially more than 1/2 of 1% of
the securities of such issuer and together own more than 5% of the securities of
such issuer.
(8) Invest more than 15% of its net assets in illiquid securities, including (a)
securities which at the time of such investment are not readily marketable, (b)
securities restricted as to disposition under the federal securities laws, and
(c) repurchase agreements maturing in more than seven days.
(9) Invest for the purpose of exercising control or management of another
issuer.
(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts.
(11) Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the Municipal Securities of
issuers which invest in or sponsor such programs.
(12) Invest more than 10% of its total assets in securities of other investment
companies, except in connection with a merger, consolidation, reorganization, or
acquisition of assets.
(13) Underwrite securities issued by others, except to the extent that the Fund
may be deemed to be an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
(14) Issue senior securities as defined in the Investment Company Act of 1940,
except money borrowed as permitted by (4) above.
(15) Invest in real estate, although it may invest in Municipal Securities which
are secured by real estate and securities of issuers which invest or deal in
real estate.
During the coming year, the Fund does not intend to invest more than 5% of
its net assets in securities of other investment companies.
B-8
Any policy or restriction which involves a maximum percentage of securities
or assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. Changes due to market
action will not cause a violation of a policy or restriction. The Fund may
invest more than 25% of its net assets in industrial development bonds.
MANAGEMENT OF THE FUND
* "Interested person" as defined in the Investment Company Act of 1940
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE WITH FUND DURING PAST 5 YEARS (1)
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lynn W. Aas (2) Director Retired; Attorney; Director, ND Holdings, Inc.;
904 NW 27th Director, Montana Tax-Free Fund, Inc., South
Minot, North Dakota 58701 Dakota Tax-Free Fund, Inc., and Integrity Fund of
76 Funds, Inc.; Trustee, Ranson Managed Portfolios;
Director, First Western Bank & Trust
Orlin W. Backes (3) Director Attorney; Director,Montana Tax-Free Fund, Inc.,
15 2nd Ave. SW, Suite 305 South Dakota Tax-Free Fund, Inc., and Integrity Fund of
Minot, North Dakota 58701 Funds, Inc.; Trustee, Ranson Managed Portfolios;
62 Director, First Western Bank & Trust
Arthur A. Link (4) Director Director, Montana Tax-Free Fund, Inc., South Dakota
2001 Grimsrud Drive Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.;
Bismarck, North Dakota 58501 Trustee, Ranson Managed Portfolios; Director, Band
83 Center First
*Peter A. Quist (5) Director Director and Vice President, ND Holdings, Inc.;
1 North Main Vice President Director, Vice President, and Secretary, ND Money
Minot, North Dakota 58703 Secretary Management, Inc., ND Capital, Inc., ND Resources,
64 Inc., Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., and Integrity Fund of
Funds, Inc.; Ranson Capital Corporation; Vice
President and Secretary, Ranson Managed Portfolios
*Robert E. Walstad (6) Director Director and President, ND Holdings, Inc.; Director,
1 North Main President President, and Treasurer, ND Money Management,
Minot, North Dakota 58703 Treasurer Inc., ND Capital, Inc., ND Resources, Inc., Montana
53 Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
and Integrity Fund of Funds, Inc.; Trustee, Chairmain,
President, and Treasurer, Ranson Managed Portfolios;
Director, President, CEO, and Treasurer, Ranson
Capital Corporation
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
B-9
(1) Except as otherwise indicated, each individual has held the office(s) shown
for the past five years. Mssrs. Aas, Backes, Link, and Walstad were elected
to the Board of Trustees of Ranson Managed Portfolios at a joint special
meeting of the shareholders of The Kansas Municipal Fund Series, The Kansas
Insured Municipal Fund - Limited Maturity (subsequently renamed "The Kansas
Insured Intermediate Fund") Series, and The Nebraska Municipal Fund Series
of Ranson Managed Portfolios held on December 11, 1995, but did not assume
office until January 5, 1996. Mssrs. Quist and Walstad were elected as
directors and officers of The Ranson Company, Inc., and Ranson Capital
Corporation on January 5, 1996.
(2) Mr. Aas resigned as a director of ND Holdings, Inc., on August 17, 1994. He
was elected to the board of directors of Integrity Fund of Funds, Inc., on
August 19, 1994, and to the boards of Montana Tax-Free Fund, Inc.,
South Dakota Tax-Free Fund, Inc., and the Fund on December 2, 1994.
(3) Mr. Backes was elected to the boards of directors of Montana
Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc., Integrity Fund of
Funds, Inc., and the Fund in 1995.
(4) Mr. Link has served on the boards of directors of Montana Tax-Free
Fund, Inc., South Dakota Tax-Free Fund, Inc., Integrity Fund of Funds,
Inc., and the Fund since their inceptions.
(5) Mr. Quist has served on the boards of directors of Montana Tax-Free
Fund, Inc., Integrity Fund of Funds, Inc., and the Fund since their
inceptions. He was elected to the board of South Dakota Tax-Free Fund,
Inc., on April 7, 1995, and has served as the vice president and secretary
of each of the aforenamed funds since their inceptions.
(6) Mr. Walstad has served as a director and as the president and treasurer of
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
Integrity Fund of Funds, Inc., and the Fund since their inceptions.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
COMPENSATION TABLE*
- - ------------------------------------------------------------------------------------------------------
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Fund and Fund
Name of Person, Compensation as Part of Fund Benefits Upon Complex Paid to
Position(s) from Fund Expenses Retirement Directors
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn W. Aas $2,035.42 -0- -0- $10,000.00
Director
Orlin W. Backes $2,035.42 -0- -0- $10,000.00
Director
Arthur A. Link $2,035.41 -0- -0- $10,000.00
Director
Peter A. Quist -0- -0- -0- -0-
Director,
Vice President and
Secretary
Robert E. Walstad -0- -0- -0- -0-
Director, President,
and Treasurer
--------- ---------- --------- ---------
Totals $6,106.25 -0- -0- $30,000.00
- - ------------------------------------------------------------------------------------------------------
</TABLE>
* Directors who are not an "interested person" as that term is defined in the
1940 Act are paid an annual fee of $10,000 for serving on the boards of the
funds in the complex. Each of the funds, including the five series
of Ranson Managed Portfolios, pays a pro rata share of the fee based upon
its respective assets. Mssrs. Quist and Walstad, who are the only
"interested persons" of the funds, receive no compensation from the funds.
B-10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 9,1998 , no person owned of record or was known by
Registrant to own of record or beneficially 5 percent or more of Registrant's
outstanding shares, and the amount of shares owned by all officers and
directors of Registrant, as a group, was less than 1 percent of Registrant's
outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ND Money Management, Inc. (the "Investment Adviser"), has been retained
under an Investment Advisory Agreement to act as the Fund's investment adviser,
subject to the authority of the Board of Directors. The Investment Adviser is a
wholly-owned subsidiary of ND Holdings, Inc., a venture capital corporation
organized under the laws of the State of North Dakota on September 22, 1987.
