<PAGE>
MANAGER AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
KPM INVESTMENT MANAGEMENT, INC.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
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
Diana P. Herrmann, Senior Vice President
Sue McCarthy-Jones, Senior Vice President
Jerry G. McGrew, Senior Vice President
Jean M. Smith, Vice President
Jessica L. 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 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, 1998
[Logo of Tax-Free Fund of Colorado: a square which contains 3
mountains
and a round sun above the first 2 mountains]
TAX-FREE FUND
OF
COLORADO
A TAX-FREE INCOME INVESTMENT
[Logo of Aquila Group of Funds: an eagle's head]
ONE OF THE
AQUILAsm GROUP OF FUNDS
</PAGE>
<PAGE>
[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
"THE BEST THINGS IN LIFE CAN BE TAX-FREE"
February 17, 1999
Dear Fellow Shareholder:
When you compare TAX-FREE municipal bonds with similar
maturity high quality taxable U.S. Treasuries, we think it is fair
to say, "THE BEST THINGS IN LIFE CAN BE TAX-FREE."
You may well come out way ahead owning a TAX-FREE bond,
since recently the ratio of return on TAXABLE U.S. Treasuries
versus TAX-FREE municipals has been running ahead of what has
normally been the case.
What this means to you in dollars and cents is that
when you take into consideration the effect of taxes you pay with
a TAXABLE bond, you actually get to keep more of your return with
the TAX-FREE investment.
Let us show you the mathematics of how this works out.
Let's suppose you purchase a $1,000 15-year U.S. Treasury bond
yielding 5% and a $1,000 tax-free municipal bond with a maturity of
15 years yielding 4.4%. Your investments would look as follows*:
U.S. TREASURY TAX-FREE
Interest Income $50.00 $44.00
Federal Tax Bracket 28% 28%
Federal Tax Paid $14.00 $-0-
Net Income Retained $36.00 $44.00
Even though on the surface the U.S. Treasury appears to
be yielding higher than the TAX-FREE municipal, once the effect of
Federal taxes is taken into consideration, the TAX-FREE investment
allows you to keep more money in your pocket. State taxes are not
applicable to either investment.
Obviously, investors in higher income tax brackets will
obtain an even greater advantage.
Given the desirability of making sure you have the
right asset allocation with your investment money, the fact that
there is an increased supply of high quality municipal bonds and a
rising ratio of taxable vs. tax-free bonds, we believe it is fair
to say that,
"THE BEST THINGS IN LIFE CAN BE TAX-FREE."
This is particularly true considering the high quality
of the bonds in Tax-Free Fund of Colorado and the intermediate
maturity of the overall portfolio of the Fund. Both these factors
lend themselves to the kind of investment that allows you to "sleep
well at night."
</PAGE>
<PAGE>
You can be assured that all those associated with the
management of your investment in Tax-Free Fund of Colorado are
consistently working in your best interest. We very much value you
as a shareholder and appreciate the confidence you have shown in
the Fund.
Sincerely,
Lacy B. Herrmann
Chairman, Board of Trustees
* The examples given, while realistic, are for illustrative
purposes only, are strictly hypothetical in nature and do not
represent the performance of any particular investment. For
simplicity, a stable net asset value has been assumed over the life
of each investment and the effect of dividend reinvestment was not
taken into account. Of course, the actual rate of return and share
price of a municipal bond fund, such as Tax-Free Fund of Colorado,
will fluctuate with general interest rate changes. Thus, redemption
price may be more or less than original purchase price.
</PAGE>
<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 fisc al year end, December 31, 1998, 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
approximately 28,000 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.
Furthermore, whatever the 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.
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 a line chart with the following information:]
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON
Lehman Brothers Fund After Sales Cost of
Quality Intermediate Charge and Expenses Living Index
Municipal Bond Index
</CAPTION>
<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
12/98 22,047 21,099 14,545
</TABLE>
[Table setup with the following information:]
FUND'S AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C>
FOR THE PERIOD ENDED LIFE OF FUND
DECEMBER 31, 1998 1 YEAR 5 YEARS 10 YEARS SINCE 5/21/87
INCLUDING SALES
CHARGE AND EXPENSES 0.74% 4.07% 6.62% 6.64%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
</PAGE>
<PAGE>
1998 REVIEW
1998 has proven to be a very interesting year for
tax-free bonds. In a year where the financial markets have seen
remarkable volatility, there has been one asset class that has gone
largely unnoticed - municipal bonds. Near record new issue volume,
investor apathy and declining interest rates on Treasury securities
have combined to make municipal bonds very attractive investments.
We have seen an explosion of new issuance in the
municipal bond market this year. This has been spurred on by the
low interest rate environment. Cities, states, school districts and
all other municipal entities have been able to borrow money at the
lowest rates seen in two decades. Much like the refinancing boom in
residential mortgages, muni issuers have also been able to repay
older high interest debt with proceeds from new refunding issues at
lower rates. The result of all this new supply of bonds has been to
keep a lid on price increases of munis.
Another factor in the listless price movement of munis
is lack of investor interest. Over the past several years as
interest rates have declined, investors have become more reluctant
to reinvest the proceeds from matured or called bonds with coupons
in the 6% to 8% range into bonds issued in today's market at
interest rates ranging from 3 1/2% to 5%. This moderate demand for
lower yield bonds has also contributed to the lack of price
movement for municipal bonds.
