<PAGE> 1
FILE NOS. 33-11981 AND 811-05009
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
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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. 15 [X]
AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 18 [X]
COLORADO BONDSHARES -- A TAX-EXEMPT FUND
(Exact Name of Registrant as Specified in Charter)
SUITE 1000, 1200 SEVENTEENTH STREET, DENVER, COLORADO 80202
(Address of Principal Executive Offices, Zip Code)
(303) 572-6990 (800) 572-0069 (OUTSIDE OF DENVER)
(Registrant's Telephone Numbers, Including Area Code)
FRED R. KELLY, JR.
SUITE 1000, 1200 SEVENTEENTH STREET
DENVER, COLORADO 80202
(Name And Address of Agent for Service)
Copy to:
ROBERT J. AHRENHOLZ, ESQ.
KUTAK ROCK LLP 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, 1999 WAS FILED ON NOVEMBER 29, 1999.
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<PAGE> 2
COLORADO BONDSHARES
A TAX-EXEMPT FUND
PROSPECTUS
January 28, 2000
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.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Risk/Return Summary................... 2
Investments, Risk and Performance..... 2
Investment Objectives, Principal
Investment............................ 4
Strategies, and Related Risks.........
What Are The Investment Policies Of
The Fund?............................ 4
What Are The Risks Of Investing In Not
Rated Tax-Exempt Obligations?........ 6
What Are The Risks Of Investing In
Lower Rated Tax-Exempt Obligations?.. 7
What Are Tax-Exempt Obligations?...... 8
Special Factors Affecting Issuers of
Colorado Tax-Exempt Obligations....... 10
Management's Discussion Of Fund
Performance.......................... 11
How Is The Fund Managed?.............. 14
How Can I Invest In The Fund?......... 14
What Do Shares Cost?.................. 15
How is Net Asset Value Per Share
Determined?.......................... 15
How are Sales Charges Determined?..... 15
How Can I "Sell" My Shares?........... 16
How Can I Reinstate My Investment?.... 16
What Distributions Will I Receive?.... 17
What Is The Effect Of Income Tax On
My Investment?....................... 17
What Services Are Provided To
Shareholders?........................ 19
General Information................... 19
Financial Highlights.................. 19
</TABLE>
<PAGE> 3
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
We 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.
- We are 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.
- We will invest up to 100% of our 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.
- We 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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BAR CHART AND TABLE
The following bar chart and table shows the risks of investing in the Fund
by showing changes in the Fund's performance from year to year and by showing
how the Fund's average annual returns for the one-year, five-year and 10-year
periods ended December 31, 1999 compare with those of a broad measure of market
performance. The performance of the Fund in the past is not necessarily an
indication of how the Fund will perform in the future.
TOTAL RETURN PERFORMANCE AT NET ASSET VALUE
The following bar chart shows the Fund's annual total returns* for each of
the last 10 calendar years:
[Chart]
<TABLE>
<CAPTION>
CALENDAR YEARS TOTAL RETURN
<S> <C>
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%
1999......................................... 3.29%
</TABLE>
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* Past performance is not predictive of future performance. The annualized
return for the fiscal year ending September 30, 2000 is 4.14%, based on the
Fund's returns as of December 31, 1999.
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 include the reinvestment of all dividends and
distributions, but do 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 second quarter of 1989 and (2.28%)
in the third quarter of 1990, respectively.
AVERAGE ANNUAL TOTAL RETURN
The following table summarizes the average annual total return at net asset
value for the one-, five- and 10- calendar year periods ended December 31, 1999
for the Fund and for the Lipper General Municipal Debt Fund Index ("Lipper Muni
Debt Fund Index"):
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN(1) PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
---------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Colorado BondShares -- A Tax-Exempt Fund 3.29% 7.29% 6.93%
Lipper Muni Debt Fund Index(2)......... -4.05% 6.15% 6.29%
</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.
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FEE TABLE
We provide the following table to help you understand the fees and expenses
that you will pay if you invest in the Fund. Shareholder fees will be paid
directly by you 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,
1999
<TABLE>
<S> <C>
SHAREHOLDER FEES (paid directly by you)
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 (indirectly paid by you)
(as a percentage of average net assets)
Management Fee(1)..................................... 0.50%
Distribution (12b-1) Fees............................. None
Other Expenses(2)..................................... 0.14%
Total Annual Fund Operating Expenses.......... 0.64%
</TABLE>
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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.
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 invest $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. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$539 $674 $822 $1,251
</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.
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.
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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 Investors
Service, Inc. ("Moody's") or lower than "BBB" by Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc. ("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 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
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<PAGE> 7
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 the price of 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, 1999, 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
lower than "BBB" by S&P as determined by the Investment Adviser.
<TABLE>
<CAPTION>
MOODY'S RATING PERCENTAGE OF TOTAL TAX-
(S&P EQUIVALENT) EXEMPT OBLIGATION
------------------------ ------------------------
<S> <C>
Rated Tax-Exempt Obligations
Aaa(AAA).................... 18.5%
Aa(AA)...................... 0.8
A(A)........................ 2.3
Baa(BBB).................... 1.3
Ba(BB)...................... 0.0
B(B)........................ 0.8
All not rated Tax-Exempt
Obligations as a group...... 76.3
Investment grade not rated
Tax-Exempt Obligations...... 68.4
Below investment grade not
rated Tax-Exempt
Obligations................. 7.9
</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:
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<PAGE> 8
- 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 may lead to weakened capacity to make
principal and interest payments in comparison to 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.
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.
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<PAGE> 9
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 amounts 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 1986 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 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.
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<PAGE> 10
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 assurance that the proceeds from a sale will be sufficient
to pay the total amount of unpaid principal and accrued income due on the lease.
If the proceeds are not sufficient to pay the 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
9
<PAGE> 11
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 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 4,000 total active 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. Colorado received $3,195,071,808 and
$3,032,963,241 in tax revenue in tax years 1998 and 1997, respectively. The 1998
assessed valuation of all real and personal property subject to taxation in
Colorado was $40,167,970,063, which is up 4.2% from 1997 levels. The Colorado
Legislative Council's economic forecast predicts an increase in state general
fund revenues, of about 5.2% during the 1999-2000 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").
10
<PAGE> 12
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 reduced the financial flexibility of all levels of Colorado
government. Consequently, local governments dependent on taxes from residential
property, have experienced diminished revenues. On January 15, 1985 a state
constitutional amendment, referred to as the Gallagher Amendment was enacted.
Gallagher requires that the residential assessment ratio be adjusted from year
to year in order to maintain the commercial property ratio and other classes at
29.0%. As a result, the Gallagher Amendment has effectively lowered the
residential assessment rate on residential property from 21.0% (prior to the
enactment) to the current rate of 9.74%.
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.
11
<PAGE> 13
During the 1980's an unprecedented number of issuers experienced trouble
meeting debt service payments, which exposed bondholders to "credit risk." As a
result, many funds in competition with the Fund have spent the last several
years focusing on this element of risk. These funds buy bonds with underlying
investment grade ratings and then further insure payment by buying municipal
bond insurance on the credit. This strategy provides an abundance of protection
with respect to meeting debt service payments, but it provides no protection
against fluctuations in interest rates. In 1994 the market reminded investors
about so-called "market risk" when interest rates rose by over two percentage
points in a single year. Management believes that "market risk" is more often a
concern than "credit risk" because historically the interest rate cycle seems to
repeat roughly every five to seven years and severe credit crunches typically
occur less frequently. Generally, the net asset value of a fund with longer
maturities on its bonds has more exposure to principal volatility 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 11.7 years as of
January 11, 2000.
