ANNUAL
REPORT
DECEMBER 31, 1996
[Logo of Aquila Group of Funds: Eagle's head]
TAX-FREE FUND
OF
COLORADO
A TAX-FREE INCOME INVESTMENT
[Logo of Tax-Free Fund of Colorado: Square box with mountains and a sun]
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
TAX-FREE FUND OF COLORADO
ANNUAL REPORT
"THE VALUE OF STEADFASTNESS"
February 18, 1997
Dear Investor:
Most of us have heard, at one time or another, the story of the
tortoise and the hare. With respect to your investment in Tax-Free Fund of
Colorado, this old adage, detailing the virtue of steadfastness, speaks
volumes. If the finish line you are seeking to cross is one of capital
preservation and double tax-free income, then an investment which performs
much like the tortoise just might "win the race."
THE CALL OF THE STOCK MARKET
As I am sure you will agree, recent years have been banner ones for
the stock market. The spectacular price increases experienced have made the
appeal of investing in equity securities extremely powerful and, at times,
almost irresistible.
If it were possible to know in advance just what and when to buy or
sell in order to maximize profit, then constantly switching your investment
vehicle, trying to capture the latest trend, would be uncomplicated.
Unfortunately, "timing" the market, with any degree of consistency,
is near impossible. We have generally found that, for the average investor,
switching continuously from one security to another in the management of
his/her investment portfolio tends to be a fruitless, often imprudent,
exercise. With the degree of volatility inherent in the equity markets,
missing an upturn or downturn could result in a disastrous loss of invested
principal.
PROUD TO BE A TORTOISE
Our various survey results indicate that a substantial portion of
investors in Tax-Free Fund of Colorado are retirees or pre-retirees who are
concerned about capital preservation. Accordingly, staying on track with your
investment in the Fund could well prove to be the most appropriate course to
follow. Although equity investments can be rewarding for a portion of one's
capital, it is still critical to keep firmly in mind your overall investment
goal and not get disproportionately distracted by the dazzle of other
investments.
It is no great secret that municipal bonds, such as those in which
the Fund invests, are generally not exciting investments. Unlike stocks, they
do not experience abrupt, dramatic highs. However, it must be kept in mind
that municipal bonds also do not experience the dumbfounding lows of stocks.
Municipal bond funds just plod along from year to year, much like the
tortoise, producing consistent double tax-free results for shareholders.
<PAGE>
While being a tortoise may not be as glamorous as being a hare, this
should not represent a cause for concern. The end result is really what
counts - not how you got there, but that you got there at all.
CAPITAL PRESERVATION STRATEGIES
Although capital preservation is not guaranteed, the Fund does take
some very deliberate steps to ensure that there will be minimal volatility in
share price over a reasonable time frame.
The Fund's basic philosophy is "don't put all your eggs in one
basket." And, when you choose the eggs for that basket, choose only quality
ones.
DIVERSIFICATION is a key stability tool used in the construction of
the Fund's investment portfolio. At year-end 1996, over 150 separate
municipal issues were represented in the Fund's portfolio. Having such a
breadth of participation helps to ensure against any significant loss of
principal by the Fund in the remote event anything ever did go wrong with a
particular issuer. Such diversification also enables the Fund to participate
in financing many different vital public purpose projects in numerous
communities throughout Colorado, thereby benefitting residents of the entire
state.
We have found from experience that sticking with QUALITY is best in
the long run. Therefore, investments in the Fund are specifically limited to
only the top four credit ratings, or equivalent, of the nine assignable to
municipal securities by nationally-known credit rating services. At December
31, 1996, 98.8% of the portfolio was comprised of the top three credit
ratings - AAA, AA, AND A.
Emphasis is also placed on having a SPREAD OF MATURITIES in the
Fund's investment portfolio. As you probably are aware, short term maturities
tend to have very little price fluctuation, but produce a lesser rate of
return than longer maturity securities. Conversely, long-term maturities
produce a higher return level, but have a much higher price volatility factor
than shorter-term issues since they reflect the risks associated with the
unpredictability of future events and the potential interest rate changes
over the extended life of the municipal bond.
By creating a blend of maturities, ranging from under one year to
over 20 years in length, the Fund attempts to provide you with a satisfactory
level of return without subjecting the share price to excessive swings as
interest rates move up and down. Thus, the current average maturity of the
Fund's portfolio is the relatively intermediate term of 9 years.
The Fund's Investment Adviser, KPM Investment Management, Inc.,
examines the above elements very carefully when selecting each individual
"egg" for your basket of investments in order to obtain the most appropriate
fit. Such careful attention seeks to provide protection for shareholders'
capital and promote stability.
TAX-FREE RATE OF RETURN
What many investors sometime forget is that while the level of income
from the Fund may seem unimpressive on the surface, it is DOUBLE TAX-FREE -
free of both regular Federal and State of Colorado income taxes. When the
rate of return achieved by the Fund is converted into a taxable equivalent
rate, the outcome is generally quite an eye-opener.
The following chart shows the average annualized level of DOUBLE
TAX-FREE income return distributed to shareholders from January 1, 1996 to
December 31, 1996, as measured against the maximum public offering price.**
It additionally illustrates the rate of taxable income return one would have
had to earn in order to equate to the DOUBLE TAX-FREE income return generated
by the Fund.
<PAGE>
[Graphic of Bar Chart with the following information:]
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO'S DOUBLE TAX-FREE DISTRIBUTION
RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN
INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
Tax Bracket Taxable Equivalent Rate Double Tax-Free Distribution Rate
<S> <C> <C>
28% 7.25% 4.96%
31% 7.57% 4.96%
36% 8.30% 4.96%
39.6% 8.82% 4.96%
</TABLE>
No matter which Federal income tax bracket applies, you can readily
see that there is quite a difference between the TAXABLE and the DOUBLE
TAX-FREE return levels.
OUR PLEDGE TO YOU
Management of Tax-Free Fund of Colorado values the confidence you
have placed in us. You can be assured that we will steadfastly strive to help
you cross the finish line of your investment goal.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
** The performance shown represents that of Class A shares. Such performance
data quoted represents past performance and is not indicative of future
results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. The Fund's average annual total return as of
12/31/96 for the past one-year period was 3.78%; for the past five-year
period was 6.49%; and since inception was 7.21%. These returns do not take
into consideration the maximum sales charge of 4% or a small portion of
management fees which are being waived. Returns would be less if the sales
charge and full management fees were applied. As of 12/31/96, the Fund's
30-day SEC yield was 4.05%.
