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FILE NOS. 33-11981 AND 811-05009
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1999
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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. 14 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 17 [X]
COLORADO BONDSHARES -- A TAX-EXEMPT FUND
(Exact Name of Registrant as Specified in Charter)
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<C> <S>
SUITE 1000, 1200 SEVENTEENTH STREET, DENVER, COLORADO 80202
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(303) 572-6990 (800) 572-0069 (OUTSIDE OF DENVER)
(Registrant's Telephone Numbers, Including Area Code)
FRED R. KELLY, JR.
SUITE 1000, 1200 SEVENTEENTH STREET
DENVER, COLORADO 80202
(Name And Address of Agent for Service)
Copy to:
ROBERT J. AHRENHOLZ, ESQ.
KUTAK ROCK 717 SEVENTEENTH STREET, SUITE 2900
DENVER, COLORADO 80202
It is proposed that this filing will become effective (check appropriate
box):
[X] immediately upon filing pursuant to paragraph (b).
[ ] on (date) pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1).
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
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, 1998 WAS FILED ON NOVEMBER 30, 1998.
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COLORADO BONDSHARES
A TAX-EXEMPT FUND
PROSPECTUS
January 28, 1999
Colorado BondShares -- A Tax-Exempt Fund is a diversified, open-end mutual
fund that invests your money in tax-exempt bonds and other tax-exempt
securities, including tax-exempt notes and tax-exempt municipal leases of the
State of Colorado, its political subdivisions, municipalities and public
authorities.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
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Risk/Return Summary........................ 2
Investments, Risk and Performance.......... 2
Investment Objectives, Principal Investment
Strategies, and Related Risks............ 6
What Are The Investment Policies Of The
Fund?.................................... 6
What Are The Risks Of Investing In Not
Rated Tax-Exempt Obligations?............ 8
What Are The Risks Of Investing In Lower
Rated Tax-Exempt Obligations?............ 8
What Are Tax-Exempt Obligations?........... 9
Management's Discussion Of Fund
Performance.............................. 13
</TABLE>
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PAGE
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How Is The Fund Managed?................... 17
How Can I Invest In The Fund?.............. 17
What Do Shares Cost?....................... 18
How Can I "Sell" My Shares?................ 19
How Can I Reinstate My Investment?......... 19
What Distributions Will I Receive?......... 19
What Is The Effect Of Income Tax On My
Investment?.............................. 20
What Services Are Provided To
Shareholders?............................ 21
General Information........................ 22
Financial Highlights....................... 23
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RISK/RETURN SUMMARY
INVESTMENTS, RISK AND PERFORMANCE
FUND INVESTMENT OBJECTIVES/GOALS
Colorado Bondshares - A Tax-Exempt Fund (the "Fund") is a diversified,
open-end mutual fund whose primary goal is to maximize income that is exempt
from both federal and Colorado income taxes while simultaneously preserving
capital. The Fund also seeks opportunities for capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES OF THE FUND
The Fund will invest in tax-exempt bonds and other tax-exempt securities,
including tax-exempt notes and tax-exempt municipal leases of the State of
Colorado, its political subdivisions, municipalities and public authorities
("Tax-Exempt Obligations"). The interest earned on these investments is exempt
from regular federal income taxes and from Colorado personal income taxes. (See
"WHAT IS THE EFFECT OF INCOME TAX ON MY INVESTMENT?")
PRINCIPAL RISKS OF INVESTING IN THE FUND
By investing in the Fund, you are subject to several investment risks. The
occurrence of any one of these risks, or a combination of these risks, could
adversely affect the Fund's net asset value, yield and/or total return. By
investing in the Fund, you are exposed to the following principal risks:
- Your investment in the Fund is not insured or guaranteed by any government
agency.
- You can lose money on your investment.
- The Fund is not limited in the amount of Fund assets that can be invested in
Tax-Exempt Obligations. A downturn in the municipal debt market would
negatively affect your investment.
- The Fund will invest up to 100% of its assets in not rated Tax-Exempt
Obligations. These not rated obligations generally have a higher level of
credit risk and market risk than rated obligations.
- The Fund can invest in lower rated Tax-Exempt Obligations. Securities with
lower ratings are generally more sensitive to changes in economic and other
conditions. These lower rated securities have a higher risk of default which
makes your investment high risk.
- The market to buy and sell the Tax-Exempt Obligations may be limited because
these obligations may be not rated or lower rated.
- The tax-exempt status of some or all of the Tax-Exempt Obligations may be
modified or eliminated through legislative action.
The Fund is designed for investors subject to income taxation in the higher
tax brackets who can take advantage of the tax-exempt nature of the Fund's
income. The Fund is not intended for tax-exempt investors such as pension funds,
charities or IRA's who cannot take advantage of the tax benefits of the Fund.
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TOTAL RETURN PERFORMANCE AT NET ASSET VALUE
The following bar chart and table shows the Fund's annual total returns* for
each of the last 10 calendar years:
Chart
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CALENDAR YEARS TOTAL RETURN
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1989................................................... 8.70%
1990................................................... 1.00%
1991................................................... 8.31%
1992................................................... 9.20%
1993................................................... 8.25%
1994................................................... 6.34%
1995................................................... 9.46%
1996................................................... 8.04%
1997................................................... 9.36%
1998................................................... 6.42%
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* Past performance is not predictive of future performance.
Total return at net asset value is the percentage change in the value of a
hypothetical investment that has occurred in the indicated period of time. The
data reflected in the graph includes the reinvestment of all dividends and
distributions, but does not include the imposition of the sales charge. If sales
charges were reflected, the returns would be less than those shown. The Fund's
highest and lowest returns for a quarter during the 10 year period reflected on
the graph and chart above were 4.08% in the third quarter of 1989 and (2.28%) in
the second quarter of 1990, respectively.
