Filed pursuant to Rule 497 (e)
Registration Nos. 333-20827
and 811-08023
DATED JUNE 27, 1998
PROSPECTUS
[LOGO] 600 17th Street
Colorado Double Tax Suite 2610 S. Tower
Exempt Bond Fund, Inc. Denver, Colorado 80202
Statewide Call Toll Free 1-800-279-4426
From the Denver Area Call (303) 623-7500
Colorado Double Tax-Exempt Bond Fund, Inc. (the "Fund") is an open end
management investment company. The Fund presently offers Colorado investors a
choice of a Short-Intermediate Portfolio and an Income Portfolio, each of which
is a no-load, non-diversified investment portfolio of the Fund. Both portfolios
seek to provide Colorado investors with as high a level of tax-exempt income as
is consistent with the maturities of the portfolio selected and, regardless of
the portfolio selected, with a greater degree of principal stability than is
associated with funds or trusts invested exclusively in long-term municipal
bonds.
The Short-Intermediate Portfolio invests primarily in high quality short
and intermediate term Colorado municipal securities and is restricted to a
weighted average maturity of no more than seven years. The Income Portfolio
invests primarily in high quality long- and intermediate-term Colorado municipal
securities and is expected to have a weighted average maturity of more than
seven years. The Short-Intermediate Portfolio generally provides a lower yield
than the Income Portfolio; but, in turn, generally provides greater principal
stability than the Income Portfolio.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference as it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
A "Statement of Additional Information" dated April 30, 1998 which
provides a further discussion of certain matters covered by this Prospectus and
other matters which may be of interest to investors, has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. A
copy is available without charge from the Fund at the address and telephone
number shown above.
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 OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
COLORADO DOUBLE TAX-EXEMPT BOND FUND
Supplement dated December 8, 1998 to the Prospectus dated June 27, 1997, as
previously amended by the Prospectus Supplements dated August 7, 1997, September
15, 1997 and March 5, 1998.
This Supplement to the Prospectus of the Colorado Double Tax-Exempt Bond
Fund, Inc. (the "Fund") dated June 27, 1997 (the "Prospectus") amends the
Prospectus to remove all references that shares purchased by check are valued
when the check is received by the Fund, which is usually the third day following
receipt of the check, and dividends are earned the day after the Fund receives
funds, and to state that shares will be issued on the next day after receipt of
the check from an investor, and dividends are paid beginning on the date that
the shares are issued. All references in the Prospectus to shares purchased by
check are hereby amended by the prior sentence.
COLORADO DOUBLE TAX-EXEMPT BOND FUND
<PAGE>
(LOGO)
COLORADO DOUBLE TAX-EXEMPT BOND FUND
Supplement dated March 5, 1998 to the Prospectus dated June 27, 1997.
This supplement to the Prospectus of the Colorado Double Tax-Exempt Bond
Fund, Inc. (the "Fund") dated June 27, 1997 amends the Prospectus (the
"Prospectus") to remove all references to the contingent deferred sales charge
of 1% upon the redemption of Fund shares that occur within one year of purchase
and to state that, because the contingent deferred charge has been deleted, the
Fund is now a no-load fund. All references in the Prospectus to a contingent
deferred sales charge or to a no front-end load fund are hereby amended by the
prior sentence.
(LOGO)
COLORADO DOUBLE TAX-EXEMPT BOND FUND
Supplement dated March 5, 1998 to the Statement of Additional Information
dated June 27, 1997.
This supplement to the statement of additional information of the Colorado
Double Tax-Exempt Bond Fund, Inc. (the "Fund") dated June 27, 1997 (the
"Statement of Additional Information") amends the Statement of Additional
Information to remove all references to the contingent deferred sales charge of
1% upon the redemption of Fund shares that occur within one year of purchase and
to state that, because the contingent deferred charge has been deleted, the Fund
is now a no-load fund. All references in the Statement of Additional Information
to a contingent deferred sales charge or to a no front-end load fund are hereby
amended by the prior sentence.
COLORADO DOUBLE TAX-EXEMPT BOND FUND
<PAGE>
EXPENSE TABLE
SHORT-INTERMEDIATE AND INCOME PORTFOLIOS
Shareholder Transaction Expenses none
Annual Fund Operating Expenses (as a percentage
of average net assets)
Management Fees .23
12b-1 Fees .25
Other Expenses (after expense limitation)* .20
Total Fund Operating Expenses (after expense limitation)* .68*
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or indirectly
in connection with an investment in the Fund. These figures are based on actual
amounts for the current fiscal year.
Example
As required by regulations of the Securities and Exchange Commission, the
following example illustrates the expenses that apply to a $1,000 investment in
the Fund over various time periods assuming (i) a 5% annual rate of return and
(ii) redemption at the end of each such time period.**
One Year Three Years
$7 $22
This example is based on the aggregate annual operating expenses, before
fee waivers and expense reductions, shown above and should not be considered a
representation of past or future expenses which may be more or less than those
shown.
- ----------
*The percentage figure above for "Other Expenses" is based on actual amounts
incurred for the most recent fiscal year less reimbursement from the Funds'
investment adviser. The Funds' investment adviser has agreed to reimburse the
Fund for its expenses to the extent that they exceed .68% of the Fund's average
annual net assets. Without the reimbursement, the Other Expenses would have been
84.89% for the Short Income Portfolio and 24.20% for the Income Portfolio. **You
would pay the same expenses assuming no redemption since the Fund does not
charge a redemption fee.
The per share data and ratios in the tables below have been extracted from
the Funds financial statements which statements have been audited by Baird,
Kurtz & Dobson, the Fund's independent accountants, whose report can be found in
the Statement of Additional Information of the Fund, which is available upon
request. Further financial information is included in the Statement of
Additional Information.
1
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Selected data for a share of beneficial interest outstanding of the
Short-Intermediate Portfolio and a share of beneficial interest outstanding of
the Income Portfolio for the period ended December 31, 1997 are as follows:
Colorado Double Tax Exempt Bond Fund, Inc.
Short Intermediate Portfolio
Financial Highlights
(For a fund share outstanding throughout the period)
For the period
October 28, 1997
(Commencement of operations)
to
December 31, 1997
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income 0.07
Capital gains
Net realized and unrealized gain (loss) on 0.03
investments ----
Total from investment operations 0.10
----
Less distributions:
Dividends from net investment income (0.07)
Dividends from net realized gains 0.00
----
Total distributions (0.07)
----
Net asset value, end of period $10.03
=====
Ratios/Supplemental Data:
Net assets, end of period (in 000s) 51
Ratio of expenses to average net assets 84.89%**
Ratio of expenses to average net assets, after 0.68%**
reimbursement
Ratio of net investment income (loss) to (80.44)%**
average net assets
Ratio of net investment income (loss) to 3.77%**
average net assets,
after reimbursement
Portfolio turnover rate 0.00%
Average commission rate paid 0.0000
Total return* 5.64%**
- ---------------
*Based on net asset value per share
**The Portfolio was capitalized on April 17, 1997, with $50,000 representing
5,000 shares at a net asset value per share of $10.00. The initial public
offering was made on October 28, 1997, at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
2
<PAGE>
Colorado Double Tax Exempt Bond Fund, Inc.
Income Portfolio
Financial Highlights
(For a fund share outstanding throughout the period)
For the period
October 28, 1997
(Commencement of
operations)
to
December 31, 1997
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income 0.09
Capital gains
Net realized and unrealized gain (loss) on 0.12
investments ----
Total from investment operations 0.21
----
Less distributions:
Dividends from net investment income (0.09)
Dividends from net realized gains 0.00
----
Total distributions (0.09)
----
Net asset value, end of period $10.12
=====
Ratios/Supplemental Data:
Net assets, end of period (in 000s) 320
Ratio of expenses to average net assets 24.20%**
Ratio of expenses to average net assets, after 0.68%**
reimbursement
Ratio of net investment income (loss) to (18.48)%**
average net assets
Ratio of net investment income (loss) to 5.03%**
average net assets, after reimbursement
Portfolio turnover rate 25.64%
Average commission rate paid 0.0000
Total return* 12.21%**
- ---------------
*Based on net asset value per share
**The Portfolio was capitalized on April 17, 1997, with $50,000 representing
5,000 shares at a net asset value per share of $10.00. The initial public
offering was made on October 28, 1997, at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
3
<PAGE>
DESCRIPTION OF THE FUND
The Fund is an open-end management investment company, or mutual fund,
organized as a Maryland corporation on August 29, 1996. The Fund offers a choice
of two portfolios, each of which is a no-load, non-diversified investment
portfolio of the Fund. Both portfolios are designed to provide Colorado
investors with as high a level of tax-exempt income exempt from Federal and
Colorado state income taxes as is consistent with the maturities of the
portfolio selected, with a greater degree of principal stability than is
associated with funds or trusts invested exclusively in long-term municipal
bonds.
Investment Objective
The Fund believes that by offering two portfolios, it can achieve a more
precise objective for an investor than a single portfolio attempting to achieve
multiple objectives. The Fund offers a Short-Intermediate Portfolio (the
"Short-Intermediate Portfolio") which restricts its weighted average maturity to
no more than seven years, and an Income Portfolio (the "Income Portfolio") which
is expected to have a weighted average maturity of more than seven years. Each
portfolio differs from the other primarily in the maturity of its holdings and
consequently in the yield levels and principal volatility which might be
expected from such maturity differentials. The Short-Intermediate Portfolio
generally provides a lower yield than the Income Portfolio; but, in turn,
generally provides greater principal stability than the Income Portfolio.
It is a nonfundamental policy of the Fund that, under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in tax-exempt bonds. The balance of its total assets will be invested in
other tax-exempt securities of the State of Colorado, its political
subdivisions, municipalities and public authorities, the interest on which is
exempt from federal income taxes and from Colorado personal income taxes.
Under normal market conditions, the Fund will attempt to invest 100% and,
as a matter of fundamental policy, will invest at least 80% of its total assets
in each portfolio in Colorado municipal securities. The Fund will invest only in
securities which at the time of purchase have one of the four highest ratings of
Moody's Investor Service, Inc. ("Moody's) (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A or BBB), or Fitch IBCA, Inc. ("Fitch") (AAA, AA,
A and BBB), or in securities which are not rated, provided that, in the opinion
of the Fund's investment adviser (the "Adviser"), such securities are comparable
in quality to those within the four highest ratings of Moody's, S&P or Fitch.
These securities are considered to be "investment grade" securities, although
bonds rated in the fourth highest ratings level (Baa by Moody's and BBB by S&P
and Fitch) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and as
having some speculative characteristics. Securities on which the interest is
treated as an item of tax preference for purposes of the alternative minimum tax
will not be counted toward the 80% policy of the Fund. In the event the rating
of an issue held in the Fund's portfolio is lowered by the rating service, such
change will be considered by the Fund in its evaluation of the overall
investments of the security, but such change will not necessarily result in an
automatic sale of the security. For a description of municipal securities
ratings see "Appendix A-Description of Municipal Securities Ratings" in the
Statement of Additional Information.
4
<PAGE>
The Fund also may invest up to 20% of the value of its net assets in
fixed-income securities, the interest on which is subject to federal, state and
local income tax. This may be done (i) pending the investment or reinvestment in
Colorado municipal securities, (ii) in order to avoid the necessity of
liquidating portfolio investments to meet redemptions of shares by investors, or
(iii) where market conditions due to rising interest rates or other adverse
factors warrant temporary investing for defensive purposes. For purposes of this
paragraph, the term "fixed-income securities" shall include only securities
issued or guaranteed by the United States Government (such as bills, notes and
bonds), its agencies, instrumentalities or authorities, and certificates of
deposit of domestic banks which have capital, surplus and undivided profits of
over $1 billion and which are members of the Federal Deposit Insurance
Corporation.
Generally, the Fund will not buy illiquid securities or Colorado municipal
securities for which an active trading market does not exist. Moreover, as a
matter of fundamental policy, in no event will the Fund acquire Colorado
municipal securities or other illiquid assets for which there is no active
trading market if such Colorado municipal securities and illiquid assets, in the
aggregate, would comprise 15% or more of the net assets of the Fund. Included in
this 15% limitation are restricted or not readily marketable securities and
repurchase agreements maturing or terminable in more than seven (7) days.
Although there may be no daily bid and asked activity for certain not rated
Colorado municipal securities, there is an active secondary market for them, and
for this reason the Adviser considers them to be liquid.
The Fund may borrow money from banks for temporary purposes only, and in
an amount not to exceed 10% of the value of its total assets. The Fund will not
purchase portfolio securities if it has outstanding borrowings in excess of 5%
of the value of its total assets.
Except as otherwise herein noted or in the Statement of Additional
Information, the investment policies of the Fund described in this Prospectus
are not fundamental and the Board of Directors of the Fund may change such
policies without the vote of a majority of the outstanding voting securities of
the Fund. However, the Board of Directors will not change the Fund's principal
investment objective, which is a fundamental policy of the Fund, of seeking to
provide as high level of income exempt from federal taxes and from Colorado
personal income taxes as is consistent with the maturities of the portfolio
selected and, regardless of the portfolio selected, with a greater degree of
principal stability than is associated with funds or trust invested exclusively
in long-term municipal bonds. Under the Investment Company Act of 1940 (the
"1940 Act"), a "vote of a majority of the outstanding voting securities" of the
Fund or of a particular Series means the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or such Series or (2) 67% or
more of the shares of the Fund or of such Series present at a shareholders'
meeting if more than 50% of the outstanding shares of the Fund or of such Series
are represented at the meeting in person or by proxy. The Fund is subject to a
number of additional investment restrictions, some of which may be changed only
with the approval of shareholders, which limits its activities to some extent.
For a list of these restrictions and more information concerning the policies
discussed herein, please see the Statement of Additional Information.
5
<PAGE>
Colorado Municipal Securities
As used in this prospectus, the term, "Colorado municipal securities,"
refers to debt obligations issued by the State of Colorado, its counties,
municipalities, authorities and political subdivisions for the purpose of
obtaining funds for various public purposes. The interest on such obligations
is, in the opinion of bond counsel to the issuers, exempt from federal and
Colorado State income taxes.
Municipal obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source, but not from the general taxing power. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues.
In addition, certain types of "industrial development bonds" issued by or
on behalf of public authorities to obtain funds for privately operated
facilities are included in the definition of Colorado municipal securities,
provided that the interest paid thereon is exempt from Federal and Colorado
State income taxes. Tax-exempt industrial development bonds do not generally
receive a pledge of the credit of the issuing municipality.
The Fund may also purchase bond put programs consisting of long-term low
coupon bonds with put options that give the purchaser the right to sell the
bonds back to the seller at a specified price on a specified date usually within
three to five years of the offering date of the program. In the case of such
purchases, the date that the put option may be exercised is considered to be the
maturity date. All bonds purchased as part of bond put programs are required to
satisfy the same quality standards of the Fund applicable to other bond
purchases. Additionally, the obligation of the seller to purchase a bond upon
exercise of the put option must be supported by a bank letter of credit (which
in the case of a selling bank must be issued by another bank). In the opinion of
the Adviser, the marketability and liquidity of such bonds and their
accompanying put options is the same as other bonds held by the Fund. The Fund
may also purchase tender option programs that give the purchaser the right to
sell the bonds back to the seller or issuer at any time prior to maturity after
expiration of a specified holding period. In the case of such purchases, the
first date that the bonds may be tendered is considered to be the maturity date.
There is no limitation on the aggregate principal amount of bonds associated
with bond put programs or tender option programs which may be purchased in
either portfolio although it is not anticipated that either program will exceed
20% of the assets of a portfolio.
Each portfolio may invest in variable rate demand instruments, repurchase
agreements and standby commitments provided that none of such investments
constitutes more than 5% of the assets of the portfolio. Each portfolio may also
invest in when-issued securities without limitation.
Also included within the general category of Colorado municipal securities
are participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
6
<PAGE>
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriative" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations, if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets. The Fund may, however, invest without
regard to such limitation in lease obligations which the Adviser, pursuant to
guidelines which have been adopted by the Board of Directors and subject to the
supervision of the Board of Directors, determines to be liquid. The Adviser will
deem lease obligations liquid if they are publicly offered and have received an
investment grade rating of Aaa, Aa, A or Baa or better by Moody's or AAA, AA, A,
BBB or better by S&P or Fitch.
