<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. 38 ( X )
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 39 ( 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 & Company, 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, 1998 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) (2)
- ----- of rule 485
This post-effective amendment designates a new effective date for a
- ----- previously filed post-effective amendment.
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 21, 1998 registrant filed a Rule 24f-2 Notice for the fiscal
year ended June 30, 1998.
<PAGE> 2
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
5A Performance Calculations
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 Turnover
14 Investment Adviser; Officers and Trustees
15 Not Applicable
16 Investment Adviser
17 Portfolio 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> 3
Prospectus
November 1, 1998
DUPREE MUTUAL FUNDS
P.O. Box 1149
Lexington, Kentucky 40588-1149
(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,
1998 (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. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Prospectus, the Statement of Additional
Information, material incorporated by reference, and other information regarding
registrants that file electronically with the Commission.
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
18 Buying Shares
20 Selling Shares
21 Dividends
22 Taxes
22 Performance Calculations
23 How to Reach Us
<PAGE> 4
DUPREE MUTUAL FUNDS - SUMMARY
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 & Company, Inc. 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, including loss of money.
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> 5
<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
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) NONE NONE NONE NONE NONE NONE NONE
Maximum Deferred Sales Load
(as a percentage of offering price) NONE NONE NONE NONE NONE NONE NONE
Maximum Sales Load Imposed on Reinvested
Dividends
(as a percentage of offering price) NONE NONE NONE NONE NONE NONE NONE
Redemption Fees (as a percentage of
amount redeemed, if applicable) 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) 0.436% 0.500% 0.072%* 0.049%* 0.208%* 0.205%* 0.200%
12b-1 Fees NONE NONE NONE NONE NONE NONE NONE
Other expenses
(after fee reimbursements)
Transfer Agent 0.122 0.131 0.150 0.150 0.147 0.150 0.150
All other expenses 0.066 0.105 0.110 0.213 0.095 0.157 0.180
------ ----- ----- ----- ----- ----- -----
Total other expenses 0.188 0.236 0.260 0.363 0.242 0.307 0.330
------ ----- ----- ----- ----- ----- -----
Total fund operating expenses 0.624% 0.736% 0.332% 0.412% 0.450% 0.512% 0.530%
====== ====== ====== ====== ====== ====== ======
</TABLE>
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 time period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1 year $7 $8 $3 $4 $5 $5 $6
3 years $21 $24 $11 $14 $15 $17 $17
5 years $36 $42 $19 $24 $26 $29 $30
10 years $80 $94 $43 $53 $58 $66 $68
</TABLE>
You would pay the same expenses on the same investment, assuming no redemption.
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. The table
should not be considered a representation of past or future expenses. 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> 6
Annual fund operating expenses (as a percentage of average net assets) are based
on actual amounts incurred for the fiscal year ended June 30, 1998.
*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, 1998 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 and the two Tennessee Series:
<TABLE>
<CAPTION>
North North Tennessee Tennessee
Carolina Carolina Tax-Free Tax-Free
Tax-Free Tax-Free Income Short-to
Income Short-to Series Medium
Series Medium Series
Series
<S> <C> <C> <C> <C>
Management Fee 0.500% 0.500% 0.500% 0.500%
Other Expenses
Transfer Agent 0.150 0.150 0.147 0.150
All Other Expenses 0.110 0.213 0.095 0.157
----- ----- ----- -----
Total Other Expenses 0.260 0.363 0.242 0.307
----- ----- ----- -----
Total Fund Operating Expenses 0.760% 0.863% 0.742% .0807%
====== ====== ====== ======
</TABLE>
<PAGE> 7
FINANCIAL HIGHLIGHTS
Kentucky Tax-Free Income Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998 and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $7.47 $7.35 $7.29 $7.21 $7.60 $7.16 $6.87 $6.77 $6.76 $6.52
-------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.39 0.40 0.40 0.40 0.41 0.43 0.44 0.45 0.46 0.47
Net gains or losses on securities
(both realized and unrealized) 0.18 0.12 0.06 0.13 (0.34) 0.44 0.29 0.10 0.01 0.24
-------------------------------------------------------------------------------------------
Total from investment operations 0.57 0.52 0.46 0.53 0.07 0.87 0.73 0.55 0.47 0.71
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- -- (0.05) (0.05) -- -- -- -- --
Dividends (from net investment (0.39) (0.40) (0.40) (0.40) (0.41) (0.43) (0.44) (0.45) (0.46) (0.47)
income)
Returns of capital total -- -- -- -- -- -- -- -- -- --
distributions
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $7.65 $7.47 $7.35 $7.29 $7.21 $7.60 $7.16 $6.87 $6.77 $6.76
===========================================================================================
Total return 7.77% 7.14% 6.38% 6.90% 0.75% 12.45% 10.95% 8.43% 7.19% 11.32%
Net assets, end of year (in thousands): $373,153 $327,304 $295,029 $269,355 $257,132 $237,781 $169,269 $113,659 $87,594 $73,062
Ratio of expenses to average net assets 0.62% 0.63% 0.62% 0.63% 0.69% 0.67% 0.71% 0.75% 0.76% 0.78%
Ratio of net investment income to
average net assets 5.14% 5.32% 5.39% 5.60% 5.82% 5.79% 6.28% 6.63% 6.82% 7.44%
Portfolio turnover rate 11.80% 6.64% 4.29% 18.05% 30.53% 31.79% 11.93% 18.08% 35.82% 43.70%
</TABLE>
<PAGE> 8
FINANCIAL HIGHLIGHTS
Kentucky Tax-Free Short-to-Medium Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $5.22 $5.20 5.18 5.17 5.29 5.17 5.05 4.99 4.97 5.00
------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.21 0.22 0.21 0.21 0.21 0.23 0.26 0.28 0.29 0.29
Net gains or losses on securities
(both realized and unrealized) 0.05 0.02 0.02 0.02 (0.12) 0.12 0.12 0.06 0.02 (0.03)
------------------------------------------------------------------------------------
Total from investment operations 0.26 0.24 0.23 0.23 0.09 0.35 0.38 0.34 0.31 0.26
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- -- (0.01) -- -- -- -- -- --
Dividends (from net investment (0.21) (0.22) (0.21) (0.21) (0.21) (0.23) (0.26) (0.28) (0.29) (0.29)
income)
Returns of capital total -- -- -- -- -- -- -- -- -- --
distributions
------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $5.27 $5.22 $5.20 $5.18 $5.17 $5.29 $5.17 $5.05 $4.99 $4.97
====================================================================================
Total return 5.12% 4.59% 4.51% 4.27% 1.71% 6.91% 7.67% 7.03% 6.36% 5.42%
Net assets, end of year (in thousands) $54,124 $53,829 $66,574 $57,064 $69,550 $55,525 $34,178 $13,972 $6,678 $7,309
Ratio of expenses to average net 0.74% 0.72% 0.75% 0.72% 0.72% 0.76% 0.76% 0.76% 0.76% 0.75%
assets
Before expense reimbursement 0.74% 0.72% 0.75% 0.72% 0.72% 0.77% 0.83% 0.85% 0.89% 0.92%
Ratio of net investment income to
average net assets 4.05% 4.11% 4.04% 4.00% 3.92% 4.37% 4.96% 5.58% 5.79% 5.88%
After expense reimbursement 4.05% 4.11% 4.04% 4.00% 3.92% 4.36% 4.89% 5.49% 5.63% 5.71%
Portfolio turnover rate 20.98% 20.03% 57.80% 4.07% 17.62% 22.89% 29.35% 26.41% 57.61% 41.31%
</TABLE>
<PAGE> 9
FINANCIAL HIGHLIGHTS
North Carolina Tax-Free Income Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years
ended June 30,
--------------------------
1997 1997 1996(a)
--------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.33 $9.88 $10.00
--------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.53 0.54 0.32
Net gains or losses on securities
(both realized and unrealized) 0.49 0.45 (0.12)
--------------------------
Total from investment operations 1.02 0.99 0.20
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- --
Dividends (from net investment income) (0.53) (0.54) (0.32)
Returns of capital total distributions -- -- --
--------------------------
NET ASSET VALUE, END OF YEAR $10.82 $10.33 $9.88
==========================
Total return (b) 9.99% 10.18% 3.23%
Net assets, end of period (in thousands) $9,911 $3,586 $1,063
Ratio of expenses to average net assets (b) 0.33% 0.25% 0.18%
Before expense reimbursement (b) 0.76% 0.81% 2.47%
Ratio of net investment income to average net assets (b) 4.47% 4.72% 3.27%
After expense reimbursement (b) 4.90% 5.29% 0.98%
Portfolio turnover rate 16.77% 24.13% 22.83%
(a) Commencement of operations November 16, 1995.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 10
FINANCIAL HIGHLIGHTS
North Carolina Tax-Free Short-to-Medium Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years
ended June 30,
---------------------------
1998 1997 1996(a)
---------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.12 $9.99 $10.00
---------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.40 0.41 0.24
Net gains or losses on securities
(both realized and unrealized) 0.12 0.13 (0.01)
---------------------------
Total from investment operations 0.52 0.54 0.23
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- --
Dividends (from net investment income) (0.40) (0.41) (0.24)
Returns of capital total distributions -- -- --
---------------------------
NET ASSET VALUE, END OF YEAR $10.24 $10.12 $9.99
===========================
Total return (b) 5.20% 5.49% 3.79%
Net assets, end of period (in thousands) $2,194 $1,458 $1,159
Ratio of expenses to average net assets (b) 0.41% 0.23% 0.16%
Before expense reimbursement (b) 0.86% 0.82% 1.78%
Ratio of net investment income to average net assets (b) 3.44% 3.46% 2.47%
After expense reimbursement (b) 3.89% 4.06% 0.85%
Portfolio turnover rate 14.89% 17.20% 17.18%
(a) Commencement of operations November 16, 1995.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 11
FINANCIAL HIGHLIGHTS
Tennessee Tax-Free Income Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the year
ended June 30,
--------------------------------------------------
1998 1997 1996 1995 1994(a)
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.53 $10.17 10.05 9.51 10.00
--------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.54 0.54 0.54 0.54 0.28
Net gains or losses on securities
(both realized and unrealized) 0.45 0.36 0.12 0.54 (0.49)
--------------------------------------------------
Total from investment operations 0.99 0.90 0.66 1.08 (0.21)
LESS DISTRIBUTIONS:
Distributions (from capital gains) (0.01) -- -- -- --
Dividends (from net investment income) (0.54) (0.54) (0.54) (0.54) (0.28)
Returns of capital total distributions -- -- -- -- --
--------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.97 $10.53 $10.17 $10.05 $9.51
==================================================
Total return (b) 9.57% 8.96% 6.65% 11.65% (4.17)%
Net assets, end of year (in thousands) $29,172 $13,678 $8,056 $5,010 $794
Ratio of expenses to average net assets (b) 0.44% 0.55% 0.54% 0.34% 0.12%
Before expense reimbursement (b) 0.74% 0.77% 0.90% 1.16% 4.01%
Ratio of net investment income to average net 4.64% 4.92% 5.27% 5.59% 2.83%
assets (b)
after expense reimbursement (b) 4.94% 5.15% 4.91% 4.77% (1.06)%
Portfolio turnover rate 12.62% 5.14% 9.13% 6.84% 15.88%
(a) Commencement of operations December 20, 1993.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 12
FINANCIAL HIGHLIGHTS
Tennessee Tax-Free Short-to-Medium Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
1998 1997 1996 1995(a)
-------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $10.32 $10.25 10.20 10.00
-------------------------------------
Income From Investment Operations:
Net investment income 0.41 0.42 0.42 0.28
Net gains or losses on securities
(both realized and unrealized) 0.12 0.07 0.05 0.20
-------------------------------------
Total from investment operations 0.53 0.49 0.47 0.48
Less Distributions:
Distributions (from capital gains) -- -- -- --
Dividends (from net investment income) (0.41) (0.42) (0.42) (0.28)
Returns of capital total distributions -- -- -- --
-------------------------------------
Net Asset Value, end of year $10.44 $10.32 10.25 10.20
=====================================
Total return (b) 5.26% 4.83% 4.62% 7.41%
Net assets, end of period (in thousands) $4,745 $2,993 $2,455 $1,535
Ratio of expenses to average net assets (b) 0.51% 0.47% 0.50% 0.28%
Before expense reimbursement (b) 0.81% 0.85% 1.19% 2.05%
Ratio of net investment income to average net assets (b) 3.67% 3.67% 4.05% 2.80%
After expense reimbursement (b) 3.97% 4.04% 3.36% 1.03%
Portfolio turnover rate 67.59% 24.49% 23.17% 0.71%
(a) Commencement of operations November 1, 1994.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 13
FINANCIAL HIGHLIGHTS
Intermediate Government Bond Series
The financial highlights in the table below for the fiscal year ended June 30,
1997 and 1998 have been audited by Ernst & Young, LLP, independent auditors.
Prior years were audited by Coopers & Lybrand, L.L.P. Financial statements for
the year ended June 30, 1998, and the independent auditors' report thereon are
included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993(a)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.89 $9.85 10.15 9.65 10.60 10.00
--------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.66 0.72 0.72 0.69 0.63 0.59
Net gains or losses on securities
(both realized and unrealized) 0.25 0.04 (0.30) 0.50 (0.95) 0.60
--------------------------------------------------------------------------
Total from investment operations 0.91 0.76 0.42 1.19 (0.32) 1.19
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- -- -- -- --
Dividends (from net investment income) (0.66) (0.72) (0.72) (0.69) (0.63) (0.59)
Returns of capital total distributions -- -- -- -- -- --
--------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.14 $9.89 $9.85 $10.15 $9.65 $10.60
==========================================================================
Total return (b) 9.47% 7.95% 4.15% 12.78% (3.32)% 12.64%
Net assets, end of period (in thousands) $9,596 $8,288 $7,765 $7,713 $8,372 $5,897
Ratio of expenses to average net assets (b) 0.53% 0.50% 0.40% 0.40% 0.40% 0.40%
Before expense reimbursement (b) 0.53% 0.56% 0.62% 0.61% 0.65% 1.34%
Ratio of net investment income to average 6.57% 7.26% 7.11% 7.06% 6.00% 6.23%
net assets (b)
After expense reimbursement (b) 6.57% 7.20% 6.89% 6.85% 5.75% 5.29%
Portfolio turnover rate 23.49% 40.86% 33.89% 74.98% 23.08% 0.00%
(a) Commencement of operations July 12, 1992.
(b) Annualized for periods less than a full
year.
</TABLE>
<PAGE> 14
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 the series in which they are
invested.
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 title of the fund.
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 markets.
Therefore,
<PAGE> 15
the net asset value 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 including
action by Congress on a settlement agreement with the tobacco industry to
resolve multiple pending lawsuits may impact the tobacco industry in each of
these states. Regulation of nicotine or elimination or adjustment of the
financial tobacco price support program may also impact the tobacco industry
though the degree of the impact cannot be predicted with any certainty.
The Kentucky non-agricultural economy is diversified as follows: 26% services,
24% wholesale and retail trade, 20% manufacturing, 16% government and 14% 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, fruits, vegetables and various kinds of 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 where the nominal
maturity will usually average 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 nominal maturity of 16.90
years and a weighted average effective maturity of 6.60 years as of June 30,
1998.
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 effective maturity of 3.71 years as of June 30, 1998. 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> 16
North Carolina Tax-Free Income Series
This is a non-diversified fund where the nominal maturity will usually average
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 nominal effective maturity of 18.92 years and a weighted average
effective maturity of 9.13 years as of June 30, 1998. 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 effective maturity of 3.19 years as of June 30, 1998. 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, where the nominal
maturity will usually average 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 nominal effective maturity of
9.62 years and a weighted average effective maturity of 7.02 years as of June
30, 1998.
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 effective maturity of 2.86 years as of June 30, 1998. 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 usually be 3 to 10 years to produce minimal
fluctuation in principal. The portfolio had a weighted average effective
maturity of 3.16 years as of June 30, 1998.
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:
A) 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> 17
B) 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).
C) 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; or 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 bonds
described above in 1) and 2); repurchase agreements fully collateralized by
bonds described in 1) and 2); or 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 will likely be invested in portfolio instruments producing
lower yields than the balance of the series' portfolio, 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> 18
Asset Composition
The weighted average ratings of the securities held by the Trust on June 30,
1998, 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 48.23% 13.67% 30.12% 3.55% 4.43%
Kentucky Tax-Free
Short-to-Medium Series 42.09 24.68 22.26 3.55 7.42
North Carolina Tax-Free
Income Series 54.66 36.63 7.58 1.13 .0
North Carolina Tax-Free
Short-to-Medium Series 54.49 34.11 10.44 .96 .0
Tennessee Tax-Free
Income Series 53.23 21.99 23.53 1.08 .17
Tennessee Tax-Free
Short-to-Medium Series 53.64 26.02 20.34 .0 .0
Government Bonds
Intermediate Government
Bond Series 100.00
</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>
Kentucky Tax-Free
Income Series 4.43%
Kentucky Tax-Free
Short-to-Medium Series 7.42
Tennessee Tax-Free
Income Series .17
</TABLE>
MANAGEMENT OF THE TRUST
Trustees
The Trustees of the Trust consist of seven 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. *
Fred L. Dupree, Jr., Vice President, Secretary, Treasurer and Director of Dupree
& Company, Inc.*
William T. Griggs II, President of Dupree & Company, Inc.*
Lucy A. Breathitt, Alexander Farms, farming; Kentucky Horse Park Foundation
Board; Kentucky Horse Park Museum Board, Kentucky State Nature Preserves
Commission.
<PAGE> 19
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;
Director, First Security Bank , Lexington, KY.
Robert L. Maddox, Partner (retired) Wyatt, Tarrant & Combs, Attorneys,
Louisville, KY.
William S. Patterson, President, CEO, Cumberland Surety Insurance Co.,
Lexington, KY.
*Thomas P. Dupree, Sr., Fred L. Dupree, Jr., and William T. Griggs II 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 & Company, Inc.
Dupree & Company, 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
William T. Griggs II -0- None- No Pension None -0-
Vice President, or Retirement Plan
Assistant Secretary
Lucy A. Breathitt $14,000 None-No Pension None $14,000
Trustee or Retirement Plan
William A. Combs, Jr. $14,000 None - No Pension None $14,000
Trustee or Retirement Plan
Robert L. Maddox $14,000 None - No Pension None $14,000
Trustee or Retirement Plan
William S. Patterson $14,000 None - No Pension None $14,000
Trustee or Retirement Plan
</TABLE>
Investment Adviser and Advisory Agreements
Our investment activities are managed by Dupree & Company, Inc., P.O. Box 1149
Lexington, Kentucky 40588-1149. Dupree & Company was formed in 1962 to continue
a business founded in 1941. Dupree & Company, Inc. also serves as Transfer
Agent.
<PAGE> 20
Dupree & Company, 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 & Company, Inc. serves as the Investment Adviser for each of our seven
series pursuant to separate Investment Advisory Agreements with each series,
each dated as of November 1, 1997. Each agreement will continue in effect until
October 31, 1999 and may be continued thereafter for annual periods if renewed.
Subject to the direction of the Trustees, Dupree & Company, Inc. is responsible
for the actual management of the Trust's portfolios. The compensation paid to
the Investment Adviser 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 the Investment
Adviser 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 & Company, Inc. has reserved the right to voluntarily waive management
fees or assume and pay other expenses of any series of the Trust at its sole
option.
In addition, the Trust has entered into a Transfer Agent/Shareholder Service
Agreement with Dupree & Company, Inc. The agreement provides for a fee computed
on the average daily net asset value at the annual rate of .15% on the first
$20,000,000 and .12% of all amount in excess of $20,000,000.
Prior to November 1, 1997 Dupree Investment Advisers, Inc., a wholly owned
subsidiary of Dupree & Company, Inc., had served as the Investment Adviser to
each of the seven series pursuant to separate Investment Advisory Agreements.
Due to corporate and tax considerations the Dupree firms restructured their
business without any change in personnel or services. The Investment Advisory
Agreements approved by the shareholders of each series at their 1997 Annual
meeting are identical to the prior agreements except that the parent firm,
Dupree & Company, Inc. is now the Investment Adviser.
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 Adviser. Mr.
Griggs has been Portfolio Manager since 1989.
Year 2000
Like other investment companies, financial and business organizations and
individuals around the world, the Trust could be adversely affected if computer
systems used by the Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
The Adviser is taking steps that it believes are reasonably designed to address
the Year 2000 issue with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Trust's other
major service providers. There can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trust.
<PAGE> 21
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 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:
* How the account is to be registered
* Name of series in which you wish to invest
* Your address
* Your tax identification number
* Amount being wired
* 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
<PAGE> 22
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 40588-1149
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 Purchase Plan
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 the back cover 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 the back cover 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, exchange and
transfer 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
<PAGE> 23
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 the back cover. Checks may not be used to close an
account. Checks may not be presented for payment over-the-counter at the
clearing bank.
