Filing by Rule 497(c) of the 1933 Act
File No. 33-71144
May 1, 2000
INTEGRITY
Mutual Funds
[Logo]
MONTANA TAX-FREE FUND, INC.
ND TAX-FREE FUND, INC.
SOUTH DAKOTA TAX-FREE FUND, INC.
PROSPECTUS
This prospectus is intended to provide important information to help you
evaluate whether one of the Integrity Mutual Funds listed above may be right
for you. Please read it carefully before investing and keep it for future
reference. To learn more about how the Integrity Mutual Funds can help you
achieve your financial goals, call us at (800) 276-1262.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Montana Tax-Free Fund, Inc. 3
Fund Summary 3
How the Fund Has Performed 4
What Are the Fund's Expenses? 5
ND Tax-Free Fund, Inc. 7
Fund Summary 7
How the Fund Has Performed 8
What Are the Fund's Expenses? 9
South Dakota Tax-Free Fund, Inc. 11
Fund Summary 11
How the Fund Has Performed 12
What Are the Fund's Expenses? 13
Fund Management 15
Principal Investment Strategies 15
Non-Principal Investment Strategies 17
Principal Risk Factors 18
The Shares We Offer 20
How to Buy Shares 21
Systematic Investing-the Monthomatic Investment Plan 21
Special Services 21
How to Sell Shares 22
Systematic Withdrawal 23
Distributions and Taxes 23
Distribution and Service Plans 24
Net Asset Value 24
Fund Service Providers 25
Shareholder Inquiries 25
Financial Highlights 26
Appendix - Additional State Information A-1
MONTANA TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks to provide as high a level of current income exempt from
federal and Montana income taxes as is consistent with preservation of
capital.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily Montana municipal bonds that are rated investment
grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent ratings
agencies. The fund may buy non-rated municipal bonds if the fund's investment
adviser judges them to be of comparable quality. The fund is non-diversified
and may invest more of its assets in a single issuer than a diversified fund.
The expected average dollar weighted maturity of the fund's portfolio is
between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding municipal bonds that offer the potential for above-average
return. To assess a bond's value, the adviser considers the bond's yield,
price, credit quality and future prospects.
The fund may also invest in futures and options on futures for hedging
purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
You should be aware that loss of money is a risk of investing. The
principal risks of investing in the fund are interest rate and credit risk.
Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. The longer the average maturity of a fund's portfolio, the
greater its interest rate risk. Credit risk is the risk that an issuer of a
municipal bond will be unable to make interest and principal payments. In
general, lower rated bonds carry greater credit risk. These may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities.
Because the fund is non-diversified and invests primarily in Montana bonds,
the fund is particularly susceptible to any economic, political or regulatory
developments affecting a particular issuer or issuers of Montana bonds in
which the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or
college funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-3-
MONTANA TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing in
the fund by showing performance changes year to year and how average annual
returns over one, five-year and the life of the fund compare with those of a
broad measure of market performance. Past performance is not an indication
of future performance.
ANNUAL TOTAL RETURNS FOR CLASS B (AS OF 12/31 EACH YEAR)
[bar chart]
1994 -1.70%
1995 12.85%
1996 5.52%
1997 5.96%
1998 3.66%
1999 -2.32%
For the periods shown, the highest and lowest quarterly returns were 6.92%
and -3.59% for the quarters ending 3/31/95 and 12/30/94. The bar chart and
highest/lowest quarterly returns do not reflect sales charges, which would
reduce returns, while the average annual return table does.
Average Annual Total Returns
for the Periods Ending
December 31, 1999
1 Year 5 Year Inception1
Class B (6.04)% 5.02% 4.06%
LB Market2
Benchmark (2.07)% 6.91% 5.08%
[FN]
1 The inception period for Class B shares is from August 12, 1993 to
December 31, 1999. Class A shares were newly offered on January 7, 2000
and therefore do not have a performance history for the periods
indicated above.
2 LB Market Benchmark returns reflect the performance of the Lehman
Brothers Municipal Bond Index, an unmanaged index comprised of a broad
range of investment grade municipal bonds.
</FN>
-4-
MONTANA TAX-FREE FUND, INC.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment) 1
SHARE CLASS CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) .........................................4.25%2.........NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price or redemption proceeds)..........NONE..........4.00%3
Maximum Sales Charge (Load) Imposed on Reinvested Dividends...................NONE..........NONE
Redemption Fees...............................................................NONE..........NONE
Exchange Fee..................................................................NONE..........NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Management Fees..............................................................0.60%..........0.60%
Distribution and Service (12b-1) Fees........................................0.25%..........0.75%4
Other Expenses...............................................................0.28%5........ 0.28%
----- -----
Total Annual Fund Operating Expenses6........................................1.13%..........1.63%
</TABLE>
[FN]
1 Authorized Dealers and other firms may charge additional fees for
shareholder transactions or for advisory services. Please see their
materials for details.
2 Reduced Class A sales charges apply to purchases of $50,000 or more.
See "Class A Shares" under "The Shares We Offer."
3 Class B shares redeemed within five years of purchase are subject to a
contingent deferred sales charge ("CDSC") of 4% during the first and
second years, 3% during the third year, 2% during the fourth year, and
1% during the fifth year. Purchases of $1 million or more are subject
to a reduced CDSC if redeemed within 1 year of purchase. See "Class B
Shares" under "The Shares We Offer."
4 Because the fund pays 12b-1 fees, long-term Class B shareholders may pay
more in distribution expenses than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5 Based on historical expenses of the fund for Class B shares for the
fiscal year ended December 31, 1999. Actual expenses of Class A shares
may be higher or lower.
6 The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2001 in order to prevent Total Annual Fund
Operating Expenses (excluding any extraordinary expenses) from exceeding
1.30% of the average daily net asset value of Class B shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses for Class B shares was 1.30% for
the fiscal year ended December 31, 1999. The investment adviser and
underwriter have also voluntarily agreed to waive fees through April 30,
2001 in order to prevent Total Annual Fund Operating Expenses (excluding
any extraordinary expenses) from exceeding 0.95% of the average daily net
assets of Class A shares.
</FN>
-5-
MONTANA TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then either redeem or do not redeem all of your shares at the end
of those periods. The example also assumes that your investment has a 5%
return each year and that the fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
REDEMPTION NO REDEMPTION
SHARE CLASS A B A B
1 Year $535 $566 $535 $166
3 Years $769 $814 $769 $514
5 Years $1,021 $987 $1,021 $887
10 Years $1,741 $1,933 $1,741 $1,933
-6-
ND TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks to provide as high a level of current income exempt from federal
and North Dakota income taxes as is consistent with preservation of capital.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily North Dakota municipal bonds that are rated
investment grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent
ratings agencies. The fund may buy non-rated municipal bonds if the fund's
investment adviser judges them to be of comparable quality. The fund is non-
diversified and may invest more of its assets in a single issuer than a
diversified fund. The expected average dollar weighted maturity of the fund's
portfolio is between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding municipal bonds that offer the potential for above-average
return. To assess a bond's value, the adviser considers the bond's yield,
price, credit quality and future prospects.
The fund may also invest in options and futures for hedging purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
You should be aware that loss of money is a risk of investing. The
principal risks of investing in the fund are interest rate and credit
risk. Interest rate risk is the risk that interest rates will rise, causing
bond prices to fall. The longer the average maturity of a fund's portfolio,
the greater its interest rate risk. Credit risk is the risk that an issuer of
a municipal bond will be unable to make interest and principal payments. In
general, lower rated bonds carry greater credit risk. These may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities.
Because the fund is non-diversified and invests primarily in North Dakota
bonds, the fund is particularly susceptible to any economic, political or
regulatory developments affecting a particular issuer or issuers of North
Dakota bonds in which the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or
college funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-7-
ND TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing in
the fund by showing performance changes year to year and how average annual
returns over one, five and ten years compare with those of a broad measure of
market performance. Past performance is not an indication of future
performance.
Annual Total Returns for Class B (as of 12/31 each year)
[bar chart]
1990 7.96%
1991 7.86%
1992 6.62%
1993 5.94%
1994 -2.07%
1995 8.68%
1996 6.62%
1997 4.17%
1998 3.48%
1999 -1.11%
For the periods shown, the highest and lowest quarterly returns were 5.37%
and -3.67% for the quarters ending 12/31/90 and 3/31/89. The bar chart and
highest/lowest quarterly returns do not reflect sales charges, which would
reduce returns, while the average annual return table does.
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDING
DECEMBER 31, 1999
1 YEAR 5 Year 10 Year 1
CLASS B (4.86)% 4.31% 4.76%
LB MARKET
BENCHMARK 2 (2.07)% 6.91% 6.89%
[FN]
1 The 10 year period for Class B shares is from January 1, 1990 to
December 31, 1999. Class A shares were newly offered on January 7,
2000 and therefore do not have performance history for the periods
indicated above.
2 LB Market Benchmark returns reflect the performance of the Lehman
Brothers Municipal Bond Index, an unmanaged index comprised of a broad
range of investment grade municipal bonds.
</FN>
-8-
ND TAX-FREE FUND, INC.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment) 1
SHARE CLASS CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) .........................................4.25% 2..........NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price or redemption proceeds).........NONE.............4.00%3
Maximum Sales Charge (Load) Imposed on Reinvested Dividends..................NONE.............NONE
Redemption Fees..............................................................NONE.............NONE
Exchange Fee.................................................................NONE.............NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Management Fees..............................................................0.60%............0.60%
Distribution and Service (12b-1) Fees........................................0.25%............0.85%4
Other Expenses...............................................................0.29%5...........0.29%
---- ----
Total Annual Fund Operating Expenses6........................................1.14%............1.74%
</TABLE>
[FN]
1 Authorized Dealers and other firms may charge additional fees for
shareholder transactions or for advisory services. Please see their
materials for details.
2 Reduced Class A sales charges apply to purchases of $50,000 or more.
See "Class A Shares" under "The Shares We Offer."
3 Class B shares redeemed within five years of purchase are subject to a
contingent deferred sales charge ("CDSC") of 4% during the first and
second years, 3% during the third year, 2% during the fourth year, and
1% during the fifth year. Purchases of $1 million or more are subject
to a reduced CDSC if redeemed within 1 year of purchase. See "Class B
Shares" under "The Shares We Offer."
4 Because the fund pays 12b-1 fees, long-term Class B shareholders may pay
more in distribution expenses than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5 Based on historical expenses of the fund for Class B shares for the
fiscal year ended December 31, 1999. Actual expenses of Class A shares
may be higher or lower.
6 The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2001 in order to prevent Total Annual Fund
Operating Expenses (excluding any extraordinary expenses) from exceeding
1.30% of the average daily net asset value of Class B shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses for Class B shares was 1.30% for
the fiscal year ended December 31, 1999. The investment adviser and
underwriter have also voluntarily agreed to waive fees through April 30,
2001 in order to prevent Total Annual Fund Operating Expenses (excluding
any extraordinary expenses) from exceeding 0.95% of the average daily net
assets of Class A shares.
</FN>
-9-
ND TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time
periods indicated and then either redeem or do not redeem all of your shares
at the end of those periods. The example also assumes that your investment
has a 5% return each year and that the fund's operating expenses remain the
same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
REDEMPTION NO REDEMPTION
SHARE CLASS A B A B
1 Year $536 $577 $536 $177
3 Years $772 $848 $772 $548
5 Years $1,026 $1,044 $1,026 $944
10 Years $1,752 $2,052 $1,752 $2,052
-10-
SOUTH DAKOTA TAX-FREE FUND, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The fund seeks 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.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The fund purchases primarily South Dakota municipal bonds that are rated
investment grade (AAA/Aaa to BBB/Baa) at the time of purchase by independent
ratings agencies. The fund may buy non-rated municipal bonds if the fund's
investment adviser judges them to be of comparable quality. The fund is non-
diversified and may invest more of its assets in a single issuer than a
diversified fund. The expected average dollar weighted maturity of the fund's
portfolio is between 15 and 25 years.
The fund's investment adviser uses a value-oriented strategy and looks for
higher-yielding municipal bonds that offer the potential for above-average
return. To assess a bond's value, the adviser considers the bond's yield,
price, credit quality and future prospects.
The fund may also invest in futures and options on futures for hedging purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
You should be aware that loss of money is a risk of investing. The
principal risks of investing in the fund are interest rate and credit risk.
Interest rate risk is the risk that interest rates will rise, causing bond
prices to fall. The longer the average maturity of a fund's portfolio, the
greater its interest rate risk. Credit risk is the risk that an issuer of a
municipal bond will be unable to make interest and principal payments. In
general, lower rated bonds carry greater credit risk. These may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities.
Because the fund is non-diversified and invests primarily in South Dakota
bonds, the fund is particularly susceptible to any economic, political or
regulatory developments affecting a particular issuer or issuers of South
Dakota bonds in which the fund invests.
Because the fund uses hedging strategies, the fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
IS THIS FUND RIGHT FOR YOU?
The fund may be a suitable investment for you if you seek to:
* Earn regular monthly tax-free dividends;
* Preserve investment capital over time;
* Reduce taxes on investment income;
* Set aside money systematically for retirement, estate planning or
college funding.
You should not invest in this fund if you seek to:
* Pursue an aggressive, high-growth investment strategy;
* Invest through an IRA or 401(k) plan;
* Avoid fluctuations in share price.
-11-
SOUTH DAKOTA TAX-FREE FUND, INC.
HOW THE FUND HAS PERFORMED
The chart and table below provide some indication of the risk of investing in
the fund by showing performance changes year to year and how average annual
returns over one, five-year and the life of the fund compare with those of a
broad measure of market performance. Past performance is not an indication
of future performance.
Annual Total Returns for Class B (as of 12/31 each year)
[bar chart]
1995 11.47%
1996 6.58%
1997 5.10%
1998 3.88%
1999 -1.63%
For the periods shown, the highest and lowest quarterly returns were 5.17%
and -1.40% for the quarters ending 3/31/95 and 12/30/94. The bar chart and
highest/lowest quarterly returns do not reflect sales charges, which would
reduce returns, while the average annual return table does.
Average Annual Total Returns
for the Periods Ending
December 31, 1999
1 Year 5 Year Inception1
Class B (5.38)% 4.99% 4.84%
LB Market
Benchmark2 (2.07)% 6.91% 6.06%
[FN]
1 The inception period for Class B shares is from April 5, 1994 to
December 31, 1999. Class A shares were newly offered on January 7, 2000
and therefore do not have a performance history for the periods indicated
above.
2 LB Market Benchmark returns reflect the performance of the Lehman
Brothers Municipal Bond Index, an unmanaged index comprised of a broad
range of investment grade municipal bonds.
</FN>
-12-
SOUTH DAKOTA TAX-FREE FUND, INC.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment) 1
SHARE CLASS CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price)...............................................4.25%2..............NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price or redemption proceeds)..............NONE................4.00%3
Maximum Sales Charge (Load) Imposed on Reinvested Dividends.......................NONE................NONE
Redemption Fees...................................................................NONE................NONE
Exchange Fee......................................................................NONE................NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Management Fees...................................................................0.60%...............0.60%
Distribution and Service (12b-1) Fees.............................................0.25%...............0.75%4
Other Expenses....................................................................0.75%5..............0.75%
---- ----
Total Annual Fund Operating Expenses6.............................................1.60%.............. 2.10%
</TABLE>
[FN]
1 Authorized Dealers and other firms may charge additional fees for
shareholder transactions or for advisory services. Please see their
materials for details.
2 Reduced Class A sales charges apply to purchases of $50,000 or more.
See "Class A Shares" under "The Shares We Offer."
3 Class B shares redeemed within five years of purchase are subject to a
contingent deferred sales charge ("CDSC") of 4% during the first and
second years, 3% during the third year, 2% during the fourth year, and
1% during the fifth year. Purchases of $1 million or more are subject
to a reduced CDSC if redeemed within 1 year of purchase. See "Class B
Shares" under "The Shares We Offer."
4 Because the fund pays 12b-1 fees, long-term Class B shareholders may pay
more in distribution expenses than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5 Based on historical expenses of the fund for Class B shares for the
fiscal year ended December 31, 1999. Actual expenses of Class A shares
may be higher or lower.
6 The investment adviser and underwriter have voluntarily agreed to waive
fees through April 30, 2001 in order to prevent Total Annual Fund
Operating Expenses (excluding any extraordinary expenses) from exceeding
1.30% of the average daily net asset value of Class B shares.
Accordingly, after fee waivers and expense reimbursements, the fund's
actual total annual operating expenses for Class B shares was 1.30% for
the fiscal year ended December 31, 1999. The investment adviser and
underwriter have also voluntarily agreed to waive fees through April 30,
2001 in order to prevent Total Annual Fund Operating Expenses (excluding
any extraordinary expenses) from exceeding 0.95% of the average daily net
assets of Class A shares.
</FN>
-13-
SOUTH DAKOTA TAX-FREE FUND, INC.
EXAMPLE:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the fund for the time periods
indicated and then either redeem or do not redeem all of your shares at the
end of those periods. The example also assumes that your investment has a 5%
return each year and that the fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
REDEMPTION NO REDEMPTION
SHARE CLASS A B A B
1 Year $581 $613 $581 $213
3 Years $908 $958 $908 $658
5 Years $1,259 $1,229 $1,259 $1,129
10 Years $2,244 $2,431 $2,244 $2,431
-14-
FUND MANAGEMENT
The overall management of the business and affairs of the funds is the
responsibility of the funds' Board of Directors. ND Money Management, Inc.
("ND Management"), 1 North Main, Minot, North Dakota 58703, is the investment
adviser to the funds. ND Management has been advising mutual funds since
1989 and is currently investment adviser to four funds with assets under
management of approximately $151 million. ND Management was also the
investment adviser to the ND Insured Income Fund, Inc. from 1991 to 1998.
ND Management is responsible for the selection and ongoing monitoring of the
securities in each fund's portfolio, and, at its own expense, provides all
necessary administrative services, office space, equipment and clerical
services for managing the funds' investments. ND Management also pays the
salaries and fees of all officers and directors of the funds who are affiliated
persons of ND Management.
Mr. Monte Avery, Chief Portfolio Strategist, is the portfolio manager for the
funds and is primarily responsible for the day-to-day management of each
fund's portfolio, including credit analysis and the execution of portfolio
transactions, under the general supervision and direction of Robert E. Walstad,
President of the Funds. Mr. Walstad started in the securities business with
PaineWebber as a retail broker in 1972. In 1977, he became branch manager
with Dean Witter Reynolds and spent ten years in that capacity. In 1987, Mr.
Walstad founded ND Holdings Inc. ("ND Holdings"), which wholly-owns the
funds' investment adviser and underwriter. Since that time, Mr. Walstad has
been President of the adviser, underwriter, and of the funds. Mr. Walstad has
supervised and directed the management of the funds since they commenced
operations. In addition, Mr. Walstad is also the President of Ranson Managed
Portfolios, an open-end investment company which currently offers four series
and the fund's investment adviser and underwriter, Ranson Capital Corporation.
Since January 1996, Mr. Walstad has supervised and directed the management of
the portfolios of these funds.
Mr. Avery started in the securities business with PaineWebber in 1981 as a
retail broker transferring to Dean Witter in 1982. In 1988, Mr. Avery joined
Bremer Bank, N.A. (Minot, ND) to help start their Invest Center. He
transferred back to Dean Witter in 1993 until joining ND Holdings in 1995.
Since that time, Mr. Avery was a co-manager of the funds and effective in
February 2000, the manager of the funds. Mr. Avery is also responsible for the
daily pricing of the funds (subject to review and approval by the fund's
internal accounting staff) as well as their portfolio tradings. Since
January 1996, he has also been the portfolio manager for the Integrity Fund of
Funds, Inc. and a co-portfolio manager of the series in Ranson Managed
Portfolios becoming the manager of these funds in February 2000. All portfolio
management decisions are subject to periodic review by Mr. Walstad and to
quarterly review by the Board of Directors.
For providing management services, ND Management is paid an annual fund
management fee by each fund of 0.60% of the fund's average daily net assets,
payable monthly.
For the most recent fiscal year, the funds paid, after expense reimbursements,
the following management fees to ND Management, as a percentage of average net
assets:
Montana Tax-Free Fund .52%
ND Tax-Free Fund .51%
South Dakota Tax-Free Fund .07%
Each fund pays for its own operating expenses such as custodial, transfer
agent, accounting and legal fees; brokerage fees and commissions, if any;
distribution and service fees; insurance premiums; interest; organizational
expenses; taxes; and extraordinary expenses. See the Statement of Additional
Information for an additional discussion of fund expenses.
PRINCIPAL INVESTMENT STRATEGIES
SECURITIES THE FUNDS INVEST IN
Each fund's investment objective may not be changed without shareholder
approval. The funds' investment policies, unless otherwise noted, may be
changed by the funds' Board of Directors without shareholder approval.
-15-
MUNICIPAL OBLIGATIONS
Under normal circumstances, each Fund will invest at least 65% of its total
assets in debt obligations of the respective state and its political
subdivisions, agencies, and instrumentalities. The funds, however, typically
have invested substantially all of their assets in municipal securities that
pay interest exempt from both federal and the relevant state's income taxes.
