<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JANUARY 28, 1997
FILE NO. 33-11981
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 11 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 14
COLORADO BONDSHARES--A TAX-EXEMPT FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
SUITE 1150, 1200 SEVENTEENTH STREET, DENVER, COLORADO 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 572-6990 (800) 572-0069 (OUTSIDE OF DENVER)
REGISTRANT'S TELEPHONE NUMBERS, INCLUDING AREA CODE:
FRED R. KELLY, JR.
SUITE 1150, 1200 SEVENTEENTH STREET
DENVER, COLORADO 80202
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROBERT J. AHRENHOLZ, ESQ.
DEBORAH A. SCHULTZ, ESQ.
KUTAK ROCK 717 SEVENTEENTH STREET, SUITE 2900
DENVER, COLORADO 80202
It is proposed that this filing will become effective (check appropriate line):
[x] immediately upon filing pursuant to paragraph (b).
[ ] on (date) pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(i).
[ ] on (date) pursuant to paragraph (a)(i).
[ ] 75 days after filing pursuant to paragraph (a)(ii).
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
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<PAGE> 2
If appropriate check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has registered an indefinite number or amount of
securities under the Securities Act of 1933, as amended, pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended. A Rule 24f-2 Notice for
the fiscal year ended September 30, 1996 was filed on November 29, 1996.
2
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COLORADO BONDSHARES--A TAX-EXEMPT FUND
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 481
LOCATION IN
FORM N-1A PROSPECTUS OR STATEMENT
ITEM NO. OF ADDITIONAL INFORMATION
- - - - -------- -------------------------
PROSPECTUS
1. Cover Page Cover Page
2. Synopsis EXPENSE TABLE
3. Condensed Financial Information FINANCIAL HIGHLIGHTS
4. General Description of Registrant WHAT IS COLORADO
BONDSHARES--A TAX-EXEMPT
FUND?
WHAT ARE THE INVESTMENT
OBJECTIVES OF THE FUND?
WHAT ARE THE INVESTMENT POLICIES
OF THE FUND?
5. Management of the Fund HOW IS THE FUND MANAGED?
WHAT ABOUT ALLOCATION OF
PORTFOLIO TRANSACTIONS?
WHAT MANAGEMENT AND SERVICE
FEES DOES THE FUND PAY?
5A. Management's Discussion of MANAGEMENT'S DISCUSSION OF FUND
Fund Performance PERFORMANCE
6. Capital Stock and Other Securities WHAT ARE TAX-EXEMPT
OBLIGATIONS?
WHAT KIND OF SHARES DOES THE
FUND OFFER?
WHO IS THE SHAREHOLDER SERVICE
AGENT?
WHAT SERVICES ARE PROVIDED TO
SHAREHOLDERS?
WHAT DISTRIBUTIONS WILL I
RECEIVE?
WHAT IS THE EFFECT OF INCOME TAX
ON MY INVESTMENT?
7. Purchase of Securities Being Offered HOW CAN I INVEST IN THE FUND?
WHAT DO SHARES COST?
3
<PAGE> 4
HOW IS NET ASSET VALUE PER SHARE
DETERMINED?
HOW CAN I REINSTATE MY
INVESTMENT?
8. Redemption or Repurchase HOW CAN I "SELL" MY SHARES?
HOW CAN I REINSTATE MY
INVESTMENT?
9. Pending Legal Proceedings Not Applicable
STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table Of Contents TABLE OF CONTENTS
12. General Information and History WHAT IS COLORADO BONDSHARES--A
TAX-EXEMPT FUND?
GENERAL INFORMATION
13. Investment Objectives and Policies WHAT ARE THE FUND'S INVESTMENT
OBJECTIVES, POLICIES AND RISKS?
WHAT ARE THE FUND'S INVESTMENT
LIMITATIONS?
14. Management of the Fund WHO GIVES INVESTMENT ADVICE TO
THE FUND?
HOW IS THE FUND MANAGED?
15. Control Persons and Principal HOW IS THE FUND MANAGED?
Holders of Securities
16. Investment Advisory and Other Services HOW IS THE FUND MANAGED?
ADVISORY AGREEMENT AND
EXPENSES and CUSTODIAN AND
AUDITORS
17. Brokerage Allocation and Other Practices Disclosed In Prospectus Under
"WHAT ABOUT ALLOCATIONS OF
PORTFOLIO TRANSACTIONS?"
ADVISORY AGREEMENT AND
EXPENSES
18. Capital Stock and Other Securities WHAT KIND OF SHARES DOES THE
FUND OFFER?
19. Purchase, Redemption and Pricing of Disclosed In Prospectus Under "HOW
Securities Being Offered CAN I INVEST IN THE FUND?," "HOW
CAN I 'SELL' MY SHARES?," "HOW
4
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IS NET ASSET VALUE PER SHARE
DETERMINED?" and "WHAT DO
SHARES COST?"
PURCHASE OF SHARES
REDEMPTION OF SHARES
HOW IS NET ASSET VALUE PER SHARE
DETERMINED?
20. Tax Status Disclosed In Prospectus Under "WHAT
IS THE EFFECT OF INCOME TAX ON
MY INVESTMENTS?"
21. Underwriters DISTRIBUTION OF SHARES
22. Calculations of Performance Data CALCULATION OF PERFORMANCE
DATA
23. Financial Statements Financial Statements
5
<PAGE> 6
COLORADO BONDSHARES
A TAX-EXEMPT FUND
1200 Seventeenth Street, Suite 1150
Denver, Colorado 80202
(303) 572-6990
(800) 572-0069 (Outside Denver)
January 28, 1997
Colorado BondShares -- A Tax-Exempt Fund (the "Fund") is a mutual fund that
seeks to maximize income exempt from federal income taxes and from Colorado
personal income taxes to the extent consistent with preservation of capital. The
Fund has a secondary objective of seeking opportunities for capital
appreciation. The Fund will invest not less than 65 percent 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 Colorado personal income taxes. The Fund
will invest principally, without percentage limitation, in Tax-Exempt
Obligations (as defined herein) which on the date of investment are not rated,
although the Fund may invest up to 50 percent of its assets in rated Tax-Exempt
Obligations. There can be no assurance that the Fund will achieve its
objectives.
This Prospectus sets forth concisely the information concerning the Fund that
a prospective investor should know before investing. Please review this
Prospectus carefully and retain it for future reference.
Additional information about the Fund, including a Statement of Additional
Information dated January 28, 1997, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information is available upon
request and without charge by calling or writing the Fund at the telephone
numbers or the address set forth above. The Statement of Additional Information
is incorporated herein by reference in its entirety.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expense Table.............................. 2
Financial Highlights....................... 3
What Is Colorado BondShares -- A Tax-Exempt
Fund?.................................... 4
What Are The Investment Objectives Of The
Fund?.................................... 4
What Are The Investment Policies Of The
Fund?.................................... 4
What Are The Risks Of Investing In Not
Rated Tax-Exempt Obligations?............ 6
What Are The Risks Of Investing In Lower
Rated Tax-Exempt Obligations?............ 6
What Are Tax-Exempt Obligations?........... 7
How Is The Fund Managed?................... 11
What About Allocation Of Portfolio
Transactions?............................ 12
What Management And Service Fees Does The
Fund Pay?................................ 13
Management's Discussion Of Fund
Performance.............................. 13
What Kind Of Shares Does The Fund
Offer?................................... 17
How Can I Invest In The Fund?.............. 17
What Do Shares Cost?....................... 17
How Can I "Sell" My Shares?................ 18
How Can I Reinstate My Investment?......... 18
What Distributions Will I Receive?......... 18
What Is The Effect Of Income Tax On My
Investment?.............................. 19
Who Is The Shareholder Service Agent?...... 20
How Is Net Asset Value Per Share
Determined?.............................. 21
What Services Are Provided To
Shareholders?............................ 21
Performance Data........................... 21
General Information........................ 22
</TABLE>
<PAGE> 7
EXPENSE TABLE
The following table is provided to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "WHAT MANAGEMENT AND SERVICE FEES DOES THE FUND PAY?" and "WHAT
DO SHARES COST?" for a more complete description of these costs and expenses.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)..................................... 4.75%
Sales Charge on Reinvested Dividends...................... None
Redemption Fee............................................ None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average
net assets) Management Fee................................ .50%
Other Expenses............................................ .27%
Total Fund Operating Expenses..................... .77%
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) a 5%
annual return and (2) redemption at the end of each time period*. The Securities
and Exchange Commission requires that all mutual funds use the 5% annual return
rate for the purpose of preparing the example below.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - - - ------ ------- ------- --------
<C> <C> <C> <C>
$55 $71 $89 $140
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE PERFORMANCE OR EXPENSES AND ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
The percentage figure above for "Other Expenses" is based on actual amounts
incurred for the most recent fiscal year.
- - - - ---------------
* You would pay the same expenses assuming no redemption since the Fund does not
charge a redemption fee.
2
<PAGE> 8
CONDENSED FINANCIAL INFORMATION
The per share data and ratios in the table below have been audited by KPMG
Peat Marwick LLP, the Fund's independent auditors, whose report can be found in
the Statement of Additional Information of the Fund, which is available upon
request. Further financial information is included in the Statement of
Additional Information.
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding for the periods
ended September 30 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <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 9.61 9.59 9.43
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income.......... .61 .60 .63 .66 .68 .71 .74 .74 .77
Net realized and unrealized
gain (loss) on investments... .20 .09 (.06) .07 .10 .03 (.68) .03 .16
------- ------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) from
investment operations........ .81 .69 .57 .73 .78 .74 .06 .77 .93
Dividends from net investment
income....................... (.60) (.60) (.63) (.67) (.67) (.71) (.74) (.75) (.77)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in net
asset value.................... .21 .09 (.06) .06 .11 .03 (.68) .02 .16
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period....................... $ 9.37 9.16 9.07 9.13 9.07 8.96 8.93 9.61 9.59
======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return, at Net Asset
Value(1)..................... 9.15% 8.05 6.50 8.53 9.09 8.49 0.61 8.49 9.57
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period
(000)s....................... $50,583 44,768 41,790 34,773 27,585 25,177 34,397 37,551 15,319
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios to average net assets:
Expenses(2).................... 77% .84 .74 .81 .94 1.06 .82 .79 .43
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income.......... 6.50% 6.81 6.96 7.27 7.61 8.04 7.85 8.80 7.38
======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover ratio(3)...... 24.53% 27.48 22.04 7.87 5.00 9.35 34.54 11.58 11.12
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1987*
-------------
<S> <C>
Per Share Operating Data:
Net asset value, beginning of
period....................... 10.00
------
Net investment income.......... .26
Net realized and unrealized
gain (loss) on investments... (.57)
------
Increase (decrease) from
investment operations........ (.31)
Dividends from net investment
income....................... (.26)
------
Net increase (decrease) in net
asset value.................... (.57)
------
Net asset value, end of
period....................... 9.43
======
Total Return, at Net Asset
Value(1)..................... (2.59)**
======
Ratios/Supplemental Data:
Net assets, end of period
(000)s....................... 5,992
======
Ratios to average net assets:
Expenses(2).................... .34**
------
Net investment income.......... 7.79**
======
Portfolio turnover ratio(3)...... 58.64**
======
</TABLE>
- - - - ---------------
* 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 Funds investment adviser, the
expense ratios for the years and period ending 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) A portfolio turnover ratio 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 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.
3
<PAGE> 9
WHAT IS COLORADO BONDSHARES --
A TAX-EXEMPT FUND?
Colorado BondShares -- A Tax-Exempt Fund (the "Fund") is a diversified,
open-end management investment company, or mutual fund, organized as a
Massachusetts business trust on February 13, 1987.
When you invest in shares of the Fund, your money is combined with that of
many other investors. The Fund provides you with diversification by investing
this money in tax-exempt bonds and other tax-exempt securities (tax-exempt notes
and tax-exempt municipal leases) (collectively, "Tax-Exempt Obligations") of the
State of Colorado, its political subdivisions, municipalities and public
authorities. Freedom Funds Management Company, a Delaware corporation, the
investment adviser of the Fund (the "Investment Adviser"), provides prudent and
professional management by investing in those Tax-Exempt Obligations that meet
the Fund's investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES
OF THE FUND?
The Fund seeks to maximize income exempt from federal income taxes and from
Colorado personal income taxes to the extent consistent with preservation of
capital; a secondary objective is to seek opportunities for capital
appreciation. The Fund will invest in Tax-Exempt Obligations of the State of
Colorado, its political subdivisions, municipalities and public authorities, the
interest on which is exempt from regular federal income taxes and from Colorado
personal income taxes. (See "WHAT IS THE EFFECT OF INCOME TAX ON MY
INVESTMENT?")
WHAT ARE THE INVESTMENT POLICIES
OF THE FUND?
It is a nonfundamental policy of the Fund that, under normal circumstances,
the Fund will invest at least 65 percent 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
regular federal income taxes and from Colorado personal income taxes.
The Fund will invest principally, without percentage limitation, in Tax-Exempt
Obligations which on the date of investment are not rated, although it may
invest up to 50 percent of its assets in rated Tax-Exempt Obligations. Because
it will invest without limitation in not rated Tax-Exempt Obligations, the Fund
will be a high-risk fund. Tax-Exempt Obligations which are not rated generally
offer higher yields than Tax-Exempt Obligations in the higher ratings
categories, but also are generally subject to a greater credit risk. Since the
yield differentials between rated and not rated Tax-Exempt Obligations vary over
time, no specific level of income or yield differential can ever be assured.
With respect to Tax-Exempt Obligations which are not rated by a major rating
agency, the Fund will be more reliant on the Investment Adviser's judgment,
analysis and experience than would be the case if such Tax-Exempt Obligations
were rated. The Fund's Investment Adviser will attempt to reduce the risk of
investing in not rated Tax-Exempt Obligations through credit analysis, attention
to current economic trends and developments in the geographic areas affecting
the Fund's investments, active portfolio management and diversification among
municipal issuers.