In addition to the supply and demand dynamics of the
municipal market, the lack of volatility relative to the government
bond market has also enhanced the value of tax-free bonds. Earlier
this fall we saw the fixed income markets influenced by uncertainty
in the international markets and conflicting domestic economic
signals. This led to a dramatic flight to quality by investors
which drove the yield on the 30-year Treasury bond to an all time
low of 4.71%. During this period, the yields on municipal bonds
declined only slightly. The ratio of long municipal yields to long
Treasury yields climbed to over 98% from an historical average of
about 80%. In other words, an investor was able to earn almost the
same return on a tax-free investment as they were a taxable
investment. Recently, yields on the 30-year have rebounded back to
the 5.25% level and just as muni yields did not drop as rapidly as
Treasury yields on the way down, they did not increase as rapidly
during this rise in rates. The ratio of tax-free yields to Treasury
yields is still an extremely attractive 95%. As an example, a
married Colorado investor in the 36% tax bracket earning 4.5% on a
double-exempt Colorado bond would have to earn about 7.5% on a
fully taxable basis.
The portfolio characteristics of Tax-Free Fund of
Colorado remained consistent during the year. The weighted average
maturity was 8.1 years, the average credit quality was AA+ and the
30-day average distribution yield on December 31, 1998 was 4.41%,
as measured against the maximum public offering price.
1999 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 or
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 rated bonds without incurring significant
additional credit or interest rate risk.
</PAGE>
<PAGE>
[Logo of KPMG: "KPMG" in front of four rectangles]
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, 1998, and the related statement
of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the 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, 1998, 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, 1998, 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 LLP
New York, New York
February 1, 1999
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (42.3%) S&P VALUE
</CAPTION>
<S> <C> <C> <C>
SCHOOL DISTRICTS (27.2%)
$1,275,000 Adams County School District #14 Aaa/AAA $ 1,428,000
5.750%, 12/01/08, FSA Insured
1,255,000 Adams County School District #12 Aaa/AAA 1,394,619
5.625%, 12/15/08, FGIC Insured
2,500,000 Adams County School District #12 Aaa/AAA 2,728,125
6.20%, 12/15/09, FGIC Insured
1,650,000 Arapahoe County School District #6 Aa2/AA 1,769,625
5.50%, 12/01/03
1,415,000 Arapahoe County School District #5 Aa2/AA 1,538,812
5.75%, 12/15/03
1,750,000 Arapahoe County School District #6 Aa2/AA 1,907,500
5.50%, 12/01/05
1,475,000 Arapahoe County, Cherry Creek School
District #5 Aa2/AA 1,653,844
6.00%, 12/15/05
2,000,000 Arapahoe County School District #5 Aa2/AA 2,207,500
5.50%, 12/15/07
1,000,000 Arapahoe County School District #5 Aa2/AA 1,108,750
5.50%, 12/15/08, FGIC Insured
1,325,000 Arapahoe County School District #5 Aa2/AA 1,399,531
5.125%, 12/01/10, FSA Insured
1,215,000 Boulder Valley Colorado Aaa/AAA 1,338,019
5.50%, 12/01/08, FGIC Insured
1,875,000 Boulder, Larimer & Weld County # RE-1J Aaa/AAA 2,067,188
5.50%, 12/15/08, FGIC Insured
1,000,000 Denver City & County School District #1 A1/AA- 1,105,000
5.60%, 06/01/08
2,920,000 Douglas & Elbert Counties School District
#RE-1 Refunding Aaa/AAA 3,215,650
5.50%, 12/15/07, FGIC Insured
2,500,000 Douglas & Elbert Counties School District
# RE-1, Series 1992 Aaa/AAA 2,778,125
6.15%, 12/15/08, MBIA Insured
2,320,000 Eagle County School District #RE50J,
Series 1999 Aaa/AAA 2,595,500
6.15%, 12/01/04, FGIC Insured
</PAGE>
<PAGE>
1,040,000 El Paso County School District #20 Aaa/AAA 1,153,100
6.00%, 12/15/04, AMBAC Insured
75,000 El Paso County School District #20 Aaa/AAA 76,032
8.00%, 12/01/06, MBIA Insured
1,145,000 El Paso County School District #11 Aa3/AA- 1,258,069
5.50%, 12/01/07
1,330,000 El Paso County School District #11 Aa3/AA- 1,557,762
6.25%, 12/01/08
1,000,000 El Paso County School District #20 Aaa/AAA 1,157,500
6.15%, 12/15/08, MBIA Insured
1,835,000 Jefferson County School District # R-1 Aaa/AAA 1,972,625
5.25%, 12/15/05, MBIA Insured
3,000,000 Jefferson County School District # R-1 Aaa/AAA 3,285,000
5.50%, 12/15/06, MBIA Insured
