<PAGE> 1
Registration No. 2-64233
(under the Securities Act
of 1933)
Registration No. 811-2918
(under the Investment
Company Act of 1940)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 36 ( X )
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 37 ( X )
(Check appropriate box or boxes)
DUPREE MUTUAL FUNDS
-------------------
(Exact Name of Registrant as Specified in Charter)
125 South Mill Street, Vine Center, Suite 100
---------------------------------------------
Lexington, Kentucky 40507
-------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (606) 254-7741
-----------------------------------------------------------------
THOMAS P. DUPREE, SR.
Dupree Investment Advisers, Inc.
125 South Mill Street, Vine Center, Suite 100
Lexington, Kentucky 40507
-------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Continuous
--------------------------------------------------------
It is proposed that this filing will become effective
(check appropriate box)
immediately upon filing pursuant to paragraph (b)
- -----
X on November 1, 1996 pursuant to paragraph (b)
- -----
60 days after filing pursuant to paragraph (a) (1)
- -----
on _________pursuant to paragraph (a) (1)
- -----
75 days after filing pursuant to paragraph (a) (2)
- -----
on _________pursuant to paragraph (a) (s)
- ----- of rule 485
Dupree Mutual Funds has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. On August 2, 1996, registrant filed a Rule 24f-2 Notice for the fiscal
year ended June 30, 1996.
<PAGE> 2
Notes rated at the time of purchase within the three highest grades assigned by
Moody's (MIG 1, MIG 2, MIG 3); and bonds and notes not rated by Moody's or S&P
within the grades specified above, but secured by the full faith and credit of
the United States government (e.g., refunded or defeased bonds secured by United
States Treasury Bills or Notes).
No more than 20% of the value of our total assets in any of the municipal bond
series will be invested in securities which are not rated. The Trust will not
purchase securities which in the opinion of the Investment Adviser would not
have been rated in one of the grades specified above. In addition, our
Investment Adviser will make its own evaluation of each security it selects for
each portfolio and will continue to evaluate each portfolio security so long as
we hold it.
As an additional matter of fundamental policy, except as indicated below, the
only securities we will purchase for the municipal bond series are those
producing income exempt from both Federal and State income taxes in the states
where shares of the series are offered, though ad valorem taxes may be due in
some states.
The investment policies may not be changed without approval of the holders of a
majority of the outstanding shares representing each series. The only exception
to the policies previously described is that we may temporarily invest up to 50%
of the value of our total assets in certain taxable obligations when, in the
judgment of our Investment Adviser, abnormal market conditions make it
advantageous to assume a defensive posture in taxable obligations. We also
reserve the right to hold such cash reserves as the Investment Adviser deems
necessary for temporary defensive purposes.
The taxable obligations and cash equivalents in which we may invest on a
temporary basis include obligations of the U.S. Government and its agencies and
instrumentalities; certificates of deposit, banker's acceptances and other
short-term debt obligations of United States and Canadian banks with total
assets of at least $1,000,000,000; commercial paper rated A-2 or better by S&P
or Prime-2 or better by Moody's; and repurchase agreements relating to an
underlying security in which we are authorized to invest.
Intermediate Government Bond Series
The Intermediate Government Bond Series has an investment objective of realizing
the highest rate of current income without undue risk to principal by investing
at least 65% of the value of our total assets in a professionally managed
non-diversified portfolio of bonds: 1) issued by the U.S. Government such as
U.S. Treasury Bonds; 2) issued by agencies or instrumentalities of the U.S.
Government such as, but not limited to, obligations of the Federal Farm Credit
Banks, the Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Bank. The remaining assets are
invested in bank accounts fully insured by the FDIC or collateralized by 1) and
2); repurchase agreements fully collateralized by 1) and 2); and U.S. Treasury
or Agency Notes and Bills. The foregoing types of securities are described in
the "Statement of Additional Information." The dollar weighted average maturity
of the portfolio will be 3-10 years to produce minimal fluctuation in principal.
There can be no assurance that the objectives of the series will be realized.
Investors should recognize that, in periods of declining interest rates, the
series yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates, the yield of the series will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the series from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of the
series' portfolio, thereby reducing the current yield of the series. In periods
of rising interest rates, the opposite can be true.
Borrowing of Money
Each series permits borrowing money from banks as a temporary measure in order
to pay redeeming shareholders or to satisfy purchase commitments, but such
borrowings may not be in excess of 5% of the value of the assets of the affected
series.
<PAGE> 3
Asset Composition
The weighted average ratings of the securities held by the Trust on June 30,
1996, the ending date of the fiscal year were:
<TABLE>
<CAPTION>
Aaa/AAA Aa/AA A/A Baa/BBB NR(total)
<S> <C> <C> <C> <C> <C>
Municipal Bonds
Kentucky Tax-Free
Income Series 39.69% 13.89% 38.07% 4.55% 3.80%
Kentucky Tax-Free
Short-to-Medium Series 34.42 22.01 39.22 2.72 1.63
North Carolina Tax-Free
Income Series 67.85 21.16 10.99 .0 .0
North Carolina Tax-Free
Short-to-Medium Series 55.45 24.75 18.85 .0 .95
Tennessee Tax-Free
Income Series 33.15 35.54 26.87 3.80 .64
Tennessee Tax-Free
Short-to-Medium Series 44.90 36.00 18.68 .42 .0
Government Bonds
Intermediate Government
Bond Series 100
</TABLE>
The Board of Trustees of the Trust, acting upon information furnished by the
Investment Adviser, has determined that the unrated bonds held by each series
were comparable to rated bonds in the following categories:
<TABLE>
<CAPTION>
Comparable To: Aaa/AAA Aa/AA A/A Baa/BBB
<S> <C> <C> <C> <C>
Kentucky Tax-Free
Income Series 3.80%
Kentucky Tax-Free
Short-to-Medium Series 1.63
North Carolina Tax-Free
Short-to-Medium Series .95
Tennessee Tax-Free
Income Series .64
</TABLE>
MANAGEMENT OF THE TRUST
Trustees
The Trustees of the Trust consist of six individuals, four of whom are not
"interested persons" of the Trust as defined in the Investment Company Act of
1940. The Trustees of the Trust are responsible for the overall supervision of
the operations of the Trust and perform the various duties imposed upon the
directors or trustees of investment companies by the Investment Company Act of
1940. The Trustees of the Trust are:
Thomas P. Dupree, Sr., Chairman of the Board of Dupree & Company, Inc. and
Dupree Investment Advisers, Inc.*
Fred L. Dupree, Jr., Vice President, Secretary, Treasurer and Director of Dupree
& Company, Inc. and Dupree Investment Advisers, Inc.*
Lucy A. Breathitt, Alexander Farms, farming; Kentucky Horse Park Foundation
Board; Kentucky Horse Park Museum Board, Kentucky State Nature Preserves
Commission.
<PAGE> 4
William A. Combs, Jr., Secretary, Treasurer, Director, Freedom Dodge, Lexington,
KY and Dana Motor Company, Cincinnati, Ohio, auto dealerships; Partner,
Ellerslie Realty, Inc., Forkland Development Co., and Lexland, Lexington, KY.
Robert L. Maddox, Member, Wyatt, Tarrant & Combs, Attorneys, Louisville, KY.
William S. Patterson, President, CEO, Cumberland Surety Insurance Co.,
Lexington, KY.
*Thomas P. Dupree, Sr. and Fred L. Dupree, Jr. are "interested persons" of the
Trust's Investment Adviser and of the Trust within the meaning of Section
2(a)(19) of the Investment Company Act of 1940 by virtue of their officership,
directorship and/or employment with Dupree Investment Advisers, Inc. Dupree
Investment Advisers, Inc. also serves as the Trust's Transfer Agent. The
other Trustees are the non-interested Trustees of the Trust.
Except as otherwise noted, each individual has held the office indicated, or
other offices in the same company, for the last five years.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual From Trust and
Name of Person, Compensation As Part of Benefits Upon Trust Complex
Position From Trust Trust Expenses Retirement Paid to Trustees
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas P. Dupree, Sr. -0- None - No Pension None -0-
President, Chairman, or Retirement Plan
Trustee
Fred L. Dupree, Jr. -0- None - No Pension None -0-
Vice President, Secretary, or Retirement Plan
Treasurer, Trustee
Lucy A. Breathitt* -0- None-No Pension None -0-
Trustee or Retirement Plan
William A. Combs, Jr. $12,000 None - No Pension None $12,000
Trustee or Retirement Plan
Robert L. Maddox $12,000 None - No Pension None $12,000
Trustee or Retirement Plan
William S. Patterson $12,000 None - No Pension None $12,000
Trustee or Retirement Plan
<FN>
*New Trustee as of October 30, 1996
</TABLE>
Investment Adviser and Advisory Agreements
Our investment activities are managed by Dupree Investment Advisers, Inc., P.O.
Box 1149 Lexington, Kentucky 40589-1149. The firm is a Kentucky corporation
formed in 1986 as a wholly owned subsidiary of Dupree & Company, Inc., which was
formed in 1962 to continue a business founded in 1941. Dupree Investment
Advisers, Inc. also serves as Transfer Agent.
<PAGE> 5
Dupree Investment Advisers, Inc., may at its sole cost and expense, enter into
sub-shareholder servicing agreements with commercial banks, investment advisers,
or other entities to provide assistance in maintaining books, accounts and
records of shareholders.
Dupree Investment Advisers, Inc. serves as the Investment Adviser for each of
our seven series pursuant to separate Investment Advisory Agreements with each
series. The dates of these agreements are as follows: Kentucky Tax-Free Income
Series (November 1, 1989), Kentucky Tax-Free Short-to-Medium Series (November 1,
1989), Intermediate Government Bond Series (November 1, 1993), Tennessee
Tax-Free Income Series (November 1, 1993) Tennessee Tax-Free Short-to-Medium
Series (November 1, 1994), North Carolina Tax-Free Income Series (November 1,
1995), and North Carolina Tax-Free Short-to-Medium Series (November 1, 1995).
Each agreement will continue in effect until October 31, 1997 and may be
continued thereafter for annual periods if renewed. Subject to the direction of
the Trustees, Dupree Investment Advisers is responsible for the actual
management of the Trust's portfolios. The compensation paid to Dupree Investment
Advisers as presented on page 3 is inclusive of certain administrative services
and provision of office space, facilities, equipment and personnel for
management of the Trust. The compensation paid to Dupree Investment Advisers
pursuant to the Investment Advisory Agreements is a percentage of the daily net
assets of each series as follows:
<TABLE>
<CAPTION>
Range of Total Assets 100,000,001-
(in dollars) $0-100,000,000 $150,000,000 $150,000,001+
<S> <C> <C> <C>
Kentucky Tax-Free Income Series .50 of 1% .45 of 1% .40 of 1%
Kentucky Tax-Free Short-to-Medium Series .50 of 1% .45 of 1% .40 of 1%
North Carolina Tax-Free Income Series .50 of 1% .45 of 1% .40 of 1%
North Carolina Tax-Free Short-to-Medium Series .50 of 1% .45 of 1% .40 of 1%
Tennessee Tax-Free Income Series .50 of 1% .45 of 1% .40 of 1%
Tennessee Tax-Free Short-to-Medium Series .50 of 1% .45 of 1% .40 of 1%
Intermediate Government Bond Series .20 of 1% .20 of 1% .20 of 1%
</TABLE>
Dupree Investment Advisers has reserved the right to voluntarily subsidize any
series of the Trust at its sole option.
Indiana and Texas limit annual expenses (exclusive of interest, taxes, brokerage
commissions and extraordinary expenses) as follows: 1.5% of the first
$30,000,000 in net assets and 1% of any additional net assets for Indiana; and
2% of the first $10,000,000 of average net assets, 1.5% of the next $20,000,000
of average net assets and 1% of the remaining average net assets for Texas.
Fund Portfolio Manager
The person primarily responsible for the day-to-day management of all series of
the Trust is William T. Griggs II, President of the Investment Advisor. Mr.
Griggs has been Portfolio Manager since 1989.
Determining Net Asset Value
The price used when you buy or sell shares in a series is the next net asset
value computed after we receive your order in proper form. The net asset value
per share of each series is determined separately at the close of trading on the
New York Stock Exchange each day the Exchange is open for trading by dividing
the total value of the assets of a series, minus liabilities, by the total
number of shares outstanding. The value of your investment in any of our series
is not reduced by a sales charge or commission.
The securities in which we invest are traded primarily in the over-the-counter
market. We value securities for which representative price quotations are
current and readily available at the mean between the quoted bid and asked
prices. If price quotations are not readily available, or if we believe that
available quotations are not current or representative, we value securities at
prices we believe will best reflect the fair value. In such cases, and in the
case of other assets, fair value is determined in good faith in accordance with
procedures
<PAGE> 6
approved in advance by our Board of Trustees, consistently applied by or under
the supervision of our officers, and monitored by the Board on an ongoing basis.
BUYING SHARES
Our goal is to make doing business with us as easy as possible. You can buy
shares at the next net asset value computed after we receive your investment in
proper form as described below. There is no sales charge or load.
Terms of Offering
If you send us a check which does not clear, we may cancel your order and hold
you responsible for any loss which we have incurred. We may recover our loss by
redeeming shares held in your account, and we may prohibit or restrict you from
placing future orders.
We retain the right to reject any order, and to raise or lower the minimum
investment size for any persons or class of persons. An order to purchase shares
is not binding on us until confirmed in writing by the Transfer Agent.
Initial Investment
Your initial and subsequent investments need only be $100.00 for any of our
series.
By Wire
If this is an initial investment you must first call us to tell us the
following:
(Y) How the account is to be registered
(Y) Name of series in which you wish to invest
(Y) Your address
(Y) Your tax identification number
(Y) Amount being wired
(Y) Name of wiring bank
Our wire instructions are directed to Star Bank, Cincinnati, Ohio as follows:
Star Bank ABA # 0420-0001-3
Kentucky Tax-Free Income Series #483-622-098
Kentucky Tax-Free Short-to-Medium Series #483-622-106
North Carolina Tax-Free Income Series #483-622-338
North Carolina Tax-Free Short-to-Medium Series #483-622-346
Tennessee Tax-Free Income Series #483-622-122
Tennessee Tax-Free Short-to-Medium Series #483-622-130
Intermediate Government Bond Series #483-622-148
If you are adding to an existing account please call us with your name and
account number.
By Mail
Make your check payable to the series you want to invest in and send your check
to:
Dupree Mutual Funds
P.O. Box 1149
Lexington, KY 40589-1149
<PAGE> 7
Along with one of the following:
*A completed new account form (if new account)
*The detachable stub which you will find at the bottom of your most
recent account statement
*A letter specifying the account number and series
Automatic Withdrawal from Your Checking Account
Once your account is open, you may make investments automatically by authorizing
Dupree Mutual Funds to draw on your bank account. Please call us at the phone
number on page 24 for more information.
Individual Retirement Accounts
Shareholders of the Intermediate Government Bond Series may establish Individual
Retirement Accounts. Please contact us at the number on page 24 for more
information.
SELLING SHARES
You may sell all or part of the shares in your account at any time without any
penalties or sales commissions. To do so, simply use one of the methods
described below. We will not require a signature guarantee (but reserve the
right to do so); however, on your account application, you will be asked to
indemnify and hold harmless the Trust, the Transfer Agent and their officers,
agents and employees, from losses, claims, expenses and liabilities based on
actions taken as the result of your instructions. The Trust will utilize
reasonable procedures, such as recording a telephone redemption request or
making inquiries of information which should only be known to the shareholder
and the Trust, to confirm that instructions communicated by telephone or in
writing are genuine. If reasonable procedures are followed by the Trust, it will
not be liable for losses due to unauthorized or fraudulent telephone
instructions. The Securities and Exchange Commission is currently considering
the propriety of the requirement of indemnification and hold harmless
provisions.
By Telephone
In Lexington (606) 254-7741
Toll Free National Number (800) 866-0614
In North Carolina (800) 284-2562
All accounts will automatically receive telephone redemption privileges unless
indicated otherwise on the initial application form. We will mail or wire the
money only to the address or bank account previously filed with us. Changes to
any redemption instructions must be made in writing and signed by all owners.
The telephone cannot be used to redeem shares for which you hold certificates of
beneficial interest or which were purchased by mail within the past 30 days.
By Mail
You must send us a written request for redemption, signed by each registered
holder exactly as the shares are registered along with (if applicable):
* Any certificates of beneficial interest
* Documents required by Corporations, Executors, Administrators, Trustees
and Guardians.
By Check
Shareholders of each of the Short-to-Medium Series, and the Intermediate
Government Bond Series may redeem shares by check. In order to arrange for
redemption by check, a check writing privilege form must be completed or call us
at the phone number on page 24. Checks may not be used to close an account.
Checks may not be presented for payment over-the-counter at the clearing bank.
<PAGE> 8
<TABLE>
<CAPTION>
Daily
Check limits Minimum Maximum CHECKING WRITING CHARGES
<S> <C> <C> <C>
KY Short-to-Medium Series $500.00 $25,000 Share Redemption: NONE
NC Short-to-Medium Series $500.00 $25,000 Checks: NONE
TN Short-to-Medium Series $500.00 $25,000 Insufficient Funds: $17.00
Government Bond Series $500.00 none Stop Payment: $9.00
</TABLE>
Payment of Redemption Proceeds
The Transfer Agent will normally mail a check or wire redemption proceeds the
business day following the receipt of necessary documents in required form. In
order to receive proceeds by wire the redeeming amount must be at least $500.00.
If the Custodian imposes a wire charge upon the Transfer Agent, the Transfer
Agent may deduct the wire charge from the proceeds. If charged, the current
amount of the charge would be $10.00. Your own bank may impose a wire charge on
your account to which the funds are wired.
We reserve the right on all redemptions, including redemptions by writing a
check in any of the Short-to-Medium Series or Intermediate Government Bond
Series, to delay payment seven days if to do otherwise would negatively affect
existing shareholders.
Shares redeemed to close an account will earn dividends through the date of
redemption. In addition to the redemption proceeds, redeeming shareholders will
receive dividends declared but unpaid. If you redeem only a portion of your
shares, you will receive all dividends declared and unpaid on all your shares on
the next dividend payment date.
Redemption Price
The redemption price of shares redeemed will be their net asset value per share
as calculated in the first determination of net asset value after the Trust has
received all necessary documents in the form it requires.
