Filing by Rule 497(c) of the 1933 Act
File No. 33-85332
May 1, 2000
INTEGRITY
INTEGRITY FUND OF FUNDS, INC.
PROSPECTUS
_______________________________________________________________________________
This prospectus is intended to provide important information to help you
evaluate whether the Integrity Fund of Funds, Inc. 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
Page
Integrity Fund of Funds, Inc. 3
Fund Summary 3
How the Fund Has Performed 4
What are the Fund's Expenses? 5
Fund Management 6
Principal Investment Strategies 7
Non-Principal Investment Strategies 9
Other Fund Policies 9
Portfolio Transactions 10
Principal Risk Factors 10
Other Risk Factors 12
How To Purchase Shares 12
Systematic Investing - The Monthomatic Investment Plan 13
Special Services 14
General Information Regarding Distribution 14
How To Sell Shares 15
Systematic Withdrawal 16
Distributions and Taxes 16
Net Asset Value 17
Fund Service Providers 18
Shareholder Inquiries 18
Financial Highlights 19
2
INTEGRITY FUND OF FUNDS, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation and growth of income. Current
income is a secondary objective of the Fund.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The Fund invests primarily in a diversified group of other registered open-end
investment companies which, in turn, invest principally in equity securities.
We seek underlying funds we believe will advance the objective of the Fund. In
selecting underlying funds, we consider the underlying fund's objectives,
policies, performance, and management as well as their overall operations
(such as size, fees and expenses, and services). We invest in approximately 15
to 50 underlying funds. We normally invest in underlying funds that are
classified as growth, aggressive growth, or growth-income funds. The Fund
generally focuses on underlying funds which primarily invest in companies with
a market capitalization of over $500 million. The Fund generally invests in
seasoned underlying funds that have had favorable performance returns compared
to other similar funds and market indexes.
The Fund may also invest in stock index futures and options on stock index
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
assets of the Fund are invested in other investment companies, so the
investment performance and risk of the Fund is directly related to the
investment performance and risks of the underlying funds held. The risks of
the underlying funds include market risk, interest rate risk, income risk, and
credit risk. The Fund also bears the risk that the underlying funds may not
perform as well as the general market. The ability of the Fund to meet its
investment objective is directly related to the ability of the underlying funds
held to meet their objectives as well as the allocation among those underlying
funds. There can be no assurance that the investment objective of the Fund or
any underlying fund will be achieved.
The Fund and the underlying funds have transactional and operating expenses.
An investor in the Fund will therefore bear not only his or her proportionate
share of the Fund's expenses, but also the similar expenses of the funds in
which the Fund invests.
The value of the underlying funds' investments, and thus the net asset value
("NAV") of both the underlying funds' and the Fund's shares, will fluctuate
in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the underlying funds
invest.
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 are seeking:
* Long-term growth potential and income growth;
* The convenience of a diversified portfolio of mutual funds in a single
investment.
You should not invest in this Fund if you are:
* Unwilling to accept share price fluctuations;
* Investing to meet short-term financial goals.
3
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-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 (AS OF 12/31 EACH YEAR)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
25.20% 13.84% 14.65% 12.17% 18.98
</TABLE>
For the periods shown, the highest and lowest quarterly returns were 16.93%
and -13.87% for the quarters ending 12/31/98 and 9/30/98. The bar chart
and highest/lowest quarterly returns do not reflect sales charges, which
would reduce returns, while the average annual return table does.
<TABLE>
<CAPTION>
Average Annual Total Returns
for the Periods Ending December 31, 1998
<S> <C> <C>
1 Year Inception(1)
______________________________________________
Fund 17.48% 16.73%
S&P 500 (2) 19.53% 26.32%
</TABLE>
[FN]
(1) The inception period is from January 3, 1995 to December 31, 1999.
(2) The S&P 500 returns assume reinvestment of dividends, but do not include
any brokerage commissions, sales charges, or other fees.
</FN>
4
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.
______________________________
SHAREHOLDER FEES (1),(2) (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase price or redemption
proceeds) 1.50%(3)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Management Fees(4) 0.90%
12b-1 Fees NONE
Other Expenses
Miscellaneous Expenses 0.45%
Service Fees(5) 0.25%
Total Other Expenses 0.70%
Total Annual Fund _____
Operating Expenses(4),(6) 1.60%
[FN]
(1) Authorized brokers and other firms may charge additional fees to effect
shareholder transactions. Please see their materials for details.
(2) An investor will not only bear the cost of any deferred sales charge (load)
of the Fund, but also his or her proportionate share of sales charges
(loads) of the funds in which the Fund invests.
(3) Shares redeemed within five years of purchase are subject to a contingent
deferred sales charge ("CDSC") of 1.5%. Purchases of $1 million or more
are subject to a reduced CDSC if redeemed within 1 year of purchase. See
"How to Purchase Shares."
(4) An investor will bear not only his or her proportionate share of the Fund's
transactional and operating expenses but also similar expenses of the funds
in which the Fund invests. Generally, the operating expenses of the
underlying funds have ranged from 0.50% to 1.50% of average net assets.
(5) The Fund pays dealers of fees up to 0.25% of the Fund's net assets for
personal service to shareholders and/or maintenance of shareholder
accounts.
(6) The investment adviser has voluntarily agreed to waive fees through April
30, 2001 in order to prevent Total Operating Expenses (excluding extra-
ordinary expenses) from exceeding 1.60% of the average daily net asset
value of Fund shares. After fee waivers and expense reimbursements, the
Fund's total annual operating expenses was 1.58% for the fiscal year ended
December 31, 1999.
</FN>
5
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 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:
1 year 3 years 5 years 10 years
________________________________________
$ 313 $ 655 $ 1,021 $ 1,900
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
________________________________________
$ 163 $ 505 $ 871 $ 1,900
FUND MANAGEMENT
The overall management of the business and affairs of the Fund is the respon-
sibility of the Fund's Board of Directors. ND Money Management, Inc. ("ND
Management"), 1 North Main, Minot, North Dakota 58703, is the investment
adviser to the Fund. 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 Manage-
ment is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, and, at its own expense, provides all necessary
administrative services, office space, equipment, and clerical services for
managing the Fund's investments and effecting its portfolio transactions. ND
Management also pays the salaries and fees of all officers and directors of the
Fund who are affiliated persons of ND Management.
Monte L. Avery, portfolio manager, is primarily responsible for the day-to-day
management of the Fund's portfolio under the supervision and direction of
Robert E. Walstad, president of the Fund. Mr. Avery has been portfolio manager
since January 1996. Mr. Avery started in the securities business with Paine-
Webber in 1981 as a retail broker transferring to Dean Witter in 1982. In
1988, Mr. Avery joined Bremer Bank, N.A. (Minot, North Dakota) to help start
their Invest Center. Mr. Avery returned to Dean Witter in 1993 until he joined
ND Holdings, Inc. ("ND Holdings") in 1995. Since that time, Mr. Avery has
been a co-portfolio manager of the following funds: ND Tax-Free Fund,
Inc., South Dakota Tax-Free Fund, Inc., and Montana Tax-Free Fund, Inc. and as
of February 2000, Mr. Avery has been the sole portfolio manager of these funds.
Since January 1996, Mr. Avery has also been co-portfolio manager to the four
series offered by Ranson Managed Portfolios, an open-end investment company,
becoming manager of these funds in February 2000. Mr. Walstad is also
president of Montana Tax-Free Fund, Inc., ND Tax-Free Fund, Inc., and
South Dakota Tax-Free Fund, Inc. and has supervised and directed the
management of the portfolios of these funds since they commenced operations.
Mr. Walstad is also president of Ranson Managed Portfolios and the fund's
adviser and underwriter, Ranson Capital Corporation. Since January 1996, Mr.
Walstad has supervised and directed the management of these 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. The Fund's investment adviser and underwriter are wholly-owned
subsidiaries of ND Holdings. For providing management services, ND Management
is paid an annual fund management fee by the Fund of 0.90% of the Fund's
average daily net assets, payable monthly.
6
For providing management services, ND Management is paid an annual fund manage-
ment fee by the Fund of 0.90% of the Fund's average daily net assets, payable
monthly.
For the most recent fiscal year, the Fund paid to ND Management, after expense
reimbursements, management fees of 0.90% of average net assets.
The Fund pays for its own operating expenses such as custodial, transfer agent,
accounting, and legal fees; brokerage fees and commissions, if any; costs
attributable to investor services; insurance premiums; interest; organizational
expenses; taxes; and extraordinary expenses. The Fund also pays dealers fees
of up to 0.25% of the Fund's net assets for personal service to shareholders
and/or the maintenance of shareholder accounts. See the Statement of
Additional Information for an additional discussion of Fund expenses.
You should note that because the Fund invests in other funds, you pay not only
the transactional expenses (such as a deferred sales charge) and a pro rata
share of the operating expenses of the Fund, you will also pay a portion of
similar expenses of the underlying funds. An investor in the Fund therefore
will indirectly pay higher expenses than if the underlying fund shares were
owned directly. You may also receive taxable capital gains distributions to a
greater extent than if the underlying funds were owned directly.
PRINCIPAL INVESTMENT STRATEGIES
SECURITIES THE FUND INVESTS IN
The Fund's investment objective may not be changed without shareholder
approval. For a detailed discussion of the Fund's fundamental investment
policies, see the Statement of Additional Information.
INVESTMENT COMPANIES
Under normal circumstances, the Fund invests at least 80% of its assets in
shares of registered open-end investment companies ("underlying funds"). The
Fund will normally invest in approximately fifteen to fifty underlying funds
and may invest up to 25% of its total assets in any one underlying fund. The
Fund will generally invest in underlying funds that invest primarily in common
stock and which seek long-term capital appreciation and growth of income with
current income of secondary importance. The Fund normally invests in underly-
ing funds that are classified as growth, aggressive growth, or growth-income
funds.
The Fund generally focuses in underlying funds which primarily invest in
companies with a market capitalization of over $500 million. The underlying
funds may also have a portion of their assets invested in fixed-income securi-
ties. These underlying funds typically invest primarily in investment grade
quality securities with respect to their assets allocated to fixed-income
securities.
The Fund generally invests in seasoned underlying funds. Accordingly, the Fund
normally invests in underlying funds with at least a five year operating
history and at least $300 million assets under management. The above policies
may be changed without shareholder approval.
