Tax Free Fund of Vermont
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TAX FREE FUND OF VERMONT, INC.
PROSPECTUS
April 30, 1997
Tax Free Fund of Vermont, Inc. (the "Fund") is an open end non-diversified
municipal bond mutual fund offering shares to Vermont residents. The Fund's 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 Fund invests primarily
in municipal securities issued by the State of Vermont and its political
subdivisions.
The Fund's shares are sold without sales loads, redemption fees or withdrawal
penalties and there are no limitations on the number of purchases or
withdrawals. Shares of the Fund may be purchased directly from the Fund at the
net asset value as next determined after receipt of a purchase order.
This prospectus concisely states information about the Fund that you should know
before investing. Please read it and retain it for future reference.
Additional information about the Fund, including information on securities
ratings, is contained in a Statement of Additional Information and its
appendices dated April 30, 1997 which has been filed with the Securities and
Exchange Commission and is incorporated by reference into this prospectus. For a
free copy, or for other information about the Fund, write to the address or call
the telephone number listed below.
TAX FREE FUND OF VERMONT, INC.
128 Merchants Row, Suite 611
Rutland, Vermont 05701
Call Toll-Free in Vermont: 800-675-3333
In Rutland Call: 773-0674 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CON- TRARY IS A CRIMINAL OFFENSE.
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Table of Contents
Page
Fund Fees and Expenses 3
Condensed Financial Information 5
The Fund 6
Investment Objective and Policies 6
Investment Restrictions 11
Risk Factors and Investor Considerations 11
Pricing Shares 14
Dividends and Taxes 14
Fund Management and Expenses 17
How to Buy Shares 19
How to Redeem Shares 20
Shareholder Services 22
Fund Shares 22
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FUND FEES AND EXPENSES
The purpose of this summary of Fund Expenses is to assist investors in
understanding the costs and expenses that a Fund shareholder will bear. For more
complete descriptions of the various costs and expenses, see the "Fund
Management and Expenses" section of this prospectus.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are expenses you pay when you buy or sell
shares of a fund. There are no shareholder transaction expenses.
Sales Load Imposed on Purchases none
Sales Load Imposed on Reinvested Dividends none
Deferred Sales Load on Redemptions none
Redemption Fees none
ANNUAL FUND OPERATING EXPENSES
Management Fee 0.70%
Other Expenses After Expense Reimbursements 0.85%
Distribution Expenses none
Total Operating Expenses 1.55% The foregoing table of fees and the following
table of expenses paid is provided to assist investors in understanding the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund. Operating expenses include the advisory and
administrative expenses paid by the Fund as well as all other expenses of
operating the Fund. Operating expenses are paid by the Fund out of income
otherwise available for distribution to the Fund's shareholders. Annual Fund
Operating Expenses are based on amounts incurred for the year ending December
31, 1996.
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EXAMPLE OF EXPENSES PAID
You would pay the following expenses on a $1000 investment, assuming (1) a 5%
annual return and (2) either redemption or non-redemption at the end of each
time period:
1 Year $ 17
3 Years $ 50
5 Years $ 87
10 Years $190 The purpose of the foregoing Example, which is based on the cost
information provided in the preceding two tables, is to assist you in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For further information concerning advisory fees,
see the "Fund Management and Expenses" section of this prospectus. In addition,
more complete information on costs and expenses is found in the "Investment
Advisor and Other Expenses" section of the Statement of Additional Information.
The above Example is intended to show the dollar amount of expenses that would
be incurred over the indicated periods on a hypothetical $1,000 investment in
the Fund, assuming a 5% annual return and assuming that the Fund's expenses
continue at the rate shown in the tables. However, the actual return on an
investment in the Fund may be greater or less than 5%. Furthermore, the Example
should not be considered a representation of future expenses; actual expenses
may be more or less than those shown depending upon a variety of factors,
including the actual performance of the Fund.
