As filed with the Securities and Exchange Commission on April 29, 1999
1933 Act Registration No. 33-25138
1940 Act Registration No. 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. 15 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17
(Check appropriate box or boxes.)
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
--------------
with a copy to:
Robert E. Walstad Mark J. Kneedy
President Chapman and Cutler
ND Tax-Free Fund, Inc. 111 West Monroe Street
1 North Main Chicago, Illinois 60603
Minot, North Dakota 58703
(Name and Address of Agent for Service)
____________________
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 30, 1999 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.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and contents:
The Facing Sheet
Part A - Prospectus for the Montana Tax-Free Fund, Inc., ND Tax-Free Fund,
Inc. and South Dakota Tax-Free Fund, Inc. (the "Funds")
Part B - Statement of Additional Information for the Funds
Part C - Other Information - ND Tax-Free Fund, Inc.
Signatures
Explanatory Note: This registration Statement contains the Prospectus and
Statement of Additional Information for the ND Tax-Free Fund, Inc., the
Montana Tax-Free Fund, Inc. and the South Dakota Tax-Free Fund, Inc., each
A separately registered investment company. Accordingly, a registration
statement for each of the Funds has been filed separately under their
Respective file numbers.
[INTEGRITY MUTUAL FUNDS LOGO]
MONTANA TAX-FREE FUND, INC.
ND TAX-FREE FUND, INC.
SOUTH DAKOTA TAX-FREE FUND, INC.
PROSPECTUS May 1, 1999
_______________________________________________________________________________
This prospectus is intended to provide important information to help you
evaluate whether one of the Integrity Mutual Funds listed above may be right
for you. Please read it carefully before investing and keep it for future
reference. To learn more about how the Integrity Mutual Funds can help you
achieve your financial goals, call us at (800) 276-1262.
The Securities and Exchange Commission has not approved or disapproved these
Securities or passed upon the adequacy of this prospectus. Any representations
to the contrary is a criminal offense.
TABLE OF CONTENTS
The Funds 3
Montana Tax-Free Fund, Inc. 3
Fund Summary 3
How the Fund Has Performed 4
What Are the Fund's Expenses? 4
ND Tax-Free Fund, Inc. 6
Fund Summary 6
How the Fund Has Performed 7
What Are the Fund's Expenses? 7
South Dakota Tax-Free Fund, Inc. 9
Fund Summary 9
How the Fund Has Performed 10
What Are the Fund's Expenses? 10
Fund Management 12
Principal Investment Strategies 12
Non-Principal Investment Strategies 14
Principal Risk Factors 14
How To Purchase Shares 15
Systematic Investing - the Monthomatic Investment Plan 16
Special Services 16
How to Sell Shares 16
Systematic Withdrawal 17
Distributions and Taxes 17
Distribution and Service Plan 18
Net Asset Value 18
Fund Service Providers 19
Shareholder Inquiries 19
Financial Highlights 20
Appendix - Additional State Information 1
-2-
MONTANA TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks to provide as high a level of current income exempt from federal
and Montana income taxes as is consistent with preservation of capital.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily municipal bonds that are rated investment
grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent ratings
agencies. The fund may buy non-rated municipal bonds if the fund's investment
adviser judges them to be of comparable quality. The fund is non-
diversified and may invest more of its assets in a single issuer than a
diversified fund. The expected average dollar weighted maturity of the fund's
portfolio is between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above-average return. To assess a bond's value, the adviser considers
the bond's yield, price, credit quality, and future prospects.
The fund may also invest in futures and options on futures for hedging
purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The principal risks of investing in the fund are interest rate and credit risk.
Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated
bonds carry greater credit risk. These 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 securities.
Because the fund is non-diversified and invests primarily in Montana bonds, the
fund is particularly susceptible to any economic, political, or regulatory
developments affecting a particular issuer or issuers of Montana bonds in which
the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that the
price movements of the futures and options will not correlate with the price
movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. As with any mutual fund investment, loss of money is a risk of invest-
ing. The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or college
funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-3-
MONTANA TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing
in the fund by showing performance changes year to year and how average annual
returns over one, five-year and the life of the fund compare with those of a
broad measure of market performance. Past performance is not an indication of
future performance.
ANNUAL TOTAL RETURNS (AS OF 12/31 EACH YEAR)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
-1.70% 12.85% 5.52% 5.96% 3.66%
</TABLE>
For the periods shown, the highest and lowest quarterly returns were 6.92% and
- -3.59%, respectively for the quarters ending 3/31/95 and 12/30/94. The bar
chart and highest/lowest quarterly returns do not reflect sales charges, which
would reduce returns, while the average annual return table does.
Average Annual Total Returns
for the Periods Ending
December 31, 1998
1 Year 5 Year Inception(1)
________________________________________________________
Fund (0.30)% 5.15% 5.29%
________________________________________________________
LB Market(2)
Benchmark 6.48% 6.22% 6.47%
______________________________________________
1 Inception period is from August 12, 1993 to December 31, 1998.
2 LB Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, and unmanaged index comprised of a broad range of
investment grade municipal bonds.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price
or redemption proceeds) 4.00%(1)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
________________________________________________________________
Management Fees 0.60%
Distribution and Service (12b-1) Fees(2) 0.75%
Other Expenses 0.28%
Total Annual Fund Operating _____
Expenses(3) 1.63%
________________________________________________________________
(1) Shares redeemed within five years of purchase are subject to a contingent
deferred sales charge ("CDSC") of 4% during the first and second years, 3%
during the third year, 2% during the fourth year and 1% during the fifth
year. Purchases of $1 million or more are subject to a reduced CDSC if
redeemed within 1 year of purchase. See "How to Purchase Shares."
(2) 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.
(3) The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2000 in order to prevent Total Operating Expenses
from exceeding 1.35% of the average daily net asset value of fund shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses was 1.30% for the fiscal year ended
December 31, 1998.
-4-
MONTANA TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
$570 $810 $990 $1,930
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
$170 $510 $890 $1,930
-5-
ND TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks to provide as high a level of current income exempt from federal
and North Dakota income taxes as is consistent with preservation of capital.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily municipal bonds that are rated investment
grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent ratings
agencies. The fund may buy non-rated municipal bonds if the fund's investment
adviser judges them to be of comparable quality. The fund is non-
diversified and may invest more of its assets in a single issuer than a
diversified fund. The expected average dollar weighted maturity of the fund's
portfolio is between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above average return. To assess a bond's value, the adviser considers
the bond's yield, price, credit quality, and future prospects.
The fund may also invest in options and futures for hedging purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The principal risks of investing in the fund are interest rate and credit risk.
Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated
bonds carry greater credit risk. These 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 securities.
Because the fund is non-diversified and invests primarily in North Dakota
bonds, the fund is particularly susceptible to any economic, political, or
regulatory developments affecting a particular issuer or issuers of North
Dakota bonds in which the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. As with any mutual fund investment, loss of money is a risk of invest-
ing. The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or college
funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-6-
ND TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing
in the fund by showing performance changes year to year and how average annual
returns over one, five, and ten years compare with those of a broad measure of
market performance. Past performance is not an indication of future
performance.
ANNUAL TOTAL RETURNS (AS OF 12/31 EACH YEAR)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
5.91% 7.96% 7.86% 6.62% 5.94% -2.07% 8.68% 6.62% 4.17% 3.48%
</TABLE>
For the periods shown, the highest and lowest quarterly returns were 5.37% and
- -3.67%, respectively for the quarters ending 12/31/90 and 3/31/89. The bar
chart and highest/lowest quarterly returns do not reflect sales charges, which
would reduce returns, while the 1-, 5- and 10-year average annual return
table does.
Average Annual Total Returns
for the Periods Ending
December 31, 1998
1 Year 5 Year 10 Year(1)
_______________________________________________________
Fund (0.46)% 4.13% 5.18%
_______________________________________________________
LB Market
Benchmark(2) 6.48% 6.22% 8.22%
______________________________________________
1 The 10 year period is from January 1, 1989 to December 31, 1998.
2 LB Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, and unmanaged index comprised of a broad range of
Investment grade municipal bonds.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price
or redemption proceeds 4.00%(1)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
________________________________________________________________
Management Fees 0.60%
Distribution and Service (12b-1) Fees(2) 0.85%
Other Expenses 0.24%
Total Annual Fund Operating _____
Expenses (3) 1.69%
________________________________________________________________
(1) Shares redeemed within five years of purchase are subject to a contingent
deferred sales charge ("CDSC") of 4% during the first and second years, 3%
during the third year, 2% during the fourth year and 1% during the fifth
year. Purchases of $1 million or more are subject to a reduced CDSC if
redeemed within 1 year of purchase. See "How to Purchase Shares."
(2) 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.
(3) The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2000 in order to prevent Total Operating Expenses
from exceeding 1.35% of the average daily net asset value of fund shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses was 1.30% for the fiscal year ended
December 31, 1998.
-7-
ND TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
$570 $830 $1,020 $2,000
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
$170 $530 $920 $2,000
-8-
SOUTH DAKOTA TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks to provide as high a level of current income exempt from federal
and any future South Dakota income taxes as is consistent with preservation of
capital.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily municipal bonds that are rated investment
grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent ratings
agencies. The fund may buy non-rated municipal bonds if the fund's investment
adviser judges them to be of comparable quality. The fund is non-
diversified and may invest more of its assets in a single issuer than a
diversified fund. The expected average dollar weighted maturity of the fund's
portfolio is between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer the potential for
above average return. To assess a bond's value, the adviser considers
the bond's yield, price, credit quality and future prospects.
The fund may also invest in futures and options on futures for hedging
purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The principal risks of investing in the fund are interest rate and credit risk.
Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. Credit risk is the risk that an issuer of a municipal bond will
be unable to make interest and principal payments. In general, lower rated
bonds carry greater credit risk. These 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 securities.
Because the fund is non-diversified and invests primarily in South Dakota
bonds, the fund is particularly susceptible to any economic, political, or
regulatory developments affecting a particular issuer or issuers of South
Dakota bonds in which the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. As with any mutual fund investment, loss of money is a risk of invest-
ing. The fund seeks to limit risk by buying investment grade quality bonds in a
variety of industry sectors.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or college
funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-9-
SOUTH DAKOTA TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing
in the fund by showing performance changes year to year and how average annual
returns over one year and the life of the fund compare with those of a broad
measure of market performance. Past performance is not an indication of future
performance.
ANNUAL TOTAL RETURNS (AS OF 12/31 OF EACH YEAR)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1995 1996 1997 1998
11.47% 6.58% 5.10% 3.88%
</TABLE>
For the periods shown, the highest and lowest quarterly returns were 5.17%
and -1.40%, respectively for the quarters ending 3/31/95 and 12/30/94. The bar
chart and highest/lowest quarterly returns do not reflect sales charges, which
would reduce returns, while the average annual return table does.
Average Annual Total Returns
for the Periods Ending
December 31, 1998
1 Year Inception(1)
________________________________________________________
Fund (0.08)% 6.09%
________________________________________________________
LB Market
Benchmark(2) 6.48% 7.85%
______________________________________________
1 The inception period is from April 5, 1994 to December 31, 1998.
2 LB Market Benchmark returns reflect the performance of the Lehman Brothers
Municipal Bond Index, and unmanaged index comprised of a broad range of
Investment grade municipal bonds.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price
or redemption proceeds) 4.00%(1)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
________________________________________________________________
Management Fees 0.60%
Distribution and Service (12b-1) Fees(2) 0.75%
Other Expenses 0.70%
Total Annual Fund Operating _____
Expenses(3) 2.05%
________________________________________________________________
(1) Shares redeemed within five years of purchase are subject to a contingent
deferred sales charge ("CDSC") of 4% during the first and second years, 3%
during the third year, 2% during the fourth year and 1% during the fifth
year. Purchases of $1 million or more are subject to a reduced CDSC if
redeemed within 1 year of purchase. See "How to Purchase Shares."
(2) 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.
(3) The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2000 in order to prevent Total Operating Expenses
from exceeding 1.35% of the average daily net asset value of fund shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses was 1.30% for the fiscal year ended
December 31, 1998.
-10-
SOUTH DAKOTA TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
$610 $940 $1,200 $2,380
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
$210 $640 $1,100 $2,380
-11-
FUND MANAGEMENT
The overall management of the business and affairs of the funds is the respon-
sibility of the funds' Board of Directors. ND Money Management, Inc.
("ND Management"), 1 North Main, Minot, North Dakota 58703, is the investment
adviser to the funds. ND Management has been advising mutual funds since 1989
and is currently investment adviser to four funds with assets under management
of approximately $168 million. ND Management was also the investment
adviser to the ND Insured Income Fund, Inc. from 1991 to 1998. ND Manage-
ment is responsible for the selection and ongoing monitoring of the securities
in each fund's portfolio, and, at its own expense, provides all necessary
administrative services, office space, equipment and clerical services for
managing the funds' investments and effecting their portfolio transactions.
ND Management also pays the salaries and fees of all officers and directors of
the funds who are affiliated persons of ND Management.
ND Management determines the portfolio management strategy of the funds under
the general supervision and direction of Robert E. Walstad, President, and
Monte L. Avery, Chief Portfolio Strategist. Mr. Avery and W. Dan Korgel are
the portfolio managers for the funds and are primarily responsible for the
day-to-day management of each fund's portfolio, including credit analysis and
the execution of portfolio transactions. Mr. Walstad started in the securities
business with Paine Webber as a retail broker in 1972. In 1977, he became
branch manager with Dean Witter Reynolds and spent ten years in that capacity.
In 1987, Mr. Walstad founded ND Holdings Inc. ("ND Holdings"), which wholly-
owns the funds' investment adviser and underwriter. Since that time, Mr.
Walstad has been President of the adviser, underwriter and of the funds. Mr.
Walstad has directed the management of the funds since they commenced
operations.
Mr. Avery started in the securities business with Paine Webber in 1981 as a
retail broker transferring to Dean Witter in 1982. In 1988, Mr. Avery joined
Bremer Bank, N.A. (Minot, ND) to help start their Invest Center. He transfer-
red back to Dean Witter in 1993 until joining ND Holdings in 1995. Mr.
Korgel has been manager of the funds since they commenced operations and Mr.
Avery since 1995. Mr. Avery is also responsible for the daily pric-
ing of the Integrity Mutual Funds as well as their portfolio tradings. He is
also portfolio manager for the Integrity Fund of Funds, Inc. since January
1996. Mr. Korgel was employed in the trust banking business for 12 years
prior to joining ND Holdings in 1988. Mr. Korgel was head of investments and
operations for the trust department of Bremer Bank N.A. (Minot, ND) for two
years. In addition to being a co-manager of the funds, Mr. Korgel is
Corporate Treasurer of ND Holdings.
For providing management services, ND Management is paid an annual fund manage-
ment fee by each fund of .60% of the fund's average daily net assets, payable
monthly.
For the most recent fiscal year, the funds paid after expense reimbursements
the following management fees to ND Management, as a percentage of average
net assets:
Montana Tax-Free Fund .53%
ND Tax-Free Fund .56%
South Dakota Tax-Free Fund .10%
Each fund pays for its own operating expenses such as custodial, transfer
agent, accounting and legal fees; brokerage fees and commissions, if any;
distribution and service fees; insurance premiums; interest; organizational
expenses; taxes; and extraordinary expenses. See the Statement of Additional
Information for an additional discussion of fund expenses.
PRINCIPAL INVESTMENT STRATEGIES
- -------------------------------
SECURITIES THE FUNDS INVEST IN
Each fund's investment objective and its investment policies, unless otherwise
noted, may not be changed without shareholder approval.