Less than thirty-five percent of the value of the Fund's total assets will be
invested in Tax-Exempt Obligations which are rated lower than Baa by Moody's
Investors Service ("Moody's") or lower than BBB by Standard & Poor's Corporation
("S&P") or, if not rated, of equivalent quality as determined by the Investment
Adviser. (A description of Moody's and S&P's ratings are included in the
Statement of Additional Information). The percentage limitation applies only at
the time of purchase and the Fund is not is not required to dispose of a
Tax-Exempt Obligation if down-graded by a rating service or, if not rated, the
Investment Adviser determines that a Tax-Exempt Obligation no longer is of
equivalent quality. See "WHAT ARE THE RISKS OF INVESTING IN LOWER RATED TAX-
EXEMPT OBLIGATIONS?"
Not rated Tax-Exempt Obligations are frequently traded in markets where the
number of potential purchasers and sellers is limited. There may be a limited
resale market for certain Tax-Exempt Obligations in which the Fund will invest
which may have the following effects: (i) limited availability of such
4
<PAGE> 10
Tax-Exempt Obligations for the Fund to purchase,
(ii) limited choice of such Tax-Exempt Obligations sold to meet redemption
requests, and (iii) limited ability of the Fund to sell or dispose of such Tax-
Exempt Obligations.
Generally, the Fund will not buy illiquid securities or Tax-Exempt Obligations
for which an active trading market does not exist. Moreover, as a matter of
fundamental policy, in no event will the Fund acquire Tax-Exempt Obligations
(including not rated Tax-Exempt Obligations) or other illiquid assets for which
there is no active trading market if such Tax-Exempt Obligations and illiquid
assets, in the aggregate, would comprise 10 percent or more of the net assets of
the Fund. Included in this 10 percent 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 Tax-Exempt Obligations, there is an active secondary market
for them, and for this reason the Fund's Investment Adviser considers them to be
liquid.
The weighted average maturity of the Fund's portfolio is currently 8.44 years.
Under normal market conditions, the Fund will attempt to invest 100 percent
and as a matter of fundamental policy will, except for temporary investments as
described below, invest at least 80 percent of the value of its net assets in
Tax-Exempt Obligations, the interest on which is exempt from regular federal
income taxes and from Colorado personal income tax. Tax-Exempt Obligations 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 percent policy of the
Fund. (See the discussion of the alternative minimum tax under "WHAT IS THE
EFFECT OF INCOME TAX ON MY INVESTMENT?")
The Fund may, on a temporary basis, invest up to 50 percent of the value of
its net assets in Tax-Exempt Obligations, the interest on which is exempt from
regular federal income tax, but not Colorado personal income tax. Such
Tax-Exempt Obligations would include those which are set forth under "What Are
Tax-Exempt Obligations?" and which would otherwise meet the Fund's objectives.
This may be done if in the judgment of the Investment Adviser sufficient
Colorado Tax-Exempt Obligations are not available for purchase, for temporary
defensive purposes, or to meet the cash needs of the Fund.
The Fund also may invest up to 20 percent of the value of its net assets in
fixed-income securities, the interest on which is subject to federal, state and
local income tax. This may be done (i) pending the investment or reinvestment in
Tax-Exempt Obligations, (ii) in order to avoid the necessity of liquidating
portfolio investments to meet redemptions of shares by investors, or (iii) where
market conditions due to rising interest rates or other adverse factors warrant
temporary investing for defensive purposes. For purposes of this paragraph, the
term "fixed-income securities" shall include only securities issued or
guaranteed by the United States Government (such as bills, notes and bonds), its
agencies, instrumentalities or authorities, and certificates of deposit of
domestic banks which have capital, surplus and undivided profits of over $1
billion and which are members of the Federal Deposit Insurance Corporation. In
addition to investing short-term in fixed-income securities, it is a fundamental
policy of the Fund that it may invest up to 10 percent of the value of its net
assets in the shares of the registered investment companies which qualify as
money market funds, the distributions from which are exempt from federal income
taxation.
The Fund may borrow money from banks for temporary purposes only, and in an
amount not to exceed 10 percent of the value of its total assets. The Fund will
not purchase portfolio securities if it has outstanding borrowings in excess of
5 percent of the value of its total assets.
The Fund may purchase, without limitation, securities on a "when-issued"
basis, in which case delivery and payment normally take place within 45 days
from the commitment to purchase. When the Fund purchases on a "when-issued," or
"firm commitment," basis, it agrees to buy securities for delayed delivery from
a seller at a future date, stated price, and fixed yield. The agreement binds
the seller as to delivery and binds the Fund as to acceptance. There are special
risk factors associated with the purchase of "when-issued" securities: the value
of fixed yield securities will fluctuate as interest rates vary. Thus, even
before delivery of the security, a firm commitment contract may represent an
unrealized gain or loss on the security to be delivered. Exposure of the Fund's
assets to risk of loss is borne proportionately
5
<PAGE> 11
by all the securities issued by the Fund; thus, the
speculative character of Tax-Exempt Obligations increases as the Fund enters
into increasing numbers of firm commitment agreements.
The Fund may also purchase floating rate and variable rate securities and
municipal leases, including participation interests therein. For information
about these Tax-Exempt Obligations and their potential effect on your
investment, see "WHAT ARE TAX-EXEMPT OBLIGATIONS?"
Except as noted above or in the Statement of Additional Information, the
foregoing investment policies are not fundamental and the Board of Trustees of
the Fund may change such policies without the vote of a majority of the
outstanding voting securities of the Fund. However, the Board of Trustees will
not change the Fund's principal investment objective, which is a fundamental
policy of the Fund, of seeking to maximize income exempt from federal taxes and
from Colorado personal income taxes to the extent consistent with preservation
of capital without such a vote. Under the Investment Company Act of 1940, a
"vote of a majority of the outstanding voting securities" of the Fund or of a
particular Series means the affirmative vote of the lesser of (1) more than 50%
of the outstanding shares of the Fund or such Series or (2) 67% or more of the
shares of the Fund or of such Series present at a shareholders' meeting if more
than 50% of the outstanding shares of the Fund or of such Series are represented
at the meeting in person or by proxy.
WHAT ARE THE RISKS OF INVESTING IN NOT RATED TAX-EXEMPT OBLIGATIONS?
The Fund will attempt to maximize income exempt from federal and Colorado
personal income taxes by investing up to 100 percent of its assets in Tax-Exempt
Obligations that are not rated. These not rated obligations will generally have
a higher level of credit and market risks than rated obligations. While the
Investment Adviser will attempt to reduce this higher level of risk, it may not
be able to do so.
The additional risks of investing in not rated Tax-Exempt Obligations include,
but are not limited to, a higher level of market price volatility, higher
sensitivity to interest rate changes, reduced creditworthiness, a less liquid
secondary trading market and lack of supply of new issues. Any one of these
risks, or a combination of them, could have an adverse effect on the Fund's net
asset value and income. In addition, the anticipated higher level of income may
not be sufficient to offset a loss in net asset value.
WHAT ARE THE RISKS OF INVESTING IN LOWER RATED TAX-EXEMPT OBLIGATIONS?
Tax-Exempt Obligations which are rated Baa or higher by Moody's or BBB or
higher by S&P are considered "investment grade" and are regarded as having a
capacity to pay interest and repay principal that varies from "extremely strong"
to "adequate." Additionally, the Investment Adviser has deemed many of the
issuers of not rated Tax-Exempt Obligations in which the Fund invests to be
comparable to issuers having such ratings. Tax-Exempt Obligations rated Baa by
Moody's or BBB by S&P have speculative characteristics and changes in economic
conditions or other circumstances which may lead to weakened capacity to make
principal and interest payments than higher rated bonds. Tax-Exempt Obligations
which are rated lower than Baa by Moody's or lower than BBB by S&P ordinarily
provide higher yields but involve greater risks because of reduced
creditworthiness and increased risk of default. Lower-rated Tax-Exempt
Obligations generally tend to reflect short-term economic and market
developments to a greater extent than higher-rated Tax-Exempt Obligations which
react primarily to fluctuations in the general level of interest rates. In
addition since there are fewer investors in lower-rated Tax-Exempt Obligations,
it may be harder to sell the Tax-Exempt Obligations at the optimum time. As a
result of these factors, lower-rated Tax-Exempt Obligations tend to have more
price volatility and carry more risk to principal and income than higher-rated
Tax-Exempt Obligations.
Additional risks of investing in lower-rated Tax-Exempt Obligations include,
without limitation, a less liquid secondary trading market, an increased
possibility of redemption earlier than the stated maturity date and legislation
which limits the use or other advantages of investing in lower-rated bonds. Any
one of these risks, or a combination of them, could have an adverse effect on
the Fund's net asset value and income. For a further description of the risks
associated with lower-rated Tax-Exempt Obligations, see "WHAT ARE THE RISKS OF
INVESTING IN LOWER-RATED TAX-EXEMPT OBLIGATIONS?" in the Statement of Additional
Information.
6
<PAGE> 12
The table below sets forth, as of September 30, 1996, the percentage of the
Fund's total assets of (i) rated Tax-Exempt Obligations, (ii) not rated
Tax-Exempt Obligations as a group, (iii) not rated Tax-Exempt Obligations that
have an equivalent rating of Baa or higher by Moody's or BBB or higher by S&P as
determined by the Investment Adviser and (iv) not rated Tax-Exempt Obligations
that have an equivalent rating of lower than Baa by Moody's or lower than BBB by
S&P as determined by the Investment Adviser.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL TAX-
MOODY'S RATING EXEMPT
(S&P EQUIVALENT) OBLIGATIONS
---------------- -------------
<S> <C>
Aaa(AAA)........................... 14.9%
Aa(AA)............................. 0.6
A(A)............................... 6.0
Baa(BBB)........................... 0.3
Ba(BB)............................. 0.0
B(B)............................... 1.3
All not rated Tax-Exempt
Obligations as a group........... 76.9
Investment grade not rated Tax-
Exempt Obligations............... 72.4
Below investment grade not rated
Tax-Exempt Obligations........... 4.5
</TABLE>
WHAT ARE TAX-EXEMPT OBLIGATIONS?
Tax-Exempt Obligations include tax-exempt bonds and other tax-exempt
securities (tax-exempt notes and tax-exempt municipal leases) issued by or on
behalf of states, territories, and possessions of the United States and the
District of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from regular federal income
taxes and, in certain instances, applicable state or local income taxes. Such
Tax-Exempt Obligations are traded primarily in the over-the-counter market.
TAX-EXEMPT BONDS
The Fund will invest, as a nonfundamental policy and under normal
circumstances, a minimum of 65 percent of the value of its total assets in not
rated "tax-exempt bonds," as that term is described in the following paragraphs.
A tax-exempt bond is a certificate of indebtedness, extending over a period of
more than one year from the time it is issued, evidencing the issuer's promise
to pay both principal and interest in the future. The amount of principal and
interest, as well as the time when these amounts are due, are specifically
described in the bond instrument.
Tax-exempt bonds are issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works, and gas and electric utilities. Tax-exempt bonds
also may be issued in connection with the refunding of outstanding obligations,
obtaining funds to lend to other public institutions and for general operating
expenses. Private activity bonds ("PABs"), which are considered tax-exempt bonds
if the interest paid thereon is exempt from regular federal income taxes, are
issued by or on behalf of public authorities to obtain funds to provide
privately-operated facilities for business and manufacturing, housing, sports,
pollution control, and for airport, mass transit, port and parking facilities.
Under the Tax Reform Act of 1986 interest on most post-'86 PABs, while still
exempt from the regular income tax, constitutes an item of tax preference in
determining the alternative minimum tax. See "WHAT IS THE EFFECT OF INCOME TAX
ON MY INVESTMENT?" for a more complete discussion.
Two principal classifications of tax-exempt bonds are "general obligation
bonds" and "revenue bonds." General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source. Although PABs are
issued by municipal authorities, they are generally secured by the revenues
derived from payments of the user. The payment of the principal and interest on
PABs is dependent solely on the ability of the user of the facilities or assets
financed by the bonds to meet its financial obligations and the pledge, if any,
of real and personal
7
<PAGE> 13
property so financed as security for such payment. The Fund's Investment Adviser
will seek to invest in those general obligation and revenue bonds which will
best achieve the Fund's principal and secondary investment objectives.
OTHER TAX-EXEMPT SECURITIES
Although the Fund will invest, as described above, a minimum of 65 percent of
its total assets in tax-exempt bonds, it will also acquire other tax-exempt
securities such as tax-exempt notes and tax-exempt municipal leases, described
in the following paragraphs.
TAX-EXEMPT NOTES
Tax-exempt notes generally are used to provide for short-term capital needs
and generally have maturities of one year or less. Notes issued by the State of
Colorado, its municipalities and public authorities are exempt from regular
federal income taxes and from Colorado personal income taxes. Tax-exempt notes
include:
1. Project Notes. Project Notes are backed by an agreement between a local
issuing agency and the federal Department of Housing and Urban Development, and
carry a United States Government guarantee. These Notes provide financing for a
wide range of financial assistance programs for housing, redevelopment, and
related needs (such as low-income housing programs and urban renewal pro grams).
Although they are the primary obligations of the local public housing agencies
or the local urban renewal agencies, the agreement provides for the additional
security of the full faith and credit of the United States government. Payment
by the United States pursuant to its full faith and credit obligation does not
impair the tax-exempt character of the income from Project Notes.
2. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
3. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
4. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases the
long-term bonds then provide the money for the payment of the Notes.
5. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.
TAX-EXEMPT MUNICIPAL LEASES
Tax-exempt municipal leases are issued for one to ten years. They provide
municipal authorities with funds to lease various types of property and
equipment. The property or equipment is collateral for the owner of the lease.
Tax-exempt municipal leases are generally self-amortizing through the term of
the lease.
A municipal lease is subject to annual appropriation by its issuing municipal
authority each year. In other words, while the lease may be for a term exceeding
one year, the issuing municipality will only commit to payments on the lease
each year. If the issuing municipality does not appropriate sufficient funds for
the following year's lease payments, the lease will go into default with the
potential for significant loss of principal and accrued interest to the
investor.
In addition, in the event of default, the owner of the lease has limited
recourse to recover unpaid principal and accrued interest from the issuing
municipality. This recourse is limited to possession of the leased property and
the subsequent sale of the property. There is no assurance that the proceeds
from a sale will be sufficient to pay the total amount of unpaid principal and
accrued income due on the lease. If the proceeds are not sufficient to pay the
8
<PAGE> 14
unpaid principal and accrued income, an investor will realize a capital loss.
