<PAGE>
DEAR SHAREHOLDER:
We are pleased to enclose the annual report on the operations of ND Insured
Income Fund, Inc. for the year ended December 31, 1996. The bond portfolio and
related financial statements are presented within for your review.
Bond prices began the year with a slight upward bias and then declined in the
February-March-April time frame. Federal Reserve monetary policy became less
accommodative in response to the growth picture in the American economy. Bond
prices then moved higher during the second half of 1996, except for late
December, when a correction took place.
Shares in the Fund decreased during the period from $9.51 to $9.24. During part
of the year the Fund utilized a partial hedge to maintain share price stability.
Futures contracts in U.S. Treasury Bonds were employed. Hedging provided share
price stability as interest rates increased and bond prices declined.
The adviser has invested primarily in corporate utility bonds which were either
pre-insured at the time of purchase or which have been covered by portfolio
insurance since their purchase. Reasonable income and preservation of capital
remain as the chief objectives of the Fund.
We invite your personal calls and visits.
Sincerely,
Robert E. Walstad
President
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
NAME OF ISSUER RATINGS
--------------------------------
Percentages represent the market value of each INV'M'T STD. & COUPON PRINCIPAL MARKET
investment category to total net assets ADVRS. MOODY'S POOR'S RATE MATURITY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES (74.55%)
Cleveland Electric Illum. Co. (FSA Insured) AAA Aaa AAA 9.000% 03/01/17 $ 46,000 $ 45,299
Commonwealth Edison Co. (FSA Insured) AAA Aaa AAA 9.500 05/01/16 99,000 97,713
Commonwealth Edison Co. (FSA Insured) AAA Aaa AAA 9.125 05/01/16 34,000 33,481
Consolidated Edison (MBIA) AAA Aaa AAA 7.500 06/15/23 300,000 305,736
Dayton Power & Light Co. (FGIC Insured) AAA Aa3 AA- 8.150 01/15/26 95,000 99,546
Dayton Power & Light Co. (FGIC Insured) AAA Aa3 AA- 7.875 02/15/24 125,000 128,335
Detroit Edison Co. (AMBAC Insured) AAA Aaa AAA 7.740 06/01/18 130,000 131,071
Duke Power Co. (FGIC Insured) AAA Aa AA- 8.375 12/01/21 40,000 41,140
Duke Power Co. (FGIC Insured) AAA Aa AA- 6.750 08/01/25 80,000 72,570
*Mississippi Power & Light Co. (FSA Insured) AAA Aaa AAA 8.500 01/15/23 265,000 268,909
Pacific Gas & Electric Co. (MBIA Insured) AAA Aaa AAA 7.250 08/01/26 125,000 124,386
Public Service Elec. & Gas Co. (FGIC Insured) AAA A3 A- 8.500 06/01/22 93,000 97,014
Southern California Edison Co. (FGIC Insured) AAA A A+ 7.250 03/01/26 100,000 95,882
Texas Utilities Electric Co. (AMBAC Insured) AAA Aaa AAA 8.500 08/01/24 47,000 49,375
*U.S. West Communications AA Aa3 A+ 8.875 06/01/31 250,000 270,188
Virginia Electric & Power Co. (MBIA Insured) AAA Aaa AAA 7.250 02/01/23 150,000 149,292
------------
TOTAL CORPORATE BONDS AND NOTES (COST: $2,041,317) $ 2,009,937
------------
U.S.GOVERNMENT AGENCIES (15.06%)
Tennessee Valley Authority Bonds AAA Aaa AAA 8.625% 11/15/29 $ 180,000 $ 193,882
Tennessee Valley Authority Bonds AAA Aaa NR 7.750 12/15/22 100,000 102,226
Tennessee Valley Authority Bonds AAA Aaa NR 7.625 09/01/22 110,000 109,799
------------
TOTAL U.S. GOVERNMENT AGENCIES (COST: $406,633) $ 405,907
------------
TAXABLE MUNICIPAL BONDS (1.86%)
*Westmoreland County, PA (AMBAC Insured) AAA Aaa AAA 7.500% 05/15/13 $ 50,000 $ 50,123
------------
TOTAL TAXABLE MUNICIPAL BONDS (COST: $50,000) $ 50,123
------------
SHORT-TERM SECURITIES (7.51%)
Goldman Sachs Institutional Liquid Assets Treasury Instruments Portfolio (COST: $202,425) $ 202,425
------------
TOTAL INVESTMENTS IN SECURITIES (COST: $2,700,375) $ 2,668,392
============
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1996
STATEMENT OF ASSETS AND LIABILITIES December 31, 1996
- -----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost: $2,700,375) $ 2,668,392
Accrued dividends receivable 498
Accrued interest receivable 42,986
Variation margin on futures 11,296
------------
Total Assets $ 2,723,172
------------
LIABILITIES
Bank overdraft $ 10,183
