[logo]
Tax Free
Fund of
Vermont
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
Annual
Report to
Shareholders
December 31, 1995
[logo]
<PAGE>
December 31, 1995
To the Shareholders of
Tax Free Fund of Vermont:
Throughout 1995 the municipal bond market turned in an extremely strong
performance. The Fund kept pace with the overall bond market results by
producing a total calendar year return of 12.65%.
As interest rates in general declined throughout 1995, almost one-half of the
Fund's bondholdings at the beginning of 1995 were either called or
prerefunded. The Fund's management strategy assumed a continuation of this
trend and resulted in the Fund purchasing several significant blocks of bonds
which, as of year end 1995, hold the potential for being prerefunded. As 1995
ended, the Fund was well positioned to benefit in 1996 and thereafter from
the capital gains which almost invariably accompany such prerefundings.
The implementation of this strategy required a substantial restructuring and
repositioning of the portfolio. This effort in large part resulted in an
increase in the Fund's turnover ratio from prior years and allowed the Fund
to be invested in accordance with its strategy as 1995 ended.
The Fund paid dividends totalling 49 cents per share during 1995, while the
Fund's net asset value was $9.96 per share on December 31, 1995 compared to
$9.30 on December 31, 1994.
Current shareholders and new investors continued to recognize the investment
value of the Fund by increasing the Fund's total net assets by over 20%, to
$7.0 million at year end 1995 from $5.8 million at the beginning of the year,
this during a time when many municipal bond funds were suffering decreases in
total net assets.
The Tax Free Fund of Vermont offers Vermont residents a no load opportunity
to earn 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,
[Signature of John T. Pearson]
John T. Pearson
President
<PAGE>
$10,000 Investment in Fund Compared to
Lehman Muni Bond Index
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 12.65%
INCEPTION 5.53%
[Tabular Representation of Line Graph]
T/F Fund of Vermont Lehman Muni Index
-------------------- -------------------
9/18/91 $10,000.00 $10,000.00
12/31/91 $10,110.00 $10,389.00
12/31/92 $10,651.00 $11,198.00
12/31/93 $11,211.00 $12,565.00
12/31/94 $11,181.00 $11,915.00
12/31/95 $12,595.00 $13,995.00
The graph above compares the increase in value of a $10,000 investment in
the Tax Free Fund of Vermont, Inc. with the performance of the Lehman Muni
Bond Index. The objective of the graph is to permit you to compare the
performance of the Fund with the current market and to give perspective to
market conditions and investments strategies and techniques pursued by the
investment manager that materially affected the performance of the Fund. The
Lehman Muni Bond Index reflects reinvestment of dividends but not the
expenses of the Fund.
From its inception, the Fund has been managed in accordance with a strategy
of producing a high level of income substantially free of both Vermont and
federal income taxes while at the same time minimizing fluctuations in the
Fund's share price. This strategy has been implemented by investing generally in
long term municipal bonds of issuers in Vermont with a portion of the Fund's
assets specifically invested in various issues of Vermont Housing Finance Agency
bonds ("Housing Bonds"). These Housing Bonds usually carry relatively high
yields yet generally fluctuate less in price as a function of changes in
interest rates than is the case with other types of municipal bonds. Therefore,
as interest rates declined and municipal bond prices rose throughout 1995, the
Housing Bonds in the Fund's portfolio increased less in value than other
municipal bonds of comparable credit quality and maturity. In 1994 and prior
years, the cause and effect was the reverse.
Vermont municipal bonds also are generally of a higher credit quality than
similar bonds issued elsewhere nationwide. Accordingly, as interest rates
decreased during 1995, the decreases in yield and corresponding increases in
principal value of the Fund's portfolio of Vermont municipal bonds were less
than the municipal bond market in general.
As a result, during 1995 the Fund modestly underperformed its peer group
as well as most municipal bond market indices. In the graph above, the Fund's
outstanding performance is demonstrated by the fact that the value of $10,000
invested in the Fund increased at a slightly lesser rate from the prior year
compared to the comparative index investment for the same period.