The Short-Intermediate Portfolio will tend to have a longer average
maturity when interest rates are expected to decline (a market rise) and a
shorter average maturity when interest rates are expected to rise (a market
decline). The Income Portfolio places no maturity restrictions on the municipal
securities in which it may invest. The Income Portfolio's weighted average
maturity is expected to be more than seven years. The Income Portfolio will tend
to have a longer average maturity when interest rates are expected to decline (a
market rise) and a shorter average maturity when interest rates are expected to
rise (a market decline). The Income Portfolio does not intend to maximize income
through total concentration in long-term maturities. The Income Portfolio will
have a dollar weighted average maturity of twenty years or more with respect to
that portion of its holdings not invested in short-term securities (maturity
equal to one year or less) only if in the Adviser's opinion the prevailing
conditions are very favorable to long-term investment.
While these quality and maturity policies should generally result in lower
yields for both portfolios than would be obtainable in funds or trusts comprised
of longer term obligations, lower quality obligations or both, they are intended
to provide greater stability of principal than such other funds or trusts.
The current yield and average maturity for both portfolios is available at
any time by calling the appropriate telephone number as indicated on the cover
page of this Prospectus.
A more detailed description of the securities in which the Fund may invest
is contained in the Statement of Additional Information.
7
<PAGE>
Investment Risk Considerations
In addition to the risks specific to the types of securities in which the
Fund may invest described herein and in the Statement of Additional Information,
the Fund is also subject to the following risks:
Market/Credit Risk. There are two categories of risks to which the Fund is
subject: credit risk and market risk. Credit risk is a function of the ability
of an issuer of a municipal security to maintain timely interest payments and to
pay the principal of a security upon maturity. It is generally reflected in a
security's underlying credit rating and its stated interest rate. A change in
the credit risk associated with a municipal security may cause a corresponding
change in the security's price. Even though the Fund's quality standards require
that investments (including bonds purchased in bond put programs) be in the four
highest categories of Moody's, S&P or Fitch or the determination of equivalent
quality by the Adviser in the case of all investments not secured with U.S.
government obligations, or of equivalent quality as determined by the Adviser
for not rated securities, there is no assurance that credit risk can be entirely
eliminated. The ratings assigned by Moody's, S&P and Fitch represent their
opinions as to the quality of the securities which they undertake to rate and
are not absolute standards of quality. Market risk is the risk of price
fluctuation of a municipal security caused by changes in economic and interest
rate conditions generally affecting the market as a whole. A municipal
security's maturity length also affects the price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's debt instruments may rise. Price changes of securities have
a direct impact on the net asset value of the Fund.
Diversification. As a non-diversified investment company, the Fund is not
subject to any restrictions under the 1940 Act with respect to the concentration
of its investments in assets of one or more issuers. This concentration may
present greater risks than in the case of a diversified company. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify, among other requirements, the Fund's investments will be
limited so that at the close of each of the taxable quarter, (i) not more than
25% of the market value of the Fund's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer. For
purposes of this restriction, the Fund will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state agency
of which such state is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
principal and interest may be regarded as the sole issuer. A fund which elects
to be classified as "diversified" under the 1940 Act must satisfy the foregoing
5% and 10% requirements with respect to 75% of its total assets. To the extent
the Fund assumes large positions in a small number of issuers, the Fund's total
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
8
<PAGE>
Risks Related to Colorado
Because of limitations contained in the state constitution, the State of
Colorado issues no general obligation bonds secured by the full faith and credit
of the state. Several agencies and instrumentalities of state government,
however, are authorized by statute to issue bonds secured by revenues from
specific projects and activities. Additionally, the state currently is
authorized to issue short-term revenue anticipation notes.
There are approximately 2,000 units of local government in Colorado. These
include counties, home rule cities and counties, statutory cities and towns,
school districts, water and sanitation districts, fire protection districts,
metropolitan districts, general improvement and service districts. These
municipal entities all have some constitutional and/or statutory authority to
collect taxes, generate revenues and incur indebtedness.
A major revenue source for many of these municipalities is the ad valorem
property tax levied at the local level, with $2,668,403,531 and $2,784,138,646
levied throughout Colorado in tax years 1995 and 1996, respectively.
In 1996, the assessed valuation of all real and personal property subject
to taxation in Colorado was $33,595,086,130. This was up 3.5% from 1995 levels.
For the 1989 and 1990 levy years, residential property was assessed at 15% of
statutory "actual" value, and all other property was assessed at 29% of
statutory "actual" value, using the levels of value for the one and one-half
year period immediately prior to July 1, 1988, to determine statutory "actual"
value. For the 1991 and 1992 levy years, the residential assessment ratio was
14.34% and the levels of value for the one and one-half year period immediately
prior to July 1, 1990, were used to determine statutory "actual" value. For 1993
and 1994, the residential assessment ratio was reduced to 12.86%. For 1995 and
1996, the ratio was reduced to 10.36% from 12.86%.
The Colorado Legislative Council's economic forecast predicts an increase
in general fund revenues of about 7.8% during the 1997-1998 fiscal year.
The major risks to a continued economic recovery in Colorado are reduced
federal expenditures, particularly in the area of defense, cessation of large
public works projects in the state, a drop in tourism caused by the lack of any
state-sponsored advertising, and reduced commercial real estate values. Any of
these potential events could adversely affect the Colorado economy and local
governmental revenues. Additionally, on November 3, 1992, Colorado voters
approved an amendment to the Colorado Constitution which is commonly referred to
as the Taxpayer's Bill of Rights ("TABOR"). TABOR imposes various limits and new
requirements on spending by the State of Colorado and all Colorado local
governments (each of which is referred to in this section as a "governmental
unit"). Any of the following, for example, now requires prior voter approval:
(i) any increase in a governmental unit's spending from one year to the next in
excess of the rate of inflation plus a "growth factor," as defined in TABOR;
(ii) any increase in the real property tax revenues of a local governmental unit
(not including the State) from one year to the next in excess of inflation plus
9
<PAGE>
the appropriate "growth factor"; (iii) any new tax, tax rate increase, mill levy
increase, valuation for assessment ratio increase for a property class,
extension of an expiring tax or a tax policy change directly causing a net tax
revenue gain; and (iv) except for refinancing bonded indebtedness at a lower
interest rate or adding new employees to existing pension plans, creation of any
multiple-fiscal year direct or indirect debt or other financial obligation
whatsoever without adequate present cash reserves pledged irrevocably and held
for payments in all future fiscal years. TABOR has already reduced the financial
flexibility of all levels of Colorado government. In particular, governmental
units dependent on taxes on residential property are being squeezed between
TABOR requirements of voter approval for increased mill levies and an earlier
State constitutional amendment which has had the effect of lowering the
assessment rate on residential property from 21.0% to 9.74% over the past eleven
years.
There can be no assurance that these, or other events, will not negatively
affect the market value of the securities in the Fund or the ability of
municipal entities to pay their debt obligations in a timely manner.
Legislative Tax Changes
From time to time proposals to restrict or eliminate the Federal income
tax exemption for interest on the type of securities to be purchased by the Fund
are introduced and undoubtedly will continue to be introduced. If such proposals
were enacted, the Fund would reevaluate its investment objective and policies.
Any change in such objective and policies would require shareholder approval. It
is not known if a flat tax plan (or any of the other Treasury recommendations)
will be enacted and, if it is enacted, the form it will take.
Impact of the Year 2000 Issue
The Year 2000 Issue (the "Year 2000 Issue") is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Fund's and the Adviser's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Based on a recent assessment, the Fund and the Adviser determined that
their software is Year 2000 compliant and therefore will allow their computer
systems to properly utilize dates beyond December 31, 1999.
The Fund and the Adviser have initiated formal communications with all of
their significant suppliers, including the Fund's transfer agent (the "Transfer
Agent"), American Data Service, Inc., the Fund's custodian (the "Custodian"),
Star Bank, N.A., and the clearing agent for the Fund's principal underwriter
("Clearing Agent"), Fiserv Correspondent Services, Inc., to determine the extent
to which the Fund and the Adviser are vulnerable to those third parties' failure
to remediate their own Year 2000 Issue.
The Transfer Agent, the Custodian and the Clearing Agent have informed the
Fund and the Adviser of their respective efforts to mitigate the effects of the
Year 2000 Issue and each has assured the Fund and the Adviser that it will have
systems installed and tested that are Year 2000 compliant by the end of December
1999. However, there can be no guarantee that the systems of the other companies
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on which the Fund's and the Adviser's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Fund's and the Adviser's systems, would not have a
material adverse effect on the Fund and the Adviser. The Fund and the Adviser
will continue to monitor the Transfer Agent's, the Custodian's and the Clearing
Agent's efforts to remediate their own Year 2000 Issue.
To date the Fund and the Adviser have not incurred any expenses and do not
anticipate a material impact on the Fund or the Adviser in connection with the
Year 2000 Issue. However, there can be no guarantee that the Fund and the
Adviser will not incur any expenses or that there will not be a material impact
on the Fund or the Adviser in connection with the Year 2000 Issue. A specific
factor that might cause the Fund and the Adviser to incur expenses in connection
with Year 2000 Issue is the ability of significant suppliers to remediate their
own Year 2000 Issue.
MANAGEMENT OF THE FUND
The affairs of the Fund will be managed under the supervision of its Board
of Directors. The identities of the directors and officers of the Fund, together
with certain other information about them, including fees paid to directors, are
contained in the Statement of Additional Information. The Fund has been
organized as a corporation under the laws of the State of Maryland. In
accordance with Maryland's General Corporation law, a director of the Fund is
responsible for performing his duties in good faith, in a manner he reasonably
believes to be in the best interests of the Fund and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances.
Adviser
The Adviser, Funds Management Corporation, located at 600 17th Street,
Suite 2610 South Tower, Denver, Colorado 80202, serves as the Fund's investment
adviser pursuant to an Investment Advisory Agreement (the "Advisory Agreement")
between the Fund and the Adviser dated May 28, 1997. The Adviser was
incorporated as a Colorado corporation on April 7, 1988.
Mr. Calvin F. Isaak, 600 17th Street, Suite 2610 South, Denver, Colorado
80202, is the President of the Advisor, as well as President and Chairman of the
Board of the Fund. In his capacity as President of the Adviser, he will be
primarily responsible in directing all investment decisions for the Fund,
placing orders to purchase and sell securities and supervising the investment
staff which provides economic and research services to the Fund.
All investment decisions are made in accordance with the Fund's stated
policies and are subject to the supervision and direction of the Board of
Directors.
Under the Advisory Agreement, the Fund pays Funds Management
Corporation as compensation for its services, a fee computed daily and paid
monthly at an annual rate of .23 of 1.00% of the value of the Fund's average
daily net assets.
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Distributor
The Fund's principal underwriter and a distributor of the Fund's shares is
Isaak Bond Investments, Inc. (the "Underwriter"). Mr. Isaak is a controlling
shareholder of the Underwriter, which owns all of the stock of the Adviser. Mr.
Isaak is also the Chairman of the Board and President of the Underwriter.
Portfolio Transactions
The frequency of portfolio transactions-the Fund's portfolio turnover
rate-will vary from year to year depending on market conditions. The Adviser
anticipates that the Fund will not have a portfolio turnover rate in excess of
100% per year; however, there can be no assurances that the Fund will be able to
meet this objective.
The Adviser will be authorized to allocate the Fund's securities
transactions to the Underwriter and to other broker-dealers who help distribute
the Fund's shares. The Adviser will allocate transactions to such broker-dealers
only when it reasonably believes that the commissions and transaction quality is
comparable to that available from other qualified broker-dealers. This is
consistent with the Rules of the National Association of Securities Dealers,
Inc., and subject to seeking the most favorable price and execution available
and such other policies as the Board of Directors may determine.
In connection with its duties to arrange for the purchase and sale of
portfolio securities, the Adviser will select such broker-dealers who will, in
the Adviser's judgment, implement the Fund's policy to achieve best execution,
i.e., prompt, efficient and reliable execution of orders at the most favorable
net price. The Adviser will cause the Fund to deal directly with the selling or
purchasing principal or market maker without incurring brokerage commissions
unless the Adviser determines that better price or execution may be obtained by
paying such commissions; the Fund expects that most transactions will be
principal transactions at net prices and that the Fund will incur little or no
brokerage costs. The Fund understands that purchases from underwriters include a
commission or concession paid by the issuer to the underwriter and that
principal transactions placed through broker-dealers include a spread between
the bid and asked prices. When allocating transactions to broker-dealers, the
Adviser is authorized to consider, in determining whether a particular
broker-dealer will provide best execution, the broker-dealer's reliability,
integrity, financial condition and risk in positioning the securities involved,
as well as the difficulty of the transaction in question, and thus need not pay
the lowest spread or commission available if the Adviser determines in good
faith that the amount of commission is reasonable in relation to the value of
the brokerage and research services provided by the broker-dealer, viewed either
in terms of the particular transaction or the Adviser's overall responsibilities
as to the accounts as to which it exercises investment discretion. If, on the
foregoing basis, the transaction in question could be allocated to two or more
broker-dealers, the Adviser is authorized in making such allocation, to
consider, (i) whether a broker-dealer has provided research services, as further
discussed below; and (ii) whether a broker-dealer has sold Fund shares or the
shares of any other investment company or companies having the Adviser as its
investment adviser or having the same sub-manager, administrator or principal
underwriter as the Fund. Such research may be in written form or through direct
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<PAGE>
contact with individuals and may include quotations on portfolio securities and
information on particular issuers and industries, as well as on market, economic
or institutional activities. The Fund recognizes that no dollar value can be
placed on such research services or on execution services, that such research
services may or may not be useful to the Fund and/or other accounts of the
Adviser and that such research received by such other accounts may or may not be
useful to the Fund.
Under the 1940 Act, the Fund may not purchase portfolio securities from
any underwriting syndicate of which the Underwriter, as principal, is a member
except under certain limited circumstances set forth in Rule 10f-3 thereof.
These conditions relate among other things, to the terms of an issue of
municipal securities purchased by the Fund, the reasonableness of the
broker-dealer spread, the amount of municipal securities which may be purchased
from any one issuer, and the amount of the Fund's assets which may be invested
in a particular issue. The rule also requires that any purchase made subject to
its provisions be reviewed at least quarterly by the Fund's Board of Directors,
including a majority of the Fund's Board of Directors who are not interested
persons of the Fund as defined by the 1940 Act.
The Board of Directors will review quarterly the Adviser's performance of
its responsibilities in connection with the placement of portfolio transactions
on behalf of the Fund. Such review is conducted for the purpose of determining
if the markups and commissions, if any, paid by the Fund are reasonable in
relation to the benefits received by the Fund taking into account the
competitive practices in the industry.
Certain investments may be appropriate for the Fund and also for clients
of the Underwriter. In such event, the Underwriter will allocate transactions
among the Fund and its clients in a manner which it believes to be equitable to
each. In some cases, this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Fund. Purchase and sale orders
for the Fund may be combined with those of other clients of the Underwriter in
the interest of obtaining the most favorable net results for the Fund.
Plan of Distribution
A plan of distribution has been approved and adopted by the Fund (the
"Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act for each of the
Fund's portfolios. Under the Distribution Plan, the Fund may reimburse
distributors or others for all expenses incurred by distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of prepaying and distributing sales literature and related
expenses, including a prorated portion of distributors' overhead expenses
attributable to the distribution of Fund shares, as well as any distribution or
service fees paid to securities broker-dealers or their firms or others who have
executed a servicing agreement with the Fund, distributors or their affiliates.
The maximum amount which the Fund may reimburse to distributors or others
for such expenses is 0.25% per annum of the average daily net assets of the
Fund, payable on a quarterly basis. All expenses of distribution in excess of
0.25% per annum will be borne by distributors or others who have incurred them,
without reimbursement from the Fund.
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The Distribution Plan also covers any payments to or by the Fund,
Advisers, distributors or other parties on behalf of the Fund, Advisers or
distributors to the extent such payments are deemed to be before the financing
of any activity primarily intended to result in the sale of shares by the Fund
in the context of Rule 12b-1. The payments under this Distribution Plan are
included in the maximum operating expenses which may be borne by the Fund.
Expenses of the Fund
In addition to the Adviser's fee, the Fund bears all its other expenses,
including, but not limited to, fees and expenses of those directors who are not
officers of the Adviser; salaries and expenses of any employees of the Fund who
are not affiliated with the Adviser; fees and expenses of the custodian,
transfer agent and dividend disbursing agent; interest expenses; taxes and
governmental fees; brokerage commissions and other expenses incurred in
acquiring or disposing of portfolio securities; accounting and legal fees;
insurance premiums; expenses of maintaining the Fund's qualification as a
Maryland corporation and of holding shareholders' meetings; expenses of
preparation and distribution to shareholders, of reports, proxies and
prospectuses; fees and expenses of membership in industry organizations;
expenses incident to the issuance of its shares against payment therefor by or
on behalf of the subscribers thereto, including printing of stock certificates
and such non-recurring expenses as may arise, including actions, suits or
proceedings to which the Fund is a party and the legal obligation which the Fund
may have to indemnify its officers and directors with respect thereto.
