<PAGE>
Dear Shareholders,
Both the optimists and the pessimists can find comfort in the latest batch of
economic data. For the optimists, the economy's inflation threatening growth
has lost momentum, lessoning one of the biggest concerns in the financial
markets. In April, job-creation downshifted measurably, retail sales fell,
businesses started with higher inventories, and factories cut production.
Wholesale prices fell for the fourth consecutive month, and the consumer price
index edged up 0.1 percent keeping it on track to increase by less than 3
percent again this year.
The pessimists look at the same data and put an entirely different spin on
things. They contend that the slowdown was inevitable from the first
quarter's robust six percent pace. Beneath the surface, growth resurgence
will rise with the tight labor market and a jobless rate hovering at a 24 year
low. Also supporting their views are climbing wages, and an upbeat household
sector as indicated by consumer confidence.
For the time being, the Federal Reserve is siding with the optimists. In the
past, this may have provoked a negative reaction in the financial markets, as
investors would worry that the Central Bank was relaxing its anti-inflation
policy. But Chairman Allan Greenspan and his colleagues have built up
formidable inflation-fighting credentials.
During the first half of the year the Fund utilized a partial hedge. Futures
contracts in U.S. Treasury Bonds were employed. In the first quarter as
interest rates rose this had the effect of minimizing share price erosion.
In the second quarter as interest rates retreated share price increases were
tempered. The overall effect to the Fund in the first six months was a
greater degree of share price stability.
Looking into our crystal ball, we feel that the economy's current slowdown is
more likely to be temporary. That prospect increases the odds of a rate hike
by the Federal Reserve in the coming months. As such, we remain concerned
(and have positioned the portfolio accordingly) that a modest increase in
rates may be needed to prevent unbridled growth.
Diversification remains an important strategy for the Fund. Among our
purchases during the first half of 1997 were bonds issued by housing
authorities, retirement homes, school districts, and utilities.
Over the remaining half of the year, management intends to maintain the
portfolio quality while diversifying throughout the State. Reasonable
tax-exempt income and preservation of capital remain as the chief objectives
of the Fund.
Sincerely,
Robert E. Walstad Monte L. Avery
President Chief Portfolio Strategist
SHAREHOLDER REPORTS REVISED
- ---------------------------
Your fund's annual report is your best source for tracking the progress of
your investment. This report includes several changes that have been made in
<PAGE>
an effort to provide additional information to you. In addition, the cover
letter includes commentary from your fund's portfolio manager on what might be
expected in the coming months. Specifically, your report now includes:
* Terms you'd need to know related to your fund
* A look at your fund's portfolio composition
* The quality and years to maturity of the fund's underlying investments
* A look at your fund's average annual total returns
Terms & Definitions
- -------------------
Average Annual Total Return
A standardized measurement of the return (yield and appreciation) earned
by the fund on an annual basis.
Contingent Deferred Sales Charge (CDSC)
A charge applied at the time of the redemption of which assumes
redemption at the end of the period.
Coupon Rate or Face Rate
The rate of interest annually payable based on the face amount of the
bond; expressed as a percentage.
Duration
A measurement of a security or a portfolio's price volatility based on
maturity, callability and coupon rate. The larger the number, the greater
the price change for a given interest rate change.
Lehman Brother's Municipal Bond Index
An unmanaged list of long-term, fixed-rate, investment-grade, tax-exempt
bonds representative of the municipal bond market. The index does not
take into account brokerage commissions or other costs, may include bonds
different from those in the fund, and may pose different risks than the
fund.
Market Value
Actual (or estimated) price at which a bond trades in the market place.
Maturity
A measure of the term or life of a bond in years. When a bond "matures",
the issuer repays the principal.
Net Asset Value (NAV)
The value of all your fund's assets, minus any liabilities, divided by the
number of outstanding shares, not including any initial or contingent
deferred sales charge.
Quality Ratings
A designation assigned by independent rating companies to give a relative
indication of a bonds' credit worthiness. "AAA", "AA" and "A" indicate
highest quality. Ratings can range from a high of "AAA" to a low of "D".
Total Return
Measures both the net investment income and any realized and unrealized
appreciation or depreciation of the underlying investments in the fund's
portfolio for the period, assuming the reinvestment of all dividends. It
represents the aggregate percentage or dollar value change over the
period.
