<PAGE>
DEAR SHAREHOLDER:
We are pleased to enclose the semi-annual report on the operations of Montana
Tax-Free Fund, Inc. for the period ended June 30, 1995. The bond portfolio and
related financial statements are presented within for your review.
Bond prices increased during the period subsequent to efforts by the Federal
Reserve to tighten short term interest rates and slow economic growth.
Tolerable rates of inflation have been reported as of late and it is expected
that restrictive monetary policy will not be required in this economic
environment.
Shares in the fund increased during the period from $9.39 to $9.66. During the
year the fund utilized a partial hedge to maintain share price stability.
Futures contracts and options in U.S. Treasury Bonds were employed. Hedging
affected values by retarding share appreciation during periods of rising bond
prices, and by buffering share depreciation during periods of receding bond
prices.
The adviser has invested primarily in high-grade Montana tax-exempt bonds.
Management intends to maintain the portfolio quality while diversifying
throughout the State. The adviser has been able to select suitable investments
from numerous offerings in both the primary and secondary municipal bond
markets.
We invite your personal calls and visits.
Sincerely,
Robert E. Walstad
President
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS June 30, 1995 (Unaudited)
NAME OF ISSUER
Percentages represent the market value
of each investment category to total RATING COUPON PRINCIPAL MARKET
net assets MOODY'S/S&P RATE MATURITY AMOUNT VALUE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS (93.24%)
Anaconda-Deer River Cty. (Arco) Solid
Waste Rev A/A 6.375% 10/01/16 $1,000,000 $ 1,016,670
Billings Tax Increment Urban Renewal
Ref. Baa2/NR 7.100 03/01/08 650,000 697,859
Forsyth (Montana Power) PCR Baa1/BBB+ 5.900 12/01/23 300,000 292,401
Forsyth (Montana Power) PCR Ref.
(AMBAC) Aaa/AAA 6.125 05/01/23 1,500,000 1,512,540
Forsyth (Montana Power) PCR Baa1/BBB+ 6.125 05/01/23 300,000 294,921
Forsyth (Montana Power Co.) PCR (MBIA) Aaa/AAA 6.125 05/01/23 700,000 712,656
Forsyth (Puget Sound Pwr. & Lt.) PCR
(AMBAC) Aaa/AAA 6.800 03/01/22 1,000,000 1,095,510
Forsyth (Puget Sound Pwr. & Lt.) PCR
(AMBAC) Aaa/AAA 7.050 08/01/21 750,000 835,627
*Great Falls, Water & Sewerage Rev.
(FGIC) Aaa/AAA 6.400 08/01/12 300,000 316,989
Lewis & Clark Co. (Asarco Inc.) PCR Baa/BBB 6.750 12/01/06 245,000 248,633
Lewis & Clark Co. Solid Waste Fac. Rev. A/NR 6.100 10/01/14 250,000 254,043
MT Board of Housing, Single Family
Program Aa/AA+ 6.100 12/01/24 715,000 711,275
MT Board of Housing, Single Family
Program Aa/AA+ 6.300 06/01/08 240,000 249,022
MT Board of Housing, Single Family
Program Aa/AA+ 6.350 06/01/27 1,500,000 1,526,760
MT Board of Housing, Single Family
Program Aa/AA 6.500 12/01/32 150,000 151,149
MT Board of Housing, Single Family
Program Aa/AA+ 6.900 06/01/25 95,000 100,770
MT Board of Housing, Single Family
Program Aa/AA+ 6.700 12/01/26 510,000 535,638
MT Board of Housing, Single Family
Program Aa/AA+ 6.550 12/01/25 95,000 97,942
MT Board of Housing, Single Family
Program Aa/AA+ 6.750 12/01/14 235,000 245,812
MT Board of Investments (Workers Comp.)
(MBIA) Aaa/AAA 6.875 06/01/11 200,000 218,968
MT Board of Investments (Workers Comp.)
(MBIA) Aaa/AAA 6.875 06/01/20 500,000 544,995
MT (Broadwater Power) Coal Severance
Tax Ref. A1/AA- 6.875 12/01/17 445,000 478,206
MT Hgr. Educ. Student Assistance Corp.
Rev. A/NR 6.500 12/01/12 250,000 256,068
MT Hgr. Educ. Student Assistance Corp.
Rev. A/NR 6.500 12/01/14 500,000 512,660
MT Hlth. Fac. Auth. (Bozeman Deaconess)
Rev. NR/A 5.750 06/01/08 100,000 97,944
MT Hlth. Fac. Auth. (Deaconess Clinic)
Rev. (AMBAC) Aaa/AAA 5.250 02/15/20 600,000 542,730
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.)