Notwithstanding the foregoing, all organizational expenses, including expenses
of registering and qualifying shares for sale with the Securities and Exchange
Commission, legal and accounting expenses incurred in organizing the Fund and
registering the shares and expenses incurred in the solicitation of purchasers
of Fund shares, will be borne by the Adviser.
The Adviser has agreed to reimburse the Fund for its expenses to the
extent that they ever exceed .68% (including the Adviser's fee) of the average
annual net assets of the Fund.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" under the
Code, and intends to take all other action required to ensure that no federal
income taxes will be payable by the Fund and that the Fund may pay
"exempt-interest dividends" to its shareholders. The Fund has received an
opinion of counsel from Kutak Rock to the effect that, subject to certain
conditions described therein, the Fund will be characterized as a regulated
investment company, as described in Section 851 of the Code. In order to pay
exempt-interest dividends at least 50% of the value of the Fund's total assets
must consist of obligations exempt from federal income tax pursuant to Section
103(a) of the Code.
Net interest income on obligations exempt from federal income tax, when
distributed to shareholders and designated by the Fund as exempt-interest
dividends, will be exempt from federal income tax in the hands of the
shareholders. Short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested. Long-term capital gain
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<PAGE>
distributions to shareholders will be treated as taxable long-term capital gain,
whether received in shares of the Fund or in cash, regardless of how long a
shareholder has held his shares. It is not likely that the Fund will retain
undistributed capital gains; however, in such an event, a shareholder must
include in income, as long-term capital gain, his share of undistributed
long-term capital gain designated by the Fund. Under such circumstances, the
shareholder may claim a refundable credit against the tax for his proportionate
share of any capital gain tax paid by the Fund. Under present law, the maximum
rate of tax on the net capital gains of an individual resulting from the sale or
exchange of assets held for more than 18 months is 20%. A maximum rate of 28%
will apply on the sale or exchange of assets held more than one year, but less
than 18 months. In addition, for tax years beginning after December 31, 2000,
the maximum capital gains rate for assets which are held for more than five
years after December 31, 2000 is 18%.
Under Section 55 of the code, the alternative minimum tax now applies to
all taxpayers, including corporations, and increases a taxpayer's tax liability
only to the extent it exceeds the taxpayer's regular income tax (less certain
credits) for the year. The alternative minimum tax is equal to 26% (or in some
cases, 28%) in the case of individuals (20% for corporations) of the excess of
the taxpayer's taxable excess, which is the amount by which alternative minimum
taxable income exceeds the applicable exemption amount. The exemption is $45,000
for spouses filing a joint return, $33,750 for a single taxpayer, and $22,500
for a married taxpayer filing a separate return, or for a trust or estate. The
exemption is phased out at the rate of $.25 for each dollar by which a
taxpayer's alternative taxable income exceeds a predetermined amount. For the
tax years beginning after December 31, 1997 certain corporations the gross
receipts of which are not greater than $5,000,000 will be exempt from the
alternative minimum tax.
"Alternative minimum taxable income" is a taxpayer's taxable income (i)
determined with specified adjustments for the alternative minimum tax and (ii)
increased by "items of tax preference." The types of income constituting "items
of tax preference" include otherwise allowable tax-exempt interest on private
activity bonds issued after August 7, 1986 (except bonds issued by charities
qualifying under Section 501(c)(3) of the Code).
Under the Code any loss on the sale or exchange of shares in the Fund held
by a shareholder for six months or less will be disallowed to the extent the
shareholder received exempt-interest dividends with respect to those shares.
Distributions from the Fund's non-exempt investment income and from any
net realized short-term gain will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares of the Fund. Under the Code,
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund will not be deductible to the extent that the Fund's distributions are
exempt from federal income tax.
Subject to modification by Regulations to be published, written notice
concerning the federal income tax status of distributions will be mailed within
sixty (60) days after the close of the year to shareholders of the Fund annually
in accordance with applicable provisions of the Code.
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Regulated investment companies will be subject to a non-deductible excise
tax equal to 4% of the excess of the amount required to be distributed for the
calendar year over the distributed amount for the calendar year. The Fund
intends to avoid the imposition of this excise tax, and will therefore
distribute during each calendar year at least 98% of its ordinary income for
such calendar year and 98% of its capital gain net income for the one year
period ending on October 31 of the calendar year.
Unless a shareholder includes his taxpayer identification number (social
security number for individuals) in the General Authorization Form and certifies
that he is not subject to backup withholding, the Fund is required to withhold
and remit to the U.S. Treasury 31% of non-exempt distributions and other
reportable payments to the shareholder.
Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by industrial development bonds should
consult their tax advisers before purchasing Fund shares.
The limitations on the deduction of miscellaneous itemized deductions do
not apply to publicly offered regulated investment companies. The Adviser
intends to use its best efforts to ensure that the Fund qualifies as a publicly
offered regulated investment company for the purposes of the foregoing
provision.
Colorado Income Taxes
Individuals, trusts, estates, and corporations who are holders of shares
of the Fund and who are subject to Colorado income tax will not be subject to
Colorado tax on distributions from the Fund to the extent that such
distributions qualify as either (1) exempt interest dividends of a regulated
investment company under Section 852(b)(5) of the Code, which are derived from
interest on tax-exempt obligations of the State of Colorado or any of its
political subdivisions; or (2) distributions derived from interest on
obligations of the United States or its possessions included in federal adjusted
gross income.
To the extent that distributions on shares of the Fund are attributable to
sources of income not described in the preceding sentences, including capital
gains, such distributions will not be exempt from Colorado income tax.
There are no municipal income taxes in Colorado. As intangibles, shares in
the Fund will be exempt from Colorado property taxes.
NET ASSET VALUE PER SHARE
The net asset value per share of each portfolio is determined by the
Fund's transfer agent (the "Transfer Agent"), American Data Services, Inc. as of
12:00 noon Colorado time on each day when the New York Stock Exchange is open
and on any other day on which there is sufficient trading in municipal
obligations to affect portfolio values, by dividing the total assets of each
portfolio less all its liabilities by the total number of shares outstanding in
such portfolio. In determining net asset value, all of each portfolio's
securities except money market instruments and short-term municipal obligations
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with remaining maturities of sixty (60) days or less are valued at market by a
pricing service, approved by the Board of Directors and the Transfer Agent,
which furnishes the Transfer Agent with valuations based in each case upon
information concerning market transactions and quotations from recognized
municipal securities broker-dealers. Securities for which market quotations are
readily available are valued at the last reported sale price, or, if no sales
are reported on that day, at the mean between the latest available bid and asked
prices. Securities for which quotations are not readily available are valued by
the pricing service considering such factors as yields or prices of municipal
securities of comparable quality, type of issue, coupon, maturity and rating,
indications as to value from broker-dealers, and general market conditions. The
methods used by the pricing service and the valuations so established are
reviewed regularly by officers of the Fund under the general supervision of its
Board of Directors. The Fund's pricing service is Kenny Information Service. The
use of such service by the Fund is the method selected by the Fund's Board of
Directors for obtaining a fair determination of the value of securities for
which quotations are not readily available.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The tax-exempt bond market in Colorado was characterized during this past
year by certain relevant market conditions, some of which are unique to Colorado
and others which are true of the tax-exempt market generally.
Relevant Market Conditions
The passage of TABOR in Colorado and the restrictions imposed by federal
law limiting the ability of local governments to finance new projects and
refinance outstanding debt have severely limited the supply of tax-exempt bonds
within the state. The desirability of Colorado bonds is directly tied to the
relatively strong local economy and the fact that the tax base is broadening in
most areas. New residences are being built at a pace not seen since the
mid-eighties and commercial properties are continuing to recover. A healthy real
estate economy translates into improved property tax collections, increased
sales and use taxes, service charges and tap fees all of which are the very
revenue sources most often pledged to the payment of municipal debt service.
Additionally, lower interest rates are allowing the stronger local governments
to refinance their outstanding debt, which makes them sounder financially and
better able to sustain operations in the years ahead.
Investment Strategy
December 31, 1997, marked the end of the Fund's first period of
operations. The activity in both portfolios, even though minimal, was primarily
Aaa rated bonds. Marketing of the Fund with investors, financial advisors, and
many other potential distributors was the managements main effort during
December 1997.
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During the last calendar quarter, the Short-Intermediate Portfolio
transactions were concentrated on municipal bonds, generally callable on any 30
day notice and having a coupon considerably higher than market resulting in an
exceptionally high yield.
The Income Portfolio was managed with the anticipation that interest rates
would be lower by December 31, 1998, also resulting in an exceptionally high
yield.
Investment Results
The calendar year ended December 31, 1997 was generally positive for
bonds. Most bond funds showed principal gains throughout the year.
The Fund's Short-Intermediate Portfolio and Income Portfolio were each
capitalized on April 17, 1997, with $50,000 representing 5,000 shares at a net
asset value per share of $10.00. The initial public offering of the
Short-Intermediate Portfolio and Income Portfolio were made on October 28, 1997,
at which time the net asset value per share was $10.00 for both the
Short-Intermediate Portfolio and the Income Portfolio. The following ratios for
this initial period of operations are annualized.
The Fund's Short-Intermediate Portfolio and Income Portfolio experienced
annualized total returns at net asset value for the calendar year ended December
31, 1997 of 5.64% and 12.21%, respectively.
The Fund's Short-Intermediate Portfolio and Income Portfolio annualized
average total returns on the basis of net asset value were 5.64% and 12.21%,
respectively, for the period ended December 31, 1997. The Fund's
Short-Intermediate Portfolio and Income Portfolio annualized average annual
total returns on the basis of maximum offering price were 5.64% and 12.21%,
respectively, for the period ended December 31, 1997.
The following tables depict the Fund's Short-Intermediate Portfolio and
Income Portfolio performance for the fiscal year ended December 31, 1997 since
inception of the Fund on October 28, 1997. Also depicted is comparative
information with respect to the Lipper Municipal Short Muni Index and the Lipper
Municipal General Muni Index.
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE COLORADO DOUBLE
TAX-EXEMPT BOND FUND, INC. SHORT-INTERMEDIATE PORTFOLIO AND THE LIPPER
MUNICIPAL SHORT MUNI INDEX
(ANNUALIZED RETURN SINCE INCEPTION 5.64%)
Measurement Period Colorado Double Tax-Exempt** Lipper Municipal Short
Muni Index
10/28/97* $10,000 $10,000
10/31/97 $10,430 $10,006
11/30/97 $10,020 $10,036
12/31/97 $10,097 $10,090
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE COLORADO DOUBLE
TAX-EXEMPT BOND FUND, INC. INCOME PORTFOLIO
AND THE LIPPER MUNICIPAL GENERAL MUNI INDEX
(ANNUALIZED RETURN SINCE INCEPTION 12.21%)
Measurement Period Colorado Double Tax-Exempt** Lipper Municipal General
Muni Index
10/28/97* $10,000 $10,000
10/31/97 $10,160 $10,036
11/30/97 $9,970 $10,091
12/31/97 $10,204 $10,251
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*Commencement of operations.
**Past performance is not predictive of future performance.
PURCHASE OF SHARES
Shares of each portfolio may be purchased by check or by wire transfer of
funds through a bank. The minimum initial investment is $10,000 for each
portfolio selected. Investments may be made in any amount in excess of the
minimum. Subsequent investments may be in any amount for the portfolio selected.
Each portfolio's shares are sold on a continuous basis without a sales charge at
the net asset value in effect at the time a purchase order is processed.
Purchase orders are processed after federal funds are made available to the Fund
as hereafter provided.
Dividends begin on the day federal funds are made available to the Fund
and continue to and including the day of redemption.
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Purchases by Check
Shares may be purchased initially by mailing a completed account
application form together with a check payable to "Colorado Double Tax-Exempt
Bond Fund, Inc." for the amount to be invested in the Fund. The address for
mailing is Colorado Double Tax-Exempt Bond Fund, Inc., P.O. Box 641235,
Cincinnati, Ohio 45264-1235. (If sending by express mail or other service
requiring a street address, use Colorado Double Tax-Exempt Bond Fund, Inc., c/o
Star Bank, N.A., Mutual Fund Custody Department, 425 Walnut Street M.L.
6118, 6th Floor, Cincinnati, Ohio 45202.
Purchases of shares purchased by check are effected when federal funds are
made available to the Fund. Federal funds are normally made available to the
Fund at 9:00 a.m. on the third business day following receipt of the check.
Shares are purchased at the net asset value in effect when the check is received
by the Fund. During the period of time between receipt of the check and the
Fund's collection of federal funds, an investor's money will not be invested and
no dividends will accrue to an investor.
Subsequent purchases may be effected by mailing a check as outlined above.
The shareholder's account number and the portfolio in which he intends to make
the additional purchase should appear on the check. In addition, the shareholder
should enclose the stub portion of the most recent confirmation statement
received from the Fund.
Purchases by Wire
Shares may be purchased by wiring federal funds to the Fund. Prior to an
initial investment, an investor should call toll free the appropriate telephone
number of the Fund listed on the cover page of this Prospectus to obtain a
shareholder account number and instructions. An investor should indicate the
portfolio in which he intends to invest, or if investing in both portfolios, the
investor will receive an account number for each portfolio.
An investor should then instruct his bank to wire transfer the intended
investment amount in federal funds to:
Star Bank, N.A. Cinti/Trust
ABA Account No. 0420-0001-3
DDA Account No. 486464589
Attention: Colorado Double Tax-Exempt Bond Fund, Inc.
Account of (Investor's name(s))
Account No. (The account number assigned by telephone)
If investing in both portfolios, indicate both account numbers and the amount to
be invested in each portfolio.
A completed account application form must be received by the Fund before
any withdrawal or exchange transactions can be handled.
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Subsequent purchases may be effected by wiring federal funds as outlined
above and indicating the investor's name and account number to which they are to
be credited.
No stock certificates will be issued unless a request in writing is made
to the Fund's transfer agent. Instead an account will be established for each
investor and all shares purchased or received, including those obtained through
reinvestment of distributions, will be registered on the books of the Fund and
credited to such account.
The Fund has the right to limit the amount of purchases and to refuse to
sell shares to any person.
No sales charges or commissions are payable in connection with the sale of
the Fund's shares. The expenses incurred in the sale of Fund shares, including
advertising and promotion, are included among the organizational expenses which
will be paid by the Adviser.
Automatic Investment Plan
Under the Fund's Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of Shares automatically on a monthly basis
by electronic funds transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing House, or by
preauthorized checks drawn on the shareholder's bank account. A shareholder may,
of course, terminate the program at any time. The Automatic Investment Plan
Application included with this Prospectus contains the requirements applicable
to this program. In addition, shareholders may obtain more information
concerning this program from their securities broker-dealers or from
distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investors should keep in
mind that such a program does not assure a profit or protect against a loss.
REDEMPTION OF SHARES
The Fund's shares may be redeemed at the net asset value of the applicable
portfolio next determined after receipt of the redemption request in proper form
at the offices of American Data Services, Inc., the Fund's Transfer Agent (the
"Transfer Agent"). A shareholder redeeming between monthly dividend payment
dates receives any accrued but unpaid dividends applicable to the redeemed
shares.
Redemption By Mail
Shares may be redeemed by sending a written redemption request to the
Transfer Agent. The redemption request should state the name of the Fund, the
portfolio name, the name(s) on the redeeming shareholder's account, such
shareholder's account number and the dollar amount or number of shares to be
redeemed. If the shares to be redeemed are represented by certificates issued by
the Fund to the redeeming shareholder, such certificates must be returned with
the redemption request. In all cases, the signature, whether on the written
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<PAGE>
request or on a stock power, must be signed exactly as the shareholder name(s)
appears on the account statement, including fiduciary capacity (e.g. Trustee,
Guardian, etc.) and be guaranteed by an authorized person of a commercial bank
or a member firm of the New York Stock Exchange. The Transfer Agent may require
additional supporting documents for redemptions made by corporations, executors,
administrators, personal representatives, trustees, guardians and other
fiduciaries. A redemption request will not be deemed to have been submitted
until the Transfer Agent receives all required documents in proper form. The
address for redemption requests is Colorado Double Tax-Exempt Bond Fund, Inc.,
c/o American Data Services, Inc., Hauppauge Corporate Center, 150 Motor Parkway,
Suite 109, Hauppauge, New York 11798. Redemption proceeds are normally mailed on
the next business day following receipt of a redemption request in proper form
but in no event later than seven (7) days following receipt of such requests.
