<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
NAME OF ISSUER
Percentages represent the market value of each investment RATING COUPON PRINCIPAL MARKET
category to total net assets MOODY'S/S&P RATE MATURITY AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH DAKOTA MUNICIPAL BONDS (96.5%)
HEALTH CARE (6.5%)
SD Hlth & Ed. Fac. Auth. (Huron Regional Ctr.) Rev. NR/BBB- 7.250% 04/01/20 $100,000 $ 104,967
*SD Hlth. & Ed. Auth. (Cr. Children's Hosp.) Rev. NR/A+ 7.100 07/01/09 260,000 263,900
----------
$ 368,867
----------
HOUSING (19.0%)
SD Hsing. Dev. Auth. Home Ownership Mtg. Aa1/AA+ 6.550% 05/01/14 $100,000 $ 104,152
SD Hsing. Dev. Auth. Home Ownership Mtg. Aa1/AA+ 6.600 05/01/17 195,000 203,260
SD Hsing Dev. Auth. Home Ownership Mtg. Aa1/AA+ 6.250 05/01/15 200,000 203,264
SD Hsing Dev. Auth. Rev. A1/A+ 6.700 04/01/20 370,000 374,651
SD Hsing Dev. Auth. Home Ownership Mtg. Aa1/AA+ 6.000 05/01/21 200,000 199,252
----------
$1,084,579
----------
REAL ESTATE (4.5%)
Minnehaha Cty C.O.P. Aa1/NR 6.000% 12/01/12 $100,000 $ 101,566
SD Hlth. & Ed. Facs. Auth. (U. Sioux Falls) Rev. NR/NR 7.100 04/01/15 150,000 157,187
----------
$ 258,753
----------
SCHOOLS (17.4%)
Dakota Valley (N. Sioux City) S. D. #61-8 G.O. NR/NR 6.000% 07/01/12 $100,000 $ 100,402
Dakota Valley (N. Sioux City) SD #61-8 G.O. NR/NR 5.650 07/01/14 200,000 195,104
Hamlin SD #28-3 General Obligation NR/NR 6.100 12/15/15 250,000 252,668
Hamlin SD #28-3 Capital Outlay Ctfs. NR/NR 5.700 10/01/15 120,000 117,499
Henry S.D. #14-2 GO School Building NR/NR 6.450 01/01/12 75,000 78,332
SD (Mitchell) S.D. #17-2 Capital Outlay C.O.P. NR/A 6.200 01/15/13 60,000 62,086
SD (Winner) S.D. #59-2 Cap. Outlay C.O.P. NR/A 6.200 01/15/10 75,000 78,450
SD Northwestern S.D. #56-3 Cap. Outlay C.O.P. NR/A 6.800 01/15/13 100,000 106,060
----------
$ 990,601
----------
STATE EDUCATION (11.8%)
SD Hlth & Ed. Auth. (Vocational Educ.) Rev. A1/NR 6.700% 08/01/22 $150,000 $ 157,407
SD Student Loan Finance Corp. Rev. NR/A+ 6.750 08/01/10 400,000 418,312
SD Student Loan Finance Corp. Rev. A/NR 6.550 08/01/20 100,000 99,858
----------
$ 675,577
----------
UTILITIES (4.7%)
Deadwood Sewer, Water & Improvement C.O.P. NR/NR 6.750% 11/01/03 $250,000 $ 266,957
----------
266,957
----------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
INSURED (32.6%)
Grant County (Northwestern Public Svc.) PCR (MBIA) Aaa/AAA 5.900% 06/01/23 $400,000 $ 394,180
*Heartland Consumers Power Elec. Rev. (Escrowed) Aaa/AAA 7.000 01/01/16 200,000 226,242
Heartland Consumers Power Elec. Rev. (FSA) Aaa/AAA 6.000 01/01/09 200,000 209,040
Rapid City Area S.D. #51-4 Cap. Outlay (MBIA) Aaa/AAA 6.200 01/01/12 100,000 104,100
SD Hsing. Dev. Auth. Home Ownership Mtg. (MBIA) Aaa/AAA 6.150 05/01/26 250,000 257,685
SD Hlth. & Ed. Facs. Auth. (Rapid City) Rev. (MBIA) Aaa/AAA 7.000 09/01/14 90,000 97,272
SD Hlth. & Ed. Auth. (St. Luke's) Rev. (MBIA) Aaa/AAA 6.625 07/01/11 250,000 267,608
SD Student Loan Program Rev. (MBIA) Aaa/AAA 7.625 08/01/06 75,000 82,642
SD State Lease Rev. COP (CGIC) Aaa/AAA 6.500 09/01/08 200,000 218,700
----------
$1,857,469
----------
SOUTH DAKOTA MUNICIPAL BONDS (COST: $5,346,508) $5,502,803
----------
SHORT-TERM SECURITIES (2.2%)
Goldman Sachs Institutional Liquid Assets Tax-Exempt Diversified Portfolio (COST: $123,982) $ 123,982
----------
TOTAL INVESTMENTS IN SECURITIES (COST: $5,470,490) $5,626,785
==========
</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, 1996 (Unaudited)
STATEMENT OF ASSETS AND LIABILITIES June 30, 1996 (Unaudited)
- --------------------------------------------------------------
<TABLE>
ASSETS
<S> <C>
Investments in securities, at value (cost:$5,470,490) $5,626,785
Cash 716
Accrued dividends receivable 275
Accrued interest receivable 113,462
----------
Total Assets $5,741,238
----------
LIABILITIES
Dividends payable $ 23,906
Accrued expenses 14,495
----------
Total Liabilities $ 38,401
----------
NET ASSETS $5,702,837
==========
Net asset value per share, 548,473 shares outstanding $ 10.40
==========
STATEMENT OF OPERATIONS for the six months ended June 30, 1996 (Unaudited)