Municipal Obligations
Under normal circumstances, the Montana Tax-Free Fund and South Dakota Tax-Free
Fund will invest at least 65% of their total assets in obligations of the
respective state and its political subdivisions, agencies, and instrumental-
ities. Similarly, the ND Tax-Free Fund, under normal circumstances, will also
invest at least 65% of its total assets in obligations of North Dakota and its
political subdivisions, agencies and instrumentalities, although this policy
may be changed without a shareholder vote. The funds, however, typically have
invested substantially all of their assets in municipal bonds that pay interest
exempt from both federal and the relevant state's income taxes. In addition,
each fund will invest, under normal circumstances, at least 80% of its net
assets in municipal bonds which pay interest that is not subject to the
alternative minimum tax.
-12-
Municipal Bonds
The funds purchase primarily municipal bonds that are either rated
investment grade (AAA/Aaa to BBB/Baa) by independent rating agencies at the
time of purchase or are non-rated but judged to be of comparable quality by the
fund's investment adviser. Each fund may also invest in municipal bonds of
U.S. territories and possessions (such as Puerto Rico and Guam) and of the
District of Columbia which are exempt from regular federal and state income
taxes. The funds will promptly dispose of a bond whose rating drops below
investment grade or is reduced in credit quality with respect to unrated
securities. The Board of Directors, however, may vary this policy if it
determines that prompt disposal of a bond would not be in the best interests
of shareholder.
Portfolio Maturity
Each fund buys municipal bonds with different maturities in pursuit of its in-
vestment objectives, but expects under normal market conditions an investment
portfolio with an average dollar weighted maturity of 15 to 25 years.
HOW WE SELECT INVESTMENTS
ND Management selects municipal obligations for the funds based upon its
assessment of a bond's relative value in terms of current yield, price, credit
quality and future prospects. ND Management reviews municipal securities
available for purchase, monitors the continued creditworthiness of each fund's
municipal investments, and analyzes economic, political and demographic trends
affecting the municipal markets. Based on our analysis of this research, we
select those municipal obligations that we believe represent the most at-
tractive values.
Portfolio Turnover
A fund buys and sells portfolio securities in the normal course of its invest-
ment activities. The proportion of the fund's investment portfolio that is sold
and replaced with new securities during a year is known as the fund's portfolio
turnover rate. The funds anticipate that their annual portfolio turnover rate
will generally be between 70% and 80%. A turnover rate of 100% would occur,
for example, if a fund sold and replaced securities valued at 100% of its net
assets within one year. Active trading would result in the payment by the fund
of increased brokerage costs and the realization of taxable capital gains.
The funds normally will not engage in the trading of securities to realize
short-term profits. The funds, however, may adjust their portfolios in view
of prevailing or anticipated market conditions and the fund's investment
objective. The funds may also make short-term trades to take advantage of
market opportunities.
RISK MANAGEMENT
---------------
Investment Limitations
The funds have adopted certain limitations that cannot be changed without
shareholder approval and are designed to limit your investment risk. Under
these restrictions, each fund may not invest 25% or more of its total assets
in any industry. In applying this limitation, government issuers of municipal
securities are not considered part of any "industry." However, municipal
securities backed by the assets and revenues of non-governmental users will be
considered issued by these users in applying this limitation. Each fund may
also invest in industrial development bonds whose revenues derive from similar
types of projects (such as, education, electric utilities or health care).
See the Statement of Additional Information for more information regarding the
funds' investment restrictions.
Hedging Strategies
Each fund may also engage in various investment strategies designed to hedge
against interest rate changes or other market conditions using financial in-
struments whose prices, in the opinion of the fund's investment adviser,
correlate with the values of securities the fund owns or expects to purchase.
The securities used to implement these strategies include financial futures
contracts (such as future contracts in U.S. Treasury securities and interest-
related indices) and options on financial futures. The ND Tax-Free Fund may
also use options on municipal securities and temporary investments, as well as
index options. The ND Tax-Free Fund may write (sell) covered call options and
secured put options on up to 25% of its net assets. In addition, the fund will
not purchase put and call options if more than 5% of its net assets are in-
vested in the premiums of such options. The ability of a fund to benefit from
options and futures is largely dependent on ND Management's ability to use such
strategies successfully. If ND Management's judgement about the general direc-
tion of interest rates or markets is wrong, the overall performance of the fund
will be poorer than if no such futures or options had been used. In addition,
a fund's ability effectively to hedge all or a portion of its portfolio through
transactions in futures and options depends on the degree to which price move-
ments in the futures and options correlate with the price movements in the
fund's portfolio. Consequently, if the price of the futures and options moves
more or less than the price of the security that is subject to the hedge, the
fund will experience a gain or loss that will not be completely offset by move-
ments in the price of the security. The risk of imperfect correlation is
greater where the securities underlying futures contracts are taxable securi-
ties (rather than municipal securities), are issued by companies in different
market sectors or have different maturities, ratings or geographic mixes than
the security being hedged. In addition, the correlation may be affected by
additions to or deletions from the index which serves as the basis for a
futures contract. A fund could lose money on futures transactions or an option
can expire worthless. Losses (or gains) involving futures can sometimes be
substantial-in part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain) for a fund.
Use of options may also (i) result in losses to a fund, (ii) force the purchase
or sale of portfolio securities at inopportune times or for prices higher than
or lower than current market values, (iii) limit the amount of appreciation the
fund can realize on its investments, (iv) increase the cost of holding a
security and reduce the returns on securities or (v) cause a fund to hold a
security it might otherwise sell.
Temporary Investment Strategies
Each fund may, from time to time, take temporary defensive positions that are
inconsistent with the fund's principal investment strategies in attempting to
respond to adverse market, economic, political, or other conditions. Each fund
may therefore invest up to 100% of its assets in short-term high quality tax-
able securities as well as short-term municipal bonds as a temporary defensive
measure in response to adverse market conditions. These short-term securities
include obligations of the U.S. government (its agencies and instrumentali-
ties), debt securities rated
-13-
within the three highest grades by independent rating agencies, commercial
paper, certificates of deposit, municipal securities and any such securities
subject to short-term repurchase agreements. During these periods, a fund may
not be able to achieve its investment objective. For more detailed information
on eligible short-term investments, see the Statement of Additional
Information.
NON-PRINCIPAL INVESTMENT STRATEGIES
- -----------------------------------
Delayed Delivery Securities
As a non-principal investment strategy, each fund may buy or sell securities on
a when-issued or delayed-delivery basis, paying for or taking delivery of the
securities at a later date, normally within 15 to 45 days of the trade. Such
transactions involve an element of risk because the value of the securities to
be purchased may decline before the settlement date. In addition, each fund is
required to set aside cash or liquid high-grade debt securities to satisfy its
commitments to buy when-issued or delayed-delivery securities. While these
assets are set aside, the cash and securities are not available to make addi-
tional investments for trading.
PRINCIPAL RISK FACTORS
Risk is inherent in all investing. Investing in the funds involves risk, in-
cluding the risk that you may receive little or no return on your investment or
that you may even lose part or all of your investment. Before you invest, you
should consider the following risks:
Interest rate risk: the risk that the value of the fund's portfolio will
decline because of rising market interest rates (bond prices move in the
opposite direction of interest rates). The longer the average maturity
(duration) of a fund's portfolio, the greater its interest rate risk.
Credit risk: the risk that an issuer of a bond is unable to meet its obliga-
tion to make interest and principal payments due to changing market
conditions. Generally, lower rated bonds provide higher current income but
are considered to carry greater credit risk than higher rated bonds. Year 2000
issues may affect the ability of municipal issuers to meet their payment
obligations to their bond holders, and may adversely affect their credit
ratings.
State Concentration risk: because the funds primarily purchase municipal bonds
from a specific state, each fund also bears investment risk from the economic,
political or regulatory changes that could adversely affect municipal bond
issuers in that state and therefore the value of the fund's investment port-
folio. See "Appendix-Additional State Information."
Non-Diversification risk: Each fund is a non-diversified investment company
and as such, each fund may invest more than 5% of its assets in the obligations
of any issuer. Because a relatively high percentage of the fund's assets may
be invested in the municipal securities 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 diversi-
fied investment company.
In addition, because of the relatively small number of issuers of municipal
securities in Montana, North Dakota, and South Dakota, the funds are more
likely to invest a higher percentage of their assets in the securities of a
single issuer than an investment company which invests in a broad range of
tax-exempt securities. The funds are therefore subject to greater risks of
loss if an issuer is unable to make interest or principal payments or if the
market value of such securities declines.
Income risk: the risk that the income from the fund's portfolio will decline
because of falling market interest rates. This can result when the fund invests
the proceeds from the new share sales, or from matured or called bonds, at
market interest rates that are below the portfolio's current earnings rate.
Inflation risk: the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of the funds' assets can decline as can the
value of the funds' distributions.
Year 2000 Disclosure
ND Management and the funds' service providers each rely on computer systems
to manage the funds' investments, process transactions and provide account
maintenance. Because of the way computers historically have stored dates, some
of these systems currently may not be able to correctly process activity
occurring in the year 2000. ND Management is working with the funds' service
providers to adapt their systems to address this "Year 2000" issue. ND Manage-
ment and the funds expect, but there can be no absolute assurance, that the
necessary work will be completed on a timely basis.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
-14-
HOW TO PURCHASE SHARES
You can buy shares at the offering price, which is the net asset value per
share without any up-front sales charge so that the full amount of your
purchase is invested in the fund. Each fund, however, has adopted a plan
under rule 12b-1 that allows the fund to pay distribution fees for the sale of
its shares and for services provided to shareholders. Under this plan,
you will pay an annual distribution and service fee of 0.75% of average daily
assets (0.85% of average daily net assets with respect to the ND Tax-Free
Fund). The annual distribution fee compensates ND Capital, Inc. ("ND
Capital"), the funds' underwriter, for paying dealers who sell fund shares an
up-front sales commission of 3-3/4% on amounts invested (1% on sales of $1
million or more), excluding sales to investors exempt from the contingent
deferred sales charge ("CDSC"). ND Capital may use a portion of this fee to
pay an annual service fee of up to 0.25% of average daily net assets to dealers
for providing ongoing service to you. Because these fees are paid out of
the fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
If you sell your shares within five years of purchase, you will have to pay a
CDSC based on either your purchase price or what you sell your shares for,
whichever amount is lower, according to the following schedule.
Years Since Purchase 1 2 3 4 5 6 and up
CDSC 4% 4% 3% 2% 1% 0%
You do not pay a CDSC on any shares you purchase by reinvesting dividends and
capital gains. When you redeem shares subject to a CDSC, the fund will first
redeem any shares that are not subject to a CDSC or that represent an increase
in the value of your fund account due to capital appreciation, and then redeem
the shares you have owned in the order purchased. When you redeem shares
subject to a CDSC, the CDSC is calculated on the lower of your purchase price
or redemption proceeds, deducted from your redemption proceeds, and paid to
ND Capital.
Purchases of $1 million or more are subject to a reduced CDSC of 1% if shares
are redeemed within 12 months of purchase. Purchases of $1 million or more
made within 13 months of the initial purchase may qualify for the reduced
CDSC. To be eligible, you must notify the fund in writing at the time of our
initial purchase of your intent to purchase $1 million or more within 13 months
and subsequently complete this investment. Any shares purchased and sold
during this 13 month period will be deducted in computing your total purchase.
The 1% CDSC applies for one year after your purchases total $1 million.
CDSC Waivers
The funds may sell shares without a CDSC to:
* directors, officers, employees (including retirees) of the funds, ND
Holdings, Inc., ND Management, and ND Capital for themselves or certain
members of their family;
* trusts, pension, profit-sharing or other plans for the benefit of direc-
tors, officers, employees (including retirees) of the funds, ND Holdings,
Inc., ND Management and ND Capital and certain members of their families;
* authorized broker-dealers and financial institutions and certain employees
(including their spouses and children) of such dealers and institutions; and
* any broker-dealer, financial institution or other qualified firm which does
not receive commissions for selling shares to its clients.
Please refer to the Statement of Additional Information for detailed
eligibility requirements. Additional information is available by calling
(800) 276-1262.
Minimum Investments and Share Price
You may open an account with $1,000 ($100 for the Monthomatic Investment Plan)
and make additional investments at any time with as little as $50. The funds
may change these minimum initial investments at any time. You may purchase
shares from investment dealers who have sales agreements with ND Capital or
directly from ND Capital. If you do not have a dealer, call (800) 276-1262
and ND Capital can refer you to one.
The price you pay for shares will depend on how and when the fund receives your
order. You will receive the share price next determined after the fund has
received your order. If you place your order by contacting the fund directly,
your order must be received by the fund prior to close of trading of the New
York Stock Exchange (normally 3:00 p.m. Minot, North Dakota time) for you to
receive that day's price. However, if you place your order through a dealer
prior to the close of trading of the New York Stock Exchange and the fund
receives such order prior to the close of business of the fund(normally
5:00 p.m. Minot, North Dakota time) you will receive that day's price.
Dealers are obligated to transmit orders promptly. See "Net Asset Value" for
a discussion of how shares are priced.
-15-
SYSTEMATIC INVESTING - THE MONTHOMATIC INVESTMENT PLAN
Once you have established a fund account, systematic investing allows you to
make regular investments through automatic deductions from your bank account
(simply complete the appropriate section of the account application form) or
call ND Resources at (800) 601-5593 for appropriate forms.
With the Monthomatic Investment Plan, you can make regular investments of $50
or more per month by authorizing us to draw either checks or debits on your
bank account. Such account must have check or draft writing privileges. You
can stop the withdrawals at any time by sending a written notice to ND
Resources, Inc. ("ND Resources"), the funds' transfer agent, at P.O. Box 759,
Minot, ND 58702. The termination will become effective within 7 days after
the transfer agent has received the request. The funds may terminate or
modify this privilege at any time and may immediately terminate a shareholder's
monthomatic plan if any item is unpaid by the shareholder's financial
institution. There is no charge for this plan.
SPECIAL SERVICES
To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.
Exchanging Shares
You may exchange fund shares into an identically registered account at any time
for shares of any mutual fund advised and underwritten by ND Capital or Ranson
Capital Corporation or ND Management at net asset value. If the shares of the
original fund are subject to a CDSC, the CDSC and the holding period of your
original investment will be carried forward into the fund in which you are
exchanging and applied in the event you redeem any or all of your shares in
this fund. If you paid a front-end sales charge on the shares being exchanged,
you will not pay a CDSC in the event you redeem any or all of your shares.
Your exchange must meet the minimum purchase requirements of the fund into
which you are exchanging and be available in your state. Because an exchange
is treated for tax purposes as a concurrent sale and purchase, and any gain may
be subject to tax, you should consult your tax adviser about the tax
consequences of any contemplated exchange.
The exchange privilege is not intended to allow you to use a fund for short-
term trading. Because excessive exchanges may interfere with portfolio
management, raise fund operating expenses or otherwise have an adverse effect
on other shareholders, each fund reserves the right to revise or suspend the
exchange privilege on 60 days written notice , limit the amount or number
of exchanges, or reject any exchange. For additional information on how to
exercise the exchange privilege, call ND Resources at (800) 601-5593.
Reinstatement Privilege
If you redeem fund shares, you may reinstate all or part of your redemption
proceeds without incurring any additional charges. If you paid a CDSC, we will
refund your CDSC as additional shares in proportion to the reinstatement amount
of your redemption proceeds. Your holding period will also be reinstated. An
investor exercising this privilege a year or more after redemption must com-
plete a new account application and provide proof that the investor was a
shareholder of the fund. The funds may modify or terminate this privilege at
any time.
HOW TO SELL SHARES
You may sell (redeem) your shares on any day the New York Stock Exchange is
open. The News York Stock Exchange is closed on weekends, national holidays
and Good Friday. You will receive the share price next determined after the
fund has received your properly completed redemption request as described
below. Your redemption request must be received before the close of trading
for you to receive that day's price. While the funds do not charge a
redemption fee, you may be assessed a CDSC, if applicable.