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The graph below illustrates the value of $10,000 invested in Class A
shares of Tax-Free Fund of Colorado at inception of the Fund in May, 1987 and
maintaining this investment through the Fund's latest fiscal year end,
December 31, 1996, as compared with a hypothetical similar size investment in
the Lehman Brothers Municipal Bond Index (the "Index") of municipal
securities and the Consumer Price Index (a cost of living index) over that
same period. The total return of the investment in the Fund is shown after
deduction of the maximum sales charge of 4% at the time of initial
investment. It also reflects deduction of the Fund's annual operating
expenses and reinvestment of monthly dividends and capital gains
distributions without sales charge. On the other hand, the Index does not
reflect any sales charge nor operating expenses but does reflect reinvestment
of interest. The performance of the Fund's other classes, first offered on
April 30, 1996, may be greater or less than the Class A shares performance
indicated on this graph, depending on whether greater or lesser sales charges
and fees were incurred by shareholders investing in the other classes.
It should also be specifically noted that the Index is nationally
oriented and consisted, over the period covered by the graph, of an unmanaged
mix of between 8,000 to 34,000 investment-grade long-term municipal
securities of issuers throughout the United States. However, the Fund's
investment portfolio consisted of a significantly lesser number of
investment-grade tax-free municipal obligations, principally of Colorado
issuers, over the same period. The maturities, market prices, and behavior of
the individual securities in the Fund's investment portfolio can be affected
by local and regional factors which might well result in variances from the
market action of the securities in the Index.
Consequently, much of the difference in performance of the Index
versus the Fund can be attributed to the lack of application of annual
operating expenses and initial sales charge to the Index. Additionally, a
portion of the difference in performance can be attributed to the different
characteristics in the single-state market of the securities in the Fund's
portfolio as compared with the national orientation of the securities in the
Index.
Since its inception, the Fund has been managed to provide as stable a
share value as possible consistent with producing a competitive income return
to shareholders. It has not been managed for maximum total return, since one
of the aims of management in structuring the portfolio of the Fund is to
reduce fluctuations in the price of the Fund's shares resulting from changes
in interest rates.
As can be observed, however, the pattern of the Fund's results and
that of the Index over the period since inception of the Fund track quite
similarly, even though they are not entirely comparable in character.
[Graphic of Line Chart with the following information:]
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON
LEHMAN BROTHERS FUND AFTER SALES COST OF
MUNICIPAL BOND INDEX CHARGE AND EXPENSES LIVING INDEX
<S> <C> <C> <C>
5/87 10,000 9,600 10,000
12/87 10,500 9,800 10,230
12/88 11,500 10,750 10,681
12/89 12,750 11,600 11,176
12/90 13,800 12,350 11,874
12/91 15,500 13,650 12,228
12/92 16,800 15,000 12,591
12/93 18,900 16,600 12,935
12/94 17,844 15,959 13,271
12/95 20,960 18,078 13,616
12/96 21,890 18,759 14,067
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
[Table with the following information:]
<TABLE>
<CAPTION>
FUND'S AVERAGE ANNUAL TOTAL RETURN
For the Period Ended 1 Year 5 Years Life of Fund
December 31, 1996 Since 5/21/87
<S> <C> <C> <C>
Including Sales (0.36%) 5.63% 6.76%
Charge and Expenses
</TABLE>
<PAGE>
1996 REVIEW
Interest rates proved to be relatively stable during 1996 when
compared to the previous two years. Yields on 10-year AAA Colorado municipal
bonds increased slightly from 4.80% at the end of 1995 to 4.95% in December
of 1996. Overall, the municipal bond market out-performed in price action the
taxable bond market as fears about tax reform abated and the quality of
municipal issuance improved. Despite the substantial increase in new issue
volume and stable bond market conditions, individual investors tended to show
more interest in pursuing the impressive investment returns in the equity
markets than the need for after-tax yield from municipal securities. We
believe this asset allocation shift is temporary and that demand for
municipals will increase as investors realign the risk profiles of their
portfolios when the stock market pauses or suffers any setback.
The investment strategy employed by the Tax-Free Fund of Colorado
during 1996 continued to emphasize intermediate-term maturities, high credit
quality and a high level of current yield. The weighted average maturity of
the Fund as of the end of the year 1996 was 8.9 years, the average credit
quality was AA+, and the 30-day average distribution yield on December 31,
1996 was 4.85%, as measured against maximum public offering price. It is
noteworthy that we were able to extend the call protection of the Fund to
about 6.5 years without lengthening maturities through careful switching of
various portfolio securities. We believe the Fund's portfolio is currently
well positioned for the next several years to provide a low level of share
price fluctuation from interest rate risk and above average income for the
portfolio's maturity structure.
1997 STRATEGY
The principal theme in our approach for 1997 in providing stable
share value will be to continue our focus on credit quality. Over the past
decade we have seen the yield difference between A-rated and AAA-rated
securities decline from 1.5% to about 0.4%. As the general level of interest
rates has dropped over this time period, various municipal bond buyers have
pursued a strategy of investing in lower quality bonds in an attempt to
replace the higher yields of bonds that have matured or been called. We
believe that at the present time, the yield pick-up offered by lower quality
bonds is not commensurate with the additional credit risk which must be
incurred by such an approach. We will continue to maintain our stance of high
credit quality until such time as yields on lower investment grade securities
warrant our attention. At such time, our knowledge of local issuers should
allow us to add these types of securities selectively to the Fund's portfolio
without undue credit risk. In the meantime, we will stay the course of our
long established market strategy in seeking low share price volatility and
high current income.
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Tax-Free Fund of Colorado:
We have audited the accompanying statement of assets and liabilities of
Tax-Free Fund of Colorado, including the statement of investments, as of
December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the five-year period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the
custodian and a broker. An audit also includes assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Fund of Colorado as of December 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
DECEMBER 31, 1996
RATING
FACE MOODY'S/ MARKET
AMOUNT GENERAL OBLIGATION BONDS (35.9%) S&P VALUE
<C> <S> <C> <C>
School Districts (18.7%)
$1,000,000 Adams County School District #1 Aaa/AAA $1,105,000
6.50%, 12/01/07, FGIC Insured
2,500,000 Adams County School District #12 Aaa/AAA 2,659,375
6.20%, 12/15/09, FGIC Insured
2,000,000 Adams County School District #12 Aaa/AAA 2,212,500
7.30%, 12/15/07, FGIC Insured
1,500,000 Arapahoe County, Cherry Creek
School District #5 Aa/AA 1,644,375
7.00%, 12/15/03
2,000,000 Boulder, Larimer & Weld County,
St. Vrain Valley School District
#RE-1J Series 1990 Aaa/AAA 2,112,500
5.70%, 12/15/06, MBIA Insured
775,000 Boulder, Larimer & Weld County, St.
Vrain Valley School District
#RE-1J Series 1990 Aaa/AAA 839,906
7.00%, 12/15/99, MBIA Insured
225,000 Boulder, Larimer & Weld County, St.
