Filed pursuant to Rule 497(a)
Registration Nos. 333-20287
and 811-08023
DATED APRIL 27, 1999
600 17th Street
Suite 2610 S. Tower
Denver, Colorado 80293
PROSPECTUS
[LOGO]
Colorado Double Tax-
Exempt Bond Fund, Inc.
Colorado Double Tax-Exempt Bond Fund, Inc. 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.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
---------------------
TABLE OF CONTENTS
---------------------
RISK/RETURN SUMMARY: INVESTMENTS, RISK AND PERFORMANCE.....................2
BAR CHART AND PERFORMANCE TABLE.............................................3
FEE TABLE SHORT-INTERMEDIATE AND INCOME PORTFOLIOS.........................4
FINANCIAL HIGHLIGHTS........................................................5
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS....7
MANAGEMENT OF THE FUND.....................................................11
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE................................13
PURCHASE OF SHARES.........................................................15
PRICING OF FUND SHARES--NET ASSET VALUE....................................17
REDEMPTION OF SHARES.......................................................17
EXCHANGE PRIVILEGE.........................................................18
DISTRIBUTIONS..............................................................19
TAXATION OF THE FUND AND ITS SHAREHOLDERS..................................19
TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND AUDITORS...............21
GENERAL INFORMATION........................................................21
<PAGE>
RISK/RETURN SUMMARY:
INVESTMENTS, RISK AND PERFORMANCE
Investment Objectives
Colorado Double Tax-Exempt Bond Fund, Inc. (the "Fund"), is a mutual
fund, also known as an open-end management investment company. The Fund offers
Colorado investors a choice of two portfolios, both of which are designed to
provide Colorado investors with as high a level of income exempt from Federal
and Colorado state income taxes as is consistent with the maturities of the
portfolios selected. The option to transfer from one portfolio to the other
should provide the investor with the opportunity to achieve a greater degree of
principal stability than is associated with funds and trusts that are invested
exclusively in long-term municipal bonds.
Principal Investment Strategies
As a matter of fundamental policy, the Fund will invest at least 80%
of its assets in each portfolio in Colorado Municipal Securities, (as defined
herein). The Fund may invest the remaining 20% in fixed-income securities,
the interest on which is subject to federal, state and local income tax.
The Fund will invest only in securities which, at the time of purchase, have
one of the four highest ratings of rating agencies, or, for unrated securities,
have similar investment grade quality.
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 ("Short-Intermediate
Portfolio"). 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 ("Income Portfolio"). 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.
Principal Risks
By investing in the Fund, you are subject to several investment risks.
The occurrence of any one of these risks, or a combination of these risks, could
adversely affect the Fund's net asset value, yield and/or total return. By
investing in the Fund, you are exposed to the following principal risks:
- Your investment is not insured or guaranteed by any government agency.
- You can lose money on your investment.
- The Fund is a non-diversified investment company because it can
concentrate its investments in fewer issuers than a diversified fund.
Therefore, a downturn in the market value of such an issuer would
negatively affect your investment to a greater extent than if the Fund
was diversified.
- An increase in interest rates could adversely affect the price of
municipal securities invested in by the Fund. This risk is greater for
the not rated securities invested in by the Fund.
- Municipal issues of securities may fail to pay interest or principal
on a timely basis.
- State or Federal legislative action could modify or eliminate the
tax-exempt securities that the Fund currently invests in.
- The Fund concentrates its investments in Colorado. A downturn in the
Colorado market would negatively affect your investment to a greater
extent than if the Fund invested in more states.
2
<PAGE>
BAR CHART AND PERFORMANCE TABLE
The information in the bar chart and table below provides an indication
of the risks of investing in the Fund by comparing the Fund's average annual
returns with a broad measure of market performance. The performance of the Fund
in the past does not indicate how the Fund will perform in the future.
The following bar chart summarizes the average annual return for the
Short-Intermediate Portfolio for the last calendar year and since the inception
of operations of the Fund on October 28, 1997.
[Bar Chart]
The following table summarizes the average annual total return at net
asset value for the Income Portfolio and the Short-Intermediate Portfolio of the
Fund for the one-year calendar period ended December 31, 1998 and since the
commencement of operations of the Fund on October 28, 1997. For the Income
Portfolio, the highest return for a quarter was 3.24% in the third quarter of
1998 and the lowest return for a quarter was (0.26%) for the fourth quarter of
1998. For the Short-Intermediate Portfolio, the highest return for a quarter was
2.15% in the third quarter of 1998 and the lowest return for a quarter was
(0.79%) for the fourth quarter of 1997. For comparative purposes, the table
also summarizes the average annual return at net asset value for the Lipper
Short Municipal Index and the Lipper General Municipal Index.
Since Commencement of
Fund Operations on
Average Annual Total Return Past One Year October 28, 1997
- --------------------------- ------------- ----------------
Short-Intermediate Portfolio 6.53% 6.40%
Lipper Short Municipal Index 5.18 5.19
------ ------
Income Portfolio 6.33 7.18
Lipper General Municipal Index 6.25 7.54
------ ------
3
<PAGE>
FEE TABLE
SHORT-INTERMEDIATE AND INCOME PORTFOLIOS
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund. These fees include shareholder fees, which are fees
paid directly from your investment. These also include annual Fund operating
expenses, which are expenses that are deducted from Fund assets.
<TABLE>
<CAPTION>
Shareholder Fees Short-Intermediate Income
Portfolio Portfolio
<S> <C> <C>
Shareholder Transaction Expenses* none none
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees .23 .23
12b-1 Fees .25 .25
Other Expenses 6.59 5.16
Total Annual Fund Operating Expenses 7.07 5.64
</TABLE>
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
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes that
you invest $10,000 in the Short-Intermediate Portfolio and/or the Income
Portfolio of the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same (0.68%). Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$69 $218 $379 $847
If you did not redeem your shares, you would pay the same expenses because
the Fund does not charge a redemption fee. The Example does not reflect charges
on reinvested dividends.