Redemption By Telephone
Shares may be redeemed by telephone if the appropriate section on the
account application form has been completed. Shareholders may request
redemptions by telephoning the Transfer Agent at 1-888-235-2215 and arranging
for the proceeds to be wire transferred to a previously designated bank account
if all the following conditions are met:
(a) A telephone redemption authorization included in the account
application form is on file with the Fund before the redemption request is
placed. See the appropriate section on the account application form. This
authorization requires designation of a bank account to which the
redemption payment is to be wired. The proceeds will not be wired to other
than the designated bank account.
(b) If a shareholder did not establish the telephone redemption
privilege or wishes to change the bank account to which the redemption
payment is to be wired, such shareholder must provide the Fund with a
signed and signature guarantee request designating the change.
(c) No shares to be redeemed by telephone may be represented by
certificates.
Redemption is consummated at the asset value in effect at the close of
business of the day the redemption request is received provided the request is
made prior to 12:00 noon Colorado time. In such event, the wire transfer is
ordinarily made the morning of the next business day. If the redemption request
is made after 12:00 noon Colorado time, redemption is consummated at the net
asset value next determined and the wire transfer is ordinarily sent on the
morning of the second business day following the receipt of the redemption
request.
Shares which were purchased by a personal check cannot be redeemed by
telephone until the check has cleared the bank which may take up to fifteen (15)
days. Accordingly, if this restriction is of concern to an investor, purchases
should be made by wire transfer.
If transfer is requested by telephone in accordance with the procedures
described above, payment will be by wire transfer to the bank account designated
on the account application form. The Transfer Agent's charges for each such wire
transfer (currently $9.00) will be deducted from the proceeds of the redemption.
22
<PAGE>
Redemption proceeds are normally wired or mailed on the next business day
following receipt of wired or telephoned instructions, but in no event later
than seven (7) days following receipt of such requests.
Investors designating a savings and loan association as the bank to
receive their telephone redemption proceeds are advised that if the savings and
loan association is not a participant in the Federal Reserve System, redemption
proceeds must be wired to a commercial bank which is a correspondent of the
savings and loan association. It is suggested that investors discuss wire
procedures and costs with their savings and loan association before completing
the telephone redemption authorization on the account application form.
The telephone redemption procedure may be modified or terminated at any
time by the Fund or the Transfer Agent.
If, in the opinion of the Board of Directors of the Fund, conditions exist
which make cash payment undesirable, redemption payments may be made in whole or
in part in securities or other property, valued for this purpose as they are
valued in computing the net asset value of the Fund. Shareholders receiving any
such securities or other property on redemption will incur any costs of sale.
Apart from the charge imposed by the Transfer Agent for effecting a
redemption payment by a bank wire transfer, neither the Fund nor the Transfer
Agent imposes a redemption fee. If a shareholder uses the services of a
broker-dealer to effect redemption of his shares, the broker-dealer may charge a
fee for such services.
EXCHANGE PRIVILEGE
The shares of one portfolio may be exchanged for shares of the other
portfolio without cost. In no event, however, may an investor exchange shares of
one portfolio for shares of the other portfolio, if such exchange would result
in the investor's investment in either portfolio to be less than $10,000. The
privilege to exchange shares enables an investor to switch portfolios when he
believes that such a shift is an appropriate personal investment decision. It is
not intended as a trading vehicle to respond to short-term market fluctuations.
An exchange involves a redemption of all or a portion of shares held in one
portfolio and the investment of the proceeds in shares of the other portfolio.
Accordingly, the exchange privilege is, for federal income tax purposes, a sale
on which a shareholder may realize a taxable gain or loss and a purchase which
establishes a new investment, a new cost basis and a new holding period. In
order to prevent abuse of the exchange privilege to the disadvantage of other
shareholders, the Fund reserves the right to terminate or restrict the exchange
privilege of any shareholder who makes more than two exchanges per year.
23
<PAGE>
Exchange by Telephone
An investor may make telephone exchanges by telephoning the Transfer Agent
at 1-888-235-2215 provided that (a) he has elected the telephone exchange option
on the account application form, (b) the registration on the two accounts will
be identical and (c) the shares to be exchanged are not in certificate form.
Neither the Fund nor the Transfer Agent is responsible for the authenticity of
exchange instructions received by telephone or telegraph. Instructions received
by the Transfer Agent are transacted at the net asset value in effect at the
time the call is received.
Exchange by Mail
An investor may exchange shares by submitting a written request signed
exactly as the shares are registered and accompanied by the certificate(s), if
any, evidencing such shares. The request must be addressed to the Transfer Agent
and should include specific instructions for the redemption and purchase of
shares. These instructions must include the identity of the existing account
(the Fund's name, portfolio name, account name and account number) and specify
the number of shares to be exchanged. Unless otherwise specified, the new
account will be established with the same registration, telephone option(s) and
dividend option as the present account. If the new account is to be different in
any respect, the exchange request must contain a signature guarantee described
under redemption procedures.
The exchange privilege may be modified or discontinued at any time.
DISTRIBUTIONS
The Fund declares dividends of net investment income daily. Dividends are
paid to shareholders in dividends of additional shares on the 15th day of each
month. If the 15th day of a month falls on a weekend or holiday on which the New
York Stock Exchange is closed, the dividend will be distributed on the next
succeeding business day. Payments vary in amount depending on income received
from portfolio securities and expenses of operation.
Shares will begin earning dividends on the day after which the Fund
receives payment and shares are issued. Shares or cash continue to earn
dividends through the date they are redeemed or delivered subsequent to
reinstatement.
Unless you elect by written notice to the Adviser, at least ten (10)
business days prior to the dividend Payable Date, your dividends and gain
distributions, if any, will be made in additional shares at net asset value. If
you desire to elect a different option, you may choose to receive dividends in
cash and any gain distributions in shares or receive both dividends and any gain
distributions in cash. (See Item 4 on the General Authorization Form.)
The Fund will distribute no later than December 31, sufficient capital
gains net income determined as of October 31 of each calendar year to avoid the
application of the 4% excise tax imposed pursuant to the Code.
24
<PAGE>
TRANSFER AND DIVIDEND DISBURSING AGENT,
COUNSEL AND AUDITORS
American Data Services, Inc. acts as transfer agent and dividend
disbursing agent for the Fund. The Transfer Agent has no part in determining
the investment policies of the Fund or portfolio securities to be purchased
or sold by the Fund.
Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202, acts as
counsel to the Fund and has rendered its opinion in connection with the shares
offered by this prospectus.
Baird, Kurtz & Dobson 1700 Lincoln Street, Suite 3400, Denver Colorado
80203, has been selected as auditor for the Fund.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on
August 29, 1996. The Fund is authorized to issue 100,000,000 shares of capital
stock, par value of $.001 per share, of which 40,000,000 shares are initially
authorized as Class A Shares which constitute the Short-Intermediate Portfolio
and 20,000,000 shares are initially authorized as Class B Shares which
constitute the Income Portfolio. Shares of each portfolio have equal voting
rights and no preference as to conversion, exchange, retirement or any other
feature exists. Each share has one vote and any vote which affects the holders
of either portfolio (other than a vote for the election of directors or
selection of auditors) shall require the approval of a majority of the shares of
the affected portfolio. Each share, when issued and paid for in accordance with
the terms of offering, will be fully paid and non-assessable. Shares of the
Fund's stock may be redeemed by shareholders at net asset value. Shares have no
preemptive, subscription or conversion rights and are freely transferable.
Fund shares do not have cumulative voting rights, which means the holders
of more than 50% of the shares voting for the election of directors can elect
100% of the directors if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any directors.
The Board of Directors is authorized to assign any of the 40,000,000
unassigned shares of the Fund to a portfolio. Additional portfolios may be
offered in the future but such additional offerings would not affect the
interests of current shareholders in the existing portfolios.
The Transfer Agent maintains a record of each shareholder's ownership.
Shareholders will receive from the Transfer Agent confirmations, as well as
monthly statements of account which will show their holdings. In the interests
of economy and convenience, certificates representing the Fund's shares will not
be physically issued except upon the shareholder's specific written request to
the Transfer Agent.
The Fund sends to each of its shareholders a semiannual report and an
audited annual report each of which includes a list of the investment securities
held by the Fund. Shareholder inquiries should be made by writing the Fund at
its address set forth on the cover page of this Prospectus or by telephoning the
Fund at the telephone numbers also set forth on the cover page of this
Prospectus.
25
<PAGE>
No person has been authorized to give any information or to make any
representations other than those which may be contained in this Prospectus and
in the Fund's official sales literature made in connection with the offering of
the Fund's shares, and if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund.
This Prospectus does not constitute an offer in any State in which, or to any
person to whom, such offer may not lawfully be made.
26
<PAGE>
No person has been authorized to give
any information or to make any
representations other than those
contained in this Prospectus and, if
given or made, such information or
representations must not be relied
upon. This Prospectus does not
constitute an offer to sell or a
solicitation of an offer to buy any
of the securities offered hereby, nor
an offer of shares in any state or COLORADO DOUBLE
jurisdiction in which, or to any TAX-EXEMPT BOND FUND, INC.
person to whom, such offer would be
unlawful. The delivery of this
Prospectus at any time does not imply
that the information contained herein
is correct as of any time subsequent
to its date; however, if any material
change occurs while this Prospectus
is required by law to be delivered,
this Prospectus will be amended or
supplemented accordingly.
-----------------
TABLE OF CONTENTS
-----------------
Page
----
EXPENSE TABLE SHORT-INTERMEDIATE
AND INCOME PORTFOLIOS 1
DESCRIPTION OF THE FUND 4
MANAGEMENT OF THE FUND 11
TAXATION OF THE FUND AND ITS
SHAREHOLDERS 14
NET ASSET VALUE PER SHARE 16
MANAGEMENT'S DISCUSSION OF FUND
PERFORMANCE 17
PURCHASE OF SHARES 19 --------------
REDEMPTION OF SHARES 21 PROSPECTUS
EXCHANGE PRIVILEGE 23 --------------
DISTRIBUTIONS 24
TRANSFER AND DIVIDEND DISBURSING
AGENT, COUNSEL AND AUDITORS 25
ADDITIONAL INFORMATION 25
June 27, 1998
<PAGE>
DATED APRIL 30, 1998
STATEMENT OF ADDITIONAL INFORMATION
COLORADO DOUBLE TAX-EXEMPT BOND FUND, INC.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated April 30, 1998 (the
"Prospectus") of Colorado Double Tax-Exempt Bond Fund, Inc. (the "Fund"). This
Statement of Additional Information is not itself a prospectus and should be
read only in conjunction with the Prospectus. Copies of the Fund's Prospectus
may be obtained by writing the Fund at 600 17th Street, 2610 S. Tower, Denver,
Colorado 80202, or calling the Fund at either 1-800-279-4426 (statewide) or
1-303-623-7500 (from the Denver area).
STATEMENT OF ADDITIONAL INFORMATION
---------------------------------
TABLE OF CONTENTS
---------------------------------
Page
----
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 2
CALCULATION OF PERFORMANCE DATA 10
MANAGEMENT OF THE FUND 13
ADVISORY AGREEMENT AND EXPENSES 15
PURCHASE OF SHARES 16
REDEMPTION OF SHARES 18
EXCHANGE PRIVILEGE 20
DISTRIBUTIONS 21
ACCOUNTING, ADMINISTRATIVE AND TRANSFER AGENT 22
CUSTODIAN, LEGAL COUNSEL AND AUDITORS 22
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS 23
APPENDIX A A-1
1
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following discussion supplements the description of the Fund's
investment objectives and management policies set forth in the Prospectus.
The Fund purchases primarily Colorado municipal securities which it
believes are attractive and competitive in terms of quality, maturity and yield.
Even though any purchase obviously appears totally suitable at the time of
purchase, the dynamics of the municipal bond market in response to changes in
general economic and political conditions, interest rate and inflationary
expectations, and supply and demand considerations require continuous
reevaluation of each investment relative to how return, quality and
marketability might be improved, within the fundamental and management policies
established for each portfolio.
The Fund believes that by offering two portfolios, it can achieve a more
precise objective for an investor than a single portfolio attempting to achieve
multiple objectives. The Fund offers a Short-Intermediate Portfolio which
restricts its weighted average maturity to no more than seven years, and an
Income Portfolio which is expected to have a weighted average maturity of more
than seven years. Each portfolio differs from the other primarily in the
maturity of its holdings and consequently in the yield levels and principal
volatility which might be expected from such maturity differentials. The
Short-Intermediate Portfolio generally provides a lower yield than the Income
Portfolio; but, in turn, generally provides greater principal stability than the
Income Portfolio.
It is a nonfundamental policy of the Fund that, under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in tax-exempt
bonds. The balance of its total assets will be invested in other tax-exempt
securities of the State of Colorado, its political subdivisions, municipalities
and public authorities, the interest on which is exempt from federal income
taxes and from Colorado personal income taxes.
Under normal market conditions, the Fund will attempt to invest 100% and,
as a matter of fundamental policy, will invest at least 80% of its total assets
in each portfolio in Colorado municipal securities. The Fund will invest only in
securities which at the time of purchase have one of the four highest ratings of
Moody's Investor Service, Inc. ("Moody's) (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A or BBB), or Fitch IBCA, Inc. ("Fitch") (AAA, AA,
A and BBB), or in securities which are not rated, provided that, in the opinion
of the Fund's investment adviser (the "Adviser"), such securities are comparable
in quality to those within the four highest ratings of Moody's, S&P or Fitch.
These securities are considered to be "investment grade" securities, although
bonds rated in the fourth highest ratings level (Baa by Moody's and BBB by S&P
and Fitch) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and as
having some speculative characteristics. Securities on which the interest is
treated as an item of tax preference for purposes of the alternative minimum tax
will not be counted toward the 80% policy of the Fund. In the event the rating
of an issue held in the Fund's portfolio is lowered by the rating service, such
change will be considered by the Fund in its evaluation of the overall
2
<PAGE>
investments of the security, but such change will not necessarily result in an
automatic sale of the security. For a description of municipal securities
ratings see "Appendix A_Description of Municipal Securities Ratings" attached
hereto.
Portfolio Turnover
To the extent that bond trading and portfolio turnover serve shareholders'
objectives by improving return, quality and marketability, such active
investment management is not only pursued but in the opinion of the Adviser is
required.
At all times, sales of investment positions, involving reinvestment of
proceeds, must either demonstrate (a) a mathematical certitude, within quality
and maturity requisites, of improved investment results for the Fund or (b) a
very apparent improvement in liquidity and marketability as perceived under any
prudent investment criteria. Since all sales give rise to realized capital gains
or losses for the Fund and since all sales, repurchases and trades result in the
payment of commissions or markups and markdowns, all such transactions are
reviewed by the Board of Directors on a quarterly basis in terms of investment
benefits to the Fund and its shareholders recognizing prevailing market
conditions and considerations.
Portfolio turnover is the lesser of purchases or sales of portfolio
securities for the year, divided by the monthly average value of the portfolio
securities. While it is impossible to determine with any accuracy the portfolio
turnover rate for each portfolio, it is expected that turnover will vary
considerably from period to period depending on market conditions, but generally
should not exceed 100% per annum. The rate of turnover will not be a limiting
factor whenever the Adviser deems it advisable to sell or purchase securities.
As discussed above, all portfolio transactions involving reinvestment must
demonstrate quantifiable benefits to the Fund and its shareholders to even
occur.
Colorado Municipal Securities
As used in this statement of additional information, the term, "Colorado
municipal securities," refers to debt obligations issued by the State of
Colorado, its counties, municipalities, authorities and political subdivisions
for the purpose of obtaining funds for various public purposes. The interest on
such obligations is, in the opinion of bond counsel to the issuers, exempt from
federal and Colorado State income taxes.
Municipal obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source, but not from the general taxing power. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues.
3
<PAGE>
In addition, certain types of "industrial development bonds" issued by or
on behalf of public authorities to obtain funds for privately operated
facilities are included in the definition of Colorado municipal securities,
provided that the interest paid thereon is exempt from Federal and Colorado
State income taxes. Tax-exempt industrial development bonds do not generally
receive a pledge of the credit of the issuing municipality.
There are also a variety of hybrid and special types of municipal
securities that have characteristics of both general obligation and revenue
bonds.
Municipal notes are short-term obligations issued to obtain temporary funds
for states, cities, municipalities and municipal agencies. These notes include
tax, revenue and bond anticipation notes that provide temporary funds until the
anticipated taxes, revenues or bond proceeds, respectively, are received by the
issuer. Other municipal notes include construction loan notes and short-term
discount notes. Project notes, issued by a state or local housing authority, are
secured by the full faith and credit of the United States. Municipal commercial
paper consists of very short-term negotiable notes, which provide seasonal
working capital needs or interim construction financing. The commercial paper is
paid from general revenues or is refinanced with long-term debt.