7
The Fund will not purchase shares of closed-end investment companies or in
investment companies which are not registered with the Securities and Exchange
Commission. The Fund intends to invest only in underlying funds which qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code. If an underlying fund fails to qualify as a RIC, it may be
subject to federal income tax. Although there is no assurance an underlying
fund will qualify as a RIC, the Fund will promptly dispose of any shares in
its portfolio which have been issued by a fund which has failed to qualify
as a RIC.
HOW WE SELECT INVESTMENTS
ND Management selects underlying funds based primarily upon its assessment of
the underlying fund's potential to advance the Fund's objective. ND Management
evaluates underlying funds based on their investment objectives, policies and
techniques, past performance, and management. ND Management will also consider
the fund's operations including: the fund's size, reputation, management
style, fees and expenses, portfolio composition and liquidity, and shareholder
services. In selecting funds, ND Management looks for funds that have had
favorable performance returns compared to similar funds or market indexes. ND
Management will compare the underlying fund's performance record over the past
3, 5, or 10 years (if available), against that of other funds and market
measurements.
RISK MANAGEMENT
HEDGING STRATEGIES
The Fund may also engage in various investment strategies designed to hedge
against changes in market conditions using stock index futures contracts and
options on stock index futures contracts. The Fund may enter into futures
contracts for the purchase or sale of stock indexes or purchase and sell
options on these futures contracts. The Fund uses these investment strategies
to hedge against changes in the values of securities the Fund owns or expects
to purchase and not for speculation. The Fund will not enter into such trans-
actions if the sum of the initial margin deposits and premiums paid for
unexpired options exceed 5% of the Fund's total assets. The ability of the
Fund to benefit from options and futures is largely dependent on ND Manage-
ment's ability to use these strategies successfully. If ND Management's
judgment about the general direction of markets is wrong, the overall perfor-
mance of the Fund will be poorer than if no such futures and options had been
used. In addition, the 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 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 im-
mediate and substantial loss (or gain) for a fund. Use of options may also
(i) result in losses to the 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 the Fund to hold a security it might
otherwise sell.
8
TEMPORARY INVESTMENT STRATEGIES
The 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.
The Fund may therefore hold cash or may invest in money market mutual funds and
in short-term obligations including U.S. government securities (including U.S.
Treasury bills), commercial paper, certificates of deposit, and bankers'
acceptances as a temporary defensive measure. During these periods, the Fund
may not be able to achieve its investment objective. For more detailed infor-
mation on eligible short-term investments, see the Statement of Additional
Information.
NON-PRINCIPAL INVESTMENT STRATEGIES
As a non-principal investment strategy, the Fund may also invest in underlying
funds which invest primarily in long or short-term fixed-income securities that
are investment grade quality. We will invest in bond funds if we believe they
offer a potential for capital appreciation.
OTHER FUND POLICIES
Although the Fund invests primarily in shares of underlying funds, the Fund may
hold cash or may invest in money market mutual funds and in short-term obliga-
tions including U.S. government securities (including U.S. Treasury bills),
commercial paper, certificates of deposit, and bankers' acceptances to accumu-
late cash for investment and redemptions. Cash held for investments or
redemptions may not exceed 35% of the Fund's total assets.
The Fund and its affiliated persons will not purchase more than 3% of the total
outstanding shares of another fund in accordance with federal securities laws.
Because of this restriction, the Fund may have to forego certain investment
opportunities. In addition, the Fund may not invest more than 15% of its net
assets in illiquid securities.
The Fund may acquire shares of underlying funds that impose sales loads or
12b-1 distribution or service fees. The underlying funds, however, may offer
shareholder programs which reduce the sales loads such as quantity discounts,
rights of accumulation, or letters of intent. To the extent available, the
Fund will use these arrangements to reduce any sales load the Fund pays.
Because of these available discounts, the Fund in most cases will not pay a
sales charge of more than 1% of the public offering price (1.01% of the net
amount invested).
9
PORTFOLIO TRANSACTIONS
The investment adviser may consider a number of factors in determining which
brokers to use for the Fund's portfolio transactions. These factors include
research services, reasonableness of commissions, quality of services, and ex-
ecution and sale of Fund shares. When the Fund purchases the shares of under-
lying funds subject to a front-end sales load, the Investment Adviser
anticipates that the Fund's underwriter, ND Capital, Inc. ("ND Capital") will
execute a substantial portion of these portfolio transactions. When ND Capital
acts as the dealer on these purchases, it may receive a dealer reallowance, up
to a maximum 1% of the public offering price. ND Capital will not be designated
as dealer if the dealer reallowance exceeds 1% of the public offering price.
ND Capital may also receive 12b-1 distribution and service fees from underlying
funds when assisting the Fund in purchasing shares of the underlying funds. In
addition, ND Capital may receive brokerage commissions on portfolio transac-
tions of underlying funds held in the Fund's portfolio.
PRINCIPAL RISK FACTORS
Risk is inherent in all investing. Investing in the Fund 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:
MARKET RISK: the risk that a particular stock, an industry, or stocks in
general may fall in value.
FUND RISK: the Fund's investment performance and risk is directly related to
the investment performance and risks of the underlying funds. The ability of
the Fund to achieve its investment objective is therefore dependent on a number
of factors, including the skills of the advisers of the underlying funds to
invest to meet the objectives of the underlying funds, to effectively respond
to changes in market conditions, and to maintain sufficient liquidity to meet
redemptions. The Fund is independent from each of the underlying funds and has
little voice in the management and investment practices of the underlying
funds.
INTEREST RATE RISK: to the extent the Fund invests in underlying funds that
invest in debt securities, the Fund is subject to interest rate risk. Interest
rate risk is 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
an underlying bond fund's portfolio, the greater its interest rate risk.
INCOME RISK: to the extent the Fund invests in underlying funds that invest in
debt securities, the Fund is subject to income risk. Income risk is the risk
that the income from the Fund's portfolio will decline because of falling
market interest rates. This can result when the underlying bond 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.
10
CREDIT RISK: to the extent the Fund invests in underlying funds that invest in
debt securities, the Fund is subject to credit risk. Credit risk is 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. Underlying funds may invest in investment grade
and non-investment grade bonds (i.e., junk bonds).
LIQUIDITY: under federal securities laws, an underlying fund is not obligated
to redeem any securities in an amount exceeding 1% of its total outstanding
securities during any period of less than 30 days. The Fund therefore may not
be able to liquidate more than 1% of an underlying fund's securities when
desired.
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 Fund's assets can decline as can the
value of the Fund's distributions.
OTHER CONSIDERATIONS: the underlying funds have their own investment
objectives, policies, practices, and techniques, any one or all of which may
subject their assets to varying degrees of risk. Principal and certain non-
principal risks have been discussed in this prospectus. Additional non-
principal risks of certain of the practices of the underlying funds are
described further in the Statement of Additional Information. The Fund is
independent from each of the underlying funds and has little influence in
the investment practices of the underlying funds. If the Fund disagrees with
these practices, the Fund may have to liquidate its shares in the underlying
fund, which can entail further losses. In addition, the investment advisers
of the underlying funds may also simultaneously pursue inconsistent investment
strategies. For example, one underlying fund may be purchasing shares of the
same issuer that another underlying fund is selling. Under these circum-
stances, the Fund's indirect expenses would increase without any corresponding
investment benefit.
11
OTHER RISK FACTORS
FOREIGN INVESTMENT RISK: to the extent the Fund invests in underlying funds
that invest in foreign securities, the Fund is subject to foreign investment
risk. Securities issued by foreign companies or governments present risks be-
yond those of securities of U.S. issuers. Such risks include political or
economic instability, changes in foreign currency exchange rates, and less
publicly available information. Prices of foreign securities also may be
more volatile and they may be less liquid than U.S. stocks.
HOW TO PURCHASE SHARES
You can buy shares at the offering price, which is 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. If you sell your shares within five years
of purchase, you will have to pay a contingent deferred sales charge (CDSC) of
1.5% based on either your purchase price or what you sell your shares for,
whichever amount is lower. You do not pay a CDSC on any 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 shares you own in the order
purchased. When you redeem shares subject to a CDSC, the CDSC is deducted from
your redemption proceeds and paid to ND Capital. Purchases of $1 million
or more are subject to a reduced CDSC of 1% if shares are redeemed within 12
months of purchase.
Fund shares are also available for individual retirement accounts (IRAs),
401(k) plans, and other retirement plans. See the Statement of Additional
Information or call (800) 276-1262 for additional information.
CDSC WAIVERS
The Fund may sell shares without a CDSC to:
* directors, officers, employees (including retirees) of the Fund, 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 Fund, 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;
and
* any broker-dealer, financial institution, or other qualified firm which
does not receive commissions for selling shares to its clients.
Please refer to the Statement of Additional Information for detailed
eligibility requirements. Additional information is available by calling
(800) 276-1262.
12
MINIMUM INVESTMENTS AND SHARE PRICE
You may open an account with $1,000 ($100 for the Monthomatic Investment Plan
and $250 for an individual retirement account) and make additional investments
at any time with as little as $50. The Fund may change these minimum initial
investments at any time. You may purchase shares from ND Capital or from
investment dealers who have sales agreements with ND Capital. If you do not
have a dealer, call (800) 276-1262 and ND Capital can refer you to one.
The price you pay for shares will depend on how and when the Fund receives your
order. You will receive the share price 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, Inc. ("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
bank account. Such account must have check or draft writing privileges. You
can stop the withdrawals at any time by sending a written notice to ND
Resources, the Fund's 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 Fund 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.
13
SPECIAL SERVICES
To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.
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
or ND Management at net asset value. If you exchange your Fund shares into
shares of the Montana Tax-Free Fund, Inc., ND Tax-Free Fund, Inc., or South
Dakota Tax-Free Fund, Inc., funds advised by ND Management, you will exchange
your shares into Class B shares of such funds. In addition, 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, subject to the following provision. If the
amount of the CDSC applicable to the fund shares being acquired is higher
than the charge applicable to the shares of the Fund, such higher charge
shall be applied upon redemption of these acquired shares.
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 shares of the Fund at net asset value.
If these shareholders paid an up-front sales load on the shares being
exchanged, such shareholder will not pay a CDSC upon redemption of any
of the Fund shares acquired. If the shares of the original fund being
exchanged are subject to a CDSC, the CDSC and holding period of the original
investment will be carried forward into the Fund and applied upon redemption.
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, the 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. If you paid a CDSC, we
will refund your CDSC as additional shares in proportion to the reinstatement
amount of your redemption proceeds. Your holding period will also be rein-
stated. 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. If you redeemed shares in a retirement account,
please review the plan document you received when you opened your account for
rules and limitations if you are repurchasing shares in the same retirement
account. The Fund may modify or terminate this privilege at any time.