- ---------------
*The Funds' investment adviser has agreed to reimburse the Fund for its expenses
to the extent that they exceed 0.68% of the Fund's average annual net assets.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Baird, Kurtz & Dobson,
independent accountants whose report, along with the Fund's financial
statements, is included in the Statement of Additional Information which is
available upon request.
<TABLE>
<CAPTION>
INCOME PORTFOLIO
(For a share outstanding throughout the period)
For the year For the period
ended October 28, 1997
December 31, 1998 (Commencement of
Operations)
to December 31, 1997
<S> <C> <C>
Net asset value, beginning of period $ 10.12 $ 10.00
------- -------
Income from investment operations:
Net investment income 0.47 0.09
Net realized and unrealized gain on 0.15 0.12
investments
------- -------
Total from investment operations 0.62 0.21
------- -------
Less distributions:
Dividends from net investment income (0.47) (0.09)
Dividends from net realized gains (0.09) 0.00
------- -------
Total distributions (0.56) (0.09)
------- -------
Net asset value, end of period $ 10.18 $10.12
======= =======
Ratios/Supplemental Data:
Net assets, end of period (in 000's).............. $2,212 $320
Ratio of expenses to average net assets........... 5.64% 24.20%**
Ratio of expenses to average net assets, after
reimbursement................................ 0.68% 0.68%**
Ratio of net investment income (loss) to average
net assets................................... (0.38%) (18.48)%**
Ratio of net investment income (loss) to average
net assets, after reimbursement.............. 4.58% 5.03%**
Portfolio Turnover Rate........................... 120.86% 25.64%
Total Return* 6.33% 12.21%**
</TABLE>
- -----------------------------------
*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 November 3, 1997, at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
5
<PAGE>
<TABLE>
SHORT-INTERMEDIATE PORTFOLIO
(For a share outstanding throughout the period)
For the year For the period
ended October 28, 1997
December 31, 1998 (Commencement of
Operations)
to December 31, 1997
<S> <C> <C>
Net asset value, beginning of period $ 10.03 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.44 0.07
Net realized and unrealized gain on 0.20 0.03
investments
-------- --------
Total from investment operations 0.64 0.10
-------- --------
Less distributions:
Dividends from net investment income (0.44) (0.07)
Dividends from net realized gains (0.04) 0.00
-------- --------
Total distributions (0.48) (0.07)
-------- --------
Net asset value, end of period $10.19 $10.03
======== ========
Ratios/Supplemental Data:
Net assets, end of period (in 000's)......... $1,870 $51
Ratio of expenses to average net assets...... 7.07% 84.89%**
Ratio of expenses to average net assets, after
reimbursement........................... 0.68% 0.68%**
Ratio of net investment income (loss) to
average net assets...................... (2.22%) (80.44)%**
Ratio of net investment income (loss) to
average net assets, after reimbursement. 4.16% 3.77%**
Portfolio Turnover Rate...................... 172.71% 0.00%
Total Return* 6.53% 5.64%**
</TABLE>
- -----------------------------------
*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 November 3, 1997, at which time the net asset value per
share was $10.00. Ratios for this initial period of operations are annualized.
6
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
The Fund is an open-end management investment company, also known as a
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 income exempt from Federal and
Colorado state income taxes as is consistent with the maturities of the
portfolio selected.
Investment Objectives and Strategies
The Fund has fundamental investment policies that cannot be changed unless
the change is approved by a vote of the holders of the voting securities of the
Fund. The Fund also has non-fundamental investment policies that can be changed
by the Board of Directors of the Fund without such a vote of security holders.
The Fund's principal investment objective is to provide as high a level of
income exempt from Federal income taxes and from Colorado personal income taxes
as is consistent with the maturities of the portfolio selected. This principal
investment objective is a fundamental policy that cannot be changed without a
shareholder vote.
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 non-fundamental 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, as defined hereafter. The
Fund will invest only in securities which at the time of purchase have one of
the four highest ratings of Moody's Investors Service, Inc. ("Moody's") ("Aaa,"
"Aa," "A" or "Baa"), Standard & Poor's Ratings Group ("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 Funds
Management Corporation, 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. Municipal securities
ratings are described in more detail in the appendix to the Statement of
Additional Information.
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 (a) pending the investment or reinvestment in
Colorado municipal securities, (b) in order to avoid the necessity of
liquidating portfolio investments to meet redemptions of shares by investors, or
(c) when 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 that
are 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.
7
<PAGE>
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 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.
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 are the same as those of 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.
8
<PAGE>
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.
The certificates represent participation in a lease, an installment purchase
contract or a conditional sales contract ("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-appropriative" 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 are available at
any time by calling the appropriate telephone number as indicated on the back
page of this prospectus.
Special Issues Raised by Colorado Tax-Exempt Bonds
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.
9
<PAGE>
A major revenue source for many of these municipalities is the ad valorem
property tax levied at the local level, with $2,784,138,646 and $3,032,963,241
levied throughout Colorado in tax years 1996 and 1997, respectively.
In 1997, the assessed valuation of all real and personal property subject
to taxation in Colorado was $38,536,664,770. This was up 14.7% from 1996 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% and for 1997, the ratio was
reduced to 9.74%.
The Colorado Legislative Council's economic forecast predicts an increase
in general fund revenues of about 7.0% during the 1998-1999 fiscal year.
Investment Risk Considerations
In addition to the risks specific to the types of securities in which the
Fund may invest described herein, the Fund is also subject to the following
principal 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 is 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. A fund which
elects to be classified as "diversified" under the 1940 Act must satisfy the 5%
and 10% requirements with respect to 75% of its total assets, as discussed under
"TAXATION OF THE FUND AND ITS SHAREHOLDERS." 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.
