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
Jerry G. McGrew, Senior Vice President
Diana P. Herrmann, Vice President
Jean M. Smith, Vice President
Jessica Wiltshire, 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
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
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.
ANNUAL
REPORT
DECEMBER 31, 1997
AQUILA
[LOGO OF AQUILA GROUP OF FUNDS: AN EAGLE'S HEAD]
TAX-FREE FUND
OF
COLORADO
A TAX-FREE INCOME INVESTMENT
[LOGO OF TAX-FREE FUND OF COLORADO: A SQUARE WHICH CONTAINS 3 MOUNTAINS
AND A ROUND SUN ABOVE THE FIRST 2 MOUNTAINS]
ONE OF THE
AQUILAsm GROUP OF FUNDS
[LOGO OF TAX-FREE FUND OF COLORADO: A SQUARE WHICH CONTAINS 3 MOUNTAINS
AND A ROUND SUN ABOVE THE FIRST 2 MOUNTAINS]
SERVING COLORADO INVESTORS FOR OVER A DECADE
TAX-FREE FUND OF COLORADO
ANNUAL REPORT
"QUALITY FOSTERS PEACE OF MIND"
February 20, 1998
Dear Investor:
Recently, there has been a lot of news about the Far East and the
problems that a number of countries in that area are experiencing. These
problems have included some failures of major financial corporations in
Japan, South Korea, Indonesia, Hong Kong, and various other countries. Also,
there have been major deterioration changes in the currencies of these
countries as they relate to U.S. dollars.
It is hard to believe the magnitude of recent currency
depreciation that has taken place in various countries vs. the U.S. dollar.
The currency deteriorations against the U.S. dollar have ranged from 10% to
well over 70% with various countries around the world. While we may have some
problems in our own country, these are very substantially less than those of
other countries.
What has occurred as a result of the problems of these countries
is a flight to quality. In comparison to various economies and currencies of
the Far East, as well as other countries in the world, the U.S. economy,
securities markets and currency stand out as a beacon of quality.
Quality has also been one of the trademarks of Tax-Free Fund of
Colorado from the inception of the fund. It has been our strong belief that
you can sleep much better at night by having high quality issues in the fund
in which you invest. Indeed, presently, the portfolio of Tax-Free Fund of
Colorado consists of 68.63% of tax-exempt securities having a AAA rating, and
20.80% of securities having a AA rating. Thus, 89.43% of the Fund's overall
portfolio is rated as AA or AAA. These are the two highest quality securities
you can possibly own.
Just as important for you to know, in the portfolio management of
the fund, separate credit analysis is done by the portfolio adviser to
confirm that such top-quality assessment of the individual securities is
justified. In other words, we do not merely rely upon the judgment of rating
agencies, but rather independently verify the credit quality of each
security.
Why do we structure the portfolio this way? Primarily, so that
you can feel comfortable with your investment in Tax-Free Fund of Colorado in
terms of knowing that that portion of your savings possesses a high level of
capital preservation.
<PAGE>
PATTERN OF PRICING OF SHARE VALUE
When you look at the pricing of share value of Tax-Free Fund of
Colorado, you will note that it presents a high level of share price
consistency. This is in stark contrast to the currency deterioration and
volatility of currency and securities markets that is taking place around the
world. The chart below shows you that consistency for every year since the
Fund began.
(Graphic of bar chart with the following information:)
<TABLE>
<CAPTION>
SHARE NET ASSET VALUE
(In Dollars)
<C> <C>
12/31/87 9.51
12/31/88 9.66
12/31/89 9.80
12/31/90 9.77
12/31/91 10.18
12/31/92 10.38
12/31/93 10.77
12/31/94 9.82
12/31/95 10.56
12/31/96 10.41
12/31/97 10.62
</TABLE>
OTHER STEPS TAKEN TO PROTECT YOUR MONEY
As we have pointed out in previous reports to you, we have also
consistently sought to diversify the holdings of municipal bonds in the
portfolio so that no one segment could hurt the overall value of your money
in the remote event a problem occurred. As a result, it is worth pointing out
that the portfolio of securities presently consists of 161 issues spread over
a variety of categories. This diversification is illustrated in the pie chart
below.
(Graphic of pie chart with the following information:)
<TABLE>
<CAPTION>
PORTFOLIO DIVERSIFICATION BY PROJECT
<C> <C>
School Districts 28.51%
Metropolitan Districts 7.72%
City & County G.O. 2.60%
Hospitals 7.53%
Water & Sewer 12.07%
Higher Education 12.50%
Housing 7.33%
Electric 7.20%
Transportation 2.48%
Other 12.06%
</TABLE>
<PAGE>
We also ensure that the maturity of the portfolio is spread out
over various time periods, with the average portfolio maturity being 8 years,
as is indicated in the pie chart below.
(Graphic of pie chart with the following information:)
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY MATURITY
<C> <C>
0-5 Years 20.04%
6-10 Years 54.20%
Over 10 Years 25.76%
</TABLE>
Altogether then, when you consider the quality, diversification,
and maturity of the portfolio, what we have consistently tried to do for you
is to provide you with the means by which you can have "PEACE OF MIND" with
your investment in Tax-Free Fund of Colorado.
WORKING IN YOUR INTEREST
You can be assured that all those associated with the management
of your investment will consistently work in your investment interest. We
very much value you as a shareholder and appreciate the confidence you have
shown in Tax-Free Fund of Colorado.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<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, 1997, as compared with a hypothetical similar size investment in
the Lehman Brothers Quality Intermediate 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 consists of an unmanaged mix of 22,000 investment-grade
intermediate-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.