1,000,000 Jefferson County School District # R-1 Aaa/AAA 1,103,750
5.50%, 12/15/09, FGIC Insured
1,500,000 Larimer County, Colorado School #R-1 Refunding A2/NR 1,618,125
5.40%, 12/15/04
2,000,000 Larimer County, Colorado School #R-1 Refunding A1/AA- 2,185,000
5.90%, 12/15/05
1,245,000 Larimer County, Colorado School #R-1 Refunding Aaa/AAA 1,394,400
5.875%, 12/15/06, FGIC Insured
2,000,000 Larimer County, Colorado School #R-1 Refunding Aa3/AA- 2,135,000
5.25%, 12/15/11
2,065,000 Mesa County School District #51 Aaa/AAA 2,328,287
6.00%, 12/01/06, MBIA Insured
1,045,000 Pitkin County Colorado School District #1 (ASPEN) Aaa/AAA 1,129,906
5.85%, 11/15/03, AMBAC Insured
1,790,000 Pitkin County, Aspen School District #1 Series 1989 Aaa/AAA 1,928,725
5.95%, 11/15/05, AMBAC Insured
1,040,000 Pueblo County Colorado School District # 70 Aaa/AAA 1,128,400
5.50%, 12/01/09, AMBAC Insured
1,000,000 Routt County School District # RE- 2 Aaa/AAA 1,100,000
5.50%, 12/01/07, MBIA Insured
</PAGE>
<PAGE>
1,050,000 Summit County School District, Series A Aaa/AAA 1,134,000
5.40%, 12/01/06, FGIC Insured
1,000,000 Summit County School District, Series A Aaa/AAA 1,092,500
5.50%, 12/01/07, FGIC Insured
58,973,969
CITY & COUNTY (2.7%)
500,000 Boulder County Open Space Acquisition Aa1/AA+ 516,250
6.90%, 08/15/99, Pre-Refunded
1,000,000 Denver Colorado City & County Unlimited Tax, Aa2/AAA 1,063,750
7.00%, 08/01/00, Pre- Refunded
2,000,000 Denver Colorado City & County Unlimited Tax, Aa2/AA 2,150,000
5.25%, 08/01/06
1,085,000 Snowmass Refunding Aaa/AAA 1,158,237
6.95%,11/15/00, FSA Insured, Pre-Refunded
1,000,000 Westminster Colorado Water Series 1992 A A1/AA- 1,075,000
6.25%, 12/01/07
5,963,237
METROPOLITAN DISTRICT (10.1%)
2,500,000 Boulder Colorado Central Area Improvement Aaa/AAA 2,565,225
6.30%, 08/15/07, FGIC Insured
1,060,000 Castle Pines Metropolitan District Aaa/AAA 1,166,000
5.50%, 12/01/07, FSA Insured
2,000,000 Castle Pines Metropolitan District Aaa/AAA 2,075,000
5.00%, 12/01/11, FSA Insured
1,080,000 Greenwood South Metropolitan District Aaa/AAA 1,183,950
5.60%, 12/01/05, MBIA Insured
1,000,000 Highlands Ranch Metropolitan District #4 Aaa/AA+ 1,108,750
5.80%, 12/01/05, LOC Swiss Bank, Pre-Refunded
1,530,000 Highlands Ranch Metropolitan District #1,
Refunding Aaa/AAA 1,644,750
</PAGE> 6.25%, 09/01/06, MBIA Insured
<PAGE>
1,000,000 Highlands Ranch Metropolitan District #4 Aaa/AAA 1,122,500
5.75%, 09/01/08, AMBAC Insured
1,730,000 Highlands Ranch Metropolitan District #4 Aaa/AAA 1,941,925
5.75%, 09/01/09, AMBAC Insured
2,165,000 Interstate South Metropolitan Distric NR/A+ 2,357,144
5.75%, 12/01/09, LOC FBS
1,500,000 Meridian Metropolitan District A3/NR 1,536,075
7.00%, 12/01/99
1,245,000 North Jefferson County, Park & Recreation Aaa/NR 1,350,825
5.25%, 12/01/08, AMBAC Insured
1,365,000 South Suburban Park & Recreational District Aaa/AAA 1,445,194
5.125%, 12/15/09, FGIC Insured
1,260,000 Westglenn Metropolitan District Colorado
Jefferson County Refunding, NR/A+ 1,340,325
5.65%, 12/01/04, LOC FBS
1,000,000 Westglenn Metropolitan District Colorado, NR/A+ 1,088,750
6.25%, 12/01/08, LOC FBS
21,926,413
WATER & SEWER (1.8%)
1,550,000 Denver Colorado City & County Water Aa2/AA 1,703,062
5.50%, 10/01/07
2,000,000 Thornton, CO, Refunding-Spur A Aaa/AAA 2,202,500
5.60%, 12/01/06, FSA Insured
3,905,562
HOSPITAL (0.5%)
1,000,000 Poudre Valley Hospital District, Refunding Aa/AA- 1,048,750
5.375%, 11/15/07
1,048,750
Total General Obligation Bonds 91,817,931
</PAGE>
<PAGE>
REVENUE BONDS (57.0%)
HIGHER EDUCATION (10.4%)
1,000,000 Aurora Educational Development Community
College Series 1990 Aaa/AAA 1,045,000
7.10%, 04/01/00, MBIA Insured, Pre-Refunded
1,000,000 Aurora Educational Development Revenue Bonds Aaa/AAA 1,046,250
7.25%, 04/01/00 MBIA Insured, Pre-Refunded
1,580,000 City of Aurora Colorado Educational Development
Refunding Bonds Series 1994 NR/BBB 1,690,600
6.00%, 10/15/07
1,000,000 Colorado Post Secondary Educational Facilities
Authority Refunding Revenue Bonds, NR/AAA 1,058,750
6.35%, 06/01/00, AMBAC Insured,
Pre-Refunded
1,235,000 Colorado Post Secondary Educational Facility,
Regis University Project A2/AAA 1,338,431
6.30%, 03/01/02, AMBAC Insured,
Pre-Refunded
1,170,000 Colorado Post Secondary Educational Facility, Aaa/AAA 1,276,762
5.50%, 03/01/08, MBIA Insured
1,000,000 Colorado Post Secondary Educational Facilities
Authority Refunding Revenue Bonds Series 93, A2/AAA 1,061,250
5.95%, 03/01/09, AMBAC Insured