This number will be limited so that the Fund can qualify as a "registered
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). See "TAXATION OF THE FUND AND ITS SHAREHOLDERS."
10
<PAGE>
Risks Related to Colorado. 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: (a) 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; (b) 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 the appropriate "growth factor"; (c) 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 (d) 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.
MANAGEMENT OF THE FUND
The affairs of the Fund will be managed under the supervision of its
Board of Directors. The Fund has been organized as a corporation under the laws
of the State of Maryland.
Investment Adviser
The Adviser, Funds Management Corporation, serves as Adviser pursuant to an
investment advisory agreement between the Fund and the Adviser dated as of May
28, 1997 (the "Advisory Agreement"). The Adviser is a Colorado corporation
incorporated on April 7, 1988 and is located at 600 17th Street, Suite 2610
South Tower, Denver, Colorado 80202.
Portfolio Manager
Mr. Calvin F. Isaak, 600 17th Street, Suite 2610 South Tower, Denver,
Colorado 80202, has served as the portfolio manager for the Fund since its
inception in 1996. Mr. Isaak is the President of the Adviser, and the President
and Chairman of the Board of Directors of the Fund. In his capacity as President
of the Adviser, he is 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. Mr. Isaak is also President of Isaak Bond Investments, Inc., the
principal underwriter for the Fund (the Underwriter").
All investment decisions made by the Fund are made in accordance with the
Fund's stated policies and are subject to the supervision and direction of the
Board of Directors.
Adviser Fee
Under the Advisory Agreement, the Fund pays the Manager, as compensation
for its services, a fee computed daily and paid monthly at an annual rate of
0.23 of 1.00% of the value of the Fund's average daily net assets, which totaled
$6,552 for the fiscal year ended December 31, 1998.
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Distributor
The Underwriter also serves as a distributor of the Fund's shares. Mr.
Isaak is a controlling shareholder of the Underwriter, which in turn owns all of
the outstanding stock of the Adviser. Mr. Isaak is also the President and
Chairman of the Board of Directors of the Underwriter.
Distribution Fees
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 sale, 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.
These fees are paid out of the Fund's assets on an ongoing basis, and will
increase the cost of your investment over time and may cost you more than paying
other types of sales charges.
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.
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 for 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.
Other 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 thereof 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 0.68% (including the Adviser's fee) of the average annual
net assets of the Fund.
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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.
During the second half of 1998, the corporate bond market experienced a
highly illiquid period. The primary cause was the anticipated bankruptcy of
major hedge funds. The Chairman of the Federal Reserve Board intervened and
orchestrated a rescue that involved major commercial and investment banking
organizations. Illiquidity can best be described by the observance that yield
spread prices on corporate issues to comparable U.S. Treasury bonds, in some
cases, went from 80 to as high as 300 basis points.
During the period when the corporate bond market experienced its
illiquidity, the municipal bonds also changed in relation to the comparable
maturity in U.S. Treasury yields. Municipal tax-exempt yields that were usually
82-84 basis points lower than comparable U.S. Treasury bond yields were then
equal to such yields.
Investment Strategy
December 31, 1998, completed the first full year of operations. With the
new issue municipal bond market insuring approximately 60% of all new issues,
both of the portfolios will likely continue to have over 50% invested in "Aaa"
rated municipal bonds. Currently, the composite quality of "Aa" will very likely
be maintained.
Both portfolios will be managed during 1999 with the anticipation that U.S.
Treasury bond yields will be lower and that the yield relationship of municipal
bonds to treasury bonds will more closely approximate the relationship as stated
in the "Relevant Market Conditions" section.
Investment Results
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 was 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.
Industry standards for measuring total return performance found the
Short-Intermediate Portfolio the recipient of the Lipper's #1 ranking in the
state specific category for municipal bond funds. The Income Portfolio was among
the top total return performers for Colorado specific funds.
The Fund's Short-Intermediate Portfolio and Income Portfolio experienced a
total return at net asset value for the calendar year ended December 31, 1998 of
6.53% and 6.33%, respectively. The components of the 6.53% total return in the
Short-Intermediate Portfolio consisted of a 4.53% tax-exempt interest and a
2.00% capital gain. The Income Portfolio total return of 6.33% consisted of a
4.79% tax-exempt interest and a 1.54% capital gain.
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The following information depicts the performance of the Income Portfolio
and the Short-Intermediate Portfolio for the fiscal year ended December 31, 1998
and since inception of operations of the Fund on October 28, 1997. Also depicted
for comparative purposes is information with respect to the Lipper Short
Municipal Index and the Lipper General Municipal Index.
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
SHORT MUNICIPAL INDEX
Average Since Inception of the Fund
Annual Total Return Past One Year** on October 28, 1997*
- ------------------- ------------- --------------------
Short-Intermediate
Portfolio 6.53% 6.40%
[GRAPH]
Lipper Short
Measurement Period Short-Intermediate Portfolio** Municipal Index
10/28/97* $10,000 $10,000
10/31/97 $10,430 $10,006
12/31/97 $10,097 $10,090
12/31/98 $10,756 $10,613
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
COLORADO DOUBLE TAX-EXEMPT BOND FUND, INC. INCOME PORTFOLIO
AND THE LIPPER GENERAL MUNICIPAL INDEX
Average Since Inception of the Fund
Annual Total Return Past One Year** on October 28, 1997*
- ------------------- ------------- --------------------
Income Portfolio 6.33% 7.18%
[GRAPH]
Lipper General
Measurement Period Income Portfolio** Municipal Index
10/28/97* $10,000 $10,000
10/31/97 $10,160 $10,036
12/31/97 $10,204 $10,251
12/31/98 $10,849 $10,892
---------------
*Commencement of operations.
**Past performance is not predictive of future performance.
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 two digits as the year 1900
rather than as 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.
