Dear Shareholders,
We are pleased to enclose the annual report on the operations of the ND
Tax-Free Fund, Inc. for the year ended December 31st, 1997. The Fund's
portfolio and related financial statements are presented within for your
review.
Will Rogers once said, "All I know is what I read in the paper." Well,
if your reading today's financial reports all you get is confused. Inflation
or deflation? Higher rates or lower rates? Read a paper, watch television or
get on a mailing list and you will find diverse opinions of economic
forecasting are quite often contradictory.
As we enter the new year, the U.S. economy is enjoying nearly seven years of
uninterrupted growth, the unemployment rate is the lowest since 1973, the stock
market is at record highs, interest rates are low and inflation is the most
docile in a generation. Yet, despite these events the financial markets are
volatile.
Recent events in foreign equity markets and their impact on the U.S. stock
market causes us to pause and question whether the recent drop in interest
rates are sustainable at these levels, or will rates back up to higher levels
experienced earlier this year. Our sense is that yields on municipal bonds
will stay at their lower levels during the first half of 1998 when the bulk
of the Asian events slow down the U.S. economy, then edge higher in the latter
part of the year once the Asian drag subsides.
In spite of all this, tax-exempt yields on tax-free municipal bonds are
relatively cheap (a good value) when compared to U.S. Treasury bonds.
Long-term municipals historically offer 75% to 80% of the return available
from a 30 year treasury bond. As of this writing that ratio is about 85%.
The ND Tax-Free Fund, Inc. began the year at $9.19 and then closed at $9.09.
During part of the period the Fund utilized a partial hedge. Futures
contracts in U.S. Treasury bonds were employed. In the first quarter as
interest rates rose this had the effect of minimizing share price erosion.
For the rest of the year as interest rates retreated share price increases
were tempered. The overall effect to the Fund for the year was a greater
degree of share price stability.
The Fund throughout the year has invested in high-grade North Dakota tax-exempt
bonds. Diversification remains an important strategy for the Fund. Among our
purchases in the primary and secondary markets throughout the year were bonds
issued by housing authorities, retirement homes, school districts, hospitals
and utilities.
Reasonable income exempt from federal and North Dakota income taxes with
preservation of capital remain the chief objectives of the Fund.
We invite your personal calls and visits.
Sincerely,
Monte L. Avery Robert E. Walstad
Chief Portfolio Strategist President
Terms & Definitions
- -------------------
Average Annual Total Return
A standardized measurement of the return (yield and appreciation) earned
by the fund on an annual basis.
Contingent Deferred Sales Charge (CDSC)
A charge applied at the time of the redemption of which assumes
redemption at the end of the period.
Coupon Rate or Face Rate
The rate of interest annually payable based on the face amount of
the bond; expressed as a percentage.
Lehman Brother's Municipal Bond Index
An unmanaged list of long-term, fixed-rate, investment-grade, tax-exempt
bonds representative of the municipal bond market. The index does not
take into account brokerage commissions or other costs, may include bonds
different from those in the fund, and may pose different risks than the
fund.
Market Value
Actual (or estimated) price at which a bond trades in the market place.
Maturity
A measure of the term or life of a bond in years. When a bond "matures",
the issuer repays the principal.
Net Asset Value (NAV)
The value of all your fund's assets, minus any liabilities, divided by
the number of outstanding shares, not including any initial or contingent
deferred sales charge.
Quality Ratings
A designation assigned by independent rating companies to give a relative
indication of a bond's credit worthiness. "AAA", "AA" and "A" indicate
highest quality. Ratings can range from a high of "AAA" to a low of "D".
Total Return
Measures both the net investment income and any realized and unrealized
appreciation or depreciation of the underlying investments in the fund's
portfolio for the period, assuming the reinvestment of all dividends. It
represents the aggregate percentage or dollar value change over the
period.