- ---------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 160,226
Dividends 4,612
----------
Total Investment Income $ 164,838
----------
EXPENSES
Investment advisory fees $ 16,623
Distribution fees (12b-1) 8,312
Custodian fees 238
Transfer agent fees 4,480
Accounting service fees 13,395
Audit and legal fees 4,860
Insurance 3,532
Directors fees 150
Printing and postage 2,274
License, fees, and registrations 2,106
Amortization of organization costs 877
----------
Total expenses $ 56,847
Less expenses waived or absorbed by the Fund's manager 33,296
----------
Total Net Expenses $ 23,551
----------
NET INVESTMENT INCOME $ 141,287
----------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FUTURES:
Net realized gain (loss) from investments:
Investment transactions (7,856)
Futures transactions 114,365
Net change in unrealized appreciation (depreciation) of
investments (93,792)
----------
Net Realized And Unrealized Gain (Loss) On Investments
and Futures $ 12,717
----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 154,004
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS June 30, 1996
STATEMENT OF CHANGES IN NET ASSETS for the six months ended June 30, 1996 and
year ended December 31,1995
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1996 For the Year Ended
(Unaudited) December 31, 1995
-----------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 141,287 $ 220,297
Net realized gain (loss) on investment and futures transactions 106,509 (108,899)
Net unrealized appreciation (depreciation) on investments (93,792) 310,810
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Operations $ 154,004 $ 422,208
-----------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (141,287) $ (220,297)
Distributions in excess of net investment income (8,311) (9,859)
Distributions from net realized gain on investment transactions 0 0
-----------------------------------
Total Dividends and Distributions $ (149,598) $ (230,156)
-----------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 718,763 $2,562,699
Proceeds from reinvested dividends 80,853 118,385
Cost of shares redeemed (264,214) (599,679)
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Capital Share Transactions $ 535,402 $2,081,405
-----------------------------------
TOTAL INCREASE IN NET ASSETS $ 539,808 $2,273,457
NET ASSETS, BEGINNING OF PERIOD 5,163,029 2,889,572
-----------------------------------
NET ASSETS, END OF PERIOD $5,702,837 $5,163,029
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS June 30, 1996 (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. The Fund's objective is to provide as high a level of current
income exempt from federal and any future South Dakota income taxes as
is consistent with preservation of capital. The Fund will seek to
achieve this by investing primarily in a portfolio of South Dakota tax-
exempt securities.
Shares of the Fund are offered with no initial sales charge. Shares may
be subject to a contingent deferred sales charge, if those shares are
redeemed within five years of purchase.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITY VALUATION - 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.
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.
FUTURES CONTRACTS AND OPTIONS - The Fund may purchase and sell financial
futures and option contracts to hedge against changes in the values of
tax-exempt municipal securities the Fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell
units of a particular index or a certain amount of U.S. Government or
municipal securities at a set price on a future date. Upon entering into
a futures contract, the Fund is required to deposit with a broker an
amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded.
Subsequent payments ("variation margin") are made or received by the
Fund,
<PAGE>
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.
Daily fluctuations in the value of the options are recorded for
financial reporting purposes as unrealized gains or losses by the 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.
