<PAGE> 1
COLORADO
[PHOTO]
BONDSHARES
A TAX-EXEMPT FUND
ANNUAL REPORT
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
COLORADO BONDSHARES - A TAX EXEMPT FND FIRST-CLASS MAIL
1200 17TH STREET, SUITE 1150 U.S. POSTAGE
DENVER, CO 80202-5811 PAID
Dallas, Texas
PERMIT NO. 1808
<PAGE> 2
Officers and Trustees
George N. Donnelly, President and Chairman of the Board of Trustees
Andrew B. Shaffer, Secretary, Treasurer and Trustee
Fred R. Kelly, Jr., Portfolio Manager
Investment Adviser
Freedom Funds Management Company
Transfer, Shareholder Servicing, and Dividend
Disbursing Agent
Freedom Funds Management Company
Distributor
SMITH HAYES Financial Services Corp.
Custodian of Portfolio Securities
Norwest Investments and Trust,
Norwest Bank Denver, N.A.
Independent Auditors
KPMG Peat Marwick LLP
Legal Counsel
Kutak Rock
This report is submitted for the general information of the shareholders of
Colorado BondShares - A Tax-Exempt Fund. This report must be preceded or
accompanied by a Prospectus of the Fund. The prospectus contains information
concerning the investment policies and expenses of the portfolio in addition to
other pertinent information. Shares of Colorado BondShares - A Tax-Exempt Fund
are not deposits or obligations of any bank, are not guaranteed by any bank,
and are not insured by the FDIC or any other agency, and involve investment
risks, including possible loss of the principal amount invested.
<PAGE> 3
[COLORADO A COLORADO TAX-EXEMPT
BONDSHARES FUND
LOGO]
One Tabor Center
1200 17th Street, Suite 1150
Denver, CO 80202-5811
(303) 572-6990
(800) 572-0069 (WATTS)
(303) 572-6995 (FAX)
November 27, 1996
Dear Shareholders:
We are proud to present continued good news as reflected in our financial
results for the fiscal year ended September 30, 1996. With one more quarter to
go in the calendar year it is possible that we could repeat our 1994
performance as the number one performing single state tax-exempt bond fund in
the United States.
Bond investors are asking themselves what happens now. In 1994 we had the
worst bond market in history. In 1995 bond prices rebounded sufficiently to
bring the combined total return for the two years in most bond funds to nearly
zero. Colorado BondShare's cumulative total returns at the maximum offered
price and the net asset value for two years ended September 30, 1995 were 9.61%
and 15.07%, respectively. In 1996 many bond funds were at negative real rates
of return until after the third quarter when prices recovered. We posted a
total return at net asset value of 9.15% for the fiscal year ended September
30, 1996. U.S. Treasury rates for the 30 year bond are at 6.50%, up only
slightly from the low of 5.93% in October 1993. Are the good days for bonds
over? No, we believe the lowest rates of this cycle are still ahead of us.
Ordinarily, interest rates hit their high point as demand for credit increases
and prices accelerate in the later stages of the recovery. This time, however,
the economy may begin to slow down on its own before the Federal Reserve is
forced to tighten money supply in order to head off inflationary pressures.
Unlike earlier recoveries, inflation remains low at approximately 3% annually
and is apparently under control. The rate of inflation is probably overstated
in government statistics. Using the standard market basket method of
determining cost changes does not account for improvements in productivity or
quality. As the last two years have illustrated, bond prices can (and no doubt
will) fluctuate. However, keep in mind that long term interest rates as
measured by U.S. Treasuries, have only been above 7% in 22 out of the last 196
years.
Hence, the case for bond ownership is strong. The case for "tax-exempt" bond
ownership is even stronger. The best place to take advantage of both is right
here at Colorado BondShares. We are offering a taxable equivalent rate of
return, excluding commissions and capital gains, to top tax bracket taxpayers
of over 9.4% and over 10.18% to Colorado residents because of the state income
tax component.
Perhaps the most gratifying fact we have encountered is that our competitors
are intently studying our methods of operation. Imitation, as they say, is the
sincerest form of flattery. As always, Mary, Stephanie and I are available at
any time to answer your questions.
Sincerely,
/s/ FRED R. KELLY, JR.
----------------------
Fred R. Kelly, Jr.