In addition, each fund will invest, under normal circumstances, at least 80%
of its net assets in municipal securities which pay interest that is not
subject to the alternative minimum tax. The preceding policy may be changed
without a shareholder vote.
Municipal securities include debt obligations (such as bonds, notes, commercial
paper and lease obligations) issued by the respective state and its political
subdivisions, municipalities, agencies and authorities and U.S. territories
and possessions. States, local governments and municipalities issue municipal
securities to raise money for various public purposes such as building public
facilities, refinancing outstanding obligations and financing general operating
expenses. These securities include general obligation bonds, which are backed
by the full faith and credit of the issuer and may be repaid from any revenue
source and revenue bonds, which may be repaid only from the revenue of a
specific facility or source.
The funds purchase primarily municipal securities that are either rated
investment grade (AAA/Aaa to BBB/Baa) by independent rating agencies at the
time of purchase or are non-rated but judged to be of comparable quality by the
fund's investment adviser. Each fund may also invest in municipal securities
of U.S. territories and possessions (such as Puerto Rico and Guam) and of the
District of Columbia which are exempt from regular federal and state income
taxes. The funds will promptly dispose of a bond whose rating drops below
investment grade or is reduced in credit quality with respect to unrated
securities. The Board of Directors, however, may vary this policy if it
determines that prompt disposal of a bond would not be in the best interests
of shareholders. Each fund may also purchase municipal securities that
represent lease obligations. These carry special risks because the issuer of
the securities may not be obligated to appropriate money annually to make
payments under the lease.
PORTFOLIO MATURITY
Each fund buys municipal bonds with different maturities in pursuit of its
investment objectives, but expects under normal market conditions an investment
portfolio with an average dollar weighted maturity of 15 to 25 years.
HOW WE SELECT INVESTMENTS
ND Management selects municipal obligations for the funds based upon its
assessment of a bond's relative value in terms of current yield, price, credit
quality and future prospects. ND Management reviews municipal securities
available for purchase, monitors the continued creditworthiness of each fund's
municipal investments, and analyzes economic, political and demographic trends
affecting the municipal markets. Based on our analysis of this research, we
select those municipal obligations that we believe represent the most
attractive values.
PORTFOLIO TURNOVER
A fund buys and sells portfolio securities in the normal course of its
investment activities. The proportion of the fund's investment portfolio that
is sold and replaced with new securities during a year is known as the fund's
portfolio turnover rate. The funds anticipate that their annual portfolio
turnover rate will generally not exceed 70%. A turnover rate of 100% would
occur, for example, if a fund sold and replaced securities valued at 100% of
its net assets within one year. Active trading would result in the payment by
the fund of increased brokerage costs and the realization of taxable capital
gains. The funds normally will not engage in the trading of securities to
realize short-term profits. The funds, however, may adjust their portfolios in
view of prevailing or anticipated market conditions and the fund's investment
objective. The funds may also make short-term trades to take advantage of
market opportunities. In deciding to sell a security, ND Management generally
considers such factors as the bond's yield, the continued creditworthiness of
the issuer, and prevailing market conditions.
RISK MANAGEMENT
INVESTMENT LIMITATIONS
The funds have adopted certain limitations that cannot be changed without
shareholder approval and are designed to limit your investment risk. Under
these restrictions, each fund may not invest 25% or more of its total assets
in any industry. In applying this limitation, government issuers of municipal
securities are not considered part of any "industry." However, municipal
securities backed by the assets and revenues of non-governmental users will
be considered issued by these users in applying this limitation. Each fund
may also invest in industrial development bonds whose revenues derive from
similar types of projects (such as, education, electric utilities or health
care). See the Statement of Additional Information for more information
regarding the funds' investment policies and restrictions and the risks
associated with these policies.
-16-
HEDGING STRATEGIES
Each fund may also engage in various investment strategies designed to hedge
against interest rate changes or other market conditions using financial
instruments whose prices, in the opinion of the fund's investment adviser,
correlate with the values of securities the fund owns or expects to purchase.
The securities used to implement these strategies include financial futures
contracts (such as future contracts in U.S. Treasury securities and interest-
related indices) and options on financial futures. The ND Tax-Free Fund may
also use options on municipal securities and temporary investments, as well
as index options. The ND Tax-Free Fund may write (sell) covered call options
and secured put options on up to 25% of its net assets. In addition, the fund
will not purchase put and call options if more than 5% of its net assets are
invested in the premiums of such options.
The ability of a fund to benefit from options and futures is largely dependent
on ND Management's ability to use such strategies successfully. If ND
Management's judgement about the general direction of interest rates or
markets is wrong, the overall performance of the fund will be poorer than if
no such futures or options had been used. In addition, a fund's ability to
effectively hedge all or a portion of its portfolio through transactions in
futures and options depends on the degree to which price movements in the
futures and options correlate with the price movements in the fund's portfolio.
Consequently, if the price of the futures and options moves more or less than
the price of the security that is subject to the hedge, the fund will
experience a gain or loss that will not be completely offset by movements in
the price of the security. The risk of imperfect correlation is greater where
the securities underlying the futures contracts are taxable securities (rather
than municipal securities), are issued by companies in different market sectors
or have different maturities, ratings or geographic mixes than the security
being hedged. In addition, the correlation may be affected by additions to
or deletions from the index which serves as the basis for a futures contract.
A fund could lose money on futures transactions or an option can expire
worthless. Losses (or gains) involving futures can sometimes be substantial
in part because a relatively small price movement in a futures contract may
result in an immediate and substantial loss (or gain) for a fund. Use of
options may also (i) result in losses to a fund, (ii) force the purchase or
sale of portfolio securities at inopportune times or for prices higher than
or lower than current market values, (iii) limit the amount of appreciation
the fund can realize on its investments, (iv) increase the cost of holding a
security and reduce the returns on securities, or (v) cause a fund to hold a
security it might otherwise sell.
TEMPORARY INVESTMENT STRATEGIES
Each fund may, from time to time, take temporary defensive positions that are
inconsistent with the fund's principal investment strategies in attempting to
respond to adverse market, economic, political or other conditions. Each fund
may therefore invest up to 100% of its assets in short-term high quality
taxable fixed income securities as well as short-term municipal bonds as a
temporary defensive measure in response to adverse market conditions. These
short-term securities include obligations of the U.S. government (its agencies
and instrumentalities), debt securities rated within the three highest grades
by independent rating agencies, commercial paper, certificates of deposit,
municipal securities and any such securities subject to short-term repurchase
agreements. During these periods, a fund may not be able to achieve its
investment objective. For more detailed information on eligible short-term
investments, see the Statement of Additional Information.
NON-PRINCIPAL INVESTMENT STRATEGIES
DELAYED DELIVERY SECURITIES
As a non-principal investment strategy, each fund may buy or sell securities
on a when-issued or delayed-delivery basis, paying for or taking delivery of
the securities at a later date, normally within 15 to 45 days of the trade.
Such transactions involve an element of risk because the value of the
securities to be purchased may decline before the settlement date. In
addition, each fund is required to set aside cash or liquid high-grade debt
securities to satisfy its commitments to buy when-issued or delayed-delivery
securities. While these assets are set aside, the cash and securities are
not available to make additional investments or for trading.
-17-
PRINCIPAL RISK FACTORS
Risk is inherent in all investing. Investing in the funds involves risk,
including the risk that you may receive little or no return on your investment
or that you may even lose part or all of your investment. Before you invest,
you should consider the following risks:
INTEREST RATE RISK: the risk that the value of the fund's portfolio will
decline because of rising market interest rates (bond prices move in the
opposite direction of interest rates). The longer the average maturity
(duration) of a fund's portfolio, the greater its interest rate risk.
CREDIT RISK: the risk that an issuer of a bond is unable to meet its
obligation to make interest and principal payments due to changing market
conditions. Generally, lower rated bonds provide higher current income but
are considered to carry greater credit risk than higher rated bonds.
CONCENTRATION RISK: because the funds primarily purchase municipal bonds
from a specific state, each fund also bears investment risk from the
economic, political or regulatory changes that could adversely affect
municipal bond issuers in that state and therefore the value of the fund's
investment portfolio. See "Appendix-Additional State Information."
In addition, each fund may also invest over 25% of its assets in municipal
securities whose revenues derive from similar types of projects including
health care, housing, utilities and education. Each fund therefore bears
the risk that economic, political or regulatory developments could adversely
affect these industries and therefore the value of a fund's portfolio.
NON-DIVERSIFICATION RISK: each fund is a non-diversified investment company
and as such, each fund may invest more than 5% of its assets in the
obligations of any issuer. Because a relatively high percentage of the fund's
assets may be invested in the municipal securities of a limited number of
issuers, the fund's portfolio securities may be more susceptible to any single
economic, political or regulatory occurrence than the portfolio securities of
a diversified investment company.
In addition, because of the relatively small number of issuers of municipal
securities in Montana, North Dakota and South Dakota, the funds are more
likely to invest a higher percentage of their assets in the securities of a
single issuer than an investment company which invests in a broad range of
tax-exempt securities. The funds are therefore subject to greater risks of
loss if an issuer is unable to make interest or principal payments or if the
market value of such securities declines.
INCOME RISK: the risk that the income from the fund's portfolio will decline
because of falling market interest rates. This can result when the fund
invests the proceeds from the new share sales, or from matured or called
bonds, at market interest rates that are below the portfolio's current earnings
rate.
INFLATION RISK: the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of the funds' assets can decline as can the
value of the funds' distributions.
THE SHARES WE OFFER
In deciding whether to purchase Class A or Class B shares, you should consider:
* the amount of your purchase;
-18-
* any current holdings of fund shares;
* how long you expect to hold the shares;
* the amount of any up-front sales charge;
* whether a contingent deferred sales charge ("CDSC") would
apply upon redemption;
* the amount of any distribution or service fees that you may incur
while you own the shares;
* whether you will be reinvesting income or capital gain
distributions in additional shares; and
* whether you qualify for a sales charge waiver or reduction.
for a summary of the charges and expenses for each class, please see "what are
the fund's expenses?" for a fund.
CLASS A SHARES
You can buy Class A shares at the offering price, which is the net asset value
per share plus an up-front sales charge. You may qualify for a reduced sales
charge, or the sales charge may be waived, as described below. The up-front
sales charge also does not apply to Class A shares acquired through
reinvestment of dividends and capital gains distributions. Each fund has also
adopted a distribution and service plan under Rule 12b-1 under the Investment
Company Act of 1940 (the "12b-1 Plan") that allows the fund to pay
distribution and service fees for the sale of its shares and for services
provided to shareholders. Class A shares are subject to an annual service fee
of 0.25% of the average daily net assets of Class A shares of the fund
which compensates your financial adviser for providing ongoing service to you.
Because these fees are paid out of fund assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges. The up-front Class A sales charge and the
commissions paid to dealers are as follows:
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE AS % SALES CHARGE AS % COMMISSION AS
AMOUNT OF OF PUBLIC OF NET % OF PUBLIC
PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Less than $50,000 4.25% 4.44% 3.60%
- ---------------------------------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 3.75% 3.90% 3.15%
- ---------------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.25% 3.36% 2.75%
- ---------------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56% 2.00%
- ---------------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.50% 1.52% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------
$1,000,000 and over 0.75% 0.76% 0.70%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CLASS B SHARES
You can buy Class B shares at the net asset value per share without any up-
front sales charge so that the full amount of your purchase is invested in the
fund. Under the 12b-1 Plan, however, you will pay an annual distribution and
service fee of 0.75% of average daily assets of Class B shares (0.85% of
average daily net assets of Class B shares with respect to the ND Tax-Free
Fund). The annual distribution fee compensates ND Capital, Inc. ("ND
Capital"), the funds' underwriter, for paying dealers who sell Class B shares
an up-front sales commission of 3-3/4% on amounts invested (1% on sales of $1
million or more), excluding sales to investors exempt from the contingent
deferred sales charge (CDSC). ND Capital may use a portion of this fee
to pay an annual service fee of up to 0.25% of the average daily net assets of
Class B shares to dealers for providing ongoing service to you. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
If you sell your Class B shares within five years of purchase, you will have
to pay a CDSC based on either your purchase price or what you sell your shares
for, whichever amount is lower, according to the following schedule.
-19-
Years Since Purchase 1 2 3 4 5 6 and up
CDSC 4% 4% 3% 2% 1% 0%
You do not pay a CDSC on any Class B shares you purchase by reinvesting
dividends and capital gains. When you redeem shares subject to a CDSC,
the fund will first redeem any shares that are not subject to a CDSC or that
represent an increase in the value of your fund account due to capital
appreciation, and then redeem the Class B shares you have owned in the order
purchased. When you redeem shares subject to a CDSC, the CDSC is calculated
on the lower of your purchase price or redemption proceeds, deducted from
your redemption proceeds, and paid to ND Capital.
Purchases of $1 million or more of Class B shares are subject to a reduced
CDSC of 1% if shares are redeemed within 12 months of purchase. Purchases of
$1 million or more made within 13 months of the initial purchase may qualify
for the reduced CDSC. To be eligible, you must notify the fund in writing at
the time of your initial purchase of your intent to purchase $1 million or
more of Class B shares within 13 months and subsequently complete this
investment. Any Class B shares purchased and sold during this 13 month period
will be deducted in computing your total purchase. The 1% CDSC applies for one
year after your purchases total $1 million.
Class B shares will automatically convert to Class A shares approximately eight
years after you buy them so that the distribution fees you pay over the life of
your investment are limited. You will continue to pay an annual service fee
on any converted Class B shares of 0.25% of the average daily net assets
applicable to Class A shares. The conversion will be based on the relative net
asset values of Class A and Class B shares without imposing any sales load, fee
or other charge. Since the net asset value per share of the Class B shares and
the Class A shares may differ at the time of the conversion, a shareholder may
receive more or fewer Class A shares than the number of Class B shares
converted, but the dollar value will be the same. This conversion feature may
be suspended or terminated if it comes to our attention that such conversion
would constitute a taxable event under federal income tax law.
HOW TO REDUCE YOUR SALES CHARGE
We offer a number of ways to reduce or eliminate the up-front sales charge on
Class A shares and to eliminate the CDSC on Class B shares.
CLASS A SALES CHARGE REDUCTIONS CLASS A AND CLASS B SALES CHARGE WAIVERS
Rights of Accumulation The funds may sell Class A shares
Letter of Intent without an up-front sales charge and
Group Purchase Class B shares without a CDSC to:
* directors, officers, employees
(including retirees) of the funds,
ND Holdings, ND Management and ND
Capital for themselves or certain
members of their family;
*trusts, pension, profit-sharing or
other plans for the benefit of
directors, officers, employees
(including retirees) of the funds, ND
Holdings, ND Management and ND Capital
and certain members of their families;
*authorized broker-dealers and
financial institutions and certain
employees (including their spouses and
children) of such dealers and
institutions;
*any broker-dealer, financial
institution or other qualified firm
which does not receive commissions for
selling shares to its clients; and
*with respect to Class A shares,
purchases using redemptions from
unrelated funds in which you have paid
a sales load.
-20-
Please refer to the Statement of Additional Information for detailed
program descriptions and eligibility requirements. Additional information
is available by calling (800) 276-1262. Your financial adviser can also help
you prepare any necessary application forms. You or your financial adviser
must notify the funds at the time of each purchase if you are eligible for
any of these programs. The funds may modify or discontinue these programs
at any time.
HOW TO BUY SHARES
Fund shares may be purchased on any business day, which is any day the
New York Stock Exchange is open for business and normally ends at 3 p.m.,
Minot, North Dakota time. Generally, the Exchange is closed on weekends,
national holidays and Good Friday.
You may buy shares through investment dealers who have sales agreements with
ND Capital, the Funds' distributor or directly from ND Capital. If you do
not have a dealer, call (800) 276-1262 and ND Capital can refer you to one.
Purchase requests should be addressed to the authorized dealer or agent from
which you received this Prospectus. Such dealers or agents may place a
telephone order with ND Capital for the purchase of shares. It is the
broker's or dealer's responsibility to promptly forward payment and the
purchase application to the transfer agent for the investor to receive the
next determined net asset value. Payment for shares purchased by telephone
should be received within three business days. Checks should be made
payable to the name of the applicable fund.
MINIMUM INVESTMENTS AND SHARE PRICE
You may open an account with $1,000 ($100 for the Monthomatic Investment
Plan) and make additional investments at any time with as little as $50.
The minimum investment requirements apply per fund share class. The funds
may change these minimum initial investments at any time.
The price you pay for a class of fund shares will depend on how and when the
fund receives your order. You will receive the share price for the
applicable class next determined after the fund has received your order.
If you place your order by contacting the fund directly, your order must be
received by the fund prior to close of trading of the New York Stock Exchange
(normally 3:00 p.m. Minot, North Dakota time) for you to receive that day's
price. However, if you place your order through a dealer prior to the close
of trading of the New York Stock Exchange and the fund receives such order
prior to the close of business of the fund (normally 5:00 p.m. Minot, North
Dakota time), you will receive that day's price. Dealers are obligated to
transmit orders promptly. See "Net Asset Value" for a discussion of how shares
are priced.
SYSTEMATIC INVESTING-THE MONTHOMATIC INVESTMENT PLAN
Once you have established a fund account, systematic investing allows you to
make regular investments through automatic deductions from your bank account
(simply complete the appropriate section of the account application form) or
call ND Resources at (800) 601-5593 for appropriate forms.
With the Monthomatic Investment Plan, you can make regular investments of $50
or more per month by authorizing us to draw either checks or debits on your
ng a written notice to ND Resources, Inc. ("ND Resources"), the funds'
transfer agent, at P.O. Box 759, Minot, ND 58702. The termination will become
effective within 7 days after the transfer agent has received the request.
The funds may terminate or modify this privilege at any time and may
immediately terminate a shareholder's monthomatic plan if any item is unpaid
by the shareholder's financial institution. There is no charge for this plan.
SPECIAL SERVICES
To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.
-21-
EXCHANGING SHARES
You may exchange fund shares into an identically registered account at any time
for shares of any mutual fund advised or underwritten by ND Capital, Ranson
Capital Corporation or ND Management at net asset value. If you own Class B
shares subject to a CDSC, the CDSC and the holding period of your original
investment will be carried forward into the fund in which you are exchanging
and applied in the event you redeem any or all of your shares in this fund.
If you own Class A shares subject to an up-front sales charge, you will not
pay a front-end sales charge or be subject to a CDSC when exchanging into
shares of another fund.
Similarly, shareholders in funds advised or underwritten by ND Capital, Ranson
Capital Corporation, or ND Management exercising the applicable exchange
privilege of these funds, may purchase Class A shares at net asset value if
they paid an up-front sales charge on the shares of the original fund being
exchanged and Class B shares if the shares of the original fund are subject
to a CDSC. In such case, the CDSC and the holding period of the original
investment will be carried forward into the fund and applied upon redemption.
However, if the CDSC applicable to the Class B shares being acquired
is higher than the CDSC applicable to the shares being exchanged, such higher
charge shall be applied upon redemption of the acquired shares.
Your exchange must meet the minimum purchase requirements of the fund into
which you are exchanging and be available in your state. Because an exchange
is treated for tax purposes as a concurrent sale and purchase, and any gain
may be subject to tax, you should consult your tax adviser about the tax
consequences of any contemplated exchange. A shareholder considering an
exchange should obtain and read the prospectus of the fund being acquired and
consider the differences between it and the fund whose shares he or she owns
before making an exchange.
The exchange privilege is not intended to allow you to use a fund for short-
term trading. Because excessive exchanges may interfere with portfolio
management, raise fund operating expenses or otherwise have an adverse effect
on other shareholders, each fund reserves the right to revise or suspend the
exchange privilege on 60 days' written notice, limit the amount or number of
exchanges, or reject any exchange. For additional information on how to
exercise the exchange privilege, call ND Resources at (800) 601-5593.
Reinstatement Privilege
If you redeem fund shares, you may reinstate all or part of your redemption
proceeds without incurring any additional charges. You may only reinvest in
the same share class you redeemed. If you paid a CDSC, we will refund your
CDSC as additional shares in proportion to the reinstatement amount of your
redemption proceeds and your holding period will also be reinstated. An
investor exercising this privilege a year or more after redemption must
complete a new account application and provide proof that the investor was a
shareholder of the fund. The funds may modify or terminate this privilege at
any time. You should consult your tax adviser about the tax consequences of
exercising your reinstatement privilege.
HOW TO SELL SHARES
You may sell (redeem) your shares on any day the New York Stock Exchange is
open. You will receive the share price next determined after the fund has
received your properly completed redemption request as described below. Your
redemption request must be received before the close of trading for you to
receive that day's price. While the funds do not charge a redemption fee, you
may be assessed a CDSC, if applicable.
You can sell your shares at any time by sending a written request to the
appropriate fund, c/o ND Resources, P.O. Box 759, Minot, ND 58702 or by placing
an order to sell through your financial adviser. Such dealers or agents may
place a fax or mail in the order to ND Capital for the sale of shares. It is
the broker's or dealer's responsibility to promptly forward the redemption
requests to the transfer agent for shares being redeemed to receive the next
determined net asset value.