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.
While the date change from 1999 to 2000 did not cause any apparent
operational problems, the Investment Adviser is dedicated to providing a high
degree of diligence to ensure that the shareholders are not harmed by any future
computer problems associated with the year 2000.
However, despite the Investment Adviser's efforts, 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 owned by the Fund.
INVESTMENT RESULTS
The calendar year ended December 31, 1999 was generally negative for bonds.
Most bond funds showed principal declines throughout the year. The yield curve
shifted upward as investor's inflation fears were renewed. Bond prices
experienced their second worst year in history, not 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, 1997 and 1998
were largely uneventful for bonds. The cumulative total returns for the last
five calendar years for bond funds in the Fund's peer group vary from 30% to
50%.
The Fund experienced a 3.29% total return at net asset value for the
calendar year ended December 31, 1999. In two out of the last six years
(calendar years 1994 and 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., at the end of 1998, the
Fund also led all other Municipal Bond Funds in the five-year total performance
category which helps to demonstrate its consistency over a longer time period.
In calendar year 1999, the Fund was cited by Morningstar Inc., as the best
tax-free fund in the country, ranked above 1,433 other competing funds.
The Fund's average annual total returns at net asset value were 3.64%,
7.41% and 6.99% for the one-five-and ten-year periods ended September 30, 1999,
respectively. The average annual total returns at maximum offering price are
(0.95%), 6.37% and 6.47% for the one- five- and ten-year periods ended September
30, 1999, respectively. Cumulative total returns at net asset value and maximum
offering price for the 10-year period ended September 30, 1999 were 96.51% and
87.23%, respectively.
12
<PAGE> 14
The following graph 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.
[Graph]
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(4) LIPPER GENERAL MUNICIPAL DEBT(3)
------------------ ---------------------- --------------------------------
<S> <C> <C>
6/4/87(5) $ 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
9/30/99 21,598 23,900
</TABLE>
Average Annual Total Return(2)
<TABLE>
<CAPTION>
Periods ended 9/30/99
- ---------------------
<S> <C>
1 Year 3.64%
5 Year 7.41%
10 Year 6.99%
</TABLE>
- ----------
(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. Past performance is not
indicative of future performance.
(2) 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 9/30/99 are 3.64%, 7.41%and 6.99%, 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.
(3) Includes reinvestment of dividends but does not reflect any adjustment for
sales charge.
(4) Includes reinvestment of dividends and adjustment for the maximum sales
charge of 4.75%.
(5) Commencement of operation.
13
<PAGE> 15
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.
14
<PAGE> 16
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 one time charge paid at the time of purchase
of shares, most of which ordinarily goes to your broker-dealer to compensate him
for the services provided to 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 on the basis of the
amount of shares purchased, 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>
15
<PAGE> 17
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.
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
16
<PAGE> 18
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 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 LLP 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
17
<PAGE> 19
$0.25 for each dollar by which a taxpayer's alternative taxable income exceeds a
predetermined amount. For the tax years beginning after December 31, 1993,
certain corporations the gross receipts of which are not, for every
3-taxable-year period, greater than $5,000,000 for the first 3-year period and
greater than $7,500,000 for each period thereafter, will be exempt from the
alternative minimum tax.
"Alternative minimum taxable income" is a taxpayer's taxable income (i)
determined with specified adjustments for the alternative minimum tax and (ii)
increased by "items of tax preference." The types of income constituting "items
of tax preference" include otherwise allowable tax-exempt interest on private
activity bonds issued after August 7, 1986 (except bonds issued by charities
qualifying under Section 501(c)(3) of the Code).
Under the Code any loss on the sale or exchange of shares in the Fund held
by a shareholder for six months or less will be disallowed to the extent the
shareholder received exempt-interest dividends with respect to those shares.
Distributions from the Fund's non-exempt investment income and from any net
realized short-term gain will be taxable to shareholders as ordinary income,
whether received in cash or in additional shares of the Fund. Under the Code,
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund will not be deductible to the extent that the Fund's distributions are
exempt from federal income tax.
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.
As intangibles, shares in the Fund will be exempt from Colorado property
taxes.
18
<PAGE> 20
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 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.
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). With respect to the fiscal years ended September 30, 1995, 1996,
1997 and 1998 this information has been audited by KPMG LLP, the Fund's former
independent auditors. With respect to the fiscal year ended September 30, 1999,
the information has been audited by Fortner, Bayens, Levkulich and Co., P.C.,
the Fund's independent auditors. These reports, along with the Fund's financial
statements, are 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,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Data:
Net asset value, beginning of period $ 9.64 $ 9.58 $ 9.37 $ 9.16 $ 9.07
---------- ---------- ---------- ---------- ----------
Net investment income 0.56 0.62 0.58 0.61 0.60
Net realized and unrealized gain (loss) on investments (0.22) 0.06 0.21 0.20 0.09
---------- ---------- ---------- ---------- ----------
Increase from investment operations 0.34 0.68 0.79 0.81 0.69
Dividends from net investment income (0.56) (0.62) (0.58) (0.60) (0.60)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset value (0.22) 0.06 0.21 0.21 0.09
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.42 $ 9.64 $ 9.58 $ 9.37 $ 9.16
========== ========== ========== ========== ==========
Total Return, at Net Asset Value (1) 3.64% 7.62% 8.66% 9.15% 8.05%
========== ========== ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000)s $ 84,142 $ 73,108 $ 67,249 $ 50,583 $ 44,768
Ratios to average net assets:
Net investment income 5.96% 6.66% 6.13% 6.50% 6.81%
Expenses, inclusive of expenses paid indirectly by .73% .77% .84% .77% .84%
the Fund
Expenses, net of expenses paid indirectly by the .64% .66% .73% .70% .77%
Fund
Portfolio turnover rate(2) 21.95% 28.63% 27.66% 24.53% 27.48%
========== ========== ========== ========== ==========
</TABLE>
19
<PAGE> 21
- ------------
(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 period September 30, 1999 were
$24,638,985 and $16,532,855, respectively.
20
<PAGE> 22
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 Soc. Sec. No.
Under UTMA will be presumed, unless otherwise indicated.)
Use Lines C & D
-OR- ----------------------
Corporations, C. U.S. Citizen (Y/N)
Trusts, -------------------------------------------------------------
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, (our) agent to act in accordance with my (our) instructions
Trusts, or herein.
others in any
representative
capacity ------------------------------------------------------------------------------------
Use Lines D, E & F
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)
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C>
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.
----------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
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>
22
<PAGE> 24
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
23
<PAGE> 25
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, 2000, 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 1-800-942-8090.
Reports and other information about the Fund 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 electronic request at the
following email address: [email protected], or by writing the Public Reference
Section of the Commission, Washington, D.C. 20549-0102.