Suspension of Redemption
We may suspend the right of redemption or postpone payment for more than seven
days for any period during which the New York Stock Exchange is closed, or the
Securities and Exchange Commission determines that trading on the Exchange is
restricted, or when there is an emergency as determined by the Commission as a
result of which it is not reasonably practicable for us to dispose of our
securities, or for such other period as the Commission may by order permit for
the protection of our shareholders.
Redemption by Trust
If your account balance falls below $100 as a result of shareholder redemption
and not simply market valuation change, we may redeem your shares and close out
your account. We will give you notice no earlier than the 15th of the month
following the month in which your account falls below $100 before we take any
action.
Transfer and Exchange of Shares
You may transfer your shares to another owner. You may exchange shares between
series offered in your state of residence without sales charge at the next
determination of net asset value; however, the Trust reserves the right to
reject any exchange in excess of $50,000 and to modify or terminate the exchange
privilege at any time only upon sixty (60) days written notice. An exchange is
treated for federal tax purposes as a redemption and purchase of shares and may
result in the realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged. No representation is made as to the
deductibility of any such loss. The Transfer Agent will provide you with
information about the documents required.
Withdrawal Plan
You may withdraw fixed or variable amounts from your account at regular
intervals. Once begun, a withdrawal plan may be discontinued at any time without
penalty.
<PAGE> 9
DIVIDENDS
Generally we declare dividends separately for each series each business day. The
Kentucky, North Carolina and Tennessee Income Series pay such dividends as of
the last business day of each quarter. The Kentucky, North Carolina and
Tennessee Short-to-Medium Series and the Intermediate Government Bond Series pay
such dividends as of the last business day of each month. If no other business
day(s) intervene between a weekend or holiday on which the New York Stock
Exchange is closed, then dividends will be paid on the second to last business
day of the quarter (Income Series) or month (Short-to-Medium Series and
Intermediate Government Bond Series).
The Trustees have the authority to change dividend payment dates. Net investment
income consists of all interest income accrued on portfolio securities less all
expenses. Capital gains, if any, will normally be distributed between October 31
and January 31 in order to comply with federal income tax regulations. See
Statement of Additional Information. Income dividends and capital gains
distributions will be paid in additional shares by credit to the shareholder's
account or in cash at the shareholder's election. Any such election remains in
effect until the Transfer Agent receives written notice terminating the election
at least three days before the payment date of a dividend or distribution. The
available elections are indicated on the new account application form.
TAXES
Each series of the Trust has qualified as a "regulated investment company" (RIC)
under the Internal Revenue Code. Accordingly, we must distribute at least 90% of
our net income earned in any year. Ordinarily, the dividends we pay our
shareholders of the Municipal Bond series will be exempt interest dividends
which will be excludable from gross income for federal and state income tax
purposes. Dividends and distributions paid on the Government Bond Series
generally will be subject to federal and state income tax. Distributions of
income from investments in non-municipal securities or net short-term capital
gains or net long-term capital gains exceeding our capital loss carry forwards
(if any) will be taxable as more fully described in the "Statement of Additional
Information." Ad valorem tax may be imposed in some states.
You should consult your tax adviser about the effects of investments in the
Trust and recognize that the tax laws of the several states afford different tax
treatment to their residents.
PERFORMANCE CALCULATIONS
All yield figures are based on historical earnings and are not intended to
indicate future performance.
Average annual total returns are calculated for specified periods by finding
average annual compounded rates of return that will equate the initial
investment to the redeemable amount of the investment at the end of each period,
assuming the reinvestment of all dividends and other distributions and taking
into account all recurring and nonrecurring expenses. Total return may be
expressed either as a percentage or as a dollar amount.
Yield quotations are based on a 30 day period in accordance with S.E.C.
computation formulas as more fully described in the Statement of Additional
Information.
Taxable equivalent yield is the yield that an investor would have to earn in
order to equal a tax-free yield after the investor had paid federal and any
applicable state income and Ad Valorem taxes.
Fund Performance
The Annual Report of Dupree Mutual Funds contains a discussion and graphs
reflecting the performance of its series during the most recently completed
fiscal year. A copy of the Annual Report may be obtained by writing or calling
us at the numbers listed on page 24. Performance may also by judged by comparing
the
<PAGE> 10
series' performance to other mutual funds with comparable investment objectives
through various mutual fund or market indices or rankings such as those provided
by Barrons, Forbes, Fortune, Money Magazine and Morningstar. Periodically
information from these publications may be included in advertisements, sales
literature and reports to shareholders.
<PAGE> 11
HOW TO REACH US
DUPREE MUTUAL FUNDS
P.O. Box 1149
Lexington, KY 40589-1149
PHONE
(606) 254-7741
(800) 866-0614
INVESTMENT ADVISER
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Dupree Investment Advisers, Inc.
(d/b/a DIA Dupree Investment Advisers, Inc. in Texas)
P.O. Box 1149
Lexington, Kentucky 40589-1149
CUSTODIAN
Star Bank
425 Walnut Street, ML 6118
P.O. Box 1118
Cincinnati, Ohio 45201-118
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
201 East Main Street, Suite 1400
Lexington, Kentucky 40507
For Fiscal Year 1996
Ernst & Young, LLP
1300 Chiquita Center
Cincinnati, OH 45202
For Fiscal Year 1997
LEGAL COUNSEL
Darsie & Elste
P.O. Box 22219
Lexington, KY 40522
This prospectus omits certain information contained in the registration
statement filed with the Securities and Exchange Commission. Items of
information which are thus omitted may be obtained from the Securities and
Exchange Commission upon payment of the fee prescribed by the Rules and
Regulations of the Commission.
DUPREE MUTUAL FUNDS
A No-Load Fund
Prospectus, November 1, 1996
<PAGE> 12
DUPREE MUTUAL FUNDS
REGISTRATION STATEMENT ON FORM N-1A
CROSS-REFERENCE SHEET
Part A
Item No. Prospectus Caption
1 Cover Page
2 Dupree Mutual Funds - Summary
3 Financial Highlights
4 Organization of the Trust
5 Management of the Trust; Trust Expenses
6 Dividends; Taxes; Organization of the Trust
7 Buying Shares
8 Selling Shares
9 Not Applicable
Part B
Item No. Statement of Additional Information
10 Cover Page
11 Table of Contents
12 General Information and History
13 Investment Objectives and Policies; Portfolio Turnovers
14 Investment Adviser; Officers and Trustees
15 Not Applicable
16 Investment Adviser
17 Portfolios Transactions
18 Shares of Beneficial Interest
19 How to Purchase Shares; How to Redeem Shares;
How We Compute Our Yields
20 Tax Information
21 Not Applicable
22 How We Compute Our Yields
23 Financial Statements
<PAGE> 13
Prospectus
November 1, 1996
DUPREE MUTUAL FUNDS
P.O. Box 1149
Lexington, Kentucky 40589-1149
(606) 254-7741
(800) 866-0614
MUNICIPAL BOND FUNDS
Kentucky Tax-Free Income Series
Kentucky Tax-Free Short-to-Medium Series
North Carolina Tax-Free Income Series
North Carolina Tax-Free Short-to-Medium Series
Tennessee Tax-Free Income Series
Tennessee Tax-Free Short-to-Medium Series
GOVERNMENT BOND FUNDS
Intermediate Government Bond Series
This Prospectus is a concise statement of information about Dupree Mutual Funds
(the "Trust") that you should know before investing. This Prospectus should be
kept for future reference.
A statement containing additional information about the Trust, Dated November 1,
1996 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
writing or calling us at the address or phone number listed above. The Statement
of Additional Information is hereby incorporated by reference into this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Table of Contents
2 Dupree Mutual Funds Summary
3 Trust Expenses
5 Financial Highlights
12 Organization of the Trust
12 Investment Objectives
14 Investment Policies and Restrictions
16 Management of the Trust
18 Determining Net Asset Value
19 Buying Shares
20 Selling Shares
22 Dividends
22 Taxes
22 Performance Calculations
23 How to Reach Us
<PAGE> 14
SINGLE STATE MUNICIPAL BOND SERIES
Investors in our municipal bond series are investors seeking tax-free income
derived from municipal securities. The Kentucky, North Carolina and Tennessee
Tax-Free Income Series seek a steady flow of income but with greater share price
fluctuation. The Kentucky, North Carolina and Tennessee Tax-Free Short-to-Medium
Series offer less principal fluctuation, but with less yield. See "Investment
Objectives".
INTERMEDIATE GOVERNMENT BOND SERIES
Investors in our Intermediate Government Bond Series are seeking income derived
from securities of the U.S. Government and its agencies. The Intermediate
Government Bond Series should provide moderate principal fluctuation. See
"Investment Objectives."
MANAGER AND DISTRIBUTOR
Dupree Investment Advisers serves as Investment Adviser to each series of Dupree
Mutual Funds, a Kentucky Business Trust, offering one class of shares of
beneficial interest in seven distinct series. See "Manager and Distributor" for
more information.
PURCHASES AND REDEMPTIONS
The Trust has no sales load, no redemption fees and no exchange fees. The
minimum initial and subsequent investment amount is $100.00. See "Buying Shares"
for more information on how easy it is to invest. Shares are redeemable by mail
and wire in all series and by check in each of the Short-to-Medium Series
(Kentucky, North Carolina and Tennessee) and the Intermediate Government Bond
Series. If a shareholder elects to redeem shares by wire transfer, the
shareholder's own bank may impose a wire charge. If the Custodian imposes a wire
charge upon the Transfer Agent, this may be passed on to the shareholder. See
"Selling Shares."
FACTORS TO CONSIDER
An investment in our Trust, as with any mutual fund, includes risks that vary
depending upon the series' investment policies. Investment in any of the Single
State Municipal Bond series may involve greater risk than investment in a Fund
with a portfolio of municipal securities from throughout the country. This
additional risk is due to the possibility of an economic or political
development unique to a single state. There is no assurance that the investment
objective of any series will be achieved. A series' return and net asset value
will fluctuate.
<PAGE> 15
TRUST EXPENSES
Transaction and Operating Expense Table
<TABLE>
<CAPTION>
Kentucky Kentucky North North Tennessee Tennessee Intermediate
Tax-Free Tax-Free Carolina Carolina Tax-Free Tax-Free Government
Income Short-to Tax-Free Tax-Free Income Short-to Bond
Series Medium Income Short-to Series Medium Series
Series Series Medium Series
SHAREHOLDER TRANSACTION EXPENSES: Series
(as a percentage of offering price or redemption proceeds, where applicable)
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases NONE NONE NONE NONE NONE NONE NONE
Maximum Sales Load
Imposed on
Reinvested Dividends NONE NONE NONE NONE NONE NONE NONE
Deferred Sales Load NONE NONE NONE NONE NONE NONE NONE
Redemption Fees NONE NONE NONE NONE NONE NONE NONE
Exchange Fee NONE NONE NONE NONE NONE NONE NONE
ANNUAL TRUST OPERATING EXPENSES: (as a percentage of average net assets)
Management Fee
(after fee reimbursements) 0.443% 0.500% 0.00%* 0.00%* 0.00%* 0.00%* 0.00%*
12b-1 Fees NONE NONE NONE NONE NONE NONE NONE
Other expenses
(after fee reimbursements)
Transfer Agent 0.122 0.130 0.000 0.000 0.000 0.000 0.129
All other expenses 0.059 0.115 0.180 0.160 0.141 0.495 0.271
----- ----- ----- ----- ----- ----- -----
Total other expenses 0.181 0.245 0.180 0.160 0.397 0.495 0.400
----- ----- ----- ----- ----- ----- -----
Total fund operating expenses 0.624% 0.745% 0.180% 0.160% 0.538% 0.495% 0.400%
====== ====== ====== ====== ====== ====== ======
EXAMPLE:
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each period:
<S> <C> <C> <C> <C> <C> <C> <C>
1 year $7 $8 $2 $2 $6 $5 $4
3 years $21 $24 $6 $5 $18 $16 $13
5 years $36 $43 $10 $9 $31 $28 $23
10 years $80 $95 $24 $21 $69 $64 $52
</TABLE>
The purpose of this table is to help you understand the various costs and
expenses that you, as a shareholder, will bear directly or indirectly. Actual
expenses and returns on investment may be greater or lesser than those shown.
For further information concerning advisory fees, see the section entitled
Investment Adviser and Advisory Agreements. In addition, more complete
information on costs and expenses is found in the Statement of Additional
Information.
<PAGE> 16
Annual fund operating expenses (as a percentage of average net assets) are based
on actual amounts incurred for the fiscal year ended June 30, 1996.
*The Investment Adviser for each of the series may waive management fees and
assume and pay other operating expenses to reduce expenses which could be passed
on to the shareholders. For the year ended June 30, 1996, if the Investment
Adviser had not waived management fees and assumed or paid other operating
expenses, the following expenses would have been incurred by the two North
Carolina Series, the two Tennessee Series and the Intermediate Government Bond
Series:
<TABLE>
<CAPTION>
North North Tennessee Tennessee Intermediate
Carolina Carolina Tax-Free Tax-Free Government
Tax-Free Tax-Free Income Short-to Bond
Income Short-to Series Medium Series
Series Medium Series
Series
<S> <C> <C> <C> <C> <C>
Management Fee 0.500% 0.500% 0.500% 0.500% 0.200%
Other Expenses
Transfer Agent 0.150 0.150 0.150 0.150 0.150
All Other Expenses 1.820 1.130 0.246 0.540 0.271
----- ----- ----- ----- -----
Total Other Expenses 1.970 1.280 0.396 0.690 0.421
----- ----- ----- ----- -----
Total Fund Operating Expenses 2.47% 1.78% 0.896% 1.19% 0.621%
===== ===== ====== ===== ======
</TABLE>
<PAGE> 17
FINANCIAL HIGHLIGHTS
Kentucky Tax-Free Income Series
The financial highlights in the table below for each of the years in the period
ended June 30, 1996 have been audited by Coopers & Lybrand, L.L.P., independent
accountants. Financial statements for the year ended June 30, 1996 and the
independent accountants' report thereon are included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
For the Years Ended June 30:
1996 1995 1994 1993
------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
Beginning of year $ 7.29 $ 7.21 $ 7.60 $ 7.16
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .40 .40 .41 .43
Net gains or losses on
securities (both realized
and unrealized) .06 .13 (.34) .44
------- ------- ------- -------
Total from investment operations .46 .53 .07 .87
LESS DISTRIBUTIONS
Distributions (from capital gains) (.00) (.05) (.05) (.00)
Dividends (from net investment income) (.40) (.40) (.41) (.43)
------- ------- ------- -------
Total distributions (.40) (.45) (.46) (.43)
------- ------- ------- -------
Net asset value,
End of year $ 7.35 $ 7.29 $ 7.21 $ 7.60
======= ======= ======= =======
TOTAL RETURN 6.38% 6.90% .75% 12.45%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 295.0 $ 269.3 $ 257.2 $ 237.9
Shares outstanding, end of period 40.1 36.9 35.7 31.3
Ratio of expenses to average net assets .62% .63% .69% .67%
Ratio of net investment income to
average net assets 5.39% 5.60% 5.82% 5.79%
Portfolio turnover rate 4.29% 18.05% 30.53% 31.79%
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30:
1992 1991 1990 1989 1988 1987
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of year $ 6.87 $ 6.77 $ 6.76 $ 6.52 $ 6.59 $ 6.62
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .44 .45 .46 .47 .48 .50
Net gains or losses on
securities (both realized
and unrealized) .29 .10 .01 .24 (.07) (.03)
------- ------- ------- ------- ------- -------
Total from investment operations .73 .55 .47 .71 .41 .47
LESS DISTRIBUTIONS
Distributions (from capital gains) (.00) (.00) (.00) (.00) (.00) (.00)
Dividends (from net investment income) (.44) (.45) (.46) (.47) (.48) (.50)
------- ------- ------- ------- ------- -------
Total distributions (.44) (.45) (.46) (.47) (.48) (.50)
------- ------- ------- ------- ------- -------
Net asset value,
End of year $ 7.16 $ 6.87 $ 6.77 $ 6.76 $ 6.52 $ 6.59
======= ======= ======= ======= ======= =======
TOTAL RETURN 10.95% 8.43% 7.19% 11.32% 6.54% 7.13%
-------
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 169.3 $ 113.7 $ 87.6 $ 73.0 $ 60.4 $ 61.8
Shares outstanding, end of period 23.6 16.5 12.9 10.8 9.3 9.4
Ratio of expenses to average net assets .71% .75% .76% .78% .81% .79%**
Ratio of net investment income to
average net assets 6.28% 6.63% 6.82% 7.44% 7.40% 7.32%
Portfolio turnover rate 11.93% 18.08% 35.82% 43.70% 87.37% 54.43%
</TABLE>
**During this period the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement.
<PAGE> 18
FINANCIAL HIGHLIGHTS
Kentucky Tax-Free Short-to-Medium Series
The financial highlights in the table below for each of the years in the period
ended June 30, 1996 have been audited by Coopers & Lybrand, L.L.P., independent
accountants. Financial statements for the year ended June 30, 1996 and the
independent accountants' report thereon are included in the Statement of
Additional Information.