To properly complete your redemption request, your request must include the
following information:
* The fund's name;
* Your name and account number;
* The dollar or share amount you wish to redeem;
* The signature of each owner exactly as it appears on the account;
* The name of the person to whom you want your redemption proceeds paid
(if other than to the shareholder of record);
* The address where you want your redemption proceeds sent (if other than
the address of record);
* Any certificates you have for the shares (signed certificate or a duly
endorsed stock power); and
* Any required signature guarantees.
-22-
We will normally mail your check the next business day, but in no event more
than seven days after we receive your request. If you purchased your shares
by check, your redemption proceeds will not be mailed until your check has
cleared which may take up to 15 days from the date of purchase. Guaranteed
signatures are required if you are redeeming more than $50,000, you want the
check payable to someone other than the shareholder of record or you want the
check sent to another address. Signature guarantees must be obtained from a
commercial bank, trust company, savings and loan association or brokerage
firm. A notary public cannot provide a signature guarantee.
You should note that the funds reserve the right to liquidate your account
upon 60 days' written notice if the value of your account falls below $1,000
for any reason other than a fluctuation in the market value of the fund
shares. The funds also reserve the right to redeem in-kind (that is to pay
redemption requests in cash and portfolio securities, or wholly in portfolio
securities). Because you would receive portfolio securities in an in-kind
redemption, you would still be subject to market risk and may incur
transaction costs in selling the securities.
A fund may also suspend the right of redemption under the following unusual
circumstances:
* when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted as determined by the SEC;
* when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable as determined by the
SEC; or
* during any period when the SEC has by order permitted a suspension of
redemption for the protection of shareholders.
SYSTEMATIC WITHDRAWAL
If the value of your fund account is at least $5,000, you may request to
have $50 or more withdrawn automatically from your account, subject to any
applicable CDSC. You may elect to receive payments monthly, quarterly,
semiannually or annually. If payments exceed reinvested dividends and
distributions, an investor's shares will be reduced and eventually depleted.
You must complete the appropriate section of the account application to
participate in the fund's systematic withdrawal plan. A shareholder who
participates in the Monthomatic Investment Plan is ineligible to participate
in this plan. You may terminate participation in the program at any time.
The funds may terminate or modify this program at any time.
DISTRIBUTIONS AND TAXES
The funds declare their net investment income as dividends daily on shares for
which they have received payment. Net investment income of a fund consists of
all interest income earned on portfolio securities less expenses. The funds
will pay dividends from the net income monthly and any dividends from realized
short-term or long-term capital gains, if any, at or around year end of the
fund's fiscal year. These policies are non-fundamental and may be modified
by the funds at any time.
REINVESTMENTS OPTIONS
The funds automatically reinvest your dividends in additional fund shares at
net asset value unless you request otherwise. You may request to have your
dividends and capital gains paid to you in the following ways:
* income dividends in cash and capital gain dividends reinvested in
additional fund shares;
* income and capital gain dividends in cash; or
* income and capital gain dividends reinvested in shares of Integrity
Fund of Funds, Inc. ("Integrity") at net asset value, provided you
open an account with Integrity with a minimum balance of $100.
You may change your selected method of distribution, provided such change
will be effective only for distributions paid three days after the transfer
agent receives the written request. The funds will send a check to investors
selecting to receive dividends in cash. You may have your distribution check
paid to a third party or sent to an address other than your address of record
(although a signature guarantee will be required). For further information,
contact ND Resources at (800) 601-5593.
-23-
TAXES AND TAX REPORTING
Because the funds invest primarily in municipal bonds from a specific state,
each fund's regular monthly dividends payable from the net tax-exempt interest
earned from these municipals will generally be exempt from regular federal
income tax. All or a portion of a fund's dividends, however, may be subject to
any state and local taxes. A portion of these dividends may also be subject to
the federal alternative minimum tax (AMT).
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. To the extent
the funds engage in hedging transactions in futures contracts and options
thereon, the funds may earn capital gains or losses. Net investment income
earned on debt obligations other than municipal securities and net short-term
gains are taxable as ordinary income. Net long-term capital gains are taxable
as long-term capital gains regardless of how long you have owned your
investment. Taxable dividends do not qualify for a dividends received
deduction if you are a corporate shareholder. For information regarding the
state tax consequences of a fund investment, see Appendix-Additional State
Information.
Early in each year, you will receive a statement detailing the amount and
nature of all dividends and capital gains, including any percentage of your
fund dividends attributable to municipal obligations, that you were paid during
the prior year. The tax status of your dividends is not affected by whether
you reinvest your dividends or receive them in cash. If you receive social
security benefits, you should be aware that any tax-free income is taken into
account in calculating the amount of these benefits that may be subject to
federal income tax.
Tax laws are subject to change, so we urge you to consult your tax adviser
about your particular tax situation and how it might be affected by current
tax law.
Please note that if you do not furnish us with your correct Social Security
number or employer identification number, federal law requires us to withhold
federal income tax from your distributions and redemption proceeds at a rate
of 31%.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
Buying fund shares shortly before the record date for a taxable dividend is
commonly known as "buying the dividend." The entire dividend may be taxable
to you even though a portion of the dividend effectively represents a return
of your purchase price. Similarly, if you sell or exchange fund shares
shortly before the record date for a tax-exempt dividend, a portion of the
price you receive may be treated as a taxable capital gain even though it
reflects tax-free income earned but not yet distributed by the fund.
DISTRIBUTION AND SERVICE PLANS
ND Capital serves as the distributor of the funds' shares. In this capacity,
ND Capital manages the offering of the funds' shares and is responsible for
all sales and promotional activities. In order to reimburse ND Capital for
its costs in connection with these activities, including compensation paid to
authorized dealers, each fund has adopted a 12b-1 Plan. See "The Shares We
Offer" for a description of the distribution and service fees paid under each
plan.
ND Capital receives the 12b-1 fee for Class B shares primarily for providing
compensation to authorized dealers, including ND Capital, in connection with
the distribution of shares and related financing costs. These fees also
compensate ND Capital for other expenses, including printing and distributing
prospectuses to persons other than shareholders; preparing, printing and
distributing advertising and sales literature, and reports to shareholders used
in connection with the sale of shares, and other overhead expenses (such as
rent and salaries).
ND Capital may also use a portion of this fee applicable to Class B shares to
pay an annual service fee to authorized dealers, including ND Capital, for
providing account services to shareholders. Similarly, ND Capital uses the
service fee for Class A shares to compensate authorized dealers, including ND
Capital, for providing account services to shareholders. These services may
include answering shareholder inquiries, assisting in redeeming shares,
interpreting confirmations, statements and other documents, and providing other
personal services to shareholders.
-24-
NET ASSET VALUE
The price you pay for your shares is based on the fund's net asset value per
share of the applicable class which is determined as of the close of trading
(normally 3:00 p.m. Minot, North Dakota time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated for each class
by taking the total value of the class' total assets, including interest or
dividends accrued but not yet collected, less all liabilities, and dividing
by the total number of shares outstanding for the class. The result, rounded
to the nearest cent, is the net asset value per share. All valuations are
subject to review by the funds' Board of Directors or its delegate.
In determining net asset value, expenses are accrued and applied daily. Fixed
income securities for which market quotations are readily available are valued
at the mean between the quoted bid and ask prices. When market quotations are
not readily available (which is usually the case for municipal securities), ND
Management establishes the fair market value pursuant to procedures
established by the Board of Directors. In establishing fair value, ND
Management considers factors such as the yields and prices of comparable
municipal bonds, the type of issue, coupon, maturity and rating, indications
of value from dealers and general market conditions. ND Management may also
use a computer based system, a "matrix system," to compare securities to
determine valuations. The procedures used by ND Management and its valuations
are reviewed by the officers of the funds under the general supervision of the
Board of Directors and periodically by the Board. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
Options that are traded on an exchange are valued at the last sales price,
unless there is no last sales price. In that case, the options will be valued
at the mean between the closing bid and ask prices. Financial futures are
valued at their settlement prices established on the board of trade or exchange
on which they are traded. Other securities, including restricted securities,
and other assets are valued at fair value as established by the Board of
Directors or its delegate. If an event were to occur, after the value of an
instrument was established but before net asset value per share was determined,
which would likely materially change the net asset value, then the instrument
would be valued using fair value considerations by the Board of Directors or
its delegate.
FUND SERVICE PROVIDERS
The custodian of the assets of the ND Tax-Free Fund and the South Dakota
Tax-Free Fund is Bremer Bank, N.A., 20 First Street SW, Minot, North Dakota
58701. The custodian of the assets of the Montana Tax-Free Fund is First
Western Bank & Trust, 900 South Broadway, Minot, North Dakota 58701. ND
Resources, a wholly-owned subsidiary of ND Holdings, is the funds' transfer
agent. As transfer agent, ND Resources performs bookkeeping, data processing,
accounting and other administrative services for the operation of the funds,
and the maintenance of shareholder accounts.
SHAREHOLDER INQUIRIES
All inquiries regarding the funds should be directed to ND Capital at 1
North Main, Minot, ND 58703 or call (800) 276-1262.
All inquiries regarding account information should be directed to ND
Resources at P.O. Box 759, Minot, ND 58702 or call (800) 601-5593.
-25-
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the funds'
recent past performance. Certain information reflects financial results for
a single fund share. The total returns in the tables represent the rate that
an investor would have earned on an investment in the fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Brady, Martz & Associates, P.C., whose report, along with the
funds' financial statements are included in the fund's annual report.
Further information about a fund's performance is also contained in the fund's
latest annual shareholder report. You may obtain a free copy of a fund's
latest annual shareholder report and Statement of Additional Information
upon request from the fund.
MONTANA TAX-FREE FUND, INC.
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December, 31 December, 31 December, 31 December, 31 December, 31
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.16 $10.07 $10.04 $9.39
-----------------------------------------------------------------------------
Income from Investment Operations:
Net investment income $.42 $.42 $.46 $.48 $.51
Net realized and unrealized gain (loss) on
Investment and futures transactions (.64) (.06) .13 .06 .67
-----------------------------------------------------------------------------
Total Income (Loss) From Investment
Operations $(.22) $.36 $.59 $.54 $1.18
-----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income $(.42) $(.42) $(.46) $(.48) $(.51)
Return of capital distributions (.05) (.05) (.04) (.03) (.02)
-----------------------------------------------------------------------------
Distributions from net realized gains .00 .00 .00 .00 .00
-----------------------------------------------------------------------------
Total Distributions $(.47) $(.47) $(.50) $(.51) $(.53)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.36 $10.05 $10.16 $10.07 $10.04
=============================================================================
Total Return (2.32%)(A) 3.66%(A) 5.96%(A) 5.52%(A) 12.85%(A)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $60,492 $58,879 $47,749 $34,803 $24,055
Ratio of net expenses (after expense
assumption) to average net assets 1.30%(B) 1.30%(B) 1.17%(B) 0.96%(B) 0.66%(B)
Ratio of net investment income to
average net assets 4.26% 4.18% 4.51% 4.76% 5.11%
Portfolio turnover rate 8.94% 3.65% 7.91% 7.12% 7.39%
</TABLE>
-26-
[FN]
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed/waived
expenses of $204,163, $177,054, $60,969, $98,321 and $99,757, respectively.
If the expenses had not been assumed/waived, the annualized ratio of total
expenses to average net assets would have been 1.63%, 1.63%, 1.32%, 1.29% and
1.22%, respectively.
</FN>
ND TAX-FREE FUND, INC.
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December, 31 December, 31 December, 31 December, 31 December, 31
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.94 $9.09 $9.19 $9.09 $8.83
-----------------------------------------------------------------------------
Income from Investment Operations:
Net investment income $.41 $.41 $.43 $.46 $.47
Net realized and unrealized gain (loss)
on investment and futures transactions (.50) (.10) (.05) .13 .28
-----------------------------------------------------------------------------
Total income (Loss) From Investment
Operations $(.09) $.31 $.38 $.59 $.75
-----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income $(.41) $(.41) $(.43) $(.46) $(.47)
Return of capital distributions (.04) (.05) (.05) (.03) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
-----------------------------------------------------------------------------
Total Distributions $(.45) $(.46) $(.48) $(.49) $(.49)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.40 $8.94 $9.09 $9.19 $9.09
=============================================================================
Total Return (1.11)%(A) 3.48%(A) 4.17%(A) 6.62%(A) 8.68%(A)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $65,815 $80,987 $88,435 $91,631 $94,532
Ratio of net expenses (after expense
assumption) to average net assets 1.30%(B) 1.30%(B) 1.30%(B) 1.13%(B) 1.05%(B)
Ratio of net investment income to
average net assets 4.61% 4.59% 4.70% 5.00% 5.20%
Portfolio turnover rate 7.45% 7.32% 13.18% 12.92% 8.02%
</TABLE>
[FN]
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed/waived
expenses of $329,246, $331,888, $50,649, $40,861 and $3,799, respectively.
If the expenses had not been assumed/waived, the annualized ratios of total
expenses to average net assets would have been 1.74%, 1.70%, 1.36%, 1.18%
and 1.05% respectively.
</FN>
-27-
SOUTH DAKOTA TAX-FREE FUND, INC.
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December, 31 December, 31 December, 31 December, 31 December, 31
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.38 $10.49 $10.50 $10.39 $9.86
Income from Investment Operations:
Net investment income $.45 $.46 $.53 $.52 $.55
Net realized and unrealized gain (loss)
on investment and futures transactions (.61) (.06) .03 .14 .55
-----------------------------------------------------------------------------
Total Income (Loss) From Investment
Operations $(.16) $.40 $.56 $.66 $1.10
-----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income $(.45) $(.46) $(.53) $(.52) $(.55)
Return of capital distributions (.05) (.05) (.04) (.03) (.02)
Distributions from net realized gain .00 .00 .00 .00 .00
-----------------------------------------------------------------------------
Total Distributions $(.50) $(.51) $(.57) $(.55) $(.57)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.72 $10.38 $10.49 $10.50 $10.39
=============================================================================
Total Return (1.63%)(A) 3.88%(A) 5.10%(A) 6.58%(A) 11.47%(A)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $6,930 $7,748 $7,330 $6,397 $5,163
Ratio of net expenses (after expense
assumption) to average net assets 1.30%(B) 1.30%(B) 1.17%(B) 0.93%(B) 0.61%(B)
Ratio of net investment income to
average net assets 4.43% 4.36% 4.70% 5.01% 5.35%
Portfolio turnover rate 28.48% 15.75% 3.35% 2.47% 0.66%
</TABLE>
[FN]
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed/waived
expenses of $58,597, $55,713, $68,538, $54,598 and $37,053, respectively.
If the expenses had not been assumed/waived, the annualized ratio of total
expenses to average net assets would have been 2.10%, 2.05%, 2.16%, 1.88%
and 1.51% respectively.
</FN>
-28-
APPENDIX - ADDITIONAL STATE INFORMATION
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from economic, political or regulatory
changes that could adversely affect municipal bond issuers in that state and
therefore the value of the fund's investment portfolio. The following
discussion of special state considerations was obtained from official offering
statements of these issuers and has not been independently verified by the
funds. The discussion includes general state tax information related to an
investment in fund shares. Because tax laws are complex and often change,
you should consult your tax adviser about the state tax consequences of a
specific fund investment.
Montana
Montana's economy is primarily based on agriculture, mining and the processing
of minerals, and agricultural forest products. Montana's economy, however,
continues to parallel the national trend of moving to more service producing
industries. In 1999, the largest industries in the state were services, retail
trade, and state and local government. The state's population, employment and
income continue to grow. Montana's population grew by 10.5% between 1990 and
1999 which exceeded the national growth of 9.6% over the same period. Although
agricultural employment continues to decline, other areas show gains in
employment, particularly in the private services sector which represents
various business, professional and personal service sectors. Between 1998
and 1999, non-farm payroll increased by 2.25%. In 1999, the statewide
unemployment rate remained basically stable at 5.2%, higher than the national
average of 4.2%. Per capita income in 1998 was $20,247 reflecting an increase
of 2.7% from 1997. Moody's currently gives the State's general obligation
debt an Aa3 rating and Standard & Poor's gives it an AA-.
Tax Treatment
The Montana Tax-Free Fund's regular monthly dividends to shareholders that
are individuals, estates and trusts will not be subject to the Montana income
tax to the extent they are paid out of income earned on state and local
municipal bonds. These dividends are subject to Montana tax for shareholders
that are corporations. You will be subject to Montana income tax, however, to
the extent the Montana Tax-Free Fund distributes any taxable income or
realized capital gains, or if you sell or exchange Montana Tax-Free Fund
shares and realize a capital gain on the transaction. Montana taxes capital
gains (including capital gain distributions paid by the fund) at the same
rates as ordinary income.
North Dakota
The North Dakota economy continues to grow at a moderate, steady pace. The
overall unemployment rate in the state, as of December 1999, was 2.4%,
compared to 4.2% nationally. Four of the nine major employment sectors showed
growth in the state over 1998 levels. The only sector with a decrease was
mining, down 10.3%. Per capita income in 1998 was $21,708, up 7.4% from the
previous year. North Dakota's mainstay industry-agriculture-continues to deal
with poor grain prices and moderate prices for cattle producers. Taxable
sales and purchases reported by the state's merchants grew a modest 1.4% for
the fiscal year 1999 over 1998's figure. The construction sector saw the
greatest increase of 79.9%, while mining and oil extraction suffered the
greatest loss of 39.5%. Retail, the state's largest sector, lost 0.1%, not
even keeping pace with inflation. The energy industry in North Dakota has
been lackluster because of low world oil prices that have plagued the
industry during recent years. However, with oil prices averaging about $22
per barrel, if sustained, should trigger drilling activity in the new year.
North Dakota expects to continue on its path of slow to moderate growth for
the beginning of 2000. Efforts to diversify the state's economy from one that
is solely production-based to one that utilizes the latest technological
breakthroughs should be the key to North Dakota's economic stability.
Tax Treatment
The ND Tax-Free Fund's regular monthly dividends will not be subject to North
Dakota income taxes to the extent they are paid out of income earned on North
Dakota state and local government municipal bonds. You will be subject to
North Dakota income taxes, however, to the extent the ND Tax-Free Fund
distributes any taxable income, or if you sell or exchange ND Tax-Free Fund
shares and realize a capital gain on the transaction.
The treatment of corporate shareholders of the ND Tax-Free Fund is similar to
that described above. However, the above dividends are not exempt from North
Dakota tax for shareholders that are banks or other entities subject to North
Dakota tax on financial institutions.
For individuals, trusts, and estates using the North Dakota short-form to
compute your North Dakota income tax as a percentage of your federal income
taxes, dividends characterized as long-term capital gains for federal tax
purposes will be similarly treated for state tax purposes. If you, however,
use the regular method of calculating North Dakota taxable income, these
long-term capital gains will be taxed at the same rates as ordinary income.
South Dakota
South Dakota's economy is dominated by wholesale and retail trade and
agriculture. South Dakota's economy has been one of the healthiest economies
among the fifty states. A prime indication of the strength of South Dakota's
economy during 1997 was the growth in South Dakota's labor force. During
1997, the South Dakota labor force grew to an all-time high, with the
construction and finance, insurance and real estate sectors leading the way,
with growth rates of 3.8% and 8.0%, respectively. However, growth in the
labor force has slowed considerably since then. For the period of 1998 to
1999, the labor force grew by 1.2%. South Dakota has, however, enjoyed one
of the lowest unemployment rates in the nation at 2.9% in 1999, far below the
national unemployment rate of 4.2%. In 1998, the mining, transportation and
government sectors all showed losses of -12.5%, -1.2%, and -3.0%,
respectively. Finally, during the second quarter period of 1998 to the second
quarter of 1999, total personal income in South Dakota grew 4.6%, compared to
the national growth rate of 5.8%. Per capita income was $22,201 in 1998.
The State does not issue general obligation bonds, however, certain
instrumentalities of the State and non-profit corporations may issue debt.
Tax Treatment
Currently, South Dakota does not assess personal income or corporate income
tax.
A-1
-2-
MONTANA TAX-FREE FUND, INC.
ND TAX-FREE FUND, INC.
SOUTH DAKOTA TAX-FREE FUND, INC.
------------------------------------
1 North Main * Minot, North Dakota 58703 * (701) 852-5292
P.O. Box 759 * Minot, North Dakota 58702
(800) 276-1262 * Marketing * Fax (701) 838-4902
(800) 601-5593 * Transfer Agent * Fax (701) 852-2548
INVESTMENT ADVISER
ND Money Management, Inc.
1 North Main
Minot, ND 58703
PRINCIPAL UNDERWRITER
ND Capital, Inc.
1 North Main
Minot, ND 58703
CUSTODIANS
First Western Bank & Trust
900 South Broadway
Minot, ND 58701
Bremer Bank, N.A.
20 First Street SW
Minot, ND 58701
TRANSFER AGENT
ND Resources, Inc.
1 North Main, Minot, ND 58703
P.O. Box 759, Minot, ND 58702
INDEPENDENT ACCOUNTANT
Brady, Martz & Associates, P.C.
24 West Central Avenue
Minot, ND 58701
LEGAL COUNSEL
Chapman and Cutler
111 West Monroe Street
Chicago, IL 60603
-3-
INTEGRITY MUTUAL FUNDS
MONTANA TAX-FREE FUND, INC.
ND TAX-FREE FUND, INC.
SOUTH DAKOTA TAX-FREE FUND, INC.