PERFORMANCE AND COMPOSITION
- ---------------------------
Portfolio Quality Ratings
(based on Total Long-Term Investments)
- --------------------------------------
[pie chart]
AAA 38.2
AA 24.7
A 19.4
NR 11.8
BBB 5.9
Quality ratings reflect the financial strength of the issuer. They are
assigned by independent rating services such as Moody's Investors Services
and Standard & Poor's. Non-rated bonds have been determined to be of
appropriate quality for the portfolio by ND Money Management, Inc., the
investment advisor.
Portfolio Market Sectors
(as a % of Net Assets)
- ------------------------
[pie chart]
HC-Health Care 30.1
H-Housing 25.8
I-Industrial 17.5
O-Other 7.9
E-Education 6.0
U-Utilities 5.2
RE-Real Estate 4.8
WS-Water & Sewer 1.5
GO-General
Obligation 1.2
Market sectors are breakdowns of the Fund's portfolio holdings into specific
investment classes.
COMPARATIVE INDEX GRAPH
- -----------------------
[line graph]
Comparison of change in value of a $10,000 investment in the
ND Tax Free Fund and the Lehman Brothers Municipal Bond Index
Lehman Brothers
w/o CDSC Municipal Bond Index
-------------------------------------------------------------
1/3/1989 $10,000 $10,000
1989 $10,291 $11,080
1980 $11,109 $11,887
1991 $12,006 $13,331
1992 $12,718 $14,508
1993 $13,529 $16,289
1994 $13,262 $15,448
1995 $14,413 $18,146
1996 $15,367 $18,949
1997 $16,007 $20,693
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities
index measures the performance of a theoretical portfolio. Unlike a fund, the
index is unmanaged; there are no expenses that affect the results. In
addition, few investors could purchase all of the securities necessary to
match the index. And, if they could, they would incur transaction costs and
other expenses.
KEY STATISTICS
- --------------
12-31-96 NAV(share value) $9.19
12-31-97 NAV $9.09
Average Maturity 20.7 years
Number of Issues 86
Total Net Assets $88,434,552
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------
For periods ending December 31, 1997
- ---------------------------------------------------
1 year 5 year Since Inception
- ---------------------------------------------------
4.17 %* 4.71 % 5.37 %
- ---------------------------------------------------
*The 1 year return does not include the effect of the 4% maximum Contingent
Deferred Sales Charges. It would have been 0.21% if it had. Returns are
historical and are not a guarantee of future results. The Fund's share price,
yields and total returns will vary, so that shares, when redeemed, may be
worth more or less than their original cost.
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1997
Name of Issuer
Percentages represent the market value of each Rating Coupon Principal Market
investment category to total net assets Moody's/S&P Rate Maturity Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH DAKOTA MUNICIPAL BONDS (97.6%)
Bismarck, ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 8.500% 06/01/09 $ 175,000 $ 182,299
*Bismarck, ND (MedCenter One, Inc.) Ref. & Impvt. BIGI Aaa/AAA 7.500 05/01/13 1,500,000 1,599,360
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. AMBAC Aaa/AAA 6.900 05/01/06 400,000 438,620
Bismarck, ND (Marillac Manor II) Facs. Rev. NR/NR 8.625 02/01/10 675,000 702,965
Bismarck, ND (Marillac Manor) Facs. Rev. Ref. NR/NR 7.700 02/01/16 250,000 272,235
Burleigh Cty., ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 7.000 06/01/19 500,000 536,815
Burleigh Cty., ND (Missouri Slope Ctr.) Rev. Ref. NR/NR 7.000 11/01/07 500,000 528,070
Burleigh Cty., ND (Missouri Slope Ctr.) Facs. Rev. NR/NR 7.250 06/01/12 500,000 524,125
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.750 12/01/11 1,000,000 1,022,470
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.875 12/01/15 1,000,000 1,033,550
Carrington, ND Cath. Hlth. Corp. Facs. Rev. A-1/A+ 6.250 11/15/15 500,000 554,775
Central Cass Cty., ND PSD #17 School Blding. G.O. MBIA Aaa/AAA 6.500 05/01/13 430,000 478,698
Central Cass Cty., ND PSD #17 School Blding. G.O. MBIA Aaa/AAA 6.500 05/01/14 460,000 514,427