The Investment Adviser was incorporated under
North Dakota law on August 19, 1988, and also serves as investment adviser for
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc., and
Integrity Fund of Funds, Inc. The address of the Investment Adviser is 1 North
Main, Minot, North Dakota 58703.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes at its own expense all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the Fund and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of the Fund. In addition, the Adviser pays the salaries and fees of
all officers and directors of the Fund who are affiliated persons of the
Investment Adviser. All other charges and expenses, as more fully described in
the Prospectus under "Expenses," are paid by the Fund.
Under the Investment Advisory Agreement, the Fund has agreed to pay the
Investment Adviser an annual fee, payable monthly, of 0.60% of the Fund's
average daily net assets. The Investment Adviser was paid $572,789, $560,900,
and $544,971 in advisory fees for fiscal years 1995, 1996, and 1997,
respectively.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Investment
Advisory Agreement relates, except a loss resulting from willful misfeasance,
bad faith, or gross negligence on the part of the Investment Adviser in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Investment Advisory Agreement.
B-11
The Investment Advisory Agreement continues in effect from year to year as
long as its continuation is approved at least annually by a majority of the
directors who are not parties to the Investment Advisory Agreement or interested
persons of any such party except in their capacity as directors of the Fund and
by the shareholders or the Board of Directors. It may be terminated at any time
upon 60 days' written notice by the Fund or by a majority vote of the
outstanding shares and will terminate automatically upon assignment.
Robert E. Walstad and Peter A. Quist, directors and officers of the Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Fund."
DISTRIBUTION PLAN
Although shares of the Fund are sold without an initial sales charge, ND
Capital, Inc. (the "Underwriter"), the Fund's principal underwriter, currently
pays dealers who sell Fund shares a commission equal to 3 3/4% (1% on sales of
$1 million or more) of the value of each sale. Such payments are made out of the
Underwriter's own funds. As a further inducement to the sale of Fund shares and
in recognition of the services provided to shareholders, the Underwriter may
also make payments to investment dealers at the annual rate of 0.25% of the
average net assets of the Fund which are attributable to shareholders of the
Fund for whom dealers are designated as the dealer of record. For this purpose,
"average net assets" attributable to a shareholder account means the product of
(i) the average daily share balance of the account times (ii) the Fund's average
daily net asset value per share. Such payments may be suspended or modified by
the Underwriter at any time and are subject to continuation of the Fund's
Distribution Plan (the "Plan") described below.
The Fund has adopted the Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Rule 12b-1 provides that any payments made by the Fund in
connection with the distribution of its shares may be made only pursuant to a
written plan describing all material aspects of the proposed financing of the
distribution and also requires that all agreements with any person relating to
the implementation of a plan must be in writing. The Fund has also entered into
a related Distribution Agreement with the Underwriter.
The Plan and the related Distribution Agreement provide that the Fund will
pay the Underwriter an annual fee for certain expenses incurred in connection
with the offer and sale of the Fund's shares. The fee is calculated daily and
paid monthly at the annual rate of 0.85% of the average daily net assets of the
Fund. The fee may be used by the Underwriter to cover any expenses primarily
intended to result in the sale of the Fund's shares, including, but not limited
to, sales commissions and other fees paid to dealers who sell Fund shares;
payments made to, and expenses of, persons who provide support services in
connection with the distribution of the Fund's shares; costs relating to the
formulation and implementation of marketing and promotional activities; costs of
printing and distributing prospectuses, statements of additional information,
and reports of the Fund to prospective shareholders; costs involved in
preparing, printing, and distributing advertising and sales literature; and
other sales expenses.
B-12
The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority of the directors who are not "interested persons" of the
Fund and have no direct or indirect financial interest in the operation of the
Plan or in the Distribution Agreement or in any other agreement related to the
Plan (the "Qualified Directors"), cast in person at a meeting called for the
purpose of voting on such continuance. The Plan may be terminated at any time,
without penalty, by vote of a majority of the Qualified Directors or by vote of
the lesser of (a) 67% or more of the shares present at a meeting, if the holders
of more than 50% of the outstanding shares are present or represented by proxy;
or (b) more than 50% of the outstanding shares. Any amendment of the Plan to
increase materially the amount the Fund is authorized to pay thereunder would
require approval by shareholders as described in the preceding sentence. Other
material amendments to the Plan would be required to be approved by vote of the
Board of Directors of the Fund, including a majority of the Qualified Directors,
cast in person at a meeting called for that purpose. The Plan further provides
that as long as the Plan remains in effect, the selection and nomination of the
Qualified Directors will be committed to the discretion of the Qualified
Directors then in office. It is expected that payments made under the Plan will
serve to encourage the Underwriter and investment dealers to sell Fund shares
and to provide ongoing services to Fund shareholders.
The Underwriter has voluntarily agreed (not as part of the Distribution
Agreement) to waive a portion of the fee payable under the Distribution
Agreement during the early stages of the Fund's existence. The Fund incurred
$238,622, $303,489, and $452,996 in fees for the fiscal years ended December
31, 1995, 1996, and 1997, respectively. The Fund paid $452,996 in 12b-1 fees
for the fiscal year ended December 31, 1997. Amounts spend on distribution
expenses included $9,709 on advertising, $224,199 on compensation to dealers
(including commissions and service fees), and $32,478 on distribution related
overhead of the underwriter.
The Investment Adviser and the Underwriter are subsidiaries of ND Holdings,
Inc. ("Holdings") . Robert E. Walstad and Peter A. Quist, directors and
president and vice president, respectively, of Holdings, are also directors and
officers of the Fund, the Investment Adviser, and the Underwriter. See
"Management of the Fund." Mssrs. Walstad and Quist are also shareholders of
Holdings and, accordingly, may indirectly benefit from the payment of 12b-1
fees by the Fund to the Underwriter.
CUSTODIAN AND TRANSFER AGENT
First American Bank West, 20 First Street SW, Minot, North Dakota 58701,
serves as Custodian for the Fund's portfolio securities and cash. ND
Resources, Inc. ("Resources"), a wholly-owned subsidiary of ND Holdings, Inc., 1
North Main, Minot, North Dakota 58703, is the Fund's Transfer Agent. As Transfer
Agent, Resources performs many of the Fund's clerical and administrative
functions, for which it is paid a monthly fee ranging from .16 of 1% of the net
asset value of all outstanding Fund shares up to $10 million down to .09 of 1%
for net assets in excess of $50 million.
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Fund's independent public accountant, Brady, Martz & Associates, P.C.,
24 West Central Avenue, Minot, North Dakota 58701, audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's federal income tax return, and performs other professional accounting,
auditing, tax, and advisory services when engaged to do so by the Fund.
Shareholders will receive annual audited financial statements and semiannual
unaudited financial statements.