Vrain Valley School District
#RE-1J Series 1990 Aaa/AAA 242,156
7.00%, 12/15/05, MBIA Insured
2,000,000 Boulder, Larimer & Weld County Aaa/AAA 2,110,000
5.90%, 12/15/05, MBIA Insured
1,245,000 Boulder, Larimer & Weld County Aaa/AAA 1,336,819
5.875%, 12/15/06, MBIA Insured
1,500,000 Denver City & County School
District #1 Aaa/AAA 1,627,500
6.10%, 12/15/06, MBIA Insured
1,000,000 Douglas & Elbert Counties School
District #RE-1 Refunding Series
1991B Aaa/AAA 1,085,000
6.70%, 12/15/06, FGIC Insured
1,000,000 Douglas & Elbert Counties School
District # Re-1, Series 1992 Aaa/AAA 1,053,750
5.75%, 12/15/05, FGIC Insured
2,500,000 Douglas & Elbert Counties School
District # Re-1, Series 1992 Aaa/AAA 2,709,375
6.15%, 12/15/08, MBIA Insured
1,500,000 Eagle County School District #RE50J Aaa/AAA 1,578,750
6.95%, 12/01/03, FGIC Insured
2,320,000 Eagle County School District #RE50J,
Series 1999 Aaa/AAA 2,537,500
6.15%, 12/01/04, FGIC Insured
<PAGE>
400,000 El Paso County School District #20 Aaa/AAA 412,724
8.00%, 12/01/06, MBIA Insured
1,145,000 El Paso County School District #20 Aaa/AAA 1,197,956
5.50%, 12/01/07, MBIA Insured
1,330,000 El Paso County School District #20 Aaa/AAA 1,472,975
6.25%, 12/01/08, MBIA Insured
1,600,000 Jefferson County School District
# R-1 Aaa/AAA 1,706,000
6.00%, 12/15/06, AMBAC Insured
4,000,000 Jefferson County, School District,
#R-001 Aaa/AAA 4,240,000
6.00%, 12/15/07, AMBAC Insured
2,165,000 Interstate South Metropolitan
District NR/A+ 2,202,888
5.75%, 12/01/09, LOC FBS
1,045,000 Pitkin County Colorado School
District #1 (ASPEN) Aaa/AAA 1,127,294
5.85%, 11/15/03, AMBAC Insured
1,790,000 Pitkin County, Aspen School
District #1 Series 1989 Aaa/AAA 1,919,775
5.95%, 11/15/05, AMBAC Insured
1,050,000 Summit County School District,
Series A Aaa/AAA 1,092,000
5.40%, 12/01/06, FGIC Insured
40,226,118
City & County (7.7%)
500,000 Boulder County Open Space
Acquisition Aa1/AA 533,750
6.90%, 08/15/04
1,000,000 Denver City & County Refunding-Water Aa/AA 1,036,250
5.85%, 09/01/07
500,000 Denver Colorado City & County
Unlimited Tax, Aa/AA 546,875
6.90%, 08/01/02
1,000,000 Denver Colorado City & County
Unlimited Tax, Aa/AA 1,088,750
7.00%, 08/01/03
1,785,000 Fort Collins, Refunding Aa/AA 1,883,175
6.05%, 12/01/07
750,000 Greeley Water & Improvement Refunding A1/AA- 791,250
7.50%, 08/01/98
1,530,000 Left Hand Water District, Series 1996 Aaa/AAA 1,602,675
5.75%, 11/15/08
500,000 Louisville, CO Water Refunding Aaa/AAA 523,125
7.10%, 12/01/02, FGIC Insured
<PAGE>
1,085,000 Snowmass Refunding Aaa/AAA 1,178,581
6.95%,11/15/05, FSA Insured
2,000,000 Thornton, CO Refunding Aaa/AAA 2,135,000
6.00%, 12/01/05, FGIC Insured
2,000,000 Thornton, CO, Refunding-Spur A Aaa/AAA 2,107,500
5.60%, 12/01/06, FGIC Insured
2,000,000 Thornton, CO, Refunding-Spur A Aaa/AAA 2,130,000
6.05%, 12/01/06, FGIC Insured
1,000,000 Westminster Colorado Water Series
1992 A A1/AA- 1,052,500
6.25%, 12/01/07
16,609,431
Metropolitan District (4.8%)
2,500,000 Boulder Colorado Central Area
Improvement Aaa/AAA 2,615,625
6.30%, 08/15/07, FGIC Insured
1,000,000 Castle Rock Ranch Public
Improvements NR/AAA 1,048,750
5.90%, 12/01/03
1,000,000 Highlands Ranch Metropolitan
District #4 Aa1/AAA 1,037,500
5.80%, 12/01/07, LOC Swiss Bank
1,530,000 Highlands Ranch Metropolitan District
#1, Refunding Aaa/AAA 1,635,188
6.25%, 09/01/06, MBIA Insured
1,500,000 Meridian Metropolitan District A3/NR 1,569,375
7.00%, 12/01/99
1,000,000 Westglenn Metropolitan District
Colorado, NR/A+ 1,056,250
6.25%, 12/01/08, LOC FBS
1,260,000 Westglenn Metropolitan District
Colorado Jefferson County
Refunding, NR/A+ 1,305,675
5.65%, 12/01/04, LOC FBS
10,268,363
Water & Sewer (2.4%)
1,750,000 Centennial Water & Sewer District Aa1/AAA 1,839,688
5.80%, 12/01/07, LOC Swiss Bank
1,220,000 Inverness Water & Sanitation District
Colorado Arapahoe & Douglas
Counties Refunding, Aaa/AAA 1,311,500
6.30%, 12/01/05, MBIA Insured
<PAGE>
1,000,000 Southgate Colorado Water District
Arapahoe & Douglas Counties Aaa/AAA 1,045,000
7.05%, 12/01/01, FGIC Insured
1,000,000 Southgate Colorado Water District
Arapahoe & Douglas Counties Aaa/AAA 1,048,750
7.20%, 12/01/05, FGIC Insured
5,244,938
Hospital (2.3%)
750,000 Poudre Valley Colorado Hospital
District Aa/AA- 793,125
6.75%, 11/15/98
2,000,000 Poudre Valley Hospital District,
Refunding Aa/AA- 2,022,500
5.375%, 11/15/07
1,000,000 Poudre Valley Hospital District,
Refunding Aa/AA- 1,095,000
6.50%, 12/01/04
1,000,000 Pueblo County Colorado Hospital
Facilities, Series A Aaa/AAA 1,092,500
6.80%, 09/01/05, MBIA Insured
5,003,125
Total General Obligation Bonds 77,351,975
REVENUE BONDS (62.4%)
Higher Education (12.7%)
1,000,000 Aurora Educational Development