Whatever difference in performance of the Index versus the Fund might
also 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.
Previously, the Fund's performance was compared to the Lehman Brothers
Municipal Bond Index (an index of long-term municipal securities) rather than
the Lehman Brothers Quality Intermediate Municipal Bond Index. A change in
the particular index was made by the Fund because it provides a better basis
of comparison inasmuch as the Fund has maintained an intermediate-term
average maturity since inception. Had the longer-term Lehman Brothers
Municipal Bond Index been used at December 31, 1997, the value of a $10,000
investment in the Lehman Brothers Municipal Bond Index at inception of the
Fund would have been $23,905. However, the correlation between the Fund's
behavior and the Lehman Brothers Quality Intermediate Municipal Fund Index is
more closely related.
(Graphic of line chart with the following information:)
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
Lehman Brothers Fund After Sales Cost of
Quality Municipal Charge and Expenses Living Index
Bond Index
<S> <C> <C> <C>
5/87 10,000 9,600 10,000
12/87 10,210 9,804 10,230
12/88 10,866 10,670 10,681
12/89 11,917 11,581 11,176
12/90 12,812 12,322 11,874
12/91 14,239 13,634 12,228
12/92 15,280 14,911 12,591
12/93 16,793 16,565 12,935
12/94 16,334 15,951 13,271
12/95 18,587 18,051 13,616
12/96 19,380 18,759 14,076
12/97 20,799 20,110 14,315
</TABLE>
(Graphic of table with the following information:)
Fund's average annual total return
<TABLE>
<CAPTION>
For the Period Ended 1 5 10 Life of Fund
December 31, 1997 Year Years Years Since 5/21/87
<S> <C> <C> <C> <C>
Including Sales Charge 2.95% 5.28% 7.01% 6.80%
and Expenses
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
<PAGE>
1997 REVIEW
1997 was a good year for Colorado municipal bond investors. Lower
interest rates, increased supply and improved credit quality all contributed
to a positive experience for bondholders. Interest rates on 10-year Colorado
bonds declined from 4.95% in December 1996 to about 4.40% at December 1997.
This decline in rates resulted in price appreciation of 2.5% for bonds held
throughout the year.
The new issue supply of Colorado municipals began the year at a very
sluggish pace, but increased throughout 1997 as interest rates continued to
decline and voters approved new bond issues in November. Total new issuance
in Colorado was $4.9 billion in 1997 versus $3.1 billion in 1996, or an
increase of 59%.
Finally, credit quality of Colorado issuers continued to improve in 1997.
Robust economic activity combined with population growth led to larger
surplus balances for many Colorado school districts, municipalities and the
State as a whole. This trend resulted in a significant number of credit
rating upgrades by the major municipal bond rating agencies for Colorado
issues.
The portfolio strategy for the Fund took advantage of higher bond prices
during the year to reduce positions in bonds that were callable in 5 years or
less and replace them with 8 to 11 year maturities that are non-callable or
have 10 year calls. We also increased our emphasis on the highest rated
securities as the yield differences between AAA rated and A rated bonds
narrowed further in 1997. The weighted average maturity of the Fund as of the
end of the year was 8.1 years, the average credit quality was AA+ and the
30-day average distribution yield on December 31, 1997 was 4.65%, as measured
against the maximum public offering price.
1998 STRATEGY
We plan to maintain our current investment strategy of high quality,
intermediate-term maturities with above average coupons. These portfolio
characteristics are designed to maintain a stable share price in the event of
rising interest rates on widening quality spreads. Should interest rates
remain stable or continue to decline, the higher interest rates and longer
call protection on the bonds we hold in the portfolio will provide an
excellent income stream for the next several years. If market conditions
change, we are in a position to adjust the portfolio holdings to take
advantage of higher yields from slightly longer maturities or lower quality
bonds without incurring significant additional credit or interest rate risk.
<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, 1997, 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, 1997, by correspondence with the custodian
. As to securities sold but not delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Fund of Colorado as of December 31, 1997, 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 6, 1998
<PAGE>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
<TABLE>
<C> <S> <C> <C>
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (43.5%) S&P VALUE