B-13
PORTFOLIO TRANSACTIONS
Allocation of portfolio brokerage transactions to various brokers is
determined by the Investment Adviser in its best judgment and in a manner deemed
fair and reasonable to shareholders. The primary consideration is prompt and
efficient execution of orders in an effective manner at the most favorable
price. Subject to this consideration, brokers who provide supplemental
investment research, statistical, or other services to the Investment Adviser
may receive orders for transactions by the Fund. Information thus received will
enable the Investment Adviser to supplement its own research and analysis with
the views and information of other securities firms and may be used for the
benefit of clients of the Investment Adviser other than the Fund. Research
services may include advice as to the value of securities; the advisability of
investing in, purchasing, or selling securities; the availability of securities
or purchasers or sellers of securities; furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement). A broker's sales of Fund shares may also be considered a factor if
the Investment Adviser is satisfied that the Fund would receive from that broker
the most favorable price and execution then available for a transaction.
Municipal bonds, notes, and short-term securities in which the Fund invests are
traded primarily in the over-the-counter market on a net basis and do not
normally involve either brokerage commissions or transfer taxes. The Fund's cost
of portfolio securities transactions will consist primarily of dealer or
underwriter spreads. The Fund will not engage in principal transactions with
affiliates.
In effecting purchases and sales of the Fund's portfolio securities, the
Investment Adviser and the Fund may place orders with and pay brokerage
commissions to brokers which are affiliated with the Fund, the Investment
Adviser, the Distributor or selected dealers participating in the offering of
the Fund's shares. Subject to rules adopted by the Securities and Exchange
Commission, the Fund may also purchase municipal securities from other members
of underwriting syndicates of which the Underwriter or other affiliates of the
Fund are members.
For the fiscal years ending 1995, 1996, and 1997 ND Capital, Inc.
earned commissions totaling $0 or 0%, $1,968 or 100%, and $31,978 or 100%,
respectively, for the ND Tax-Free Fund, Inc. ND Capital , Inc. was the only
dealer through which transactions involving the payment of commissions were
effected.
The Board of Directors will monitor the Investment Adviser's performance
with respect to portfolio transactions in order to evaluate the overall
reasonableness of brokerage commissions paid or spreads allowed.
PURCHASE AND REDEMPTION OF SHARES
The ND Tax-Free Fund, Inc. shares are sold at their public offering
price, which is the net asset value next determined after an order and payment
are received in proper form. On December 31, 1997, the Fund's net asset value
per share was calculated as follows: Net Assets ($88,434,552), divided by
Shares Outstanding (9,733,454), which equals Net Asset Value Per Share ($9.09).
B-14
The minimum initial investment is $1,000 ($100 for the Monthomatic
Investment Plan), and the minimum subsequent investment is $50, but such
minimum amounts may be changed at any time.
Upon receipt of a request for redemption, shares will be redeemed by the
Fund at the net asset value next determined following receipt of a properly
executed request with any required documents, less any applicable contingent
deferred sales charge as described in the Prospectus.
The following example illustrates the operation of the contingent deferred
sales charge. Assume that you own 1,000 shares that you purchased six years ago,
1,000 shares acquired by reinvesting distributions, 1,000 shares that you
purchased two years ago at $10 each, and 1,000 shares that you purchased one
year ago at $10 each. Also assume that the shares now have a net asset value
equal to $20 each. You may redeem the 2,000 shares that you have owned for six
years or acquired by reinvesting distributions without paying a contingent
deferred sales charge. Appreciation on the shares you bought in the last two
years equals $20,000 (the $10 increase in net asset value times 2,000 shares),
$10,000 of which is attributed to each of the two years. Because the $20,000 of
appreciation is equivalent to 1,000 shares at the assumed current net asset
value of $20 per share, you may redeem 1,000 more shares without paying a
contingent deferred sales charge. If you redeem 3,500 shares, you would have a
contingent deferred sales charge on 500 of those shares. The Fund would treat
these 500 redeemed shares as representing a redemption of the $10,000 investment
which you made two years ago. Based on the assumed net asset value of $20 per
share, you would pay a contingent deferred sales charge equal to $400 (500
shares times $20 per share times the applicable rate of 4.0%). If in the same
year you redeemed your remaining 500 shares, the Fund would treat this as a
redemption of your $10,000 investment made one year ago, applying a charge at
the rate of 4.0%.
The elimination of the contingent deferred sales charge for redemptions by
certain classes of persons as described in the Prospectus is provided because of
anticipated economies in sales and sales related efforts.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed for
trading (other than customary weekend and holiday closings), (b) when trading in
the markets the Fund normally utilizes is restricted or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Fund's investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the Fund's shareholders. The
New York Stock Exchange is currently closed on the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, the Fourth of July,Labor Day, Thanksgiving, and Christmas. The
amount received by a shareholder upon redemption may be more or less than the
amount paid for such shares depending on the market value of the Fund's
portfolio securities at the time. When the Fund is requested to redeem shares
for which it may not have yet received good payment (e.g., cash or certified
check on a United States bank), it may delay the mailing of a redemption check
until such time as it has assured itself that good payment has been collected
for the purchase of such shares (which will generally be within 15 calendar
days).
B-15
UNDERWRITER
ND Capital, Inc. (the "Underwriter"), a subsidiary of ND Holdings, Inc.,
is the principal underwriter of the Fund's shares in a continuous
public offering.
Under the terms of the Distribution Agreement between the Fund and the
Underwriter, the Underwriter has agreed to use its best efforts to solicit
orders for the sale of the Fund's shares and to undertake such advertising and
promotion as it believes is reasonable in connection with such solicitation.
In consideration of those services, the Fund pays the Underwriter a fee,
calculated daily and paid monthly, at the annual rate of 0.85% of the average
daily net assets of the shares for the prior month. For information concerning
payments made by the Fund to the Underwriter pursuant to the Distribution
Agreement, see "Distribution Plan" above. As further consideration, the Fund
has agreed to pay the Underwriter the proceeds from any contingent deferred
sales charges imposed on the redemption of shares. The Fund paid the Underwriter
$57,760 in contingent deferred sales charges for the fiscal year ended
December 31, 1997 .
The Underwriter, in turn, pays a sales commission currently equal
to 3 3/4% (1% on sales of $1 million or more) of the amount invested to
dealers who sell shares (excluding sales to investors exempt from the
contingent deferred sales charge). Commission payments totaled $154,888 in
1995, and $102,562 in 1996, and $168,418 in 1997. As a further inducement
to the sale of Fund shares and in recognition of services provided to
shareholders, the Underwriter may also pay service fees to dealers at the
annual rate of up to 0.25% of the average net assets which are attributable
to shareholders of the Fund for whom such dealers are designated as the
dealers of record.
The Distribution Agreement must be approved at least annually by the Fund's
Board of Directors and a vote of a majority of the Fund's directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or any agreement related thereto or in the Distribution Agreement (the
"Qualified Directors"), by vote cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement will terminate
automatically in the event of its assignment and is terminable with respect to
the Fund without penalty on 60 days' written notice by vote of a majority of the
Qualified Directors or by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund.