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<PAGE>
Based on a recent assessment, the Fund and the Adviser determined that
their software is Year 2000 compliant, which will allow their internal computer
systems to properly utilize dates beyond December 31, 1999.
The Fund and the Adviser have contacted the Fund's third party vendors and
service providers, including the Fund's transfer agent, American Data Services,
Inc. (the "Transfer Agent" or "ADS"), the Fund's custodian, Star Bank, N.A. (the
"Custodian"), and the clearing agent for the Fund's principal underwriter,
Fiserv Correspondent Services, Inc. (the "Clearing Agent"), to determine the
extent to which the Fund and the Adviser are vulnerable to a failure by those
third parties 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.
The third party vendors are involved in an industry-wide test to determine
whether their respective systems can identify the Year 2000, which includes a
compliance test in the first quarter of 1999 and, for those non-compliant
vendors, a second test in the second quarter of 1999. The Fund and the Adviser
will continue to monitor the results of third party vendors' efforts to
remediate their own Year 2000 Issue. In addition, the Adviser and the Fund will
develop a contingency plan following the second round of vendor testing to
insure that the operations of the Fund are not adversely affected by the failure
of a third party to provide services to the Fund.
Despite the testing by the third party vendors and any contingency
planning, there can be no assurance that the systems of the other companies on
which the Fund's and the Adviser's systems rely upon will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with the Fund's or the Adviser's systems, would not have a material
adverse effect on the Fund.
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 assurance that the Fund and the
Adviser will not incur any expenses, or that the inability of third party
vendors or suppliers to remediate their own Year 2000 Issues will not cause the
Fund to incur any expenses in connection with the Year 2000 Issue.
PURCHASE OF SHARES
Shares of each portfolio may be purchased by check, by wire transfer of
funds through a bank or through one or more brokers authorized by the Fund to
receive purchase orders. 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
a price which is the net asset value in effect at the time a purchase order is
processed, which is the net asset value as determined at 12:00 p.m. Colorado
time the day the check or wire of funds is received. For a complete explanation
of how net asset value is calculated, see "PRICING OF FUND SHARES--NET ASSET
VALUE."
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 mailing address
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.
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<PAGE>
Shares purchased by check will be issued the day after the receipt of
the check from the investor and dividends are paid beginning on the date that
the shares are issued. The purchase price of shares is the net asset value as
calculated the day the check is received by the Fund.
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 also 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 back 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.
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.
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<PAGE>
Purchases through an Authorized Broker
The Fund has authorized one or more brokers to receive on its behalf
purchase and redemption orders. Such brokers are further authorized to designate
other intermediaries to receive purchase and redemption orders on the Fund's
behalf. A purchase order will be deemed to be received by the Fund when an
authorized broker, or, if applicable, a broker's authorized designee, receives
such order. Such orders will be priced at the Fund's net asset value next
computed after they are received by an authorized broker or the broker's
authorized designee.
Automatic Investment Plan
Under the Fund's automatic investment plan ("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.
PRICING OF FUND SHARES--NET ASSET VALUE
The price you pay for the Fund's shares is the net asset value per share of
each portfolio as of the day your check or wire funds are received. The net
asset value per share of each portfolio is determined by the Transfer Agent 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 net assets of each
portfolio (total assets less 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 with remaining
maturities of 60 days or less are valued at market by a pricing service, J.J.
Kenny Information Services, 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 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.
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 Transfer Agent or if received by a broker authorized by
the Fund or that broker's authorized designee. A shareholder redeeming between
monthly dividend payment dates receives any accrued but unpaid dividends
applicable to the redeemed shares.
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<PAGE>
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) 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 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 of 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 net 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 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 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.
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<PAGE>
The telephone redemption procedure may be modified or terminated at any
time by the Fund or the Transfer Agent.
Pursuant to an election by the Fund under Rule 18f-1 of the 1940 Act that
was filed with the Securities and Exchange Commission December 12, 1998, all
redemptions will be made in cash.
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 reducing the investor's investment in either portfolio to 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.
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 on the 15th day of each month ("Payable
Date"). 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.
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<PAGE>
Shares will begin earning dividends on the day which the shares are issued.
Shares or cash continue to earn dividends through the date they are redeemed or
delivered subsequent to reinstatement.
Unless you elect differently by written notice to the Adviser, at least 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.
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. However, the Fund's investments
will be limited so as to qualify as a "regulated investment company" for
purposes of the Code. To qualify, among other requirements, the Fund's
investments will be limited so that at the close of each of the taxable
quarters, (a) 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 (b) 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.
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
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. Generally, 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 12 months is 20%. 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 $0.25 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.
20
<PAGE>
"Alternative minimum taxable income" is a taxpayer's taxable income (a)
determined with specified adjustments for the alternative minimum tax and (b)
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
60 days after the close of the year to shareholders of the Fund annually in
accordance with applicable provisions of the Code.
Regulated investment companies will be subject to a nondeductible 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 (a) 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 (b) 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.
21
<PAGE>
There are no municipal income taxes in Colorado. As intangibles, shares in
the Fund will be exempt from Colorado property taxes.
TRANSFER AND DIVIDEND DISBURSING AGENT,
COUNSEL AND AUDITORS
ADS acts as transfer agent and as 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.
GENERAL INFORMATION
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 back page of this prospectus or by telephoning the
Fund at the telephone numbers also set forth on the back page of this
prospectus.
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.
22
<PAGE>
This prospectus is intended to set forth
in a clear and concise manner
information about the Fund that a
prospective investor should know before PROSPECTUS
investing. After reading this
prospectus, it should be retained for
future reference as it contains COLORADO DOUBLE
information about the purchase and sale TAX-EXEMPT BOND FUND, INC.
of shares and other items which a
prospective investor will find useful to
have.
