Dear Shareholders,
We are pleased to enclose the annual report on the operations of the Montana
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 you
are 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 Montana Tax-Free Fund, Inc. began the year at $10.07 and then closed at
$10.16. 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 Montana 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, hospitals, utilities, and transportation
authorities.
Reasonable income exempt from federal and Montana 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 Brothers 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 bonds 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 44.9%
AA 18.6%
A 10.5%
BBB 16.9%
NR 9.1%
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]
I-Industrial 32.7%
H-Housing 20.4%
HC-Health Care 20.0%
S-School 8.3%
O-Other 8.2%
T-Transportation 4.6%
WS-Water/Sewer 3.2%
GO-General Obligation 1.6%
U-Utilities 1.0%
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
Montana Tax-Free Fund and the Lehman Bros. Municipal Bond Index
Montana Tax-Free Fund Montana Tax-Free Fund Lehman Bros
w/o CDSC w/ max applicable CDSC Municipal Bond
Index
--------------------------------------------------------------
8/12/1993 $10,000 $10,000 $10,000
1993 $10,268 $9,868 $10,363
1994 $10,093 $9,718 $9,828
1995 $11,390 $11,090 $11,544
1996 $12,019 $11,819 $12,055
1997 $12,736 $12,636 $13,164
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) $10.07
12-31-97 NAV $10.16
Average Maturity 23.3 years
Number of Issues 62
Total Net Assets $47,749,103
AVERAGE ANNUAL RETURNS
- ----------------------
For periods ending December 31, 1997
- ---------------------------------------------------
1 year 5 year Since Inception
- ---------------------------------------------------
5.96%* NA 5.66%*
- ---------------------------------------------------
*The 1 year and Since Inception returns do not include the effect of the 4%
and 1% respective Contingent Deferred Sales Charges. It would have been
1.96% and 5.47% respectively, 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 Rating Coupon Principal Market
of each investment category to total net assets(Unaudited) Moody's/S&P Rate Maturity Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS ( 97.8%)
Anaconda-Deer River Cty., MT (Arco) Solid Waste Facs. Rev. A/A+ 6.375% 10/01/16 $ 1,500,000 $ 1,626,840
Billings, MT Multifamily Hsg. Devl. Ref. Rev. GNMA Aaa/NR 5.550 12/01/32 2,000,000 2,021,560
Billings, MT Tax Increment Urban Renewal Ref. Baa/NR 7.100 03/01/08 650,000 708,324
Flathead Municipal Airport Auth. (Glacier Park) NR/NR 6.300 06/01/17 2,190,000 2,278,892
Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 7.050 08/01/21 750,000 839,497
Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 6.800 03/01/22 565,000 636,246
Forsyth, MT (Puget Sound) Pollution Control Rev. MBIA Aaa/AAA 5.875 04/01/20 540,000 576,650
Forsyth, MT (MT Power) Pollution Control Rev. Ref. Baa1/BBB+ 6.125 05/01/23 1,220,000 1,321,492
Forsyth, MT (MT Power) Pollution Control Rev. Ref. AMBAC Aaa/AAA 6.125 05/01/23 4,250,000 4,677,805
Forsyth, MT (MT Power) Pollution Control Rev. Ref. Baa1/BBB+ 5.900 12/01/23 300,000 317,913
Forsyth, MT (MT Power) Pollution Control Rev. Ref. AMBAC Aaa/AAA 5.900 12/01/23 225,000 242,363
Forsyth, MT (MT Power) Pollution Control Rev. MBIA Aaa/AAA 5.900 12/01/23 600,000 646,302
Forsyth, MT (MT Power) Pollution Control Rev. MBIA Aaa/AAA 6.125 05/01/23 1,410,000 1,551,931
*Great Falls, MT Water & Sewerage Rev. FGIC Aaa/AAA 6.400 08/01/12 300,000 329,862
Hamilton, MT (Valley View Estates) Nursing Home Rev. NR/NR 7.250 05/01/26 250,000 272,857
Lewis & Clark MT Environmental Rev. Asarco Proj. Baa/BBB 5.600 01/01/27 2,000,000 2,052,180
Lewis & Clark Cty., MT (Asarco Inc.) Pollution Control Rev. Baa/BBB 6.750 12/01/06 230,000 240,858
Lewis & Clark Cty., MT Solid Waste Facs. Rev. A/NR 6.100 10/01/14 250,000 274,598
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/15 435,000 468,908
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/16 460,000 495,374
MT Board of Hsg., Single Family Program Aa/A+ 6.250 12/01/17 2,505,000 2,598,036
MT Board of Hsg., Single Family Program Aa/AA+ 6.350 06/01/27 1,260,000 1,301,832
MT Board of Hsg., Single Family Program Aa/AA+ 6.550 12/01/25 80,000 82,900
MT Board of Hsg., Single Family Program Aa/AA+ 6.400 12/01/35 490,000 507,140
MT Board of Hsg., Single Family Program Aa/AA+ 6.400 12/01/27 305,000 314,107