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CONDENSED FINANCIAL INFORMATION
The financial information in the table below has been audited by Tait, Weller
and Baker, independent auditors, for the years ended December 31, 1993, 1994,
1995 and 1996 and by KPMG Peat Marwick, independent auditors, for the year ended
December 31, 1992 and the period ended December 31, 1991. Financial statements
for the years ended December 31, 1996 and 1995 and the independent auditors'
report thereon are included in the Statement of Additional Information.
Years ended December 31,
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<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 September 18, 1991
(Commencement of Operations) to
December 31, 1991
NET ASSET VALUE
Beginning of period $9.96 $9.30 $9.86 $9.88 $9.93 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .43 .49 .53 .53 .56 .18
Net gain (loss) on securities
(both realized and unrealized) .01 .66 (.56) (.02) (.05) (.07)
Total from investment operations .44 1.15 (.03) .51 .51 .11
LESS DISTRIBUTIONS FROM
Net investment income (.43) (.49) (.53) (.53) (.56) (.18)
Realized capital gains -- -- -- -- -- --
(.43) (.49) (.53) (.53) (.56) (.18)
End of period $9.97 $9.96 $9.30 $9.86 $9.88 $9.93
TOTAL RETURN 4.56% 12.65% (.27)% 5.26% 5.35% 3.90%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's) $7,219 $6,961 $5,786 $5,875 $2,885 $249
RATIO OF
Expenses to average net assets 1.55% 1.49% 1.66% 2.48% 1.25% .50%(1)
Net investment income to
average net assets 4.41% 5.06% 5.61% 5.34% 5.77% 6.00%(1)
PORTFOLIO TURNOVER 98% 182% 44% 61% 172% 49%
(1)Annualized
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THE FUND
Tax Free Fund of Vermont, Inc. is an open end, non-diversified management
investment company (known as a municipal bond fund). The Fund was formed as a
Vermont corporation on May 20, 1991. The Fund is managed by Vermont Fund
Advisors, Inc. ("Vermont Advisors").
The Fund continuously offers its shares at the net asset value per share. The
Fund is "no-load"; this means that no sales commissions are charged and that
every dollar shareholders invest is applied to the purchase of the Fund's
shares. The minimum initial investment is $500 and the minimum additional
investment is $100. The Fund's net asset value is available daily by telephoning
the Fund at 1-800-675-3333.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide shareholders with the highest level of current income
exempt from federal and Vermont income taxes as is consistent with the prudent
investment management of the principal invested by shareholders.
As a matter of fundamental investment policy, at least 80% of the Fund's assets
under normal market conditions will be invested in securities the income from
which is exempt from federal and Vermont state income taxes. Under normal market
conditions, the Fund invests primarily in "Vermont Municipal Bonds" (as defined
in this prospectus) and may also invest in "Other Municipal Bonds" (as defined
in this prospectus). All of the income from both of these investment categories
is anticipated, in the opinion of the Fund's investment advisor, to be exempt
from federal and Vermont income taxes.
PRINCIPAL INVESTMENTS
The Fund seeks to achieve its objective by investing substantially all of its
assets in a portfolio of long term municipal debt securities which are issued by
or on behalf of the State of Vermont, its political subdivisions, agencies, and
authorities (collectively, "Vermont Municipal Bonds"). The Fund may also invest
in obligations of other qualifying issuers which are territories and possessions
of the United States, such as Puerto Rico, which pay interest exempt, in the
opinion of bond counsel to the issuer, from federal and state income taxes
(collectively, "Other Municipal Bonds"). Qualifying issuers include the
territories and possessions of the United States which are not themselves
states, as well as their respective political subdivisions, agencies and
authorities (See the "Other Municipal Bonds" section of this prospectus).
Under normal market conditions, except for a small cash position which usually
would not exceed 3% of the Fund's assets, it is the investment policy of the
Fund to invest at least 65% of its assets in Vermont Municipal Bonds. Further,
the Fund anticipates that under normal market conditions it will as a matter of
fundamental investment policy invest a minimum of 80% of its assets in a
combination of tax exempt Vermont Municipal Bonds and tax exempt Other Municipal
Bonds. Under the current tax laws of the State of Vermont, all of the Fund's
income derived from both of these investment sources is exempt from Vermont
income taxes (see "Dividends and Taxes").