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AVERAGE ANNUAL TOTAL RETURN
The following table summarizes the average annual total return at net asset
value for the one year, five-year and 10-year periods ended September 30, 1998
for the Fund and for the Lipper General Municipal Debt Fund Index ("Lipper Muni
Debt Fund Index"):
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AVERAGE ANNUAL
TOTAL RETURN(1) PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
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Colorado BondShares -- A Tax-Exempt Fund........ 7.62% 7.99% 7.49%
Lipper Muni Debt Fund Index(2).................. 8.53% 5.91% 8.02%
</TABLE>
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* Past performance is not indicative of future performance.
(1) The average annual total return at net asset value does not include the
imposition of the sales charge and assumes reinvestment of all dividends and
distributions. If sales charges were reflected, the returns would be less
than those shown.
(2) The Lipper Muni Debt Fund Index is a non-weighted index of the 30 largest
funds within the investment objective of the General Municipal Debt.
FEE TABLE
We provide the following table to help you understand the fees and expenses
that you will bear directly and indirectly if you invest in the Fund. You will
be charged shareholder fees directly when you purchase shares of the Fund.
Indirectly, you will also incur the annual operating expenses of the Fund, which
are fees that will be deducted from the Fund assets. These costs and expenses
are described more fully in the "WHAT DO SHARES COST?" section of the
prospectus.
Annual Fund Operating Expenses for fiscal year ended September 30, 1998
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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(1)......................................... 0.50%
Distribution (12b-1) Fees................................. None
Other Expenses(2)......................................... 0.16%
Total Annual Fund Operating Expenses.............. 0.66%
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(1) Management fees are described more fully in "HOW IS THE FUND MANAGED?"
(2) The percentage figure above for "Other Expenses" is based on actual expenses
that were incurred for the most recent fiscal year. This percentage includes
the earnings credits that the Fund receives on cash balances maintained with
the custodian which offsets the custodian fees that are incurred for
safeguarding Fund assets.
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EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The Example assumes that you invested $10,000 in the Fund for the time periods
indicated and then redeemed all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Based on these assumptions your costs
would be:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$541 $680 $833 $1,384
</TABLE>
If you did not redeem your shares, you would pay the same expenses described
above, because the Fund does not charge a redemption fee.
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INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS
WHAT ARE THE INVESTMENT POLICIES OF THE FUND?
The Fund has fundamental investment policies, that cannot be changed unless
the change is approved by a vote of the security holders. The Fund also has
non-fundamental investment policies, that can be changed by the Board of
Trustees of the Fund (the "Board") without a vote of the holders of the voting
securities of the Fund. The investment policies of the Fund are carried out by
the investment adviser of the Fund, Freedom Funds Management Company (the
"Investment Adviser").
INVESTMENT POLICIES
The Fund's principal investment objective is to maximize income that is exempt
from both federal and Colorado income taxes while simultaneously preserving
capital. This principal objective is a fundamental policy of the Fund that
cannot be changed without a shareholder vote.
The Fund will attempt to maximize income exempt from federal income tax and
Colorado personal income taxes by investing up to 100% of its assets in
Tax-Exempt Obligations that are not rated. Under normal circumstances, the Fund
will invest at least 65% of the value of its total assets in tax-exempt bonds.
The balance of its total assets will be invested in other tax-exempt securities
of the State of Colorado, its political subdivisions, municipalities and public
authorities, the interest on which is exempt from regular federal income taxes
and from Colorado personal income taxes.
The Fund will primarily invest in Tax-Exempt Obligations that are not rated on
the date of investment. The Fund is not limited in the percentage of not rated
Obligations that it can invest in. The Fund cannot invest more than 50% of its
assets in rated Tax-Exempt Obligations.
With respect to Tax-Exempt Obligations which are not rated by a major rating
agency, the Investment Adviser believes that the Investment Adviser's judgment,
analysis and experience are more important than they would be if such Tax-Exempt
Obligations were rated. The Investment Adviser will try to reduce the risk of
investing in not rated Tax-Exempt Obligations by: (a) performing credit
analysis; (b) reviewing the current economic trends and developments in the
geographic areas affecting the Fund's investments; and (c) actively managing and
diversifying the portfolio among municipal issuers.
Less than 35% of the value of the Fund's total assets will be invested in
Tax-Exempt Obligations that are rated lower than "Baa" by Moody's Investor
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. However, this percentage limitation applies only at the time of
purchase and the Fund is not required to dispose of a Tax-Exempt Obligation if
downgraded 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?"
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% or more of the net assets of the
Fund. Included in this 10% 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.
Under normal market conditions, the Fund will attempt to invest 100% and as a
matter of fundamental policy will, except for temporary investments as described
below, invest at least 80% 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. Such securities trade primarily in the
over-the-counter market. Tax-Exempt Obligations on which
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the interest is treated as an item of tax preference for purposes of the
alternative minimum tax will not be counted toward the 80% policy of the Fund.
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% 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% of the value of its net assets in
fixed-income securities, the interest on which is subject to federal, state and
local income tax. This may be done (a) pending the investment or reinvestment in
Tax-Exempt Obligations, (b) in order to avoid the necessity of liquidating
portfolio investments to meet redemptions of shares by investors, or (c) 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 short-term investing in fixed-income securities, it is a fundamental
policy of the Fund that it may invest up to 10% of the value of its net assets
in the shares of 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% of the value of its total assets. The Fund will not
purchase portfolio securities if it has outstanding borrowings in excess of 5%
of the value of its total assets.
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.
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.
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.
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?"
CURRENT INVESTMENTS
The table below sets forth, as of September 30, 1998, the percentage of the
Fund's total assets in (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
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lower than BBB by S&P as determined by the Investment Adviser.