Community College Series 1990 Aaa/AAA 1,082,500
7.10%, 04/01/02, MBIA Insured
1,000,000 Aurora Educational Development
Revenue Bonds Aaa/AAA 1,086,250
7.25%, 04/01/05 MBIA Insured
1,580,000 City of Aurora Colorado Educational
Development Refunding Bonds Series
1994 NR/BBB 1,637,275
6.00%, 10/15/07
1,000,000 Colorado Post Secondary Educational
Facility,
Regis University Project NR/AAA 1,061,250
6.35%, 06/01/05, Connie Lee Insured
1,235,000 Colorado Post Secondary Educational
Facility, Regis University Project NR/AAA 1,312,187
6.30%, 03/01/07, Connie Lee Insured
<PAGE>
1,000,000 Colorado Post Secondary Educational
Facilities Authority Refunding
Revenue Bonds Series 93, NR/AAA 1,031,250
5.95%, 03/01/09
1,000,000 Colorado State Board of Agriculture
Revenue, Fort Lewis College Aaa/AAA 1,082,500
6.50%, 10/01/06, FGIC Insured
1,000,000 Colorado State Board of Agriculture
Revenue, University of Southern
Colorado Auxiliary Facility Aaa/AAA 1,062,500
6.25%, 08/01/07, AMBAC Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding & Improvement Aaa/AAA 1,066,250
6.35%, 03/01/08, MBIA Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding, Colorado State
University Student Sports, Aaa/AAA 1,022,500
5.40%, 04/01/06, MBIA Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding, Colorado State
University Student Sports, Aaa/AAA 1,005,000
5.45%, 04/01/08, MBIA Insured
2,655,000 Board of Trustees State Colleges
Colorado Auxiliary Facilities
System Revenue Bonds
(Western State Colleges Project) NR/AAA 2,943,731
6.60%, 05/01/08, Connie Lee Insured
1,500,000 Colorado Student Obligation Board
Authority Student Loan Revenue A/NR 1,546,875
6.00%, 09/01/01, MBIA Insured
1,860,000 Colorado State Colleges Western
State, Aaa/AAA 1,897,200
5.50%, 05/15/09, MBIA Insured
1,000,000 Larimer County, Colorado State
University Research Fund Aaa/AAA 1,015,610
7.00%, 04/01/03, BIGI Insured
1,000,000 Larimer County, Colorado School
No. R1 Aaa/AAA 1,055,000
6.15%, 12/15/08, MBIA Insured
1,500,000 Larimer County, Colorado School
No. R1 Refunding A/NR 1,524,375
5.40%, 12/15/04
420,000 University of Colorado, Student
Recreation Center Aaa/AAA 445,725
7.00%, 06/01/99, MBIA Insured
<PAGE>
500,000 University of Colorado Regents
Research Building Revolving Fund
Revenue NR/A+ 529,375
6.85%, 06/01/03
320,000 University of Colorado Revenue Aaa/AAA 348,000
7.10%, 06/01/02, MBIA Insured
1,000,000 University of Colorado Research
Building Revenue Aaa/AAA 1,052,500
6.00%, 06/06/06, MBIA Insured
1,000,000 University of Colorado Revenue Aaa/AAA 1,057,500
6.20%, 06/01/07, MBIA Insured
1,500,000 State of Colorado University of
Northern Colorado Auxiliary
Facilities Aaa/AAA 1,563,750
5.75%, 06/01/07, MBIA Insured
27,429,103
Electric (10.2%)
8,000,000 Adams County Colorado Pollution
Control Revenue Public Service Aaa/AAA 8,220,000
5.625%, 04/01/08, MBIA Insured
2,000,000 Colorado Springs Utility Revenue
Series 1991 A Aa/AA 2,197,500
6.75%, 11/15/05
1,460,000 Colorado Springs Utility Revenue Aa/AA 1,511,100
5.50%, 12/15/05
2,125,000 Moffat County Colorado Pollution
Control Revenue Aaa/AAA 2,228,594
5.625%, 11/01/06, AMBAC Insured
1,210,000 Moffat County Colorado Pollution
Control Revenue Aaa/AAA 1,265,962
5.50%, 11/01/03, AMBAC Insured
3,000,000 Platte River Power Authority Aa/A+ 3,088,230
6.75%, 06/01/07
2,000,000 Platte River Power Authority Aa/A+ 2,120,000
6.00%, 06/01/06
1,315,000 Platte River Power Authority Power
Revenue Series BB Aa/A+ 1,380,750
6.125%, 06/01/09
22,012,136
<PAGE>
Sales Tax (8.1%)
1,000,000 Arvada Colorado Sales & Use Tax
Revenue Aaa/AAA 1,046,250
6.10%, 12/01/07, FGIC Insured
2,000,000 Boulder County Colorado Open Space
& Use Tax Revenue Bonds Series
1994 FGIC Insured, Aaa/AAA 2,107,500
5.75%, 12/15/04
905,000 Castle Rock Sales & Use Tax Revenue Aaa/AAA 917,317
6.85%, 06/01/00, MBIA Insured
500,000 Denver City & County Excise Tax Aaa/AAA 533,125
6.90%, 09/01/00, MBIA Insured
1,000,000 Denver Metro Major League Baseball
Stadium Excise Tax Revenue Aaa/AAA 1,086,250
6.35%, 10/01/03, FGIC Insured
2,000,000 Denver Metro Major League Baseball
Stadium Excise Tax Revenue Aaa/AAA 2,180,000
6.45%, 10/01/04, FGIC Insured
1,000,000 Fort Collins Downtown Development
Authority Tax Increment Revenue Aaa/AAA 1,061,250
6.50%, 06/01/07, MBIA Insured
2,045,000 Fort Collins Sales & Use Tax Revenue Aaa/AAA 2,091,012
5.375%, 12/01/06, FGIC Insured
1,000,000 Jefferson County Districtwide Sales
Tax Aaa/AAA 1,067,500
6.10%, 12/01/04, MBIA Insured
500,000 Mesa County Sales Tax Revenue Aaa/AAA 526,250
7.40%, 06/01/00, MBIA Insured
2,065,000 Mesa County Sales Tax Revenue Aaa/AAA 2,240,525
6.00%, 12/01/06, MBIA Insured
500,000 Thornton Sales & Use Tax Revenue Aaa/AAA 530,625
6.70%, 09/01/99, FGIC Insured