<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: $19.00
Government Bond Series $500.00 none Stop Payment: $15.00
</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 proper form.
Suspension of Redemption
We may suspend the right of redemption or postpone payment for more than seven
days during any of the following:
*The New York Stock Exchange is closed
*The Securities and Exchange Commission determines trading on the Exchange is
restricted
*There is an emergency as determined by the commission where it is not
reasonably practicable for us to dispose of securities.
*Such other period as the Commission may by order permit for the protection of
the 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, and you will have 30
days from the date of the notice to bring the account up to $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
<PAGE> 24
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.
Inactive Accounts
If your Account is inactive (i.e., you do not make any deposits or withdrawals)
and you have not otherwise communicated with us about your Account for the
period provided by law, we will be required to transfer the balance of your
Account as "abandoned property" to the appropriate state authority.
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) intervenes 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 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.
Total returns are calculated for specified periods by finding the compounded
rate of return that will equal the total amount redeemed at the specified
redemption date versus the initial amount invested. Average annual total return
calculations consider reinvestment of all dividends and all other distributions
less all expenses.
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.
<PAGE> 25
Taxable equivalent yield is the yield that an investor would have to earn from
fully taxable investments, before the investor had paid federal and any
applicable state income and ad valorem taxes, in order to equal a tax-free
yield.
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 the back cover. Performance may also be judged by
comparing the 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> 26
HOW TO REACH US
DUPREE MUTUAL FUNDS
P.O. Box 1149
Lexington, KY 40588-1149
PHONE
(606) 254-7741
(800) 866-0614
INVESTMENT ADVISER
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Dupree & Company, Inc.
P.O. Box 1149
Lexington, Kentucky 40588-1149
CUSTODIAN
Star Bank
425 Walnut Street, ML 6118
P.O. Box 1118
Cincinnati, Ohio 45201-118
INDEPENDENT AUDITORS
Ernst & Young LLP
1300 Chiquita Center
Cincinnati, OH 45202
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, 1998
<PAGE> 27
DUPREE MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY................................................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.............................................................................. 1
Portfolio Turnover.......................................................................................... 6
Investment Restrictions..................................................................................... 7
NON-FUNDAMENTAL RESTRICTIONS.................................................................................... 10
INVESTMENT ADVISER AND OTHER SERVICES........................................................................... 10
(See "Management of the Trust" in Prospectus)
OFFICERS AND TRUSTEES........................................................................................... 12
(See "Management of the Trust" in Prospectus)
PORTFOLIO TRANSACTIONS.......................................................................................... 14
SHARES OF BENEFICIAL INTEREST................................................................................... 15
(See "Organization of the Trust" in Prospectus)
HOW TO PURCHASE SHARES.......................................................................................... 15
(See "Buying Shares" in Prospectus)
HOW TO REDEEM SHARES............................................................................................ 16
(See "Selling Shares" in Prospectus)
HOW WE COMPUTE OUR YIELDS....................................................................................... 16
TAX INFORMATION................................................................................................. 19
(See "Dividends" and "Taxes" in Prospectus)
FINANCIAL STATEMENTS............................................................................................ 23
NOTES TO FINANCIAL STATEMENTS................................................................................... 54
REPORT OF INDEPENDENT AUDITORS.................................................................................. 60
</TABLE>
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Trust's Prospectus dated November 1, 1998. 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 &
Company, Inc. 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 in the states where our shares are offered, from state income
tax as well. 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 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
-1-
<PAGE> 29
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. 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."
-2-
<PAGE> 30
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 years' 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 sales are 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.
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 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
-3-
<PAGE> 31
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 sales are 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.
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.
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
-4-
<PAGE> 32
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 sales are 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
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.
-5-
<PAGE> 33
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. At this time, we do not
anticipate any change in the 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, 1998 the portfolio turnover rate for the
Kentucky Tax-Free Income Series was approximately 11.80%, as compared with a
rate of approximately 6.64% for the fiscal year ended June 30, 1997. Fiscal
1997-98 was a year of relatively stable turnover. Since we expect declining
interest rates for the upcoming year fiscal 1998-99 should reflect an increased
portfolio turnover.
For the fiscal year ended June 30, 1998, the portfolio turnover rate for the
Kentucky Tax-Free Short-to-Medium Series was approximately 20.98%, as compared
with a rate of approximately 20.03% for the fiscal year ended June 30, 1997.
Since we expect declining interest rates for the upcoming year fiscal 1998-99
should reflect an increased portfolio turnover.
For the fiscal year ended June 30, 1998, the portfolio turnover rate for the
Tennessee Tax-Free Income Series was approximately 12.62% as compared with a
rate of approximately 5.14% for the fiscal year ended June 30, 1997. Fiscal
1997-98 was a year of growth. Since we expect declining interest rates for the
upcoming year fiscal 1998-99 should reflect an increased portfolio turnover.
For the fiscal year ended June 30, 1998, the portfolio turnover rate for the
Tennessee Tax-Free Short-to-Medium Series was approximately 67.59% as compared
with a rate of approximately 24.49% for fiscal year ended June 30, 1997. Since
we expect declining interest rates for the upcoming year fiscal 1998-99 should
reflect an increased portfolio turnover.
For the fiscal year ended June 30, 1998, the portfolio turnover rate for the
North Carolina Tax-Free Income Series was approximately 16.77% as compared with
a rate of approximately 24.13% for the fiscal year ended June 30, 1997. Fiscal
1997-98 was a year of growth. Since we expect declining interest rates for the
upcoming year fiscal 1998-99 should reflect an increased portfolio turnover.
For the fiscal year ended June 30, 1998, the portfolio turnover rate for the
North Carolina Tax-Free Short-to-Medium Series was approximately 14.89% as
compared with a rate of approximately 17.20% for fiscal year ended June 30,
1997.
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<PAGE> 34
Since we expect declining interest rates for the upcoming year fiscal 1998-99
should reflect an increased portfolio turnover.
INTERMEDIATE GOVERNMENT BOND SERIES
- -----------------------------------
For the fiscal year ended June 30, 1998 the portfolio turnover rate was
approximately 23.49% as compared with a rate of approximately 40.86% for the
fiscal year ended June 30, 1997. Since we expect declining interest rates for
the upcoming year fiscal 1998-99 should reflect an increased portfolio turnover.
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.
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
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<PAGE> 35
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 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
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<PAGE> 36
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.
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.
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<PAGE> 37
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 &
Company, Inc.. Thomas P. Dupree, Sr., is Chairman of the Board. 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.
Michelle M. Dragoo and William T. Griggs II are both Vice President with us, and
Alison L. Arnold is Assistant Vice Presidents with us.
INVESTMENT ADVISORY AGREEMENTS
Dupree & Company, Inc. serves as the Investment Adviser for each of our seven
series pursuant to separate Investment Advisory Agreements with each series.
Each agreement is dated as of November 1, 1997 and will continue in effect until
October 31, 1999 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 & Company, 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. Thereafter Dupree Investment Advisers, Inc. became the
Investment Adviser. In 1997 the two Dupree firms reorganized and the parent
firm, Dupree & Company, Inc. once again became the Investment Adviser without
any change in personnel or services.
Pursuant to the Agreements, Dupree & Company, 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,
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<PAGE> 38
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 &
Company, Inc. 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 & Company, 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 & Company, 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 $150,000,001 of each series determined separately. For the Government Bond
Series, we have agreed to pay to Dupree & Company, 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 & Company, Inc. in monthly installments. Dupree & Company, Inc. has
reserved the right to voluntarily subsidize any series of the Trust at its sole
option. During the past three fiscal years the following fees have been paid the
Investment Adviser and the following reimbursements have been received from the
Investment Adviser which at the time was Dupree Investment Advisers, Inc.:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
6-30-98 6-30-97 6-30-96
<S> <C> <C> <C>
Kentucky Tax-Free Income Series
fees $1,529,994 $1,375,201 $1,279,636
reimbursements -0- -0- -0-
Kentucky Tax-Free Short-to-Medium Series
fees 268,875 300,340 292,588
reimbursements -0- -0- -0-
North Carolina Tax-Free Income Series
fees 32,367 10,797 1,534
reimbursements 27,686 12,274 11,229
North Carolina Tax-Free Short-to-Medium Series
fees 8,143 6,989 2,312
reimbursements 7,346 8,243 12,026
Tennessee Tax-Free Income Series
fees 96,775 51,432 33,578
reimbursements 56,512 23,339 24,095
Tennessee Tax-Free Short-to-Medium Series
fees 18,236 13,694 10,277
reimbursements 10,752 10,311 14,297
Intermediate Government Bond Series
fees 17,633 16,159 16,061
reimbursements -0- 5,347 17,702
</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
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<PAGE> 39
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.
Ernst & Young LLP, 1300 Chiquita Center, 250 East 5th Street, Cincinnati, Ohio
45202 serves as the independent auditors of the Trust, providing expertise in
accounting and taxation, including tax return preparation.
Dupree & Company, 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 shareholder transactions. Each Series of the Trust has an agreement
with Dupree & Company 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.
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,
125 South Mill Street Inc., President of Dupree Investment Advisers,
Vine Center, Suite 100 Inc. Director, Studio Plus Hotels, Inc.
Lexington, KY 40507
FRED L. DUPREE, JR.* Vice President, Secretary, Vice President, Secretary, Treasurer and
125 South Mill Street Treasurer and Trustee Director of Dupree & Company, Inc. and Dupree
Vine Center, Suite 100 Investment Advisers, Inc.
Lexington, KY 40507
WILLIAM T. GRIGGS, II* Vice President President of Dupree & Company, Inc. and Dupree
125 South Mill Street Assistant Secretary and Trustee Investment Advisers, Inc.
Vine Center, Suite 100
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.; Director, First Security Bank,
Lexington, KY
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C> <C>
ROBERT L. MADDOX Trustee Partner (retired) Wyatt, Tarrant & Combs,
2800 Citizens Plaza Louisville, KY Attorneys; Director, Nugent Sand
Louisville, KY 40202 Company, 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.,
Lexington, KY 40507 Frankfort, KY, (real estate development,
thoroughbred horse breeding, farming)
MICHELLE M. DRAGOO Vice President Vice President of Dupree & Company, Inc. and
125 South Mill Street Dupree Investment Advisers, Inc.
Vine Center, Suite 100
Lexington, KY 40507
ALISON L. ARNOLD Assistant Vice President Assistant Vice President of Dupree & Company,
125 South Mill Street Inc. and Dupree Investment Advisers, Inc.
Vine Center, Suite 100
Lexington, KY 40507
</TABLE>
- - Thomas P. Dupree, Sr., Fred L. Dupree, Jr., and William T. Griggs II are
"interested persons" of our Investment Adviser and of us within the meaning
of the Investment Company Act of 1940.
[As of October 10, 1997 shares of the Trust were owned by our officers and
trustees as shown below.
<TABLE>
<CAPTION>
Thomas P. Fred L. Dupree, Jr. William T. Griggs II Non-Interested
Dupree, Sr. Trustees and other
officers as a group
<S> <C> <C> <C> <C>
Kentucky Income Series
Number of Shares Outstanding 263,508.901 25,179.285 355,329.099
Percentage of Shares Outstanding .583% .056% .786%
Kentucky Short-to-Medium Series
Number of Shares Outstanding 74,049.939 0.000 143,039.838
Percentage of Shares Outstanding .726% 0.000 1.402%
Intermediate Government Bond Series
Number of Shares Outstanding 0.000 3,316.736 16,837.442
Percentage of Shares Outstanding 0.000 .395% 2.004%]
</TABLE>
Thomas P. Dupree, Sr., and Fred L. Dupree, Jr. are brothers. Thomas P. Dupree,
Sr., Fred L Dupree, Jr ., or William T. Griggs II receives any remuneration
from us.
Each non-interested Trustee received compensation in the amount of $12,000 for
their services to us for the fiscal year ended June 30, 1998. For the current
fiscal year the four non-interested Trustees (who all serve on the audit
committee) will be entitled to fees of $13,000 each plus $1,000 for each Audit
Committee meeting attended. Two Audit Committee meetings are anticipated to be
held during fiscal year ending June 30, 1999. Executive officers of the Trust
receive no remuneration from us, but are instead paid by Dupree & Company, 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.
Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 41
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 & Company, 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 & Company, 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 & Company, Inc. 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 & Company, 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.
Dupree & Company, 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 & Company, 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 its 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 & Company, 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 underwriting, 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 as described in the Prospectus: 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.
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<PAGE> 42
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 non-assessable.
[As of October 10, 1997, no person was known to beneficially own 5% or more of
our outstanding shares of Kentucky Tax-Free Income Series or the Intermediate
Government Bond Series. As of that date CEBANTCO owned 5.51% of the outstanding
shares of the Kentucky Short-to-Medium Series. As of that date Kenneth R.
Haynes, Jr. Owned 5.98% of the outstanding shares of the North Carolina Income
Series. As of that date NEC Industries, Inc. owned 16.11%, Kemp Pendleton Bureau
owned 12.45%, Calvin H. Price owned 8.17% and James L. Olsen owned 6.29% of the
North Carolina Tax-Free Short-to-Medium Series. As of that date Terrell-Dean
Mays Trust owned 6.40% and Gail S. Mays owned 5.85% of the Tennessee Tax-Free
Income Series. As of that date B.D. Hughes, Jr. Trust owned 18.67%, Gail S. Mays
owned 10.25%, Harry Samuels Trust owned 10.20%, Thomas F. Buchanan, Jr. Owned
5.91% of the Tennessee Tax-Free Short-to-Medium 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 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.
Language indicated as being shown by strike out in the typeset document is
enclosed in brackets "[" and "]" in the electronic format.
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<PAGE> 43
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
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.
The average annual total return for the 1, 5 and 10 year periods ended on June
30, 1998 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 =
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 7.77% 5.12% 9.99% 5.20% 9.57% 5.26% 9.47%
June 30, 1998
Five years ended 5.89% 4.06% 8.43% (1) 4.98% (2) 7.56% (3) 5.40% (4) 6.07%
June 30, 1998
Ten years ended 7.93% 5.36% 7.14% (5)
June 30, 1998
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
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
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Period
One year ended $1,078 $1,051 $1,100 $1,052 $1,096 $1,053 $1,095
June 30, 1998
Five years ended $1,331 $1,220 $1,237 (1) $1,136 (2) $1,391 (3) $1,213 (4) $1,343
June 30, 1998
Ten years ended $2,144 $1,685 $1,513 (5)
June 30, 1998
1 since inception 11/16/95
2 since inception 11/16/95
3 since inception 12/20/93
4 since inception 11/01/94
5 since inception 7/12/92
</TABLE>
Payments are assumed to have been made at the beginning of the one, five or ten
year periods (or fractional portion thereof).
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.
SEC Yield quotations will be computed based on a 30-day period by dividing (a)
the interest income based on the market yield, prescribed by the SEC, of each
security during the period (including appropriate adjustments for accretion of
original issue discounts and amortization of market premiums) reduced by period
expenses divided by b) the average daily number of shares outstanding during the
period that were entitled to receive 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, 1998 for the Kentucky Tax-Free Income Series was
3.58% and for the Kentucky Short-to-Medium Series was 1.96%. The tax-equivalent
yield for Kentucky residents for the same period (based on a tax rate of 28%)
for the Kentucky Income Series was 5.54% and for the Kentucky Short-to-Medium
Series was 3.15%. The yield for the 30-day period ending June 30, 1998 for the
North Carolina Income Series was 4.31% and for the North Carolina
Short-to-Medium Series was 2.68%. The tax-equivalent yield for North Carolina
residents for the same period (based on a tax rate of 28%) was 6.44% and for the
North Carolina Short-to-Medium Series was 4.02%. The yield for the 30-day period
ending June 30, 1998 for the Tennessee Tax-Free Income Series was 4.13% and for
the Tennessee Tax-Free Short-to-Medium Series was 2.30%. The tax-equivalent
yield for Tennessee residents for the same period (based on a tax rate of 28%)
for the Tennessee Income Series was 6.10% and for the Tennessee Tax-Free
Short-to-Medium Series was 3.40%. The yield for the 30-day period ending June
30, 1998 for the Intermediate Government Bond Series was 4.66%.
Other yield quotations will be computed based on a 30-day period by dividing (a)
the total daily income minus all expenses by b) the average daily number of
shares outstanding during the period that were entitled to receive dividends
multiplied by the maximum offering price per share on the last day of the
period. Tax equivalent yield quotations will be
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<PAGE> 45
computed by dividing (a) the part of the Series' yield that is tax-exempt by (b)
one minus a stated tax rate which combines federal and state income tax rates
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, 1998 for the
Kentucky Tax-Free Income Series was 5.04% and for the Kentucky Short-to-Medium
Series was 3.97%. The tax-equivalent yield for Kentucky residents for the same
period (based on a tax rate of 28%) for the Kentucky Income Series was 7.70% and
for the Kentucky Short-to-Medium Series was 6.12%. The yield for the 30-day
period ending June 30, 1998 for the North Carolina Income Series was 4.77% and
for the North Carolina Short-to-Medium Series was 3.86%. The tax-equivalent
yield for North Carolina residents for the same period (based on a tax rate of
28%) was 7.12% and for the North Carolina Short-to-Medium Series was 5.77%. The
yield for the 30-day period ending June 30, 1998 for the Tennessee Tax-Free
Income Series was 4.85% and for the Tennessee Tax-Free Short-to-Medium Series
was 3.82%. The tax-equivalent yield for Tennessee residents for the same period
(based on a tax rate of 28%) for the Tennessee Income Series was 7.14% and for
the Tennessee Tax-Free Short-to-Medium Series was 5.72%.
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 prior to January 1, 1997,
for the Tennessee Tax-Free Income Series since its inception December 20, 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.
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; this is reflective of 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
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<PAGE> 46
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. However, these rules generally permit the
deduction of interest paid on mortgage borrowings to purchase or improve a
personal residence and on business borrowings directly related to business needs
or purposes.
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.
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 a regulated
investment company from deferring its shareholders' taxes by delaying
distributions of dividend income to shareholders. 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.
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.
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.,
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<PAGE> 47
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 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
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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.
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.
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<PAGE> 49
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.
