Dear Shareholder:
We are pleased to enclose the annual report of the operations of the ND Tax-Free
Fund, Inc. for the year ended December 31, 1998. The Fund's portfolio and
related financial statements are presented within for your review.
As we end 1998, the U.S. economy exhibited more strength than expected. While
there has been some weakening in factory orders reflective of foreign
competition, the housing market and domestic consumer sales have been strong.
Much of this strength can be contributed to the way computer technology has
allowed productivity to increase in the U.S.
In addition to new efficient technology, the U.S. is poised to benefit from free
international trade. The recent trade deficit has restrained U.S. growth, but
at the same time has kept inflation low. However, with the U.S. dollar
declining relative to Asian currencies and Europe improving, international
trade should become less of a drag on the U.S. economy. This, along with an
already robust domestic economy, should help the U.S. prosper.
The main story for municipal investors in 1998 was the increase in the ratio
between municipal and Treasury yields. At the beginning of the year, municipals
were yielding 87% as much as the 30-year Treasury bond. By year-end, that ratio
had climbed to 98%. As yields on the 30-year Treasury bond fell from 5.92% to
5.09%, municipal yields dropped from 5.15% to 5.00%. This abnormal relationship
does not appear to be a concern over possible tax law changes, but results from
foreign and domestic investor demand for U.S. Treasuries in times of economic
turmoil abroad. Restoring municipals and Treasuries to a more normal
relationship will likely result as the U.S. trade deficit puts downward
pressure on the dollar, thus weakening foreign support for Treasuries.
Municipal bonds remain ridiculously cheap (in terms of price) by historical
standards. Normally, buyers pay for the tax benefits of municipals by getting
a lower return. Today, however, investors are saving on taxes without giving
up return. Faced with a choice of paying taxes on investment income or not,
what would you do?
The ND Tax-Free Fund, Inc. began the year at $9.09 and closed the year at
$8.94. The ND Tax-Free Fund, Inc., at times during the year, utilized a
defensive position in U.S. Treasury futures to minimize the effects of strong
economic growth. Share price was tempered as yields on U.S. Treasuries dropped
to record lows in the fall and stabilized share price as yields rose in the
latter part of the year. Stability of share price is the primary objective of
a defensive position.
The Fund continues to invest in high-grade North Dakota tax-exempt bonds.
Diversification remains an important strategy for the Fund. Purchases
throughout the year in the primary and secondary markets include North Dakota
Housing Authority and Bismarck St. Alexius Medical Center issues.
Income exempt from federal and North Dakota income taxes with preservation of
capital remain the chief objectives of the Fund.
Your calls and personal visits are always welcome.
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
investment grade securities. 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 Ratings
(based on Total Long-Term Investments)
- --------------------------------------
[pie chart]
AAA 43.8
AA 34.1
A 9.7
NR 12.4
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 adviser.
Portfolio Market Sectors
(As a % of Net Assets)
- ------------------------
[pie chart]
HC-Health Care 31.4
H-Housing 24.7
I-Industrial 16.9
O-Other 9.5
E-Education 5.8
U-Utilities 5.2
RE-Real Estate 4.8
WS-Water & Sewer 1.7
Market sectors 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 Bros. Municipal Bond Index
Lehman Bros
w/o CDSC Municipal Bond Index
- -----------------------------------------------------
1/3/1989 $10,000 $10,000
1989 $10,291 $11,080
1990 $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
1998 $16,564 $22,034
Average Annual Total Returns
For periods ending December 31, 1998
------------------------------------
Since Inception
1 year 5 year January 3, 1989
------ ------ ---------------
Without CDSC 3.48% 4.13% 5.18%
With CDSC (.46)% N/A N/A
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. The Lehman Brothers index is a national index representative of the
national municipal bond market, whereas the Fund concentrates its investments
in North Dakota municipal bonds. 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. All Fund and benchmark returns include
reinvested dividends. 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.