DIVIDENDS AND TAXES
DIVIDENDS
All of the net investment income of the Fund is declared daily as a
dividend on shares for which the Fund has received payment. Net investment
income of the Fund consists of all interest income earned on portfolio assets
less all expenses of the Fund. Income dividends will be distributed monthly, and
dividends of net realized capital gains, if any, will normally be paid out once
a year after the end of the Fund's fiscal year. The Fund may at any time vary
the foregoing dividend practices and, therefore, reserves the right from time to
time to either distribute or retain for reinvestment such of its net investment
income and its net short-term and long-term capital gains as the Board of
Directors of the Fund determines appropriate under the then current
circumstances. In particular,
B-16
and without limiting the foregoing, the Fund may make additional distributions
of net investment income or capital gain net income in order to satisfy the
minimum distribution requirements contained in the Internal Revenue Code (the
"Code"). Dividends will be reinvested in shares of the Fund unless shareholders
indicate in writing that they wish to receive them in cash.
TAXES
To the extent that dividends are derived from earnings on North Dakota
state and local government issues, such dividends will be exempt from North
Dakota income taxes in the hands of shareholders that are corporations,
individuals, estates, and trusts.
Dividend from the Fund will not be eligible for the dividends
received deduction available to corporate shareholders.
The Fund's options and futures transactions are subject to special tax
provisions that may accelerate or defer recognition of certain gains or losses,
change the character of certain gains or losses, or alter the holding periods of
certain of the Fund's securities.
Redemption of shares of the Fund will be a taxable transaction for
federal income tax purposes, and the shareholder will recognize capital gain
or loss in an amount equal to the difference between the basis of the shares
and the amount received. For corporate shareholders, such gain or loss will be
long-term gain or loss if the shares were held more than one year. For share-
holders who are individuals, estates, or trusts, the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more that one
year but not more than 18 months. The loss on shares held six months or less
will be a long-term capital loss to the extent any long-term capital gain
distribution is made with respect to such shares during the period the investor
owns the shares. In the case of shareholders holding shares of the Fund for
less than six months and subsequently selling those shares at a loss after
receiving an exempt-interest dividend, the loss will be disallowed to the
extent of the exempt-interest dividends received.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by private activity bonds held by the Fund or are "related
persons" to such users. Such persons should consult their tax adviser before
investing in the Fund.
CALCULATION OF PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent yield,
and total return figures.
YIELD
The 30 day SEC Yield for the ND Tax-Free Fund, Inc., as of December 31,
1997, was 3.671%. Absent fee waivers and expense assumptions, the 30 day SEC
Yield for the ND Tax-Free Fund, Inc., as of December 31, 1997, would have been
3.254%.
B-17
Yield reflects the income per share deemed earned by the Fund's portfolio
investments. Yield is determined by dividing the net investment income per share
deemed earned during the preceding 30-day period by the maximum offering price
per share on the last day of the period and annualizing the result according to
the following formula:
a-b /6/
YIELD = 2[(--- + 1) - 1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
To calculate interest earned (for the purpose of "a" above), the Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund based
on the market value of the obligation at the close of business on the last
business day of each month, or, with respect to obligations purchased
during the month, the purchase price.
(b) Divide the yield to maturity by 360 and multiply the quotient by the
market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the portfolio.
The maturity of an obligation with a call provision is the next call date
on which the obligation reasonably may be expected to be called or, if none, the
maturity date.
In the case of an obligation issued without original issue discount and
having a current market discount, the coupon rate of interest is used in lieu of
the yield to maturity. In the case of an obligation with original issue
discount, if the discount based on the current market value exceeds the then-
remaining portion of original issue discount (market discount), the yield to
maturity is the imputed rate based on the original issue discount calculation.
In the case of an obligation with original issue discount, if the discount based
on the current market value is less than the then-remaining portion of original
issue discount (market premium), the yield to maturity is based upon market
value.
TAX EQUIVALENT YIELD
The Tax Equivalent Yield for the ND Tax-Free Fund, Inc., as of December
31, 1997, was 6.96%.
Tax equivalent yield shows the yield from a taxable investment which would
produce an after-tax yield equal to that of a fund that invests in tax-exempt
securities. It is computed by dividing the tax-exempt portion of the Fund's
B-18
yield (as calculated above) by one minus a stated income tax rate and adding the
product to the portion (if any) of the Fund's yield that is not tax-exempt.
TEY = CY/(1-SITR)
Where:
TEY = Tax Equivalent Yield
CY = Current Yield
SITR = Stated Income Tax Rate
TOTAL RETURN
The total return for the ND Tax-Free Fund, Inc., as of December 31,
1997, was 60.07%.
Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into account
the imposition of various fees, including the contingent deferred sales
charge, and assuming the reinvestment of all dividends and distributions.
Cumulative total return reflects the Fund's performance over a stated period of
time and is computed as follows:
ERV - P = Total Return
-------
P
Where:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the base period, assuming reinvestment of all dividends
and distributions
P = a hypothetical initial payment of $1,000
The average annual total return for the ND Tax-Free Fund, Inc. for 1
year, 5 year and Since Inception, as of December 31, 1997, were 4.17%, 4.71%,
and 5.37%, respectively. The 1 year return does not include the effect of the
4% maximum Contingent Deferred Sales Charge. It would have been 0.21% if it
had.
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period and is computed according
to the following formula:
P( 1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the base period, assuming reinvestment of all
dividends and distributions
All performance figures are based on historical results and are not
intended to indicate future performance.
B-19
TAX-FREE VERSUS TAXABLE INCOME
The following table shows the rate of return an individual North Dakota
investor would need to receive from a taxable investment to equal the rate of
return from the Fund. The table assumes that the investor's income from a
taxable investment would be subject to federal income tax at the maximum federal
rate and North Dakota state income tax at a rate equal to 14% of the federal tax
liability.
Our calculations are based on the maximum federal statutory tax rates
applicable in 1998. The highest marginal federal tax rate for 1998 can be in
excess of the statutory maximum federal tax rate due to the disallowance of a
portion of itemized deductions and personal exemptions. We have calculated the
combined marginal tax rate based on a family with adjusted gross income from
$180,000 to $300,000 for 1998 filing on a married filing jointly basis with two
dependent children. At this level of income, the highest federal marginal tax
rate is 44.02%. In addition, this assumes the investor is not subject to
alternative minimum tax and has a reasonable amount of itemized deductions.
Assuming the deductibility of North Dakota taxes in computing federal
taxable income, the combined marginal tax rate for this taxpayer is
approximately 47.26%.
The following table uses the combined marginal tax rate of 47.26 %
to present the equivalent taxable yield for taxpayers in the situation
presented above.