24
<PAGE> 26
INVESTMENT COMPANY FILE NUMBER 811-05009
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, 2000
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, 2000 (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
What Reductions In Sales Charges Are
Provided?............................ B-7
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-9
Taxable Versus Tax-Exempt Yields
Colorado Residents................... B-11
General Information.................... B-11
Financial Statements................... B-13
</TABLE>
<PAGE> 27
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;
B-2
<PAGE> 28
- Purchase or hold the securities of any issuer, if to its knowledge,
trustees or officers of the Fund individually owning beneficially more
than 0.5% of the securities of that issuer own in the aggregate more
than 5% of such securities;
- Write or purchase put, call, straddle or spread options, purchase
securities on margin or sell "short," or underwrite the securities of
other issuers;
- Purchase or sell commodities or commodity contracts, including
commodity futures contracts; or
- Make loans except to the extent that the purchase of notes, bonds or
other evidences of indebtedness or the entry into repurchase
agreements or deposits with banks may be considered loans. The Fund
has no present intention of entering into repurchase agreements during
the coming year.
Under the Investment Company Act of 1940, 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 AGE WITH THE FUND PRINCIPAL OCCUPATIONS DURING THE PAST 5 YEARS
- ------------------------ --- ---------------------- ----------------------------------------------------
<S> <C> <C> <C>
George N. Donnelly 53 Chairman of the Board of Mr. Donnelly is President of Registered Rep/Financial
1200 17th Street, Ste. 1000 Trustees and President of Planner Exchange.com, a website designed to match
Denver, CO 80202 the Fund independent registered representatives and financial
planners with broker dealers. From May 1991 to July
1999, Mr. Donnelly was a Principal for MKT Inc., a
marketing firm engaged in the sales of financial
service products.
Andrew B. Shaffer 52 Trustee, Secretary and Mr. Shaffer is an attorney engaged in private
1200 17th Street, Ste. 1000 Treasurer of the Fund practice. Mr. Shaffer has also been an attorney with
Denver, CO 80202 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 11, 2000, 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, 1999. The
officers and trustees of the Fund, as a group, received $ 400 in compensation
from the Fund for services to the Fund during the 1999 fiscal year. There is no
family relationship between any officers and trustees of the Fund.
B-3
<PAGE> 29
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 1999, 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 21.95%. 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> 30
The table below sets forth the advisory fees earned and the advisory fees
actually paid by the Fund during the last three fiscal years of the Fund:
<TABLE>
<CAPTION>
ADVISORY ADVISORY
FEES EARNED FEES PAID
----------- ---------
<S> <C> <C>
1997....................... 297,728 297,728
1998....................... 345,393 345,393
1999....................... 399,110 399,110
</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 1999 the Fund's
portfolio turnover rate was 21.95%. 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 or commission
available if the Investment Adviser determines in good faith that the amount of
commission is reasonable in
B-5
<PAGE> 31
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.
Fortner, Bayens, Levkulich and Co., P.C., certified public accountants, are
the independent auditors of the Fund and were engaged as such on September 28,
1999. Their address is 1099 18th Street, Suite 950, 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 1,361 holders of record and 9,267,241 shares
outstanding as of January 3, 2000.
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
dividends through the date they are redeemed or delivered subsequent to
reinstatement.
B-6
<PAGE> 32
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.
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.
B-7
<PAGE> 33
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 rights 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 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.
B-8
<PAGE> 34
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, 1999, 1998 and 1997 the total
amount of sales charges paid by investors was $401,344, $218,515 and $285,733,
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.
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:
B-9
<PAGE> 35
[( )(6) ]
[( (a- b) ) ]
[( ------- +1) -1 ]
YIELD = 2 [( cd ) ]
[( ) ]
Where: a = interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
To calculate interest earned (for the purpose of "a" above) the Fund will:
(a) Compute the yield to maturity of each obligation held by the Fund
based on the market value of the obligation at the close of business on the
last business day of each month, or with respect to obligations purchased
during the month, the purchase price.
(b) Divide the yield to maturity by 360 and multiply the quotient by
the market value of the obligation (including actual accrued interest) to
determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the portfolio.
The maturity of an obligation with a call provision is the next call date
on which the obligation reasonably may be expected to be called or, if none, the
maturity date.
In the case of an obligation issued without original issue discount and
having a current market discount, the coupon rate of interest is used in lieu of
the yield to maturity. In the case of an obligation with original issue
discount, if the discount based on the current market value exceeds the
then-remaining portion of original issue discount (market discount), the yield
to maturity is the imputed rate based on the original issue discount
calculation. In the case of an obligation with original issue discount, if the
discount based on the current market value is less than the then-remaining
portion of original issue discount (market premium), the yield to maturity is
based upon market value.
TAX EQUIVALENT YIELD
Tax equivalent yield shows the yield from a taxable investment which would
produce an after-tax yield equal to that of a fund that invests in tax-exempt
securities. It is computed by dividing the tax-exempt portion of the Fund's
yield (as calculated above) by one minus a stated income tax rate and adding the
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> 36
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.
B-11
<PAGE> 37
As described under "How Is The Fund Managed?" in the Prospectus and
Statement of Additional Information, the Fund ordinarily will not hold
shareholder meetings; however, shareholders under certain circumstances may have
the right to call a meeting of shareholders for the purpose of voting to remove
trustees.
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 LLP 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> 38
FINANCIAL STATEMENTS
[FORTNER, BAYENS, LEVKULICH AND CO., PC. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders of
Colorado BondShares - A Tax-Exempt Fund:
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Colorado BondShares, A Tax-Exempt Fund, as of
September 30, 1999, and the related statements of operations, changes in net
assets and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the year ended September 30, 1998 and financial highlights for
each of the years in the four-year period ended September 30, 1998, were audited
by other auditors whose report dated November 3, 1998 expressed an unqualified
opinion on that statement and financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of September 30, 1999, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Colorado BondShares - A Tax-Exempt Fund as of September 30, 1999, the results of
its operations, changes in its net assets and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.
/s/ Fortner, Bayens, Levkulich and Co., P.C.
- --------------------------------------------
Fortner, Bayens, Levkulich and Co., P.C.