You can sell your shares at any time by sending a written request to the
appropriate fund, c/o ND Resources, P.O. Box 759, Minot, ND 58703. To
properly complete your redemption request, your request must include the
following information:
* The fund's name;
* Your name and account number;
* The dollar or share amount you wish to redeem;
* The signature of each owner exactly as it appears on the account;
* The name of the person to whom you want your redemption proceeds paid (if
other than to the shareholder of record);
* The address where you want your redemption proceeds sent (if other than the
address of record);
* Any certificates you have for the shares (signed certificate or a duly
endorsed stock power); and
* Any required signature guarantees.
-16-
We will normally mail your check the next business day, but in no event more
than seven days after we receive your request. If you purchased your shares
by check, your redemption proceeds will not be mailed until your check has
cleared which may take up to 15 days from the date of purchase.
Guaranteed signatures are required if you are redeeming more than $50,000,
you want the check payable to someone other than the shareholder of record
or you want the check sent to another address. Signature guarantees must be
obtained from a commercial bank, trust company, savings and loan association,
or brokerage firm. A notary public cannot provide a signature guarantee.
You should note that the fund reserves the right to liquidate your account upon
60 days' written notice if the value of your account falls below $1,000 for any
reason other than a fluctuation in the market value of the fund shares. The
funds also reserve the right to redeem in-kind (that is to pay redemption
request in cash and portfolio securities, or wholly in portfolio securities).
A fund may also suspend the right of redemption under the following unusual
circumstances:
* when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
* when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
* during any period when the SEC has by order permitted a suspension of re-
demption for the protection of shareholders.
SYSTEMATIC WITHDRAWAL
If the value of your fund account is at least $5,000, you may request to have
$50 or more withdrawn automatically from your account, subject to any
applicable CDSC. You may elect to receive payments monthly, quarterly, semi-
annually or annually. If payments exceed reinvested dividends and distribu-
tions, an investor's shares will be reduced and eventually depleted. You must
complete the appropriate section of the account application to participate in
the fund's systematic withdrawal plan. A shareholder who participates in the
Monthomatic Investment Plan is ineligible to participate in this plan.
DISTRIBUTIONS AND TAXES
The funds declare dividends daily on shares for which they have received
payment. The funds pay tax-free dividends monthly and any taxable capital
gains or other taxable distributions once a year after the end of the fund's
fiscal year. The funds have also adopted a policy whereby they will distribute
to shareholders more than the fund's net investment income and net realized
capital gains. These excess distributions represent a return of capital to
shareholders. These policies are non-fundamental and may be modified
by the funds at any time.
The following table sets forth the percentage of each fund's distributions that
constituted a return of capital for the fiscal year ended December 31, 1998:
Montana Tax-Free Fund 11%
ND Tax-Free Fund 10%
South Dakota Tax-Free Fund 10%
Reinvestments Options
The funds automatically reinvest your dividends in additional fund shares
unless you request otherwise. You may request to have your dividends and
capital gains paid to you in the following ways:
* income dividends in cash and capital gain dividends reinvested in additional
fund shares;
* income and capital gain dividends in cash; or
* income and capital gain dividends reinvested in shares of Integrity Fund of
Funds, Inc. ("Integrity") at net asset value, provided you open an account
with Integrity with a minimum balance of $100.
The funds will send a check to investors selecting to receive dividends in
cash. You may have your distribution check paid to a third party or sent to
an address other than your address of record (although a signature guarantee
will be required). For further information, contact ND Resources at
(800) 601-5593.
Taxes and Tax Reporting
Because the funds invest in municipal bonds, the regular monthly dividends you
receive will be exempt from regular federal income tax. All or a portion of
these dividends, however, may be subject to any state and local taxes . A
portion of these dividends may also be subject to the federal alternative
minimum tax (AMT).
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. To the extent
the funds engage in hedging transactions in futures contracts and options
thereon, the funds may earn capital gains or losses. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net
long-term capital gains are taxable as
-17-
long-term capital gains regardless of how long you have owned your investment.
Taxable dividends do not qualify for a dividends received deduction if you are
a corporate shareholder. For information regarding the state tax consequences
of a fund investment, see Appendix-Additional State Information.
Early in each year, you will receive a statement detailing the amount and
nature of all dividends and capital gains, including any percentage of your
fund dividends attributable to municipal obligations, that you were paid during
the prior year. The tax status of your dividends is not affected by whether
you reinvest your dividends or receive them in cash. If you receive social
security benefits, you should be aware that any tax-free income is taken into
account in calculating the amount of these benefits that may be subject to
federal income tax.
Tax laws are subject to change, so we urge you to consult your tax adviser
about your particular tax situation and how it might be affected by current
tax law.
Please note that if you do not furnish us with your correct Social Security
number or employer identification number, federal law requires us to withhold
federal income tax from your distributions and redemption proceeds at a rate
of 31%.
Buying or Selling Shares Close to a Record Date
Buying fund shares shortly before the record date for a taxable dividend is
commonly known as "buying the dividend." The entire dividend may be taxable
to you even though a portion of the dividend effectively represents a return
of your purchase price. Similarly, if you sell or exchange fund shares shortly
before the record date for a tax-exempt dividend, a portion of the price you
receive may be treated as a taxable capital gain even though it reflects
tax-free income earned but not yet distributed by the fund.
DISTRIBUTION AND SERVICE PLAN
ND Capital serves as the distributor of the funds' shares. In this capacity,
ND Capital manages the offering of the funds' shares and is responsible for
all sales and promotional activities. In order to reimburse ND Capital for
its costs in connection with these activities, including compensation paid to
authorized dealers, each fund has adopted a distribution and service plan (the
"Plan") under Rule 12b-1 under the Investment Company Act of 1940. See "How to
Purchase Shares" for a description of the distribution and service fees paid
under this plan.
ND Capital receives the 12b-1 fee for fund shares primarily for providing
compensation to authorized dealers including ND Capital in connection with the
distribution of shares and related financing costs. ND Capital may also use
the fee to compensate authorized dealers for providing account services to
shareholders. These services may include answering shareholder inquiries,
assisting in redeeming shares, interpreting confirmations, statements and other
documents, and providing other personal services to shareholders. These fees
also compensate ND Capital for other expenses, including printing and dis-
tributing prospectuses to persons other than shareholders, and preparing,
printing, and distributing advertising and sales literature and reports to
shareholders used in connection with the sale of shares and other overhead
expenses (such as rent and salaries). Payments made to ND Capital under the
Plan are not dependent upon expenses incurred, and therefore payments made
under the Plan may exceed ND Capital's expenses in any given year.
NET ASSET VALUE
The price you pay for your shares is based on the fund's net asset value per
share which is determined as of the close of trading (normally 3:00 p.m. Minot,
North Dakota time) on each day the New York Stock Exchange is open for
business. Net asset value is calculated by taking the total value of the
fund's assets, including interest or dividends accrued but not yet collected,
less all liabilities, and dividing by the total number of shares outstanding.
The result, rounded to the nearest cent, is the net asset value per share. All
valuations are subject to review by the funds' Board of Directors or its
delegate.
In determining net asset value, expenses are accrued and applied daily. The
prices of municipal bonds are provided by ND Management which establishes
market value based on prices and yields of comparable municipal bonds.
Options that are traded on an exchange are valued at the last sales price,
unless there is no last sales price. In that case, the options will be valued
at the mean between the closing bid and ask prices. Financial futures are
valued at their settlement prices established on 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 established by the Board of
Directors or its delegate. If an event were to occur, after the value of an
instrument was established but before net asset value per share was determined,
which would likely materially change the net asset value, then the instrument
would be valued using fair value considerations by the Board of Directors or
its delegate.
FUND SERVICE PROVIDERS
The custodian of the assets of the ND Tax-Free Fund and the South Dakota Tax-
Free Fund is Bremer Bank, N.A., 20 First Street SW, Minot, North Dakota 58701.
The custodian of the assets of the Montana Tax-Free Fund is First Western Bank
& Trust, 900 South Broadway, Minot, North Dakota 58701. ND Resources, a
wholly-owned subsidiary of ND Holdings, is the funds' transfer agent. As
transfer agent, ND Resources performs bookkeeping,
-18-
data processing, accounting and other administrative services for the operation
of the funds and the maintenance of shareholder accounts.
SHAREHOLDER INQUIRIES
All inquiries regarding the funds should be directed to ND Capital at 1 North
Main, Minot, ND 58703 or call (800) 276-1262.
All inquiries regarding account information should be directed to ND Resources
at P.O. Box 759, Minot, ND 58702 or call (800) 601-5593.
-19-
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
fund's recent past performance. Certain information reflects financial results
for a single fund share. The total returns in the tables represent the rate
that an investor would have earned on an investment in the fund (assuming rein-
vestment of all dividends and distributions). This information has been
audited by Brady, Martz & Associates, P.C., whose report, along with the funds'
financial statements are included in the funds' Statement of Additional Infor-
mation. Further information about a fund's performance is contained in the
fund's latest annual shareholder report. You may obtain a free copy of the
fund's latest annual shareholder report and Statement of Additional Information
upon request from the fund.
MONTANA TAX-FREE FUND
<TABLE>
<CAPTION>
For The For The For The For The For The
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 1998 31, 1997 31, 1996 31, 1995 31, 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 10.07 $ 10.04 $ 9.39 $ 10.07
--------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .42 $ .46 $ .48 $ .51 $ .50
Net realized and unrealized gain (loss) on
investment and futures transactions (.06) .13 .06 .67 (.66)
--------------------------------------------------------
Total Income (Loss) From Investment Operations $ .36 $ .59 $ .54 $ 1.18 $ (.16)
--------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.42) $ (.46) $ (.48) $ (.51) $ (.50)
Return of capital distributions (.05) (.04) (.03) (.02) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
--------------------------------------------------------
Total Distributions $ (.47) $ (.50) $ (.51) $ (.53) $ (.52)
--------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 10.16 $ 10.07 $ 10.04 $ 9.39
========================================================
Total Return 3.66%(A) 5.96%(A) 5.52%(A) 12.85%(A) (1.70)%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $58,879 $47,749 $34,803 $24,055 $11,956
Ratio of net expenses (after expense assumption)
to average net assets 1.30% 1.17%(B) 0.96%(B) 0.66%(B) 0.46%(B)
Ratio of net investment income to average net
assets 4.18% 4.51% 4.76% 5.11% 5.06%
Portfolio turnover rate 3.65% 7.91% 7.12% 7.39% 12.46%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$60,969, $98,321, $99,757, and $87,483. If the expenses had not been
assumed, the annualized ratio of total expenses to average net assets would
have been 1.32%, 1.29%, 1.22%, and 1.46% , respectively.
-20-
ND TAX-FREE FUND
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
----------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .41 $ .43 $ .46 $ .47 $ .48
Net realized and unrealized
gain (loss) on investments
and futures transactions (.10) (.05) .13 .28 (.67)
----------------------------------------------------------------------------
Total Income (Loss) From
Investment Operations $ .31 $ .38 $ .59 $ .75 $ (.19)
------------------------------------------------------------- ------------
Less Distributions:
Dividends from net investment income $ (.41) $ (.43) $ (.46) $ (.47) $ (.48)
Return of capital distributions (.05) (.05) (.03) (.02) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
--------------------------------------------------------------------------
Total Distributions $ (.46) $ (.48) $ (.49) $ (.49) $ (.50)
--------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.94 $ 9.09 $ 9.19 $ 9.09 $ 8.83
--------------------------------------------------------------------------
Total Return 3.48%(A) 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $80,987 $88,435 $91,631 $94,532 $91,865
Ratio of net expenses
(after expense assumption) to
average net assets 1.30% 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B)
Ratio of net investment income
to average net assets 4.59% 4.70% 5.00% 5.20% 5.19%
Portfolio turnover rate 7.32% 13.18% 12.92% 8.02% 5.55%
</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, and $31,115, 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%, and 1.10%, respectively.
-21-
SOUTH DAKOTA TAX-FREE FUND
<TABLE>
<CAPTION>
For The
For The For The For The For The Period Since
Year Ended Year Ended Year Ended Year Ended Inception(April
December 31, December 31, December 31, December 31, 5, 1994) Through
1998 1997 1996 1995 December 31, 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.49 $ 10.50 $ 10.39 $ 9.86 $ 10.00
---------------------------------------------------------------------
Income from Investment
Operations:
Net investment income $ .46 $ .53 $ .52 $ .55 $ .39
Net realized and
unrealized gain (loss)
on investment and
futures transactions (.06) .03 .14 .55 (.11)
-----------------------------------------------------------------
Total Income(Loss) From
Investment Operations $ .40 $ .56 $ .66 $ 1.10 $ .28
-----------------------------------------------------------------
Less Distributions:
Dividends from net
investment income $ (.46) $ (.53) $ (.52) $ (.55) $ (.39)
Return of capital
distributions (.05) (.04) (.03) (.02) (.02)
Distributions from net
realized gain .00 .00 .00 .00 (.01)
-----------------------------------------------------------------
Total Distributions $ (.51) $ (.57) $ (.55) $ (.57) $ (.42)
-----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.38 $ 10.49 $ 10.50 $ 10.39 $ 9.86
=================================================================
Total Return 3.88%(A) 5.10%(A) 6.58%(A) 11.47%(A) 3.72%(A)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $7,748 $ 7,330 $ 6,397 $ 5,163 $ 2,890
Ratio of net expenses
(after expense assumption)
to average net assets 1.30% 1.17%(C) 0.93%(C) 0.61%(C) 0.46%(B)
Ratio of net investment
income to average net assets 4.36% 4.70% 5.01% 5.35% 5.62%(B)
Portfolio turnover rate 15.75% 3.35% 2.47% 0.66% 31.32%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) Ratio was annualized.
(C) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$68,538, $54,598, $37,053, and $24,509, respectively. If the expenses
had not been assumed, the annualized ratio of total expenses to average
net assets would have been 2.16%, 1.88%, 1.51% and 2.15%, respectively.
-22-
APPENDIX - ADDITIONAL STATE INFORMATION
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from economic, political or regulatory
changes that could adversely affect municipal bond issuers in that state and
therefore the value of the fund's investment portfolio. The following discus-
sion of special state considerations was obtained from official offering state-
ments of these issuers and has not been independently verified by the funds.
The discussion includes general state tax information related to an investment
in fund shares. Because tax laws are complex and often change, you should
consult your tax adviser about the state tax consequences of a specific fund
investment.
Montana
Montana's economy is primarily based on agriculture, mining and the processing
of minerals and agricultural forest products. Montana's economy, however,
continues to parallel the national trend of moving to more service producing
industries. In 1997, the largest industries in the state were services, state
and local government, and retail trade. The state's population, employment and
income continue to grow. Montana's population had a 10% growth rate between
1990 and 1997 which exceeded the national average of 7.69% over the same
period. Although agricultural employment continues to decline, other areas
show gains in employment, particularly in the private services sector which
represents various business, professional, and personal service sectors.
Between 1996 and 1997, employment as measured by non-farm payroll increased
by 1.5% At this same time, the statewide unemployment rate remained basically
stable at 5.4%, higher than the national average of 4.9%. Per capital income
in 1997 was $19,704 reflecting an increase of 4.6% from 1996. Moody's
currently gives the State's general obligation debt an Aa3 rating and Standard
& Poor's gives it an AA-.
Tax Treatment
The Montana Tax-Free Fund's regular monthly dividends to shareholders that are
individuals, estates and trusts will not be subject to the Montana income tax
to the extent they are paid out of income earned on state and local municipal
bonds. These dividends are subject to Montana tax for shareholders that are
corporations. You will be subject to Montana income tax, however, to the
extent the Montana Tax-Free Fund distributes any taxable income or realized
capital gains, or if you sell or exchange Montana Tax-Free Fund shares and
realize a capital gain on the transaction. Montana taxes capital gains
(including capital gain distributions paid by the fund) at the same rates as
ordinary income.