Dividends payable 14,858
Accrued expenses 2,115
------------
Total Liabilities $ 27,156
------------
NET ASSETS $ 2,696,016
============
Net asset value per share, 291,865 shares outstanding $ 9.24
============
</TABLE>
STATEMENT OF OPERATIONS for the year ended December 31, 1996
- -------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 200,631
Dividends 5,356
-------------
Total Investment Income $ 205,987
-------------
EXPENSES
Investment advisory fees $ 16,938
Custodian fees 585
Transfer agent fees 4,434
Accounting service fees 25,394
Audit and legal fees 4,050
Insurance 3,975
Directors fees 1,351
Printing and postage 6,868
License, fees, and registrations 1,508
Amortization of organization costs 875
-------------
Total expenses $ 65,978
Less expenses waived or absorbed
by the Fund's manager 40,723
-------------
Total Net Expenses $ 25,255
-------------
NET INVESTMENT INCOME $ 180,732
-------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES
Net realized gain (loss) from:
Investment transactions $ (2,068)
Futures transactions 67,086
Net change in unrealized appreciation (depreciation) of:
Investments (148,320)
Futures (2,003)
--------------
Net Realized And Unrealized Gain (Loss) On Investments
And Futures $ (85,305)
--------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 95,427
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1996
STATEMENT OF CHANGES IN NET ASSETS
For the years ended December 31, 1996 and 1995
- ----------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31,1995
----------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 180,732 $ 205,024
Net realized gain (loss) on investment and futures transactions 65,018 (116,476)
Net unrealized appreciation (depreciation) on investments and futures (150,323) 394,006
----------------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 95,427 $ 482,554
----------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (180,732) $ (205,024)
Distributions from net realized gain on investment and futures transactions 0 0
----------------------------------------------
Total Dividends and Distributions $ (180,732) $ (205,024)
----------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 73,819 $ 209,568
Proceeds from reinvested dividends 119,801 190,630
Cost of shares redeemed (424,389) (483,527)
----------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Capital Share Transactions $ (230,769) $ (83,329)
----------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (316,074) $ 194,201
NET ASSETS, BEGINNING OF PERIOD 3,012,090 2,817,889
----------------------------------------------
NET ASSETS, END OF PERIOD $ 2,696,016 $ 3,012,090
==============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1996
Note 1. ORGANIZATION
ND Insured Income 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 November 27, 1990 and commenced operations
on March 19, 1991. The Fund's objective is to provide as high a level
of current income as is consistent with prudent investment management,
preservation of capital, and ready marketability of its portfolio. The
Fund will seek to achieve this objective by investing primarily in a
portfolio of debt securities, including U.S. Government securities and
insured corporate bonds.
Shares of the Fund are offered at net asset value plus a maximum sales
charge of 4.5% of the offering price.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITY VALUATION - Investments in securities traded on
national securities exchanges are valued at the last reported sales
price at the close of each business day. Securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by the portfolio management team. The Fund
follows industry practice and records security transactions on the
trade date.
FEDERAL AND STATE INCOME TAXES - It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net taxable income
and any net realized gain on investments, to its shareholders.
Therefore, no provision for income taxes is required.
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 payable in cash. Capital gains, when
available, are distributed along with the last income dividend of the
calendar year.