Denver, Colorado
November 11, 1999
B-13
<PAGE> 39
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders of
Colorado BondShares - A Tax-Exempt Fund:
We have audited the statement of changes in net assets of Colorado BondShares -
A Tax-Exempt Fund for the year ended September 30, 1998 and the financial
highlights for each of the years in the four-year period ended September 30,
1998. This statement of changes in net assets and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998, by correspondence with the custodian
and brokers; and where confirmations were not received from brokers, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statement of changes in net assets and financial highlights
referred to above present fairly, in all material respects, the changes in net
assets of Colorado BondShares - A Tax-Exempt Fund for the year ended September
30, 1998, and the financial highlights for each of the years in the four-year
period then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Denver, Colorado
November 3, 1998
B-14
<PAGE> 40
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Investments
September 30, 1999
<TABLE>
<CAPTION>
Face Market
Amount Colorado Municipal Bonds - 87.8% Value
- -------------- ----------------------------------------------------------- ------------
<S> <C> <C>
$ 235,000 Academy Water and Sanitation District G.O. Series 1995, 6.20%-7.10% due 11/15/02-05 $ 251,747
25,000 Adams & Arapahoe Counties School District No. 31J G.O. Series 1989, 7.30% due 11/15/04 (b) 25,111
200,000 Arapahoe County Water and Wastewater Authority Revenue Series 1994, 6.20%-6.30%
due 12/01/03-04 (b) 208,804
235,000 Arapahoe Water and Sanitation District G.O. Refunding and Improvement Series 1986,
8.50% due 12/01/05 264,335
2,250,000 Arapahoe Water and Sanitation District G.O. Refunding Series 1995B, 8.50% due 12/01/20 (b) 2,515,545
65,000 Arrowhead Metropolitan District G.O. Improvement Series 1995A, 5.90%-6.10%
due 12/01/01-03 66,478
100,000 Arrowhead Metropolitan District G.O. Refunding Series 1994, 5.70% due 12/01/03 102,439
70,000 City of Arvada G.O. Street and Bridge Refunding Series 1994, 3.80% due 12/01/99 70,004
306,040 Aurora Centretech Metropolitan District G.O. Refunding and Improvement Series 1994,
6.00% due 12/01/23 (b) 328,880
700,000 Beebe Draw Farms Metropolitan District G.O. Series 1998, 7.00% due 10/01/18 700,000
1,765,000 Bell Mountain Ranch Phase II Metropolitan District G.O. Series 1995, 8.50% due 11/15/15 2,002,745
680,000 Bennett School District No. 29J G.O. Refunding and Improvement Series 1991,
6.35%-6.95% due 12/01/99-04 688,470
145,000 City of Black Hawk Device Tax Revenue Series 1994, 5.55%-5.70% due 12/01/00-01 147,282
200,000 City of Black Hawk Device Tax Revenue Series 1996, 5.75%-5.85% due 12/01/03-04 205,514
275,000 City of Black Hawk G.O. Water Improvement Series 1992, 6.60%-6.80% due 12/01/99-00 279,240
80,000 Boulder County Gunbarrel General Improvement District G.O. Series 1994, 5.00% due 11/15/99 80,121
805,000 Boulder County Multifamily Refunding & Improvement Revenue (Thistle Cmnty Housing)
Series 1999A, 6.25% due 6/01/2019 764,790
75,000 Boulder County Multifamily Refunding & Improvement Revenue (Thistle Cmnty Housing)
Subordinate Series 1999B, 7.375% due 6/01/2015 72,891
25,000 Boulder Valley School District No. RE-2 Series 1992A, 5.80% due 10/15/01 25,834
135,000 Boxelder Sanitation District Sewer Revenue Refunding and Improvement Series 1994,
5.60%-5.90% due 1/01/00-03 136,480
280,000 Town of Breckenridge G.O. Recreation Center Refunding Series 1993, 4.30%-4.45%
due 12/01/99-00 281,195
310,543 Briargate Public Building Authority, Landowner Assessment Lien Series 1985A and 1986A,
9.50%-10.25% due 12/15/95-05 (g)(i) 282,406
12,000 Castle Pines North Metropolitan District Tax Revenue Series 1994B, 6.10%, due 12/01/33 (h) 10,200
25,000 Town of Castle Rock G.O. Series 1988-2, 10.375% due 12/01/08 25,000
530,000 Town of Castle Rock LID Series 1988-2D Special Assessment, 9.25%-10.375% due 12/01/08 (a) 185,500
470,000 Town of Castle Rock G.O. Water Refunding Series 1993, 4.55%-4.65% due 12/01/99-00 471,100
59,394 Centennial Downs Metropolitan District Cash Payment Deficiency Bond Series 1993,
8.09% due 12/01/34 (i) 59,471
588,601 Centennial Downs Metropolitan District Limited Tax Refunding Bond Series 1993,
8.09% due 12/01/34 (i) 595,252
271,980 Centennial Downs Metropolitan Interest Certificate Series 1993, 6.00% due 12/01/34 (i) 30,222
45,000 City of Central City Special Assessment District No.1, 7.5% due 12/01/03 45,247
2,500,000 Central Platte Valley Metropolitan District Special Obligation Revenue Series 1998, 7.00%
due 12/01/17 2,437,500
100,000 Clear Creek School District No. Re-1 G.O. Improvement Series 1991, 5.90% due 12/01/00 102,392
</TABLE>
B-15
<PAGE> 41
<TABLE>
<CAPTION>
Face Market
Amount Colorado Municipal Bonds - 87.8% Value
- -------------- ----------------------------------------------------------- ------------
<S> <C> <C>
2,009,520 Colorado Centre Metropolitan District Limited Tax and Special Revenue Series 1992A, 20,095
principal only, 0.00% due 1/01/27 (a)(e)(i)
2,008,335 Colorado Centre Metropolitan District Limited Tax and Special Revenue Series 1992A,
interest only, 9.00% due 1/01/27 (f)(i) 1,205,001
6,465,662 Colorado Centre Metropolitan District Limited Tax and Special Revenue Series 1992B,
0.00% due 1/01/32 (a)(g)(i) 64,657
4,150,000 Colorado Educational & Cultural Facility Authority Revenue Charter School-Liberty
Common Series 1998, 6.95% due 8/15/19 4,096,465
190,000 Colorado Health Facilities Authority Refunding Revenue Porter Memorial Hospital Series
1986A, 7.40% due 2/01/16 (b) 192,326
520,000 Colorado Health Facilities Authority Zero Coupon Retirement Housing Revenue Liberty
Heights Project 1990 Subordinate Series B, 6.97% due 7/15/20 (d) 143,478
635,000 Colorado Postsecondary Educational Facilities Authority Revenue National Technological
University Project Series 1993, 7.375% due 12/01/10 (b) 706,647
885,000 Colorado Postsecondary Educational Facilities Authority Revenue National Technological
University Project Series 1993, 7.75% due 12/01/10 990,022
65,000 Colorado Postsecondary Educational Facilities Authority Revenue The Naropa Institutional
Project Series 1990, 7.875% due 9/01/10 put 9/01/00 65,000
835,000 Colorado Springs Spring Creek G.I.D. GO Series 1995, 4.00% due 12/01/14 (b)(i) 375,750
1,180,000 Columbia Metropolitan District G.O. Improvement Series 1992, 7.60%-8.50% due 11/01/00-11/01/12 1,326,511
500,000 Cordillera Metropolitan District G.O. Series 1994A, 8.00% due 12/01/09 (b) 582,885
500,000 Cordillera Metropolitan District G.O. Series 1994, 8.25% due 12/01/13 (b) 588,385
1,025,000 Cotton Ranch Metropolitan District G.O. Series 1998A, 7.25% due 12/01/17 978,199
3,500,000 Cotton Ranch Metropolitan District Subordinate Junior G.O. Limited Tax Refunding Variable
Rate Series 1999B, 7.75% due 12/15/17 (h) 3,104,535
2,250,000 Cottonwood Water and Sanitation District Refunding Series 1996A, 7.60% 12/01/12 2,319,817
19,106,474 Cottonwood Water and Sanitation District Capital Appreciation Refunding Second Lien,
Series 1998A, 8.00% due 12/01/27 (d) 3,810,595
240,000 Town of Crested Butte Sales Tax Revenue Series 1994, 6.10%-6.35% due 12/01/01-03 248,976
125,000 Town of Crested Butte G.O. Water and Sewer Refunding Series 1993, 4.25% due 11/01/99 125,056
375,000 City of Delta Sales and Use Tax Revenue Refunding Series 1994, 4.35%-4.65%
due 12/01/01-03 375,740
72,000 City and County of Denver Lease Purchase Certificates Series 1993, 6.30% due 1/01/02 72,105
1,885,000 City and County of Denver Subordinate Multifamily Housing Revenue Capital Heights Apts.