VERMONT MUNICIPAL BONDS
Vermont Municipal Bonds include general obligation bonds of the State of
Vermont, its political subdivisions, agencies and authorities. Vermont Municipal
Bonds also include debt obligations of those issuers which provide funds for
various public purposes, including the construction or improvement of a wide
range of public facilities such as airports, bridges, highways, hospitals,
housing, jails, mass transportation, nursing homes, parks, public buildings,
recreational facilities, school facilities, streets and water and sewer works.
Other public purposes for which Vermont Municipal Bonds may be issued include
the refunding of outstanding obligations, the anticipation of taxes, the funding
of student loans and student housing, community development, the purchase of
street maintenance and firefighting equipment, or any authorized corporate
purpose of the issuer.
The two principal classifications of Vermont Municipal Bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Limited obligation bonds, including
industrial revenue bonds, are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a specific revenue source, such as the user of the facility. The credit
quality of limited obligation bonds is usually directly related to the owner or
user of the facilities, or to a third-party guarantor or insurer, if any.
Certain agencies of the State of Vermont created by the Vermont legislature
issue limited obligation bonds which are not general obligations of the State of
Vermont. The Fund may invest in both general and limited obligations which are
Vermont Municipal Bonds, but the Fund will not invest in limited obligation
Vermont Municipal Bonds in such a manner that more than 25% of the Fund's assets
would be concentrated in any particular industry or group of industries. The
interest on Vermont Municipal Bonds may bear a fixed rate or be payable at a
variable or floating rate.
OTHER MUNICIPAL BONDS
The Fund may purchase investment grade obligations issued by territories and
possessions of the United States and their respective agencies and
instrumentalities (collectively "Other Municipal Bonds"), whose interest income
is exempt, in the opinion of bond counsel for the issuer, from federal and state
income taxes. Presently, the principal issuers of Other Municipal Bonds are
Puerto Rico, the United States Virgin Islands, and the trusteeships of Guam and
the Marianas Islands and their agencies, instrumentalities and political
subdivisions. Interest income on Other Municipal Bonds will also be exempt from
Vermont income taxes. Except for the identity of the issuer, investments by the
Fund in Other Municipal Bonds must meet all of the fundamental investment policy
requirements of the Fund, are subject to all of the investment restrictions of
the Fund and in all other respects may have any of the investment terms,
conditions and characteristics as regards Vermont Municipal Bonds.
CREDIT QUALITY
Vermont and Other Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which must be rated, at
the time of purchase, within the four highest quality ratings as determined by
either Moody's Investors Service ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch Investors Service ("Fitch"). Currently, these quality ratings
are Baa and higher for Moody's and BBB and higher for S&P and Fitch. Bonds rated
Baa by Moody's may have some speculative characteristics.
Generally, the higher the credit rating of a security the less subject the
security is to a change in market value. Accordingly, higher rated securities
carry relatively lower rates of interest which makes it more difficult for the
Fund to achieve that portion of the investment objective related to providing
the highest level of current income. Lower rated securities, including
securities rated Baa/BBB, may achieve higher current income, but are subject to
relatively greater fluctuation in market value than are higher rated securities.
The Fund may also invest up to 20% of its assets in Vermont Municipal Bonds or
Other Municipal Bonds which are unrated, if such bonds are comparable, in the
opinion of the Fund's manager, Vermont Advisors, in creditworthiness to other
obligations in which the Fund may invest.
WEIGHTED AVERAGE MATURITY
The weighted average maturity of the securities in the Fund's portfolio will
vary with market conditions, interest rate trends and the availability of
qualifying securities. Under normal market conditions the weighted average
maturity of the Fund's portfolio is expected to range between ten and twenty
five years.