For the years ended June 30, 1996, 1995, 1994, 1993, 1992, 1991, 1990, and 1989,
and for the period September 15, 1987 (commencement of operations) to June 30,
1988:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value,
Beginning of year $ 5.18 $ 5.17 $ 5.29 $ 5.17 $ 5.05
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .21 .21 .21 .23 .26
Net gains or losses on
securities (both realized
and unrealized) .02 .02 (.12) .12 .12
------- ------- ------- ------- -------
Total from investment operations .23 .23 .09 .35 .38
LESS DISTRIBUTIONS
Distributions (from capital gains) (.00) (.01) (.00) (.00) (.00)
Dividends (from net investment income) (.21) (.21) (.21) (.23) (.26)
------- ------- ------- ------- -------
Total distributions (.21) (.22) (.21) (.23) (.26)
------- ------- ------- ------- -------
Net asset value,
End of year $ 5.20 $ 5.18 $ 5.17 $ 5.29 $ 5.17
======= ======= ======= ======= =======
TOTAL RETURN 4.51% 4.27% 1.71% 6.91% 7.67%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 66.6 $ 57.1 $ 69.6 $ 56.0 $ 34.2
Shares outstanding, end of period 12.8 11.0 13.5 10.6 6.6
Ratio of expenses to average net assets .75% .72% .72% .76%** .76%**
Ratio of net investment income to
average net assets 4.04% 4.00% 3.92% 4.37% 4.96%
Portfolio turnover rate 57.80% 4.07% 17.62% 22.89% 29.35%
</TABLE>
<TABLE>
<CAPTION>
1991 1990 1989 1988
<S> <C> <C> <C> <C>
Net asset value,
Beginning of year $ 4.99 $ 4.97 $ 5.00 $ 5.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .28 .29 .29 .20
Net gains or losses on
securities (both realized
and unrealized) .06 .02 (.03) .00
------- ------- ------- -------
Total from investment operations .34 .31 .26 .20
LESS DISTRIBUTIONS
Distributions (from capital gains) (.00) (.00) (.00) (.00)
Dividends (from net investment income) (.28) (.29) (.29) (.20)
------- ------- ------- -------
Total distributions (.28) (.29) (.29) (.20)
------- ------- ------- -------
Net asset value,
End of year $ 5.05 $ 4.99 $ 4.97 $ 5.00
======= ======= ======= =======
TOTAL RETURN 7.03% 6.36% 5.42% 5.53%
-------
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 14.0 $ 6.7 $ 7.3 $ 3.1
Shares outstanding, end of period 2.8 1.3 1.5 .6
Ratio of expenses to average net assets .76%** .76%** .75%** .75%**
Ratio of net investment income to
average net assets 5.58% 5.79% 5.88% 5.48%
Portfolio turnover rate 26.41% 57.61% 41.31% 103.35%
<FN>
**During these periods the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the years
ended June 30, 1993, 1992, 1991, 1990 , and 1989 the ratio of expenses to
average net assets without the reimbursement of expenses by the investment
adviser would have been .77%, .83%, .85%, .89%, and .92%, respectively, and
the ratio of net investment income to average net assets would have been
4.36%, 4.89%, 5.49%, 5.63%, and 5.71% respectively.
</TABLE>
<PAGE> 19
FINANCIAL HIGHLIGHTS
North Carolina Tax-Free Income Series
The financial highlights in the table below for the period ended June 30, 1996
have been audited by Coopers & Lybrand, L.L.P., independent accountants.
Financial statements for the period ended June 30, 1996 and the independent
accountants' report thereon are included in the Statement of Additional
Information.
For the period November 16, 1995 (commencement of operations) to June 30, 1996
1996
Net asset value,
Beginning of period $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .32
Net gains on
securities (both realized
and unrealized) (.12)
-----
Total from investment operations .20
LESS DISTRIBUTIONS
Dividends (from net investment income) (.32)
-------
Total distributions (.32)
-------
Net asset value,
End of year $ 9.88
======
TOTAL RETURN (SINCE INCEPTION) 3.23%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS)
Net assets, end of period $ 1.0
Shares outstanding, end of period .1
Ratio of expenses to average net assets .18%**(1)
Ratio of net investment income to
average net assets 3.27%(1)
Portfolio turnover rate 22.83%
[FN]
**During this period the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the 228
days ended June 30, 1996 the ratio of expenses to average net assets without
the reimbursement of expenses by the investment adviser would have been 2.47%,
and the ratio of net investment income to average net assets would have been
.98%.
(1)Annualized
<PAGE> 20
FINANCIAL HIGHLIGHTS
North Carolina Tax-Free Short-to-Medium Series
The financial highlights in the table below for the period ended June 30, 1996
have been audited by Coopers & Lybrand, L.L.P., independent accountants.
Financial statements for the period ended June 30, 1996 and the independent
accountants' report thereon are included in the Statement of Additional
Information.
For the period November 16, 1995 (commencement of operations) to June 30, 1996
<TABLE>
<CAPTION>
1996
<S> <C>
Net asset value,
Beginning of period $10.00
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .24
Net gains on
securities (both realized
and unrealized) (.01)
----
Total from investment operations .23
LESS DISTRIBUTIONS
Dividends (from net investment income) (.24)
------
Total distributions (.24)
------
Net asset value,
End of year $9.99
======
TOTAL RETURN (SINCE INCEPTION) 3.79%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS)
Net assets, end of period $1.2
Shares outstanding, end of period .1
Ratio of expenses to average net assets .16%**(1)
Ratio of net investment income to
average net assets 2.47%(1)
Portfolio turnover rate 17.18%
<FN>
**During this period the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the 228
days ended June 30, 1996 the ratio of expenses to average net assets without
the reimbursement of expenses by the investment adviser would have been 1.78%,
and the ratio of net investment income to average net assets would have been
.85%.
(1) Annualized
</TABLE>
<PAGE> 21
FINANCIAL HIGHLIGHTS
Tennessee Tax-Free Income Series
The financial highlights in the table below for each of the years in the period
ended June 30, 1996 have been audited by Coopers & Lybrand, L.L.P., independent
accountants. Financial statements for the year ended June 30, 1996 and the
independent accountants' report thereon are included in the Statement of
Additional Information.
For the year ended June 30, 1996, 1995 and
for the period December 20, 1993 (commencement of operations) to June 30, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net asset value,
Beginning of period $ 10.05 $ 9.51 $ 10.00
------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54 .54 .28
Net gains or losses on
securities (both realized
and unrealized) .12 .54 (.49)
------- ------- -------
Total from investment operations .66 1.08 (.21)
LESS DISTRIBUTIONS
Dividends (from net investment income) (.54) (.54) (.28)
------- ------- -------
Total distributions (.54) (.54) (.28)
------- ------- -------
Net asset value,
End of year $ 10.17 $ 10.05 $ 9.51
======= ======= =======
TOTAL RETURN 6.65% 11.65% (4.17)%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 8.0 $5.0 $.794
Shares outstanding, end of period .792 .500 .083
Ratio of expenses to average net assets .54%** .34%** .12%**(1)
Ratio of net investment income to
average net assets 5.27% 5.59% 2.83%(1)
Portfolio turnover rate 9.13% 6.84% 15.88%
<FN>
**During this period the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the years
ended June 30, 1996, 1995 and the period ended June 30, 1994 the ratio of
expenses to average net assets without the reimbursement of expenses by the
investment adviser would have been .90%, 1.16% and 4.01%, respectively, and
the ratio of net investment income to average net assets would have been
4.91%, 4.77% and (1.06)%, respectively.
1Annualized
</TABLE>
<PAGE> 22
FINANCIAL HIGHLIGHTS
Tennessee Tax-Free Short-to-Medium Series
The financial highlights in the table below for each of the years in the period
ended June 30, 1996 have been audited by Coopers & Lybrand, L.L.P., independent
accountants. Financial statements for the year ended June 30, 1996 and the
independent accountants' report thereon are included in the Statement of
Additional Information.
For the year ended June 30, 1996 and the period November 1, 1994
(commencement of operations) to June 30, 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net asset value,
Beginning of period $10.20 $10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .42 .28
Net gains on
securities (both realized
and unrealized) .05 .20
------ ------
Total from investment operations .47 .48
LESS DISTRIBUTIONS
Dividends (from net investment income) (.42) (.28)
------ ------
Total distributions (.42) (.28)
------ ------
Net asset value,
End of year $10.25 $10.20
====== ======
TOTAL RETURN 4.62% 7.41%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 2.4 $ 1.5
Shares outstanding, end of period .239 .150
Ratio of expenses to average net assets .50%** .28%**(1)
Ratio of net investment income to
average net assets 4.05% 2.80%(1)
Portfolio turnover rate 23.17% 0.71%
<FN>
**During these periods the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the year
ended June 30, 1996 and the period ended June 30, 1995, the ratio of expenses
to average net assets without the reimbursement of expenses by the investment
adviser would have been 1.19% and 2.05%, respectively, and the ratio of net
investment income to average net assets would have been 3.36% and 1.03%,
respectively.
(1) Annualized
</TABLE>
<PAGE> 23
FINANCIAL HIGHLIGHTS
Intermediate Government Bond Series
The financial highlights in the table below for each of the years in the period
ended June 30, 1996 have been audited by Coopers & Lybrand, L.L.P., independent
accountants. Financial statements for the year ended June 30, 1996 and the
independent accountants' report thereon are included in the Statement of
Additional Information.
For the years ended June 30, 1996, 1995 and 1994, and the period July 12, 1992
(commencement of operations) to June 30, 1993:
<TABLE>
<CAPTION>
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Net asset value,
Beginning of year $10.15 $ 9.65 $10.60 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .72 .69 .63 .59
Net gains or losses on
securities (both realized
and unrealized) (.30) .50 (.95) .60
------ ------ ------ ------
Total from investment operations .42 1.19 (.32) 1.19
LESS DISTRIBUTIONS
Dividends (from net investment income) (.72) (.69) (.63) (.59)
------ ------ ------ ------
Total distributions (.72) (.69) (.63) (.59)
------ ------ ------ ------
Net asset value,
End of year $ 9.85 $10.15 $ 9.65 $10.60
====== ====== ====== ======
TOTAL RETURN 4.15% 12.78% (3.32)% 12.64%
RATIOS/SUPPLEMENTAL DATA (IN MILLIONS):
Net assets, end of period $ 7.8 $ 7.7 $ 8.4 $ 5.9
Shares outstanding, end of period .8 .8 .9 .6
Ratio of expenses to average net assets .40%** .40%** .40%** .40%**(1)
Ratio of net investment income to
average net assets 7.11% 7.06% 6.00% 6.23%(1)
Portfolio turnover rate 33.89% 74.98% 23.08% 0.00%
<FN>
**During these periods the adviser reimbursed the fund a portion of the fees and
expenses in accordance with the investment advisory agreement. For the years
ended June 30, 1996, 1995, 1994 and 1993 the ratio of expenses to average net
assets without the reimbursement of expenses by the investment adviser would
have been .62%, .61%, .65% and 1.34%, respectively, and the ratio of net
investment income to average net assets would have been 6.89%, 6.85%, 5.75%
and 5.29%, respectively.
(1) Annualized
</TABLE>
<PAGE> 24
ORGANIZATION OF THE TRUST
Dupree Mutual Funds is a Kentucky Business Trust organized under the laws of the
Commonwealth of Kentucky on July 1, 1987. The Trust offers shares of beneficial
interest of separate series without par value.
Shares of seven series are being offered for sale:
Kentucky Tax-Free Income Series
Kentucky Tax-Free Short-to-Medium Series
North Carolina Tax-Free Income Series
North Carolina Tax-Free Short-to-Medium Series
Tennessee Tax-Free Income Series
Tennessee Tax-Free Short-to-Medium Series
Intermediate Government Bond Series
Each share has one vote. Fractional shares have proportionate voting rights and
participate pro-rata in dividends and distributions. Our shares have cumulative
voting rights for the election of Trustees. On matters affecting an individual
series, a separate vote of the series is required. Shareholders of a series are
not entitled to vote on any matter not affecting that series but requiring a
separate vote of the other series.
We are registered as a diversified, open-end investment company of the
management type under the Investment Company Act of 1940; however, each series
of the Trust may or may not be diversified. Our shares, which are offered
continuously, are registered for sale under the Securities Act of 1933. The
Kentucky, Tennessee, North Carolina Series and the Intermediate Government Bond
Series are qualified for sale in Kentucky, Florida, Indiana, and North Carolina
under the securities law of those states. The two Kentucky Series and the
Intermediate Government Bond Series are qualified for sale in Texas. The two
Tennessee Series and the Intermediate Government Bond Series are qualified for
sale in Tennessee. We offer and redeem our shares at current net asset value.
Investment Objectives
Our investment objective is to seek the highest level of income without undue
risk to principal. Of course, no mutual fund offered by us or anyone else can
guarantee that the investment objective will be met.
Single State Municipal Bond Series
All of our single state series, whatever their maturity range, have an
investment objective of realizing the highest level of tax-exempt income
available without undue risk to principal by investing in state specific
municipal securities. The interest earned on these securities, in the opinion of
bond counsel for the issuer, is exempt from federal and state taxation in the
state of issuance. In conformity with Guidelines of the Securities and Exchange
Commission, each single state series has a fundamental policy that during
periods of normal market conditions either (1) the series' assets will be
invested so that at least 80% of the income will be tax-exempt or (2) the series
will have at least 80% of its net assets invested in tax-exempt securities. In
addition, under normal market conditions, at least 65% of the value of each
series assets will be invested in municipal securities of the state identified
in the series name as described herein.
Yield on municipal securities is dependent on a variety of factors, including
the maturity and quality of the particular obligation, the size of the total
offering, conditions in the municipal securities markets and general monetary
and economic conditions. Generally, issues of shorter maturity and/or higher
quality pay lower yields than issues of longer maturity and/or lower quality.
The market values of municipal securities vary depending upon available yields
both in the municipal securities markets and in the short-term money
<PAGE> 25
markets. Therefore, the net asset values of our shares will change as interest
rates fluctuate, generally declining as interest rates rise and rising as
interest rates fall. The types of municipal securities and the general
characteristics of each type are described in the "Statement of Additional
Information".
The inherent risk associated with investment in municipal securities is that the
issuer might default. Payment on nearly all Kentucky municipal securities
depends upon revenue generated by the property financed by the securities; the
securities are not general obligations of the issuer. Payment on nearly all
North Carolina and Tennessee municipal securities are general obligations of the
issuer. In addition, the net asset value of our shares may be impacted by the
general economic situation in the country and/or within the states of Kentucky,
North Carolina and Tennessee. The limitation of our investments of each series
to a single state may involve greater risk than if we invested in municipal
securities throughout the country, due to the possibility of an economic or
political development which could uniquely affect the ability of issuers to meet
the debt obligations of the securities. The economies of Kentucky, North
Carolina and Tennessee are supported by agricultural products, coal,
manufacturing and service professions. A decline in the tobacco, equine or coal
market could affect these states in a manner different from the effect on most
other states. Potential federal regulation of the tobacco industry may impact
the tobacco industry in each of these states, though the degree of the impact
cannot be predicted with any definity.
The Kentucky non-agricultural economy is diversified as follows: 24% services,
24% wholesale and retail trade, 19% manufacturing, 18% government and 15% other.
Agriculture in Kentucky is well diversified among tobacco, corn, hogs, cattle,
other grains, equine, and truck crops. No single segment of the economy consists
of as much as one fourth of the overall State Domestic Product.
The North Carolina economy derives most of its income from three main sectors:
industry, agriculture and tourism in that order. Each of these sectors are well
diversified. Industry has a good balance between production of goods versus
services, with a slight edge to the services side. Agriculture is diversified
among tobacco, poultry, turkeys, fruits, vegetables and other livestock. Tourism
is concentrated in the far west and the coastal region. The U.S. military bases
in North Carolina constitute a significant part of the economy as well.
The Tennessee non-agricultural economy is diversified among the following
sectors: 23% manufacturing; 23% wholesale and retail trade; 22% services; 16%
government and 14% other. Agriculture in Tennessee is widely diversified among
livestock, poultry, fruit and vegetables production, as well as nursery
operations. Agriculture constitutes about one third of the overall economy.
The economies of Kentucky, North Carolina and Tennessee are of such
diversification that an economic decline in a single segment of a state's
economy would not necessarily lead to the non-payment of debt service on
municipal bonds. A national economic decline could impact the ability of
municipalities to pay debt service, if the decline impacted various industries
within each state.
Kentucky Tax-Free Income Series
This is a diversified fund of long-term maturity bonds, usually averaging 10
years or more, where a fairly level stream of income is important, though net
asset value per share can fluctuate considerably. The portfolio had a weighted
average maturity of 8.70 years as of June 30, 1996.
Kentucky Tax-Free Short-to-Medium Series
This is a non-diversified fund with a dollar weighted average maturity of two to
five years. The yield of this series will typically be lower than the Income
Series, but with less principal fluctuation. The portfolio had a weighted
average maturity of 3.96 years as of June 30, 1996. As a non-diversified series,
the Short-to-Medium Series may invest up to 50% of the series' total assets in
as few as two investments, with each of those investments comprising up to 25%
of the series' total assets. In this case, a default would produce a more
dramatic result as compared to a fully diversified fund.
<PAGE> 26
North Carolina Tax-Free Income Series
This is a non-diversified fund with a dollar weighted average maturity usually
averaging 10 years or more, where a fairly level stream of income is important,
though net asset value per share can fluctuate considerably. The portfolio had a
weighted average maturity of 15.04 years as of June 30, 1996. As a
non-diversified series, the Income Series may invest up to 50% of the series'
total assets in as few as two investments, with each of those investments
comprising up to 25% of the series total assets. In this case, a default would
produce a more dramatic result as compared to a fully diversified fund.
North Carolina Tax-Free Short-to-Medium Series
This is a non-diversified fund with a dollar weighted average maturity of two to
five years. The yield of this series will typically be lower than the Income
Series, but with less principal fluctuation. The portfolio had a weighted
average maturity of 3.31 years as of June 30, 1996. As a non-diversified series,
the Short-to-Medium Series may invest up to 50% of the series' total assets in
as few as two investments, with each of those investments comprising up to 25%
of the series total assets. In this case, a default would produce a more
dramatic result as compared to a fully diversified fund.
Tennessee Tax-Free Income Series
This is a diversified fund of long-term maturity bonds, usually averaging 10
years or more, where a fairly level stream of income is important, though net
asset value per share can fluctuate considerably. The portfolio had a weighted
average maturity of 11.14 years as of June 30, 1996.
Tennessee Tax-Free Short-to-Medium Series
This is a non-diversified fund with a dollar weighted average maturity of two to
five years. The yield of this series will typically be lower than the Income
Series, but with less principal fluctuation. This portfolio had a weighted
average maturity of 2.77 years as of June 30, 1996. As a non-diversified series,
the Short-to-Medium Series may invest up to 50% of the series' total assets in
as few as two investments, with each of those investments comprising up to 25%
of the series' total assets. In this case, a default would produce a more
dramatic result as compared to a fully diversified fund.
Intermediate Government Bond Series
Seeks the highest level of current income without undue risk to principal by
investing in the following securities: issues of the U.S. Government or its
agencies or instrumentalities, repurchase agreements fully collateralized by
issues of the U.S. Government or its agencies or instrumentalities and bank
accounts fully insured by the FDIC or collateralized. The types of securities
are described in the "Statement of Additional Information". The dollar weighted
maturity of the portfolio will be 3 to 10 years to produce minimal fluctuation
in principal. The portfolio had a weighted average maturity of 4.52 years as of
June 30, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
Single State Municipal Bond Series
Our six single state municipal bond series have fundamental policies of
investing at least 80% of the value of the assets in securities meeting the
following quality standards.
Bonds rated at the time of purchase within the four highest grades assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa) or Standard &
Poor's Corporation ("S&P") (AAA, AA, A, BBB). According to Moody's, bonds rated
Baa are medium-grade and possess some speculative characteristics. A BBB rating
by S&P indicates a satisfactory degree of safety and capacity for repayment, but
more vulnerability to adverse economic conditions or changing circumstances.