Key Statistics
- --------------
12/31/97 NAV(share value) $9.09
12/31/98 NAV $8.94
Average Maturity 20.7 years
Number of Issues 68
Total Net Assets $80,987,062
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1998
Name of Issuer
Percentages represent the Rating
Market value of each Moody's Coupon Maturity Principal Market
Investment category to total net assets /S&P Rate Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NORTH DAKOTA MUNICIPAL BONDS (96.9%)
Bismarck, ND (Marillac Manor) Facs. Rev. Ref. NR/NR 7.700% 02/01/16 $ 250,000 $ 258,563
*Bismarck, ND (MedCenter One, Inc.) Rev. Ref. & Impvt. BIGI Aaa/AAA 7.500 05/01/13 1,500,000 1,557,315
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. AMBAC Aaa/AAA 6.900 05/01/06 400,000 432,888
Bismarck, ND (St. Alexius Medl. Ctr.) Rev. Ref. FSA Aaa/AAA 5.000 07/01/28 1,100,000 1,073,941
Bismarck, ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 8.500 06/01/09 175,000 178,421
Burleigh Cty., ND (Missouri Slope Ctr.) Rev. Ref. NR/NR 7.000 11/01/07 500,000 517,205
Burleigh Cty., ND (St. Vincent Nursing Home) Facs. Rev. NR/NR 7.000 06/01/19 500,000 504,470
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.750 12/01/11 1,000,000 1,097,570
Burleigh Cty., ND (Univ. of Mary) Facs. Rev. NR/NR 5.875 12/01/15 1,000,000 1,079,370
Carrington, ND Cath. Hlth. Corp. Facs. Rev. Aa/AA 6.250 11/15/15 500,000 545,395
Devils Lake, ND Cath. Hlth. Corp. Facs. Rev. Aa/AA 6.250 11/15/07 1,125,000 1,222,279
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. Aa/NR 7.625 02/15/20 1,210,000 1,274,917
Dickinson, ND (BHS L\T Care, Inc.) Facs. Rev. Aa/NR 7.500 02/15/10 600,000 632,196
Dickinson, ND (St. Luke's Home) Rev. NR/NR 7.250 05/01/22 500,000 530,720
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.550 06/01/16 500,000 535,520
Fargo, ND (MeritCare Obligation Group) Rev. MBIA Aaa/AAA 5.375 06/01/27 1,565,000 1,627,490
#Fargo, ND (St. Luke's Hospital) Facs. Rev. Ref. NR/A+ 6.500 06/01/15 4,000,000 4,342,040
Grand Forks ND( 4000 Valley Square Project) Hsg. Rev. NR/NR 6.250 12/01/34 2,000,000 2,037,460
Grand Forks, ND (Aurora Project) Sales Tax Rev. MBIA Aaa/AAA 5.625 12/15/29 1,500,000 1,599,930
Grand Forks, ND (Cirrus Project) Sales Tax Rev. A-1/NR 5.900 05/01/17 695,000 739,237
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.625 12/01/10 830,000 905,953
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.500 12/01/06 750,000 811,950
Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.250 12/01/19 1,000,000 1,121,550
*Grand Forks, ND (United Hospital) Facs. Rev. MBIA Aaa/AAA 6.450 12/01/23 1,525,000 1,720,185
Grand Forks, ND (Valley Square Project) Hsg. Rev. NR/NR 6.375 12/01/34 645,000 670,671
Hazen, ND (Sakakawea Medl. Ctr.) Facs. Rev. NR/NR 6.750 05/01/16 500,000 375,000
Jamestown, ND (College) Facs. Rev. NR/NR 6.625 10/01/14 800,000 864,416
Jamestown, ND (Heritage Centre) Ref. Rev. NR/NR 5.700 11/01/20 250,000 248,635
Jamestown, ND (Heritage Centre) Rev. NR/NR 8.500 09/01/06 200,000 216,816
+Lisbon, ND (Parkside Lutheran Home) Rev. NR/NR 0.0 06/01/12 500,000 118,113
Mercer Cty., ND (Basin Elec.) Rev. A/A 7.000 01/01/19 975,000 1,011,329
Mercer Cty., ND (Basin Elec.) Rev. AMBAC Aaa/AAA 6.050 01/01/19 5,425,000 6,015,674
Mercer Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 3,500,000 3,848,180
#Mercer Cty., ND (NW Public Svc.) Rev. Ref. MBIA Aaa/AAA 5.850 06/01/23 3,800,000 4,087,736