By their nature, securities with longer maturities are more volatile with regard
to changes in market value resulting from changes in interest rates than is the
case with securities of shorter maturities. Accordingly, a portfolio of
securities held by the Fund whose weighted average maturity is greater than ten
years will, all else being equal, have a larger fluctuation in its underlying
market value given a change in interest rates than a portfolio of securities
whose weighted average maturity is less than ten years. These fluctuations in
market value will generally be in the inverse direction to changes in interest
rates. Therefore, an increase in interest rates can generally be expected to
cause a decline in the value of the Fund's portfolio of securities and a
corresponding decline in the Fund's net asset value while a decrease in interest
rates can generally be expected to cause corresponding increases in the market
value of the Fund's portfolio and net asset value per share. Additionally, a
portfolio of long term securities carries the risk that, over time, the credit
quality of any security in the portfolio may change and the risk of such change
increases with increases in the average weighted maturity of the portfolio.
Credit quality changes can affect the market value of the Fund's portfolio and
the net asset value per share of the Fund.
TEMPORARY DEFENSIVE POLICY
The Fund will assume a temporary defensive position when the Fund's investment
advisor, Vermont Advisors, makes a determination that conditions in the
securities markets or economic, political or other conditions in Vermont, the
United States or internationally either have significant potential for or have
in fact already begun to cause significant disruption of the underlying value of
or the market for any security in which the Fund has invested. When the Fund's
advisor implements a temporary defensive position, the Fund will seek to invest
in very high quality fixed income securities with strong liquidity and
relatively short maturities. The income derived from investment in such
securities may be taxable. To the extent the Fund implements a temporary
defensive position, the Fund is not pursuing its investment objectives.
Temporary defensive investments purchased by the Fund will be rated, in the case
of notes, MIG/VMIG-1, MIG/VMIG-2 or MIG/VMIG-3 by Moody's or SP-1, SP-2 or SP-3
by S&P or, in the case of commercial paper, P-1 or P-2 by Moody's or A-1 or A-2
by S&P.
WHEN-ISSUED SECURITIES
Municipal securities are frequently offered on a "when issued" basis. When so
offered, the price, which is generally expressed in yield terms, is fixed at the
time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month after the purchase of municipal bonds and notes. During
the period between commitment to purchase and settlement, no payment is made by
the Fund to the issuer and, thus, no interest accrues to the Fund from the
transaction. When-issued securities may be sold prior to the settlement date,
but the Fund makes when-issued commitments only with the intention of actually
acquiring the securities. To facilitate such acquisitions at the time of
settlement, the Fund will maintain, for short periods of time, cash or short
term liquid investments having a value equal to or greater than such
commitments. When the Fund makes a commitment to purchase a security on a
when-issued basis, the Fund does not record the transaction and reflect the
value of the security in determining the net asset value until the settlement
date. The Fund, as long as it remains obligated to purchase the security, is
subject to changes in the market value of such security and the Fund could
sustain unrealized gains or losses resulting from such market changes. If the
Fund chooses to dispose of the right to acquire a when-issued security prior to
its acquisition, the Fund can incur a realized gain or loss.
STANDBY COMMITMENTS
The portfolio may purchase municipal securities together with the right to
resell them to the seller at an agreed-upon price or yield within specified
periods prior to their maturity dates. Such a right to resell is commonly known
as a "standby commitment" and the aggregate price which the Fund pays for
securities with a standby commitment may be higher than the price which
otherwise would be paid. The primary purpose of this practice is to permit the
Fund to be as fully invested as practicable in municipal securities while
maintaining the necessary flexibility and liquidity to meet unanticipated
redemptions. In this regard, the Fund acquires standby commitments solely to
facilitate the Fund's liquidity and does not exercise its rights thereunder for
trading purposes. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the Fund's policy is to enter into standby commitment transactions only with
municipal securities dealers which are determined by the Fund management to
present minimal credit risks.
The acquisition of a standby commitment does not affect the valuation or
maturity of the underlying municipal securities. Standby commitments acquired by
the portfolio are valued at zero in determining net asset value. Where the Fund
pays directly or indirectly for a standby commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Standby commitments do not affect the average weighted maturity of the Fund's
assets.