Investment in tax-exempt municipal leases also involves special investment
risk considerations not associated with general obligation or revenue municipal
debt obligations, due to the reduced liquidity of tax-exempt municipal leases
because of a limited secondary trading market. Furthermore, all municipal debt
securities, including tax-exempt municipal leases, are subject to the risk that
their tax-exempt status may be modified or eliminated through legislative
action.
WHEN-ISSUED SECURITIES
The Fund may purchase Tax-Exempt Obligations on a "when-issued" basis, in
which case delivery and payment normally take place within 45 days after the
date of the commitment to purchase. The payment obligation and the interest rate
that will be received on the Tax-Exempt Obligations are each fixed at the time
the buyer enters into the commitment. Although the Fund will only purchase Tax-
Exempt Obligations on a when-issued basis with the intention of actually
acquiring the Tax-Exempt Obligations, the Fund may sell these Tax-Exempt
Obligations before the settlement date if it is deemed advisable.
A separate account of the Fund consisting of cash or liquid high-grade debt
securities equal to the amount of the when-issued commitments will be
established with the Fund's Custodian and marked to market daily, with
additional cash or liquid high-grade debt securities added when necessary. When
the time comes to pay for when-issued securities, the Fund will meet its
obligations from then available cash, sale of securities held in the separate
account, sale of other securities or, although it would not normally expect to
do so, from the sale of the when-issued securities themselves (which may have a
value greater or less than the Fund's payment obligations). Sale of securities
to meet such obligations carries with it a greater potential for the realization
of capital appreciation, which is not exempt from federal income taxes.
Tax-exempt securities purchased on a when-issued basis and the securities held
in the Fund are subject to changes in market value based upon the public's
perception of the credit worthiness of the issuer and changes, real or
anticipated, in the level of interest rates (which will generally result in
similar changes in value, i.e., both experiencing appreciation when interest
rates decline and depreciation when interest rates rise). Therefore, to the
extent that the Fund remains substantially fully invested at the same time that
it has purchased securities on a when-issued basis, there will be a greater
possibility that the market value of the Fund's assets will vary. Purchasing a
tax-exempt security on a when-issued basis can involve a risk of loss if the
value of the Tax-Exempt Obligation or other security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Fund's other assets. For a further description of the risks
associated with "when-issued" securities, see "WHAT ARE THE INVESTMENT POLICIES
OF THE FUND?"
FLOATING RATE AND VARIABLE RATE TAX-EXEMPT OBLIGATIONS
The Fund may purchase floating rate and variable rate Tax-Exempt Obligations,
including participation interests therein. Investments in floating or variable
rate Tax-Exempt Obligations normally will involve PABs which provide that the
rate of interest is set as a specific percentage of a designated base rate, such
as rates on Treasury Bonds or Bills or the prime rate at a major commercial
bank, and that the Fund can demand payment of the obligation on short notice,
usually ten days, at par plus accrued interest, which amount may be more or less
than the amount the Fund paid for the Tax-Exempt Obligations. Floating rate
Tax-Exempt Obligations have an interest rate which changes whenever there is a
change in the designated base interest rate (generally every six months) while
variable rate Tax-Exempt Obligations provide for a specified periodic adjustment
in the interest rate. Frequently such Tax-Exempt Obligations are secured by
letters of credit or other credit support arrangements provided by banks.
The Fund may invest in participation interests purchased from banks in
variable rate Tax-Exempt Obligations (such as PABs) owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank. An irrevocable letter of credit is an unconditional promise
by a bank to allow the owner of a participation to draw down on the letter of
credit to meet any unpaid principal or
9
<PAGE> 15
interest payments. While the letter of credit gives additional security to an
investor, it is backed only by the full faith and credit of the issuing bank and
as such is based on the financial soundness of the bank. The letter of credit
may lose its effectiveness if the bank becomes insolvent, is closed or
restructured or is liquidated pursuant to an order from an appropriate banking
authority.
The Investment Adviser will monitor the pricing, quality and liquidity of the
variable rate demand Tax-Exempt Obligations held by the Fund, including the PABs
supported by bank letters of credit or guarantees, on the basis of published
financial information, reports of rating agencies and other analytical services
to which the Investment Adviser may subscribe. Participation interests will be
purchased only if, in the opinion of bond counsel for the original issuance of
such participation interests, interest income on such interests will be
tax-exempt when distributed as dividends to shareholders.
SPECIAL FACTORS AFFECTING ISSUERS OF COLORADO TAX-EXEMPT OBLIGATIONS
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 districts and service districts.
These municipal entities all have some constitutional and/or statutory authority
to collect taxes, generate revenues and incur indebtedness.
A major revenue source for many of these municipalities is the ad valorem
property tax levied at the local level, with $2,512,514,138 and $2,668,377,625
levied throughout Colorado in tax years 1994 and 1995, respectively.
In 1995, the assessed valuation of all real and personal property subject to
taxation in Colorado was $32,428,020,970. This was up 8.9% from 1994 levels.
The Colorado Legislative Council's economic forecast predicts an increase in
general fund revenues of about 6.9% during the 1996-1997 fiscal year.
The major risks to a continued economic recovery in Colorado are reduced
federal expenditures, particularly in the area of defense, cessation of large
public works projects in the state, a drop in tourism caused by the lack of any
state-sponsored advertising, and reduced commercial real estate values. Any of
these potential events could adversely affect the Colorado economy and local
governmental revenues. Additionally, on November 3, 1992, Colorado voters
approved an amendment to the Colorado Constitution which is commonly referred to
as the Taxpayer's Bill of Rights ("TABOR"). TABOR imposes various limits and new
requirements on spending by the State of Colorado and all Colorado local
governments (each of which is referred to in this section as a "governmental
unit"). Any of the following, for example, now requires prior voter approval:
(i) any increase in a governmental unit's spending from one year to the next in
excess of the rate of inflation plus a "growth factor," as defined in TABOR;
(ii) any increase in the real property tax revenues of a local governmental unit
(not including the State) from one year to the next in excess of inflation plus
the appropriate "growth factor"; (iii) any new tax, tax rate increase, mill levy
increase, valuation for assessment ratio increase for a property class,
extension of an expiring tax or a tax policy change directly causing a net tax
revenue gain; and (iv) except for refinancing bonded indebtedness at a lower
interest rate or adding new employees to existing pension plans, creation of any
multiple-fiscal year direct or indirect debt or other financial obligation
whatsoever without adequate present cash reserves pledged irrevocably and held
for payments in all future fiscal years. TABOR has already reduced the financial
flexibility of all levels of Colorado government. In particular, governmental
units dependent on taxes on residential property are being squeezed between
TABOR requirements of voter approval for increased mill levies and an earlier
State constitutional amendment which has had the effect of lowering the
assessment rate on residential
10
<PAGE> 16
property from 21.0% to 10.36% over the past eight 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.
HOW IS THE FUND MANAGED?
The Fund is a Massachusetts business trust. Its Board of Trustees will
supervise the activities of the Fund and review the Fund's service contracts.
The Fund is not required to hold annual shareholder meetings. However, special
meetings may be called for such purposes as electing or removing trustees,
changing fundamental investment policies or approving a new or amended advisory
or management contract or plan of distribution. As a shareholder, you receive
one vote for each share of the Fund you own. The Board of Trustees has the power
to create additional series of Fund shares.
OFFICERS AND TRUSTEES OF THE FUND
George N. Donnelly, Chairman of the Board of Trustees and President of the
Fund, is a principal for MKT Inc., a marketing firm engaged in the sales of
financial service products. Prior to joining MKT, Mr. Donnelly was a Vice
President with Piper, Jaffray & Hopwood from February 1989 to April 1991. He
previously served as President of Hanifen, Imhoff Inc. Mr. Donnelly was
previously associated with MKT Inc. from August 1984 to April 1985 and with E.
F. Hutton & Company from December 1979 to November 1983.
Andrew B. Shaffer, Trustee, Secretary and Treasurer of the Fund, is an
attorney engaged in private practice. Mr. Shaffer has also been an attorney with
the Internal Revenue Service, an associate at the Denver law firm of Sherman and
Howard and a Shareholder/Director at the Denver law firm of Conover, McClearn &
Heppenstall, P.C. He has been a visiting lecturer and Associate Professor at the
University of Colorado Law School and has written numerous articles and lectured
extensively in the areas of business, tax and estate planning.
INVESTMENT ADVISER
The Investment Adviser is registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940. The Investment Adviser has
its office at 1200 Seventeenth Street, Suite 1150, Denver, Colorado 80202.
The Investment Adviser is a wholly-owned subsidiary of Carbon County Holding
Company, a Colorado corporation ("Carbon County"). Carbon County is a single
bank holding company which owns 100% of Rawlins National Bank. Fred R. Kelly
Jr., President, Secretary and Treasurer of the Investment Adviser and the Fund's
portfolio manager, owns approximately 65% of the issued and outstanding stock of
Carbon County.
Fred R. Kelly, Jr., is President, Secretary and Treasurer of the Investment
Adviser. Mr. Kelly has, for the past six years, been the portfolio manager for
the Fund and has been primarily responsible for the day-to-day management of the
Fund's portfolio. From September 2, 1992 to November 30, 1994 Mr. Kelly also
served as Secretary and Treasurer to the Fund. For ten years preceding his
appointment as portfolio manager, Mr. Kelly worked for the investment banking
firm of Hanifen, Imhoff Inc. ("Hanifen") and specialized in the area of tax-
exempt public finance serving as financial advisor and investment banker for
public entities primarily in the Rocky Mountain region. More recently, Mr. Kelly
has been actively involved in the restructuring of financially troubled
projects, has acted as a financial consultant and has appeared as an expert
witness in the area of tax-exempt finance in Chapter 9 and Chapter 11 bankruptcy
cases. Prior to joining Hanifen, Mr. Kelly was employed for six years by the
U.S. Treasury Department, Comptroller of the Currency, as a Senior Field
Examiner. Mr. Kelly is a past director of the Colorado Municipal Bond Dealers
Association and Kansas National Bancorporation. Mr. Kelly pursued his
undergraduate study at the University of Wyoming in Laramie, receiving his
Bachelor's degree in Accounting with emphasis in Finance. Subsequently, he
attended Northwestern University in Evanston, Illinois, where he completed his
postgraduate work in banking.
The Investment Adviser will attempt to meet the Fund's investment objectives
by providing portfolio management and credit analysis services pursuant
11
<PAGE> 17
to the Prospectus and the Advisory Agreement. There is no assurance that the
Investment Adviser can meet the Fund's investment objectives.
Under the Advisory Agreement dated November 17, 1994, between the Fund and the
Investment Adviser, and subject to the control of the Board of Trustees, the
Investment Adviser will manage the investment of 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 Investment Adviser
will administer the Fund's daily business affairs such as providing accurate
accounting records, computing accrued income and expenses of the Fund, computing
the daily net asset value of the Fund, assuring proper dividend disbursements,
proper financial information to investors, and notices of all shareholder
meetings, and providing sufficient office space, storage, telephone services,
and personnel to accomplish these responsibilities. The Investment Adviser will
pay all of the compensation of trustees of the Fund who are employees of the
Investment Adviser and of the officers and employees of the Fund. The Advisory
Agreement also provides that the Investment 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.
The Fund will pay all its expenses other than those assumed by the Investment
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, transfer agents and custodians, expenses of
disbursing dividends and distributions, fees and expenses of trustees of the
Fund not employed by the Investment Adviser or its affiliates, insurance
premiums and extraordinary expenses such as litigation expenses.
WHAT ABOUT ALLOCATION OF PORTFOLIO TRANSACTIONS?
The frequency of portfolio transactions -- the Fund's portfolio turnover
rate -- will vary from year to year depending on market conditions. The
Investment Adviser anticipates that the Fund will not have a portfolio turnover
rate in excess of 20% per year; however, there can be no assurances that the
Fund will be able to meet this objective.
The Investment Adviser will be authorized to allocate the Fund's securities
transactions to SMITH HAYES Financial Services Corporation (the "Underwriter"),
the principal underwriter and a distributor the Fund's shares and to other
broker-dealers who help distribute the Fund's shares. The Investment 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 Trustees may determine.
In connection with its duties to arrange for the purchase and sale of
portfolio securities, the Investment Adviser will select such broker-dealers
("dealers") who will, in the Investment 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 Investment Adviser will cause the
Fund to deal directly with the selling or purchasing principal or market maker
without incurring brokerage commissions unless the Investment 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 dealers
include a spread between the bid and asked prices. When allocating transactions
to dealers, the Invest-
12
<PAGE> 18
ment Adviser is authorized to consider, in determining whether a particular
dealer will provide best execution, the 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 Investment 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 dealer, viewed either in
terms of the particular transaction or the Investment 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 dealers, the Investment Adviser is authorized in making
such allocation, to consider, (i) whether a dealer has provided research
services, as further discussed below; and (ii) whether a dealer has sold Fund
shares or the shares of any other investment company or companies having the
Investment 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. 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 Investment Adviser and that such research
received by such other accounts may or may not be useful to the Fund.
Under the Investment Company Act of 1940, as amended, 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 under such Act. These conditions relate
among other things, to the terms of an issue of municipal securities purchased
by the Fund, the reasonableness of the 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 Trustees, including a majority of the Fund's
Board of Trustees who are not interested persons of the Fund as defined by the
Act.
The Board of Trustees will review quarterly the Investment 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.
WHAT MANAGEMENT AND SERVICE FEES DOES THE FUND PAY?
Pursuant to the Advisory Agreement between the Fund and the Investment
Adviser, the Fund pays the Investment Adviser an annual fee of 0.5% of the
Fund's daily net assets. For the fiscal year ended September 30, 1996, the total
expenses of the Fund, including the investment advisory fee, were .77% of the
Fund's average daily net assets for the period. For fiscal year ended September
30, 1996, the Investment Adviser did not assume any of the Fund's expenses.