14
GENERAL INFORMATION REGARDING DISTRIBUTION
ND Capital is the Fund's principal underwriter and is responsible for all
sales and promotional activities. For its services, ND Capital receives any
CDSC paid upon redemption of Fund shares. ND Capital pays sales commissions
to dealers and its salesmen who sell Fund shares. In addition, the Fund pays
dealers fees (in an amount not to exceed 0.25% of net assets) for personal
service to shareholders and/or the maintenance of shareholder accounts. For
additional information regarding compensation to the underwriter, see
"Portfolio Transactions".
HOW TO SELL SHARES
You may sell (redeem) your shares on any day the New York Stock Exchange is
open. The New York Stock Exchange is closed on weekends, national holidays,
and Good Friday. 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 Fund does not charge a redemp-
tion fee, you may be assessed a CDSC, if applicable.
You can sell your shares at any time by sending a written request to the Fund,
c/o ND Resources, P.O. Box 759, Minot, ND 58702. 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.
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 Fund reserves the right to liquidate your account
(other than an IRA) 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 Fund also reserves 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.
15
The 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 Securities and Exchange Commission 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 applic-
able 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 the Plan.
DISTRIBUTIONS AND TAXES
The Fund pays dividends and any capital gains at least once a year. The Fund
will automatically reinvest your dividends in additional Fund shares unless you
request your dividends to be paid to you in cash.
The Fund will send a check to investors electing 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.
TAXES AND TAX REPORTING
The Fund intends to make distributions that may be taxed as ordinary income or
capital gains (which may be taxable at different rates depending on the length
of time the Fund holds its assets). Distributions of net capital gain
distributions received by the Fund from underlying funds as well as net long-
term capital gains realized by the Fund are generally taxable as long-term
capital gains. Dividends from income (including dividends and net short-term
capital gains received from the underlying funds) as well as short-term capital
gains realized by the Fund are generally taxable as ordinary income. The tax
you pay on a given capital gains distribution depends generally on how long
the Fund has held the portfolio securities it sold. It does not depend on how
long you have owned your Fund shares.
Early in each year, you will receive a statement detailing the amount and
nature of all dividends and capital gains 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. The sale of shares in your account may
produce a gain or loss and is a taxable event.
16
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.
NET ASSET VALUE
The price you pay for your shares is based on the Fund's net asset value per
share 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 by calculating the total value of the
Fund's assets, including interest or dividends accrued but not yet collected,
less all liabilities, and dividing by the total number of shares outstanding.
The result, rounded to the nearest cent, is the net asset value per share. All
valuations are subject to review by the Fund's Board of Directors or its
delegate.
The Fund's assets consist primarily of shares of the underlying funds which are
valued at their respective net asset values. The underlying funds value
securities in their portfolios for which market quotations are readily avail-
able at their current market value (generally the last reported sale price) and
all other securities and assets at fair value pursuant to methods established
in good faith by their boards of directors. Money market funds with portfolio
securities that mature in one year or less may use the amortized cost or penny-
rounding methods to value their securities. Securities having 60 days or less
remaining to maturity generally are valued at their amortized cost, which
approximates market value. Other assets of the Fund are valued at their
current market value if market quotations are readily available and, if not
available, at fair value pursuant to methods established in good faith by the
Board of Directors.
17
FUND SERVICE PROVIDERS
The custodian of the assets of the Fund is First Western Bank & Trust, 900
South Broadway, Minot, North Dakota 58701. ND Resources, a wholly-owned
subsidiary of ND Holdings, is the Fund's transfer agent. As transfer agent,
ND Resources performs bookkeeping, data processing, accounting and other admin-
istrative services for the operation of the Fund, and the maintenance of share-
holder accounts.
SHAREHOLDER INQUIRIES
All inquiries regarding the Fund 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.
18
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
recent past performance. Certain information reflects financial results for a
single Fund share. The total returns in the table 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 Fund's financial
statements are included in the Fund's annual report. Further information about
the Fund's performance is also contained in the Fund's latest annual
shareholder report. You may obtain a free copy of the Fund's latest annual
shareholder report and Statement of Additional Information upon request
from the Fund.
INTEGRITY FUND OF FUNDS, INC.
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year 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 $ 14.22 $ 13.27 $ 12.53 $ 11.76 $ 10.00
-----------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income (loss) $ .08 $ (.03) $ .21 $ .10 $ .22
Net realized and unrealized
gain (loss) on investment
and futures transactions 2.62 1.64 1.63 1.53 2.30
-----------------------------------------------------------------------------------
Total Income (Loss) From
Investment Operations $ 2.70 $ 1.61 $ 1.84 $ 1.63 $ 2.52
-----------------------------------------------------------------------------------
Less Distributions:
From net investment income $ (.08) $ .00 $ (.21) $ (.10) $ (.22)
Distributions from net
realized gains (1.04) (.66) (.89) (.76) (.54)
-----------------------------------------------------------------------------------
Total Distributions $ (1.12) $ (.66) $ (1.10) $ (.86) $ (.76)
-----------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 15.80 $ 14.22 $ 13.27 $ 12.53 $ 11.76
===================================================================================
Total Return 18.98%(A) 12.17%(A) 14.65%(A) 13.84%(A) 25.20%(A)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $ 22,133 $ 20,058 $ 17,444 $ 11,406 $ 4,362
Ratio of net expenses
(after expense
Assumption) to average
net assets 1.58%(B) 1.60%(B) 1.62%(B) 1.63%(B) 1.59%(B)
Ratio of net investment
income to
Average net assets .49% (.36)% 1.73% .98% 4.00%
Portfolio turnover rate 19.49% 32.28% 31.99% 50.11% 15.30%
</TABLE>
[FN]
(A)Excludes contingent deferred sales charge of 1.5%.
(B)During the periods indicated above, ND Holdings, Inc. assumed/waived
expenses of $3,205, $2,151, $7,031, $24,114, and $39,760. If the expenses
had not been assumed/waived, the annualized ratio of total expenses to average
net assets would have been 1.60%, 1.62%, 1.64%, 1.78%, and 2.08%, respectively.
</FN>
19
INTEGRITY FUND OF FUNDS, 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
CUSTODIAN
First Western Bank & Trust
900 South Broadway
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
20
This Page Intentionally Left Blank
21
INTEGRITY MUTUAL FUNDS
Integrity Fund of Funds, Inc.
Several additional sources of information are available to you. The Statement
of Additional Information (SAI), incorporated by reference into this pros-
pectus, contains detailed information on the Fund's 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
The Fund's SEC File No. 811-8824
22
PART B
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
INTEGRITY FUND OF FUNDS, 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 Integrity Fund of Funds, Inc.
(the "Fund"), dated May 1, 2000. The Prospectus may be obtained without charge
from the Fund by writing to the above address or calling (800) 276-1262. In
addition, the audited financial statements for the Fund's most recent fiscal
year appear in the Fund's annual report which is incorporated herein by
reference. The annual report accompanies this Statement of Additional
Information.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Section Page
Investments 1
Stock Index Futures Contracts and Options on Stock Index Futures Contracts 2
Temporary Investments 3
Investment Policies and Practices of Underlying Funds 4
Investment Restrictions of the Fund 11
Management of the Fund 13
Control Persons and Principal Holders of Securities 15
Investment Advisory and Other Services 16
Expenses 17
Portfolio Transactions 18
Purchase and Redemption of Shares 20
Retirement Plans 20
Individual Retirement Accounts (IRAs) 21
Defined Contribution Plan 21
Section 401(k) Plan 21
Monthomatic Investment plan 21
Exchange Privilege 21
Minimum Investment 22
Redemptions 22
Contingent Deferred Sales Charges 22
Systematic Withdrawal Plan 24
Underwriter 24
Dividends and Taxes 25
Calculation of Performance Data 27
Organization and Share Attributes 30
Shareholder Meetings 30
Appendix - Description of Commercial Paper and Bond Ratings 31
Financial Statements F-1
</TABLE>
INVESTMENTS
INVESTMENT COMPANIES
The Fund seeks to achieve its objective by investing primarily in a
diversified group of other open-end investment companies ("underlying funds")
which, in turn, invest principally in equity securities. The Fund will invest
in approximately fifteen to fifty underlying funds which invest primarily in
common stock and which seek long-term capital appreciation and growth
of income, with current income of secondary importance. The underlying
funds may also invest in securities convertible into or exchangeable for common
stock (such as convertible preferred stock, convertible debentures or
warrants). For temporary defensive purposes, the underlying funds may also
invest in (or enter into repurchase agreements with banks and broker-dealers
with respect to) corporate bonds, U.S. Government securities, commercial paper,
certificates of deposit, or other money market instruments.
The Fund may also invest in underlying funds which invest primarily in long-
or short-term bonds and other fixed income securities (such as securities
issued, guaranteed, or insured by the U.S. Government, its agencies and
instrumentalities, commercial paper, preferred stock, convertible preferred
stock, or convertible debentures) whenever ND Money Management, Inc. (the
"Investment Adviser" or "ND Management") thinks that such funds offer a
potential for capital appreciation.
The Investment Adviser exercises broad discretion in choosing which under-
lying funds to include in the Fund's portfolio. The Fund, however, will not
purchase shares of closed-end investment companies or of investment companies
which are not registered with the Securities and Exchange Commission. In
addition, the Fund intends to invest only in underlying funds which qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended. If a fund fails to qualify as a RIC, it may
be subject to federal income tax. No assurance can be given that an underlying
fund will qualify as a RIC. However, the Fund will promptly dispose of any
shares in its portfolio which have been issued by a fund which failed to
qualify as a RIC. Under normal circumstances, the Fund will invest in approx-
imately fifteen to fifty underlying funds and may invest up to 25% of its total
assets in any one underlying fund.
The Fund may acquire shares of underlying funds irrespective of whether such
funds impose sales loads of various kinds or have 12b-1 or other distribution
plans or expenses. However, whenever possible, the Fund will purchase shares
pursuant to arrangements which provide for (1) quantity discounts under which
lower front-end loads are available for substantial minimum purchases;
(2) letters of intent, permitting reduced front-end loads by aggregating
intended purchases over time; (3) rights of accumulation, permitting reduced
front-end loads for purchases of additional shares of the underlying fund; and
(4) rights to obtain reduced front-end sales loads by aggregating purchases of
several funds within a family of funds.