Series 1999C, 8.00% due 5/01/32 1,878,290
45,000 Denver West Metropolitan District Series 1997B, 4.80% due 12/01/02 45,065
775,000 Denver West Metropolitan District Series 1997B, 5.70% due 12/01/17 774,930
75,000 Town of Dillon G.O. Series 1992, 5.70%-5.90% due 10/01/99-00 75,756
95,000 Town of Dillon Excise Tax Revenue Series 1994, 5.80% - 5.90% due 6/01/02-03 97,935
90,000 City of Durango First Mortgage Revenue Series 1995, 6.50% due 12/15/00 89,982
455,000 Eagle Riverview Affordable Housing Corp. Multifamily Housing Project
Revenue Series 1992A-2, 6.30% due 7/01/2029 455,000
60,000 El Paso and Elbert Counties Joint School District No. 23-JT G.O. Building
Series 1994, 5.75% due 12/15/01 61,606
90,000 El Paso County LID 85-2 Special Assessment Refunding Series 1988,
8.875%-9.00% due 9/01/00 9,000
90,588 El Paso County Pheasant Run LID Special Assessment Series 1986-2,
9.25% due 9/01/99(a) 22,647
100,000 El Paso County School District No. 2 - Harrison G.O. Improvement Series 1994, 7.10% due 12/01/04 111,270
500,000 El Paso County School District No. 20 Zero Coupon G.O. Refunding Series 1993A,
6.10% due 6/15/08 (d) 317,865
150,000 Elbert County School District C-1 G.O. Series 1994, 4.40% due 12/01/02 149,405
155,000 City of Englewood Golf Course Revenue Series 1994, 4.35% due 12/01/00 155,239
3,123,380 Equi-Mor Holdings Inc., Series 1998B, Class A Pass-Through Certificates, 7.00% due 9/01/18 3,123,380
1,060,527 Equi-Mor Holdings Inc., Series 1999A, Class A Pass-Through Certificates, 7.50% due 4/05/18 1,060,527
1,500,000 Fairlake Metropolitan District G.O. Series 1989, 9.00% due 6/01/09 1,528,125
25,000 Fort Collins Refunding Series B, 6.00%, due 12/01/02 26,291
25,000 Fort Lupton Golf Course Revenue Anticipation Warrants Series 1996A, 8.50% due 12/15/15 23,000
80,000 Fraser Valley Metropolitan Recreation District G.O. Refunding Series 1992, 5.40% due 10/01/99 80,002
100,000 Fremont School District RE-1 G.O. Refunding Series 1990, 6.80% due 10/01/99 100,008
2,000,000 Gateway Village GID G.O. Refunding and Improvement Series 1998, 6.00% due 12/01/18 1,868,280
239,000 Gateway Village GID G.O. Refunding and Improvement Series 1998, Zero Coupon 5.20%-5.60%
due 12/01/99-12/01/01 (d) 226,823
</TABLE>
B-16
<PAGE> 42
<TABLE>
<CAPTION>
Face Market
Amount Colorado Municipal Bonds - 87.8% Value
- -------------- ----------------------------------------------------------- ------------
<S> <C> <C>
845,000 Gateway Village GID G.O. Series 1995, 8.25%-8.75% due 12/01/05-14 (b) 943,543
1,000,000 Gateway Village GID Subordinate Limited Tax G.O. Series 1999, 7.00% due 6/01/19 1,000,000
100,000 City of Golden Sales and Use Tax Revenue Series 1992, 5.00% due 11/15/99 100,151
300,000 City of Grand Junction Downtown Development Authority Tax Increment Revenue Series 1996,
5.55%-5.65% due 11/15/04-05 308,126
1,275,000 Greatrock North Water and Sanitation District, Limited Tax G.O. Series 1998,
8.00% due 12/01/17 1,210,664
70,000 Greeley General Improvement District No. 1 G.O. Refunding Series July 15, 1994,
5.30% due 10/01/99 70,003
270,000 Greenwood Metropolitan District G.O. Refunding Series 1994, 6.10%-7.00% due 12/01/00-04 282,968
380,000 Greenwood North Metropolitan District G.O. Refunding Series 1993,
4.50%-5.00% due 12/01/99-01 380,313
220,000 Greenwood South Metropolitan District G.O. Refunding Series 1994, 6.25%-6.90%
due 12/01/01-04 230,324
100,000 City of Greenwood Village Sales Tax Revenue Refunding Series 1993, 4.40% due 12/01/99 100,105
510,000 Hamilton Creek District Series 1990, 1.18% due 12/01/04 (g) 255,000
10,000 Hyland Hills Park & Recreation District Special Revenue Improvement Series 1992,
7.10% due 12/15/00 10,370
340,000 Idledale Fire Protection District G.O. Series 1993, 5.20%-5.80% due 12/15/03-07 337,172
475,000 La Plata County Recreational Facilities Revenue Refunding Durango Ski Corporation
Project Series 1989A, 9.00% due 2/01/10 474,017
315,000 City of Las Animas Water G.O. Series 1989, 8.60% due 12/01/09 317,302
300,000 Left Hand Water District Water Revenue Refunding Series 1993, 4.30%-4.45% due 11/15/00-01 301,514
135,000 Lookout Mountain Water District G.O. Refunding Series 1993, 5.20% due 12/01/01 137,287
220,000 Mesa County Single Family Mortgage Revenue Series 1982, 5.375% due 12/01/99 (g) 17,600
1,250,000 Mid Valley Metropolitan District G.O. Refunding & Improvement Series 1989,
8.90% due 12/15/04 (b) 1,275,713
165,000 City of Montrose Sales and Use Tax Revenue Refunding Series 1993, 4.40% due 8/15/00 165,820
250,000 City of Montrose Water and Sewer Revenue Refunding and Improvement Series 1993,
4.50%-4.65% due 10/01/01-02 252,086
155,000 Monument Sanitation District G.O. Refunding Series 1994, 5.80%-5.90% due 12/01/01-02 158,638
175,000 Town of Mt. Crested Butte G.O. Refunding Series 1993, 4.60%-4.75% due 5/01/00-01 175,662
100,000 Mountain Village Metropolitan District G.O. Series 1992, 7.95% due 12/01/03 (b) 111,251
545,000 Mountain Village Metropolitan District G.O. Series 1992, 7.95% due 2/01/03 611,501
20,000 Northgate Public Building Authority Landowner Assessment Lien Series 1987A,
8.25% due 12/01/00(a) 2,800
225,000 North Jeffco Park and Recreation District Golf Course Revenue Series 1994, 5.80%-6.10%
due 12/01/01-04 232,554
800,000 North Pines Metropolitan District G.O. Limited Tax Series 1999, 6.00% due 12/01/03 788,368
760,000 North Pines Metropolitan District G.O. Limited Tax Series 1999, 8.00% due 6/01/2019 730,839
75,000 Otero County Swink School District No. 33 G.O. Building Series 1994, 8.40% due 12/15/00-03 83,284
165,000 Ouray County Ridgway School District #R-2 Series 1994 , 7.75% due 12/01/99-02 174,938
1,055,000 Panorama Metropolitan District G.O. Refunding Series 1989B, 9.00% due 12/01/09 (b) 1,074,707