Pursuant to the Transfer Agency and Service Agreement (the "Service
Agreement"), between the Fund and the Investment Adviser, the Investment Adviser
serves as the transfer agent, shareholder servicing agent and dividend
disbursing agent for the Fund. The Investment Adviser's duties pursuant to the
Service Agreement include processing purchase and redemption orders,
establishing and maintaining shareholder accounts and records, disbursing
dividends declared by the Fund and all other customary services of a transfer
agent, shareholder servicing agent and dividend disbursing agent. The Investment
Adviser provides transfer agency services as part of the management fee
arrangement. Transfer agency expenses represent direct expenses charged to the
Fund by third parties.
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
13
<PAGE> 19
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 beginning to recover. A healthy real estate economy
translates into improved property tax collections, increased sales and use
taxes, service charges and tap fees all of which are the very revenue sources
most often pledged to the payment of municipal debt service. Additionally, lower
interest rates are allowing the stronger local governments to refinance their
outstanding debt, which makes them sounder financially and better able to
sustain operations in the years ahead.
INVESTMENT STRATEGY
The Fund is the only fund of its type which is specifically designed to choose
from among the many not rated Tax-Exempt Obligations in the state of Colorado
and to select for investment those Tax-Exempt Obligations which demonstrate
suitable repayment characteristics. It is management's belief that if properly
chosen, Tax-Exempt Obligations of this type will, over the long-term, generate
higher returns to investors than rated Tax-Exempt Obligations even after taking
into account the incidence of actual defaults on not rated Tax-Exempt
Obligations.
Ideally, not rated Tax-Exempt Obligations in a growing economy tend to improve
over time as their credit history matures, their tax base broadens, and they
achieve additional diversity as well as financial stability. This trend, if it
develops, exerts an upward bias on the price of a given entity's securities. It
should also be noted that such a trend may take a number of years to develop and
is subject to the potentially adverse effect of economic cycles along the way.
Fund management believes that not rated Tax-Exempt Obligations do not
precisely follow the general market which has caused the Fund's net asset value
to be more stable. While the not rated market does follow the larger market's
general direction, it tends to react more slowly and the amplitude of the change
tends to be less, all other factors being equal. For example, not rated
Tax-Exempt Obligations did not decline as much as rated Tax-Exempt Obligations
when interest rates rose quickly in 1994. Conversely, in 1995, when interest
rates fell precipitously, not rated Tax-Exempt Obligations went up, but at a
slower pace.
During the 1980's an unprecedented number of issuers experienced trouble
meeting debt service payments, which exposed bondholders to "credit risk". As a
result, many funds in competition with the Fund have spent the last several
years focusing on this element of risk. These funds buy bonds with underlying
investment grade ratings and then further insure payment by buying municipal
bond insurance on the credit. This strategy provides an abundance of protection
with respect to meeting debt service payments, but it provides no protection
against fluctuations in interest rates. In 1994 the market reminded investors
about so-called "market risk" when interest rates rose by over two percentage
points in a single year. Management believes that "market risk" is more often a
concern than "credit risk" because historically the interest rate cycle seems to
repeat roughly every five to seven years and severe credit crunches typically
occur less frequently. Generally, the net asset value of a fund with longer
maturities on its bonds has more exposure to principal during changes in
interest rates. The Fund attempts to further ensure against market swings by
keeping the average maturity of the portfolio relatively short compared to
competing products. In the not rated arena long-term yields are not sufficiently
higher than short-term yields to justify making extremely long-term investments.
Much attention is presently being given to flat income tax proposals discussed
in the Congress of the United States. It is not possible at this juncture to
determine if or when a flat tax proposal may be adopted or what effect the final
structure might have on tax-exempt securities. Management's strategy is to
attempt to nullify the effect of any such change by keeping the average maturity
relatively short and by
14
<PAGE> 20
purchasing new additions to the portfolio at as near to the comparable rate on
taxable instruments as the market will permit.
To summarize, Fund management continues to believe strongly in the prospects
of the Fund's market niche. The Fund's emphasis will continue to be to maximize
the distribution of tax-exempt income and at the same time strive for as stable
a net asset value as possible.
INVESTMENT RESULTS
The calendar year ended December 31, 1996 was largely uneventful for bonds.
Most bond funds showed losses of principal until the third quarter when bond
prices finally showed some improvement. However, bond prices generally traded
within a fairly narrow range unlike the very turbulent two prior years of 1994
and 1995. By contrast, 1994 was the worst year in current history for bonds and
1995 was the third best year ever. The combined performance for the last three
years has most funds ahead slightly.
The Fund, on the other hand, experienced an 8.02% total return at net asset
value for the twelve months ended December 31, 1996 which placed it as the
number one single state fund in the country according to Morningstar Inc. based
on total performance figures including the income component and capital
appreciation. This marks the second time in the last three years (calendar year
1994 and calendar year 1996) that the Fund has received this highly prized
distinction. The Fund also was unsurpassed in the five year total performance
category which helps to demonstrate its consistency over a longer time period.
Figures are not yet available for a ten year time frame since the Fund is now
nine years old.
A more in-depth review of the Fund's performance will indicate that the
average annual return at net asset value is 8.26% over the last five fiscal
years and 7.91% over the last three fiscal years (the average annual return at
maximum offering price is 7.21% and 5.53% respectively). Cumulative total
returns at net asset value and maximum offering price for the period June 4,
1987 through September 30, 1996 were 87.95% and 83.77%, respectively.
The table on the following page depicts the Fund's performance for the fiscal
years ended September 30 since the inception of the Fund in 1987. Also enclosed
is comparative information with respect to the Lipper General Municipal Debt
Fund Index, which is a non-weighted index of the 30 largest funds within the
General Municipal Debt Fund investment objective.
15
<PAGE> 21
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
COLORADO BONDSHARES -- A TAX-EXEMPT FUND AND THE
LIPPER GENERAL MUNICIPAL DEBT FUND INDEX
<TABLE>
Measurement Period Colorado BondShares Lipper General Municipal
- - - - ------------------ ------------------- ------------------------
<S> <C> <C>
6/4/87 9,525 10,000
9/30/87 9,278 9,684
9/30/88 10,166 11,076
9/30/89 11,029 12,068
9/30/90 11,097 12,703
9/30/91 12,039 14,350
9/30/92 13,133 15,855
9/30/93 14,253 17,977
9/30/94 15,180 17,363
9/30/95 16,402 19,125
9/30/96 17,902 20,239
</TABLE>
- - - - ---------------
(1) Includes reinvestment of dividends but does not reflect any adjustment for
sales charge.
(2) Includes reinvestment of dividends and adjustment for the maximum sales
charge of 4.75%.
* Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated period of time, taking into
account the imposition of the sales charge and other fees and assuming the
reinvestment of all dividends and distributions. 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.
Average annual total return at net asset value, for the one year, five year
and since inception periods ending 9/30/96 are 9.15%, 8.26% and 7.06%,
respectively. Average annual total return at net asset value does not
include the imposition of the sales charge and assumes the reinvestment of
all dividends and distributions.
** Commencement of operations.
16
<PAGE> 22
WHAT KIND OF SHARES DOES THE FUND OFFER?
The Fund has one class of shares, an unlimited number of which may be issued
by the Board of Trustees, and the Board of Trustees has the power to create
additional series of Fund shares. Each share represents an equal proportionate
beneficial interest in the Fund. When issued and outstanding, the shares are
fully paid and nonassessable by the Fund. Shares are fully redeemable as
described under the "How Can I Sell My Shares?" portion of this Prospectus.
Shares of the Fund have no preemptive or conversion rights, and are freely
transferable. Upon liquidation of the Fund, shareholders are entitled to share
pro rata in the net assets of the Fund available for distribution to
shareholders.
HOW CAN I INVEST IN THE FUND?
Shares of the Fund are being continuously offered through securities dealers
who have a dealer agreement with the Underwriter and are members of the National
Association of Securities Dealers, Inc. Broker-dealers may be classified as
statutory underwriters under Section 2(11) of the Securities Act of 1933.
Shares of the Fund will be purchased at the offering price based on the net
asset value next determined following receipt of the order by the Fund, plus
applicable sales charges. Any orders received by the Fund from you directly or
from your broker, as the case may be, before 2:00 p.m. Denver, Colorado time
will receive that day's share price. The Fund is open for business each day on
which the New York Stock Exchange is open.
You can open an account for $500 or more by delivering a check made payable to
"Colorado BondShares -- A Tax Exempt Fund," and a completed General
Authorization Form, either to your broker or to the Fund at 1200 Seventeenth
Street, Suite 1150, Denver, Colorado 80202. The Fund's telephone numbers,
including toll-free numbers, are set forth on the cover of this Prospectus.
You may make additional purchases at any time by delivering a check either to
your broker or to the Fund at the address stated above. There is no minimum
purchase amount required for these subsequent investments.
WHAT DO SHARES COST?
The price you pay for shares of the Fund is the public offering price, that
is, the next determined net asset value of the shares plus a sales charge. The
sales charge is a one-time charge paid at the time of purchase of shares, most
of which ordinarily goes to your broker-dealer to compensate him for the
services provided you. The Underwriter will serve as a broker-dealer with
respect to sales of Shares of Fund.
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.
HOW ARE SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
DEALER
% OF DISCOUNT
NET AS% OF
SALES AMOUNT OFFERING
AMOUNT OF PURCHASE CHARGE INVESTED PRICE
------------------ ------ -------- --------
<S> <C> <C> <C>
Less than $100,000........... 4.75% 4.99% 4.35%
$100,000 up to $249,999...... 3.50 3.63 3.00
$250,000 up to $499,999...... 2.50 2.56 2.00
$500,000 up to $999,999...... 2.00 2.04 1.50
$1,000,000 up to
$3,999,999................. 1.00 1.01 .90
$4,000,000 or more........... .20 .20 .15
</TABLE>
REDUCTIONS IN SALES CHARGES
Volume Discounts are provided if the total amount being invested in shares of
the Fund reaches the levels indicated in the above sales charge schedule.
Rights of Accumulation allow the Fund's shares to be purchased at the rate
applicable in the discount schedule after adding the value of shares already
owned by the investor to the amount of the Fund shares being purchased.
A Letter of Intent allows you to purchase shares of the Fund over a 13-month
period at reduced sales charges based on the total amount that you state in the
letter you intend to purchase. For more information concerning terms of Letters
of Intent, see the General Authorization Form.
17
<PAGE> 23
For any such discounts, the purchaser or his broker-dealer must provide Fund
with sufficient information to permit verification that the purchase order
qualifies for the discount privilege. Confirmation of the order is subject to
such verification.
Reductions in sales charges apply to purchases by a "single person," including
an individual, members of a family unit comprising husband, wife and minor
children purchasing securities for their own account, or a trustee or other
fiduciary purchasing for a single fiduciary account or single trust estate.
The Fund may sell shares at net asset value to present and retired trustees,
officers, directors, employees (and their respective spouses and minor children)
of the Fund, the Investment Adviser and its affiliate, the Underwriter, Hanifen,
Imhoff Holdings, Inc. and its affiliates as constituted on November 17, 1994 and
other NASD registered representatives. Such sales also may be made to employee
benefit plans for such persons (and to any investment advisory, custodial, trust
or other fiduciary account managed or advised by the Investment Adviser or any
affiliate). Shareholders of unrelated mutual funds that charge a sales load may
also purchase shares of the Fund at net asset value to the extent that the
purchase price of Fund shares is funded by the proceeds from the redemption
(within 60 days prior to the purchase of Fund shares) of shares of such
unrelated mutual funds.
HOW CAN I "SELL" MY SHARES?
Upon receipt by the Fund of a proper request, the Fund will redeem shares at
their next determined net asset value.
Shares may be redeemed without charge at any time upon written request, to the
Fund, containing the signature(s) of the shareholder(s), which must be
guaranteed by a member firm of a principal stock exchange or a commercial bank
or trust company. Such member firm must be a participant in good standing in a
Securities Transfer Association recognized signature guarantee program. The Fund
may request further documentation from corporations, executors, administrators,
trustees or custodians. When the proceeds of a redemption are to be paid to
someone other than a shareholder, the shareholder's signature(s) must be
guaranteed on the redemption request as described above. A shareholder will
receive the net asset value per share next determined after receipt of his
request in good order.
Shares may also be redeemed by telephoning the Fund directly at (303)
572-6990, or, outside of Denver, (800) 572-0069. To reduce the shareholder's
risk of attempted fraudulent use of the telephone redemption procedure, payment
will be made to the bank account designated on the General Authorization Form.
The proceeds of redemption will be paid by check mailed to the bank designated
in the authorization form unless, at the time of the redemption, the shareholder
requests that Federal Funds be wired to that bank.
Once you have redeemed your shares, a check for the proceeds will be mailed to
you within seven calendar days after your redemption request is received in
proper form. The Fund will not mail redemption proceeds until checks received
for the purchase of shares have cleared, which may take up to 15 days. The
proceeds, of course, may be more or less than your cost.
HOW CAN I REINSTATE MY INVESTMENT?
If you redeem shares and then decide you should not have redeemed them, you
may, within 30 calendar days of the date of redemption, use all or any part of
the proceeds of the redemption to reinstate, free of sales charge, all or any
part of your investment in shares of the Fund. Your investment will be
reinstated at the net asset value per share established at the close of the New
York Stock Exchange on the day your request is accepted. You may use this
privilege to reinstate an investment in the Fund only once.
Exercise of the Reinstatement Privilege does not alter the federal income tax
status of any gain realized on a sale of Fund shares, but to the extent that any
shares are sold at a loss and the proceeds are reinvested in shares of the Fund,
some or all of the loss will not be allowed as a deduction, depending upon the
percentage of the proceeds reinvested.
WHAT DISTRIBUTIONS WILL I RECEIVE?
The Fund declares dividends of net investment income daily. Dividends are paid
to shareholders in dividends of additional shares on the 15th day of
18
<PAGE> 24
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.
Shares will begin earning dividends on the day after which the Fund receives
payment and shares are issued. Shares or cash continue to earn dividends through
the date they are redeemed or delivered subsequent to reinstatement.
Unless you elect by written notice to the Investment Adviser, at least ten
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 5 on the General Authorization Form.)
You also may elect to have your dividends paid to another person. If you
desire to do so, please complete Item 7 on the General Authorization Form.
The Fund will generally distribute sufficient net income to avoid the
application of the 4% excise tax imposed pursuant to the Internal Revenue Code
of 1986, as amended.