Rules adopted by the Securities and Exchange Commission allow funds to elect
to make redemptions either in part or wholly in securities from their port-
folios ("in kind" redemptions) instead of in cash under certain circumstances.
If the Fund acquires in kind securities from an
underlying fund which has exercised such an election, the Fund may hold the
securities until the Investment Adviser decides to sell them. The Fund will
likely incur additional expenses in connection with the sale of any securities
acquired as a result of an in kind redemption.
In addition to the foregoing, the Investment Company Act of 1940 (the "1940
Act") imposes certain conditions on funds which invest in other funds. For
example, a fund and its affiliated persons may not purchase or otherwise
acquire more than 3% of the total outstanding shares of another fund. Conse-
quently, the Fund may have to forego what the Investment Adviser deems to be
an advantageous purchase because of this restriction. The 1940 Act also
provides that an underlying fund is not obligated to redeem any securities in
an amount exceeding 1% of its total outstanding securities during any period
of less than 30 days. As a result of this provision, the Investment Adviser
may be unable to liquidate more than 1% of an underlying fund's securities
should market or other considerations indicate the advisability of doing so.
Finally, the 1940 Act requires that the Fund either seek instructions from
its shareholders regarding the voting of proxies with respect to securities
of underlying funds it holds and vote the proxies in accordance with such
instructions or vote such shares in the same proportion as the vote of all
other holders of such securities. The Fund will vote the shares in the same
proportion as the vote of all other shareholders.
STOCK INDEX FUTURES CONTRACTS AND
OPTIONS ON STOCK INDEX FUTURES CONTRACT
The Fund may purchase and sell stock index futures contracts and options on
such futures in accordance with its investment objective and policies for hedg-
ing purposes and not for speculation. For a description of these securities
and the risks associated with them, see Investment Policies and Practices of
the Underlying Funds-Futures Contracts, Options on Futures Contracts, Option
Activities, and Hedging.
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, the 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.
To the extent required to comply with Commodity Futures Trading Commission
("CFTC") Regulation 4.5 to avoid "commodity pool operator" status, the 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. The 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.
B-2
TEMPORARY INVESTMENTS
Although the Fund invests primarily in shares of underlying funds, for
temporary defensive purposes or to accumulate cash for investments or redemp-
tions, the Fund may hold cash or invest in money market mutual funds or in a
variety of short-term debt securities, including U.S. Treasury Bills and other
U.S. Government securities, commercial paper, certificates of deposit, and
bankers' acceptances. When the Fund invests for temporary defensive purposes,
it may do so without any percentage limitations. The following information
supplements that in the Prospectus under "Risk Management - Temporary
Investment Strategies" and "Other Fund Policies."
U.S. GOVERNMENT SECURITIES
The Fund may invest in obligations issued or guaranteed by the U.S. Govern-
ment or its agencies or instrumentalities which have remaining maturities not
exceeding one year. Agencies and instrumentalities which issue or guarantee
debt securities and which have been established or sponsored by the U.S. Gov-
ernment include the Bank for Cooperatives, the Export-Import Bank, the Federal
Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan Mortgage
Corporation, the Federal Intermediate Credit Banks, the Federal Land Banks, the
Federal National Mortgage Association, and the Student Loan Marketing
Association.
BANK OBLIGATIONS
The Fund may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase
in excess of $100 million. Such banks must be members of the Federal Deposit
Insurance Corporation.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance
is a short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. Although the borrower
is liable for payment of the draft, the bank unconditionally guarantees to pay
the draft at its face value on the maturity date.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by bank holding companies, corporations, and finance companies.
The commercial paper purchased by the Fund consists of direct obligations of
domestic issuers which, at the time of investment, are (i) rated "P-1" by
Moody's Investors Service, Inc. ("Moody's"), or "A-1" or better by Standard
& Poor's Corporation ("Standard & Poor's"), (ii) issued or guaranteed as to
principal and interest by issuers or guarantors having an existing debt
security rating of "Aa" or better by Moody's or "AA" or better by Standard &
Poor's, or (iii) securities which, if not rated, are, in the opinion of the
Fund's Investment Adviser, of an investment quality comparable to rated
commercial paper in which the Fund may invest.
B-3
The rating "P-1" is the highest commercial paper rating assigned by Moody's,
and the ratings "A-1" and "A-1+" are the highest commercial paper ratings
assigned by Standard & Poor's. Debt rated "Aa" or better by Moody's or "AA" or
better by Standard & Poor's is generally regarded as high-grade, and such
ratings indicate that the ability to pay principal and interest is very
strong.
INVESTMENT POLICIES AND PRACTICES OF UNDERLYING FUNDS
The underlying funds have their own investment objectives, policies,
practices, and techniques, any one or all of which may subject their assets to
varying degrees of risk. For example, the underlying funds in which the fund
invests may be authorized to invest up to 100% of their assets in securities of
foreign issuers and engage in foreign currency transactions with respect to
these investments; invest up to 15% of their assets in illiquid securities;
invest in warrants; lend their portfolio securities; sell securities short;
borrow money in amounts up to 33 1/3% of their assets for leverage purposes;
write or purchase call or put options on securities or financial indexes;
invest up to 100% of their assets in master demand notes; enter into
futures contracts and options on futures contracts; trade their portfolio
aggressively, which results in higher brokerage commissions and increased
realization of capital gains; invest in start-up and unproven companies;
invest up to 100% of their assets in junk bonds; and engage in any number
of other investment practices and techniques that involve greater risks.
The risks involved in certain of these practices and techniques are
described below.
CONVERTIBLE SECURITIES
Certain preferred stocks and debt securities that may be held by an underly-
ing fund have conversion features allowing the holder to convert securities
into another specified security (usually common stock) of the same issuer at
a specified conversion ratio (e.g., two shares of preferred for one share of
common stock) at some specified future date or period. The market value of
convertible securities generally includes a premium that reflects the conver-
sion right. That premium may be negligible or substantial. To the extent that
any preferred stock or debt security remains unconverted after the expiration
of the conversion period, the market value will fall to the extent represented
by that premium.
FOREIGN INVESTMENTS
The Fund may invest in certain underlying funds which invest all or a
portion of their assets in foreign securities. Investing in securities of non-
U.S. companies, which are generally denominated in foreign currencies, and
utilization of forward foreign currency exchange contracts and other currency
hedging techniques involve certain considerations comprising both opportunity
and risk not typically associated with investing in U.S. dollar-denominated
securities. Risks unique to international investing include: (1) restrictions
on foreign investment and on repatriation of capital; (2) fluctuations in
currency exchange rates; (3) costs of converting foreign currency into U.S.
dollars; (4) price volatility and less liquidity; (5) settlement practices,
including delays, which may differ from those customary in U.S. markets;
(6) exposure to political and economic risks, including the risk of nationali-
zation, expropriation of assets, and
B-4
war; (7) possible imposition of foreign taxes and exchange control and currency
restrictions; (8) lack of uniform accounting, auditing, and financial reporting
standards; (9) less governmental supervision of securities markets, brokers,
and issuers of securities; (10) less financial information available to
investors; (11) difficulty in enforcing legal rights outside the U.S.; and
(12) higher costs, including custodial fees. These risks are often heightened
for investments in emerging or developing countries.
FOREIGN CURRENCY TRANSACTIONS
Foreign securities in which the underlying funds invest are subject to
currency risk, i.e., the risk that the U.S. dollar value of these securities
may be affected favorably or unfavorably by changes in foreign currency ex-
change rates and exchange control regulations. To manage this risk and
facilitate the purchase and sale of foreign securities, these underlying funds
may engage in foreign currency transactions involving the purchase and sale of
forward foreign currency exchange contracts. Although foreign currency trans-
actions will be used primarily to protect the underlying funds from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted and the underlying funds' total
return could be adversely affected.
FUTURES CONTRACTS
An underlying fund may enter into futures contracts for the purchase or sale
of debt securities and financial indexes. A futures contract is an agreement
between two parties to buy and sell a security or an index for a set price on
a future date. Futures contracts are traded on designated "contract markets"
which, through their clearing corporations, guarantee performance of the
contracts.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if a fund holds long-term U.S. Government securities and
it anticipates a rise in long-term interest rates, it could, in lieu of dispos-
ing of its portfolio securities, enter into futures contracts for the sale of
similar long-term securities. If rates increased and the value of the fund's
portfolio securities declined, the value of the fund's futures contracts would
increase, thereby protecting the fund by preventing the net asset value from
declining as much as it otherwise would have. Similarly, entering into futures
contracts for the purchase of securities has an effect similar to the actual
purchase of the underlying securities but permits the continued holding of
securities other than the underlying securities. For example, if the fund
expects long-term interest rates to decline, it might enter into futures
contracts for the purchase of long-term securities so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
it intends to purchase while continuing to hold higher-yield short-term
securities or waiting for the long-term market to stabilize.
A financial index futures contract may be used to hedge an underlying fund's
portfolio with regard to market risk as distinguished from risk relating to a
specific security. A financial
B-5
index futures contract does not require the physical delivery of securities but
merely provides for profits and losses resulting from changes in the market
value of the contract to be credited or debited at the close of each trading
day to the respective accounts of the parties to the contract. On the
contract's expiration date, a final cash settlement occurs. Changes in the
market value of a particular financial index futures contract reflect changes
in the specified index of securities on which the futures contract is based.
There are several risks in connection with the use of futures contracts. In
the event of an imperfect correlation between the futures contract and the
portfolio position which is intended to be protected, the desired protection
may not be obtained, and the fund may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements may result in
a poorer overall performance for the fund than if it had not entered into the
futures contracts.
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through off-
setting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an ex-
change or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board
of trade will exist for any particular contract or at any particular time.
OPTIONS ON FUTURES CONTRACTS
A fund also may purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the option period. When
an option on a futures contract is exercised, delivery of the futures position
is accompanied by cash representing the difference between the current market
price of the futures contract and the exercise price of the option. The fund
may purchase put options on futures contracts in lieu of, and for the same
purpose as, a sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract
in the same manner as it purchases "protective puts" on securities.
As with options on securities, the holder of an option may terminate a
position by selling an option of the same series. There is no guarantee that
such closing transactions can be effected. The fund is required to deposit
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it pursuant to brokers' requirements similar to
those applicable to futures contracts described above, and, in addition, net
option premiums received will be included as initial margin deposits.
