Dear Shareholder:
We are pleased to enclose the annual report of the operations of the Montana
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 Montana Tax-Free Fund, Inc. began the year at $10.16 and closed the year at
$10.05. The Montana 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 Montana tax-exempt bonds.
Diversification remains an important strategy for the Fund. Purchases
throughout the year in the primary and secondary markets include University of
Montana Facilities and Montana Higher Education Student Assistance issues.
Income exempt from federal and Montana 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 bonds 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 & COMPOSITION
- -------------------------
Portfolio Ratings
(based on Total Long-Term Investments)
- --------------------------------------
[pie chart]
AAA 44.4
AA 15.0
A 18.8
BBB 13.8
NR 8.0
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 30.2
I-Industrial 27.7
H-Housing 18.3
S-School 11.7
O-Other 4.1
T-Transportation 3.9
WS-Water/Sewer 2.7
GO-General Obligation 1.4
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 Brothers Municipal Bond Index
Montana Tax-Free Fund Lehman Bros
w/o CDSC Municipal Bond Index
-------------------------------------------------------------
8/12/1993 $10,000 $10,000
1993 $10,268 $10,363
1994 $10,093 $9,828
1995 $11,390 $11,544
1996 $12,019 $12,055
1997 $12,736 $13,164
1998 $13,201 $14,018
Average Annual Total Returns
- ----------------------------
For periods ending December 31, 1998
Since Inception
1 year 5 year Aug.12, 1993
- -------------------------------------------------------------------------------
Without CDSC 3.66% 5.15% 5.29%
With CDSC (.30)% NA NA
- -------------------------------------------------------------------------------
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
Montana 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) $10.16
12-31-98 NAV $10.05
Average Maturity 22.6 years
Number of Issues 74
Total Net Assets $58,878,852
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1998
Name of Issuer
Percentages represent the market value of each investment
category to total net assets
Rating
(Unaudited) Coupon Principal Market
Moody's/S&P Rate Maturity Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS (98.0%)
Anaconda-Deer River Cty., MT (Arco) Solid Waste Facs. Rev. A/A 6.375% 10/01/16 $ 1,500,000 $ 1,624,875
Billings, MT Multifamily Hsg. Devl. Ref. Rev. 97A GNMA Aaa/NR 5.550 12/01/32 2,500,000 2,557,900
Billings, MT Tax Increment Urban Renewal Ref. Baa/NR 7.100 03/01/08 650,000 703,606
Forsyth, MT (Montana Power) Pollution Control Rev. MBIA Aaa/AAA 5.900 12/01/23 600,000 647,898
*Forsyth, MT (Montana Power) Pollution Control Rev. MBIA Aaa/AAA 6.125 05/01/23 1,410,000 1,548,871
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Baa-1/A- 6.125 05/01/23 1,220,000 1,307,340
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Baa-1/A- 5.900 12/01/23 300,000 317,094
#Forsyth, MT (Montana Power) Pollution Control Rev. Ref. AMBAC Aaa/AAA 6.125 05/01/23 4,250,000 4,650,223
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. AMBAC Aaa/AAA 5.900 12/01/23 225,000 242,962
*Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 7.050 08/01/21 750,000 817,388
*Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 6.800 03/01/22 565,000 617,370
Forsyth, MT (Puget Sound) Pollution Control Rev. MBIA Aaa/AAA 5.875 04/01/20 540,000 579,609
*Great Falls, MT Water & Sewerage Rev. FGIC Aaa/AAA 6.400 08/01/12 300,000 328,713
Hamilton, MT (Valley View Estates) Nursing Home Rev. NR/NR 7.250 05/01/26 250,000 272,848
Kalispell, MT Flathead Municipal Airport Auth.(Glacier Park) NR/NR 6.300 06/01/17 2,190,000 2,271,468
Lewis & Clark Cty., MT Solid Waste Facs. Rev. A/NR 6.100 10/01/14 250,000 276,098
Lewis & Clark MT Environmental Rev Asarco Proj. Baa-3/BBB- 5.600 01/01/27 2,300,000 2,289,236
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/15 435,000 476,129
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/16 460,000 503,327
MT (Broadwater Power) Coal Severance Tax Ref. A-1/AA- 6.875 12/01/17 445,000 475,999
MT Board of Hsg., Multifamily Mrtge. FHA Aa-1/NR 6.150 08/01/26 450,000 476,019
MT Board of Hsg., Single Family Mrtge. Aa-1/AA 6.150 06/01/30 1,245,000 1,324,493
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.250 12/01/17 2,215,000 2,352,972
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.350 06/01/27 1,110,000 1,170,939
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.550 12/01/25 70,000 73,997
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.400 12/01/35 490,000 512,182