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<PAGE> 50
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INSURED MUNICIPAL REVENUE BONDS
47.31% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Boyle County KY Hospital Revenue-Ephraim McDowell Regional 5.800 4/1/14 Aaa/AAA* $ 1,000,000 $ 1,074,830
Danville KY Multi-City Lease Revenue 6.875 12/1/10 Aaa/AAA* 400,000 450,176
Danville KY Multi-City Lease Revenue-Shelbyville 6.550 7/1/06 Aaa/AAA* 495,000 552,247
Danville KY Multi-City Lease Revenue-Shelbyville 6.700 7/1/11 Aaa/AAA* 2,500,000 2,789,050
Daviess County KY Hospital Revenue 6.250 8/1/12 Aaa/AAA* 3,000,000 3,261,450
Floyd County KY Hospital Revenue-Low Highland Hospital 7.500 8/1/10 AAA* 1,465,000 1,612,115
Greater Kentucky Housing Assistance Corporation 5.350 7/1/22 Aaa/AAA* 1,000,000 1,009,520
Greater KY Housing-Tug Fork Apartments 5.600 1/1/07 Aaa/AAA* 365,000 378,647
Greater KY Housing-Tug Fork Apartments 6.350 1/1/22 Aaa/AAA* 2,105,000 2,176,802
Greater KY Housing Assistance Corporation 6.050 7/1/22 Aaa/AAA* 1,435,000 1,476,830
Greater KY Housing Assistance Corporation 6.100 1/1/24 Aaa/AAA* 4,000,000 4,157,480
Hopkins County KY Hospital Revenue-Trover Clinic Foundation 6.625 11/15/11 Aaa/AAA* 2,000,000 2,195,760
Jefferson County Health Facilities-Alliant Health Systems 5.125 10/1/27 Aaa/AAA* 500,000 493,610
Jefferson County Health Facilities Alliant Health Services 5.125 10/1/17 Aaa/AAA* 4,700,000 4,741,642
Jefferson County Health Facilities Jewish Hospital 5.700 1/1/21 Aaa/AAA* 8,000,000 8,480,080
Jefferson County KY Capital Projects Corporation Revenue 5.600 4/1/14 Aaa/AAA* 1,000,000 1,062,440
Jefferson County KY Capital Projects Corporation Revenue 5.375 6/1/18 Aaa/AAA* 1,500,000 1,544,280
Jefferson County KY Health Facilities-Jewish Hospital 6.500 5/1/15 Aaa/AAA* 6,380,000 6,984,122
Jefferson County KY Health Facilities University Medical Center 5.500 7/1/17 Aaa/AAA* 6,000,000 6,307,260
Jefferson County KY Hospital Revenue 6.436 10/23/14 Aaa/AAA* 4,000,000 4,406,760
Kentucky Counties 1987 Single Family Mortgage Revenue 8.625 9/1/15 AAA* 30,000 30,975
Kentucky Development Finance Authority-Ashland Hospital 6.125 2/1/12 Aaa/AAA* 4,000,000 4,345,600
Kentucky Development Finance Authority-Baptist Hospital 7.625 9/1/11 AAA* 6,930,000 7,118,496
Kentucky Development Finance Authority-Methodist Hospital 5.625 2/1/17 AAA* 6,500,000 6,814,080
Kentucky Development Finance Authority-St Claire Medical 5.625 9/1/21 AAA* 2,500,000 2,596,750
Kentucky Development Finance Authority-St Elizabeth Hospital 5.900 12/1/15 Aaa/AAA* 2,500,000 2,678,325
Kentucky Development Finance Authority St. Clair Medical 5.875 9/1/13 Aaa 2,000,000 2,147,380
Kentucky Economic Development Authority-Baptist Hospital 5.000 8/15/15 Aaa/AAA* 600,000 604,338
Kentucky Economic Development Authority-South Central Nursing 6.000 7/1/27 Aaa/AAA* 3,650,000 4,130,596
Kentucky Housing Corporation 6.600 7/1/11 Aaa/AAA* 390,000 429,846
Kentucky Housing Corporation 5.700 7/1/17 Aaa/AAA* 500,000 522,755
Kentucky Housing Corporation 5.950 7/1/17 Aaa/AAA* 500,000 549,505
Kentucky Housing Corporation 6.625 7/1/14 Aaa/AAA* 1,000,000 1,103,080
Kentucky Housing Corporation 7.250 1/1/17 Aaa/AAA* 1,415,000 1,564,353
Kentucky Housing Corporation 6.600 1/1/11 Aaa/AAA* 1,640,000 1,819,285
Kentucky Housing Corporation 5.400 7/1/14 Aaa/AAA* 3,000,000 3,104,640
Kentucky Housing Corporation 5.300 7/1/10 Aaa/AAA* 3,000,000 3,130,020
Kentucky Housing Corporation 7.125 1/1/10 Aaa/AAA* 3,935,000 4,336,567
Kentucky Housing Corporation 6.600 7/1/11 Aaa/AAA* 4,500,000 4,959,765
Kentucky Housing Corporation 5.800 1/1/19 Aaa/AAA* 6,755,000 7,034,522
Kentucky Housing Corporation 6.500 7/1/17 Aaa/AAA* 6,945,000 7,756,593
Kentucky Housing Corporation 6.400 1/1/17 Aaa/AAA* 13,845,000 15,497,262
Kentucky State Turnpike Authority Resource Recovery Revenue 6.000 7/1/09 Aaa/AAA* 740,000 745,550
Lexington-Fayette Urban County Government KY Project Revenue** 5.000 11/1/18 Aaa 6,205,000 6,126,569
Lexington Fayette Urban County Government KY Sewer System 6.350 7/1/07 Aaa/AAA* 400,000 440,336
Lexington Fayette Urban County Government KY Sewer System 6.375 7/1/12 Aaa/AAA* 2,500,000 2,747,575
Lexington Fayette Urban County Government KY Sewer System 6.375 7/1/10 Aaa/AAA* 2,900,000 3,209,865
Louisville & Jefferson County KY Metropolitan Sewer District 5.300 5/15/19 Aaa/AAA* 10,000,000 10,148,900
Louisville & Jefferson County KY Metropolitian Sewer District 5.200 5/15/26 Aaa/AAA* 3,000,000 3,051,000
Louisville KY Parking Authority-River City First Mortgage 5.000 12/1/17 Aaa/AAA* 1,000,000 996,260
Northern Kentucky University Certificates of Participation 7.250 1/1/12 Aaa/AAA* 1,500,000 1,653,930
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 51
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Owensboro KY Water Revenue 6.250 9/15/09 Aaa/AAA* $ 800,000 $ 866,127
Pike County KY Mortgage Revenue-Phelps Regional Health 5.350 9/20/12 AAA* 320,000 334,259
Radcliff KY Mortgage Revenue-Lincoln Trail Care 5.650 1/20/19 AAA* 1,555,000 1,633,248
Shelbyville KY Certificate of Participation 5.150 7/1/18 Aaa 4,165,000 4,190,948
University of Kentucky Consolidated Educational Buildings 5.750 5/1/15 Aaa/AAA* 1,850,000 1,982,090
Warren County KY Hospital Facility Revenue 5.000 4/1/16 Aaa/AAA* 1,000,000 992,940
-----------
176,549,431
PUBLIC CORPORATION REVENUE BONDS
15.85% OF NET ASSETS
Boone County KY Certificate of Participation 7.000 11/15/14 A 5,500,000 6,219,895
Boone County KY Public Property 6.250 12/15/12 A1 960,000 1,058,909
Calloway County Public Property Corporation-Courthouse 5.625 3/1/18 A 1,000,000 1,057,940
Campbell County KY Public Property 6.250 12/1/15 A 810,000 880,187
Danville KY Multi-City Lease Revenue-Cambellsville 7.000 4/1/02 NR 310,000 341,000
Danville KY Multi-City Lease Revenue-Mt. Sterling 7.500 6/1/11 NR 205,000 228,480
Danville KY Multi-City Lease Revenue-Mt. Sterling 7.375 6/1/07 NR 240,000 268,015
Danville KY Multi-City Lease Revenue-Owensboro Museum 7.050 8/1/11 A 440,000 489,984
Danville KY Multi-City Lease Revenue Housing Authority 6.500 2/1/12 A1 1,170,000 1,286,836
Danville KY Multi-City Lease Revenue Paducah Public Property 7.200 6/1/11 A 500,000 551,685
Danville Multi-City Lease Revenue 5.000 9/1/11 NR 545,000 552,494
Jefferson County KY Economic Development Lease Revenue 7.625 7/1/08 A1 100,000 103,563
Jefferson County KY Economic Development Lease Revenue 7.750 7/1/16 A1 500,000 517,940
Jeffersontown KY Certificate of Participation 5.750 11/1/15 A 1,095,000 1,178,899
Jeffersontown KY Certificate of Participation 6.500 9/1/09 A 1,400,000 1,577,828
Kenton County Public Properties Corporation-Courthouse Facilities 5.000 3/1/20 A1 2,000,000 1,958,400
Kentucky League of Cities-Middlesboro Series 6.200 8/1/17 A-* 555,000 608,818
Lexington-Fayette Urban County Government KY Public Parking 6.875 2/1/08 A1 300,000 321,057
Martin County KY Public Property Corporation Revenue 7.250 9/1/10 NR 150,000 165,317
Martin County KY Public Property Corporation Revenue 7.250 9/1/11 NR 160,000 176,338
Mt. Sterling KY Lease Revenue-Kentucky League of Cities 6.100 3/1/08 Aa 1,500,000 1,642,965
Mt. Sterling KY Lease Revenue-Kentucky League of Cities 6.200 3/1/18 Aa 5,500,000 6,017,825
Mt. Sterling KY Lease Revenue-Kentucky League of Cities 6.150 3/1/13 Aa 12,000,000 13,158,120
Oldham County KY Public Facilities Construction Corporation 5.250 6/1/17 A-* 1,060,000 1,086,532
Pendleton County KY Multi-County Lease Revenue 6.500 3/1/19 A* 11,000,000 12,144,110
Richmond KY Public Recreation Corporation Revenue 7.250 10/1/11 NR 290,000 318,391
Richmond KY Public Recreation Corporation Revenue 6.750 8/1/13 NR 575,000 640,360
Shelbyville KY Certificate of Participation Revenue Refunding 5.450 10/1/17 NR 1,130,000 1,142,995
Shelbyville KY Certificate of Participation Revenue Refunding 5.350 10/1/13 NR 1,295,000 1,306,474
Somerset KY Municipal Projects Corporation Revenue 7.500 5/1/99 NR 130,000 132,569
Somerset KY Municipal Projects Corporation Revenue 7.500 5/1/00 NR 140,000 142,752
Union County KY Public Property Corporation 6.125 9/1/15 NR 700,000 762,482
Woodford County KY Public Property Corporation Revenue 5.600 11/1/17 A 1,065,000 1,113,734
-----------
59,152,894
SCHOOL BUILDING REVENUE BONDS
10.97% OF NET ASSETS
Adair County KY School District Finance Corporation 6.375 3/1/12 A 315,000 349,688
Bell County KY School District Finance Corporation 6.850 9/1/09 A* 450,000 496,863
Bell County KY School District Finance Corporation 6.875 9/1/10 A* 675,000 745,794
Boone County KY School District Finance Corporation 6.000 2/1/18 A 1,000,000 1,076,060
Boone County KY School District Finance Corporation 5.700 5/1/18 A 2,500,000 2,635,650
Breathitt County KY School District Finance Corporation 6.500 3/1/11 NR 420,000 465,297
Breathitt County KY School District Finance Corporation 6.500 3/1/12 NR 450,000 498,533
Bullitt County KY School District Finance Corporation 6.000 8/1/14 A 1,100,000 1,200,023
Carroll County KY School District Finance Corporation 7.000 7/1/10 A* 270,000 300,140
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 52
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Clark County KY School District Finance Corporation 6.000 5/1/12 A $ 320,000 $ 346,714
Elliott County KY School District Finance Corporation 7.250 11/1/08 A/A* 100,000 109,018
Elliott County KY School District Finance Corporation 7.250 11/1/07 A/A* 115,000 125,534
Estill County KY School District Finance Corporation 5.875 8/1/16 A 1,780,000 1,936,174
Floyd County KY School District Finance Corporation 6.000 6/1/14 A 1,000,000 1,097,440
Greenup County KY School District Finance Corporation 6.100 9/1/14 A/A* 1,105,000 1,218,550
Hardin County KY School District Finance Corporation 6.000 7/1/16 A 1,025,000 1,130,052
Harlan KY Independent School District Finance Corporation 6.000 5/1/15 A 275,000 304,799
Hopkins County KY School District Finance Corporation 6.200 6/1/15 A 2,500,000 2,751,500
Jefferson County School District Finance Corporation 5.000 2/1/18 Aa3/A+* 2,125,000 2,103,963
Jessamine County KY School District Finance Corporation 6.125 6/1/15 A 1,000,000 1,100,590
Johnson County KY School District Finance Corporation 6.750 3/1/10 A* 300,000 326,787
Johnson County KY School District Finance Corporation 6.750 3/1/11 A* 325,000 353,587
Johnson County KY School District Finance Corporation 5.000 2/1/18 A1 1,015,000 1,021,161
Kenton County KY Public Property Corporation Revenue 5.700 12/1/15 A 1,305,000 1,363,908
Kenton County KY Public Property Corporation Revenue 5.700 12/1/16 A 1,380,000 1,441,244
Kentucky State Property & Building Revenue Project #59 5.625 11/1/15 A/A+* 1,000,000 1,057,560
Larue County KY School District Finance Corporation 6.500 10/1/10 A 290,000 326,523
Laurel County KY School District Finance Corporation 5.600 3/1/17 A1 1,000,000 1,064,960
Letcher County KY School District Finance Corporation 6.700 10/1/14 A 1,490,000 1,706,065
Martin County KY School District Finance Corporation 5.500 6/1/15 A 1,650,000 1,734,018
McCreary County KY School District Finance Corporation 6.600 10/1/10 A* 400,000 443,504
McLean County KY School District Finance Corporation 6.000 6/1/14 NR 1,405,000 1,534,218
Perry County KY School District Finance Corporation 6.250 7/1/10 A* 1,155,000 1,268,144
Perry County KY School District Finance Corporation 6.250 7/1/12 A* 1,305,000 1,423,703
Pike County KY School District Finance Corporation 6.200 8/1/10 A 305,000 331,541
Pike County KY School District Finance Corporation 6.200 8/1/11 A 325,000 353,282
Powell County KY School District Finance Corporation 5.900 8/1/16 A* 1,185,000 1,283,865
Scott County KY School District Finance Corporation 5.900 6/1/16 A/A* 3,450,000 3,720,722
Simpson County KY School District Finance Corporation 6.700 1/1/11 A/A* 175,000 189,623
------------
40,936,797
INDUSTRIAL REVENUE AND POLLUTION CONTROL REVENUE BONDS
9.79% OF NET ASSETS
Ashland KY Pollution Control Revenue-Ashland Oil Project 6.650 8/1/09 Baa1 8,835,000 9,714,966
Campbellsville KY Industrial Revenue-Campbellsville College 6.950 3/1/15 NR 1,150,000 1,276,190
Campbellsville KY Industrial Revenue-Campbellsville College 6.000 3/1/17 NR 1,920,000 2,043,859
Carroll County KY Collateralized Pollution Control Revenue 6.250 2/1/18 Aa2/AA-* 1,000,000 1,074,710
Elsmere KY Industrial Development Revenue-Courtaulds plc 6.750 4/1/10 NR 2,000,000 2,235,920
Jefferson County KY Pollution Control-Louisville Gas 7.450 6/15/15 Aa2/AA* 1,750,000 1,911,700
Jefferson County KY Pollution Control-Louisville Gas 5.625 8/15/19 Aa2/AA* 7,150,000 7,445,080
Jefferson County KY Pollution Control Revenue-E I DuPont 6.300 7/1/12 Aa3/AA* 3,500,000 3,905,370
Kentucky League of Cities-Ashland Series 6.250 8/1/17 A-* 1,550,000 1,709,588
Meade County KY Pollution Control Revenue-Olin Corporation 6.000 7/1/07 NR 750,000 779,655
Mercer County KY Collateralized Pollution Control Revenue 6.250 2/1/18 Aa2/AA-* 2,500,000 2,705,825
Middlesboro KY Industrial Building Revenue-Fern Lake Project 6.200 12/1/02 NR 615,000 663,770
Muhlenberg County KY Collateralized Pollution Control Revenue 6.250 2/1/18 Aa2/AA* 1,000,000 1,082,330
------------
36,548,963
STATE AGENCY REVENUE BONDS
3.75% OF NET ASSETS
Kentucky Higher Education Student Loan 9.250 6/1/01 Aa/AA-* 180,000 205,517
Kentucky Infrastructure Authority 7.625 8/1/04 A* 20,000 21,318
Kentucky Infrastructure Authority 7.750 8/1/02 A* 40,000 42,694
Kentucky Infrastructure Authority 6.375 8/1/14 A* 700,000 785,421
Kentucky Infrastructure Authority 5.750 8/1/13 A* 900,000 960,696
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 53
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kentucky Infrastructure Authority 5.750 8/1/18 A* $ 1,500,000 $ 1,586,520
Kentucky Infrastructure Authority 5.375 2/1/18 A 2,000,000 2,052,820
Kentucky Infrasturcture Authority 5.000 6/1/17 A2/A* 1,035,000 1,027,444
Kentucky State Property & Buildings Commission Project #40 6.875 11/1/07 A/A+* 3,250,000 3,604,445
Kentucky State Property & Buildings Commission Project #54 6.000 9/1/12 A/A+* 1,450,000 1,561,578
Kentucky State Property & Buildings Commission Project #56 6.000 9/1/14 A/A* 1,000,000 1,085,550
Kentucky State Property & Buildings Commission Project #59 5.700 11/1/14 A/A* 1,000,000 1,067,010
-------------
14,001,013
PREREFUNDED AND ESCROWED TO MATURITY BONDS
3.73% OF NET ASSETS
Kentucky Development Finance Authority-Sisters of Charity 6.500 11/1/07 A1/A+* 2,000,000 2,185,660
Kentucky Development Finance Authority-Sisters of Charity 6.750 11/1/12 A1/A+* 10,160,000 11,181,588
Kentucky Infrastructure Authority 6.000 8/1/11 Aaa/AAA* 90,000 95,146
Shelbyville KY Public Property Recreational Corporation 6.900 10/1/12 NR 400,000 448,664
-------------
13,911,058
HOSPITAL AND HEALTHCARE REVENUE BONDS
3.34% OF NET ASSETS
Christian County KY Hospital Revenue-Jennie Stuart Medical 5.800 7/1/11 A-* 270,000 292,143
Christian County KY Hospital Revenue-Jennie Stuart Medical 6.000 7/1/13 A-* 2,870,000 3,103,130
Christian County KY Hospital Revenue-Jennie Stuart Medical 6.000 7/1/17 A-* 4,000,000 4,259,960
Jefferson County KY Health Facilities Jewish Hospital 5.700 1/1/11 A1/AA-* 1,200,000 1,303,764
Jefferson County KY Medical Center Services Revenue 7.300 5/1/09 A 400,000 416,320
Kentucky Development Finance Association-Green River 6.000 11/1/10 Aa3 1,000,000 1,115,550
Kentucky Economic Development Finance Authority-Catholic Health 5.000 12/1/18 Aa2/AA* 2,000,000 1,967,240
-------------
12,458,107
STATE AND LOCAL MORTGAGE REVENUE BONDS
1.99% OF NET ASSETS
Erlanger KY Public Property Revenue-Fire Protection 7.400 11/1/08 BBB+ 75,000 82,750
Erlanger KY Public Property Revenue-Fire Protection 7.400 11/1/09 BBB+ 100,000 110,331
Floyd County KY Public Property Revenue-Justice Center 6.125 9/1/18 A 1,240,000 1,362,351
Jefferson Oldham & Bullitt Counties KY Home Mortgage 0.750 11/1/14 A1 10,000 11,227
Kentucky Housing Corporation 7.625 1/1/09 Aaa/AAA* 220,000 227,515
Kentucky Housing Corporation 7.400 1/1/10 Aaa/AAA* 2,290,000 2,482,566
Kentucky Housing Corporation 7.550 1/1/16 Aaa/AAA* 2,910,000 3,163,054
-------------
7,439,794
MUNICIPAL UTILITY REVENUE BONDS
1.78% OF NET ASSETS
Cynthiana KY Waterworks & Sewer Revenue 6.400 1/1/07 BBB-* 575,000 636,945
Danville KY Multi-City Lease Revenue-Ashland Utilities 6.750 4/1/12 BBB+* 915,000 1,021,781
Danville KY Multi-City Lease Revenue-Hopkinsville 6.875 6/1/12 Baa1 2,170,000 2,645,576
Franklin KY Water & Sewer Revenue Refunding 6.200 12/1/11 Baa 1,000,000 1,082,990
Grayson KY Utility Revenue 7.375 2/1/10 NR 320,000 336,368
Hardin County KY Water District Number 1 Water Revenue 7.400 9/1/06 A 85,000 92,848
Hardin County KY Water District Number 1 Water Revenue 7.400 9/1/07 A 90,000 98,310
Hardin County KY Water District Number 1 Water Revenue 7.400 9/1/08 A 100,000 109,233
Hardin County KY Water District Number 1 Water Revenue 7.400 9/1/09 A 105,000 113,865
Pendleton County KY Multi-County Lease Revenue 7.450 3/1/04 AA* 245,000 268,905
Wurtland KY Sewer System Revenue 7.700 10/1/04 A+* 200,000 222,460
-------------
6,629,281
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 54
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATE AND LOCAL REVENUE BONDS
.69% OF NET ASSETS
Junction City KY College Revenue-Center College Project 5.875 4/1/17 A2 $ 1,000,000 $ 1,086,760
KY Interlocal Transportation Equipment Lease Revenue 6.000 12/1/20 A 400,000 432,312
Richmond KY Court Facilities Corporation Revenue 5.250 2/1/19 A3 1,035,000 1,055,162
-------------
2,574,234
UNIVERSITY CONSOLIDATED EDUCATION AND BUILDING REVENUE BONDS
.35% OF NET ASSETS
University of Louisville Health & Eduation 6.000 11/1/13 A2 1,180,000 1,289,351
-------------
1,289,351
KENTUCKY TURNPIKE AUTHORITY REVENUE BONDS
.06% OF NET ASSETS
Kentucky State Turnpike Authority Toll Road Revenue 8.500 7/1/04 A/A* 205,000 213,200
-------------
213,200
Total Investments (cost $347,447,026)(a) - 99.61% of Net Assets $ 371,704,123
=============
<FN>
* Standard and Poor's Corporation
** Security purchased on a delayed
delivery basis.