These bonds have speculative characteristics, and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
<PAGE> 27
DUPREE MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1996
----------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
GENERAL INFORMATION AND HISTORY................................................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.............................................................................. 1
Portfolio Turnover.......................................................................................... 5
Investment Restrictions..................................................................................... 6
NON-FUNDAMENTAL RESTRICTIONS.................................................................................... 9
INVESTMENT ADVISER AND OTHER SERVICES........................................................................... 9
(See "Management of the Trust" in Prospectus)
OFFICERS AND TRUSTEES...........................................................................................11
(See "Management of the Trust" in Prospectus)
PORTFOLIO TRANSACTIONS..........................................................................................13
SHARES OF BENEFICIAL INTEREST...................................................................................14
(See "Organization of the Trust" in Prospectus)
HOW TO PURCHASE SHARES..........................................................................................14
(See "Buying Shares" in Prospectus)
HOW TO REDEEM SHARES............................................................................................15
(See "Selling Shares" in Prospectus)
HOW WE COMPUTE OUR YIELDS.......................................................................................15
TAX INFORMATION.................................................................................................17
(See "Dividends" and "Taxes" in Prospectus)
FINANCIAL STATEMENTS............................................................................................21
NOTES TO FINANCIAL STATEMENTS...................................................................................57
REPORT OF INDEPENDENT ACCOUNTANTS...............................................................................64
</TABLE>
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Trust's Prospectus dated November 1, 1996. A Prospectus
may be obtained, without charge, by calling or writing the Trust listed on the
back cover.
<PAGE> 28
GENERAL INFORMATION AND HISTORY
Dupree Mutual Funds is a no-load mutual fund that offers shares in separate
investment series to the public. We have been in continuous operation since
1979, first as the Kentucky Tax-Free Income Fund, Inc. and in our current form
since 1987. We were organized as a Kentucky Business Trust on July 1, 1987 as
the successor to the fund organized in 1979. We currently offer no-load mutual
fund shares in seven series that invest in professionally-managed bond
portfolios. Our Investment Adviser for each series of shares is Dupree
Investment Advisers, Inc., a wholly owned subsidiary of Dupree & Company, Inc.,
our original sponsor. Dupree & Company is a Lexington, Kentucky firm with more
than 50 years experience in managing, underwriting and trading Kentucky
municipal securities.
INVESTMENT OBJECTIVES AND POLICIES
As stated in our Prospectus, our investment objective for each of our seven
series is to realize the highest level of income available as determined by a
shareholder's state of residence without undue risk to principal. Six of the
seven series we offer invest in professionally-managed bond portfolios
consisting of municipal securities issued in a single state. These series (with
only minor exceptions) invest in municipal securities from Kentucky, North
Carolina or Tennessee in order to provide interest income exempt from federal
income tax and from state income tax as well in the states where our shares are
offered. Investors should consult our Prospectus for a description of the
investment objectives of each series and the manner in which each series seeks
to achieve its objectives.
We have established a number of investment policies and restrictions to help
ensure that the investments of each series are consistent with its investment
goals. Certain of these policies are deemed "fundamental", meaning that they are
subject to change only upon approval by the holders of a majority of shares of
the affected series. "Non-fundamental policies" may be changed without a vote of
the shareholders. The fundamental policies of each of the series are set forth
below and in the "Investment Restrictions" section which follows. As used in the
Prospectus and this Statement of Additional Information, with respect to any
matter requiring shareholder approval, whether it be shareholder approval within
an affected series or the shareholders of the Trust, the phrase "majority of our
shares" means the vote at a meeting of (i) 67% or more of the shares present or
represented, if the holders of more than 50% of the outstanding shares of the
affected series are present in person or represented by proxy, or (ii) more than
50% of the outstanding shares of the affected series, whichever is less.
Kentucky Tax-Free Income Series
Kentucky Tax-Free Short-to-Medium Series
North Carolina Tax-Free Income Series
North Carolina Tax-Free Short-to-Medium Series
Tennessee Tax-Free Income Series
Tennessee Tax-Free Short-to Medium Series
As stated in our Prospectus, the investment objective our six municipal bond
series is to realize the highest level of tax-exempt income available as
determined by a shareholder's state of residence without undue risk to
principal. In general, interest income derived from municipal securities is
exempt from federal income tax and, for residents of the states in which we
offer shares, from state income tax as well. Accordingly, as a matter of
fundamental policy, these series invest in tax-exempt issues from a single
state, one of either Kentucky, North Carolina or Tennessee, in order to maximize
the tax exemption available to shareholders in the states where are our shares
are offered. The only exception to this policy is that, when abnormal market
conditions warrant doing so, we may from time to time invest in taxable
securities on a temporary basis. Investors should consult our Prospectus and the
"Tax Information" section which follows for a more complete discussion of the
tax consequences of these investment policies. The Kentucky Tax-Free Income
Series and the Tennessee Tax-Free Income Series maintain diversified portfolios,
while the Kentucky Tax-Free Short-to-Medium Series, the North Carolina Tax-Free
Income Series, the North Carolina Tax-Free Short-to-Medium Series, and the
Tennessee Tax-Free Short-to-Medium Series maintain non-diversified portfolios.
At least 80% of the Kentucky, North Carolina or Tennessee municipal securities
we purchase must be municipal bonds within the four highest grades assigned by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") or
1
<PAGE> 29
municipal notes rated at the time of purchase within the three highest grades
assigned by Moody's or Kentucky, North Carolina or Tennessee municipal bonds and
notes not rated by Moody's or S&P within the grades specified above, but secured
by the full faith and credit of the United States government. A description of
the general characteristics of the municipal securities qualifying for the
Moody's and S&P ratings specified above and in the Prospectus follows.
No more than 20% of the value of our total assets in each of the Kentucky
Series, the North Carolina Series or the Tennessee Series will be invested in
securities which are not rated, but which, in the opinion of our Investment
Adviser, would have been rated at the grades indicated above if the issuers had
sought a rating at the time of issuance. Issuers do not always secure ratings
for reasons of cost or when ratings are not needed to effectuate the sale. No
special or particular risk is associated solely with unrated securities.
The ratings described below reflect the opinions of Moody's and S&P as to the
quality of the municipal securities they undertake to rate. As such, the ratings
represent broad guidelines rather than absolute standards of quality. You should
also bear in mind that Moody's and S&P usually rate an issue of municipal
securities at the time it is first offered to the public, and that, once issued,
a rating is seldom updated unless and until the municipal issuer makes a further
offering of its securities. Our Investment Adviser will make its own evaluation
of each security it selects for our portfolios and will continue to evaluate
each portfolio security so long as we hold it.
RATINGS OF MUNICIPAL BONDS
- --------------------------
MOODY'S INVESTORS SERVICE, INC. Aaa: the "best quality." Aa: "high quality by
all standards," but margins of protection or other elements make long-term risks
appear somewhat larger than Aaa rated municipal bonds. A: "upper medium grade
obligations." Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future. Baa: "Medium grade," neither highly
protected, nor poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time.
STANDARD & POOR'S CORPORATION. AAA: "obligations of the highest quality," AA:
issues with investment characteristics "only slightly less marked than those of
prime quality issues." A: "the third strongest capacity for payment of debt
service." Principal and interest payments on bonds in this category are regarded
as safe. It differs from the two higher ratings because, with respect to general
obligation bonds, there is some weakness which, under certain adverse
circumstances, might impair the ability of the issuer to meet debt obligations
at some future date. With respect to revenue bonds, debt service coverage is
good, but not exceptional, and stability of the pledged revenues could show some
variations because of increased competition or economic influences in revenues.
BBB: the lowest "investment grade" security rating. The difference between A and
BBB ratings is that the latter shows more than one fundamental weakness, or one
very substantial fundamental weakness. With respect to revenue bonds, debt
coverage is only fair. Stability of the pledged revenues could show substantial
variations, with the revenue flow possibly being subject to erosion over time.
RATINGS OF MUNICIPAL NOTES
- --------------------------
MOODY'S INVESTORS SERVICE, INC. MIG 1: the best quality. MIG 2: high quality,
with margins of protection ample although not so large as in the preceding
group. MIG 3: favorable quality, with all security elements accounted for, but
lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
KENTUCKY MUNICIPAL SECURITIES
- -----------------------------
Kentucky municipal securities are obligations issued by the state of Kentucky,
its political subdivisions, and the districts, authorities, agencies and
instrumentalities of the state and its political subdivisions, the interest on
which is exempt from federal and Kentucky income taxes.
Kentucky municipal bonds are issued for various public purposes, including the
construction of airports, highways, housing, hospitals, pollution abatement
facilities, schools, streets, water and sewer works, gas and electric utilities
and university buildings.
2
<PAGE> 30
Municipal issuers in Kentucky can issue bonds for the purposes of refunding
outstanding obligations, obtaining funds to finance other public institutions
and meeting general operating expenses. Industrial building revenue bonds, which
are considered municipal bonds if the interest paid thereon is exempt from
federal and Kentucky income taxes, are issued by or on behalf of public
authorities to finance construction of privately operated facilities, such as
manufacturing plants, housing, sports arenas and pollution control
installations. Our investments in Kentucky industrial building revenue bonds are
subject to the restrictions set forth in Paragraph 10 of the "Investment
Restrictions."
There are five general types of Kentucky municipal bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, honor, credit and/or
taxing power for the payment of principal and interest. Apart from those issued
by the state of Kentucky, general obligation bonds are relatively rare since
they must be authorized by a two-thirds vote of the electorate of the municipal
issuer. Revenue bonds are payable from and secured by a particular revenue
stream, such as lease rentals, utility usage and connection charges, student
registration or housing fees, bridge or highway tolls, parking fees, sports
event gate receipts, etc. Although industrial building revenue bonds are issued
by municipal authorities, they are secured by revenues derived from a lease
rental contract with a non-governmental user. Some revenue bonds, including
industrial building revenue bonds, are secured by a mortgage on the rental
property. Improvement assessment bonds are obligations secured by a special
assessment (e.g. a sewer charge) that the governmental issuer imposes on each
owner of property benefited by the improvement (e.g. a sanitary sewer project).
The assessments are similar to taxes and have a priority which is similar to a
tax lien. Refunded or defeased bonds are secured by an escrow fund, which
usually is invested in United States government securities and occasionally in
bank certificates of deposit or similar instruments. Housing bonds, including
Kentucky Housing Corporation bonds, are usually secured by mortgages that the
issuer acquires and pledges for the payment of the bonds. Local housing
authorities sometimes issue bonds that are secured by rentals from the operation
of a housing project. Housing bonds may also have additional security in the
form of federal guarantees of the mortgages or rentals constituting the primary
security.
Because of constitutional limitations, the state of Kentucky cannot enter into a
financial obligation of more than two year's duration, and no other municipal
issuer within the state can enter into a financial obligation of more than one
year's duration. As a consequence, the payment and security arrangements
applicable to Kentucky revenue bonds differ significantly from those generally
applicable to municipal revenue bonds in other states. Many city and county
construction projects are financed through bonds which are nominally issued in
the name of a public corporation which holds title to the project and leases the
project back to the city or county on a year-to-year renewable basis. In this
situation, the rent that the nominal issuer receives from the actual user of the
property financed by the bonds is the only source of any security for the
payment of the bonds, so that a failure by the user to renew the lease in any
year will put the bonds into default.
At times, we may purchase Kentucky municipal securities when a new issue is
being offered in an underwriting, at which time the securities are offered on a
"when-issued" basis, meaning that the delivery date is unknown. This means we
would commit to purchase the securities at an agreed price to be paid at the
time of delivery, usually in 30 to 45 days. During the period prior to delivery,
we will not have paid for the securities and will not receive interest on them.
There is a slight risk that such securities will not be delivered. It is also
possible that by the delivery date, due to changing market conditions, the
market value of the securities will be higher or lower than the price we have
committed to pay. We do not intend to make when-issued purchase commitments for
speculative purposes, but only to accomplish our investment objective.
Therefore, when we commit to purchase securities on a when-issued basis, we will
identify designated, readily marketable assets at least equal to the amount of
the purchase to pay for the commitment. During any such period in which assets
are identified to meet a "when-issued" purchase commitment, we will ordinarily
sell other assets not so identified if necessary to meet shareholder redemption
requests. In the unlikely event that it becomes necessary for us to sell
when-issued securities before delivery, any resulting gain or loss would not be
tax-exempt.
Unlike other types of investments, municipal securities have traditionally have
not been subject to registration with, or other regulation by, the Securities
and Exchange Commission. However, there have been proposals which could lead to
future regulation of these securities by the Commission.
NORTH CAROLINA MUNICIPAL SECURITIES
- -----------------------------------
North Carolina municipal securities are obligations issued by the state of North
Carolina, its political subdivisions, and the districts, authorities, agencies
and instrumentalities of the state and its political subdivisions, the interest
on which is exempt from federal
3
<PAGE> 31
and North Carolina income taxes.
North Carolina municipal bonds are issued for various public purposes, including
the construction of airports, highways, housing, hospitals, pollution abatement
facilities, schools, streets, water and sewer works, gas and electric utilities
and university buildings. Municipal issuers in North Carolina can issue bonds
for the purposes of refunding outstanding obligations, obtaining funds to
finance other public institutions and meeting general operating expenses.
Industrial building revenue bonds, which are considered municipal bonds if the
interest paid thereon is exempt from federal income and North Carolina income
taxes, are issued by or on behalf of public authorities to finance construction
of privately operated facilities, such as manufacturing plants, housing, sports
arenas and pollution control installations. Our investments in North Carolina
building revenue bonds are subject to the restrictions set forth in Paragraph 10
of the "Investment Restrictions."
There are five general types of North Carolina municipal bonds. General
obligation bonds are secured by the issuer's pledge of its faith and credit
(taxing power) for the payment of principal and interest. Revenue bonds are
payable from and secured by a particular revenue stream, such as lease rentals,
utility usage and connection charges, student registration or housing fees,
parking fees, sports event gate receipts, etc. Although industrial development
revenue bonds are issued by municipal authorities, they are secured by revenues
derived from a lease rental contract or loan agreement with a non-governmental
user. Some revenue bonds, including industrial development revenue bonds, are
secured by a mortgage on the property financed. Refunded or defeased bonds are
secured by an escrow fund, which usually is invested in United States government
securities and occasionally in bank certificates of deposit or similar
instruments. Housing bonds, including North Carolina Housing Finance Agency
bonds, are usually secured by mortgages that the issuer acquires and pledges for
the payment of the bonds. Local housing authorities sometimes issue bonds that
are secured by rentals from the operation of a housing project. Housing bonds
may also have additional security in the form of federal guarantees of the
mortgages or rentals constituting the primary security. Certificates Of
Participation ("COP's") are payable from a stream of revenues generated by an
installment financing contract or lease. This contract or lease is between the
North Carolina local government and the issuer, which is usually a nonprofit
corporation that is a financing instrumentality of the local government. COP's
are only secured by a lien or mortgage on the property being acquired or leased.
The local government's taxing power is not pledged to the repayment of the COP's
and no deficiency judgment may be rendered against a local government for
repayment of the COP's. Payments on COP's by the local government are subject to
the annual appropriation process of the local government. Some COP's may also be
secured with financial guarantee insurance, a letter of credit or other credit
enhancement.
At times, we may purchase North Carolina municipal securities when a new issue
is being offered in an underwriting, at which time the securities are offered on
a "when-issued" basis, meaning that the delivery date is unknown. This means we
would commit to purchase the securities at an agreed price to be paid at the
time of delivery, usually in 30 to 45 days. During the period prior to delivery,
we will not have paid for the securities and will not receive interest on them.
There is a slight risk that such securities will not be delivered. It is also
possible that by the delivery date, due to changing market conditions, the
market value of the securities will be higher or lower than the price we have
committed to pay. We do not intend to make when-issued purchase commitments for
speculative purposes, but only to accomplish our investment objective.
Therefore, when we commit to purchase securities on a when-issued basis, we will
identify designated, readily marketable assets at least equal to the amount of
the purchase to pay for the commitment. During any such period in which assets
are identified to meet a "when-issued" purchase commitment, we will ordinarily
sell other assets not so identified if necessary to meet shareholder redemption
requests. In the unlikely event that it becomes necessary for us to sell
when-issued securities before delivery, any resulting gain or loss would not be
tax-exempt.
Unlike other types of investments, municipal securities have traditionally not
been subject to registration with, or other regulation by, the Securities and
Exchange Commission. However, there have been proposals which could lead to
future regulation of these securities by the Commission.
TENNESSEE MUNICIPAL SECURITIES
- ------------------------------
Tennessee municipal securities are obligations issued by the state of Tennessee,
its political subdivisions, and the districts, authorities, agencies and
instrumentalities of the state and its political subdivisions, the interest on
which is exempt from federal and Tennessee Hall income taxes.
4
<PAGE> 32
Tennessee municipal bonds are issued for various public purposes, including the
construction of airports, highways, housing, hospitals, pollution abatement
facilities, schools, streets, water and sewer works, gas and electric utilities
and university buildings. Municipal issuers in Tennessee can issue bonds for the
purposes of refunding outstanding obligations, obtaining funds to finance other
public institutions and meeting general operating expenses. Industrial building
revenue bonds, which are considered municipal bonds if the interest paid thereon
is exempt from federal income and Tennessee Hall income taxes, are issued by or
on behalf of public authorities to finance construction of privately operated
facilities, such as manufacturing plants, housing, sports arenas and pollution
control installations. Our investments in Tennessee industrial building revenue
bonds are subject to the restrictions set forth in Paragraph 10 of the
"Investment Restrictions."
There are six general types of Tennessee municipal bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, honor, credit and/or
taxing power for the payment of principal and interest. Revenue bonds are
payable from and secured by a particular revenue stream, such as lease rentals,
utility usage and connection charges, student registration or housing fees,
bridge tolls, parking fees, sports event gate receipts, etc. Although industrial
building revenue bonds are issued by municipal authorities, they are secured by
revenues derived from a lease rental contract with a non-governmental user. Some
revenue bonds, including industrial building revenue bonds, are secured by a
mortgage on the rental property. Refunded or defeased bonds are secured by an
escrow fund, which usually is invested in United States government securities
and occasionally in bank certificates of deposit or similar instruments. Housing
bonds, including Tennessee Housing Development Agency bonds, are usually secured
by mortgages that the issuer acquires and pledges for the payment of the bonds.