Devils Lake, ND Cath. Hlth. Corp. Facs. Rev. A-1/A+ 6.250 11/15/07 1,125,000 1,213,538
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. A-1/NR 7.625 02/15/20 1,210,000 1,304,150
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. A-1/NR 7.500 02/15/10 600,000 646,710
Dickinson, ND (St. Luke's Home) Rev. NR/NR 7.250 05/01/22 500,000 525,120
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.550 06/01/16 500,000 522,915
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.375 06/01/27 1,815,000 1,847,289
Fargo, ND (St. Luke's Hospital) Facs. Rev. Ref. NR/A+ 6.500 06/01/15 4,000,000 4,439,080
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.300 11/01/06 130,000 138,148
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.350 11/01/07 110,000 116,951
Fargo, ND Park Dist. (Golf Course) Rev. NR/NR 7.250 11/01/10 190,000 205,671
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.625 12/01/10 830,000 912,643
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.500 12/01/06 750,000 819,908
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.250 12/01/19 1,000,000 1,119,830
*Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.450 12/01/23 1,525,000 1,732,934
Grand Forks, ND Regl. Airport Auth. Rev. A/NR 7.500 10/01/09 225,000 232,625
Grand Forks, ND Regl. Airport Auth. Rev. A/NR 7.500 10/01/10 240,000 248,134
Grand Forks, ND (Cirrus Project) Sales Tax Rev. A-1/NR 5.900 05/01/17 695,000 727,491
Grand Forks, ND (Aurora Project) Sales Tax Rev. MBIA Aaa/AAA 5.625 12/15/29 1,500,000 1,577,025
Grand Forks, ND (Valley Square Project) Hsg. Rev. NR/NR 6.375 12/01/34 645,000 645,000
Hazen, ND (Sakakawea Medl. Ctr.) Facs. Rev. NR/NR 6.750 05/01/16 500,000 539,740
Jamestown, ND (College) Facs. Rev. NR/NR 6.625 10/01/14 800,000 882,416
Jamestown, ND (Heritage Centre) Rev. NR/NR 8.500 09/01/06 200,000 220,488
Lisbon, ND (Parkside Lutheran Home) Rev. NR/NR 0.000 06/01/12 500,000 134,290
Mercer Cty., ND (Otter Tail Power) Rev. Aa-3/AA- 6.900 02/01/19 500,000 550,295
Mercer Cty., ND (Basin Elec.) Rev. A/A 7.000 01/01/19 985,000 1,036,880
Mercer Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 3,500,000 3,928,645
Mercer Cty., ND (NW Public Svc.) Rev. Ref. MBIA Aaa/AAA 5.850 06/01/23 4,600,000 4,916,066
Mercer Cty., ND (Basin Elec.) Rev. AMBAC Aaa/AAA 6.050 01/01/19 5,425,000 5,925,782
Morton Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 600,000 673,482
Morton Cty., ND Multifamily Hsg. Rev. Ref. NR/NR 6.750 03/01/21 500,000 506,565
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.375 07/01/17 490,000 510,183
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.850 07/01/01 210,000 221,275
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.000 07/01/13 225,000 244,620
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.900 07/01/10 142,000 150,661
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.050 01/01/24 735,000 792,778
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.750 07/01/24 670,000 719,922
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.250 07/01/10 285,000 306,261
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.300 07/01/24 1,125,000 1,206,585
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.000 07/01/23 885,000 956,889
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/23 2,955,000 3,140,308
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.700 07/01/13 370,000 392,618
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/25 1,540,000 1,627,657
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.950 07/01/25 1,985,000 2,131,017
ND (HFA) Hsg. Finance Program AA/NR 6.750 07/01/25 3,210,000 3,428,697
ND (HFA) Hsg. Finance Program AA/NR 6.300 01/01/15 860,000 891,897
ND (HFA) Hsg. Finance Program AA/NR 6.250 07/01/15 155,000 159,245
ND (HFA) Hsg. Finance Program AA/NR 6.300 07/01/16 490,000 511,036
ND (HFA) Hsg. Finance Program AA/NR 6.400 01/01/28 300,000 311,898
ND (HFA) Hsg. Finance Program AA/NR 6.150 07/01/27 530,000 536,821