<PAGE>
PERFORMANCE AND COMPOSITION
- ---------------------------
Portfolio Quality Ratings
(based on Total Long-Term Investments
- -------------------------------------
[pie chart]
AAA 42.5%
AA 23.8%
A 11.9%
BBB 12.3%
NR 9.5%
(non-rated)
Quality ratings reflect the financial strength of the issuer. They are
assigned by independent rating services such as Moody's Investors Services
and Standard & Poor's. Non-rated bonds have been determined to be of
appropriate quality for the portfolio by ND Money Management, Inc. the
investment advisor
Portfolio Market Sectors
(as a % of Net Assets)
- ------------------------
[pie chart]
Insured 44.4%
Housing 22.0%
Healthcare 13.3%
Real Estate 6.3%
Energy 5.0%
Other 2.9%
Utilities 2.9%
Education 1.9%
Pollution
Control 1.3%
Market sectors are breakdowns of the Fund's portfolio holdings into specific
investment classes.
COMPARATIVE INDEX GRAPH
- -----------------------
[line graph]
Comparison of change in value of a $10,000 investment in the
Montana Tax-Free Fund and the Lehman Brother's Municipal Bond
Index
Montana Tax-Free Montana Tax-Free Fund Lehman Brother's
Fund w/o CDSC w/ max applicable CDSC Municipal Bond Index
----------------------------------------------------------------
8/12/1993 $10,000 $10,000 $10,000
1993 $10,268 $ 9,868 $10,363
1994 $10,093 $ 9,718 $ 9,828
1995 $11,390 $11,090 $11,544
1996 $12,019 $11,819 $12,055
6/30/1997 $12,370 $12,270 $12,442
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities
index measures the performance of a theoretical portfolio. Unlike a fund, the
index is unmanaged; there are no expenses that affect the results. In
<PAGE>
addition, few investors could purchase all of the securities necessary to
match the index. And, if they could, they would incur transaction costs and
other expenses.
KEY STATISTICS
- --------------
12-31-96 NAV(share value) $10.07
06-30-97 NAV $10.11
Average Maturity 23.1 years
Average Duration 7.1 years
Number of Issues 57
Total Net Assets $40,926,898
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------
For periods ending June 30, 1997
- ---------------------------------------------------
1 year 5 year Since Inception
- ---------------------------------------------------
6.49% * NA 5.63% *
*The 1 year and Since Inception returns do not include the effect of the 4% and
1% respective Contingent Deferred Sales Charges. It would have been 2.49% and
5.41% respectively, if it had. Returns are historical and are not a guarantee
of future results. The Fund's share price, yields and total returns will
vary, so that shares, when redeemed, may be worth more or less than their
original cost.
<PAGE>
<TABLE>
<CAPTION>
Schedule of Investments June 30, 1997 (Unaudited)
Name of Issuer
Percentages represent the market value Rating Coupon Principal Market
of each investment category to total net assets Moody's/S&P Rate Maturity Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS (97.2%)
ENERGY (5.0%)
Anaconda-Deer River Cty. (Arco) Solid Waste Rev. A/A+ 6.375% 10/01/16 $ 1,500,000 $ 1,565,280
MT (Broadwater Power) Coal Severance Tax Ref. A1/AA- 6.875 12/01/17 445,000 486,318
------------
$ 2,051,598
------------
HEALTH CARE (13.3%)
Hamilton, MT (Valley View Estates) Rev. NR/NR 7.250% 05/01/26 $ 250,000 $ 261,812
MT St. Hlth. Fac. Auth. (Mission Ridge) Rev. NR/NR 6.300 08/15/26 500,000 504,445
MT St. Hlth. Fac. Auth. (Mission Ridge) Rev. NR/NR 7.000 08/15/26 195,000 204,682
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.) Rev. A/NR 6.300 06/01/14 500,000 531,390
MT St. Hlth. Fac. Auth. (MT Devl. Ctr.) Rev. A/NR 6.400 06/01/19 930,000 989,427
MT Hlth. Fac. Auth. (Master Loan Pgm.) Rev. A/NR 6.400 10/01/14 450,000 488,781
MT Hlth. Fac. Auth. (Northern Montana Care Ctr.) Rev. Baa/NR 6.350 09/01/15 1,000,000 1,020,660
MT Hlth. Fac. Auth. (Missoula Comm. Med. Ctr.) Rev. NR/BBB- 6.375 06/01/18 1,330,000 1,347,277
MT Hlth. Fac. Auth. (Bozeman Deaconess) Rev. NR/A 5.750 06/01/08 100,000 104,700
------------
$ 5,453,174
------------
HOUSING (22.0%)
MT Board of Housing, Single Family Program Aa/A+ 6.250% 12/01/17 $ 2,855,000 $ 2,924,091
