[LOGO] Tax Free
Fund of
Vermont
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
Semiannual
Report to
Shareholders
June 30, 1996
[LARGE VT LOGO]
<PAGE>
June 30, 1996
To the Shareholders of
Tax Free Fund of Vermont:
During the first six months of 1996, your Fund performed among the top state tax
free bond funds despite a weak performance by the municipal bond market in
general. Interest rates on tax exempt bonds increased almost continuously
throughout the entire first half of 1996 and municipal bonds accordingly
decreased in value. The Fund's excellent performance was achieved principally as
a result of the management of the Fund to realize substantial gains on
pre-refunded bond positions held in the Fund's portfolio. Your Fund's net asset
value, reflecting these circumstances, decreased from $9.96 per share at year
end 1995 to $9.83 per share on June 30, 1996.
Also during the first half of 1996 the Fund continued to make significant
progress toward achieving its objective of reducing the ratio of expenses to
average net assets. During the first six months of 1995, the Fund reduced its
expense ratio by 9%, from 1.49% to 1.38%. The continuous improvement in this
important ratio since the inception of the Fund demonstrates that the Fund is
achieving success in reducing the cost of operating the Fund and thereby
increasing the income return to shareholders.
The Fund has maintained both the diversity and the credit quality of the
bondholdings in the Fund's investment grade portfolio. As of June 30, 1996, the
Fund's portfolio included securities of 16 different tax-exempt issuers. The
credit quality of the Fund's portfolio as of June 30, 1996 was as follows:
Percent of
Rating Portfolio
Category Assets
----------- ---------------
AAA 6.9%
AA 8.5
A 21.9
BBB 62.7
The Fund paid dividends totalling 22.3 cents per share during the first six
months of 1996.
The Tax Free Fund of Vermont offers Vermont residents a no load tax free mutual
fund that earns income free of both federal and Vermont income taxes. We
encourage you to call us toll-free or visit our office to discuss any aspect of
the Fund's management or operation. In addition, your suggestions, comments and
advice are always welcomed. Thank you again for your confidence, investment in
and support of the Fund.
Yours truly,
/s/ John T. Pearson
John T. Pearson
President
<PAGE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS
June 30, 1996
Unaudited
<TABLE>
<CAPTION>
Municipal Bonds (94.7%) Maturity Principal Market
Rate Date Amount Value
---- ------- -------- ------------
<S> <C> <C> <C> <C>
Vermont (93.3%)
Vermont Educational and
Health Buildings Agency
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.1% 02/01/31 $ 275,000 $ 290,813
Vermont Educational and
Health Buildings Agency
1996 Revenue Bond
(St. Michael's College Project) 6.0 04/01/21 350,000 349,125
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(Middlebury College Project) 5.375 11/01/26 300,000 276,375
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.15 04/15/14 1,115,000 1,174,931
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.375 04/15/24 200,000 212,250
Vermont Educational and
Health Buildings Financing Agency
1993 Revenue Bond
(Champlain College Project) 6.0 10/01/13 245,000 248,981
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(Landmark College Project) 7.15 11/01/14 325,000 353,844
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(Lyndon Institute Project) 6.6 12/01/14 350,000 360,938
Swanton, Vermont
1993 Village Electric System
Revenue Bond 6.7 12/01/23 1,650,000 1,722,187
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1990 Series 1 7.3 05/01/05 275,000 283,250
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1989 Series A 7.85 12/01/29 265,000 276,925
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1988 Series B 8.1 06/01/22 380,000 395,675
See accompanying notes to financial statements.
2
<PAGE>
Maturity Principal Market
Rate Date Amount Value
---- ------- -------- ------------
Vermont (Continued)
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1990 Series 1 6.8% 05/01/25 $100,000 $ 103,000
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1994 Series 5 6.875 11/01/16 100,000 103,750
St. Albans, Vermont
Bellow Free Academy
General Obligation Bond 5.6 07/01/16 160,000 154,400
Vermont Student Assistance
Corporation, 1992 Series B
Revenue Bond 6.7 12/15/12 300,000 315,000
Total Vermont Bonds 6,621,444
----------
Puerto Rico (1.4%)
Puerto Rico Public Building
Authority, 1993 Series L
Revenue Bond 5.75 07/01/16 100,000 97,125
Total Puerto Rico Bonds 97,125
----------
Total investments in securities
(Cost $6,615,888) (94.7%) (1) 6,718,569
Other assets and liabilities, net (5.3%) 376,097
----------
Net assets (100%) $7,094,666
==========
(1) The cost of investments for federal income tax purposes amounted to $6,615,888.