1,000,000 Thornton Sales & Use Tax Revenue Aaa/AAA 1,057,500
6.80%, 09/01/01, FGIC Insured
1,000,000 Westminster Sales & Use Tax 1991 Aaa/AAA 1,085,000
6.70%, 12/01/01, FGIC Insured
17,530,104
<PAGE>
Water & Sewer (8.7%)
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,112,500
6.90%, 09/01/04
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,116,250
7.00%, 09/01/05
1,000,000 Colorado Water Resource & Power
Development Authority, Clean Aa/AA 1,037,500
Water Revenue, 5.35%, 09/01/06
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,116,250
7.00%, 09/01/06
500,000 Colorado Water Resource & Power
Development Authority, Series B Aa/AA+ 557,500
6.875%, 09/01/05
500,000 Colorado Water Resource & Power
Development Authority, Aaa/AAA 544,375
7.00%, 11/01/00
1,000,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,090,000
6.80%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,091,250
6.50%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power
Development Authority Aa/AA 1,072,500
6.00%, 09/01/06
1,100,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,133,000
5.45%, 11/01/07, FGIC Insured
1,965,000 Fort Collins Colorado Wastewater
Sewer Revenue Aaa/AAA 1,984,650
5.375%, 12/01/08, FGIC Insured
1,000,000 Loveland Sewer Revenue Series 1989 Aaa/AAA 1,063,750
6.80%, 11/01/01, MBIA Insured
1,000,000 Metro Wastewater Reclaimation
District, Gross Revenue Series A1/AA 1,048,750
5.70%, 04/01/05
1,055,000 Metro Wastewater Reclaimation
District, Gross Revenue Series A1/AA 1,106,431
5.80%, 04/01/06
<PAGE>
1,010,000 Northglenn Colorado Water & Sewer Aaa/AAA 1,079,438
5.75%, 12/01/06, FSA Insured
1,500,000 Parker Water and Sanitation District
Revenue Refunding Aaa/AAA 1,575,000
6.10%, 10/01/07, FGIC Insured
1,000,000 Westminster Colorado Water &
Wastewater Utility Enterprise-Water
And Wastewater Revenue Series 1994 Aaa/AAA 1,073,750
5.70%, 12/01/04, AMBAC Insured
18,802,894
Hospital (4.0%)
2,255,000 Colorado Health Facility Community
Provider Pooled Loan Revenue Aaa/AAA 2,500,231
7.20%, 07/15/05, FSA Insured
980,000 Colorado Health Facility Community
Provider Pooled Loan Program Aaa/AAA 990,574
7.40%, 07/15/99, MBIA Insured
1,000,000 Colorado Health Facility Authority
Sisters of Charity Health Care Aaa/AAA 1,097,500
6.25%, 05/15/09, AMBAC Insured
2,030,000 Colorado Health Facility Authority
Hospital Revenue North Colorado
Medical Center Aaa/AAA 2,134,038
5.60%, 05/15/05, MBIA Insured
1,410,000 Colorado Health Facility Authority
Hospital Revenue Boulder Community
Hospital Aaa/AAA 1,484,025
5.65%, 10/01/06, MBIA Insured
300,000 Denver City & County Revenue Refunding
for St. Anthony's Hospital Series
1988 Aaa/AAA 322,125
7.10%, 05/01/00, MBIA Insured
8,528,493
Housing (9.5%)
1,600,000 Adams County Colorado Multi-family
Housing Revenue, Brittany Station
Series A, FNMA NR/AAA 1,634,000
5.400%, 09/01/25
990,000 City of Arvada Colorado Multi-family
Housing Revenue, Springwood, GNMA NR/AAA 1,002,375
5.60%, 08/20/08
<PAGE>
655,000 Colorado Housing Finance Authority
1991, Series A NR/A 688,569
6.90%, 05/01/01
275,000 Colorado Housing Finance Authority
1991, Series A-3 NR/AA 284,282
6.10%, 11/01/00
280,000 Colorado Housing Finance Authority
1991, Series A-1 NR/AA 291,900
6.20%, 11/01/01
1,480,000 Colorado Housing Finance Authority,
SFM Series A-2 NR/AA 1,563,250
6.65%, 11/01/06
1,090,000 Colorado Housing Finance Authority,
SFM Series 1994C Aa/NR 1,130,875
6.00%, 12/01/04
1,255,000 Colorado Housing Finance Authority,
SFM Series A-2 Aa/NR 1,283,238
5.75%, 11/01/10
3,185,000 Colorado Housing Finance Authority,
SFM Series D-2 Aa/NR 3,224,812
5.625%, 06/01/10
2,535,000 Colorado Housing Finance Authority,
SFM Series 1994C Aa/NR 2,626,894
6.25%, 12/01/12
430,000 Commerce City Single Family Revenue
Series A A/NR 449,350
6.875%, 03/01/12
1,000,000 Littleton Assisted Living Building
Authority, Amity Plaza Project
Multi-family Housing Revenue Bond
Series 1994 NR/A+ 1,041,250
6.10%, 03/01/06
1,500,000 Snowmass Village Multi-family Revenue
Refunding Aaa/AAA 1,565,625
6.30%, 12/15/08
440,000 Southwestern Colorado Single Family
Revenue Partnership, Refunding A/NR 461,450
7.10%, 09/01/04
235,000 Summit County Single Family Revenue
Refunding Series A A/NR 244,400
7.25%, 12/01/04
3,000,000 Westminster Colorado Multi-family
Revenue Refunding, Oasis Wexford
Apartments NR/AAA 3,063,750
5.35%, 12/01/25, FNMA
20,556,020
Industrial Development Revenue (3.6%)
4,750,000 Boulder County Industrial Development
Revenue Refunding May Department
Stores Company Project NR/A 5,029,062
6.25%, 09/01/07
<PAGE>
720,000 Denver City & County Industrial
Development Revenue NR/A 741,600
6.40%, 12/01/10
1,860,000 Denver City & County, Industrial
Development Revenue, Rollie R.