Morton Cty., ND (MT-Dak. Util.) Rev. FGIC Aaa/AAA 6.650 06/01/22 350,000 385,053
Morton Cty., ND Multifamily Hsg. Rev. Ref. NR/NR 6.750 03/01/21 500,000 515,125
ND (HFA) Hsg. Finance Program Aa-3/NR 5.250 01/01/30 500,000 502,255
ND (HFA) Hsg. Finance Program Aa-3/NR 6.750 07/01/25 3,085,000 3,376,656
ND (HFA) Hsg. Finance Program Aa-3/NR 6.300 01/01/15 725,000 778,947
ND (HFA) Hsg. Finance Program Aa-3/NR 6.300 07/01/16 460,000 496,156
ND (HFA) Hsg. Finance Program Aa-3/NR 6.150 07/01/27 510,000 541,584
ND (HFA) Hsg. Finance Program Aa-3/NR 6.100 07/01/28 1,950,000 2,076,497
ND (HFA) Multifamily Rev. Ref. FNMA NR/AAA 6.200 12/01/20 825,000 882,354
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.900 07/01/10 113,000 118,012
ND (HFA) Single Family Mrtge. Program Aa/A+ 8.050 01/01/24 560,000 589,422
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.750 07/01/24 570,000 609,678
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.300 07/01/24 955,000 1,020,618
ND (HFA) Single Family Mrtge. Program Aa/A+ 7.000 07/01/23 800,000 861,656
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/23 2,675,000 2,860,297
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.700 07/01/13 335,000 360,869
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.800 07/01/25 1,530,000 1,642,256
ND (HFA) Single Family Mrtge. Program Aa/A+ 6.950 07/01/25 1,940,000 2,114,503
ND Blding. Auth. Lease Rev. FSA Aaa/AAA 6.000 12/01/13 500,000 548,390
ND Blding. Auth. Lease Rev. Ref. AMBAC Aaa/AAA 6.000 06/01/10 1,700,000 1,850,229
ND Municipal Bond Bank Revolving Fund Program Aa/NR 4.625 10/01/19 690,000 663,656
ND Municipal Bond Bank Revolving Fund Program Aa/NR 6.300 10/01/15 530,000 590,881
ND Municipal Bond Bank Revolving Fund Program Aa/NR 6.250 10/01/14 3,525,000 3,871,402
ND State Board of Hgr. Educ. (MSU) Facs. Rev. Ref. NR/NR 6.750 08/01/05 755,000 806,604
ND State Water Commission Devl. Rev. AMBAC Aaa/AAA 5.750 07/01/27 1,250,000 1,348,175
ND Student Loan Rev. AMBAC Aaa/AAA 6.350 07/01/13 250,000 277,735
ND Student Loan Rev. AMBAC Aaa/AAA 6.300 07/01/12 100,000 110,846
ND Student Loan Rev. AMBAC Aaa/AAA 6.400 07/01/14 400,000 447,516
Univ. of ND Lease Financing C.O.P.'s A/A- 7.300 09/01/10 1,425,000 1,500,596
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 02/01/14 250,000 249,500
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/AAA 7.250 11/01/06 1,000,000 1,103,550
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. NR/AAA 8.875 11/15/24 200,000 253,176
Ward Cty., ND (St. Joseph Hospital) Facs. Rev. Ref. NR/AAA 7.250 11/01/06 1,000,000 1,102,750
-----------
TOTAL NORTH DAKOTA MUNICIPAL BONDS (COST: $73,952,695) $78,464,077
-----------
SHORT-TERM SECURITIES (1.2%)
Federated Tax-Free Fund #15 $442,011
Federated Intermediate Municipal Trust #78 500,000
-----------
TOTAL SHORT-TERM SECURITES (Cost: $942,011) $942,011
-----------
TOTAL INVESTMENTS IN SECURITIES (Cost: $74,894,706) $79,406,088
OTHER ASSETS LESS LIABILITIES 1,580,974
-----------
NET ASSETS $80,987,062
-----------
-----------
</TABLE>
* Indicates bonds are segregated by the custodian to cover when-issued or
delayed-delivery purchases.
# Indicates bonds are segregated by the custodian to cover initial margin
requirements.
+ Indicates bond is non-income producing.
FOOTNOTE: Non-rated (NR) securities have been determined to be of investment
grade quality by the Fund's Manager.
