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[LOGO]
ANNUAL REPORT, AUGUST 31, 1998
THE RUSHMORE FUND, INC.
4922 FAIRMONT AVENUE, BETHESDA, MARYLAND 20814
(800) 343-3355 (301) 657-1500
October 1, 1998
Dear Shareholder:
International financial woes and low inflation in the U.S. have been major
factors in the dramatic decrease in bond yields over the past year. The yield on
the benchmark thirty-year Treasury Bond has dropped over 150 basis points since
last August, to the lowest levels since the Treasury Department began regular
auctions of that issue in 1977. The entire Treasury yield curve currently falls
below the Federal Funds rate of 5 1/4%, which the Federal Reserve recently
lowered by 25 basis points at the September Federal Open Market Committee
meeting.
There are several reasons for the dramatic drop in Treasury yields over the past
year. Among the most common cited are: a domestic economy that has continued to
operate in an environment of little or no inflation, a decrease in issuance of
new Treasuries due to a shrinking budget deficit, recent worries about the
performance of stock markets here in the U.S., and international economic
problems such as those in Asia, Russia, and South America. The increased demand
for the safety of U.S. Treasury issues and decreased supply of them, as well as
low inflation have resulted in the historically low yields we are seeing now.
RUSHMORE U.S. GOVERNMENT BOND PORTFOLIO
The U.S. Government Bond Portfolio invests primarily in the ten- and thirty-year
Treasury issues. Our objective is to provide high current income as well as
maintain safety of principal. For the fiscal year ending August 31, 1998, the
total return of the portfolio was 19.35%, as compared with the Lehman Brothers
Intermediate Govt. Index total return of 9.27%, and the Lehman Brothers Long
Government Index total return of 20.84%. The Portfolio had an annualized net
investment income of 4.98% of net assets for the year ended August 31, 1998, and
an average maturity of 18.6 years.
OUTLOOK
It was only a few short months ago that an increase in the Federal Funds rate by
the end of this year was being considered a real possibility. The sustained
impact of financial woes in Asia and other parts of the world on our domestic
economy resulted in a change in market sentiment, and a Fed easing was priced in
to the market. At the Federal Open Market Committee meeting in September, the
Federal Reserve did indeed decide to lower rates cutting them by 25 basis
points. This was considered a somewhat conservative move by many, as an
adjustment of as much as 50 basis points had been anticipated. The question now
is whether or not this was just the first of a series of Fed easings. Our belief
had previously been that the tight labor market and rising wage pressures would
be enough to keep the Fed from intervening on interest rates, but the prolonged
impact around the world on our economic growth has become too much for the Fed
to ignore.
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Given the current global economic environment, we expect the Federal Reserve to
lower the Fed Funds rate 25 basis points at least one more time, possibly as
early as the next FOMC meeting in November.
As always, we thank you for your continued support.
Sincerely,
/s/ Daniel L. O'Connor /s/ Richard J. Garvey
Daniel L. O'Connor Richard J. Garvey
Chairman of the Board President
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THE RUSHMORE FUND, INC.
U.S. GOVERNMENT BOND PORTFOLIO
STATEMENT OF NET ASSETS
AUGUST 31, 1998
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS: 91.9% OF NET ASSETS
U.S. Treasury Notes, 6.125%, 8/15/07.................................. $4,000,000 $ 4,281,252
U.S. Treasury Notes, 5.625%, 5/15/08.................................. 7,500,000 7,832,813
U.S. Treasury Bonds, 7.625%, 2/15/25.................................. 3,550,000 4,624,986
U.S. Treasury Bonds, 6.875%, 8/15/25.................................. 4,900,000 5,881,534
U.S. Treasury Bonds, 6.125%, 11/15/27................................. 2,200,000 2,439,250
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Total U.S. Treasury Obligations (Cost $23,416,990).................... 25,059,835
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REPURCHASE AGREEMENT: 6.7%
With PaineWebber dated 8/31/98 at 5.7% to be repurchased at $1,807,577
on 9/1/98, collateralized by $1,829,077 in U.S. Treasury Notes, due
12/31/98 (Cost $1,807,291).......................................... 1,807,291
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TOTAL INVESTMENTS: 98.6% (COST $25,224,281*).......................... 26,867,126
OTHER ASSETS LESS LIABILITIES: 1.4%................................... 393,062
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NET ASSETS (NOTE 5): 100.0%........................................... $27,260,188
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NET ASSET VALUE PER SHARE (BASED ON 2,418,593 SHARES OUTSTANDING)..... $11.27
-----------
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</TABLE>
*Aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
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THE RUSHMORE FUND, INC.