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PERCENTAGE OF
TOTAL TAX-
MOODY'S RATING EXEMPT
(S&P EQUIVALENT) OBLIGATIONS
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Rated Tax-Exempt Obligations
Aaa(AAA)......................... 22.7%
Aa(AA)........................... 1.8
A(A)............................. 2.1
Baa(BBB)......................... 0.9
Ba(BB)........................... 0.0
B(B)............................. 0.9
All not rated Tax-Exempt
Obligations as a group........... 71.6
Investment grade not rated Tax-
Exempt Obligations............... 64.8
Below investment grade not rated
Tax-Exempt Obligations........... 6.8
</TABLE>
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. Obligations which are not rated generally offer
higher yields than Tax-Exempt Obligations in the higher ratings categories, but
also are generally subject to higher risk. The following is a list of the risks
associated with investing in not rated tax-exempt obligations. Any one of these
risks, or a combination of these risks, could adversely affect the Fund's net
asset value, yield and total return. The anticipated higher yield from the not
rated obligations may not be sufficient to offset losses caused by the
following:
- Credit risk is the possibility that a bond issuer will fail to make timely
payments of either interest or principal.
- Market risk is the potential for changes in bond prices due to changing
market conditions or interest rates.
- Income risk is the potential for a decline in income due to falling interest
rates.
- Prepayment risk or call risk is the likelihood that, during periods of
falling interest rates, bonds will be prepaid or "called" prior to maturity,
requiring the proceeds to be invested at a generally lower interest rate.
- Liquidity risk is the reduced ability to sell or dispose of such obligations
if shareholders request redemption of their shares.
WHAT ARE THE RISKS OF INVESTING IN LOWER RATED TAX-EXEMPT OBLIGATIONS?
There are several risks associated with investing in not rated obligations.
Any one of these risks, or a combination of them, could have an adverse affect
on the Fund's net asset value and income. 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." 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.
The Tax-Exempt Obligations that are rated lower than Baa by Moody's or lower
than 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 these 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.
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<PAGE> 10
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 anticipated 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. On occasion, therefore, it may become difficult to price or
dispose of a particular security in the Fund's portfolio.
There is also an increased possibility of redemption earlier than the stated
maturity date. 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.
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% 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. For a more complete discussion, see
"WHAT IS THE EFFECT OF INCOME TAX ON MY INVESTMENT?"
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
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<PAGE> 11
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 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% 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
are guaranteed by the United States Government. 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
programs). They are primarily obligations of the local public housing agencies
or the local urban renewal agencies. Payment by the United States pursuant to
its full faith and credit obligation does not impair the tax-exempt character of
the income from the 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 serves as 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 for
a one-year period. 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 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 and the subsequent sale of the leased
property. There is no assur-
10
<PAGE> 12
ance 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 unpaid principal and accrued income, an investor will
realize a capital loss.
The secondary trading market for tax-exempt municipal leases is limited. As a
result, investment in tax-exempt municipal leases involves special investment
risk considerations not associated with general obligation or revenue municipal
debt obligations.
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 creditworthiness 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 RISKS OF INVESTING
IN LOWER-RATED TAX-EXEMPT OBLIGATIONS?"
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 interest payments. While the letter of
credit gives
11
<PAGE> 13
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 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 $2,784,138,646 and $3,032,963,241
levied throughout Colorado in tax years 1996 and 1997, respectively.
In 1997, the assessed valuation of all real and personal property subject to
taxation in Colorado was $38,536,664,770. This was up 14.7% from 1996 levels.
The Colorado Legislative Council's economic forecast predicts an increase in
state general fund revenues of about 7.0% during the 1998-1999 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
12
<PAGE> 14
rate on residential property from 21.0% to 9.74% over the past thirteen 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.
MANAGEMENT'S DISCUSSION OF FUND
PERFORMANCE
The tax-exempt bond market in Colorado was characterized during this past year
by certain relevant market conditions, some of which are unique to Colorado and
others which are true of the tax-exempt market generally.
RELEVANT MARKET CONDITIONS
The passage of TABOR in Colorado and the restrictions imposed by federal law
limiting the ability of local governments to finance new projects and refinance
outstanding debt have severely limited the supply of tax-exempt bonds within the
state. The desirability of Colorado bonds is directly tied to the relatively
strong local economy and the fact that the tax base is broadening in most areas.
New residences are being built at a pace not seen since the mid-eighties and
commercial properties are continuing to recover. A healthy real estate economy
translates into improved property tax collections, increased sales and use
taxes, service charges and tap fees all of which are the very revenue sources
most often pledged to the payment of municipal debt service. Additionally, lower
interest rates are allowing the stronger local governments to refinance their
outstanding debt, which makes them sounder financially and better able to
sustain operations in the years ahead.
INVESTMENT STRATEGY
The Fund is the only fund of its type which is specifically designed to choose
from among the not rated Tax-Exempt Obligations in the state of Colorado and to
select for investment not rated 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.
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, the value of 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, the value of 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
13
<PAGE> 15
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 several income tax proposals being
discussed in the Congress of the United States. It is not possible at this
juncture to determine if or when these proposals 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 purchasing new additions to the portfolio at as
near to the comparable rate on taxable instruments as the market will permit.
The weighted average maturity of the Fund's portfolio was 10.83 years as of
January 22, 1998.
To summarize, 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.
YEAR 2000
The common practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. Such failure could adversely affect the Fund's operations,
including pricing, securities trading and the servicing of shareholder accounts.
The Investment Adviser is dedicated to providing a high degree of diligence to
ensure that the shareholders are not harmed by computer problems associated with
the year 2000. In August 1998, the Fund and the Investment Adviser participated
in the Securities and Exchange Commission's review of Year 2000 compliance.
Internal systems consist of off-the-shelf software, updated personal computers
and office equipment, all Year 2000 compliant. All third party service
providers, suppliers and vendors have given their assurance to the Investment
Adviser that they are within Year 2000 compliance guidelines and will remain
operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, the Investment Adviser is further developing contingency
plans intended to assure that unexpected systems failures will not adversely
affect the Fund's operations. The Investment Adviser intends to monitor these
processes through the rollover of 1999 to 2000 and to implement quickly
alternate solutions if necessary.
However, despite the Investment Adviser's efforts and contingency plans,
noncompliant computer systems could have a material adverse effect on the Fund's
business, operations or financial condition. Additionally, the Fund's
performance could be hurt if a computer-system failure at a company or
governmental unit affects the price of the securities the Fund owns.