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1998
Statement of Assets and Liabilities December 31, 1998
<TABLE>
<CAPTI0N>
ASSETS
<S> <C>
Investments in securities, at value (cost:$74,894,706) $ 79,406,088
Cash 76,261
Accrued dividends receivable 3,110
Accrued interest receivable 1,282,267
Receivable for fund shares sold 25,000
Variation margin on futures 647,503
------------
Total Assets $ 81,440,229
------------
LIABILITIES
Dividends payable $ 337,369
Accrued expenses 88,777
Payable for fund shares redeemed 27,021
------------
Total Liabilities $ 453,167
------------
NET ASSETS $ 80,987,062
------------
------------
Net assets are represented by:
Capital stock outstanding, at par $ 9,055
Additional paid-in capital 83,437,662
Accumulated undistributed net realized gain(loss) on investments (6,971,037)
Unrealized appreciation on investments 4,511,382
------------
Total amount representing net assets applicable to
9,055,044 outstanding shares of $.001 par value
common stock (100,000,000 shares authorized) $ 80,987,062
------------
------------
Net asset value per share $ 8.94
------------
------------
Statement of Operations for the year ended December 31, 1998
- ------------------------------------------------------------
INVESTMENT INCOME
Interest $ 4,931,261
Dividends 31,131
---------------
Total Investment Income $ 4,962,392
---------------
EXPENSES
Investment advisory fees $ 469,016
Distribution fees (12b-1) 421,529
Custodian fees 16,411
Transfer agent fees 92,532
Accounting service fees 62,822
Professional fees 8,773
Directors fees 5,386
Transfer agent out of pocket expense 13,777
Reports to shareholders 4,078
License, fees, and registrations 1,650
---------------
Total Expenses $ 1,095,974
---------------
NET INVESTMENT INCOME $ 3,866,418
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 534,169
Futures transactions (1,996,772)
Net change in unrealized appreciation (depreciation) of:
Investments (342,605)
Futures 872,672
---------------
Net Realized and Unrealized Gain (Loss) On
Investments And Futures $ (932,536)
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,933,882
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1998
Statement of Changes in Net Assets
For the year ended December 31, 1998 and the year ended December 31, 1997
<TABLE>
<CAPTION>
For The Year Ended For The Year Ended
December 31, 1998 December 31,1997
-----------------------------------------
<C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S>
Net investment income $ 3,866,418 $ 4,261,981
Net realized gain (loss) on investments and futures (1,462,603) (1,941,479)
Net change in unrealized appreciation (depreciation)
on investments and futures 530,067 1,350,315
----------------- ----------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 2,933,882 $ 3,670,817
----------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ($.41 and $.43, respectively) $ (3,866,418) $ (4,261,981)
Return of capital distributions ($.05 and $.05, respectively) (421,529) (452,996)
Distributions from net realized gain on investment transactions 0 0
----------------- ----------------
Total Dividends and Distributions $ (4,287,947) $ (4,714,977)
----------------- ----------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 3,794,231 $ 4,728,769
Proceeds from reinvested dividends 2,911,012 3,117,985
Cost of shares redeemed (12,798,668) (9,999,185)
----------------- ----------------
Net Increase (Decrease) in Net Assets Resulting From
Capital Share Transactions $ (6,093,425) $ (2,152,431)
----------------- ----------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ (7,447,490) $ (3,196,591)
NET ASSETS, BEGINNING OF PERIOD 88,434,552 91,631,143
----------------- ----------------
NET ASSETS, END OF PERIOD $ 80,987,062 $ 88,434,552
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements December 31, 1998
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 - Securities for which quotations are not readily
available (which will constitute a majority of the securities held by the Fund)
are valued using a matrix system at fair value as determined by ND Money
Management. The matrix system has been developed based on procedures approved
by the Board of Trustees which include consideration of the following: yields
or prices of municipal bonds of comparable quality, type of issue, coupon,
maturity and rating, and indications as to value from dealers and general market
conditions. Because the market value of securities can only be established by
agreement between parties in a sales transaction, and because of the
uncertainty inherent in the valuation process, the fair values as determined
may differ from the values that would have been used had a ready market for
the securities existed. 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,
1998, a net capital loss carryforward totaling $6,971,037, which may be used to
offset capital gains realized during subsequent years through December 31, 2006.
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.
Securities held in collateralized accounts to cover initial margin requirements
on open futures contracts are noted in the Schedule of Investments. The
Statement of Assets and Liabilities reflects a receivable or payable for the
daily mark to market for variation margin.
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.
At December 31, 1998, the Fund had outstanding futures contracts to sell debt
securities as follows:
<TABLE>
Contracts Expiration Number of Valuation Unrealized
to Date Futures as of Appreciation
Sell Contracts December 31, 1998 (Depreciation)
- ----------------------------------------- --------------------------------------------------------------
<C> <C> <C> <C> <C>
U.S. Treasury Notes 03/99 150 $647,503 $269,378
- --------------------------------------------------------------------------------------------------------
</TABLE>
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.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
Note 3. SHARE TRANSACTIONS
As of December 31, 1998, there were 100,000,000 shares of $.001 par authorized;
9,055,044 and 9,733,454 were outstanding at December 31, 1998 and December
31, 1997, respectively.