A Statement of Additional Information
("SAI") dated April 27, 1999 provides
a further discussion of certain matters
covered by this prospectus and other
information about the Fund ha been
filed with the Securities and Exchange
Commission (the "Commission") and is
incorporated herein by reference. A copy 601 17TH Street
of the SAI, the annual report and the Suite 2610 S. Tower
semi-annual report are available without Denver, Colorado 80202
charge from the Fund at the address and
telephone number shown above. All
shareholder inquiries and requests for
other information about the Fund can
also be made to the address and
telephone number shown above.
Information about the Fund, including Statewide Call Toll Free
the SAI can be reviewed and copied at 1-800-279-4426
the commission's Public Reference Room From the Denver Area Call
in Washington, D.C. Information on the (303) 623-7500
operation of the public reference room
may be obtained by calling the
Commission at 1-800-SEC-0330. Reports
and other information about the Fund are
available on the Commission's Internet
site at http://www.sec.gov. Copies of
this information may be obtained, upon
payment of a duplicating fee, by writing
the Public Reference Section of the PROSPECTUS
Commission, Washington, D.C. 20549-6009. April 27, 1999
Investment Company Act
File No. 811-08023
<PAGE>
DATED APRIL 27, 1999
STATEMENT OF ADDITIONAL INFORMATION
COLORADO DOUBLE TAX-EXEMPT BOND FUND, INC.
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the prospectus dated April 27, 1999
(the "Prospectus") of the Colorado Double Tax-Exempt Bond Fund, Inc. (the
"Fund"). This SAI 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).
This SAI incorporates by reference the Registrant's Annual Report on Form
N-30D for the year ended December 31, 1998 that was filed with the Securities
and Exchange Commission on February 25, 1999.
---------------------------------
TABLE OF CONTENTS
---------------------------------
Page
----
HISTORY OF THE FUND......................................................B-2
INVESTMENT STRATEGIES AND RISKS..........................................B-2
CALCULATION OF PERFORMANCE DATA..........................................B-8
MANAGEMENT OF THE FUND..................................................B-11
ADVISORY AGREEMENT AND EXPENSES.........................................B-12
DISTRIBUTION PLAN.......................................................B-13
BROKERAGE ALLOCATION--PORTFOLIO TRANSACTIONS............................B-14
CAPITAL STOCK...........................................................B-15
CONTROL PERSONS AND PRINCIPAL HOLDERS...................................B-16
PURCHASE OF SHARES......................................................B-16
PRICING OF FUND SHARES--NET ASSET VALUE.................................B-18
REDEMPTION OF SHARES....................................................B-18
EXCHANGE PRIVILEGE......................................................B-20
DISTRIBUTIONS...........................................................B-20
UNDERWRITER.............................................................B-21
ACCOUNTING, ADMINISTRATIVE AND TRANSFER AGENT...........................B-21
CUSTODIAN, LEGAL COUNSEL AND AUDITORS...................................B-21
FINANCIAL INFORMATION...................................................B-22
ACCOUNT APPLICATION.................................................ATTACHED
APPLICATION FOR AUTOMATIC INVESTMENT PLAN...........................ATTACHED
APPENDIX A..........................................................ATTACHED
<PAGE>
HISTORY 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.
INVESTMENT STRATEGIES AND RISKS
The following discussion supplements the description of the Fund's
investment strategies, risks and management policies set forth in the
"INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS"
section of the Prospectus.
The Fund purchases primarily Colorado municipal securities which it
believes are attractive and competitive in terms of quality, maturity and yield.
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
("Short-Intermediate Portfolio"), and an income portfolio which is expected to
have a weighted average maturity of more than seven years ("Income Portfolio").
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 non-fundamental 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
of 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 Funds Management Corporation, 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 "COLORADO
MUNICIPAL SECURITIES" and "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.
B-2
<PAGE>
The Fund will not sell an investment position and reinvest proceeds in a
new investment, unless the new investment demonstrates either: (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 portfolio transactions are reviewed by the Board of
Directors on a quarterly basis to determine the investment benefits to the Fund
and its shareholders recognizing prevailing market conditions and
considerations.
Portfolio turnover is measured as 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 the turnover
will vary considerably from period to period depending on market conditions, but
generally should not exceed 100% per annum. In no circumstance will the Adviser
consider the rate of turnover in deciding to sell or purchase securities. As
previously discussed, all portfolio transactions involving reinvestment must
demonstrate quantifiable benefits to the Fund and its shareholders.
The portfolio turnover rate for the fiscal year ended December 31, 1998 was
172.71% for the Short-Intermediate Portfolio and was 120.86% for the Income
Portfolio.
Colorado Municipal Securities
As used in this SAI, 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.
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, monetary 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.
B-3
<PAGE>
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").
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 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.
B-4
<PAGE>
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
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 participation in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "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.
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 who agrees to
repurchase the securities at the same price plus an amount equal to an agreed
upon interest rate, within a specified time. The seller usually agrees to
repurchase the securities within a week, but, on occasion, agrees to repurchase
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.
B-5
<PAGE>
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.
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, as amended (the "1940 Act"), a "vote of the majority of the outstanding
voting securities" means the lesser of the vote of (a) 67% or more of the
portfolio's shares at a shareholders' meeting where more than 50% of the
outstanding shares are represented in person or by proxy or (b) more than 50% of
the portfolio's shares.
Under such restrictions, each portfolio may not:
1. Issue senior securities.
2. Purchase securities or make investments other than in accordance with
its investment objective and policies.
B-6
<PAGE>
3. 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.
4. Enter into a repurchase agreement if more than 10% of assets would be
subject to repurchase agreements maturing in more than seven days.
5. 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.
6. 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.
7. Make loans to others, except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies.
8. Borrow money or enter into reverse repurchase agreements, except the
Fund may borrow money from banks for temporary or emergency (not leveraging)
purposes, including to fulfill 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.