INVESTMENT INCOME - Dividend income is recognized on the ex-dividend
date and interest income is recognized daily on an accrual basis.
Premiums and discounts on securities purchased are amortized using the
effective interest method over the life of the respective securities,
unless callable, in which case they are amortized to the earliest call
date.
<PAGE>
FUTURES CONTRACTS - The Fund may purchase and sell financial futures
contracts to hedge against changes in the values of 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
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, and are recorded for financial reporting purposes as unrealized
gains or losses by the fund. When entering into a closing transaction,
the Fund will realize, for book purposes, a gain or loss equal to the
difference between the value of the futures contracts sold and the
futures contracts to buy. Unrealized appreciation (depreciation)
related to open futures contracts is required to be treated as
realized gain (loss) for Federal income tax purposes.
Certain risks may arise upon entering into futures contracts. These
risks may include changes in the value of the futures contracts that
may not directly correlate with changes in the value of the underlying
securities.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3. SHARE TRANSACTIONS
As of December 31, 1996, there were 200,000,000 shares of $.001 par
value authorized; 291,865 and 316,842 were outstanding at December 31,
1996 and December 31, 1995, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
For The For The For The For The
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 8,164 22,961 $ 73,819 $ 209,568
Shares issued on reinvestment of dividends 13,030 21,438 119,801 190,630
Shares redeemed (46,171) (52,837) (424,389) (483,527)
-----------------------------------------------------------------
Net increase (decrease) (24,977) (8,438) $ (230,769) $ (83,329)
=================================================================
</TABLE>
<PAGE>
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. Total investment advisory fees
incurred during the year ended December 31, 1996 were $14,031. Certain
officers and directors of the Fund are also officers and directors of
the investment adviser.
As of December 31, 1996, the Fund owed ND Money Management $1,175 for
investment advisory fees incurred but not paid, and owed ND Holdings,
Inc. $940 for other expenses.
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 $4,434 of transfer agency fees for the year ended
December 31, 1996. 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 $25,394 of accounting service
fees for the year ended December 31, 1996.
Note 5. INVESTMENT SECURITY TRANSACTIONS
Proceeds from sale of investment securities (excluding short-term
securities) aggregated $568,207, $736,420 and $297,549 for corporate
bonds and notes, U.S. Government obligations and taxable municipal
securities respectively, with cost of purchases totaling $739,471 and
$563,765 for U.S. Government obligations and corporate bonds and notes
for the year ended December 31, 1996.
<PAGE>
Note 6. CALCULATION OF PUBLIC OFFERING PRICE
Using the net asset value of one share and the sales charge
percentage, the maximum public offering price was determined as
follows for an investment of less than $100,000 made on December 31,
1996:
<TABLE>
<CAPTION>
Divided by Maximum
Net Asset (1.00 - 0.045) Public
Value of For a 4.50% Offering
One Share Sales Charge Price
--------- ------------ -----
<S> <C> <C>
$9.24 .955 $9.68
</TABLE>
On sales of greater than $100,000, the sales charge is reduced on a
sliding scale.
Note 7. SPECIAL RISK CONSIDERATIONS
The Fund is registered as a non-diversified investment company, and
therefore will be able to invest a relatively high percentage of its
assets in a limited number of issuers, thus making the Fund more
susceptible to a single economic, political, or regulatory occurrence
than a diversified company. The Fund also is exposed to a certain
degree of market risk and liquidity risk in that as cash flow needs
arise, investment securities may have to be sold under unfavorable
market conditions.
Under normal market conditions, at least 65% of the Fund's portfolio
securities will be protected by insurance. The insurance policies
guarantee only the timely payment of principal and interest on the
insured securities. Market value, which may fluctuate due to changes
in interest rates or factors affecting the credit of the issuer or the
insurer, is not insured.
Note 8. INVESTMENT IN SECURITIES
At December 31, 1996, the aggregate cost of securities for federal
income tax purposes was $2,700,375, and the net unrealized
depreciation of investments based on the cost was $31,983, which was
comprised of $27,056 aggregate gross unrealized appreciation and
$59,039 aggregate gross unrealized depreciation.
