Dear Shareholder:
Enclosed is the annual report of the operations of the Montana Tax-Free Fund,
Inc., the "Fund," for the year ended December 31, 1999. The Fund's portfolio
and related financial statements are presented within for your review.
As we start the new millennium, 1999 will go down as one of the worst years in
bond market history. The benchmark 30-year Treasury bond has seen a value
loss of approximately 27%, as yields have risen from a January yield of 5.07%
to a year ending 6.48%. Stabilizing global economies and a U.S. economy
growing at what many economists believe is an unsustainable pace has led the
Federal Reserve to raise short-term interest rates three times in 1999 for a
total increase of three quarters of one percent. Strong consumer confidence,
low unemployment, housing and retail sales at record levels, and a doubling
of crude oil prices contributed to the Federal Reserve's actions.
Tax-free municipal bonds haven't faired much better. A long-term tax-free
bond worth $1,000.00 on December 31, 1998 would be worth roughly $860.00 today,
as yields have risen from a January yield of 4.94% to a year ending 5.94% on
AAA rated bonds. As a result, we are now seeing Montana municipal bonds
paying 90% to as high as 100% of the 30-year Treasury yield. Historically,
municipals have averaged 85% of the 30-year Treasury yield over the past ten
years. In terms of real rates of return, this is a very attractive
opportunity.
The Fund began the year at $10.05 and closed the year at $9.36, for a total
return of (2.32)%*. In anticipation of stronger economic growth, the Fund at
times during the year utilized a defensive position in U.S. Treasury futures.
Share price was stabilized as yields on U.S. Treasuries rose throughout the
year. Stability of share price is the primary objective of a defensive
position.
Diversification remains an important strategy of the Fund. Throughout the
year, purchases in the primary and secondary market included Montana Health
Facilities for Providence Services, Montana Long Range Building, and Montana
Higher Education Student Assistance issues.
High current income exempt from federal and state income tax with preservation
of capital remain the objectives of the Fund.
Sincerely,
Monte L. Avery Robert E. Walstad
Chief Portfolio Strategist President
* without C.D.S.C.
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 redemption, assuming redemption at the end
of the period.
Coupon Rate or Face Rate
The rate of interest payable annually, 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 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 & COMPOSITION
- -------------------------
Portfolio Quality Ratings
(based on Total Long-Term Investments)
- --------------------------------------
[pie chart]
AAA 42.9
AA 18.6
A 19.1
BBB 8.9
NR 10.5
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 Assest)
- ------------------------
[pie chart]
HC-Health Care 30.3
I-Industrial 25.5
H-Housing 16.0
S-School 12.5
GO-General Obligation 6.5
O-Other 3.7
T-Transportation 3.5
WS-Water/Sewer 2.0
Market sectors are breakdowns of the Fund's portfolio holdings into specific
investment classes.
These percentages are subject to change.
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 Brothers
w/o CDSC Municipal Bond Index
---------------------------------------------------------------
8/12/1993 $10,000 $10,000
1993 $10,268 $10,363
1994 $10,093 $ 9,827
1995 $11,390 $11,543
1996 $12,019 $12,055
1997 $12,736 $13,164
1998 $13,201 $14,018
1999 $12,896 $13,728
Average Annual Total Returns
- ----------------------------
For periods ending December 31, 1999
---------------------------------------
Since Inception
1 year 5 year 10 year (Aug. 12, 1993)
- -------------------------------------------------------------------------------
Without CDSC (2.32)% 5.02% N/A 4.06%