Rev. A/A 6.300 06/01/14 500,000 503,270
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.)
Rev. A/A 6.400 06/01/19 200,000 202,342
MT Hlth. Fac. Auth. (Holy Rosary) Rev.
(MBIA) Aaa/AAA 5.250 07/01/20 250,000 225,865
MT Hlth. Fac. Auth. (St. Pat's) Rev.
(AMBAC) Aaa/AAA 6.625 09/01/12 195,000 209,412
MT Hlth. Fac. Auth. (Master Loan Pgm.)
Rev. A/NR 6.400 10/01/14 450,000 459,023
*Richland Cty. (Mon.-Dak. Utilities)
PCR (FGIC) Aaa/AAA 6.500 06/01/22 600,000 648,768
Silver Bow, (Butte-Silver Bow) Water
Rev. (FGIC) Aaa/AAA 6.650 11/01/14 275,000 293,521
-----------
TOTAL MONTANA MUNICIPAL BONDS (COST: $15,820,456) $16,089,989
-----------
SHORT-TERM SECURITIES (4.56%)
Goldman Sachs Institutional Liquid Asset Tax Exempt Diversified Portfolio $ 258,398
Federated Intermediate Muni Trust #078 494,345
September U.S. Treasury Bond Put Options 33,750
-----------
TOTAL SHORT-TERM SECURITIES (COST: $805,186) $ 786,493
-----------
TOTAL INVESTMENTS IN SECURITIES (COST: $16,625,642) $16,876,482
===========
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS June 30, 1995
STATEMENT OF ASSETS AND LIABILITIES June 30, 1995 (Unaudited)
-------------------------------------------------------------
ASSETS
Investments in securities, at $16,876,482
value (cost: $16,625,642)
Accrued dividends receivable 5,656
Accrued interest receivable 204,792
Receivable for fund shares sold 272,460
Deferred organization costs 10,138
-----------
Total Assets $17,369,528
-----------
LIABILITIES
Dividends payable $ 71,648
Accrued expenses 21,075
Payable for fund shares redeemed 19,951
-----------
Total Liabilities $ 112,674
-----------
NET ASSETS $17,256,854
===========
Net asset value per share,
1,787,117 shares outstanding $ 9.66
===========
STATEMENT OF OPERATIONS for the six months ended June 30, 1995 (Unaudited)
--------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 410,807
Dividends 17,231
-----------
Total Investment Income $ 428,038
-----------
EXPENSES
Distribution (12b-1 fees) $ 18,241
Management fees 43,778
Custodian fees 1,760
Transfer agent fees 11,298
Audit and legal fees 4,350
Insurance 1,032
Directors fees 42
Printing and postage 8,842
License, fees, and registrations 4,357
Amortization of organization costs 1,614
-----------
Total expenses $ 95,314
Less expenses waived or absorbed
by the Fund's manager 50,375
-----------
Total Net Expenses $ 44,939
-----------
NET INVESTMENT INCOME $ 383,099
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES, AND OPTIONS:
Net realized gain (loss) from:
Investment transactions $ (66,577)
Futures transactions (619,696)
Net change in unrealized
appreciation (depreciation) of
investments 962,430
-----------
Net Realized And Unrealized
Gain (Loss) on Investments,
Futures, And Options $ 276,157
-----------
<PAGE>
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 659,256
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS June 30, 1995
STATEMENT OF CHANGES IN NET ASSETS for the six months ended June 30, 1995 and
the year ended December 31, 1994
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
June 30, 1995 Ended December
(Unaudited) 31, 1994
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 383,099 $ 444,730
Net realized gain (loss) on
investment, futures, and
option transactions (686,273) (37,452)
Net unrealized appreciation
(depreciation) on
investments 962,430 (692,985)
--------------------------------
Net Increase (Decrease)
in Net Assets
Resulting From
Operations $ 659,256 $ (285,707)
--------------------------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
Dividends from net
investment income $ (383,099) $ (444,730)
Distributions in excess of
net investment income (17,303) (21,811)
Distributions from net
realized gain on
investment, futures,
and option transactions 0 0
--------------------------------
Total Dividends and
Distributions $ (400,402) $ (466,541)
--------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 4,941,166 $ 7,450,974
Proceeds from reinvested
dividends 251,159 269,271
Cost of shares redeemed (150,152) (246,694)
--------------------------------
Net Increase (Decrease)
in Net Assets Resulting
From Capital Share
Transactions $ 5,042,173 $ 7,473,551
--------------------------------
TOTAL INCREASE IN NET ASSETS $ 5,301,027 $ 6,721,303
NET ASSETS, BEGINNING OF PERIOD 11,955,827 5,234,524
--------------------------------
NET ASSETS, END OF PERIOD $17,256,854 $11,955,827
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS June 30, 1995 (Unaudited)
Note 1. ORGANIZATION
Montana 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 April 15, 1993 and commenced operations on August 12, 1993.