INVESTMENT RESULTS
The calendar year ended December 31, 1998 was generally positive for bonds.
Most bond funds showed small principal gains throughout the year. The yield
curve continued to flatten as inflation fears abated. Bond prices traded within
a fairly narrow range unlike the very turbulent 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 years 1996 and 1997 were largely uneventful for bonds.
The cumulative total returns for the last five calendar years for many bond
funds in the peer group are as much as 40%.
The Fund experienced a 6.42% total return at net asset value for the calendar
year ended December 31, 1998. In two out of the last five years (calendar year
1994 and calendar year 1996) the Fund was ranked by Morningstar Inc., as the
number one fund performer in the United States in the category of single state
municipal bond funds. According to Morningstar Inc., the Fund also leads all
other Municipal Bond Funds in the five year total performance category which
helps to demonstrate its consistency over a longer time period.
The Fund's average annual total returns at net asset value were 7.62%, 7.99%
and 7.49% for the one, five and ten year periods ended September 30,
14
<PAGE> 16
1998, respectively. The average annual total returns at maximum offering price
are 2.50%, 6.94% and 6.95% for the one, five and ten year periods ended
September 30, 1998, respectively. Cumulative total returns at net asset value
and maximum offering price for the 10-year period ended September 30, 1998 were
105.93% and 96.15% respectively.
The graph on the following page depicts the Fund's performance for the fiscal
years ended September 30 since the inception of the Fund on June 4, 1987. Also
depicted 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> 17
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
COLORADO BONDSHARES -- A TAX-EXEMPT FUND AND THE
LIPPER GENERAL MUNICIPAL DEBT FUND INDEX(1)
<TABLE>
<CAPTION>
Measurement Period Colorado BondShares(3) Lipper General Municipal Debt(2)
- ------------------ ---------------------- --------------------------------
<S> <C> <C>
(4)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
9/30/97 19,452 22,446
9/30/98 20,935 24,500
</TABLE>
Average Annual Total Return(1)
Periods ended 9/30/98
- ---------------------
1 year 7.62%
5 year 7.99%
10 Year 7.49%
- ---------------
(1) 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 returns at net asset
value, for the one year, five year and ten year periods ended 9/30/98 are
7.62%, 7.99% and 7.49%, 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.
(2) Includes reinvestment of dividends and adjustment for the maximum sales
charge of 4.75%.
(3) Includes reinvestment of dividends but does not reflect any adjustment for
sales charge.
(4) Commencement of operation.
16
<PAGE> 18
HOW IS THE FUND MANAGED?
INVESTMENT ADVISER
The Investment Adviser of the Fund is located at 1200 Seventeenth Street,
Suite 1000, Denver, Colorado 80202. The Investment Adviser is responsible for
administering the Fund's daily business affairs and managing the investment of
assets for the Fund.
Pursuant to an advisory agreement between the Fund and the Investment Adviser
(the "Advisory Agreement"), the Fund pays the Investment Adviser an annual fee
of 0.5% of the Fund's average daily net assets. In return, the Investment
Adviser will attempt to meet the Fund's investment objectives by providing
portfolio management and credit analysis services pursuant to the Advisory
Agreement and to this prospectus. Under the Advisory Agreement and subject to
the control of the Board, the Investment Adviser will manage the investment of
the assets of the Fund, including the purchase and sale of portfolio securities
consistent with the Fund's investment objectives and policies.
PORTFOLIO MANAGER
Fred R. Kelly, Jr., is President, Secretary and Treasurer of the Investment
Adviser and is also the Fund's portfolio manager. Mr. Kelly has, since November
1990, 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 10 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
adviser 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.
HOW CAN I INVEST IN THE FUND?
Shares of the Fund are being continuously offered through securities dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
and who have a dealer agreement with the underwriter, SMITH HAYES Financial
Services Corporation ("SMITH HAYES" or the "Underwriter"). Broker-dealers may be
classified as statutory underwriters under Section 2(11) of the Securities Act
of 1933, as amended.
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 the
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, which is the net asset value at the close
of business of the New York Stock Exchange ("NYSE") that day. Orders received
after 2:00 p.m. will be priced based on the net asset value at the close of
business of the NYSE the next day. 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 1000, Denver, Colorado 80202. The Fund's telephone numbers,
including toll-free numbers, are set forth on the back 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.
Instructions for redemptions and other transactions in accounts and requests
for information about an account should go to the above stated address.
17
<PAGE> 19
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.
WHAT DO SHARES COST?
The price you pay for shares of the Fund is the public offering price, which
is the sum of the next determined net asset value of the shares and a sales
charge. The sales charge is a onetime 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. SMITH HAYES will serve as a broker-dealer with
respect to sales of Shares of Fund.
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 NASD.
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 NYSE for each day the Exchange is open. Net asset value is
determined by dividing the value of the net assets of the Fund (total assets
less liabilities) 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. 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 that is available with respect to many municipal issuers.
Therefore, in addition to the pricing service, the Board 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.
In the future, the Board 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 determines appropriate.
HOW ARE SALES CHARGES DETERMINED?
Sales charges for the Fund's shares 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% 0.90%
$4,000,000 or more........... 0.20% 0.20% 0.15%
</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 of dollars that you
state in the letter that you intend to purchase. For more information concerning
terms of Letters of Intent, see the General Authorization Form.
18
<PAGE> 20
Net Asset Value Transfer Privilege allows shareholders who own shares of
unrelated mutual funds that have paid a sales charge to 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.
For any such discounts, the purchaser or his broker-dealer must provide the
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, SMITH HAYES, 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).
HOW CAN I "SELL" MY SHARES?
The Fund will redeem shares at their next determined net asset value based on
the procedures described below.
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 calling 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, proceeds will be mailed as
registered on the account or will be wired to the bank account designated on the
General Authorization Form.
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 on the 15th day of each month ("Payable Date"). If the
19
<PAGE> 21
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.
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 (the "Code").
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.