TAX RELATED INVESTMENT POLICIES
The Tax Reform Act of 1986 made significant changes in the federal tax status of
certain obligations which previously were fully federally tax exempt. As a
result, three categories of such obligations issued after August 7, 1986 now
exist; (1) "public purpose" bonds, the income from which remains fully exempt
from federal income tax, (2) "qualified private activity" industrial development
bonds, the income from which, while exempt from federal income tax under section
103 of the Internal Revenue Code, is includable in the calculation of the
federal alternative minimum tax, and (3) "private activity" (private purpose)
bonds, the income from which is not exempt from federal income tax. The Fund
will invest in "public purpose" bonds, may invest up to 20% of its total assets
in "qualified private activity" bonds but will not invest in "private activity"
(private purpose) bonds.
For further information about the types of investments and investment techniques
available to the Fund, including the risks associated with such investments and
investment techniques, see the last full paragraph on page 16 of this prospectus
under the section "Dividends and Taxes" and see the Statement of Additional
Information. There can, of course, be no assurance that the Fund will achieve
its investment objective since there is uncertainty in every investment.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objectives of the Fund and the requirement that, under ordinary
circumstances, over 65% of its assets be invested in Vermont Municipal Bonds and
at least 80% of its assets be invested in tax exempt Vermont Municipal Bonds and
tax exempt Other Municipal Bonds are fundamental and neither may be changed
without the vote of a majority (as hereinafter defined) of the Fund's
outstanding shares. A majority means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental restrictions which may not be
changed without the vote of a majority , as defined hereinabove, of the Fund's
outstanding shares. These restrictions and certain other fundamental
restrictions are set forth in the Statement of Additional Information. Unless
otherwise stated, all references to the Fund's assets are in terms of current
market value. The Fund may not:
(1) Borrow money or enter into repurchase agreements, except for temporary or
emergency purposes in aggregate amounts of up to 5% of the value of the Fund's
net assets;
(2) Pledge any assets to secure indebtedness; except that the purchase of
securities on a "when issued" basis is not deemed to be a pledge of assets;
(3) Make loans, except that the Fund may purchase or hold debt securities
consistent with its investment objectives;
(4) Purchase any security of any issuer, other than a security which is a
general obligation of the U.S. government, if as a result of such purchase more
than 25% of the Fund's assets (50% in the case of securities which are general
obligations of the State of Vermont) would be invested in the obligations of a
single issuer or one or more issuers having their principal business activities
in the same industry;
(5) Invest more than 10% of its total assets in illiquid securities;
(6) Invest more than 5% of its total assets in securities of any issuer having a
record, together with its predecessors, of less than three years of continuous
operation;
(7) Make short sales of any securities;
(8) Invest in municipal leases;
(9) Invest more than 20% of its total assets in "qualified private activity"
industrial development bonds.
RISK FACTORS AND INVESTOR CONSIDERATIONS
The risk inherent in investing in the Fund is that risk common to any security,
that the net asset value will fluctuate in response to changes in economic
conditions, interest rates and the market's perception of the underlying
securities portfolio of the Fund.
In addition, the Fund is a non-diversified mutual fund and accordingly invests
its assets primarily in securities issued by the State of Vermont and of other
issuers of tax exempt securities located within Vermont. The Fund will therefore
have a significant proportion of its assets invested in a concentrated
geographic, political and economic region. Therefore, economic or political
changes within or affecting Vermont or the issuers of securities held by the
Fund could have a significant effect on the market value and credit quality of
securities held by the Fund and on the net asset value of the Fund's shares.
SPECIAL RISK FACTORS IN CONCENTRATION IN VERMONT
The primary purpose of investing in a portfolio of municipal securities the
majority of which are Vermont Municipal Bonds is the special tax treatment
accorded to Vermont resident investors. However, payment of interest and
preservation of principal is dependent upon the continuing ability of the
Vermont issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors should consider the
greater risk of the Fund's concentration of its assets invested in Vermont
Municipal Bonds versus the safety that comes with a less concentrated investment
portfolio and should compare yields available on the Fund's portfolio with those
of more diversified portfolios before making an investment decision.
This summary is included for the purpose of providing a general description of
Vermont credit and financial conditions. This summary is based on information
from statements of issuers of Vermont municipal securities and does not purport
to be either complete or timely. While the Fund has not undertaken to
independently verify such information, it has no reason to believe that such
information is not correct in all material aspects.