WHAT IS THE EFFECT OF INCOME TAX ON MY INVESTMENT?
FEDERAL INCOME TAXES
The Fund intends to continue to qualify as a "regulated investment company"
under the Code, and intends to take all other action required to ensure that no
federal income taxes will be payable by the Fund and that the Fund may pay
"exempt-interest dividends" to its shareholders. The Fund has received an
opinion of counsel from Kutak Rock to the effect that, subject to certain
conditions described therein, the Fund will be characterized as a regulated
investment company, as described in Section 851 of the Code. In order to pay
exempt-interest dividends at least 50% of the value of the Fund's total assets
must consist of obligations exempt from regular federal income tax pursuant to
Section 103(a) of the Code. The federal income tax consequences of a
distribution by the Fund at the shareholder level will be as follows:
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 regular 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.
Under present law, capital gains are subject to a maximum tax rate of 28%.
With respect to bonds (including other securities) purchased after April 1993,
the amount of any "market discount" (generally the amount by which the cost is
less than the face amount of the bond) is taxed as ordinary income. This means
that most "capital appreciation" on these bonds will now be distributed to, and
taxed to, the shareholders as ordinary interest income (rather than as capital
gains).
Under Section 55 of the code, the alternative minimum tax now applies to all
taxpayers, including corporations, and increases a taxpayer's tax liability only
to the extent it exceeds the taxpayer's regular income tax (less certain
credits) for the year. The alternative minimum tax is equal to 26% (or in some
cases, 28%) in the case of individuals (20% for corporations) of the excess of
the taxpayer's taxable excess, which is the amount by which alternative minimum
taxable income exceeds the applicable exemption amount. The exemption is $45,000
for spouses filing a joint return, $33,750 for a single taxpayer, and $22,500
for a married taxpayer filing a separate return, or for a trust or estate. The
exemption is phased out at the rate of $.25 for each dollar
19
<PAGE> 25
by which a taxpayer's alternative taxable income exceeds a predetermined amount.
"Alternative minimum taxable income" is a taxpayer's taxable income (i)
determined with specified adjustments for the alternative minimum tax and (ii)
increased by "items of tax preference." The types of income constituting "items
of tax preference" include otherwise allowable tax-exempt interest on private
activity bonds issued after August 7, 1986 (except bonds issued by charities
qualifying under Section 501(c)(3) of the Code).
Under the Code any loss on the sale or exchange of shares in the Fund held by
a shareholder for six months or less will be disallowed to the extent the
shareholder received exempt-interest dividends with respect to those shares.
Distributions from the Fund's non-exempt investment income and from any net
realized short-term gain will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares of the Fund. Under the Code,
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund will not be deductible to the extent that the Fund's distributions are
exempt from federal income tax.
Subject to modification by Regulations to be published, written notice
concerning the federal income tax status of distributions will be mailed within
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 non-deductible excise tax
equal to 4% of the excess of the amount required to be distributed for the
calendar year over the distributed amount for the calendar year. The Fund
intends to avoid the imposition of this excise tax, and will therefore
distribute during each calendar year at least 98% of its ordinary income for
such calendar year and 98% of its capital gain net income for the one year
period ending on October 31 of the calendar year.
UNLESS A SHAREHOLDER INCLUDES HIS TAXPAYER IDENTIFICATION NUMBER (SOCIAL
SECURITY NUMBER FOR INDIVIDUALS) IN THE GENERAL AUTHORIZATION FORM AND CERTIFIES
THAT HE IS NOT SUBJECT TO BACKUP WITHHOLDING, THE FUND IS REQUIRED TO WITHHOLD
AND REMIT TO THE U.S. TREASURY 31% OF NON-EXEMPT DISTRIBUTIONS AND OTHER
REPORTABLE PAYMENTS TO THE SHAREHOLDER.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by industrial development bonds should consult
their tax advisers before purchasing Fund shares.
The limitations on the deduction of miscellaneous itemized deductions do not
apply to publicly offered regulated investment companies. The Investment Adviser
intends to use its best efforts to ensure that the Fund qualifies as a publicly
offered regulated investment company for the purposes of the foregoing
provision.
COLORADO INCOME TAXES
Individuals, trusts, estates, and corporations who are holders of shares of
the Fund and who are subject to Colorado income tax will not be subject to
Colorado tax on distributions from the Fund to the extent that such
distributions qualify as either (1) exempt interest dividends of a regulated
investment company under Section 852(b)(5) of the Code, which are derived from
interest on tax-exempt obligations of the State of Colorado or any of its
political subdivisions; or (2) distributions derived from interest on
obligations of the United States or its possessions included in federal adjusted
gross income.
To the extent that distributions on shares of the Fund are attributable to
sources of income not described in the preceding sentences, including capital
gains, such distributions will not be exempt from Colorado income tax.
There are no municipal income taxes in Colorado. As intangibles, shares in the
Fund will be exempt from Colorado property taxes.
WHO IS THE SHAREHOLDER SERVICE AGENT?
The Investment Adviser also serves as the Fund's Shareholder Service Agent,
and has registered with the Securities and Exchange Commission as a Transfer
Agent. As Shareholder Service Agent, the Investment Adviser performs only those
services described in the Transfer Agency and Service Agreement. (See the
description of the Agreement
20
<PAGE> 26
in the "What Management and Service Fees Does the Fund Pay?" section of this
Prospectus.)
Checks for the purchase of Fund shares should be made payable to "Colorado
BondShares -- A Tax-Exempt Fund," and should be sent to the Fund at 1200
Seventeenth Street, Suite 1150, Denver, Colorado 80202, as should instructions
for redemptions and other transactions in Accounts and requests for information
about an Account. Any share purchases will be made through the Fund from the
investment dealer designated by the shareholder. A shareholder may change his
dealer at any time upon written notice to the Investment Adviser, provided that
the new dealer has a dealer agreement with the Underwriter.
HOW IS NET ASSET VALUE
PER SHARE DETERMINED?
The net asset value per share of the Fund is determined as of the close of
business of the New York Stock Exchange for each day the Exchange is open. Net
asset value is determined by dividing the value of the total assets of the Fund,
less liabilities (net assets), by the number of shares outstanding. The value of
total assets is primarily the sum of the market values of the bonds, other
investments and cash in the portfolio.
In determining the market values of bonds and other investments in the
portfolio, the Fund uses valuations provided on a daily basis by a pricing
service approved by the Board of Trustees. The pricing service uses quotes from
bond dealers, market transactions and other relevant information in setting
these values. However, the determination of market values for municipal bonds,
particularly not rated municipal bonds, can be a very subjective process due to
the infrequency at which individual bonds actually trade and the limited amount
of information available about many municipal issuers. Therefore, in addition to
the pricing service, the Board of Trustees has determined that it is appropriate
to verify the values of bonds for which there is not an active market by
obtaining quotes from municipal bond dealers in Colorado on a periodic basis.
If, in the opinion of the Investment Adviser, the valuation provided by the
pricing service appears less reliable than that provided by a consensus from at
least two municipal bond dealers, the Investment Adviser will use the value
provided by the bond dealers.
The Board of Trustees in the future may direct the Fund to rely on other
methods or combination of methods in determining the market values of its
municipal bonds. These other methods may include the use of a matrix system, the
use of relative changes in a municipal index or price changes of municipal
future contracts or some other method that the Board of Trustees determines
appropriate.
WHAT SERVICES ARE PROVIDED TO
SHAREHOLDERS?
For general information about Colorado BondShares -- A Tax-Exempt Fund, call
or write the Fund at 1200 Seventeenth Street, Suite 1150, Denver, Colorado
80202. The telephone number is (303) 572-6990, or, outside of Denver, (800)
572-0069. You may call on Monday through Friday (except holidays) between the
hours of 8:00 a.m. and 4:00 p.m. Denver, Colorado time and your calls will be
answered by our service representatives.
As a shareholder, you will receive semi-annual reports. In addition, you will
receive statements confirming transactions in your Account and the current
balance of shares you own. For your convenience, all shares acquired in an
Account will be credited as book credits.
PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from time
to time. These performance figures may include yield, tax equivalent yield and
total return figures.
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. 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
21
<PAGE> 27
Fund's yield that is not tax-exempt. Yields are calculated according to
accounting methods that are standardized for all stock and bond funds. Because
yield calculation methods differ from the methods used for other accounting
purposes, the Fund's yield may not equal its distribution rate, the income paid
to an investor's account, or the income reported in the Fund's financial
statements.
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. 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.
All performance figures are based on historical results and are not intended
to indicate future performance. A more detailed description of the foregoing
performance figures and their methods of computation is contained in the Fund's
Statement of Additional Information under "CALCULATION OF PERFORMANCE DATA."
GENERAL INFORMATION
The Fund was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to a Declaration of Trust filed on
February 13, 1987. The Fund is authorized to issue an unlimited number of shares
of beneficial interest. Each share has one vote.
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Fund. However, the Declaration of Trust
disclaims shareholder liability for acts or obligations of the Fund and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or a Trustee. The Declaration of
Trust provides for indemnification from the Fund's property for all losses and
expenses of any shareholder held liable for the obligations of the Fund. Thus,
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations, a possibility which management believes is remote. Upon
payment of any liability incurred by the Fund, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the Fund.
The Board of Trustees intends to conduct the operations of the Fund in such a
way so as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of the Fund.
As described under "How Is The Fund Managed?" in the Prospectus and Statement
of Additional Information, the Fund ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove trustees.
The Shareholder Service Agent maintains a record of your ownership and will
send you monthly statements of account. Shareholder inquiries should be directed
to your registered representative or the Service Agent or the Fund at the
telephone numbers or mailing addresses listed in the prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE FUND'S
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER 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 OFFERING MAY NOT
LAWFULLY BE MADE.
22
<PAGE> 28
COLORADO BONDSHARES -- A TAX-EXEMPT FUND
GENERAL AUTHORIZATION FORM
<TABLE>
- - - - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 REGISTRATION PLEASE PRINT
Individual
Use Line A A.__________________________________________________________ _____________________
-OR- First Name Initial Last Name Soc. Sec. No.
Joint Owners
Use Lines A & B B.__________________________________________________________ _____________________
-OR- Joint Owner (A Joint Tenancy with right of survivorship U.S. Citizen (Y/N)
Gifts to Minors will be presumed, unless otherwise indicated.)
Under UGMA
Use Lines C & D C.__________________________________________________________
-OR- Custodian's Name
Corporations, Trusts,
or others in any D.__________________________________________________________ _____________________
representative Minor's Name Minor's Soc. Sec. No.
capacity
Use Line E E.__________________________________________________________ _____________________
Account Title (where appropriate include name of trustee, Tax I.D. No.
beneficiary, etc.)
- - - - -----------------------------------------------------------------------------------------------------------------
2 SIGNATURE Under penalties of perjury I (we) certify that the number(s)
AND shown on this form is my (our) correct taxpayer
CERTIFICATE identification number (social security number for
Individual individuals) and that I (we) am (are) not subject to backup
Use Line A withholding either because I (we) have not been notified
-OR- that I (we) am (are) subject to backup withholding as a
Joint Owners result of a failure to report all interest or dividends, or
Use Lines A & B the Internal Revenue Service has notified me (us) that I
-OR- (we) am (are) no longer subject to backup withholding. I
Gifts to Minors (we) certify to my (our) legal capacity to purchase or
Under UGMA redeem shares of the Fund for my (our) own Account, or for
Use Line C the Account of the organization named below. I (we) have
-OR- received a current Prospectus of the Fund and appoint
Corporations, Trusts, as my (our) agent to act in accordance with
or others in any my (our) instructions herein.
representative
capacity -----------------------------------------------------------------------------------
Use Lines D & E
A._________________________________________________________________________________
Date Signature of Investor
B._________________________________________________________________________________
Date Signature of Co-Investor, if any
C._________________________________________________________________________________
Date Signature of Custodian
D._________________________________________________________________________________
Name
E._________________________________________________________________________________
Date Signature and Title
F._________________________________________________________________________________
Date Signature and Title
- - - - -----------------------------------------------------------------------------------------------------------------
3 ADDRESS
--------------------------------------------------------------
Street
( )
-------------------------------------------------------------- -------------------
Street State Zip Code Telephone No. (in-
cluding Area Code)
- - - - -----------------------------------------------------------------------------------------------------------------
4 INITIAL Enclosed is a check, payable to "Colorado Bondshares -- A Tax-Exempt Fund" for
INVESTMENT $ ___________________
NO REDEMPTION OF SHARES PURCHASED BY CHECK (UNLESS CERTIFIED) WILL BE PERMITTED WITHIN
15 DAYS OF THE CREDIT OF THOSE SHARES TO YOUR ACCOUNT.
MINIMUM INITIAL INVESTMENT: $500 NO MINIMUM ON SUBSEQUENT INVESTMENTS
- - - - -----------------------------------------------------------------------------------------------------------------
5 DIVIDENDS I elect to receive: ___ 1. Dividends in shares, gain distributions in shares.
AND GAIN ___ 2. Dividends in cash, gain distributions in shares.
DISTRIBUTIONS ___ 3. Dividends in cash, gain distributions in cash.
NOTE: IF NO ELECTION IS MADE, OPTION NO. 1 AUTOMATICALLY
WILL BE PUT INTO EFFECT.
Dividends will be invested and gain distributions will be
credited at net asset value.
- - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
<TABLE>
- - - - -----------------------------------------------------------------------------------------------------------------
<S> <C>
6 LETTER I intend to purchase, although I am not obligated to do so,
OF INTENT shares of the Fund within a 13-month period, which together
with the total asset value of shares owned, will aggregate
at least:
[ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000 [ ] $4,000,000
I agree to the escrow provision on the following page.