1,000,000 Colorado State Board of Agriculture Revenue
Refunding, Colorado State University Student
Sports, Aaa/AAA 1,057,500
5.40%, 04/01/06, MBIA Insured
1,000,000 Colorado State Board of Agriculture Revenue,
Fort Lewis College Aaa/AAA 1,085,000
6.50%, 10/01/06, FGIC Insured
1,000,000 Colorado State Board of Agriculture Revenue,
University of Southern Colorado Auxiliary
Facility Aaa/AAA 1,072,500
6.25%, 08/01/07, AMBAC Insured
</PAGE>
<PAGE>
1,000,000 Colorado State Board of Agriculture Revenue
Refunding, Colorado State University Student
Sports, Aaa/AAA 1,052,500
5.45%, 04/01/08, MBIA Insured
1,500,000 Colorado Student Obligation Board Authority
Student Loan Revenue A/NR 1,552,500
6.00%, 09/01/01
1,860,000 Colorado State Colleges Western State, Aaa/AAA 1,971,600
5.50%, 05/15/09, MBIA Insured
500,000 University of Colorado Regents Research
Building Revolving Fund Revenue A2/A+ 510,885
6.85%, 06/01/03
1,000,000 University of Colorado Research Building
Revenue Aaa/AAA 1,068,750
6.00%, 06/01/06, MBIA Insured
1,000,000 University of Colorado Revenue Aaa/AAA 1,075,000
6.20%, 06/01/07, MBIA Insured
1,500,000 State of Colorado University of Northern
Colorado Auxiliary Facilities Aaa/AAA 1,642,500
5.75%, 06/01/04, MBIA Insured
1,745,000 State of Colorado University of Northern
Colorado Auxiliary Facilities Aaa/AAA 1,941,312
5.75%, 06/01/08, MBIA Insured
22,547,090
ELECTRIC (7.3%)
8,000,000 Adams County Colorado Pollution Control Revenue
Public Service Aaa/AAA 8,480,000
5.625%, 04/01/08, MBIA Insured
1,210,000 Moffat County Colorado Pollution Control Revenue Aaa/AAA 1,297,725
5.50%, 11/01/03, AMBAC Insured
2,125,000 Moffat County Colorado Pollution Control Revenue Aaa/AAA 2,334,844
5.625%, 11/01/06, AMBAC Insured
1,375,000 Platte River Power Authority Aaa/AAA 1,498,750
5.75%, 06/01/04, MBIA Insured
</PAGE>
<PAGE>
2,000,000 Platte River Power Authority Aaa/AAA 2,255,000
6.00%, 06/01/07, MBIA Insured
15,866,319
SALES TAX (8.0%)
1,000,000 Arvada Colorado Sales & Use Tax Revenue Aaa/AAA 1,072,500
6.10%, 12/01/07, FGIC Insured
2,000,000 Boulder County Colorado Open Space & Use Tax
Revenue Bonds Aaa/AAA 2,197,500
Series 1994 FGIC Insured, 5.75%, 12/15/04
2,500,000 Boulder County, Colorado Capital Improvements NR/AA- 2,712,500
5.25%, 12/15/09
1,000,000 Denver Metro Major League Baseball Stadium
Excise Tax Revenue Aaa/AAA 1,078,750
6.35%, 10/01/01, FGIC Insured, Pre-Refunded
2,000,000 Denver Metro Major League Baseball Stadium
Excise Tax Revenue Aaa/AAA 2,162,500
6.45%, 10/01/01, FGIC Insured, Pre-Refunded
2,045,000 Fort Collins Sales & Use Tax Revenue Aaa/AAA 2,162,587
5.375%, 12/01/06, FGIC Insured
1,000,000 Fort Collins Downtown Development Authority Tax
Increment Revenue Aaa/AAA 1,053,750
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
1,040,000 Lakewood Colorado Sales & Use Tax Revenue, NR/AA 1,123,200
5.25%, 12/01/09
290,000 Thornton, Colorado Sales and Use Tax Revenue, Aaa/AAA 296,960
6.80%, 09/01/99, FGIC Insured, Pre-Refunded
1,000,000 Westminster Sales & Use Tax 1991 Aaa/AAA 1,063,750
6.70%, 12/01/01, FGIC Insured
1,175,000 Westminster Colorado Sales Tax Revenue Aaa/AAA 1,289,562
5.50%, 12/01/07, FGIC Insured
</PAGE>
<PAGE>
17,293,559
WATER & SEWER (9.2%)
1,750,000 Centennial Water & Sewer District Aaa/AAA 1,931,562
5.80%, 12/01/07, FSA Insured
500,000 Colorado Water Resource & Power Development
Authority, Aaa/AAA 530,625
7.00%, 11/01/00, FGIC Insured
710,000 Colorado Water Resource & Power Development
Authority, Series A Aa1/AA 775,675
7.00%, 09/01/01, Pre-Refunded
1,000,000 Colorado Water Resource & Power Development
Authority Aaa/AAA 1,083,750
6.80%, 11/01/01, FGIC Insured, Pre-Refunded
1,000,000 Colorado Water Resource & Power Development
Authority Aaa/AAA 1,097,500
6.50%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power Development
Authority Aa1/AA 1,086,250
6.00%, 09/01/06
1,000,000 Colorado Water Resource & Power Development
Authority, Aa1/AA 1,081,250
Clean Water Revenue, 5.35%, 09/01/06
1,000,000 Colorado Water Resource & Power Development
Authority, Aaa/AAA 1,091,250
Clean Water Revenue, 5.50%, 09/01/09
1,965,000 Fort Collins Colorado Wastewater Sewer Revenue Aaa/AAA 2,090,269
5.375%, 12/01/08, FGIC Insured
1,530,000 Left Hand Water District, Series 1996 Aaa/AAA 1,677,263
5.75%, 11/15/08, MBIA Insured
1,055,000 Metro Wastewater Reclamation District, Gross
Revenue Series Aa2/AA 1,118,300
5.80%, 04/01/02, Pre-Refunded
1,270,000 Metro Wastewater Reclamation District, Gross