School Districts (28.8%)
$ 1,000,000 Adams County School District #1 Aaa/AAA $ 1,108,750
6.50%, 12/01/02, FGIC Insured, Pre-Refunded
2,000,000 Adams County School District #12 Aaa/AAA 2,182,500
7.30%, 12/15/00, FGIC Insured, Pre- Refunded
1,255,000 Adams County School District #12 Aaa/AAA 1,378,931
5.625%, 12/15/08, FGIC Insured
1,275,000 Adams County School District #14 Aaa/AAA 1,413,656
5.750%, 12/01/08, FSA Insured
2,500,000 Adams County School District #12 Aaa/AAA 2,731,250
6.20%, 12/15/09, FGIC Insured
1,500,000 Arapahoe County, Cherry Creek School District #5 Aa2/AA 1,635,000
7.00%, 12/15/00, Pre-Refunded
1,415,000 Arapahoe County School District #5 Aa2/AA 1,531,738
5.75%, 12/15/03
1,650,000 Arapahoe County School District #6 Aa/AA 1,765,500
5.50%, 12/01/03
1,750,000 Arapahoe County School District #6 Aa/AA 1,887,812
5.50%, 12/01/05
1,475,000 Arapahoe County, Cherry Creek School District #5 Aa2/AA 1,652,000
6.00%, 12/15/05
2,000,000 Arapahoe County School District #5 Aa2/AA 2,177,500
5.50%, 12/15/07
1,000,000 Arapahoe County School District #5 Aa2/AA 1,091,250
5.50%, 12/15/08, FGIC Insured
2,000,000 Boulder, Larimer & Weld County NR/AA- 2,157,500
5.90%, 12/15/05
1,245,000 Boulder, Larimer & Weld County Aaa/AAA 1,383,506
5.875%, 12/15/06, FGIC Insured
1,215,000 Boulder Valley Colorado Aaa/AAA 1,313,719
5.50%, 12/01/08, FGIC Insured
1,875,000 Boulder, Larimer & Weld County # RE-1J Aaa/AAA 2,017,969
5.50%, 12/15/08, FGIC Insured
1,500,000 Denver City & County School District #1 Aaa/AAA 1,638,750
6.10%, 12/15/02, MBIA Insured, Pre-Refunded
1,000,000 Denver City & County School District #1 A1/AA- 1,080,000
5.60%, 06/01/08
1,000,000 Douglas & Elbert Counties School District #
Re-1, Series 1992 Aaa/AAA 1,063,750
5.75%, 12/15/05, FGIC Insured
1,000,000 Douglas & Elbert Counties School District #RE-1
Refunding Series 1991 B Aaa/AAA 1,092,500
6.70%, 12/15/06, FGIC Insured
2,920,000 Douglas & Elbert Counties School District #RE-1
Refunding Aaa/AAA 3,186,450
5.50%, 12/15/07, FGIC Insured
2,500,000 Douglas & Elbert Counties School District # Re-1,
Series 1992 Aaa/AAA 2,793,750
6.15%, 12/15/08, MBIA Insured
1,500,000 Eagle County School District #RE50J Aaa/AAA 1,542,810
6.95%, 12/01/98, FGIC Insured, Pre-Refunded
2,320,000 Eagle County School District #RE50J, Series 1999 Aaa/AAA 2,586,800
6.15%, 12/01/04, FGIC Insured
1,040,000 El Paso County School District #20 Aaa/AAA 1,138,800
6.00%, 12/15/04, AMBAC Insured
400,000 El Paso County School District #20 Aaa/AAA 406,712
8.00%, 12/01/06, MBIA Insured
1,145,000 El Paso County School District #11 Aa/AA- 1,243,756
5.50%, 12/01/07, MBIA Insured
1,330,000 El Paso County School District #11 Aa/AA- 1,529,500
6.25%, 12/01/08, MBIA Insured
1,000,000 El Paso County School District #20 Aaa/AAA 1,148,750
6.15%, 12/15/08, MBIA Insured
1,600,000 Jefferson County School District # R-1 Aaa/AAA 1,740,000
6.00%, 12/15/02, AMBAC Insured, Pre-Refunded
3,000,000 Jefferson County School District # R-1 Aaa/AAA 3,266,250
5.50%, 12/15/06, MBIA Insured
1,500,000 Larimer County, Colorado School No.R1 Refunding A2/NR 1,560,000
5.40%, 12/15/04
2,065,000 Mesa County School District #51 Aaa/AAA 2,317,962
6.00%, 12/01/06, MBIA Insured
1,045,000 Pitkin County Colorado School District #1
(ASPEN) Aaa/AAA 1,140,356
5.85%, 11/15/03, AMBAC Insured
1,790,000 Pitkin County, Aspen School District #1 Series
1989 Aaa/AAA 1,939,912
5.95%, 11/15/05, AMBAC Insured
1,040,000 Pueblo County Colorado School District # 70 Aaa/AAA 1,114,100
5.50%, 12/01/09, AMBAC Insured
1,000,000 Routt County School District # RE- 2 Aaa/AAA 1,075,000
5.50%, 12/01/07, MBIA Insured
1,050,000 Summit County School District, Series A Aaa/AAA 1,128,750
5.40%, 12/01/06, FGIC Insured
1,000,000 Summit County School District, Series A Aaa/AAA 1,090,000
5.50%, 12/01/07, FGIC Insured
64,253,239
City & County (2.5%)
500,000 Boulder County Open Space Acquisition Aa1/AA 526,875
6.90%, 08/15/04
500,000 Denver Colorado City & County Unlimited Tax, Aa2/AA 541,250
6.90%, 08/01/02
1,000,000 Denver Colorado City & County Unlimited Tax, Aa2/AA 1,080,000
7.00%, 08/01/03
750,000 Greeley Water & Improvement Refunding A1/AA- 765,412
7.50%, 08/01/98
500,000 Louisville, CO Water Refunding Aaa/AAA 511,315
7.10%, 12/01/02, FGIC Insured
1,085,000 Snowmass Refunding Aaa/AAA 1,182,650
6.95%,11/15/00, FSA Insured, Pre-Refunded
1,000,000 Westminster Colorado Water Series 1992 A A1/AA- 1,070,000
6.25%, 12/01/07 5,677,502
Metropolitan District (7.6%)
2,500,000 Boulder Colorado Central Area Improvement Aaa/AAA 2,609,374
6.30%, 08/15/07, FGIC Insured
1,060,000 Castle Pines Metropolitan District Aaa/AAA 1,147,450
5.50%, 12/01/07, FSA Insured
1,080,000 Greenwood South Metropolitan District Aaa/AAA 1,174,500
5.60%, 12/01/05, MBIA Insured