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.400 12/01/27 305,000 324,648
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.500 12/01/32 150,000 158,768
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.100 12/01/24 640,000 665,011
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.300 06/01/08 160,000 172,390
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.750 12/01/14 145,000 156,607
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.900 06/01/25 65,000 69,110
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.700 12/01/26 235,000 251,053
MT Board of Hsg., Single Family Program FHA Aa-1/AA+ 5.450 06/01/27 500,000 507,465
MT Board of Invmts. (Workers Compensation) MBIA Aaa/AAA 6.875 06/01/11 200,000 217,224
MT Board of Invmts. (Workers Compensation) Ref. Aaa/AAA 6.875 06/01/20 145,000 157,453
MT Board of Invmts. (Workers Compensation) Ref. Escrowed Aaa/AAA 6.875 06/01/20 85,000 92,300
MT Board of Invmts. (Workers Compensation) Ref. Escrowed Aaa/AAA 6.875 06/01/20 270,000 293,188
MT Board of Regents University of MT Fac. Impvt. Rev. MBIA NR/AAA 5.000 05/15/21 650,000 658,957
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/12 250,000 275,148
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/14 500,000 547,230
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 5.500 12/01/31 2,000,000 2,005,880
MT Hlth. Facs. Auth. (Big Horn Hosp.) Rev. A/NR 5.100 02/01/18 300,000 302,784
MT Hlth. Facs. Auth. (Billings Clinic Deaconess) Rev. AMBAC Aaa/AAA 5.250 02/15/20 1,700,000 1,736,499
MT Hlth. Facs. Auth. (Bozeman Deaconess) Rev. Ref. NR/A+ 5.750 06/01/08 100,000 106,019
MT Hlth. Facs. Auth. (Kalispell Regl. Hosp.) AMBAC NR/AAA 5.000 07/01/18 250,000 251,853
MT Hlth. Facs. Auth. (Bozeman Deaconess) Rev. Ref. NR/A+ 5.000 06/01/18 1,500,000 1,491,300
MT Hlth. Facs. Auth. (Lewis & Clark Nursing Home) Rev. A/NR 5.100 02/01/18 350,000 353,248
MT Hlth. Facs. Auth. (Lewis & Clark Office Proj.) Rev. A/NR 5.100 02/01/18 150,000 151,392
MT Hlth. Facs. Auth. (Master Loan Program) Rev. A/NR 6.400 10/01/14 450,000 500,940
MT Hlth. Facs. Auth. (Missoula Community Medl. Ctr.) Rev. NR/BBB- 6.375 06/01/18 2,830,000 3,083,002
MT Hlth. Facs. Auth. (Northern MT Care Ctr.-Havre) Rev. Baa-3/NR 6.350 09/01/15 1,000,000 1,077,070
MT Hlth. Facs. Auth. (Sisters of Charity) Rev. MBIA Aaa/AAA 5.125 12/01/18 1,800,000 1,826,532
MT Hlth. Facs. Auth. (Sisters of Charity) Rev. MBIA Aaa/AAA 5.000 12/01/24 600,000 600,318
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. AMBAC Aaa/NR 5.000 06/01/18 840,000 844,452
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. AMBAC Aaa/NR 5.000 06/01/22 1,525,000 1,521,096
MT Hlth. Facs. Auth. Prerelease Ctr. Rev. NR/BBB+ 5.600 10/01/17 750,000 779,400
MT Hlth. Facs. Rev. (Toole Cty, Marias Heritage Project) NR/NR 6.375 11/01/22 200,000 206,752
MT Hlth. Facs. Rev. (Toole Cty, Marias Heritage Project) NR/NR 6.500 11/01/27 200,000 208,258
MT State Hlth. Facs. Auth. (Mission Ridge) Rev. NR/NR 6.300 08/15/26 500,000 497,345
MT State Hlth. Facs. Auth. (Mission Ridge) Rev. NR/NR 7.000 08/15/26 195,000 199,803
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.300 06/01/14 500,000 557,695
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.400 06/01/19 930,000 1,018,964
MT State Hlth. Facs. Auth. (St. Patrick's) Rev. AMBAC Aaa/AAA 6.625 09/01/12 195,000 211,355
MT State Univ. Rev. MBIA Aaa/AAA 5.250 11/15/13 1,165,000 1,223,844
*MT State Univ. Rev. MBIA Aaa/AAA 5.625 11/15/25 1,000,000 1,058,990
MT State Univ. Rev. MBIA Aaa/AAA 5.375 11/15/21 500,000 517,890
Phillips Cty., MT Eastern School Dist. #14 Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/16 155,000 166,512
Phillips Cty., MT Eastern School Dist. #14 Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/15 145,000 156,135
Phillips Cty., MT Eastern School Dist. #14 Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/17 165,000 176,649
Phillips Cty., MT H School Dist. #A Bldg. G.O. MBIA Aaa/AAA 5.600 07/01/15 290,000 312,269
*Richland Cty., MT (MDU) Pollution Control Rev. FGIC Aaa/AAA 6.650 06/01/22 600,000 665,796
Silver Bow (Butte-Silver Bow) Water Syst. Rev. FGIC Aaa/AAA 6.500 11/01/14 275,000 306,045
University of MT Fac. Impvt. Rev. MBIA NR/AAA 5.000 05/15/17 600,000 609,000
-----------
TOTAL MONTANA MUNICIPAL BONDS (COST: $55,206,392) $57,691,190
----------
SHORT-TERM SECURITIES (.5%)
Federated Tax-Free Trust #73 (COST: $311,423) $ 311,423
-----------
TOTAL INVESTMENTS IN SECURITIES (COST: $55,517,815 ) $58,002,613
OTHER ASSETS LESS LIABILITIES 876,239
-----------
NET ASSETS $58,878,852
===========
</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.