<PAGE> 4
[KPMG PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS OF
COLORADO BONDSHARES -
A TAX-EXEMPT FUND:
We have audited the accompanying statements of investments and assets and
liabilities of Colorado BondShares - a Tax-Exempt Fund as of September 30,
1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in the
nine-year period then ended and the period from June 4, 1987 (commencement of
operations) to September 30, 1987. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and brokers; and where
confirmations were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Colorado BondShares - A Tax-Exempt Fund as of September 30, 1996, the results
of its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the nine-year period then ended and the
period from June 4, 1987 to September 30, 1987, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
November 6, 1996
1
<PAGE> 5
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 75,000 Adams County Pollution Control Revenue Refunding Series 1986A, 7.375% due
11/01/09 $ 76,642
25,000 Arapahoe County Cherry Creek School District #5 Series 1990, 6.45% due
12/15/96 25,125
250,000 Arapahoe Water and Sanitation District G.O. Refunding and Improvement
Series 1986, 8.50% due 12/01/05 291,625
175,000 Arapahoe Water and Sanitation District G.O. Refunding and Improvement
Series, 1988A, 9.25% due 12/01/13 184,870
1,000,000 Arapahoe Water and Sanitation District G.O. Refunding and Improvement
Series, 1988A, 9.25% due 12/01/13 (b) 1,111,250
2,250,000 Arapahoe Water and Sanitation District G.O. Refunding Series 1995B, 8.50%
due 12/01/20 2,205,000
525,000 Arrowhead Metropolitan District G.O. Refunding and Improvement Series
1986, 8.50% due 11/01/06 (b) 526,942
575,000 Arvada Multifamily Rental Housing Revenue Series 1993, 7.50% due 12/15/18 575,000
306,040 Aurora Centretech Metropolitan District G.O. Refunding and Improvement
Series 1994, 6.00% due 12/01/23 229,530
155,000 Basalt and Rural Fire Protection District G.O. Series 1996, 3.50% due
12/01/96 154,690
475,000 Bear Creek LID #1 Special Assessment Refunding Series 1993, 6.50% due
3/15/98 475,000
1,915,000 Bell Mountain Ranch Phase II Metropolitan District G.O. Series 1995, 8.50%
due 11/15/96-15 1,915,000
350,000 Bell Mountain Ranch Phase II Metropolitan District Improvement Fee Revenue
Series 1995, 7.00% due 11/15/98 350,000
100,000 Boulder County Single Family Mortgage Revenue Series 1982A, 10.00% due
5/01/99 90,000
395,000 Boulder County Zero Coupon Single Family Mortgage Revenue Series 1983,
11.00% due 12/01/14 (d) 55,529
25,000 Boulder Valley School District No. RE-2 Series 1992A, 5.80% 10/15/01 26,095
463,188 Briargate Public Building Authority, Landowner Assessment Lien Series 1985A
and 1986A, 9.50%-10.25% due 12/15/95-05 (a) 231,594
12,000 Castle Pines North Metropolitan District Tax Revenue Bonds Series 1994B,
8.55%, due 12/01/33 (h) 6,000
530,000 Town of Castle Rock LID Series 1988-2D Special Assessment, 9.25%-10.375%
due 12/01/08 (a) 84,800
25,000 Town of Castle Rock G.O. Series 1988-2 10.375% due 12/01/08 6,500
60,389 Centennial Downs Metropolitan District Cash Payment Deficiency Bond Series
1993, 8.09% due 12/01/34(i) 36,234
588,601 Centennial Downs Metropolitan District Limited Tax Refunding Bond Series
1993, 8.09% due 12/01/34(i) 353,161
</TABLE>
(Continued)
2
<PAGE> 6
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 271,980 Centennial Downs Metropolitan Interest Certificate Series 1993, 6.00% due
12/01/34 (c) $ 6,799
205,000 Cherry Hills Farm Metropolitan District G.O. Refunding Series 1992, 6.50%
due 12/01/96-97 206,360