Generally, a 20% maximum long-term capital gains tax rate applies to assets
held for more than 12 months.
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 by which a
taxpayer's alternative taxable income exceeds a predetermined amount. For the
tax years beginning after December 31, 1997 certain corporations the gross
receipts of which are not greater than $5,000,000 will be exempt from the
alternative minimum tax.
"Alternative minimum taxable income" is a taxpayer's taxable income (i)
determined with specified adjustments for the alternative minimum tax and (ii)
increased by "items of tax preference." The types of income constituting "items
of tax preference" include otherwise allowable tax-exempt inter-
20
<PAGE> 22
est 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.
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.
OTHER STATE AND LOCAL INCOME TAXES
Distributions from the Fund may be subject to income taxation in other
jurisdictions. Individuals, trusts, estates and corporations who are holders of
shares of the Fund and who are subject to state and/or local income taxation
outside of Colorado should contact their personal income tax adviser regarding
the proper treatment of these amounts.
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 1000, 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
21
<PAGE> 23
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.
GENERAL INFORMATION
The Investment Adviser is also the shareholder service agent ("Service
Agent"), and as such, maintains a record of your ownership and will send you
monthly statements of your 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.
22
<PAGE> 24
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned [or lost] on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, the Fund's independent auditors, whose
report, along with the Fund's financial statements, is included in the Statement
of Additional Information of the Fund, which is available upon request.
Selected data for a share of beneficial interest outstanding for the periods
ended September 30 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Data:
Net asset value, beginning of period............. $ 9.58 $ 9.37 $ 9.16 $ 9.07 $ 9.13
------- ------- ------- ------- -------
Net investment income............................ 0.62 0.58 0.61 0.60 0.63
Net realized and unrealized gain (loss) on
investments................................... 0.06 0.21 0.20 0.09 (0.06)
------- ------- ------- ------- -------
Increase from investment operations.............. 0.68 0.79 0.81 0.69 0.57
Dividends from net investment income............. (0.62) (0.58) (0.60) (0.60) (0.63)
------- ------- ------- ------- -------
Net increase (decrease) in net asset value......... 0.06 0.21 0.21 0.09 (0.06)
------- ------- ------- ------- -------
Net asset value, end of period................... $ 9.64 $ 9.58 $ 9.37 $ 9.16 $ 9.07
======= ======= ======= ======= =======
Total Return, at Net Asset Value(1).............. 7.62% 8.66% 9.15% 8.05% 6.50%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000)s................... $73,108 $67,249 $50,583 $44,768 $41,790
======= ======= ======= ======= =======
Ratios to average net assets:
Net investment income............................ 6.66% 6.13% 6.50% 6.81% 6.96%
Expenses, inclusive of expenses paid indirectly
by the Fund................................... 0.77% 0.84% 0.77% 0.84% 0.74%
Expenses, net of expenses paid indirectly by the
Fund.......................................... 0.66% 0.73% 0.70% 0.77% 0.74%
Portfolio turnover rate(2)......................... 28.63% 27.66% 24.53% 27.48% 22.04%
</TABLE>
- ---------------
(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) 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.
Cost of purchases and proceeds from sales of investment securities
(excluding short-term securities) for the year ended September 30, 1998 were
$26,758,411 and $18,782,105, respectively.
23
<PAGE> 25
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
-OR- B.__________________________________________________________ _____________________
Transfers to Minors Joint Owner (A Joint Tenancy with right of survivorship U.S. Citizen (Y/N)
Under UTMA will be presumed, unless otherwise indicated.)
Use Lines C & D
-OR-
Corporations, Trusts, C.__________________________________________________________
or others in any Custodian's Name, as custodian for under the Uniform
representative Transfers to Minors Act ("UTMA")
capacity
Use Line E
D.__________________________________________________________ _____________________
Minor's Name Minor's Soc. Sec. No.
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
Transfers to Minors (we) certify to my (our) legal capacity to purchase or
Under UTMA 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 as my
Corporations, Trusts, (our) agent to act in accordance with my (our) instructions
or others in any 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
( )
_______________________________________________________ _______________________
City State Zip Code Telephone No.
(including 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> 26
- --------------------------------------------------------------------------------
<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)
- ------------------------------------------------------------------------------------------------------
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)
PRIVILEGE I (we) 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 (WE) 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
(we) 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.
Signature of Investor___________________ Signature of Co-Investor ______________
_________________________________________________________________________________
Name of Bank (include name of branch) Bank Account Number
_________________________________________________________________________________
Bank Routing # Address of Bank
_________________________________________________________________________________
Bank Phone # 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 Account 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 5% 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 1000
DENVER, COLORADO 80202
<PAGE> 27
COLORADO BONDSHARES --
A TAX-EXEMPT FUND
1200 Seventeenth Street, Suite 1000
Denver, Colorado 80202
(303) 572-6990
(800) 572-0069 (Outside Denver)
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 is included in the Statement of
Additional Information dated as of January 28, 1999, 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.
Information about the Fund, including a Statement of Additional Information,
can be reviewed and copied at the Commission's Public Reference Room in
Washington, D.C. Information regarding the operation of the public reference
room may be obtained by calling the Commission at 1-800-SEC-0330. Reports and
other information are available on the Commission's Internet site at
http://www.sec.gov and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009.