9. 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.
10. 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.
11. 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.
12. 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 days and
securities which are not otherwise readily marketable.
13. Invest for the purpose of exercising control or management of another
issuer.
14. 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.
B-7
<PAGE>
15. 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.
16. 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.
17. 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.
Along with the Fund's own regulations of borrowing money from a bank in
paragraph 8 above, the 1940 Act limits the ability of the Fund to borrow money
from a Bank. 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. However, for an open-end investment company that elects to
commit itself to pay in cash all requests for redemption pursuant to Rule 18f-1
of the 1940 Act, that 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 made such an election to pay all redeemed shares in
cash and, is therefore not subject to Section 18(f)(1).
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
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; and
(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.
B-8
<PAGE>
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.
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
<TABLE>
<CAPTION>
Taxable Income Hypothetical Tax Free Yield
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% 4.25% 4.50% 4.75% 5.00%
Single Return Joint Return Tax Rate Taxable Equivalent Yield
$25,750-$62,450 $43,050-$104,050 31.60% 5.85% 6.21% 6.58% 6.94% 7.31%
$62,451-$130,250 $104,051-$158,550 34.45 6.10% 6.48% 6.86% 7.25% 7.63%
$130,251-$283,150 $158,551-$283,150 39.20 6.58% 6.99% 7.40% 7.81% 8.22%
over $283,150 over $283,150 42.62 6.97% 7.41% 7.84% 8.28% 8.71%
</TABLE>
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 December 31, 1998 was calculated.
B-9
<PAGE>
Representative Calculation of Distribution Rate for December 31, 1998:
Use One Day Amounts Only,
even on Mondays
Total Interest 263.70
- - Star Interest (1.45)
Total Interest 263.70
262.25 Star Interest 1.45
Discount Rate 13.56
Income Year (*365) 94,410.00 Premium 27.67
New Daily Income 258.66 Expenses 34.77
Shares 183,613.00
+ Star Interest 1.45 NAV 10.19
+ Discount Rate 13.58
- - Premium (27.67)
- - Expenses (34.77)
= TOTAL for 365 Days 211.25
/ Shares 183,613.00
/ NAV 10.19
= Adjusted Rate 0.00011291
= Distribution Rate (*365 *100) 4.1212
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 / P = Total Return
Where: ERV = ending redeemable value of the hypothetical $10,000
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 $10,000.
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 $10,000.
T = average annual total return.
n = number of years in the base period.
ERV = ending redeemable value of the hypothetical $10,000
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.
B-10
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The Fund is a Maryland Corporation. Its Board of Directors will supervise
and manage the affairs of the Fund. 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. 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.
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.
<TABLE>
<CAPTION>
Name, Address and Age Positions with the Fund Principal Occupation During Past 5 Years
--------------------- ----------------------- ----------------------------------------
<S> <C> <C>
James M. Coughlin (63) Director Managing Director of Coughlin & Company,
621 17th Street an investment banking firm, since 1972.
Suite 1900
Denver, CO 80202
Alfred A. Wiesner (70) Director President and CEO of Anchor Bay, a private
1600 Stout Street investor in oil and gas, since 1985.
Suite 750
Denver, CO 80202
Calvin F. Isaak* (68) President, Chairman and Chairman of the Board of Directors and
600 17th Street Director President of Isaak Bond Investments, Inc.,
2610 South Tower a registered broker-dealer, since 1977.
Denver, CO 80293
David Isaak* (38) Vice President, Treasurer Manager of Municipal Bond Trading Department
600 17th Street and Director of Isaak Bond Investments, Inc. since 1984.
2610 South Tower
Denver, CO 80293
Philip J. Konsella (65) Director Real estate broker for and owner of Comark
1519 Genesee Vista Road Realty, Inc. prior to 1992.
Golden, CO 80401
Stan Voth* (53) Secretary Chief Financial Officer of Isaak Bond
600 17th Street Investments, Inc. since 1987.
210 South Tower
Denver, CO 80293
</TABLE>
B-11
<PAGE>
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., a
registered broker dealer and the Fund's principal underwriter and a distributor
of the Fund's shares ("Isaak Bond" or the "Underwriter"). Mr. Isaak is also the
Chairman of the Board of Directors and President of the Adviser. Mr. Calvin F.
Isaak and Mr. David Isaak are father and son.
Mr. Philip J. Konsella, a director of the Fund, resigned as director of the
Underwriter. Mr. Voth, Secretary of the Fund, is also the Chief Financial
Officer of the Underwriter.
The Adviser, Funds Management Corporation, is 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 as defined below in "ADVISORY AGREEMENT
AND EXPENSES." 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.
ADVISORY AGREEMENT AND EXPENSES
Under the advisory agreement between the Fund and the Adviser, dated as of
May 28, 1997 ("Advisory Agreement"), 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, 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 April 22, 1998 in the manner required by the
1940 Act.
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, which totaled $6,552
for the fiscal year ended December 31, 1998 ($2,841 for the Short-Intermediate
Portfolio and $3,711 for the Income Portfolio).
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, 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, expenses and fees of 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.
B-12
<PAGE>
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., (a) by a
vote of a majority of the Board of Directors or of the outstanding voting
securities of the Fund and (b) by a vote of a majority of the Directors 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 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 60 days' written notice to the Adviser and will terminate
automatically in the event of its assignment.
The table below sets forth the advisory fees earned and the advisory fees
actually paid during the fiscal year ended December 31, 1998 and from the
inception of operations of the Fund on October 28, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
Advisory Fees Earned Advisory Fees Paid
---------------------------------------- ----------------------------------------
Short-Intermediate Income Portfolio Short-Intermediate Income Portfolio
Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
1997 $ 21 $ 73 $ 21 $ 73
1998 2,841 3,711 2,841 3,711
</TABLE>
DISTRIBUTION PLAN
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 sale, 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.