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.
DEFERRED ORGANIZATION COSTS - Costs incurred in connection with initial
registration and public offering of the shares of the Fund amounted to
$16,187. These costs have been paid by ND Holdings, Inc. (the Fund's
sponsor) and may be reimbursed by the Fund. Repayment of these costs are
currently being waived by the fund's sponsor. These costs are being
amortized over a five year period. If the Manager redeems any or all of
its shares in the Fund representing initial capital prior to the end of the
60-month amortization period, the manager will reimburse the Fund for the
unamortized balance in the same proportion as the number of shares redeemed
bear to the number of initial shares outstanding at the time of redemption.
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.
DISTRIBUTION 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 on an accrual basis. Premiums on
securities purchased are amortized over the life of the respective
securities, unless callable, in which case they are amortized to the
earliest call date.
FUTURES CONTRACTS AND OPTIONS - The Fund may enter into financial futures
contracts. 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. Futures contracts are valued at the most recent
settlement price, unless such price does not reflect the fair market value
of the contract, in which case the position will be valued using methods
approved by the Board of Directors of the Company.
The Fund may purchase options on financial futures contracts. Daily
fluctuations in the value of the options are recorded for financial
reporting purposes as unrealized gains or losses by the
<PAGE>
fund. Upon sale or expiration of the option, the Fund will realize,
for book purposes, a gain or loss equal to the difference between the
cost of the option and the value on sale or expiration date.
Certain risks may arise upon entering into futures contracts and
options. These risks may include changes in the value of the futures
contracts or options that may not directly correlate with changes in
the value of the underlying securities.
Note 3. SHARE TRANSACTIONS
As of June 30, 1995, there were 200,000,000 shares of $.001 par
authorized; 1,787,117 and 1,272,951 were outstanding at June 30, 1995
and December 31, 1994, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
For the year For the year
For the six ended For the six ended
months ended December 31, months ended December 31,
June 30, 1995 1994 June 30, 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 521,139 751,657 $4,941,166 $7,450,974
Shares issued on 25,723 27,230 251,159 269,271
reinvestment of dividends
Shares redeemed (32,696) (25,699) (150,152) (246,694)
-------------------------------------------------------------------
Net increase 514,166 753,188 $5,042,173 $7,473,551
===================================================================
</TABLE>
Note 4. MANAGEMENT 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 agent, are subsidiaries of ND Holdings, Inc., the Fund's
sponsor. As of June 30, 1995, ND Capital, Inc., owns 10,000 shares
of the Fund.
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 $43,778 of investment advisory and management fees for the
period ended June 30, 1995. The Fund has a payable to ND Money
Management, Inc. of $5,511 at June 30, 1995 for management fees.
Certain officers and directors of the Fund are also officers and
directors of the investment adviser.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act (the Plan), whereby the Fund shall pay at the annual
rate of 0.75% of the average daily net assets of the Fund to ND
Capital, Inc. (Capital), its principal underwriter, for expenses
incurred in the distribution of the Fund's shares. Pursuant to the
Plan, Capital is entitled to reimbursement each month for its actual
expenses incurred in the distribution and promotion of the Fund's
shares, including the printing of prospectuses and reports used for
sales purposes, expenses of preparation and printing of sales
literature and other such distribution related expenses, including
any distribution or service fees paid to securities dealers who have
executed a dealer sales agreement with Capital. Capital will be
reimbursed at a rate not to exceed 0.75% of the average daily net
assets of the Fund for the prior month. The fund has recognized
$18,241 of 12b-1 fee expenses for the period ended June 30, 1995. The
Fund has a payable to ND Capital, Inc. of $3,444 at June 30, 1995 for
12b-1 fees.
ND Holdings, Inc. has elected to reimburse certain administrative
costs incurred by the Fund to provide a fair return to the investors
during the growth stage of the Fund. As the Fund grows, these
expenses will be assumed gradually by the Fund. The expenses
reimbursed by ND Holdings, Inc. for the period ended June 30, 1995
amounted to $31,681. The Fund has a
<PAGE>
payable to ND Holdings, Inc. of $10,138 at June 30, 1995 for the
unamortized cost incurred in connection with the initial registration
and public offering of the shares of the fund.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment
securities (excluding short-term securities) aggregated $4,812,170, and
$1,231,350, respectively, for the period ended June 30, 1995.