MT Board of Housing, Single Family Program Aa/AA+ 6.350 06/01/27 1,435,000 1,462,193
MT Board of Housing, Single Family Program Aa/AA+ 6.550 12/01/25 90,000 92,027
MT Board of Housing, Single Family Program Aa/AA+ 6.400 12/01/35 500,000 510,100
MT Board of Housing, Single Family Program Aa/AA+ 6.400 12/01/27 310,000 314,997
MT Board of Housing, Multifamily Mtg. Program Aa/NR 6.150 08/01/26 450,000 451,647
MT Board of Housing, Single Family Program Aa/AA 6.150 06/01/30 1,245,000 1,251,885
MT Board of Housing, Single Family Program Aa/AA 6.500 12/01/32 150,000 155,092
MT Board of Housing, Single Family Program Aa/AA+ 6.100 12/01/24 670,000 666,556
MT Board of Housing, Single Family Program Aa/AA+ 6.300 06/01/08 225,000 233,489
MT Board of Housing, Single Family Program Aa/AA+ 6.750 12/01/14 215,000 226,978
MT Board of Housing, Single Family Program Aa/AA+ 6.900 06/01/25 90,000 93,620
MT Board of Housing, Single Family Program Aa/AA+ 6.700 12/01/26 580,000 605,636
------------
$ 8,988,311
------------
POLLUTION CONTROL (1.3%)
Forsyth, MT (Montana Power) PCR Baa1/BBB+ 5.900% 12/01/23 $ 300,000 $ 304,005
Lewis & Clark Cty. (Asarco Inc.) PCR Baa/BBB 6.750 12/01/06 235,000 240,363
------------
$ 544,368
------------
REAL ESTATE (6.3%)
Billings Tax Increment Urban Renewal Ref. Baa/NR 7.100% 03/01/08 $ 650,000 $ 703,313
Flathead Muni. Airport Auth. (Glacier Park) NR/NR 6.300 06/01/17 1,900,000 1,882,862
------------
$ 2,586,175
------------
STATE EDUCATION (1.9%)
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500% 12/01/12 $ 250,000 $ 262,880
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/14 500,000 528,370
------------
$ 791,250
------------
UTILITIES (2.9%)
Lewis & Clark Cty. Solid Waste Fac. Rev. A/NR 6.100% 10/01/14 $ 250,000 $ 264,465
Lewistown, MT Water System Rev. NR/NR 5.700 07/01/15 435,000 450,403
Lewistown, MT Water System Rev. NR/NR 5.700 07/01/16 460,000 475,157
------------
$ 1,190,025
------------
INSURED/GUARANTEED (44.4%)
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (AMBAC) Aaa/AAA 7.050% 08/01/21 $ 750,000 $ 839,190
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (AMBAC) Aaa/AAA 6.800 03/01/22 565,000 628,568
Forsyth, MT (Puget Sound Pwr. & Lt.) PCR (MBIA) Aaa/AAA 5.875 04/01/20 540,000 552,161
Forsyth, MT (Montana Power) PCR (MBIA) Aaa/AAA 6.125 05/01/23 1,220,000 1,265,079
Forsyth, MT (Montana Power) PCR Ref. (AMBAC) Aaa/AAA 6.125 05/01/23 4,250,000 4,477,247
Forsyth, MT (Montana Power) PCR Ref. (AMBAC) Aaa/AAA 5.900 12/01/23 225,000 231,712
Forsyth, MT (Montana Power) PCR Rev. (MBIA) Aaa/AAA 5.900 12/01/23 600,000 617,898
Forsyth, MT (Montana Power) PCR Rev. (MBIA) Aaa/AAA 6.125 05/01/23 1,410,000 1,485,393
*Great Falls, Water & Sewerage Rev. (FGIC) Aaa/AAA 6.400 08/01/12 300,000 327,264
MT State University Rev. Aaa/AAA 5.250 11/15/13 1,165,000 1,165,478
MT State University Rev. Aaa/AAA 5.625 11/15/25 1,000,000 1,022,650
MT State University Rev. Aaa/AAA 5.375 11/15/21 1,000,000 986,810
MT Hlth. Fac. Auth. (St. Pat's) Rev. (AMBAC) Aaa/AAA 6.625 09/01/12 195,000 213,710
MT Hlth. Fac. Auth. (Holy Rosary) Rev. (MBIA) Aaa/AAA 5.250 07/01/20 250,000 241,420
MT Hlth. Fac. Auth. (Deaconess Clinic) Rev. (AMBAC) Aaa/AAA 5.250 02/15/20 1,700,000 1,642,710
MT Board of Investments (Workers Comp.) (MBIA) Aaa/AAA 6.875 06/01/11 200,000 219,728
MT Board of Investments (Workers Comp.)(ESCRWD) Aaa/AAA 6.875 06/01/20 145,000 159,294
MT Board of Investments (Workers Comp.)(ESCRWD) Aaa/AAA 6.875 06/01/20 355,000 389,996
Phillips Cty., MT (Malta) ESD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/15 145,000 146,472
Phillips Cty., MT (Malta) ESD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/16 155,000 156,076
Phillips Cty., MT (Malta) HSD #14 G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/17 165,000 166,779
Phillips Cty., MT (Malta) ESD #A G.O. School Bldg. (MBIA) Aaa/AAA 5.600 07/01/15 290,000 292,943
*Richland Cty. (Mon.-Dak. Utilities) PCR (FGIC) Aaa/AAA 6.650 06/01/22 600,000 661,026
Silver Bow, (Butte-Silver Bow)Water System Rev. (FGIC) Aaa/AAA 6.500 11/01/14 275,000 301,983