North Dakota
North Dakota's economy is primarily dependent on agriculture and energy and
mineral products. North Dakota's economy continues its decade-long path of
growth but the rate of growth is beginning to slow. Taxable sales and
purchases reported by the state's business community grew by a modest 2.86%
in the second quarter in 1998 compared to the second quarter in 1997. This
growth rate, however, may be somewhat skewed by the extensive post-flood
rebuilding efforts that bolstered the 1997 figures. North Dakota's wholesale
trade sector declined in the second quarter while the state's transportation,
communication and public utilities sectors experienced a 23.4% increase in
this period. Retail trade, the largest sector, also grew by 4% during this
period. Agriculture, North Dakota's mainstay industry, however, continues to
struggle due to low prices for the state's major crops and depressed cattle
prices. In addition, low oil prices are responsible for a slowdown in oil
production in the state. These factors make the outlook for North Dakota's
economy mixed. In 1997, North Dakota's unemployment rate was 2.5%, below the
national average of 4.9%, and per capital income was $20,213 down from $20,308
in 1996.
Tax Treatment
The North Dakota Tax-Free Fund's regular monthly dividends will not be subject
to North Dakota income taxes to the extent they are paid out of income earned
on North Dakota state and local government municipal bonds. You will be
subject to North Dakota income taxes, however, to the extent the North Dakota
Tax-Free Fund distributes any taxable income, or if you sell or exchange North
Dakota Fund shares and realize a capital gain on the transaction.
The treatment of corporate shareholders of the North Dakota Tax-Free Fund is
similar to that described above. However, the above dividends are not exempt
from North Dakota tax for shareholders that are banks or other entities subject
to North Dakota tax on financial institutions.
For individuals, trusts and estates using the North Dakota short-form to
compute your North Dakota income tax as a percentage of your federal income
taxes, dividends characterized as long-term capital gains for federal tax
purposes will be similarly treated for state tax purposes. If you, however,
use the regular method of calculating North Dakota taxable income, these
long-term capital gains will be taxed at the same rates as ordinary income.
South Dakota
South Dakota's economy is dominated by wholesale and retail trade and
agriculture. South Dakota's economy has been one of the healthiest
economies among the fifty states. A prime indication of the strength of
South Dakota's economy during 1997 was the growth in South Dakota's labor
force. During 1997, the South Dakota labor force
-1-
grew to an all-time high, with the construction and finance, insurance and
real estate sectors leading the way, with growth rates of 3.8% and 8.0%,
respectively. At the same time, South Dakota enjoyed one of the lowest
unemployment rates in the nation at 2.8%, far below the national unemployment
rate of 4.9%. All major non-farm sectors in South Dakota, excluding retail
trade, transportation, and public utilities realized growth in jobs. Finally,
total personal income in South Dakota grew 7.9%, compared to the national
growth rate of 5.8%. Per capita income was $21,183.
The State does not issue general obligation bonds, however, certain instrumen-
talities of the State and non-profit corporations may issue debt.
Tax Treatment
Currently, South Dakota does not assess personal income or corporate income
tax.
-2-
INTEGRITY MUTUAL FUNDS
Montana Tax-Free Fund, Inc.
ND Tax-Free Fund, Inc.
South Dakota Tax-Free Fund, Inc.
Several additional sources of information are available to you. The Statement
of Additional Information (SAI), incorporated by reference into this
prospectus, contains detailed information on the funds' policies and
operation. Annual reports and semi-annual reports contain management's
discussion of market conditions, investment strategies and performance results
as of the fund's latest semiannual or annual fiscal year end. Call ND Capital
at (800) 276-1262 to request a free copy of any of these materials.
You may also obtain this and other fund information directly from the
Securities and Exchange Commission (SEC). The SEC may charge a copying fee for
this information. Visit the SEC on-line at http://www.sec.gov or in person at
the SEC's Public Reference Room in Washington, D.C. Call the SEC at
(800) SEC-0330 for room hours and operation. You may also request fund
information by writing to the SEC's Public Reference Section, Washington, D.C.
20549.
Integrity Mutual Funds
1 North Main
Minot, North Dakota 58703
(800) 276-1262
File Nos. 811-5681 (ND Tax-Free Fund)
811-7738 (Montana Tax-Free Fund)
811-8124 (South Dakota Tax-Free Fund)
-3-
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
MONTANA TAX-FREE FUND, INC.
ND TAX-FREE FUND, INC.
SOUTH DAKOTA 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 the Montana Tax-Free Fund,
Inc., the ND Tax-Free Fund, Inc. and the South Dakota Tax-Free Fund, Inc. (the
"Funds"), dated May 1, 1999. The Prospectus may be obtained without charge
from the Funds by writing to the above address or calling (800) 276-1262.
Table of Contents
Section Page
Investments 1
Investment Policies and Techniques 3
Investment Restrictions 10
Additional Risk Considerations 12
Management of the Funds 12
Control Persons and Principal Holders of Securities 14
Investment Advisory and Other Services 15
Distribution Plans 16
Expenses 19
Portfolio Transactions 19
Purchase and Redemption of Shares 20
Monthomatic Investment Plan 21
Exchange Privilege 21
Minimum Investment 22
Redemptions 22
Contingent Deferred Sales Charges 22
Systematic Withdrawal Plan 25
Net Asset Value 25
Underwriter 25
Dividends and Taxes 26
Calculation of Performance Data 30
Tax-Free Versus Taxable Income 33
Organization and Share Attributes 36
Shareholder Meetings 36
Appendix-Ratings of Investments 37
Financial Statements F-1
INVESTMENTS
MUNICIPAL SECURITIES
The Montana Tax-Free Fund, Inc. (the "Montana Fund"), the ND Tax-Free Fund,
Inc. (the "ND Fund"), and the South Dakota Tax-Free Fund, Inc. (the "South
Dakota Fund") are each registered open-end, non-diversified, management invest-
ment companies. Each Fund seeks 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 politi-
cal subdivisions, agencies, and instrumentalities, the interest from which is
exempt from federal income taxes ("Municipal Securities"). Municipal
Securities 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 construc-
tion, 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.
("Moody's") and Standard & Poor's Corporation ("S&P") 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. Each Fund will not purchase or hold more than 5% of its net assets
in securities rated below investment grade.
Each Fund may invest in "private activity" bonds. Each Fund may also
purchase participation interests in Municipal Securities (such as industrial
development bonds) from financial institutions, including banks, insurance
companies and broker-dealers. A participation interest gives the Fund an un-
divided 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.
With respect to the ND Fund and the Montana Fund, not more than 5% of the
net assets of the respective Fund will be invested in participation interests
in Municipal Securities during the coming year. With respect to the South
Dakota Fund, not more than 5% of the net assets of the Fund will be invested in
municipal lease obligations with non-appropriation clauses.
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.
Each Fund will seek to achieve its objective by investing primarily in tax-
exempt securities issued by the State after which the Fund is named and its
political subdivisions, agencies, and instrumentalities which are within the
four highest grades of either Moody's (Aaa, Aa, A, or Baa) or S&P's (AAA, AA,
A or BBB) or which are unrated but are of comparable quality, as determined by
the fund's investment adviser, ND Money Management, Inc. (the "Investment
Adviser" or "ND Money Management"). Municipal Securities within the four
highest grades of Moody's and S&P's are generally considered to be "investment
grade." Those rated Baa by Moody's or BBB by S&P'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. A 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
Appendix under "Ratings of Investments." There is no assurance that a Fund
will achieve its objective.
B-2
TEMPORARY INVESTMENTS
For temporary defensive purposes, each Fund may invest in any of the follow-
ing 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 or S&P; 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 $25,000,000 or more; and Municipal
Securities or any of the foregoing temporary investments subject to short-
term repurchase agreements. When a Fund invests in accordance with this
policy, it may do so without percentage limits. A repurchase agreement is an
instrument under which 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 bank-
ruptcy 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" below. For a
description of the ratings of commercial paper and other debt securities
permitted as temporary investments, see "Appendix-Ratings of Investments."
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Each Fund may engage in future transactions and options on such futures in
accordance with its investment objective and policies for hedging purposes and
not for speculation. The ND Fund may also engage in option transactions on
securities in accordance with its objective and policies. Each 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
A Fund may enter into financial futures contracts. 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. Each 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
B-3
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.
At the time a 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.
A Fund may engage in financial futures as an attempt to hedge against the
effects of fluctuations in interest rates and other market conditions. For
example, if a Fund owned long-term Municipal Securities and interest rates were
expected to rise, it could sell futures on 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, a 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, a 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. A 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 respective 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 obliga-
tion to make or take delivery of the securities. Other financial futures
contracts, such as futures contracts on a securities index, by their terms
call for cash settlements. 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. A 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. The costs
incurred in connection with futures transactions would also reduce a Fund's
yield.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio securities that are being hedged. The degree of
difference in price movements
B-4
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 a
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. 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 a Fund may be illiquid during periods when daily
market price movement limits have reached. As a result, net assets of the Fund
may be impacted negatively until normal futures trading resumes or until the
Fund's future contracts are closed out. In addition to the foregoing, 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
off-setting 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 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 correla-
tion 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, a Fund could lose money on the financial futures contracts and
also on the value of its portfolio securities.
A Fund may engage in futures transactions only on commodities or securities
exchanges or boards of trade. A 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.
Options on Financial Futures Contracts
Each Fund may 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. 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
B-5
during the period of the option. 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 underly-
ing futures contracts at the exercise price during the option period. A 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 a Fund may expire worthless, in which case the Fund would lose the
premium paid therefor.
Options on Securities
In addition to the foregoing, the ND 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 in-
vestments. 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 ND 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 ND 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 ND Fund is able to fix the cost of acquiring the securities,
this being the cost of the call plus the exercise price of the option. This
procedure also provides some protection from an unexpected downturn in the
market, because the ND 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.
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 depre-
ciation 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
B-7
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.
Options on Securities Indices
The ND Fund also may purchase and write call and put options on securities
indices which are traded on national stock exchanges 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 a 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 ND 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 such 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 securities and index options involve risks similar to those risks
relating to transactions in financial futures contracts described above.
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, there-
fore, 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. 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 obliga-
tions 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. Also, an option purchased by
the ND Fund may expire worthless, in which case the Fund would lose the
premium paid therefor.
Delayed Delivery Transactions
Each Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When issued or delayed delivery transactions involve a
commitment by the respective 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 a 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 a 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. A Fund generally has the ability to close
out a purchase obligation on or before the settlement date, rather than to
purchase the security. Because a Fund is required to segregate cash or
liquid high-grade debt securities to satisfy its commitments to purchase
when-issued or delayed-delivery securities, management of the Fund's invest-
ments 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 a 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. Each 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.
Diversification and Concentration Policies
Each Fund is a non-diversified investment company under the Investment
Company Act of 1940. This means that more than 5% of a Fund's assets may be
invested in the obligations of any issuer. The Funds, however, intend to
comply with Subchapter M of the internal Revenue Code (the "Code") that limits
the aggregate value of all holdings (except U.S. Government and cash items, as
defined in the Code) that exceed 5% of the Fund's total assets to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits, up to 50%
of a Fund's total assets may be invested in as few as two single issuers. In
the event of decline of creditworthiness or default upon the obligations of one
or more such issuers exceeding 5%, an investment in a Fund will entail greater
risk than in a portfolio having a policy of "diversification" because a high
percentage of the Fund's assets may be invested in municipal obligations of one
or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of
the assets of a Fund and consequently a greater degree of fluctuation of the
Fund's net asset value, because the Fund will be more susceptible to economic,
political, or regulatory developments affecting these securities than would be
the case with a portfolio composed of varied obligations of more issuers.
B-8
In addition, because of the relatively small number of issuers of
Municipal Securities in South Dakota, North Dakota and Montana, each 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.
A Fund will not invest 25% or more of its total assets in any industry.
Governmental issuers of Municipal Securities are not considered part of an
"industry." However, 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 a 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, each 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.
Portfolio Turnover
A 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, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in anticipa-
tion 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.
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, a 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
B-9
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 to avoid "commodity pool operator" status, each 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's port-
folio. Each 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. With respect to the ND Fund, when
futures contracts or options thereon are purchased to protect against a price
increase on securities intended to be purchased later, it is anticipated that
at least 75% of such intended purchases will be completed. In addition, when
other futures contracts or options thereon are purchased, the underlying value
of such contracts will at all times not exceed the sum of: (1) accrued profit
on such contracts held by the broker; (2)cash or high quality money market
instruments set aside in an identifiable manner; and (3) cash proceeds from
investments due in 30 days.
INVESTMENT RESTRICTIONS
Each 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. Each Fund may not:
(1) 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 securities of the state
after which the Fund was named (e.g., the State of North Dakota for the ND
Fund) or their respective political subdivisions, agencies, or instrumentali-
ties) if as a result of such purchase 25% or more of the Fund's total assets
would be within 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.
B-10
A Fund will not purchase portfolio securities when outstanding borrow-
ings exceed 5% of its total assets.
(5) Make short sales of securities.
(6) 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.
(7) 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) repur-
chase agreements maturing in more than seven days.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Invest in commodities or commodity futures contracts, although it may
buy or sell financial futures contracts and options on such contracts.
(10) 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.
(11) Invest more than 10% of its total assets in securities of other invest-
ment companies, except in connection with a merger, consolidation, reorganiza-
tion, or acquisition of assets.
(12) 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.
(13) Issue senior securities as defined in the Investment Company Act of
1940, except money borrowed as permitted by (4) above.
(14) Invest in real estate (or real estate mortgage loans in the case of the
Montana Fund and the South Dakota Fund), although a Fund may invest in
Municipal Securities which are secured by real estate and securities of
issuers which invest or deal in real estate.
In addition to the foregoing, the ND Fund, as a fundamental policy, may not
write, purchase, or sell puts, calls, or combinations thereof, except in
accordance with its investment objective and policies.
Interest paid on funds borrowed as permitted by (4) above will decrease the
net earnings of the respective Fund.
B-11
During the coming year, each Fund does not intend to invest more than 5% of
its net assets in securities of other investment companies.
Each Fund may invest more than 25% of its net assets in industrial develop-
ment bonds.
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 respective Fund. Changes due
to market action will not cause a violation of a policy or restriction.
ADDITIONAL RISK CONSIDERATIONS
An investment in the Funds are subject to a number of risks, some of which
have been described in the Funds' Prospectus under "Fund Summary" for each
Fund and the "Risk Factors" Section. See also "Investments" and "Investment
Policies and Techniques" above for some of the risks associated with the Funds'
investment policies. In addition to the foregoing, you should note that each
Fund is a separately registered investment company the shares of which are
being offered through the same prospectus. Accordingly, one Fund could be
liable for any misstatement, inaccuracy, or incomplete disclosure in the
prospectus concerning another Fund.
MANAGEMENT OF THE FUNDS
The management of each Fund, including general supervision of the duties
performed for a Fund under its Investment Advisory Agreement, is the responsi-
bility of its Board of Directors. The number of directors of each Fund is
five, two of whom are "interested persons" (as the term "interested persons"
is defined in the Investment Company Act of 1940) and three of whom are "dis-
interested persons." The names and business addresses of the directors and
officers of the Funds and their principal occupations and other affiliations
during the past five years are set forth below, with the directors who are
"interested persons" of the Funds indicated by an asterisk.