B-6
In addition to the risks which apply to all options transactions (discussed
below under "Options Activities"), there are several special risks relating to
options on futures contracts. The ability to establish and close out positions
on such options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop. Compared
to the use of futures contracts, the purchase of options on futures contracts
involves less potential risk to the fund, because the maximum amount at risk is
the premium paid for the options (plus transaction costs). However, there may
be circumstances when the use of an option on a futures contract would result
in a loss to the fund when the use of futures contract would not, such as when
there is no movement in the prices of the underlying securities. Writing an
option on a futures contract involves risks similar to those arising in the
sale of futures contracts as described above.
OPTIONS ACTIVITIES
An underlying fund may write (i.e., sell) and purchase put and call options
on securities and securities indexes.
A put option on a security gives the purchaser of the option the right (but
not the obligation) to sell, and the writer of the option the obligation to
buy, the underlying security at a stated price (the "exercise price") at any
time before the option expires. A call option on a security gives the
purchaser the right (but not the obligation) to buy, and the writer the obliga-
tion to sell, the underlying security at the exercise price at any time before
the option expires. The purchase price for a put or call option is the
"premium" paid by the purchaser for the right to sell or buy.
Options on indexes are similar to options on securities except that, rather
than the right to take or make delivery of a specific security at a stated
price, an option on an index gives the holder the right to receive, upon
exercise of the option, a defined amount of cash if the closing value of the
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.
Writing Options. The principal reason for writing call or put options is to
obtain, through the receipt of premiums, a greater current return than would be
realized on the underlying securities alone. By writing a call option, a fund
becomes obligated during the term of the option to deliver the securities
underlying the option upon payment of the exercise price if the option is
exercised. By writing a put option, a fund becomes obligated during the term
of the option to purchase the securities underlying the option at the exercise
price if the option is exercised. Options on securities indexes are settled in
cash based on the values of the securities in the underlying index rather than
by delivery of the underlying securities.
Underlying funds receive premiums from writing call or put options, which
they retain whether or not the options are exercised. If a call option written
by a fund is exercised, the fund will forgo any gain from an increase in the
market price of the underlying security over the exercise price. If a put
option written by a fund is exercised, the fund will be obligated to purchase
the underlying security for more than its current market price.
B-7
Purchasing Options. Underlying funds generally will purchase put options in
order to protect portfolio holdings against a substantial decline in the market
value of such holdings. Such protection is provided during the life of a put
because a fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Underlying
funds generally will purchase call options for the purpose of hedging against
an increase in prices of securities that the funds ultimately want to buy.
Such protection is provided during the life of the call option because the fund
may buy the underlying security at the call exercise price regardless of any
increase in the underlying security's market price. An underlying fund's loss
exposure in purchasing an option is limited to the sum of the premium paid and
the commission or other transaction expenses associated with acquiring the
option.
A fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be
no assurance that a liquid secondary market will exist at a given time for
any particular option. In this regard, trading in options on certain
securities (such as U.S. Government securities) is relatively new so that it is
impossible to predict to what extent liquid markets will develop or continue.
HEDGING
An underlying fund may employ many of the investment techniques described
herein not only for investment purposes, but also for hedging purposes. For
example, an underlying fund may purchase or sell put and call options on common
stocks to hedge against movements in individual common stock prices or purchase
and sell stock index futures and related options to hedge against marketwide
movements in common stock prices. Although such hedging techniques generally
tend to minimize the risk of loss that is hedged against, they also may limit
commensurately the potential gain that might have resulted had the hedging
transaction not occurred. Also, the desired protection generally resulting
from hedging transactions may not always be achieved.
JUNK BONDS
Bonds which are rated BB and below by Standard and Poor's and Ba and below
by Moody's (See Appendix-Description of Commercial Paper and Bond Ratings for
a more detailed explanation of bond ratings) are commonly known as "junk
bonds." Investing in junk bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. Junk bonds
may be regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments.
Junk bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade securities. The prices
of junk bonds have been found to be less sensitive to interest rate changes
than more highly rated investments but more sensitive to adverse economic down-
turns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in junk bond prices, because the advent of a recession could lessen
the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If the issuer of
B-8
junk bonds defaults, a fund may incur additional expenses to seek recovery. In
the case of junk bonds structured as zero coupon or payment-in-kind securities,
the market prices of such securities are affected to a greater extent by
interest rate changes and, therefore, tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary markets on which junk bonds are traded may be less liquid than
the market for higher grade securities. Less liquidity in the secondary
trading markets could adversely affect and cause large fluctuations in the
daily net asset value of a fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of junk bonds, especially in a thinly traded market.
There may be special tax considerations associated with investing in junk
bonds structured as zero coupon or payment-in-kind securities. A fund records
the interest on these securities as income even though it receives no cash
interest until the security's maturity or payment date. A fund will be
required to distribute all or substantially all such amounts annually and may
have to obtain the cash to do so by selling securities which otherwise would
continue to be held. Shareholders will be taxed on these distributions.
The use of credit ratings as the sole method of evaluating junk bonds can
involve certain risks. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of junk bonds.
Also, credit rating agencies may fail to change credit ratings in a timely
fashion to reflect events since the security was last rated.
ILLIQUID SECURITIES
An underlying fund may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities") including
repurchase agreements having more than seven days to maturity. A considerable
period of time may elapse between an underlying fund's decision to dispose of
such securities and the time when the fund is able to dispose of them, during
which time the value of the securities (and therefore the value of the under-
lying fund's shares held by the Fund) could decline.
INDUSTRY CONCENTRATION
An underlying fund may concentrate its investments within one industry.
Accordingly, such fund bears the investment risk from economic, political
or regulatory changes that could adversely affect issuers in that industry
and therefore the value of such underlying fund's investment portfolio.
LEVERAGE THROUGH BORROWING
An underlying fund may borrow up to 33-1/3% of the value of its total assets
on an unsecured basis from banks to increase its holdings of portfolio
securities. Under the 1940 Act, a fund is required to maintain continuous
asset coverage of 300% with respect to such borrowings and to sell (within
three days) sufficient portfolio holdings to restore such coverage if it should
decline to less than 300% due to market fluctuations or otherwise, even if
disadvantageous from an investment standpoint. Leveraging will exaggerate the
effect of any increase or decrease in the value of portfolio securities on a
fund's net asset value, and money borrowed will be subject to interest costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the interest or dividends
received from, or appreciation of, the securities purchased with borrowed
funds.
B-9
LOANS OF PORTFOLIO SECURITIES
An underlying fund may lend its portfolio securities provided that: (1) the
loan is secured continuously by collateral maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the fund may at any time call the loan and obtain the return of the
securities loaned; (3) the fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the fund. Loans
of securities involve a risk that the borrower may fail to return the
securities or may fail to provide additional collateral.
MASTER DEMAND NOTES
Although the Fund itself will not do so, underlying funds (particularly
money market mutual funds) may invest up to 100% of their assets in master
demand notes. Master demand notes are unsecured obligations of U.S. corpora-
tions redeemable upon notice that permit investment by a fund of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between
the fund and the issuing corporation. Because they are direct arrangements
between the fund and the issuing corporation, there is no secondary market
for the notes. However, they are redeemable at face value plus accrued
interest at any time.
REPURCHASE AGREEMENTS
Underlying funds, particularly money market funds, may enter into repurchase
agreements with banks and broker-dealers under which they acquire securities
subject to an agreement with the seller to repurchase the securities at an
agreed upon time and price. These agreements are considered under the 1940 Act
to be loans by the purchaser collateralized by the underlying securities. If
the seller should default on its obligation to repurchase the securities, the
underlying fund may experience delay or difficulties in exercising its rights
to realize upon the securities held as collateral and might incur a loss if the
value of the securities should decline.
SHORT SALES
An underlying fund may sell securities short. In a short sale, a fund sells
stock which it does not own, making delivery with securities "borrowed" from a
broker. The fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. This price may
or may not be less than the price at which the security was sold by the fund.
Until the security is replaced, the fund is required to pay to the lender any
dividends or interest which accrue during the period of the loan. In order to
borrow the security, the fund may also have to pay a premium which would
increase the cost of the security sold. The proceeds of the short sale will
be retained by the broker to the extent necessary to meet margin requirements
until the short position is closed out.
The fund also must deposit in a segregated account an amount of cash or
liquid securities equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) the value of the
collateral deposited with the broker in connection with
B-10
the short sale (not including the proceeds from the short sale). While the
short position is open, the fund must maintain daily the segregated account
at such a level that (1) the amount deposited in it plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short and (2) the amount deposited in it plus the amount deposited with
the broker as collateral is not less than the market value of the securities
at the time they were sold short. Depending upon market conditions, up to 80%
of the value of a fund's net assets may be deposited as collateral for the
obligation to replace securities borrowed to effect short sales and allocated
to a segregated account in connection with short sales.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security. The fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased and the amount of any loss increased by the amount of any premium,
dividends, or interest the fund may be required to pay in connection with a
short sale.
A short sale is "against the box" if at all times when the short position is
open the fund owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issue as the securities sold short. Such a transaction serves to defer a gain
or loss for federal income tax purposes.
WARRANTS
An underlying fund may invest in warrants, which are options to purchase
equity securities at specific prices valid for a specific period of time. The
prices do not necessarily move parallel to the prices of the underlying
securities. Warrants have no voting rights, receive no dividends, and have
no rights with respect to the assets of the issuer. If a warrant is not
exercised within the specified time period, it will become worthless and the
fund will lose the purchase price and the right to purchase the underlying
security.
INVESTMENT RESTRICTIONS OF THE FUND
The Fund has adopted certain fundamental investment restrictions which,
together with the Fund's investment objective, cannot be changed without
approval by holders of a majority of its outstanding voting shares. As defined
in 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. The Fund may not:
(1) Purchase securities of any one issuer if as a result more than 5% of
the Fund's total assets would be invested in such issuer or the Fund would own
or hold more than 10% of the outstanding voting securities of that issuer;
provided, however, that up to 25% of the Fund's total assets may be invested
without regard to this limitation and provided further that this limitation
does not apply to securities issued by the U.S. Government, its agencies or
instrumentalities, nor to securities issued by other open-end investment
companies.
B-11
(2) Make loans, except in accordance with its investment objective and
policies.
(3) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell stock index futures contracts and options thereon
for hedging purposes.
(4) 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.
(5) Issue senior securities as defined in the 1940 Act, except as
appropriate to evidence indebtedness which the Fund is permitted to incur,
provided that the Fund's use of stock index futures contracts and options
thereon will not be deemed to constitute senior securities for this purpose.