Yields of municipal securities depend upon a number of factors, including
economic and money and capital market conditions, the volume of municipal
securities available, conditions within the municipal securities market, and the
maturity, rating, and size of individual offerings. Market values of municipal
securities will vary inversely in relation to their yields. The magnitude of
changes in market values in response to changes in market rates of interest
typically varies in proportion to the maturity of the obligation.
Bond Put Programs and Tender Option Programs
The Fund may invest in bond put programs. Under such programs, long-term,
low coupon bonds are purchased with a put option that gives the purchaser the
right to sell the bonds back to the seller at a specified price on a specified
date significantly prior to the stated maturity of the bonds. Usually, but not
necessarily, the put option is exercisable three to five years from the date of
the offering of a program. Sellers of bond put programs usually are large
institutional holders of low coupon bonds bought prior to 1980 who believe they
can use the proceeds from such sales more advantageously by investing in taxable
securities. All bonds purchased as part of bond put programs are required to
satisfy the same quality standards of the Fund applicable to other bond
purchases. Additionally, the obligation of the seller to purchase the bond upon
exercise of the put option must be supported by a bank letter of credit. In the
opinion of the Adviser, the marketability and liquidity of such bonds and their
accompanying put options is the same as other bonds held by the Fund.
The Fund may also invest in tender option programs which give the purchaser
the option to tender the bonds purchased to the seller or issuer at face amount.
The bonds may be tendered after the expiration of a specified holding period
usually ranging from one to five years ("initial tender option date").
4
<PAGE>
Subsequent to the initial tender option date, the interest rate is ordinarily
adjusted semiannually or annually to the then current market level for
corresponding short-term bonds. Under tender option programs, the purchaser has
a choice of tendering its bonds on any semiannual or annual readjustment date,
continuing to maintain its position or selling the bonds and the related tender
option in the open market between the semiannual and annual readjustment dates.
In the case of tender option programs, the earliest date that the tender option
is exercisable is considered to be the maturity date. If the bonds are not
tendered on the initial tender option date or on any subsequent readjustment
date, the next readjustment date is considered the maturity date. There is no
limitation on the aggregate principal amount of bonds associated with bond put
programs or tender option programs which may be purchased in either portfolio
although it is not anticipated that either program will exceed 20% of the assets
of a portfolio.
In the case of either bond put programs or tender option programs involving
a seller other than the issuer, the Fund may only purchase programs where the
put or tender option obligations of the seller are supported by bank letters of
credit which additionally provide that funds will be available to repurchase the
bonds when the put or tender options are exercised. If the seller is a bank, the
letter of credit is required to be issued by another bank.
Variable Rate Demand Instruments
Variable rate demand instruments are tax-exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid on the instrument
according to changes in interest rates generally. These instruments permit the
Fund to demand payment of the unpaid principal balance plus accrued interest
upon a specified number of days' notice to the issuer. The demand feature may be
backed by a bank letter of credit or guarantee issued with respect to such
instrument. The Fund intends to exercise the demand only (a) upon a default
under the terms of the municipal obligation, (b) as needed to provide liquidity
to the Fund, or (c) to maintain a high-quality investment portfolio. The issuer
of a variable rate demand instrument may have a corresponding right to prepay in
its discretion the outstanding principal of the instrument plus accrued interest
upon notice comparable to that required for the holder to demand payment.
The variable rate demand instruments that the Fund may purchase are payable
on demand on not more than seven (7) days' notice. The terms of the instruments
provide that interest rates are adjustable at intervals ranging from daily up to
six months, and the adjustments are based upon the prime rate of a bank or other
appropriate interest rate adjustment index as provided in the respective
instruments.
When-Issued Securities
Municipal securities may be purchased or sold on a delayed-delivery basis
or on a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, in order to secure what is considered to be an advantageous price and
yield to the Fund. No payment is made until delivery is due, often a month or
5
<PAGE>
more after the purchase. When the Fund engages in when-issued and
delayed-delivery transactions, certain risks are involved. The Fund relies on
the buyer or seller, as the case may be, to consummate the transaction. Failure
of the buyer or seller to do so may result in the Fund missing the opportunity
of obtaining a price considered to be advantageous. The securities are subject
to market fluctuations and no interest accrues to the purchaser during this
period. At the time the Fund makes the commitment to purchase municipal
securities on a delayed-delivery basis or a when-issued basis, it will record
the transaction and reflect the value of the municipal securities in determining
the net asset value of the appropriate portfolio. A segregated account for the
Fund consisting of cash or high-grade securities equal to the amount of the
when-issued commitments will be established with the Fund's custodian. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market. If the market value of such
securities declines, additional cash or securities will be placed in the account
on a daily basis so that the market value of the account will equal the amount
of such commitments by the Fund. There is no restriction on the amount of
when-issued securities which may be purchased by either portfolio.
Certificates of Participation
Also included within the general category of Colorado municipal securities
are participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriative" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations, if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets. The Fund may, however, invest without
regard to such limitation in lease obligations which the Adviser, pursuant to
guidelines which have been adopted by the Board of Directors and subject to the
supervision of the Board of Directors, determines to be liquid. The Adviser will
deem lease obligations liquid if they are publicly offered and have received an
investment grade rating of Aaa, Aa, A or Baa or better by Moody's or AAA, AA, A,
BBB or better by S&P or Fitch's.
6
<PAGE>
Repurchase Agreements
The Fund may invest in repurchase agreements. A repurchase agreement
involves a sale of securities to the Fund, with the concurrent agreement of the
seller (a member bank of the Federal Reserve system or a securities
broker-dealer which the Adviser believes to be financially sound) to repurchase
the securities at the same price plus an amount equal to an agreed upon interest
rate, within a specified time, usually less than one week, but, on occasion, at
a later time. The value of the underlying securities will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. The Fund will make payment for such securities only upon
physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent for the Fund. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses,
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights. It is expected that repurchase agreements
will give rise to income which will not qualify as tax-exempt income when
distributed by the Fund.
Standby Commitments
Subject to the receipt of any required regulatory authorization, the Fund
may acquire standby commitments for either portfolio which will enable such
portfolio to improve its liquidity by making available same day settlements on
sales. A standby commitment is a right acquired by the Fund, when it purchases a
municipal obligation from a broker, dealer or other financial institution
("seller"), to sell up to the same principal amount of such securities back to
the seller, at the Fund's option, at a specific price. Standby commitments are
also known as "puts." The Fund's investment policies permit the acquisition of
standby commitments solely to facilitate portfolio liquidity. The exercise by
the Fund of a standby commitment is subject to the ability of the seller to
fulfill its contractual commitment.
Standby commitments acquired by the Fund for a portfolio will have the
following features: (a) they will be in writing and will be physically held by
the Fund's custodian; (b) the Fund's rights to exercise them will be
unconditional and unqualified; (c) they will be entered into only with sellers
which in the Adviser's opinion present a minimal risk of default; (d) although
standby commitments will not be transferable, municipal obligations purchased
subject to such commitments may be sold to a third party at any time, even
though the commitment is outstanding; and (e) their exercise price will be (i)
the Fund's acquisition cost, excluding the cost, if any, of the standby
commitment, of the municipal obligations which are subject to the commitment
(excluding any accrued interest which the Fund may have paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date.
7
<PAGE>
The Fund expects that standby commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for standby commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
paid by the Fund in either manner for outstanding standby commitments will not
exceed 1/2 of 1% of the value of the total assets of the affected portfolio
calculated immediately after any standby commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential benefit
of a standby commitment. Therefore, it is expected that the Adviser will
determine that standby commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the standby commitment is less than
the exercise price of the standby commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held.
The Fund understands that the Internal Revenue Service has issued a revenue
ruling to the effect that a registered investment company will be the owner of
municipal obligations acquired subject to a put option and that interest on the
obligations will be tax-exempt to the Fund. There is, however, no assurance that
standby commitments will be available to the Fund, and the Fund has not assumed
that such commitments would continue to be available under all market
conditions.
Investment Restrictions
The Fund has adopted certain investment restrictions which cannot be
changed without approval by the holders of a majority of the outstanding voting
shares of each affected portfolio. As defined in the Investment Company Act of
1940 (the "1940 Act"), this means the lesser of the vote of (a) 67% of the
portfolio's shares at a meeting where more than 50% of the outstanding shares
are present in person or by proxy or (b) more than 50% of the portfolio's
shares.
Each portfolio may not:
1. Purchase securities or make investments other than in accordance with
its investment objective and policies.
2. Purchase securities if as a result of such purchase more than 25% of the
portfolio's total assets would be invested in any one industry. For purposes of
this limitation, there is no limitation on the purchase of securities issued by
state or municipal governments or their political subdivisions or securities
issued, guaranteed or secured by the U.S. government, its agencies or
instrumentalities (including refunded municipal obligations fully secured by
direct obligations of the U.S. government or its agencies or instrumentalities
held in irrevocable trust). Industrial revenue bonds ultimately payable by
companies within the same industry are treated as if they were issued by issuers
in the same industry. Neither portfolio may enter into a repurchase agreement if
more than 10% of assets would be subject to repurchase agreements maturing in
more than seven (7) days.
8
<PAGE>
3. Purchase the securities of any issue if as a result more than 5% of the
portfolio's assets would be invested in the securities of such issuer provided
that there is no limitation on the purchase of securities issued, guaranteed or
secured by the U.S. government, its agencies or instrumentalities (including
refunded municipal obligations fully secured by direct obligations of the U.S.
government, its agencies or instrumentalities held in irrevocable trust). This
restriction does not apply with respect to 50% of the portfolio's total assets.
For purposes of this limitation, the Fund will regard the entity which has the
primary responsibility for the payment of interest and principal as the issuer.
4. Invest more than 5% of the portfolio's total assets in industrial
development bonds sponsored by companies which with their predecessors have less
than three years continuous operation.
5. Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies).
6. Borrow money or enter into reverse repurchase agreements except the Fund
may borrow money from banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount up to 10% of the
value of the portfolio's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time the
borrowing is made. Whenever borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments.
7. Make short sales of securities or purchase securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions.
8. Write, purchase or sell puts, calls or combinations thereof, although
the Fund may purchase municipal securities comprising bond put programs and
tender option programs as well as municipal securities subject to standby
commitments, variable rate demand notes or repurchase agreements in accordance
with its investment objective and policies provided that neither municipal
securities subject to standby commitments nor variable rate demand notes
constitute more than 5% of the assets of either portfolio.
9. Purchase or retain the securities of any issuer if any of the officers
or directors of the Fund or its investment adviser owns beneficially more than
1/2 of 1% of the securities of such issuer and together own more than 5% of the
securities of such issuer.
10. Invest more than 15% of the portfolio's total assets in non-marketable
securities, including securities restricted as to disposition under the federal
securities laws, repurchase agreements maturing in more than seven (7) days and
securities which are not otherwise readily marketable.
9
<PAGE>
11. Invest for the purpose of exercising control or management of another
issuer.
12. Invest in commodities or commodity futures contracts or in real estate
except that the Fund may invest in municipal securities secured by real estate
or interests therein.
13. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in municipal securities of issuers
which invest in or sponsor such programs.
14. Invest more than 10% of its total assets in securities of other
investment companies, except in connection with a merger, consolidation,
reorganization or acquisition of assets.
15. Underwrite securities issued by others except to the extent the Fund
may be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit resulting
from a change in values or net assets will not be considered a violation.
Section 18(f)(1) of the 1940 Act prohibits an open-end investment company
from borrowing from a bank unless there is an asset coverage of 300% for all
borrowings. Under Rule 18f-1 of the 1940 Act, an open-end investment company may
elect to commit itself to pay in cash all requests for redemption subject to
certain limitations specified in said Rule. If an investment company makes such
an election, the investment company is exempt from the requirements of Section
18(f)(1) to the extent necessary to enable it to effectuate cash redemptions.
The Fund has elected to commit itself to pay all cash in redeeming shares and,
therefore, is not subject to Section 18(f)(1). The restriction set forth in
paragraph 6 above further restricts borrowings.
CALCULATION OF PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield, tax equivalent yield,
distribution yield and total return figures.
Yield
Yield reflects the income per share deemed earned by the Fund's portfolio
investments. Yield is determined by dividing the net investment income per share
deemed earned during the preceding 30-day period by the maximum offering price
10
<PAGE>
per share on the last day of the period and annualizing the result according to
the following formula:
a-b 6
YIELD = 2 [ (--- + 1) - 1]
cd
Where: a = interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
To calculate interest earned (for the purpose of "a" above) the Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund
based on the market value of the obligation at the close of business on the
last business day of each month, or with respect to obligations purchased
during the month, the purchase price.
(b) Divide the yield to maturity by 360 and multiply the quotient by
the market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the portfolio.
The maturity of an obligation with a call provision is the next call date
on which the obligation reasonably may be expected to be called or, if none, the
maturity date.
In the case of an obligation issued without original issue discount and
having a current market discount, the coupon rate of interest is used in lieu of
the yield to maturity. In the case of an obligation with original issue
discount, if the discount based on the current market value exceeds the
then-remaining portion of original issue discount (market discount), the yield
to maturity is the imputed rate based on the original issue discount
calculation. In the case of an obligation with original issue discount, if the
discount based on the current market value is less than the then-remaining
portion of original issue discount (market premium), the yield to maturity is
based upon market value.
Tax Equivalent Yield
Tax equivalent yield shows the yield from a taxable investment which would
produce an after-tax yield equal to that of a fund that invests in tax-exempt
securities. It is computed by dividing the tax-exempt portion of the Fund's
yield (as calculated above) by one minus a stated income tax rate and adding the
product to the portion (if any) of the Fund's yield that is not tax-exempt.
11
<PAGE>
The following table shows the rate of return that an individual investor
would need to receive from taxable investment to equal various possible rates of
return from the Fund. There can be no assurance that the Fund will achieve any
particular tax-exempt yield.
Taxable Equivalent Yield
Taxable Income Hypothetical Tax Free Yield
- -------------------------------------------- ---------------------------------
4.50% 4.75% 5.00% 5.50%
------- ------- ------- ---------
Single Person Joint Return Tax Rate Taxable Equivalent Yield
- ------------- ------------ -------- ---------------------------------
$24,651-$59,750 $41,201-$99,600 31.60% 6.58% 6.94% 7.31% 8.04%
$59,751-$124,650 $99,601-$151,750 34.45 6.86 7.25 7.63 8.39
$124,651-$271,050 $151,751-$271,050 39.20 7.40 7.81 8.22 9.05
over $271,050 over $271,050 42.56 7.84 8.28 8.71 9.59
Distribution Yield
Distribution yield is a measure of cash flow, which includes the interest
paid out in the time period, capital gains distributions and return of
principal. Distribution yield does not necessarily reflect what the fund has
earned in the time period, and does not accurately measure the lifetime
performance of an investment.
Distribution yield is calculated by taking the net investment income for
the day (based on a 365 day year), dividing the current number of shares
outstanding (shareholders) to get a daily factor which is then divided by the
current net asset value and then annualized. The following table provides an
example of how the distribution rate on November 12, 1998 was calculated.
Representative Calculation of Distribution Rate for November 12, 1998
<TABLE>
<S> <C>
Use 1 Day Amounts Only, even on Monday's
<S> <C> <C> <C>
Total Interest 268.16
- - Star Interest (3.66)
---------- Total Interest 268.16
264.50 Star Interest 3.66
Discount Rate 33.15
Income Year (*365) 95,220.00 Premium 7.20
New Daily Income 260.88 Expenses 38.83
Shares 203,191.58
+ Star Interest 3.66 NAV 10.27
+ Discount Rate 33.15
- - Premium (7.20)
- - Expenses (38.83)
----------
= TOTAL for 365 Days 251.66
/ Shares 203,191.58
/ NAV 10.27
----------
= Adjusted Rate .000120596
= Distribution Rate (*365 *100) 4.4017
</TABLE>
Total Return
Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into account
the imposition of the sales charge and other fees and assuming the reinvestment
of all dividends and distributions. Cumulative total return reflects the Fund's
performance over a stated period of time and is computed as follows:
ERV-P
----- = Total Return
P
Where: ERV = ending redeemable value of the hypothetical $1,000
payment made at the beginning of the base period (reduced by the
maximum sales charge) assuming reinvestment of all dividends and
distributions.
P = a hypothetical initial payment of $1,000.