1,900,000 Parker Jordan Metropolitan District Series 1998A, 6.25% due 12/01/17 1,849,289
280,000 Town of Parker Sales and Use Tax Refunding Revenue Series 1993, 4.20%-4.30%
due 11/01/99-00 280,712
</TABLE>
B-17
<PAGE> 43
<TABLE>
<CAPTION>
Face Market
Amount Colorado Municipal Bonds - 87.8% Value
- -------- ----------------------------------------------------------- ------------
<S> <C> <C>
45,000 Pitkin County Sales Tax Revenue Series 1995, 5.30% due 12/01/00 45,077
200,000 Project 7 Water Authority Water Revenue Refunding Series 1993, 4.50% due 12/01/00 201,238
354,000 Pueblo County Capital Improvement Residual Revenue Series 1988, 10.07% due 8/02/10 (d) 136,527
130,000 Rangely Junior College District G.O. Building Series 1992, 6.25%-6.40% due 10/01/99-00 130,908
159,868 Roxborough Village Metropolitan District Series 1993A, 9.00% due 12/31/16 (i) 131,092
278,078 Roxborough Village Metropolitan District Series 1993B, principal only, 0.00% due 12/31/21 (e)(i 16,685
906,622 Roxborough Village Metropolitan District Series 1993C, 9.84% due 12/31/32 (d)(i) 9,066
20,270 Roxborough Village Metropolitan District Series 1993B, interest only, 10.41% due 1/01/43 (f)(i) 203
125,000 Saguache County Moffat School District No. 2 G.O. Series 1994, 5.70%-5.90% due 12/01/99-01 128,279
1,250,000 Sand Creek Metropolitan District G.O. Limited Tax Series 1997, 7.125% due 12/1/16 1,254,838
535,000 San Miguel County Housing Authority Multifamily Telluride Village Revenue Refunding
Series 1993, 6.30% due 7/01/13 558,262
1,710,000 City of Sheridan G.O. Series 1997, 7.50% due 12/01/16 1,684,162
120,000 Town of Snowmass Village Multifamily Revenue Series 1990A, 7.70% due 12/15/99 120,991
1,000,000 Southpark Metropolitan District Refunding G.O. Series 1996, 6.60% due 12/01/13 1,010,100
305,000 Southtech Metropolitan District G.O. Refunding Series 1994, 5.10%-5.85% due 12/01/99-04 311,954
100,000 Southwest Plaza Metropolitan District G.O. Refunding Series 1993, 5.00% due 12/01/99 100,174
40,000 City of Steamboat Springs Accommodations Tax Revenue Series 1995, 5.25% due 3/01/00 40,262
2,000,000 Sterling Hills Metropolitan District G.O. Series 1998, 7.75% due 12/01/18 1,896,160
360,000 Telluride Hospital District Series 1997, 4.60%-4.80% due 12/01/00-02 358,646
2,000,000 Todd Creek Farms Metropolitan District #2 Limited Tax G. O. Series 1997, 8.00% due 6/01/17 1,973,640
1,000,000 Todd Creek Farms Metropolitan District #2 Series 1999, 7.50% due 12/01/2018 960,670
300,000 Upper Eagle Regional Water Authority Water Refunding Series 1994, 5.50%-5.80%
due 12/01/99-01 304,060
610,000 Valley Metropolitan District G.O. Revenue Series 1992, 7.00% due 12/15/06 633,296
100,000 Weld County Reorganized School District RE-4 G.O. Series 1993, 4.65% due 12/01/00 100,800
235,000 Town of Windsor G.O. Water Refunding Series 1994, 4.40%-4.80% due 4/01/99-01 236,121
----------
Total Colorado Municipal Bonds (cost $74,135,905) 73,922,698
----------
</TABLE>
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Investments
September 30, 1999
<TABLE>
<CAPTION>
Face Market
Amount Colorado Certificates of Participation - 1.0% Value
- -------------- ----------------------------------------------------------- -----------
<S> <C> <C>
155,000 Arapahoe County Recreation District Refunding Certificates of Participation Series 1996,
5.00%-5.20% due 12/01/04-06 158,278
170,000 City of Central City Certificates of Participation City Hall Project Series 1995,
6.50%-6.80% due 12/01/99-01 170,555
100,000 El Paso County School District No. 49 Falcon Schools Refunding Certificates of Participation
Series 1995, 4.375% due 11/01/01 100,323
200,000 Gilpin County Certificates of Participation Detention Facility Project Series 1994,
6.60% due 10/15/01 208,974
50,000 Las Animas County School District No. 001 Certificates of Participation Series 1991A,
8.00% due 12/01/10 52,775
145,000 Park School District R-3 Certificates of Participation Series 1996, 5.35%-5.45% due 6/01/04-05 145,109
---------
Total Colorado Certificates of Participation Bonds (cost $835,725) 836,014
---------
</TABLE>
B-18
<PAGE> 44
<TABLE>
<CAPTION>
Face Market
Amount Colorado Industrial Development Revenue Bonds - 2.7% Value
- ------------- ----------------------------------------------------------- ----------
<S> <C> <C>
2,900,000 City of Fort Collins The Opera House Project Series 1986, 8.75%-10.00% due 12/01/10-16 (a) 2,239,400
---------
Total Colorado Industrial Development Revenue Bonds (cost $2,875,626) 2,239,400
---------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Other Municipal Bonds - 2.0% Value
- -------------- ----------------------------------------------------------- ----------
<S> <C> <C>
100,000 City of Burnsville G.O. Tax Increment Refunding Series 1993C, 4.40% due 2/01/02 100,526
105,000 Daggett County School District, G.O. Refunding Series 1993, 4.65% due 12/15/99 105,191
510,000 Dona Ana County New Mexico Tax-Exempt Multi-Family Housing Revenue Bonds
Subordinate Series 1999B1, 8.50% due 8/01/14 502,738
225,000 Saint Charles Mesa Water District Water Revenue Refunding Series 1992, 5.55% due 12/01/00 229,167
515,000 Sandoval County, New Mexico Project Revenue Bonds, Series 1997, 7.50% due 8/15/06 505,679
100,000 Santa Fe Public School District G.O. Series 1994, 5.60% due 6/15/01 100,134
120,000 West Wendover Recreation District G.O. Golf Course Improvement Refunding Series 1993,
5.60% due 12/01/99 120,332
-----------
Total Other Municipal Bonds (cost $1,680,444) 1,663,767
-----------
Total investments, at value (cost $79,527,700)* 93.5% 78,661,879
Other assets net of liabilities 6.5% 5,480,375
------ -----------
Net assets 100.0% $84,142,254
====== ===========
</TABLE>
- -------------
* Tax cost basis approximates book cost basis.