Local housing authorities sometimes issue bonds that are secured by rentals from
the operation of a housing project. Housing bonds may also have additional
security in the form of federal guarantees of the mortgages or rentals
constituting the primary security. "Double Barrel Bonds" are primarily water and
sewer issues for which the revenues are the primary source of debt service, but
with taxes as the unlimited secondary source. Improvement Assessment bonds are
obligations secured by a special assessment (e.g. a sewer charge) that the
government issuer imposes on each owner of property benefited by the improvement
(e.g. a sanitary sewer project). The assessments are similar to taxes and have a
priority which is similar to a tax lien.
At times, we may purchase Tennessee municipal securities when a new issue is
being offered in an underwriting, at which time the securities are offered on a
"when-issued" basis, meaning that the delivery date is unknown. This means we
would commit to purchase the securities at an agreed price to be paid at the
time of delivery, usually in 30 to 45 days. During the period prior to delivery,
we will not have paid for the securities and will not receive interest on them.
There is a slight risk that such securities will not be delivered. It is also
possible that by the delivery date, due to changing market conditions, the
market value of the securities will be higher or lower than the price we have
committed to pay. We do not intend to make when-issued purchase commitments for
speculative purposes, but only to accomplish our investment objective.
Therefore, when we commit to purchase securities on a when-issued basis, we will
identify designated, readily marketable assets at least equal to the amount of
the purchase to pay for the commitment. During any such period in which assets
are identified to meet a "when-issued" purchase commitment, we will ordinarily
sell other assets not so identified if necessary to meet shareholder redemption
requests. In the unlikely event that it becomes necessary for us to sell
when-issued securities before delivery, any resulting gain or loss would not be
tax-exempt.
Unlike other types of investments, municipal securities traditionally have not
been subject to registration with, or other regulation by, the Securities and
Exchange Commission. However, there have been proposals which could lead to
future regulation of these securities by the Commission.
INTERMEDIATE GOVERNMENT BOND SERIES
- -----------------------------------
As stated in our Prospectus, our investment objective for this series is to
realize the highest level of income available without undue risk to principal by
investing in a portfolio consisting of: 1) bonds issued by the U.S. Government
such as U.S. Treasury Notes and Bills; 2) bonds issued by agencies or
instrumentalities of the U.S. Government such as obligations of the Federal Farm
Credit Banks, the Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Bank; 3) bank accounts fully
insured by the FDIC or collateralized by federal government or federal agency
bonds; and 4) repurchase agreements fully collateralized by issues of the U.S.
Government or its agencies. The Intermediate Government Bond Series will
maintain a non-diversified portfolio as described in our Prospectus and in the
"Investment Restrictions" section below.
PORTFOLIO TURNOVER
5
<PAGE> 33
Portfolio turnover is defined to be the lesser of purchases or sales divided by
the average monthly value of the portfolio. The portfolio turnover rate is
expressed as a percentage ratio calculated by taking the lesser of sales or
purchases of securities as the numerator and dividing by the average monthly
value of the entire portfolio, excluding short term investments from both the
numerator and denominator. Portfolio turnover for each of the series offered
will vary depending on a number of factors, including net capital flows into or
out of each series, our investment strategy, and market conditions.
Portfolio turnover rate may influence a series' yield under certain conditions.
In periods of declining interest rates, the series' yield will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates, the yield of the series will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to the series from the
continuous sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the series' portfolio, thereby
reducing the current yield of the series. In periods of rising interest rates,
the opposite can be true.
Kentucky Tax-Free Income Series
Kentucky Tax-Free Short-to-Medium Series
North Carolina Tax-Free Income Series
North Carolina Tax-Free Short-to-Medium Series
Tennessee Tax-Free Income Series
Tennessee Tax-Free Short-to Medium Series
We do not intend to purchase Kentucky, North Carolina or Tennessee municipal
securities for short-term profits. Securities will be purchased and sold in
response to our management's evaluation of the issuer's ability to meet its debt
obligations in the future. However, a security purchased at any earlier date may
be sold in anticipation of a market decline (a rise in interest rates), and a
security purchased in anticipation of a market rise (a decline in interest
rates) may be sold at any later date. In addition, a security may be sold and
another purchased when, in the opinion of our management, a favorable yield
spread exists between those particular issuers or in different market sectors.
Finally, in order to obtain an immediate yield on the cash proceeds from the
sale of our shares pending the selection and availability of a more permanent
investment, we may temporarily acquire Kentucky, North Carolina or Tennessee
municipal securities under informal repurchase arrangements with a bank.
Typically, under these arrangements, we would resell such securities to the
bank, and the bank would repurchase them from us, within a short period of time,
usually not more than seven days.
Based on current trends, we expect portfolio turnover in the coming year to be
similar to that of the past year for all series except the Kentucky Tax-Free
Short-to-Medium Series, which we expect will have a lower turnover rate than for
the previous year. At this time, we do not anticipate any change to our
investment strategy that would significantly impact portfolio turnover rate and
therefore we expect that the turnover rate for the coming year will be
influenced mainly by the net growth of each series and by market conditions.
For the fiscal year ended June 30, 1996 our portfolio turnover rate for the
Kentucky Tax-Free Income Series was approximately 4.29%, as compared with our
rate of approximately 18.05% for the fiscal year ended June 30, 1995. Fiscal
1995-96 was a year of stability. If current trends continue, fiscal 1996-97 will
be a year of stability, the portfolio turnover should remain about the same.
For the fiscal year ended June 30, 1996, our portfolio turnover rate for the
Kentucky Tax-Free Short-to-Medium Series was approximately 57.80%, as compared
with our rate of approximately 4.07% for the fiscal year ended June 30, 1995.
Fiscal 1995-96 was a year of growth. If this series experiences more steady
growth in1996-97, we expect that the portfolio turnover should decrease.
For the fiscal year ended June 30, 1996, our portfolio turnover rate for the
Tennessee Tax-Free Income Series was approximately 9.13% as compared with our
rate of approximately 6.84% for the fiscal year ended June 30, 1995. Fiscal
1995-96 was a year of growth. If current trends continue in fiscal 1996-97 the
portfolio turnover should remain about the same.
For the fiscal year ended June 30, 1996, our portfolio turnover rate for the
Tennessee Tax-Free Short-to-Medium Series was approximately 23.17% as compared
with our rate of approximately .71% for fiscal year ended June 30, 1995. If
current trends
6
<PAGE> 34
continue in fiscal 1996-97 the portfolio turnover rate for the Tennessee
Tax-Free Short-to-Medium Series is expected to remain about the same.
For the fiscal year ended June 30, 1996 our portfolio turnover rate for the
North Carolina Income Series was 22.83%. As this is a new and growing series,
the turnover rate is expected to remain about the same.
For the fiscal year ended June 30, 1996 the portfolio turnover rate for the
North Carolina Short-to-Medium series was 17.18%. As this is a new and growing
series the turnover rate is expected to remain about the same.
INTERMEDIATE GOVERNMENT BOND SERIES
- -----------------------------------
For the fiscal year ended June 30, 1996 our portfolio turnover rate was
approximately 33.89% as compared with our rate of approximately 74.98% for the
fiscal year ended June 30, 1995. Fiscal 1995-96 was a year of stability. If
current trends continue fiscal 1996-97 will continue to be stable and the
portfolio turnover rate should remain about the same.
INVESTMENT RESTRICTIONS
We have adopted certain investment restrictions which may not be changed without
the approval of the holders of a majority of the shares representing the
affected series. Under these restrictions, we may not take any of the following
actions with respect to each series:
KENTUCKY AND TENNESSEE TAX-FREE INCOME SERIES
- ---------------------------------------------
1. With respect to 75% of the value of our total assets as of the close of
each fiscal quarter, purchase the securities of any single issuer (except
the United States government, its agencies and instrumentalities), if, as a
result, more than 5% of the value of our total assets would be invested in
securities of such issuer (including repurchase agreements with any one
bank). For this purpose, the states of Kentucky and Tennessee, each
political subdivision of each state, and each district, authority, agency
or instrumentality of each state or any of either states' political
subdivisions will be deemed to be a separate issuer.
2. Borrow money, except from banks as a temporary measure for purposes of
meeting redemption requests and/or bond purchase commitments and then only
in an amount not exceeding 5% of the value of our total assets.
3. Pledge or hypothecate any of our assets, except as security for a
permissible temporary bank borrowing (see Restriction 2), and then only in
an amount not exceeding 15% of the value of our total assets.
4. Make loans, except through the purchase of portions of issues or publicly
distributed debt securities and entry into repurchase agreements. We will
not enter into a repurchase agreement maturing in more than seven business
days, if, as a result more than 10% of the value of our net assets would be
so invested.
5. Purchase securities subject to legal or contractual restrictions on resale
(except those imposed by repurchase agreements).
6. Underwrite the securities of other issuers, except to the extent that our
purchase of Kentucky and Tennessee municipal securities directly from the
issuer (either alone or as one of a group of bidders) may be deemed to be
an underwriting of such securities.
7. Purchase or sell real estate or real estate mortgage loans, but this
limitation will not prevent us from purchasing Kentucky and Tennessee
municipal securities or other securities secured by real estate or interest
in real estate.
8. Purchase or sell commodities or commodity contracts.
7
<PAGE> 35
9. Purchase equity securities or securities convertible into equity
securities.
10. Purchase any security, if, as a result, more than 25% of the value of our
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation would
preclude us from investing more than 25% of the value of our total assets
in industrial building revenue bonds issued to finance facilities for
non-governmental issuers in any one industry. However, the limitation does
not apply to any other tax exempt municipal securities, to securities
issued or guaranteed by the United States government or any of its agencies
or instrumentalities.
11. Invest in companies for the purpose of exercising management or control.
12. Invest in securities of other investment companies, except where such
investment results from a merger or consolidation with, or an acquisition
of assets of, another investment company.
13. Make short sales of securities.
14. Purchase securities on margin, except that we may obtain such short term
credit as may be necessary for the clearance of securities purchases.
15. Write or invest in put or call options, or any combination thereof.
16. Issue senior securities.
KENTUCKY, NORTH CAROLINA AND TENNESSEE TAX-FREE SHORT-TO-MEDIUM SERIES, AND
- ---------------------------------------------------------------------------
NORTH CAROLINA TAX-FREE INCOME SERIES
- -------------------------------------
1. With respect to 50% of the value of our total assets as of the close of
each fiscal quarter, purchase the securities of any single issuer (except
the United States government, its agencies and instrumentalities), if, as a
result, more than 5% of the value of our total assets would be invested in
securities of such issuer (including repurchase agreements with any one
bank). For this purpose, the states of Kentucky, North Carolina and
Tennessee, each political subdivision of the state, and each district,
authority, agency or instrumentality of the state or any of its political
subdivisions will be deemed to be a separate issuer.
2. Borrow money, except from banks as a temporary measure for purposes of
meeting redemption requests and/or bond purchase commitments and then only
in an amount not exceeding 5% of the value of our total assets.
3. Pledge or hypothecate any of our assets, except as security for a
permissible temporary bank borrowing (see Restriction 2), and then only in
an amount not exceeding 15% of the value of our total assets.
4. Make loans, except through the purchase of portions of issues or publicly
distributed debt securities and entry into repurchase agreements. We will
not enter into a repurchase agreement maturing in more than seven days, if,
as a result, more than 10% of the value of our total assets would be so
invested.
5. Purchase securities subject to legal or contractual restrictions on resale
(except those imposed by repurchase agreements).
6. Underwrite the securities of other issuers, except to the extent that our
purchase of Kentucky, North Carolina and Tennessee municipal securities
directly from the issuer (either alone or as one of a group of bidders) may
be deemed to be an underwriting of such securities.
7. Purchase or sell real estate or real estate mortgage loans, but this
limitation will not prevent us from purchasing
8
<PAGE> 36
Kentucky, North Carolina and Tennessee municipal securities or other
securities secured by real estate or interest in real estate.
8. Purchase or sell commodities or commodity contracts.
9. Purchase equity securities or securities convertible into equity
securities.
10. Purchase any security, if, as a result as of the close of each fiscal
quarter more than 25% of the value of our total assets would be invested in
the securities of issuers having their principal business activities in the
same industry. This limitation would preclude us from investing more than
25% of the value of our total assets in industrial building revenue bonds
issued to finance facilities for non-governmental issuers in any one
industry. However, the limitation does not apply to any other municipal
securities, to securities issued or guaranteed by the United States
government or any of its agencies or instrumentalities.
11. Invest in companies for the purpose of exercising management or control.
12. Invest in securities of other investment companies, except where such
investment results from a merger or consolidation with, or an acquisition
of assets of, another investment company.
13. Make short sales of securities.
14. Purchase securities on margin, except that we may obtain such short term
credit as may be necessary for the clearance of securities purchases.
15. Write or invest in put or call options, or any combination thereof.
16. Issue senior securities.
INTERMEDIATE GOVERNMENT BOND SERIES
- -----------------------------------
1. With respect to 50% of the value of our total assets as of the close of
each fiscal quarter, purchase the securities of any single issuer (except
the United States government, its agencies and instrumentalities), if, as a
result, more than 5% of the value of our total assets would be invested in
securities of such issuer (including repurchase agreements with any one
bank or brokerage firm).
2. Borrow money, except from banks as a temporary measure for purposes of
meeting redemption requests and/or bond purchase commitments and then only
in an amount not exceeding 5% of the value of our total assets.
3. Pledge or hypothecate any of our assets, except as security for a
permissible temporary bank borrowing (see Restriction 2), and then only in
an amount not exceeding 15% of the value of our total assets.
4. Make loans, except through the purchase of portions of issues or publicly
distributed debt securities and entry into repurchase agreements. We will
not enter into a repurchase agreement maturing in more than seven days, if,
as a result, more than 10% of the value of our total assets would be so
invested.
5. Purchase securities subject to legal or contractual restrictions on resale
(except those imposed by repurchase agreements).
6. Underwrite the securities of other issuers, except to the extent that our
purchase of United States Government securities directly from the issuer
(either alone or as one of a group of bidders) may be deemed to be an
underwriting of such securities.
9
<PAGE> 37
7. Purchase or sell real estate or real estate mortgage loans, but this
limitation will not prevent us from purchasing securities or other
securities secured by real estate or interest in real estate.
8. Purchase or sell commodities or commodity contracts.
9. Purchase equity securities or securities convertible into equity
securities.
10. Purchase any security, if, as a result as of the close of each fiscal
quarter more than 25% of the value of our total assets would be invested in
the securities of issuers having their principal business activities in the
same industry. The limitation does not apply to securities issued or
guaranteed by the United States government or any of its agencies or
instrumentalities.
11. Invest in companies for the purpose of exercising management or control.
12. Invest in securities of other investment companies, except where such
investment results from a merger or consolidation with, or an acquisition
of assets of, another investment company.
13. Make short sales of securities.
14. Purchase securities on margin, except that we may obtain such short term
credit as may be necessary for the clearance of securities purchases.
15. Write or invest in put or call options, or any combination thereof.
16. Issue senior securities.
NON-FUNDAMENTAL RESTRICTIONS
None of the single state series will invest in certificates of deposit or
banker's acceptances.
In accord with the requirements of the Texas securities laws, the Trust will not
invest in real estate limited partnerships, or in oil, gas and other mineral
leases, or invest more than 15% of average net assets of any series in
investments which are not readily marketable as described in Texas securities
regulations.
These restrictions are "non-fundamental" investment policies of the affected
series. As such, they may be changed by the Board of Trustees and do not require
a vote of shareholders of the affected series.
INVESTMENT ADVISER AND OTHER SERVICES
As stated in the Prospectus, our investment activities are managed by Dupree
Investment Advisers, Inc., a wholly owned subsidiary of Dupree & Company, Inc.
Thomas P. Dupree, Sr., is Chairman of the Board of both Dupree firms. He and his
wife, Clara, are the sole owners of the stock of Dupree & Company, Inc. Thomas
P. Dupree, Sr. also serves as our chief executive officer and as a member of our
Board of Directors. Fred L. Dupree, Jr., is Vice President, Secretary, Treasurer
and a director of both Dupree firms, and also holds the same offices with us.
William T. Griggs II is a Vice President with us, and Alison L. Arnold and
Michelle M. Dragoo are both Assistant Vice Presidents with us.
10
<PAGE> 38
INVESTMENT ADVISORY AGREEMENTS
Dupree Investment Advisers, Inc. serves as the Investment Adviser for each of
our seven series pursuant to separate Investment Advisory Agreements with each
series. The dates of these agreements are as follows: Kentucky Tax-Free Income
Series (November 1, 1989), Kentucky Tax-Free Short-to-Medium Series (November 1,
1989), Intermediate Government Bond Series (November 1, 1993), Tennessee
Tax-Free Income Series (November 1, 1993), Tennessee Tax-Free Short-to-Medium
Series (November 1, 1994), North Carolina Tax-Free Income Series (November 1,
1995), North Carolina Tax-Free Short-to-Medium Series (November 1, 1995). Each
agreement will continue in effect until October 31, 1997 and may be continued
from year to year after their defined ending dates if such continuation is
specifically approved at least annually by our Board of Trustees at a meeting
called for that purpose, or by a separate vote of the holders of a majority of
each series' shares, and, in either case, also by vote of a majority of our
Trustees who are not "interested persons" of Dupree Investment Advisers, Inc.
for us within the meaning of the Investment Company Act of 1940. The Agreements
are subject to termination by either party without penalty on 60 days written
notice to the other and terminate automatically in the event of assignment.
Dupree & Company, Inc. had served as the Investment Adviser to Kentucky Tax-Free
Income Fund, Inc. from our inception through October 31, 1986, when Dupree
Investment Advisers, Inc. began serving as the Investment Adviser.
Pursuant to the Agreements, Dupree Investment Advisers, Inc. provides us with
investment supervisory services, office space and facilities, and corporate
administration. Specifically, the Dupree firm has undertaken to obtain and
evaluate relevant information regarding the economy, industries, businesses,
municipal issuers, securities markets and securities; to formulate a continuing
program for the management of our assets in a manner consistent with our
investment objectives; and to implement this program by selecting the securities
to be purchased or sold by us and placing orders for such purchases and sales.
In addition, the Dupree firm provides for our office needs, maintains our books
and records, assumes and pays all sales and promotional expenses incurred in the
distribution of our shares out of its own resources without reimbursement from
the Trust, staffs us with persons competent to perform all of our executive and
administrative functions, supervises and coordinates the activities of our
institutional and other agents (e.g., custodian, transfer agent, independent
accountants, outside legal counsel), and permits its officers and employees to
serve us as trustees and officers, all without additional cost to us. Dupree
Investment Advisers may contract with commercial banks or other entities to
assist in the provision of shareholder services.