B-12
<TABLE>
<CAPTION>
<S> <C> <C> <C>
POSITIONS HELD
NAME AND ADDRESS AGE WITH EACH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS1
Lynn W. Aas2 77 Director Retired; Attorney; Director, ND Holdings, Inc.;
904 NW 27th Director, Integrity Fund of Funds, Inc.; Trustee,
Minot, North Dakota 58701 Ranson Managed Portfolios; Director, First Western
Bank & Trust
Orlin W. Backes3 63 Director Attorney; Director, Integrity Fund
15 2nd Ave. SW, Suite 305 of Funds, Inc.; Trustee, Ranson Managed
Minot, North Dakota 58701 Portfolios; Director, First Western Bank & Trust
R. James Maxson4 51 Director Attorney; Director, Integrity Fund of Funds, Inc.;
6 - 9th Street SE Trustee, Ranson Managed Portfolios
Minot, ND 58701
*Peter A. Quist5 65 Director Director and Vice President, ND Holdings, Inc.;
1 North Main Vice- Director, Vice President, and Secretary, ND Money
Minot, North Dakota 58703 President Management, Inc., ND Capital, Inc., ND Resources, Inc.,
Secretary and Integrity Fund of Funds, Inc. and Ranson Capital Corporation;
Vice President and Secretary, Ranson Managed Portfolios;
*Robert E. Walstad6 54 Director Director and President, ND Holdings, Inc.; Director, President,
1 North Main President and Treasurer, ND Money Management, Inc., ND Capital, Inc., ND
Minot, North Dakota 58703 Treasurer Resources, Inc., and Integrity Fund of Funds, Inc.; Trustee,
Chairman, President, and Treasurer, Ranson Managed Portfolios;
Director, President, CEO, and Treasurer, Ranson Capital Corporation
</TABLE>
1 Except as otherwise indicated, each individual has held the office(s) shown
for the past five years. Mssrs. Aas, Backes, 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 each Fund on December 2, 1994.
3 Mr. Backes was elected to the board of directors of each Fund and of the
Integrity Fund of Funds, Inc., in 1995.
4 Mr. R. James Maxson was elected to the board of directors of each Fund,
Integrity Fund of Funds, Inc., and the board of trustees for the five series
of the Ranson Managed Portfolios on December 4, 1998, effective January 1, 1999.
5 Mr. Quist has served on the board of directors of Montana Fund, Integrity
Fund of Funds, Inc., and the ND Fund since their inceptions. He was elected to
the board of South Dakota Fund on April 7, 1995, and has served as the vice
president and secretary of each of the aforementioned funds since their
inceptions.
6 Mr. Walstad has served as a director and as the president and treasurer of
each Fund and the Integrity Fund of Funds, Inc., since their inceptions.
Directors who are not an "interested person" as that term is defined in the
1940 Act of the Funds are paid an annual fee of $10,000 for serving on the
boards of the Funds in the complex. In addition to the three Funds, the di-
rectors are also directors of six open-end investment companies advised by ND
Money Management, Inc. or Ranson Capitals Corporation, an affiliate of the
Investment Adviser. Each of these funds (which includes the five series of
Ranson Managed Portfolios), pays a pro rata share of the fee based upon its
respective assets. Messrs. Quist and Walstad, who are the only "interested
persons" of such funds, receive no compensation from the funds.
B-13
The following table sets forth compensation paid by each Fund to each of
the directors of the Funds and total compensation paid to each director for
the fiscal year ended December 31, 1998. The Funds have no retirement or
pension plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TOTAL**
AGGREGATE* COMPENSATION FROM
AGGREGATE* AGGREGATE* COMPENSATION FROM FUNDS AND FUND
NAME OF PERSON, COMPENSATION FROM COMPENSATION FROM THE SOUTH DAKOTA COMPLEX PAID TO
POSITION(S) THE MONTANA FUND THE ND FUND FUND DIRECTORS
Lynn W. Aas
Director $1,330.12 $1,795.20 $613.90 $10,000.00
Orlin W. Backes
Director $1,330.11 $1,795.20 $613.91 $10,000.00
Arthur A. Link(1)
Director $1,330.12 $1,795.20 $613.91 $10,000.00
R. James Maxson(2)
Director -0- -0- -0- -0-
Peter A. Quist
Director,
Vice President, and
Secretary -0- -0- -0- -0-
Robert E. Walstad
Director, President,
and Treasurer -0- -0- -0- -0-
___________ __________ __________ ___________
TOTALS $3,990.35 $5,385.60 $1,841.74 $30,000.00
</TABLE>
____________________
(1) Mr. Link has retired effective December 4, 1998.
(2) Mr. Maxson was appointed to the board of each Fund on December 4, 1998,
effective January 1, 1999.
* Based on compensation paid to the directors for the one-year period ended
December 31, 1998 for services to the respective Fund.
** Based on the compensation paid to the trustees for the one-year period
ended December 31, 1998 for services to the Funds and six other open-end funds
advised by ND Money Management, Inc. or Ranson Capital Corporation.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 23, 1999, no person owned of record or was known
by a Fund to own of record or beneficially 5 percent or more of the Fund's out-
standing shares. In addition, as of April 23, 1999, the officers and
directors of each Fund, in the aggregate, own less than 1% of the shares of
each Fund.
B-14
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ND Money Management, Inc. has been retained by each Fund under an Investment
Advisory Agreement to act as each 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 the Integrity Fund of Funds, Inc. The address
of the Investment Adviser is 1 North Main, Minot, North Dakota 58703.
The Investment Adviser furnishes each Fund with investment advice and, in
general, supervises the management and investment program of each Fund. The
Investment Adviser furnishes, at its own expenses, all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of a Fund and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of each Fund. In addition, the Investment Adviser pays the
salaries and fees of all officers and directors of the Funds who are affiliated
persons of the Investment Adviser. All other charges and expenses, as more
fully described under "Expenses," are paid by the respective Fund.
For the management services and facilities furnished by ND Money Management,
each of the Funds has agreed to pay the Investment Adviser an annual management
fee, payable monthly, of 0.60% of the respective Fund's average daily net
assets. In addition, the Investment Adviser voluntarily agreed to waive all
or a portion of its management fee or reimburse certain expenses of a Fund for
the year ended April 30, 2000 in order to prevent total operating expenses
excluding extraordinary expenses from exceeding 1.35% of the average daily net
asset value of the shares of the relevant Fund. The table below sets forth the
advisory fees paid by the Funds, net of expenses reimbursements and the fees
waived and expenses reimbursed by the Investment Adviser for the periods
indicated.
MANAGEMENT FEES NET OF
EXPENSE REIMBURSEMENT FEE WAIVERS AND
TO ND MONEY MANAGEMENT EXPENSE REIMBURSEMENTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
______________________________ ______________________________
12/31/96 12/31/97 12/31/98 12/31/96 12/31/97 12/31/98
Montana Fund $170,943 $246,178 $285,851 $6,570 -0- $40,905
ND Fund $560,900 $544,971 $469,016 -0- -0- $36,818
South Dakota
Fund $ 33,385 $ 44,337 $ 7,592 $1,384 -0- $37,094
The Investment Advisory Agreement with each Fund 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
B-15
Investment Adviser in the performance of its duties or by reason of its reck-
less disregard of its obligations and duties under the respective Investment
Advisory Agreement.
The Investment Advisory Agreement with each Fund 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 Agree-
ment 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. Each
Investment Advisory Agreement may be terminated at any time upon 60 days'
written notice by the relevant 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 each Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Funds."
CUSTODIAN AND TRANSFER AGENT
Bremer Bank, N.A., 20 First Street SW, Minot, North Dakota 58701 performs
custodial services for the securities and cash of the ND Fund and South Dakota
Fund. First Western Bank & Trust, 900 South Broadway, Minot, North Dakota
58701, performs custodial services for the securities and cash of the Montana
Fund. ND Resources ("ND Resources"), a wholly-owned subsidiary of ND Holdings,
1 North Main, Minot, North Dakota 58703, is the Funds' Transfer Agent. As
Transfer Agent, ND Resources performs many of the Funds' clerical and
administrative functions. For its services, each Fund pays ND Resources a
monthly fee ranging from .16 of 1% of the net asset value of all the respective
Fund's outstanding shares up to $10 million down to .09 of 1% for net assets in
excess of $50 million. ND Resources also provides internal accounting and
related services for each Fund, for which it is paid a monthly fee of $2,000
plus 0.05% of the respective Fund's average daily net assets on an annual basis
for the first $50 million down to 0.01% for the net assets in excess of $500
million.
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Funds' independent public accountant, Brady, Martz & Associates, P.C.,
24 West Central Avenue, Minot, North Dakota 58701, audits and reports on each
Fund's annual financial statements, reviews certain regulatory reports and
each Fund's federal income tax return, and performs other professional
accounting, auditing, tax, and advisory services when engaged to do so by the
respective Fund. Shareholders will receive annual audited financial
statements and semiannual unaudited financial statements.
DISTRIBUTION PLANS
Although shares of each Fund are sold without an initial sales charge, ND
Capital, Inc. (the "Underwriter" or "ND Capital"), the Fund's principal under-
writer, currently pays dealers who sell the Funds' 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. In recognition of
the services provided to shareholders, the Underwriter may also make payments
to
B-16
investment dealers at the annual rate of 0.25% of the average net assets of the
respective Fund which are attributable to shareholders of such 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 Distribution
Plan of the respective Fund (each a "Plan") described below.
To compensate the Underwriter for its services and expenses in distributing
shares, including the foregoing payments, each Fund has adopted a Plan pursuant
to Rule l2b-1 under the Investment Company Act of 1940. Rule 12b-1 provides
that any payments made by a 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. Each Fund has also entered into a related Distribution Agreement
with the Underwriter.
Each Fund's Plan and its related Distribution Agreement provide that the
respective Fund will pay the Underwriter an annual fee for certain expenses
incurred in connection with the offer and sale of such 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 ND Fund (0.75% of the average daily net assets
of the Montana Fund and South Dakota Fund). The fee under each Fund's Plan may
be used by the Underwriter to cover any expenses primarily intended to result
in the sale of the respective 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 such 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 relevant Fund to prospective shareholders; costs involved in
preparing, printing, and distributing advertising and sales literature; and
other sales expenses.
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.
During periods of substantial sales of shares, the commissions paid by the
Underwriter to dealers may, together with other distributions 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 distributions expenses paid
by the Underwriter, which has the effect of reimbursing the Underwriter for
distribution expenses incurred in prior periods. Payments made to the Under-
writer 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."
B-17
Each Fund's Plan continues in effect from year to year, provided that each
such continuance is approved at least annually by a vote of the Fund's Board
of Directors, including a majority of the directors who are not "interested
persons" of such Fund and have no direct or indirect financial interest in the
operation of the Plan or in the related 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. Each Fund's Plan
may be terminated at any time, without penalty, by vote of a majority of the
Qualified Directors of the Fund or by vote of a majority of the outstanding
shares of the Fund. If the Fund's Plan is terminated and not continued, the
Underwriter is not legally entitled to any payment for amounts expended but
not yet recovered. However, the Board of Directors of the respective Fund
reserves the right to make payments to the Underwriter notwithstanding a
termination or non-continuance. Any amendment to a Plan to increase
materially the amount the Fund is authorized to pay thereunder would require
approval by a majority of the outstanding shares of the respective Fund.
Other material amendments to a Fund's Plan would be required to be approved
by vote of the Board of Directors of such Fund, including a majority of the
Qualified Directors, cast in person at a meeting called for that purpose.
Each Fund's Plan further provides that as long as the respective Fund's 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 a Plan will serve to encourage the Under-
writer 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 Plan
during the early stages of a Fund's existence. The table below provides the
fees paid by Funds, under the Distribution Plan, net of waivers, for the
periods indicated:
12B-1 FEES PAID FOR
THE FISCAL YEARS ENDED
12/31/96 12/31/97 12/31/98
________ ________ ________
Montana Fund $88,756 $157,458 $272,297
ND Fund $303,489 $452,996 $421,529
South Dakota Fund $ 17,384 $ 26,399 $ 37,238
The 12b-1 fees paid by the ND Fund during the fiscal year ended December
31, 1998 were spent on distribution expenses including $9,472 on advertising,
$161,991 on compensation to dealers (including commission and service fees),
$34,104 on compensation to sales personnel and $6,171 on distribution related
overhead of the Underwriter. During this same period, the 12b-1 fees paid by
the Montana Fund and the South Dakota Fund were spent on distribution expenses
including $14,172 and $1,017 on advertising, $565,176 and $392,754 on compensa-
tion to dealers (including commission and service fees), $34,104 and $34,104 on
compensation to sales personnel and $8,857 and 6,000 on distribution related
overhead of the Underwriter, respectively.
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 Funds, the Investment Adviser,
B-18
and the Underwriter. See "Management of the Funds." Mssrs. Walstad and Quist
are also shareholders of Holdings and, accordingly, may indirectly benefit from
the payment of 12b-1 fees by the Funds to the Underwriter.
EXPENSES
The expenses of each Fund are deducted from its respective 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 distribu-
tion 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, each 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
Allocation of portfolio brokerage transactions to various brokers is deter-
mined by the Investment Adviser in its best judgment and in a manner deemed
fair and reasonable to shareholders. The Investment Adviser may consider a
number of factors in determining which brokers to use for a Fund's portfolio
transactions. 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, statisti-
cal, or other services to the Investment Adviser may receive orders for trans-
actions by a Fund. Information thus received will enable the Investment
Adviser to supplement its own research and analysis with the views and informa-
tion of other securities firms and may be used for the benefit of clients of
the Investment Adviser other than the Funds. 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 a Fund's shares may also be considered a factor if the Investment
Adviser is satisfied that the respective Fund would receive from that broker
the most favorable price and execution then available for a transaction. Muni-
cipal bonds, notes, and short-term securities in which a 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. Accordingly,
the Investment Adviser expects that transactions in Municipal Securities will
be effected on a principal (as opposed to an agency) basis and therefore does
not expect to pay any brokerage commissions on such transactions. Purchases
may be made from underwriters, dealers, or issuers. The Fund's cost of port-
folio securities transactions will
B-19
consist primarily of dealer or underwriter spreads. The Funds may also pay
mark-ups on principal transactions. The Funds will not engage in principal
transactions with affiliates. Commissions will be paid on the Funds' futures
and options transactions, if any.
In effecting purchases and sales of the Funds' portfolio securities, the
Investment Adviser and the Funds may place orders with and pay brokerage
commissions to brokers which are affiliated with the Funds, the Investment
Adviser, the Distributor or selected dealers participating in the offering of
the Funds' shares. Subject to rules adopted by the Securities and Exchange
Commission, each Fund may also purchase municipal securities from other
members of underwriting syndicates of which the Underwriter or other affiliates
of the Funds are members.
The table below reflects the aggregate amount of commissions paid by the
Funds for the periods indicated.
COMMISSION PAID FOR
FISCAL YEAR ENDED
______________________________
12/31/96 12/31/97 12/31/98
_______ _______ _______
Montana Fund $15,825 $20,925 $ 1,250
ND Fund $ 1,968 $31,938 $ 9,225
South Dakota Fund $ 1,610 $ 1,750 $ -0-
ND Capital, Inc., the Funds' underwriter (the "Underwriter"), was the only
dealer through which transactions involving the payment of commissions was
effected. Accordingly, 100% of the brokerage commissions paid by the Funds
(as reflected above) were paid to ND Capital. Fluctuations in commissions
were due to changes in procedures in the purchase and sale of municipal
securities.
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
Fund shares may be purchased from investment dealers who have sales agree-
ments with the Fund's Underwriter or from the Underwriter. Fund shares are
sold at their public offering price, which is the net asset value next deter-
mined after an order and payment are received in proper form. On December 31,
1998, the net asset value per share of each Fund was calculated as follows: for
the ND Fund, net assets of $80,987,062 were divided by 9,055,044 shares out-
standing to equal a net asset value per share of $8.94; with respect to the
Montana Fund, net assets of $58,878,852 were divided by 5,857,896 shares out-
standing to equal a net asset value per share of $10.05; and with respect to
the South Dakota Fund, the net assets of $7,748,258 were divided by 746,382
shares outstanding to equal a net asset value per share of $10.38.
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
B-20
"How to Purchase Shares" in the Funds' Prospectus. 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.
Each Fund reserves the right to withdraw all or any part of the offering of
its shares and to reject purchase orders. Also, from time to time, a 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 respec-
tive 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 safe-
keeping, the Transfer Agent will not issue certificates for shares of the
Funds unless requested to do so. A shareholder or broker may obtain a
certificate by writing to the Transfer Agent at P.O. Box 759, Minot, North
Dakota 58702.