ND Tax-Free Equivalent Taxable Yield
Yield for Taxpayer in 1998
----- --------------------
5.0% 9.48%
5.5% 10.43%
6.0% 11.38%
6.5% 12.32%
7.0% 13.27%
7.5% 14.22%
8.0% 15.17%
APPENDIX--RATINGS OF INVESTMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's"),
for municipal bonds are Aaa, Aa, A, and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa rated municipal bonds. The Aaa, Aa, and A rated municipal bonds comprise
what are generally known as "high grade bonds." Municipal bonds which are rated
A by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Municipal bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest coverage
and principal security appear ade
B-20
quate for the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well.
The four highest ratings of Standard & Poor's Corporation ("S&P") for
municipal bonds are AAA, AA, A, and BBB. Municipal bonds rated AAA have the
highest rating assigned by S&P to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the highest rated
issues only in small degree. Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity than for bonds in
higher rated categories.
The "debt securities" included in the discussion of temporary investments
are corporate (as opposed to municipal) debt obligations rated AAA, AA, or A by
S&P or Aaa, Aa, or A by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." Corporate debt obligations rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions." The Moody's corporate debt ratings of Aaa, Aa, and A do not differ
materially from those set forth above for municipal bonds.
Taxable or tax-exempt commercial paper ratings of A-l or A-2 by S&P and P-l
or P-2 by Moody's are the highest paper ratings of the respective agencies. The
issuer's earnings, quality of long-term debt, management, and industry position
are among the factors considered in assigning such ratings.
Subsequent to its purchase by the Fund, an issue of Municipal Securities or
a temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event requires the
elimination of such obligation from the Fund's portfolio, but the Investment
Adviser will consider such an event in its determination of whether the Fund
should continue to hold such obligation in its portfolio. To the extent that the
ratings accorded by S&P or Moody's for municipal bonds or temporary investments
may change as a result of changes in such organizations or changes in their
rating system, the Fund will attempt to use comparable ratings as standards for
its investments in municipal bonds or temporary investments in accordance with
the investment policies contained herein.
B-21
[LETTERHEAD OF BRADY MARTZ APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
ND Tax Free Fund, Inc.
We have audited the accompanying statement of assets and liabilities of ND Tax
Free Fund, Inc. (the Fund), including the schedule of investments, as of
December 31, 1997, the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the four years in
the period then ended. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audit. The financial highlights for the year ended December 31,
1993, were audited by other auditors whose report dated January 20, 1994,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of ND
Tax Free Fund, Inc. as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for the four years
in the period then ended, in conformity with generally accepted accounting
principles.
BRADY, MARTZ & ASSOCIATES, P.C.
February 12, 1998
F-1
<TABLE>
<CAPTION>
ND TAX-FREE FUND, INC.
Schedule of Investments December 31, 1997
Name of Issuer
Percentages represent the market value of each Rating Coupon Principal Market
investment category to total net assets Moody's/S&P Rate Maturity Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH DAKOTA MUNICIPAL BONDS (97.6%)
Bismarck, ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 8.500% 06/01/09 $ 175,000 $ 182,299
*Bismarck, ND (MedCenter One, Inc.) Ref. & Impvt. BIGI Aaa/AAA 7.500 05/01/13 1,500,000 1,599,360
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. AMBAC Aaa/AAA 6.900 05/01/06 400,000 438,620
Bismarck, ND (Marillac Manor II) Facs. Rev. NR/NR 8.625 02/01/10 675,000 702,965
Bismarck, ND (Marillac Manor) Facs. Rev. Ref. NR/NR 7.700 02/01/16 250,000 272,235
Burleigh Cty., ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 7.000 06/01/19 500,000 536,815
Burleigh Cty., ND (Missouri Slope Ctr.) Rev. Ref. NR/NR 7.000 11/01/07 500,000 528,070
Burleigh Cty., ND (Missouri Slope Ctr.) Facs. Rev. NR/NR 7.250 06/01/12 500,000 524,125
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.750 12/01/11 1,000,000 1,022,470
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.875 12/01/15 1,000,000 1,033,550
Carrington, ND Cath. Hlth. Corp. Facs. Rev. A-1/A+ 6.250 11/15/15 500,000 554,775
Central Cass Cty., ND PSD #17 School Blding. G.O. MBIA Aaa/AAA 6.500 05/01/13 430,000 478,698
Central Cass Cty., ND PSD #17 School Blding. G.O. MBIA Aaa/AAA 6.500 05/01/14 460,000 514,427
Devils Lake, ND Cath. Hlth. Corp. Facs. Rev. A-1/A+ 6.250 11/15/07 1,125,000 1,213,538
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. A-1/NR 7.625 02/15/20 1,210,000 1,304,150
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. A-1/NR 7.500 02/15/10 600,000 646,710
Dickinson, ND (St. Luke's Home) Rev. NR/NR 7.250 05/01/22 500,000 525,120
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.550 06/01/16 500,000 522,915
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.375 06/01/27 1,815,000 1,847,289
Fargo, ND (St. Luke's Hospital) Facs. Rev. Ref. NR/A+ 6.500 06/01/15 4,000,000 4,439,080
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.300 11/01/06 130,000 138,148
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.350 11/01/07 110,000 116,951
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.250 11/01/10 190,000 205,671
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.625 12/01/10 830,000 912,643
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.500 12/01/06 750,000 819,908
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.250 12/01/19 1,000,000 1,119,830
*Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.450 12/01/23 1,525,000 1,732,934
Grand Forks, ND Regl. Airport Auth. Rev. A/NR 7.500 10/01/09 225,000 232,625
Grand Forks, ND Regl. Airport Auth. Rev. A/NR 7.500 10/01/10 240,000 248,134
Grand Forks, ND (Cirrus Project) Sales Tax Rev. A-1/NR 5.900 05/01/17 695,000 727,491
Grand Forks, ND (Aurora Project) Sales Tax Rev. MBIA Aaa/AAA 5.625 12/15/29 1,500,000 1,577,025
Grand Forks, ND (Valley Square Project) Hsg. Rev. NR/NR 6.375 12/01/34 645,000 645,000
Hazen, ND (Sakakawea Medl. Ctr.) Facs. Rev. NR/NR 6.750 05/01/16 500,000 539,740
Jamestown, ND (College) Facs. Rev. NR/NR 6.625 10/01/14 800,000 882,416
Jamestown, ND (Heritage Centre) Rev. NR/NR 8.500 09/01/06 200,000 220,488
Lisbon, ND (Parkside Lutheran Home) Rev. NR/NR 0.000 06/01/12 500,000 134,290
Mercer Cty., ND (Otter Tail Power) Rev. Aa-3/AA- 6.900 02/01/19 500,000 550,295
Mercer Cty., ND (Basin Elec.) Rev. A/A 7.000 01/01/19 985,000 1,036,880
Mercer Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 3,500,000 3,928,645
Mercer Cty., ND (NW Public Svc.) Rev. Ref. MBIA Aaa/AAA 5.850 06/01/23 4,600,000 4,916,066
Mercer Cty., ND (Basin Elec.) Rev. AMBAC Aaa/AAA 6.050 01/01/19 5,425,000 5,925,782
Morton Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 600,000 673,482
Morton Cty., ND Multifamily Hsg. Rev. Ref. NR/NR 6.750 03/01/21 500,000 506,565
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.375 07/01/17 490,000 510,183
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.850 07/01/01 210,000 221,275
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.000 07/01/13 225,000 244,620
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.900 07/01/10 142,000 150,661
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.050 01/01/24 735,000 792,778
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.750 07/01/24 670,000 719,922
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.250 07/01/10 285,000 306,261
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.300 07/01/24 1,125,000 1,206,585
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.000 07/01/23 885,000 956,889
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/23 2,955,000 3,140,308
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.700 07/01/13 370,000 392,618
</TABLE>
F-2
<TABLE>
<CAPTION>
ND TAX-FREE FUND, INC.