Under the Agreements for each of the series, neither Dupree Investment Advisers,
Inc. nor any of its directors, officers or employees performing executive or
administrative functions for us will be liable to us for any error of judgment,
mistake of law or other act or omission in connection with a matter to which the
Agreements relate, unless such error, mistake, act or omission involves willful
misfeasance, bad faith, gross negligence or reckless disregard of duty, or
otherwise constitutes a breach of fiduciary duty involving personal misconduct.
Under the terms of the Agreements for the Kentucky, North Carolina and Tennessee
Series, we have agreed to pay to Dupree Investment Advisers, Inc., as
compensation for all services rendered, facilities furnished and expenses paid
or assumed by it under the Agreements, a fee at the annual rate of .50 of 1% of
the first $100,000,000 average daily net assets of each series determined
separately, .45 of 1% of the average daily net assets between $100,000,001 and
$150,000,000 of each series determined separately, and .40 of 1% of the average
daily net assets in excess of $150,000,000 of each series determined separately.
For the Government Bond Series, we have agreed to pay to Dupree Investment
Advisers, Inc., as compensation for all services rendered, facilities furnished
and expenses paid or assumed by it under the Agreement, a fee at the annual rate
of .2 of 1%. The fees are payable to Dupree Investment Advisers in monthly
installments. Dupree Investment Advisers has reserved the right to voluntarily
subsidize any series of the Trust at its sole option. Prior to November 1, 1986,
our agreement with Dupree & Company, our Investment Adviser at that time,
required the firm to reimburse the Kentucky Tax-Free Income Fund, Inc. amounts
sufficient to keep operating expenses (excluding interest, taxes and
extraordinary expenses) from exceeding the annual rate of .75 of 1% of average
11
<PAGE> 39
daily net asset value. During the past three fiscal years the following fees
have been paid the Investment Adviser:
12
<PAGE> 40
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
6/30/96 6/30/95 6/30/94
------- ------- -------
<S> <C> <C> <C>
Kentucky Income Series
fees $1,279,636 $1,164,516 $1,175,795
reimbursement $ -0- $ -0- $ -0-
Kentucky Short-to-Medium Series
fees $ 292,588 $ 309,977 $ 334,294
reimbursement $ -0- $ -0- $ -0-
North Carolina Income Series
fees $ 1,534
reimbursements $ 11,229
North Carolina Short-to-Medium Series
fees $ 2,312
reimbursements $ 12,026
Tennessee Income Series
fees $ 33,578 $ 11,633 $ 1,256
reimbursement $ 24,095 $ 19,037 $ 18,535
Tennessee Short-to-Medium Series
fees $ 10,277 $ 2,067
reimbursement $ 14,297 $ 11,008
Intermediate Government Bond Series
fees $ 16,061 $ 15,235 $ 20,266
reimbursement $ 17,702 $ 15,743 $ 19,475
</TABLE>
Indiana and Texas limit annual expenses (exclusive of interest, taxes, brokerage
commissions and extraordinary expenses) as follows: 1.5% of the first
$30,000,000 in net assets and 1% of any additional net assets for Indiana; and
2% of the first $10,000,000 of average net assets, 1.5% of the next $20,000,000
of average net assets and 1% of the remaining average net assets for Texas.
OTHER SERVICES
Star Bank, 425 Walnut Street, ML 6118, PO Box 1118, Cincinnati, Ohio 45201-1118
serves as Custodian for the Trust. Star Bank is responsible for the safekeeping
of the assets of each series of the Trust. Star Bank presents for payment the
coupons of the municipal bonds held by it or its sub-custodians and deposits
payment to the Trust accounts.
Bank of the Bluegrass, 101 East High Street, Lexington, Kentucky 40507 assists
the Transfer Agent in the clearing of redemption checks of shareholders of the
Kentucky Tax-Free Short-to-Medium Series, North Carolina Tax-Free
Short-to-Medium Series, Tennessee Tax-Free Short-to-Medium Series and the
Intermediate Government Bond Series.
For the fiscal year 1996 Coopers & Lybrand L.L.P., 201 East Main Street, Suite
1400, Lexington, Kentucky 40507 served as the independent auditors of the Trust,
providing expertise in accounting and taxation, including tax return preparation
for the fiscal year 1996. For the fiscal year 1997 Ernst & Young LLP, 1300
Chiquita Center 250 East 5th Street, Cincinnati, Ohio 45202 will provide the
aforementioned services.
Dupree Investment Advisers, Inc., serves as the Transfer Agent and Dividend
Paying Agent of the Trust, collecting monies from new shareholders and paying
dividends and redemption proceeds to shareholders, in addition to maintaining
books and accounts of
13
<PAGE> 41
shareholder transactions. Each Series of the Trust has an agreement with Dupree
Investment Advisers, Inc., as Transfer Agent, by the terms of which a fee is
paid computed on the average daily net asset value at the annual rate of .15% on
the first $20,000,000 and .12% on all amounts in excess of $20,000,000.
14
<PAGE> 42
OFFICERS AND TRUSTEES
The following table sets forth information as to our officers and trustees:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Office(s) With Us During the Past Five Years
- ---------------- ----------------- --------------------------
<S> <C> <C>
THOMAS P. DUPREE, SR.* President and Trustee Chairman of the Board of Dupree & Company, Inc.
125 South Mill Street President of Dupree Investment Advisers, Inc.
Vine Center, Suite 100 Director, Studio Plus Hotels, Inc.
Lexington, KY 40507
FRED L. DUPREE, JR.* Vice President, Vice President, Secretary, Treasurer and
125 South Mill Street Secretary, Treasurer of Dupree & Company, Inc. and
Vine Center, Suite 100 and Trustee Dupree Investment Advisers, Inc.
Lexington, KY 40507
LUCY A. BREATHITT Trustee Alexander Farms, farming; Kentucky Horse Park
1703 Fairway Drive Foundation Board; Kentucky Horse Park Museum
Lexington, KY 40502 Board, Kentucky State Nature Preserves
Commission
WILLIAM A. COMBS, JR. Trustee Secretary, Treasurer, Director, Dana Motor
111 Woodland Ave., #510 Cincinnati, Ohio; Secretary-Treasurer, Director
Lexington, KY 40502 Freedom Dodge, Lexington, KY; Secretary,
Treasurer, Director Ellerslie Realty Inc., Lexington,
KY; Partner, Forkland Development Co., Lexington,
KY; Partner, Lexland, Lexington, KY.
ROBERT L. MADDOX Trustee Partner, Wyatt, Tarrant & Combs, Louisville, KY
2800 Citizens Plaza Attorneys; Director, Nugent Sand Company,
Louisville, KY 40202 Louisville, KY; Director, Orr Safety Corporation,
Louisville, KY,; Director, Whip-Mix Corporation,
Louisville, KY.
WILLIAM S. PATTERSON Trustee President, CEO, Cumberland Surety Co.,
367 West Short Street Lexington, KY; President, Patterson & Co., Frankfort
Lexington, KY 40507 KY.,(real estate development, thoroughbred horse
breeding, farming)
WILLIAM T. GRIGGS, II Vice President President of Dupree & Company, Inc.
125 South Mill Street Assistant Secretary
Vine Center, Suite 100
Lexington, KY 40507
ALISON L. ARNOLD Assistant Vice Assistant Vice President of
125 South Mill Street President Dupree & Company, Inc.
Vine Center, Suite 100
Lexington, KY 40507
MICHELLE M. DRAGOO Assistant Vice Vice President of
125 South Mill Street President Dupree & Company, Inc.
Vine Center, Suite 100
</TABLE>
15
<PAGE> 43
Lexington, KY 40507
* Thomas P. Dupree, Sr. and Fred L. Dupree, Jr. are "interested persons" of
our Investment Adviser and of us within the meaning of the Investment Company
Act of 1940.
16
<PAGE> 44
As of September 11, 1996 shares of the Trust were owned by our officers and
trustees as shown below.
<TABLE>
<CAPTION>
Thomas P. Fred L. Non-Interested Trustees and
Dupree Sr. Dupree, Jr. other officers as a group
---------- ----------- -------------------------
<S> <C> <C> <C>
KENTUCKY INCOME SERIES
Number of Shares Outstanding 186,387.972 25,263.654 243,594.357
Percentage of Shares Outstanding .457% .062% .597%
KENTUCKY SHORT-TO-MEDIUM SERIES
Number of Shares Outstanding 74,019.933 0.000 123,263.240
Percentage of Shares Outstanding .604% 0.000% 1.006%
NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
Number of Shares Outstanding 397.481 0.000 0.000
Percentage of Shares Outstanding .325% 0.000% 0.000
INTERMEDIATE GOVERNMENT BOND SERIES
Number of Shares Outstanding 0.000 3,469.442 465.998
Percentage of Shares Outstanding 0.000% .430% .058%
</TABLE>
Thomas P. Dupree, Sr. and Fred L. Dupree, Jr. are brothers. Neither receives any
remuneration from us.
Each non-interested Trustee, except Ms. Breathitt who is a new trustee as of
October 30, 1996, received compensation in the amount of $12,000 for their
services to us for the fiscal year ended June 30, 1996. For the current fiscal
year the four non-interested Trustees will be entitled to fees of $12,000 each.
Executive officers of the Trust receive no remuneration from us, but are instead
paid by Dupree Investment Advisers, Inc.
PORTFOLIO TRANSACTIONS
Ordinarily, portfolio securities for each series are purchased from underwriters
at prices that include underwriting fees or from primary market makers acting as
principals and selling to us at net prices. In either case, we would not pay any
brokerage commission. Transactions placed with dealers serving as primary market
makers are executed at prices within the spread between the bid and asked prices
for the securities.
Decisions with respect to the purchase and sale of our portfolio securities,
including the allocation of principal business and portfolio brokerage, are made
by our Investment Adviser, Dupree Investment Advisers, Inc., our Investment
Adviser has discretionary authority to implement these decisions by placing
orders for the purchase or sale of securities for our account with underwriters,
dealers or brokers selected by it for that purpose. However, Dupree Investment
Advisers, Inc. will not deal with us as principal, or as our agent, in
purchasing and selling securities for our accounts. Purchases and sales of
securities for the Trust's portfolios, as well as allocation of brokerage, are
reviewed quarterly by the Trust's Board of Trustees. Dupree Investment Advisers
on behalf of the Trust has from time to time executed trades through Paine
Webber, Inc., in which Thomas P. Dupree, Jr. acted as the broker. Each of these
trades is either an exclusive offering or the high bid on bonds for sale. Each
is reviewed by the board on an individual basis.
Dupree Investment Advisers, Inc. has advised us that, in placing orders for the
purchase and sale of our portfolios transactions, it will seek execution at the
most favorable prices through responsible brokers, in agency transactions, at
competitive commission rates. Our investment adviser has also advised us that,
in selecting brokers to execute our portfolio transactions, it will give
consideration to such factors as the price of the security, the rate of
commission, if any, the size and difficulty of the order, the reliability,
integrity, financial conditions and general execution and operating capabilities
of competing brokers, and the brokerage and research services which they provide
to our investment adviser to us.
17
<PAGE> 45
Dupree Investment Advisers, Inc. has further advised us that it does not
presently intend to award brokerage on our portfolios to brokers who charge
higher commissions because of research services they provide. However, under our
Investment Advisory Agreements with it, we have authorized the investment
adviser to adopt a brokerage allocation policy embodying the concepts of Section
28(e) of the Securities Exchange Act of 1934. Under such a policy, a broker
furnishing research services could be paid a higher commission than the
commission that would be paid to another broker which either does not furnish
research services or furnishes research services deemed to be of lesser value,
if such higher commission is deemed to be reasonable in relation to the value of
the brokerage and research services provided by the broker charging it, either
in terms of that particular transaction or in terms of the overall
responsibilities of the investment advisor with respect to the accounts as to
which it exercises investment discretion. Research services furnished by a
broker can include evaluation of the market prices of securities in the Trust's
portfolios, evaluation of potential additions to the Trust's portfolios and
credit analysis of particular issuers of securities.
Whether and to what extent net prices or commissions charged by brokers selected
by Dupree Investment Advisers, Inc. reflect an element of value for research
services cannot presently be determined. To the extent that research services of
value are provided by brokers with or through which the investment adviser
places our portfolio transactions, the investment adviser may be relieved of
expenses it might otherwise bear. Research services furnished by brokers could
be useful and of value to the investment adviser in serving its other clients as
well as us; but, on the other hand, research services obtained by the investment
adviser as a result of placing portfolio brokerage of other clients could be
useful and of value to it in serving us.
Since our shares are not sold through intermediary brokers, it is not the
practice of Dupree Investment Advisers, Inc. to allocate principal business or
portfolio brokerage on the basis of such sales. However, brokers effecting
purchases of our shares for their customers may participate in principal
transactions of brokerage allocated as described in the preceding paragraphs.
The Dupree firm has advised us that, when it purchases Kentucky municipal
securities for our portfolios in underwritings, it will seek to negotiate a
purchase price reflecting a reduction from the initial public offering price by
an amount equal to some or all of the applicable selling group concessions.
No brokerage commissions have been paid by the Trust during the three most
recent fiscal years.
SHARES OF BENEFICIAL INTEREST
Dupree Mutual Funds is a Kentucky Business Trust organized under the laws of the
Commonwealth of Kentucky on July 1, 1987. The Business Trust is the successor of
Kentucky Tax-Free Income Fund, Inc. The Trust offers shares of beneficial
interest of separate series without par value. The Trust is authorized to create
an unlimited number of new series, but at this time the Trust is offering shares
in seven series: Kentucky Tax-Free Income Series, Kentucky Tax-Free
Short-to-Medium Series, North Carolina Tax-Free Income Series, North Carolina
Tax-Free Short-to-Medium Series, Tennessee Tax-Free Income Series, Tennessee
Tax-Free Short-to-Medium Series, and Intermediate Government Bond Series as
described in the Prospectus.
Each share has one vote. Fractional shares have proportionate voting rights and
participate pro rata in dividends and distributions. Our shareholders have
cumulative voting rights for the election of Trustees. This means that, in each
election of Trustees, each shareholder has the right to cast a number of votes
equal to the number of Trustees to be elected and to cast all of such votes for
one candidate or distribute such votes among two or more candidates, as the
shareholder sees fit. When issued, our shares are fully paid and nonassessable.
As of September 11, 1996, no person was known to beneficially own 5% or more of
our outstanding shares of Kentucky Tax-Free Income Series. As of that date
Studio Plus Hotels, Inc. owned 11.25% of the outstanding shares of the Kentucky
Tax-Free Short-to-Medium Series. As of that date Robert A. Eberle owned 19.44%,
Frank A. Daniels III owned 15.76%, Sidney C. Teague II owned 12.84% and Lawrence
J. La Brie owned 5.61% of the outstanding shares of the North Carolina Tax-Free
Income Series. As of that date Kemp Pendleton Burpeau owned 33.77%, Frank A.
Daniels III owned 16.88%, NEC Industries, Inc. owned 16.88%, and Calvin H. Price
owned 8.94% of the outstanding shares of the North Carolina Short-to-Medium
Series. As of that date Gail S. Mays owned 10.24% and Terrell D. Mays Trust
owned 9.42% of the outstanding shares of the Tennessee Tax-Free Income Series.
Gail S. Mays owned 14.93%, Thomas F. Buchanan Jr. owned 8.18%, Harry Samuels
Trust owned 8.03%, Arthur H. Woods owned
18
<PAGE> 46
5.98% and Diane L. Edge owned 5.96% of the outstanding shares of the Tennessee
Tax-Free Short-to-Medium Series. As of that date Saxon & Company owned 6.62% of
the outstanding shares of the Intermediate Government Bond Series.
HOW TO PURCHASE SHARES
Shares of our Trust which are offered for sale are offered directly by the
Trust. Since we do not charge any sales commissions, every dollar you invest in
us is applied to the purchase of our shares.
The price of your shares will be their net asset value per share, as calculated
in the first determination of net asset value after your order has become
effective. Your order will be priced and executed at the net asset value next
determined after the order is received. There is no sales charge or load.
The Prospectus describes the procedures to be utilized by an investor desiring
to purchase our shares.
DETERMINATION OF NET ASSET VALUE
We compute the net asset value of the shares of each series separately at the
close of trading on the New York Stock Exchange each day the Exchange is open
for trading, by dividing the value of the assets of each series, minus its
liabilities, by the total number of shares of each series which are outstanding.
The New York Stock Exchange is closed on the following Holidays: New Year's Day
(January 1), Washington's Birthday (third Monday in February), Good Friday
(varies annually), Memorial Day (last Monday in May), Independence Day (July 4),
Labor Day (first Monday in September), Thanksgiving Day (fourth Thursday in
November), and Christmas Day (December 25).
The securities in which we invest are traded primarily in the over-the-counter
market. We value securities for which representative price quotations are
current and readily available at the mean between the quoted bid and asked
prices. If price quotations are not readily available, or if we believe that
available quotations are not current or representative, we value securities at
prices we believe will best reflect their fair value. In such cases, and in the
case of other assets, fair value is determined in good faith in accordance with
procedures approved in advance by our Board of Trustees, consistently applied by
or under the supervision of our officers, and monitored by the Board on an
ongoing basis.
Under procedures currently in effect, all series securities for which
representative price quotations are not readily available are valued on the
basis of appraisals obtained from at least three dealers. The dealers furnishing
such appraisals may, but need not, be market makers with respect to the
particular issues to which their appraisals relate. Where appraisals are not
available for particular Kentucky, North Carolina or Tennessee municipal
securities in our portfolios, we value such securities on the basis of price
quotations or appraisals for comparable municipal securities. In evaluating
appraisals, as well as available price quotations, our officers will take into
account pricing data derived from a matrix system developed and used for many
years by our Investment Adviser's parent, Dupree & Company, Inc. This matrix
system utilizes electronic data processing techniques to rank and price
municipal securities of the same maturity on the basis of their respective
yields.
HOW TO REDEEM SHARES
The Prospectus describes the procedures to be utilized by a shareholder desiring
to redeem our shares.