2,009,520 Colorado Centre Metropolitan District Limited Tax and Special Revenue
Series 1992A, principal only, 0.00% due 1/01/27 (e) 20,095
2,008,335 Colorado Centre Metropolitan District Limited Tax and Special Revenue
Series 1992A, interest only, 9.00% due 1/01/27 (f) 1,305,418
6,465,662 Colorado Centre Metropolitan District Limited Tax and Special Revenue
Series 1992B, 0.00% due 1/01/32 (g) 64,657
370,000 Colorado Health Facilities Authority Revenue Bethesda Psychealth System
Project Series 1987, 8.875%-9.125% due 9/01/07-17 (b) 390,369
5,000 Colorado Health Facilities Authority Hospital Refunding Revenue National
Jewish Center Series 1992, 6.15% due 2/15/98 5,025
190,000 Colorado Health Facilities Authority Refunding Revenue Porter Memorial
Hospital Series 1986A, 7.40% due 2/01/16 (b) 205,857
240,000 Colorado Health Facilities Authority Prerefunded Revenue Refunding Swedish
Medical Center Series 1987, 7.00% due 10/01/15 252,000
260,000 Colorado Housing Finance Authority Multifamily Housing Woodstream Series
1985, 3.95% due 6/01/05 (h) 260,000
1,610,000 Colorado Postsecondary Educational Facilities Authority Revenue National
Technological University Project Series 1993, 7.375%-7.75% due 12/01/10 1,602,475
75,000 Colorado Postsecondary Educational Facilities Authority Revenue The Naropa
Institutional Project Series 1990, 7.875% due 9/01/10 put 9/01/97 75,000
25,000 Colorado Postsecondary Educational Facilities Authority Revenue University
of Denver Project Series B, 8.10% due 12/01/96 25,163
1,000,000 Colorado Springs Spring Creek G.O. Series 1995, 3.00% due 12/01/14 (h)(i) 450,000
340,000 Colorado Tech Center Metropolitan District G.O. Prerefunded Refunding
Series 1989, 9.75% due 6/01/09(b) 385,050
1,180,000 Columbia Metropolitan District G.O. Improvement Series 1992, 7.60%-8.50%
due 9/01/00-11/01/12 1,409,686
595,000 Cordillera Metropolitan District G.O. Series 1994A, 8.00% due 12/01/09 615,825
500,000 Cordillera Metropolitan District G.O. Series 1994, 8.25% due 12/01/13 517,500
</TABLE>
(Continued)
3
<PAGE> 7
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 2,250,000 Cottonwood Water and Sanitation District Refunding Series 1996, 7.60%
12/01/12 $ 2,250,000
115,000 City and County of Denver Zero Coupon Single Family Mortgage Revenue
Series 1984, 11.63% due 9/01/15 (d) 13,800
50,000 Metropolitan Denver Sewage Disposal District No. 1 Series 1986A, 6.75% due
4/01/11 (b) 50,500
410,000 Douglas County LID #3 Series 1991, 10.00% due 8/01/99-02 410,000
575,000 Dove Valley Metropolitan District G.O. Refunding & Improvement Series
1988, 8.90%-9.50% due 12/01/99-08 586,750
505,000 Dove Valley Metropolitan District G.O. Refunding & Improvement Series
1989, 8.25% due 12/01/08 515,100
600,000 Eaglebend Affordable Housing Corporation Revenue Series 1990A-2, 10.309%
due 7/01/21 (g) 582,000
500,000 Eaglebend Affordable Housing Corporation Revenue Series 1991B, 10.309% due
7/01/21 (g) 485,000
90,000 El Paso County LID 85-2 Special Assessment Refunding Series 1988,
8.875%-9.00% due 9/01/00 9,000
2,400,000 El Paso County Multifamily Housing Briarglen Apartments Project Series
1994, 3.90% due 12/01/24 (h) 2,400,000
100,000 El Paso County Pheasant Run LID Special Assessment Bonds Series 1986-2,
9.25% due 9/01/97 (a) 26,000
25,000 El Paso County Pikes Peak Library Series 1987, 6.15% due 6/01/01 25,062
500,000 El Paso County School District No. 20 Zero Coupon G.O. Refunding Series
1993A, 6.10% due 6/15/08 (d) 250,000
1,500,000 Fairlake Metropolitan District G.O. Series 1989, 9.00% due 6/01/09 1,560,000
10,000 Fairlake Metropolitan District G.O. Series 1991, 9.625% due 12/01/98 10,400