(Also complete Section 5 above)
- - - - -----------------------------------------------------------------------------------------------------------------
7 DIVIDEND (If you wish to have your dividend payments made to another
DIRECTION party please complete the following)
OPTION I hereby authorize and request that my dividend payments be
made to:
Name________________________________________________________________________________
Address ____________________________________________________________________________
City _____________________ State _________________________________ Zip __________
Signature of Investor ______________________________________________________________
Signature of Co-Investor ___________________________________________________________
- - - - -----------------------------------------------------------------------------------------------------------------
8 TELEPHONE (If you wish to be able to use telephone redemption please
REDEMPTION complete the following)
I hereby authorize the Fund to honor any telephonic or
telegraphic instructions from any of the registered
shareholders or the registered representative of account for
redemption without signature guarantee, of any or all shares
held in my/our account. Proceeds will be mailed as
registered on the account or, on redemptions of $1000 or
more, I may request that the proceeds be wired to the bank
account designated below. The Fund shall not have any
liability to me/us for acting upon such instructions, and I
will indemnify and hold harmless the Fund from and against
all losses, claims, expenses and liabilities that may arise
out of, or be in any way connected with a redemption of
shares under this expedited redemption procedure, whether or
not properly authorized and directed.
____________________________________________________________________________________
Name of Bank (include name of branch) Bank Account Number
____________________________________________________________________________________
Address of Bank City State Zip Code
ATTACHED IS A VOIDED CHECK OR DEPOSIT SLIP FROM THE BANK
ACCOUNT TO WHICH PROCEEDS MAY BE WIRED IF REQUESTED.
- - - - -----------------------------------------------------------------------------------------------------------------
9 DEALER'S Please establish the Account specified by the investor and
AUTHORIZATION purchase through SMITH HAYES Financial Services Corporation,
general distributor, at the public offering price, shares
which you are authorized to purchase from us for the
investor. The investor is authorized to send any future
payments directly to you for investment. Confirm each
transaction to the investor and to us. We guarantee the
genuineness of the investor's signature. We are a duly
registered and licensed dealer and have a sales agreement
with
____________________________________________________________________________________
Dealer Dealer's Office Where Accounts Originated
____________________________________________________________________________________
Representative's Name Representative's Number Address (for accounting purposes)
____________________________________________________________________________________
Representative's Phone No. Date Authorized Signature
- - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
TERMS AND CONDITIONS
OPEN ACCOUNT
Investments will be made in as many shares of the Fund, including fractions to
the third decimal place, as can be purchased at the public offering price at the
close of business on the day payment is received. Shareholders will receive
dividends from investment income and any distributions from long-term gain
realized on the investment in shares or in cash according to the option elected.
Dividend and gain options may be changed at any time by notifying Freedom Funds
Management Company in writing. Share certificates will not be issued.
LETTER OF INTENT
Freedom Funds Management Company will hold in escrow shares equal to five
percent of the minimum purchase amount specified. Dividends and distributions on
the escrowed shares will be paid to you or credited to your Account. Upon
completion of the specified minimum purchase within the 13-month period, all
shares held in escrow will be deposited in your Account. You may include the
total asset value of shares of the Fund owned as of the date of a Letter of
Intent toward the completion of the Letter. If the total amount invested within
the 13-month period does not equal or exceed the specified minimum purchase, you
will be requested to pay the difference between the amount of the sales charge
paid and the amount of the sales charge applicable to the total purchase made.
If within 20 days following the making of a written request, you have not paid
this additional sales charge to Freedom Funds Management Company, sufficient
escrowed shares will be redeemed for payment of the additional sales charge.
Shares remaining in escrow after this payment will be released to your Account.
The standard purchase amount may be increased at any time during the 13-month
period by filing a revised Agreement for the same period, provided that your
Dealer furnishes evidence that an amount representing the reduction in sales
charge under the new Agreement, which becomes applicable on purchases already
made under the original Agreement, will be refunded to you and that the required
additional escrowed shares are being furnished by you.
SEND CHECK AND COMPLETED AUTHORIZATION FORM TO:
COLORADO BONDSHARES -- A TAX-EXEMPT FUND
1200 SEVENTEENTH STREET, SUITE 1150
DENVER, COLORADO 80202
<PAGE> 30
PART B
COLORADO BONDSHARES A TAX-EXEMPT FUND
1200 SEVENTEENTH STREET, SUITE 1150
DENVER, COLORADO 80202
(303) 572-6990
(800) 572-0069 (OUTSIDE OF DENVER)
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 28, 1997
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Colorado BondShares A
Tax-Exempt Fund (the "Fund"), dated January 28, 1997 (the "Prospectus"). It
should be read in conjunction with the Prospectus, which may be obtained by
writing or calling the Fund at the address or telephone number listed above.
This Statement of Additional Information, although not in itself a Prospectus,
is incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
PAGE
What is Colorado BondShares A Tax-Exempt Fund? B-1
What are the Fund's Investment Objectives, Policies and Risks? B-1
What are the Risks of Investing in Not Rated Tax-Exempt Obligations? B-2
What are the Risks of Investing in Lower-Rated Tax-Exempt Obligations? B-2
What are the Fund's Investment Limitations? B-4
Who Gives Investment Advice to the Fund? B-5
How is the Fund Managed? B-6
Advisory Agreement and Expenses B-6
Custodian and Auditors B-8
What Kind of Shares Does the Fund Offer? B-9
Purchase of Shares B-9
Distribution of Shares B-10
Redemption of Shares B-11
How is Net Asset Value Per Share Determined? B-11
Calculation of Performance Data B-12
Taxable Versus Tax-Exempt Yields Colorado Residents B-14
General Information B-16
<PAGE> 31
WHAT IS COLORADO BONDSHARES
A TAX-EXEMPT FUND?
Colorado BondShares A Tax-Exempt Fund (the "Fund") is a diversified,
open-end management investment company, or mutual fund, organized as a
Massachusetts business trust on February 13, 1987. The Fund's name was
previously Hanifen, Imhoff Colorado BondShares A Tax-Exempt Fund and was changed
on December 1, 1994 in connection with the change in control of the Fund's
investment adviser which was previously a wholly-owned subsidiary of Hanifen,
Imhoff, Inc. ("Hanifen"). The Fund no longer has any affiliation with Hanifen.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. Each share has one vote.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES AND RISKS?
As stated in the Prospectus, the Fund seeks to maximize income exempt
from federal income taxes and from the personal income taxes of the State of
Colorado to the extent consistent with preservation of capital, and has a
secondary objective of seeking opportunities for capital appreciation. It is a
nonfundamental policy of the Fund that, under normal circumstances, the Fund
will invest at least 65% of the value of its total assets in tax-exempt bonds
and the balance of its total assets in other tax-exempt securities (including
tax-exempt notes and tax-exempt municipal leases) (collectively, "Tax-Exempt
Obligations") of the State of Colorado, its political subdivisions,
municipalities and public authorities, the interest on which is exempt from
federal income taxes and Colorado personal income taxes. The Fund will invest
principally, without percentage limitation, in Tax-Exempt Obligations which on
the date of investment are not rated, although it may invest up to 50% of its
assets in rated Tax-Exempt Obligations.
Less than thirty-five percent of the value of the Fund's total net
assets will be invested in Tax-Exempt Obligations which are rated lower than Baa
by Moody's Investors Service ("Moody's") or lower than BBB by Standard & Poor's
Corporation ("S&P") or, if not rated, are of equivalent quality as determined by
the Investment Adviser. (A description of Moody's and S&P's ratings is attached
hereto as Appendix A.) The Fund is not required to dispose of a Tax-Exempt
Obligation if down-graded by a rating service or, if not rated, the Investment
Adviser determines that a Tax-Exempt Obligation no longer is of equivalent
quality, unless any such down-grade or determination would cause the Fund's
total net assets not to meet the investment policy described in the preceding
sentence. See "WHAT ARE THE RISKS OF INVESTING IN LOWER RATED TAX-EXEMPT
OBLIGATIONS?"
At least 80% of the Tax-Exempt Obligations in which the Fund will
invest will be issued primarily by or on behalf of the State of Colorado, its
municipalities and public authorities, the interest on which is exempt from
federal and Colorado personal income taxes. Such securities are traded primarily
in the over-the-counter market. In no event will the Fund acquire debt
securities or other illiquid assets for which there is no active trading market
if such illiquid assets and debt securities, in the aggregate, would comprise
10% or more of the net assets of the Fund.
B-1
<PAGE> 32
A separate account of the Fund consisting of cash or liquid high-grade
debt securities equal to the amount of the Tax-Exempt Obligations purchased by
the Fund on a "when-issued" basis will be established with the Fund's custodian
and marked to market daily, with additional cash or liquid high-grade debt
securities added when necessary.
WHAT ARE THE RISKS OF INVESTING
IN NOT RATED TAX-EXEMPT OBLIGATIONS?
The Fund will attempt to maximize income exempt from federal and
Colorado personal income taxes by investing up to 100% of its assets in
Tax-Exempt Obligations that are not rated. These not rated obligations will
generally have a higher level of credit and market risks than rated obligations.
While the Investment Adviser will attempt to reduce this higher level of risk,
it may not be able to do so.
The additional risks of investing in not rated Tax-Exempt Obligations
include, but are not limited to, a higher level of market price volatility,
higher sensitivity to interest rate changes, creditworthiness, liquidations in
the secondary market and lack of supply of new issues. Any one of these risks,
or a combination of them, could have an adverse effect on the Fund's net asset
value and income. In addition, the anticipated higher level of income may not be
sufficient to offset a loss in net asset value.
WHAT ARE THE RISKS OF
INVESTING IN LOWER-RATED TAX-EXEMPT OBLIGATIONS?
Tax-Exempt Obligations which are rated Baa or higher by Moody's or BBB
or higher by S&P are considered "investment grade" and are regarded as having a
capacity to pay interest and repay principal that varies from "extremely strong"
to "adequate." Additionally, the Investment Adviser has deemed many of the
issuers of not rated Tax-Exempt Obligations in which the Fund invests to be
comparable to issuers having such ratings. Tax-Exempt Obligations rated Baa by
Moody's or BBB by S&P have speculative characteristics and changes in economic
conditions or other circumstances may lead to weakened capacity to make
principal and interest payments. Tax-Exempt Obligations which are rated lower
than Baa by Moody's or lower than BBB by S&P ordinarily provide higher yields
but involve greater risks because of reduced creditworthiness and increased risk
of default. Lower-rated Tax-Exempt Obligations generally tend to reflect
short-term economic and market developments to a greater extent than
higher-rated Tax-Exempt Obligations which react primarily to fluctuations in the
general level of interest rates. In addition, since there are fewer investors in
lower-rated Tax-Exempt Obligations, it may be harder to sell the Tax-Exempt
Obligations at the optimum time. As a result of these factors, lower-rated
Tax-Exempt Obligations tend to have more price volatility and carry more risk to
principal and income than higher-rated Tax-Exempt Obligations.
Additional risks of investing in lower-rated Tax-Exempt Obligations
include, without limitation, a less liquid secondary trading market, an
increased possibility of redemption earlier than the stated maturity date and
legislation which limits the use or other advantages of investing in lower-rated
Tax-Exempt
B-2
<PAGE> 33
Obligations. Any one of these risks, or a combination of them, could have an
adverse effect on the Fund's net asset value and income.
An economic downturn may adversely affect the value of some lower-rated
Tax-Exempt Obligations. Such a downturn may especially affect highly leveraged
issuers or issuers in cyclically sensitive industries, where deterioration in an
issuer's cash flow may impair its ability to meet its obligation to pay
principal and interest to holders of Tax-Exempt Obligations in a timely fashion.
From time to time, as a result of changing conditions, issuers of lower-rated
Tax-Exempt Obligations may seek or may be required to restructure the terms and
conditions of the securities they have issued. As a result of these
restructurings, holders of lower-rated Tax-Exempt Obligations may receive less
principal and interest than they had bargained for at the time such Tax-Exempt
Obligations were purchased. In the event of a restructuring, the Fund may bear
additional legal or administrative expenses in order to maximize recovery from
an issuer.
The secondary trading market for lower-rated Tax-Exempt Obligations is
generally less liquid than the secondary trading market for higher-rated
Tax-Exempt Obligations. In 1989, legislation was enacted that requires federally
insured savings and loan associations to divest their holdings of lower-rated
securities by 1994. The reduction of the number of institutions empowered to
purchase and hold lower-rated securities could have an adverse impact on the
overall liquidity of the market. Adverse publicity and the perception of
investors relating to issuers, underwriters, dealers or underlying business
conditions, whether or not warranted by fundamental analysis, may also affect
the price or liquidity of lower-rated Tax-Exempt Obligations. On occasion,
therefore, it may become difficult to price or dispose of a particular security
in the Fund's portfolio.
The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash).
The price of zero coupon bonds and pay-in-kind securities are generally
more sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
paid-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.
Many municipal debt obligations, including many lower-rated Tax-Exempt
Obligations, permit the issuers to call the security and thereby redeem their
obligations earlier than the stated maturity dates. Issuers are more likely to
call Tax-Exempt Obligations during periods of declining interest rates. In these
cases, if the Fund owns a Tax-Exempt Obligation which is called, the Fund will
receive its return of principal earlier than expected and would likely be
required to reinvest the proceeds at lower interest rates, thus reducing income
to the Fund.
B-3
<PAGE> 34
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed except
by vote of a majority of the outstanding voting securities of the Fund, the Fund
may not:
# Issue senior securities;
# Invest more than 10% of the value of its total assets in the
aggregate in restricted or not readily marketable securities
or in repurchase agreements maturing or terminable in more
than seven days or in illiquid assets;
# Invest less than 80% of the value of its net assets in
Tax-Exempt Obligations the interest on which is exempt from
federal income taxes and from Colorado personal income tax.