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>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost: $55,517,815) $ 58,002,613
Accrued dividends receivable 2,142
Accrued interest receivable 587,906
Receivable for fund shares sold 80,600
Variation margin 498,335
--------------
Total Assets $ 59,171,596
--------------
LIABILITIES
Dividends payable 225,477
Accrued expenses 67,267
--------------
Total Liabilities $ 292,744
--------------
NET ASSETS $ 58,878,852
==============
Net assets are represented by:
Capital stock outstanding, at par $ 5,858
Additional paid-in capital 58,036,538
Accumulated undistributed net realized gain(loss) on investments (1,648,342)
Unrealized appreciation on investments 2,484,798
--------------
Total amount representing net assets applicable to
5,857,896 outstanding shares of $.001 par value
common stock (200,000,000 shares authorized) $ 58,878,852
==============
Net asset value per share $ 10.05
==============
Statement of Operations for the year ended December 31, 1998
- ------------------------------------------------------------
INVESTMENT INCOME
Interest $ 2,926,942
Dividends 54,313
--------------
Total Investment Income $ 2,981,255
--------------
EXPENSES
Investment advisory fees $ 285,851
Distribution (12b-1 fees) 272,297
Custodian fees 8,101
Transfer agent fees 66,366
Accounting service fees 50,775
Professional fees 6,576
Reports to shareholders 2,495
Directors fees 3,990
Transfer agent out of pockets 7,826
License, fees, and registrations 3,696
--------------
Total expenses $ 707,973
--------------
NET INVESTMENT INCOME $ 2,273,282
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ 2,494
Futures transactions (883,112)
Net change in unrealized appreciation (depreciation) of:
Investments 256,966
Futures 306,972
--------------
Net Realized And Unrealized Gain (Loss) on Investments
and Futures $ (316,680)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,956,602
==============
</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 For the Year
Ended Ended
December 31,1998 December 31, 1997
-------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 2,273,282 $ 1,851,889
Net realized gain (loss) on investment and futures transactions (880,618) (982,732)
Net change in unrealized appreciation (depreciation) on investments
and futures 563,938 1,540,031
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ 1,956,602 $ 2,409,188
-----------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ($.42 and $.46, respectively) $ (2,273,282) $ (1,851,889)
Return of capital distributions ($.05 and $.04, respectively) (272,297) (157,457)
Distributions from net realized gain on investment
and futures transactions 0 0
-----------------------------------
Total Dividends and Distributions $ (2,545,579) $ (2,009,346)
-----------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 13,684,445 $ 13,656,561
Proceeds from reinvested dividends 1,658,612 1,323,734
Cost of shares redeemed (3,624,331) (2,434,008)
-----------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital
Share Transactions $ 11,718,726 $ 12,546,287
-----------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ 11,129,749 $ 12,946,129
NET ASSETS, BEGINNING OF PERIOD 47,749,103 34,802,974
-----------------------------------
NET ASSETS, END OF PERIOD $ 58,878,852 $ 47,749,103
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements December 31, 1998
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 - 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 $1,648,342, 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:
Valuation
Number of as of Unrealized
Expiration Futures December 31, Appreciation
Contracts to Sell Date Contracts 1998 (Depreciation)
- ---------------------------------------------------------------------------
U.S. Treasury Notes 03/99 100 $498,335 $178,023
- ---------------------------------------------------------------------------
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. CAPITAL SHARE TRANSACTIONS
As of December 31, 1998, there were 200,000,000 shares of $.001 par authorized;
5,857,896 and 4,699,453 were outstanding at December 31, 1998 and December 31,
1997, respectively.