515,000 Forest Hills Metropolitan District G.O. Refunding Series 1992B, 7.75% due
11/01/99 520,150
500,000 Fort Collins G.O. Water Series 1982, 10.00% due 12/01/99 (b) 534,325
25,000 Fort Collins Refunding Series B, 6.00%, due 12/01/02 26,500
850,000 Gateway Village Improvement District G.O. Series 1995, 8.25%-8.75% due
12/01/05-14 850,000
490,000 Greenwood North Metropolitan District G.O. Refunding Series 1993,
4.40%-5.00% due 12/01/98-01 484,500
500,000 Hamilton Creek District Series 1990, 1.00% due 12/01/04 (g) 250,000
750,000 Hyland Hills Park & Recreation District Special Revenue Refunding
Improvement Series 1996A, 4.35% due 12/15/96 750,000
10,000 Hyland Hills Park & Recreation District Special Revenue Improvement Series
1992, 7.10% due 12/15/00 10,250
</TABLE>
(Continued)
4
<PAGE> 8
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 340,000 Idledale Fire Protection District G.O. Series 1993, 5.20%-5.80% due
12/15/03-07 $ 331,656
210,000 Interstate South Metropolitan District G.O. Refunding & Improvement Series
1986, 9.50% due 12/01/06 (b) 214,011
270,000 Interstate South Metropolitan District Prerefunded G.O. Refunding &
Improvement Series 1989, 8.375% due 12/01/05 274,671
230,000 Interstate South Metropolitan District G.O. Refunding & Improvement Series
1989, 8.375% due 12/01/05 233,335
1,655,000 Interstate South Metropolitan District Zero Coupon G.O. Refunding &
Improvement Series 1989, 9.00% due 12/01/10-14 (d) 373,467
250,000 Jefferson County School District R-1 Series B, 8.75% due 12/15/96 252,500
495,000 La Plata County Recreational Facilities Revenue Refunding Durango Ski
Corporation Project Series 1989A, 9.00% due 02/01/10 480,150
65,000 City of Lakewood Zero Coupon Single Family Mortgage Series 1985, 11.10%
due 5/01/15 (d) 8,618
35,000 Larimer County Zero Coupon Single Family Mortgage Revenue Series 1985,
11.25% due 4/01/15 (d) 4,622
315,000 City of Las Animas Water G.O. Series 1989, 8.60% due 12/01/09 316,452
1,000,000 City of Louisville Sales Tax Revenue Series 1989, 8.60% due 11/15/13 (b) 1,096,340
220,000 Mesa County Single Family Mortgage Revenue Series 1982, 10.75% due
12/01/99 (a) 22,000
1,250,000 Mid Valley Metropolitan District G.O. Refunding & Improvement Series
1989, 8.90% due 12/15/04 1,362,500
15,000 Montrose County Airport Authority Airport Revenue Refunding & Improvement
Series 1987, 9.50% due 12/01/07(b) 15,921
750,000 Mountain Village Metropolitan District G.O. Series 1992, 7.95% due 12/01/03 821,250
350,000 Town of Nederland G.O. Water Refunding Series 1989, 8.50% due 8/15/13 353,500
285,000 Northern Metropolitan District Limited Tax Revenue Refunding Series 1992A,
8.25%-8.875% due 12/01/22 247,950
596,100 Northern Metropolitan District Limited Tax Revenue Refunding Series 1992B,
0.00% due 12/01/22 (a)(d) 23,844
881,250 Northern Metropolitan District Limited Tax Revenue Refunding Series 1992B,
8.25%-8.875% due 12/01/22 (c) 343,687
20,000 Northgate Public Building Authority Landowner Assessment Lien Series
1987A, 8.25% due 12/01/00(a) 3,200
</TABLE>
(Continued)
5
<PAGE> 9
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 150,000 Panorama Metropolitan District G.O. Series 1986, 9.50% due 12/01/05 (b) $ 153,000
5,000 Panorama Metropolitan District G.O. Series 1986, 9.50% due 12/01/05 5,050
1,055,000 Panorama Metropolitan District G.O. Refunding Series 1989B, 9.00% due
12/01/09 1,076,100
1,000,000 Piney Creek Metropolitan District Refunding Series 1989A, 8.50% due
12/01/14 1,040,800
410,000 Plains Metropolitan District G.O. Series 1986, 8.50%-9.25% due
12/01/96-6/01/06 328,000
225,000 Pueblo Urban Renewal Authority Revenue Series 1994B, 5.05% due 12/01/19,
