<PAGE>
DEAR SHAREHOLDER:
We are pleased to enclose the semi-annual report on the operations of South
Dakota 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 $9.86 to $10.04. 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 SD 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>
SCHEDULE OF INVESTMENTS June 30, 1995
<TABLE>
<CAPTION>
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>
SOUTH DAKOTA MUNICIPAL BONDS (89.61%)
Dakota Valley (N. Sioux City) S. D.
#61-8 G.O. NR/NR 6.000% 07/01/12 $100,000 $ 99,133
Deadwood Sewer, Water & Improvement COP NR/NR 6.750 11/01/03 250,000 255,520
Henry S.D. #14-2 GO School Building NR/NR 6.450 01/01/12 75,000 78,522
*Heartland Consumers Power Elec. Rev.
(Escrowed) Aaa/AAA 7.000 01/01/16 200,000 222,494
Heartland Consumers Power Elec. Rev. (FSA) Aaa/AAA 6.000 01/01/09 200,000 209,254
Minnehaha Cty C.O.P. Aa1/NR 6.000 12/01/12 100,000 98,982
Rapid City Area S.D. #51-4 Cap. Outlay
(MBIA) Aaa/AAA 6.200 01/01/12 100,000 101,984
SD (Winner) S.D. #59-2 Cap. Outlay
C.O.P. NR/A 6.200 01/15/10 75,000 75,882
SD Northwestern S.D. #56-3 Cap. Outlay
C.O.P. NR/A 6.800 01/15/13 100,000 104,307
SD State Lease Rev. COP (CGIC) Aaa/AAA 6.500 09/01/08 200,000 211,842
SD Student Loan Finance Corp. Rev. NR/A+ 6.750 08/01/10 400,000 417,644
SD Student Loan Program Rev. (MBIA) Aaa/AAA 7.625 08/01/06 100,000 107,850
SD (Mitchell) S.D. #17-2 Cap. Outlay
Lease COP NR/A 6.200 01/15/13 60,000 60,381
SD Hlth. & Ed. Facs. Auth. (Rapid City)
Rev. (MBIA) Aaa/AAA 7.000 09/01/14 90,000 97,676
SD Hlth & Ed. Auth. (Vocational Educ.)
Rev. A1/NR 6.700 08/01/22 150,000 156,813
SD Hlth & Ed. Fac. Auth. (Huron
Regional Ctr.) Rev. NR/BBB- 7.250 04/01/20 100,000 104,660
*SD Hlth. & Ed. Auth. (Cr. Childrens
Hosp.) Rev. NR/NR 7.100 07/01/09 260,000 262,600
SD Hlth. & Ed. Auth. (St. Luke's) Rev.
(MBIA) Aaa/AAA 6.625 07/01/11 250,000 265,535
SD Hlth. & Ed. Facs. Auth. (U. Sioux
Falls) Rev. NR/NR 7.100 04/01/15 150,000 152,703
SD Hsing. Dev. Auth. Homeownership Mtg.