Several additional sources of information are available to you. The
Statement of Additional Information (SAI), incorporated by reference
into this prospectus, contains detailed information on the funds'
policies and operation. Annual and semiannual reports contain
management's discussion of market conditions, investment strategies and
performance results as of the fund's latest semiannual or annual fiscal
year end. Call ND Capital at (800) 276-1262 to request a free copy of
any of these materials, or visit our website at www.integrityfunds.com.
Information about the funds (including the SAI) can be reviewed and copied
at the Commission's Public Reference Room in Washington D.C. Information
on the operation of the Public Reference Room may be obtained by calling the
Commission at 202-942-8090. Reports and other information about the funds
are also available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying
a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington D.C. 20549-0102.
Integrity Mutual Funds
1 North Main
Minot, North Dakota 58703
(800) 276-1262
Funds' SEC File Nos. 811-5681 (ND Tax-Free Fund)
811-7738 (Montana Tax-Free Fund)
811-8124 (South Dakota Tax-Free Fund)
-4-
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
Montana Tax-Free Fund, Inc.
ND Tax-Free Fund, Inc.
South Dakota Tax-Free Fund, Inc.
1 NORTH MAIN
MINOT, NORTH DAKOTA 58703
(701) 852-5292
(800) 601-5593 / TRANSFER AGENT
(800) 276-1262 / MARKETING
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of the Montana Tax-Free Fund, Inc.,
the ND Tax-Free Fund, Inc., and the South Dakota Tax-Free Fund, Inc. (the
"Funds"), dated May 1, 2000. The Prospectus may be obtained without charge
from the Funds by writing to the above address or calling (800) 276-1262.
In addition, the audited financial statements for each Fund's most recent
fiscal year appear in the Fund's annual report, which is incorporated by
reference. The Fund's annual report accompanies this Statement of
Additional Information.
TABLE OF CONTENTS
Section Page
Investments.........................................................1
Investment Policies and Techniques..................................3
Investment Restrictions............................................10
Additional Risk Considerations.....................................12
Management of the Funds............................................12
Control Persons and Principal Holders of Securities................14
Investment Advisory and Other Services.............................15
Distribution and Service Plans.....................................17
Expenses...........................................................20
Portfolio Transactions.............................................20
Purchase and Redemption of Shares..................................21
Reduction of Up-Front Sales Charge on Class A Shares...............22
Waivers of Up-Front Sales Charge on Class A Shares.................24
Monthomatic Investment Plan........................................26
Exchange Privilege.................................................26
Minimum Investment.................................................26
Redemptions........................................................26
Contingent Deferred Sales Charges..................................27
Additional Information on Purchases and Redemptions................29
Systematic Withdrawal Plan.........................................30
Net Asset Value....................................................30
Underwriter........................................................30
Dividends and Taxes................................................32
-i-
Calculation of Performance Data....................................36
Tax-Free Versus Taxable Income.....................................41
Organization and Share Attributes..................................44
Shareholder Meetings...............................................45
Appendix-Ratings of Investments....................................45
Financial Statements...............................................47
-ii-
INVESTMENTS
MUNICIPAL SECURITIES
The Montana Tax-Free Fund, Inc. (the "Montana Fund"), the ND Tax-Free
Fund, Inc. (the "ND Fund"), and the South Dakota Tax-Free Fund, Inc. (the
"South Dakota Fund") are each registered open-end, non-diversified, management
investment companies. Each Fund seeks to achieve its objective by investing
in a portfolio of obligations issued by or on behalf of states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from
which is exempt from federal income taxes ("Municipal Securities"). Municipal
Securities are debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Securities may be issued include refunding of outstanding
obligations, obtaining funds for general operating expenses and obtaining
funds to loan to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide privately-operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity,
or sewage or solid waste disposal. Such obligations, which may include lease
arrangements, are included within the term Municipal Securities if the
interest paid thereon qualifies as exempt from federal income tax. Other types
of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately-operated
industrial or commercial facilities, may constitute Municipal Securities,
although the current federal tax laws place substantial limitations on the
size of such issues.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source.
Industrial development bonds that are Municipal Securities are in most cases
revenue bonds and do not generally involve the pledge of the credit of the
issuer of such bonds. There are, of course, variations in the degree of risk
of Municipal Securities, both within a particular classification and between
classifications, depending upon numerous factors.
The yields on Municipal Securities are dependent upon a variety of factors,
including general money market conditions, general conditions of the Municipal
Securities market, size of particular offering, maturity of the obligation and
rating of the issue. The ratings of Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P") represent their opinions
as to the quality of the Municipal Securities which they undertake to rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, Municipal Securities with the same
maturity, coupon and rating may have different yields, while Municipal
Securities of the same maturity and coupon with different ratings may have the
same yield. Each Fund will not purchase or hold more than 5% of its net assets
in securities rated below investment grade.
Each Fund may invest in "private activity" bonds. Each Fund may also
purchase participation interests in Municipal Securities (such as industrial
development bonds) from financial institutions, including banks, insurance
companies and broker-dealers. A participation interest gives the Fund an
undivided interest in the Municipal Securities in the proportion that the
Fund's participation interest bears to the total principal amount of the
Municipal Securities. These instruments may be variable or fixed rate.
With respect to the ND Fund and the Montana Fund, not more than 5% of the
net assets of the respective Fund will be invested in participation interests
in Municipal Securities during the coming year. With respect to the South
Dakota Fund, not more than 5% of the net assets of the Fund will be invested
in municipal lease obligations with non-appropriation clauses.
Provisions of the federal bankruptcy statutes relating to the adjustment
of debts of political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior notice to
or consent of creditors, which proceedings could result in material and
adverse modification or alteration of the rights of holders of obligations
issued by such subdivisions or authorities.
Litigation challenging the validity under state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or
the validity of their issuance under state or federal law which litigation
could ultimately affect the validity of those Municipal Securities or the
tax-free nature of the interest thereon.
Each Fund will seek to achieve its objective by investing primarily in
tax-exempt securities issued by the State after which the Fund is named and
its political subdivisions, agencies, and instrumentalities which are within
the four highest grades of either Moody's (Aaa, Aa, A or Baa) or S&P's (AAA,
AA, A or BBB) or which are unrated but are of comparable quality, as
determined by the fund's investment adviser, ND Money Management, Inc. (the
"Investment Adviser" or "ND Money Management"). Municipal Securities within
the four highest grades of Moody's and S&P's are generally considered to be
"investment grade." Those rated Baa by Moody's or BBB by S&P's (and
equivalent for unrated securities) may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the
case with higher grade bonds. A Fund will promptly dispose of a bond whose
rating drops below investment grade or is reduced in credit quality with
respect to unrated securities. The Board of Directors, however, may vary this
policy if it determines that prompt disposal of a bond would not be in the
best interests of shareholders. The characteristics of the rating categories
are described in the Appendix under "Ratings of Investments." There is no
assurance that a Fund will achieve its objective.
B-2
TEMPORARY INVESTMENTS
For temporary defensive purposes, each Fund may invest in any of the
following short-term, fixed-income obligations, the interest on which is
subject to federal income taxes: obligations of the United States Government,
its agencies or instrumentalities; debt securities rated within the three
highest grades of Moody's or S&P; commercial paper rated in the highest two
grades by either of those rating services (P-1, P-2 or A-1, A-2, respectively);
certificates of deposit of domestic banks with assets of $25,000,000 or more;
and Municipal Securities or any of the foregoing temporary investments subject
to short-term repurchase agreements. When a Fund invests in accordance with
this policy, it may do so without percentage limits. A repurchase agreement is
an instrument under which the purchaser acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby determining the yield during the holding period. Maturity of the
securities subject to repurchase may exceed one year. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might incur expenses in enforcing its rights and could experience losses,
including a decline in the value of the underlying securities and loss of
income. Dividends from interest income from temporary investments may be
taxable to shareholders as ordinary income. See "Dividends and Taxes" below.
For a description of the ratings of commercial paper and other debt securities
permitted as temporary investments, see "Appendix-Ratings of Investments."
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Each Fund may engage in futures transactions and options on such futures in
accordance with its investment objective and policies for hedging purposes
and not for speculation. The ND Fund may also engage in option transactions
on securities in accordance with its objective and policies. Each Fund
intends to engage in such transactions if it appears advantageous to the
Investment Adviser to do so in order to pursue its investment objective, to
hedge against the effects of fluctuating interest rates, and to stabilize the
value of its assets. The use of futures and options, possible benefits and
attendant risks are discussed below, along with information concerning certain
other investment policies and techniques.
FINANCIAL FUTURES CONTRACTS
A Fund may enter into financial futures contracts. Financial futures
contracts are commodity contracts that obligate the long or short holder to
take or make delivery of a specified quantity of a financial instrument, such
as a security, or the cash value of a securities index during a specified
future period at a specified price. Each Fund may enter into financial futures
contracts for the future delivery of a financial instrument, such as a
security, or the cash value of a security index. This investment technique
is designed primarily to hedge (i.e., protect) against anticipated future
changes in interest rates or market conditions which otherwise might adversely
affect the value of securities which the Fund holds or intends to purchase. A
B-3
"sale" of a futures contract means the undertaking of a contractual obligation
to deliver the securities or the cash value of an index called for by the
contract at a specified price during a specified delivery period. A "purchase"
of a futures contract means the undertaking of a contractual obligation to
acquire the securities or cash value of an index at a specified price during a
specified delivery period. At the time of delivery in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
At the time a Fund enters into a futures contract, it is required to
deposit with its custodian a specified amount of cash or eligible securities
called "initial margin." The initial margin required for a futures contract
is set by the exchange on which the contract is traded. Subsequent payments,
called "variation margin," to and from the broker are made on a daily basis
as the market price of the futures contract fluctuates.
A Fund may engage in financial futures as an attempt to hedge against the
effects of fluctuations in interest rates and other market conditions. For
example, if a Fund owned long-term Municipal Securities and interest rates were
expected to rise, it could sell futures on a Municipal Securities Index. If
interest rates did increase, the value of the Municipal Securities in the Fund
would decline, but this decline would be offset in whole or in part by an
increase in the value of the Fund's futures contracts. If, on the other hand,
long-term interest rates were expected to decline, a Fund could hold short-
term Municipal Securities and benefit from the income earned by holding such
securities, while at the same time the Fund could purchase futures contracts
on a Municipal Securities Index. Thus, a Fund could take advantage of the
anticipated rise in the value of long-term Municipal Securities without
actually buying them. The futures contracts and short-term Municipal
Securities could then be liquidated and the cash proceeds used to buy long-
term Municipal Securities. A Fund will not enter into any futures contracts
or options on futures contracts if the aggregate of the contract value of the
outstanding options written by the Fund would exceed 50% of the total assets
of the respective Fund.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take
delivery of the security. The offsetting of a contractual obligation is
accomplished by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, if effected through a member of an exchange,
cancels the obligation to make or take delivery of the securities. Other
financial futures contracts, such as futures contracts on a securities index,
by their terms call for cash settlements. All transactions in the futures
market are made, offset or fulfilled through a clearing house associated with
the exchange on which the contracts are traded. A Fund will incur brokerage
fees when it purchases or sells contracts and will be required to maintain
margin deposits. Futures contracts entail risks. If the Investment Adviser's
judgment about the general direction of interest rates or markets is wrong,
the overall performance may be poorer than if no such contracts had been
made. The costs incurred in connection with futures transactions would also
reduce a Fund's yield.
B-4
There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities that are being hedged. The degree
of difference in price movements between futures contracts and the securities
being hedged depends upon such things as variations in speculative market
demand for futures contracts and debt securities and differences between the
securities being hedged and the securities underlying the futures contracts,
e.g., interest rates, tax status, maturities and creditworthiness of issuers.
While interest rates on taxable securities generally move in the same
direction as interest rates on Municipal Securities, there are frequently
differences in the rate of such movements and temporary dislocations.
Accordingly, the use of a financial futures contract on a taxable security or
a taxable securities index may involve a greater risk of an imperfect
correlation between the price movements of the futures contract and of the
Municipal Security being hedged than when using a financial futures contract
on a Municipal Security or a Municipal Securities Index. If a liquid secondary
market did not exist when a Fund wished to close out a financial futures
contract, it would not be able to do so and would have to continue making daily
cash payments of variation margin in the event of adverse price movements. In
addition, futures markets have daily market price movement limits for many
futures contracts which may further inhibit the Investment Adviser's ability to
manage the Fund's portfolio. Futures contracts held by a Fund may be illiquid
during periods when daily market price movement limits have been reached. As a
result, net assets of the Fund may be impacted negatively until normal futures
trading resumes or until the Fund's future contracts are closed out. In
addition to the foregoing, the market prices of futures contracts may be
affected by certain factors. If participants in the futures market elect to
close out their contracts through off-setting transactions rather than meet
margin requirements, distortions in the normal relationship between the debt
securities and futures markets could result. Price distortions could also
result if investors in futures contracts decide to make or take delivery of
underlying securities rather than engage in closing transactions because of
the resultant reduction in the liquidity of the futures market. In addition,
from the point of view of speculators, the margin requirements in the futures
market are less onerous than margin requirements in the cash market. Thus,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in
the futures market and because of the imperfect correlation between movements
in the prices of securities and movements in the prices of futures contracts,
a correct forecast of market trends by the Investment Adviser may still not
result in a successful hedging transaction. If this should occur, a Fund
could lose money on the financial futures contracts and also on the value of
its portfolio securities.
A Fund may engage in futures transactions only on commodities or securities
exchanges or boards of trade. A Fund will not engage in transactions in
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
Although the successful use of futures contracts and options techniques
requires skills different from those needed to select portfolio securities, the
Investment Adviser has experience in the use of these techniques.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
Each Fund may purchase and write call and put options on financial futures
contracts in an attempt to hedge against the effects of fluctuations in
interest rates and other market conditions. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
B-5
position in a futures contract at a specified exercise price at any time during
the period of the option. A call option gives the purchaser the right to buy,
and the writer the obligation to sell, the underlying futures contract at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy the underlying futures
contracts at the exercise price during the option period. A Fund would be
required to deposit with its custodian initial margin and maintenance margin
with respect to put and call options on futures contracts written by it.
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by a Fund may expire worthless, in which case the Fund would lose the
premium paid therefor.
OPTIONS ON SECURITIES
In addition to the foregoing, the ND Fund may write (sell) covered call
options as long as it owns securities which are acceptable for escrow purposes
and may write secured put options, which means that as long as the Fund is
obligated as a writer of a put option, it will invest an amount not less than
the exercise price of the put option in Municipal Securities or temporary
investments. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer has the obligation to buy, the underlying security at the
exercise price during the option period. The premium received for writing an
option will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to such market
price, the price volatility of the underlying security, the option period,
supply and demand, and interest rates. The ND Fund may write or purchase
spread options, which are options for which the exercise price may be a fixed
dollar spread or yield spread between the security underlying the option and
another security that is used as a bench mark. The exercise price of an option
may be below, equal to, or above the current market value of the underlying
security at the time the option is written. The buyer of a put who also owns
the related securities is protected by ownership of a put option against any
decline in that security's price below the exercise price less the amount paid
for the option. The ability to purchase put options allows the ND Fund to
protect capital gains in an appreciated security it owns without being required
to actually sell that security. At times, the Fund would like to establish a
position in a security upon which call options are available. By purchasing a
call option, the ND Fund is able to fix the cost of acquiring the securities,
this being the cost of the call plus the exercise price of the option. This
procedure also provides some protection from an unexpected downturn in the
market, because the ND Fund is only at risk for the amount of the premium paid
for the call option which it can, if it chooses, permit to expire.
During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price should the underlying
security rise in value, and the secured put writer retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result
in the security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.
B-6
If a secured put option expires unexercised, the writer realizes a gain and
the buyer a loss in the amount of the premium. If the secured put writer has
to buy the underlying security because of the exercise of the put option, the
secured put writer incurs an unrealized loss to the extent that the current
market value of the underlying security is less than the exercise price of
the put option, minus the premium received.
OPTIONS ON SECURITIES INDICES
The ND Fund also may purchase and write call and put options on securities
indices which are traded on national stock exchanges in an attempt to hedge
against market conditions affecting the value of securities that the Fund owns
or intends to purchase and not for speculation. Through the writing or
purchase of index options, the Fund can achieve many of the same objectives
as through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the
right to take or make delivery of a security at a specified price, an option
on a securities index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the securities index
upon which the option is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option. The writer of the option is
obligated, in return for a premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash, and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities.
When the ND Fund writes an option on a securities index, it will be
required to deposit with its custodian eligible securities equal in value to
100% of the exercise price, in the case of a put, or the contract value, in
the case of a call. In addition, where such Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise
price, the Fund will segregate, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
Options on securities and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Price movements in securities which the Fund owns or intends to purchase will
not correlate perfectly with movements in the level of the index and,
therefore, the Fund bears the risk that a loss on an index option would not be
completely offset by movements in the price of such securities. The use of
index options on a taxable security may involve a greater risk of an imperfect
correlation between price movements in the Municipal Securities being hedged
and the movements in the level of the index. Because index options are settled
in cash, a call writer cannot determine the amount of its settlement
obligations in advance and, unlike call writing on specific securities, cannot
provide in advance for, or cover, its potential settlement obligations by
acquiring and holding the underlying securities. Also, an option purchased by
the ND Fund may expire worthless, in which case the Fund would lose the premium
paid therefor.
B-7
DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. When issued or delayed delivery transactions involve a
commitment by the respective Fund to purchase securities with payment and
delivery to take place in the future in order to secure what is considered to
be an advantageous price or yield to the Fund at the time of entering into the
transaction. When a Fund enters into a delayed delivery purchase, it becomes
obligated to purchase securities and it has all the rights and risks attendant
to ownership of a security, although delivery and payment occur at a later
date. The value of fixed income securities to be delivered in the future will
fluctuate as interest rates vary. At the time a Fund makes the commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the amount due and the value of the security in
determining its net asset value. A Fund generally has the ability to close out
a purchase obligation on or before the settlement date, rather than to purchase
the security. Because a Fund is required to segregate cash or liquid high-
grade debt securities to satisfy its commitments to purchase when-issued or
delayed-delivery securities, such cash and securities are not available to make
additional investments or for trading while these assets are set aside.
To the extent a Fund engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage or to speculate in interest rate changes.
Each Fund will only make commitments to purchase securities on a when-issued
or delayed delivery basis with the intention of actually acquiring the
securities, but the Fund reserves the right to sell these securities before
the settlement date if deemed advisable.
DIVERSIFICATION AND CONCENTRATION POLICIES
Each Fund is a non-diversified investment company under the Investment
Company Act of 1940. This means that more than 5% of a Fund's assets may be
invested in the obligations of any issuer. The Funds, however, intend to
comply with Subchapter M of the Internal Revenue Code (the "Code") that limits
the aggregate value of all holdings (except U.S. Government and cash items, as
defined in the Code) that exceed 5% of the Fund's total assets to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits, up to 50%
of a Fund's total assets may be invested in as few as two single issuers. In
the event of decline of creditworthiness or default upon the obligations of one
or more such issuers exceeding 5%, an investment in a Fund will entail greater
risk than in a portfolio having a policy of "diversification" because a high
percentage of the Fund's assets may be invested in municipal obligations of
one or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of
the assets of a Fund and consequently a greater degree of fluctuation of the
Fund's net asset value, because the Fund will be more susceptible to economic,
political or regulatory developments affecting these securities than would be
the case with a portfolio composed of varied obligations of more issuers.
B-8
In addition, because of the relatively small number of issuers of
Municipal Securities in South Dakota, North Dakota and Montana, each Fund is
more likely to invest a higher percentage of its assets in the securities of a
single issuer than an investment company which invests in a broad range of tax-
exempt securities. This practice involves an increased risk of loss to the
Fund if the issuer is unable to make interest or principal payments or if the
market value of such securities declines.
A Fund will not invest 25% or more of its total assets in any industry.
Governmental issuers of Municipal Securities are not considered part of an
"industry." However, Municipal Securities backed only by the assets and
revenues of non-governmental users will for this purpose be deemed to be issued
by such non-governmental users, in which case the 25% limitation would apply
to such obligations. Accordingly, a Fund will not invest 25% or more of its
assets in obligations deemed to be issued by non-governmental users in any one
industry and in taxable obligations of issuers in the same industry. In
addition, each Fund may invest more than 25% of its net assets in industrial
development bonds whose revenue sources are from similar types of projects, for
example, education, electric utilities, health care, housing, transportation,
or water, sewer, and gas utilities. There may be economic, business or
political developments or changes that affect all securities of a similar type,
such as proposed legislation affecting the financing of certain projects,
shortages or price increases of necessary materials, or declining market needs
for such projects. Therefore, developments affecting a single issuer,
industry or securities financing similar types of projects could have a
significant effect on the Fund's performance.
PORTFOLIO TURNOVER
A Fund will not normally engage in the trading of securities for the purpose
of realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, a Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities in
anticipation of a decline in interest rates. In addition, a security may be
sold and another of comparable quality purchased at approximately the same time
to take advantage of what the Investment Adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, such
as changes in the overall demand for or supply of various types of Municipal
Securities or changes in the investment objectives of some investors.
Frequency of portfolio turnover will not be a limiting factor should the
Investment Adviser deem it desirable to purchase or sell securities.