put 12/01/96 225,000
159,868 Roxborough Village Metropolitan District Series 1993A, 9.00% due 12/31/16 132,690
278,078 Roxborough Village Metropolitan District Series 1993B, principal only,
0.00% due 12/31/21 (e) 27,808
906,622 Roxborough Village Metropolitan District Zero Coupon Series 1993C, 9.84%
due 12/31/32 (d) 9,066
20,270 Roxborough Village Metropolitan District Series 1993B, interest only,
10.41% due 1/01/43 (f) 203
240,000 Saint Vrain Sanitation District G.O. Series 1987, 9.625% due 12/01/06 257,230
500,000 City of Salida Sales Tax Revenue Refunding & Improvement Series 1990,
8.20% due 12/01/11 526,850
125,000 San Miguel County Housing Authority Multifamily Telluride Village Zero
Coupon Revenue Refunding Series 1993, 7.00% due 7/01/98 (d) 112,733
535,000 San Miguel County Housing Authority Multifamily Telluride Village Revenue
Refunding Series 1993, 6.30% due 7/01/13 508,250
185,000 San Miguel County School District No. R-1 G.O. Series 1992, 8.50% due
12/01/98 198,875
1,000,000 Southpark Metropolitan District Refunding G.O. Series 1996, 6.60% due
12/01/13 970,000
100,000 Southtech Metropolitan District G.O. Series 1994, 5.35%-5.85% due
12/01/01-04 98,812
385,000 Squaw Creek Metropolitan District Revenue Series 1994, 5.25% due 12/01/13,
put 12/01/98 385,000
610,000 Valley Metropolitan District G.O. Revenue Series 1992, 7.00% due 12/15/06 622,200
100,000 Walsenburg Natural Gas Revenue Series 1968, 6.25% due 6/01/98-99 101,700
</TABLE>
(Continued)
6
<PAGE> 10
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT COLORADO MUNICIPAL BONDS - 87.0% VALUE
------ -------------------------------- -----
<S> <C> <C>
$ 75,000 City of Westminster Special Assessment Series 1988, 9.00% due 12/01/03 $ 76,500
5,000 Wright Farms Metropolitan District G.O. Series 1986, 9.75% due 12/01/05
5,050
------------
Total Colorado Municipal Bonds (cost $43,496,209) 43,047,794
------------
COLORADO CERTIFICATES OF PARTICIPATION - 1.3%
100,000 Arapahoe Library District Certificates of Participation Series 1990, 6.55%
due 12/15/96 100,500
80,000 Huerfano County Refunding Certificates of Participation Series 1993, 4.50%
due 12/01/96 80,000
50,000 Las Animas County School District No. 001 Certificates of Participation
Series 1991A, 8.00% due 12/01/10 56,534
425,000 Roaring Fork School District RE-1 Garfield Pitkin and Eagle Counties
Series 1996, 3.4% due 12/15/96 424,363
------------
Total Colorado Certificates of Participation Bonds (cost $662,158) 661,397
------------
COLORADO INDUSTRIAL DEVELOPMENT REVENUE BONDS - 11.7%
400,000 Adams County Outdoor Sports Project Series 1978, 7.125% due 11/01/96-98 398,250
5,000 City and County of Denver American Water Works Association Series 1987,
10.00% due 3/01/07 5,050
200,000 City and County of Denver Desks Colorado Project Series 1983, 4.35% due
10/15/05 (put 10/15/96) 200,000
1,490,000 City of Englewood Swedish Medical Center Series 1985, 3.75%, due
12/01/10(h) 1,490,000
1,305,000 City of Fort Collins The Opera House Project Series 1986, 8.75%-9.125% due
12/01/10-16 1,318,050
2,400,000 City of Northglenn Castle Gardens Series 1988, 3.625% due 12/01/09 (h) 2,400,000
------------
Total Colorado Industrial Development Revenue
Bonds (cost $5,790,575) 5,811,350
------------
Total investments, at value (cost $49,948,942) 97.9% 49,520,541
Other assets net of liabilities 2.1 1,062,309
----- ------------
Net assets 100.0% $ 50,582,850
===== ============
</TABLE>
7
<PAGE> 11
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
(A) Non-income producing based upon the financial condition of the issuer (see
footnote 1).