With CDSC (4% max) (6.04)% N/A N/A N/A
- -------------------------------------------------------------------------------
Putting Performance into Perspective
Returns are historical and are not a guarantee of future results. 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. 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
- --------------
12-31-98 NAV (share value) $10.05
12-31-99 NAV $9.36
Average Maturity 22.2 years
Number of Issues 73
Total Net Assets $60,492,030
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1999
Name of Issuer Rating
Percentages represent the market value of each investment (Unaudited) Coupon Principal Market
category to total net assets Moody's/S&P Rate Maturity Amount Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONTANA MUNICIPAL BONDS (97.0%)
Anaconda-Deer River Cty., MT (Arco) Solid Waste Facs. Rev. A/A 6.375% 10/01/16 $ 1,500,000 $ 1,514,805
Billings, MT (West Park Vill.) Multifam. Hsg. Devl. Ref. Rev. Aaa/AAA 5.550 12/01/32 2,500,000 2,404,950
Billings, MT Tax Increment Urban Renewal Ref. Baa-3/NR 7.100 03/01/08 650,000 674,394
Forsyth, MT (Montana Power) Pollution Control Rev. MBIA Aaa/AAA 5.900 12/01/23 600,000 591,060
*Forsyth, MT (Montana Power) Pollution Control Rev. MBIA Aaa/AAA 6.125 05/01/23 1,410,000 1,417,402
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Baa-1/A- 6.125 05/01/23 1,220,000 1,200,029
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Baa-1/A- 5.900 12/01/23 300,000 288,249
#Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Aaa/AAA 6.125 05/01/23 4,250,000 4,256,502
Forsyth, MT (Montana Power) Pollution Control Rev. Ref. Aaa/AAA 5.900 12/01/23 225,000 221,647
*Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 7.050 08/01/21 750,000 790,830
*Forsyth, MT (Puget Sound) Pollution Control Rev. AMBAC Aaa/AAA 6.800 03/01/22 565,000 571,424
Forsyth, MT (Puget Sound) Pollution Control Rev. MBIA Aaa/AAA 5.875 04/01/20 540,000 534,773
*Great Falls, MT Water & Sewerage Rev. FGIC Aaa/AAA 6.400 08/01/12 300,000 309,753
Hamilton, MT (Valley View Estates) Nursing Home Rev. NR/NR 7.250 05/01/26 250,000 249,460
Kalispell, MT Flathead Municipal Airport Auth. (Glacier Park) NR/NR 6.300 06/01/17 2,190,000 2,107,787
Lewis & Clark Cty., MT Solid Waste Facs. Rev. A-3/NR 6.100 10/01/14 250,000 257,148
Lewis & Clark MT Environmental Rev. (Asarco Project) NR/NR 5.600 01/01/27 2,300,000 2,023,632
Lewis & Clark MT Environmental Rev. (Asarco Project) NR/NR 5.850 10/01/33 500,000 447,010
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/15 435,000 437,662
Lewistown, MT Water Syst. Rev. NR/NR 5.700 07/01/16 460,000 461,458
Montana ST (Long Range Bldg) G.O. Aa-3/AA- 5.000 08/01/16 1,080,000 1,005,091
Montana ST (Long Range Bldg) G.O. Aa-3/AA- 5.000 08/01/17 1,070,000 995,592
Montana ST (Long Range Bldg) G.O. Aa-3/AA- 5.000 08/01/18 1,250,000 1,162,962
MT (Broadwater Power) Coal Severance Tax Ref. A-1/AA- 6.875 12/01/17 445,000 461,892
MT Board of Hsg., Multifamily Mrtge. FHA Aa-1/NR 6.150 08/01/26 450,000 451,053
MT Board of Hsg., Single Family Mrtge. Aa/AA+ 6.150 06/01/30 1,150,000 1,154,658
MT Board of Hsg., Single Family Program Aa/AA+ 6.400 12/01/35 490,000 492,029
MT Board of Hsg., Single Family Program Aa-1/AA+ 6.400 12/01/27 305,000 307,650
MT Board of Hsg., Single Family Program Aa/AA+ 5.950 12/01/27 300,000 292,698
MT Board of Hsg., Single Family Program Aa/AA+ 6.500 12/01/32 150,000 149,988
MT Board of Hsg., Single Family Program Aa/AA+ 6.100 12/01/24 545,000 537,572
MT Board of Hsg., Single Family Program Aa/AA+ 6.300 06/01/08 135,000 140,979
MT Board of Hsg., Single Family Program Aa/AA+ 6.750 12/01/14 115,000 120,004
MT Board of Hsg., Single Family Program Aa/AA+ 6.900 06/01/25 15,000 15,031
MT Board of Hsg., Single Family Program Aa/AA+ 6.700 12/01/26 175,000 177,524