ND (HFA) Hsg. Finance Program Aa-3/NR 6.100 07/01/28 2,000,000 2,030,640
ND (HFA) Hsg. Finance Program Aa-3/NR 5.900 01/01/29 500,000 507,120
ND (HFA) Multifamily Rev. Ref. FNMA NR/AAA 6.200 12/01/20 825,000 855,797
ND Municipal Bond Bank Revolving Fund Program A-1/NR 6.300 10/01/15 530,000 588,634
ND Municipal Bond Bank Revolving Fund Program A-1/NR 6.250 10/01/14 3,525,000 3,763,043
ND Blding. Auth. Lease Rev. Ref. AMBAC Aaa/AAA 6.000 06/01/10 1,700,000 1,849,192
ND Blding. Auth. Lease Rev. A/A 5.500 08/15/14 300,000 308,670
ND Blding. Auth. Lease Rev. CGIC Aaa/AAA 6.000 12/01/13 500,000 550,225
ND State Board of Hgr. Educ. (MSU) Facs. Rev. Ref. NR/NR 6.750 08/01/05 755,000 808,077
ND State Board of Hgr. Educ. (MSU) Facs. Rev. NR/NR 5.500 08/01/13 400,000 415,704
ND Student Loan Rev. AMBAC Aaa/AAA 6.300 07/01/12 100,000 106,579
ND Student Loan Rev. AMBAC Aaa/AAA 6.350 07/01/13 250,000 267,978
ND Student Loan Rev. AMBAC Aaa/AAA 6.400 07/01/14 400,000 430,464
ND State Water Commission Devl. Rev. AMBAC Aaa/AAA 5.750 07/01/27 1,250,000 1,322,638
Univ. of ND Lease Financing C.O.P.'s A/A- 7.300 09/01/10 1,425,000 1,533,229
Univ. of ND (State Board of Hgr. Educ.) Ref. AMBAC Aaa/AAA 7.850 04/01/14 340,000 355,864
Valley City, ND Western Hlth. Care Facs. Rev. BIGI Aaa/AAA 7.625 01/01/19 200,000 204,000
Wahpeton, ND (Town Centre Square) Rev. Ref. NR/NR 8.500 02/01/14 250,000 265,900
Wahpeton, ND PSD #37 G.O. A/NR 6.000 05/01/16 100,000 108,421
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. Ref. NR/BBB- 7.250 11/01/06 1,000,000 1,082,680
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.250 11/01/06 1,000,000 1,082,680
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.500 11/01/15 1,000,000 1,105,620
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 7.500 11/01/15 1,450,000 1,603,149
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/BBB- 8.875 11/15/24 200,000 216,000
------------
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST: $81,426,903) $ 86,280,890
------------
SHORT-TERM SECURITIES (1.0%)
Federated Tax-Free Fund #15 $ 260,574
Federated Intermediate Municipal Trust #78 600,000
------------
TOTAL SHORT-TERM SECURITES (Cost: $860,574) $ 860,574
------------
TOTAL INVESTMENTS IN SECURITIES (Cost: $82,287,477) $ 87,141,464
OTHER ASSETS LESS LIABILITIES $ 1,293,088
------------
NET ASSETS $ 88,434,552
============
</TABLE>
*Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1997
Statement of Assets and Liabilities December 31, 1997
- -----------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost:$82,287,477) $ 87,141,464
Accrued dividends receivable 2,204
Accrued interest receivable 1,533,161
Variation margin on futures 462,500
----------------
Total Assets $ 89,139,329
----------------
LIABILITIES
Bank overdraft $ 88,888
Dividends payable 404,704
Accrued expenses 110,263
Payable for fund shares redeemed 100,922
----------------
Total Liabilities $ 704,777
----------------
NET ASSETS $ 88,434,552
================
Net assets are represented by:
Capital stock outstanding, at par $ 9,733
Additional paid-in capital 89,951,937
Accumulated undistributed net realized gain(loss)
on investments (6,381,105)
Unrealized appreciation on investments 4,853,987
----------------
Total amount representing net assets applicable to
9,733,454 outstanding shares of $.001 par value
common stock (100,000,000 shares authorized) $ 88,434,552
================
Net asset value per share $ 9.09
================
Statement of Operations for the year ended December 31, 1997
INVESTMENT INCOME
Interest $ 5,406,630
Dividends 34,974
---------------
Total Investment Income $ 5,441,604
---------------
EXPENSES
Investment advisory fees $ 544,971
Distribution fees (12b-1) 452,996
Custodian fees 16,544
Transfer agent fees 98,606
Accounting service fees 65,330
Audit and legal fees 15,633
Directors fees 6,106
Insurance 8,251
Printing and postage 16,282
License, fees, and registrations 5,553
---------------
Total expenses $ 1,230,272
Less expenses waived or absorbed
by the Fund's manager 50,649