12
<PAGE>
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period, and is computed according
to the following formula:
n
P(1+T) =ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years in the base period.
ERV = ending redeemable value of the hypothetical $1,000 payment
made at the beginning of the base period (reduced by the maximum
sales charge) assuming reinvestment of all dividends and
distributions.
All performance figures are based on historical results and are not
intended to indicate future performance.
MANAGEMENT OF THE FUND
Directors and Officers
The names and business addresses of the directors and officers of the Fund
together with information as to their principal business occupations during at
least the past five years are shown below. Each director who is an "interested
person" of the Fund, as defined in the 1940 Act, is indicated by an asterisk.
Principal Occupation
Name, Address and Age Positions with the Fund During Past 5 Years
- --------------------- ----------------------- --------------------
James M. Coughlin (62) Director Managing Director of
621 17th Street Coughlin & Company, an
Suite 1900 investment banking firm,
Denver, Colorado 80202 since 1972.
Alfred A. Wiesner (69) Director President and CEO of
1600 Stout Street Anchor Bay, a private
Suite 750 investor in oil and gas,
Denver, CO 80202 since 1985.
Calvin F. Isaak* (67) President, Chairman Chairman of the Board of
600 17th Street and Director Directors and President of
2610 South Tower Isaak Bond Investments,
Denver, Colorado 80293 Inc., a registered
broker-dealer, since 1977.
David J. Isaak* (37) Vice President, Manager of Municipal Bond
600 17th Street Treasurer and Director Trading Department of
2610 South Tower Isaak Bond Investments,
Denver, Colorado 80293 Inc. since 1984.
Philip J. Konsella* (64) Director Real estate broker for and
1519 Genesee Vista Road owner of Comark Realty,
Golden, Colorado 80401 Inc. prior to 1992.
13
<PAGE>
Name, Address and Age Positions with the Fund During Past 5 Years
- --------------------- ----------------------- --------------------
Stan Voth* (52) Secretary Chief Financial Officer of
600 17th Street Isaak Bond Investments,
2610 South Tower Inc. since 1987.
Denver, Colorado 80293
Directors of the Fund who are not "interested persons" of the Fund are paid
$500 per meeting by the Fund, which is subject to adjustment annually, and are
reimbursed for expenses incurred in attending meetings of the Board of
Directors.
Calvin F. Isaak, the President and a director of the Fund, is also the
majority shareholder and the President of Isaak Bond Investments, Inc., the
Fund's principal underwriter and a distributor of the Fund's shares (the
"Underwriter"). Mr. Isaak is also the Chairman of the Board of Directors and
President of Funds Management Corporation, the Fund's investment adviser. Mr.
Calvin F. Isaak and Mr. David Isaak are father and son.
Mr. Philip J. Konsella, a director of the Fund, is a director of the
Underwriter. Mr. Voth, Secretary of the Fund, is also the Chief Financial
Officer of the Underwriter.
The Fund's investment adviser is Funds Management Corporation (the
"Adviser"), a Colorado corporation formed on April 7, 1988. The Adviser has
registered with the Securities and Exchange Commission as an Adviser under the
Investment Advisers Act of 1940.
The Adviser will attempt to meet the Fund's investment objectives by
providing portfolio management and credit analysis services pursuant to the
Prospectus and the Advisory Agreement. There is no assurance that the Adviser
can meet the Fund's investment objectives. The Adviser anticipates that the Fund
will not have a portfolio turnover rate in excess of 100% per year in an attempt
to meet these objectives.
The Fund is a Maryland Corporation. Its Board of Directors will supervise
the activities of the Fund and review the Fund's service contracts.
The Fund is not required to hold annual shareholder meetings. However,
special meetings may be called by the Board of Directors or upon the written
request of shareholders owning at least one-tenth of the shares entitled to
vote, for such purposes as electing or removing directors, changing fundamental
investment policies, or approving a new or amended advisory or management
contract or plan of distribution. Each shareholder receives one vote for each
share held. The Board of Directors has the power to create additional series of
Fund shares.
14
<PAGE>
ADVISORY AGREEMENT AND EXPENSES
Under the Advisory Agreement dated May 28, 1997, between the Fund and the
Adviser, and subject to the control of the Board of Directors, the Adviser
manages the assets of the Fund, including making purchases and sales of
portfolio securities consistent with the Fund's investment objectives and
policies. In addition, the Adviser administers the Fund's daily business affairs
such as providing accurate accounting records, computing accrued income and
expenses of the Fund, computing the daily net asset value of the Fund, assuring
proper dividend disbursements, proper financial information to investors, and
notices of all shareholders', meetings, and providing sufficient office space,
storage, telephone services, and personnel to accomplish these responsibilities.
The Board of Directors of the Fund approved the Advisory Agreement, by unanimous
vote, on December 16, 1996 in the manner required by the 1940 Act. The sole
shareholder of the Fund approved the Advisory Agreement on May 28, 1997. The
Adviser pays all of the compensation of directors of the Fund who are employees
of the Adviser and of the officers and employees of the Fund. The Fund pays all
of the compensation of directors who are not employees of the Adviser. The
Advisory Agreement also provides that the Adviser will not be liable to the Fund
for any error of judgment or mistake of law, or for any loss arising out of any
investment, or for any act or omission in performing its duties under the
Agreement, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties under the Advisory Agreement.
In exchange for its services, the Adviser is entitled to receive a
management fee from the Fund, calculated daily and payable monthly, equal to
0.23% of the average daily net assets on an annual basis.
The Fund is responsible for paying all its expenses other than those
assumed by the Adviser, including brokerage commissions, if any, fees and
expenses of independent attorneys and auditors, taxes and governmental fees,
including fees and expenses of qualifying the Fund and its shares under federal
and state securities laws, and expenses of repurchase or redemption of shares,
expenses of printing and distributing reports, notices and proxy materials to
shareholders, expenses of printing and filing reports and other documents with
governmental agencies, expenses of shareholders' meetings, expenses of corporate
data processing and related services, shareholder account services, fees and
disbursements of appraisers, transfer agents and custodians, expenses of
disbursing dividends and distributions, fees and expense of trustees of the Fund
not employed by the Adviser or its affiliates, insurance premiums and
extraordinary expenses such as litigation expenses.
The Advisory Agreement will continue in effect from year to year if such
continuance is approved in the manner required by the 1940 Act (i.e., (1) by a
vote of a majority of the Board of Trustees or of the outstanding voting
securities of the Fund and (2) by a vote of a majority of the trustees who are
not parties to the Advisory Agreement or interested persons of any such party),
and if the Adviser shall not have notified the Fund at least sixty (60) days
prior to the anniversary date of the previous continuance that it does not
desire such continuance. The Advisory Agreement may be terminated by the Fund,
without penalty, on sixty (60) days' written notice to the Adviser and will
terminate automatically in the event of its assignment.
15
<PAGE>
The table below sets forth the advisory fees earned and the advisory fees
actually paid during the last fiscal year of the Fund.
Advisory Fees Earned Advisory Fees Paid
------------------------- ------------------------
Short- Short-
Intermediate Income Intermediate Income
Portfolio Portfolio Portfolio Portfolio
------------ --------- ------------ ---------
1997 $21 $73 $21 $73
PURCHASE OF SHARES
Shares of each portfolio may be purchased by check or by wire transfer of
funds through a bank. The minimum initial investment is $10,000 for each
portfolio selected. Investments may be made in any amount in excess of the
minimum. Subsequent investments may be in any amount for the portfolio selected.
Each portfolio's shares are sold on a continuous basis without a sales charge at
the net asset value in effect at the time a purchase order is processed.
Purchase orders are processed after federal funds are made available to the Fund
as hereafter provided.
Dividends begin on the day federal funds are made available to the Fund and
continue to and including the day of redemption.
Purchases by Check
Shares may be purchased initially by mailing a completed account
application form together with a check payable to "Colorado Double Tax-Exempt
Bond Fund, Inc." for the amount to be invested in the Fund. The address for
mailing is Colorado Double Tax-Exempt Bond Fund, Inc., P.O. Box 641235,
Cincinnati, Ohio 45264-1235. (If sending by express mail or other service
requiring a street address, use Colorado Double Tax-Exempt Bond Fund, Inc., c/o
Star Bank, N.A., Mutual Fund Custody Department, 425 Walnut Street M.L. 6118,
6th Floor, Cincinnati, Ohio 45202.
Purchases of shares purchased by check are effected when federal funds are
made available to the Fund. Federal funds are normally made available to the
Fund at 9:00 a.m. on the third business day following receipt of the check.
Shares are purchased at the net asset value in effect when the check is received
by the Fund. During the period of time between receipt of the check and the
Fund's collection of federal funds, an investor's money will not be invested and
no dividends will accrue to an investor.
16
<PAGE>
Subsequent purchases may be effected by mailing a check as outlined above.
The shareholder's account number and the portfolio in which he intends to make
the additional purchase should appear on the check. In addition, the shareholder
should enclose the stub portion of the most recent confirmation statement
received from the Fund.
Purchases by Wire
Shares may be purchased by wiring federal funds to the Fund. Prior to an
initial investment, an investor should call toll free the appropriate telephone
number of the Fund listed on the cover page of this Prospectus to obtain a
shareholder account number and instructions. An investor should indicate the
portfolio in which he intends to invest, or if investing in both portfolios, he
will receive an account number for each portfolio.
An investor should then instruct his bank to wire transfer the intended
investment amount in federal funds to:
Star Bank, N.A. Cinti/Trust
ABA Account No. 0420-0001-3
DDA Account No. 486464589
Attention: Colorado Double Tax-Exempt Bond Fund, Inc.
Account of (Investor's name(s))
Account No. (The account number assigned by telephone)
If investing in both portfolios, indicate both account numbers and the amount to
be invested in each portfolio.
A completed account application form must be received by the Fund before
any withdrawal or exchange transactions can be handled.
Subsequent purchases may be effected by wiring federal funds as outlined
above and indicating the investor's name and account number to which they are to
be credited.
No stock certificates will be issued unless a request in writing is made to
the Fund's transfer agent. Instead an account will be established for each
investor and all shares purchased or received, including those obtained through
reinvestment of distributions, will be registered on the books of the Fund and
credited to such account.
The Fund has the right to limit the amount of purchases and to refuse to
sell shares to any person.
17
<PAGE>
No sales charges or commissions are payable in connection with the sale of
the Fund's shares. The expenses incurred in the sale of Fund shares, including
advertising and promotion, are included among the organizational expenses which
will be paid by the Adviser.
Automatic Investment Plan
Under the Fund's Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of Shares automatically on a monthly basis
by electronic funds transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing House, or by
preauthorized checks drawn on the shareholder's bank account. A shareholder may,
of course, terminate the program at any time. The Automatic Investment Plan
Application included with this Prospectus contains the requirements applicable
to this program. In addition, shareholders may obtain more information
concerning this program from their securities broker-dealers or from
distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investors should keep in
mind that such a program does not assure a profit or protect against a loss.
REDEMPTION OF SHARES
The Fund's shares may be redeemed at the net asset value of the applicable
portfolio next determined after receipt of the redemption request in proper form
at the offices of the Fund's transfer agent (the "Transfer Agent"), American
Data Services, Inc. A shareholder redeeming between monthly dividend payment
dates receives any accrued but unpaid dividends applicable to the redeemed
shares.
Redemption By Mail
Shares may be redeemed by sending a written redemption request to the
Transfer Agent. The redemption request should state the name of the Fund, the
portfolio name, the name(s) on the redeeming shareholder's account, such
shareholder's account number and the dollar amount or number of shares to be
redeemed. If the shares to be redeemed are represented by certificates issued by
the Fund to the redeeming shareholder, such certificates must be returned with
the redemption request. In all cases, the signature, whether on the written
request or on a stock power, must be signed exactly as the shareholder name(s)
appears on the account statement, including fiduciary capacity (e.g. Trustee,
Guardian, etc.) and be guaranteed by an authorized person of a commercial bank
or a member firm of the New York Stock Exchange. The Transfer Agent may require
additional supporting documents for redemptions made by corporations, executors,
administrators, personal representatives, trustees, guardians and other
fiduciaries. A redemption request will not be deemed to have been submitted
until the Transfer Agent receives all required documents in proper form. The
address for redemption requests is Colorado Double Tax-Exempt Bond Fund, Inc.,
c/o American Data Services, Inc., Hauppauge Corporate Center, 150 Motor Parkway,
Suite 109, Hauppauge, New York 11798. Redemption proceeds are normally mailed on
the next business day following receipt of a redemption request in proper form
but in no event later than seven (7) days following receipt of such requests.
18
<PAGE>
Redemption By Telephone
Shares may be redeemed by telephone if the appropriate section on the
account application form has been completed. Shareholders may request
redemptions by telephoning the Transfer Agent at 1-888-235-2215 and arranging
for the proceeds to be wire transferred to a previously designated bank account
if all the following conditions are met:
(a) A telephone redemption authorization included in the account
application form is on file with the Fund before the redemption request is
placed. See the appropriate section on the account application form. This
authorization requires designation of a bank account to which the
redemption payment is to be wired. The proceeds will not be wired to other
than the designated bank account.
(b) If a shareholder did not establish the telephone redemption
privilege or wishes to change the bank account to which the redemption
payment is to be wired, such shareholder must provide the Fund with a
signed and signature guarantee request designating the change.
(c) No shares to be redeemed by telephone may be represented by
certificates.
Redemption is consummated at the asset value in effect at the close of
business of the day the redemption request is received provided the request is
made prior to 12:00 noon Colorado time. In such event, the wire transfer is
ordinarily made the morning of the next business day. If the redemption request
is made after 12:00 noon Colorado time, redemption is consummated at the net
asset value next determined and the wire transfer is ordinarily sent on the
morning of the second business day following the receipt of the redemption
request.
Shares which were purchased by a personal check cannot be redeemed by
telephone until the check has cleared the bank which may take up to fifteen (15)
days. Accordingly, if this restriction is of concern to an investor, purchases
should be made by wire transfer.
If transfer is requested by telephone in accordance with the procedures
described above, payment will be by wire transfer to the bank account designated
on the account application form. the Transfer Agent's charges for each such wire
transfer (currently $9.00) will be deducted from the proceeds of the redemption.
Redemption proceeds are normally wired or mailed on the next business day
following receipt of wired or telephoned instructions, but in no event later
than seven (7) days following receipt of such requests.
19
<PAGE>
Investors designating a savings and loan association as the bank to receive
their telephone redemption proceeds are advised that if the savings and loan
association is not a participant in the Federal Reserve System, redemption
proceeds must be wired to a commercial bank which is a correspondent of the
savings and loan association. It is suggested that investors discuss wire
procedures and costs with their savings and loan association before completing
the telephone redemption authorization on the account application form.
The telephone redemption procedure may be modified or terminated at any
time by the Fund or the Transfer Agent.
If, in the opinion of the Board of Directors of the Fund, conditions exist
which make cash payment undesirable, redemption payments may be made in whole or
in part in securities or other property, valued for this purpose as they are
valued in computing the net asset value of the Fund. Shareholders receiving any
such securities or other property on redemption will incur any costs of sale.
Apart from the charge imposed by the Transfer Agent for effecting a
redemption payment by a bank wire transfer, neither the Fund nor the Transfer
Agent imposes a redemption fee. If a shareholder uses the services of a
broker-dealer to effect redemption of his shares, the broker-dealer may charge a
fee for such services.
EXCHANGE PRIVILEGE
The shares of one portfolio may be exchanged for shares of the other
portfolio without cost. In no event, however, may an investor exchange shares of
one portfolio for shares of the other portfolio, if such exchange would result
in the investor's investment in either portfolio to be less than $10,000. The
privilege to exchange shares enables an investor to switch portfolios when he
believes that such a shift is an appropriate personal investment decision. It is
not intended as a trading vehicle to respond to short-term market fluctuations.
An exchange involves a redemption of all or a portion of shares held in one
portfolio and the investment of the proceeds in shares of the other portfolio.
Accordingly, the exchange privilege is, for federal income tax purposes, a sale
on which a shareholder may realize a taxable gain or loss and a purchase which
establishes a new investment, a new cost basis and a new holding period. In
order to prevent abuse of the exchange privilege to the disadvantage of other
shareholders, the Fund reserves the right to terminate or restrict the exchange
privilege of any shareholder who makes more than two exchanges per year.
Exchange by Telephone
An investor may make telephone exchanges by telephoning the Transfer Agent
at 1-888-235-2215 provided that (a) he has elected the telephone exchange option
on the account application form, (b) the registration on the two accounts will
be identical and (c) the shares to be exchanged are not in certificate form.