Note 6. 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.
Note 7. INVESTMENT IN SECURITIES
At June 30, 1995, the aggregate cost of securities for federal income
tax purposes was $16,625,642, and the net unrealized appreciation of
investments based on the cost was $250,840, which is comprised of
$386,990 aggregate gross unrealized appreciation and $136,150 aggregate
gross unrealized depreciation.
Note 8. CERTAIN RECLASSIFICATIONS
In accordance with a recently approved accounting pronouncement
(Statement of Position 93-2), the Fund has reclassified certain items.
These reclassifications have no impact on the net asset value of the
Fund and are designed to present the Fund's capital accounts on a tax
basis.
Note 9. MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS
A special meeting of the shareholders of Montana Tax-Free Fund, Inc.
was held on March 31, 1995. A quorum was declared present and voting
for the election of directors occurred with the following results:
<TABLE>
<CAPTION>
Votes Cast To Votes Cast To
Votes Cast Withhold All Withhold An
Nominee For Nominees Nominees Individual Nominee Abstentions
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn W. Aas 609,008.406 6,095.728 0 0
Orlin W. Backes 609,008.406 6,095.728 0 0
Arthur A. Link 606,622.915 6,095.728 2,385.491 0
Peter A. Quist 609,008.406 6,095.728 0 0
Robert E. Walstad 609,008.406 6,095.728 0 0
</TABLE>
In addition, Brady, Martz & Associates P.C. was ratified as the Fund's
independent public accountant with 585,555.659 votes cast for, 0 votes
cast against, and 29,548.475 abstentions.
<PAGE>
FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period indicated
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Six Since Inception
Months Ended For the Year (August 12, 1993)
June 30, 1995 Ended December through December
(unaudited) 31, 1994 31, 1993
------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.39 $ 10.07 $10.00
------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income $ .26 $ .50 $ .19
Net realized and unrealized gain (loss) on
investment, futures, and option transactions .28 (.66) .09
------------------------------------------------------------------
Total From Investment Operations $ .54 $ (.16) $ .28
------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income $(.26) $ (.50) $ (.19)
Distributions in excess of net
investment income (.01) (.02) (.01)
Distributions from realized gains 0 0 (.01)
------------------------------------------------------------------
Total Distributions $(.27) $ (.52) $ (.21)
------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.66 $ 9.39 $10.07
==================================================================
TOTAL RETURN 11.48%(A)(C) (1.70)%(C) 7.00%(A)(C)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $17,257 $11,956 $5,235
Ratio of net expenses (after expense assumption) to
average net assets .61%(A)(B) .46%(B) .12%(A)(B)
Ratio of net investment income to average net assets 5.24%(A) 5.06% 4.84%(A)
Portfolio turnover rate 9.21% 12.46% 26.05%
</TABLE>
(A) Ratio was annualized.
(B) During the six month period ending June 30, 1995 and the periods ended
December 31, 1994, and 1993, ND Holdings, Inc. assumed expenses of $50,375,
$87,483, and $21,944. If the expenses had not been assumed, the annualized
ratio of total expenses to average net assets would have been 1.30%, 1.46%
and 1.71%, respectively.
(C) Excludes contingent deferred sales charge of 4%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 16625642
<INVESTMENTS-AT-VALUE> 16876482
<RECEIVABLES> 482908
<ASSETS-OTHER> 10138
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17369528
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 112674
<TOTAL-LIABILITIES> 112674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1787117
<SHARES-COMMON-PRIOR> 1272951
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (723725)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 250840
<NET-ASSETS> 17256854
<DIVIDEND-INCOME> 17231
<INTEREST-INCOME> 410807
<OTHER-INCOME> 0
<EXPENSES-NET> 44939
<NET-INVESTMENT-INCOME> 383099
<REALIZED-GAINS-CURRENT> (686273)
<APPREC-INCREASE-CURRENT> 962430
<NET-CHANGE-FROM-OPS> 659256
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 383099
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 17303
<NUMBER-OF-SHARES-SOLD> 521139
<NUMBER-OF-SHARES-REDEEMED> 32696
<SHARES-REINVESTED> 25723
<NET-CHANGE-IN-ASSETS> 5301027
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 43778
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95314
<AVERAGE-NET-ASSETS> 14628798
<PER-SHARE-NAV-BEGIN> 9.39
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> (.26)
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.66
<EXPENSE-RATIO> .61<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> Ratio of net expenses to average net assets, annualized.
</FN>
</TABLE>