Kelley Project NR/A 1,936,725
7.00%, 06/01/06
7,707,387
Transportation (1.8%)
1,000,000 Arapahoe County Colorado E-470
Vehicle Registration Revenue Bonds,
MBIA Insured Aaa/AAA 1,030,000
5.45%, 08/31/07
1,550,000 Regional Transportation District Sales
Tax Revenue A1/AA- 1,674,000
6.05%, 11/01/04
1,000,000 Regional Transportation District Sales
Tax Revenue Aaa/AAA 1,068,750
6.15%,11/01/05, FGIC Insured
3,772,750
Lease (2.3%)
600,000 Arapahoe Library District, Adams &
Arapahoe Counties COP Aaa/AAA 663,000
7.00%, 12/15/02, FGIC Insured
405,000 Boulder Municipal Property Authority
Lease Purchase Revenue, Series B Aaa/AAA 418,397
7.20%, 12/01/00 BIGI Insured
215,000 Denver City & County School District
#1, COP Aaa/AAA 222,349
6.80%, 12/15/98, FGIC Insured
185,000 Denver City & County School District
#1, COP Aaa/AAA 192,304
6.80%, 12/15/98, FGIC Insured
560,000 Denver City & County School District
Lease Purchase Agreement Aaa/AAA 582,366
6.85%, 12/15/99, FGIC Insured
640,000 Denver City & County School District Aaa/AAA 660,665
6.85%, 12/15/99, FGIC Insured
475,000 Denver City & County School District
#1, COP Aaa/AAA 514,188
6.95%, 12/15/00, FGIC Insured
525,000 Denver City & County School District Aaa/AAA 568,969
6.95%, 12/15/00, FGIC Insured
1,000,000 Denver City & County School District
#1, COP Aaa/AAA 1,032,500
5.60%, 06/01/08, FGIC Insured
4,854,738
<PAGE>
Miscellaneous Revenue (1.5%)
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,085,000
6.50%, 12/01/02
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,083,750
6.60%, 12/01/03
1,000,000 South Suburban Park & Recreational
District Baa/NR 1,032,500
6.00%, 11/01/07
3,201,250
Total Revenue Bonds 134,394,875
Total Investments - 98.3%
(Cost $202,878,442*) 211,746,850
Other assets in excess of
liabilities - 1.7% 3,560,974
Net Assets - 100% $215,307,824
<FN>
* Cost for Federal tax purposes is identical.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<S> <C>
ASSETS
Investments at value (identified cost $202,878,442) $ 211,746,850
Cash 3,047,255
Interest receivable 2,023,428
Receivable for Fund shares sold 189,296
Total assets 217,006,829
LIABILITIES
Payable for investment securities purchased 1,340,777
Dividends payable 118,672
Adviser and Administrator fees payable 87,431
Accrued expenses 78,966
Payable for Fund shares redeemed 45,140
Distribution fees payable 28,019
Total liabilities 1,699,005
NET ASSETS $ 215,307,824
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 206,825
Additional paid-in capital 206,788,512
Accumulated net loss on investments (555,921)
Net unrealized appreciation on investments 8,868,408
$ 215,307,824
CLASS A
Net Assets $ 214,392,300
Capital shares outstanding 20,594,503
Net asset value and redemption price per share $10.41
Offering price per share (100/96 of $10.41 adjusted to
nearest cent) $10.84
CLASS C
Net Assets $ 915,420
Capital shares outstanding 87,960
Net asset value and offering price per share $ 10.41
Redemption price per share (*varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 104
Capital shares outstanding 10
Net asset value, offering and redemption price per share $ 10.41
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Interest income $12,263,903
Expenses:
Investment Adviser fees (note B) $429,691
Administrator fees (note B) 644,125
Transfer and shareholder servicing agent fees 137,101
Distribution fees (note B) 109,809
Legal fees 63,601
Trustees' fees and expenses (note G) 59,804
Shareholders' reports and proxy statements 53,456
Audit and accounting fees 31,909
Custodian fees (note F) 29,390
Registration fees and dues 18,964
Insurance 4,335
Miscellaneous 30,190
1,612,375
Investment Advisory fees waived (note B) (7,388)
Administration fees waived (note B) (99,853)
Expenses paid indirectly (note F) (29,390)
Net expenses 1,475,744
Net investment income 10,788,159
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 110,498
Change in unrealized appreciation on investments (3,150,185)
Net realized and unrealized gain (loss) on
investments (3,039,687)
Net increase in net assets resulting from operations $7,748,472
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED
DECEMBER 31,
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,788,159 $ 11,118,030
Net realized gain (loss) from securities
transactions 110,498 (610,206)
Change in unrealized appreciation
(depreciation) on investments (3,150,185) 15,943,831
Change in net assets from operations 7,748,472 26,451,655
DISTRIBUTIONS TO SHAREHOLDERS (NOTE E):
Class A Shares:
Net investment income (10,779,866) (11,118,030)
Distributions in excess of net investment
income (236,198) -
Net realized gain on investments - -
Class C Shares:
Net investment income (8,288) -
Distributions in excess of net investment
income (229) -
Net realized gain on investments - -
Class Y Shares:
Net investment income (5) -
Distributions in excess of net investment
income - -
Net realized gain on investments - -
Change in net assets from distributions (11,024,586) (11,118,030)
CAPITAL SHARE TRANSACTIONS (NOTE H):
Proceeds from shares sold 22,599,522 20,448,079
Reinvested dividends and distributions 6,733,129 6,682,125
Cost of shares redeemed (30,054,520) (22,233,430)
Change in net assets from capital share
transactions (721,869) 4,896,774
Change in net assets (3,997,983) 20,230,399
NET ASSETS:
Beginning of period 219,305,807 199,075,408
End of period $ 215,307,824 $219,305,807
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Tax-Free Fund of Colorado (the "Fund"), a non-diversified, open-end
investment company, was organized in February, 1987 as a Massachusetts
business trust and commenced operations on May 21, 1987. The Fund is
authorized to issue an unlimited number of shares and, since its inception to
April 30, 1996, offered only one class of shares. On that date, the Fund
began offering two additional classes of shares, Class C and Class Y shares.
All shares outstanding prior to that date were designated as Class A shares
and, as was the case since inception, are sold with a front-payment sales
charge and bear an annual service fee. Class C shares are sold with a
level-payment sales charge with no payment at time of purchase but level
service and distribution fees from date of purchase through a period of six
years thereafter. A contingent deferred sales charge is assessed to any Class
C shareholder who redeems shares of this Class within one year from the date
of purchase. The Class Y shares are only offered to institutions acting for
an investor in a fiduciary, advisory, agency, custodian or similar capacity.
They are not available to individual retail investors. Class Y shares are
sold at net asset value without any sales charge, redemption fees, contingent
deferred sales charge or distribution or service fees. All classes of shares
represent interests in the same portfolio of investments in the Fund and are
identical as to rights and privileges. They differ only with respect to the
effect of sales charges, the distribution and/or service fees borne by the
respective class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privileges of each class.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
(1) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued each business day based upon
information provided by a nationally prominent independent pricing
service and periodically verified through other pricing services; in the
case of securities for which market quotations are readily available,
securities are valued at the mean of bid and asked quotations and, in
the case of other securities, at fair value determined under procedures
established by and under the general supervision of the Board of
Trustees. Securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or
less, or by amortizing their unrealized appreciation or depreciation on
the 61st day prior to maturity, if their term to maturity at purchase
exceeded 60 days.
In Fiscal 1996, the Fund began amortizing bond premium using the
constant yield method. Accordingly, net unrealized appreciation and
additional paid-in capital have been adjusted by equal amounts at the
beginning of the year. This change had no effect on the Fund's net asset
value or distribution policy and conforms to the amortization policy
followed by the Fund for Federal tax purposes.
(2) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Interest income is recorded daily on the accrual basis and is adjusted
for amortization of premium and accretion of original issue discount.