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 financial institution. Such account must have check
or draft writing privileges. A shareholder may terminate the Monthomatic by
sending written notice to the Transfer Agent. See "Systematic-Investing - the
Monthomatic Plan" in the Funds' Prospectus for additional information.
EXCHANGE PRIVILEGE
As described in the Funds' Prospectus under "Exchanging Shares," each Fund
offers an exchange privilege pursuant to which a shareholder in a Fund may
exchange some or all of his shares in any of the funds advised and under-
written by the Underwriter or Ranson Capital Corporation or ND Management at
net asset value. The exchange privilege may be changed or discontinued upon
60 days' written notice to shareholders and is available only to shareholders
where such exchanges may be legally made. A shareholder considering an ex-
change 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.
B-21
MINIMUM INVESTMENT
The minimum initial investment for each Fund is $1,000 ($100 for the Month-
omatic Investment Plan), and the minimum subsequent investment is $50, but such
minimum amounts may be changed at any time.
REDEMPTIONS
Any Fund shareholder may require its respective 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
P.O. Box 759, Minot, North Dakota 58702. 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 practi-
cable but in no event later than seven days after receipt of a properly
executed letter of instruction accompanied by any outstanding share certifi-
cates in proper form for transfer. When a 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).
CONTINGENT DEFERRED SALES CHARGES
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:
B-22
PERCENTAGE
CONTINGENT
YEAR SINCE REDEMPTION DEFERRED
AMOUNT WAS INVESTED 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 the 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.
Upon receipt of a request for redemption, shares will be redeemed by a 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.
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 invest-
ment 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
B-23
(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%.
Each Fund may sell shares without a contingent deferred sales charge to
directors, officers, and employees (including retirees) of the Fund, of ND
Holdings, of ND Money Management, and of ND Capital, 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. Each Fund may also sell shares without a contingent
deferred sales charge to broker-dealers having sales agreements with ND
Capital, and registered representatives and other employees of such broker-
dealers, including their spouses and children; to financial institutions having
sales agreements with ND Capital, 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. The elimination of the contingent deferred sales charge
for redemptions by certain classes of persons is provided because of
anticipated economies in scales and sales related efforts. The Underwriter
receives the entire amount of any contingent deferred sales charges assessed.
Each 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 respective 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 share-
holders. 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 applicable
Fund's portfolio securities at the time. When a 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).
Each 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 a 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 in-
vestor will have sixty days to increase the account to at least the $1,000
minimum amount before the account is redeemed. Each Fund allocates net
interest income to those shares for which the Fund has received payment. A
Fund receives the entire public offering price of all of its shares sold.
B-24
SYSTEMATIC WITHDRAWAL PLAN
A shareholder who owns shares with an aggregate value of $5,000 or more may
establish a Systematic Withdrawal Plan (the "Withdrawal Plan"). Under the
Withdrawal 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 in-
eligible to participate in the Withdrawal Plan. If payments exceed reinvested
dividends and distribution, a shareholder's shares will be reduced and
eventually depleted. The Withdrawal Plan may be terminated at any time by a
shareholder or the Fund.
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 pric-
ing 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).
UNDERWRITER
ND Capital, a subsidiary of ND Holdings, is the principal underwriter of the
Funds' shares in a continuous public offering. ND Capital is located at 1
North Main, Minot, North Dakota 58703. Robert E. Walstad and Peter A. Quist,
who are directors and the president and treasurer and vice president and
secretary, respectively, of the Funds, are also the only two directors and
officers of the Underwriter. The Underwriter sells shares to or through
brokers, dealers, or other qualified financial intermediaries (collectively
referred to as "Dealers"), or others, in a manner consistent with the then
effective registration statement of the Funds. ND Capital, Inc. may act as
such a Dealer.
Under the terms of each Distribution Agreement between the respective Fund
and the Underwriter, the Underwriter has agreed to use its best efforts to
solicit orders for the sale of the
B-25
applicable Fund's shares and to undertake such advertising and promotion as it
believes is reasonable in connection with such solicitation. The Underwriter
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). For the fiscal
year ended December 31, 1998, the Underwriter paid commissions in connection
with sales of the shares of the Montana Fund, the ND Fund and the South Dakota
Fund of $511,779, $110,268 and $39,884, respectively. As a further inducement
to the sale of Fund shares and in recognition of services provided to share-
holders, 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 share-
holders of the Fund for whom such dealers are designated as the dealers of
record. See "Distribution Plans" for additional information.
Because shares of the Funds are sold without any front-end sales loads, the
Underwriter does not receive underwriting commissions. The Underwriter,
however, does receive compensation pursuant to a distribution plan adopted
by the Funds pursuant to Rule 12b-1. For a description of such compensation,
see "Distribution Plans." The Underwriter also receives any CDSCs imposed on
redemptions of shares.
The following table sets forth the amount of compensation on redemptions,
brokerage commissions and other compensation received by the Underwriter from
each of the Funds for the last fiscal year ended December 31, 1998.
COMPENSATION ON BROKERAGE
REDEMPTIONS COMMISSION
_________________________
Montana Fund $67,416 $1,250
North Dakota Fund $38,428 $9,225
South Dakota Fund $11,940 $ -0-
_______________________
Each Distribution Agreement must be approved at least annually by the
respective Fund's Board of Directors and a vote of a majority of such 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. Each Fund's Distribution
Agreement will terminate automatically in the event of its assignment and is
terminable with respect to such Fund without penalty on 60 days' written notice
by vote of a majority of the Qualified Directors or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of such Fund.
DIVIDENDS AND TAXES
DIVIDENDS
All of the net investment income of each Fund is declared daily as a divi-
dend on shares for which the applicable Fund has received payment. Net invest-
ment income of a Fund consists of all interest income earned on portfolio
assets less all expenses of such Fund. Income dividends will be distributed
monthly, and dividends of net realized short-term and long-term
B-26
capital gains, if any, will normally be paid out once a year after the end of
the Fund's fiscal year. Each Fund may at any time vary the foregoing dividend
practices and, therefore, each Fund 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, each 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").
Income and capital gains dividends, if any, of a Fund will be credited to
shareholder's accounts in full and fractional of such Fund shares at net asset
value on the reinvestment date unless shareholders indicate in writing to the
Transfer Agent that they wish to receive them in cash. See "Reinvestment
Options" in the Funds' Prospectus for a description of the dividend payment
options available to shareholders.
Cash dividends and reinvested dividends will be paid or reinvested, as the
case may be, as of the day following the last day of the month. Share certifi-
cates are issued for full and fractional shares and only upon a request by the
shareholder or broker 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
of 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, 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
Each Fund intends to qualify as a regulated investment company under Sub-
chapter M of the Code and, if so qualified, will not be liable for federal
income taxes to the extent its earnings are distributed. Each 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 in-
cludable 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 share-
holders as ordinary income, and long-term capital gain dividends are generally
taxable to shareholders as long-
B-27
term capital gains, regardless of how long the shares have been held and
whether received in cash or shares. Dividends declared by a 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 a year, including exempt-interest dividends from
the Funds. Dividends from the Funds will not be eligible for the dividends
received deduction available to corporate shareholders.
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.
Redemption of shares of a Fund will be a taxable transaction for federal
income tax purposes. Gain or loss realized on the sale or exchange of shares
in a 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 share-
holder. In such case, 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. Such gain or loss will be long-term gain or loss if the
shares were held more than one year. 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.
A 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.
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 a 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. The Funds may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by private activity bonds held by a Fund or are "related persons" to
such users. Such persons should consult their tax adviser before investing in
a Fund.
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."
B-28
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.
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.
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 a Fund.
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than interest
from Municipal Securities), and distribution to its shareholders would be
taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of the Fund's available earnings and profits.
Each 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.
STATE TAXES
ND FUND
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.
MONTANA FUND
Dividends to the extent of interest received on Montana state and local gov-
ernment issues are exempt from Montana state income taxes in the hands of
shareholders that are individuals, estates, and trusts. Such dividends are
subject to Montana tax, however, in the hands of shareholders that are corp-
orations. Moreover, Montana taxes capital gains (including capital gain dis-
tributions paid by the Fund) at the same rates as ordinary income.
B-29
SOUTH DAKOTA
South Dakota does not assess personal or corporate income tax.
CALCULATION OF PERFORMANCE DATA
The Funds may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent
yield, and total return figures.
Yields are calculated according to accounting methods that are standardized
by the SEC for all stock and bond funds. Because yield calculation methods
differ from the methods used for other accounting purposes, a 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. A Fund may also
include in advertisements performance rankings compiled by independent organ-
izations 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.
YIELD
As of December 31, 1998, the 30-day SEC Yield for the ND Fund, the Montana
Fund, and the South Dakota Fund, was 3.262%, 3.593% and 3.144%, respectively.
Absent fee waivers and expense assumptions, the 30-day SEC Yield as of December
31, 1998 for the ND Fund, Montana Fund and South Dakota Fund, would have been
2.865%, 3.284% and 2.471%, respectively.
Yield reflects the income per share deemed earned by a 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:
YIELD = 2[(a-b/cd + 1)6 - 1]
B-30
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 on debt obligations (for the purpose of "a"
above), a Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund based
on the market value of the obligation (including actual accrued interest) 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 (plus actual
accrued interest). 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.
(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. Assume that each month has 30 days.
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 is based on the current market value and 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 calcula-
tion. 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
As of December 31, 1998, the Tax Equivalent Yield for the ND Fund, the
Montana Fund, and the South Dakota and was 6.19%, 6.86% and 5.62%, respective-
ly. The tax equivalent calculation for the ND Fund, Montana Fund and South
Dakota Fund were based on combined federal and state income tax rates of
47.26%, 47.64% and 44.02%, respectively.
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
yield (as calculated above) by one minus a stated
B-31
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
For additional tax equivalent yield information, see "Tax-Free vs. Taxable
Income".
TOTAL RETURN
As of December 31, 1998, the total return for the ND Fund, the Montana Fund,
and the South Dakota Fund was 65.64%, 32.01% and 33.34%, respectively.
Total return is the percentage change in the value of a hypothetical invest-
ment 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 a 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
In calculating cumulative and average annual total return, the maximum
contingent deferred sales charge is deducted from the hypothetical investment.
However, such total return
quotations may also be accompanied by quotations which do not reflect the
contingent deferred sales charges, and which therefore will be higher.
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if a Fund's
performance had been constant over the entire period and is computed according
to the following formula:
P(1 + T)n = ERV
B-32
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
The following table reflects the average annual total return for each of the
Funds for the periods indicated:
AVERAGE ANNUAL TOTAL RETURN
______________________________________________________
ONE YEAR* FIVE YEARS FROM INCEPTION**
ENDED ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998
______________________________________________________
Montana Fund 3.66% 5.15% 5.29%
ND Fund 3.48% 4.13% 5.18%
South Dakota Fund 3.88% N/A 6.26%
_______________________________
* The 1 year return does not include the effect of the 4% maximum Contingent
Deferred Sales Charge. Taking into account the CDSC, the one year return for
the ND Fund, Montana Fund and South Dakota Fund would have been (.46)%, (.30)%
and (.08)%, respectively.
** The inception date for the Montana Fund, the ND Fund and the South Dakota
Fund is August 12, 1993, January 3, 1989, and April 5, 1994, respectively.
All performance figures are based on historical results and are not intended
To indicate future performance.
TAX-FREE VERSUS TAXABLE INCOME
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the Funds with taxable alternative instruments, the tables below present the
taxable equivalent yields for hypothetical tax-free yields and tax rates.
Taxable equivalent yield is computed by dividing that portion of the Fund's
yield which is tax-exempt by the remainder of 1 minus the stated combined
federal and state income tax rate and adding the product to that portion, if
any, of the Fund's yield that is not tax-exempt. Our calculations below are
based on the maximum federal statutory tax rates applicable in 1999. The
highest marginal federal tax rate for 1999 can be in excess of the statutory
maximum federal tax rate due to the disallowance of a portion of itemized
deductions and personal exemptions.
NORTH DAKOTA
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 ND Fund. The table assumes that the investor's income from a
taxable investment would be subject to federal
B-33
income tax at the maximum federal rate and North Dakota state income tax at
a rate equal to 14% of the federal tax liability.
We have calculated the combined marginal tax rate based on a family with
adjusted gross income from $180,000 to $300,000 for 1999 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%
MONTANA
The following table shows the rate of return an individual Montana investor
would need to receive from a taxable investment to equal the rate of return
from the Montana 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 Montana state income tax at a rate equal to 11% of the Montana
taxable income. This assumes that the maximum Montana individual income tax
rate will remain at 11%.
We have calculated the combined marginal tax rate based on families with
adjusted gross incomes of $180,000 to $300,000 for 1999 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.
The following table uses the combined marginal tax rate of 47.64% for
adjusted gross income of $180,000 to $300,000 to present the equivalent taxable
yield for taxpayers in the situations presented above assuming that federal
income taxes are deductible in calculating Montana taxable income and that
Montana income taxes are deductible in calculating federal taxable income.
B-34
MONTANA TAX-FREE EQUIVALENT TAXABLE YIELD
YIELD FOR TAXPAYER IN 1999
_______________ _______________________
5.0% 9.55%
5.5% 10.50%
6.0% 11.46%
6.5% 12.41%
7.0% 13.37%
7.5% 14.32%
8.0% 15.28%
SOUTH DAKOTA
The following table shows the rate of return an individual South Dakota
investor would need to receive from a taxable investment to equal the rate of
return from the South Dakota Fund. Because South Dakota does not have an
individual income tax system, the table assumes that the investor's income from
a taxable investment would be subject to federal income tax only, at the
maximum federal rate.
We have calculated the effective marginal tax rate for three different
taxable income brackets (31%, 36%, and 39.6%). Each bracket assumes that the
investor is filing jointly with two dependent children.
In addition, this assumes the investor is not subject to alternative minimum
tax and has a reasonable amount of itemized deductions.
TAXABLE INCOME HIGHEST MARGINAL
BETWEEN TAX RATE
_____________ _______________
#1 $128,600 31.93%
and
158,550
#2 $158,550 40.02%
and
283,150
#3 $283,150 44.02%
and
OVER
The following table uses the marginal tax rate for each taxable income
bracket to present the equivalent taxable yield for taxpayers in the situations
above.
B-35
SOUTH DAKOTA EQUIVALENT TAXABLE YIELD
TAX-FREE FOR TAXPAYER IN 1998
YIELD WITH TAXABLE INCOME AS IN
#1 #2 #3
5.0% 7.35% 8.34% 8.93%
5.5% 8.08% 9.17% 9.82%
6.0% 8.81% 10.00% 10.72%
6.5% 9.55% 10.84% 11.61%
7.0% 10.28% 11.67% 12.50%
7.5% 11.02% 12.50% 13.40%
8.0% 11.75% 13.34% 14.29%
ORGANIZATION AND SHARE ATTRIBUTES
Each Fund is organized as a corporation under the laws of the State of
North Dakota and is authorized to issue shares all of one class and one series,
with a par value of $.001 per share. The ND Fund was incorporated on October
7, 1988, the Montana Fund was incorporated on April 15, 1993, and the South
Dakota Fund was incorporated on October 1, 1993. The ND Fund is authorized to
issue a total of 100,000,000 shares and the Montana Fund and South Dakota Fund
are each authorized to issue 200,000,000 shares. Shares are fully paid and
nonassessable when issued, are redeemable and freely transferable, 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 a Fund will not hold regular meetings of shareholders.
Each Fund's Bylaws provide the 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 shareholders 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 receipt of the demand, the Board of Directors must cause a regular meet-
ing of shareholders to be called, or if the Board fails to do so, the share-
holder 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 respective 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.
B-36
Meetings of shareholders will also be held
whenever required in order to comply with the Investment Company Act of 1940;
however, each Fund does not intend to hold annual shareholder meetings.
Shareholders have the right to remove directors.