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 24,279,399
Unrealized depreciation (22,302)
-------------
Net unrealized appreciation $ 24,257,097
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE> 55
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Cost: $347,447,026) $ 371,704,123
Cash 4,274,169
Interest receivable 7,107,194
Receivable for investments sold 925,000
-----------------------
Total assets 384,010,486
LIABILITIES:
Payable for:
Investments purchased $ 6,142,143
Distributions 4,433,347
Fund shares redeemed 69,500
Management fee 131,865
Transfer agent 36,971
Other fees 44,052
--------------------
Total liabilities 10,857,878
-----------------------
NET ASSETS:
Net assets consist of:
Capital $ 350,308,043
Net accumulated realized losses on investment transactions (1,412,532)
Net unrealized appreciation in value of investments 24,257,097
-----------------------
Net assets at value $ 373,152,608
=======================
NET ASSET VALUE, offering price and redemption price per share
($373,152,608 / 48,755,882 shares outstanding) $ 7.65
=======================
===================================================================================================================================
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
Net investment income:
Interest income $ 20,249,056
-----------------------
Expenses:
Investment advisory fees 1,529,994
Transfer agent 427,498
Professional fees 84,845
Trustee fees 44,364
Other expenses 105,353
-----------------------
Total expenses 2,192,054
-----------------------
Net investment income 18,057,002
-----------------------
Realized and unrealized gain on investments
Net realized gain 2,653,620
Net increase in unrealized appreciation 5,303,172
-----------------------
Net realized and unrealized gain on investments 7,956,792
-----------------------
Net increase in net assets resulting from operations $ 26,013,794
=======================
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE> 56
DUPREE MUTUAL FUNDS - KENTUCKY TAX FREE INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 18,057,002 $ 16,663,220
Net realized gain on investments 2,653,620 25,632
Net increase in unrealized appreciation 5,303,172 4,996,899
-----------------------------------
Net increase in net assets resulting from operations 26,013,794 21,685,751
Distributions to shareholders (18,057,002) (16,663,220)
Net fund share transactions 37,891,984 27,252,574
-----------------------------------
Total increase 45,848,776 32,275,105
Net assets:
Beginning of year 327,303,832 295,028,727
-----------------------------------
End of year $ 373,152,608 $ 327,303,832
===================================
</TABLE>
================================================================================
The accompanying notes are an integral part of the financial statements.
29
<PAGE> 57
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE INCOME SERIES
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 7.47 $ 7.35 $ 7.29 $ 7.21 $ 7.60
-----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.39 0.40 0.40 0.40 0.41
Net gains or losses on securities
(both realized and unrealized) 0.18 0.12 0.06 0.13 (0.34)
-----------------------------------------------------------------------------
Total from investment operations 0.57 0.52 0.46 0.53 0.07
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- -- (0.05) (0.05)
Distributions (from net investment income) (0.39) (0.40) (0.40) (0.40) (0.41)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 7.65 $ 7.47 $ 7.35 $ 7.29 $ 7.21
============================================================================
Total return 7.77% 7.14% 6.38% 6.90% 0.75%
Net assets, end of year (in thousands): $ 373,153 $ 327,304 $ 295,029 $ 269,355 $ 257,132
Ratio of expenses to average net assets 0.62% 0.63% 0.62% 0.63% 0.69%
Ratio of net investment income to
average net assets 5.14% 5.32% 5.39% 5.60% 5.82%
Portfolio turnover 11.80% 6.64% 4.29% 18.05% 30.53%
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
STATE AND LOCAL REVENUE BONDS
16.38% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
KY Interlocal Transportation Equipment Lease 4.550 12/1/00 AA-* $ 361,000 $ 365,512
KY Interlocal Transportation Equipment Lease 6.000 3/1/00 A/A* 500,000 521,060
KY Interlocal Transportation Equipment Lease 4.750 12/1/00 Aa/AA* 718,000 718,000
KY Interlocal Transportation Equipment Lease 5.900 3/1/99 A/A* 950,000 969,219
KY Interlocal Transportation Equipment Lease 4.500 12/1/00 AA-* 1,432,000 1,496,325
Mt Sterling KY Lease Revenue KY League of Cities Series:A 5.625 3/1/03 Aa 4,500,000 4,794,570
---------
8,864,686
INSURED MUNICIPAL REVENUE BONDS
14.88% OF NET ASSETS
Covington KY Municipal Properties Corporation 1ST Mortgage 5.200 8/1/07 Aaa/AAA* 855,000 911,020
Greater KY Housing Assistance Corporation Mortgage Revenue 6.250 1/1/05 Aaa/AAA* 1,020,000 1,066,114
Jefferson County KY Capital Project Corporation Lease 5.500 4/1/05 Aaa/AAA* 365,000 392,623
KY Turnpike Authority Economic Development Road Revenue 5.500 7/1/07 Aaa/AAA* 3,000,000 3,264,030
Lexington-Fayette Urban County Government Ky Alumni Association** 5.000 11/1/09 Aaa 1,360,000 1,409,980
Northern KY University Certificate of Participation 4.500 12/1/04 Aaa/AAA* 1,000,000 1,009,960
---------
8,053,727
STATE AND LOCAL MORTGAGE REVENUE BONDS
14.77% OF NET ASSETS
KY Housing Corporation Housing Revenue 4.850 7/1/04 Aaa/AAA* 1,700,000 1,764,464
KY Housing Corporation Housing Revenue 5.300 1/1/04 Aaa/AAA* 2,250,000 2,372,715
KY Housing Corporation Housing Revenue 5.150 7/1/07 Aaa/AAA* 2,500,000 2,628,475
Louisville KY Multi-Family Housing Revenue-Station House Square 5.125 7/15/19 A1 1,220,000 1,226,100
---------
7,991,754
STATE AND LOCAL REVENUE BONDS
11.26% OF NET ASSETS
KY Higher Education Student Loan 6.050 12/1/98 Aa/AA-* 150,000 151,995
KY Higher Education Student Loan 4.550 6/1/99 Aa/AA-* 1,000,000 1,013,020
KY Higher Education Student Loan 6.400 6/1/00 A1/AA-* 1,835,000 1,909,648
KY Infrastructure Authority Revolving Fund Program 5.900 6/1/99 A/A* 215,000 219,857
KY Property & Building Commission Revenue Project#53 5.900 10/1/99 A/A* 170,000 175,498
KY Property & Building Commission Revenue Project #40 2nd 6.400 11/1/01 A2/A+* 500,000 539,035
KY State Property & Building Community Revenue Project#55 4.700 9/1/04 A2/A+* 2,030,000 2,084,546
---------
6,093,599
PREREFUNDED BONDS
9.88% OF NET ASSETS
Covington KY Municipal Properties Corporation 1ST Mortgage 8.250 8/1/10 NR 500,000 517,305
Danville KY Multi-City Lease Revenue Hopkinsville 6.100 6/1/00 Baa1 140,000 146,721
Danville KY Multi-City Lease Revenue Hopkinsville 6.200 6/1/01 Baa1 165,000 175,791
Owensboro KY Electric Light & Power Revenue 10.500 1/1/04 AAA* 3,770,000 4,505,150
---------
5,344,967
PUBLIC CORPORATION REVENUE BONDS
5.35% OF NET ASSETS
Danville KY Multi-City Lease Jefferson Housing Authority 5.750 2/1/00 A1 150,000 155,297
Danville KY Mutli-City Lease Revenue Owensboro 4.650 7/1/00 A 340,000 346,440
Jeffersontown KY Certificate of Participation 4.450 11/1/00 A 555,000 562,098
Louisville KY Public Properties Corporation Revenue 5.500 4/1/99 A/A-* 350,000 356,682
Shelbyville Certificates of Participation Refinancing 4.900 10/1/07 NR 1,455,000 1,472,664
---------
2,893,181
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE> 59
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
KENTUCKY MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
ESCROWED TO MATURITY BONDS
5.04% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Danville KY Multi-City Lease Revenue Mount Sterling 6.800 9/1/99 Aaa/AAA* $ 75,000 $ 83,183
KY Development Finance Authority Hospital-St Clair 6.150 9/1/98 NR 325,000 327,031
KY Property & Building Commission Revenue Project#34 7.000 12/1/98 Aaa/A+* 500,000 509,165
KY Turnpike Authority Economic Development Road Revenue 7.000 5/15/99 Aaa/AAA* 1,750,000 1,809,920
------------
2,729,299
UNIVERSITY CONSOLIDATED EDUCATION AND BUILDING REVENUE BONDS
4.50% OF NET ASSETS
University Of Louisville KY Consolidated Education Building 5.200 5/1/04 A1/AA-* 1,000,000 1,054,920
University of Louisville KY Consolidated Education Building 4.700 5/1/00 A1/AA-* 1,350,000 1,378,256
------------
2,433,176
HOSPITAL AND HEALTH CARE REVENUE BONDS
4.26% OF NET ASSETS
Christian County KY Hospital Jennie Stuart Medical Center 5.250 7/1/03 A-* 200,000 207,488
KY Development Finance Authority-Sisters of Charity 6.000 11/1/00 A1/A+* 2,000,000 2,100,080
------------
2,307,568
INDUSTRIAL REVENUE AND POLLUTION CONTROL REVENUE BONDS
4.18% OF NET ASSETS
Ashland KY Pollution Control Revenue-Ashland Oil 7.375 7/1/09 BAA1 1,370,000 1,478,888
Meade County KY Pollution Control Revenue-Olin Corporation 6.000 7/1/07 NR 755,000 784,853
------------
2,263,740
KENTUCKY TURNPIKE AUTHORITY REVENUE BONDS
3.74% OF NET ASSETS
KY Turnpike Authority Economic Development Road Revenue 5.100 1/1/99 A/A+* 2,000,000 2,023,400
------------
2,023,400
COUNTY AND SCHOOL REVENUE BONDS
2.12% OF NET ASSETS
Hardin County KY Building Commission Revenue 5.750 7/1/01 NR 1,000,000 1,014,670
Muhlenberg Co KY School District Finance Corporation 4.900 8/1/98 A 130,000 130,256
------------
1,144,926
MUNICIPAL UTILITY REVENUE BONDS
.10% OF NET ASSETS
Ashland KY Utility Revenue 7.000 4/1/99 BBB+* 50,000.00 51,281
------------
51,281
------------
Total Investments (cost $50,553,450)(a) - 96.44% of Net Assets $ 52,195,304
============
<FN>
* Standard and Poor's Corporation
** Security purchased on a delayed delivery basis.
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 1,904,926
Unrealized depreciation (263,072)
------------
Net unrealized appreciation $ 1,641,854
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE> 60
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE SHORT-TO-MEDIUM SERIES
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investment in securities, at value (Cost: $50,553,450) $ 52,195,304
Cash 1,476,945
Interest receivable 1,033,223
Receivable for investments sold 1,290,000
---------------
Total assets 55,995,472
LIABILITIES:
Payable for:
Investments purchased $1,416,970
Distributions 186,837
Fund shares redeemed 235,620
Management fee 22,090
Transfer agent 5,795
Other fees 4,516
-------------
Total liabilities 1,871,828
---------------
NET ASSETS:
Net assets consist of:
Capital $ 53,167,465
Net accumulated realized losses on investment transactions (685,675)
Net unrealized appreciation in value of investments 1,641,854
---------------
Net assets at value $ 54,123,644
===============
NET ASSET VALUE, offering price and redemption price per share
($54,123,644 / 10,268,698 shares outstanding) $ 5.27
===============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income $ 2,572,032
---------------
Expenses:
Investment advisory fees 268,875
Transfer agent 70,530
Professional fees 14,281
Trustee fees 6,863
Other expenses 35,100
---------------
Total expenses 395,649
---------------
Net investment income 2,176,383
---------------
Realized and unrealized gain (loss) on investments
Net realized loss (73,155)
Net increase in unrealized appreciation 571,918
---------------
Net realized and unrealized gain on investments 498,763
---------------
Net increase in net assets resulting from operations $ 2,675,146
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE> 61
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE SHORT-TO-MEDIUM SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 2,176,383 $ 2,474,776
Net realized loss on investments (73,155) (188,198)
Net increase in unrealized appreciation 571,918 459,373
-----------------------------------------
Net increase in net assets resulting from operations 2,675,146 2,745,951
Distributions to shareholders (2,176,383) (2,474,776)
Net fund share transactions (204,548) (13,015,798)
-----------------------------------------
Total increase (decrease) 294,215 (12,744,623)
Net assets:
Beginning of year 53,829,429 66,574,052
-----------------------------------------
End of year $ 54,123,644 $ 53,829,429
=========================================
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 62
DUPREE MUTUAL FUNDS - KENTUCKY TAX-FREE SHORT-TO-MEDIUM SERIES
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $5.22 $5.20 $5.18 $5.17 $5.29
-------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.21 0.22 0.21 0.21 0.21
Net gains or losses on securities
(both realized and unrealized) 0.05 0.02 0.02 0.02 (0.12)
-------------------------------------------------------
Total from investment operations 0.26 0.24 0.23 0.23 0.09
LESS DISTRIBUTIONS:
Distributions (from capital gains) -- -- -- (0.01) --
Distributions (from net investment income) (0.21) (0.22) (0.21) (0.21) (0.21)
-------------------------------------------------------
NET ASSET VALUE, END OF YEAR $5.27 $5.22 $5.20 $5.18 $5.17
=======================================================
Total return 5.12% 4.59% 4.51% 4.27% 1.71%
Net assets, end of year (in thousands) $54,124 $53,829 $66,574 $57,064 $69,550
Ratio of expenses to average net assets 0.74% 0.72% 0.75% 0.72% 0.72%
Before expense reimbursement 0.74% 0.72% 0.75% 0.72% 0.72%
Ratio of net investment income to
average net assets 4.05% 4.11% 4.04% 4.00% 3.92%
After expense reimbursement 4.05% 4.11% 4.04% 4.00% 3.92%
Portfolio turnover 20.98% 20.03% 57.80% 4.07% 17.62%
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
NORTH CAROLINA MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INSURED MUNICIPAL REVENUE BONDS
44.62% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Catawba County NC Hospital Revenue-Catawba Memorial 6.000 10/1/17 Aaa/AAA* $ 100,000 $ 107,838
Charlotte NC Convention Facilities Project Series C 5.000 12/1/21 Aaa/AAA* 20,000 19,435
Craven County NC General Obligation School Building Revenue 5.500 6/1/14 Aaa/AAA* 40,000 42,510
Craven NC Regional Medical Auth Health Care Facs Revenue 5.625 10/1/17 Aaa/AAA* 10,000 10,537
Cumberland County NC Hospital Facilities Revenue 6.000 10/1/21 Aaa/AAA* 90,000 94,228
Elizabeth City NC Housing Developement Mortgage Revenue 6.125 4/1/23 Aa 140,000 148,596
Fayetteville NC Public Works Community Revenue Bond 5.100 3/1/15 Aaa/AAA* 400,000 406,556
Gaston County NC Public Facilities Project Certificate of Participation 5.250 12/1/16 Aaa/AAA* 850,000 878,925
Greenville NC Housing Developement Corp Series A 5.800 7/1/24 Aaa/AAA* 40,000 42,277
NC Central University Housing System Revenue 5.800 11/1/18 Aaa/AAA* 50,000 53,570
NC Central University Housing System Revenue 5.800 11/1/20 Aaa/AAA* 60,000 64,234
NC Eastern Municipal Power Agency Power System Revenue 5.750 1/1/19 Aaa/AAA* 100,000 103,714
NC Eastern Municipal Power Agency Power System Revenue 5.700 1/1/15 Aaa/AAA* 345,000 372,152
NC Housing Finance Agency Multi-Family Refunding Series A 5.800 7/1/13 Aaa/AAA* 10,000 10,649
NC Housing Finance Agency Multi-Family Refunding Series A 5.900 7/1/20 Aaa/AAA* 40,000 41,875
NC Medical Care Community Hospital Revenue-High Point 5.000 10/1/12 Aaa/AAA* 350,000 352,370
NC Medical Care Community Hospital Revenue-Memorial Mission 6.000 10/1/22 Aaa/AAA* 15,000 15,989
NC Medical Care Community Hospital Revenue-St Joseph 5.100 10/1/14 Aaa/AAA* 5,000 5,076
NC Medical Care Community Hospital Revenue-Stanly Hospital 5.375 10/1/14 Aaa/AAA* 50,000 51,852
NC Medical Care Community Hospital Revenue-Wilson Memorial 5.625 11/1/18 Aaa/AAA* 80,000 84,482
NC Municipal Power Agency No. 1 Catawba Electric Revenue 5.000 1/1/15 Aaa/AAA* 5,000 5,022
NC Municipal Power Agency No. 1 Catawba Electric Revenue 5.750 1/1/15 Aaa/AAA* 35,000 36,809
NC Municipal Power Agency No. 1 Catawba Electric Revenue 5.750 1/1/20 Aaa/AAA* 50,000 52,460
NC Municipal Power Agency No. 1 Catawba Electric Revenue 5.125 1/1/17 Aaa/AAA* 550,000 553,563
New Hanover County NC Certificate of Participation 5.000 12/1/17 Aaa/AAA* 250,000 250,420
New Hanover County NC Hospital Revenue 5.750 10/1/26 Aaa/AAA* 100,000 107,195
Onslow County NC General Obligation School Improvement 5.700 3/1/12 Aaa/AAA* 10,000 10,815
Pitt County NC Public Facilities Certificate of Participation 5.850 4/1/17 Aaa/AAA* 100,000 108,119
Union County NC Enterprise System Revenue 5.500 6/1/21 Aaa/AAA* 245,000 255,256
University of NC at Wilmington Dorm & Dining System Revenue 5.400 1/1/18 Aaa/AAA* 120,000 124,980
Winston Salem NC State University Revenue Student Services 5.400 6/1/12 Aaa/AAA* 10,000 10,527
-----------
4,422,031
HOSPITAL AND HEALTHCARE REVENUE BONDS
23.86% OF NET ASSETS
Charlotte-Mecklenburg NC Health Care System 6.375 1/1/09 Aa3/AA* 5,000 5,445
Charlotte-Mecklenburg NC Health Care System 6.250 1/1/20 Aa3/AA* 25,000 26,823
Charlotte-Mecklenburg NC Health Care System 5.875 1/15/26 Aa3/AA* 50,000 52,975
Charlotte-Mecklenburg NC Health Care System 5.750 1/15/21 Aa3/AA* 250,000 263,503
NC Medical Care Community Hospital Revenue-Baptist Hospital 6.375 6/1/14 Aa3/AA* 45,000 48,976
NC Medical Care Community Hospital Revenue-Baptist Hospital 6.000 6/1/22 Aa/AA* 75,000 80,090
NC Medical Care Community Hospital Revenue-Carolina Medicorp 5.500 5/1/15 Aa3/AA* 70,000 72,246
NC Medical Care Community Hospital Revenue-Duke Univ Hospital 5.250 6/1/17 Aa3\AA* 900,000 910,413
NC Medical Care Community Hospital Revenue-Duke University Hospital 5.250 6/1/21 Aa3/AA* 150,000 151,541
NC Medical Care Community Hospital Revenue-Gaston Memorial 5.500 2/15/19 A2/A+* 150,000 153,137
NC Medical Care Community Hospital Revenue-Presbyterian 5.500 10/1/14 Aa/AA* 35,000 36,352
Pitt County NC Memorial Hospital Refunding 5.375 12/1/10 Aa/AA-* 10,000 10,570
Pitt County NC Memorial Hospital Revenue 5.500 12/1/15 Aa/AA-* 325,000 339,307
University of NC at Chapel Hill Hospital Revenue 6.000 2/15/24 Aa/AA* 100,000 106,350
University of NC at Chapel Hill Hospital Revenue 5.250 2/15/19 Aa3/AA* 105,000 106,820
-----------
2,364,548
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 64
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
NORTH CAROLINA MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATE AND LOCAL MORTGAGE REVENUE BONDS
9.54% OF NET ASSETS
Lenoir NC Housing Authority Mortgage Revenue 5.700 8/20/24 AAA* $ 100,000 $ 103,751
NC Housing Finance Agency Home Ownership Revenue 5.000 7/1/11 Aa2/AA* 250,000 253,153
NC Housing Finance Agency Homeownership Revenue 5.125 7/1/13 Aa2/AA* 100,000 100,848
NC Housing Finance Agency Single Family Refunding Series CC 5.950 9/1/17 Aa/AA* 20,000 21,293
NC Housing Finance Agency Single Family Revenue Series II 6.200 3/1/16 Aa2/AA* 100,000 107,987
NC Housing Finance Agency Single Family Revenue Series KK 5.875 9/1/17 Aa2/AA* 90,000 94,424
NC Housing Finance Agency Single Family Revenue Series Y 6.300 9/1/15 Aaa/AA* 145,000 160,124
Vance County NC Housing Mortgage Revenue Henderson Project 6.150 3/1/22 Aa2 100,000 103,608
-----------
945,188
MUNICIPAL UTILITY REVENUE BONDS
8.45% OF NET ASSETS
Charlotte NC General Obligation Water & Sewer Revenue 5.400 4/1/15 Aaa/AAA* 20,000 21,165
Charlotte NC Water & Sewer System Revenue 5.250 12/1/21 Aa/AA* 355,000 365,029
Morrisville NC General Obligation Water & Sewer Revenue 5.600 6/1/15 A/A+* 35,000 37,739
NC Eastern Municipal Power Agency Power System Revenue 5.875 1/1/13 Baa/BBB* 50,000 52,375
NC Eastern Municipal Power Agency Power System Revenue 5.500 1/1/17 Aaa/AAA* 150,000 154,266
NC Municipal Power Agency No. 1 Catawba Electric Revenue 6.000 1/1/20 A3/A-* 100,000 100,000
NC Municipal Power Agency No. 1 Catawba Electric Revenue 6.250 1/1/17 A3/A-* 100,000 107,130
-----------
837,704
PREREFUNDED AND ESCROWED TO MATURITY BONDS
4.45% OF NET ASSETS
Charlotte-Mecklenburg NC Health Care System Prerefunded 6.250 1/1/20 AA* 30,000 32,905
NC Eastern Municipal Power Agency Power System Revenue 6.000 1/1/26 AAA/BBB* 15,000 17,380
NC Medical Care Community Hospital Revenue-Presbyterian 6.125 10/1/14 Aa3/AA* 135,000 147,720
NC Medical Care Community Hospital Revenue-Rex Hospital 6.125 6/1/10 A1/A+* 50,000 55,027
NC Medical Care Community Hospital Revenue-Rex Hospital 6.250 6/1/17 A1/A+* 115,000 127,196
NC Municipal Power Agency No. 1 Catawba Electric Revenue 6.250 1/1/17 A3/A-* 55,000 61,237
-----------
441,465
PUBLIC CORPORATION REVENUE BONDS
3.60% OF NET ASSETS