Market discount is recognized upon disposition of the security.
<PAGE>
(3) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The
Fund intends to make distributions of income and securities profits
sufficient to relieve it from all, or substantially all, Federal income
and excise taxes.
(4) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on the
relative net assets of each class. Class-specific expenses, which
include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly to
such class.
(5) 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 at the date of the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Fund are conducted through two separate
management arrangements.
KPM Investment Management, Inc. (the "Adviser") became Investment Adviser
to the Fund effective July 1, 1994. (Kirkpatrick, Pettis, Smith, Polian Inc.,
of which the Adviser is a wholly-owned subsidiary, was the predecessor
Investment Adviser beginning October 1, 1992.) In this role, under an
Investment Advisory Agreement, the Adviser supervises the Fund's investments
and provides various services to the Fund for which it is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.20 of 1% of the entire net assets of the Fund.
This fee will be reduced to 0.16% if certain payments are made under the
Fund's Distribution Plan relative to Class A Shares.
The Fund also has an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Fund's founder and sponsor. Under this
Agreement, the Administrator provides all administrative services, other than
those relating to the management of the Fund's investments. These include
providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the
Fund such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor and additionally maintaining the Fund's accounting
books and records. For its services, the Administrator is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.30 of 1% of the entire net assets of the Fund.
This fee will be reduced to 0.24% if certain payments are made under the
Fund's Distribution plan relative to Class A Shares.
Specific details as to the effect of the Fund's payments under its
Distribution Plan, as described below, on the above management fees and as
to the nature and extent of the services provided by the Adviser and the
Administrator are more fully defined in the Fund's Prospectus and Statement
of Additional Information.
The Adviser and the Administrator each agrees that the above fees
shall be reduced, but not below zero, by an amount equal to its pro-rata
portion (determined on the basis of the respective fees computed
<PAGE>
as described above) of the amount, if any, by which the total expenses of
the Fund in any fiscal year, exclusive of taxes, interest and brokerage
fees, shall exceed the lesser of (i) 2.5% of the first $30 million of
average annual net assets of the Fund plus 2% of the next $70 million of
such assets and 1.5% of its average annual net assets in excess of $100
million, or (ii) 25% of the Fund's total annual investment income. No such
reduction in fees was required during the year ended December 31, 1996.
For the year ended December 31, 1996, the Fund incurred fees under the
Advisory Agreement and Administration Agreement of $429,691 and $644,125,
respectively, of which amounts the Adviser and Administrator voluntarily
waived $7,388 and $99,853, respectively.
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Fund's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the facilities of
these dealers having offices within Colorado, with the bulk of sales
commissions inuring to such dealers. For the year ended December 31, 1996,
the Distributor received sales commissions in the amount of $83,492.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part
of the Plan, with respect to Class A Shares, the Fund is authorized to make
service fee payments to broker-dealers or others ("Qualified Recipients")
selected by the Distributor, including, but not limited to, any principal
underwriter of the Fund, with which the Distributor has entered into written
agreements contemplated by the Rule and which have rendered assistance in the
distribution and/or retention of the Fund's shares or servicing of
shareholder accounts. The Fund makes payment of this service fee at the
annual rate of 0.05% of the Fund's average net assets represented by Class A
Shares. The Board of Trustees and shareholders approved an amendment to the
Fund's Distribution Plan applicable to Class A Shares which will permit the
Fund to make service fee payments at the rate of 0.15 of 1% on the entire net
assets represented by Class A Shares. However, there will be a simultaneous
reduction in the fee payable to the Adviser from an annual rate of 0.20 of 1%
to 0.16% and in the fee payable to the Administrator from an annual rate of
0.30 of 1% to 0.24% on all net assets. The combined payments of these fees
will accordingly remain at the current level of 0.55 of 1% of the average
annual net assets represented by the Class A Shares. However, management of
the Fund has determined that implementation of the changes should be
indefinitely postponed. For the year ended December 31, 1996, service fees on
Class A Shares amounted to $107,593, of which the Distributor received
$2,606.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C shares
or servicing of shareholder accounts. These payments are made at the annual
rate of 0.75% of the Fund's net assets represented by Class C Shares and for
the period April 30, 1996 through December 31, 1996, amounted to $1,662, of
which the Distributor received $1,662.
In addition, under a Shareholder Services Plan, the Fund is authorized to
make service fee payments with respect to Class C Shares to Qualified
Recipients for providing personal services and/or maintenance of shareholder
accounts. These payments are made at the annual rate of 0.25% of the Fund's
net assets represented by Class C Shares and for the period April 30, 1996
through December 31, 1996, amounted to $554, of which the Distributor
received $554.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
<PAGE>
NOTE C - PURCHASES AND SALES OF SECURITIES:
During the year ended December 31, 1996, purchases of securities and
proceeds from the sales of securities aggregated $23,330,570 and $25,335,469,
respectively.
At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to approximately $8,900,000 and aggregate gross unrealized depreciation for
all securities in which there is an excess of tax cost over market value
amounted to approximately $38,000 for an approximate net unrealized
appreciation of $8,870,000. At December 31, 1996, the Fund has a capital loss
carryover of approximately $556,000 of which $15,000 expire on December 31,
2002 and $541,000 expire on December 31, 2003. This carryover is available to
offset future net realized gains on securities transactions to the extent
provided for in the Internal Revenue Code. To the extent that this loss is
used to offset future realized capital gains, it is probable the gains so
offset will not be distributed.
NOTE D - PORTFOLIO ORIENTATION:
Since the Fund invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Colorado, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Colorado and whatever
effects these may have upon Colorado issuers' ability to meet their
obligations.
NOTE E - DISTRIBUTIONS:
The Fund declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Colorado
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized
securities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. Also, annual capital
gains distributions, if any, are taxable.
NOTE F - CUSTODIAN FEES:
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the year ended December 31, 1996,
the Fund's custodian fees amounted to $29,390, all of which was offset by
such credits. It is the general intention of the Fund to invest, to the
extent practicable, some or all cash balances in income-producing assets
rather than leave cash on deposit with the custodian.
NOTE G - TRUSTEES FEES AND EXPENSES:
During the fiscal year from January 1, 1996 through December 31, 1996,
there were seven Trustees. Trustees' fees paid during the year were at the
annual rate of $5,000 for carrying out their responsibilities and attendance
at regularly scheduled Board Meetings. If additional or special meetings are
scheduled for the Fund, separate meeting fees are paid for each such meeting
to those Trustees in attendance. The Fund also reimburses Trustees for
expenses such as travel, accommodations, and meals incurred in connection
with attendance at regularly scheduled or special Board Meetings and at the
Annual Meeting and outreach meetings of Shareholders. For the fiscal year
ended December 31, 1996, such reimbursements averaged approximately $3,900
per Trustee. One of the Trustees, who is affiliated with the Administrator,
is not paid any Trustee fees.