Revenue Series Aa2/AA 1,354,137
5.25%, 04/01/09
</PAGE>
<PAGE>
1,010,000 Northglenn Colorado Water & Sewer Aaa/AAA 1,122,363
5.75%, 12/01/06, FSA Insured
1,000,000 Pagosa Water & Sanitation Colorado Water & Sewer Aaa/AAA 1,070,000
5.25%, 12/01/08, AMBAC Insured
1,715,000 Town of Erie Aaa/AAA 1,772,881
5.125%, 12/01/10, ACA Insured
1,000,000 Westminster Colorado Water & Wastewater
Utility Enterprise-Water And Wastewater
Revenue Series 1994 Aaa/AAA 1,095,000
5.70%, 12/01/04, AMBAC Insured
19,978,075
HOSPITAL (8.5%)
780,000 Colorado Health Facility Community Provider
Pooled Loan Program Aaa/AAA 785,998
7.40%, 07/15/99, MBIA Insured
2,030,000 Colorado Health Facility Authority Hospital
Revenue North Colorado Aaa/AAA 2,189,863
Medical Center 5.60%, 05/15/05, MBIA Insured
1,000,000 Colorado Health Facility Authority Hospital
Revenue Medical Center Aaa/AAA 1,092,500
5.50%, 12/01/08, MBIA Insured
1,000,000 Colorado Health Facility Authority Hospital
Revenue Medical Center Aa2/AA 1,078,750
5.375%, 12/01/09, MBIA Insured
1,500,000 Colorado Health Facility Authority Hospital
Revenue Medical Center Aaa/AAA 1,588,125
5.25%, 12/01/10, MBIA Insured
2,300,000 Colorado Health Facility Authority Hospital
Revenue Medical Center Aaa/AAA 2,300,000
3.90%, 12/01/25, MBIA Insured
2,255,000 Colorado Health Facility Community Provider
Pooled Loan Revenue Aaa/AAA 2,469,225
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
</PAGE>
<PAGE>
1,000,000 Colorado Health Facility Authority Sisters
of Charity Health Care Aaa/AAA 1,153,750
6.25%, 05/15/09, AMBAC Insured
1,460,000 Colorado Springs Hospital Revenue Aaa/AAA 1,589,575
5.50%, 12/15/06, MBIA Insured
1,000,000 Pueblo County Colorado Hospital Facilities,
Series A Aaa/AAA 1,078,750
6.80%, 09/01/05, MBIA Insured
1,475,000 University Colorado Hospital Authority
Hospital Revenue Aaa/NR 1,611,438
5.50%, 11/15/07, AMBAC Insured
18,474,874
HOUSING (7.4%)
1,600,000 Adams County Colorado Multi-family Housing
Revenue, Brittany Station Series A, FNMA NR/AAA 1,700,000
5.40%, 09/01/05
885,000 City of Arvada Colorado Multi-family Housing
Revenue, Springwood NR/AAA 931,463
5.60%, 08/20/08, GNMA Insured
160,000 Colorado Housing Finance Authority 1991,
Series A-3 NR/AA+ 165,200
6.10%, 11/01/00
160,000 Colorado Housing Finance Authority 1991,
Series A-1 NR/AA+ 167,400
6.20%, 11/01/01
390,000 Colorado Housing Finance Authority 1991,
Series A A1/A 402,675
6.90%, 05/01/01
1,200,000 Colorado Housing Finance Authority, SFM
Series A-2 NR/AA+ 1,276,500
6.65%, 11/01/06
665,000 Colorado Housing Finance Authority, SFM
Series 1994C Aa2/NR 706,563
6.00%, 12/01/04
</PAGE>
<PAGE>
1,565,000 Colorado Housing Finance Authority, SFM
Series D-2 Aa2/NR 1,658,900
5.625%, 06/01/10
795,000 Colorado Housing Finance Authority, SFM
Series A-2 Aa2/NR 851,644
5.75%, 11/01/10
1,530,000 Colorado Housing Finance Authority, SFM
Series 1994C Aa2/NR 1,640,925
6.25%, 12/01/12
2,000,000 Colorado Housing Finance Authority Aa2/NR 2,197,500
6.50%, 05/01/16
1,000,000 Colorado Housing Finance Authority Aa2/NR 1,092,500
6.125%, 11/01/23
245,000 Commerce City Single Family Revenue Series A Aa1/NR 258,169
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+ 1,070,000
6.10%, 03/01/06
1,500,000 Snowmass Village Multi-family Revenue Refunding Aaa/AAA 1,605,000
6.30%, 12/15/08, FSA Insured
280,000 Southwestern Colorado Single Family Revenue
Partnership, Refunding Aa2/NR 294,000
7.10%, 09/01/04
150,000 Summit County Single Family Revenue Refunding
Series A Aaa/NR 156,375
7.25%, 12/01/04
16,174,814
INDUSTRIAL DEVELOPMENT REVENUE (1.1%)
1,860,000 Denver City & County, Industrial Development
Revenue, Rollie R. Kelley Project NR/A+ 1,879,139
7.00%, 06/01/06, LOC FBS
555,000 Denver City & County Industrial Development
Revenue NR/A+ 559,590
6.40%, 06/01/99
</PAGE> 2,438,729
<PAGE>
TRANSPORTATION (2.0%)
1,000,000 Arapahoe County Colorado E-470 Vehicle
Registration Revenue Bonds Aaa/AAA 1,091,250
5.45%, 08/31/07, MBIA Insured
2,000,000 Regional Transportation District Sales Tax Revenue Aaa/AAA 2,180,000
5.50%,11/01/05, FGIC Insured
1,000,000 Regional Transportation District Sales Tax Revenue Aaa/AAA 1,086,250
6.15%,11/01/05, FGIC Insured
4,357,500
LEASE (0.3%)
640,000 Denver City & County School District Aaa/AAA 656,653
6.85%, 12/15/99, FGIC Insured
656,653
MISCELLANEOUS REVENUE (2.8%)
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,078,750
6.50%, 12/01/02
2,275,000 Denver Colorado City & County Helen Bonfils