Charlotte NC Certificate of Participation Law Project B 5.375 6/1/13 Aa1/AA* 100,000 104,004
Durham County NC Jail Facilities & Computer Equipment 6.625 5/1/14 Aa1/AA* 20,000 21,847
Greensboro NC Coliseum Complex Improvement Project Series A 5.700 12/1/10 A1/AA* 55,000 60,295
Monroe NC Combined Enterprise System Revenue 6.000 3/1/19 A/A* 100,000 107,621
Shelby NC Combined Enterprise System Revenue 5.625 5/1/14 A/A-* 20,000 21,102
Shelby NC Combined Enterprise System Revenue 5.625 5/1/14 A/A-* 40,000 41,969
-----------
356,838
COUNTY GENERAL OBLIGATION BONDS
3.10% OF NET ASSETS
Durham County NC Certificate of Participation 5.000 5/1/14 Aa1/AA* 300,000 301,845
Forsyth County NC General Obligation Public Improvement 5.600 8/1/09 Aa1/AAA* 5,000 5,360
-----------
307,205
INDUSTRIAL REVENUE AND POLLUTION CONTROL REVENUE BONDS
1.11% OF NET ASSETS
Greenville NC Enterprise System Revenue 6.000 9/1/10 A1/A+* 100,000 110,256
-----------
110,256
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 65
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
NORTH CAROLINA MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOCAL GENERAL OBLIGATION BONDS
.05% OF NET ASSETS
High Point NC Unlimited General Obligation Revenue Bond 5.600 3/1/13 Aa/AA* $ 5,000 $ 5,370
-----------
5,370
Total Investments (cost $9,466,982)(a) - 98.78% of Net Assets $ 9,790,605
============
* Standard and Poor's Corporation
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 325,877
Unrealized depreciation (2,254)
-----------
Net unrealized appreciation $ 323,623
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE> 66
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $9,466,982) $ 9,790,605
Cash 108,610
Interest receivable 123,931
Receivable from Advisor 2,787
-----------
Total assets 10,025,933
LIABILITIES:
Payable for:
Distributions $106,232
Management fee 4,027
Transfer agent 1,208
Other fees 3,273
--------
Total liabilities 114,740
-----------
NET ASSETS:
Net assets consist of:
Capital $ 9,600,180
Net accumulated realized losses on investment transactions (12,610)
Net unrealized appreciation in value of investments 323,623
-----------
Net assets at value $ 9,911,193
===========
NET ASSET VALUE, offering price and redemption price per share
($9,911,193 / 916,032 shares outstanding) $ 10.82
===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<S> <C>
Net investment income:
Interest income $ 338,572
-----------
Expenses:
Investment advisory fees 32,367
Transfer agent 9,710
Professional fees 1,995
Trustee fees 753
Other expenses 4,373
-----------
Total expenses 49,198
Expenses reimbursed by Investment Advisor (27,686)
-----------
Net investment income 317,060
-----------
Realized and unrealized gain (loss) on investments
Net realized loss (9,023)
Net increase in unrealized appreciation 249,438
-----------
Net realized and unrealized gain on investments 240,415
-----------
Net increase in net assets resulting from operations $ 557,475
===========
</TABLE>
<PAGE> 67
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 317,060 $ 114,159
Net realized loss on investments (9,023) (2,782)
Net increase in unrealized appreciation 249,438 83,328
----------------------------------
Net increase in net assets resulting from operations 557,475 194,705
Distributions to shareholders (317,060) (114,159)
Net fund share transactions 6,084,478 2,442,372
----------------------------------
Total increase 6,324,893 2,522,918
Net assets:
Beginning of year 3,586,300 1,063,382
----------------------------------
End of year $9,911,193 $3,586,300
==================================
</TABLE>
================================================================================
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX FREE INCOME SERIES
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding
<TABLE>
<CAPTION>
For the years ended June 30,
---------------------------------------
1998 1997 1996(a)
---------------------------------------
<S> <C> <C> <C>
Net Asset Value, beginning of year $10.33 $9.88 $10.00
---------------------------------------
Income From Investment Operations:
Net investment income 0.53 0.54 0.32
Net gains or losses on securities
(both realized and unrealized) 0.49 0.45 (0.12)
---------------------------------------
Total from investment operations 1.02 0.99 0.20
Less Distributions:
Distributions (from net investment income) (0.53) (0.54) (0.32)
---------------------------------------
Net Asset Value, end of year $10.82 $10.33 $9.88
=======================================
Total return (b) 9.99% 10.18% 3.23%
Net assets, end of year (in thousands) $9,911 $3,586 $1,063
Ratio of expenses to average net assets (b) 0.33% 0.25% 0.18%
Before expense reimbursement (b) 0.76% 0.81% 2.47%
Ratio of net investment income to average net assets (b) 4.47% 4.72% 3.27%
After expense reimbursement (b) 4.90% 5.29% 0.98%
Portfolio turnover 16.77% 24.13% 22.83%
(a) Commencement of operations November 16, 1995.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
NORTH CAROLINA MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INSURED MUNICIPAL REVENUE BONDS
25.60% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Asheville NC Certificate of Participation Series B 4.300 6/1/02 Aaa/AAA* $ 25,000 $ 25,323
Burke County NC General Obligation 6.250 3/1/00 Aaa/AAA* 50,000 52,432
Columbus County NC Refunding General Obligation 4.500 2/1/99 Aaa/AAA* 10,000 10,104
NC Medical Care Community Hospital-High Point Health System 4.400 10/1/03 Aaa/AAA* 50,000 50,889
New Hanover County NC Water & Sewer District Refunding 4.600 8/1/98 Aaa/AAA* 20,000 20,041
North Carolina Municipal Power Agency No.1 Catawba Electric 5.500 1/1/01 Aaa/AAA* 70,000 72,291
Richmond County NC Certificate of Participation 4.800 6/1/99 Aaa/AAA* 20,000 20,307
Sanford NC Refunding-Water & Sewer General Obligation 4.500 3/1/00 Aaa/A+* 15,000 15,306
University North Carolina Charlotte Student Activity Center 5.000 6/1/99 Aaa/AAA* 20,000 20,374
Wilkes County NC Refinancing 5.250 6/1/06 Aaa/AAA* 250,000 264,490
Winston-Salem State Unviersity Student Services Fee 5.200 6/1/99 Aaa/AAA* 10,000 10,201
------
561,758
PREREFUNDED BONDS
24.17% OF NET ASSETS
Buncombe County NC General Obligation 7.000 3/1/10 AAA* 30,000 31,357
Charlotte NC Certificate of Participation Convention Center 6.750 12/1/21 Aaa/AAA* 200,000 222,534
Charlotte NC General Obligation 6.750 6/1/07 Aaa/AAA* 10,000 10,527
Charlotte NC General Obligation 6.900 10/1/06 Aaa/AAA* 25,000 27,241
Franklin County NC Certificates of Participation Jail & School 6.000 6/1/02 Aaa/AAA* 15,000 16,140
North Carolina Eastern Municipal Power System Revenue 7.500 1/1/21 Aaa/BBB* 25,000 26,090
North Carolina Medical Care Community Health Care Facility 7.250 2/15/19 Aaa/AAA* 30,000 31,348
North Carolina State University-Raleigh Parking Systems 6.600 6/1/01 A1 10,000 10,523
Pitt County NC Revenue-Pitt County Memorial Hospital 6.900 12/1/21 Aaa/AA-* 5,000 5,576
Polk County NC General Obligation 6.700 5/1/11 Aaa/AAA* 40,000 43,887
University of North Carolina Parking Systems 6.600 6/1/01 A1/AA* 100,000 105,023
-------
530,246
LOCAL GENERAL OBLIGATION BONDS
18.40% OF NET ASSETS
Asheville NC Certificate of Participation Series:A 4.600 6/1/05 A1/A* 50,000 51,188
Charlotte NC Certificate of Participation Equipment Aquisition 4.350 9/1/00 AA* 70,000 71,200
Charlotte NC Certificate of Participation Governmental Equipment 5.050 9/1/99 AA* 55,000 56,201
Charlotte NC Water & Sewer General Obligation 5.250 4/1/99 Aaa/AAA* 10,000 10,186
Concord NC General Obligation 6.750 3/1/99 Aa/A+* 20,000 20,522
Durham NC Certificate of Participation 5.100 6/1/05 Aa3/AA* 100,000 105,968
Forsyth County NC Refunding General Obligation 4.600 3/1/01 Aa1/AAA* 15,000 15,416
Greensboro NC Refunding General Obligation 4.600 3/1/00 Aa1/AAA* 25,000 25,560
Rocky Mount NC General Obligation 6.100 5/1/01 A/A+* 25,000 26,572
Surf City NC Refunding General Obligation 5.400 3/1/01 BBB-* 20,000 20,850
------
403,663
UNIVERSITY CONSOLIDATED EDUCATION AND BUILDING REVENUE BONDS
6.99% OF NET ASSETS
NC Education Facility Finance Agency (St Augustine College) 4.450 10/1/02 AA* 100,000 101,153
University of North Carolina Utlity System Revenue 4.900 8/1/03 Aa2/AA* 50,000 52,121
------
153,274
HOSPITAL AND HEALTHCARE REVENUE BONDS
6.35% OF NET ASSETS
NC Medical Care Community Hospital-Baptist Hospital 5.400 6/1/01 Aa/AA-* 10,000 10,500
NC Medical Care Community Hospital-Presbytarian Health 4.600 10/1/99 Aa3/AA* 10,000 10,155
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE> 69
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
NORTH CAROLINA MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NC Medical Care Community Hospital-Presbytarian Health 5.350 10/1/01 Aa/AA* $ 25,000 $ 26,252
NC Medical Care Community Hospital-Presbytarian Health 5.000 10/1/02 Aa3/AA* 40,000 41,643
NC Medical Care Community Hospital-Rex Hospital 4.900 6/1/99 A1/A+* 50,000 50,786
-----------
139,336
COUNTY GENERAL OBLIGATION BONDS
6.15% OF NET ASSETS
Caldwell County NC General Obligation 6.000 2/1/05 A1/A* 50,000 51,723
Forsyth County NC General Obligation 6.700 3/1/04 Aa1/AAA* 30,000 32,215
Guildford County NC General Obligation 5.250 4/1/99 Aa1/AA+* 10,000 10,181
Mecklenburg County NC Refunding General Obligation 5.200 3/1/99 Aaa/AAA* 20,000 20,327
Union County NC School General Obligation 5.800 3/1/99 A1/A+* 20,000 20,386
-----------
134,832
MUNICIPAL UTILITY REVENUE BONDS
5.91% OF NET ASSETS
Buncombe County NC Water & Sewer Revenue 6.100 7/1/01 A/A+* 25,000 26,581
North Carolina Municipal Agency Number 1 Catawba Electric 6.000 1/1/04 A3/A-* 25,000 26,886
Orange County NC Water & Sewer Authority Revenue Refunding 4.250 7/1/01 Aa/AA* 5,000 5,077
Winston-Salem NC Water & Sewer Revenue Refunding 4.300 6/1/03 Aa2/AA* 70,000 71,084
-----------
129,628
STATE GENERAL OBLIGATION BONDS
2.39% OF NET ASSETS
North Carolina State General Obligation 5.000 6/1/03 Aaa/AAA* 50,000 52,485
-----------
52,485
ESCROWED TO MATURITY BONDS
1.97% OF NET ASSETS
Durham NC General Obligation 7.000 5/1/00 Aaa/AAA* 40,000 43,239
-----------
43,239
STATE AND LOCAL MORTGAGE REVENUE BONDS
1.40% OF NET ASSETS
North Carolina Housing Finance Agency Single Family 4.750 3/1/02 Aa/AA* 30,000 30,811
-----------
30,811
Total Investments (cost $2,145,700)(a) - 99.33% of Net Assets $ 2,179,272
===========
<FN>
* Standard and Poor's Corporation
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 45,074
Unrealized depreciation 11,502
-----------
Net unrealized appreciation $ 33,572
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE> 70
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments in securities,at value (Cost: $2,145,700) $2,179,272
Interest receivable 23,794
Receivable from Advisor 10,170
----------
Total assets 2,213,236
LIABILITIES:
Cash overdraft $3,541
Payable for:
Distributions 7,397
Transfer agent 5,233
Other fees 3,098
------
Total liabilities 19,269
----------
NET ASSETS:
Net assets consist of:
Capital $2,163,656
----------
Net accumulated realized losses on investment transactions (3,261)
Net unrealized appreciation in value of investments 33,572
Net assets at value $2,193,967
==========
NET ASSET VALUE, offering price and redemption price per share
($2,193,967 / 214,334 shares outstanding) $ 10.24
==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<S> <C>
Net investment income:
Interest income $ 70,096
----------
Expenses:
Investment advisory fees 8,143
Transfer agent 2,443
Professional fees 1,321
Trustee fees 202
Other expenses 1,949
----------
Total expenses 14,058
Expenses Reimbursed by Investment Advisor (7,346)
----------
Net investment income 63,384
----------
Realized and unrealized gain (loss) on investments
Net realized loss (804)
Net increase in unrealized appreciation 18,639
----------
Net realized and unrealized gain on investments 17,835
----------
Net increase in net assets resulting from operations $ 81,219
==========
</TABLE>
<PAGE> 71
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
STATEMENT OF CHANGES IN NET ASSETS
For the periods ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 63,384 $ 56,681
Net realized loss on investments (804) (1,015)
Net increase in unrealized appreciation 18,639 16,178
----------------------------
Net increase in net assets resulting from operations 81,219 71,844
Distributions to shareholders (63,384) (56,681)
Net fund share transactions 717,742 284,529
----------------------------
Total increase 735,577 299,692
Net assets:
Beginning of year 1,458,390 1,158,698
----------------------------
End of year $2,193,967 $1,458,390
============================
</TABLE>
- --------------------------------------------------------------------------------
DUPREE MUTUAL FUNDS - NORTH CAROLINA TAX-FREE SHORT-TO-MEDIUM SERIES
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding:
<TABLE>
<CAPTION>
For the years ended June 30,
--------------------------------------
1998 1997 1996(a)
--------------------------------------
<S> <C> <C> <C>
Net Asset Value, beginning of year $10.12 $9.99 $10.00
--------------------------------------
Income From Investment Operations:
Net investment income 0.40 0.41 0.24
Net gains or losses on securities
(both realized and unrealized) 0.12 0.13 (0.01)
Total from investment operations 0.52 0.54 0.23
Less Distributions:
Distributions (from net investment income) (0.40) (0.41) (0.24)
--------------------------------------
Net Asset Value, end of year $10.24 $10.12 $9.99
======================================
Total return (b) 5.20% 5.49% 3.79%
Net assets, end of year (in thousands) $2,194 $1,458 $1,159
Ratio of expenses to average net assets (b) 0.41% 0.23% 0.16%
Before expense reimbursement (b) 0.86% 0.82% 1.78%
Ratio of net investment income to average net assets (b) 3.44% 3.46% 2.47%
After expense reimbursement (b) 3.89% 4.06% 0.85%
Portfolio turnover 14.89% 17.20% 17.18%
(a) Commencement of operations November 16, 1995.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INSURED MUNICIPAL REVENUE BONDS
46.10% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Bristol TN Health & Educational Facilities Bristol Memorial Hospital 5.250 9/1/21 Aaa/AAA* $ 400,000 $ 402,580
Chattanooga/Hamilton County TN Hospital Revenue Erlanger 5.625 10/1/18 Aaa/AAA* 30,000 31,163
Chattanooga/Hamilton County TN Hospital Revenue Erlanger 5.000 10/1/18 Aaa/AAA* 800,000 792,896
Clarksville TN Water Sewer & Gas Refunding & Improvement 6.250 2/1/18 Aaa/AAA* 200,000 215,080
Clarksville TN Water Sewer & Gas Revenue 5.650 2/1/17 Aaa 200,000 212,604
Franklin TN Industrial Development Board Landings Apartment 5.550 10/1/08 Aaa/AAA* 50,000 54,142
Franklin TN Industrial Development Board Landings Apartment 5.900 10/1/16 Aaa/AAA* 800,000 845,296
Gatlinburg TN Public Building Authority Convention Center 6.900 12/1/12 Aaa/AAA* 90,000 100,046
Greater Tennessee Housing Assistance Refunding 7.250 7/1/24 Aaa/AAA* 5,000 5,554
Jackson TN Hospital Revenue Refunding & Improvement 5.625 4/1/15 Aaa/AAA* 310,000 326,715
Knox County TN Health Educational & Housing Facility Baptist 5.500 4/15/17 AAA* 1,315,000 1,369,441
Knox County TN Health Educational & Housing Facility Ft Sanders 6.250 1/1/13 Aaa/AAA* 10,000 11,491
Knox County TN Health Educational & Housing Facility Ft Sanders 5.650 1/1/08 Aaa/AAA* 20,000 21,200
Knox County TN Health Educational & Housing Facility Ft Sanders 5.250 1/1/23 Aaa/AAA* 400,000 404,196
Knox County TN Health Educational & Housing Facility Mercy Health 5.875 9/1/15 Aaa/AAA* 15,000 16,406
Knox County TN Health Educational & Housing Facility Mercy Health 6.000 9/1/19 Aaa/AAA* 100,000 107,088
Knox County TN Utility District Water & Sewer 5.625 12/1/19 Aaa 400,000 426,368
Knox County/Chapman TN Utility District Water & Sewer 6.000 1/1/14 Aaa/AAA* 40,000 43,851
Knoxville TN Development Corp Housing Revenue Morningside 6.100 7/20/20 AAA* 500,000 528,175
Lauderdale County TN General Obligation Bond 6.000 4/1/13 Aaa/AAA* 20,000 21,688
Lawrence County TN Public Improvements General Obligation 6.300 3/1/08 Aaa/AAA* 50,000 55,003
Memphis Shelby County TN Airport Revenue Refunding 5.650 9/1/15 Aaa/AAA* 55,000 57,837
Metropolitan Nashville & Davidson County TN General Obligation 5.125 11/15/27 Aaa/AAA* 750,000 749,393
Metropolitan Nashville & Davidson County TN Stadium Project 5.750 7/1/14 Aaa/AAA* 100,000 107,695
Metropolitan Nashville & Davidson County TN Stadium Project 5.875 7/1/21 Aaa/AAA* 350,000 376,912
Metropolitan Nashville & Davidson County TN Water & Sewer 5.000 1/1/18 Aaa/AAA* 200,000 199,014
Metropolitan Nashville TN Airport Refunding & Improvement 5.000 7/1/15 Aaa/AAA* 300,000 302,697
Metropolitan Nashville TN Airport Series C 6.625 7/1/07 Aaa/AAA* 30,000 33,001
Metropolitan Nashville TN Airport Series C 6.600 7/1/15 Aaa/AAA* 120,000 130,698
Milan TN Special School District 6.750 4/1/13 Aaa/AAA* 60,000 69,221
North Anderson TN Utility District Waterworks Revenue 5.600 1/1/15 Aaa/AAA* 100,000 106,321
Oak Ridge TN Industrial Development Board Gardens** 5.250 8/20/18 AAA* 655,000 659,493
Sevier County TN Public Buildings Auth Solid Waste Facility 5.600 9/1/15 Aaa/AAA* 100,000 105,206
Shelby County TN Health & Educational Housing Methodist 5.000 4/1/18 Aaa/AAA* 1,000,000 993,710
Shelby County TN Health Educational & Housing Heritage Place 6.900 7/1/14 Aaa/AAA* 150,000 172,101
Shelby County TN Health Educational & Housing Methodist 5.300 8/1/15 Aaa/AAA* 800,000 822,248
Sullivan County TN Health Educational & Housing Holston 5.750 2/15/13 Aaa/AAA* 130,000 138,206
Tennessee Housing Development Agency Homeownership Program 5.900 7/1/17 Aaa/AAA* 35,000 36,779
Tennessee Housing Development Agency Mortgage Finance Program 5.900 7/1/18 Aaa/AAA* 100,000 105,928
Tennessee Housing Development Agency Mortgage Finance Program 5.850 7/1/13 Aaa/AAA* 100,000 106,474
Tennessee Housing Development Agency Mortgage Finance Program 6.200 7/1/18 Aaa/AAA* 755,000 821,931
Tennessee Local Development Authority Student Loan Program 5.125 3/1/16 Aaa/AAA* 350,000 354,634
Tennessee Local Development Authority Student Loan Program 5.125 3/1/22 Aaa/AAA* 1,000,000 1,007,890
----------
13,448,372
STATE AND LOCAL MORTGAGE REVENUE BONDS
13.85% OF NET ASSETS
Knoxville TN Development Corp Housing Revenue Clinton Tower 6.650 10/15/10 A* 285,000 309,159
Memphis TN Health Education & Housing Board Hunters Trace 6.250 6/1/13 Aa/AAA* 55,000 56,420
Memphis TN Health Education & Housing Board River Trace II 6.250 10/1/13 Aaa 50,000 55,043
Memphis TN Health Education & Housing Board Riverdale Plaza 6.350 7/20/28 AAA* 300,000 326,454
Metropolitan Nashville & Davidson County TN Dandridge Tower 6.375 1/1/11 A* 200,000 225,152
Metropolitan Nashville & Davidson County TN Hermitage Apts 5.900 2/1/19 A* 395,000 413,893
Murfreesboro TN Housing Authority Westbrooks Towers Project 5.875 1/15/10 A* 310,000 325,320
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE> 73
<TABLE>
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shelby County TN Health Educational & Housing Corners Apts 6.000 1/1/17 A $ 250,000 $ 262,108
Shelby County TN Health Educational & Housing Harbour Apts 6.000 4/15/24 A* 50,000 51,736
Shelby County TN Health Educational & Housing Harbour Apts 5.750 4/15/11 A* 100,000 103,600
Shelby County TN Health Educational & Housing Harbour Apts 6.000 4/15/18 A* 125,000 129,467
Shelby County TN Health Educational & Housing Windsor Apts 6.750 10/1/17 AA* 355,000 395,104
Tennessee Housing Development Agency Homeownership Program 6.700 7/1/12 Aa2/AA* 85,000 94,027
Tennessee Housing Development Agency Homeownership Program 5.850 1/1/11 Aa2/AA* 200,000 213,738
Tennessee Housing Development Agency Mortgage Finance Program 5.700 1/1/08 A1/A+* 100,000 106,690
Tennessee Housing Development Agency Mortgage Finance Program 5.850 7/1/13 A1/A+* 125,000 131,061
Tennessee Housing Development Agency Mortgage Finance Program 5.900 7/1/18 A1/A+* 800,000 842,584
---------
4,041,556
COUNTY GENERAL OBLIGATION BONDS
11.12% OF NET ASSETS
Marshall County TN General Obligation 5.600 6/1/14 A* 5,000 5,167
Marshall County TN General Obligation 5.700 6/1/09 A 25,000 25,928
Metropolitan Nashville & Davidson County TN Limited Obligation 7.000 9/1/11 A1*/A 180,000 198,686
Rutherford County TN General Obligation 5.000 4/1/17 Aa3/AA-* 500,000 499,355