B-19
<PAGE> 45
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Investments
September 30, 1999
(a) Non-income producing based upon the financial condition of the issuer (see
footnote 1).
(b) Originally issued as general obligation bonds but are now prerefunded and
are secured by an escrow fund consisting entirely of direct U.S. Government
obligations.
(c) Represents interest certificates whose characteristics are similar to zero
coupon bonds. All interest based on the coupon rate is remitted upon
maturity. Interest rate shown for interest certificates represents effective
yield at acquisition.
(d) Interest rate shown for zero coupon bonds represents the effective yield at
the date of acquisition.
(e) Principal-only certificate represents the right to receive the principal
payments on the underlying debt security upon maturity. The price of this
security is typically more volatile than that of coupon-bearing bonds of the
same maturity.
(f) Interest-only certificate represents the right to receive semi-annual
interest payments on the underlying debt security. The principal amount of
the underlying security represents the notional amount on which current
interest is calculated. The interest rate shown represents the effective
yield at the date of acquisition.
(g) Interest rate disclosed for cash flow bond represents the effective yield at
September 30, 1999. Income on this security is derived from the cash flow of
the issuer.
(h) Represents current interest rate for a variable rate bond.
(i) Terms of security have been restructured since the original issuance. The
face amount and market value of such securities amount to $14,423,783 and
$3,044,900 or 3.62% of net assets, respectively, as of September 30, 1999.
The following abbreviations are used in the descriptions of securities included
in the Statement of Investments:
G.O. - General Obligations
LID - Local Improvement District
GID - General Improvement District
See accompanying notes to financial statements.
B-20
<PAGE> 46
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Assets and Liabilities
September 30, 1999
<TABLE>
<S> <C>
Assets
Investments, at value (cost $79,527,700) - see accompanying statement $ 78,661,879
Cash 4,281,043
Interest receivable 1,632,703
Shares of beneficial interest sold 14,430
------------
Total assets 84,590,055
------------
Liabilities
Payables and other liabilities:
Dividends 203,575
Investments purchased 23,000
Shares of beneficial interest redeemed 157,654
Accrued expenses and other 63,572
------------
Total liabilities 447,801
------------
Net Assets $ 84,142,254
============
Composition of Net Assets
Paid-in capital $ 84,951,295
Undistributed net investment income 57,472
Accumulated net realized gain from investment transactions (693)
Net unrealized depreciation of investments (note 3) (865,820)
------------
Net assets $ 84,142,254
============
Net asset value and redemption value per share (based on 8,932,095
shares of beneficial interest outstanding) $ 9.42
============
Maximum offering price per share (net asset value plus sales charge
of 4.75% of offering price) $ 9.89
============
</TABLE>
See accompanying notes to financial statements.
B-21
<PAGE> 47
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Operations
September 30, 1999
<TABLE>
<S> <C>
Investment income - interest $ 5,269,218
------------
Expenses:
Management fees (note 4) 399,110
Custodian fees (note 5) 71,443
Legal and auditing fees 31,741
Transfer agency expenses (note 4) 53,733
Shareholders' reports and proxy statements 24,265
Registration fees 510
Trustees' fees 800
Other 3,667
------------
Total expenses 585,269
Earnings credits on cash balances (note 5) (71,443)
------------
Net expenses 513,826
------------
Net investment income 4,755,392
------------
Realized and unrealized gain on investments:
Net realized gain on investments 7,024
------------
Net unrealized appreciation (depreciation) of investments:
Beginning of the period 1,102,024
End of the period (865,820)
------------
Net change in unrealized appreciation (depreciation)
on investments (1,967,844)
------------
Net realized and unrealized gain (loss) on investments (1,960,820)
------------
Net increase in net assets resulting from operations $ 2,794,572
============
</TABLE>
See accompanying notes to financial statements.
B-22
<PAGE> 48
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Statement of Changes in Net Assets
September 30, 1999
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
From investment activities:
Net investment income $ 4,755,392 $ 4,640,447
Net realized gain on investments 7,024 294,050
Net change in unrealized appreciation (depreciation) on investments (1,967,844) 187,505
------------ ------------
Net increase in net assets resulting from operations 2,794,572 5,122,002
------------ ------------
Dividends to shareholders from net investment income (4,697,920) (4,661,865)
------------ ------------
From beneficial interest transactions:
Proceeds from sale of shares 15,448,573 12,613,472
Dividends reinvested 2,828,356 2,860,000
Payments for shares redeemed (5,338,925) (10,075,001)
------------ ------------
Increase in net assets derived from beneficial
interest transactions 12,938,004 5,398,471
------------ ------------
Net increase in net assets 11,034,656 5,858,608
Net assets:
Beginning of period 73,107,598 67,248,990
------------ ------------
End of period (including undistributed net investment income of
$57,472 and $0, respectively) $ 84,142,254 $ 73,107,598
============ ============
</TABLE>
See accompanying notes to financial statements.
B-23
<PAGE> 49
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Financial Highlights
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per Share Operating Data:
Net asset value, beginning of period $ 9.64 $ 9.58 $ 9.37 $ 9.16 $ 9.07
------ ------ ------ ------ ------
Net investment income 0.56 0.62 0.58 0.61 0.60
Net realized and unrealized gain (loss) on investments (0.22) 0.06 0.21 0.20 0.09
------ ------ ------ ------ ------
Increase from investment operations 0.34 0.68 0.79 0.81 0.69
Dividends from net investment income (0.56) (0.62) (0.58) (0.60) (0.60)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (0.22) 0.06 0.21 0.21 0.09
------ ------ ------ ------ ------
Net asset value, end of period $ 9.42 $ 9.64 $ 9.58 $ 9.37 $ 9.16
====== ====== ====== ====== ======
Total Return, at Net Asset Value (1) 3.64% 7.62% 8.66% 9.15% 8.05%
====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets, end of period (000)s $ 84,142 $ 73,108 $ 67,249 $ 50,583 $ 44,768
Ratios to average net assets:
Net investment income 5.96% 6.66% 6.13% 6.50% 6.81%
Expenses, inclusive of expenses paid indirectly by the Fund .73% .77% .84% .77% .84%
Expenses, net of expenses paid indirectly by the Fund .64% .66% .73% .70% .77%
Portfolio turnover rate(2) 21.95% 28.63% 27.66% 24.53% 27.48%
====== ====== ====== ====== ======
</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 period September 30, 1999
were $24,638,985 and $16,532,855, respectively.
See accompanying notes to financial statements.
B-24
<PAGE> 50
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Notes to Financial Statements
September 30, 1999
(1) Summary of Significant Accounting Policies
Colorado BondShares - A Tax-Exempt Fund (the Fund) is registered under
the Investment Company Act of 1940 as amended, as a diversified,
open-end management company. The Fund's investment objectives are to
maximize income exempt from federal income taxes and from personal
income taxes of the State of Colorado to the extent consistent with the
preservation of capital and to seek opportunities for capital
appreciation. The Fund's investment adviser is Freedom Funds Management
Company (FFMC). The following is a summary of significant accounting
policies consistently followed by the Fund.