Transactions in capital shares were as follows:
Shares
-------------------------------------
For the Year For the Year
Ended Ended
December 31, 1998 December 31, 1997
-------------------------------------
Shares sold 1,353,606 1,353,198
Shares issued on reinvestment of dividends 164,173 131,160
Shares redeemed (359,336) (241,624)
-------------------------------------
Net increase (decrease) 1,158,443 1,242,734
=====================================
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 $285,851 of investment advisory fees after
partial waiver for the year ended December 31, 1998. The Fund has a payable to
ND Money Management, Inc. of $26,710 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 0.75% of the average daily net assets of the Fund. The Fund has
recognized $272,297 of 12b-1 fee expenses after partial waiver for the year
ended December 31, 1998. The Fund has a payable to Capital of $24,457 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 year ended
December 31,1998 commissions earned by Capital totaled $1,250 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 $66,366 of transfer agency fees for the year ended
December 31, 1998. The Fund has a payable to ND Resources, Inc. of $5,798 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 $50,775 of accounting service fees for the year ended December 31,
1998. The Fund has a payable to ND Resources, Inc. of $4,357 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 $12,733,159, and $1,921,335,
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 $55,517,815, and the net unrealized appreciation of investments
based on the cost was $2,484,798, which is comprised of $2,568,682 aggregate
gross unrealized appreciation and $83,884 aggregate gross unrealized
depreciation.
Financial Highlights Selected per share data and ratios for the period indicated
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The For The For The For The For The
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 1998 31, 1997 31, 1996 31, 1995 31, 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 10.07 $ 10.04 $ 9.39 $ 10.07
--------------------------------------------------------
Income from Investment Operations:
Net Investment Income $ .42 $ .46 $ .48 $ .51 $ .50
Net realized and unrealized gain (loss) on
investment and futures transactions (.06) .13 .06 .67 (.66)
--------------------------------------------------------
Total Income (Loss) From Investment Operations $ .36 $ .59 $ .54 $ 1.18 $ (.16)
--------------------------------------------------------
Less Distributions:
Dividends from net investment income $ (.42) $ (.46) $ (.48) $ (.51) $ (.50)
Return of capital distributions (.05) (.04) (.03) (.02) (.02)
Distributions from net realized gains .00 .00 .00 .00 .00
--------------------------------------------------------
Total Distributions $ (.47) $ (.50) $ (.51) $ (.53) $ (.52)
--------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.05 $ 10.16 $ 10.07 $ 10.04 $ 9.39
========================================================
Total Return 3.66%(A) 5.96%(A) 5.52%(A) 12.85%(A) (1.70)%(A)
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $58,879 $47,749 $34,803 $24,055 $11,956
Ratio of net expenses (after expense assumption)
to average net assets 1.30% 1.17%(B) 0.96%(B) 0.66%(B) 0.46%(B)
Ratio of net investment income to average net
assets 4.18% 4.51% 4.76% 5.11% 5.06%
Portfolio turnover rate 3.65% 7.91% 7.12% 7.39% 12.46%
</TABLE>
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed expenses of
$60,969, $98,321, $99,757, and $87,483. 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%, and 1.46% , 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, 1998, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five 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
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, 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
Montana 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, 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.
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> 55517815
<INVESTMENTS-AT-VALUE> 58002613
<RECEIVABLES> 670648
<ASSETS-OTHER> 498335
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59171596
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292744
<TOTAL-LIABILITIES> 292744
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58042396
<SHARES-COMMON-STOCK> 5857896
<SHARES-COMMON-PRIOR> 4699453
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1648342)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24847982
<NET-ASSETS> 58878852
<DIVIDEND-INCOME> 54313
<INTEREST-INCOME> 2926942
<OTHER-INCOME> 0
<EXPENSES-NET> 707973
<NET-INVESTMENT-INCOME> 2273282
<REALIZED-GAINS-CURRENT> (880618)
<APPREC-INCREASE-CURRENT> 563938
<NET-CHANGE-FROM-OPS> 1956602
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2273282)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (272297)
<NUMBER-OF-SHARES-SOLD> 1353606
<NUMBER-OF-SHARES-REDEEMED> 359336
<SHARES-REINVESTED> 164173
<NET-CHANGE-IN-ASSETS> 11129749
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 285851
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 707973
<AVERAGE-NET-ASSETS> 54341106
<PER-SHARE-NAV-BEGIN> 10.16
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> (.06)
<PER-SHARE-DIVIDEND> (.42)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.05)
<PER-SHARE-NAV-END> 10.05
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