Shelby County TN General Obligation Refunding Revenue 5.625 4/1/14 Aa/AA+* 80,000 85,295
Shelby County TN Health Educational & Housing Cameron Kirby 5.900 7/1/18 A* 1,500,000 1,561,605
Williamson County TN General Obligation 5.600 9/1/10 Aa 45,000 48,677
Williamson County TN Rural School Building Revenue 5.800 3/1/12 Aa 100,000 108,546
Wilson County TN Certificates of Participation 6.125 6/30/10 A 410,000 449,381
Wilson County TN Unlimited General Obligation 5.750 6/1/17 Aaa/AAA* 250,000 260,310
---------
3,242,950
MUNICIPAL UTILITY REVENUE BONDS
5.54% OF NET ASSETS
Atoka TN Water & Sewer Revenue 7.000 2/1/11 NR 50,000 50,633
Knoxville TN Gas System Revenue 5.400 3/1/15 Aa3/AA* 100,000 103,152
Knoxville TN Gas System Revenue Refunding & Improvement 5.900 3/1/12 A1/AA* 25,000 26,468
Knoxville TN Waste Water System Revenue 5.100 4/1/18 Aa3/AA* 435,000 436,288
Memphis TN Sanitary Sewer System Revenue 5.750 10/1/14 Aa/AA* 100,000 106,150
Memphis TN Water Revenue 6.000 1/1/12 Aa/AA* 140,000 150,977
Metropolitan Nashville & Davidson County TN Electric System 5.625 5/15/14 Aa/AA* 500,000 529,285
Metropolitan Nashville & Davidson County TN Water & Sewer 5.500 1/1/16 A1/A* 185,000 185,818
Mount Juliet TN Public Building Revenue Utility District 7.550 2/1/14 A3 25,000 26,115
---------
1,614,886
HOSPITAL AND HEALTHCARE REVENUE BONDS
5.47% OF NET ASSETS
Anderson County TN Health Facilities Methodist Hospital 5.650 7/1/07 A1 155,000 163,789
Metropolitan Nashville & Davidson County TN H&E Multi Modal 5.500 5/1/23 AA* 1,290,000 1,328,957
Signal Mountain TN Health Educational & Housing Alexian Villiage 7.500 1/1/19 A2 15,000 16,089
Sumner County TN Health Educational & Housing Sumner Health 7.500 11/1/14 A-* 75,000 88,046
---------
1,596,881
UNIVERSITY CONSOLIDATED EDUCATION AND BUILDING REVENUE BONDS
5.05% OF NET ASSETS
Metropolitan Nashville & Davidson County TN Belmont University 6.300 12/1/14 Baa3 10,000 10,938
Metropolitan Nashville & Davidson County TN Vanderbilt 6.500 5/1/16 Aa3/AA* 80,000 86,691
Metropolitan Nashville & Davidson County TN Vanderbilt 6.000 10/1/16 Aa3/AA* 130,000 139,874
Metropolitan Nashville & Davidson County TN Vanderbilt 5.375 7/1/18 Aa3/AA* 1,200,000 1,235,664
---------
1,473,167
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE> 74
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATE GENERAL OBLIGATION AND AGENCY REVENUE BONDS
3.94% OF NET ASSETS
Hamilton County TN Multifamily Housing Revenue 6.700 3/1/21 A* $ 450,000 $ 502,799
Knoxville TN Development Corp Housing Revenue Clinton Tower 6.600 10/15/07 A* 350,000 378,858
Shelby County TN General Olbigation Refunding 5.875 3/1/07 Aa2/AA+* 15,000 15,950
Tennessee Local Development Authority Student Loan Program 5.750 3/1/11 A2/AA-* 200,000 214,622
Tennessee State School Board Authority Higher Educational Facilities 6.250 5/1/17 A1/AA* 35,000 37,691
------------
1,149,920
PREREFUNDED AND ESCROWED TO MATURITY BONDS
3.83% OF NET ASSETS
Jackson TN Water & Sewer Revenue 7.200 7/1/12 Aaa/AAA* 10,000 12,276
Metropolitan Nashville & Davidson County TN Electric System 6.000 5/15/12 Aa/AA* 30,000 32,523
Metropolitan Nashville & Davidson County TN Electric System 6.000 5/15/17 Aa/AA* 345,000 374,011
Metropolitan Nashville & Davidson County TN Water & Sewer 6.500 12/1/14 Aaa/AAA* 60,000 70,739
Shelby County TN General Obligation 5.875 3/1/07 AA+* 35,000 37,235
Shelby County TN General Obligation Public Improvement Series A 6.000 3/1/13 Aa/AA+* 30,000 32,414
Shelby County TN School Building Revenue 5.900 3/1/12 Aa/AA+* 10,000 10,775
Shelby County TN School Building Revenue 6.000 3/1/13 Aa/AA+* 35,000 37,817
Shelby County TN School Building Revenue 5.950 3/1/19 Aa/AA+* 40,000 43,080
Shelby County TN School Building Revenue 5.900 3/1/16 Aa/AA+* 50,000 53,766
Shelby County TN School Building Revenue 5.950 3/1/17 Aa/AA+* 100,000 107,701
Shelby County TN School Building Revenue 5.800 4/1/19 Aa/AA+* 100,000 109,052
Shelby County TN School Building Revenue 5.875 3/1/12 Aa/AA+* 150,000 161,490
Tipton County TN General Obligation High School 6.650 4/1/14 Aaa/AAA* 30,000 33,539
------------
1,116,418
LOCAL GENERAL OBLIGATION BONDS
2.94% OF NET ASSETS
Chattanooga TN General Obligation 6.000 8/1/11 A1/AA-* 110,000 119,345
Collierville TN General Obligation Improvement 5.900 5/1/12 A1 30,000 32,790
Johnson City TN General Obligation 5.500 5/1/20 Aaa/AAA* 300,000 313,197
Memphis TN General Obligation Improvement 5.500 10/1/10 Aa/AA* 20,000 21,000
Metropolitan Nashville & Davidson County TN General Obligation 5.875 5/15/26 Aa/AA* 100,000 107,390
Metropolitan Nashville & Davidson County TN General Obligation 5.625 5/15/17 Aa/AA* 250,000 264,337
------------
858,059
INDUSTRIAL REVENUE AND POLLUTION CONTROL REVENUE BONDS
2.22% OF NET ASSETS
Chattanooga TN Industrial Development Board F L Haney Co 7.200 8/15/10 AAA* 20,000 24,685
Chattanooga TN Industrial Development Board F L Haney Co 7.200 2/15/09 AAA* 25,000 30,413
Chattanooga TN Industrial Development Board F L Haney Co 7.200 8/15/09 AAA* 25,000 30,683
Chattanooga TN Industrial Development Board F L Haney Co 7.200 2/15/10 AAA* 100,000 122,795
Cookeville TN Industrial Development Board General Hospital 5.625 10/1/16 A* 200,000 209,098
Franklin TN Industrial Development Board Sussex Downs LTD 6.250 6/1/07 AAA* 30,000 33,811
Maury County TN Pollution Control Revenue Saturn Corporation Project 6.500 9/1/24 A2/A* 100,000 112,009
TN Local Development Authority Community Provider Pooled Loan Program 7.000 10/1/11 A-* 5,000 5,569
TN Local Development Authority Community Provider Pooled Loan Program 6.250 10/1/09 A-* 30,000 33,026
TN Local Development Authority Community Provider Pooled Loan Program 6.450 10/1/14 A-* 40,000 44,188
------------
646,277
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE> 75
<TABLE>
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
RENTAL AND MUNICIPAL LEASE REVENUE BONDS
1.05% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Memphis Shelby County TN Airport Revenue Refunding FedX 6.750 9/1/12 Baa/BBB* $ 155,000 $ 170,562
Memphis Shelby County TN Airport Special Facilities Revenue 7.875 9/1/09 Baa/BBB* 120,000 135,872
------------
306,434
------------
Total Investments (cost $28,323,914)(a) - 101.11% of Net Assets $ 29,494,920
=============
<FN>
* Standard and Poor's Corporation
* * Security purchased on a delayed delivery basis.
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 1,176,676
Unrealized depreciation (5,670)
------------
Net unrealized appreciation $ 1,171,006
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE> 76
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Cost: $28,323,914) $ 29,494,920
Cash 92,312
Interest receivable 541,985
Receivable from advisor 6,119
--------------
Total assets 30,135,336
LIABILITIES:
Payable for:
Investments purchased $ 657,579
Distributions 270,645
Fund shares redeemed 1,500
Management fee 11,849
Transfer agent 3,337
Other fees 18,367
----------
Total liabilities 963,277
--------------
NET ASSETS:
Net assets consist of:
Capital $ 28,007,504
Net accumulated capital gain distributions in excess of realized gains
on investment transactions (6,451)
Net unrealized appreciation in value of investments 1,171,006
--------------
Net assets at value $ 29,172,059
==============
NET ASSET VALUE, offering price and redemption price per share
($29,172,059 / 2,658,680 shares outstanding) $ 10.97
==============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income $ 1,049,218
--------------
Expenses:
Investment advisory fees 96,775
Transfer agent 28,469
Professional fees 4,050
Trustee fees 2,292
Other expenses 12,025
--------------
Total expenses 143,611
Expenses reimbursed by Investment Advisor (56,512)
--------------
Net investment income 962,119
--------------
Realized and unrealized gain on investments
Net realized gain 18,613
Net increase in unrealized appreciation 679,328
--------------
Net realized and unrealized gain on investments 697,941
--------------
Net increase in net assets resulting from operations $ 1,660,060
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE> 77
DUPREE MUTUAL FUNDS - TENNESSEE TAX FREE INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 962,119 $ 530,200
Net realized gain on investments 18,613 5,962
Net increase in unrealized appreciation 679,328 306,580
-----------------------------------
Net increase in net assets resulting from operations 1,660,060 842,742
Capital gains distributed to shareholders (17,066) 0
Distributions to shareholders (962,119) (530,200)
Net fund share transactions 14,812,946 5,309,898
-----------------------------------
Total increase 15,493,821 5,622,440
Net assets:
Beginning of year 13,678,238 8,055,798
-----------------------------------
End of year $29,172,059 $13,678,238
===================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 78
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE INCOME SERIES
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994(a)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.53 $10.17 $10.05 $9.51 $10.00
---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.54 0.54 0.54 0.54 0.28
Net gains or losses on securities
(both realized and unrealized) 0.45 0.36 0.12 0.54 (0.49)
---------------------------------------------------------------------
Total from investment operations 0.99 0.90 0.66 1.08 (0.21)
LESS DISTRIBUTIONS:
Distributions (from capital gains) (0.01)
Distributions (from net investment income) (0.54) (0.54) (0.54) (0.54) (0.28)
---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.97 $10.53 $10.17 $10.05 $9.51
=====================================================================
Total return(b) 9.57% 8.96% 6.65% 11.65% (4.17)%
Net assets, end of year (in thousands) $29,172 $13,678 $8,056 $5,010 $794
Ratio of expenses to average net assets(b) 0.44% 0.55% 0.54% 0.34% 0.12%
Before expense reimbursement(b) 0.74% 0.77% 0.90% 1.16% 4.01%
Ratio of net investment income to average net assets(b) 4.64% 4.92% 5.27% 5.59% 2.83%
after expense reimbursement(b) 4.94% 5.15% 4.91% 4.77% (1.06)%
Portfolio turnover 12.62% 5.14% 9.13% 6.84% 15.88%
<FN>
(a) Commencement of operations December 20, 1993.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS- TENNESSEE TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
PREREFUNDED BONDS
31.22% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Bristol TN Health & Education Facility-Memorial Hospital 7.000 9/1/21 Aaa/AAA* $ 100,000 $ 110,256
Jackson TN Water & Sewer Revenue Refunded 10.375 7/1/12 Aaa/AAA* 10,000 10,912
Johnson City TN Health & Education Revenue 6.750 7/1/06 Aaa/AAA* 20,000 22,065
Johnson City TN Health & Education Revenue 6.750 7/1/16 Aaa/AAA* 300,000 330,789
Knox County TN Health & Education-Fort Sanders Alliance 7.000 1/1/08 Aaa/AAA* 10,000 10,712
Knox County TN Health & Education-Fort Sanders Alliance 7.000 1/1/15 Aaa/AAA* 80,000 85,693
Memphis TN Electic Systems Revenue 6.750 1/1/03 NR 100,000 105,685
Memphis TN General Obligation 5.200 1/1/00 Aaa 10,000 10,146
Metro Government Nashville/Davidson County TN Meharry Medical 7.875 12/1/04 AAA* 170,000 189,162
Metropolitan Government Nashville & Davidson Co Elec Revenue 9.900 7/1/05 Aaa/AAA* 50,000 56,924
Metropolitan Nashville TN Airport Improvement Revenue 7.750 7/1/06 Aaa/AAA* 100,000 113,110
Scott & Morgan Counties TN Citizens Gas Utility District 7.500 1/1/09 Aaa/AAA* 10,000 10,436
Shelby County Tn General Obligation School 5.750 3/1/09 Aa2/AA+* 400,000 425,552
-----------
1,481,442
COUNTY GENERAL OBLIGATION BONDS
13.17% OF NET ASSETS
Hamilton County TN General Obligation 4.600 10/1/98 Aa 10,000 10,058
Madison County TN School General Obligation 6.000 4/1/01 A1 10,000 10,612
Maury County TN General Obligation 4.500 6/1/01 A1 75,000 76,643
Metropolitan Government Nashville & Davidson County TN 4.600 11/15/01 Aa/AA* 50,000 51,190
Metropolitan Government Nashville & Davidson County TN 6.500 9/1/00 A1/A* 50,000 52,986
Metropolitan Government Nashville & Davidson County TN 4.500 5/15/99 Aa/AA* 70,000 70,935
Rutherford County Tn Capital Outlay Notes General Obligation 4.700 4/1/02 Aa/AA-* 45,000 46,306
Rutherford County TN General Obligation 4.750 4/1/01 Aa/AA* 100,000 102,587
Shelby County Mutli-Family Housing Cameron Kibry-A General Obligation 4.700 7/1/02 A* 200,000 203,648
-----------
624,965
INSURED MUNICIPAL REVENUE BONDS
12.55% OF NET ASSETS
Bristol Tn Health & Education Facility-Memphis Hospital 6.300 9/1/00 Aaa/AAA* 50,000 52,865
Chattanooga-Hamilton TN Hospital Authority-Erlanger Medical 5.100 10/1/01 Aaa/AAA* 10,000 10,397
Chattanooga-Hamilton TN Hospital Authority-Erlanger Medical 5.125 10/1/02 Aaa/AAA* 50,000 52,356
Hamilton County TN Industrial Development Lease Revenue 5.500 9/1/02 Aaa/AAA* 100,000 106,095
Johnson City TN Health & Education Refunding & Improvement 6.200 7/1/99 Aaa/AAA* 35,000 36,035
LaFollette TN Electric System Revenue 5.500 3/1/01 Aaa 165,000 172,516
Metropolitan Nashville Airport Revenue 6.200 7/1/02 Aaa/AAA* 25,000 27,082
Milan TN Hospital Revenue 7.050 3/1/99 Aaa/AAA* 80,000 82,257
Powell Clinch TN Utility District Natural Gas System Revenue 6.450 1/1/99 Aaa/AAA* 35,000 35,577
Sevier County TN Utility District Gas Revenue 6.300 5/1/99 Aaa/AAA* 20,000 20,548
-----------
595,728
PUBLIC CORPORATION REVENUE BONDS
7.02% OF NET ASSETS
Clarksville TN Public Building Authority-Pooled Loan 4.750 12/1/00 AA* 280,000 286,737
Hardeman County TN Corrctional Facility Revenue 7.000 8/1/05 A* 40,000 46,244
-----------
332,981
UNIVERSITY CONSOLIDATED EDUCATION AND BUILDING REVENUE BONDS
6.29% OF NET ASSETS
Metro Government Nashville/Davidson County TN Multi-Family 4.800 1/1/01 AAA* 50,000 51,243
Metropolitan Government of Nashville & Davidson Counties 4.500 10/1/03 Aa3/AA* 100,000 101,301
Tennessee Housing Development Agency Mortgage Finance 5.300 1/1/03 A1/A+* 100,000 104,763
Tennessee Housing Development Mortgage Finance Agency 4.950 7/1/00 Aa/A+* 40,000 41,018
-----------
298,325
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE> 80
<TABLE>
<CAPTION>
DUPREE MUTUAL FUNDS- TENNESSEE TAX-FREE SHORT-TO-MEDIUM SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
TENNESSEE MUNICIPAL BONDS -- 100%
JUNE 30, 1998
MATURITY
BOND DESCRIPTION COUPON DATE RATING+ PAR VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL REVENUE AND POLLUTION CONTROL REVENUE BONDS
4.76% OF NET ASSETS
<S> <C> <C> <C> <C> <C>
Bristol TN Industrial Development Board Revenue 4.800 3/1/01 AA* $ 70,000 $ 71,721
Bristol TN Industrial Development Board Revenue 4.700 3/1/00 AA* 75,000 76,310
Chattanooga TN Industrial Development-F.L.Haney Corporation 6.700 8/15/00 AAA* 25,000 26,565
Franklin TN Industrial Development Multi-Family Housing 4.650 10/1/00 Aaa/AAA* 50,000 51,047
-----------
225,643
LOCAL GENERAL OBLIGATION BONDS
4.48% OF NET ASSETS
Chattanooga TN General Obligation 7.750 8/1/99 A1/AA-* 100,000 104,891
Chattanooga TN Public Improvement General Obligation 4.900 2/1/99 A1/AA-* 40,000 40,475
Chattanooga TN Refunding General Obligation 5.000 11/1/00 A1/AA-* 30,000 30,897
Kingsport TN Water Refunding General Obligation 5.300 8/1/00 A1/A+* 25,000 25,876
Mufreesboro TN General Obligation 5.700 9/1/99 A1 10,000 10,303
-----------
212,442
STATE AND LOCAL MORTGAGE REVENUE BONDS
4.46% OF NET ASSETS
Tennessee Housing Development Mortgage Agency 5.500 1/1/05 A1/A+* 200,000 211,744
-----------
211,744
VARIABLE RATE BONDS
4.21% OF NET ASSETS
Clarksville TN Public Building Authority Pooled Financing 3.600 10/1/25 AA-* 200,000 199,646
-----------
199,646
ESCROWED TO MATURITY BONDS
2.25% OF NET ASSETS
Knox County TN 1st Utility District Water Revenue 6.000 12/1/01 Aaa 100,000 106,922
-----------
106,922
STATE GENERAL OBLIGATION
2.20% OF NET ASSETS
Tennessee State General Obligation 5.000 3/1/03 Aaa/AA+* 100,000 104,605
-----------
104,605
HOSPITAL AND HEALTHCARE REVENUE BONDS
1.30% OF NET ASSETS
Jackson TN Hospital Refunding & Improvement Revenue 4.800 4/1/02 A1/A+* 60,000 61,654
-----------
61,654
MUNICIPAL UTILITY REVENUE BONDS
1.07% OF NET ASSETS
Memphis TN Electric System Revenue Refunding 5.300 1/1/99 Aa/AA* 25,000 25,265
Memphis TN Sanitation Sewer System Revenue 5.500 10/1/99 Aa/AA* 25,000 25,702
-----------
50,967
-----------
Total Investments (cost $4,430,671)(a) - 94.99% of Net Assets $ 4,507,064
===========
<FN>
* Standard and Poor's Corporation
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 99,376
Unrealized depreciation 22,983
-----------
Net unrealized appreciation $ 76,393
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE> 81
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE SHORT-TO-MEDIUM SERIES
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Cost: $4,430,671) $ 4,507,064
Cash 648,609
Receivable from investments sold 55,800
Interest receivable 86,894
--------------
Total assets 5,298,367
LIABILITIES:
Payable for:
Investments purchased $ 535,914
Distributions 13,179
Management fee 440
Transfer agent 477
Other fees 3,332
------------
Total liabilities 553,342
--------------
NET ASSETS:
Net assets consist of:
Capital $ 4,673,765
Net accumulated realized losses on investment transactions (5,133)
Net unrealized appreciation in value of investments 76,393
--------------
Net assets at value $ 4,745,025
==============
NET ASSET VALUE, offering price and redemption price per share
($4,745,025 / 454,351 shares outstanding) $ 10.44
==============
- --------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
Net investment income:
Interest income $ 163,451
--------------
Expenses:
Investment advisory fees 18,236
Transfer agent 5,471
Professional fees 822
Trustee fees 419
Other expenses 4,490
--------------
Total expenses 29,438
Expenses reimbursed by Investment Advisor (10,752)
--------------
Net investment income 144,765
--------------
Realized and unrealized gain (loss) on investments
Net realized loss (2,666)
Net increase in unrealized appreciation 38,777
--------------
Net realized and unrealized gain on investments 36,111
--------------
Net increase in net assets resulting from operations $ 180,876
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 82
DUPREE MUTUAL FUNDS - TENNESSEE TAX FREE SHORT-TO-MEDIUM SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 144,765 $ 110,807
Net realized loss on investments (2,666) (1,660)
Net increase in unrealized appreciation 38,777 19,480
----------------------------
Net increase in net assets resulting from operations 180,876 128,627
Dividends to shareholders (144,765) (110,807)
Net fund share transactions 1,716,083 519,836
----------------------------
Total increase 1,752,194 537,656
Net assets:
Beginning of year 2,992,831 2,455,175
----------------------------
End of year $ 4,745,025 $ 2,992,831
============================
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE> 83
DUPREE MUTUAL FUNDS - TENNESSEE TAX-FREE SHORT-TO-MEDIUM SERIES FINANCIAL
HIGHLIGHTS
Selected data for a share outstanding
<TABLE>
<CAPTION>
For the years ended June 30,
-----------------------------------------------------
1998 1997 1996 1995(a)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $10.32 $10.25 $10.20 $10.00
-----------------------------------------------------
Income From Investment Operations:
Net investment income 0.41 0.42 0.42 0.28
Net gains or losses on securities
(both realized and unrealized) 0.12 0.07 0.05 0.20
-----------------------------------------------------
Total from investment operations 0.53 0.49 0.47 0.48
Less Distributions:
Distributions (from net investment income) (0.41) (0.42) (0.42) (0.28)
-----------------------------------------------------
Net Asset Value, end of year $10.44 $10.32 $10.25 $10.20
=====================================================
Total return(b) 5.26% 4.83% 4.62% 7.41%
Net assets, end of year (in thousands) $4,745 $2,993 $2,455 $1,535
Ratio of expenses to average net assets(b) 0.51% 0.47% 0.50% 0.28%
Before expense reimbursement(b) 0.81% 0.85% 1.19% 2.05%
Ratio of net investment income to average net assets(b) 3.67% 3.67% 4.05% 2.80%
After expense reimbursement(b) 3.97% 4.04% 3.36% 1.03%
Portfolio turnover 67.59% 24.49% 23.17% 0.71%
<FN>
(a) Commencement of operations November 1, 1994.