U.S. GOVERNMENT BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C>
INTEREST INCOME (Note 1)......................................... $ 1,024,522
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EXPENSES
Investment Advisory Fee (Note 2)............................... 88,661
Administrative Fee (Note 2).................................... 53,196
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Total Expenses............................................... 141,857
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NET INVESTMENT INCOME............................................ 882,665
------------
Net Realized Gain on Investment Transactions..................... 160,475
Net Change in Unrealized Appreciation/Depreciation of
Investments.................................................... 2,107,472
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NET GAIN ON INVESTMENTS.......................................... 2,267,947
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $ 3,150,612
------------
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</TABLE>
See Notes to Financial Statements.
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THE RUSHMORE FUND, INC.
U.S. GOVERNMENT BOND PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income........................... $ 882,665 $ 966,547
Net Realized Gain (Loss) on Investment
Transactions.................................. 160,475 (260,096)
Net Change in Unrealized
Appreciation/Depreciation of Investments...... 2,107,472 1,358,287
------------ ------------
Net Increase in Net Assets Resulting from
Operations.................................... 3,150,612 2,064,738
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DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income...................... (882,665) (971,703)
From Net Realized Gain on Investments........... -- (31,134)
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Total Distributions to Shareholders........... (882,665) (1,002,837)
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SHARE TRANSACTIONS
Net Proceeds from Sales of Shares............... 33,728,661 10,275,496
Reinvestment of Distributions................... 748,179 838,080
Cost of Shares Redeemed......................... (24,696,560) (18,387,418)
------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Share Transactions........... 9,780,280 (7,273,842)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS........ 12,048,227 (6,211,941)
NET ASSETS -- Beginning of Year................... 15,211,961 21,423,902
------------ ------------
NET ASSETS -- End of Year......................... $27,260,188 $15,211,961
------------ ------------
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SHARES
Sold............................................ 3,128,125 1,055,504
Issued in Reinvestment of Distributions......... 69,888 85,019
Redeemed........................................ (2,313,568) (1,887,103)
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Net Increase (Decrease) in Shares............. 884,445 (746,580)
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</TABLE>
See Notes to Financial Statements.
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THE RUSHMORE FUND, INC.
U.S. GOVERNMENT BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value -- Beginning of Year..... $9.92 $9.39 $9.89 $9.08 $11.55
---------- ---------- ---------- ---------- ----------
Income from Investment Operations
Net Investment Income.................. 0.53 0.55 0.56 0.61 0.60
Net Realized and Unrealized Gain (Loss)
on Investments....................... 1.35 0.55 (0.50) 0.81 (1.88)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations..... 1.88 1.10 0.06 1.42 (1.28)
---------- ---------- ---------- ---------- ----------
Distributions to Shareholders
From Net Investment Income............. (0.53) (0.55) (0.56) (0.61) (0.60)
From Net Realized Capital Gain......... -- (0.02) -- -- (0.59)
---------- ---------- ---------- ---------- ----------
Total Distributions.................. (0.53) (0.57) (0.56) (0.61) (1.19)
---------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Net Asset
Value.................................. 1.35 0.53 (0.50) 0.81 (2.47)
---------- ---------- ---------- ---------- ----------
Net Asset Value -- End of Year........... $11.27 $9.92 $9.39 $9.89 $9.08
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT RETURN.................... 19.35% 11.94% 0.41% 16.35% (10.29)%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. 0.80% 0.80% 0.80% 0.80% 0.80%
Net Investment Income.................... 4.98% 5.60% 5.59% 6.75% 5.97%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate.................. 49.0% 19.2% 95.0% 63.3% 188.3%
Net Assets at End of Year (000's
omitted)............................... $27,260 $15,212 $21,424 $16,391 $29,276
Number of Shares Outstanding at End of
Year (000's omitted)................... 2,419 1,534 2,281 1,658 3,225
</TABLE>
See Notes to Financial Statements.