20
<PAGE>
Neither the Fund nor the Transfer Agent is responsible for the authenticity of
exchange instructions received by telephone or telegraph. Instructions received
by the Transfer Agent are transacted at the net asset value in effect at the
time the call is received.
Exchange by Mail
An investor may exchange shares by submitting a written request signed
exactly as the shares are registered and accompanied by the certificate(s), if
any, evidencing such shares. The request must be addressed to the Transfer Agent
and should include specific instructions for the redemption and purchase of
shares. These instructions must include the identity of the existing account
(the Fund's name, portfolio name, account name and account number) and specify
the number of shares to be exchanged. Unless otherwise specified, the new
account will be established with the same registration, telephone option(s) and
dividend option as the present account. If the new account is to be different in
any respect, the exchange request must contain a signature guarantee described
under redemption procedures.
The exchange privilege may be modified or discontinued at any time.
DISTRIBUTIONS
The Fund declares dividends of net investment income daily. Dividends are
paid to shareholders in dividends of additional shares on the 15th day of each
month. If the 15th day of a month falls on a weekend or holiday on which the New
York Stock Exchange is closed, the dividend will be distributed on the next
succeeding business day. Payments vary in amount depending on income received
from portfolio securities and expenses of operation.
Shares will begin earning dividends on the day after which the Fund
receives payment and shares are issued. Shares or cash continue to earn
dividends through the date they are redeemed or delivered subsequent to
reinstatement.
Unless you elect by written notice to the Adviser, at least ten (10)
business days prior to the dividend Payable Date, your dividends and gain
distributions, if any, will be made in additional shares at net asset value. If
you desire to elect a different option, you may choose to receive dividends in
cash and any gain distributions in shares or receive both dividends and any gain
distributions in cash. (See Item 4 on the General Authorization Form.)
The Fund will distribute no later than December 31, sufficient capital
gains net income determined as of October 31 of each calendar year to avoid the
application of the 4% excise tax imposed pursuant to the Internal Revenue Code
of 1986, as amended.
The Underwriter is the general distributor of the shares of the Fund
pursuant to a Distribution Agreement dated May 28, 1997 (the "Distribution
Agreement"). The Distribution Agreement was approved by the Board of Directors
of the Fund, on December 16, 1996 in the manner required by the 1940 Act.
21
<PAGE>
The Underwriter may offer cash or non-cash incentives to dealers in
addition to sales charges in order to promote the sale of shares of the Fund.
Any such cash or non-cash incentives will be in compliance with all applicable
rules and regulations of the National Association of Securities Dealers, Inc.
ACCOUNTING, ADMINISTRATIVE AND TRANSFER AGENT
The Fund entered into a Fund Accounting Service Agreement, an
Administrative Agreement and a Transfer Agency and Service Agreement with
American Data Services, Inc. (the "ADS") to provide, fund accounting and
administrative services and shareholder servicing to the Fund. The services to
be provided under the agreements include processing purchase and redemption
transactions, establishing and maintaining shareholder accounts and records,
disbursing dividends declared by the Fund, day-to-day administration of matters
related to the corporate existence of the Fund (other than rendering investment
advice), maintenance of its records, preparation of reports, supervision of the
Fund's arrangement with its custodian and assistance in the preparation of the
Fund's registration statement under federal and state laws.
As compensation for these services the Fund pays ADS reasonable
out-of-pocket expenses plus fees pursuant to, the Fund Accounting Service
Agreement based on the average net assets of each portfolio, the Administrative
Agreement based on the greater of the average net asset of each portfolio or
1/12th of .05% of the average net assets of each portfolio and the Transfer
Agency and Service Agreement based on a combination of account maintenance
charges and transaction charges. Costs incurred, before the Adviser's
reimbursement of expenses that exceeded .68% of the Fund's average annual net
assets, totaled $2,581 ($1,279 from the Short-Intermediate Portfolio, and $1,302
from the Income Portfolio, respectively) for the period October 28, 1997
(commencement of operations) through December 31, 1997. The agreements provide
for a total monthly minimum fees of $3,000 per portfolio plus expenses and
transactional charges. The agreements provide for discounts to the Fund during
the first twelve months of the Fund's operations or until average daily net
assets exceed specified levels. The Fund is required to maintain a $3,000 per
portfolio deposit with ADS.
CUSTODIAN, LEGAL COUNSEL AND AUDITORS
Star Bank, N.A. is the portfolio securities custodian for the Fund. Their
address is 425 Walnut Street, M.L. 6118, Cincinnati, Ohio 45202. The Custody
Agreement with Star Bank, N.A. provides for fees on a transactional basis plus
out-of-pocket expenses. The minimum monthly fee per portfolio is $400 per month.
Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202, acts as
counsel to the Fund.
Baird, Kurtz & Dobson, independent certified public accountants, are the
auditors of the Fund. Their address is One Norwest Center, 1700 Lincoln Street,
Suite 3400, Denver, Colorado 80203.
22
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
Independent Accountants' Report
To the Shareholders
and
Board of Directors
Colorado Double Tax-
Exempt Bond Fund, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of COLORADO DOUBLE TAX-EXEMPT BOND FUND,
INC. (Company) (comprising, respectively, the Short-Intermediate and Income
Portfolio), as of December 31, 1997 and the related statements of operations,
changes in net assets and financial highlights for the periods indicated
thereon. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit 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 disclosure in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting the COLORADO DOUBLE TAX-EXEMPT
BOND FUND, INC. as of December 31, 1997, the results of their operations, the
changes in their net assets, and the financial highlights for the periods
indicated thereon in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
/s/ Baird, Kurtz & Dobson
Denver, Colorado
February 25, 1998
23
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Schedule of Investments
Short-Intermediate Portfolio
December 31, 1997
Bond Rating
Face Amount Moody's/S&P Market Value
Revenue Bonds 98.02%
--------------------
Hospital 92.66%
$45,000 Pueblo County, Hospital
Facilities, 7.50%, 09/01/01 NR/AAA $47,169
Housing 5.36%
5,000 Arapahoe County, Single Family
Mtg., Zero Coupon, 09/01/10 NR/NR 2,728
-----
Total Revenue Bonds (Cost $49,736) $49,897
======
34 Mutual Funds .06%
-----------------
Star Bank Tax Free Fund (Cost 34
--
$34)
Total Investments (Cost $49,770) 98.08% $49,931
Other Assets in Excess of Liabilities 1.92% 975
---- ---
Net Assets 100.00% $50,906
====== ======
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Schedule of Investments
Income Portfolio
December 31, 1997
Bond Rating
Face Amount Moody's/S&P Market Value
Certificates of Participation
-----------------------------
4.92%
$15,000 El Paso County, School District
38, 6.90%, 12/01/13 (Cost Aaa/AAA $15,774
$15,775)
Revenue Bonds 88.88%
--------------------
Hospitals 8.55%
25,000 Colorado Springs Hospital,
5.70%, 12/15/08 Aaa/AAA 27,384
------
Housing 4.43%
5,000 Adams County, Building Auth.,
Zero Coupon, 08/15/12 NR/AAA 2,406
30,000 Colorado Housing Finance Auth.,
Zero Coupon, 09/01/10 Aa1/NR 11,770
------
14,176
Public Facilities 6.62% ------
20,000 Colorado Health Facs. Auth.,
Lutheran Medical, 7.25%, 10/01/14 A1/A+ 21,200
------
Transportation 48.88%
150,000 Denver City & County Airport,
5.875%, 11/15/16 Aaa/AAA 156,542
-------
Utility 20.40%
25,000 Colorado Springs Utilities,
6.00%, 11/15/18 Aa2/AA 26,421
35,000 Platte River Power Authority,
6.00%, 06/01/18 NR/AAA 38,913
------
65,334
------
Total Revenue Bonds (Cost $280,646) 284,636
-------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Schedule of Investments
Income Portfolio
December 31, 1997
Bond Rating
Face Amount Moody's/S&P Market Value
Mutual Funds 5.83%
18,662 Star Bank Tax Free Fund (Cost 18,662
$18,662) ------
Total Investments (Cost $315,083) 99.63% $319,072
Other Assets in Excess of Liabilities 0.37% 1,178
---- -----
Net Assets 100.00% $320,250
====== =======
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Statement of Assets and Liabilities
December 31, 1997
Short-
Intermediate Income
Portfolio Portfolio
------------ ---------
Assets:
Investments in securities, at value (Cost $49,770
and $315,083, respectively) (Note 6) $49,931 $319,072
Receivable from advisor (Note 3) 1,298 1,200
Service deposit 3,000 3,000
Interest receivable 1,125 2,029
----- -----
Total assets 55,354 325,301
------ -------
Liabilities:
Payable for dividends declared 89 635
Accrued expenses 4,359 4,416
----- -----
Total liabilities 4,448 5,051
----- -----
Net Assets $50,906 $320,250
====== =======
Net Assets Consist of:
Capital stock, $.001 par value; limited shares
authorized; 5,074 and 31,653 shares outstanding,
respectively (Note 5) $ 5 $ 32
Additional paid in capital 50,740 315,931
Undistributed net investment income 0 0
Accumulated undistributed net realized gain from
security transactions 0 298
Net realized appreciation of investments 161 3,989
--- -----
Net Assets $50,906 $320,250
====== =======
Net asset value, redemption and offering price per
share ($50,906/5,074 and $320,250/31,653 shares of
capital stock outstanding, respectively) (Note 5) $10.03 $10.12
===== =====
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Statement of Operations
For the Period April 17, 1997 (Capitalization) to December 31, 1997
Short-
Intermediate Income
Portfolio Portfolio
------------ ---------
Investment Income:
Interest $ 395 $1,814
--- -----
Total income 395 1,814
--- -----
Expenses:
Investment advisory fee (Note 3) 21 73
Distribution fee (Note 4) 22 80
Administrative fee (Note 3) 959 982
Transfer agent fee (Note 3) 320 320
Audit fee 1,971 1,971
Custody fee 1,014 1,014
Directors fees and expenses 750 750
Registration 127 127
Legal fee 1,774 1,774
Other 591 591
--- ---
Total expenses 7,549 7,682
----- -----
Less: Expense reimbursement from advisor (Note 3) (7,489) (7,466)
Net expenses 60 216
-- ---
Net investment income $ 335 $ 1,598
--- -----
Realized and Unrealized Gain on Investments: (Note 2)
Net realized gain on investments 0 298
Unrealized appreciation of investments for the 161 3,989
period --- -----
Net gain on investments 161 4,287
--- -----
Net increase in net assets from operations $ 496 $ 5,885
=== =====
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Statement of Changes in Net Assets
For the Period April 17, 1997 (Capitalization) to December 31, 1997
Short-
Intermediate Income
Portfolio Portfolio
------------ ---------
Increase in Net Assets from Operations:
Net investment income $ 335 $ 1,598
Net realized gain on investments 0 298
Unrealized appreciation for the period 161 3,989
--- -----
Net increase in net assets from operations 496 5,885
--- -----
Distributions paid to shareholders:
From net investment income ($.07 and $.08 per
share, respectively) (335) (1,598)
----- -------
Capital share transactions (Note 5) 50,745 315,963
------ -------
Total increase in net assets 50,906 320,250
------ -------
Net Assets:
Beginning of period 0 0
- -
End of period $50,906 $320,250
====== =======
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Short-Intermediate Portfolio
Financial Highlights
(For a Fund Share Outstanding Throughout the Period)
For the Period October 28,
1997
(Commencement of Operations)
to December 31, 1997
Net asset value, beginning of period $10.00
Income from net investment operations:
Net investment income 0.07
Capital gains
Net realized and unrealized gain (loss) on 0.03
----
investments
Total from investment operations 0.10
Less: distributions ----
Dividends from net investment income (0.07)
Dividends from net realized gains 0.00
----
Total distributions (0.07)
----
Net asset value, end of period $10.03
=====
Ratios/Supplemental Data:
Net assets, end of period (in 000s) 51
Ratio of expenses to average net assets 84.89%**
Ratio of expenses to average net assets,
after reimbursement 0.68%**
Ratio of net investment income (loss) to average
net assets (80.44)%**
Ratio of net investment income (loss) to average
net assets, after reimbursement 3.77%**
Portfolio turnover rate 0.00%
Average commission rate paid 0.0000
Total return* 5.64%**
- --------------------------
*Based on net asset value per share.
**The Portfolio was capitalized on April 17, 1997, with $50,000 representing
5,000 shares at a net asset value per share of $10.00. The initial public
offering was made on October 28, 1997 at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Income Portfolio
Financial Highlights
(For a Fund Share Outstanding Throughout the Period)
For the Period October 28,
1997
(Commencement of Operations)
to December 31, 1997
Net asset value, beginning of period $10.00
Income from net investment operations:
Net investment income 0.09
Capital gains
Net realized and unrealized gain (loss) on 0.12
----
investments
Total from investment operations 0.21
Less: distributions ----
Dividends from net investment income (0.09)
Dividends from net realized gains 0.00
----
Total distributions (0.09)
----
Net asset value, end of period $10.12
=====
Ratios/Supplemental Data:
Net assets, end of period (in 000s) 320
Ratio of expenses to average net assets 24.20%**
Ratio of expenses to average net assets,
after reimbursement 0.68%**
Ratio of net investment income (loss) to average
net assets (18.48)%**
Ratio of net investment income (loss) to average
net assets, after reimbursement 5.03%**
Portfolio turnover rate 25.64%
Average commission rate paid 0.0000
Total return* 12.21%**
- ---------------
*Based on net asset value per share.
**The Portfolio was capitalized on April 17, 1997, with $50,000 representing
5,000 shares at a net asset value per share of $10.00. The initial public
offering was made on October 28, 1997 at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Colorado Double Tax-Exempt Bond Fund, Inc.
Notes to Financial Statements
Colorado Double Tax-Exempt Bond Fund, Inc.
Notes to Financial Statements
December 31, 1997
NOTE 1. ORGANIZATION
The Colorado Double Tax-Exempt Bond Fund (the "Fund") was organized as a
Maryland Corporation on August 29, 1996 and commenced operations on October 28,
1997. The Corporation is registered under the Investment Company Act of 1940, as
amended, as a nondiversified, open-end management investment company. The Fund
is authorized to issue 100,000,000 shares of capital stock par value of $.001
per share, of which 40,000,000 shares are initially authorized as Class A shares
which constitute the Short-Intermediate Portfolio and 20,000,000 shares are
initially authorized as Class B Shares which constitute the Income Portfolio.
The Fund was formed to provide Colorado investors with as high a level of
tax-exempt income exempt from federal and Colorado state income taxes as is
consistent with the maturities of the portfolio selected, with a greater degree
of principal stability than is associated with funds or trusts invested
exclusively in long-term municipal bonds.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuations. Portfolio securities are valued at the last reported
sale price on the securities exchange or national securities market on which
such securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by the Fund's
Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Fund's shares.
Federal Income Taxes. The Funds intends to qualify each year as a
"regulated investment company" under the Internal Revenue Code. By so
qualifying, the Fund will not be subject to federal income taxes to the extent
that it distributes substantially all of its net investment income and any
realized capital gains.
Dividends and Distributions. The Fund accrues dividends daily and
distributes monthly all of its net investment income. The Fund intends to
distribute its net long-term capital gains and its net short-term capital gains
at least once a year.
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
Organization Expenses. During its organization and initial registration
with the Securities and Exchange Commission (the "SEC"), the Fund incurred
organization expenses of $38,656. The Advisor has elected to incur these
expenses.
Other. The Fund follows industry practice and records security transactions
on the trade date. The specific identification method is used for determining
gains or losses for financial statements and income tax purposes. Interest
income is recorded on an accrual basis.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
NOTE 3. INVESTMENT ADVISORY, ADMINISTRATION AND CUSTODIAL AGREEMENTS
The Board of Directors provides broad supervision over the affairs of the
Fund. Pursuant to a Management Agreement between the Fund and Funds Management
Corporation (the "Manager") and subject to the authority of the Board of
Directors, the Manager manages the investments of the Fund and is responsible
for the overall management of the business affairs of the Fund.
Under the terms of the Management Agreement, the Fund has agreed to pay the
manager a base monthly management fee at the annual rate of .23% of the Fund's
average daily net assets.