MT Board of Hsg., Single Family Program FHA/VA Aa/AA+ 6.350 06/01/27 965,000 970,124
MT Board of Hsg., Single Family Program FHA/VA Aa/AA+ 6.250 12/01/17 1,920,000 1,955,866
MT Board of Hsg., Single Family Program FHA/VA Aa/AA+ 6.550 12/01/25 60,000 60,550
MT Board of Hsg., Single Family Program FHA Aa-1/AA+ 5.450 06/01/27 490,000 464,736
MT Board of Regents (Univ. of MT) Fac. Impvt. Rev. MBIA Aaa/AAA 5.000 05/15/21 650,000 591,318
MT Board of Regents (Univ. of MT) Fac. Impvt. Rev. MBIA Aaa/AAA 5.000 05/15/17 600,000 559,470
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/12 250,000 257,915
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.500 12/01/14 500,000 510,225
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 5.500 12/01/31 2,000,000 1,826,840
MT Hgr. Educ. Student Assistance Corp. Rev. A/NR 6.400 12/01/32 1,250,000 1,231,312
MT Hlth. Facs. Auth. (Big Horn Hosp. - Hardin) Rev. A/NR 5.100 02/01/18 300,000 270,048
MT Hlth. Facs. Auth. (Billings Clinic Deaconess) Rev. Aaa/AAA 5.250 02/15/20 1,200,000 1,118,976
MT Hlth. Facs. Auth. (Bozeman Deaconess) Rev. Ref. NR/A+ 5.750 06/01/08 100,000 100,252
MT Hlth. Facs. Auth. (Kalispell Regl. Hosp.) AMBAC Aaa/AAA 5.000 07/01/18 250,000 228,748
MT Hlth. Facs. Auth. (Bozeman Deaconess) Rev. Ref. NR/A+ 5.000 06/01/18 1,500,000 1,355,355
MT Hlth. Facs. Auth. (Lewis & Clark Nursing Home) Rev. A/NR 5.100 02/01/18 350,000 314,346
MT Hlth. Facs. Auth. (Lewis & Clark Office Proj.) Rev. A/NR 5.100 02/01/18 150,000 134,720
MT Hlth. Facs. Auth. (Master Loan Program) Rev. A/NR 6.400 10/01/14 450,000 462,614
MT Hlth. Facs. Auth. (Missoula Community Medl. Ctr.) Rev. NR/BBB- 6.375 06/01/18 2,830,000 2,845,395
MT Hlth. Facs. Auth. (Northern MT Care Ctr. - Havre) Rev. Baa-3/NR 6.350 09/01/15 1,000,000 1,002,820
MT Hlth. Facs. Auth. (Prerelease Ctr.) Rev. NR/BBB+ 5.600 10/01/17 750,000 711,638
MT Hlth. Facs. Auth. (Providence Services) MBIA Aaa/AAA 5.375 12/01/25 2,800,000 2,626,204
MT Hlth. Facs. Auth. (Providence Services) MBIA Aaa/AAA 5.450 12/01/26 100,000 94,038
MT Hlth. Facs. Auth. (Sisters of Charity) Rev. MBIA Aaa/AAA 5.000 12/01/24 2,620,000 2,320,062
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. Aaa/NR 5.000 06/01/18 1,340,000 1,223,876
MT Hlth. Facs. Auth. (State Hospital) Hlth. Care Rev. Aaa/NR 5.000 06/01/22 1,525,000 1,357,799
MT Hlth. Facs. Auth. (Toole Cty., Marias Heritage Project) NR/NR 6.375 11/01/22 200,000 189,644
MT Hlth. Facs. Auth. (Toole Cty., Marias Heritage Project) NR/NR 6.500 11/01/27 285,000 268,775
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.300 06/01/14 500,000 519,155
MT State Hlth. Facs. Auth. (MT Devl. Ctr.) Rev. A/NR 6.400 06/01/19 930,000 939,560
MT State Univ. Rev. MBIA Aaa/AAA 5.250 11/15/13 1,165,000 1,128,128
*MT State Univ. Rev. MBIA Aaa/AAA 5.625 11/15/25 1,000,000 960,860
MT State Univ. Rev. MBIA Aaa/AAA 5.375 11/15/21 500,000 474,910
Phillips Cty., MT Eastern School Dist. #14 School Bldg. G.O. Aaa/AAA 5.600 07/01/16 155,000 152,297
Phillips Cty., MT Eastern School Dist. #14 School Bldg. G.O. Aaa/AAA 5.600 07/01/15 145,000 141,985
Phillips Cty., MT Eastern School Dist. #14 School Bldg. G.O. Aaa/AAA 5.600 07/01/17 165,000 160,913
Phillips Cty., MT High School Dist. #A School Bldg. G.O. Aaa/AAA 5.600 07/01/15 290,000 286,592
*Richland Cty., MT (MDU) Pollution Control Rev. FGIC Aaa/AAA 6.650 06/01/22 600,000 627,462
-----------
TOTAL MONTANA MUNICIPAL BONDS (COST: $61,063,859) $58,670,226
-----------
SHORT-TERM SECURITIES (2.5%)
Federated Tax-Free Trust 73 $ 496,553
Federated Intermediate Municipal Trust 78 991,080
-----------
TOTAL SHORT-TERM SECURITIES (COST: $1,496,553) $ 1,487,633
-----------
TOTAL INVESTMENTS IN SECURITIES (COST: $62,560,412 ) $60,157,859
OTHER ASSETS LESS LIABILITIES 334,171
-----------
NET ASSETS $60,492,030
===========
</TABLE>
[FN]
*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.