The Vermont economy was effected significantly by an economic downturn which
began in 1990. The downturn ended during late 1992. Vermont's economy recovered
to a degree during 1993 through 1996 but the recovery was not particularly
robust as a result of slow growth in several of the major sectors of the State's
economy.
The current slow economic growth is caused by Vermont and regional economies
which have recovered slowly from the 1990-92 economic downturn, relatively high
Vermont income taxes compounded by a federal tax increase in 1993 and
demographic and economic changes which have affected the portion of Vermont's
economy based on recreation and tourism. The recession impacted on all sectors
of the State's economy, including manufacturing. The primary reason for this is
that Vermont's economy is relatively dependent on financial services, defense
contracting and high technology. These three sectors of the economy declined
relatively more severely than the national economy as a whole during the
economic downturn, contributing to a relatively more severe recessionary impact
in Vermont and New England. While Vermont's economy is more diverse than the
balance of the regional economy, certain significant sectors of the Vermont
economy, including tourism and construction, are dependent on the regional
economic environment and tend to recover more slowly because these sectors are
not engines of economic growth but rather improve as a derivative of such
growth.
Vermont's economy is diversified; manufacturing, tourism-related services,
wholesale and retail trade each represent a significant percentage of the
State's employment base.
OTHER FACTORS
The Fund enables investors seeking income exempt from federal and Vermont income
taxes to invest in a managed portfolio of tax-exempt obligations primarily of
issuers located within the State of Vermont and some portion of which may be
obligations of issuers located outside Vermont but all of the income from which
is exempt from Federal and Vermont income taxes. The resulting investment
portfolio of the Fund provides investors with a combination of diversity of
issuers and income fully exempt from federal and Vermont income taxes which is
difficult for investors to achieve individually.
The Fund also offers the economic advantages of block purchases of securities
and may relieve the investor of many of the administrative tasks and costs
associated with the direct purchase of Vermont Municipal Bonds, such as locating
securities for sale in quantities acceptable to the investor, scheduling
maturities and reinvestments, safekeeping securities, and having to incur the
cost and possible inconvenience of disposing of entire security positions to
obtain cash to meet requirements equal to only a fraction of the value of the
liquidated position.
The Fund's ability to achieve its objective depends partially on the prompt
payment by issuers of the interest on and principal of the municipal bonds held
by the Fund. Issuers of municipal securities are subject to the bankruptcy laws
and other laws affecting the rights of creditors which may reduce or eliminate
the payment of interest and repayment of principal on such securities. A
moratorium, default or other nonpayment of interest or principal when due on any
municipal bond, in addition to affecting the market value and liquidity of that
particular security, would affect the market value and liquidity of other
securities of that issuer held by the Fund and could affect the market value and
liquidity of other municipal bonds held by the Fund. In addition, the market
value for municipal bonds, including Vermont Municipal Bonds, is often thin and
can be temporarily affected by large purchases and sales, including those
undertaken by the Fund. The acquisition of securities by the Fund with a credit
quality rating of Baa/BBB introduces, to the extent such securities are held by
the Fund, an increased volatility in the market value of such securities and an
increase in the risk associated with the periodic payment of interest and the
repayment of principal at maturity compared to higher rated securities held by
the Fund.
By itself, the Fund does not constitute a balanced investment program and is not
designed for investors seeking capital appreciation. The Fund does not have the
full benefits of geographical diversification and is subject to the risks of
concentrating a majority of its investments in Vermont Municipal Bonds.
Generally, the value of the Fund's portfolio of Vermont Municipal Bonds and
Other Municipal Bonds will fluctuate inversely with the general level of
interest rates and therefore the net asset value per share can fluctuate
considerably. Shares of the Fund would not be suitable for tax exempt
institutions or for certain retirement plans which are unable to benefit from
the Fund's dividends which are exempt from federal and Vermont state income
taxes. In addition, the Fund may not be an appropriate investment for entities
which are "substantial users" of facilities financed by industrial development
bonds or related persons thereof.