(MBIA) Aaa/AAA 6.150 05/01/26 250,000 244,900
SD Hsing Dev. Authority Rev. A1/A+ 6.700 04/01/20 320,000 328,547
SD Hsing. Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.550 05/01/14 100,000 102,352
SD Hsing. Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.600 05/01/17 195,000 199,703
----------
SOUTH DAKOTA MUNICIPAL BONDS (COST: $3,860,536) $3,959,284
----------
SHORT-TERM SECURITIES (10.53%)
Goldman Sachs Institutional Liquid Assets Tax-Exempt Diversified Portfolio $ 138,253
September U.S. Treasury Bond Put Options 28,219
Federated Intermediate Muni Trust #078 298,861
----------
TOTAL SHORT-TERM SECURITIES (COST: $464,310) $ 465,333
----------
TOTAL INVESTMENTS IN SECURITIES (COST: $4,324,846) $4,424,617
==========
</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)
--------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at $ 4,424,617
value (cost: $4,324,846)
Cash, custodian bank 12,000
Accrued dividends receivable 1,106
Accrued interest receivable 91,326
Receivable for fund shares sold 11,000
Deferred organization costs 11,834
------------
Total Assets $ 4,551,883
------------
LIABILITIES
Dividends payable $ 19,319
Accrued expenses 13,998
Securities payable 100,067
------------
Total Liabilities $ 133,384
------------
NET ASSETS $ 4,418,499
============
Net asset value per share, 440,170 $ 10.04
shares outstanding
============
STATEMENT OF OPERATIONS for the six months ended June 30, 1995 (Unaudited)
--------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 103,646
Dividends 4,282
------------
Total Investment Income $ 107,928
------------
EXPENSES
Distribution fees (12b-1) $ 4,472
Management fees 10,732
Custodian fees 393
Transfer agent fees 2,949
Audit and legal fees 3,575
Insurance 258
Directors fees 150
Printing and postage 4,047
License, fees, and registrations 2,344
Amortization of organization costs 1,579
------------
Total expenses $ 30,499
Less expenses waived or absorbed
by the Fund's manager 20,354
------------
Total Net Expenses $ 10,145
------------
NET INVESTMENT INCOME $ 97,783
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES, AND OPTIONS:
Net realized gain (loss) from:
Investment transactions $ (242)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Futures transactions (122,680)
Net change in unrealized
appreciation (depreciation) of
investments 160,495
------------
Net Realized And Unrealized
Gain (Loss) On Investments,
Futures, And Options $ 37,573
------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 135,356
============
</TABLE>
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
period since inception (April 5, 1994) through December 31, 1994
<TABLE>
<CAPTION>
For the period
since inception
For the Six Months (April 5, 1994)
Ended 6/30/95 through December 31,
(Unaudited) 1994
------------------ --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 97,783 $ 81,593
Net realized gain (loss) on investments, futures, and option transactions (122,922) 1,577
Net unrealized appreciation (depreciation) on investments 160,495 (60,723)
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Operations $ 135,356 $ 22,447
--------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (97,783) $ (81,593)
Distributions in excess of net investment income (4,216) (3,802)
Distributions from net realized gain on investments, futures,
and option transactions 0 (2,691)
--------------------------------------
Total Dividends and Distributions $ (101,999) $ (88,086)
--------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $1,625,413 2,930,418
Proceeds from reinvested dividends 55,116 45,889
Cost of shares redeemed (184,959) (21,096)
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital
Share Transactions $1,495,570 $2,955,211
--------------------------------------
TOTAL INCREASE IN NET ASSETS $1,528,927 $2,889,572
NET ASSETS, BEGINNING OF PERIOD 2,889,572 0
--------------------------------------
NET ASSETS, END OF PERIOD $4,418,499 $2,889,572
======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS June 30, 1995 (Unaudited)
Note 1. ORGANIZATION
South Dakota 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 1, 1993 and commenced operations on April 5,
1994.
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 the
initial registration and public offering of the shares of the Fund
amounted to $15,687. 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.
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 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 fund. Upon
<PAGE>
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 value
authorized; 440,170 and 292,912 shares were outstanding at June 30, 1995
and December 31, 1994, respectively. Transactions in capital shares were
as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
For the period from For the period from
For the Six inception (April 5, inception (April 5,
Months Ended 1994) through For the Six Months 1994) through
June 30, 1995 December 31, 1994 Ended June 30, 1995 December 31, 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 208,410 290,440 $1,625,413 $2,930,418
Shares issued on
reinvestment of dividends 5,458 4,548 55,116 45,889
Shares redeemed (66,610) (2,076) (184,959) (21,096)
-------------------------------------------------------------------------------
Net increase 147,258 292,912 $1,495,570 $2,955,211
===============================================================================
</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 $10,732 of
investment advisory and management fees for the period ended June 30,
1995. The Fund has a payable to ND Money Management, Inc. of $1,262 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 $4,472 of 12b-1 fee expenses for the
period ended June 30, 1995. The Fund has a payable to ND Capital, Inc.
of $902 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 $13,716. The Fund
has a payable to ND Holdings, Inc. of
<PAGE>
$11,834 at June 30, 1995 for the unamortized cost incurred in
connection with the initial registration and public offering of the
shares of the Fund.