All expenses incurred in the operation of the Fund will be borne by the
Fund, except to the extent specifically assumed by the manager. The expenses to
be borne by the Fund will include: taxes, interest, brokerage fees and
commissions, fees of board members who are not officers, directors or employees
of the Manager or its affiliates, Securities and Exchange Commission fees, state
Blue Sky qualification fees, advisory, administrative and fund accounting fees,
charges of custodians, transfer and dividend disbursing agents' fees, insurance
premiums, industry association fees, outside auditing and legal expenses, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs of shareholders' reports and meetings, costs of
preparing and printing prospectuses and statements of additional information,
amounts payable under the Fund's Distribution and Shareholder Servicing Plan
(the "Plan") any extraordinary expenses. The Manager has agreed to reimburse the
Fund for its expenses to the extent that they ever exceed .68% (including the
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Advisor's fee) of the average annual net assets of the Fund. The Manager is a
wholly owned subsidiary of Isaak Bond Investments, Inc. (The Principal
Underwriter). The Principal Underwriter is owned by certain Officers and
Directors of the Fund.
For the period October 28, 1997 (commencement of operations) through
December 31, 1997, the Manager earned advisory fees of $94. The Manager earned
$21 from the Short-Intermediate Portfolio and $73 from the Income Portfolio,
respectively. The Manager reimbursed the Fund $14,955 in expenses. The Manager
reimbursed the Short-Intermediate Portfolio $7,489 and reimbursed the Income
Portfolio $7,466, respectively.
The Fund has agreements with American Data Services, Inc. (the
"Administrator") to provide shareholder servicing, fund accounting and
administrative services to the Fund. The services to be provided under the
agreements include day-to-day administration of matters related to the corporate
existence of the Fund (other than rendering investment advice), maintenance of
its records, preparation of reports, supervision of the Fund's arrangement with
its custodian and assistance in the preparation of the Fund's registration
statement under federal and state laws. Costs incurred, before the Adviser's
reimbursement of expenses that exceeded .68% of the Fund's average annual net
assets, totaled $2,581 ($1,279 from the Short-Intermediate Portfolio, and $1,302
from the Income Portfolio, respectively) for the period October 28, 1997
(commencement of operations) through December 31, 1997. The agreements provide
for a total monthly minimum fees of $3,000 per portfolio plus expenses and
transactional charges. The agreements provide for discounts to the Fund during
the first twelve months of the Fund's operations or until average daily net
assets exceed specified levels. The Fund is required to maintain a $3,000 per
portfolio deposit with the Administrator.
The Fund's custody agreements with a bank provide for fees on a
transactional basis plus expenses. The minimum monthly fee per portfolio is $400
per month.
NOTE 4. DISTRIBUTION AGREEMENT
Under a plan adopted by the Fund's Board of Directors pursuant to Rule
12b-1 under the 1940 Act (the "Plan"), the Fund pays the Manager for each of the
Fund's portfolios, a shareholder servicing and distribution fee at the annual
rate of .25% of the average daily net assets of the Fund. Such fee will be used
in its entirety by the Manager to make payments to reimburse distributors or
others for all expenses incurred by distributors or others in the promotion and
distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of prepaying and distributing sales literature and related expenses,
including a prorated portion of distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
paid to securities broker-dealers or their firms or others who have executed a
servicing agreement with the Fund, distributors or their affiliates. The fees
paid to the Manager under the Plan are in addition to the fees payable under the
Management Agreement and are payable without regard to actual expenses incurred.
For the period ended December 31, 1997, the amount paid or accrued for such
expenses was $102.
NOTE 5. CAPITAL SHARE TRANSACTIONS
As of December 31, 1997, there was an authorized number of $.001 par value
shares of capital stock authorized for the Fund. The Fund is authorized to issue
100,000,000 shares of capital stock, par value of $.001 per share, of which
40,000,000 shares were initially authorized as Class A Shares which constitute
the Short-Intermediate Portfolio and 20,000,000 shares were initially authorized
as Class B Shares which constitute the Income Portfolio. The Board of Directors
is authorized to assign any of the 40,000,000 unassigned shares of the Fund to a
portfolio. Transactions in capital stock during the period April 17, 1997
(capitalization) through December 31, 1997 were as follows:
Short-Intermediate Portfolio Income Portfolio
---------------------------- -----------------
Shares Amount Shares Amount
------------- ------------ -------- ------
Shares sold 5,050 $50,500 31,558 $315,000
Shares issued for 24 245 95 963
reinvestment
of dividends and
distribution
Shares redeemed 0 0 0 0
- - - -
Net increase 5,074 $50,745 31,653 $315,963
===== ====== ====== =======
NOTE 6. INVESTMENTS
For the period October 28, 1997 (commencement of operations) through
December 31, 1997, purchases and sales of investment securities, other than
short-term investments, were as follows. The Short-Intermediate Portfolio
aggregated $49,885 and $0, respectively. The gross unrealized appreciation for
all securities totaled $161 and the gross unrealized depreciation for all
securities totaled $0 for a net unrealized appreciation of $161. The aggregate
cost of securities for federal income tax purposes at December 31, 1997 was
$49,770. Purchases and sales of the Income Portfolio aggregated $347,959 and
$51,850, respectively. The gross unrealized appreciation for all securities
totaled $4,048 and the gross unrealized depreciation for all securities totaled
$59 for a net unrealized appreciation of $3,989. The aggregate cost of
securities for federal income tax purposes at December 31, 1997 was $315,083.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Colorado Double Tax
Exempt Bond Fund [LOGO]
- --------------------------------------------------------------------------------
Account Application
Send All Checks and Forms To
Colorado Double Tax-Exempt Bond Fund, Inc.
- --------------------------------------------------------------------------------
1. Registration_Please Print All Items Except Signatures.
Check one box
_ Individual _ Joint Registrant _ Gift to Minors _ Corporations,
Use line 1 Use line 2 Use lines 3, 4 & % Partnerships, Trusts
& Others
Use lines 6 & 7
_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| _|_|_|_|_|_|_|_|_|
1. First Name Initial Last Name Soc.Sec.No.
_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| _|_|_|_|_|_|_|_|_|
2. Right of survivorship presumed,
unless tenancy in common is indicated. Soc.Sec.No.
_______________________________________________________________ as Custodian for
3. Custodian's Name
______________________________________________________________________ under the
4. Minor's Name
___________________________________________________ Uniform Gifts to Minors Act.
5. State Minor's Soc.Sec.No.
________________________________________________________________________________
6. Name of Corporation or Other Entity. If a Trust, include date of trust
instrument.
______________________________________________________ |_|_|_|_|_|_|_|_|_|_|
7. Taxpayer Ident. No.
- --------------------------------------------------------------------------------
2. Address_Please Print.
________________________________________________________________________________
Street Address (Area Code) Home Phone No.
________________________________________________________________________________
City State Zip Code (Area Code) Home Phone No.
- --------------------------------------------------------------------------------
3. Initial Investment $10,000 Minimum per Portfolio
Portfolio Selection: |_| The Short-Intermediate Portfolio $__________
|_| The Income Portfolio $__________
Investment Source:
|_| *By Check $__________ |_| **By Wire $__________
*Please make check payable to **Call the Fund for instructions and
Colorado Double Tax-Exempt account number(s). Read the purchase by
Bond Fund, Inc, and mail with wire section of the prospectus as a
this completed Account reference if you are unclear on any
Application. You will be procedures.
assigned an account number(s)
by ____________ upon receipt.
Each portfolio is assigned a separate account number to avoid errors.
I confirm the account number(s) I was assigned by telephone with regard to my
wire transfer of funds as follows:
_______________________________________ ____________________________________
Short-Intermediate Portfolio Income Portfolio Assigned
Assigned Account Number Account Number
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
4. Distributions (If no selection is checked,the Share Option will be assigned.)
|_| Share Option Income dividends and capital gain distributions
automatically reinvested in additional shares.
|_| Income Option Income dividends and capital gain distributions
distributed in cash.
- --------------------------------------------------------------------------------
5. Wire Service
|_| Yes |_| No Permits Redemption Proceeds initiated by wire, telephone or
letter to be transmitted via Fed Wire to Fed Member Banks. If you desire to
permit such transmittals, fill out "Bank Account Details" Below.
Bank Account Details-Fill Out This Section if "Yes" is Checked For Item 5:
________________________________________________________________________________
Name of your Bank. Note: Initial Investment Check or wire must be drawn against
this account.
________________________________________________________________________________
Account Name Account Number(s)
________________________________________________________________________________
Address of Bank City State Zip Code
- --------------------------------------------------------------------------------
6. Telephone Privileges
|_| Yes |_| No Portfolio Exchange - Permits Exchange between the two
portfolios by telephone
|_| No Status of Account by Telephone - Unless the "NO" box
is checked, the investor(s) authorize(s) _______________
to respond to telephone inquiries from persons reasonably
believed by the Bank to be the registrant(s).
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
7. Signature And Taxpayer Identification Number Certification For
Individual Investors
The undersigned warrant(s) that I (we) have full authority and, if a natural
person, am (are) of legal age to purchase shares pursuant to this Application
have received a current Fund Prospectus and agree to be bound by its terms. I
(we) agree that American Data Services, Inc., Colorado Double Tax-Exempt Bond
Fund, Inc. or any of their officers, directors or employees will not be liable
for any loss or expense for acting upon any instructions or inquiries believes
genuine.
Taxpayer Identification Number Certification: Under the penalties of perjury, I
(we) certify [1] that the Social Security Number(s) or Taxpayer Identification
Number(s) shown in Section 1 of this form is (are) my (our) correct Taxpayer
Identification Number(s), and [2] that I (we) am (are) not subject to backup
withholding either because I (we) have not been notified that I (we) am (are)
subject to backup withholding as a result of a failure to report all dividends,
or the Internal Revenue Service has notified me (us) that I (we) am (are) no
longer subject to backup withholding.
________________________________________________________________________________
Individual (or Custodian) Date Joint Registrant, if any
- --------------------------------------------------------------------------------
Certification A For Use by Advisers Only. Complete Only If Copies
of Advices Are Required.
The undersigned represent(s) and warrant(s) that
authorization to purchase and redeem shares of the
Fund has been given by the investor(s).
______________________________________ ______________________________________
Firm Name Firm Name
______________________________________ ______________________________________
Address Address
______________________________________ ______________________________________
City State Zip City State Zip
______________________________________ ______________________________________
Date Authorized Signature and Title Date Authorized Signature and Title
______________________________________ ______________________________________
Date Authorized Signature and Title Date Authorized Signature and Title
- --------------------------------------------------------------------------------
Certification B For Use By Corporations, Pension Trusts, Partnership or
Other Institutional Investors Only.
__________________________________________
Dated:
Note: Retain a copy of this document for your records. Any modification of the
information below will require an amendment to this form. This document is in
full force and effect until another duly executed form is received by American
Data Services, Inc.
|_| New |_| Amendment to form dated
______________________________________ ______________________________________
Name of Registered Owner: Account No(s):
Registered Owner is a:
|_| Corporation/Incorporated Association* |_| Partnership
|_| Pension Trust |_| _________________________________________
Other: (such as Non-Profit Organization, Religious Organization, Sole
Proprietorship, Investment Club, Non-Incorporated Association, etc.)
The following named persons are currently officers/trustees/general
partners/other authorized signatories of the Registered Owner, and any _____**
of them ("Authorized Person(s)") is/are currently authorized under the
applicable governing document to act with full power to purchase, redeem, assign
or transfer securities of Colorado Double Tax-Exempt Bond Fund, Inc. (the
"Fund") for the Registered Owner and to execute and deliver any instrument
necessary to effectuate the authority hereby conferred:
Name Title Specimen Signature
________________________ _____________________ _____________________________
________________________ _____________________ _____________________________
________________________ _____________________ _____________________________
________________________ _____________________ _____________________________
37
<PAGE>
American Data Services, Inc. ("ADS") may, without inquiry, act only upon the
instruction of Any Person(s) purporting to be (an) Authorized Person(s) as named
in the Certification form last received by ADS. ADS and the Fund shall not be
liable for any claims, expenses (including legal fees) or losses resulting from
the ADS having acted upon any instruction reasonably believed genuine.
*For Corporations and Incorporated Associations Only. Note: Either Signature
Guarantee or Seal is Required.
I, ____________________, Secretary of the above-named Registered Owner, do
hereby certify that at a meeting on ____________________ at which a quorum was
present throughout, the Board of Directors of the corporation/the officers of
the association duly adopted a resolution, which is in full force and effect and
in accordance with the Registered Owner's charter and bylaws, which resolution
did the following: (1) empowered the above-named Authorized Person(s) to effect
securities transactions for the Registered Owner on the terms described above;
(2) authorized the Secretary to certify, from time to time, the names and titles
of the officers of the Registered Owner and to notify ADS when changes in office
occur; and (3) authorized the Secretary to certify that such a resolution has
been duly adopted and will remain in full force and effect until ADS receives a
duly executed amendment to the Certification form.
Signature
Guaranteed***
(or Corporation Seal) Witness my hand on behalf of the
corporation/association this ____ day
of __________, 19__.
____________________________________________
Secretary***
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the
corporation/association.
Signature
Guaranteed***
(or Corporate Seal) ____________________________________________
Certifying Officer of the Corporation or
Incorporated Association***
For All Other Institutional
Investors ____________________________________________
Certifying Trustee(s)/
General Partner(s)/Other(s)***
Signature(s)
Guaranteed*** ____________________________________________
Certifying Trustee(s)/
General Partner(s)/Other(s)***
**Insert a number unless otherwise indicated. The bank may honor instructions of
any one of the persons named above. ***Signature(s) must be guaranteed by a
commercial bank or trust company located or having a correspondent in New York
City, or by a member firm of a national securities exchange. Notarization is not
acceptable.
<PAGE>
APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that __________ draw a check or an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase shares in the Short-Intermediate Portfolio or
shares in the Income Portfolio of Colorado Double Tax-Exempt Bond Fund
subject to the terms set forth below.
- -------------------- AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
You are hereby authorized to draw a SERVICES,INC.
check or an ACH debit each month on
my bank account for investment in To Bank
Colorado Double Tax-Exempt Bond Fund (Investor's Bank)
as indicated below:
Bank Address
Amount of each check or ACH debit $ City State Zip Code
Account No.
Please date and invest checks or As a convenience to me, I hereby
draw ACH debits on the 20th of each request and authorize you to pay and
month beginning charge to my account checks or ACH
debits drawn on my account by and
(Month) payable to __________. I agree that
your rights in respect to each such
I agree that you are preparing these check or debit shall be the same as
checks or drawing these debits volun- if it were a check drawn on you and
tarily at my request and that you signed personally by me. This
shall not be liable for any loss authority is to remain in effect
arising from any delay in preparing or until revoked personally by me.
failure to prepare any such check or This authority is to remain in effect
debit. If I change banks or desire to until revoked personally by me in
terminate or suspend this program, I writing. Until you receive such
agree to notify you promptly in notice, you shall be fully protected
writing. in honoring any such check or debit.
I further agree that if any such
I further agree that if a check or check or debit be dishonored, whether
debit is not honored upon with or without cause and whether
presentation, __________ is authorized intentionally or inadvertently, you
to discontinue immediately the shall be under no liability.
Automatic Investment plan and to
liquidate sufficient shares held in Date Signature of Depositor
my account to offset the purchase made Bank (If joint account,
with the returned check or dishonored both must sign)
debit. Number
38
<PAGE>
Date Signature of Depositor NOTE: IF AUTOMATIC INVESTMENT PLAN IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
Signature of Depositor MARKED "VOID" SHOULD ACCOMPANY THIS
(If joint account, both must sign) APPLICATION.
FOR BROKER-DEALER ONLY
We hereby authorize Isaak Bond
Branch Office, Address, Stamp Investments, Inc. to act as our agent
in connection with transactions under
This form when completed should be this authorization form and agree to
mailed to: notify the distributor of any
purchases made under a Letter of
Colorado Double Tax-Exempt Bond Fund Intention or Systematic Withdrawal
c/o __________ Plan. We guarantee the Shareholder's
______________ Signature.
______________
______________ Broker-Dealer Name and Address
By
Authorized Signature of Broker-Dealer
Branch-Code F/C No. F/C Last Name
Broker-Dealer's Customer A/C No.
<PAGE>
APPENDIX A
KEY TO MOODY'S MUNICIPAL BOND RATINGS
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment
some time in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are 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. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
A-1
<PAGE>
Ca Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
<PAGE>
KEY TO S&P'S MUNICIPAL BOND RATINGS
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BBB-" rating.
B Debt rated "B" has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
A-3
<PAGE>
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
A-4
<PAGE>
KEY TO FITCH'S MUNICIPAL BOND RATINGS
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving [Up Arrow]
Stable [Left, Right Arrow]
Declining [Down Arrow]
Uncertain [Up, Down Arrow]
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating
purposes.
A-5
<PAGE>
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designed as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
A-6
<PAGE>
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD and D Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. "DDD" represents
the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
A-7