(6) Borrow money except from a bank and then only for temporary or
emergency purposes and 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%. The Fund will not purchase portfolio securities when outstanding borrow-
ings exceed 5% of the total assets. The Fund may mortgage, pledge, or
hypothecate its assets in an amount not exceeding 10% of its total assets to
secure temporary or emergency borrowing.
(7) Invest in real estate or real estate mortgage loans, although it may
invest in securities which are secured by real estate and securities of issuers
which invest or deal in real estate.
In addition to the foregoing, under its fundamental investment
policies, the Fund will invest at least 25% of its total assets in shares of
underlying funds. The Fund may not invest more than 25% of its total assets
in the securities of companies in the same industry or in securities of under-
lying funds which concentrate (i.e., invest 25% or more of total assets) in any
industry. Nevertheless, through its investment in underlying funds, the Fund
may invest more than 25% of its assets in one industry.
The following investment restrictions are nonfundamental and may be changed
by the vote of the Fund's Board of Directors without shareholder approval.
The Fund may not:
(1) Purchase or retain the securities of any issuer if any of its officers
or directors or if 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.
(2) Invest more than 15% of its net assets in illiquid securities, in-
cluding securities which at the time of such investment are not readily market-
able and securities restricted as to disposition under the federal securities
laws.
B-12
(3) Invest for the purpose of exercising control or management of another
issuer.
(4) Make short sales of securities.
(5) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of issuers which
invest in or sponsor such programs.
With the exception of the Fund's policy with respect to borrowing, 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 Fund. Changes due to market
action will not cause a violation of a policy or restriction.
MANAGEMENT OF THE FUND
The management of the Fund, including general supervision of the duties
performed for the Fund under the Investment Advisory Agreement, is the respon-
sibility of the Board of Directors. The number of directors of the 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 "disinter-
ested persons." The names and business addresses of the directors and officers
of the Fund 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 Fund indicated by an asterisk.
B-13
<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 Small-Cap
904 NW 27th Fund of Funds, Inc. (since September 1998),
Minot, North Dakota 58701 ND Tax-Free Fund, Inc., Montana Tax-Free Fund
Inc., South Dakota Tax-Free Fund, Inc., 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, ND Insured Income Fund, Inc.
Minot, North Dakota 58701 (March 1995 to August 1999), ND Tax-Free Fund,
Inc., Montana Tax-Free Fund Inc., South Dakota
Tax-Free Fund, Inc., and Integrity Small-Cap Fund
of Funds, Inc. (since September 1998); Trustee,
Ranson Managed Portfolios (since January 1996);
Director, First Western Bank & Trust.
R. James Maxson3 52 Director Attorney, McGee, Hankla, Backes & Wheeler,
15 2nd Ave. SW, Suite 305 P.C. (since April 2000) ; Attorney, Farhart, Lian
Minot, North Dakota 58701 and Maxson, P.C. (March 1976 to March 2000);
Director, ND Tax-Free Fund, Inc., (since January
1999); Montana Tax-Free Fund Inc., (since January
1999); South Dakota Tax-Free Fund, 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 Attorney; Director and Vice President, ND
1 North Main Vice- Holdings, 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), ND Tax-Free Fund,
Inc., Montana Tax-Free Fund Inc., South Dakota
Tax-Free Fund, 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 Small-Cap Fund of Funds, Inc. (since
September 1998), ND Tax-Free Fund, Inc., Montana
Tax-Free Fund Inc., South Dakota Tax-Free Fund,
Inc.; 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.
2 Mr. Aas was elected to the board of directors of the Fund on August 19, 1994.
3 Mr. Backes was elected to the board of directors of ND Tax-Free Fund, Inc.,
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc. and of the Fund
in 1995.
4 Mr. R. James Maxson was elected to the board of directors of ND Tax-Free
Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc. and
the Fund, and the board of trustees for the four series of Ranson Managed
Portfolios on December 4, 1998, effective January 1, 1999.
5 Mr. Quist was elected to the board of South Dakota Tax-Free Fund, Inc. on
April 7, 1995,and has served as the vice president and secretary of such fund
since its inception.
6 Mr. Walstad has served as a director and as the president and treasurer of
the Fund since its inception.
</FN>
B-14
Each Director who is not an "interested person" as that term is defined in
the 1940 Act of the Fund is paid an annual fee of $10,000 for serving on the
boards of the funds in the complex. In addition to the Fund, the directors are
also directors of eight open-end investment companies advised by ND Money
Management, Inc. or Ranson Capital Corporation. The annual fee paid to the
directors is allocated among the funds in the complex (which includes 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 the Fund to each of the
directors of the Fund and total compensation paid to each director for the
fiscal year ended December 31, 1999. The Fund has no retirement or pension
plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE* TOTAL**
COMPENSATION COMPENSATION FROM THE FUND AND
NAME OF PERSON, POSITION(S) FROM THE FUND FUND COMPLEX PAID TO DIRECTORS
<S> <C> <C>
Lynn W. Aas
Director $849.41 $10,000.00
Orlin W. Backes
Director $849.41 $10,000.00
R. James Maxson
Director $849.41 $10,000.00
Peter A. Quist
Director,
Vice President, and
Secretary -0- -0-
Robert E. Walstad
Director, President,
and Treasurer -0- -0-
___________ ___________
Totals $2,548.23 $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 Fund.
** Based on the compensation paid to the directors for the one-year period
ended December 31, 1999 for services to the Fund and eight open-end funds
advised by ND Money Management, Inc. or Ranson Capital Corporation
(which includes the four series of Ranson Managed Portfolios).
</FN>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 13, 2000, no person owned of record or was known
by the Fund to own of record or beneficially 5 percent or more of the Fund's
outstanding shares. In addition, as of April 13, 2000, the officers and
directors (including family members) of the Fund, in the aggregate, own less
than 1% of the shares of the Fund.
B-15
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ND Management has been retained by the Fund under an Investment Advisory
Agreement to act as the 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 Invest-
ment Adviser was incorporated under North Dakota law on August 19, 1988, and
also serves as investment adviser for ND Tax-Free Fund, Inc., Montana Tax-Free
Fund, Inc., and South Dakota Tax-Free Fund, Inc. The address of the Investment
Adviser is 1 North Main, Minot, North Dakota 58703.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes, at its own expenses, all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the Fund and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of the Fund. In addition, the Investment Adviser pays the
salaries and fees of all officers and directors of the Fund who are affiliated
persons of the Investment Adviser. All other charges and expenses, as more
fully described under "Expenses," are paid by the Fund.
For the management services and facilities furnished by ND Management, the
Fund has agreed to pay the Investment Adviser an annual management fee, payable
monthly, of 0.90% of the Fund's average daily net assets. In addition, the
Investment Adviser has voluntarily agreed to waive all or a portion of its
management fee or reimburse certain expenses of the Fund for the year ended
April 30, 2001 in order to prevent total operating expenses excluding
Extraordinary expenses from exceeding 1.60% of the average daily net asset
value of the shares of the Fund. The table below sets forth the advisory
fees paid by the Fund to the Investment Adviser for the periods indicated.
MANAGEMENT FEES
TO ND MONEY MANAGEMENT
FOR THE YEAR ENDED
______________________________________
12/31/97 12/31/98 12/31/99
________ ________ ________
Integrity Fund
of Funds, Inc. $141,687 $183,452 $191,153
The Investment Advisory Agreement with the 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 dis-
regard of its obligations and duties under the Investment Advisory Agreement.
B-16
The Investment Advisory Agreement 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 inter-
ested persons of any such party except in their capacity as directors of the
Fund and by the shareholders or the Board of Directors. The Investment
Advisory Agreement may be terminated at any time upon 60 days' written notice
by the Fund or by a majority vote of the outstanding shares and will terminate
automatically upon assignment.
Robert E. Walstad and Peter A. Quist, directors and officers of the Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Funds."
The Investment Adviser and the ND Capital, Inc., the Fund's underwriter
(the "Underwriter") are subsidiaries of ND Holdings. Robert E. Walstad and
Peter A. Quist, directors and president and vice president, respectively, of
Holdings, are also directors and officers of the Fund, the Investment Adviser,
and the Underwriter. See "Management of the Funds." Walstad and Quist are
also shareholders of Holdings.
CODE OF ETHICS
You should also note that the Investment Adviser, ND Capital, Inc. (the
Funds' underwriter), and the Fund have adopted a code of ethics under Rule
17j-1 of the 1940 Act. The purpose of the code is to avoid potential conflicts
of interest and to prevent fraud, deception or misconduct with respect to the
Fund. Such code of ethics permits personnel covered by the code to invest in
securities, subject to the restrictions of the code.
CUSTODIAN AND TRANSFER AGENT
First Western Bank & Trust, 900 South Broadway, Minot, North Dakota 58701,
serves as custodian for the Fund's portfolio securities and cash. ND
Resources, Inc. ("ND Resources"), a wholly-owned subsidiary of ND Holdings,
1 North Main, Minot, North Dakota 58703, is the Fund's Transfer Agent. As
Transfer Agent, ND Resources performs many of the Fund's clerical and admin-
istrative functions. For its services, the Fund pays ND Resources a monthly
fee ranging from .16 of 1% of the net asset value of all the Fund's outstanding
shares up to $10 million down to .09 of 1% for net assets in excess of $50
million. ND Resources also provides internal accounting and related services
for the Fund, for which it is paid a monthly fee of $2,000 plus 0.05% of the
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.
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Fund's independent public accountant, Brady, Martz & Associates, P.C.,
24 West Central Avenue, Minot, North Dakota 58701, audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and
the Fund's federal income tax return, and performs other professional account-
ing, auditing, tax, and advisory services when engaged to do so by the Fund.
Shareholders will receive annual audited financial statements and semiannual
unaudited financial statements.
EXPENSES
The expenses of the 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
B-17
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 share-
holders; 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 extra-
ordinary expenses. In addition, the Fund pays dealers up to 0.25% of the
Fund's net assets for personal service to shareholders and/or the maintenance
of shareholder accounts.
PORTFOLIO TRANSACTIONS
In effecting purchases and sales of the Fund's portfolio securities, the
Investment Adviser and Fund may place orders with and pay brokerage
commissions, if any, to brokers affiliated with the Fund, the Investment
Adviser, including the Underwriter.