MT Board of Hsg., Multifamily Mrtge. FHA Aa/NR 6.150 08/01/26 450,000 458,015
MT Board of Hsg., Single Family Mrtge. Aa/AA 6.150 06/01/30 1,245,000 1,269,663
MT Board of Hsg., Single Family Program Aa/AA 6.500 12/01/32 150,000 157,274
MT Board of Hsg., Single Family Program Aa/AA+ 6.100 12/01/24 655,000 660,646
MT Board of Hsg., Single Family Program Aa/AA+ 6.300 06/01/08 210,000 220,120
MT Board of Hsg., Single Family Program Aa/AA+ 6.750 12/01/14 200,000 213,708
MT Board of Hsg., Single Family Program Aa/AA+ 6.900 06/01/25 85,000 89,560
MT Board of Hsg., Single Family Program Aa/AA+ 6.700 12/01/26 320,000 338,640
MT (Broadwater Power) Coal Severance Tax Ref. A1/AA- 6.875 12/01/17 445,000 492,668
MT State Hlth. Facs. Auth. (Mission Ridge) Rev. NR/NR 6.300 08/15/26 500,000 527,540
MT State Hlth. Facs. Auth. (Mission Ridge) Rev. NR/NR 7.000 08/15/26 195,000 211,645
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.300 06/01/14 500,000 550,875
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.400 06/01/19 930,000 1,030,803
MT Hlth. Facs. Auth. (Master Loan Program) Rev. A/NR 6.400 10/01/14 450,000 501,552
MT Hlth. Facs. Auth. (Northern MT Care Ctr.-Havre) Rev. A/NR 6.350 09/01/15 1,000,000 1,060,930
MT Hlth. Facs. Auth. (Missoula Community Medl. Ctr.) Rev. NR/BBB- 6.375 06/01/18 1,330,000 1,401,926
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. AMBAC Aaa/AAA 5.000 06/01/18 840,000 825,754
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. AMBAC Aaa/AAA 5.000 06/01/22 825,000 804,128
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/12 250,000 271,033
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/14 500,000 548,340
MT State Univ. Rev. MBIA Aaa/AAA 5.250 11/15/13 1,165,000 1,209,468
MT State Univ. Rev. MBIA Aaa/AAA 5.625 11/15/25 1,000,000 1,072,550
MT State Univ. Rev. MBIA Aaa/AAA 5.375 11/15/21 1,000,000 1,032,650
MT State Hlth. Facs. Auth. (St. Patrick's) Rev. AMBAC Aaa/AAA 6.625 09/01/12 195,000 214,315
MT Hlth. Facs. Auth. (Bozeman Deaconess) Rev. Ref. NR/A+ 5.750 06/01/08 100,000 107,337
MT Hlth. Facs. Auth. (Billings Clinic Deaconess) Rev. AMBA Aaa/AAA 5.250 02/15/20 1,700,000 1,718,955
MT Board of Invmts. (Workers Compensation) MBIA Aaa/AAA 6.875 06/01/11 200,000 220,102
MT Board of Invmts. (Workers Compensation) Ref. Aaa/AAA 6.875 06/01/20 145,000 161,294
MT Board of Invmts. (Workers Compensation) Ref. Escrowed Aaa/AAA 6.875 06/01/20 85,000 94,958
MT Board of Invmts. (Workers Compensation) Ref. Escrowed Aaa/AAA 6.875 06/01/20 270,000 301,631
MT Hlth. Facs. Auth. Prerelease Ctr. Rev. NR/BBB+ 5.600 10/01/17 750,000 762,780
Phillips Cty., MT E. School Dist. #14 School Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/15 145,000 152,549
Phillips Cty., MT E. School Dist. #14 School Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/16 155,000 162,779
Phillips Cty., MT E. School Dist. #14 School Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/17 165,000 173,545
Phillips Cty., MT School Dist. #A School Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/15 290,000 305,097
*Richland Cty., MT (MDU) Pollution Control Rev. FGIC Aaa/AAA 6.650 06/01/22 600,000 672,960
Silver Bow (Butte-Silver Bow) Water Syst. Rev. FGIC Aaa/AAA 6.500 11/01/14 275,000 304,626
-----------
TOTAL MONTANA MUNICIPAL BONDS (COST: $44,460,198) $46,686,883
-----------
SHORT-TERM SECURITIES (5.7%)
Federated Tax-Free Trust #15 $ 356,773
Federated Intermediate Municipal Trust #78 2,379,907
-----------
TOTAL SHORT-TERM SECURITIES (COST: $2,735,533) $ 2,736,680
-----------
TOTAL INVESTMENTS IN SECURITIES (COST: $47,195,731) $49,423,563
OTHER ASSETS LESS LIABILITIES (1,674,460)
-----------
NET ASSETS $47,749,103
===========
</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: $47,195,731) $ 49,423,563
Accrued dividends receivable 6,354
Accrued interest receivable 477,403
Receivable for fund shares sold 33,000
Variation margin on futures 115,625
----------------
Total Assets $ 50,055,945
----------------
LIABILITIES
Bank overdraft $ 4,312
Dividends payable 199,155
Accrued expenses 52,142
Security purchases payable 2,051,233
----------------
Total Liabilities $ 2,306,842
----------------
NET ASSETS $ 47,749,103
================
Net assets are represented by:
Capital stock outstanding, at par $ 4,699
Additional paid-in capital 46,591,268
Accumulated undistributed net realized gain(loss) on investments (1,074,696)
Unrealized appreciation on investments 2,227,832
---------------
Total amount representing net assets applicable to