1,530,000 Highlands Ranch Metropolitan District #1,
Refunding Aaa/AAA 1,660,050
6.25%, 09/01/06, MBIA Insured
1,000,000 Highlands Ranch Metropolitan District #4 Aa1/AA+ 1,066,250
5.80%, 12/01/07, LOC Swiss Banc
1,000,000 Highlands Ranch Metropolitan District #4 Aaa/AAA 1,112,500
5.75%, 09/01/08, AMBAC Insured
1,730,000 Highlands Ranch Metropolitan District #4 Aaa/AAA 1,931,112
5.75%, 09/01/09, AMBAC Insured
2,165,000 Interstate South Metropolitan District NR/A+ 2,297,607
5.75%, 12/01/09, LOC FBS
1,500,000 Meridian Metropolitan District A3/NR 1,558,125
7.00%, 12/01/99
1,260,000 Westglenn Metropolitan District Colorado
Jefferson County Refunding NR/A+ 1,341,900
5.65%, 12/01/04, LOC FBS
1,000,000 Westglenn Metropolitan District Colorado, NR/A+ 1,083,750
6.25%, 12/01/08, LOC FBS
16,982,618
Water & Sewer (3.3%)
1,550,000 Denver Colorado City & County Water Aa2/AA 1,685,625
5.50%, 10/01/07
1,220,000 Inverness Water & Sanitation District Colorado
Arapahoe & Douglas Counties Refunding, Aaa/AAA 1,342,000
6.30%, 12/01/05, MBIA Insured
1,000,000 Southgate Colorado Water District Arapahoe &
Douglas Counties Aaa/AAA 1,026,180
7.05%, 12/01/01, FGIC Insured
1,000,000 Southgate Colorado Water District Arapahoe &
Douglas Counties Aaa/AAA 1,028,490
7.20%, 12/01/05, FGIC Insured
2,000,000 Thornton, CO, Refunding-Spur A Aaa/AAA 2,185,000
5.60%, 12/01/06, FSA Insured
7,267,295
Hospital (1.3%)
750,000 Poudre Valley Colorado Hospital District NR/AAA 776,370
6.75%, 11/15/98, Pre-Refunded
2,000,000 Poudre Valley Hospital District, Refunding Aa/AA- 2,075,000
5.375%, 11/15/07 2,851,370
Total General Obligation Bonds 97,032,024
REVENUE BONDS (55.4%)
Higher Education (12.3%)
1,000,000 Aurora Educational Development Community
College Series 1990 Aaa/AAA 1,066,250
7.10%, 04/01/00, MBIA Insured, Pre-Refunded
1,000,000 Aurora Educational Development Revenue Bonds Aaa/AAA 1,068,750
7.25%, 04/01/00 MBIA Insured, Pre-Refunded
1,580,000 City of Aurora Colorado Educational Development
Refunding Bond NR/BBB 1,692,575
6.00%, 10/15/07
1,000,000 Colorado Post Secondary Educational Facilities
Authority Refund Revenue Bonds NR/AAA 1,071,250
6.35%, 06/01/00, Connie Lee Insured,
Pre-Refunded
1,235,000 Colorado Post Secondary Educational Facility,
Regis University A2/AAA 1,343,062
6.30%, 03/01/02, Connie Lee Insured,
Pre-Refunded
1,170,000 Colorado Post Secondary Educational Facility, Aaa/AAA 1,267,988
5.50%, 03/01/08, MBIA Insured
1,000,000 Colorado Post Secondary Educational Facilities
Authority Refunding Revenue Bonds Series 93, A2/AAA 1,062,500
5.95%, 03/01/09, Connie Lee Insured
1,000,000 Colorado State Board of Agriculture Revenue
Refunding, Colorado State University Student
Sports, Aaa/AAA 1,061,250
5.40%, 04/01/06, MBIA Insured
1,000,000 Colorado State Board of Agriculture Revenue,
Fort Lewis College Aaa/AAA 1,100,000
6.50%, 10/01/06, FGIC Insured
1,000,000 Colorado State Board of Agriculture Revenue,
University of Southern Colorado Auxiliary
Facility Aaa/AAA 1,086,250
6.25%, 08/01/07, AMBAC Insured
565,000 Colorado State Board of Agriculture Revenue
Refunding & Improvement Aaa/AAA 615,850
6.35%, 03/01/02, MBIA Insured, Pre-Refunded
435,000 Colorado State Board of Agriculture Revenue
Refunding & Improvement Aaa/AAA 470,344
6.35%, 03/01/08, MBIA Insured
1,000,000 Colorado State Board of Agriculture Revenue
Refunding, Colorado University Student Sports, Aaa/AAA 1,056,250
5.45%, 04/01/08, MBIA Insured
2,655,000 Board of Trustees State Colleges Colorado
Auxiliary Facilities Revenue Bonds (Western
State Colleges Project) NR/AAA 2,947,050
6.60%, 05/01/02, Connie Lee Insured,
Pre-Refunded
1,500,000 Colorado Student Obligation Board Authority
Student Loan Revenue A/NR 1,573,125
6.00%, 09/01/01
1,860,000 Colorado State Colleges Western State, Aaa/AAA 1,969,275
5.50%, 05/15/09, MBIA Insured
420,000 University of Colorado, Student Recreation
Center Aaa/AAA 437,325
7.00%, 06/01/99, MBIA Insured
320,000 University of Colorado Revenue Aaa/AAA 342,800
7.10%, 06/01/00, MBIA Insured, Pre-Refunded
500,000 University of Colorado Regents Research Building
Revolving Fund Revenue A2/A+ 523,125
6.85%, 06/01/03
1,000,000 University of Colorado Research Building
Revenue Aaa/AAA 1,075,000
6.00%, 06/01/06, MBIA Insured
1,000,000 University of Colorado Revenue Aaa/AAA 1,081,250
6.20%, 06/01/07, MBIA Insured
1,500,000 State of Colorado University of Northern
Colorado Auxiliary Facilities Aaa/AAA 1,621,875
5.75%, 06/01/07, MBIA Insured
1,745,000 State of Colorado University of Northern
Colorado Auxiliary Facilities Aaa/AAA 1,943,494
5.75%, 06/01/08, MBIA Insured
27,476,638
Electric (7.1%)
8,000,000 Adams County Colorado Pollution Control
Revenue Public Service Aaa/AAA 8,490,000
5.625%, 04/01/08, MBIA Insured
1,210,000 Moffat County Colorado Pollution Control