1
<PAGE>
[Tait, Weller & Baker Letterhead]
[Certified Public Accountants]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Tax Free Fund of Vermont, Inc.
Rutland, Vermont
We have audited the accompanying statement of assets and liabilities of
the Tax Free Fund of Vermont, Inc., including the portfolio of investments, as
of December 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years in
the period then ended and for the period September 18, 1991 (commencement of
operations) to December 31, 1991. 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, 1995, by correspondence with the custodian and brokers. 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 the
Tax Free Fund of Vermont, Inc. as of December 31, 1995, and the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended and for the period September 18, 1991 to
December 31, 1991, in conformity with generally accepted accounting principles.
[Signature of Tait, Weller & Baker]
Philadelphia, Pennsylvania
January 31, 1996
2
<PAGE>
TAX FREE FUND OF VERMONT FINANCIAL STATEMENTS DECEMBER 31, 1995
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Maturity Principal Market
Municipal Bonds (86.5%) Rate Date Amount Value
---- --------- -------- -----------
<S> <C> <C> <C> <C>
Vermont (86.3%)
Vermont Educational and
Health Buildings Financing Agency
1992 Series A Revenue Bond
(Central Vermont Hospital Project) 7.0% 10/01/22 $ 300,000 $ 318,375
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.1 02/01/31 275,000 298,375
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.15 04/15/14 1,115,000 1,205,594
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.375 04/15/24 200,000 217,500
1993 Revenue Bond
(Champlain College Project) 6.0 10/01/13 245,000 258,169
1994 Revenue Bond
(Landmark College Project) 7.15 11/01/14 500,000 569,375
Swanton Village, Vermont
1993 Electric System
Revenue Bond 6.7 12/01/23 1,400,000 1,480,500
Vermont Housing Finance Agency
Single Family Mortgage-Backed Bond
1990 Series 2 7.3 05/01/25 275,000 289,780
1989 Series A 7.85 12/01/29 265,000 280,569
1988 Series B 8.1 06/01/22 325,000 342,875
1990 Series 1 6.8 05/01/25 300,000 309,375
1994 Series 5 6.875 11/01/16 100,000 106,750
Chittenden County, Vermont
Waste District
1992 General Obligation Bonds 6.6 01/01/12 300,000 327,375
---------
Total Vermont Bonds 6,004,612
Puerto Rico (0.2%)
Puerto Rico Finance Corporation
1988 Mortgage Revenue Bonds 7.65 10/15/22 15,000 15,000
---------
Total investments in securities
(Cost $5,782,860) (86.5%) (1) 6,019,612
Other assets and liabilities, net
(13.5%) 941,120
---------
Net assets (100%) $6,960,732
=========
</TABLE>
(1) The cost of investments for federal income tax purposes amounted to
$5,782,860. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $
239,854
Gross unrealized depreciation (3,102)
---------
Net unrealized appreciation $236,752
=========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Investments in securities at market value (identified cost $5,782,860) (Note 1-A) $6,019,612
Cash 12,039
Receivable for
Investments sold 846,604
Interest 72,104
Prepaid expenses and other assets 38,716
Due from investment advisor 4,360
---------
Total assets 6,993,435
---------
LIABILITIES
- -----------
Payable for investments purchased 32,234
Accrued expenses 469
---------
Total liabilities 32,703
---------
NET ASSETS
- ----------
(Applicable to 699,043 shares outstanding, $.01 par value, 10,000,000 shares
authorized) $6,960,732
==========
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
- --------------------------------------------------------
($6,960,732 / 699,043) $9.96
=====
NET ASSETS
- ----------
At December 31, 1995, net assets consisted of:
Paid-in capital $6,908,324
Accumulated net realized loss on investments (184,344)
Unrealized appreciation of investments 236,752
----------
$6,960,732
==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
- -----------------
Income
Interest $425,637
-------
Expenses
Investment advisory fees (Note 4) 45,485
Printing and postage 11,705
Audit fees 10,000
Insurance 9,493
Administrative and shareholder services (Note 4) 8,296
Portfolio pricing costs 2,560
Custody fees 3,471
Registration fees 2,417