(B) Originally issued as general obligation bonds but are now prerefunded and
are secured by an escrow fund consisting entirely of direct U.S.
Government obligations.
(C) Represents interest certificates whose characteristics are similar to zero
coupon bonds. All interest based on the coupon rate is remitted upon
maturity.
(D) Interest rate shown for zero coupon bonds represents the effective yield
at the date of acquisition.
(E) Principal-only certificate represents the right to receive the principal
payments on the underlying debt security upon maturity. The price of this
security is typically more volatile than that of coupon-bearing bonds of
the same maturity.
(F) Interest-only certificate represents the right to receive semi-annual
interest payments on the underlying debt security. The principal amount of
the underlying security represents the notional amount on which current
interest is calculated. The interest rate shown represents the effective
yield at the date of acquisition.
(G) Interest rate disclosed for cash flow bond represents the effective yield
at September 30, 1996. Income on this security is derived from the cash
flow of the issuer.
(H) Represents current interest rate for a variable rate bond.
(I) Represents a security which was formerly in default and was restructured
during the year ended September 30, 1996.
The following abbreviations are used in the descriptions of securities included
in the Statement of Investments:
G.O. - General Obligations
LID - Local Improvement District
GID - General Improvement District
See accompanying notes to financial statements.
8
<PAGE> 12
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
ASSETS
- ------
<TABLE>
<S> <C> <C>
Investments, at value (cost $49,948,942) - see accompanying statement $ 49,520,541
Cash 2,210,054
Interest receivable 1,273,432
------------
Total assets 53,004,027
------------
LIABILITIES
- -----------
Payables and other liabilities:
Dividends 122,379
Shares of beneficial interest redeemed 1,000
Investments purchased 2,250,000
Accrued expenses and other 47,798
------------
Total liabilities 2,421,177
------------
Net assets $ 50,582,850
============
COMPOSITION OF NET ASSETS
- -------------------------
Paid-in capital $ 51,368,326
Undistributed net investment income 10,698
Accumulated net realized loss from investment transactions (367,773)
Net unrealized depreciation of investments (note 3) (428,401)
------------
Net assets $ 50,582,850
============
Net asset value and redemption value per share (based on 5,399,890
shares of beneficial interest outstanding) $ 9.37
======
Maximum offering price per share (net asset value plus sales charge
of 4.75% of offering price) $ 9.84
======
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 13
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income - interest $ 3,427,447
-----------
Expenses:
Management fees (note 4) 240,476
Transfer agency expenses (note 4) 38,231
Custodian fees (note 5) 33,213
Legal and auditing fees 31,876
Shareholders' reports and proxy statements 15,072
Registration fees 3,367
Fidelity bond 2,793
Trustees' fees 1,746
Other 1,101
-----------
Total expenses 367,875
Earnings credits on cash balances (note 5) (33,213)
-----------
Net expenses 334,662
-----------
Net investment income 3,092,785
-----------
Realized and unrealized loss on investments:
Net realized loss on investments (7,594)
-----------
Net unrealized depreciation of investments:
Beginning of year (1,493,175)
End of year (428,401)
-----------
Net change in unrealized depreciation on investments 1,064,774
-----------
Net realized and unrealized gain on investments 1,057,180
-----------
Net increase in net assets resulting from operations $ 4,149,965
===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 14
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
From investment activities:
Net investment income $ 3,092,785 2,948,098
Net realized loss on investments (7,594) (143,604)
Net change in unrealized depreciation on
investments 1,064,774 579,126
------------ ------------
Net increase in net assets resulting from operations 4,149,965 3,383,620
------------ ------------
Dividends to shareholders from net investment income (3,082,087) (2,947,825)
------------ ------------
From beneficial interest transactions:
Proceeds from sale of shares 6,719,354 6,594,466
Dividends reinvested 2,038,765 1,915,678
Payments for shares redeemed (4,011,430) (5,967,321)
------------ ------------