Gross unrealized appreciation and depreciation of investments based on identified
tax cost at June 30, 1996 are as follows:
Gross unrealized appreciation $ 138,201
Gross unrealized depreciation (35,520)
----------
Net unrealized appreciation $ 102,681
==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
Unaudited
<TABLE>
<S> <C>
ASSETS
- ------
Investments in securities at market value (identified cost $6,615,888) (Note 1-A) $6,718,569
Cash 9,893
Receivable for
Investments sold 333,157
Interest 71,436
Prepaid expenses and other assets 58,151
Due from fund adviser 5,901
---------
Total assets 7,197,107
---------
LIABILITIES
- -----------
Accrued expenses 102,441
---------
Total liabilities 102,441
---------
NET ASSETS
- ----------
(Applicable to 721,588 shares outstanding, $.01 par value, 10,000,000 shares authorized) $7,094,666
=========
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
- --------------------------------------------------------
($7,094,666 / 721,588) $9.83
=========
NET ASSETS
- ----------
At June 30, 1996, net assets consisted of:
Paid-in capital $7,129,840
Accumulated net realized loss on investments (137,855)
Unrealized appreciation of investments 102,681
---------
$7,094,666
=========
</TABLE>
STATEMENT OF OPERATIONS
Six months ended June 30, 1996
Unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME
- -----------------
Income
Interest $ 205,441
--------
Expenses
Investment advisory fees (Note 4) 24,446
Audit and legal fees 5,151
Insurance 5,593
Printing and postage 5,939
Administrative and shareholder services (Note 4) 4,938
Custody fees 1,253
Portfolio pricing costs 602
Registration fees (1,101)
Directors fees and expenses 1,240
Other 269
--------
Total expenses 48,330
--------
Net investment income 157,111
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------
Net realized gain on investments sold 46,418
Net change in unrealized appreciation (134,072)
--------
Net gain on investments (87,654)
--------
Net increase in net assets resulting from operations $ 69,457
========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Six months ended June 30, 1996
Unaudited
<TABLE>
<CAPTION>
1996
----------
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------
Net investment income $ 157,111
Net realized gain (loss) on investments 46,418
Net change in unrealized appreciation (134,072)
--------
Net increase in net assets resulting from operations 69,457
DISTRIBUTIONS TO SHAREHOLDERS FROM
- ----------------------------------
Net investment income (157,111)
CAPITAL SHARE TRANSACTIONS (Note 3)
- -----------------------------------
Increase in net assets resulting from capital share transactions 221,588
--------
Total increase in net assets 133,934
NET ASSETS
- ----------
Beginning of period 6,960,732
--------
End of period $7,094,666
========
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
January 1, 1996 Year Ended
to December 31,
June 30, 1996 1995
---------------- ------------
<S> <C> <C>
NET ASSET VALUE
- ---------------
Beginning of period $ 9.96 $ 9.30
-------------- ----------
Income from investment operations
Net investment income .22 .49
Net gain (loss) on securities (both realized and unrealized) (.13) .66
-------------- ----------
Total from investment operations .09 1.15
-------------- ----------
Less distributions
Dividends from net investment income (.22) (.49)
-------------- ----------
End of period $ 9.83 $ 9.96
============== ==========
TOTAL RETURN
- ------------ 1.81%(1) 12.65%
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets at end of period (000's) $7,095 $6,961
Ratio of expenses to average net assets 1.38%(1) 1.49%
Ratio of net investment income to average net assets 4.49%(1) 5.06%
PORTFOLIO TURNOVER 77% 182%
- ------------------
</TABLE>
(1) Annualized
See accompanying notes to financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
Unaudited
(1) Summary of Significant Accounting Policies
The Tax Free Fund of Vermont, Inc. (the "Fund") was incorporated under the laws
of the State of Vermont on May 20, 1991. The Fund is registered under the
Investment Company Act of 1940, as amended, as a non-diversified open-end
investment company. The Fund's investment goal is to seek the highest level of
current income exempt from Federal and Vermont income taxes for shareholders as
is consistent with the prudent investment management of the principal invested
by shareholders.