Transactions in capital shares were as follows:
Shares
------
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------ ------------------
Shares sold 421,712 515,034
Shares issued on
reinvestment of dividends 323,387 339,531
Shares redeemed (1,423,509) (1,091,312)
------------------ ------------------
Net increase (decrease) (678,410) (236,747)
------------------ ------------------
------------------ ------------------
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 $469,016 of investment
advisory fees after a partial waver for the year ended December 31, 1998. The
Fund has a payable to ND Money Management, Inc. of $37,866 at December 31, 1998
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 $421,529 of 12b-1 fee expenses after partial waiver for
the year ended December 31, 1998. The Fund has a payable to Capital of $33,896
at December 31, 1998 for 12b-1 fees. In addition, the Fund has engaged Capital
as agent for the purchase of certain investment securities. For the six months
ended December 31, 1998 commissions earned by Capital totaled $9,225 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 $92,532 of transfer agency fees for the year
ended December 31, 1998. The Fund has a payable to ND Resources, Inc. of $7,534
at December 31,1998 for transfer agency fees. 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 $62,822 of accounting service fees for the year ended December
31, 1998. The Fund has a payable to ND Resources, Inc. of $5,157 at December
31, 1998 for accounting service fees.
Note 5. INVESTMENT SECURITY TRANSACTIONS
The cost of purchases and proceeds from the sales of investment securities
(excluding short-term securities) aggregated $6,047,091 and $13,930,663 ,
respectively, for the year ended December 31, 1998.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1998, the aggregate cost of securities for federal income tax
purposes was $74,894,706, and the net unrealized appreciation of investments
based on the cost was $4,511,382, which is comprised of $4,971,626 aggregate
gross unrealized appreciation and $460,244 aggregate gross unrealized
depreciation.
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.09 $ 9.19 $ 9.09 $ 8.83 $ 9.52
----------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .41 $ .43 $ .46 $ .47 $ .48
Net realized and unrealized
gain (loss) on investments
and futures transactions (.10) (.05) .13 .28 (.67)
----------------------------------------------------------------------------
Total Income (Loss) From
Investment Operations $ .31 $ .38 $ .59 $ .75 $ (.19)
------------------------------------------------------------- ------------
Less Distributions:
Dividends from net investment income $ (.41) $ (.43) $ (.46) $ (.47) $ (.48)
Return of capital distributions (.05) (.05) (.03) (.02) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
--------------------------------------------------------------------------
Total Distributions $ (.46) $ (.48) $ (.49) $ (.49) $ (.50)
--------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 8.94 $ 9.09 $ 9.19 $ 9.09 $ 8.83
--------------------------------------------------------------------------
Total Return 3.48%(A) 4.17%(A) 6.62% (A) 8.68%(A) (2.07)%(A)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $80,987 $88,435 $91,631 $94,532 $91,865
Ratio of net expenses
(after expense assumption) to
average net assets 1.30% 1.30%(B) 1.13%(B) 1.05%(B) 1.06%(B)
Ratio of net investment income
to average net assets 4.59% 4.70% 5.00% 5.20% 5.19%
Portfolio turnover rate 7.32% 13.18% 12.92% 8.02% 5.55%
</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, and $31,115, 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%, and 1.10%, 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, 1998, 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 each of the five periods 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.
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,
1998, 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, 1998, 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 each of the respective
periods stated in the first paragraph, in conformity with generally accepted
accounting principles.
BRADY, MARTZ & ASSOCIATES, P.C.
Minot, North Dakota
February 03, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 74894706
<INVESTMENTS-AT-VALUE> 79406088
<RECEIVABLES> 1310377
<ASSETS-OTHER> 723764
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 81440229
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 453167
<TOTAL-LIABILITIES> 453167
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83446717
<SHARES-COMMON-STOCK> 9055044
<SHARES-COMMON-PRIOR> 9733454
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6971037)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4511382
<NET-ASSETS> 80987062
<DIVIDEND-INCOME> 31131
<INTEREST-INCOME> 4931261
<OTHER-INCOME> 0
<EXPENSES-NET> 1095974
<NET-INVESTMENT-INCOME> 3866418
<REALIZED-GAINS-CURRENT> (1462603)
<APPREC-INCREASE-CURRENT> 530067
<NET-CHANGE-FROM-OPS> 2933882
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3866418)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (421529)
<NUMBER-OF-SHARES-SOLD> 421712
<NUMBER-OF-SHARES-REDEEMED> 1423509
<SHARES-REINVESTED> 323387
<NET-CHANGE-IN-ASSETS> (7447490)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 469016
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1095974
<AVERAGE-NET-ASSETS> 84226990
<PER-SHARE-NAV-BEGIN> 9.09
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> (.10)
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.05)
<PER-SHARE-NAV-END> 8.94
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