Subject to policies established by the Fund's Board of Directors, the
Investment Adviser, is responsible for the execution of the Fund's portfolio
transactions. In executing portfolio transactions, the Investment Adviser
seeks to obtain the best net results for the Fund. A primary consideration
is prompt and efficient execution of orders in an effective manner at the most
favorable price. With respect to purchases of shares of underlying funds
subject to a front-end sales load at the time of purchase ("load fund shares"),
the Investment Adviser anticipates directing, to the extent possible,
substantially all of the Fund's orders to ND Capital, Inc., the Fund's
underwriter, ("ND Capital" or "Underwriter"). Where the Underwriter acts
as the dealer with respect to purchases of load fund shares, it retains dealer
reallowances on those purchases up to a maximum of 1% of the public offering
price of the shares. The Underwriter is not designated as the dealer on any
sales where such reallowance exceeds 1% of the public offering price. In the
event the Underwriter is unable to execute a particular transaction, the
Investment Adviser will direct such order to another broker-dealer.
Where underlying fund shares are purchased through the Underwriter, the
Underwriter may also receive Rule 12b-1 fees (in an amount not to exceed 0.25%
of net assets) or service fees from the underlying funds or their underwriters
or sponsors in accordance with the normal arrangements of those funds. Rule
12b-1 fees and dealer reallowances as described in the preceding paragraph will
be aggregated for determining compliance with Section 17(e)(2) of the 1940 Act.
The Underwriter may retain brokerage commissions on portfolio transactions
of underlying funds held in the Fund's portfolio, including funds which have
a policy of considering sales of their shares in selecting broker-dealers for
the execution of their portfolio transactions. The payment of brokerage
commissions and Rule 12b-1 fees to the Underwriter on such transactions is not
a factor considered by the Investment Adviser in selecting or retaining an
underlying fund for investment.
Under the 1940 Act, a mutual fund must sell its shares at the price
(including sales load, if any) described in its prospectus, and current rules
under the 1940 Act do not permit
B-18
negotiations of sales loads. The Investment Adviser takes into account the
amount of the applicable sales load, if any, when it is considering whether or
not to purchase shares of an underlying fund. The Investment Adviser
anticipates investing most of the assets of the Fund in funds that impose no
front-end sales load or impose a front-end sales load on the Fund of no more
than 1% of the public offering price. The Investment Adviser, to the extent
possible, seeks to reduce the sales load imposed by purchasing shares pursuant
to (i) letters of intent, permitting purchases over time; (ii) rights of
accumulation, permitting it to obtain reduced sales charges as it purchases
additional shares of an underlying fund; and (iii) rights to obtain reduced
sales charges by aggregating its purchases of several funds within a "family"
of mutual funds. The Investment Adviser also takes advantage of exchange or
conversion privileges offered by any "family" of mutual funds.
A factor in the selection of unaffiliated brokers is the receipt of
research, analysis, advice, and similar services. 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 Fund.
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). The extent to which commissions reflect
an element of value for research services cannot be presently determined.
To the extent that research services of value are provided by broker-dealers
with or through whom the Investment Adviser places the Fund's portfolio
transactions, the Investment Adviser may be relieved of expenses that it
might otherwise bear. Any research and other services provided by brokers
to the Investment Adviser or the Fund are considered to be in addition to,
and not in lieu of, services required to be performed by the Investment
Adviser under the Investment Advisory Agreement.
Another important factor in the selection of brokers is the sale of Fund
shares. Where all major factors are equal, the fact that a broker has sold
Fund shares may be considered in placing portfolio transactions.
The Fund expects that purchases and sales of money market instruments will
usually be principal transactions and purchases and sales of other debt
securities may be principal transactions. Thus, the Fund will normally not pay
brokerage commissions in connection with those transactions. The Fund may pay
mark-ups on principal transactions. Money market instruments are generally
purchased directly from the issuer or from an underwriter or market maker for
the securities, and other debt securities may be purchased in a similar manner.
Purchases from underwriters include an underwriting commission or concession,
and purchases from dealers serving as market makers include the spread
between the bid and asked price. Where transactions are made in the over-the-
counter market, the Fund will deal with the primary market makers unless more
favorable prices are obtainable elsewhere. Commissions will be paid on the
Fund's futures and options transactions, if any.
B-19
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the foregoing practices
may be modified. For the past three fiscal years, the Fund has not paid any
brokerage commissions. 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 agree-
ments with the Fund's Underwriter or from the Underwriter. Fund shares are
sold at their public offering price, which is the net asset value next deter-
mined after an order and payment are received in proper form. On December 31,
1999, the net asset value per share of the Fund was calculated as follows:
net assets of $22,133,845 were divided by 1,400,763 shares outstanding to equal
a net asset value per share of $15.80.
No sales charge is imposed when shares are purchased. However, a contingent
deferred sales charge is imposed if certain shares are redeemed within five
years after their purchase. See "How to Purchase Shares" in the Fund's
Prospectus. The Underwriter will pay a sales commission to investment dealers
and to its salesmen who sell Fund shares. 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.
The 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, the 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 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 safekeep-
ing, the Fund's transfer agent, ND Resources, Inc. (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.
RETIREMENT PLANS
The Fund offers shares in connection with tax-deferred retirement plans.
Application forms and additional information about these plans, including
applicable fees, are available from the Fund or the Fund's custodian, First
Western Bank & Trust (the "Custodian"), upon request. The federal income tax
treatment of contributions to retirement plans has been substantially affected
by recently enacted federal tax legislation. Before investing in the Fund
through such a plan, an investor should consult a tax adviser.
B-20
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAs")
Fund shares may be used as a funding medium for an IRA. An Internal Revenue
Service-approved IRA plan is available from the Custodian. The minimum initial
investment for an IRA is $250; the minimum subsequent investment in $50. IRAs
are available to individuals who receive compensation or earned income and
their spouses whether or not they are active participants in a tax-qualified
or government-approved retirement plan. An IRA contribution by an individual
or spouse who participates in a tax-qualified or government-approved retirement
plan may not be deductible depending upon the individual's income. Individuals
also may establish an IRA to receive a rollover contribution of distributions
from another IRA or a qualified plan. Tax advice should be obtained before
planning a rollover.
DEFINED CONTRIBUTION PLAN
Investors who are self-employed may purchase Fund shares for retirement plans
for self-employed persons which are known as Defined Contribution Plans
(formerly Keogh or H.R. 10 Plans). The Custodian offers a prototype Defined
Contribution Plan for Money Purchase or Profit Sharing Plans.
SECTION 401(k) PLAN
The Fund may be used as a vehicle for a cash or deferred arrangement designed
to qualify under Section 401(k) of the Code.
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 (the "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 Plan" in the Fund's Prospectus for additional information.
EXCHANGE PRIVILEGE
As described in the Fund's Prospectus under "Exchanging Shares," the Fund
offers an exchange privilege pursuant to which a shareholder in the Fund may
exchange some or all of his shares for shares in any of the funds advised or
underwritten by the Underwriter or ND Management at net asset value, subject
to certain terms and conditions described in the Prospectus. 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. Each exchange involves the redemption of Fund shares to be
exchanged and the purchase of the fund shares being acquired. As a result,
any gain or loss on the redemption of fund shares exchanged is reportable on
the shareholder's federal income tax return. A shareholder considering an
exchange should obtain and read the prospectus of the fund to be acquired 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.
B-21
shares to be exchanged and the purchase of Fund shares. As a result, any gain
or loss on the redemption of fund shares exchanged is reportable on the share-
holder's federal income tax return. 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 is $1,000 ($100 for the
Monthomatic Investment Plan and $250 for an Individual Retirement Account),
and the minimum subsequent investment is $50, but such minimum amounts may be
changed at any time.
REDEMPTIONS
Any Fund shareholder may require the 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
signed certificate or 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 associa-
tion, or member firm of a national securities exchange. A notary public may
not provide a signature guarantee. The redemption request and signed certifi-
cate or stock power must be signed exactly as the account is registered includ-
ing 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, as described below. 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 the
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 of the purchase date).
CONTINGENT DEFERRED SALES CHARGES
Except as otherwise provided below, a contingent deferred sales charge
("charge") equal to 1.5% of the redemption proceeds is imposed if a shareholder
redeems shares purchased within the preceding five years. Shares acquired by
reinvestment of dividends may be redeemed without charge 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. In determining whether a charge is payable on any redemption, the Fund
will first redeem shares not subject to a charge.
B-22
If the initial amount of purchase is $1 million or more, the charge is
reduced to 1% and only applies during the first year of purchase.
All purchases are considered made on trade date. Upon receipt of a request
for redemption, 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 Fund may sell shares without a contingent deferred sales charge to
directors, officers, and employees (including retirees) of the Fund, of ND
Holdings, of ND Management, and of ND Capital, for themselves or their spouses,
children, or parents and parents of spouses, or to any trust, pension, or
profit-sharing, or other benefit plan for only such persons at net asset value
and in any amount. The Fund may also sell 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, includ-
ing 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 of scale and sales related efforts. The Underwriter
receives the entire amount of any contingent deferred sales charges assessed.
The 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 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 Fund's portfolio
securities at the time.
The Fund reserves the right to redeem Fund accounts (other than an IRA) that
are reduced to a value of less than $1,000 (for any reason other than fluctua-
tion in the market value of the Fund's portfolio securities). Should the Fund
elect to exercise this right, the investor will be notified before such redemp-
tion 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. The Fund receives
the entire public offering price of all of its shares sold.
B-23
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 (see Contingent Deferred Sales
Charge above), the number of full and fractional shares that will produce what-
ever monthly, quarterly, semi-annual, 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 in-
eligible to participate in the Withdrawal Plan. If payments exceed reinvested
dividends and distributions, a shareholder's shares will be reduced and
eventually depleted. The Withdrawal Plan may be terminated at any time by a
shareholder or the Fund.
UNDERWRITER
ND Capital, a subsidiary of ND Holdings, is the principal underwriter of the
Fund's 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 Fund, 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 Fund. ND Capital may act as such a
Dealer.
Under the terms of the Distribution Agreement between the Fund and the
Underwriter, the Underwriter has agreed to use its best efforts to solicit or-
ders for the sale of the 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 currently equal to 4% (1% on sales of
$1 million or more) of the amount invested to dealers who sell shares
(excluding sales to investors exempt from the contingent deferred sales
charge). In addition, in recognition of services provided to shareholders, the
Fund may also pay service fees to dealers at the annual rate of up to
0.25% of the average net assets which are attributable to shareholders of the
Fund for whom such dealers are designated as the dealers of record.
Because shares of the Fund are sold without any front-end sales loads, the
Underwriter does not receive underwriting commissions. In consideration for
these services, the Underwriter receives any contingent deferred sales charges
imposed on redemptions of shares.