These fees are paid out of the Fund's assets on an ongoing basis, and will
increase the cost of your investment over time and may cost you more than paying
other types of sales charges.
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.
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 for 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.
For the fiscal year ended December 31, 1998, the 12b-1 fees paid by the
Fund totaled $7,121 ($3,088 for the Short-Term Portfolio and $4,033 for the
Income Portfolio). Of these expenses, approximately half of them were allocated
to compensating underwriters, and the other half went to sales personnel.
BROKERAGE ALLOCATION--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.
B-13
<PAGE>
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, (a) whether a
broker-dealer has provided research services, as further discussed below; and
(b) 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 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, and may also include comparison of the performance of the Fund to
the performance of various indices and investments for which reliable
performance data is available and similar information prepared by recognized
mutual fund statistical services. 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 of the Fund. 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.
B-14
<PAGE>
CAPITAL STOCK
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 Fund had 183,613 shares of its Short-Intermediate Portfolio and 217,271
shares of its Income Portfolio outstanding as of December 31, 1998.
CONTROL PERSONS AND PRINCIPAL HOLDERS
As of December 31, 1998, the Fund had 14 holders of record of its
Short-Intermediate Portfolio shares and 31 holders of record of its Income
Portfolio shares. The following table summarizes the principal security holders
of the Fund who held more than five percent of the outstanding voting securities
of the Fund and the control persons of the Fund who held more than twenty five
percent of the outstanding voting securities of the Fund as of December 31,
1998:
Percentage of Ownership
Short-Intermediate Portfolio: -----------------------
William Sorensen* 54.5%
550 South University Blvd.
Denver, CO 80209
21.3%
Jerry Berglund
#2 Countryside Lane
Littleton, CO 80121
Income Portfolio:
Susan M. Duncan 16.1%
2651 S. Wadsworth Circle
Lakewood, CO 80027
12.3%
Laverne M. Wiesner
1998 Green Oaks Drive
Littleton, CO 80121-1539
B-15
<PAGE>
Income Portfolio, continued Percentage of Ownership
-----------------------
The Robert Duncan Haley Family Trust 9.2%
DTD-4-17-90
303 E. 17th Ave. Suite 550
Denver, CO 80203
5.6%
Thelma M. Owens
6988 Carr Court
Arvada, CO 80004
Mr. Sorenson, as a holder of 54.5% of the Short-Intermediate Portfolio, is
a control person of the Fund.
Collectively, the officers and directors of the Fund held less than 1% of
the equity securities of the Income Portfolio and the Short-Intermediate
Portfolio as of December 31, 1998.
PURCHASE OF SHARES
Shares of each portfolio may be purchased by check, by wire transfer of
funds through a bank or through one or more authorized brokers authorized by the
Fund to receive purchase orders. 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 as
hereinafter provided.
Dividends are paid beginning on the date that shares are issued.
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 will be issued the day after the
receipt of the check from the investors and dividends are paid beginning on the
date that shares are issued. The purchase price of the shares is the net asset
value in effect when the check is received by the Fund.
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 also 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 back page of the 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.
B-16
<PAGE>
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.
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.
Purchases through an Authorized Broker
The Fund has authorized one or more brokers to receive on its behalf
purchase and redemption orders. Such brokers are further authorized to designate
other intermediaries to receive purchase and redemption orders on the Fund's
behalf. A purchase order will be deemed to be received by the Fund when an
authorized broker, or, if applicable, a broker's authorized designee, receives
such order. Such orders will be priced at the Fund's net asset value next
computed after they are received by an authorized broker or the broker's
authorized designee.
Automatic Investment Plan
Under the Fund's automatic investment plan ("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 the 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.
PRICING OF FUND SHARES--NET ASSET VALUE
The price you pay for the Fund's shares is the net asset value per share of
each portfolio that is determined on the day of purchase. The net asset value
per share of each portfolio is determined by the Fund's transfer agent, American
Data Services, Inc. (the "Transfer Agent" or "ADS") 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 net assets of each portfolio (total assets
less liabilities) by the total number of shares outstanding in such portfolio.
B-17
<PAGE>
In determining net asset value, all of each portfolio's securities except
money market instruments and short-term municipal obligations with remaining
maturities of 60 days or less are valued at market by a pricing service,
approved by the Board of Directors and the Transfer Agent. The pricing service,
Kenny Information Service, 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 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.
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
as specified herein at the offices of the Fund's Transfer Agent or if received
by a broker authorized by the Fund or that broker's authorized designee. 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) 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 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-18
<PAGE>
(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 net 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 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 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.
Pursuant to an election by the Fund under Rule 18f-1 of the 1940 Act that
was filed with the Securities and Exchange Commission on December 11, 1998, all
redemptions will be paid in cash.
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.
B-19
<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 fifteenth day of
each month. If the fifteenth 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 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 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.
UNDERWRITER
Isaak Bond is the underwriter and the general distributor of the shares of
the Fund pursuant to a Distribution Agreement between Isaak Bond and the Fund
dated as of May 28, 1997 (the "Distribution Agreement"). The Distribution
Agreement was approved by the Board of Directors of the Fund, on April 22, 1998
in the manner required by the 1940 Act. See "MANAGEMENT OF THE FUND--Directors
and Officers."
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.
B-20
<PAGE>
For the fiscal year ended December 31, 1998, the Underwriter received
$7,121 in commissions pursuant to the Rule 12b-1 Plan. See "PLAN OF
DISTRIBUTION."