------------
$ 18,191,587
-----------
TOTAL MONTANA MUNICIPAL BONDS (COST: $38,889,654) $ 39,796,488
------------
SHORT-TERM SECURITIES (6.1%)
Federated Tax-Free Trust #73 $ 161,410
Federated Intermediate Municipal Trust #78 2,334,174
------------
TOTAL SHORT TERM SECURITIES (COST: $2,482,718) $ 2,495,584
------------
TOTAL INVESTMENTS IN SECURITIES (COST: $41,372,372) $ 42,292,072
OTHER ASSETS LESS LIABILITIES $(1,365,174)
------------
NET ASSETS $ 40,926,898
============
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Statements June 30, 1997 (Unaudited)
Statement of Assets and Liabilities June 30, 1997
- -------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost:$41,372,372 ) $ 42,292,072
Accrued dividends receivable 8,555
Accrued interest receivable 447,722
Receivable for fund shares sold 46,000
Variation margin on futures 277,844
----------------
Total Assets $ 43,072,193
----------------
LIABILITIES
Bank overdraft $ 29,001
Dividends payable 165,828
Accrued expenses 43,021
Security purchases payable 1,905,445
Payable for fund shares redeemed 2,000
---------------
Total Liabilities $ 2,145,295
---------------
NET ASSETS $ 40,926,898
===============
Net asset value per share, 4,047,529 shares outstanding $ 10.11
===============
Statement of Operations for the six months ended June 30, 1997
INVESTMENT INCOME
Interest $ 1,049,248
Dividends 28,611
--------------
Total Investment Income $ 1,077,859
--------------
EXPENSES
Investment advisory fees $ 112,833
Distribution (12b-1 fees) 70,303
Custodian fees 1,849
Transfer agent fees 24,886
Accounting service fees 21,414
Audit and legal fees 4,665
Insurance 1,463
Directors fees 1,770
Printing and postage 9,158
--------------
Total expenses $ 248,341
Less expenses waived or absorbed
by the Fund's manager 32,513
--------------
Total Net Expenses $ 215,828
--------------
NET INVESTMENT INCOME $ 862,031
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 39,066
Futures transactions 300,516
Net change in unrealized appreciation (depreciation) of:
Investments 191,831
Futures (293,363)
--------------
Net Realized And Unrealized Gain (Loss) on Investments
and Futures $ 238,050
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,100,081
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Statements June 30, 1997
Statement of Changes in Net Assets
For the six month period ended June 30, 1997 and year ended December 31, 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, 1997 For the Year Ended
(Unaudited) December 31, 1996
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 862,031 $ 1,404,545
Net realized gain (loss) on investment and futures transactions 339,582 659,566
Net unrealized appreciation (depreciation) on investments and futures (101,532) (440,184)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 1,100,081 $ 1,623,927
----------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (862,031) $ (1,404,545)
Distributions in excess of net investment income (70,303) (88,756)
Distributions from net realized gain on investment
and futures transactions 0 0
----------------------------------------
Total Dividends and Distributions $ (932,334) $ (1,493,301)
----------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 6,534,806 $ 10,721,943
Proceeds from reinvested dividends 621,298 948,882
Cost of shares redeemed (1,199,927) (1,053,866)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital
Share Transactions $ 5,956,177 $ 10,616,959
----------------------------------------
TOTAL INCREASE IN NET ASSETS $ 6,123,924 $ 10,747,585
NET ASSETS, BEGINNING OF PERIOD 34,802,974 24,055,389
----------------------------------------
NET ASSETS, END OF PERIOD $ 40,926,898 $ 34,802,974
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements June 30, 1997 (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. The Fund's
objective is to provide as high a level of current income exempt from federal
and Montana income taxes as is consistent with preservation of capital. The
Fund will seek to achieve this by investing primarily in a portfolio of
Montana tax-exempt securities.