Revenue Aaa/AAA 1,293,188
5.50%, 11/01/03, AMBAC Insured
2,125,000 Moffat County Colorado Pollution Control
Revenue Aaa/AAA 2,326,875
5.625%, 11/01/06, AMBAC Insured
1,375,000 Platte River Power Authority Aaa/AAA 1,491,875
5.75%, 06/01/04, MBIA Insured
2,000,000 Platte River Power Authority Aaa/AAA 2,260,000
6.00%, 06/01/07, MBIA Insured
15,861,938
Sales Tax (7.1%)
1,000,000 Arvada Colorado Sales & Use Tax Revenue Aaa/AAA 1,076,250
6.10%, 12/01/07, FGIC Insured
2,000,000 Boulder County Colorado Open Space & Use Tax
Revenue Bonds Aaa/AAA 2,182,500
Series 1994 FGIC Insured, 5.75%, 12/15/04
500,000 Denver City & County Excise Tax Aaa/AAA 526,875
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%, 10/01/01, FGIC Insured, Pre-Refunded
2,000,000 Denver Metro Major League Baseball Stadium
Excise Tax Revenue Aaa/AAA 2,177,500
6.45%, 10/01/01, FGIC Insured, Pre-Refunded
2,045,000 Fort Collins Sales & Use Tax Revenue Aaa/AAA 2,165,144
5.375%, 12/01/06, FGIC Insured
1,000,000 Fort Collins Downtown Development Authority
Tax Increment Revenue Aaa/AAA 1,072,500
6.50%, 06/01/07, MBIA Insured
1,000,000 Jefferson County Districtwide Sales Tax Aaa/AAA 1,080,000
6.10%, 12/01/04, MBIA Insured
500,000 Mesa County Sales Tax Revenue Aaa/AAA 516,205
7.40%, 06/01/00, MBIA Insured
500,000 Thornton Sales & Use Tax Revenue Aaa/AAA 522,500
6.70%, 09/01/99, FGIC Insured
1,000,000 Thornton Sales & Use Tax Revenue Aaa/AAA 1,043,750
6.80%, 09/01/01, FGIC Insured
1,000,000 Westminster Sales & Use Tax 1991 Aaa/AAA 1,078,750
6.70%, 12/01/01, FGIC Insured
1,175,000 Westminster Colorado Sales Tax Revenue Aaa/AAA 1,282,219
5.50%, 12/01/07, FGIC Insured
15,810,443
Water & Sewer (8.6%)
1,750,000 Centennial Water & Sewer District Aaa/AAA 1,929,375
5.80%, 12/01/07, FSA Insured
500,000 Colorado Water Resource & Power Development
Authority Aaa/AAA 540,000
7.00%, 11/01/00, FGIC Insured
675,000 Colorado Water Resource & Power Development
Authority, Series A Aa2/AA 743,344
6.90%, 09/01/01, Pre-Refunded
325,000 Colorado Water Resource & Power Development
Authority Aa2/AA 359,125
6.90%, 09/01/04
140,000 Colorado Water Resource & Power Development
Authority Aa2/AA+ 154,525
6.875%, 09/01/05
710,000 Colorado Water Resource & Power Development
Authority, Series A Aa2/AA 783,662
7.00%, 09/01/01, Pre-Refunded
360,000 Colorado Water Resource & Power Development
Authority, Series B Aa2/AA+ 396,000
6.875%, 09/01/01, Pre-Refunded
1,000,000 Colorado Water Resource & Power Development
Authority Aaa/AAA 1,096,250
6.80%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power Development
Authority Aaa/AAA 1,103,750
6.50%, 11/01/05, FGIC Insured
745,000 Colorado Water Resource & Power Development
Authority, Series A Aa2/AA 822,294
7.00%, 09/01/01, Pre-Refunded
1,000,000 Colorado Water Resource & Power Development
Authority Aa2/AA 1,086,250
6.00%, 09/01/06
1,000,000 Colorado Water Resource & Power Development
Authority Clean Water Revenue, Aa2/AA 1,070,000
5.35%, 09/01/06
1,965,000 Fort Collins Colorado Wastewater Sewer Revenue Aaa/AAA 2,082,900
5.375%, 12/01/08, FGIC Insured
1,530,000 Left Hand Water District, Series 1996 Aaa/AAA 1,673,438
5.75%, 11/15/08, MBIA Insured
1,000,000 Loveland Sewer Revenue Series 1989 Aaa/AAA 1,050,000
6.80%, 11/01/01, MBIA Insured
1,000,000 Metro Wastewater Reclaimation District, Gross
Revenue Series Aa/AA 1,062,500
5.70%, 04/01/05
1,055,000 Metro Wastewater Reclaimation District, Gross
Revenue Series Aa/AA 1,120,938
5.80%, 04/01/06
1,010,000 Northglenn Colorado Water & Sewer Aaa/AAA 1,118,575
5.75%, 12/01/06, FSA Insured
1,000,000 Westminster Colorado Water & Wastewater Utility
Enterprise Water And Wastewater Revenue
Series 1994 Aaa/AAA 1,088,750
5.70%, 12/01/04, AMBAC Insured
19,281,676
Hospital (6.2%)
935,000 Colorado Health Facility Community Provider
Pooled Loan Program Aaa/AAA 940,508
7.40%, 07/15/99, MBIA Insured
2,030,000 Colorado Health Facility Authority Hospital
Revenue North Colorado Medical Center Aaa/AAA 2,192,400
5.60%, 05/15/05, MBIA Insured
2,255,000 Colorado Health Facility Community Provider
Pooled Loan Revenue Aaa/AAA 2,508,687
7.20%, 07/15/05, FSA Insured
1,410,000 Colorado Health Facility Authority Hospital
Revenue Boulder Community Hospital Aaa/AAA 1,536,900
5.65%, 10/01/06, MBIA Insured
1,000,000 Colorado Health Facility Authority Sisters
of Charity Health Care Aaa/AAA 1,162,500
6.25%, 05/15/09, AMBAC Insured
1,460,000 Colorado Springs Hospital Revenue Aaa/AAA 1,587,750
5.50%, 12/15/06, MBIA Insured
1,000,000 Poudre Valley Hospital District, Refunding Aaa/AAA 1,093,750
6.50%, 12/01/01, AMBAC Insured, Pre-Refunded
1,000,000 Pueblo County Colorado Hospital Facilities,
Series A Aaa/AAA 1,097,500
6.80%, 09/01/05, MBIA Insured
1,475,000 University Colorado Hospital Authority Hospital
Revenue Aaa/NR 1,602,219