# Borrow money, except from banks for temporary purposes and in
an amount not to exceed 10% of the value of its total assets
at the time the borrowing is made;
# Mortgage or pledge any of its assets, except to secure
permitted borrowings noted above;
# Invest 25% or more of its total assets at market value in
issuers of any one industry (determined by reference to the
current Directory of Companies Filing Annual Reports with the
Securities and Exchange Commission, published by the
Securities and Exchange Commission), provided that, with
respect to Tax-Exempt Obligations issued by the State of
Colorado, its political subdivisions, municipalities and
public authorities, the identity of the issuer shall be
determined with reference to the applicable provisions of the
Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder;
# As to 75% of the value of its total assets, purchase
securities of any issuer if immediately thereafter more than
5% of its total assets at market value would be invested in
the securities of any issuer;
# Acquire securities in other investment companies, if the total
amount so invested would have an aggregate value in excess of
10% of the value of the total assets of the Fund. In
connection with this limitation, the Fund may not acquire more
than 3% of the total outstanding voting stock of any one
investment company, or acquire securities in any one
investment company which securities have an aggregate value in
excess of 5% of the value of the total assets of the Fund
# Purchase or hold any real estate, except that the Fund may
invest in securities secured by real estate or interests
therein or issued by persons (other than real estate
investment trusts) which deal in real estate or interests
therein;
B-4
<PAGE> 35
# Purchase or hold the securities of any issuer, if to its
knowledge, trustees or officers of the Fund individually
owning beneficially more than 0.5% of the securities of that
issuer own in the aggregate more than 5% of such securities;
# Write or purchase put, call, straddle or spread options,
purchase securities on margin or sell "short," or underwrite
the securities of other issuers;
# Purchase or sell commodities or commodity contracts, including
commodity futures contracts; or
# Make loans except to the extent that the purchase of notes,
bonds or other evidences of indebtedness or the entry into
repurchase agreements or deposits with banks may be considered
loans. The Fund has no present intention of entering into
repurchase agreements during the coming year.
Under the Investment Company Act of 1940, a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy.
WHO GIVES INVESTMENT ADVICE TO THE FUND?
The investment adviser to the Fund is Freedom Funds Management Company,
formerly known as Hanifen, Imhoff Management Co., Inc. (the "Investment
Adviser"), a Delaware corporation formed on November 7, 1986 and wholly-owned by
Carbon County Holding Company, a Colorado corporation ("Carbon County"). Carbon
County is a single bank holding company which owns 100% of Rawlins National
Bank.
Fred R. Kelly Jr., President, Secretary and Treasurer of the Investment
Adviser and the Fund's portfolio manager, owns approximately 65% of the issued
and outstanding capital stock of Carbon County.
The Investment Adviser has registered with the Securities and Exchange
Commission as an Investment Adviser under the Investment Advisers Act of 1940.
The Investment Adviser will attempt to meet the Fund's investment
objectives by providing portfolio management and credit analysis services
pursuant to the Prospectus and the Advisory Agreement. There is no assurance
that the Investment Adviser can meet the Fund's investment objectives. The
Investment Adviser anticipates that the Fund will not have a portfolio turnover
rate in excess of 20% per year in an attempt to meet these objectives.
During fiscal year 1996, the Fund's portfolio turnover rate, the
percentage computed by dividing the lesser of purchases or sales of portfolio
B-5
<PAGE> 36
securities by the monthly average of the market value of such securities during
the period, reached 24.53%. This is an unusually high figure for the Fund which
resulted from a large number of the portfolio's securities being called early
and not from high trading volume.
HOW IS THE FUND MANAGED?
The Fund is a Massachusetts business trust. Its Board of Trustees will
supervise the activities of the Fund and review the Fund's service contracts.
Pursuant to the terms of the Advisory Agreement, dated November 17, 1994, the
Investment Adviser will manage investment of the Fund's assets and administer
its business and other affairs. (See "Advisory Agreement and Expenses" below.)
The Fund is not required to hold annual shareholder meetings. However,
special meetings may be called by the Board of Trustees 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 trustees, 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 Trustees has the power to create additional series of
Fund shares.
OFFICERS AND TRUSTEES OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during the past five years and an
indication of which trustees and officers are "interested persons" of the Fund
as defined in the Investment Company Act of 1940, are described in the
Prospectus under "How Is The Fund Managed?" As of January 15, 1997, the officers
and trustees of the Fund as a group owned less than 1% of the outstanding shares
of the Fund.
No officer or Trustee of the Fund received remuneration from the Fund
in excess of $60,000 for services to the Fund during the fiscal year ended
September 30, 1996. The officers and trustees of the Fund, as a group, received
$800 in compensation from the Fund for services to the Fund during the 1996
fiscal year. There is no family relationship between any officers and trustees
of the Fund.
ADVISORY AGREEMENT AND EXPENSES
Under the Advisory Agreement dated November 17, 1994, between the Fund
and the Investment Adviser, and subject to the control of the Board of Trustees,
the Investment 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 Investment Adviser
administers the Fund's daily business affairs such as providing accurate
accounting records, computing accrued income and expenses of the Fund, computing
the daily net asset value of the Fund, assuring proper dividend disbursements,
proper financial information to investors, and notices of all shareholders',
meetings, and providing sufficient office space, storage, telephone services,
and personnel to accomplish these responsibilities. The Board of Trustees of the
Fund approved the Advisory
B-6
<PAGE> 37
Agreement, by unanimous vote, on June 1, 1994 in the manner required by the
Investment Company Act of 1940. A majority of the shareholders of the Fund
approved the Advisory Agreement at a shareholders' meeting held on September 30,
1994. The Investment Adviser pays all of the compensation of trustees of the
Fund who are employees of the Investment Adviser and of the officers and
employees of the Fund. The Fund pays all of the compensation of trustees who are
not employees of the Investment Adviser. The Advisory Agreement also provides
that the Investment 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 Investment Adviser is entitled to
receive a management fee from the Fund, calculated daily and payable monthly,
equal to 0.5% of the average daily net assets on an annual basis.
The Fund is responsible for paying all its expenses other than those
assumed by the Investment Adviser, including brokerage commissions, if any, fees
and expenses of independent attorneys and auditors, taxes and governmental fees,
including fees and expenses of qualifying the Fund and its shares under federal
and state securities laws, and expenses of repurchase or redemption of shares,
expenses of printing and distributing reports, notices and proxy materials to
shareholders, expenses of printing and filing reports and other documents with
governmental agencies, expenses of shareholders' meetings, expenses of corporate
data processing and related services, shareholder account services, fees and
disbursements of appraisers, transfer agents and custodians, expenses of
disbursing dividends and distributions, fees and expense of trustees of the Fund
not employed by the Investment Adviser or its affiliates, insurance premiums and
extraordinary expenses such as litigation expenses.
The table below sets forth the advisory fees earned, the advisory fees
actually paid and the expense reductions by the Investment Adviser during the
last three fiscal years of the Fund:
<TABLE>
<CAPTION>
ADVISORY ADVISORY REDUCTIONS
FEES EARNED FEES PAID THE ADVISER
<S> <C> <C> <C>
1994 192,495 192,495 -0-
1995 215,384 215,384 -0-
1996 240,476 240,476 -0-
</TABLE>
The Advisory Agreement will continue in effect from year to year if
such continuance is approved in the manner required by the Investment Company
Act of 1940 (i.e., (1) by a vote of a majority of the Board of Trustees or of
the outstanding voting securities of the Fund and (2) by a vote of a majority of
the trustees who are not parties to the Advisory Agreement or interested persons
of any such party), and if the Investment 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
B-7
<PAGE> 38
the Fund, without penalty, on 60 days' written notice to the Investment Adviser
and will terminate automatically in the event of its assignment.
The Investment Adviser also serves as the transfer agent, shareholder
servicing agent and dividend disbursing agent for the Fund, pursuant to a
Transfer Agency and Service Agreement dated November 17, 1994 (the "Agreement").
The Investment Adviser's duties under the Agreement include processing purchase
and redemption transactions, establishing and maintaining shareholder accounts
and records, disbursing dividends declared by the Fund and all other customary
services of a transfer agent, shareholder servicing agent and dividend
disbursing agent. As compensation for these services, the Fund pays the
Investment Adviser at a rate intended to represent the Investment Adviser's cost
of providing such services. This fee is in addition to the investment advisory
fee payable to the Investment Adviser under the Advisory Agreement.
CUSTODIAN AND AUDITORS
Norwest Investments and Trust, Norwest Bank Denver, N.A., is the
portfolio securities custodian (the "Custodian") for the Fund. Their address is
1740 Broadway, Denver, Colorado 80274.
KPMG Peat Marwick LLP, independent certified public accountants, are
the auditors of the Fund. Their address is 2300 MCI Tower, 707 Seventeenth
Street, Denver, Colorado 80202.
B-8
<PAGE> 39
WHAT KIND OF SHARES DOES THE FUND OFFER?
As described in the Prospectus, the Fund presently has only one class
of shares, an unlimited number of which may be issued by the Board of Trustees.
The Board of Trustees has the power to create additional series of the Fund.
Each share represents an equal proportionate beneficial interest in the Fund.
Shareholders are entitled to one vote for each full share held. Fractional
shares may be voted proportionately. Voting rights are not cumulative.
Shares of the Fund have no preemptive or conversion rights, and are
freely transferable. Upon liquidation of the Fund, shareholders are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders.
Rule 18f-2 under the Investment Company Act of 1940 provides that any
matter required to be submitted by the provisions of the Act or applicable state
law, or otherwise, to the holders of the outstanding voting securities of an
investment company such as the Fund shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
voting securities of each class affected by such matter. Rule 18f-2 further
provides that a class shall be deemed to be affected by a matter unless it is
clear that the interests of each class in the matter are substantially identical
or that the matter does not affect any interest of such class. However, the Rule
exempts the selection of independent public accountants, the approval of
principal distributing contracts and the election of trustees from the separate
voting requirements of the Rule.
PURCHASE OF SHARES
WHAT REDUCTIONS IN SALES CHARGES ARE PROVIDED?
Volume Discounts will be provided if the total amount being invested in
shares of the Fund reaches levels set forth in the sales charge schedule set
forth in the Prospectus.
Rights of Accumulation allow an investor to purchase shares of the Fund
at the rate applicable in the discount schedule set forth in the Prospectus
after adding the value of shares already owned by the investor to the amount of
Fund shares being purchased.
A Letter of Intent allows an investor to purchase shares of the Fund
over a 13-month period at reduced sales charges in accordance with the sales
charge schedule in the Prospectus, based on the total amount an investor states
that he intends to purchase plus the total net asset value of shares of the
Fund. Reduced sales charges also may apply to purchases made within a 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. For more information concerning terms of Letters of Intent, see the
General Authorization Form.
B-9
<PAGE> 40
WHO IS ENTITLED TO REDUCTIONS?
Shares of the Fund may be sold at net asset value to (i) present and
retired trustees, officers, directors, employees (and their respective spouses
and minor children) of the Fund, the Investment Adviser and its affiliates,
SMITH HAYES Financial Services Corporation, Hanifen, Imhoff Holdings Inc. and
its affiliates as constituted on November 17, 1994 and other NASD registered
representatives; (ii) employee benefit plans for such persons (and to any
investment advisory, custodial, trust or other fiduciary account managed or
advised by the Investment Adviser or any affiliate); and (iii) shareholders of
unrelated mutual funds that charge a sales load to the extent that the purchase
price of Fund shares is funded by the proceeds from the redemption (within 60
days prior to the purchase of Fund shares) of shares of such unrelated mutual
fund(s).
Shares may be issued without a sales charge in connection with the
acquisition of cash and securities owned by other investment companies and
personal holding companies.
REASONS FOR DIFFERENCES IN PUBLIC OFFERING PRICE
As described in the Prospectus, there are a number of instances in
which the Fund's shares are sold or issued on a basis other than the maximum
public offering price (net asset value plus the highest sales charge). Some of
these relate to lower or eliminated sales charges for larger purchases, whether
made at one time or over a period of time as under a Letter of Intent or right
of accumulation. (See the table of sales charges in the Prospectus.) The reasons
for these quantity discounts are, in general, that (i) they are traditional and
have long been permitted in the industry and are therefore necessary to meet
competition as to sales of shares of other funds having such discounts, and (ii)
they are designed to avoid an unduly large dollar amount of sales charges on
substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons ("single purchasers") for reasons
of family unity and to provide a benefit to tax-exempt plans and organizations.
The reasons for the eliminated sales charges to certain individuals and
groups are permitted because of (i) reduced or eliminated selling expenses; (ii)
encouragement of an interest and an identification with the aims and policies of
the Fund; and (iii) the necessity to meet competition as to sales of shares of
other funds.
DISTRIBUTION OF SHARES
SMITH HAYES Financial Services Corporation ("SMITH HAYES") is the
general distributor of the shares of the Fund pursuant to a Distribution
Agreement dated November 30, 1994 (the "Distribution Agreement"). The
Distribution Agreement was approved by the Board of Trustees of the Fund, on
November 30, 1994 in the manner required by the Investment Company Act of 1940.
Hanifen served as the general distributor of the Fund's shares from its
inception until November 30, 1994. As general distributor of the Fund's shares,
SMITH HAYES allows concessions to all dealers, up to 4.35% on purchases to which
the 4.75% sales charge applies. SMITH HAYES receives the balance of such sales
charges (.40%) paid by investors. In its sole discretion, SMITH HAYES may give
up all or part of such .40% sales charge
B-10
<PAGE> 41
to dealers; however, this practice may be discontinued at any time. For the
fiscal years ended September 30, 1996, 1995 and 1994, the total amount of sales
charges paid by investors was $164,333, $157,291 and $239,349, respectively.
SMITH HAYES 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.
REDEMPTION OF SHARES
The procedures for redemption of Fund shares under ordinary
circumstances are set forth in the Prospectus.
In unusual circumstances, payment may be postponed, or the right of
redemption postponed for more than seven days, if the orderly liquidation of
portfolio securities is prevented by the closing of, or restricted trading on,
the New York Stock Exchange during periods of emergency or such other periods as
ordered by the Securities and Exchange Commission.
Payment may be made in securities, subject to the review of some state
securities commissions. If payment is made in securities, a shareholder may
incur brokerage expenses in converting these securities into cash.
HOW IS NET ASSET VALUE PER SHARE DETERMINED?
The net asset value per share of the Fund is determined as of the close
of business of the New York Stock Exchange for each day the Exchange is open.
Net asset value is determined by dividing the value of the total assets of the
Fund, less liabilities (net assets), by the number of shares outstanding. The
value of total assets is primarily the sum of the market values of the bonds,
other investments and cash in the portfolio.
In determining the market values of bonds and other investments in the
portfolio, the Fund uses valuations provided on a daily basis by a pricing
service approved by the Board of Trustees. The pricing service uses quotes from
bond dealers, market transactions and other relevant information in setting
these values. However, the determination of market values for municipal bonds,
particularly not rated municipal bonds, can be a very subjective process due to
the infrequency at which individual bonds actually trade and the limited amount
of information available about many municipal issuers.