Shares of the Fund are offered with no initial sales charge. Shares may be
subject to a contingent deferred sales charge, if those shares are redeemed
within five years of purchase.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment security valuation - Investments in securities traded on national
securities exchanges are valued at the last reported sales price at the close
of each business day. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith by the
portfolio management team. The Fund follows industry practice and records
security transactions on the trade date.
The Fund concentrates its investments in a single state. This concentration
may result in the Fund investing a relatively high percentage of its assets in
a limited number of issuers.
Federal and state income taxes - The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies, and to distribute all of its net investment income and
any net realized gain on investments, to its shareholders. Therefore, no
provision for income taxes is required. The Fund has available at June 30,
1997, a net capital loss carryforward totaling $113,123 , which may be used to
offset capital gains realized during subsequent years through December 31, 2003.
Distributions to shareholders -Dividends from net investment income, declared
daily and payable monthly, are reinvested in additional shares of the Fund at
net asset value or paid in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar year.
Investment income - Dividend income is recognized on the ex-dividend date and
interest income is recognized daily on an accrual basis. Premiums and
discounts on securities purchased are amortized using the effective interest
method over the life of the respective securities, unless callable, in which
case they are amortized to the earliest call date.
Futures contracts - The Fund may purchase and sell financial futures contracts
to hedge against changes in the values of tax-exempt municipal securities the
Fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of
a particular index or a certain amount of U.S. Government or municipal
securities at a set price on a future date. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount of cash or
securities equal to the minimum "initial margin" requirement of the futures
exchange on which the contract is traded. Subsequent payments
<PAGE>
("variation margin") are made or received by the Fund, dependent on the
fluctuations in the value of the underlying index. Daily fluctuations in value
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize,
for book purposes, a gain or loss equal to the difference between the value of
the futures contracts sold and the futures contracts to buy. Unrealized
appreciation (depreciation) related to open futures contracts is required to
be treated as realized gain (loss) for Federal income tax purposes.
Certain risks may arise upon entering into futures contracts. These risks
may include changes in the value of the futures contracts that may not
directly correlate with changes in the value of the underlying securities.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Note 3. CAPITAL SHARE TRANSACTIONS
As of June 30, 1997, there were 200,000,000 shares of $.001 par authorized;
4,047,529 and 3,456,719 were outstanding at June 30, 1997 and December 31,
1996, respectively.
Transactions in capital shares were as follows:
Shares
----------------------------------------
For The Six Months For the Year
Ended Ended
June 30, 1997 December 31, 1996
----------------------------------------
Shares sold 648,216 1,071,978
Shares issued on reinvestment
of dividends 61,609 94,940
Shares redeemed (119,015) (105,905)
----------------------------------------
Net increase 590,810 1,061,013
========================================
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 $112,833 of investment
advisory fees for the six months ended June 30, 1997. The Fund has a payable
to ND Money Management, Inc. of $20,251 at June 30,1997 for investment advisory
fees. Certain officers and directors of the Fund are also officers and
directors of the investment adviser.
<PAGE>
The Fund has adopted a distribution plan (the Plan), pursuant to Rule 12b-1
under the 1940 Act, whereby the Fund shall pay at the annual rate of 0.75% 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 $70,303 of 12b-1 fee expenses after partial waiver for the
six months ended June 30, 1997. The Fund has a payable to Capital of $12,657
at June 30,1997 for 12b-1 fees. In addition, the Fund has engaged Capital as
agent for the purchase of certain investment securities. For the six months
ended June 30, 1997 commissions earned by Capital totaled $17,375 and are
included in the cost basis of the securities acquired.