REGULATORY RESTRICTIONS
To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option
or entering into a delayed delivery purchase, a Fund will maintain in a
segregated account with its custodian cash or liquid high-grade debt
securities equal to the value of such contracts. The amount held by the
custodian is less than the amount held by any futures commission agent as
initial margin and will be marked to market daily.
B-9
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 to avoid "commodity pool operator" status, each Fund will use
futures and options positions only (a) for "bona fide hedging purposes" (as
defined in CFTC regulations) or (b) for other purposes so long as aggregate
initial margins and premiums required in connection with non-hedging positions
do not exceed 5% of the liquidation value of the investment company's
portfolio. Each Fund will not engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt to hedge
against changes in market conditions affecting the values of securities which
the Fund holds or intends to purchase. With respect to the ND Fund, when
futures contracts or options thereon are purchased to protect against a price
increase on securities intended to be purchased later, it is anticipated that
at least 75% of such intended purchases will be completed. In addition, when
other futures contracts or options thereon are purchased, the underlying value
of such contracts will at all times not exceed the sum of: (1) accrued profit
on such contracts held by the broker; (2) cash or high quality money market
instruments set aside in an identifiable manner; and (3) cash proceeds from
investments due in 30 days.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions which, together
with the investment objective and policies, cannot be changed without approval
by holders of a majority of its outstanding voting shares. As defined in the
Investment Company Act of 1940 (the "1940 Act"), this means the lesser of the
vote of (a) 67% or more of the outstanding shares of the Fund present at a
meeting where more than 50% of the outstanding shares are present in person
or by proxy; or (b) more than 50% of the outstanding shares of the Fund. Each
Fund may not:
(1) Purchase securities or make investments other than in accordance
with its investment objectives and policies.
(2) Purchase securities (other than securities of the United States
Government, its agencies or instrumentalities, or securities of the state after
which the Fund was named (e.g., the State of North Dakota for the ND Fund) or
their respective political subdivisions, agencies or instrumentalities) if as
a result of such purchase 25% or more of the Fund's total assets would be
within any industry.
(3) Make loans, except in accordance with its investment objectives and
policies.
(4) Borrow money except for temporary or emergency purposes and then
only in amounts not exceeding the lesser of 10% of its total assets valued at
cost, or 5% of its total assets valued at market, and, in any event, only if
immediately thereafter there is an asset coverage of at least 300%; or
mortgage, pledge or hypothecate its assets in an amount exceeding 10% of its
total assets to secure temporary or emergency borrowing. A Fund will not
purchase portfolio securities when outstanding borrowings exceed 5% of its
total assets.
(5) Make short sales of securities.
B-10
(6) Purchase or retain the securities of any issuer if any of its
officers or directors or of the Investment Adviser owns beneficially more
than 1/2 of 1% of the securities of such issuer and together own more than 5%
of the securities of such issuer.
(7) Invest more than 15% of its net assets in illiquid securities,
including (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to disposition under the federal
securities laws, and (c) repurchase agreements maturing in more than seven
days.
(8) Invest for the purpose of exercising control or management of
another issuer.
(9) Invest in commodities or commodity futures contracts, although it
may buy or sell financial futures contracts and options on such contracts.
(10) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the Municipal Securities of
issuers which invest in or sponsor such programs.
(11) Invest more than 10% of its total assets in securities of other
investment companies, except in connection with a merger, consolidation,
reorganization or acquisition of assets.
(12) Underwrite securities issued by others, except to the extent that
the Fund may be deemed to be an underwriter under the federal securities laws
in connection with the disposition of portfolio securities.
(13) Issue senior securities as defined in the Investment Company Act
of 1940, except money borrowed as permitted by (4) above.
(14) Invest in real estate (or real estate mortgage loans in the case
of the Montana Fund and the South Dakota Fund), although a Fund may invest in
Municipal Securities which are secured by real estate and securities of
issuers which invest or deal in real estate.
In addition to the foregoing, the ND Fund, as a fundamental policy, may
not write, purchase, or sell puts, calls, or combinations thereof, except in a
ccordance with its investment objective and policies.
Interest paid on funds borrowed as permitted by (4) above will decrease
the net earnings of the respective Fund.
During the coming year, each Fund does not intend to invest more than 5%
of its net assets in securities of other investment companies. Any investment
by a Fund in securities issued by other investment companies will result in
duplication of certain expenses.
B-11
Each Fund may invest more than 25% of its net assets in industrial
development bonds.
Any policy or restriction which involves a maximum percentage of securities
or assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the respective Fund. Changes due to
market action will not cause a violation of a policy or restriction.
ADDITIONAL RISK CONSIDERATIONS
An investment in the Funds are subject to a number of risks, some of which
have been described in the Funds' Prospectus under "Fund Summary" for each Fund
and the "Principal Risk Factors" Section. See also "Investments" and
"Investment Policies and Techniques" above for some of the risks associated
with the Funds' investment policies. In addition to the foregoing, you should
note that each Fund is a separately registered investment company the shares
of which are being offered through the same prospectus. Accordingly, one Fund
could be liable for any misstatement, inaccuracy or incomplete disclosure in
the prospectus concerning another Fund.
MANAGEMENT OF THE FUNDS
The management of each Fund, including general supervision of the duties
performed for a Fund under its Investment Advisory Agreement, is the
responsibility of its Board of Directors. The number of directors of each Fund
is five, two of whom are "interested persons" (as the term "interested persons"
is defined in the Investment Company Act of 1940) and three of whom are
"disinterested persons." The names and business addresses of the directors
and officers of the Funds and their principal occupations and other
affiliations during the past five years are set forth below, with the
directors who are "interested persons" of the Funds indicated by an asterisk.
B-12
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH
NAME AND ADDRESS AGE EACH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS1
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lynn W. Aas 78 Director Retired; Attorney; Director, Integrity
904 NW 27th Fund of Funds, Inc., Integrity Small-Cap
Minot, North Dakota 58701 Fund of Funds, Inc. (since September 1998)and
ND Insured Income Fund Inc. (December 1994 to
August 1999); Trustee, Ranson Managed
Portfolios (since January 1996); Director,
First Western Bank & Trust
Orlin W. Backes2 64 Director Attorney, McGee, Hankla, Backes & Wheeler,
15 2nd Ave. SW, Suite 305 P.C.; Director, Integrity Fund of Funds,
Minot, North Dakota 58701 Inc. (since April 1995), Integrity
Small-Cap Fund of Funds, Inc. (since
September 1998) and ND Insured Income Fund Inc.
(March 1995 to August 1999); Trustee, Ranson
Managed Portfolios (since January 1996);
Director, First Western Bank & Trust
R. James Maxson3 52 Attorney, McGee, Hankla, Backes &
15 2nd Ave. SW, Suite 305 Wheeler, P.C. (since April 2000); Attorney,
Minot, North Dakota 58701 Farhart, Lian and Maxson, P.C. (March 1976 to
March 2000); Director, Integrity Fund of Funds,
Inc. (since January 1999), and Integrity
Small-Cap Fund of Funds, Inc. (since
January 1999); Trustee, Ranson
Managed Portfolios (since January 1999)
*Peter A. Quist4 66 Director Director and Vice President, ND Holdings,
1 North Main Vice- Inc.; Director, Vice President,
Minot, North Dakota 58703 President and Secretary, ND Money Management,
Secretary Inc., ND Capital, Inc., ND Resources,
Inc., ND Insured Income Fund, Inc.
(November 1990 to August 1999), Integrity Fund of
Funds, Inc., Integrity Small-Cap Fund of Funds,
Inc. (since September 1998), The Ranson Company,
Inc. (January 1996 to February 1997), and Ranson
Capital Corporation (since January 1996); Vice
President and Secretary, Ranson Managed
Portfolios (since January 1996)
*Robert E. Walstad5 55 Director Director and President, ND Holdings,
1 North Main President Inc.; Director, President, and Treasurer,
Minot, North Dakota 58703 Treasurer ND Money Management, Inc., ND Capital,
Inc., ND Resources, Inc., ND Insured Income
Fund, Inc. (November 1990 to August 1999),
Integrity Fund of Funds, Inc. and Integrity
Small-Cap Fund of Funds, Inc. (since
September 1998); Trustee, Chairman, President,
and Treasurer, Ranson Managed Portfolios (since
January 1996); Director, President, CEO, and
Treasurer, The Ranson Company, Inc.
(January 1996 to February 1997), and Ranson
Capital Corporation (since January 1996)
</TABLE>
[FN]
1 Except as otherwise indicated, each individual has held the office(s)
shown for the past five years. Messrs. Aas, Backes and Walstad were elected
to the Board of Trustees of Ranson Managed Portfolios at a joint special
meeting of the shareholders of The Kansas Municipal Fund Series, The Kansas
Insured Municipal Fund - Limited Maturity (subsequently renamed "The Kansas
Insured Intermediate Fund") Series and The Nebraska Municipal Fund Series of
Ranson Managed Portfolios held on December 11, 1995, but did not assume office
until January 5, 1996. Mr. R. James Maxson was elected to the Board of
Trustees of Ranson Managed Portfolios on December 4, 1998, effective January 1,
1999.
2 Mr. Backes was elected to the board of directors of each Fund, in April
1995.
3 Mr. R. James Maxson was elected to the board of directors of each Fund
on December 4, 1998, effective January 1, 1999.
4 Mr. Quist has served on the board of directors of the Montana Fund, the
ND Fund, the Integrity Fund of Funds, Inc., and the Integrity Small-Cap Fund
of Funds, Inc., since their inceptions. He was elected to the board of South
Dakota Fund on April 7, 1995, and has served as the vice president and
secretary of each of the aforementioned funds since their inceptions.
5 Mr. Walstad has served as a director and as the president and treasurer
of each Fund, the Integrity Fund of Funds, Inc., and the Integrity Small-Cap
Fund of Funds, Inc., since their inceptions.
</FN>
B-13
Directors who are not an "interested person" as that term is defined in
the 1940 Act of the Funds are paid an annual fee of $10,000 for serving on the
boards of the Funds in the complex. In addition to the three Funds, the
directors are also directors or trustees of six open-end investment companies
advised by ND Money Management, Inc. or Ranson Capital Corporation, an
affiliate of the Investment Adviser. The annual fee paid to the directors is
allocated among the funds in the complex (which includes each of the four
series of Ranson Managed Portfolios) as follows: each fund pays a minimum
$500 and the remainder of the fee is allocated among the funds on the basis of
their relative net asset values. Messrs. Quist and Walstad, who are the only
"interested persons" of such funds, receive no compensation from the funds.
The following table sets forth compensation paid by each Fund to each of
the directors of the Funds and total compensation paid to each director for the
fiscal year ended December 31, 1999. The Funds have no retirement or pension
plans.
<TABLE>
<CAPTION>
COMPENSATION TABLE
TOTAL**
AGGREGATE* COMPENSATION FROM
AGGREGATE* AGGREGATE* COMPENSATION FROM FUNDS AND FUND
NAME OF PERSON, COMPENSATION FROM COMPENSATION FROM THE SOUTH DAKOTA COMPLEX PAID TO
POSITION(S) THE MONTANA FUND THE ND FUND FUND DIRECTORS
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Lynn W. Aas
Director $1,487.41 $1,730.01 $633.81 $10,000.00
Orlin W. Backes
Director $1,487.41 $1,730.01 $633.81 $10,000.00
R. James Maxson(2)
Director $1,487.41 $1,730.01 $633.81 $10,000.00
Peter A. Quist
Director,
Vice President, and
Secretary -0- -0- -0- -0-
Robert E. Walstad
Director, President,
and Treasurer -0- -0- -0- -0-
TOTALS $4,462.23 $5,190.03 $1,901.43 $30,000.00
</TABLE>
[FN]
* Based on compensation paid to the directors for the one-year period
ended December 31, 1999 for services to the respective Fund.
** Based on the compensation paid to the trustees for the one-year period
ended December 31, 1999 for services to the Funds and six other open-end funds
advised by ND Money Management, Inc. or Ranson Capital Corporation.
</FN>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 14, 2000, ND Holdings, Inc. owned of record 100% of
Class A shares outstanding in the South Dakota Fund.
To the best knowledge of the respective Fund, as of April 14, 2000,
the following persons owned, of record or beneficially 5% or more of the
Class A shares outstanding of the Montana Fund:
B-14
NAME ADDRESS PERCENT OWNERSHIP
ND Holdings, Inc. 1 North Main 28.33%
Minot, ND 58703
Clifford & Patricia Douglass 318 Sweathouse Creek Rd. 64.92%
Victor, MT 59875
Norwest Investment Services, Inc. Northstar Building East 9th Floor 6.74%
608 2nd Ave. South
Minneapolis, MN 55479
As of April 14, 2000, no person owned of record or was known by ND Fund to
own of record or beneficially 5% or more of ND Fund's outstanding Class A
shares. As of April 14, 2000, no person owned of record or was known by a
Fund to own of record or beneficially 5% or more of a Fund's outstanding
Class B shares. In addition, as of April 14, 2000, the officers and directors
of each Fund, in the aggregate, own less than 1% of any class of the shares of
each Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ND Money Management, Inc. has been retained by each Fund under an Investment
Advisory Agreement to act as each Fund's investment adviser, subject to the
authority of the Board of Directors. The Investment Adviser is a wholly-
owned subsidiary of ND Holdings, Inc. ("ND Holdings"), a venture capital
corporation organized under the laws of the State of North Dakota on
September 22, 1987. The Investment Adviser was incorporated under North
Dakota law on August 19, 1988, and also serves as investment adviser for
Integrity Fund of Funds, Inc. The address of the Investment Adviser is 1
North Main, Minot, North Dakota 58703.
The Investment Adviser furnishes each Fund with investment advice and, in
general, supervises the management and investment program of each Fund. The
Investment Adviser furnishes, at its own expense, all necessary administrative
services, office space, equipment and clerical personnel for servicing the
investments of a Fund and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of each Fund. In addition, the Investment Adviser pays the
salaries and fees of all officers and directors of the Funds who are affiliated
persons of the Investment Adviser. All other charges and expenses, as more
fully described under "Expenses," are paid by the respective Fund.
For the management services and facilities furnished by ND Money Management,
each of the Funds has agreed to pay the Investment Adviser an annual management
fee, payable monthly, of 0.60% of the respective Fund's average daily net
assets. In addition, the Investment Adviser voluntarily agreed to waive all
or a portion of its management fee or reimburse certain expenses of a Fund for
the year ended April 30, 2001 in order to prevent total operating expenses
excluding extraordinary expenses from exceeding 1.30% of the average daily net
asset value of the Class B shares of the relevant Fund. The investment
adviser and underwriter have also voluntarily agreed to waive fees through
April 30, 2001, in order to prevent total operating expenses excluding
extraordinary expenses from exceeding 0.95% of the average daily net assets of
Class A shares. The table below sets forth the advisory fees paid by the
Funds, net of expenses reimbursements and the fees waived and expenses
reimbursed by the Investment Adviser for the periods indicated.
B-15
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF
EXPENSE REIMBURSEMENT FEE WAIVERS AND
TO ND MONEY MANAGEMENT EXPENSE REIMBURSEMENTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
--------------------------------------------------------------------------
12/31/97 12/31/98 12/31/99 12/31/97 12/31/98 12/31/99
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Montana Fund $246,178 $285,851 $323,083 -0- $40,905 $49,091
ND Fund $544,971 $469,016 $387,947 -0- $36,818 $65,017
South Dakota Fund $ 44,337 $ 0 $ 5,302 -0- $37,094 $39,141
</TABLE>
The Investment Advisory Agreement with each Fund provides that the
Investment Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
the matters to which the Investment Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Investment Adviser in the performance of its duties or by
reason of its reckless disregard of its obligations and duties under the
respective Investment Advisory Agreement.
The Investment Advisory Agreement with each Fund continues in effect from
year to year as long as its continuation is approved at least annually by a
majority of the directors who are not parties to the Investment Advisory
Agreement or interested persons of any such party except in their capacity
as directors of the Fund and by the shareholders or the Board of Directors.
Each Investment Advisory Agreement may be terminated at any time upon 60
days' written notice by the relevant Fund or by a majority vote of the
outstanding shares or 90 days' written notice by the Investment Adviser
and will terminate automatically upon assignment.
Robert E. Walstad and Peter A. Quist, directors and officers of each Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Funds."
CODE OF ETHICS
You should also note that the Investment Adviser, ND Capital, Inc.
(the Funds' underwriter), and the Funds have adopted codes of ethics under
Rule 17j-1 of the 1940 Act. The purpose of a code is to avoid potential
conflicts of interest and to prevent fraud, deception or misconduct with
respect to the Fund. Such codes of ethics permit personnel covered by the
codes to invest in securities, subject to the restrictions of the code.
CUSTODIAN AND TRANSFER AGENT
Bremer Bank, N.A., 20 First Street SW, Minot, North Dakota 58701 performs
custodial services for the securities and cash of the ND Fund and South Dakota
Fund. First Western Bank & Trust, 900 South Broadway, Minot, North Dakota
58701, performs custodial services for the securities and cash of the Montana
Fund. ND Resources, Inc. ("ND Resources" or "Transfer Agent"), a wholly-
owned subsidiary of ND Holdings, 1 North Main, Minot, North Dakota 58703, is
the Funds' Transfer Agent. As Transfer Agent, ND Resources performs many of
the Funds' clerical and administrative functions. For its services, each Fund
pays ND Resources a monthly fee ranging from 0.16 of 1% of the net asset value
of all the respective Fund's outstanding shares up to $10 million down to 0.09
of 1% for net assets in excess of $50 million. ND Resources also provides
internal accounting and related services for each Fund, for which it is paid a
monthly fee of $2,000 plus 0.05% of the respective Fund's average daily net
assets on an annual basis for the first $50 million down to 0.01% for the net
assets in excess of $500 million.
B-16
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Funds' independent public accountant, Brady, Martz & Associates, P.C., 24
West Central Avenue, Minot, North Dakota 58701, audits and reports on each
Fund's annual financial statements, reviews certain regulatory reports and each
Fund's federal income tax return, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the respective
Fund. Shareholders will receive annual audited financial statements and
semiannual unaudited financial statements.
DISTRIBUTION AND SERVICE PLANS
Each Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class B shares will be
subject to an annual distribution and service fee, and that Class A shares
will be subject to an annual service fee. Rule 12b-1 provides that any
payments made by a Fund in connection with the distribution of its shares
may be made only pursuant to a written plan describing all material aspects
of the proposed financing of the distribution and also requires that all
agreements with any person relating to the implementation of a plan must
be in writing. Each Fund has also entered into a related Distribution A
greement with ND Capital, Inc. (the "Underwriter" or "ND Capital").
The 12b-1 fee applicable to Class B shares under each Fund's Plan will be
payable to reimburse ND Capital for services and expenses incurred in
connection with the distribution of Class B shares. These expenses include
sales commissions and other fees paid, together with related financing costs,
to brokers, dealers or other selling entities having a dealer agreement in
effect ("Authorized Dealers") including ND Capital, who are brokers of record
with respect to the Class B shares, as well as, without limitation, costs
relating to the formulation and implementation of marketing and promotional
activities including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising;
expenses of printing and distributing prospectuses, statements of additional
information and reports of the Fund to persons other than shareholders of the
Fund; expenses of preparing printing and distributing advertising and sales
literature; costs involved in obtaining whatever information, analyses and
reports with respect to marketing and promotional activities that the Fund
may from time to time deem advisable; and reasonable compensation for the
Underwriter's services and other expenses, including allocable overhead
expenses, such as salaries, rent and printing and communications. The Fund
may also use a portion of this fee to compensate Authorized Dealers for
providing services to Class B shareholders of such Fund, as noted below.
B-17
Each Fund may spend up to .75 of 1% per year of the average daily net
assets of the Class B shares (.85 of 1% of the average daily net assets of
Class B shares of the ND Tax-Free Fund) as a distribution and service fee.
The Underwriter may use a portion of this fee to pay an annual service fee
of up to .25 of 1% per year of the average daily net assets attributable to
the Class B shares to dealers for providing personal services and/or
maintenance of shareholder accounts.
Similarly, each Fund may spend up to .25 of 1% per year of average daily
net assets of Class A shares as a service fee to compensate Authorized Dealers,
including ND Capital, for personal services and/or maintenance of shareholder
accounts. These services may include answering routine inquiries regarding
the Funds, assisting shareholdings in interpreting confirmations, statements
and other documents; assisting shareholders in redeeming shares; processing
shareholder transactions; office space and telephone facilities; and providing
any other shareholder service not provided by the Funds' transfer agent and for
which service fees may be paid.
To determine any service fee payable to an Authorized Dealer, Authorized
Dealers receive the service fee based on the average daily net assets of the
respective class of the Fund which are attributable to shareholders of such
Fund for whom the dealer is designated the dealer of record. The "average
daily net assets" attributable to the shares in a shareholder account means
the product of (i) the average daily share balance of the account and (ii)
the Fund's average daily net asset value per share. Such payments may be
suspended or modified by the Underwriter at any time and are subject to the
continuance of the Fund's Plan.