(a) Investment Valuation
The values of investments are determined using prices quoted by a
national independent pricing service approved by the Fund's Board of
Trustees. The pricing service values the municipal bonds taking into
consideration yield, stability, risk, quality, coupon, maturity, type
of issue, trading characteristics and any other relevant trading or
market factors. The Fund records amortization of premiums and accretion
of original issued discounts on zero coupon bonds, using the effective
yield method, in accordance with federal income tax requirements.
Short-term debt securities having a remaining maturity of 60 days or
less are valued at amortized cost which approximates market value.
(b) Income Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all its net investment income to shareholders. Therefore, no
tax provision is required. At September 30, 1999, the Fund had
available for federal income tax purposes an unused capital loss
carryover of approximately $700, expiring in 2003.
(c) Other/Security Credit Risk
Investment transactions are accounted for on the date the investments
are purchased or sold (trade date). Dividends to shareholders are
declared each business day and paid monthly. Distributions to
shareholders are recorded on the ex-dividend date. Realized gains and
losses from investment transactions are calculated using the
identified-cost basis which is the same basis the Fund uses for federal
income tax purposes. The Fund concentrates its investments in Colorado
and, therefore, may have more credit risks related to the economic
conditions of Colorado than a portfolio with a broader geographical
diversification. The Fund invests in nonrated securities, which may be
subject to a greater degree of credit risk, and risk of loss of income
and principal, and may be more sensitive to economic conditions than
lower yielding, higher rated fixed income securities. The Fund
discontinues the accrual of interest income on municipal bonds when the
securities become delinquent as to payment of principal or interest, or
when the Fund's investment adviser determines that an uncertainty
exists as to the realization of all or a portion of the principal
balance. The face amount and market value of bonds, for which the
accrual of interest income has been discontinued, approximated
$12,015,770 and $2,535,099 (3.01% of net assets), respectively, as of
September 30, 1999.
B-25
<PAGE> 51
COLORADO BONDSHARES -
A TAX-EXEMPT FUND
Notes to Financial Statements
September 30, 1999
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) Shares of Beneficial Interest
The Fund has an unlimited number of no par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest for
the years ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Proceeds from shares sold 1,611,128 1,313,197
Dividends reinvested 295,764 297,289
--------- ---------
1,906,892 1,610,486
Shares redeemed (557,388) (1,047,465)
--------- ---------
Net change 1,349,504 563,021
========= =========
</TABLE>
(3) Unrealized Gains and Losses
At September 30, 1999, the net unrealized depreciation on investments
of $865,820 was comprised of gross appreciation of $2,020,944 and gross
depreciation of $2,886,764.
(4) Management Fees and Other Transactions with Affiliates
Management fees paid to FFMC were in accordance with the investment
advisory agreement with the Fund which provides for an annual fee
equivalent to 0.5% of the net assets of the Fund. FFMC pays all
expenses associated with advertising, marketing, and distributing the
Fund's shares and serves as the transfer agent, dividend disbursing
agent, and registrar for the Fund. FFMC provided certain transfer
agency and shareholder services as part of the management fee
arrangement for the fiscal year ended September 30, 1999. Transfer
agency expenses represent direct expenses charged to the Fund by third
parties.
(5) Earnings Credits on Cash Balances
Expenses paid indirectly by the Fund represent earnings credits on cash
balances maintained with the custodian by the Fund which result in
offsetting custodian fees incurred for the safeguarding of Fund assets.
B-26
<PAGE> 52
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-27
<PAGE> 53
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-28
<PAGE> 54
PART C
ITEM 23. EXHIBITS
<TABLE>
<S> <C>
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 LLP
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.*
J.5 -- Consent of Former 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.
(4) As filed with a Post-Effective Amendment to the Registration Statement on
January 29, 1988.
(*) 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.
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):
C-1
<PAGE> 55
<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 Stratus
Fund, Inc.
(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>
(1) (2) (3)
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
-------------------- ------------------------- ---------------------
<S> <C> <C>
Thomas C. Smith..... Chairman None
Max H. Callen....... Director and Senior VP None
George W. Peterson.. Director and Senior VP None
Arnold J. Walters... Director and Senior VP None
Allen J. Moore...... Director and President None
Sharon A. Shelley... Director, Senior V P, None
Secretary and Treasurer
Ruth E. Howell...... Vice President None
W. Don Nelson....... Vice President None
William B. Shreve... Vice President None
</TABLE>
- ----------
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-2
<PAGE> 56
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, 2000.
COLORADO BONDSHARES-A TAX-EXEMPT FUND
By: /s/ ANDREW B. SHAFFER
---------------------------------
Andrew B. Shaffer,
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---------------------- ---------------------- ----------------
<S> <C> <C>
/s/ GEORGE N. DONNELLY Chairman of the Board, January 28, 2000
---------------------- President and Trustee
George N. Donnelly
/s/ ANDREW B. SHAFFER Trustee, Treasurer January 28, 2000
--------------------- and Secretary
Andrew B. Shaffer
</TABLE>
C-3
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
J.3 -- Consent of Kutak Rock LLP
J.4 -- Consent of Independent Auditors
J.5 -- Consent of Former Independent Auditors
27. Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FUND'S
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 79,527,700
<INVESTMENTS-AT-VALUE> 78,661,879
<RECEIVABLES> 1,647,133
<ASSETS-OTHER> 4,281,043
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 84,590,055
<PAYABLE-FOR-SECURITIES> 23,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 424,801
<TOTAL-LIABILITIES> 447,801
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,951,295
<SHARES-COMMON-STOCK> 8,932,095
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (693)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (865,820)
<NET-ASSETS> 84,142,254
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,269,218
<OTHER-INCOME> 0
<EXPENSES-NET> 513,826
<NET-INVESTMENT-INCOME> 4,755,392
<REALIZED-GAINS-CURRENT> 7,024
<APPREC-INCREASE-CURRENT> (1,967,844)
<NET-CHANGE-FROM-OPS> 2,794,572
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,697,865
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,448,573
<NUMBER-OF-SHARES-REDEEMED> 5,388,925
<SHARES-REINVESTED> 2,828,356
<NET-CHANGE-IN-ASSETS> 11,034,656
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 399,110
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 585,269
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.64
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> (0.22)
<PER-SHARE-DIVIDEND> .56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.42
<EXPENSE-RATIO> .73
</TABLE>
<PAGE> 1
EXHIBIT J.3
CONSENT OF KUTAK ROCK LLP
We consent to the reference in the Prospectus contained in this
Post-Effective Amendment No. 15 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 LLP
---------------------------
KUTAK ROCK LLP
Denver, Colorado
January 28, 2000
<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 11, 1999 included in
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/ Fortner, Bayens, Levkulich and Co., P. C.
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Fortner, Bayens, Levkulich and Co., P.C.
Denver, Colorado
January 28, 2000
<PAGE> 1
EXHIBIT J.5
CONSENT OF FORMER INDEPENDENT AUDITORS
The Board of Trustees Colorado BondShares-A Tax-Exempt Fund:
We consent to the use of our report dated November 3, 1998 which is
included in the Statement of Additional Information and to the reference to our
firm under the heading "Financial Highlights" in the Prospectus, which is a part
of this Registration Statement.
/s/ KPMG LLP
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KPMG LLP
Denver, Colorado
January 28, 2000