Project NR/AA- 2,505,344
5.875%, 12/01/09
1,000,000 South Suburban Park & Recreational District Baa/NR 1,100,000
6.00%, 11/01/07
1,230,000 Thornton, Colorado Development Authority Aaa/AAA 1,363,763
5.75%, 12/01/06, MBIA Insured
6,047,857
Total Revenue Bonds 123,835,470
Total Investments (cost $204,818,428*) 99.3% 215,653,401
Other assets in excess of liabilities .7 1,493,695
Net Assets 100.0% $217,147,096
* Cost for Federal tax purposes is identical.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
TAX-FREE FUND OF COLORADO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<S> <C> <C>
ASSETS
Investments at value (cost $204,818,428) $215,653,401
Cash 132,039
Interest receivable 1,791,483
Receivable for Fund shares sold 153,201
Receivable for investment securities sold 40,194
Other assets 7,267
Total assets 217,777,585
LIABILITIES
Dividends payable 266,277
Payable for Fund shares redeemed 222,897
Management fee payable 92,128
Accrued expenses 19,813
Distribution fees payable 29,374
Total liabilities 630,489
NET ASSETS $217,147,096
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value
$.01 per share $ 204,266
Additional paid-in capital 204,354,854
Net unrealized appreciation on investments 10,834,973
Accumulated net realized gain on investments 1,753,003
$217,147,096
CLASS A
Net Assets $208,771,227
Capital shares outstanding 19,639,683
Net asset value and redemption price per share $ 10.63
Offering price per share (100/96 of $10.63 adjusted to nearest cent) $ 11.07
CLASS C
Net Assets $ 1,328,416
Capital shares outstanding 125,196
Net asset value and offering price per share $ 10.61
Redemption price per share (*generally, a charge of 1% is imposed on
the proceeds of shares redeemed during the first 12 months
after purchase) $ 10.61*
CLASS Y
Net Assets $ 7,047,453
Capital shares outstanding 661,698
Net asset value, offering and redemption price per share $ 10.65
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $11,332,773
Expenses:
Management fee (note 3) $ 1,087,501
Transfer and shareholder servicing agent fees 141,718
Distribution and service fees (note 3) 116,922
Trustees' fees and expenses (note 8) 73,819
Shareholders' reports and proxy statements 54,330
Legal fees 49,707
Custodian fees 32,227
Audit and accounting fees 27,750
Registration fees and dues 13,926
Insurance 3,532
Miscellaneous 27,329
1,628,761
Expenses paid indirectly (note 7) (40,851)
Net expenses 1,587,910
Net investment income 9,744,863
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 1,753,003
Change in unrealized appreciation on investments (1,140,899)
Net realized and unrealized gain on investments 612,104
Net increase in net assets resulting from operations $10,356,967
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
1998 1997
</CAPTION>
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 9,744,863 $ 10,526,816
Net realized gain from securities transactions 1,753,003 1,694,628
Change in unrealized appreciation on investments (1,140,899) 3,107,464
Change in net assets from operations 10,356,967 15,328,908
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (9,122,237) (10,364,025)
Distributions in excess of net investment income - (335,411)
Net realized gain on investments (771,886) -
Class C Shares:
Net investment income (41,352) (38,032)
Distributions in excess of net investment income - (1,231)
Net realized gain on investments (3,498) -
Class Y Shares:
Net investment income (280,993) (124,757)
Distributions in excess of net investment income - (4,037)
Net realized gain on investments (23,772) -
Change in net assets from distributions (10,243,738) (10,867,493)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 21,817,536 25,290,827
Reinvested dividends and distributions 6,045,620 6,533,875
Cost of shares redeemed (33,853,380) (28,569,850)
Change in net assets from capital share transactions (5,990,224) 3,254,852
Change in net assets (5,876,995) 7,716,267
NET ASSETS:
Beginning of period 223,024,091 215,307,824
End of period $217,147,096 $223,024,091
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<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. On April
30, 1998 the Fund established Class I shares, which are offered and
sold only through financial intermediaries and are not offered
directly to retail investors. At December 31, 1998 there were no
Class I shares outstanding. 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.