5.50%, 11/15/07, AMBAC Insured
13,722,214
Housing (7.2%)
1,600,000 Adams County Colorado Multi-Family Housing
Revenue,Brittany Station Series A, FNMA NR/AAA 1,694,000
5.40%, 09/01/25
940,000 City of Arvada Colorado Multi-family Housing
Revenue, Springwood GNMA NR/AAA 987,000
5.60%, 08/20/08
230,000 Colorado Housing Finance Authority 1991,
Series A-3 NR/AA+ 239,775
6.10%, 11/01/00
235,000 Colorado Housing Finance Authority 1991,
Series A-1 NR/AA+ 248,219
6.20%, 11/01/01
525,000 Colorado Housing Finance Authority 1991,
Series A A2/NR 555,844
6.90%, 05/01/01
1,405,000 Colorado Housing Finance Authority, SFM
Series A-2 NR/AA+ 1,512,131
6.65%, 11/01/06
900,000 Colorado Housing Finance Authority, SFM
Series 1994C Aa2/NR 964,125
6.00%, 12/01/04
2,480,000 Colorado Housing Finance Authority, SFM
Series D-2 Aa2/NR 2,638,100
5.625%, 06/01/10
1,250,000 Colorado Housing Finance Authority, SFM
Series A-2 Aa2/NR 1,346,875
5.75%, 11/01/10
2,090,000 Colorado Housing Finance Authority, SFM
Series 1994C Aa2/NR 2,262,425
6.25%, 12/01/12
275,000 Commerce City Single Family Revenue Series A Aa1/NR 292,531
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+ 1,072,500
6.10%, 03/01/06
1,500,000 Snowmass Village Multi-family Revenue Refunding Aaa/AAA 1,608,750
6.30%, 12/15/08, FSA Insured
345,000 Southwestern Colorado Single Family Revenue
Partnership, Refunding A1/NR 366,562
7.10%, 09/01/04
185,000 Summit County Single Family Revenue Refunding
Series A A1/NR 194,712
7.25%, 12/01/04
15,983,549
Industrial Development Revenue (1.2%)
1,860,000 Denver City & County, Industrial Development
Revenue, Rollie R. Kelley Project NR/A+ 1,920,450
7.00%, 06/01/06, LOC FBS
635,000 Denver City & County Industrial Development
Revenue NR/A+ 651,669
6.40%, 12/01/10
2,572,119
Transportation (1.9%)
1,000,000 Arapahoe County Colorado E-470 Vehicle
Registration Revenue Bonds Aaa/AAA 1,085,000
5.45%, 08/31/07, MBIA Insured
2,000,000 Regional Transportation District Sales Tax
Revenue Aaa/AAA 2,162,500
5.50%,11/01/05, FGIC Insured
1,000,000 Regional Transportation District Sales Tax
Revenue Aaa/AAA 1,092,500
6.15%,11/01/05, FGIC Insured
4,340,000
Lease (0.6%)
215,000 Denver City & County School District #1, COP Aaa/AAA 219,939
6.80%, 12/15/98, FGIC Insured
640,000 Denver City & County School District Aaa/AAA 654,272
6.85%, 12/15/99, FGIC Insured
525,000 Denver City & County School District Aaa/AAA 559,125
6.95%, 12/15/00, FGIC Insured
1,433,336
Miscellaneous Revenue (3.2%)
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,090,000
6.50%, 12/01/02
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,091,250
6.60%, 12/01/03
2,275,000 Denver Colorado City & County Helen Bonfils
Project NR/AA- 2,482,594
5.875%, 12/01/09
1,000,000 South Suburban Park & Recreational District Baa/NR 1,078,750
6.00%, 11/01/07
1,230,000 Thornton, Colorado Development Authority Aaa/AAA 1,359,150
5.75%, 12/01/06, MBIA Insured
7,101,744
Total Revenue Bonds 123,583,657
Total Investments (Cost $208,639,809*) 98.9% 220,615,681
Other assets in excess of liabilities 1.1 2,408,410
Net Assets 100.0% $223,024,091
<FN> * Cost for Federal tax purposes is identical. </FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
TAX-FREE FUND OF COLORADO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
Investments at value (identified cost $208,639,809) $ 220,615,681
Cash 780,161
Interest receivable 1,950,306
Receivable for Fund shares sold 77,713
Receivable for investment securities sold 50,426
Other assets 7,871
Total assets 223,482,158
LIABILITIES
Dividends payable 165,655
Payable for Fund shares redeemed 113,107
Adviser and Administrator fees payable 94,261
Accrued expenses 55,398
Distribution fees payable 29,646
Total liabilities 458,067
NET ASSETS $ 223,024,091
Net Assets consist of:
Capital Stock - Authorized an unlimited
number of shares, par value $.01 per share $ 209,960
Additional paid-in capital 209,699,660
Accumulated net realized gain on investments 1,138,599
Net unrealized appreciation on investments 11,975,872
$ 223,024,091
CLASS A
Net Assets $ 216,320,615
Capital shares outstanding 20,365,542
Net asset value and redemption price per share $ 10.62
Offering price per share (100/96 of $10.62
adjusted to nearest cent) $ 11.06
CLASS C
Net Assets $ 1,035,516
Capital shares outstanding 97,669
Net asset value and offering price per share $ 10.60
Redemption price per share (*generally, a charge
of 1% is imposed on the proceeds of shares
redeemed during the first 12 months after
purchase) $ 10.60*
CLASS Y
Net Assets $ 5,667,960
Capital shares outstanding 532,755
Net asset value, offering and redemption
price per share $ 10.64
See accompanying notes to financial statements.
<PAGE>
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 12,105,096
Expenses:
Investment Adviser fees (note 3) $ 437,704
Administrator fees (note 3) 656,555
Transfer and shareholder servicing agent fees 143,353
Distribution and service fees (note 3) 117,411
Custodian fees (note 7) 68,877
Trustees' fees and expenses (note 8) 65,221
Shareholders' reports and proxy statements 43,042
Legal fees 35,063
Audit and accounting fees 29,335
Registration fees and dues 10,878
Insurance 3,902
Miscellaneous 30,038
1,641,379
Administration fees waived (note 3) (5,270)
Expenses paid indirectly (note 7) (57,829)
Net expenses 1,578,280
Net investment income 10,526,816
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities
transactions 1,694,628
Change in unrealized appreciation on
investments 3,107,464
Net realized and unrealized gain on
investments 4,802,092
Net increase in net assets resulting from
operations $ 15,328,908
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,526,816 $ 10,788,159
Net realized gain from securities
transactions 1,694,628 110,498
Change in unrealized appreciation on
investments 3,107,464 (3,150,185)
Change in net assets from operations 15,328,908 7,748,472
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (10,364,025) (10,779,866)
Distributions in excess of net investment
income (335,411) (236,198)
Net realized gain on investments - -
Class C Shares:
Net investment income (38,032) (8,288)
Distributions in excess of net
investment income (1,231) (229)
Net realized gain on investments - -
Class Y Shares:
Net investment income (124,757) (5)
Distributions in excess of net investment
income (4,037) -
Net realized gain on investments - -
Change in net assets from distributions (10,867,493) (11,024,586)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 25,290,827 22,599,522
Reinvested dividends and distributions 6,533,875 6,733,129
Cost of shares redeemed (28,569,850) (30,054,520)
Change in net assets from capital share
transactions 3,254,852 (721,869)
Change in net assets 7,716,267 (3,997,983)
NET ASSETS:
Beginning of period 215,307,824 219,305,807
End of period $ 223,024,091 $ 215,307,824
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
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 of 1% 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.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value 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.
<PAGE>
b) 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.
c) 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.
d) 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.
e) 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 asets from operations during the
reporting period. Actual results could differ from those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Management affairs of the Fund are conducted through two separate
management arrangements.
KPM Investment Management, Inc. (the "Adviser") serves as Investment
Adviser to the Fund. The Adviser is a wholly-owned subsidiary of KFS
Corporation, a member of the nationally oriented Mutual of Omaha Companies.
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,
<PAGE>
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 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, 1997.
For the year ended December 31, 1997, the Fund incurred fees under the
Advisory Agreement and Administration Agreement of $437,704 and $656,555,
respectively. The Administrator voluntarily waived $5,270 of its fee.
b) DISTRIBUTION AND SERVICE FEES
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 Aquila Distributors, Inc. (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, 1997,
service fees on Class A Shares amounted to $107,821, of which the Distributor
received $4,357.
<PAGE>
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 year ended December 31, 1997, amounted to $7,193. 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 year ended December 31, 1997, amounted to
$2,397. The total of these payments with respect to Class C Shares amounted
to $9,590, of which the Distributor received $8,921.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, Aquila Distributors, Inc. 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, 1997, the Distributor received sales
commissions of $68,322.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1997, purchases of securities and
proceeds from the sales of securities aggregated $53,232,011and $48,837,291,
respectively.
At December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $11,976,228 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to $356
for a net unrealized appreciation of $11,975,872.
5. 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.
6. 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 and are taxable.
<PAGE>
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.