During periods of substantial sales of shares, the commissions paid by the
Underwriter to dealers may, together with other distributions expenses, exceed
the amount of Plan payments it receives. This is likely to be the case in the
early years of the Fund's operations. In other periods, the payments under the
Plan may exceed the amount of commissions and other distributions expenses paid
by the Underwriter, which has the effect of reimbursing the Underwriter for
distribution expenses incurred in prior periods. Payments made to the
Underwriter under the Plan are not dependent upon expenses incurred, and in
any given year the Underwriter may have fewer expenses than the amount of the
payments, thus creating a "profit." Accordingly, the Plan compensates the
Underwriter regardless of its expenses.
Each Fund's Plan continues in effect from year to year, provided that each
such continuance is approved at least annually by a vote of the Fund's Board
of Directors, including a majority of the directors who are not "interested
persons" of such Fund and have no direct or indirect financial interest in
the operation of the Plan or in the related Distribution Agreement or in any
other agreement related to the Plan (the "Qualified Directors"), cast in
person at a meeting called for the purpose of voting on such continuance.
Each Fund's Plan may be terminated at any time with respect to a Fund or as
to a given Class A or Class B shares, by vote of majority of the Qualified
Directors of the Fund or by vote of a majority of the outstanding shares of
the affected Class. If the Fund's Plan is terminated and not continued, the
Underwriter is not legally entitled to any payment for amounts expended but
not yet recovered. However, the Board of Directors of the respective Fund
reserves the right to make payments to the Underwriter notwithstanding a
termination or non-continuance. Any amendment to a Plan to increase materially
the amount the Fund is authorized to pay thereunder with respect to Class A or
Class B shares would require approval by a majority of the outstanding voting
shares of the affected Class of the respective Fund. Other material amendments
to a Fund's Plan would be required to be approved by vote of the Board of
Directors of such Fund, including a majority of the Qualified Directors,
cast in person at a meeting called for that purpose. Each Fund's Plan
further provides that as long as the respective Fund's Plan remains in effect,
the selection and nomination of the Fund's Directors who are not interested
persons of the Fund will be committed to the discretion of the disinterested
Directors then in office. It is expected that payments made under a Plan
will serve to encourage the Underwriter and investment dealers to sell Fund
shares and to provide ongoing services to Fund shareholders.
B-18
The Underwriter has voluntarily agreed (not as part of the Distribution
Agreement) to waive a portion of the fee payable under the Plan during the
early stages of a Fund's existence. The table below provides the fees paid
by Class B shares of the Funds, under the Plan, net of waivers, for the
periods indicated.
12B-1 FEES PAID FOR
THE FISCAL YEARS ENDED*
12/31/97 12/31/98 12/31/99
------------------------------------
Montana Fund
(Class B) $157,458 $272,297 $310,145
ND Fund
(Class B) $452,996 $421,529 $377,470
South Dakota Fund
(Class B) $26,399 $37,238 $35,729
[FN]
* Class A shares were newly offered on January 7, 2000 and therefore
did not exist for the periods indicated.
</FN>
The 12b-1 fees paid by the ND Fund during the fiscal year ended December 31,
1999 were spent toward distribution expenses including $5,846 on advertising
and promotion, $137,758 on compensation to dealers (including commission and
service fees), $69,908 on compensation to sales personnel and payroll taxes,
$ 2,762 on travel, meals and entertainment and $1,315 on distribution related
overhead of the Underwriter. During this same period, the 12b-1 fees paid by
the Montana Fund and the South Dakota Fund were spent toward distribution
expenses including $16,676 and $1,262 on advertising and promotion, $449,842
and $25,395 on compensation to dealers (including commission and service fees),
$69,908 and $69,908 on compensation to sales personnel and payroll taxes,
$6,320 and $1,716 on travel, meals and entertainment and $1,315 and $1,315 on
distribution related overhead of the Underwriter, respectively. ND Holdings
absorbs the costs of distribution expenses incurred in excess of the 12b-1 fees
received from the Funds which are set forth in the table above
The Investment Adviser and the Underwriter are subsidiaries of ND Holdings.
Robert E. Walstad and Peter A. Quist, directors and president and vice
president, respectively, of ND Holdings, are also directors and officers of the
Funds, the Investment Adviser, and the Underwriter. See "Management of the
Funds." Messrs. Walstad and Quist are also shareholders of ND Holdings and,
accordingly, may indirectly benefit from the payment of 12b-1 fees by the
Funds to the Underwriter.
B-19
EXPENSES
The expenses of each Fund are deducted from its respective total income before
dividends are paid. These expenses include, but are not limited to,
organizational expenses; taxes; interest; brokerage fees and commissions,
if any; fees and expenses of directors and officers of the Fund who are not
officers or directors of the Investment Adviser; Securities and Exchange
Commission fees and state securities laws fees; charges of custodians and
transfer and dividend disbursing agents; insurance premiums; outside
auditing and legal expenses; costs of maintenance of the Fund's existence;
costs attributable to investor services, including, without limitation,
telephone and personnel expenses; costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports and
meetings of the shareholders of the Fund and of the officers and Board of
Directors of the Fund; and any extraordinary expenses. In addition, each
Fund pays 12b-1 fees pursuant to the terms of a Distribution and Service Plan
adopted under Rule 12b-1 of the 1940 Act.
PORTFOLIO TRANSACTIONS
Allocation of portfolio brokerage transactions to various brokers is
determined by the Investment Adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. In executing transactions for a
Fund and selecting brokers or dealers, the Investment Adviser will use its
best efforts to seek the best overall terms available. The Investment
Adviser may consider a number of factors in determining which brokers to use
for a Fund's portfolio transactions, such as the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of any commission
for the specific transaction and on a continuing basis. The primary
consideration is prompt and efficient execution of orders in an effective
manner at the most favorable price. Subject to this consideration,
unaffiliated brokers who provide supplemental investment research,
statistical or other services to the Investment Adviser may receive orders for
transactions by a Fund. Information thus received will enable the Investment
Adviser to supplement its own research and analysis with the views and
information of other securities firms and may be used for the benefit of
clients of the Investment Adviser other than the Funds. Research services may
include advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). A broker's
sales of a Fund's shares may also be considered a factor if the Investment
Adviser is satisfied that the respective Fund would receive from that broker
the most favorable price and execution then available for a transaction.
Municipal bonds, notes and short-term securities in which a Fund invests are
traded primarily in the over-the-counter market on a net basis and do not
normally involve either brokerage commissions or transfer taxes. Accordingly,
the Investment Adviser expects that transactions in Municipal Securities will
be effected on a principal (as opposed to an agency) basis and therefore does
not expect to pay any brokerage commissions on such transactions. Purchases
may be made from underwriters, dealers or issuers. A Fund's cost of
portfolio securities transactions will consist primarily of dealer or
underwriter spreads. The Funds may also pay mark-ups on principal
transactions. The Funds will not engage in principal transactions with
affiliates. Commissions will be paid on the Funds' futures and options
transactions, if any.
B-20
In effecting purchases and sales of the Funds' portfolio securities, the
Investment Adviser and the Funds may place orders with and pay brokerage
commissions to brokers which are affiliated with the Funds, the Investment
Adviser, the Underwriter or selected dealers participating in the offering
of the Funds' shares. Subject to rules adopted by the Securities and Exchange
Commission, each Fund may also purchase municipal securities from other
members of underwriting syndicates of which the Underwriter or other
affiliates of the Funds are members.
The table below reflects the aggregate amount of commissions paid by the
Funds for the periods indicated.
COMMISSION PAID FOR
FISCAL YEAR ENDED
12/31/97 12/31/98 12/31/99
-------------------------------
Montana Fund $20,925 $1,250 $-0-
ND Fund $31,938 $9,225 $-0-
South Dakota Fund $1,750 $-0- $-0-
ND Capital, the Funds' underwriter, was the only dealer through which
transactions involving the payment of commissions was effected. Accordingly,
100% of the brokerage commissions paid by the Funds (as reflected above)
were paid to ND Capital. Fluctuations in commissions were due to changes in
procedures in the purchase and sale of municipal securities.
The Board of Directors will monitor the Investment Adviser's performance
with respect to portfolio transactions in order to evaluate the overall
reasonableness of brokerage commissions paid or spreads allowed.
PURCHASE AND REDEMPTION OF SHARES
Fund shares may be purchased from investment dealers who have sales agreements
with the Fund's Underwriter or from the Underwriter. As described in the
Prospectus, the Funds provide you with alternative ways of purchasing Fund
shares based upon your individual investment needs and preferences by offering
Class A shares and Class B shares, as described below.
CLASS A SHARES
You may purchase Class A shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
B-21
the time of purchase as set forth in the Prospectus. You may qualify for a
reduced sales charge, or the sales charge may be waived in its entirety, as
described below. Class A shares are also subject to an annual service fee of
.25% of the average daily net assets of Class A shares of the Fund. Set
forth below is an example of the method of computing the offering price of
the Class A shares of each of the Funds. The example assumes a purchase on
April 14, 2000 of Class A shares from a Fund aggregating less than $50,000
subject to the schedule of sales charges set forth in the Prospectus at a
price based upon the net asset value of the Class A shares.
<TABLE>
<CAPTION>
Montana Tax-Free Fund ND Tax-Free Fund South Dakota Tax-Free Fund
<S> <C> <C> <C>
Net Asset Value per share $9.40 $8.43 $9.77
Per Share Sales Charge-4.25%
of public offering price
(4.54% of net asset value per share) $.42 $.37 $.43
Per Share Offering Price to the
Public $9.82 $8.80 $10.20
</TABLE>
Each Fund receives the entire net asset value of all Class A shares that
are sold. ND Capital retains the full applicable sales charge from which it
pays a commission shown in the Prospectus to Authorized Dealers.
REDUCTION OF UP-FRONT SALES CHARGE ON CLASS A SHARES
LETTERS OF INTENT
An investor may qualify for a reduced sales charge on Class A shares
immediately by stating his or her intention to invest in Class A shares of
one or more of the Funds, during a 13-month period, an amount that would
qualify for a reduced sales charge shown in the Funds' Prospectus under
"The Shares We Offer - Class A Shares" and by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. After signing the
Letter of Intent, each investment in Class A shares made by an investor will
be entitled to the sales charge applicable to the total investment indicated
in the Letter of Intent. If an investor does not complete the purchases under
the Letter of Intent within the 13-month period, the sales charge will be
adjusted upward, corresponding to the amount actually purchased. When an
investor signs a Letter of Intent, Class A shares of a Fund with a value of up
to 5% of the amount specified in the Letter of Intent will be restricted.
If the total purchases of Class A shares made by an investor under the Letter
of Intent, less redemptions, prior to the expiration of the 13-month period
equals or exceeds the amount specified in the Letter of Intent, the
restriction on the shares will be removed. In addition, if the total purchases
of Class A shares exceed the amount specified and qualify for a further
quantity discount, the Underwriter will make a retroactive price adjustment
and will apply the adjustment to purchase additional Class A shares at the
then current applicable offering price. If an investor does not complete
purchases under a Letter of Intent, the sales charge is adjusted upward,
and, if after written notice to the investor, he or she does not pay the
increased sales charge, sufficient Class A restricted shares will be redeemed
at the current net asset value to pay such charge. In connection with the
determination of sales charges applicable to the purchase of Class A shares
of a Fund, the Letter of Intent program will take into account investments
in shares of any other mutual fund carrying an up-front sales load of
which ND Capital is the Underwriter but will not take into account investments
in Class B shares of a Fund.
B-22
GROUP PROGRAM
Each Fund has a group investment and reinvestment program (the "Group
Program") which allows investors to purchase Class A shares of a Fund with a
lower minimum initial investment and with a lower sales charge if the investor
and the Group Program of which he or she is a participant meet the cost saving
criteria set forth below.
Description of Group Program. If the investor's Group Program (such as an
employee investment program) meets the requirements described below, a Fund
will modify the $1,000 initial investment requirement to such minimum
investment as may be determined by the Fund. The sales charge set forth in
the Funds' Prospectus for each purchase by a participant of a Group Program
will be based on (i) the combined current purchases of such group of Class A
shares together with (ii) the combined net asset value of Class A shares of
such group at the time of such investment. The dealer or agent, if any,
through which the Group Program was initiated will be entitled to a dealer
concession or agency commission based on the sales charges paid by
participants of such Group Program.
Criteria for the Group Program. The cost savings criteria to a Fund that
must be met in order for a Group Program to qualify for the benefits set
forth above are:
(a) The administrator of an investor's investment program must have
entered into an agreement with the Underwriter.
(b) Such agreement must provide that the administrator must submit a
single order and make payment with a single remittance for all investments
during each investment period (e.g., each pay period or distribution period)
by all investors who choose to invest through the Group Program.
(c) Such agreement must provide that the administrator will provide
the Transfer Agent with appropriate backup data for each participating investor
in a computerized format compatible with the Transfer Agent's processing
system.
Additional Criteria for the Group Program. As further requirements for
obtaining these special benefits under the Group Program, each Fund requires
that investments be in the form of an open account (with no share certificates
being issued), that all dividends and other distributions be reinvested in
additional Class A shares without any systematic withdrawal program described
herein and that the minimum new investment in Class A shares of a Fund by
each participant in an employee investment program be at least $25 per month.
Each Fund reserves the right to modify or terminate this program at any time.
B-23
RIGHTS OF ACCUMULATION
A purchase of Class A shares may qualify for a cumulative quantity discount.
The applicable sales charge set forth in the Funds' Prospectus will be based
on the total of:
(a) the investor's current purchase of Class A shares; and
(b) the net asset value (at the close of business on the previous
day) of the Class A shares of the Funds held by an investor.
For example, if an investor owned Class A shares worth $40,000 at the
current net asset value and purchased an additional $10,000 of Class A shares,
the sales charge for the $10,000 purchase would be at the rate applicable to a
single $50,000 purchase.
To qualify for the cumulative quantity discount on a purchase of Class A
shares through a broker-dealer, when each purchase is made, the investor or
broker-dealer must provide the respective Fund with sufficient information
to verify that the purchase qualifies for the discount.
WAIVERS OF UP-FRONT SALES CHARGE ON CLASS A SHARES
Each Fund may sell Class A shares without an up-front sales charge to
directors, officers and employees (including retirees) of the Fund, of ND
Holdings, of ND Money Management and of ND Capital, for themselves or their
spouses, children, or parents and parents of spouse, or to any trust, pension,
or profit-sharing, or other benefit plan for only such persons at net asset
value and in any amount. Each Fund may also sell shares without an up-front
sales charge to broker-dealers having sales agreements with ND Capital, and
registered representatives and other employees of such broker-dealers,
including their spouses and children; to financial institutions having sales
agreements with ND Capital, and employees of such financial institutions,
including their spouses and children; and to any broker-dealer, financial
institution, or other qualified firm which receives no commissions for selling
shares to its clients. The elimination of the sales up-front charge for
redemptions by certain classes of persons is provided because of anticipated
economies of scale and sales related efforts.
REDEMPTIONS FROM OTHER FUNDS
Class A shares of the Funds may be purchased at net asset value where the
amount invested is documented to the Fund to be proceeds from the redemption
of shares of an unrelated investment company which does not impose a
contingent deferred sales charge or redemption fee and where the investor paid
an initial sales charge. Purchases must be made within 60 days of the
redemption date. Each Fund reserves the right to modify or terminate this
privilege at any time.
B-24
CLASS B SHARES
You may purchase Class B shares at the applicable net asset value per share
without any up-front sales charge next determined after an order and payment
are received in proper form. Since Class B shares are sold without an initial
sales charge, the full amount of your purchase payment will be invested in
Class B shares. Class B shares are subject to an annual distribution and
service fee to compensate ND Capital for its costs in connection with the sale
of Class B shares and to compensate Authorized Dealers for providing you with
ongoing financial advice and other account services. See "Distribution and
Service Plans."
You may be subject to a contingent deferred sales charge ("CDSC") if you
redeem your Class B shares within five years after purchase. Any CDSC will be
imposed on the lower of the redeemed shares' cost or net asset value at the
time of redemption. Class B shares acquired through the reinvestment of
dividends are not subject to a CDSC. Each Fund may also sell Class B shares
to certain investors without a CDSC. See "Contingent Deferred Sales Charges"
for additional information.
Class B shares will automatically convert to Class A shares approximately
eight years after purchase. The purpose of the conversion is to limit the
distribution fees you pay over the life of your investment. All conversions
will be done at net asset value without the imposition of any sales load, fee
or other charge, so that the value of each shareholder's account immediately
before conversion will be the same as the value of the account immediately
after conversion. The conversion will be based on the relative net asset
values of the two classes on the fifteenth day of the month in which the
eighth anniversary of the issuance of Class B shares occurs or if the
anniversary occurs after the fifteenth, the conversion will be based on the
relative net asset value per share of the two classes on the fifteenth day of
the following month. If the fifteenth is not a business day, the conversion
will be effected on the first business day following the fifteenth. However,
when introducing the conversion feature, Class B shares outstanding on
January 7, 2000 that had been held for 8 years or more after purchase were
converted effective January 18, 2000. If a shareholder effected an exchange
into Class B shares from a fund advised or underwritten by ND Capital,
Ranson Capital Corporation or ND Money Management and the shares of the
original fund are subject to a CDSC, the holding period of your original
investment will be counted toward the eight year period.
In addition, Class B shares acquired through reinvestment of distributions
will convert to Class A shares in accordance with the following procedure.
First, the ratio of Class B shares eligible to be converted divided by the
total amount of Class B shares in the shareholder's account will be
determined. This ratio multiplied by the amount of Class B shares acquired
from reinvested dividends and distributions equals the amount of such Class B
shares that will be converted. Further, if after the conversion, the
shareholder has 50 or less Class B shares remaining in his or her account,
such shares will also be converted to Class A shares. Class B shares that
are converted to Class A shares will remain subject to an annual service fee
of up to .25 of 1% of the average daily net assets attributable to the
Class A shares. Since the net asset value per share of the Class B shares
and the Class A shares may differ at the time of conversion, a shareholder
may receive more or fewer Class A shares than the number of Class B shares
converted. This conversion feature may be suspended or terminated if it
comes to our attention that such conversion would constitute a taxable event
under federal income tax law.
B-25
MONTHOMATIC INVESTMENT PLAN
A shareholder may purchase additional Fund shares through an automatic
investment program (minimum initial investment is $100). With the Monthomatic
Investment Plan ("Monthomatic"), monthly investments (minimum $50) are made
automatically from the shareholder's account at a bank, savings and loan
association, or credit union into the shareholder's Fund account. By
enrolling in Monthomatic, the shareholder authorizes the Fund and its agents
to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. Such
account must have check or draft writing privileges. A shareholder may
terminate the Monthomatic by sending written notice to the Transfer Agent.
See "Systematic Investing-the Monthomatic Investment Plan" in the Funds'
Prospectus for additional information.
EXCHANGE PRIVILEGE
As described in the Funds' Prospectus under "Special Services-Exchanging
Shares," each Fund offers an exchange privilege pursuant to which a
shareholder in a Fund may exchange some or all of his shares in any of the
funds advised and underwritten by the Underwriter or Ranson Capital
Corporation or ND Management at net asset value. The exchange privilege
may be changed or discontinued upon 60 days' written notice to shareholders
and is available only to shareholders where such exchanges may be legally
made. A shareholder considering an exchange should obtain and read the
prospectus of the Fund and consider the differences between it and the fund
whose shares he owns before making an exchange. For further information on
how to exercise the exchange privilege, contact the Transfer Agent.
MINIMUM INVESTMENT
The minimum initial investment for each Fund per share class is $1,000
($100 for the Monthomatic Investment Plan), and the minimum subsequent
investment is $50, but such minimum amounts may be changed at any time.
REDEMPTIONS
Any Fund shareholder may require its respective Fund to redeem shares.
All registered owners must sign a letter of instruction which needs to be
signature guaranteed if the request is over $50,000 and sent to the Transfer
Agent at P.O. Box 759, Minot, North Dakota 58702. When certificates for
shares have been issued, they must be mailed to or deposited with the Transfer
Agent, along with a duly endorsed stock power with signatures guaranteed over
$50,000 and accompanied by a written request for redemption. Signatures must
be guaranteed by a commercial bank, trust company, savings and loan
association or member firm of a national securities exchange. A notary public
may not provide a signature guarantee. The redemption request and stock power
must be signed exactly as the account is registered including any special
capacity of the registered owner. The redemption price will be the net asset
value next determined following receipt of a properly executed request with
any required documents, less any applicable contingent deferred sales charge
with respect to Class B shares, as described below.
B-26
Alternatively, an investor may place an order to sell shares (whether in
certificate or book entry form) through his or her dealer or agent which has
a sales agreement with the Underwriter and from which this Prospectus was
received, which dealer or agent may fax or mail such request to the
Underwriter. The investor will receive the net asset value next determined
after the Underwriter receives such sell order from the dealer or agent. A
Fund does not charge for this transaction. Authorized Dealers may charge
additional fees for shareholder transactions or for advisory services.
Payment for shares redeemed will be made in cash as promptly as practicable
but in no event later than seven days after receipt of a properly executed
letter of instruction accompanied by any outstanding share certificates in
proper form for transfer. When a Fund is requested to redeem shares for
which it may not yet have received good payment (e.g., cash or certified
check on a United States bank), it may delay the mailing of a redemption
check until such time as it has assured itself that good payment has been
collected for the purchase of such shares (which will generally be within
15 calendar days).
