<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1995
<TABLE>
<CAPTION>
NAME OF ISSUER RATING
Percentages represent the market value of each MOODY'S/S&P COUPON PRINCIPAL MARKET
investment category to total net assets (UNAUDITED) RATE MATURITY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH CARE (7.19%)
SD Hlth & Ed. Fac. Auth. (Huron Regional Ctr.) Rev. NR/BBB- 7.250% 04/01/20 $100,000 $ 107,175
*SD Hlth. & Ed. Auth. (Cr. Childrens Hosp.) Rev. NR/A+ 7.100 07/01/09 260,000 263,900
----------
$ 371,075
----------
HOUSING (21.4%)
SD Hsing. Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.550% 05/01/14 $100,000 $ 105,966
SD Hsing. Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.600 05/01/17 195,000 207,137
SD Hsing Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.250 05/01/15 200,000 206,750
SD Hsing Dev. Auth. Rev A1/A+ 6.700 04/01/20 370,000 381,814
SD Hsing Dev. Auth. Homeownership Mtg. Aa1/AA+ 6.000 05/01/21 200,000 203,268
----------
$1,104,935
----------
REAL ESTATE (5.11%)
Minnehaha Cty C.O.P. Aa1/NR 6.000% 12/01/12 $100,000 $ 103,933
SD Hlth. & Ed. Facs. Auth. (U. Sioux Falls) Rev. NR/NR 7.100 04/01/15 150,000 159,919
----------
$ 263,852
----------
SCHOOLS (13.42%)
Dakota Valley (N. Sioux City) S. D. #61-8 G.O. NR/NR 6.000% 07/01/12 $100,000 $ 102,463
Hamlin SD #28-3 General Obligation NR/NR 6.100 12/15/15 250,000 259,645
Henry S.D. #14-2 GO School Building NR/NR 6.450 01/01/12 75,000 79,717
SD SD #17-2 (Mitchell) Capital Outlay COP's NR/A 6.200 01/15/13 60,000 63,534
SD (Winner) S.D. #59-2 Cap. Outlay C.O.P. NR/A 6.200 01/15/10 75,000 79,620
SD Northwestern S.D. #56-3 Cap. Outlay C.O.P. NR/A 6.800 01/15/13 100,000 108,034
----------
$ 693,013
----------
STATE EDUCATION(11.35%)
SD Hlth & Ed. Auth. (Vocational Educ.) Rev. A1/NR 6.700% 08/01/22 $150,000 $ 161,436
SD Student Loan Finance Corp. Rev. NR/A+ 6.750 08/01/10 400,000 424,336
----------
$ 585,772
----------
UTILITIES (5.22%)
Deadwood Sewer, Water & Improvement COP NR/NR 6.750% 11/01/03 $250,000 $ 269,432
----------
$ 269,432
----------
INSURED (28.79%)
*Heartland Consumers Power Elec. Rev. (Escrowed) Aaa/AAA 7.000% 01/01/16 $200,000 $ 228,158
Heartland Consumers Power Elec. Rev. (FSA) Aaa/AAA 6.000 01/01/09 200,000 211,224
Rapid City Area S.D. #51-4 Cap. Outlay (MBIA) Aaa/AAA 6.200 01/01/12 100,000 106,098
SD Hsing. Dev. Auth. Homeownership Mtg. (MBIA) Aaa/AAA 6.150 05/01/26 250,000 264,123
SD Hlth. & Ed. Facs. Auth. (Rapid City) Rev. (MBIA) Aaa/AAA 7.000 09/01/14 90,000 98,022
SD Hlth. & Ed. Auth. (St. Luke's) Rev. (MBIA) Aaa/AAA 6.625 07/01/11 250,000 272,348
SD Student Loan Program Rev. (MBIA) Aaa/AAA 7.625 08/01/06 75,000 83,950
SD State Lease Rev. COP (CGIC) Aaa/AAA 6.500 09/01/08 200,000 222,318
----------
$1,486,241
----------
SOUTH DAKOTA MUNICIPAL BONDS (COST: $4,524,233) $4,774,320
==========
SHORT-TERM SECURITIES (5.14%)
Goldman Sachs Institutional Liquid Assets Tax-Exempt Diversified Portfolio (Cost: $265,424) $ 265,424
==========
TOTAL INVESTMENTS IN SECURITIES (COST: $4,789,657) $5,039,744
==========
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1995
STATEMENT OF ASSETS AND LIABILITIES December 31, 1995
- -----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at $ 5,039,744
value (cost:$4,789,657)
Cash, custodian bank 16,448
Accrued dividends receivable 849
Accrued interest receivable 100,507
Receivable for fund shares sold 30,000
Deferred organization costs 10,269
------------
Total Assets $ 5,197,817
------------
LIABILITIES
Dividends payable $ 21,718
Accrued expenses 13,070
------------
Total Liabilities $ 34,788
------------
NET ASSETS $ 5,163,029
============
Net asset value per share, 497,017 $ 10.39
shares outstanding
============
STATEMENT OF OPERATIONS for the year
ended December 31, 1995
- ------------------------------------
INVESTMENT INCOME
Interest $ 235,670
Dividends 9,934
------------
Total Investment Income $ 245,604
------------
EXPENSES
Investment advisory fees $ 24,680
Distribution fees (12b-1) 10,283
Custodian fees 1,045
Transfer agent fees 6,754
Accounting service fees 1,715
Audit and legal fees 4,150
Insurance 415
Directors fees 275
Printing and postage 5,720
License, fees, and registrations 4,193
Amortization of organization costs 3,130
------------
Total expenses $ 62,360
Less expenses waived or absorbed
by the Fund's manager 37,053
------------
Total Net Expenses $ 25,307
------------