REDEMPTION BY TRUST
If transactions in your account at any time reduce its value to less than $100,
we may notify you that, unless you bring the account up to at least $100, we
will redeem all of your shares and close out your account by paying you the
redemption price and dividends declared but unpaid at the date of redemption. We
will give you this notice no earlier than the 15th of the month following the
month in which your account falls below $100, and you will have 30 days to bring
the account up to $100 before we take any action. The Trust reserves the right
to raise or lower minimum account size.
HOW WE COMPUTE OUR YIELDS
19
<PAGE> 47
The yield for each series is determined separately.
We compute the yields, the average annual total return, and tax equivalent
yields on our shares in each portfolio separately in accord with SEC guidelines.
Our tax equivalent yield for the 30-day (or one month) period ended on June 30,
1996 is computed by dividing that portion which is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
yield which is not tax-exempt. Thereafter any applicable ad valorem tax rate is
added. Thus, the tax equivalent distribution rate for the Kentucky Tax-Free
Income Series was 7.11% in Kentucky, 6.76% in Indiana, 6.44% in Texas, and 6.44%
in Florida. The tax equivalent distribution rate for the Kentucky Tax-Free
Short-to-Medium Series was 4.82% in Kentucky, 4.51% in Indiana, 4.30% in Texas,
and 4.30% in Florida. The tax equivalent distribution rate for the North
Carolina Income Series was 7.91% in North Carolina. The tax equivalent
distribution rate for the North Carolina Short-to-Medium Series was 5.68% in
North Carolina. The tax equivalent distribution rate for the Tennessee Tax-Free
Income Series was 7.55% in Tennessee. The tax equivalent distribution rate for
the Tennessee Tax-Free Short-to-Medium Series was 4.74% in Tennessee.
The average annual total return for the 1, 5 and 10 year periods ended on June
30, 1996 is computed by finding the average annual compounded rates of return
over the 1, 5 and 10 year periods that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1+T)n(exponent) = ERV, where: P equals a hypothetical initial payment of
$1,000, T equals average annual total return, n equals number of years, and
ERV equals ending redeemable value of a hypothetical $1,000 Set forth below is
average annual total return information for the Income Series and the
Short-to-Medium Series and the Intermediate Government Bond Series for the
periods indicated.
<TABLE>
<CAPTION>
Expressed as a Percentage
Based on a Hypothetical
$1,000 investment
---------------------------------------
Kentucky Kentucky North North Tennessee Tennessee Intermediate
Tax-Free Tax-Free Carolina Carolina Tax-Free Tax-Free Government
Income Short-to Tax-Free Tax-Free Income Short-to Bond
Series Medium Income Short-to Series Medium Series
Series Series Medium Series
Series
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Period Average Annual Total Return
One year ended 6.38% 4.52% 3.23% 2 3.79% 3 6.65% 4.62% 4.15%
June 30, 1996
Five years ended 7.55% 5.02% 6.06% 4 5.82% 5 6.37% 6
June 30, 1996
Ten years ended 7.83% 5.49% 1
June 30, 1996
Redeemable Value
Based on a Hypothetical $1,000
Investment at the end of the period
-----------------------------------------
Kentucky Kentucky North North Tennessee Tennessee Intermediate
Tax-Free Tax-Free Carolina Carolina Tax-Free Tax-Free Government
Income Short-to Tax-Free Tax-Free Income Short-to Bond
Series Medium Income Short-to Series Medium Series
Series Series Medium Series
Series
-------------------------------------------------------------------------------------------------
Period
One year ended $1,064 $1,045 $1,020 2 $1,024 3 $1,067 $1,046 $1,042
</TABLE>
20
<PAGE> 48
<TABLE>
<CAPTION>
June 30, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Five years ended $1,439 $1,277 $1,164 4 $1,099 5 $1,280 6
June 30, 1996
Ten years ended $2,125 $1,596 1
June 30, 1996
payment made at the beginning of the one, five, or ten year periods at the end
of the one, five, or ten year periods (or fractional portion thereof).
<FN>
1 since inception 9/15/87
2 since inception 11/16/95
3 since inception 11/16/95
4 since inception 12/20/93
5 since inception 11/01/94
6 since inception 7/14/92
</TABLE>
The series' average annual total return may be expressed either as a percentage
or as a dollar amount in order to illustrate such total return on a hypothetical
investment in the series at the beginning of each specified period.
For the Kentucky, North Carolina and Tennessee Income Series, Kentucky, North
Carolina and Tennessee Short-to-Medium Series and Intermediate Government Bond
Series, if yield is computed for a period of less than one year it is annualized
on a 360 day basis. The yields we quote in response to telephone inquiries
represent such an annualization of our yields for the preceding 30 calendar
days.
Our yields for any given period in the past should not be considered a
representation as to our yields for any future period. Since the dividends we
declare are based on income earned on portfolio securities net of expenses, any
changes in our income or expenses will directly affect our yields. The income we
earn on our portfolio securities can be expected to fluctuate as we make changes
in or additions to our portfolios. Our yields will be affected if we experience
a net inflow of new money which is invested at interest rates different from
those being earned on our then-current portfolio securities. A change in our net
asset values due to fluctuations in values of our portfolio securities will, of
course, also affect our yields.
Yield information may be useful in reviewing our performance and comparing an
investment in our shares with other investment alternatives. In addition, when
comparing the yields of mutual funds, you should consider the investment
objectives, policies and programs of each fund, including the types of
investments permitted and the quality and maturity of the portfolio securities,
as well as the method used by each fund to compute yield, which may differ from
fund to fund. Finally, in evaluating our yields, you should be aware that prior
to November 1, 1986 our Investment Adviser had been bearing a portion of our
operating expenses for our Kentucky Income Series. Our Investment Adviser has
been bearing a portion of our operating expenses for our Kentucky
Short-to-Medium Series prior to July 1, 1993 and has been bearing a portion of
our operating expenses for the Government Bond Series since its inception July
14, 1992, for the Tennessee Tax-Free Income Series since its inception December
21, 1993, for the Tennessee Tax-Free Short-to-Medium Series since its inception,
November 1, 1994, for the North Carolina Income Series and for the North
Carolina Short-to-Medium Series since their inception November 16, 1995.
In order to keep shareholders and prospective investors informed about our
historic and current yields, the make-up of our portfolios, and other meaningful
investment information, we (i) send reports to our shareholders on a semi-annual
and annual basis, (ii) provide such information in our sales literature, and
(iii) maintain a toll-free telephone through which such information may be
obtained.
Yield quotations will be computed based on a 30-day period by dividing (a) the
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during the period that were
entitled to receive
21
<PAGE> 49
dividends multiplied by the maximum offering price per share on the last day of
the period. Tax equivalent yield quotations will be computed by dividing (a) the
part of the Series' yield that is tax-exempt by (b) one minus a stated tax rate
and adding the result to that part, if any, of the series' yield that is not
tax-exempt. The yield for the 30-day period ending June 30, 1996 for the
Kentucky Tax-Free Income Series was 5.53% and for the Kentucky Short-to-Medium
Series was 4.07%. The tax-equivalent yield for Kentucky residents for the same
period (based on a tax rate of 28%) for the Kentucky Income Series was 8.42% and
for the Kentucky Short-to-Medium Series was 6.26% The yield for the 30-day
period ending June 30, 1996 for the North Carolina Income Series was 5.38% and
for the North Carolina Short-to-Medium Series was 4.07%. The tax-equivalent
yield for North Carolina residents for the same period was 8.04% and for the
North Carolina Short-to-Medium Series was 6.08%. The yield for the 30-day period
ending June 30, 1996 for the Tennessee Tax-Free Income Series was 5.44% and for
the Tennessee Tax-Free Short-to-Medium Series was 4.00%. The tax-equivalent
yield for Tennessee residents for the same period (based on a tax rate of 28%)
for the Tennessee Income Series was 8.04% and for the Tennessee Tax-Free
Short-to-Medium Series was 5.91%.
Total return, yield and tax equivalent yield figures are based on the series'
historical performance and are not intended to indicate future performance. The
series' total return, yield and tax equivalent yield will vary depending on
market conditions, the securities comprising the series' portfolio, the series'
operating expenses and the amount of realized and unrealized net capital gains
or losses during the period. The value of an investment in the Trust may
fluctuate and an investors' shares, when redeemed, may be worth more or less
than their original cost.
TAX INFORMATION
FEDERAL TAX INFORMATION
We have qualified as a "regulated investment company" under the Internal Revenue
Code and intend to continue to do so. By qualifying as a regulated investment
company we are relieved of federal and Kentucky income taxes on all net income
and all net realized capital gains, if any, that we distribute to shareholders.
In order to qualify for this treatment, we must (i) derive at least 90% of our
gross income from dividends, interest and gains from the sale or other
disposition of securities, (ii) derive less than 30% of our gross income from
the sale or other disposition of securities held less than three months, (iii)
meet certain diversification tests as to our investments in securities, and (iv)
distribute to shareholders at least 90% of our net tax exempt and net taxable
income earned in any year.
Distribution of net short-term capital gains we may realize from the sale of
municipal or other securities will be taxable to the shareholders as ordinary
income. Distribution of net long-term capital gains, if any, will be taxable to
shareholders as long-term capital gains, regardless of how long the shareholder
has held the shares in respect of which the distributions are paid. The tax
effect of dividends (whether taxable or exempt) on our shareholders is the same
whether such dividends are in the form of cash or additional shares.
The net asset value at which our shares are purchased may include undistributed
income or capital gains or unrealized appreciation in the value of securities
held in our investment portfolio. To the extent that such income or gains, or
any capital gains realized from such appreciation, are subsequently distributed
to the holder of such shares, the distributed amounts, although a return of his
investment, may be taxable to him as set forth above.
The Internal Revenue Code prohibits investors from deducting for federal income
tax purposes interest paid on loans made or continued for the purpose of
purchasing or carrying shares of a mutual fund, such as the Kentucky, North
Carolina or Tennessee Income or Short-to-Medium Series, that distributes exempt
interest dividends. Under rules of the Internal Revenue Service, there are
circumstances in which purchases of our shares may be considered to have been
made with borrowed funds, even though the borrowed funds are not directly
traceable to the share purchases.
If in any fiscal year we have taxable income, we will use the actual earned
method of allocating taxable and nontaxable income. We will also allocate
expenses between taxable and non-taxable income. In any such year, the
percentage of quarterly dividends that are exempt will vary from quarter to
quarter.
22
<PAGE> 50
The following summary discusses some of the more important tax issues affecting
the Trust and its shareholders.
EXCISE TAX
The Internal Revenue Code contains a provision which discourages shareholders
from deferring tax on dividend income received from a regulated investment
company. Under the provision, a 4% non-deductible federal excise tax is levied
on undistributed fund income unless the fund distributes at least a) 98% of
calendar year ordinary income during the calendar year; b) 98% of capital gain
net income earned in the year ending October 31 by December 31; and c) 100% of
any undistributed capital gain net income from the prior October 31 measurement
period and 100% of any undistributed ordinary income from the prior December 31
measurement period.
CAPITAL GAINS
Long term capital gain distributions to a corporation will be taxed at the
regular corporate tax rate. Net long term capital gain distributions to
individuals will be taxed at the applicable individual tax rate; however the
maximum federal tax rate imposed on net long term capital gains cannot exceed
28%.
For the 1994-95 fiscal year, a capital gains distribution was paid March 31,
1995 for the Kentucky Tax-Free Income and Short-to-Medium Series following a
recharacterization of dividends paid from February through March 15, 1995. This
recharacterization was made by the Trusts's Board of Trustees on August 28, 1995
and a spill back tax-exempt dividend was declared and paid in amounts equal to
the recharacterized capital gains dividend.
EXEMPT INTEREST DIVIDENDS
Under the present tax law, if the stock of a regulated investment company
acquired after March 28, 1985 is held for six months or less, any loss on the
sale or exchange of that stock would be disallowed to the extent the taxpayer
received exempt interest dividends with respect to that stock. Further, the six
month requirement would be shortened under Treasury Department regulations to a
period not less than the greater of 31 days or the period between regular
dividend distributions, if the regulated investment company regularly
distributes at least 90% of its net tax-exempt interest.
23
<PAGE> 51
TAX EXEMPT BONDS
Under laws in effect as of the date of this Prospectus, interest on obligations
of states, territories, possessions of the U.S., the District of Columbia and
political subsidiaries of these governmental entities is generally exempt from
state taxation in the state of issuance. Interest on non-governmental purpose
bonds, such as industrial development bonds, issued by qualified government
units may be taxable unless the bonds are issued to finance certain specified
exempt activities, are used for development of industrial park sites, or are
exempt small issues. Furthermore, bonds issued for activities for
non-governmental persons are referred to collectively as "non-essential" bonds.
Interest on non-essential bonds may be taxable unless a specific exception is
provided. For example, interest on exempt facility bonds, small issue bonds,
mortgage subsidy bonds and qualified student loan bonds, is non-taxable.
Stricter volume limitations will apply to certain issuers and aggregate volume
limitations would apply to all non-essential bonds issued in each state. Tax
exempt interest on non-essential function bonds will be treated as an
alternative minimum tax preference item for corporate and individual taxpayers.
The Trust does not intend to purchase "non-essential purpose" bonds for the
Income Series or the Short-to-Medium Series.
INCOME SERIES AND SHORT-TO-MEDIUM SERIES
As a regulated investment company, we are qualified to pay "exempt interest
dividends", provided that at least 50% of our total assets are invested in
municipal securities at the close of each quarter of our taxable year.
Ordinarily, the dividends we pay from net income earned on our investments in
Kentucky, North Carolina or Tennessee municipal securities will be exempt
interest dividends. Shareholders receiving exempt interest dividends may exclude
them from gross income for federal income tax purposes. However, dividends to
our shareholders from net income we may earn from investments in non-municipal
securities will be fully taxable as interest income.
INTERMEDIATE GOVERNMENT BOND SERIES
Ordinarily, the dividends we pay from net income earned on our investments will
not be exempt interest dividends. Accordingly, shareholders will include these
dividends in gross income for Federal income tax purposes.
The above analysis is not all-inclusive and is subject to federal regulations.
KENTUCKY TAX INFORMATION
Insofar as the dividends we pay from the Kentucky Series qualify as "exempt
interest dividends" for federal income tax purposes, they will also be
excludable from the shareholder's gross income for Kentucky income tax purposes.
For Kentucky residents who own shares of the Government Bond Series, a portion
of dividends and distributions paid by the Trust may be exempt from Kentucky
income taxes. All other dividends and distributions, as well as any earnings we
receive from taxable investments and any capital gains we realize from any
investments, will have the same general consequences to shareholders for
Kentucky income tax purposes as they have for federal income tax purposes. This
means that dividends paid by the Income Series and the Short-to-Medium Series
will ordinarily be excludable from gross income for Kentucky income tax
purposes.
Shareholders of the Income Series, and the Short-to-Medium Series are not
subject to Kentucky ad valorem taxes on their shares. For individual Kentucky
residents who own shares of the Intermediate Government Bond Series, a portion
of the shares of that series are subject to Kentucky ad valorem tax. The
Kentucky municipal securities in our portfolios are also exempt from Kentucky ad
valorem taxes and from the Kentucky Corporation License Tax.
INDIANA TAX INFORMATION
Insofar as the dividends it pays qualify as "exempt interest dividends" for
federal income tax purposes, they will also be excludable from the shareholder's
gross income for Indiana income tax purposes. For Indiana residents who own
shares of the Government
24
<PAGE> 52
Bond Series, a portion of the dividends paid by the Trust are exempt from
Indiana income tax. All other dividends and distributions, as well as any
earnings we receive from taxable investments and any capital gains we realize
from any investments, will have the same general consequences to shareholders
for Indiana income tax purposes as they have for federal income tax purposes.
This means that dividends paid by the Income Series and the Short-to-Medium
Series will ordinarily be excludable from gross income for Indiana individual
income tax purposes.
The state of Indiana does not impose intangible tax on resident individuals.
Accordingly, individual Indiana resident shareholders of the Income Series, the
Short-to-Medium Series and the Government Bond Series are not subject to Indiana
ad valorem taxes on their shares.
No representation is made as to the tax implications of an Indiana corporation
or other entity.
TEXAS TAX INFORMATION
The state of Texas does not impose an individual income tax or personal
intangible property tax upon resident individuals. Accordingly, Texas resident
shareholders of the Income Series, the Short-to-Medium Series or the Government
Bond Series are not subject to individual income tax or personal intangible
property tax on the dividends and distributions they receive from us.
No representation is made as to the tax implications of a Texas corporation or
other entity.
FLORIDA TAX INFORMATION
The state of Florida does not impose an individual income tax upon resident
individuals. Accordingly, individual Florida resident shareholders of the Income
Series, Short-to-Medium Series or Government Bond Series are not subject to
individual income tax.
Individual Florida resident shareholders of the Income Series or the
Short-to-Medium Series will be subject to an annual intangible property tax of
1.0 mill (.10%) per dollar of intangible property value. An additional 1.0 mill
(.10%) tax is levied against intangible property valued greater than $100,000
($200,000 for taxpayers filing jointly). Each Florida resident is entitled to
apply a $20 tax exemption ($40 for taxpayers filing jointly) against property
subject to the first mill of tax. An additional tax exemption of $100 ($200 for
taxpayers filing jointly) is available for property subject to the additional
1.0 mill tax. For individual Florida residents who own shares of the Government
Bond Series, a portion of the shares of that Series are exempt from Florida ad
valorem tax.
No representation is made as to the tax implications of a Florida corporation or
other entity.
TENNESSEE TAX INFORMATION
Insofar as the dividends we pay from the Tennessee Series qualify as "exempt
interest dividends" for federal income tax purposes, they will also be
excludable from the shareholder's gross income for Tennessee Hall income tax
purposes. All other dividends and distributions, as well as any earnings we
receive from taxable investments and any capital gains we realize from any
investments, will have the same general consequences to shareholders for
Tennessee Hall income tax purposes as they have for federal income tax purposes.
This means that dividends paid by the Tennessee Series will ordinarily be
excludable from gross income for Tennessee Hall individual income tax purposes.
Individual shareholders of the Tennessee Series are not subject to Tennessee ad
valorem taxes on their shares or on the dividends and distributions they receive
from us.
For Tennessee residents who own shares of the Intermediate Government Bond
Series, a portion of the dividends paid by the Trust is exempt from Tennessee
Hall income tax.
25
<PAGE> 53
No representation is made as to the tax implications of a Tennessee
corporation or other entity.