Schedule of Investments December 31, 1997
Name of Issuer
Percentages represent the market value of each Rating Coupon Principal Market
investment category to total net assets Moody's/S&P Rate Maturity Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/25 1,540,000 1,627,657
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.950 07/01/25 1,985,000 2,131,017
ND (HFA) Hsg. Finance Program AA/NR 6.750 07/01/25 3,210,000 3,428,697
ND (HFA) Hsg. Finance Program AA/NR 6.300 01/01/15 860,000 891,897
ND (HFA) Hsg. Finance Program AA/NR 6.250 07/01/15 155,000 159,245
ND (HFA) Hsg. Finance Program AA/NR 6.300 07/01/16 490,000 511,036
ND (HFA) Hsg. Finance Program AA/NR 6.400 01/01/28 300,000 311,898
ND (HFA) Hsg. Finance Program AA/NR 6.150 07/01/27 530,000 536,821
ND (HFA) Hsg. Finance Program Aa-3/NR 6.100 07/01/28 2,000,000 2,030,640
ND (HFA) Hsg. Finance Program Aa-3/NR 5.900 01/01/29 500,000 507,120
ND (HFA) Multifamily Rev. Ref. FNMA NR/AAA 6.200 12/01/20 825,000 855,797
ND Municipal Bond Bank Revolving Fund Program A-1/NR 6.300 10/01/15 530,000 588,634
ND Municipal Bond Bank Revolving Fund Program A-1/NR 6.250 10/01/14 3,525,000 3,763,043
ND Blding. Auth. Lease Rev. Ref. AMBAC Aaa/AAA 6.000 06/01/10 1,700,000 1,849,192
ND Blding. Auth. Lease Rev. A/A 5.500 08/15/14 300,000 308,670
ND Blding. Auth. Lease Rev. CGIC Aaa/AAA 6.000 12/01/13 500,000 550,225
ND State Board of Hgr. Educ. (MSU) Facs. Rev. Ref. NR/NR 6.750 08/01/05 755,000 808,077
ND State Board of Hgr. Educ. (MSU) Facs. Rev. NR/NR 5.500 08/01/13 400,000 415,704
ND Student Loan Rev. AMBAC Aaa/AAA 6.300 07/01/12 100,000 106,579
ND Student Loan Rev. AMBAC Aaa/AAA 6.350 07/01/13 250,000 267,978
ND Student Loan Rev. AMBAC Aaa/AAA 6.400 07/01/14 400,000 430,464
ND State Water Commission Devl. Rev. AMBAC Aaa/AAA 5.750 07/01/27 1,250,000 1,322,638
Univ. of ND Lease Financing C.O.P.'s A/A- 7.300 09/01/10 1,425,000 1,533,229
Univ. of ND (State Board of Hgr. Educ.) Ref. AMBAC Aaa/AAA 7.850 04/01/14 340,000 355,864
Valley City, ND Western Hlth. Care Facs. Rev. BIGI Aaa/AAA 7.625 01/01/19 200,000 204,000
Wahpeton, ND (Town Centre Square) Rev. Ref. NR/NR 8.500 02/01/14 250,000 265,900
Wahpeton, ND PSD #37 G.O. A/NR 6.000 05/01/16 100,000 108,421
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. Ref. NR/BBB- 7.250 11/01/06 1,000,000 1,082,680
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.250 11/01/06 1,000,000 1,082,680
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.500 11/01/15 1,000,000 1,105,620
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.500 11/01/15 1,450,000 1,603,149
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 8.875 11/15/24 200,000 216,000
------------
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST: $81,426,903) $ 86,280,890
------------
SHORT-TERM SECURITIES (1.0%)
Federated Tax-Free Fund #15 $ 260,574
Federated Intermediate Municipal Trust #78 600,000
------------
TOTAL SHORT-TERM SECURITES (Cost: $860,574) $ 860,574
------------
TOTAL INVESTMENTS IN SECURITIES (Cost: $82,287,477) $ 87,141,464
OTHER ASSETS LESS LIABILITIES $ 1,293,088
------------
NET ASSETS $ 88,434,552
------------
</TABLE>
F-3
ND TAX-FREE FUND, INC.
FINANCIAL STATEMENTS DECEMBER 31, 1997
- ------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost:$82,287,477) $ 87,141,464
Accrued dividends receivable 2,204
Accrued interest receivable 1,533,161
Variation margin on futures 462,500
----------------
Total Assets $ 89,139,329
----------------
LIABILITIES
Bank overdraft $ 88,888
Dividends payable 404,704
Accrued expenses 110,263
Payable for fund shares redeemed 100,922
----------------
Total Liabilities $ 704,777
----------------
NET ASSETS $ 88,434,552
================
Net assets are represented by:
Capital stock outstanding, at par $ 9,733
Additional paid-in capital 89,951,937
Accumulated undistributed net realized gain(loss)
on investments (6,381,105)
Unrealized appreciation on investments 4,853,987
----------------
Total amount representing net assets applicable to
9,733,454 outstanding shares of $.001 par value
common stock (100,000,000 shares authorized) $ 88,434,552
================
Net asset value per share $ 9.09
================
Statement of Operations for the year ended December 31, 1997
INVESTMENT INCOME
Interest $ 5,406,630
Dividends 34,974
---------------
Total Investment Income $ 5,441,604
---------------
EXPENSES
Investment advisory fees $ 544,971
Distribution fees (12b-1) 452,996
Custodian fees 16,544
Transfer agent fees 98,606
Accounting service fees 65,330
Audit and legal fees 15,633
Directors fees 6,106
Insurance 8,251
Printing and postage 16,282
License, fees, and registrations 5,553
---------------
Total expenses $ 1,230,272
Less expenses waived or absorbed
by the Fund's manager 50,649
---------------
Total Net Expenses $ 1,179,623
---------------
NET INVESTMENT INCOME $ 4,261,981
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 70,112
Futures transactions (2,011,591)
Net change in unrealized appreciation (depreciation) of:
Investments 1,250,146
Futures 100,169
---------------
Net Realized and Unrealized Gain (Loss) On Investments
And Futures $ (591,164)
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,670,817
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
ND TAX-FREEFUND, INC.