</FN>
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1999
Statement of Assets and Liabilities December 31, 1999
- -----------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost: $62,560,412) $ 60,157,859
Receivable for fund shares sold 58
Accrued dividends receivable 6,019
Accrued interest receivable 646,911
Prepaid expenses 2,891
--------------
Total Assets $ 60,813,738
--------------
LIABILITIES
Payable for fund shares redeemed $ 2,125
Dividends payable 254,440
Accrued expenses 65,143
--------------
Total Liabilities $ 321,708
--------------
NET ASSETS $ 60,492,030
==============
Net assets are represented by:
Capital stock outstanding, at par $ 6,465
Additional paid-in capital 63,834,850
Accumulated undistributed net realized gain (loss) on investments (946,732)
Unrealized depreciation on investments (2,402,553)
--------------
Total amount representing net assets applicable to
6,464,834 outstanding shares of $.001 par value
common stock (200,000,000 shares authorized) $ 60,492,030
==============
Net asset value per share $ 9.36
==============
Statement of Operations for the year ended December 31, 1999
- ------------------------------------------------------------
INVESTMENT INCOME
Interest $ 3,397,745
Dividends 50,499
---------------
Total Investment Income $ 3,448,244
---------------
EXPENSES
Investment advisory fees $ 372,174
Distribution fees (12b-1) 465,217
Transfer agent fees 72,958
Accounting service fees 53,845
Custodian fees 9,330
Professional fees 13,804
Reports to shareholders 4,575
Directors fees 4,462
Transfer agent out of pockets 8,657
License, fees, and registrations 1,235
Insurance expense 4,282
---------------
Total Expenses $ 1,010,539
Less expenses waived or absorbed
by the Fund's manager (204,163)
---------------
Total Net Expenses $ 806,376
---------------
NET INVESTMENT INCOME $ 2,641,868
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES
Net realized gain (loss) from:
Investment transactions $ (176,650)
Futures transactions 1,056,283
Net change in unrealized appreciation (depreciation) of:
Investments (4,887,351)
Futures (178,023)
---------------
Net Realized And Unrealized Gain (Loss) on Investments
and Futures $ (4,185,741)
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,543,873)
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Financial Statements December 31, 1999
Statement of Changes in Net Assets
For the year ended December 31, 1999, and the year ended December 31, 1998
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
December 31, 1999 December 31,1998
------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income $ 2,641,868 $ 2,273,282
Net realized gain (loss) on investment and futures transactions 879,633 (880,618)
Net change in unrealized appreciation (depreciation) on investments
and futures (5,065,374) 563,938
------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Operations $ (1,543,873) $ 1,956,602
------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ($.42 and $.42 per share,
respectively) $ (2,641,868) $ (2,273,282)
Return of capital distributions ($.05 and $.05 per share, respectively) (310,145) (272,297)
Distributions from net realized gain on investment
and futures transactions 0 0
------------------------------------------------
Total Dividends and Distributions $ (2,952,013) $ (2,545,579)
------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares $ 11,085,486 $ 13,684,445
Proceeds from reinvested dividends 1,867,130 1,658,612
Cost of shares redeemed (6,843,552) (3,624,331)
------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital
Share Transactions $ 6,109,064 $ 11,718,726
------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS $ 1,613,178 $ 11,129,749
NET ASSETS, BEGINNING OF PERIOD 58,878,852 47,749,103
------------------------------------------------
NET ASSETS, END OF PERIOD $ 60,492,030 $ 58,878,852
================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements December 31, 1999
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 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 Directors and includes 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, 1999, a
net capital loss carryforward totaling $946,732, 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.