B-11
<PAGE> 42
Therefore, in addition to the pricing service, the Board of Trustees has
determined that it is appropriate to verify the values of bonds for which there
is not an active market by obtaining quotes from municipal bond dealers in
Colorado on a periodic basis. If, in the opinion of the Investment Adviser, the
valuation provided by the pricing service appears less reliable than that
provided by a consensus from at least two municipal bond dealers, the Investment
Adviser will use the value provided by the bond dealers.
The Board of Trustees in the future may direct the Fund to rely on
other methods or combination of methods in determining the market values of its
municipal bonds. These other methods may include the use of a matrix system, the
use of relative changes in a municipal index or price changes of municipal
future contracts or some other method that the Board of Trustees determines
appropriate.
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
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:
6
(a - b)
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:
B-12
<PAGE> 43
(a) Compute the yield to maturity of each obligation held by
the Fund based on the market value of the obligation at the close of
business on the last business day of each month, or with respect to
obligations purchased during the month, the purchase price.
(b) Divide the yield to maturity by 360 and multiply the
quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation
for each day of the subsequent month that the obligation is in the
portfolio.
The maturity of an obligation with a call provision is the next call
date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
In the case of an obligation issued without original issue discount and
having a current market discount, the coupon rate of interest is used in lieu of
the yield to maturity. In the case of an obligation with original issue
discount, if the discount based on the current market value exceeds the
then-remaining portion of original issue discount (market discount), the yield
to maturity is the imputed rate based on the original issue discount
calculation. In the case of an obligation with original issue discount, if the
discount based on the current market value is less than the then-remaining
portion of original issue discount (market premium), the yield to maturity is
based upon market value.
TAX EQUIVALENT YIELD
Tax equivalent yield shows the yield from a taxable investment which
would produce an after-tax yield equal to that of a fund that invests in
tax-exempt securities. It is computed by dividing the tax-exempt portion of the
Fund's yield (as calculated above) by one minus a stated income tax rate and
adding the product to the portion (if any) of the Fund's yield that is not
tax-exempt.
TOTAL RETURN
Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into account
the imposition of the sales charge and other fees and assuming the reinvestment
of all dividends and distributions. Cumulative total return reflects the Fund's
performance over a stated period of time and is computed as follows:
ERV - P
= Total Return
P
Where: ERV = ending redeemable value of the hypothetical
$1,000 payment made at the beginning of the base
period (reduced by the maximum sales charge) assuming
reinvestment of all dividends and distributions.
P = a hypothetical initial payment of $1,000.
B-13
<PAGE> 44
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:
P(1+T)N = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years in the base period.
ERV = ending redeemable value of the hypothetical
$1,000 payment made at the beginning of the base
period (reduced by the maximum sales charge) assuming
reinvestment of all dividends and distributions.
All performance figures are based on historical results and are not
intended to indicate future performance.
TAXABLE VERSUS TAX-EXEMPT YIELDS
COLORADO RESIDENTS
The following table shows the rate of return an individual investor
would need to receive from a 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.
<TABLE>
<CAPTION>
COLORADO DOUBLE EQUIVALENT
TAX-EXEMPT YIELD TAXABLE YIELD*
- - - - ---------------- --------------
<S> <C>
8.00% 14.44%
7.75% 13.99%
7.50% 13.54%
7.25% 13.09%
7.00% 12.64%
6.75% 12.18%
6.50% 11.73%
6.25% 11.28%
6.00% 10.83%
5.75% 10.38%
5.50% 9.93%
</TABLE>
B-14
<PAGE> 45
<TABLE>
<CAPTION>
COLORADO DOUBLE EQUIVALENT
TAX-EXEMPT YIELD TAXABLE YIELD*
- - - - ---------------- --------------
<S> <C>
5.25% 9.48%
5.00% 9.03%
</TABLE>
*The equivalent taxable yield is based on a 39.6% marginal federal income tax
bracket and a 5% marginal Colorado income tax bracket reduced by the
deductibility of the state tax on the federal return.
B-15
<PAGE> 46
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on September 30.
The Fund distributes reports semiannually to its shareholders. Financial
statements regarding the Fund, audited by the Fund's independent accountants,
are sent to shareholders annually.
LEGAL COUNSEL. The firm of Kutak Rock in Denver, Colorado, is legal
counsel for the Fund.
FUND PROSPECTUS. The Fund's Prospectus will be furnished without charge
upon request. Such requests should be made to the Fund at the mailing address or
telephone numbers set forth on the first page of this Statement of Additional
Information.
REGISTRATION STATEMENT. This Statement of Additional Information and
the Prospectus do not contain all of the information set forth in the
Registration Statement the Fund has filed with the Securities and Exchange
Commission. The complete Registration Statement may be obtained from the
Securities and Exchange Commission upon payment of the fee prescribed by the
rules and regulations of the Commission.
B-16
<PAGE> 47
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.
B-17
<PAGE> 48
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.
B-18
<PAGE> 49
KEY TO S&P'S MUNICIPAL BOND RATINGS
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB-" rating.
B Debt rated "B" has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The
B-19
<PAGE> 50
"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.
B-20
<PAGE> 51
[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.
/s/ KPMG PEAT MARWICK LLP
Denver, Colorado
November 6, 1996
F-1
<PAGE> 52
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)
F-2
<PAGE> 53
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)
F-3
<PAGE> 54
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)
F-4
<PAGE> 55
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)
F-5
<PAGE> 56
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)
F-6
<PAGE> 57
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>
F-7
<PAGE> 58
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.
F-8
<PAGE> 59
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.
F-9
<PAGE> 60
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.
F-10
<PAGE> 61
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.
F-11
<PAGE> 62
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>
F-12
<PAGE> 63
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.
F-13
<PAGE> 64
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.
F-14
<PAGE> 65
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.
F-15
<PAGE> 66
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Included in Part B of the Registration Statement
Independent Auditor's Report, dated November 6, 1996
Statement of Investments September 30, 1996 (Schedule
I)
Statement of Assets and Liabilities September 30,
1996
Statement of Operations Year ended September 30, 1996
Statements of Changes in Net Assets Years Ended
September 30, 1996 and 1995
Financial Highlights Years Ended September 30, 1996,
1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988
and the period from June 4, 1987 (commencement of
operations) to September 30, 1987
Notes to Financial Statements
Schedules II through VII are omitted because they are
not applicable.
(b) EXHIBITS
1 Amended and Restated Declaration of Trust of the
Registrant.(3)
2 Bylaws of the Registrant.(1)
5 Investment Advisory Agreement dated November 17,
1994.(3)
6.1 Distribution Agreement dated November 30, 1994.(3)
6.2 Form of Selling Agreement.(3)
8 Form of Custodian Agreement.(1)
9 Transfer Agency and Service Agreement dated November
17, 1994.(3)
10.1 Opinion and consent of Lane & Mittendorf.(2)
10.2 Opinion and consent of Hale and Dorr.(2)
11.1 Consent of Kutak Rock.*
C-1
<PAGE> 67
11.2 Consent of KPMG Peat Marwick LLP.*
17. Financial Data Schedule*
(1) As filed with the Registration Statement on February 13, 1987.
(2) As filed with Pre-Effective Amendment No. 1 to the Registration
Statement on April 1, 1987.
(3) As filed with Post-Effective Amendment No. 10 to the Registration
Statement on January 28, 1995.
(*) Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of January 20, 1997 the Fund had 1,275 holders of record of
its shares.
ITEM 27. INDEMNIFICATION
Under the terms of the Fund's Declaration of Trust, dated February 13,
1987, as amended, every trustee and officer of the Fund shall be indemnified to
the fullest extent permitted by law, unless a court or body before which the
proceeding was brought and adjudicated shall have found such person liable to
the Fund or its shareholders by reason of willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties of his office ("disabling
conduct"), or unless found by such court or body not to have acted in good faith
in the reasonable belief that his action was in the best interest of the Fund.
In the event of a settlement, no indemnification may be provided unless there
has been a determination that such person did not engage in disabling conduct
(1) by a court or other body before whom the proceeding was brought, or (2) in
the absence of such a determination, a reasonable determination, based upon a
review of the facts, by (a) the vote of the majority of a quorum of directors
who are neither "interested persons" of the Fund as defined in Section 2(a)(19)
of the Investment Company Act of 1940 nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion. The complete provisions of this
indemnification arrangement are set out in Article XII of the Declaration of
Trust of the Fund.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Freedom Funds Management Company, a Delaware corporation (the
"Investment Adviser"), is the Registrant's investment adviser.
C-2
<PAGE> 68
The Investment Adviser is a wholly-owned subsidiary of Carbon County
Holding Company, whose business address is 47 Sunset Drive, Englewood, Colorado
80110.
The Investment Adviser has engaged in no other business, profession,
vocation or employment since its incorporation on November 7, 1986.
The following individuals serve as Directors or officers of the
Investment Adviser (unless otherwise indicated, each named individual has held
the position or positions described under "Principal Occupation" for at least
the past two fiscal years):
POSITION WITH
NAME INVESTMENT ADVISER
- - - - ---- ------------------
Fred R. Kelly, Jr. Director, President, Secretary and Treasurer(1)
Mary F. Phillips Vice President and Assistant Secretary(2)
(1) For the previous two fiscal years of the Fund through November 30,
1994, Mr. Kelly served as Secretary and Treasurer to the Fund and was
Vice President of the Investment Adviser through November 17, 1994.
(2) For the previous two fiscal years of the Fund, through November 17,
1994, Ms. Phillips served as Operations Manager for the Investment
Adviser.
The principal business address of each of the foregoing persons is 1200
Seventeenth Street, Suite 1150, Denver, Colorado 80202.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) SMITH HAYES also is principal underwriter for the shares
of SMITH HAYES Trust, Inc. and Stratus Fund, Inc. Conley Smith, Inc.,
an affiliate of SMITH HAYES, is the investment adviser to SMITH HAYES
Trust, Inc. and Stratus Fund, Inc.
(b) Information required with respect to each director,
officer or partner of SMITH HAYES, the principal underwriter named in
the answer to Item 21:
C-3
<PAGE> 69
SMITH HAYES FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
(1) (2) (3)
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
---- ---------------- ---------------
<S> <C> <C>
Thomas C. Smith Chairman and President None
Max H. Callen Director and Vice President None
George W. Peterson Director and Vice President None
Arnold J. Walters Director and Vice President None
Allen J. Moore Director and Vice President None
Sharon A. Shelley Director, Vice President, Secretary
and Treasurer None
Larry J. Vawter Vice President None
John H. Conley Director* None
W. Don Nelson Vice President None
</TABLE>
* Mr. Conley's business address is 444 Regency Parkway, Suite 100, Omaha,
Nebraska 68114
Unless otherwise noted, the principal business address of each of the
foregoing persons is 200 Centre Terrace, 1225 L Street, P.O. Box 83000 Lincoln,
Nebraska 68501.
(c) Information required with respect to all
commissions and other compensation received by each principal
underwriter who is not an affiliated person of the Registrant
or an affiliated person of such an affiliated person, directly
or indirectly, from the Registrant during the Registrant's
last fiscal year: Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts and records of the Registrant, and all documents
required to be maintained by Section 31(a) of the 1940 Act and
the Rules promulgated thereunder, are in the physical
possession of Fred R. Kelly, Jr., at 1200 Seventeenth Street,
Suite 1150, Denver, Colorado 80202.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
C-4
<PAGE> 70
ITEM 32. UNDERTAKINGS
Not Applicable.
C-5
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on the 28th day of January, 1997.
COLORADO BONDSHARES-A TAX-EXEMPT FUND
By: /s/ Andrew B. Shaffer
Andrew B. Shaffer,
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ George N. Donnelly Chairman of the Board, President January 28, 1997
George N. Donnelly and Trustee
/s/ Andrew B. Shaffer Trustee, Treasurer and Secretary January 28, 1997
Andrew B. Shaffer
</TABLE>
<PAGE> 72
INDEX TO EXHIBITS
11.1 Consent of Kutak Rock
11.2 Consent of KPMG Peat Marwick LLP
27. Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
We consent to the reference in the Prospectus contained in this
Post-Effective Amendment No. 11 to the Registration Statement to our opinion
concerning the status of Colorado BondShares A Tax-Exempt Fund as a regulated
investment company under the Internal Revenue Code of 1986, as amended, under
the heading "What is the Effect of Income Tax on My Investment?" and to the use
of our name therein.
Very truly yours,
/s/ KUTAK ROCK
KUTAK ROCK
Denver, Colorado
January 28, 1997
<PAGE> 1
EXHIBIT 11.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
Colorado BondShares A Tax-Exempt Fund:
We consent to the use of our report dated November 6, 1996 included in this
Registration Statement and to the reference to our firm under the headings
"Custodian and Auditors" and "Financial Highlights" in such Registration
Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
January 27, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<INVESTMENTS-AT-COST> 49,948,942
<INVESTMENTS-AT-VALUE> 49,520,541
<RECEIVABLES> 1,273,432
<ASSETS-OTHER> 2,210,054
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,004,027
<PAYABLE-FOR-SECURITIES> 2,250,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 171,177
<TOTAL-LIABILITIES> 2,421,177
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,368,326
<SHARES-COMMON-STOCK> 5,399,890
<SHARES-COMMON-PRIOR> 4,887,331
<ACCUMULATED-NII-CURRENT> 10,698
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (367,773)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (428,401)
<NET-ASSETS> 50,582,850
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,427,447
<OTHER-INCOME> 0
<EXPENSES-NET> 334,662
<NET-INVESTMENT-INCOME> 3,092,785
<REALIZED-GAINS-CURRENT> (7,594)
<APPREC-INCREASE-CURRENT> 1,064,774
<NET-CHANGE-FROM-OPS> 4,149,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,082,087
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,719,354
<NUMBER-OF-SHARES-REDEEMED> (4,011,430)
<SHARES-REINVESTED> 2,038,765
<NET-CHANGE-IN-ASSETS> 5,814,567
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 240,476
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 367,875
<AVERAGE-NET-ASSETS> 47,838
<PER-SHARE-NAV-BEGIN> 9.16
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .60
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.37
<EXPENSE-RATIO> .77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