The Fund's Advisor has managed the Fund since its inception in 1991. Since
inception, the Fund's total net assets have increased to $6.4 million as of
April 27, 1995. Prior to 1991, the Advisor did not have any previous experience
in the management of mutual funds.
From time to time the Congress of the United States has considered proposed
legislation with the purpose of reducing or eliminating the exemption from
federal income taxes of interest income derived from municipal securities. Any
proposal which Congress may, in the future, pass into law which would reduce or
eliminate such exemption would have an adverse effect on the Fund, both to the
extent that the market value of the securities held by the Fund could decrease
as a result of such legislation and to the extent that the income earned by the
Fund and distributed to its shareholders could be taxable.
PRICING SHARES
The net asset value of the shares of the Fund is determined at the close of
trading on the New York Stock Exchange ("Exchange") each day the exchange is
open for trading by dividing the value of the assets of the Fund, minus its
liabilities, by the number of Fund shares which are outstanding.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. The Fund values securities for which representative
price quotations are current and readily available at the mean between the
quoted bid and asked prices. If price quotations are not readily available, or
if the available quotations are not current or representative, the Fund values
securities at prices that the Fund believes will best reflect their fair value.
In such cases, fair value is determined in good faith in accordance with
procedures approved in advance by the Fund's Board of Directors, consistently
applied by the Fund.
Currently the Fund takes into account pricing data derived from a professional
bond portfolio pricing service as well as pricing information provided by
Vermont Advisors and approved by the Fund's Board of Directors. Valuations
provided by pricing services are generally determined without exclusive regard
to quoted prices. Generally, pricing services consider in their valuation the
market activity of similar groups of securities, their yields, quality ratings,
maturities and other characteristics. In addition, the Fund also may take into
account such factors as the "Blue List" of municipal securities offers, offers
for similar securities, individual dealers' offering lists, the Fund's own
historical data, and investment analysis by Vermont Advisors. Securities with
remaining maturities of sixty days or less will be valued at amortized cost if
the Fund's Board of Directors determines that amortized cost represents the fair
market value of such securities.
DIVIDENDS AND TAXES
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. Each distribution will be made in shares or,
at the option of the shareholder, in cash. Shareholders who have not opted to
receive cash prior to the record date for any distribution will have the number
of such shares determined on the basis of the Fund's net asset value per share
computed at the end of the day on the record date after adjustment for the
distribution. Net asset value is used in computing the number of shares in both
gains and income distribution reinvestments. Account statements and checks if
appropriate will be mailed to shareholders within seven days after the Fund pays
the distribution. Unless the Fund receives instructions to the contrary from a
shareholder before the record date of a distribution, it will assume that the
shareholder wishes to receive that distribution and future gains and income
distributions in shares. Such instructions are deemed to continue in effect
until changed in writing by the shareholder.
The Fund intends to qualify as a "regulated investment company" ("RIC") under
the Internal Revenue Code and to maintain such qualification. In order to
qualify as an RIC, the Fund must distribute at least 90% of its net income
earned in any year to Fund shareholders. Ordinarily, the dividends the Fund pays
to shareholders will be "exempt interest dividends" which will be excludable
from shareholders' gross income for federal and Vermont income tax purposes.
Distributions of income from nonmunicipal securities or net short-term capital
gains or net long-term capital gains exceeding the Fund's capital loss
carryforwards, if any, will be taxable as more fully described below and in the
Statement of Additional Information.
The Tax Reform Act of 1986 contains a new provision which discourages
shareholders from deferring tax on dividend income received from a RIC such as
the Fund. Under the new provision, a 4% non-deductible federal excise tax is
levied on undistributed Fund income unless the Fund distributes at least (a) 98%
of calendar year ordinary income during the calendar year; (b) 98% of capital
gain net income earned during the twelve (12) month period ending October 31 by
December 31; and (c) 100% of any undistributed capital gain net income from the
prior October 31 measurement period and 100% of any undistributed ordinary
income from the prior December 31 measurement period. The percentage of the
total dividends paid by the Fund with respect to any taxable year which
qualifies as exempt interest dividends will be the same for all shareholders
receiving dividends with respect to such year.