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, 1996, there were 200,000,000 shares of $.001 par value
authorized; 548,473 and 497,017 shares were outstanding at June 30, 1996
and December 31, 1995, respectively. Transactions in capital shares were
as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
For the Six For the Year For the Six For The Year
Months Ended Ended Months Ended Ended
June 30, 1996 December 31, 1995 June 30, 1996 December 31, 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 69,406 251,922 $718,763 $2,562,699
Shares issued on reinvestment of 7,820 11,653 80,853 118,385
dividends
Shares redeemed (25,770) (59,470) (264,214) (599,679)
----------------------------------------------------------------------------------------------
Net increase 51,456 204,105 $535,402 $2,081,405
==============================================================================================
</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.
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 $15,239 of
investment advisory fees for the six months ended June 30, 1996. The
Fund has a payable to ND Money Management, Inc. of $2,638 at June 30,
1996 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 $8,312 of 12b-1 fee expenses for the six
months ended June 30, 1996. The Fund has a payable to ND Capital, Inc.
of $1,319 at June 30, 1996 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 six months ended June 30, 1996 amounted to $33,296.
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
$4,480 of transfer agency fees for the six months ended June 30, 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 $13,395 of accounting service fees for the six months ended
June 30, 1996.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases of investment securities (excluding short-term
securities) aggregated $831,207, with no sales for the six months ended
June 30, 1996.
Note 6. INVESTMENT IN SECURITIES
At June 30, 1996, the aggregate cost of securities for federal income
tax purposes was $5,470,490 and the net unrealized appreciation of
investments based on the cost was $156,295, which is comprised of
$174,093 aggregate gross unrealized appreciation and $17,798 aggregate
gross unrealized depreciation.
<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 (April 5, 1994)
June 30, 1996 Ended Through
(Unaudited) December 31, 1995 December 31, 1994
-------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.39 $ 9.86 $10.00
-------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income $ .26 $ .55 $ .39
Net realized and unrealized gain (loss) on
investments and futures transactions .03 .55 (.11)
-------------------------------------------------------
Total From Investment Operations $ .29 $ 1.10 $ .28
-------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income $ (.26) $ (.55) $ (.39)
Distributions in excess of net investment income (.02) (.02) (.02)
From net realized gain on investment transactions .00 .00 (.01)
-------------------------------------------------------
Total Distributions $ (.28) $ (.57) $ (.42)
-------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.40 $10.39 $ 9.86
=======================================================
TOTAL RETURN 5.66% (A)(C) 11.47% (A)(C) 3.72% (A)(C)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $5,703 $5,163 $2,890
Ratio of net expenses (after expense assumption) to
average net assets .85% (A)(B) .61% (B) .46% (A)(B)
Ratio of net investment income to average net
assets 5.10% 5.35% 5.62% (A)
Portfolio turnover rate .00% .66% 31.32%
</TABLE>
(A) Ratio was annualized.
(B) During the six months ended June 30, 1996, the year ended December 31, 1995
and the period ended December 31, 1994, ND Holdings, Inc. assumed expenses
of $33,296, $37,053, and $24,509. If the expenses had not been assumed, the
annualized ratio of total expenses to average net assets would have been
2.05%, 1.51% and 2.15%.
(C) Excludes contingent deferred sales charge of 4%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5470490
<INVESTMENTS-AT-VALUE> 5626785
<RECEIVABLES> 113737
<ASSETS-OTHER> 716
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5741238
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38401
<TOTAL-LIABILITIES> 38401
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 548473
<SHARES-COMMON-PRIOR> 497017
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3504)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 156295
<NET-ASSETS> 5702837
<DIVIDEND-INCOME> 4612
<INTEREST-INCOME> 160226
<OTHER-INCOME> 0
<EXPENSES-NET> 23551
<NET-INVESTMENT-INCOME> 141287
<REALIZED-GAINS-CURRENT> 106509
<APPREC-INCREASE-CURRENT> (93792)
<NET-CHANGE-FROM-OPS> 154004
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 141287
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 8311
<NUMBER-OF-SHARES-SOLD> 69406
<NUMBER-OF-SHARES-REDEEMED> 25770
<SHARES-REINVESTED> 7820
<NET-CHANGE-IN-ASSETS> 539808
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16623
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56847
<AVERAGE-NET-ASSETS> 5537828
<PER-SHARE-NAV-BEGIN> 10.39
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> .26
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> .02
<PER-SHARE-NAV-END> 10.40
<EXPENSE-RATIO> .85<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets, annualized.
</FN>
</TABLE>