Directors fees and expenses 2,457
Other 965
-------
Total expenses 96,849
-------
Net investment income 328,788
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------
Net realized loss on investments sold (22,154)
Net change in unrealized appreciation 447,528
-------
Net gain on investments 425,374
-------
Net increase in net assets resulting from
operations $754,162
========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
- -------------------------------------------------
Net investment income $ 328,788 $ 330,114
Net realized loss on investments (22,154) (162,190)
Net change in unrealized appreciation 447,528 (185,840)
--------- ----------
Net increase (decrease) in net assets
resulting from operations 754,162 (17,916)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (328,788) (330,114)
Realized capital gains -- (1,298)
CAPITAL SHARE TRANSACTIONS (Note 3)
Increase in net assets resulting from capital share
transactions 749,279 260,399
--------- ----------
Total increase (decrease) in net assets 1,174,653 (88,929)
NET ASSETS
- ----------
Beginning of year 5,786,079 5,875,008
--------- ----------
End of year $6,960,732 $5,786,079
========== ==========
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
September 18,
1991
(Commencement
of Operations)
Years ended December 31, to
------------------------------- December 31,
1995 1994 1993 1992 1991
----- ----- ----- ----- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
- ---------------
Beginning of period $9.30 $9.86 $9.88 $9.93 $10.00
------ ----- ------ ------ -------
Income from investment operations
Net investment income .49 .53 .53 .56 .18
Net gain (loss) on securities (both
realized and unrealized) .66 (.56) (.02) (.05) (.07)
------ ----- ------ ------ --------
Total from investment operations 1.15 (.03) .51 .51 .11
------ ----- ------ ------ --------
Less distributions from
Net investment income (.49) (.53) (.53) (.56) (.18)
Realized capital gains -- -- -- -- --
------ ----- ----- ------ ---------
(.49) (.53) (.53) (.56) (.18)
------ ----- ----- ------ --------
End of period
$9.96 $9.30 $9.86 $9.88 $ 9.93
====== ===== ====== ====== ========
TOTAL RETURN 12.65% (.27)% 5.26% 5.35% 3.90%(1)
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets at end of period (000's) $6,961 $5,786 $5,875 $2,885 $249
Ratio of
Expenses to average net assets 1.49% 1.66% 2.48% 1.25% .50%(1)
Net investment income to
average net assets 5.06% 5.61% 5.34% 5.77% 6.00%(1)
PORTFOLIO TURNOVER 182% 44% 61% 172% 49%
</TABLE>
((1))Annualized
See accompanying notes to financial statements.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
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.
The Fund has a capital loss carryforward available to offset future
capital gains, if any, in the amount of $184,344, of which $109,258 expires
in 2002 and $75,086 expires in 2003.
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. Income and
capital distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatment of post-October
capital losses. 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.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995
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
aggregated $11,506,475 and $11,411,630, respectively.
3. Capital Share Transactions
--------------------------
Transactions in shares of the Fund for the years ended December 31, 1995
and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- ------------------------
<S> <C> <C> <C> <C>
Shares Amount Shares Amount
------- ---------- -------- -----------
Shares sold 122,190 $1,192,833 118,858 $ 1,141,505
Shares issued in reinvestment of dividends 21,900 213,767 23,348 222,615
Shares redeemed (67,474) (657,321) (115,675) (1,103,721)
------- ---------- -------- -----------
Net increase 76,616 $ 749,279 26,531 $ 260,399
======= ========== ======== ===========
</TABLE>
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 year
ended December 31, 1995.
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 year ended December 31, 1995, administrative services fees
paid by the Fund totaled $5,213.
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.
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.
8