CONTINGENT DEFERRED SALES CHARGES
Except as otherwise provided below, a contingent deferred sales charge is
imposed only if a shareholder redeems Class B shares purchased within the
preceding five years. Class B shares acquired by reinvestment of dividends
may be redeemed without a CDSC even though acquired within five years.
In addition, a number of shares having a value equal to any net increase in
the value of all shares purchased by the shareholder during the preceding five
years will be redeemed without a contingent deferred sales charge. Subject to
the foregoing exclusions, the amount of the charge is determined based on the
lower of the redeemed shares' cost or net asset value at the time of redemption
and will depend on the number of years the dollar amount being redeemed was
invested, according to the following table:
PERCENTAGE
CONTINGENT
YEAR SINCE REDEMPTION DEFERRED
AMOUNT WAS INVESTED SALES CHARGE
- ----------------------------------------------------------------
First.......................................................4.0%
Second......................................................4.0%
Third.......................................................3.0%
Fourth......................................................2.0%
Fifth.......................................................1.0%
Sixth and following......................................No Charge
B-27
If the initial amount of purchase of Class B shares is $1 million or more,
the charge is reduced to 1% and only applies during the first year of
purchase. In addition, purchases totaling $1 million or more made within 13
months of the initial purchase date qualify for this exception, provided that
the purchaser notifies the Fund in writing at the time of the initial purchase
of his or her intent to purchase $1 million or more within 13 months and
subsequently satisfies this condition. Any shares purchased and sold within
the 13-month period will be deducted in computing total purchases, and the
charge applies for one year after purchases total a minimum of $1 million.
All purchases are considered made on the trade date. In determining
whether a contingent deferred sales charge is payable on any redemption, the
Fund will first redeem shares not subject to any charge, or that represent an
increase in the value of a Fund account due to capital appreciation and then
will redeem Class B shares held for the longest period. This will result in
a shareholder paying the lowest possible contingent deferred sales charge
rate. Upon receipt of a request for redemption, Class B shares will be
redeemed by a Fund at the net asset value next determined following receipt
of a properly executed request with any required documents, less any
applicable contingent deferred sales charge.
The following example illustrates the operation of the contingent deferred
sales charge. Assume that you own 1,000 Class B shares that you purchased
six years ago, 1,000 shares acquired by reinvesting distributions, 1,000
shares that you purchased two years ago at $10 each, and 1,000 Class B shares
that you purchased one year ago at $10 each. Also assume that the Class B
shares now have a net asset value equal to $20 each. You may redeem the
2,000 Class B shares that you have owned for six years or acquired by
reinvesting distributions without paying a contingent deferred sales charge.
Appreciation on the Class B shares you bought in the last two years equals
$20,000 (the $10 increase in net asset value times 2,000 shares), $10,000 of
which is attributed to each of the two years. Because the $20,000 of
appreciation is equivalent to 1,000 Class B shares at the assumed current net
asset value of $20 per share, you may redeem 1,000 more Class B shares
without paying a contingent deferred sales charge. If you redeem 3,500 Class
B shares, you would have a contingent deferred sales charge on 500 of those
shares. The Fund would treat these 500 redeemed Class B shares as representing
a redemption of the $10,000 investment which you made two years ago.
Based on the assumed net asset value of $20 per share, you would pay a
contingent deferred sales charge equal to $400 (500 Class B shares times
$20 per share times the applicable rate of 4.0%). If in the same year you
redeemed your remaining 500 shares, the Fund would treat this as a
redemption of your $10,000 investment made one year ago, applying a charge at
the rate of 4.0%.
Each Fund may sell Class B shares without a contingent deferred sales charge
to directors, officers, and employees (including retirees) of the Fund, of
ND Holdings, of ND Money Management, and of ND Capital, for themselves or
their spouses, children, or parents and parents of spouse, or to any trust,
pension, or profit-sharing, or other benefit plan for only such persons at
net asset value and in any amount. Each Fund may also sell Class B shares
without a contingent deferred sales charge to broker-dealers having sales
agreements with ND Capital, and registered representatives and other
employees of such broker-dealers, including their spouses and children; to
financial institutions having sales agreements with ND Capital, and employees
of such financial institutions, including their spouses and children; and to
any broker-dealer, financial institution, or other qualified firm which
receives no commissions for selling shares to its clients. The elimination
of the contingent deferred sales charge for redemptions by certain classes
of persons is provided because of anticipated economies in scales and sales
related efforts. The Underwriter receives the entire amount of any contingent
deferred sales charges assessed. A Fund receives the net asset value of
Class B shares sold.
B-28
ADDITIONAL INFORMATION ON PURCHASES AND REDEMPTIONS
Each Fund reserves the right to withdraw all or any part of the offering of its
shares and to reject purchase orders. Also, from time to time, a Fund may
temporarily suspend the offering of its shares to new investors. During the
period of such suspension, persons who are already shareholders of the
respective Fund normally will be permitted to continue to purchase additional
shares and to have dividends reinvested.
In order to facilitate redemptions and to eliminate the need for
safekeeping, the Transfer Agent will not issue certificates for shares of the
Funds unless requested to do so. A shareholder or broker may obtain a
certificate by writing to the Transfer Agent at P.O. Box 759, Minot, North
Dakota 58702.
Each Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed
for trading (other than customary weekend and holiday closings), (b) when
trading in the markets the respective Fund normally utilizes is restricted or
an emergency exists as determined by the Securities and Exchange Commission
so that disposal of the Fund's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit for protection of the
Fund's shareholders. The New York Stock Exchange is currently closed on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving, and
Christmas. The amount received by a shareholder upon redemption may be more
or less than the amount paid for such shares depending on the market value of
the applicable Fund's portfolio securities at the time. When a Fund is
requested to redeem shares for which it may not have yet received good payment
(e.g., cash or certified check on a United States bank), it may delay the
mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such shares (which will
generally be within 15 calendar days).
Each Fund reserves the right to redeem Fund accounts that are reduced to
a value of less than $1,000 (for any reason other than fluctuation in the
market value of the Fund's portfolio securities). Should a Fund elect to
exercise this right, the investor will be notified before such redemption is
processed that the value of the investor's account is less than $1,000 and
that the investor will have sixty days to increase the account to at least
the $1,000 minimum amount before the account is redeemed. Each Fund allocates
net interest income to those shares for which the Fund has received payment.
B-29
SYSTEMATIC WITHDRAWAL PLAN
A shareholder who owns shares with an aggregate value of $5,000 or more may
establish a Systematic Withdrawal Plan (the "Withdrawal Plan"). Under the
Withdrawal Plan, a shareholder may redeem at net asset value, subject to any
applicable contingent deferred sales charge with respect to Class B shares
(see Contingent Deferred Sales Charge above), the number of full and fractional
shares that will produce whatever monthly, quarterly, semiannual or annual
payments (minimum $50 per payment) are selected. No additional charge is
made for this service.
A shareholder who participates in the Monthomatic Investment Plan is
ineligible to participate in the Withdrawal Plan. If payments exceed
reinvested dividends and distributions, a shareholder's shares will be reduced
and eventually depleted. The Plan may be terminated at any time by a
shareholder or the Fund.
NET ASSET VALUE
The net asset value per share is determined separately for each class of shares
of a Fund by calculating the total value of the Fund's assets attributable to
the class, deducting total liabilities attributable to the class, and dividing
the result by the number of shares of the class outstanding. Fixed income
securities are valued using a matrix pricing system which estimates market
values from yield data relating to instruments or securities with similar
characteristics. Exchange-traded options are valued at the last sale price
unless there is no sale price, in which event the options will be valued at
the mean between the current closing bid and asked prices. Financial futures
are valued at the settlement price established each day by the board of trade
or exchange on which they are traded. Other securities, including restricted
securities, and other assets are valued at fair value as determined in good
faith by the Board of Directors. If an event were to occur, after the value
of an instrument was so established but before the net asset value per share
was determined, which was likely to materially change the net asset value,
then that instrument would be valued using fair value considerations by the
Board of Directors or its delegates. On each day the New York Stock Exchange
is open for trading, the net asset value per share is determined as of the
close of the Exchange (normally, 3:00 p.m. Minot, North Dakota time). The
Exchange is not open for trading on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
UNDERWRITER
ND Capital, a subsidiary of ND Holdings, is the principal underwriter of the
Funds' shares in a continuous public offering. ND Capital is located at 1
North Main, Minot, North Dakota 58703. Robert E. Walstad and Peter A. Quist,
who are directors and the president and treasurer and vice president and
secretary, respectively, of the Funds, are also the only two directors and
officers of the Underwriter. The Underwriter sells shares to or through
brokers, dealers, or other qualified financial intermediaries (collectively
referred to as "Dealers"), or others, in a manner consistent with the then
effective registration statement of the Funds. ND Capital may act as such
a Dealer.
B-30
Under the terms of each Distribution Agreement between the respective Fund
and the Underwriter, the Underwriter has agreed to use its best efforts to
solicit orders for the sale of the applicable Fund's shares and to undertake
such advertising and promotion as it believes is reasonable in connection
with such solicitation. The Underwriter pays a sales commission to dealers
as set forth in the Funds' Prospectus. For the fiscal year ended December
31, 1999, the Underwriter paid commissions in connection with sales of the
Class B shares of the Montana Fund, the ND Fund and the South Dakota Fund
of $414,262, $92,624, and $21,941, respectively. The Underwriter may also
pay service fees applicable to Class A shares and Class B shares to dealers
for providing personal service and/or account maintenance to Class A and
Class B shareholders, respectively. See "Distribution and Service Plans"
for additional information.
Class A shares are sold subject to an up-front sales charge. ND Capital
retains the full applicable up-front sales charge (the excess of the offering
price over the net amount invested) from which it pays the uniform
reallowances shown in the Funds' Prospectus, as supplemented, to Authorized
Dealers. Class B shares are sold at net asset value but are subject to a
CDSC. ND Capital receives any contingent deferred sales charges imposed on
redemptions of Class B shares. In addition, ND Capital receives any Rule
12b-1 distribution or service fees applicable to Class A and Class B shares
for service and expenses incurred in connection with the distribution of
shares. For a description of such compensation, see "Distribution and Service
Plans."
The following table sets forth the amount of compensation on redemptions,
brokerage commissions and other compensation received by the Underwriter from
each of the Funds for the last fiscal year ended December 31, 1999. Because
Class A was only recently offered effective January 7, 2000, the Underwriter
did not receive any front-end sales load or other compensation with respect
to Class A shares for the fiscal year ended December 31, 1999.
COMPENSATION
ON BROKERAGE OTHER
REDEMPTIONS COMMISSION COMPENSATION*
Montana Fund $133,234 $0 $310,145
North Dakota Fund $38,895 $0 $377,470
South Dakota Fund $9,614 $0 $35,729
[FN]
* Other compensation reflects the 12b-1 distribution and service fees paid to
the underwriter under each Fund's 12b-1 Plan for Class B shares.
</FN>
B-31
Each Distribution Agreement must be approved at least annually by the
respective Fund's Board of Directors and a vote of a majority of such Fund's
directors who are not "interested persons" (as defined in the 1940 Act) of the
Fund and who have no direct or indirect financial interest in the operation
of the Distribution and Service Plan or any agreement related thereto or in
the Distribution Agreement (the "Qualified Directors"), by vote cast in person
at a meeting called for the purpose of voting on such approval. Each Fund's
Distribution Agreement will terminate automatically in the event of its
assignment and is terminable with respect to such Fund without penalty on 60
days' written notice by vote of a majority of the Qualified Directors or by
vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of such Fund or on 90 days' written notice by the Underwirter.
As noted, the Underwriter will pay a sales commission to investment
dealers and to its salesmen who sell Fund shares. The staff of the Securities
and Exchange Commission takes the position that dealers who receive 90% or
more of the applicable sales charge may be deemed underwriters under the
Securities Act of 1933, as amended. The Underwriter may also provide
additional promotional incentives to dealers who sell Fund shares. In some
instances, these incentives may be offered only to certain dealers who have
sold or may sell significant amounts of shares.
DIVIDENDS AND TAXES
DIVIDENDS
All of the net investment income of each Fund is declared daily as a dividend
on shares for which the applicable Fund has received payment. Net investment
income of a Fund consists of all interest income earned on portfolio assets
less all expenses of such Fund. Income dividends will be distributed monthly,
and dividends of net realized short-term and long-term capital gains, if any,
will normally be paid out once a year at or around the end of the Fund's fiscal
year. Each Fund may at any time vary the foregoing dividend practices and,
therefore, each Fund reserves the right from time to time to either distribute
or retain for reinvestment such of its net investment income and its net short-
term and long-term capital gains as the Board of Directors of the Fund
determines appropriate under the then current circumstances. In particular,
and without limiting the foregoing, each Fund may make additional distributions
of net investment income or capital gain net income in order to satisfy the
minimum distribution requirements contained in the Internal Revenue Code of
1986, as amended (the "Code").
Income and capital gains dividends, if any, of a Fund will be credited to
shareholder's accounts in full and fractional of such Fund shares at net asset
value on the reinvestment date unless shareholders indicate in writing to the
Transfer Agent that they wish to receive them in cash. See "Distributions and
Taxes - Reinvestment Options" in the Funds' Prospectus for a description of
the dividend payment options available to shareholders.
Cash dividends and reinvested dividends will be paid or reinvested, as the
case may be, as of the day following the last day of the month. Share
certificates are issued for full and fractional shares and only upon a request
by the shareholder or broker to the Transfer Agent.
A check will be generated on the date on which distributions are payable
for dividends to be received in cash. A shareholder can expect to receive this
check within seven days. If the U.S. Postal Service cannot deliver the check
or if the check remains uncashed for six months, a letter will be sent to the
shareholder. If the shareholder has not cashed the check or called within a
month and if the shareholder has shares in his or her account, the check will
be reinvested in the shareholder's account at the then-current net asset
value. If the shareholder has a zero balance, we will contact the shareholder
by phone or contact his or her broker. If the shareholder has misplaced or
lost the check, we will then issue a new check.
B-32
Distribution checks may be sent to parties other than the investor. The
Transfer Agent of the Fund will accept a letter from the shareholder. Please
attach a voided check if payable to your bank account (signature guarantee is
not required). If payable to a person or address other than the person or
address under which the shares are registered, a signature guarantee is
required.
TAXES
Each Fund has elected and intends to qualify each year as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). If the Fund so qualifies, and timely
distributes to shareholders 90% or more of its taxable income (without
regard to its net capital gain, i.e., the excess of its long-term capital
gain over its short-term capital loss), it will not be subject to federal
income tax on the portion of its taxable income (including any net capital
gain) that it distributes to shareholders. In addition, to the extent the
Fund distributes to shareholders at least 98% of its taxable income
(including any net capital gain), it will not be subject to the 4% excise tax
on certain undistributed income of RICs. The Fund intends to timely
distribute its taxable income (including any net capital gains) to avoid
imposition of federal income tax or the excise tax. If in any year a Fund
should fail to qualify under Subchapter M for tax treatment as a regulated
investment company, a Fund would incur a regular corporate federal income
tax upon its taxable income for that year, and distributions to shareholders
of the respective Fund would be taxable to such shareholders as ordinary income
to the extent of the earnings and profits of the Fund, including distributions
that would otherwise qualify as exempt-interest dividends.
In addition, each Fund intends to invest in sufficient municipal securities
so that it will qualify to pay "exempt-interest dividends" (as defined in the
Code) to shareholders. Each Fund's dividends payable from net tax-exempt
interest earned from municipal securities will qualify as exempt-interest
dividends if, at the close of each quarter of the taxable year of the Fund, at
least 50% of the value of the respective Fund's total assets consists of tax-
exempt municipal securities.
Exempt-interest dividends distributed to shareholders generally are excluded
from gross income for federal income tax purposes except in the case of
certain substantial users of facilities financed with the proceeds of bonds
owned by the Fund and related persons. Such exempt-interest dividends may be
taken into account in determining the alternative minimum tax, as discussed
hereinafter. The percentage of income that is tax-exempt is applied uniformly
to all distributions made during each calendar year and thus is an annual
average for a Fund rather than a day-by-day determination for each shareholder
whether received in shares or in cash. The percentage of all distributions of
earnings other than exempt-interest dividends paid by a Fund, such as net
realized investment income received from investments in debt securities other
than municipal securities, and any net realized short-term capital gains
(including certain amounts deemed distributed) will generally be taxable to
the shareholders as ordinary income. Any distribution of net realized long-
term capital gains (including amounts deemed distributed) which are properly
designated as capital gains dividends by the Fund will generally be subject
to federal taxation as long-term capital gains ("long-term capital gain
distributions"), regardless of the length of time the investor has held such
shares.
B-33
The Internal Revenue Service Restructuring and Reform Act of 1998
(the "1998 Tax Act") provides that for taxpayers other than corporations, net
capital gain realized from property (with certain exclusions) is generally
subject to a maximum marginal stated rate of 20% (10% in the case of certain
taxpayers in the lowest tax bracket). Capital gain or loss is long-term if
the holding period for the asset is more than one year, and is short-term if
the holding period is one year or less. The date on which a share is acquired
(i.e., the "trade date") is excluded for purposes of determining the holding
period of the shares. Capital gains realized from assets held for one year or
less are taxed at the same rates as ordinary income.
Distributions to shareholders will be taxable to shareholders in the manner
described above, regardless of whether the shareholder receives the dividends
or reinvests them in additional shares of the Fund. All taxpayers are
required to report to the Internal Revenue Service on their tax returns the
amount of tax-exempt interest earned during the year, including exempt interest
dividends from a Fund.
"The Revenue Reconciliation Act of 1993" (the "1993 Tax Act") subjects tax-
exempt municipal securities to the market discount rules of the Code effective
for municipal securities purchased after April 30, 1993. In general, market
discount is the amount (if any) by which the stated redemption price at
maturity exceeds an investor's purchase price (except to the extent that such
difference, if any, is attributable to original issue discount not yet
accrued), subject to a statutory de minimus rule. Market discount can
arise based on the price a Fund pays for municipal securities. Under the
1993 Tax Act, accretion of market discount is taxable as ordinary income;
under prior law the accretion had been treated as capital gain. Market
discount that accretes while a Fund holds a municipal security would be
recognized as ordinary income by the Fund when principal payments are received
on the municipal security or upon sale or at redemption (including early
redemption), unless the Fund elects to include market discount in taxable
income as it accrues. Distributions to shareholders of a Fund, to the extent
of any market discount that is included in the Fund's taxable income, would be
taxable to shareholders as ordinary income.
For both individuals and corporations, interest paid on certain "private
activity bonds" issued on or after August 8, 1986, will be treated as an item
of tax preference and may, therefore, be subject to the alternative minimum
tax. To the extent provided by regulations to be issued by the Secretary of
the Treasury, exempt-interest dividends paid by a Fund will be treated as
interest on private activity bonds to the extent of the proportionate amount
of interest on such private activity bonds received by the Fund. Such exempt-
interest dividends constitute a tax preference item subject to both the
individual and corporate alternative minimum tax. Each Fund will annually
supply shareholders with a report indicating the percentage of Fund income
attributable to bonds subject to the alternative minimum tax.
B-34
Exempt-interest dividends received by a shareholder which are not with
respect to certain "private activity bonds" are not treated as a tax preference
item. However, for certain corporate shareholders such dividends will be
included in the computation of an adjustment item used in determining such
corporation's alternative minimum tax. The adjustment item is 75% of the
excess of such corporate shareholder's "adjusted current earnings" over its
other alternative minimum taxable income with certain adjustments. Although
exempt-interest dividends received by a shareholder will not be included in
the gross income of corporations for federal income tax purposes, "adjusted
current earnings" include all tax-exempt interest, including exempt-interest
dividends received from the Fund. Corporate shareholders are advised to
consult their tax advisers with respect to the tax consequences of the
alternative minimum tax and the branch profits tax under Section 884 of the
Code.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders
of record on a specified date in one of those months and paid during January
of the following year, will be treated as having been distributed by the
Fund (and received by the shareholders) on December 31 of the year such
dividends are declared.
Distributions from a Fund will not generally be eligible for the dividends
received deduction for corporations.
You should note that at December 31, 1999, the Montana Fund, the ND Fund and
the South Dakota Fund had a net capital loss carry forward totaling $946,732,
$6,065,007, and $141,273, respectively, which may be used by the Fund to offset
capital gains realized during subsequent years through December 31, 2006.
A Fund is required by law to withhold a specified percentage of taxable
dividends and certain other payments, including redemption payments, paid to
non-corporate investors who do not certify to the Fund their correct taxpayer
identification number (in the case of individuals, their social security
number) and in certain other circumstances.
Under Section 86 of the Code, up to 85% of a social security recipient's
benefits may be included in gross income for a benefit recipient if the sum
of his adjusted gross income, income from tax-exempt sources such as tax-exempt
bonds and distributions made by a Fund, plus 50% of his social security
benefits exceeds certain base amounts. Exempt interest dividends from the
Fund are still excluded from gross income to the extent described above;
they are only included in the calculation of whether a recipient's income
exceeds certain established amounts.