7. 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, 1997,
the Fund's custodian fees amounted to $68,877, of which $57,829 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.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were seven Trustees. Trustee' 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, 1997, 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>
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,718,765 $ 17,904,456 2,086,373 $ 21,654,023
Reinvested distributions 621,035 6,486,344 648,241 6,730,082
Cost of shares redeemed (2,568,761) (26,830,982) (2,898,027) (30,020,808)
Net change (228,961) (2,440,182) (163,413) (1,636,703)
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 11,536 120,381 90,792 945,399
Reinvested distributions 3,049 31,824 316 3,043
Cost of shares redeemed (4,876) (51,711) (3,148) (33,712)
Net change 9,709 100,494 87,960 914,730
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 691,207 7,265,990 10 100
Reinvested distributions 1,497 15,707 - 4
Cost of shares redeemed (159,960) (1,687,157) - -
Net change 532,744 5,594,540 10 104
Total transactions in
Fund shares 313,492 $ 3,254,852 (75,443) $ (721,869)
<FN>* From April 30, 1996 (date of inception) through December 31, 1996.</FN>
</TABLE>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class A(1)
Year ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.41 $10.56 $9.82 $10.77 $10.38
Income from Investment Operations:
Net investment income 0.50 0.52 0.54 0.55 0.57
Net gain (loss) on securities
(both realized and unrealized) 0.23 (0.13) 0.74 (0.95) 0.55
Total from Investment
Operations 0.73 0.39 1.28 (0.40) 1.12
Less Distributions (note 6):
Dividends from net investment
income (0.52) (0.54) (0.54) (0.55) (0.57)
Distributions from capital gains - - - - (0.16)
Total Distributions (0.52) (0.54) (0.54) (0.55) (0.73)
Net Asset Value, End of Period $10.62 $10.41 $10.56 $9.82 $10.77
Total Return (not reflecting
sales charge)(%) 7.21 3.78 13.28 (3.80) 11.10
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 216,321 214,392 219,306 199,075 222,277
Ratio of Expenses
to Average Net Assets (%) 0.72 0.69 0.63 0.57 0.53
Ratio of Net Investment Income
to Average Net Assets (%) 4.81 5.03 5.21 5.36 5.32
Portfolio Turnover Rate (%) 22.66 10.96 14.20 15.53 20.89
<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>
Net Investment Income ($) 0.50 0.51 0.52 0.53 0.55
Ratio of Expenses to Average
Net Assets (%) 0.75 0.75 0.77 0.76 0.73
Ratio of Net Investment Income
to Average Net Assets (%) 4.78 4.97 5.07 5.17 5.12
<FN> (1) Designated as Class A Shares on April 30, 1996. </FN>
</TABLE>
Note: On October 1, 1992, Kirkpatrick, Pettis, Smith, Polian Inc. became the
Fund's Investment Adviser replacing Norwest Bank Minnesota, NA. 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>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS (continued)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Period(2) Year Period(2)
Ended Dec. Ended Dec. Ended Dec. Ended Dec.
31, 1997 31, 1996 31, 1997 31, 1996
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.41 $10.31 $10.41 $10.31
Income from Investment
Operations:
Net investment income 0.40 0.28 0.52 0.38
Net gain (loss) on securities
(both realized and
unrealized) 0.21 0.12 0.25 0.12
Total from Investment
Operations 0.61 0.40 0.77 0.50
Less Distributions (note 6):
Dividends from net investment
income (0.42) (0.30) (0.54) (0.40)
Distributions from capital gains - - - -
Total Distributions (0.42) (0.30) (0.54) (0.40)
Net Asset Value, End of Period $10.60 $10.41 $10.64 $10.41
Total Return (not reflecting
sales charge) (%) 5.99 3.78# 7.65 4.87#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 1,036 915 5,668 0.1
Ratio of Expenses to Average
Net Assets (%) 1.66 1.64* 0.67 0.64*
Ratio of Net Investment Income
to Average Net Assets (%) 3.84 4.08* 4.79 5.08*
Portfolio Turnover Rate (%) 22.66 10.96 22.66 10.96
<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 and the expense offset in custodian fees for uninvested cash balances
would have been:
<S> <C> <C> <C> <C>
Net Investment Income ($) 0.40 0.27 0.52 0.37
Ratio of Expenses to Average
Net Assets (%) 1.69 1.70* 0.70 0.70*
Ratio of Net Investment Income
to Average Net Assets (%) 3.81 4.02* 4.76 5.02*
<FN> (1) New Class of Shares established on April 30, 1996. </FN>
<FN> (2) From April 30, 1996 to December 31, 1996. </FN>
<FN> # Not annualized. </FN>
<FN> * Annualized. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Tax-Free Fund of Colorado (the "Fund")
was held on June 12, 1997.* 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
158,061,430.15 affirmative votes (98.56%); no more than
2,313,453.86 votes were withheld for any Trustee (1.44%)), 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, 1997 (votes for: 156,220,712.80 (97.41%); votes
against: 575,625.93 (0.36%); abstentions: 3,578,545.28 (2.23%);
broker non-votes: 0.00 (0.00%)).
_____________________
* On the record date for this meeting, the holders of 20,670,693.83 Class A
shares, 90,891.97 Class C shares, and 52,464.00 Class Y shares of the Fund
were outstanding and entitled to vote representing a total net asset value of
$215,425,031.14. The holders of shares entitled to vote representing a total
net asset value of $160,374,884.01 (74.45%) were present in person or by
proxy at the meeting.
FEDERAL TAX STATUS OF 1997 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1997, of the total amount of dividends
paid by Tax-Free Fund of Colorado, 96.87% was "exempt-interest dividends" and
the balance was ordinary dividend income.
Prior to January 31, 1998, shareholders were mailed IRS Form 1099-DIV which
contained information on the status of distributions paid for the 1997
CALENDAR YEAR.