NET INVESTMENT INCOME $ 220,297
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FUTURES:
Net realized gain (loss) from
investments:
Investment transactions (1,554)
Futures transactions (107,345)
Net change in unrealized
appreciation (depreciation) of
investments 310,810
Net Realized And Unrealized
Gain (Loss) On Investments
and Futures $ 201,911
------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 422,208
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL STATEMENTS December 31, 1995
STATEMENT OF CHANGES IN NET ASSETS for the year ended December 31, 1995 and the
period since inception (April 5, 1994) through December 31, 1994
<TABLE>
<CAPTION>
For the period
since inception
(April 5, 1994)
For the Year Ended through December
12/31/95 31, 1994
------------------ ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 220,297 $ 81,593
Net realized gain (loss) on investment and futures transactions (108,899) 1,577
Net unrealized appreciation (depreciation) on investments 310,810 (60,723)
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Operations $ 422,208 $ 22,447
--------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (220,297) $ (81,593)
Distributions in excess of net investment income (9,859) (3,802)
Distributions from net realized gain on investment transactions 0 (2,691)
--------------------------------------
Total Dividends and Distributions $ (230,156) $ (88,086)
--------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $2,562,699 2,930,418
Proceeds from reinvested dividends 118,385 45,889
Cost of shares redeemed (599,679) (21,096)
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Capital Share Transactions $2,081,405 $2,955,211
--------------------------------------
TOTAL INCREASE IN NET ASSETS $2,273,457 $2,889,572
NET ASSETS, BEGINNING OF PERIOD 2,889,572 0
--------------------------------------
NET ASSETS, END OF PERIOD $5,163,029 $2,889,572
======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1995
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 Funds 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.
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 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.
<PAGE>
A futures contract is an agreement between two parties to buy or sell
units of a particular index or a certain amount of US 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, 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.
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 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. SHARE TRANSACTIONS
As of December 31, 1995, there were 200,000,000 shares of $.001 par
value authorized; 497,017 and 292,912 shares were outstanding at
December 31, 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
inception (April 5, inception (April 5,
For the Year Ended 1994) through For the Year Ended 1994) through
December 31, 1995 December 31, 1994 December 31, 1995 December 31, 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 251,922 290,440 $2,562,699 $2,930,418
Shares issued on
reinvestment of dividends 11,653 4,548 118,385 45,889
Shares redeemed (59,470) (2,076) (599,679) (21,096)
--------------------------------------------------------------------------------------
Net increase 204,105 292,912 $2,081,405 $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 December 31, 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 $15,024
of investment advisory fees for the period ended December 31, 1995. The
Fund has a payable
<PAGE>
to ND Money Management, Inc. of $1,801 at December 31, 1995 for
investment advisory 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 $10,283 of 12b-1 fee expenses for the
period ended December 31, 1995. The Fund has a payable to ND Capital,
Inc. of $1,000 at December 31, 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 December 31, 1995 amounted to $37,053.The
Fund has a payable to ND Holdings, Inc. of $10,269 at December 31, 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 $2,015,558 and
$25,000, respectively, for the year ended December 31, 1995.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1995, the aggregate cost of securities for federal
income tax purposes was $4,789,657 and the net unrealized appreciation
of investments based on the cost was $250,087, which is comprised of
$250,087 aggregate gross unrealized appreciation and $0 aggregate gross
unrealized depreciation.