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 adequate
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 muni-
cipal 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-1 or A-2 by S&P and P-1
or P-2 by Moody's are the highest paper ratings of the respective agencies.
The issuer's earnings, quality
B-37
of long term debt, management, and industry position are among the factors
considered in assigning such ratings.
Subsequent to its purchase by a 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. The Funds will promptly
dispose of a bond whose rating drops below investment grade or is reduced in
credit quality with respect to unrated securities. The Board of Directors,
however, may vary from this policy if it determines that prompt disposal of a
bond would not be in the best interests of the shareholder. 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-38
FINANCIAL STATEMENTS
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, 1998, 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 each of the five periods 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.
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,
1998, 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, 1998, 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 each of the respective
periods stated in the first paragraph, in conformity with generally accepted
accounting principles.
BRADY, MARTZ & ASSOCIATES, P.C.
Minot, North Dakota
February 03, 1999
F-1
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1998
Name of Issuer
Percentages represent the Rating
Market value of each Moody's Coupon Maturity Principal Market
Investment category to total net assets /S&P Rate Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH DAKOTA MUNICIPAL BONDS (96.9%)
Bismarck, ND (Marillac Manor) Facs. Rev. Ref. NR/NR 7.700% 02/01/16 $ 250,000 $ 258,563
*Bismarck, ND (MedCenter One, Inc.) Rev. Ref. & Impvt. BIGI Aaa/AAA 7.500 05/01/13 1,500,000 1,557,315
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. AMBAC Aaa/AAA 6.900 05/01/06 400,000 432,888
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. FSA Aaa/AAA 5.000 07/01/28 1,100,000 1,073,941
Bismarck, ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 8.500 06/01/09 175,000 178,421
Burleigh Cty., ND (Missouri Slope Ctr.) Rev. Ref. NR/NR 7.000 11/01/07 500,000 517,205
Burleigh Cty., ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 7.000 06/01/19 500,000 504,470
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.750 12/01/11 1,000,000 1,097,570
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.875 12/01/15 1,000,000 1,079,370
Carrington, ND Cath. Hlth. Corp. Facs. Rev. Aa/AA 6.250 11/15/15 500,000 545,395
Devils Lake, ND Cath. Hlth. Corp. Facs. Rev. Aa/AA 6.250 11/15/07 1,125,000 1,222,279
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. Aa/NR 7.625 02/15/20 1,210,000 1,274,917
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. Aa/NR 7.500 02/15/10 600,000 632,196
Dickinson, ND (St. Luke's Home) Rev. NR/NR 7.250 05/01/22 500,000 530,720
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.550 06/01/16 500,000 535,520
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.375 06/01/27 1,565,000 1,627,490
#Fargo, ND (St. Luke's Hospital) Facs. Rev. Ref. NR/A+ 6.500 06/01/15 4,000,000 4,342,040
Grand Forks ND( 4000 Valley Square Project) Hsg. Rev. NR/NR 6.250 12/01/34 2,000,000 2,037,460
Grand Forks, ND (Aurora Project) Sales Tax Rev. MBIA Aaa/AAA 5.625 12/15/29 1,500,000 1,599,930
Grand Forks, ND (Cirrus Project) Sales Tax Rev. A-1/NR 5.900 05/01/17 695,000 739,237
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.625 12/01/10 830,000 905,953
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.500 12/01/06 750,000 811,950
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.250 12/01/19 1,000,000 1,121,550
*Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.450 12/01/23 1,525,000 1,720,185
Grand Forks, ND (Valley Square Project) Hsg. Rev. NR/NR 6.375 12/01/34 645,000 670,671
Hazen, ND (Sakakawea Medl. Ctr.) Facs. Rev. NR/NR 6.750 05/01/16 500,000 375,000
Jamestown, ND (College) Facs. Rev. NR/NR 6.625 10/01/14 800,000 864,416
Jamestown, ND (Heritage Centre) Ref. Rev. NR/NR 5.700 11/01/20 250,000 248,635
Jamestown, ND (Heritage Centre) Rev. NR/NR 8.500 09/01/06 200,000 216,816
+Lisbon, ND (Parkside Lutheran Home) Rev. NR/NR 0.0 06/01/12 500,000 118,113
Mercer Cty., ND (Basin Elec.) Rev. A/A 7.000 01/01/19 975,000 1,011,329
Mercer Cty., ND (Basin Elec.) Rev. AMBAC Aaa/AAA 6.050 01/01/19 5,425,000 6,015,674
Mercer Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 3,500,000 3,848,180
#Mercer Cty., ND (NW Public Svc.) Rev. Ref. MBIA Aaa/AAA 5.850 06/01/23 3,800,000 4,087,736
Morton Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 350,000 385,053
Morton Cty., ND Multifamily Hsg. Rev. Ref. NR/NR 6.750 03/01/21 500,000 515,125
ND (HFA) Hsg. Finance Program Aa-3/NR 5.250 01/01/30 500,000 502,255
ND (HFA) Hsg. Finance Program Aa-3/NR 6.750 07/01/25 3,085,000 3,376,656
ND (HFA) Hsg. Finance Program Aa-3/NR 6.300 01/01/15 725,000 778,947
ND (HFA) Hsg. Finance Program Aa-3/NR 6.300 07/01/16 460,000 496,156
ND (HFA) Hsg. Finance Program Aa-3/NR 6.150 07/01/27 510,000 541,584
ND (HFA) Hsg. Finance Program Aa-3/NR 6.100 07/01/28 1,950,000 2,076,497
ND (HFA) Multifamily Rev. Ref. FNMA NR/AAA 6.200 12/01/20 825,000 882,354
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.900 07/01/10 113,000 118,012
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.050 01/01/24 560,000 589,422
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.750 07/01/24 570,000 609,678
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.300 07/01/24 955,000 1,020,618
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.000 07/01/23 800,000 861,656
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/23 2,675,000 2,860,297
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.700 07/01/13 335,000 360,869
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/25 1,530,000 1,642,256
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.950 07/01/25 1,940,000 2,114,503
ND Blding. Auth. Lease Rev. FSA Aaa/AAA 6.000 12/01/13 500,000 548,390
ND Blding. Auth. Lease Rev. Ref. AMBAC Aaa/AAA 6.000 06/01/10 1,700,000 1,850,229
ND Municipal Bond Bank Revolving Fund Program Aa/NR 4.625 10/01/19 690,000 663,656
ND Municipal Bond Bank Revolving Fund Program Aa/NR 6.300 10/01/15 530,000 590,881
ND Municipal Bond Bank Revolving Fund Program Aa/NR 6.250 10/01/14 3,525,000 3,871,402
ND State Board of Hgr. Educ. (MSU) Facs. Rev. Ref. NR/NR 6.750 08/01/05 755,000 806,604
ND State Water Commission Devl. Rev. AMBAC Aaa/AAA 5.750 07/01/27 1,250,000 1,348,175
ND Student Loan Rev. AMBAC Aaa/AAA 6.350 07/01/13 250,000 277,735
ND Student Loan Rev. AMBAC Aaa/AAA 6.300 07/01/12 100,000 110,846
ND Student Loan Rev. AMBAC Aaa/AAA 6.400 07/01/14 400,000 447,516
Univ. of ND Lease Financing C.O.P.'s A/A- 7.300 09/01/10 1,425,000 1,500,596
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 02/01/14 250,000 249,500
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/AAA 7.250 11/01/06 1,000,000 1,103,550
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/AAA 8.875 11/15/24 200,000 253,176
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. Ref. NR/AAA 7.250 11/01/06 1,000,000 1,102,750
-----------
F-2
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST: $73,952,695) $78,464,077
-----------
SHORT-TERM SECURITIES (1.2%)
Federated Tax-Free Fund #15 $442,011
Federated Intermediate Municipal Trust #78 500,000
-----------
TOTAL SHORT-TERM SECURITIES (Cost: $942,011) $942,011
-----------
TOTAL INVESTMENTS IN SECURITIES (Cost: $74,894,706) $79,406,088
OTHER ASSETS LESS LIABILITIES 1,580,974
-----------
NET ASSETS $80,987,062
-----------
-----------
</TABLE>
* Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
# Indicates bonds are segregated by the custodian to cover initial margin
requirements.
+ Indicates bond is non-income producing.
FOOTNOTE: Non-rated (NR) securities have been determined to be of investment
grade quality by the Fund's Manager.
The accompanying notes are an integral part of these financial statements.
F-3
Statement of Assets and Liabilities December 31, 1998
<TABLE>
<CAPTI0N>
ASSETS
<S> <C>
Investments in securities, at value (cost:$74,894,706) $ 79,406,088
Cash 76,261
Accrued dividends receivable 3,110
Accrued interest receivable 1,282,267
Receivable for fund shares sold 25,000
Variation margin on futures 647,503
------------
Total Assets $ 81,440,229
------------
LIABILITIES
Dividends payable $ 337,369
Accrued expenses 88,777
Payable for fund shares redeemed 27,021
------------
Total Liabilities $ 453,167
------------
NET ASSETS $ 80,987,062
------------
------------
Net assets are represented by:
Capital stock outstanding, at par $ 9,055
Additional paid-in capital 83,437,662
Accumulated undistributed net realized gain(loss) on investments (6,971,037)
Unrealized appreciation on investments 4,511,382
------------
Total amount representing net assets applicable to
9,055,044 outstanding shares of $.001 par value
common stock (100,000,000 shares authorized) $ 80,987,062
------------
------------
Net asset value per share $ 8.94
------------
------------
F-4
Statement of Operations for the year ended December 31, 1998
- ------------------------------------------------------------
INVESTMENT INCOME
Interest $ 4,931,261
Dividends 31,131
---------------
Total Investment Income $ 4,962,392
---------------
EXPENSES
Investment advisory fees $ 469,016
Distribution fees (12b-1) 421,529
Custodian fees 16,411
Transfer agent fees 92,532
Accounting service fees 62,822
Professional fees 8,773
Directors fees 5,386
Transfer agent out of pocket expense 13,777
Reports to shareholders 4,078
License, fees, and registrations 1,650
---------------
Total Expenses $ 1,095,974
---------------
NET INVESTMENT INCOME $ 3,866,418
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 534,169
Futures transactions (1,996,772)
Net change in unrealized appreciation (depreciation) of:
Investments (342,605)
Futures 872,672
---------------
Net Realized and Unrealized Gain (Loss) On
Investments And Futures $ (932,536)
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,933,882
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
Financial Statements December 31, 1998
Statement of Changes in Net Assets
For the year ended December 31, 1998 and the year ended December 31, 1997
<TABLE>
<CAPTION>
For The Year Ended For The Year Ended
December 31, 1998 December 31,1997
-----------------------------------------
<C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S>
Net investment income $ 3,866,418 $ 4,261,981
Net realized gain (loss) on investments and futures (1,462,603) (1,941,479)
Net change in unrealized appreciation (depreciation)
on investments and futures 530,067 1,350,315
----------------- ----------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 2,933,882 $ 3,670,817
----------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ($.41 and $.43, respectively) $ (3,866,418) $ (4,261,981)
Return of capital distributions ($.05 and $.05, respectively) (421,529) (452,996)
Distributions from net realized gain on investment transactions 0 0
----------------- ----------------
Total Dividends and Distributions $ (4,287,947) $ (4,714,977)
----------------- ----------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 3,794,231 $ 4,728,769
Proceeds from reinvested dividends 2,911,012 3,117,985
Cost of shares redeemed (12,798,668) (9,999,185)
----------------- ----------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions $ (6,093,425) $ (2,152,431)
----------------- ----------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (7,447,490) $ (3,196,591)
NET ASSETS, BEGINNING OF PERIOD 88,434,552 91,631,143
----------------- ----------------
NET ASSETS, END OF PERIOD $ 80,987,062 $ 88,434,552
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
Notes to Financial Statements December 31, 1998
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 - Securities for which quotations are not readily
available (which will constitute a majority of the securities held by the Fund)
are valued using a matrix system at fair value as determined by ND Money
Management. The matrix system has been developed based on procedures approved
by the Board of Trustees which include consideration of the following: yields
or prices of municipal bonds of comparable quality, type of issue, coupon,
maturity and rating, and indications as to value from dealers and general market
conditions. Because the market value of securities can only be established by
agreement between parties in a sales transaction, and because of the
uncertainty inherent in the valuation process, the fair values as determined
may differ from the values that would have been used had a ready market for
the securities existed. 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,
1998, a net capital loss carryforward totaling $6,971,037, which may be used to
offset capital gains realized during subsequent years through December 31, 2006.
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.
F-7
Investment income - Dividend income is recognized on the ex-dividend date and
interest income is recognized daily on an accrual basis. Premiums and discounts
on securities purchased are amortized using the effective interest method over
the life of the respective securities, unless callable, in which case they are
amortized to the earliest call date.
Futures contracts - The Fund may purchase and sell financial futures contracts
to hedge against changes in the values of tax-exempt municipal securities the
Fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of
a particular index or a certain amount of U.S. Government or municipal
securities at a set price on a future date. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount of cash or
securities equal to the minimum "initial margin" requirement of the futures
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.
Securities held in collateralized accounts to cover initial margin requirements
on open futures contracts are noted in the Schedule of Investments. The
Statement of Assets and Liabilities reflects a receivable or payable for the
daily mark to market for variation margin.
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.
At December 31, 1998, the Fund had outstanding futures contracts to sell debt
securities as follows:
<TABLE>
Contracts Expiration Number of Valuation Unrealized
to Date Futures as of Appreciation
Sell Contracts December 31, 1998 (Depreciation)
- ----------------------------------------- --------------------------------------------------------------
<C> <C> <C> <C> <C>
U.S. Treasury Notes 03/99 150 $647,503 $269,378
- --------------------------------------------------------------------------------------------------------
</TABLE>
F-8
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.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
Note 3. SHARE TRANSACTIONS
As of December 31, 1998, there were 100,000,000 shares of $.001 par authorized;
9,055,044 and 9,733,454 were outstanding at December 31, 1998 and December
31, 1997, respectively.
Transactions in capital shares were as follows:
Shares
------
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------ ------------------
Shares sold 421,712 515,034
Shares issued on
reinvestment of dividends 323,387 339,531
Shares redeemed (1,423,509) (1,091,312)
------------------ ------------------
Net increase (decrease) (678,410) (236,747)
------------------ ------------------
------------------ ------------------
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 $469,016 of investment
advisory fees after a partial waver for the year ended December 31, 1998. The
Fund has a payable to ND Money Management, Inc. of $37,866 at December 31, 1998
for investment advisory fees. Certain officers and directors of the Fund are
also officers and directors of the investment adviser.
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 $421,529 of 12b-1 fee expenses after partial waiver for
the year ended December 31, 1998. The Fund has a payable to Capital of $33,896
at December 31, 1998 for 12b-1 fees. In addition, the Fund has engaged Capital
as agent for the purchase of certain investment securities. For the six months
ended December 31, 1998 commissions earned by Capital totaled $9,225 and are
included in the cost basis of the securities acquired.
F-9
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 $92,532 of transfer agency fees for the year
ended December 31, 1998. The Fund has a payable to ND Resources, Inc. of $7,534
at December 31,1998 for transfer agency fees. 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 $62,822 of accounting service fees for the year ended December
31, 1998. The Fund has a payable to ND Resources, Inc. of $5,157 at December
31, 1998 for accounting service fees.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $6,047,091 and $13,930,663 ,
respectively, for the year ended December 31, 1998.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1998, the aggregate cost of securities for federal income tax
purposes was $74,894,706, and the net unrealized appreciation of investments
based on the cost was $4,511,382, which is comprised of $4,971,626 aggregate
gross unrealized appreciation and $460,244 aggregate gross unrealized
depreciation.