<PAGE>
NOTE H - CAPITAL SHARE TRANSACTIONS:
<TABLE>
Transactions in Capital Shares of the Fund were as follows:
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares
sold 2,086,373 $ 21,654,023 1,989,814 $ 20,448,079
Reinvested dividends
and distributions 648,241 6,730,082 647,189 6,682,125
Cost of shares redeemed (2,898,027) (30,020,808) (2,154,129) (22,233,430)
Net change (163,413) $ (1,636,703) 482,874 $ 4,896,774
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
CLASS C SHARES:
Proceeds from shares
sold 90,792 $ 945,399
Reinvested dividends
and distributions 316 3,043
Cost of shares redeemed (3,148) (33,712)
Net change 87,960 $ 914,730
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
CLASS Y SHARES:
Proceeds from shares
sold 10 $ 100
Reinvested dividends
and distributions - 4
Cost of shares redeemed - -
Net change 10 $ 104
<S> <C> <C> <C> <C>
Total transactions in
Fund shares (75,443) $ (721,869) 482,874 $ 4,896,774
<FN>
* From April 30, 1996 (date of inception) through December 31, 1996.
</FN>
<PAGE>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>
Class C(2) Class Y(2) Class A(1)
Period ended Year ended December 31
December 31, 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.31 $10.31 $10.56 $9.82 $10.77 $10.38 $10.18
Income from Investment
Operations:
Net investment
income 0.28 0.38 0.52 0.54 0.55 0.57 0.61
Net gain (loss) on
securities (both
realized and
unrealized) 0.12 0.12 (0.13) 0.74 (0.95) 0.55 0.28
Total from Investment
Operations 0.40 0.50 0.39 1.28 (0.40) 1.12 0.89
Less Distributions:
Dividends from net
investment income (0.30) (0.40) (0.54) (0.54) (0.55) (0.57) (0.61)
Distributions from
capital gains - - - - - (0.16) (0.08)
Total Distributions (0.30) (0.40) (0.54) (0.54) (0.55) (0.73) (0.69)
Net Asset Value, End
of Period $10.41 $10.41 $10.41 $10.56 $9.82 $10.77 $10.38
Total Return (not
reflecting sales
charge) (%) 3.78# 4.87# 3.78 13.28 (3.80) 11.10 9.00
Ratios/Supplemental
Data
Net Assets, End of
Period ($ thousands) 915 0.1 214,392 219,306 199,075 222,277 174,031
Ratio of Expenses to
Average Net Assets
(%) 1.64* 0.64* 0.69 0.63 0.57 0.53 0.45
Ratio of Net
Investment Income to
Average Net Assets
(%) 4.08* 5.08* 5.03 5.21 5.36 5.32 5.90
Portfolio Turnover
Rate (%) 10.96 10.96 10.96 14.20 15.53 20.89 25.88
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary waiver
of fees, the Administrator's voluntary expense reimbursement and the expense
offset in custodian fees for uninvested cash balances would have been:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment
Income ($) 0.27 0.37 0.51 0.52 0.53 0.55 0.59
Ratio of Expenses to
Average Net Assets
(%) 1.70* 0.70* 0.75 0.77 0.76 0.73 0.70
Ratio of Net Investment
Income to Average Net
Assets (%) 4.02* 5.02* 4.97 5.07 5.17 5.12 5.65
<FN>
(1) Designated as Class A Shares on April 30, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 30, 1996.
</FN>
<FN>
# Not annualized
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
Note: On April 19, 1991, Norwest Bank Denver, NA (formerly United Bank of
Denver NA), originally the Fund's Investment Adviser, became Sub-Adviser and
Norwest Bank Minnesota, NA became Investment Adviser upon completion of a
merger with Norwest Corporation. On October 1, 1992, Kirkpatrick, Pettis,
Smith, Polian Inc. became the Fund's Investment Adviser. On July 1, 1994,
KPM Investment Management, Inc. a wholly-owned subsidiary of Kirkpatrick,
Pettis, Smith, Polian Inc., became the Fund's Investment Adviser.
See accompanying notes to financial statements.
<PAGE>
REPORT ON THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED)
Special Meetings of Shareholders of Tax-Free Fund of Colorado (the
"Fund") were held on April 19, 1996 for the Fund's Class C and Class Y
Shareholders.* At the Special Meeting of Class C Shareholders of the Fund,
the Class C Shareholders voted on and unanimously approved amendments to the
Fund's Distribution Plan affecting the interests of the Class C Shareholders
of the Fund. At the Special Meeting of Class Y Shareholders of the Fund, the
Class Y Shareholders voted on and unanimously approved amendments to the
Fund's Distribution Plan affecting the interests of the Class Y Shareholders
of the Fund.
The Annual Meeting of Shareholders of the Fund was held on June 19,
1996.** At the meeting, the following matters were submitted to a
shareholder vote and approved:
(i) the election of Lacy B. Herrmann, Tucker Hart Adams, Arthur K.
Carlson, William M. Cole, Anne J. Mills, J. William Weeks, and John G.
Welles as Trustees to hold office until the next annual meeting of the
Fund's shareholders or until his or her successor is duly elected
(each Trustee received at least 15,813,939 affirmative votes
(98.34%); no more than 266,361 votes were withheld for any Trustee
(1.66%), and
(ii) the ratification of the selection of KPMG Peat Marwick LLP as the
Fund's independent auditors for the fiscal year ending December 31,
1996 (votes for: 15,568,098 (96.81%); votes against: 50,020 (0.31%);
abstentions: 438,348 (2.73%); broker non-votes: 23,834 (0.15%),
- -----------
* On the record dates for the Special Meetings, the total net asset values of
the Class C and Class Y Shares of the Fund outstanding and entitled to vote
were $100 and $100, respectively. The holders of all Class C and Class Y
Shares entitled to vote were present in person at the meetings.
** On the record date for the Annual Meeting, 20,719,636 shares of the Fund
were outstanding and entitled to vote. The holders of 16,080,300 shares
(77.61%) entitled to vote were present in person or by proxy at meeting.
FEDERAL TAX STATUS OF 1996 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1996, of the total amount of
dividends paid by Tax-Free Fund of Colorado, 97.86% was "exempt-interest
dividends" and the balance was ordinary dividend income.
Prior to January 31, 1997, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1996
CALENDAR YEAR.
<PAGE>
INVESTMENT ADVISER
KPM INVESTMENT MANAGEMENT, INC.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
William M. Cole
Anne J. Mills
J. William Weeks
John G. Welles
OFFICERS
Lacy B. Herrmann, President
W. Dennis Cheroutes, Senior Vice President
Marie Aro, Vice President
Jean M. Smith, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