FINANCIAL STATEMENTS DECEMBER 31, 1997
- - ----------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the years ended December 31, 1997 and 1996
- - -----------------------------------------------
<TABLE>
<CAPTION>
For The Year For the Year
Ended Ended
December 31, 1997 December 31,1996
----------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 4,261,981 $ 4,648,578
Net realized gain (loss) on investments and futures (1,941,479) 3,142,612
Net unrealized appreciation (depreciation) on investments and futures 1,350,315 (1,799,734)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 3,670,817 $ 5,991,456
----------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (4,261,981) $ (4,648,578)
Distributions in excess of net investment income (452,996) (303,489)
Distributions from net realized gain on investment transactions 0 0
---------------------------------------
Total Dividends and Distributions $ (4,714,977) $ (4,952,067)
----------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 4,728,769 $ 3,336,320
Proceeds from reinvested dividends 3,117,985 3,190,615
Cost of shares redeemed (9,999,185) (10,466,886)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions $ (2,152,431) $ (3,939,951)
----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (3,196,591) $ (2,900,562)
NET ASSETS, BEGINNING OF PERIOD 91,631,143 94,531,705
----------------------------------------
NET ASSETS, END OF PERIOD $ 88,434,552 $ 91,631,143
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
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 December 31, 1997, a net capital loss carryforward totaling $6,381,105,
which may be used to offset capital gains realized during subsequent years
through December 31, 2005.
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.
F-6
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
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 December 31, 1997, there were 100,000,000 shares of $.001 par
authorized; 9,733,454 and 9,970,201 were outstanding at December 31, 1997
and December 31, 1996, respectively.
Transactions in capital shares were as follows:
Shares
--------------------------------------
For the Year For The Year
Ended Ended
December 31, 1997 December 31, 1996
--------------------------------------
Shares sold 515,034 366,454
Shares issued on reinvestment
of dividends 339,531 349,952
Shares redeemed (1,091,312) (1,148,695)
--------------------------------------
Net increase (decrease) (236,747) (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 $544,971 of investment
advisory fees for the year ended December 31, 1997. The Fund has a payable to
ND Money Management, Inc. of $47,339 at December 31, 1997 for investment
advisory fees. Certain officers and directors of the Fund are also officers
and directors of the investment adviser.
F-7
.
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1
under the 1940 Act, whereby the Fund shall pay to ND Capital, Inc. (Capital),
its principal underwriter, an annual fee for certain expenses incurred by
Capital in connection with the distribution of the Fund's shares. The annual
fee paid to Capital under the Plan is calculated daily and paid monthly by the
Fund at the annual rate of 0.85% of the average daily net assets of the Fund.
The Fund has recognized $452,996 of 12b-1 fee expenses after partial waiver
for the year ended December 31, 1997. The Fund has a payable to Capital of
$39,449 at December 31, 1997 for 12b-1 fees. In addition, the Fund has
engaged Capital as agent for the purchase of certain investment securities.
For the year ended December 31, 1997 commissions earned by Capital totaled
$31,938 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 $98,606 of transfer agency fees for
the year ended December 31, 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 $65,330 of accounting service fees for the year ended December 31,
1997.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $11,819,027 and $11,724,172,
respectively, for the year ended December 31, 1997.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1997, the aggregate cost of securities for federal income tax
purposes was $82,287,477, and the net unrealized appreciation of investments
based on the cost was $4,853,987, which is comprised of $5,187,167 aggregate
gross unrealized appreciation and $333,180 aggregate gross unrealized
depreciation.
F-8
ND TAX-FREE FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for the period indicated
- -----------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.19 $ 9.09 $ 8.83 $ 9.52 $ 9.49-
----------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .43 .46 $ .47 $ .48 $ .52
Net realized and unrealized gain (loss) on investments
and futures transactions (.05) .13 .28 (.67) .05
----------------------------------------------------------------
Total Income(Loss) From Investment Operations $ .38 $ .59 $ .75 $ (.19) $ .57
----------------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.43) $ (.46) $ (.47) $ (.48) $ (.52)
Distributions in excess of net investment income (.05) (.03) (.02) (.02) (.02)
----------------------------------------------------------------
Total Distributions $ (.48) $ (.49) $ (.49) $ .50) $ (.54)
----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
================================================================
Total Return 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A) 5.94%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $88,435 $91,631 $94,532 $91,865 $85,042
Ratio of net expenses (after expense assumption) to
average net assets 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B) 1.01%(B)
Ratio of net investment income to average net assets 4.70% 5.00% 5.20% 5.19% 5.39%
Portfolio turnover rate 13.18% 12.92% 8.02% 5.55% 18.59%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B)
During the periods indicated above, ND Holdings, Inc. assumed expenses
of $50,649, $40,861, $3,799, $31,115, and $30,707, 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%, and
1.05%, respectively.
The accompanying notes are an integral part of these financial statements.
F-9
ND TAX-FREE-FUND, INC.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Included in Part B of the Registration Statement:
Independent Public Accountant's Report, dated February 12,
1998
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the Year Ended December 31,
1997
Statement of Changes in Net Assets for the Years Ended
December 31, 1997 and 1996
Notes to Financial Statements
Financial Highlights
Schedule of Investments
Schedules II through VII are ommitted because inapplicable.
(b) Exhibits
(1) Articles of Incorporation *
(2) Bylaws **
(4) Specimen Copy of Share Certificate *
(5) Form of Investment Advisory Agreement *
(6) (a) Form of Distribution Agreement *
(6) (b) Form of Dealer Sales Agreement ****
(8) Form of Custodian Agreement ***
(9) (a) Form of Transfer Agency Agreement ***
(9) (b) Form of Accounting Services Agreement *****
(10) Opinion of Pringle & Herigstad, P. C. **
(11) Consent of Independent Accountant
(13) Form of Purchase Agreement *
(14) Form of Distribution Plan ***
__________________________
* Previously filed as an exhibit to Registrant's Registration
Statement on Form N-1A filed with the Securities and Exchange
Commission on October 25, 1988, and incorporated by reference
herein.
** Previously filed as an exhibit to Pre-effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed with the
Securities and Exchange Commission on December 13, 1989, and
incorporated by reference herein.
C-1
*** Previously filed as an exhibit to Post-effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A filed with the
Securities and Exchange Commission on October 25, 1988, and
incorporated by reference herein.
**** Previously filed as an exhibit to Post-effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A filed with the
Securities and Exchange Commission on May 1, 1995, and incorporated
by reference herein.
***** Previously filed as an exhibit to Post-effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A filed with the
Securities and Exchange Commission on May 1, 1996, and incorporated
by reference herein.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable
Item 26. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares, par value 3,090
$.001 per share (As of April 9, 1998)
Item 27. INDEMNIFICATION
Section 4 of the Distribution Agreement [ Exhibit (6) (a) ] provides
for the indemnification of ND Capital, Inc., Registrant's principal underwriter,
against certain losses. Section 12 of the Transfer Agency Agreement [ Exhibit 9
] provides for the indemnification of ND Resources, Inc., Registrant's transfer
agent, against certain losses.