---------------
Total Net Expenses $ 1,179,623
---------------
NET INVESTMENT INCOME $ 4,261,981
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 70,112
Futures transactions (2,011,591)
Net change in unrealized appreciation (depreciation) of:
Investments 1,250,146
Futures 100,169
---------------
Net Realized and Unrealized Gain (Loss) On Investments
And Futures $ (591,164)
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,670,817
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1997
Statement of Changes in Net Assets
For the years ended December 31, 1997 and 1996
- ----------------------------------------------
<TABLE>
<CAPTION>
For The Year For the Year
Ended Ended
December 31, 1997 December 31,1996
----------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 4,261,981 $ 4,648,578
Net realized gain (loss) on investments and futures (1,941,479) 3,142,612
Net unrealized appreciation (depreciation) on investments and futures 1,350,315 (1,799,734)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 3,670,817 $ 5,991,456
----------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ (4,261,981) $ (4,648,578)
Distributions in excess of net investment income (452,996) (303,489)
Distributions from net realized gain on investment transactions 0 0
---------------------------------------
Total Dividends and Distributions $ (4,714,977) $ (4,952,067)
----------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 4,728,769 $ 3,336,320
Proceeds from reinvested dividends 3,117,985 3,190,615
Cost of shares redeemed (9,999,185) (10,466,886)
----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions $ (2,152,431) $ (3,939,951)
----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (3,196,591) $ (2,900,562)
NET ASSETS, BEGINNING OF PERIOD 91,631,143 94,531,705
----------------------------------------
NET ASSETS, END OF PERIOD $ 88,434,552 $ 91,631,143
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements December 31, 1997
Note 1. ORGANIZATION
ND Tax-Free Fund, Inc. (the Fund) is registered under the Investment Company
Act of 1940 as a non-diversified, open-end management investment company. The
Fund incorporated under the laws of the State of North Dakota on October 7,
1988, and commenced operations on January 3, 1989. The Fund's objective is
to provide as high a level of current income exempt from federal and North
Dakota income taxes as is consistent with preservation of capital. The Fund
will seek to achieve this by investing primarily in a portfolio of North
Dakota tax-exempt securities.
Shares of the Fund are offered with no initial sales charge. Shares may
be subject to a contingent deferred sales charge, if those shares are redeemed
within five years of purchase.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment security valuation - Investments in securities traded on national
securities exchanges are valued at the last reported sales price at the
close of each business day. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by
the portfolio management team. The Fund follows industry practice and
records security transactions on the trade date.
The Fund concentrates its investments in a single state. This concentration
may result in the Fund investing a relatively high percentage of its assets
in a limited number of issuers.
Federal and state income taxes - The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies, and to distribute all of its net investment
income and any net realized gain on investments, to its shareholders.
Therefore, no provision for income taxes is required. The Fund has available
at December 31, 1997, a net capital loss carryforward totaling $6,381,105,
which may be used to offset capital gains realized during subsequent years
through December 31, 2005.
Distributions to shareholders - Dividends from net investment income, declared
daily and payable monthly, are reinvested in additional shares of the Fund at
net asset value or paid in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar year.