ACCOUNTING, ADMINISTRATIVE AND TRANSFER AGENT
The Fund entered into a series of agreements with ADS (collectively, the
"ADS Agreement"), including a fund accounting service agreement ("Fund
Accounting Service Agreement"), an administrative agreement ("Administrative
Agreement") and a transfer agency and service agreement ("Transfer Agency and
Service Agreement") whereby ADS will provide accounting and administrative
services and shareholder servicing to the Fund. The services to be provided
under the ADS Agreement 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 securities 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 for the fiscal year ended
December 31, 1998, before the Adviser's reimbursement of expenses that exceeded
0.68% of the Fund's average annual net assets, totaled $178,319 ($87,282 from
the Short-Intermediate Portfolio, and $91,037 from the Income Portfolio). The
ADS Agreement provides for a total monthly minimum fees of $3,000 per portfolio
plus expenses and transactional charges. The ADS Agreement provides for
discounts to the Fund during the first twelve months of the Fund's operations or
until average daily net assets exceed specified levels. Under the ADS Agreement,
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 (the "Custodian") for
the Fund pursuant to a custody agreement between the Custodian and the Fund
dated as of May 27, 1997 ("Custody Agreement"), whereby the Custodian provides
for fees on a transactional basis plus out-of-pocket expenses. The Custodian's
address is 425 Walnut Street, M.L. 6118, Cincinnati, Ohio 45202. The minimum
monthly fee per portfolio is $400 per month.
Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202, acts as
legal counsel to the Fund.
Baird, Kurtz & Dobson, independent certified public accountants, is the
auditor of the Fund. Their address is One Norwest Center, 1700 Lincoln Street,
Suite 3400, Denver, Colorado 80203.
FINANCIAL INFORMATION
The financial statements required by Item 22 of the registration statement
are incorporated by reference from the Registrant's Annual Report on Form N-30D
for the year ended December 31, 1998 that was filed with the Securities and
Exchange Commission on February 25, 1999.
B-21
<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
Use line 1 Use line 2
__ Gift to Minors __ Corporations,
Use lines 3, 4 & 5 Partnerships,
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
1. First Name Initial Last Name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Trusts & Others
Use lines 6 & 7
_|_|_|_|_|_|_|_|_|_|_|_|
Soc.Sec.No.
_|_|_|_|_|_|_|_|_|_|_|_|
Soc. Sec. No.
2. Right of survivorship presumed, Soc. Sec. No.
unless tenancy in common is indicated.
_______________________________________________________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.
___________________________________________________________________________
Street Address (Area Code) Home Phone No.
3. Initial Investment $10,000 Minimum per Portfolio
Portfolio Selection: |_| The Short-Intermediate Portfolio $___________
|_| The Income Portfolio $_______________________
<PAGE>
Investment Source
|_| *By Check $__________________
*Please make check payable to Colorado Double Tax-Exempt Bond Fund, Inc.,
and mail with this completed Account Application. You will be assigned
account number(s) by _________________ upon receipt.
|_| **By Wire $________________
**Call the Fund for instructions and account number(s). Read the purchase
by wire section of the Prospectus as a reference if you are unclear on an
any procedures.
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
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
<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 (a) 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 (b) 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:
<PAGE>
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 Nonprofit 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
_________________________ _______________________ _____________________
_________________________ _______________________ _____________________
_________________________ _______________________ _____________________
_________________________ _______________________ _____________________
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.
<PAGE>
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: (a) empowered the above-named Authorized person(s)
to effect securities transactions for the Registered Owner on the terms
described above; (b) 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 (c) 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
Partner(s)/Other(s)***
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.
You are hereby authorized to draw a check or an ACH debit each month on my bank
account for investment in Colorado Double Tax-Exempt Bond Fund as indicated
below:
Amount of each check or ACH debit $_________________
Account No.__________________________________________
Please date and invest checks or draw ACH debits on
the 20th of each month beginning
_____________________________________________________
(Month)
I agree that you are preparing these checks or drawing these debits voluntarily
at my request and that you shall not be liable for any loss arising from any
delay in preparing or failure to prepare any such check or debit. If I change
banks or desire to terminate or suspend this program, I agree to notify you
promptly in writing.
I further agree that if a check or debit is not honored upon presentation, is
authorized to discontinue immediately the Automatic Investment Plan and to
liquidate sufficient shares held in my account to offset the purchase made with
the returned check or dishonored debit.
AUTHORIZATION TO HONOR CHECKS OR ACH DEBITS DRAWN BY
FINANCIAL DATA SERVICES, INC.
To Bank
(Investor's Bank)
Bank address
City State Zip Code
As a convenience to me, I hereby request and authorize you to pay and charge to
my account checks or ACH debits drawn on my account by and payable to
___________________ . I agree that your rights in respect to each such check or
debit shall be the same as it if were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such check or debit. I further agree that if any such check or debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.
Date_________________________ Signature of Depositor
Bank_________________________ (if joint account, both must sign)
_____________________________
Number_______________________
_____________________________
<PAGE>
Date_________________________ Signature of Depositor
Bank_________________________ (if joint account, both must sign)
_____________________________
Number_______________________
_____________________________
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR
BLANK, UNSIGNED CHECK MARKED "VOID" SHOULD ACCOMPANY
THIS APPLICATION.
FOR BROKER-DEALER ONLY
____________________________________________
Branch Office
____________________________________________
Address
[Stamp]
This form when completed should be mailed to:
Colorado Double Tax-Exempt Bond Fund
c/o_________________________________
____________________________________
____________________________________
____________________________________
We hereby authorize Isaak Bond Investments, Inc. to act
as our agent in connection with transactions under this
authorization form and agree to notify the distributor
of any purchases made under a Letter of Intention or
Systematic Withdrawal Plan. We guarantee the
Shareholder's Signature.
________________________________________________________
Broker-Dealer Name
________________________________________________________
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.
"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.
KEY TO S&P'S MUNICIPAL BOND RATINGS
"AAA" Debt rated "AAA" has the highest rating assigned by Standard &
Poor's; the 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.
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"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.
"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.
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.
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"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.
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.
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"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.
"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.
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