INVESTMENT COMPANY FILE NUMBER 811-05009
<PAGE> 28
PART B
COLORADO BONDSHARES --
A TAX-EXEMPT FUND
1200 Seventeenth Street, Suite 1000
Denver, Colorado 80202
(303) 572-6990
(800) 572-0069 (Outside of Denver)
STATEMENT OF ADDITIONAL INFORMATION
January 28, 1999
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, 1999 (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, is not in itself a Prospectus, and is
incorporated by reference into the Prospectus in its entirety.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
What Is Colorado BondShares A Tax-Exempt
Fund?................................... B-2
What Are The Fund's Investment Objectives,
Policies and Risks?..................... B-2
What Are The Fund's Investment
Limitations?............................ B-2
How Is The Fund Managed?.................. B-3
Officers And Trustees Of The Fund......... B-3
Who Gives Investment Advice To The Fund?.. B-4
Advisory Agreement And Expenses........... B-4
Allocation of Portfolio Transactions...... B-5
Shareholder Service Agent................. B-6
Custodian And Auditors.................... B-6
What Kind Of Shares Does The Fund Offer?.. B-6
Purchase Of Shares........................ B-7
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
What Reductions In Sales Charges Are
Provided?............................... B-8
Who Is Entitled To Reductions?............ B-8
Reasons For Differences In Public Offering
Price................................... B-8
Distribution Of Shares.................... B-8
Redemption Of Shares...................... B-9
How Is Net Asset Value Per Share
Determined?............................. B-9
Calculation Of Performance Data........... B-10
Taxable Versus Tax-Exempt Yields Colorado
Residents............................... B-11
General Information....................... B-11
Financial Statements...................... B-13
</TABLE>
<PAGE> 29
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?
The Fund's investment objectives, policies and risks that are discussed in the
"WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES AND RISKS?" section of the
Prospectus are incorporated by reference into this Statement of Additional
Information.
WHAT ARE THE FUND'S INVESTMENT
LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed unless either:
(1) a majority of outstanding voting securities vote in favor of the proposal,
or (2) at a security holder meeting in which at least half of the outstanding
voting securities are represented, two-thirds of the outstanding voting
securities at that meeting vote in favor of the proposal, 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, (the "Code") 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;
- 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;
- 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;
B-2
<PAGE> 30
- 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, as amended (the "1940 Act"), 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.
HOW IS THE FUND MANAGED?
The Fund is a Massachusetts business trust. Its Board of Trustees (the
"Board") will supervise the activities of the Fund and review the Fund's service
contracts. Pursuant to the terms of an agreement between the Fund and Freedom
Funds Management Company, the investment adviser to the Fund ("Investment
Adviser"), the Investment Adviser will manage investment of the Fund's assets
and administer its business and other affairs. See "WHO GIVES INVESTMENT ADVICE
TO THE FUND?" and "ADVISORY AGREEMENT AND EXPENSES."
The Fund is not required to hold annual shareholder meetings. However, special
meetings may be called by the Board 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
has the power to create additional series of Fund shares.
OFFICERS AND TRUSTEES OF THE FUND
The following chart lists the trustees and officers of the Fund, together with
information as to their principal business occupations during the past five
years:
<TABLE>
<CAPTION>
POSITIONS HELD
NAME AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATIONS DURING THE PAST 5 YEARS
---------------- -------------- ---------------------------------------------
<S> <C> <C>
George N. Chairman of the Board of Mr. Donnelly is a Principal for MKT Inc., a marketing firm
Donnelly.......... Trustees and President engaged in the sales of financial service products. Prior to
of the Fund 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 Mr. Shaffer is an attorney engaged in private practice. Mr.
Treasurer of the Fund 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.
</TABLE>
As of January 22, 1999, 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, 1998. The officers and
trustees of the Fund, as a group, received $800 in compensation from the Fund
for services to the Fund during the 1998 fiscal year. There is no family
relationship between any officers and trustees of the Fund.
B-3
<PAGE> 31
WHO GIVES INVESTMENT ADVICE TO THE FUND?
The Investment Adviser to the Fund is 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. The Investment Adviser is located at
1200 Seventeenth Street, Suite 1000, Denver, Colorado 80202.
Fred R. Kelly Jr., President, Secretary and Treasurer of the Investment
Adviser and the Fund's portfolio manager, owns approximately 66% 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 1940 Act.
The Investment Adviser's goal is to have a portfolio turnover rate that is not
in excess of 20% per year in an attempt to meet the investment objectives of the
Fund. During fiscal year 1998, the Fund's portfolio turnover rate, the
percentage computed by dividing the lesser of purchases or sales of portfolio
securities by the monthly average of the market value of such securities owned
during the period, was 28.63%. This resulted from a large number of the
portfolio's securities being called and not from high trading volume.
ADVISORY AGREEMENT AND EXPENSES
Under the advisory agreement approved by the Board and by a majority of the
shareholders (the "Advisory Agreement"), by and between the Fund and the
Investment Adviser, subject to the control of the Board, 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. 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.
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 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 Advisory 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.
B-4
<PAGE> 32
The table below sets forth the advisory fees earned and the advisory fees
actually paid during the last three fiscal years of the Fund:
<TABLE>
<CAPTION>
ADVISORY ADVISORY
FEES EARNED FEES PAID
----------- ---------
<S> <C> <C>
1996................. $240,476 $240,476
1997................. 297,728 297,728
1998................. 345,393 345,393
</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, as amended (the "1940 Act") (i.e., (1) by a vote of a majority of the
Board 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 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 (the "Service Agreement"). The Investment
Adviser's duties under the Service 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.
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's goal is 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. During the fiscal year 1998 the Fund's
portfolio turnover rate was 28.63%. This resulted from a large number of
portfolio securities being called and not from high trading volume.
The Investment Adviser will be authorized to allocate the Fund's securities
transactions to the Underwriter, the principal underwriter and the distributor
of 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. ("NASD"), and subject to seeking the most favorable price and
execution available and such other policies as the Board 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 Investment 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
B-5
<PAGE> 33
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 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which the Underwriter, as principal, is a member
except under certain limited circumstances set forth in Rule 10f-3 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, including a
majority of the Fund's Board who are not interested persons of the Fund as
defined by the 1940 Act.
The Board 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.
SHAREHOLDER SERVICE AGENT
The Investment Adviser also serves as the Fund's shareholder service agent
("Service Agent"), and has registered with the Securities and Exchange
Commission as a transfer agent. As Service Agent, the Investment Adviser
performs only those services described in the Service Agreement.