6
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THE RUSHMORE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
The Rushmore Fund, Inc. (the "Fund") is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 as an open-end,
diversified investment company. The Fund currently consists of one portfolio,
the U.S. Government Bond Portfolio. On August 31, 1998, there were 1,000,000,000
shares of $0.001 par value capital stock authorized. The financial statements
have been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the date of
the financial statements. The following is a summary of significant accounting
policies which the Fund consistently follows:
(a) Securities of the U.S. Government Bond Portfolio are valued on the
basis of the average of quoted bid and ask prices when market
quotations are available. If market quotations are not readily
available, the Board of Directors will value the portfolio's
securities in good faith.
(b) Security transactions are recorded on the trade date (the date the
order to buy or sell is executed). Interest income is accrued on a
daily basis. Realized gains and losses from security transactions
are computed on an identified cost basis.
(c) Net investment income is computed and dividends are declared daily in
the U.S. Government Bond Portfolio. Income dividends in this
portfolio are paid monthly. Dividends are reinvested in additional
shares unless shareholders request payment in cash. Capital gains,
if any, are distributed annually.
(d) The Fund complies with the provisions of the Internal Revenue Code
applicable to regulated investment companies and distributes all net
investment income to its shareholders. Therefore, no Federal income
tax provision is required.
2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Investment advisory and management services are provided by Money Management
Associates, ("the Adviser"). Under an agreement with the Adviser, the U.S.
Government Bond Portfolio pays a fee for such services at an annual rate of
0.50% of the average daily net assets. Certain Officers and Directors of the
Fund are affiliated with the Adviser.
Rushmore Trust and Savings, FSB ("Rushmore Trust"), a majority-owned subsidiary
of the Adviser, provides transfer agency, dividend-disbursing and shareholder
services to the Fund. In addition, Rushmore Trust serves as custodian of the
Fund's assets and pays the operating expenses of the Fund. For these services,
Rushmore Trust receives an annual fee of 0.30% of the average daily net assets
of the U.S. Government Bond Portfolio.
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3. SECURITIES TRANSACTIONS
For the year ended August 31, 1998, purchases of securities, excluding
short-term securities, were $16,420,406 and sales (including maturities) of
securities were $8,375,328.
4. NET UNREALIZED APPRECIATION/DEPRECIATION OF INVESTMENTS
As of August 31, 1998, net appreciation of investments for Federal income tax
purposes was $1,642,845 of which the entire amount was related to appreciated
investments. At August 31, 1998 the cost of the Fund's securities for Federal
income tax purposes was $25,224,281.
5. NET ASSETS
At August 31, 1998, net assets consisted of the following:
<TABLE>
<S> <C>
Paid-in-Capital................................... $26,204,655
Accumulated Net Realized Loss on Investments...... (587,312)
Net Unrealized Appreciation on Investments........ 1,642,845
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NET ASSETS........................................ $27,260,188
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</TABLE>
6. CAPITAL LOSS CARRYOVERS
At August 31, 1998, for Federal income tax purposes, the U.S. Government Bond
Portfolio had capital loss carryovers which may be applied against future net
taxable realized gains of each succeeding year until the earlier of its
utilization or its expiration as follows:
<TABLE>
<CAPTION>
Expires August 31,
- --------------------------------------------------
<S> <C>
2001.............................................. $ 93,489
2002.............................................. 233,727
2005.............................................. 260,096
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$ 587,312
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</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
of The Rushmore Fund, Inc.:
We have audited the accompanying statement of net assets of the U.S. Government
Bond Portfolio of The Rushmore Fund, Inc., as of August 31, 1998, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned at August 31, 1998, by correspondence with the custodian and
broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
U.S. Government Bond Portfolio of The Rushmore Fund, Inc., as of August 31,
1998, the results of its operations, the changes in its net assets, and the
financial highlights for the above stated periods in conformity with generally
accepted accounting principles.
[SIGNATURE]
Princeton, New Jersey
September 25, 1998
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