F-10
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
----------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .41 $ .43 $ .46 $ .47 $ .48
Net realized and unrealized
gain (loss) on investments
and futures transactions (.10) (.05) .13 .28 (.67)
----------------------------------------------------------------------------
Total Income (Loss) From
Investment Operations $ .31 $ .38 $ .59 $ .75 $ (.19)
------------------------------------------------------------- ------------
Less Distributions:
Dividends from net investment income $ (.41) $ (.43) $ (.46) $ (.47) $ (.48)
Return of capital distributions (.05) (.05) (.03) (.02) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
--------------------------------------------------------------------------
Total Distributions $ (.46) $ (.48) $ (.49) $ (.49) $ (.50)
--------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.94 $ 9.09 $ 9.19 $ 9.09 $ 8.83
--------------------------------------------------------------------------
Total Return 3.48%(A) 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $80,987 $88,435 $91,631 $94,532 $91,865
Ratio of net expenses
(after expense assumption) to
average net assets 1.30% 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B)
Ratio of net investment income
to average net assets 4.59% 4.70% 5.00% 5.20% 5.19%
Portfolio turnover rate 7.32% 13.18% 12.92% 8.02% 5.55%
</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, and $31,115, 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%, and 1.10%, respectively.
The accompanying notes are an integral part of these financial statements.
F-11
ND TAX-FREE FUND, INC.
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation(1)
(b) Bylaws(2)
(c) Specimen Copy of Share Certificate(1)
(d) Form of Investment Advisory Agreement(1)
(e) (1)Form of Distribution Agreement(1)
(e) (2)Form of Dealer Sales Agreement(5)
(f) Not Applicable.
(g) Form of Custodian Agreement(3)
(h) (1)Form of Transfer Agency Agreement(3)
(h) (2)Form of Accounting Services Agreement(4)
(i) (1)Opinion of Pringle & Herigstad, P. C.(2)
(i) (2)Opinion of Chapman and Cutler(5)
(j) Consent of Independent Accountant(5)
(k) Not Applicable.
(l) Form of Purchase Agreement(1)
(m) Form of Distribution Plan(3)
(n) Financial Data Schedules.(5)
(o) Not Applicable.
___________________________________
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) Filed herewith.
C-1
Item 24. Persons Controlled By or Under Common Control with Registrant
Not Applicable.
Item 25. Indemnification
Section 4 of the Distribution Agreement [Exhibit (e)(1)] provides for the
indemnification of ND Capital, Inc., Registrant's principal underwriter,
against certain losses. Section 12 of the Transfer Agency Agreement [Exhibit
(h)(1)] 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, there-
fore, 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 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 Incorp-
oration 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.
C-2
Item 26. 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 27. 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:
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
Robert E. Walstad President, Treasurer President, Treasurer
1 North Main and Director and Director
Minot, North Dakota 58703
Peter A. Quist Vice President, Vice President, Secretary
1 North Main Secretary, and Director
Minot, North Dakota 58703 and Director
(c) Not Applicable.
C-3
Item 28. Location of Accounts and Records
Bremer Bank, N.A., 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 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Invest-
ment Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this registration statement pursuant to
rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
effective Amendment No. 15 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minot,
State of North Dakota, on the 23rd day of April, 1999.
ND TAX-FREE FUND, INC.
By /s/ Robert E. Walstad
Robert E. Walstad
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
effective Amendment No. 15 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 23, 1999
Lynn W. Aas
Director
/s/ Orlin W. Backes April 23, 1999
Orlin W. Backes
Director
/s/ R. James Maxson April 23, 1999
R. James Maxson
Director
/s/ Peter A. Quist April 23, 1999
Peter A. Quist
Director, Vice President, and Secretary
/s/ Robert E. Walstad April 23, 1999
Robert E. Walstad,
Director, President, and Treasurer
C-5
EXHIBIT (E)(2)
FORM OF DEALER SALES AGREEMENT
INTEGRITY MUTUAL FUNDS
DEALER SALES AGREEMENT
To The Undersigned Dealer:
ND Capital, Inc., the principal underwriter of shares of the funds (the
"Funds"), open-end, management investment companies registered under the
Investment Company Act of 1940, for which ND Money Management, Inc., serves
as the investment adviser, understands that you are a member in good standing
of the National Association of Securities Dealers, Inc. (the "NASD"), and that
you and any individuals who represent you are properly qualified and
registered, if required, with the Securities and Exchange Commission and
with the state securities administrators of the various states in which shares
of one or more of the Funds are to be offered for sale or sold by you. In
consideration of the mutual promises stated below, you and we hereby agree as
follows:
1. COMPLIANCE WITH PROSPECTUS. Offers and sales of shares by you will comply
in all respects with the terms and conditions contained in the then-current
prospectuses of the Funds.
2. PURCHASE RESTRICTIONS. You agree to purchase shares solely through us and
only for the purpose of covering purchase orders already received from
customers or for your own bona fide investment. You agree not to purchase
for any other securities dealer unless you have an agreement with such other
dealer or broker to handle clearing arrangements and then only in the ordinary
course of business for such purpose and only if such other dealer has executed
a Dealer Sales Agreement with us. You also agree not to withhold any customer
order so as to profit therefrom.
3. PROCESSING ORDERS. The procedures relating to the handling of orders
shall be subject to instructions which we will forward from time to time to
all dealers with whom we have entered into a Dealer Sales Agreement. The
minimum initial and subsequent purchase order shall be specified in the Funds'
then-current prospectuses. All purchase orders are subject to receipt of shares
by us from the Funds and to acceptance of such orders by us. We reserve the
right in our sole discretion to reject any order.
4. PURCHASE ORDERS. We shall accept orders only on the basis of the then-
current offering price. You agree to place orders in respect of shares immedi-
ately upon the receipt of orders from your customers for the same number of
shares. Orders which you receive from your customers shall be deemed to be
placed with us when received by us. Orders which you receive prior to the close
of business, as defined in the prospectuses, and placed with us within the time
frame set forth in the prospectuses shall be priced at the offering price next
computed after they are received by you. We will not accept a conditional order
from you on any basis. All orders shall be subject to confirmation by us.
5. SETTLEMENT. Unless otherwise agreed, settlement shall be made at the
office of the Funds' transfer agent within three (3) business days after our
acceptance of the order. If payment is not so received or made within ten (10)
business days of our acceptance of the order, we reserve the right to cancel
the sale or, at our option, to sell the shares to the Funds at the then-
prevailing net asset value. In this event, or in the event that you cancel
the trade for any reason, you agree to be responsible for any loss resulting
to the Funds or to us from your failure to make payments as aforesaid. You
shall not be entitled to any gains generated thereby.
6. DEALER COMMISSIONS AND DISCOUNTS. You shall receive for each sale of
shares of the Funds listed in Category 1 on attached Schedule A, except shares
sold which are not subject to a contingent deferred sales charge, a commission
in an amount equal to three and three-quarters (3 3/4) percent of the offering
price of shares sold multiplied by the number of shares sold; provided,
however, that if the aggregate offering price of the shares sold is one
million dollars ($1,000,000) or more, the commission is reduced to one (1)
percent of the offering price multiplied by the number of shares sold.
You shall receive for each sale of shares of the Funds listed in Category
2 on attached Schedule A, except shares sold which are not subject to a contin-
gent deferred sales charge, a commission in an amount equal to four (4) percent
of the offering price of shares sold multiplied by the number of shares sold;
provided, however, that if the aggregate offering price of shares
-1-
sold is one million dollars ($1,000,000) or more, the commission is reduced to
one (1) percent of the offering price multiplied by the number of shares sold.
The amount of the commission or discount is subject to change by us
without notice.
7. REDEMPTIONS. Redemptions of shares by the Funds will be effected in the
manner and upon the terms described in the then-current prospectuses. We will,
upon your request, assist you in processing orders for redemptions. If any
shares sold to you are redeemed by the Funds or are tendered to the Funds for
redemption within seven (7) business days after the date of our confirmation
to you of your original purchase order therefor, you agree to pay forthwith to
us the full amount of the commission or discount allowed you on the sale.
8. SUSPENSION OF SALES AND AMENDMENTS TO AGREEMENT. We reserve the right in
our discretion without notice to you to suspend sales or withdraw an offering
of shares entirely, to change the offering price as provided in the prospec-
tuses, or, upon notice to you, to amend or cancel this Agreement. Such amend-
ment may include, but is not limited to, the addition of any new fund or funds
to our fund group. You agree that any order to purchase shares placed by you
after notice of any amendment to this Agreement has been sent to you shall
constitute your agreement to any such amendment.
9. DEALER STATUS. In every transaction, you shall act as an independent
contractor and not as an agent for the Funds, the Funds' transfer agent, any
other dealer, or us. You agree that neither the Funds, the Funds' transfer
agent, any other dealer, nor we shall be deemed an agent of you. Nothing here-
in shall constitute you as a partner of the Funds, the Funds' transfer agent,
any other dealer, or us or render any of us liable for your obligations.
10. REPRESENTATIONS CONCERNING THE FUNDS. No person is authorized to make
any representations concerning shares of the Funds except those contained in
the then-current prospectuses. You shall not sell shares of the Funds pursuant
to this Agreement unless the then-current prospectuses are furnished to the
purchasers prior to or at the time of purchase. You shall not use any supple-
mental sales literature of any kind without our prior written approval unless
it is furnished by us for such purpose. In offering and selling shares of the
Funds, you will rely solely on the representations contained in the then-
current prospectuses.
11. DEALER'S REPRESENTATIONS AND AGREEMENTS. By accepting this Agreement,
you represent that you: (i) are registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended; (ii) are qualified to act as a
dealer in the states in which the Funds' shares are offered for sale or sold
by you; (iii) are a member in good standing of the NASD; and (iv) will maintain
such registrations, qualifications, and memberships throughout the term of this
Agreement. You agree to abide by the Rules of Fair Practice of the NASD and all
federal and state laws and rules and regulations that are now or may become
applicable to the transactions hereunder. Your expulsion from the NASD will
automatically terminate this Agreement without notice. Your suspension from
the NASD or violation of applicable state and federal laws and rules and
regulations will terminate this Agreement effective upon our notice to you.
You shall not be entitled to any compensation during any period in which you
have been suspended or expelled from membership in the NASD.
12. INDEMNIFICATION. You hereby agree to indemnify and to hold harmless the
Funds and us and each person, if any, who controls the Funds or us within the
meaning of Section 15 of the Securities Act of 1933, as amended (the "Act"),
from and against any and all losses, claims, demands, or liabilities to which
the Funds or we may become subject under the Act, or otherwise, insofar as such
losses, claims, demands, or liabilities (or actions in respect thereof) arise
out of or are based upon any unauthorized use of sales materials by you or your
salesmen or upon alleged misrepresentations or omissions to state material
facts in connection with statements made by you or your salesmen orally or by
other means or upon sales of shares in any state or jurisdiction in which the
shares are not registered or qualified for sale; and you will reimburse the
Funds and us for any legal or other expenses reasonably incurred in connection
with the investigation or defense of any such action or claim. We shall, after
receiving the first summons or other legal process disclosing the nature of the
action being served upon the Funds or us, in any proceeding in respect of which
indemnity may be sought by the Funds or us hereunder, notify you in writing of
the commencement thereof within a reasonable time. In case any such litigation
be brought against the Funds or us, we shall notify you of the commencement
thereof, and you shall be entitled to participate in (and to the extent you
shall wish, to direct) the defense thereof at your expense, but such defense
shall be conducted by counsel in good standing satisfactory to the Funds and
us. If you fail to provide such defense, the Funds or we may defend such action
at your cost and expense. Your obligation under this Section 12 shall survive
the termination of this Agreement.
13. DEALER'S EXPENSES. All expenses incurred in connection with your
activities under this Agreement shall be borne by you.
-2-
14. SUPERVISORY RESPONSIBILITY. By accepting this Agreement, you assume full
responsibility for the registration, qualification, and training of your repre-
sentatives in connection with the offer and sale of shares of the Funds.
15. PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION. We will supply you
with copies of the prospectuses and statements of additional information of the
Funds (including any amendments thereto) in reasonable quantities upon request.
You will provide customers with prospectuses prior to or at the time customers
purchase shares. You will provide customers who so request copies of the state-
ments of additional information on file with the Securities and Exchange
Commission.
16. ASSIGNMENT. This Agreement may not be assigned by you without our
consent.
17. WAIVER. No failure, neglect, or forbearance on our part to require strict
performance of this Agreement shall be construed as a waiver of our rights or
remedies hereunder.
18. TERMINATION. Either party may terminate this Agreement at any time upon
giving written notice to the other party.
19. GOVERNING LAW. This Agreement shall be construed in accordance with the
laws of the State of North Dakota.
20. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the undersigned and supersedes all prior oral or written agreements between the
parties hereto.
21. SIPC MEMBERSHIP. Rule 10b-10 under the Securities Exchange Act of 1934,
as amended, requires the disclosure of non-SIPC membership on confirmations of
customer purchases of shares of the Funds. Please indicate your SIPC status by
checking the appropriate box below. It is your responsibility to promptly
notify us in writing of any change in your SIPC status.
________________________________________ ___is ___is not a member of SIPC.
Broker/Dealer Name (Please print.)
ND CAPITAL, INC.
Date: ________________________________ By: ________________________________
The undersigned accepts your invitation to become a dealer and agrees to
abide by the foregoing terms and conditions.
Date: __________________
By: ___________________________________ ___________________________________
Print Signature and Title
Contact Name: _______________________________________
Address: _______________________________________
_______________________________________
_______________________________________
Phone #: (_____) _______________________________
Fax #: (_____) _______________________________
Email: _______________________________________
-3-
SCHEDULE A
CATEGORY 1 CATEGORY 2
ND Tax-Free Fund, Inc. Integrity Fund of Funds, Inc.
Montana Tax-Free Fund, Inc.
South Dakota Tax-Free Fund, Inc.
-4-
*DATE*
Dear Selling Group Member:
This letter amends your Dealer Sales Agreement to include the newest addition
to Integrity Mutual Funds, (fund name). (Fund name) will be added to Category
(1 or 2) on Schedule A.
As indicated in the Dealer Sales Agreement, any order to purchase shares of
(fund name) placed by you after notice of this amendment has been sent you
constitutes your agreement to such amendment.
Best regards,
____________________________________
R.E. Walstad
President
EXHIBIT (i)(2)
[LETTERHEAD OF CHAPMAN AND CUTLER]
April 27, 1999
ND Tax-Free Fund, Inc.
1 North Main
Minot, North Dakota 58703
Re: ND Tax-Free Fund, Inc.
Gentlemen:
We have served as counsel for the ND Tax-Free Fund, Inc. (the "Fund"),
which proposes to offer and sell shares (the "Shares") in the manner and on
the terms set forth in its Registration Statement filed with the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended.
In connection therewith, we have examined such pertinent records and
documents and matters of law as we have deemed necessary in order to enable
us to express the opinions hereinafter set forth, including the Fund's Articles
of Incorporation, Bylaws, Registration Statement, votes of the Board of
Directors at its organizational meeting and a certificate executed by an
appropriate officer of the Fund certifying and attaching copies of, the Fund's
Articles of Incorporation, Bylaws, and certain actions of the Board of
Directors of the Fund authorizing the issuance of the Shares.
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, the authenticity and completeness of all original documents reviewed
by us in original or copy form and the legal competence of each individual
executing any document.
Based upon the foregoing, we are of the opinion that:
The Shares of the Fund which are currently being registered by the
Registration Statement referred to above may be legally and validly issued
from time to time in accordance with the Fund's Articles of Incorporation dated
October 7, 1988, the Fund's Bylaws; and subject to compliance with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, and applicable state laws regulating the sale of securities and the
receipt by
ND Tax-Free Fund, Inc.
April 27, 1999
Page 2
the Fund of a purchase price of not less than the net asset value per share
and such Shares, when so sold, will be legally issued and outstanding, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement (File No. 33-25138) relating to the Shares referred
to above, to the use of our name and to the reference to our firm and said
Registration Statement.
Respectfully submitted,
CHAPMAN AND CUTLER
EXHIBIT (j)
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. 15 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 3, 1999, 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 "Accountants 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 14, 1999
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