In anticipation of the Fund's initial offering, ND Capital, Inc.
purchased South Dakota Municipal Bonds. The bonds were subsequently
purchased by the Fund for $287,550.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment
securities (excluding short-term securities) aggregated $1,322,117 and
$0, 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 $4,324,846, and the net unrealized appreciation of
investments based on the cost was $99,770, which is comprised of
$104,853 aggregate gross unrealized appreciation and $5,083 aggregate
gross unrealized depreciation.
Note 8. MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS
A special meeting of the shareholders of South Dakota Tax-Free Fund,
Inc. was held on March 31, 1995 and reconvened on April 7, 1995. A
quorum was declared present on April 7, 1995 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 109,663.594 2,266.010 931.373 0
Orlin W. Backes 110,594.967 2,266.010 0 0
Arthur A. Link 110,594.967 2,266.010 0 0
Peter A. Quist 110,594.967 2,266.010 0 0
Robert E. Walstad 110,594.967 2,266.010 0 0
</TABLE>
In addition, Brady, Martz & Associates P.C. was ratified as the Fund's
independent public accountant with 110,594.821 votes cast for, 0 votes
cast against, and 2,266.156 abstentions.
<PAGE>
FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period indicated
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months For the period since
Ended June 30, 1995 inception (April 5, 1994)
(unaudited) through December 31, 1994
-----------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.86 $10.00
-----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income $ .28 $ .39
Net realized and unrealized gain (loss) on investments,
futures and option transactions .19 (.11)
-----------------------------------------------------
Total From Investment Operations $ .47 $ .28
-----------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income $ (.28) $ (.39)
Distributions in excess of net investment income (.01) (.02)
From net realized gain on investment
and futures transactions 0 (.01)
-----------------------------------------------------
Total Distributions $ (.29) $ (.42)
-----------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.04 $ 9.86
=====================================================
TOTAL RETURN 9.57% (A)(C) 3.72% (A)(C)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $4,425 $2,890
Ratio of net expenses (after expense
assumption) to average net assets .57% (A)(B) .46% (A)(B)
Ratio of net investment income to 5.47% (A) 5.62% (A)
average net assets
Portfolio turnover rate 0.00% (D) 31.32%
</TABLE>
(A) Ratio was annualized.
(B) During the six month period ended June 30, 1995 and the period ended
December 31, 1994 ND Holdings, Inc. assumed expenses of $20,354 and
$24,509.
If the expenses had not been assumed, the annualized ratio of total
expenses to average net assets would have been 1.71% and 2.15%.
(C) Excludes contingent deferred sales charge of 4%.
(D) There were no securities sold during the period.
<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> 4324846
<INVESTMENTS-AT-VALUE> 4424617
<RECEIVABLES> 103432
<ASSETS-OTHER> 23834
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4551883
<PAYABLE-FOR-SECURITIES> 100067
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33317
<TOTAL-LIABILITIES> 133384
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 440170
<SHARES-COMMON-PRIOR> 292912
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (124036)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 99771
<NET-ASSETS> 4418499
<DIVIDEND-INCOME> 4282
<INTEREST-INCOME> 103646
<OTHER-INCOME> 0
<EXPENSES-NET> 10145
<NET-INVESTMENT-INCOME> 97783
<REALIZED-GAINS-CURRENT> (122,922)
<APPREC-INCREASE-CURRENT> 160495
<NET-CHANGE-FROM-OPS> 135356
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 97783
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 4216
<NUMBER-OF-SHARES-SOLD> 208410
<NUMBER-OF-SHARES-REDEEMED> 66610
<SHARES-REINVESTED> 5458
<NET-CHANGE-IN-ASSETS> 1528927
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10732
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 30499
<AVERAGE-NET-ASSETS> 3572912
<PER-SHARE-NAV-BEGIN> 9.86
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> .19
<PER-SHARE-DIVIDEND> (.28)
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.04
<EXPENSE-RATIO> .57<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> Ratio of net expenses to average net assets, annualized.
</FN>
</TABLE>