Investment income - Dividend income is recognized on the ex-dividend date and
interest income is recognized daily on an accrual basis. Premiums and
discounts on securities purchased are amortized using the effective interest
method over the life of the respective securities, unless callable, in which
case they are amortized to the earliest call date.
Futures contracts - The Fund may purchase and sell financial futures contracts
to hedge against changes in the values of tax-exempt municipal securities the
Fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of
a particular index or a certain amount of U.S. Government or municipal
securities at a set price on a future date. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount of cash or
securities equal to the minimum "initial margin" requirement of the futures
exchange on which the contract is traded. Subsequent payments ("variation
margin") are made or received by the Fund, dependent on the fluctuations in
the value of the underlying index. Daily fluctuations in value are recorded
for financial reporting purposes as unrealized gains or losses by the Fund.
When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contracts sold and the futures contracts to buy. Unrealized
appreciation (depreciation) related to open futures contracts is required to
be treated as realized gain (loss) for Federal income tax purposes.
Certain risks may arise upon entering into futures contracts. These risks may
include changes in the value of the futures contracts that may not directly
correlate with changes in the value of the underlying securities.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Note 3. SHARE TRANSACTIONS
As of December 31, 1997, there were 100,000,000 shares of $.001 par
authorized; 9,733,454 and 9,970,201 were outstanding at December 31, 1997
and December 31, 1996, respectively.
Transactions in capital shares were as follows:
Shares
--------------------------------------
For the Year For The Year
Ended Ended
December 31, 1997 December 31, 1996
--------------------------------------
Shares sold 515,034 366,454
Shares issued on reinvestment
of dividends 339,531 349,952
Shares redeemed (1,091,312) (1,148,695)
--------------------------------------
Net increase (decrease) (236,747) (432,289)
=======================================
Note 4. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
ND Money Management, Inc., the Fund's investment adviser, ND Capital, Inc.,
the Fund's underwriter, and ND Resources, Inc., the Fund's transfer and
accounting services agent, are subsidiaries of ND Holdings, Inc., the Fund's
sponsor.
The Fund has engaged ND Money Management, Inc., to provide investment advisory
and management services to the Fund. The Investment Advisory Agreement
provides for fees to be computed at an annual rate of 0.60% of the Fund's
average daily net assets. The Fund has recognized $544,971 of investment
advisory fees for the year ended December 31, 1997. The Fund has a payable to
ND Money Management, Inc. of $47,339 at December 31, 1997 for investment
advisory fees. Certain officers and directors of the Fund are also officers
and directors of the investment adviser.
The Fund has adopted a distribution plan (the Plan) pursuant to Rule 12b-1
under the 1940 Act, whereby the Fund shall pay to ND Capital, Inc. (Capital),
its principal underwriter, an annual fee for certain expenses incurred by
Capital in connection with the distribution of the Fund's shares. The annual
fee paid to Capital under the Plan is calculated daily and paid monthly by the
Fund at the annual rate of 0.85% of the average daily net assets of the Fund.
The Fund has recognized $452,996 of 12b-1 fee expenses after partial waiver
for the year ended December 31, 1997. The Fund has a payable to Capital of
$39,449 at December 31, 1997 for 12b-1 fees. In addition, the Fund has
engaged Capital as agent for the purchase of certain investment securities.
For the year ended December 31, 1997 commissions earned by Capital totaled
$31,938 and are included in the cost basis of the securities acquired.
ND Resources, Inc., (the transfer agent), provides shareholder services for a
monthly fee equal to an annual rate of 0.16% of the Fund's first $10 million
of net assets, 0.13% of the Fund's net assets on the next $15 million, 0.11%
of the Fund's net assets on the next $15 million, 0.10% of the Fund's net
assets on the next $10 million, and 0.09% of the Fund's net assets in excess
of $50 million. The Fund has recognized $98,606 of transfer agency fees for
the year ended December 31, 1997. ND Resources, Inc. also acts as the Fund's
accounting services agent for a monthly fee equal to the sum of a fixed fee of
$2,000, and a variable fee equal to 0.05% of the Fund's average daily net
assets on an annual basis for the Fund's first $50 million and at a lower rate
on the average daily net assets in excess of $50 million. The Fund has
recognized $65,330 of accounting service fees for the year ended December 31,
1997.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $11,819,027 and $11,724,172,
respectively, for the year ended December 31, 1997.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1997, the aggregate cost of securities for federal income tax
purposes was $82,287,477, and the net unrealized appreciation of investments
based on the cost was $4,853,987, which is comprised of $5,187,167 aggregate
gross unrealized appreciation and $333,180 aggregate gross unrealized
depreciation.