</PAGE>
<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 and disclosure of
contingent 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.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Aquila Management Corporation (the "Manager"), the Fund's
founder and sponsor, serves as the Manager for the Fund under an
Advisory and Administration Agreement with the Fund. The portfolio
management of the Fund has been delegated to a Sub-Adviser as
described below. Under the Advisory and Administration Agreement,
the Manager provides all administrative services to the Fund, other
than those relating to the day-to-day portfolio management. The
Manager's services include providing the office of the Fund and
all related services as well as overseeing the activities of the
Sub-Adviser and all the various support organizations to theFund
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 Manager 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 0.50 of 1%
on the Fund's net assets. This fee will be reduced to 0.40% if
certain payments are made under the Fund's Distribution Plan
relative to Class A Shares.
</PAGE>
<PAGE>
KPM Investment Management, Inc. (the "Sub-Adviser"), a
wholly-owned subsidiary of KFS Corporation, a member of the
nationally oriented Mutual of Omaha Companies, serves as the
Investment Sub-Adviser for the Fund under a Sub-Advisory Agreement
between the Manager and the Sub-Adviser. Under this agreement, the
Sub-Adviser continuously provides, subject to oversight of the
Manager and the Board of Trustees of the Fund, the investment
program of the Fund and the composition of its portfolio, arranges
for the purchases and sales of portfolio securities, and provides
for daily pricing of the Fund's portfolio. For its services, the
Sub-Adviser is entitled to receive a fee from the Manager which is
payable monthly and computed as of the close of business each day
at the annual rate of 0.20 of 1% on the Fund's net assets.
This fee will be reduced to 0.16% if certain payments are made
under the Fund's Distribution Plan relative to Class A Shares.
For the year ended December 31, 1998, the Fund incurred
fees for advisory and administrative services of $1,087,501.
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 Manager and the Sub-Adviser are more fully defined
in the Fund's Prospectus and Statement of Additional Information.
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 Manager from an annual rate of 0.50 of 1% to
0.40% on all net assets so that the combined payments of these fees
will 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, 1998, service fees on Class A Shares amounted to
$104,938, of which the Distributor received $4,466.
</PAGE>
<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, 1998, amounted to $8,988. 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, 1998, amounted to
$2,996. The total of these payments with respect to Class C Shares
amounted to $11,984, of which the Distributor received $6,345.
Specific details about the Plans are more fully defined
in the Fund's Prospectus and Statement of Additional Information.
Under a Distribution Agreement, 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, 1998, the Distributor received sales commissions
of $73,271 on sales of Class A Shares.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1998, purchases of
securities and proceeds from the sales of securities aggregated
$32,725,763 and $37,810,673, respectively.
At December 31, 1998, aggregate gross unrealized
appreciation for all securities in which there is an excess of
market value over tax cost amounted to $10,861,168 and aggregate
gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value amounted to $26,195 for a
net unrealized appreciation of $10,834,973.
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>
<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 statement 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 taxes at
ordinary income and/or capital gain rates.
7. EXPENSES
The Fund has negotiated an expense offset arrangement
with its custodian wherein it receives credit toward the reduction
of custodian fees and other Fund expenses whenever there are
uninvested cash balances. The Statement of Operations reflects the
total expenses before any offset, the amount of offset and the net
expenses. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in
income-producing assets rather than leave cash on deposit.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year 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. A meeting of the independent
trustees is often held prior to each quarterly Board Meeting for
which each attendee is paid a fee of $250. 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, 1998 such reimbursements averaged approximately
$4,800 per Trustee. One of the Trustees, who is affiliated with the
Manager, is not paid any Trustee fees.
</PAGE>
<PAGE>
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
</CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,425,794 $15,152,177 1,718,765 $17,904,456
Reinvested distributions 566,091 6,002,679 621,035 6,486,344
Cost of shares redeemed (2,717,744) (28,777,984) (2,568,761) (26,830,982)
Net change (725,859) (7,623,128) (228,961) (2,440,182)
CLASS C SHARES:
Proceeds from shares sold 37,561 396,665 11,536 120,381
Reinvested distributions 3,233 34,224 3,049 31,824
Cost of shares redeemed (13,267) (139,797) (4,876) (51,711)
Net change 27,527 291,092 9,709 100,494
CLASS Y SHARES:
Proceeds from shares sold 591,639 6,268,694 691,207 7,265,990
Reinvested distributions 822 8,717 1,497 15,707
Cost of shares redeemed (463,517) (4,935,599) (159,960) (1,687,157)
Net change 128,944 1,341,812 532,744 5,594,540
Total transactions in Fund
shares (569,388) $(5,990,224) 313,492 $ 3,254,852
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A(1)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.62 $10.41 $10.56 $9.82 $10.77
Income from Investment Operations:
Net investment income 0.47 0.50 0.52 0.54 0.55
Net gain (loss) on securities (both realized and
unrealized) 0.04 0.23 (0.13) 0.74 (0.95)
Total from Investment Operations 0.51 0.73 0.39 1.28 (0.40)
Less Distributions (note 6):
Dividends from net investment income (0.46) (0.52) (0.54) (0.54) (0.55)
Distributions from capital gains (0.04) - - - -
Total Distributions (0.50) (0.52) (0.54) (0.54) (0.55)
Net Asset Value, End of Period $10.63 $10.62 $10.41 $10.56 $9.82
Total Return (not reflecting sales charge)(%) 4.92 7.21 3.78 13.28 (3.80)
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 208,771 216,321 214,392 219,306 199,075
Ratio of Expenses to Average Net Assets (%) 0.75 0.75 0.70 0.64 0.61
Ratio of Net Investment Income to Average Net
Assets (%) 4.47 4.78 5.02 5.20 5.32
Portfolio Turnover Rate (%) 15.20 22.66 10.96 14.20 15.53
The expense and net investment income ratios without the effect of the
voluntary waiver of a portion of the management fee in years ended December
31, 1996, 1995 and 1994 were:
Ratio of Expenses to Average Net Assets (%) - - 0.74 0.76 0.72
Ratio of Net Investment Income (Loss) to Average
Net Assets (%) - - 4.98 5.08 5.21
The expense ratios after giving effect to the waiver and expense offset for
uninvested cash balances were:
Ratio of Expenses to Average Net Assets (%) 0.73 0.72 0.69 0.63 0.57
(1) Designated as Class A Shares on April 30, 1996.