The following is a summary of the significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
(A) Security Valuation
Portfolio securities are valued by an independent pricing service using
market quotations, prices provided by market makers, or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics, in accordance with procedures established in good
faith by the Board of Directors.
(B) Security Transactions and Investment Income
Security transactions are accounted for on the trade date. Interest income
is accrued on a daily basis. Bond premiums and discounts are
amortized/accreted as required by the Internal Revenue Code.
(C) Income Taxes
It is the Fund's policy to qualify as a regulated investment company by
complying with the requirements of the Internal Revenue Code applicable to
regulated investment companies, including the distribution of all taxable
income to the Fund's shareholders. Therefore, no Federal income tax
provision is required. By qualifying as a "regulated investment company"
for Federal income tax purposes, the Fund is not subject to Vermont income
taxes on net income and net capital gains, if any, that are distributed to
the Fund's shareholders. Dividends paid by the Fund to shareholders which
qualify as "exempt interest dividends" for Federal income tax purposes are
also excludable from shareholders' gross income for Vermont state income
tax purposes so long as the total assets of the Fund are invested in
Vermont Municipal Bonds and Other Municipal Bonds as defined in the
prospectus. The Fund intends to avoid excise tax liability by making the
required distributions under the Internal Revenue Code.
(D) Distributions to Shareholders
The Fund intends to declare daily and distribute monthly to its
shareholders dividends from net investment income and to declare and
distribute annually net realized long-term capital gains, if any. Each
distribution will be made in shares or, at the option of the shareholder,
in cash.
(E) Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) Purchases and Sales of Securities
Realized gains and losses are recorded on the specific identification method.
Costs of purchases and proceeds from sales of securities for the Fund for the
six months ended June 30, 1996 aggregated $5,844,350 and $5,044,156,
respectively.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996
(Unaudited)
(3) Capital Share Transactions
Transactions in shares of the Fund for the six months ended June 30, 1996 were
as follows:
Shares Amount
------- --------
Shares sold 53,796 $ 533,099
Shares issued in reinvestment of dividends 9,738 96,470
Shares redeemed (40,963) (407,981)
----- ------
Net increase 22,571 $ 221,588
===== ======
(4) Investment Advisory Fee and Other Transactions with Affiliates
As compensation for its management services, the Fund has agreed to pay Vermont
Fund Advisors, Inc. (the "Advisor") a fee computed at the annual rate of .7%
(seven-tenths of 1 percent) of average daily net asset value. However, the
Advisor may voluntarily waive or refund investment advisory fees payable to it
under the Advisory Agreement and assume and pay or otherwise reimburse the Fund
for other operating expenses to whatever extent deemed necessary and
appropriate. There was no reimbursement made by the Advisor for the six months
ended June 30, 1996.
In addition, the Fund has entered into an Administrative Services Agreement with
the Advisor. The Agreement provides for a fee computed at a rate of .08%
(eight-one hundredths of 1 percent) on the average daily net asset value of the
Fund to be paid for administrative services received by the Fund. For the six
months ended June 30, 1996, administrative services fees paid by the Fund
totaled $2,794.
The president, director and sole shareholder of the Advisor also serves as
president and as a director of the Fund. Officers of the Fund receive no
compensation directly from the Fund. The directors of the Fund were paid $700 in
fees for the six months ended June 30, 1996.
(5) Concentration of Credit Risk
The Fund invests a substantial portion of its investments in debt obligations
issued by the State of Vermont and its political sub-divisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is more
susceptible to factors adversely affecting issuers of Vermont municipal
securities than is a fund that is not concentrated in these issuers to the same
extent.
7