Increase in net assets derived from
beneficial interest transactions 4,746,689 2,542,823
------------ ------------
Net increase in net assets 5,814,567 2,978,618
Net assets:
Beginning of year 44,768,283 41,789,665
------------ ------------
End of year, including undistributed net investment
income of $10,698 and $-0-, respectively $ 50,582,850 44,768,283
============ ============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 15
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period $ 9.16 9.07 9.13 9.07 8.96 8.93
-------- ------ ------ ------ ------ ------
Net investment income .61 .60 .63 .66 .68 .71
Net realized and unrealized
gain (loss) on investments .20 .09 (.06) .07 .10 .03
-------- ------ ------ ------ ------ ------
Increase (decrease) from
investment operations .81 .69 .57 .73 .78 .74
Dividends from net invest-
ment income (.60) (.60) (.63) (.67) (.67) (.71)
-------- ------ ------ ------ ------ ------
Net increase (decrease)
in net asset value .21 .09 (.06) .06 .11 .03
-------- ------ ------ ------ ------ ------
Net asset value, end of period $ 9.37 9.16 9.07 9.13 9.07 8.96
======== ====== ====== ====== ====== ======
TOTAL RETURN, AT NET ASSET
VALUE (1) 9.15% 8.05 6.50 8.53 9.09 8.49
======== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)s $ 50,583 44,768 41,790 34,773 27,585 25,177
======== ====== ====== ====== ====== ======
Ratios to average net assets:
Expenses (2) .77% .84 .74 .81 .94 1.06
Net investment income 6.50% 6.81 6.96 7.27 7.61 8.04
Portfolio turnover rate (3) 24.53% 27.48 22.04 7.87 5.00 9.35
======== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Period
Year ended September 30 ended
--------------------------------------- September 30,
1990 1989 1988 1987*
---- ---- ---- -----
<S> <C> <C> <C> <C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period 9.61 9.59 9.43 10.00
------ ------ ------ -----
Net investment income .74 .74 .77 .26
Net realized and unrealized
gain (loss) on investments (.68) .03 .16 (.57)
------ ------ ------ -----
Increase (decrease) from
investment operations .06 .77 .93 (.31)
Dividends from net invest-
ment income (.74) (.75) (.77) (.26)
------ ------ ------ -----
Net increase (decrease)
in net asset value (.68) .02 .16 (.57)
------ ------ ------ -----
Net asset value, end of period 8.93 9.61 9.59 9.43
====== ====== ====== =====
TOTAL RETURN, AT NET ASSET
VALUE (1) 0.61 8.49 9.57 (2.59)**
====== ====== ====== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)s 34,397 37,551 15,319 5,992
====== ====== ====== =====
Ratios to average net assets:
Expenses (2) .82 .79 .43 .34**
Net investment income 7.85 8.80 7.38 7.79**
Portfolio turnover rate (3) 34.54 11.58 11.12 58.64**
====== ====== ====== =====
</TABLE>
12
<PAGE> 16
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
FINANCIAL HIGHLIGHTS, CONTINUED
- --------------------------------------------------------------------------------
* For the period June 4, 1987 (commencement of operations) to September 30,
1987.
** Annualized.
(1) Assumes a hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends reinvested in
additional shares on the reinvestment date, and redemption at the net
asset value calculated on the last business day of the fiscal period.
Sales charges are not reflected in the total returns.
(2) Beginning in fiscal 1995 the expense ratio reflects the effect of gross
expenses (including those paid indirectly by the Fund via earnings credits
on cash balances). Prior period expense ratios have not been adjusted.
Absent voluntary expense reimbursement by the Fund's investment adviser,
the expense ratio for the years and period ended September 30, 1989, 1988,
and 1987 would have been .86%, 1.27%, and 3.13%, respectively. There have
been no voluntary reimbursements subsequent to fiscal 1989.
(3) The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of portfolio securities for a period by the monthly
average of the market value of portfolio securities owned during the
period. Sales of securities include the proceeds of securities which have
been called, or for which payment has been made through redemption or
maturity. Securities with a maturity date of one year or less at the time
of acquisition are excluded from the calculation.
Purchases and sales of investment securities (excluding short-term
securities) for the year ended September 30, 1996 were $17,937,039 and
$10,756,288, respectively.
See accompanying notes to financial statements.