ND Resources, Inc., (the transfer agent), provides shareholder services for a
monthly fee equal to an annual rate of 0.16% of the Fund's first $10 million
of net assets, 0.13% of the Fund's net assets on the next $15 million, 0.11%
of the Fund's net assets on the next $15 million, 0.10% of the Fund's net
assets on the next $10 million, and 0.09% of the Fund's net assets in excess
of $50 million. The Fund has recognized $24,886 of transfer agency fees for
the six months ended June 30, 1997. ND Resources, Inc. also acts as the Fund's
accounting services agent for a monthly fee equal to the sum of a fixed fee
of $2,000, and a variable fee equal to 0.05% of the Fund's average daily net
assets on an annual basis for the Fund's first $50 million and at a lower rate
on the average daily net assets in excess of $50 million. The Fund has
recognized $21,414 of accounting service fees for the six months ended June
30, 1997.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $5,727,499, and $256,300,
respectively, for the six months ended June 30,1997.
Note 6. INVESTMENT IN SECURITIES
At June 30, 1997, the aggregate cost of securities for federal income tax
purposes was $41,372,372, and the net unrealized appreciation of investments
based on the cost was $919,700, which is comprised of $1,028,409 aggregate
gross unrealized appreciation and $108,709 aggregate gross unrealized
depreciation.
<PAGE>
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Since Inception
For the Six Months For The Year For The Year For The Year (August 12, 1993)
Ended Ended Ended Ended Through
June 30, 1997 December December December December
(Unaudited) 1996 1995 1994 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.07 $ 10.04 $ 9.39 $ 10.07 $ 10.00
----------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .23 $ .48 $ .51 $ .50 $ .19
Net realized and unrealized
gain (loss) on investment
and futures transactions .06 .06 .67 (.66) .09
----------------------------------------------------------------------------------------
Total From Investment
Operations $ .29 $ .54 $ 1.18 $ (.16) $ .28
----------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment
income $ (.23) $ (.48) $ (.51) $ (.50) $ (.19)
Distributions in excess of
net investment income (.02) (.03) (.02) (.02) (.01)
Distributions from realized
gains .00 .00 .00 .00 (.01)
-------------------------------------------------------------------------------------
Total Distributions $ (.25) $ (.51) $ (.53) $ (.52) $ (.21)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.11 $ 10.07 $ 10.04 $ 9.39 $ 10.07
=====================================================================================
Total Return 5.84%(A)(B) 5.52%(A) 12.85%(A) (1.70)%(A) 7.00%(A)(B)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $40,927 $34,803 $24,055 $11,956 $5,235
Ratio of net expenses (after
expense assumption) to average
net assets 1.14%(B)(C) 0.96%(C) 0.66%(C) 0.46%(C) 0.12%(B)(C)
Ratio of net investment income
to average net assets 4.58%(B) 4.76% 5.11% 5.06% 4.84%(B)
Portfolio turnover rate .71% 7.12% 7.39% 12.46% 26.05%
</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 $32,513, $98,321, $99,757, $87,483, and $21,944, respectively. 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%,
1.46% and 1.71%, respectively.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 41,372,372
<INVESTMENTS-AT-VALUE> 42,292,072
<RECEIVABLES> 502,277
<ASSETS-OTHER> 277,844
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,072,193
<PAYABLE-FOR-SECURITIES> 1,905,445
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 239,850
<TOTAL-LIABILITIES> 2,145,295
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 4,047,529
<SHARES-COMMON-PRIOR> 3,456,719
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (113,123)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 919,700
<NET-ASSETS> 40,926,898
<DIVIDEND-INCOME> 28,611
<INTEREST-INCOME> 1,049,248
<OTHER-INCOME> 0
<EXPENSES-NET> (215,828)
<NET-INVESTMENT-INCOME> 862,031
<REALIZED-GAINS-CURRENT> 339,582
<APPREC-INCREASE-CURRENT> (101,532)
<NET-CHANGE-FROM-OPS> 1,100,081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (862,031)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (70,303)
<NUMBER-OF-SHARES-SOLD> 648,216
<NUMBER-OF-SHARES-REDEEMED> 119,015
<SHARES-REINVESTED> 61,609
<NET-CHANGE-IN-ASSETS> 6,123,924
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112,833
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 248,341
<AVERAGE-NET-ASSETS> 37,615,302
<PER-SHARE-NAV-BEGIN> 10.07
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> (.23)
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> (.02)
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.14<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets, annualized.
</FN>
</TABLE>