The Underwriter also may receive dealer reallowances (up to a maximum of 1%
of the public offering price) and/or distribution payments and/or service fees
on purchases by the Fund of shares of underlying funds sold with a sales load
and/or which have a distribution plan and/or service fees.
B-24
The following table sets forth the amount of compensation on redemptions,
brokerage commissions and other compensation received by the Underwriter
directly or indirectly from the Fund for the last fiscal year ended December
31, 1999.
COMPENSATION ON BROKERAGE OTHER
REDEMPTIONS COMMISSION COMPENSATION*
___________ __________ _____________
Integrity Fund of Funds, Inc. $45,277 $ -0- $60,073
*The Underwriter received from the underlying funds $10,000 in brokerage
commissions on the portfolio transactions of these underlying funds and
$50,073 in 12b-1 distribution or service fees for assisting the Fund in
purchasing shares of the underlying funds.
The 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 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. The Fund's Distribution
Agreement will terminate automatically in the event of its assignment and is
terminable with respect to the 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.
DIVIDENDS AND TAXES
The Fund distributes any net investment income and net realized capital
gains at least annually.
Income and capital gains dividends, if any, of the Fund will be credited to
shareholders' accounts in full and fractional of 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.
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.
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
B-25
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
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In any year in which the Fund qualifies as a regulated investment company
and distributes substantially all of its investment company taxable income
(which includes, among other items, the excess of net short-term capital
gains over net long-term capital losses) and its net capital gains (the
excess of net long-term capital gains over net short-term capital losses),
the Fund will not be subject to federal income tax to the extent it distri-
butes to shareholders such income and capital gains in the manner required
under the Code. Amounts not distributed on a timely basis in accordance with
a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, the Fund must distribute
for each calendar year an amount equal to the sum of (1) at least 98% of its
net ordinary income (excluding any capital gains or losses) for the calendar
year, (2) at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 of such year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. A distribution
will be treated as paid on December 31 of the calendar year if it is declared
by the Fund in October, November, or December of that year with a record date
in such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in
which the distributions are received. The Fund intends to distribute its
income in accordance with this requirement to prevent application of the
excise tax.
Distributions of net capital gains distributions received by the Fund from
underlying funds, as well as net long-term capital gains realized by the Fund
from the purchase and sale (or redemption) of underlying funds' shares or other
securities held (generally) by the Fund for more than one year, will be
distributed by the Fund and will be taxable to shareholders generally as
long-term capital gain, (regardless of the period for which the shareholder has
held shares of the Fund).
For purposes of determining the character of income received by the Fund
when an underlying fund distributes net capital gains to the Fund, the Fund
will treat the distribution as a long-term capital gain, even if it has held
shares of the underlying fund for less than one year. However, any loss incur-
red by the Fund on the sale of that underlying fund's shares held for six
months or less will be treated as a long-term capital loss to the extent of
the gain distribution.
The tax treatment of distributions from the Fund is the same whether the
distributions are received in additional shares or in cash. Shareholders
receiving distributions in the form of additional shares will have a cost
basis for federal income tax purposes in each share received equal to the net
asset value of a share of the Fund on the reinvestment date.
B-26
Redemption of shares of a Fund will be a taxable transaction for federal
income tax purposes. Gain or loss realized on the sale or exchange of shares
in the Fund will be treated as capital gain or loss, provided that (as is
usually the case) the shares represented a capital asset in the hands of the
shareholder. In such case, the shareholder will recognize capital gain or loss
in an amount equal to the difference between the basis of the shares and the
amount received. Such gain or loss will be long-term gain or loss if the
shares were held more than one year. The loss on shares held six months or
less will be a long-term capital loss to the extent any long-term capital
gain distribution is made with respect to such shares during the period the
investor owns the shares.
The Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Tax Act") provides that for taxpayers other than corporations, net capital
gain (which is defined as net long-term capital gain over net short-term
capital loss for the taxable year) realized from property (with certain
exclusions) is generally subject to a maximum marginal stated tax 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 for the asset is one year
of less. The date on which a Unit is acquired (i.e. the "trade date") is
excluded for purposes for determining the holding period of the Unit.
The legislation is generally effective retroactively for amounts properly
taken into account on or after January 1, 1998. Capital gains realized from
assets held for one year or less are taxed at the same rates as ordinary
income.
A Fund's options and futures transactions are subject to special tax
provisions that may accelerate or defer recognition of certain gains or
losses, change the character of certain gains or losses, or alter the
holding periods of certain of the Fund's securities.
In addition, please note that capital gains may be recharacterized as
ordinary income in the case of certain financial transactions that are
considered "conversion transactions" effective for transactions entered
into after April 30, 1993. Shareholders and prospective investors should
consult with their tax adviser regarding the potential effect of this
provision on their investment in shares of a Fund.
Depending on the residence of the shareholder for tax purposes, distribu-
tions also may be subject to state and local taxes, including withholding
taxes. Shareholders should consult their own tax advisers as to the tax
consequences of ownership of shares of the Fund in their particular
circumstances.
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year, and distribution
to its shareholders would be taxable to shareholders as ordinary dividend
income for federal income tax purposes to the extent of the Fund's available
earnings and profits.
The Fund generally will be required to withhold federal income tax at a rate
of 31% ("backup withholding") from dividends paid to certain shareholders if
(a) the payee fails to furnish the Fund with and to certify the payee's correct
taxpayer identification number or Social Security number, (b) the Internal
Revenue Service (the "IRS") notifies the Fund that the payee has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect or (c) the payee fails to certify that he is not
subject to backup withholding.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction. In addition, the statement will
show the details of prior transactions in the account during the calendar year.
Information for federal income tax purposes will be provided after the end of
the calendar year.
CALCULATION OF PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from time
to time. These performance figures may include 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, the Fund's yield
may not equal its distribution rate, the income
B-27
paid to an investor's account, or the income reported in the Fund's financial
statements. The 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 infor-
mation 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.
YIELD
Yield reflects the income per share deemed earned by the Fund's portfolio
investments. 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/cd + 1)6 - 1]
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.
If the Fund computes yields, the Fund would follow certain standardized
accounting practices specified by SEC rules. These practices are not
necessarily consistent with those that the Fund uses to prepare its annual
and interim financial statements in conformity with generally accepted
accounting principles. Thus, yield may not equal the income paid to
shareholders or the income reported in a Fund's financial statements.
TOTAL RETURN
As of December 31, 1999, the total return for the Fund since the Fund's
inception on January 3, 1995 was 118.07% which does not include the effect
of the 1.5% CDSC. Taking into account the CDSC, the total return would
have been lower.
Total return is the percentage change in the value of a hypothetical invest-
ment 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 the Fund's performance over a stated period of time and is
computed as follows:
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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 the 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 the Fund
for the periods indicated:
AVERAGE ANNUAL TOTAL RETURN
ONE YEAR* FROM INCEPTION**
ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1999
Integrity Fund of Funds, Inc. 18.98% 16.89%
_______________________________
[FN]
* The one-year and since inception returns do not include the effect of the
1.5% maximum contingent deferred sales charge. Taking into account the
CDSC, the one-year and since inception returns for the Fund would have been
17.48% and 16.73%, respectively.
** The inception date for the Fund is January 3, 1995.
</FN>
All performance figures are based on historical results and are not intended
to indicate future performance.
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ORGANIZATION AND SHARE ATTRIBUTES
The Fund is an open-end, diversified, management investment company. The
Fund is organized as a corporation under the laws of the State of North Dakota
on June 1, 1994 and is authorized to issue a total of one billion shares, all
of one class and one series, with a par value of $.0001 per share. Shares
are fully paid and nonassessable when issued, are redeemable and freely
transferable, and have equal rights and preferences in all matters, including
voting, redemption, dividends and liquidation. 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. There are no subscription, preemptive, or conversion rights.
SHAREHOLDER MEETINGS
Regular meetings of shareholders will not be held unless required under the
North Dakota Business Corporation Act or the 1940 Act. It is probable that
the Fund will not hold regular meetings of shareholders. The 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 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 1940 Act; however, the Fund does
not intend to hold annual shareholder meetings. Shareholders have the right to
remove directors.
Pursuant to the 1940 Act, if an underlying fund submits a matter to its
shareholders for a vote, the Fund will vote the shares of the underlying fund
which it owns in the same proportion as the vote of all other holders of such
shares.
B-30
APPENDIX - DESCRIPTION OF COMMERCIAL PAPER AND BOND RATING
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"), SHORT-TERM
DEBT RATINGS
Prime-1. Issuers (or supporting institutions) rated Prime-1 ("P-1") have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following character-
istics: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earn-
ings coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources
of alternate liquidity. Prime-2. Issuers (or supporting institutions) rated
Prime-2 ("P-2") have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alter-
nate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S"),
COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety character-
istics are denoted with a plus (+) sign designation. A-2. Capacity for
timely payment on issues with this designation is satisfactory. However,
the relative degree of safety is not as high for issues designated A-1.
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exception-
ally stable margin, and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues; Aa.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds, because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities; A. Bonds which are rated A possess many favorable investment
attributes and are considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment some
time in the future; Baa. Bonds which are rated Baa are considered as medium-
grade obligations (i.e., they are
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neither highly protected nor poorly secured). Interest payments 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; Ba. Bonds which are rated Ba are judged
to have speculative elements; their future cannot be considered as well-
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class;
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small; Caa.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest; Ca. Bonds which are rated Ca represent obligations which are specu-
lative in a high degree. Such issues are often in default or have other marked
shortcomings; C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong; AA. Debt
Rated AA has a very strong capacity to pay interest and repay principal and
differs from the higher rated issues only in small degree; A. Debt rated A
has a strong capacity to pay interest and repay principal although it is some-
what more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB. Debt rated BBB
is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B, CCC, CC, C. Debt Rated BB, B, CCC, CC, and C
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the obliga-
tion. BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are out-weighed by large uncertainties or major risk
exposures to adverse conditions; BB. Debt rated BB has less near-term
vulnerability to default than other speculative issues. However, it faces
major ongoing uncertainties or exposure of adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BBB-
rating; B. Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair
B-32
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied BB or BB- rating; CCC. Debt rated CCC has a currently
identifiable vulnerability to default and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or B-
rating; CC. The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating; C. The rating C is
typically applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service
payments are continued; CI. The rating CI is reserved for income bonds
on which no interest is being paid; D. Debt rated D is in payment default.
The D rating category is used when interest payments or principal payments
are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Financial Statements
The audited financial statement 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.
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