CUSTODIAN AND AUDITORS
Norwest Investment Management and Trust, Norwest Bank Colorado, N.A., is the
portfolio securities custodian (the "Custodian") for the Fund. Their address is
1740 Broadway, Denver, Colorado 80274.
KPMG LLP, certified public accountants, are the independent auditors of the
Fund. Their address is 2300 MCI Tower, 707 Seventeenth Street, Denver, Colorado
80202.
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, and the Board has the power to create additional series of Fund
shares. The Fund had 1,326 holders of record and 8,009,844 shares outstanding as
of January 22, 1998.
The Fund declares dividends of net investment income daily. Dividends are paid
to shareholders on the 15th day of each month ("Payable Date"). If the 15th day
of a month falls on a weekend or holiday on which the New York Stock Exchange is
closed, the dividend will be distributed on the next succeeding business day.
Payments vary in amount depending on income received from portfolio securities
and expenses of operation.
Shares will begin earning dividends on the day after which the Fund receives
payment and shares are issued. Shares or cash continue to earn divi-
B-6
<PAGE> 34
dends 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 in the
Prospectus.
The Fund will generally distribute sufficient net income to avoid the
application of the 4% excise tax imposed pursuant to the Code.
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.
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 the 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.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted by the provisions of the 1940 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
Shares of the Fund are being continuously offered through securities dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
and who have a dealer agreement with the underwriter, SMITH HAYES Financial
Services Corporation ("SMITH HAYES" or the "Underwriter"). Broker-dealers may be
classified as statutory underwriters under Section 2(11) of the Securities Act
of 1933, as amended.
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 the
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, which is the net asset value at the close
of business of the New York Stock Exchange ("NYSE") that day. Orders received
after 2:00 p.m. will be priced based on the net asset value at the close of
business of the NYSE the next day. The Fund is open for business each day on
which the NYSE 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 1000, Denver, Colorado 80202. The Fund's telephone numbers,
including toll-free numbers, are set forth on the cover of this Statement of
Additional Information.
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.
Instructions for redemptions and other transactions in accounts and requests
for information about an account should go to the above stated address.
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.
B-7
<PAGE> 35
WHAT REDUCTIONS IN SALES CHARGES
ARE PROVIDED?
Volume Discounts are provided if the total amount being invested in shares of
the Fund reaches the levels indicated in the sales charge schedule in the "HOW
ARE SALES CHARGES DETERMINED?" section of the Prospectus.
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 of dollars that you
state in the letter that you intend to purchase. For more information concerning
terms of Letters of Intent, see the General Authorization Form.
Net Asset Value Transfer Privilege allows shareholders who own shares of
unrelated mutual funds that have paid a sales charge to 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.
For any such discounts, the purchaser or his broker-dealer must provide the
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.
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, the
Underwriter, 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.
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.
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 "WHAT DO SHARES COST?"
section of 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
single persons 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 is also the general distributor of the shares of the Fund pursuant
to a distribution
B-8
<PAGE> 36
agreement approved by the Board as of November 30, 1994 (the "Distribution
Agreement"). SMITH HAYES replaced Hanifen, who served as the general distributor
of the Fund's shares from the Funds' inception until November 30, 1994. The
Underwriter is located at 200 Centre Terrace, 1225 L Street, P.O. Box 83000
Lincoln, Nebraska 68501.
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 to dealers; however, this practice may be discontinued at any time. For
the fiscal years ended September 30, 1998, 1997, and 1996, the total amount of
sales charges paid by investors was $218,515, $285,733, and $164,333,
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 NASD.
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 public offering price of its shares is the next determined net asset value
of the shares plus a sales charge. 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. 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 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 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 determines appropriate.
B-9
<PAGE> 37
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:
<TABLE>
<S> <C> <C> <C> <C> <C>
[( )6 ]
[( (a - b) ) ]
[( ------- + 1 ) - 1]
YIELD = 2 [( cd ) ]
[( ) ]
</TABLE>
Where: a = interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
To calculate interest earned (for the purpose of "a" above) the Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund based
on the market value of the obligation at the close of business on the last
business day of each month, or with respect to obligations purchased during
the month, the purchase price.
(b) Divide the yield to maturity by 360 and multiply the quotient by the
market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is in the portfolio.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
In the case of an obligation issued without original issue discount and having
a current market discount, the coupon rate of interest is used in lieu of the
yield to maturity. In the case of an obligation with original issue discount, if
the discount based on the current market value exceeds the then-remaining
portion of original issue discount (market discount), the yield to maturity is
the imputed rate based on the original issue discount calculation. In the case
of an obligation with original issue discount, if the discount based on the
current market value is less than the then-remaining portion of original issue
discount (market premium), the yield to maturity is based upon market value.
TAX EQUIVALENT YIELD
Tax equivalent yield shows the yield from a taxable investment which would
produce an after-tax yield equal to that of a fund that invests in tax-exempt
securities. It is computed by dividing the tax-exempt portion of the Fund's
yield (as calculated above) by one minus a stated income tax rate and adding the
quotient 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
Where: ERV = ending redeemable value of the hypothetical $10,000 payment made
at the beginning of the base period (reduced by the maximum sales
charge) assuming reinvestment of all dividends and distributions.
P = a hypothetical initial payment of $10,000.
B-10
<PAGE> 38
AVERAGE ANNUAL TOTAL RETURN
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 $10,000.
T = average annual total return.
n = number of years in the base period.
ERV = ending redeemable value of the hypothetical $10,000 payment
made at the beginning of the base period (reduced by the maximum sales
charge) assuming reinvestment of all dividends and distributions.
All performance figures are based on historical results and are not intended
to indicate future performance.
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%............................ 13.94%
7.75%............................ 13.50%
7.50%............................ 13.07%
7.25%............................ 12.63%
7.00%............................ 12.20%
6.75%............................ 11.76%
6.50%............................ 11.32%
6.25%............................ 10.89%
6.00%............................ 10.45%
5.75%............................ 10.02%
5.50%............................ 9.58%
5.25%............................ 9.15%
5.00%............................ 8.71%
4.75%............................ 8.28%
4.50%............................ 7.84%
</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.