(b) Annualized for periods less than a year.
</TABLE>
<PAGE> 84
DUPREE MUTUAL FUNDS- INTERMEDIATE GOVERNMENT BOND SERIES
SCHEDULE OF PORTFOLIO INVESTMENTS
GOVERNMENT SECURITIES AND AGENCIES - 100%
JUNE 30, 1998
<TABLE>
<CAPTION>
MATURITY
BOND DESCRIPTION COUPON DATE PAR VALUE MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION
66.66% OF NET ASSETS
Medium Term Note 7.700 8/10/04 $ 250,000 $ 255,103
Medium Term Note 7.170 6/26/07 1,000,000 1,019,230
Medium Term Note 6.950 11/13/06 1,105,000 1,134,544
Medium Term Note 7.780 9/29/06 300,000 306,931
Medium Term Note 7.720 6/14/06 2,000,000 2,035,641
Medium Term Note 7.280 5/23/07 1,000,000 1,043,430
Medium Term Note 6.470 3/13/08 600,000 602,314
-----------
6,397,193
FEDERAL HOME LOAN BANK
27.73% OF NET ASSETS
Medium Term Note 8.170 12/16/04 2,000,000 2,246,954
Medium Term Note 7.560 9/1/04 150,000 163,198
Medium Term Note 7.000 12/17/07 250,000 250,606
-----------
2,660,758
FEDERAL HOME LOAN MORTGAGE CORPORATION
2.64% OF NET ASSETS
Medium Term Note 7.225 11/8/06 250,000 253,327
-----------
253,327
Total Investments (cost $8,884,407)(a) - 97.03% of Net Assets $ 9,311,278
============
<FN>
* Standard and Poor's Corporation
NR Not Rated
All other ratings by Moody's Investors Service, Inc.
+ Bond ratings are unaudited.
(a) Represents cost for financial reporting and federal income tax purposes
and differs from market value by net unrealized appreciation of securities
as follows:
Unrealized appreciation $ 426,871
Unrealized depreciation -
----------
Net unrealized appreciation $ 426,871
==========
</TABLE>
<PAGE> 85
DUPREE MUTUAL FUNDS - INTERMEDIATE GOVERNMENT BOND SERIES
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Cost: $8,884,407) $ 9,311,278
Cash 288,408
Interest receivable 65,041
-------------
Total assets 9,664,727
LIABILITIES:
Payable for:
Distributions $ 54,151
Management fee 1,575
Transfer agent 1,182
Other fees 11,713
-----------
Total liabilities 68,621
-------------
NET ASSETS:
Net assets consist of:
Capital 9,944,801
Net accumulated realized losses on investment transactions (775,566)
Net unrealized appreciation in value of investments 426,871
-------------
Net assets at value $ 9,596,106
=============
NET ASSET VALUE, offering price and redemption price per share
($9,596,106 / 946,412 shares outstanding) $ 10.14
=============
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income $ 626,090
-------------
Expenses:
Investment advisory fees 17,633
Transfer agent 13,225
Professional fees 2,147
Trustee fees 1,110
Other expenses 12,648
-------------
Total expenses 46,763
-------------
Net investment income 579,327
-------------
Realized and unrealized gain on investments
Net realized gain 11,397
Net increase in unrealized appreciation 198,164
-------------
Net realized and unrealized gain on investments 209,561
-------------
Net increase in net assets resulting from operations $ 788,888
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE> 86
DUPREE MUTUAL FUNDS - INTERMEDIATE GOVERNMENT BOND SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Increase in net assets:
Operations:
Net investment income $ 579,327 $ 586,960
Net realized gain on investments 11,397 41,000
Net increase (decrease) in unrealized appreciation 198,164 (6,266)
--------------------------------
Net increase in net assets resulting from operations 788,888 621,694
Distributions to shareholders (579,327) (586,960)
Net fund share transactions 1,098,229 488,797
--------------------------------
Total increase 1,307,790 523,531
Net assets:
Beginning of year 8,288,316 7,764,785
--------------------------------
End of year $ 9,596,106 $ 8,288,316
================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE> 87
DUPREE MUTUAL FUNDS - INTERMEDIATE GOVERNMENT BOND SERIES
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING
<TABLE>
<CAPTION>
For the years ended June 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.89 $9.85 $10.15 $9.65 $10.60
-----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.66 0.72 0.72 0.69 0.63
Net gains or losses on securities
(both realized and unrealized) 0.25 0.04 (0.30) 0.50 (0.95)
-----------------------------------------------------
Total from investment operations 0.91 0.76 0.42 1.19 (0.32)
LESS DISTRIBUTIONS:
Distributions (from net investment income) (0.66) (0.72) (0.72) (0.69) (0.63)
-----------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.14 $9.89 $9.85 $10.15 $9.65
=====================================================
Total return 9.47% 7.95% 4.15% 12.78% (3.32)%
Net assets, end of year (in thousands) $9,596 $8,288 $7,765 $7,713 $8,372
Ratio of expenses to average net assets 0.53% 0.50% 0.40% 0.40% 0.40%
Before expense reimbursement 0.53% 0.56% 0.62% 0.61% 0.65%
Ratio of net investment income to average net assets(b) 6.57% 7.26% 7.11% 7.06% 6.00%
After expense reimbursement 6.57% 7.20% 6.89% 6.85% 5.75%
Portfolio turnover 23.49% 40.86% 33.89% 74.98% 23.08%
</TABLE>
<PAGE> 88
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Dupree Mutual Funds is registered under the Investment Company Act of
1940, as amended, as a no-load, open-end investment company. The
Declaration of Trust of Dupree Mutual Funds (the "Trust") permits the
Trustees to create an unlimited number of series of investment portfolios
(each a "Fund" and collectively the "Funds") and with respect to each
series to issue an unlimited number of full or fractional shares of a
single class. The Trust currently offers seven series:
the Kentucky Tax-Free Income Series, a diversified portfolio,
the Kentucky Tax-Free Short-to-Medium Series, a non-diversified
portfolio,
the North Carolina Tax-Free Income Series, a non-diversified
portfolio,
the North Carolina Tax-Free Short-to-Medium Series, a
non-diversified portfolio,
the Tennessee Tax-Free Income Series, a diversified portfolio,
the Tennessee Tax-Free Short-to-Medium Series, a non-diversified
portfolio, and
the Intermediate Government Bond Series, a non-diversified
portfolio.
The investment strategy of the six state tax-free funds is to maintain
100% of their investments in Kentucky, North Carolina or Tennessee
municipal securities. Regarding the Kentucky Series, unlike many states,
payment on nearly all Kentucky municipal securities depends upon revenue
generated by the property financed by the securities, and the securities
are not general obligations of the issuer.
The Intermediate Government Bond Series' investment strategy is to invest
only in obligations of the U.S. Treasury and Agencies of the U.S.
Government. The Intermediate Government Bond Series will buy bonds and
notes that will maintain an average maturity of no more than ten years.
The following is a summary of significant accounting policies
consistently followed by the Funds in the preparation of their financial
statements. The policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION
Securities are valued by using market quotation or obtained from
yield data relating to instruments or securities with similar
characteristics as determined in good faith under the direction of
the Funds' Board of Trustees.
B. SECURITY TRANSACTIONS
Security transactions are accounted for on a trade date basis.
Gains and losses on securities sold are determined on an
identified cost basis.
C. SECURITY INCOME
Interest income, which includes the amortization of premiums and
the accretion of original issue discounts for financial and tax
reporting purposes, is recorded on the accrual basis.
56
<PAGE> 89
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
D. FEDERAL INCOME TAXES
Each of the Funds is a separate entity for federal income tax
purposes. It is each Fund's policy to qualify as a regulated
investment company by complying with the requirements of the
Internal Revenue Code (the "code") applicable to regulated
investment companies, including the distribution of all taxable
income to their shareholders. The Funds have met the requirements
of the code applicable to regulated investment companies for the
year ended June 30, 1998.Therefore, no federal income tax
provision is required.
E. DISTRIBUTIONS
All of the net investment income of the Funds is declared as a
dividend to shareholders of record as of the close of business
each day. Distributions to be paid are payable in cash or in
additional shares at the net asset value on the payable date.
Distributions are payable:
MONTHLY for: the Kentucky Tax-Free Short-to-Medium Series, and
the North Carolina Tax-Free Short-to-Medium
Series, and
the Tennessee Tax-Free Short-to-Medium Series, and
the Intermediate Government Bond Series, and
QUARTERLY for: the Kentucky Tax-Free Income Series, and
the North Carolina Tax-Free Income Series, and
the Tennessee Tax-Free Income Series
Timing differences relating to shareholder distributions are
reflected in the components of net assets and permanent book and
tax basis differences relating to shareholder distributions have
been reclassified to capital.
F. ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
and disclosures. Actual amounts could differ from those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
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. Two of the Trust's trustees 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 & Company, Inc.
Dupree & Company, Inc. also serves as the Trust's Transfer Agent.
The Funds have a contractual agreement with Star Bank, N.A. whereby the
bank will provide certain custodial services for $1.00 per year.
Subject to the direction of the Trustees, Dupree & Company, Inc. is
responsible for the management of the Funds' portfolios. The compensation
paid to Dupree & Company, Inc. pursuant to the Investment Advisory
Agreements is a percentage of the daily net assets of each series
(determined separately) as follows:
57
<PAGE> 90
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES,
CONTINUED:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RANGE OF NET ASSETS $100,000,001-
$0-$100,000,000 $150,000,000 $150,000,001+
Intermediate Government Bond Series .20 of 1% .20 of 1% .20 of 1%
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%
</TABLE>
However, the advisor may voluntarily waive or refund investment advisory
fees payable to it under the Investment Advisory Agreement with each
Fund, and assume and pay other operating expenses.
For the period ended June 30, 1998 investment advisory fees for:
the North Carolina Tax-Free Income Series totaled $32,367; however,
Dupree voluntarily refunded fees and reimbursed expenses totaling $27,686
in accordance with the investment advisory agreement,
the North Carolina Tax-Free Short-to-Medium Series totaled $8,143;
however, Dupree voluntarily refunded fees and reimbursed expenses
totaling $7,346 in accordance with the investment advisory agreement,
the Tennessee Tax-Free Income Series totaled $96,775; however, Dupree
voluntarily refunded fees and reimbursed expenses totaling $56,512 in
accordance with the investment advisory agreement,
the Tennessee Tax-Free Short-to-Medium Series totaled $18,236; however,
Dupree voluntarily refunded fees and reimbursed expenses totaling $10,752
in accordance with the investment advisory agreement, and
In addition, each Fund has entered into a shareholder service agreement
with Dupree. The agreement provides for a fee computed on the average
daily net asset value at the annual rate of .15% on the first $20,000,000
and .12% of all amounts in excess of $20,000,000.
3. PURCHASES AND SALES OF SECURITIES
The Funds may purchase securities with delivery or payments to occur at a
later date. At the time the Funds enter into a commitment to purchase a
security, the transaction is recorded and the value of the security is
reflected in the net asset value. The value of the security may vary
with market fluctuations. No interest accrues to the Fund until payment
takes place. At the time the Fund enters into this type of transaction
it is required to segregate cash or other liquid assets equal to the
value of the securities purchased. At June 30, 1998, the market value of
securities segregated for these types of transactions was as follows:
<TABLE>
<S> <C>
Kentucky Tax-Free Income Series $6,798,362
Kentucky Tax-Free Short-to-Medium Series $1,478,888
Tennessee Tax-Free Income Series $ 660,388
</TABLE>
58
<PAGE> 91
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
3. PURCHASES AND SALES OF SECURITIES, CONTINUED:
During the period, the cost of purchases and the proceeds from sales of
securities for each Series were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Kentucky Tax-Free Income Series $ 80,224,953 $ 41,053,485
Kentucky Tax-Free Short-to-Medium Series 11,078,978 11,020,280
North Carolina Tax-Free Income Series 7,080,766 1,072,518
North Carolina Tax-Free Short-to-Medium Series 915,990 240,946
Tennessee Tax-Free Income Series 17,714,126 2,475,863
Tennessee Tax-Free Short-to-Medium Series 3,936,603 2,428,655
Intermediate Government Bond Series 2,961,502 2,020,000
</TABLE>
4. CAPITAL SHARES
At June 30, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
KENTUCKY TAX-FREE INCOME SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 8,274,443 $63,166,991 6,911,832 $51,529,504
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 1,330,547 10,107,037 1,239,589 9,213,871
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (4,637,701) (35,382,044) (4,493,844) (33,490,801)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 4,967,289 $37,891,984 3,657,577 $27,252,574
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
KENTUCKY TAX-FREE
SHORT-TO-MEDIUM SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 4,280,299 $22,602,280 2,967,033 $15,516,882
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 301,877 1,593,039 349,476 1,826,424
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (4,621,840) (24,399,867) (5,804,189) (30,359,104)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE (39,664) $(204,548) (2,487,680) $(13,015,798)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA TAX-FREE
INCOME SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 612,725 $6,555,188 357,843 $3,659,166
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 16,794 178,616 6,414 65,020
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (60,759) (649,326) (124,629) (1,281,814)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 568,760 $6,084,478 239,628 $2,442,372
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 92
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
4. CAPITAL SHARES, CONTINUED:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA TAX-FREE
SHORT-TO-MEDIUM SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 166,808 $1,702,208 110,651 $1,116,918
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 5,170 52,695 4,785 48,224
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (101,790) (1,037,161) (87,250) (880,613)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 70,188 $717,742 28,186 $284,529
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TENNESSEE TAX-FREE INCOME SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 1,497,327 $16,307,421 572,212 $5,987,451
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 40,478 436,058 24,083 250,183
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
CAPITAL GAIN 1,015 11,036
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (179,345) (1,941,569) (88,998) (927,736)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 1,359,475 $14,812,946 507,297 $5,309,898
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TENNESSEE TAX-FREE
SHORT-TO-MEDIUM SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 464,170 $4,840,427 175,341 $1,807,115
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 10,556 109,973 9,873 101,711
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (310,299) (3,234,317) (134,750) (1,388,990)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 164,427 $1,716,083 50,464 $519,836
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND
SERIES YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
=====================================================================================================================
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD 197,726 $1,997,534 218,223 $2,158,124
- ---------------------------------------------------------------------------------------------------------------------
SHARES ISSUED FOR REINVESTMENT FROM
NET INVESTMENT INCOME 36,875 371,910 39,541 390,306
- ---------------------------------------------------------------------------------------------------------------------
SHARES REDEEMED (126,069) (1,271,215) (208,029) (2,059,633)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE 108,532 $1,098,229 49,735 $488,797
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 93
DUPREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
5. FEDERAL INCOME TAXES
At June 30, 1998, the Kentucky Tax-Free Income Series, the Kentucky Tax-Free
Short-to-Medium Series, the North Carolina Tax-Free Income Series, the North
Carolina Tax-Free Short-to-Medium Series, the Tennessee Tax-Free
Short-to-Medium Series and the Intermediate Government Bond Series have
capital loss carryforwards which are available to offset future capital
gains, if any. The capital loss carryforwards expire as follows:
<TABLE>
<CAPTION>
KY NC TN
KY Tax-Free NC Tax-Free TN Tax-Free Intermediate
Tax-Free Short-to Tax-Free Short-to Tax-Free Short-to Government
Income Medium Income Medium Income Medium Bond
Series Series Series Series Series Series Series
<S> <C> <C> <C> <C> <C> <C>
2003 $1,412,532 $414,178 $ --- $ --- --- $ --- $688,185
2004 --- 10,144 805 1,442 --- 807 87,381
2005 --- 188,198 2,782 1,015 --- 1,660 ---
2006 --- 73,155 9,023 804 --- 2,666 ---
------------------------------------------------------------------------------------------------
Net accumulated
realized losses $1,412,532 $685,675 $12,610 $3,261 --- $5,133 $775,566
================================================================================================
</TABLE>
6. LINE OF CREDIT AGREEMENT
Under the terms of an agreement with Star Bank, N.A., principal amounts
up to 5% of a Funds net assets are available on an uncommitted line of
credit. The principal amounts borrowed are due on demand. Interest will
be payable based on the prime rate of the bank (8.50% at June 30, 1998).