4,699,453 outstanding shares of $.001 par value
common stock (200,000,000 shares authorized) $ 47,749,103
================
Net asset value per share $ 10.16
================
Statement of Operations for the year ended December 31, 1997
INVESTMENT INCOME
Interest $ 2,263,098
Dividends 67,825
----------------
Total Investment Income $ 2,330,923
----------------
EXPENSES
Investment advisory fees $ 246,178
Distribution (12b-1 fees) 157,457
Custodian fees 4,886
Transfer agent fees 53,430
Accounting service fees 44,539
Audit and legal fees 5,173
Insurance 2,928
Directors fees 3,608
Printing and postage 13,644
License, fees, and registrations 8,160
----------------
Total expenses $ 540,003
Less expenses waived or absorbed
by the Fund's manager 60,969
----------------
Total Net Expenses $ 479,034
----------------
NET INVESTMENT INCOME $ 1,851,889
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 101,861
Futures transactions (1,084,593)
Net change in unrealized appreciation (depreciation) of:
Investments 1,499,963
Futures 40,068
----------------
Net Realized And Unrealized Gain (Loss) on Investments
and Futures $ 557,299
----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,409,188
================
</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 $ 1,851,889 $ 1,404,545
Net realized gain (loss) on investment and futures transactions (982,732) 659,566
Net unrealized appreciation (depreciation) on investments and futures 1,540,031 (440,184)
-----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 2,409,188 $ 1,623,927
-----------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income $ 1,851,889) $ (1,404,545)
Distributions in excess of net investment income (157,457) (88,756)
Distributions from net realized gain on investment and futures transactions 0 0
-----------------------------------------
Total Dividends and Distributions $ (2,009,346) $ (1,493,301)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 13,656,561 $ 10,721,943
Proceeds from reinvested dividends 1,323,734 948,882
Cost of shares redeemed (2,434,008) (1,053,866)
-----------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital
Share Transactions $ 12,546,287 $ 10,616,959
-----------------------------------------
TOTAL INCREASE IN NET ASSETS $ 12,946,129 $ 10,747,585
NET ASSETS, BEGINNING OF PERIOD 34,802,974 24,055,389
-----------------------------------------
NET ASSETS, END OF PERIOD $ 47,749,103 $ 34,802,974
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements December 31, 1997
Note 1. ORGANIZATION
Montana 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 April 15, 1993 and commenced operations on August 12, 1993. The Fund's
objective is to provide as high a level of current income exempt from federal
and Montana income taxes as is consistent with preservation of capital. The
Fund will seek to achieve this by investing primarily in a portfolio of
Montana 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 $1,074,696, 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. CAPITAL SHARE TRANSACTIONS
As of December 31, 1997, there were 200,000,000 shares of $.001 par
authorized; 4,699,453 and 3,456,719 were outstanding at December 31, 1997
and 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 1,353,198 1,071,978
Shares issued on reinvestment
of dividends 131,160 94,940
Shares redeemed (241,624) (105,905)
----------------------------------------
Net increase 1,242,734 1,061,013
========================================
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 $246,178 of investment
advisory fees for the year ended December 31, 1997. The Fund has a payable
to ND Money Management, Inc. of $25,112 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 0.75% of the average daily net assets of the
Fund. The Fund has recognized $157,458 of 12b-1 fee expenses after partial
waiver for the year ended December 31, 1997. The Fund has a payable to Capital
of $16,741 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
$20,925 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 $53,430 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 $44,539 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 $15,515,364, and $3,118,783,
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 $47,195,731, and the net unrealized appreciation of investments
based on the cost was $2,227,832, which is comprised of $2,234,858 aggregate
gross unrealized appreciation and $7,026 aggregate gross unrealized
depreciation.