13
<PAGE> 17
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Colorado BondShares - A Tax-Exempt Fund (the Fund) is registered under the
Investment Company Act of 1940 as amended, as a diversified, open-end
management company. The Fund's investment objectives are to maximize
income exempt from federal income taxes and from personal income taxes of
the State of Colorado to the extent consistent with the preservation of
capital and to seek opportunities for capital appreciation. The Fund's
investment adviser is Freedom Funds Management Company (Freedom Funds).
The following is a summary of significant accounting policies consistently
followed by the Fund.
INVESTMENT VALUATION
The value of investments are determined using prices quoted by one or more
independent broker/dealers dealing in municipal bonds. The Fund does not
record amortization of premiums or accretion of discounts for financial
statement purposes, except for original issued discounts on zero coupon
bonds which are amortized to maturity using the effective yield method.
Short-term debt securities having a remaining maturity of 60 days or less
are valued at amortized cost which approximates market value.
INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all
its net investment income to shareholders. Therefore, no tax provision is
required. At September 30, 1996, the Fund had available for federal income
tax purposes an unused capital loss carryover of approximately $368,000,
expiring in 2001, 2002, and 2003.
OTHER/SECURITY CREDIT RISK
Investment transactions are accounted for on the date the investments are
purchased or sold (trade date). Dividends to shareholders are declared
each business day and paid monthly. Distributions to shareholders are
recorded on the ex-dividend date. Realized gains and losses from
investment transactions are calculated using the identified-cost basis
which is the same basis the Fund uses for federal income tax purposes. The
Fund concentrates its investments in Colorado and, therefore, may have
more credit risks related to the economic conditions of Colorado than a
portfolio with a broader geographical diversification. The Fund invests in
nonrated securities, which may be subject to a greater degree of credit
risk, and risk of loss of income and principal, and may be more sensitive
to economic conditions than lower yielding, higher rated fixed income
securities. The Fund discontinues the accrual of interest income on
municipal bonds when the securities become delinquent as to payment of
principal or interest, or when the Fund's investment adviser determines
that an uncertainty exists as to the realization of all or a portion of
the principal balance. The face amount and market value of bonds, for
which the accrual of interest income has been discontinued, approximated
$1,929,000 and $391,000 (0.8% of net assets), respectively, as of
September 30, 1996.
14
<PAGE> 18
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SHARES OF BENEFICIAL INTEREST
At September 30, 1996, there was an unlimited number of no par value
shares of beneficial interest authorized. Transactions in shares of
beneficial interest for the years ended September 30, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sold 724,744 727,055
Dividends reinvested 219,736 210,777
-------- --------
944,480 937,832
Redeemed (431,911) (657,433)
-------- --------
Net increase 512,569 280,399
======== ========
</TABLE>
(3) UNREALIZED GAINS AND LOSSES
At September 30, 1996, the net unrealized depreciation on investments of
$428,401 was comprised of gross appreciation of $1,682,679 and gross
depreciation of $2,111,080.
(4) MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees paid to Freedom Funds were in accordance with the
investment advisory agreement with the Fund which provides for an annual
fee equivalent to 0.5% of the net assets of the Fund. Freedom Funds pays
all expenses associated with advertising, marketing, and distributing the
Fund's shares and serves as the transfer agent, dividend disbursing agent,
and registrar for the Fund. Freedom Funds provided certain transfer agency
and shareholder services as part of the management fee arrangement for the
fiscal year ended September 30, 1996. Transfer agency expenses represent
direct expenses charged to the Fund by third parties.
(5) EARNINGS CREDITS ON CASH BALANCES
Earnings credits on cash balances maintained with the custodian by the
Fund resulted in offsetting custodian fees incurred for the safeguarding
of Fund assets.
15
<PAGE> 19
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<PAGE> 20
FEDERAL INCOME TAX INFORMATION
(unaudited)
In early 1997, shareholders will receive information regarding all dividends
and distributions paid to them by the Fund during calendar year 1996.
Regulations of the U.S. Treasury Department require the Fund to report this
information to the Internal Revenue Service.
During fiscal year ended September 30, 1996, 100 percent of the dividends paid
by Colorado BondShares A Tax-Exempt Fund from net investment income should be
treated as tax-exempt dividends.