<PAGE>
FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Year For The Year For The Year For The Year For The Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.51 $ 8.66 $ 9.62 $ 9.68 $ 9.69
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income $ .59 $ .62 $ .64 $ .68 $ .73
Net realized and unrealized gain (loss)
on investments and futures transactions (.27) .85 (.70) (.01) (.01)
------------------------------------------------------------------------------------------
Total From Investment Operations $ .32 $ 1.47 $ (.06) $ .67 $ .72
------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income $ (.59) $ (.62) $ (.64) $ (.68) $ (.73)
Distributions from net realized gains .00 .00 (.26) (.05) .00
------------------------------------------------------------------------------------------
Total Distributions $ (.59) $ (.62) $ (.90) $ (.73) $ (.73)
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.24 $ 9.51 $ 8.66 $ 9.62 $ 9.68
==========================================================================================
TOTAL RETURN 3.65%(A) 17.53%(A) (.58)%(A) 6.86%(A) 7.78%(A)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $2,696 $3,012 $2,818 $2,445 $1,839
Ratio of net expenses (after expense
assumption) to average net assets 0.90%(B) 0.76%(B) 0.65%(B) 0.85%(B) 1.31%(B)
Ratio of net investment income to
average net assets 6.47% 6.85% 7.02% 7.11% 7.56%
Portfolio turnover rate 49.27% 0.00%(C) 14.55% 102.00% 58.00%
</TABLE>
(A) Excludes maximum sales charge of 4.5%.
(B) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$40,723, $18,573, $23,697, $35,570, and $32,228, respectively. If the
expenses had not been assumed, the annualized ratios of total expenses to
average net assets would have been 2.36%, 1.38%, 1.53%, 2.52%, and 3.40%,
respectively.
(C) No investment securities were purchased during the period
<PAGE>
GRAPH APPEARS HERE
Comparison of change in value of $10,000 investment in ND Insured Income Fund
and Lehman Bros. Corporate Bond Index (Unaudited)
<TABLE>
<CAPTION>
ND Insured Income ND Insured Income Lehman Bros
Fund w/o sales charge Fund w/ max sales charge Corporate Bond Index
-------------------------------------------------------------------------
<S> <C> <C> <C>
3/19/1991 $10,000 $ 9,550 $10,000
1991 $10,510 $10,276 $11,507
1992 $11,514 $11,112 $12,506
1993 $12,414 $11,856 $14,028
1994 $12,342 $11,787 $13,477
1995 $14,506 $13,854 $16,474
1996 $15,036 $14,359 $17,016
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
ND Insured Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of ND
Insured Income Fund, Inc. (the Fund), including the schedule of investments, as
of December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets for the each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits 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, 1996, 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
Insured Income Fund, Inc. as of December 31, 1996, 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 financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
BRADY, MARTZ & ASSOCIATES, P.C.
February 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 2,700,375
<INVESTMENTS-AT-VALUE> 2,668,392
<RECEIVABLES> 43,484
<ASSETS-OTHER> 11,296
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,723,172
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,156
<TOTAL-LIABILITIES> 27,156
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 291,865
<SHARES-COMMON-PRIOR> 316,842
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (51,458)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (31,983)
<NET-ASSETS> 2,696,016
<DIVIDEND-INCOME> 5,356
<INTEREST-INCOME> 200,631
<OTHER-INCOME> 0
<EXPENSES-NET> 25,255
<NET-INVESTMENT-INCOME> 180,732
<REALIZED-GAINS-CURRENT> 65,018
<APPREC-INCREASE-CURRENT> (150,323)
<NET-CHANGE-FROM-OPS> 95,427
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 180,732
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,164
<NUMBER-OF-SHARES-REDEEMED> 46,171
<SHARES-REINVESTED> 13,030
<NET-CHANGE-IN-ASSETS> (316,074)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16,938
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65,978
<AVERAGE-NET-ASSETS> 2,791,834
<PER-SHARE-NAV-BEGIN> 9.51
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> (.27)
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.24
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