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Since Inception
For The Year For The Year For The Year For The Year (August 12, 1993)
Ended Ended Ended Ended through
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.07 $ 10.04 $ 9.39 $ 10.07 $ 10.00
--------------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .46 $ .48 $ .51 $ .50 $ .19
Net realized and unrealized
gain (loss) on investment
and futures transactions .13 .06 .67 (.66) .09
--------------------------------------------------------------------------------------------
Total From Investment
Operations $ .59 $ .54 $ 1.18 $ (.16) $ .28
--------------------------------------------------------------------------------------------
Less Distributions
Dividends from net investment
income $ (.46) $ (.48) $ (.51) $ (.50) $ (.19)
Distributions in excess of net
investment income (.04) (.03) (.02) (.02) (.01)
Distributions from realized
gains .00 .00 .00 .00 (.01)
---------------------------------------------------------------------------------------------
Total Distributions $ (.50) $ (.51) $ (.53) $ (.52) $ (.21)
---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.16 $ 10.07 $ 10.04 $ 9.39 $ 10.07
=============================================================================================
Total Return 5.96%(A) 5.52%(A) 12.85%(A) (1.70)%(A) 7.00%(A)(B)
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $47,749 $34,803 $24,055 $11,956 $5,235
Ratio of net expenses (after
expense assumption) to average
net assets 1.17%(C) 0.96%(C) 0.66%(C) 0.46%(C) 0.12%(B)(C)
Ratio of net investment income
to average net assets 4.51% 4.76% 5.11% 5.06% 4.84%(B)
Portfolio turnover rate 7.91% 7.12% 7.39% 12.46% 26.05%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) Ratio was annualized.
(C) During the periods indicated above, ND Holdings, Inc. assumed expenses
of $60,969, $98,321, $99,757, $87,483, and $21,944. If the expenses had
not been assumed, the annualized ratio of total expenses to average net
assets would have been 1.32%, 1.29%, 1.22%, 1.46% and 1.71%,
respectively.
The accompanying notes are an integral part of these financial statements.
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of
Montana Tax Free Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Montana 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 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 four
periods then ended and for the period from inception (August 12, 1993)
through December 31, 1993. 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 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 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
Montana 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, and
financial highlights for each of the respective periods stated in the first
paragraph, 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> 47,195,731
<INVESTMENTS-AT-VALUE> 49,423,563
<RECEIVABLES> 516,757
<ASSETS-OTHER> 115,625
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 50,055,945
<PAYABLE-FOR-SECURITIES> 2,051,233
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 255,609
<TOTAL-LIABILITIES> 2,306,842
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46,595,967
<SHARES-COMMON-STOCK> 4,699,453
<SHARES-COMMON-PRIOR> 3,456,719
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,074,696)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,227,832
<NET-ASSETS> 47,749,103
<DIVIDEND-INCOME> 67,825
<INTEREST-INCOME> 2,263,098
<OTHER-INCOME> 0
<EXPENSES-NET> (479,034)
<NET-INVESTMENT-INCOME> 1,851,889
<REALIZED-GAINS-CURRENT> (982,732)
<APPREC-INCREASE-CURRENT> 1,540,031
<NET-CHANGE-FROM-OPS> 2,409,188
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,851,889)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (157,457)
<NUMBER-OF-SHARES-SOLD> 1,353,198
<NUMBER-OF-SHARES-REDEEMED> 241,624
<SHARES-REINVESTED> 131,160
<NET-CHANGE-IN-ASSETS> 12,946,129
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 246,178
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 540,003
<AVERAGE-NET-ASSETS> 41,064,319
<PER-SHARE-NAV-BEGIN> 10.07
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> .13
<PER-SHARE-DIVIDEND> (.46)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.04)
<PER-SHARE-NAV-END> 10.16
<EXPENSE-RATIO> 1.17<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of net expenses to average net assets.
</FN>
</TABLE>