Redemption of shares of a Fund will be a taxable transaction for federal
income tax purposes, and such investors will generally recognize gain or
loss in an amount equal to the difference between the basis of the shares
and the amount received. Assuming that investors hold such shares as a
capital asset, the gain or loss will be a capital gain or loss and will
generally be long-term if investors have held such shares for a period of
more than one year. In the case of shareholders holding shares of a Fund
B-35
for six months or less and subsequently selling those shares at a loss after
receiving an exempt-interest dividend, the loss will be disallowed to the
extent of the exempt-interest dividends received. If such loss is not entirely
disallowed, it will be treated as a long-term capital loss to the extent any
long-term capital gain distribution is made with respect to such shares during
the six-month period or less that the investor owns the shares. If a loss is
realized on the redemption of Fund shares, the reinvestment in additional Fund
shares or the acquisition of a contract or option to acquire securities that
are substantially identical to the respective Fund shares within 30 days
before or after the redemption may be subject to the "wash sale" rules of the
Code, resulting in a postponement of the recognition of such loss for federal
income tax purposes. In addition, an investor cannot take into account any
sales or similar charge incurred in acquiring shares of a Fund (a "load
charge," such charge does not include amounts paid with respect to the
reinvestment of mutual fund share dividends) in computing gain or loss on the
sale of shares of a Fund if the investor sells such shares within 90 days of
the date the shares are acquired and the investor obtains and subsequently
exercises the right to reinvest in shares of any mutual fund without the
payment of a load charge or with the payment of a reduced charge (However,
such charges shall be treated as incurred in connection with the reinvestment
in shares).
The 1993 Tax Act includes a provision that may recharacterize capital
gains as ordinary income in the case of certain financial transactions that
are "conversion transactions" effective for transactions entered into after
April 30, 1993. It is possible that this provision could result in the
recharacterization of amounts or distributions otherwise characterized as
capital gains by a Fund or a shareholder as ordinary income. Shareholders
of a Fund should consult with their advisers regarding the potential effect
of this provision on their investment in shares of the Fund.
Under the Code, certain miscellaneous itemized deductions, such as
investment expenses, tax return preparation fees, and employee business
expenses, will be deductible by individuals only to the extent they exceed
2% of adjusted gross income. Miscellaneous itemized deductions subject to
this limitation do not include expenses incurred by a Fund so long as shares
of the Fund are held by 500 or more persons at all times during the taxable
year or another exception is met. In the event the shares of the Fund are
held by less than 500 persons, additional taxable income may be realized by
individual (and other noncorporate) shareholders in excess of the
distributions received from the Fund.
The Taxpayer Relief Act of 1997 includes provisions that treat certain
transactions designed to reduce or eliminate risk of loss and opportunities
for gain (e.g., short sales, offsetting notional principal contracts, futures
or forward contracts, or similar transactions) as constructive sales for
purposes of gain (but not loss) recognition and for purposes of measuring
the holding period. Shareholders should consult their own tax advisors with
regard to any such constructive sales rules.
Except to the extent described in the Funds' Prospectus under "Appendix-
Additional State Information" regarding Montana, North Dakota, and South
Dakota income taxation, the exemption from federal income tax for exempt-
interest dividends does not necessarily result in exemption for such dividends
under the income or other tax laws of any state or local taxing authority.
Taxpayers should consult their own advisers regarding the consequences under
such taxes with respect to the purchase, ownership and disposition of shares
of the Funds.
B-36
Interest on indebtedness which is incurred to purchase or carry shares of
a mutual fund which distributes exempt-interest dividends during the year is
not deductible for federal income tax purposes. Further, a Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development bonds held by the respective Fund or are
"related persons" to such users; such persons should consult their tax
advisers before investing in the respective Fund.
STATE TAXES
ND FUND
To the extent that dividends are derived from earnings on North Dakota state
and local government issues, such dividends will be exempt from North Dakota
income taxes in the hands of shareholders that are corporations, individuals,
estates and trusts.
MONTANA FUND
Dividends to the extent of interest received on Montana state and local
government issues are exempt from Montana state income taxes in the hands of
shareholders that are individuals, estates and trusts. Such dividends are
subject to Montana tax, however, in the hands of shareholders that are
corporations. Moreover, Montana taxes capital gains (including capital gain
distributions paid by the Fund) at the same rates as ordinary income.
SOUTH DAKOTA
South Dakota does not assess personal or corporate income tax.
CALCULATION OF PERFORMANCE DATA
The Funds may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent
yield and total return figures.
Yields are calculated according to accounting methods that are standardized
by the SEC for all stock and bond funds. Because yield calculation methods
differ from the methods used for other accounting purposes, a Fund's yield
may not equal its distribution rate, the income paid to an investor's account,
or the income reported in the Fund's financial statements. A Fund may also
include in advertisements performance rankings compiled by independent
organizations such as Lipper Analytical Services and publications which monitor
the performance of mutual funds. Performance information may be quoted
numerically or may be represented in a table, graph or other illustration.
All performance figures are based on historical results and are not intended
to indicate future performance.
B-37
YIELD
As of December 31, 1999, the 30-day SEC Yield for the Class B shares of the
Montana Fund, the ND Fund, and the South Dakota Fund, was 4.734%, 4.880%, and
4.828%, respectively. Absent fee waivers and expense assumptions, the 30-day
SEC Yield as of December 31, 1999 for the Class B shares of the Montana Fund,
ND Fund and South Dakota Fund, would have been 4.419%, 4.167%, and 3.816%,
respectively. Class A shares is a new class initially offered on January 7,
2000 and therefore does not have a performance history for the foregoing
period.
Yield reflects the income per share deemed earned by a Fund's portfolio
investments. In accordance with a standardized method prescribed by rules of
the SEC, yield is determined by dividing the net investment income per share
deemed earned during the preceding 30-day period by the maximum offering
price per share on the last day of the period and annualizing the result
according to the following formula:
YIELD =2[a-b +1)6-1]
--
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period. In the case of Class A shares, the maximum offering price includes
the current maximum front-end sales charge of 4.25%.
To calculate interest earned on debt obligations (for the purpose of "a"
above), a Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund
based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month,
or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest). The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may
be expected to be called or, if none, the maturity date.
(b) Divide the yield to maturity by 360 and multiply the quotient by
the market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is in the portfolio. Assume that each month has
30 days.
B-38
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. In the case of a tax-exempt
obligation with original issue discount, if the discount is based on the
current market value and exceeds the then-remaining portion of original issue
discount (market discount), the yield to maturity is the imputed rate based
on the original issue discount calculation. In the case of a tax-exempt
obligation with original issue discount, if the discount based on the
current market value is less than the then-remaining portion of original
issue discount (market premium), the yield to maturity is based upon market
value.
TAX EQUIVALENT YIELD
As of December 31, 1999, the 30 day Tax Equivalent Fund Yield for the
Class B shares of the Montana Fund, the ND Fund, and the South Dakota Fund
and was 9.47%, 9.83% and 8.43%, respectively. Class A shares were initially
offered on January 7, 2000 and therefore does not have performance history
for the foregoing period. The tax equivalent yield calculation for the
Montana Fund, ND Fund and the South Dakota Fund were based on combined
federal and state income tax rates of 46.24%, 45.14% and 39.60%, respectively.
Tax equivalent yield shows the yield from a taxable investment which
would produce an after-tax yield equal to that of a fund that invests in tax-
exempt securities. It is computed by dividing the tax-exempt portion of the
Fund's yield (as calculated above) by one minus a stated income tax rate and
adding the product to the portion (if any) of the Fund's yield that is not
tax-exempt.
TEY = CY / (1-SITR)
Where:
TEY = Tax Equivalent Yield
CY = Current Yield
SITR = Stated Income Tax Rate
For additional tax equivalent yield information, see "Tax Free versus
Taxable Income."
B-39
TOTAL RETURN
As of December 31, 1999, the total return for the
Class B shares of the Montana Fund, the ND Fund, and the South Dakota Fund
since the Fund's inception was 28.95%, 63.80%, and 31.16%,
respectively, taking into account any applicable CDSC. The inception
date for the Montana Fund, the ND Fund and the South Dakota Fund is April
12, 1993, January 3, 1989, and April 5, 1994, respectively. Class A
shares were initially offered on January 7, 2000 and therefore do not have
any performance history for the foregoing period.
Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into
account the imposition of various fees, including the contingent deferred
sales charge, and assuming the reinvestment of all dividends and distributions.
Cumulative total return reflects a Fund's performance over a stated period of
time and is computed as follows:
ERV - P = Total Return
P
Where:
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the base period, assuming reinvestment of all dividends and
distributions
P = a hypothetical initial payment of $1,000
In calculating cumulative and average annual total return, the maximum
contingent deferred sales charge is deducted from the hypothetical investment.
However, such total return quotations may also be accompanied by quotations
which do not reflect the contingent deferred sales charges, and which therefore
will be higher.
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if a Fund's
performance had been constant over the entire period and is computed according
to the following formula:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending, redeemable value of a hypothetical $1,000 payment
made at the beginning of the base period, assuming reinvestment of all
dividends and distributions
The following table reflects the average annual total return for Class B
shares of each of the Funds for the periods indicated:
B-40
AVERAGE ANNUAL TOTAL RETURN (CLASS B)1
ONE YEAR2 FIVE YEARS TEN YEARS FROM INCEPTION3
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999 1999
---------------------------------------------------
Montana Fund (2.32)% 5.02% N/A 4.06%
ND Fund (1.11)% 4.31% 4.76% 4.59%
South Dakota Fund (1.63)% 4.99% N/A 4.84%
[FN]
1 Class A shares were initially offered on January 7, 2000 and therefore
do not have any performance history for the periods indicated above.
2 The 1 year return does not include the effect of the 4% maximum
Contingent Deferred Sales Charge on Class B shares. Taking into account the
CDSC, the one year return for the Class B shares of the Montana Fund, ND Fund
and South Dakota Fund would have been (6.04)%, (4.86)% and (5.38)%,
respectively.
3 The inception date for the Montana Fund, the ND Fund and the South
Dakota Fund is August 12, 1993, January 3, 1989, and April 5, 1994,
respectively.
</FN>
All performance figures are based on historical results and are not
intended to indicate future performance.
TAX-FREE VERSUS TAXABLE INCOME
The taxable equivalent yield is the current yield you would need to earn
on a taxable investment in order to equal a stated tax-free yield on a
municipal investment. To assist you to more easily compare municipal
investments like the Funds with taxable alternative instruments, the tables
below present the taxable equivalent yields for hypothetical tax-free yields
and tax rates. Taxable equivalent yield is computed by dividing that portion
of the Fund's yield which is tax-exempt by the remainder of 1 minus the stated
combined federal and state income tax rate and adding the product to that
portion, if any, of the Fund's yield that is not tax-exempt. Our calculations
below are based on the maximum federal statutory tax rates applicable in 2000.
The highest marginal federal tax rate for 2000 can be in excess of the
statutory maximum federal tax rate due to the disallowance of a portion of
itemized deductions and personal exemptions.
NORTH DAKOTA
The following table shows the rate of return an individual North Dakota
investor would need to receive from a taxable investment to equal the rate of
return from the ND Fund. The table assumes that the investor's income from a
taxable investment would be subject to federal income tax at the maximum
federal rate and North Dakota state income tax at a rate equal to 14% of the
federal tax liability.
We have calculated the combined marginal tax rate based on a family with
adjusted gross income from $180,000 to $300,000 for 2000 filing on a married
filing jointly basis with two dependent children. At this level of income,
the highest federal marginal tax rate is 44.02%. In addition, this assumes
the investor is not subject to alternative minimum tax and has a reasonable
amount of itemized deductions. Assuming the deductibility of North Dakota
taxes in computing federal taxable income, the combined marginal tax rate for
this taxpayer is approximately 47.26%.
The following table uses the combined marginal tax rate of 47.26% to
present the equivalent taxable yield for taxpayers in the situation presented
above.
B-41
ND TAX-FREE EQUIVALENT TAXABLE YIELD
YIELD FOR TAXPAYER IN 2000
- ----------------------------------------------------
5.0% 9.48%
5.5% 10.43%
6.0% 11.38%
6.5% 12.32%
7.0% 13.27%
7.5% 14.22%
8.0% 15.17%
MONTANA
The following table shows the rate of return an individual Montana investor
would need to receive from a taxable investment to equal the rate of return
from the Montana Fund. The table assumes that the investor's income from a
taxable investment would be subject to federal income tax at the maximum
federal rate and Montana state income tax at a rate equal to 11% of the
Montana taxable income. This assumes that the maximum Montana individual
income tax rate will remain at 11%.
We have calculated the combined marginal tax rate based on families with
adjusted gross incomes of $180,000 to $300,000 for 2000 filing on a married
filing jointly basis with two dependent children. At this level of income,
the highest federal marginal tax rate is 44.02%. In addition, this assumes
the investor is not subject to alternative minimum tax and has a reasonable
amount of itemized deductions.
The following table uses the combined marginal tax rate of 47.64% for
adjusted gross income of $180,000 to $300,000 to present the equivalent
taxable yield for taxpayers in the situations presented above assuming that
federal income taxes are deductible in calculating Montana taxable income and
that Montana income taxes are deductible in calculating federal taxable income.
B-42
MONTANA TAX-FREE EQUIVALENT TAXABLE YIELD
YIELD FOR TAXPAYER IN 2000
- ---------------------------------------------------------
5.0% 9.55%
5.5% 10.50%
6.0% 11.46%
6.5% 12.41%
7.0% 13.37%
7.5% 14.32%
8.0% 15.28%
SOUTH DAKOTA
The following table shows the rate of return an individual South Dakota
investor would need to receive from a taxable investment to equal the rate
of return from the South Dakota Fund. Because South Dakota does not have an
individual income tax system, the table assumes that the investor's income
from a taxable investment would be subject to federal income tax only, at
the maximum federal rate.
We have calculated the effective marginal tax rate for three different
taxable income brackets (31%, 36%, and 39.6%). Each bracket assumes that the
investor is filing jointly with two dependent children.
In addition, this assumes the investor is not subject to alternative minimum
tax and has a reasonable amount of itemized deductions.
TAXABLE INCOME HIGHEST MARGINAL
BETWEEN TAX RATE
#1 $126,600
and 31.93%
161,450
#2 $161,450
and 40.02%
288,350
#3 $288,350
and 44.02%
OVER
The following table uses the marginal tax rate for each taxable income
bracket to present the equivalent taxable yield for taxpayers in the situations
above.
B-43
SOUTH DAKOTA EQUIVALENT TAXABLE YIELD
TAX-FREE FOR TAXPAYER IN 2000
YIELD WITH TAXABLE INCOME AS IN
#1 #2 #3
5.0% 7.35% 8.34% 8.93%
5.5% 8.08% 9.17% 9.82%
6.0% 8.81% 10.00% 10.72%
6.5% 9.55% 10.84% 11.61%
7.0% 10.28% 11.67% 12.50%
7.5% 11.02% 12.50% 13.40%
8.0% 11.75% 13.34% 14.29%
ORGANIZATION AND SHARE ATTRIBUTES
Each Fund is organized as a corporation under the laws of the State of North
Dakota and is authorized to issue multiple classes and one series, with a par
value of $.001 per share. The ND Fund was incorporated on October 7, 1988,
the Montana Fund was incorporated on April 15, 1993, and the South Dakota Fund
was incorporated on October 1, 1993. The ND Fund is authorized to issue a
total of 100,000,000 shares and the Montana Fund and South Dakota Fund are
each authorized to issue a total of 200,000,000 shares.
Each Fund has established four classes designated Class A, Class B, Class C
and Class R shares, but is publicly offering only Class A and Class B
shares. Each class of shares of a Fund represents an interest in the same
portfolio of investments. Each class of shares is identical in all respects
(including equal rights as to voting, redemption, dividends and liquidation)
except that each class bears its own class expenses, including distribution
and administration expenses; each class has exclusive voting rights with
respect to any matters submitted to shareholders that relate solely to that
class or for which the interests of one class differ from the interests of
another class or classes; such differences relating to eligible investors as
may be set forth in the Funds' Prospectus or Statement of Additional
Information from time to time; the designation of each class of shares; and
any conversion or exchange features. As a result of the differences in the
expenses borne by each class of shares, net income per share, dividends per
share and net asset value per share will vary among a Fund's classes of
shares. There are no conversion, preemptive or other subscription rights,
except that Class B shares automatically convert into Class A shares as
described above. The Board of Directors of each Fund has the right to
establish additional classes in the future, to change those classes and to
determine the preferences, voting powers, rights and privileges thereof.
Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares
will bear only those expenses that are directly attributable to that class,
where the type or amount of services received by a class varies from one
class to another. For example, class-specific expenses generally will include
distribution and service fees. The expenses to be borne by specific classes
of shares may include, but are not limited to, 12b-1 distribution fees and
service fees, expenses associated with the addition of share classes to a
Fund (to the extent that the expenses were not fully accrued prior to the
issuance of the new classes of shares), expenses of administrative personnel
and services required to support the shareholders of a specific class,
litigation or other legal expenses relating to a specific class of shares,
directors' fees or expenses incurred as a result of issues relating to a
specific class of shares and accounting expenses relating to a specific
class of shares. Shares are fully paid and nonassessable when issued, are
redeemable and freely transferable.
B-44
Cumulative voting, a form of proportional representation, is permitted in
the election of directors. Under cumulative voting, a shareholder may
cumulate votes either by casting for one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of votes
represented by the shares entitled to vote or by distributing all of those
votes on the same principle among any number of candidates.
SHAREHOLDER MEETINGS
It is probable that a Fund will not hold regular meetings of shareholders.
Each Fund's Bylaws provide the regular meetings of shareholders may be held
on an annual or other less frequent basis but need not be held unless required
by law. Under the North Dakota Business Corporation Act, if a regular meeting
of shareholders has not been held during the earlier of six months after the
fiscal year end of the corporation or fifteen months after its last meeting,
a shareholder or shareholders holding 5% or more of the voting power of all
shares entitled to vote may demand a regular meeting by written notice of
demand given to the president or secretary of the Fund. Within thirty days
after receipt of the demand by one of those officers, the Board of Directors
must cause a regular meeting of shareholders to be called and held at the
expense of the Fund on notice no later than ninety days after receipt of the
demand, or if the Board fails to do so, the shareholder or shareholders making
the demand may call the meeting by giving notice as prescribed by law. All
necessary expenses of the notice and the meeting must be paid by the
respective Fund.
In addition to regular meetings, special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act. Meetings of shareholders will also be held
whenever required in order to comply with the Investment Company Act of 1940;
however, each Fund does not intend to hold annual shareholder meetings.
Shareholders have the right to remove directors.
APPENDIX-RATINGS OF INVESTMENTS
The four highest ratings of Moody's Investors Service, Inc. ("Moody's"),
for municipal bonds are Aaa, Aa, A and Baa. Municipal bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to municipal
bonds which are of high quality by all standards, but as to which margins of
protection or other elements make long-term risks appear somewhat larger
than Aaa rated municipal bonds. The Aaa, Aa and A rated municipal bonds
comprise what are generally known as "high grade bonds." Municipal bonds
which are rated A by Moody's possess many favorable investment attributes
and are considered "upper medium grade obligations." Factors giving
security to principal and interest of A rated municipal bonds are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. Municipal bonds which are rated Baa are
considered as medium grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest coverage and principal security appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
B-45
The four highest ratings of Standard & Poor's Corporation ("S&P") for
municipal bonds are AAA, AA, A and BBB. Municipal bonds rated AAA have the
highest rating assigned by S&P to a debt obligation. Capacity to pay interest
and repay principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the highest
rated issues only in small degree. Bonds rated A have a strong capacity to
pay interest and repay principal although they are somewhat susceptible to
the adverse effects of changes in circumstances and economic conditions than
bonds in higher rated categories. Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity than
for bonds in higher rated categories.
The "debt securities" included in the discussion of temporary investments
are corporate (as opposed to municipal) debt obligations rated AAA, AA or A
by S&P or Aaa, Aa or A by Moody's. Corporate debt obligations rated AAA by
S&P are "highest grade obligations." Obligations bearing the rating of AA
also qualify as "high grade obligations" and "in the majority of instances
differ from AAA issues only in small degree." Corporate debt obligations
rated A by S&P are regarded as "upper medium grade" and have "considerable
investment strength, but are not entirely free from adverse effects of
changes in economic and trade conditions." The Moody's corporate debt
ratings of Aaa, Aa, and A do not differ materially from those set forth
above for municipal bonds.
Taxable or tax-exempt commercial paper ratings of A-1 or A-2 by S&P
and P-1 or P-2 by Moody's are the highest paper ratings of the respective
agencies. The issuer's earnings, quality of long term debt, management, and
industry position are among the factors considered in assigning such ratings.
Subsequent to its purchase by a Fund, an issue of Municipal Securities or a
temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. The Funds will promptly
dispose of a bond whose rating drops below investment grade or is reduced in
credit quality with respect to unrated securities. The Board of Directors,
however, may vary from this policy if it determines that prompt disposal of
a bond would not be in the best interests of shareholders. To the extent
that the ratings accorded by S&P or Moody's for municipal bonds or temporary
investments may change as a result of changes in such organizations or
changes in their rating system, the Fund will attempt to use comparable
ratings as standards for its investments in municipal bonds or temporary
investments in accordance with the investment policies contained herein.
B-46
FINANCIAL STATEMENTS
The audited financial statements for the Fund's most recent fiscal year
appear in the Fund's Annual Report which are incorporated by reference.
The Annual Report accompanies this Statement of Additional Information.
B-47
[/TABLE]