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, 1999, there were 200,000,000 shares of $.001 par authorized;
6,464,834 and 5,857,896 were outstanding at December 31, 1999 and December 31,
1998, respectively.
Transactions in capital shares were as follows:
Shares
--------------------------------------
For the Year For the Year
Ended Ended
December 31, 1999 December 31, 1998
---------------------------------------
Shares sold 1,121,083 1,353,606
Shares issued on reinvestment of dividends 190,311 164,173
Shares redeemed (704,456) (359,336)
---------------------------------------
Net increase (decrease) 606,938 1,158,443
=======================================
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 $323,083 of investment
advisory fees after partial waiver for the year ended December 31, 1999. The
Fund has a payable to ND Money Management, Inc. of $20,340 at December 31,
1999 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 $310,145 of 12b-1 fee expenses after partial
waiver for the year ended December 31, 1999. The Fund has a payable to
Capital of $25,379 at December 31, 1999 for 12b-1 fees.
The Fund has engaged ND Capital, Inc. as agent for the purchase of certain
investment securities. For the year ended December 31, 1999, no
commissions were earned by ND Capital, Inc.
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 $72,958 of transfer agency fees
for the year ended December 31, 1999. The Fund has a payable to ND Resources,
Inc. of $6,000 at December 31, 1999 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 $53,845 of accounting service fees for the
year ended December 31, 1999. The Fund has a payable to ND Resources, Inc.
of $4,461 at December 31, 1999 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 $11,417,321, and $5,383,025,
respectively, for the year ended December 31, 1999.
Note 6. INVESTMENT IN SECURITIES
At December 31, 1999, the aggregate cost of securities for federal income
tax purposes was $62,560,412, and the net unrealized depreciation of
investments based on the cost was $2,402,553, which is comprised of $205,555
aggregate gross unrealized appreciation and $2,608,108 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, 1999 31, 1998 31, 1997 31, 1996 31, 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.05 $ 10.16 $ 10.07 $ 10.04 $ 9.39
-------------------------------------------------------------------
Income from Investment Operations:
Net investment income $ .42 $ .42 $ .46 $ .48 $ .51
Net realized and unrealized gain
(loss) on investment and futures
transactions (.64) (.06) .13 .06 .67
-------------------------------------------------------------------
Total Income (Loss) From
Investment Operations $ (.22) $ .36 $ .59 $ .54 $ 1.18
-------------------------------------------------------------------
Less Distributions:
Dividends from net investment
Income $ (.42) $ (.42) $ (.46) $ (.48) $ (.51)
Return of capital distributions (.05) (.05) (.04) (.03) (.02)
Distributions from net realized
Gains .00 .00 .00 .00 .00
-------------------------------------------------------------------
Total Distributions $ (.47) $ (.47) $ (.50) $ (.51) $ (.53)
-------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.36 $ 10.05 $ 10.16 $ 10.07 $ 10.04
===================================================================
Total Return (2.32%)(A) 3.66%(A) 5.96%(A) 5.52%(A) 12.85%(A)
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $ 60,492 $ 58,879 $ 47,749 $ 34,803 $ 24,055
Ratio of net expenses (after
expense assumption) to average
net assets 1.30%(B) 1.30%(B) 1.17%(B) 0.96%(B) 0.66%(B)
Ratio of net investment income to
average net assets 4.26% 4.18% 4.51% 4.76% 5.11%
Portfolio turnover rate 8.94% 3.65% 7.91% 7.12% 7.39%
</TABLE>
[FN]
(A) Excludes contingent deferred sales charge of 4%.
(B) During the periods indicated above, ND Holdings, Inc. assumed/waived
expenses of $204,163, $177,054, $60,969, $98,321, and $99,757. If the
expenses had not been assumed/waived, the annualized ratio of total expenses
to average net assets would have been 1.63%, 1.63%, 1.32%, 1.29%, and 1.22%
respectively.
</FN>
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, 1999, 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, 1999, 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, 1999, 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, 2000