NORTH CAROLINA TAX INFORMATION
Insofar as the dividends we pay from the North Carolina Series qualify as
"exempt interest dividends" for federal income tax purposes, they will also be
excludable from the shareholder's gross income for North Carolina income tax
purposes. For North Carolina residents who own shares of the Government Bond
Series, a portion of dividends and distributions paid by the Trust are exempt
from North Carolina income taxes. All other dividends and distributions, as well
as any earnings we receive from taxable investments and any capital gains we
realize from any investments, will have the same general consequences to
shareholders for North Carolina income tax purposes as they have for federal
income tax purposes. This means that dividends paid by the Income Series and the
Short-to-Medium Series will ordinarily be excludable from gross income for North
Carolina income tax purposes.
Shareholders of the Income Series and the Short-to-Medium Series are not subject
to North Carolina ad valorem taxes on their shares. For individual North
Carolina residents who own shares of the Intermediate Government Bond Series, a
portion of the shares of that series are subject to North Carolina ad valorem
tax.
No representation is made as to the tax implications of a North Carolina
corporation or other entity.
26
<PAGE> 54
DUPREE MUTUAL FUNDS
POST-EFFECTIVE ADMENTMENT NO. 36
PART C of Form N-1A OTHER INFORMATION
Page
Item 24. Financial Statements and Exhibits Ky Income KY S/M NC Income NC S/M TN
---------------------------------
Income TN S/M GBS
(a) Financial Statements
Included in the Registration Statement, Part B,
Statement of Additional Information:
Portfolio of Investment of June 30, 1996
Statement of Assets and Liabilities
at June 30, 1996
Statement of Operation for the Year
at June 30, 1996
Statement of Changes in Net Assets
for the Years Ended
June 30, 1995 and 1996
Notes to Financial Statements
Report of Independent Accountants
Included in the Registration Statement Part C, Other Information
(11) Consent of Independent Accountants
(16 ) Schedule for computation of each performance quotation shown at
"How to Compute Our Yields" in Statement of Additional Information
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Inapplicable
<PAGE> 55
Item 26. Number of Holders of Securities
-------------------------------
On September 11, 1996 there were 8486 record holders of Registrant's
Shares of Beneficial Interest as follows:
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- ------------------------
<S> <C>
Kentucky Tax-Free Income Series 5650
Kentucky Tax-Free Short-to-Medium Series 1505
North Carolina Tax-Free Income Series 53
North Carolina Tax-Free Short-to-Medium Series 33
Tennessee Tax-Free Income Series 341
Tennessee Tax-Free Short-to-Medium Series 108
Intermediate Government Bond Series 796
</TABLE>
Item 27. Indemnification
---------------
Inapplicable
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
The Registrant's Investment Adviser, Dupree Investment Advisers, Inc.,
is a wholly owned subsidiary of Dupree & Company Inc., the former
investment adviser . Dupree Investment Advisers, Inc. is a Kentucky
Corporation located at 125 South Mill Street, Suite 100, Lexington,
Kentucky 40507, and it serves as the Transfer Agent for the Registrant.
Thomas P. Dupree, is the Chairman of the Board of Dupree Investment
Advisers, Inc., Dupree & Company, Inc., and the Registrant. Fred L.
Dupree, Jr., is Vice President, Secretary and Treasurer of Dupree
Investment Advisers, Inc., Dupree & Company, Inc., and the Registrant.
Item 29. Principal Underwriters
----------------------
Inapplicable
Item 30. Location of Accounts and Records
Registrant's Transfer Agent and Dividend Disbursing Agent is Dupree
Investment Advisers, Inc., 125 South Mill Street, Vine Center,
Lexington, Kentucky 40507
Item 31. Management Services
-------------------
Inapplicable at this time.
Item 32. Undertakings
------------
None
<PAGE> 56
Exhibit 11.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
DUPREE MUTUAL FUNDS
We consent to the inclusion appearing in the Post-Effective Amendment No. 36 to
the Registration Statement of Dupree Mutual Funds (comprised of the Kentucky
Tax-Free Income Series, the Kentucky Tax-Free Short-to-Medium Series, the
Intermediate Government Bond Series, the Tennessee Tax-Free Income Series, the
Tennessee Tax-Free Short-to-Medium Series, the North Carolina Tax-Free Income
Series, and the North Carolina Tax-Free Short-to Medium Series) on Form N-1A of
our report dated July 26, 1996 on our audit of the financial statements and
financial highlights of the Funds, which report is included in the Annual Report
to Shareholders for the year ended June 30, 1996 which is also included in the
Registration Statement. We also consent to the reference to our Firm under the
caption "Other Services."
Lexington, Kentucky
October 7, 1996
Coopers & Lybrand LLP
<PAGE> 57
Exhibit 11.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Other Services" in
the Statement of Additional Information included in Post-Effective Amendment No.
36 to the Registration Statement (Form N-1A No. 33-2-64233) of Dupree Mutual
Funds.
ERNST & YOUNG LLP
Cincinnati, Ohio
October 2, 1996
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Fayette and State of Kentucky on the
11th day of September, 1996.
DUPREE MUTUAL FUNDS
By /s/ THOMAS P. DUPREE, SR.
-------------------------
Thomas P. Dupree, Sr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 36 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS P. DUPREE, SR.
- -------------------------- President (Principal Executive Sept. 13, 1996
Thomas P. Dupree, Sr. Officer) and Trustee
/s/ FRED L. DUPREE, JR.
- -------------------------- Vice President, Secretary, Sept. 13, 1996
Fred L. Dupree, Jr. and Treasurer (Principal
Financial and Accounting
Officer)
/s/ WILLIAM A. COMBS, JR.
- -------------------------- Trustee Oct. 17, 1996
William A. Combs, Jr.
- -------------------------- Trustee _____________
Robert L. Maddox
/s/ WILLIAM S. PATTERSON
- -------------------------- Trustee Oct. 17, 1996
William S. Patterson
<PAGE> 59
DUPREE MUTUAL FUNDS
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO 36
TO
FORM N-1A REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
AND
INVESTMENT COMPANY ACT OF 1940
<PAGE> 1
Exhibit 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the Kentucky Tax Free Income Series was 4.64%
and was calculated as follows:
YIELD=
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $1,278,470.14
b = Expenses accrued for the period:
$149,569.14
c = The average daily number of shares
outstanding during the period that
were entitled to receive dividends:
40,101,064.725
d = The maximum offering price per share
on the last day of the period,
June 30, 1996: $7.35.
1
<PAGE> 2
EXHIBIT 16
The average annual total return for the Kentucky Tax Free Income Series for the
one-year period ended June 30, 1996, was 6.38% and was calculated as follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial
payment of $1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the
initial hypothetical $1,000
payment made at the
beginning of the one-year
period: $1,063.80
The average annual total return for the Kentucky Tax Free Income Series for the
period July 1, 1991 to June 30, 1996, was 7.55% and for the period July 1, 1986
to June 30, 1996, was 7.83%. The average annual total return for each of these
periods was calculated in a manner similar to that described above.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-year period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value
per share ($7.29) equals initial number of shares (137.174 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 137.174 plus
incremental number of shares of 7.561 equals 144.735 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(144.735 shares x $7.35 = $1,063.80)
2
<PAGE> 3
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares for the one-year period ending June 30, 1996
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
6/30/95 $7.29
9/30/95 .1019466 7.41 1.887
12/31/95 .1010274 7.62 3.731
3/31/96 .0992825 7.40 5.621
6/30/96 .0998299 7.35 7.561
</TABLE>
3
<PAGE> 4
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the Kentucky Tax Free Income
Series was 6.44% (based on a tax rate of 28%) and was calculated as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 4.64%
B = Stated tax rate: 28%
C = That part of the series yield that
is not tax-exempt: 0.
4
<PAGE> 5
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the Kentucky Tax Free Short-to-Medium Series was
3.095% and was calculated as follows:
YIELD =
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $208,083.93
b = Expenses accrued for the period:
$39,517.25
c = The average daily number of shares
outstanding during the period that
were entitled to receive dividends:
12,651,080.099
d = The maximum offering price per
share on the last day of the
period, June 30, 1996: $5.20
1
<PAGE> 6
EXHIBIT 16
The average annual total return for the Kentucky Tax Free Short-to-Medium Series
for the one-year period ended June 30, 1996, was 4.51% and was calculated as
follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the
initial hypothetical $1,000
payment made at the beginning of
the one-year period: $1,045.05
The average annual total return for the Kentucky Tax Free Short-to-Medium Series
for the period July 1, 1991 to June 30, 1996, was 5.02% and was calculated in a
similar manner.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-year period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value per
share ($5.18) equals initial number of shares (193.050 shares).
Step 2 - Convert initial shares to ending shares assuming timely reinvested
distributions. Initial shares of 193.050 plus incremental number of
shares of 7.922 equals 200.972 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(200.972 shares x $5.20 = $1,045.05)
2
<PAGE> 7
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares of the one-year period ending June 30, 1996 was
as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
6/30/95 $5.18
9/30/95 .0512472 5.20 1.903
12/31/95 .0534719 5.25 3.888
3/31/96 .0527926 5.18 5.895
6/30/96 .0529703 5.20 7.922
</TABLE>
3
<PAGE> 8
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the Kentucky Tax Free
Short-to-Medium Series was 4.29% (based on a tax rate of 28%) and was calculated
as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 3.095%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
4
<PAGE> 9
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the Tennessee Tax Free Income Series was 5.114%
and was calculated as follows:
YIELD =
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $37,327.26
b = Expenses accrued for the period:
$3,571.34
c = The average daily number of shares
outstanding during the period that
were entitled to receive dividends:
787,144.068
d = The maximum offering price per share
on the last day of the period,
June 30, 1996: $10.17.
1
<PAGE> 10
EXHIBIT 16
The average annual total return for the Tennessee Tax Free Income Series for the
one year period ended June 30, 1996, was 6.65% and was calculated as follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the initial
hypothetical $1,000 payment made at the
beginning of the one-year period:
$1,066.47
The average annualized total return for the Tennessee Tax Free Income Series for
the period July 1, 1995 to June 30, 1996, was 6.65% and was calculated in a
manner similar to that described above.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value
per share ($10.05) equals initial number of shares (99.502 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 99.502 plus
incremental number of shares of 5.362 equals 104.864 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(104.864 shares x $10.17 = $1,066.47)
2
<PAGE> 11
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares for the one-year period ending June 30, 1996
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/95 $10.05
09/30/95 .1364619 10.14 1.339
12/31/95 .1356862 10.52 2.639
03/31/96 .1348359 10.23 3.986
06/30/96 .1352157 10.17 5.362
</TABLE>
3
<PAGE> 12
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the Tennessee Tax Free Income
Series was 7.10% (based on a tax rate of 28%) and was calculated as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 5.114%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
4
<PAGE> 13
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the Tennessee Tax Free Short-to-Medium Series
was 3.208% and was calculated as follows:
YIELD:
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $7,645.84
b = Expenses accrued for the period:
$1,017.33
c = The average daily number of shares
outstanding during the period that
were entitled to receive dividends:
243,530.566
d = The maximum offering price per
share on the last day of the period,
June 30, 1996: $10.25.
1
<PAGE> 14
EXHIBIT 16
The average annual total return for the Tennessee Tax Free Short-to-Medium
Series for the one year period ended June 30, 1996, was 4.62% and was calculated
as follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the initial
hypothetical $1,000 payment made at the
beginning of the one-year period: $1,046.21
The average annualized total return for the Tennessee Tax-Free Short-to-Medium
Series for the one year period July 1, 1995 to June 30, 1996, was 4.62% and was
calculated in a manner similar to that described above.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value
per share ($10.20) equals initial number of shares (98.039 shares).
Step 2 - Convert initial shares to ending shares assuming timely reinvested
distributions. Initial shares of 98.039 plus incremental number
of shares of 4.030 equals 102.069 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(102.069 shares x $10.25 = $1,046.21)
2
<PAGE> 15
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares for the one year period ending June 30, 1996
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/95 $10.20
09/30/95 .1063215 10.31 1.011
12/31/95 .1048237 10.35 2.014
03/31/96 .1034306 10.26 3.023
06/30/96 .1021461 10.25 4.030
</TABLE>
3
<PAGE> 16
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the Tennessee Tax-Free
Short-to-Medium Series was 4.46% (based on a tax rate of 28%) and was calculated
as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 3.208%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
4
<PAGE> 17
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the Intermediate Government Bond Series was
6.711% and was calculated as follows:
YIELD =
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $45,585.55
b = Expenses accrued for the period: $2,513.73
c = The average daily number of shares outstanding
during the period that were entitled to
receive dividends: 792,814.861
d = The maximum offering price per share on the
last day of the period, June 30, 1996: $9.85
1
<PAGE> 18
EXHIBIT 16
The average annual total return for the Intermediate Government Bond Series for
the one-year period ended June 30, 1996, was 4.15% and was calculated as
follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment
of $1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the
initial hypothetical $1,000
payment made at the beginning of
the one-year period: $1,041.45.
The average annual total return for the Intermediate Government Bond Series for
the period July 1, 1995 to June 30, 1996, was 4.18% and was calculated in a
similar manner.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-year period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value per
share ($10.15) equals initial number of shares (98.522 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 98.522 plus
incremental number of shares of 7.209 equals 105.731 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(105.731 shares x $9.85 = $1,041.45)
2
<PAGE> 19
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares of the one-year period ending June 30, 1996 was
as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
6/30/95 $10.15
9/30/95 .1821631 10.12 1.773
12/31/95 .1802146 10.34 3.521
3/31/96 .1773421 10.00 5.331
6/30/96 .1781332 9.85 7.209
</TABLE>
3
<PAGE> 20
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the Intermediate Government Bond
Series was 9.32% (based on a tax rate of 28%) and was calculated as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 6.711%
B = Stated tax rate: 28%
C = That part of the series yield
that is not tax-exempt: 0.
4
<PAGE> 21
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the North Carolina Tax Free Income Series was
5.295% and was calculated as follows:
YIELD:
2[ ((a-b / cd) +1) to the 6th
power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $4,802.96
b = Expenses accrued for the period:
$250.20
c = The average daily number of shares
outstanding during the period
that were entitled to receive
dividends: 105,572.221
d = The maximum offering price per
share on the last day of the period,
June 30, 1996: $9.88.
1
<PAGE> 22
EXHIBIT 16
The average annual total return for the North Carolina Tax Free Income Series
for the period ended November 16, 1995 (commencement of operations) to June 30,
1996, was 3.23% and was calculated as follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the initial
hypothetical $1,000 payment made at the
beginning of the one-year period:
$1,020.20
The average annualized total return for the North Carolina Tax-Free Income
Series for the period November 16, 1995 (commencement of operations) to June 30,
1996, was 3.23% and was calculated in a manner similar to that described above.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value
per share ($10.00) equals initial number of shares
(100.000 shares).
Step 2 - Convert initial shares to ending shares assuming timely reinvested
distributions. Initial shares of 100.000 plus incremental number
of shares of 3.259 equals 103.259 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(103.259 shares x $9.88 = $1,020.20)
2
<PAGE> 23
The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares for the period November 16, 1995 (commencement
of operations) to June 30, 1996 was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
11/01/95 $10.00
12/31/95 .0650216 10.28 .633
3/31/96 .1274040 9.88 1.930
6/30/96 .1288432 9.88 3.259
</TABLE>
3
<PAGE> 24
COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the North Carolina Tax-Free
Income Series was 7.35% (based on a tax rate of 28%) and was calculated as
follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 5.295%
B = Stated tax rate: 28%
C = That part of the series yield that is not
tax-exempt: 0.
4
<PAGE> 25
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
Yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to interest earned during a
thirty-day period less expenses accrued for the period and is based on the
average number of shares outstanding for the period and on the maximum offering
price per share on the last day of the period. The results are compounded on a
bond equivalent (semi-annual) basis and then annualized.
Interest earned is determined by computing yield to maturity on each obligation
held by the fund during the period and is based on the market value of the
obligation plus accrued interest at the close of business on each day during the
thirty-day period. Daily interest income for premium obligations is calculated
using the daily yield to maturity rate applied to market value plus accrued
interest of the obligations. For discount bonds, other than original issue
discounts, the coupon rate is used instead of the yield to maturity rate and the
par value of the obligation plus accrued interest is used instead of market
value.
At June 30, 1996, the yield for the North Carolina Tax Free Short-to-Medium
Series was 3.804% and was calculated as follows:
YIELD:
2[ ((a-b / cd) +1) to the 6th power - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $3,953.56
b = Expenses accrued for the period: $285.53
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 116,752.343
d = The maximum offering price per share on
the last day of the period, June 30, 1996:
$9.99.
1
<PAGE> 26
EXHIBIT 16
The average annual total return for the North Carolina Tax Free Short-to-Medium
Series for the period ended November 16, 1995 (commencement of operations) to
June 30, 1996, was 3.79% and was calculated as follows:
P(1 + T)n(exponent) = ERV
Where: P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years - 1
ERV = The redeemable value of the initial
hypothetical $1,000 payment made
at the beginning of the one-year
period: $1,023.66
The average annualized total return for the North Carolina Tax-Free
Short-to-Medium Series for the period November 16, 1995 (commencement of
operations) to June 30, 1996, was 3.79% and was calculated in a manner similar
to that described above.
The ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period was calculated as follows:
Step 1 - Initial investment ($1,000) divided by beginning Net Asset Value per
share ($10.00) equals initial number of shares (100.000 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 100.000 plus
incremental number of shares of 2.468 equals 102.468 ending shares.
Step 3 - Determine value of ending shares. Number of ending shares times
ending Net Asset Value per share equals ending value.
(102.468 shares x $9.99 = $1,023.66)
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The above calculation assumes that all distributions are reinvested on the
payment date at the then current net asset value per share. The resulting
calculation of reinvested shares for the period November 16, 1995 (commencement
of operations) to June 30, 1996 was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
11/01/95 $10.00
12/31/95 .0488899 10.07 .487
3/31/96 .0976193 9.99 1.467
6/30/96 .0981464 9.99 2.468
</TABLE>
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COMPUTATION OF TAX EQUIVALENT YIELD
The tax equivalent yield is computed by dividing (a) the part of the series
yield that is tax-exempt by (b) one minus a stated tax rate and adding the
result to that part, if any, of the series yield that is not tax-exempt.
At June 30, 1996, the tax equivalent yield for the North Carolina Tax-Free
Short-to-Medium Series was 5.28% (based on a tax rate of 28%) and was calculated
as follows:
Tax Equivalent Yield =
[A / (1 - B) ] + C
Where: A = The part of the series yield that is
tax-exempt: 3.804%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
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