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.19 $ 9.09 $ 8.83 $ 9.52 $ 9.49-
----------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .43 .46 $ .47 $ .48 $ .52
Net realized and unrealized gain (loss) on investments
and futures transactions (.05) .13 .28 (.67) .05
----------------------------------------------------------------
Total Income(Loss) From Investment Operations $ .38 $ .59 $ .75 $ (.19) $ .57
----------------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.43) $ (.46) $ (.47) $ (.48) $ (.52)
Distributions in excess of net investment income (.05) (.03) (.02) (.02) (.02)
----------------------------------------------------------------
Total Distributions $ (.48) $ (.49) $ (.49) $ .50) $ (.54)
----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
================================================================
Total Return 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A) 5.94%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $88,435 $91,631 $94,532 $91,865 $85,042
Ratio of net expenses (after expense assumption) to
average net assets 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B) 1.01%(B)
Ratio of net investment income to average net assets 4.70% 5.00% 5.20% 5.19% 5.39%
Portfolio turnover rate 13.18% 12.92% 8.02% 5.55% 18.59%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$50,649, $40,861, $3,799, $31,115, and $30,707, respectively. If the
expenses had not been assumed, the annualized ratios of total expenses to
average net assets would have been 1.36%, 1.18%, 1.05%, 1.10%, and
1.05%, respectively.
The accompanying notes are an integral part of these financial statements.
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
ND Tax Free Fund, Inc.
We have audited the accompanying statement of assets and liabilities of ND Tax
Free Fund, Inc. (the Fund), including the schedule of investments, as of
December 31, 1997, the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the four years in
the period then ended. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audit. The financial highlights for the year ended December 31,
1993, were audited by other auditors whose report dated January 20, 1994,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of ND
Tax Free Fund, Inc. as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for the four years
in the period then ended, in conformity with generally accepted accounting
principles.
BRADY, MARTZ & ASSOCIATES, P.C.
February 12, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 82,287,477
<INVESTMENTS-AT-VALUE> 87,141,464
<RECEIVABLES> 1,535,365
<ASSETS-OTHER> 462,500
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,139,329
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 704,777
<TOTAL-LIABILITIES> 704,777
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,961,670
<SHARES-COMMON-STOCK> 9,733,454
<SHARES-COMMON-PRIOR> 9,970,201
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,381,105)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,853,987
<NET-ASSETS> 88,434,552
<DIVIDEND-INCOME> 34,974
<INTEREST-INCOME> 5,406,630
<OTHER-INCOME> 0
<EXPENSES-NET> (1,179,623)
<NET-INVESTMENT-INCOME> 4,261,981
<REALIZED-GAINS-CURRENT> (1,941,479)
<APPREC-INCREASE-CURRENT> 1,350,315
<NET-CHANGE-FROM-OPS> 3,670,817
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,261,981)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (452,996)
<NUMBER-OF-SHARES-SOLD> 515,034
<NUMBER-OF-SHARES-REDEEMED> 1,091,312
<SHARES-REINVESTED> 339,531
<NET-CHANGE-IN-ASSETS> (3,196,591)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544,971
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,230,272
<AVERAGE-NET-ASSETS> 90,723,166
<PER-SHARE-NAV-BEGIN> 9.19
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> (.05)
<PER-SHARE-DIVIDEND> (.43)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.05)
<PER-SHARE-NAV-END> 9.09
<EXPENSE-RATIO> 1.30<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets.
</FN>
</TABLE>