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 ("Declaration of Trust"). 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 Fund's 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 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
B-11
<PAGE> 39
meeting of shareholders for the purpose of voting to remove trustees.
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.
How to Contact the Fund. For general information about Colorado
BondShares -- A Tax-Exempt Fund, call or write the Fund at 1200 Seventeenth
Street, Suite 1000, 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.
Inquiries, instructions for purchases, redemptions and other transactions in
accounts and requests for information about an account should be directed to the
above address.
B-12
<PAGE> 40
FINANCIAL STATEMENTS
The financial statements required by Item 22 of this registration statement
are incorporated by reference from the Registrant's Annual Report on Form N-30D
for the year ended September 30, 1998 that was filed with the Securities and
Exchange Commission on December 1, 1998.
B-13
<PAGE> 41
APPENDIX A
KEY TO MOODY'S MUNICIPAL BOND RATINGS
AAA Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment
some time in the future.
BAA Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance
of other terms of the contract over any long period of time may be
small.
CAA Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
B-14
<PAGE> 42
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 "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-15
<PAGE> 43
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<C> <S>
A. -- Amended and Restated Declaration of Trust of the
Registrant.(3)
B. -- Bylaws of the Registrant.(1)
D. -- Investment Advisory Agreement dated as of November 17,
1994.(3)
E.2 -- Distribution Agreement dated as of November 30, 1994.(3)
E.3 -- Form of Selling Agreement.(3)
G. -- Form of Custodian Agreement.(1)
H. -- Transfer Agency and Service Agreement dated as of
November 17, 1994.(3)
I. -- Opinion of Kutak Rock
J.1 -- Opinion and consent of Lane & Mittendorf. (2)
J.2 -- Opinion and consent of Hale and Dorr.(2)
J.3 -- Consent of Legal Counsel.*
J.4 -- Consent of Independent Auditors.*
27. -- Financial Data Schedule*
</TABLE>
- ---------------
(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 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
Under the terms of the Fund's Declaration of Trust, dated as of February 13,
1987, as amended ("Declaration of Trust"), 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 1940 Act 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.
<PAGE> 44
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Freedom Funds Management Company, a Delaware corporation (the "Investment
Adviser"), is the Registrant's investment adviser.
The Investment Adviser is a wholly owned subsidiary of Carbon County Holding
Company, whose business address is 1200 Seventeenth Street, Suite 1000, Denver,
CO 80202.
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):
<TABLE>
<CAPTION>
NAME POSITION WITH INVESTMENT ADVISER
- ---- --------------------------------
<S> <C>
Fred R. Kelly, Jr............................ Director, President, Secretary and Treasurer(1)
Mary F. Phillips............................. Vice President and Assistant Secretary(2)
</TABLE>
- ---------------
(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 1000, Denver, Colorado 80202.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) The Underwriter also is principal underwriter for the shares of SMITH
HAYES Trust, Inc. and Stratus Fund, Inc. Conley Smith, Inc., an affiliate of the
Underwriter, is the investment adviser to SMITH HAYES Trust, Inc.
C-2
<PAGE> 45
(b) Information required with respect to each director, officer or partner of
the Underwriter, the principal underwriter named in the answer to Item 20:
SMITH HAYES FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
(2) (3)
(1) 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, None
Secretary and Treasurer
Ruth E. Howell................................. Vice President None
John H. Conley................................. Director* None
W. Don Nelson.................................. Vice President None
Pam Feilmeier.................................. 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 28. 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 1000, Denver, Colorado 80202.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-3
<PAGE> 46
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, 1999.
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
---- -------- ----
<C> <S> <C>
/s/ GEORGE N. DONNELLY Chairman of the Board, January 28, 1999
- ----------------------------------------------------- President and Trustee
George N. Donnelly
/s/ ANDREW B. SHAFFER Trustee, Treasurer January 28, 1999
- ----------------------------------------------------- and Secretary
Andrew B. Shaffer
</TABLE>
C-4
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<C> <S>
J.3 -- Consent of Kutak Rock
J.4 -- Consent of Independent Auditors
27. -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT J.3
CONSENT OF KUTAK ROCK
We consent to the reference in the Prospectus contained in this Post-Effective
Amendment No. 14 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, 1999
<PAGE> 1
EXHIBIT J.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
Colorado BondShares A Tax-Exempt Fund:
We consent to the use of our report dated November 3, 1998 incorporated by
reference into this Registration Statement and to the references to our firm
under the headings "Financial Highlights" in the Prospectus and "Custodian and
Auditors" in the Statement of Additional Information.
/s/ KPMG LLP
--------------------------------------
KPMG LLP
Denver, Colorado
January 28, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FUND'S
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 71,076,820
<INVESTMENTS-AT-VALUE> 72,178,844
<RECEIVABLES> 15,962,204
<ASSETS-OTHER> 320,673
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 74,095,737
<PAYABLE-FOR-SECURITIES> 700,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 288,139
<TOTAL-LIABILITIES> 988,139
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,013,291
<SHARES-COMMON-STOCK> 7,582,591
<SHARES-COMMON-PRIOR> 7,019,571
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,717)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,102,024
<NET-ASSETS> 73,107,598
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,098,765
<OTHER-INCOME> 0
<EXPENSES-NET> 458,318
<NET-INVESTMENT-INCOME> 4,640,447
<REALIZED-GAINS-CURRENT> 294,050
<APPREC-INCREASE-CURRENT> 187,505
<NET-CHANGE-FROM-OPS> 5,122,002
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,661,865
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,613,472
<NUMBER-OF-SHARES-REDEEMED> 10,075,001
<SHARES-REINVESTED> 2,860,000
<NET-CHANGE-IN-ASSETS> 5,858,608
<ACCUMULATED-NII-PRIOR> 21,418
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 345,393
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 537,953
<AVERAGE-NET-ASSETS> 69,115
<PER-SHARE-NAV-BEGIN> 9.58
<PER-SHARE-NII> .62
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> .62
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.64
<EXPENSE-RATIO> .77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