Indemnification of directors, officers, employees, and agents of
Registrant is required under Section 10-19.1-91 of the North Dakota Century
Code. In addition, Registrant has obtained an insurance policy on behalf of
directors and officers against any liability asserted against and incurred by
the person in or arising from that person's official capacity to the extent
permitted by law.
In no event will Registrant indemnify its directors, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith, gross negligence in
the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office arising under his agreement with
Registrant.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection
C-2
with the securities being registered, Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Anything in the North Dakota Business Corporation Act (Chapters 10-19
through 10-23 of the North Dakota Century Code), the Fund's Articles of
Incorporation or Bylaws, or the Investment Advisory, Distribution, or Transfer
Agency Agreements to the contrary notwithstanding, Registrant will comply in all
respects with the provisions of Investment Company Act Release No. 11330
(September 4, 1980) concerning indemnification.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
ND Money Management, Inc. (the "Investment Adviser"), is a wholly-
owned subsidiary of ND Holdings, Inc. ("Holdings"), Registrant's promoter. The
Investment Adviser was organized under the laws of the State of North Dakota on
August 19, 1988, and also serves as investment adviser for
Montana
Tax-Free Fund, Inc. ("MTFF"), South Dakota Tax-Free Fund, Inc. ("SDTFF"), and
Integrity Fund of Funds, Inc. ("IFF").
The officers and directors of the Investment Adviser are Robert E.
Walstad and Peter A. Quist. Mssrs. Walstad and Quist are also officers and
directors of Holdings, ND Capital, Inc. ("Capital"), Registrant's principal
underwriter and initial shareholder, ND Resources, Inc. ("Resources"),
Registrant's transfer agent, MTFF, SDTFF, and IFF.
Mr. Walstad served as a stockbroker and branch manager of the Minot,
North Dakota, office of Dean Witter Reynolds from September 1977 to October 1987
when he resigned to organize Holdings. Mr. Quist was Securities Commissioner of
the State of North Dakota from May 6, 1983, to January 31, 1988, when he
resigned to join Holdings as vice president and director.
The Investment Adviser, Registrant, Holdings, Capital, Resources,
MTFF, SDTFF, and IFF have their principal address at 1 North Main,
Minot, North Dakota 58703.
Item 29. PRINCIPAL UNDERWRITERS
(a) Other investment companies for which Registrant's principal
underwriter also acts as principal underwriter, depositor, or investment
adviser: Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
and Integrity Fund of Funds, Inc.
(b) Information concerning each director, officer, or partner of the
principal underwriter:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
------------------ --------------------- ---------------------
<S> <C> <C>
Robert E. Walstad President, Treasurer, President, Treasurer,
1 North Main and Director and Director
Minot, North Dakota 58703
</TABLE>
C-3
Peter A. Quist Vice President, Vice President,Secretary
1 North Main Secretary, and Director and Director
Minot, North Dakota 58703
(c) Inapplicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS
First American Bank West, 20 First Street SW, Minot, North Dakota
58701, serves as custodian of Registrant and maintains all records related to
that function. ND Resources, Inc. ("Resources"), serves as transfer agent,
dividend disbursing, administrative, and accounting services agent of Registrant
and maintains all records related to those functions. ND Capital, Inc.
("Capital"), serves as the principal underwriter of Registrant and maintains all
records related to that function. ND Money Management, Inc. ("Money
Management"), serves as Registrant's investment adviser and maintains all
records related to that function. Registrant maintains all of its corporate
records. The address of Resources, Capital, Money Management, and Registrant is
1 North Main, Minot, North Dakota 58703.
Item. 31. MANAGEMENT SERVICES
Inapplicable
Item 32. UNDERTAKINGS
Inapplicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of this Post-effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed with the Securities and
Exchange Commission on October 25, 1988, pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-effective Amendment No. 13
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minot, State of North Dakota, on the 27th day of April, 1998.
ND TAX-FREEFUND, INC.
/s/ Robert E. Walstad
By _____________________________
Robert E. Walstad
President
C-4
Pursuant to the requirements of the Securities Act of 1933,
this Post-effective Amendment No. 13 to Registrant's Registration Statement
on Form N-1A has been signed below by the following persons in the capacities
and on the date indicated.
/s/ Lynn W. Aas
________________________________ April 27, 1998
Lynn W. Aas
Director
/s/ Orlin W. Backes
________________________________ April 27, 1998
Orlin W. Backes
Director
/s/ Arthur A. Link
________________________________ April 27, 1998
Arthur A. Link
Director
/s/ Peter A. Quist
________________________________ April 27, 1998
Peter A. Quist
Director, Vice President, and Secretary
/s/ Robert E. Walstad
________________________________ April 27, 1998
Robert E. Walstad
Director, President, and Treasurer
C-5
EXHIBIT (11)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
[LETTERHEAD OF BRADY, MARTZ & ASSOCIATES]
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-effective Amendment No.13 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 12, 1998, relating to the financial statements and selected per share
data and ratios of ND Tax-Free Fund, Inc., which appears in such Statement of
Additional Information and to the incorporation by reference of our report into
the Prospectus which constitutes part of the Registration Statement. We also
consent to the reference to us under the heading "Accountant and Reports to
Shareholders" in such Statement of Additional Information and to the reference
to us under the heading "Financial Highlights" in the Prospectus and on the back
cover of the Prospectus.
/s/ BRADY, MARTZ
BRADY, MARTZ & ASSOCIATES, P.C.
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 82,287,477
<INVESTMENTS-AT-VALUE> 87,141,464
<RECEIVABLES> 1,535,365
<ASSETS-OTHER> 462,500
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,139,329
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 704,777
<TOTAL-LIABILITIES> 704,777
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,961,670
<SHARES-COMMON-STOCK> 9,733,454
<SHARES-COMMON-PRIOR> 9,970,201
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,381,105)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,853,987
<NET-ASSETS> 88,434,552
<DIVIDEND-INCOME> 34,974
<INTEREST-INCOME> 5,406,630
<OTHER-INCOME> 0
<EXPENSES-NET> (1,179,623)
<NET-INVESTMENT-INCOME> 4,261,981
<REALIZED-GAINS-CURRENT> (1,941,479)
<APPREC-INCREASE-CURRENT> 1,350,315
<NET-CHANGE-FROM-OPS> 3,670,817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,261,981)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (452,996)
<NUMBER-OF-SHARES-SOLD> 515,034
<NUMBER-OF-SHARES-REDEEMED> 1,091,312
<SHARES-REINVESTED> 339,531
<NET-CHANGE-IN-ASSETS> (3,196,591)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544,971
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,230,272
<AVERAGE-NET-ASSETS> 90,723,166
<PER-SHARE-NAV-BEGIN> 9.19
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> (.05)
<PER-SHARE-DIVIDEND> (.43)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.05)
<PER-SHARE-NAV-END> 9.09
<EXPENSE-RATIO> 1.30<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets.
</FN>
</TABLE>