Note: On October 1, 1992, Kirkpatrick, Pettis, Smith, Polian Inc. became the
Fund's Investment Adviser and on July 1, 1994, KPM Investment
Management, Inc., a wholly-owned subsidiary of Kirkpatrick, Pettis,
Smith, Polian Inc., became the Fund's Investment Adviser. Pursuant to
new management arrangements which were effective on June 29, 1998, KPM
Investment Management, Inc. was appointed as the Fund's Investment
Sub-Adviser.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C(1) CLASS Y(1)
PERIOD(2) PERIOD(2)
ENDED ENDED
YEAR ENDED DECEMBER 31, DEC. 31 YEAR ENDED DECEMBER 31, DEC. 31,
1998 1997 1996 1998 1997 1996
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.60 $10.41 $10.31 $10.64 $10.41 $10.31
Income from Investment Operations:
Net investment income 0.37 0.40 0.28 0.48 0.52 0.38
Net gain (loss) on securities (both
realized and unrealized) 0.04 0.21 0.12 0.04 0.25 0.12
Total from Investment Operations 0.41 0.61 0.40 0.52 0.77 0.50
Less Distributions (note 6):
Dividends from net investment income (0.36) (0.42) (0.30) (0.47) (0.54) (0.40)
Distributions from capital gains (0.04) - - (0.04) - -
Total Distributions (0.40) (0.42) (0.30) (0.51) (0.54) (0.40)
Net Asset Value, End of Period $10.61 $10.60 $10.41 $10.65 $10.64 $10.41
Total Return (not reflecting sales charge) (%) 3.92 5.99 3.78+ 4.97 7.65 4.87+
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 1,328 1,036 915 7,047 5,668 0.1
Ratio of Expenses to Average Net
Assets (%) 1.69 1.69 1.65* 0.69 0.70 0.65*
Ratio of Net Investment Income to
Average Net Assets (%) 3.50 3.81 4.07* 4.50 4.76 5.07*
Portfolio Turnover Rate (%) 15.20 22.66 10.96 15.20 22.66 10.96
The expense and net investment income ratios without the effect of the
voluntary waiver of a portion of the management fee in the period ended
December 31, 1996 were:
Ratio of Expenses to Average Net
Assets (%) - - 1.69* - - 0.69*
Ratio of Net Investment Income (Loss)
to Average Net Assets (%) - - 4.03* - - 5.03*
The expense ratios after giving effect to the waiver and expense offset for
uninvested cash balances were:
Ratio of Expenses to Average Net
Assets (%) 1.68 1.66 1.64* 0.68 0.67 0.64*
(1) New Class of Shares established on April 30, 1996.
(2) From April 30, 1996 to December 31, 1996.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
FEDERAL TAX STATUS OF 1998 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1998, of the
total amount of dividends paid by Tax-Free Fund of Colorado, 92.20%
was "exempt-interest dividends" and the balance was net realized
long-term gains. $799,156 of the amount distributed by the Fund
during fiscal 1998 is designated as a dividend from 20% net
long-term capital gains.
Prior to January 31, 1999, shareholders were mailed IRS
Form 1099-DIV which contained information on the status of
distributions paid for the 1998 CALENDAR YEAR.
</PAGE>
<PAGE>
PREPARING FOR YEAR 2000 (UNAUDITED)
The Trustees and officers of the Fund have been
monitoring issues involving preparedness for the turn of the
century for some time in an effort to minimize or eliminate any
potential impact upon the Fund and its shareholders. Our officers
have focussed significant time and effort in order that the various
computerized functions that could affect the Fund are ready
by the beginning of the year 2000.
The Fund is highly reliant on certain mission-critical
suppliers' services. Each supplier of these services has provided
the Fund's officers with assurances that it is actively addressing
potential problems relating to the year 2000. The officers, in
turn, are monitoring and will continue to monitor the progress of
its suppliers.
As you can well understand, we cannot directly control
our supplier operations. We assure you, however, that we recognize
a responsibility to inform our shareholders if in the future we
become aware of any developments which would lead us to believe
that the Fund will be significantly affected by year 2000 problems.
We will continue to keep you up-to-date through future
communications.
</PAGE>