Securities with a minimum value of three times the loan proceeds will be
assigned as collateral until the balance of the note and unpaid interest
is paid in full and terminated. Debt covenants, among others, require the
Funds to:
- Provide the lender with the Funds' annual report
- Comply with all agreements with the lender and with applicable laws
and regulations
- Maintain appropriate insurance coverage
The North Carolina Tax-Free Income Series, North Carolina Tax-Free
Short-to-Medium Series, Tennessee Tax-Free Income Series, and the
Tennessee Tax-Free Short-to-Medium Series had no borrowings during the
period ended June 30, 1998. No borrowings were outstanding as of June 30,
1998 for the Funds. During the period ended June 30, 1998, the weighted
average interest rate for each Series, were as follows:
<TABLE>
<CAPTION>
Weighted average interest rate
<S> <C>
Kentucky Tax-Free Income Series 8.50%
Kentucky Tax-Free Short-to-Medium Series 8.50%
Intermediate Government Bond Series 8.50%
</TABLE>
61
<PAGE> 94
[Ernst & Young LLP Letterhead]
Report of Independent Auditors
The Board of Trustees and Shareholders
Dupree Mutual Funds
We have audited the accompanying statements of assets and liabilities, including
the schedules of portfolio investments, of Dupree Mutual Funds (comprised of
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)(the Funds) as of June 30, 1998, and the
related statements of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the two years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights presented herein for each of the respective
years or periods ended June 30, 1996 were audited by other auditors whose report
dated July 26, 1996 expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of June 30, 1998, by correspondence with the custodian and
others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Dupree Mutual Funds as of June 30,
1998, the results of their operations for the year then ended, and the changes
in their net assets and financial highlights for each of the two years in the
period then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
July 30, 1998
<PAGE> 95
DUPREE MUTUAL FUNDS
POST-EFFECTIVE AMENDMENT NO. 38
<TABLE>
<CAPTION>
PART C of Form N-1A OTHER INFORMATION-------------------------------Page---------------------------
Item 24. Financial Statements and Exhibits KY KY NC NC TN TN GBS
--------------------------------- INCOME S/M INCOME S/M INCOME S/M
(a) Financial Statements
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Included in the Registration Statement,
Part B,Statement of Additional
Information:
Portfolio of Investments of
June 30, 1998 23 30 34 39 43 49 53
Statement of Assets and
Liabilities at June 30, 1998 28 32 37 41 47 51 54
Statement of Operation for the
Year at June 30, 1998 28 32 37 41 47 51 54
Statement of Changes in Net
Assets for the Years Ended
June 30, 1997 and 1998 29 33 38 42 48 52 55
Notes to Financial Statements ---------------------------56--------------------------
Report of Independent Auditors ---------------------------62--------------------------
(b) Exhibits
</TABLE>
<PAGE> 96
(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
Item 26. Number of Holders of Securities
-------------------------------
On September 15, 1998 there were 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 5798
Kentucky Tax-Free Short-to-Medium Series 1370
North Carolina Tax-Free Income Series 485
North Carolina Tax-Free Short-to-Medium Series 139
Tennessee Tax-Free Income Series 560
Tennessee Tax-Free Short-to-Medium Series 138
Intermediate Government Bond Series 783
</TABLE>
Item 27. Indemnification
---------------
Inapplicable
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
The Registrant's Investment Adviser, Dupree & Company, 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 &
Company, Inc., and the Registrant. Fred L. Dupree, Jr., is Vice
President, Secretary and Treasurer of 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 &
Company, Inc., 125 South Mill Street, Vine Center, Lexington, Kentucky
40507
Item 31. Management Services
-------------------
Inapplicable at this time.
Item 32. Undertakings
------------
None
<PAGE> 97
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
5th day of October 1998.
DUPREE MUTUAL FUNDS
/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. 38 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
/s/ THOMAS P. DUPREE, SR. President (Principal Executive officer)
- ----------------------------- and Trustee Oct. 7, 1998
Thomas P. Dupree, Sr.
- ----------------------------- President (Principal Executive officer)
Fred L. Dupree, Jr. (Principal Financial and Accounting officer)
and Trustee ------------
/s/ WILLIAM A. COMBS, JR. Trustee
- ----------------------------- Oct. 7, 1998
William A. Combs, Jr.
- ----------------------------- Trustee ------------
Robert L. Maddox
- ----------------------------- Trustee ------------
Lucy A. Breathitt
/s/ WILLIAM S. PATTERSON Trustee
- ----------------------------- Oct. 7, 1998
William S. Patterson
</TABLE>
<PAGE> 98
DUPREE MUTUAL FUNDS
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO 38
TO
FORM N-1A REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
AND
INVESTMENT COMPANY ACT OF 1940
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the prospectus and under the caption
"Other Services" in the Statement of Additional Information, both included in
Post-Effective Amendment No. 39 to the Registration Statement (Form N-1A No.
811-2918) of Dupree Mutual Funds and to the use of our report dated July 30,
1998, incorporated therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
October 5, 1998
<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, 1998, the yield for the Kentucky Tax-Free Income Series was 3.58%
and was calculated as follows:
YIELD=
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period. Interest
earned during the 30-day period ended was
$1,283,005.70
b = Expenses accrued for the period: $188,659.61
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 48,264,530.152
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $7.65.
1
<PAGE> 2
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.
At June 30, 1998, the yield for the Kentucky Tax-Free Income Series was 5.04%
and was calculated as follows:
YIELD=
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $1,731,703.94
b = Expenses accrued for the period:
$195,867.98
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 48,264,530.152
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $7.65.
2
<PAGE> 3
EXHIBIT 16
The average annual total return for the Kentucky Tax-Free Income Series for the
one-year period ended June 30, 1998, was 7.77% and was calculated as follows:
P(1 + T)(to the power of n) = 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:
$1,077.68
The average annual total return for the Kentucky Tax-Free Income Series for the
period July 1, 1993 to June 30, 1998, was 5.89% and for the period July 1, 1988
to June 30, 1998, was 7.93%. The average annual total return for each of these
periods was calculated in a manner similar to that described.
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 ($7.47) equals initial number of shares
(133.869 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 133.869 plus
incremental number of shares of 7.004 equals 140.873 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(140.873 shares x $7.65 = $1,077.68)
3
<PAGE> 4
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 7.47
09/30/97 .099959 7.59 1.763
12/31/97 .09928392 7.68 3.516
03/31/98 .09648269 7.64 5.251
06/30/98 .09638141 7.65 7.004
</TABLE>
4
<PAGE> 5
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.
June 30, 1998, the tax equivalent yield for the Kentucky Tax-Free Income Series
was 4.97% (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: 3.58%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
5
<PAGE> 6
7
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.
June 30, 1998, the tax equivalent yield for the Kentucky Tax-Free Income Series
was 7.00% (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: 5.04%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
1
<PAGE> 7
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, 1998, the yield for the Kentucky Tax-Free Short-to-Medium Series
was 1.96% and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day period
ended was $119,502.83
b = Expenses accrued for the period: $32,082.89
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 10,185,563.415
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $5.27
1
<PAGE> 8
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.
At June 30, 1998, the yield for the Kentucky Tax-Free Short-to-Medium Series
was 3.97% and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1) (to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $241,728.94
b = Expenses accrued for the period:
$65,398.63
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 10,185,563.415
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $5.27
2
<PAGE> 9
EXHIBIT 16
The average annual total return for the Kentucky Tax-Free Short-to-Medium
Series for the one-year period ended June 30, 1998, was 5.12% and was
calculated as follows:
P(1 + T) (to the power of n) = 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:
$1051.19
The average annual total return for the Kentucky Tax-Free Short-to-Medium
Series for the period July 1, 1993 to June 30, 1998, was 4.06% and for the
period July 1, 1988 to June 30, 1998 was 5.36% The average annual total return
for each of these periods was calculated in a manner similar to that described.
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 ($5.22) equals initial number of shares
(191.571 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 191.571 plus
incremental number of shares of 7.896 equals 199.467 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(199.467 shares x $5.27 = $1,051.19)
3
<PAGE> 10
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 5.22
07/31/97 .01807606 5.28 .655842
08/31/97 .0181104 5.25 1.318947
09/30/97 .01781503 5.27 1.971004
10/31/97 .01834973 5.30 2.641087
11/30/97 .01725681 5.29 3.274637
12/31/97 .01810101 5.29 3.941348
01/31/98 .01823855 5.31 4.612885
02/28/98 .01617937 5.30 5.211777
03/31/98 .0180598 5.28 5.884856
04/30/98 .01760303 5.26 6.545658
05/31/98 .01857765 5.28 7.24273
06/30/98 .01731357 5.27 7.895894
</TABLE>
4
<PAGE> 11
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, 1998, the tax equivalent yield for the Kentucky Tax-Free
Short-to-Medium Series was 2.72% (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: 1.96%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
5
<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, 1998, the tax equivalent yield for the Kentucky Tax-Free
Short-to-Medium Series was 5.51% (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: 3.97%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
1
<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, 1998, the yield for the Tennessee Tax-Free Income Series was 4.13%
and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1) (to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $108,861.53
b = Expenses accrued for the period: $10,663.82
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 2,623,655.870
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $10.97.
1
<PAGE> 14
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.
At June 30, 1998, the yield for the Tennessee Tax-Free Income Series was 4.83%
and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1) (to the power of 6) - 1 ]
Where: a = Interest earned during the period. Interest
earned during the 30-day period ended was
$126,774.36
b = Expenses accrued for the period: $12,033.14
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 2,623,655.870
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $10.97.
2
<PAGE> 15
EXHIBIT 16
The average annual total return for the Tennessee Tax-Free Income Series for
the one year period ended June 30, 1998, was 9.57% and was calculated as
follows:
P(1 + T)(to the power of n) = 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: $1,095.75
The average annualized total return for the Tennessee Tax-Free Income Series
for the period December 15, 1993 to June 30, 1998, was 7.56% and was calculated
in a manner similar to that described.
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 ($10.53) equals initial number of shares
(94.967 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 94.967 plus
incremental number of shares of 4.919 equals 99.886 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(99.886 shares x $10.97 = $1,095.75)
3
<PAGE> 16
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 10.53
09/30/97 .137554 10.73 1.217434
12/31/97 .136951 10.87 2.52925
03/31/98 .133498 10.89 3.724431
06/30/98 .132772 10.97 4.918908
</TABLE>
4
<PAGE> 17
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, 1998, the tax equivalent yield for the Tennessee Tax-Free Income
Series was 5.74% (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: 4.13%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
5
<PAGE> 18
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, 1998, the tax equivalent yield for the Tennessee Tax-Free Income
Series was 6.71% (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: 4.83%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
1
<PAGE> 19
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, 1998, the yield for the Tennessee Tax-Free Short-to-Medium Series
was 2.30% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $9,108.88
b = Expenses accrued for the period:
$1,718.69
c = The average daily number of
shares outstanding during the
period that were entitled to
receive dividends: 370,514.475
d = The maximum offering price per
share on the last day of the
period, June 30, 1998: $10.44.
1
<PAGE> 20
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.
At June 30, 1998, the yield for the Tennessee Tax-Free Short-to-Medium Series
was 3.87% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $16,949.40
b = Expenses accrued for the period: $4,579.27
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 370,514.475
d = The maximum offering price per share on the
last day of the period, June 30, 1998:
$10.44.
2
<PAGE> 21
EXHIBIT 16
The average annual total return for the Tennessee Tax-Free Short-to-Medium
Series for the one year period ended June 30, 1998, was 5.26% and was
calculated as follows:
P(1 + T)(to the power of n) = 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: $1052.59
The average annualized total return for the Tennessee Tax-Free Short-to-Medium
Series for the period November 1, 1994 to June 30, 1998 was 5.40% and was
calculated in a manner similar to that described.
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 ($10.32) equals initial number of shares
(96.899 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 96.899 plus
incremental number of shares of 3.924 equals 100.823 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(100.823 shares x $10.44 = $1,052.59)
3
<PAGE> 22
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 10.32
07/31/97 .03567926 10.42 .331794
08/31/97 .03445777 10.36 .655188
09/30/97 .03324832 10.40 .967065
10/31/97 .03559113 10.43 1.301022
11/30/97 .03390709 10.43 1.620263
12/31/97 .03539123 10.46 1.953602
01/31/98 .03600432 10.47 2.293538
02/28/98 .03313868 10.44 2.608396
03/31/98 .03491736 10.43 2.941526
04/30/98 .03369099 10.41 3.264651
05/31/98 .03513889 10.45 3.601459
06/30/98 .03348184 10.44 3.923772
</TABLE>
4
<PAGE> 23
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, 1998, the tax equivalent yield for the Tennessee Tax-Free
Short-to-Medium Series was 3.19% (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: 2.30%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
5
<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, 1998, the tax equivalent yield for the Tennessee Tax-Free
Short-to-Medium Series was 5.38% (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: 3.87%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
1
<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, 1998, the yield for the Intermediate Government Bond Series was
4.58% and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1)( to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $40,122.04
b = Expenses accrued for the period: $3,902.42
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 945,062.267
d = The maximum offering price per share on the
last day of the period, June 30, 1998:
$10.14
1
<PAGE> 26
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.
At June 30, 1998, the yield for the Intermediate Government Bond Series was
6.50% and was calculated as follows:
YIELD =
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $55,493.87
b = Expenses accrued for the period: $4,273.19
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends:945,062.267
d = The maximum offering price per share on
the last day of the period, June 30, 1998:
$10.14
2
<PAGE> 27
EXHIBIT 16
The average annual total return for the Intermediate Government Bond Series for
the one-year period ended June 30, 1998, was 9.47% and was calculated as
follows:
P(1 + T) (to the power of n) = 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:
$1,094.66.
The average annual total return for the Intermediate Government Bond Series for
the period July 1, 1993 to June 30, 1998 was 6.07% and for the period July 14,
1992 to June 30, 1998 was 7.14%. The average annual total return for each of
these periods were calculated in a manner similar to described.
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 ($9.89) equals initial number of shares
(101.112 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 101.112 plus
incremental number of shares of 6.843 equals 107.955 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(107.955 shares x $10.14 = $1,094.66)
3
<PAGE> 28
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 9.89
07/31/97 .05755641 10.11 .575634
08/31/97 .05716784 9.94 1.16047
09/30/97 .0548907 10.02 1.720732
10/31/97 .05587149 10.11 2.289024
11/30/97 .05402797 10.07 2.843796
12/31/97 .05651914 10.13 3.423807
01/31/98 .0566257 10.22 4.003007
02/28/98 .0508987 10.15 4.530123
03/31/98 .05610303 10.12 5.115781
04/30/98 .05399516 10.12 5.682559
05/31/98 .05565177 10.14 6.268686
06/30/98 .05420128 10.14 6.842668
</TABLE>
4
<PAGE> 29
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, 1998, the tax equivalent yield for the Intermediate Government Bond
Series was 4.58% (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: 0%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 100%.
5
<PAGE> 30
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, 1998, the tax equivalent yield for the Intermediate Government Bond
Series was 6.50% (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: 0%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 100%.
6
<PAGE> 31
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, 1998, the yield for the North Carolina Tax-Free Income Series was
4.31% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $37,927.92
b = Expenses accrued for the period: $3,060.24
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 904,524.004
d = The maximum offering price per share on the
last day of the period, June 30, 1998:
$10.82.
1
<PAGE> 32
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.
At June 30, 1998, the yield for the North Carolina Tax-Free Income Series was
4.77% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period. Interest
earned during the 30-day period ended was
$41,781.37
b = Expenses accrued for the period: $3,223.67
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 904,524.004
d = The maximum offering price per share on the
last day of the period, June 30, 1998:
$10.82.
2
<PAGE> 33
EXHIBIT 16
The average annual total return for the North Carolina Tax-Free Income Series
for the one-year period ended June 30, 1998, was 9.98% and was calculated as
follows:
P(1 + T)(to the power of n) = 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:
$1,099.83
The average annual total return for the North Carolina Tax-Free Income Series
for the period November 16, 1995 to June 30, 1998 was 8.43%. The average annual
total return for this period was calculated in a manner similar to described.
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 ($10.33) equals initial number of shares
(96.805 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 96.805 plus
incremental number of shares of 4.843 equals 101.648 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(101.648 shares x $10.82 = $1,099.83)
3
<PAGE> 34
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 10.33
09/30/97 .13519 10.54 1.24166
12/31/97 .133066 10.73 2.457569
03/31/98 .12865 10.77 3.643284
06/30/98 .129183 10.82 4.842568
</TABLE>
4
<PAGE> 35
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, 1998, the tax equivalent yield for the North Carolina Tax-Free
Income Series was 5.99% (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: 4.31
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
5
<PAGE> 36
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, 1998, the tax equivalent yield for the North Carolina Tax-Free
Income Series was 6.63% (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: 4.77%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
1
<PAGE> 37
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, 1998, the yield for the North Carolina Tax-Free Short-to-Medium
Series was 2.68% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $5,590.27
b = Expenses accrued for the period: $767.35
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends: 212,195.080
d = The maximum offering price per share on
the last day of the period, June 30, 1998:
$10.24.
2
<PAGE> 38
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.
At June 30, 1998, the yield for the North Carolina Tax-Free Short-to-Medium
Series was 3.86% and was calculated as follows:
YIELD:
2[ ((a-b/cd) +1)(to the power of 6) - 1 ]
Where: a = Interest earned during the period.
Interest earned during the 30-day
period ended was $9,162.40
b = Expenses accrued for the period:
$2,227.79
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends:
212,195.080
d = The maximum offering price per share on
the last day of the period, June 30,
1998: $10.24.
3
<PAGE> 39
EXHIBIT 16
The average annual total return for the North Carolina Short-to-Medium Series
for the one-year period ended June 30, 1998, was 5.20% and was calculated as
follows:
P(1 + T)(to the power of n) = 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:
$1,051.98
The average annual total return for the North Carolina Short-to-Medium Series
for the period November 16, 1995 to June 30, 1998 was 4.98%. The average annual
total return for this period was calculated in a manner similar to described.
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 ($10.12) equals initial number of shares
(98.814 shares).
Step 2 - Convert initial shares to ending shares assuming timely
reinvested distributions. Initial shares of 98.814 plus
incremental number of shares of 3.918 equals 102.732 ending
shares.
Step 3 - Determine value of ending shares. Number of ending shares
times ending Net Asset Value per share equals ending value.
(102.732 shares x $10.24 = $1,051.98)
4
<PAGE> 40
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, 1998
was as follows:
<TABLE>
<CAPTION>
Payable Total Cumulative
Reinvestment Quarterly Reinvestment Incremental
Date Dividend Price Shares
- ---- -------- ----- ------
<S> <C> <C> <C>
06/30/97 10.12
07/31/97 .034888 10.22 .337318
08/31/97 .034897 10.14 .678552
09/30/97 .032324 10.17 .994776
10/31/97 .033899 10.20 1.326482
11/30/97 .031718 10.21 1.637571
12/31/97 .034051 10.21 1.972588
01/31/98 .033498 10.23 2.302609
02/28/98 .029551 10.21 2.595277
03/31/98 .034389 10.20 2.937172
04/30/98 .032625 10.17 3.263587
05/31/98 .032804 10.22 3.59124
06/30/98 .032682 10.24 3.918081
</TABLE>
5
<PAGE> 41
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, 1998, the tax equivalent yield for the North Carolina Tax-Free
Short-to-Medium Series was 3.72% (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: 2.68%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
6
<PAGE> 42
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, 1998, the tax equivalent yield for the North Carolina Tax-Free
Short-to-Medium Series was 5.36% (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: 3.86%
B = Stated tax rate: 28%
C = That part of the series yield that is
not tax-exempt: 0.
7