<PAGE>
FINANCIAL HIGHLIGHTS Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period since
For the Year Ended inception (April 5, 1994)
December 31, 1995 through December 31, 1994
-----------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.86 $10.00
-----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income $ .55 $ .39
Net realized and unrealized gain (loss) on investments
and futures transactions .55 (.11)
-----------------------------------------------
Total From Investment Operations $ 1.10 $ .28
-----------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income $ (.55) $ (.39)
Distributions in excess of net investment income (.02) (.02)
From net realized gain on investment transactions 0 (.01)
-----------------------------------------------
Total Distributions $ (.57) $ (.42)
-----------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.39 $ 9.86
===============================================
TOTAL RETURN 11.47% (C) 3.72% (A)(C)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $5,163 $2,890
Ratio of net expenses (after expense assumption) to
average net assets .61% (B) .46% (A)(B)
Ratio of net investment income to average net assets 5.35% 5.62% (A)
Portfolio turnover rate .66% 31.32%
</TABLE>
(A) Ratio was annualized.
(B) During the year ended December 31, 1995 and the period ended December 31,
1994 ND Holdings, Inc. assumed expenses of $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 1.51% and 2.15%.
(C) Excludes contingent deferred sales charge of 4%.
[GRAPH APPEARS HERE]
Comparison of change in value of $10,000 investment in
South Dakota Tax-Free Fund, Inc. and Lehman Municipal Bond Index (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
South Dakota Tax-Free Fund South Dakota Tax-Free Fund Lehman Municipal Bond
without CDSC with max applicable CDSC Index
- ---------------------------------------------------------------------------------------
<S> <C> <C>
4/6/1994 $10,000 $10,000 $10,000
- ---------------------------------------------------------------------------------------
1995 $10,280 $9,885 $9,882
- ---------------------------------------------------------------------------------------
1996 $11,459 $11,059 $12,183
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
South Dakota Tax Free Fund, Inc.
We have audited the accompanying statement of assets and liabilities of South
Dakota Tax Free Fund, Inc. (the Fund), including the schedule of investments, as
of December 31, 1995, the related statement of operations for the year then
ended, the statement of changes in net assets, and the financial highlights for
the year ended December 31, 1995 and for the period since inception (April 5,
1994) through December 31, 1994. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1995, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of South
Dakota Tax Free Fund, Inc. as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets, and the
financial highlights for each of the respective periods stated in the first
paragraph, in conformity with generally accepted accounting principles.
BRADY, MARTZ & ASSOCIATES, P.C.
February 12, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 4789657
<INVESTMENTS-AT-VALUE> 5039744
<RECEIVABLES> 131356
<ASSETS-OTHER> 26717
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5197817
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34788
<TOTAL-LIABILITIES> 34788
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 497017
<SHARES-COMMON-PRIOR> 292912
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (110013)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 250087
<NET-ASSETS> 5163029
<DIVIDEND-INCOME> 9934
<INTEREST-INCOME> 235670
<OTHER-INCOME> 0
<EXPENSES-NET> 25307
<NET-INVESTMENT-INCOME> 220297
<REALIZED-GAINS-CURRENT> (108899)
<APPREC-INCREASE-CURRENT> 310810
<NET-CHANGE-FROM-OPS> 422208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 220297
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 9859
<NUMBER-OF-SHARES-SOLD> 251922
<NUMBER-OF-SHARES-REDEEMED> 59470
<SHARES-REINVESTED> 11653
<NET-CHANGE-IN-ASSETS> 2273457
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24680
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 62360
<AVERAGE-NET-ASSETS> 4118867
<PER-SHARE-NAV-BEGIN> 9.86
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> .55
<PER-SHARE-DIVIDEND> .55
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> .02
<PER-SHARE-NAV-END> 10.39
<EXPENSE-RATIO> .61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