Also under the Tax Reform Act of 1986, interest on certain "private activity
bonds" issued after August 7, 1986, although otherwise tax exempt, is treated as
a tax preference item for alternative minimum tax purposes. Under regulations to
be promulgated, the Fund's exempt interest dividends will be treated the same
way to the extent attributable to interest paid on such private activity bonds.
Corporate shareholders should also be aware that the receipt of exempt interest
dividends could subject them to alternative minimum tax under the provisions of
Internal Revenue Code section 56(f) (relating generally to book income in excess
of taxable income).
Currently, capital gains distributions (where gains exceed loss carryforwards)
will be taxed at the regular individual and corporate tax rates. In addition,
certain capital losses from the sale of Fund shares held less than six months
may be disallowed.
Under current Vermont law, individual taxpayers are assessed Vermont income
taxes based on a percentage of their federal income tax liability. Currently
individual taxpayers have a Vermont income tax liability equal to 25% of such
taxpayers' federal income tax liability. Assuming the Fund qualifies under the
Internal Revenue Code as described above, all dividend income to shareholders
deriving from Vermont Municipal Bonds and Other Municipal Bonds will be exempt
from Vermont income taxes. Shareholders who are partnerships, corporations,
trusts or other organizations should consult their tax advisers with respect to
the exemption of the Fund's dividends from Vermont income taxes.
Any shareholder who may be a "substantial user" of a facility financed with an
issue of tax exempt obligations or a "related person" to such a user should
consult their tax advisor concerning their qualification to receive exempt
interest dividends should the Fund hold obligations financing such facility.
Although it is the fundamental investment objective of the Fund to minimize or
eliminate the portion of exempt interest dividends subject to Vermont income
taxes, it is possible that some portion of such dividends will be subject to
such taxes under certain circumstances. These circumstances would arise, for
example, where the Fund's investment policy is affected by the need for
liquidity or the availability or value of Vermont Municipal Bonds. Virtually all
of the Fund's exempt interest dividends will be subject to state income taxes in
states other than Vermont. The Fund will report to shareholders the sources of
its exempt interest dividends.
Since none of the Fund's income will consist of corporate dividends, no
distributions will qualify for the corporate dividends received deduction.
The Fund intends to distribute its net capital gains as capital gains dividends;
such dividends are treated by shareholders as long term capital gains. Such
distributions will be designated as capital gains dividends by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If any shareholder receives a capital gains dividend and holds
their shares for six months or less, then any allowable loss on disposition of
such shares will be treated as a long-term capital loss to the extent of such
capital gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase or
carry shares of the Fund will not be deductible for federal or Vermont income
tax purposes to the extent of the portion of the interest expense relating to
exempt interest dividends; that portion is determined by multiplying the total
amount of interest paid or accrued on the indebtedness by a fraction, the
numerator of which is the exempt interest dividends received by a shareholder in
his taxable year, and the denominator of which is the sum of the exempt interest
dividends and the taxable distributions out of the Fund's investment income and
short term capital gains received by the shareholder.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Fund and its shareholders. No attempt is made to present
a detailed explanation of the federal and Vermont income tax treatment of the
Fund or its shareholders and this discussion is not intended as a substitute for
careful tax planning. Accordingly, potential investors in the Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
Under particularly unusual circumstances it is possible that no portion of the
Fund's distributions of income to its shareholders for a fiscal year would be
exempt from federal and Vermont income taxes; however the Fund does not
presently anticipate that such unusual circumstances will occur.
FUND MANAGEMENT AND EXPENSES
BOARD OF DIRECTORS
Under Vermont law, the Fund's Board of Directors has absolute and exclusive
control over the management and disposition of all assets of the Fund. The
names, addresses, principal occupations and other affiliations of the Directors
and Executive Officers of the Fund are set forth in the Statement of Additional
Information.
Vermont Fund Advisors, Inc., (Vermont Advisors), located at 128 Merchants Row,
Suite 611, Rutland, Vermont 05701, serves as investment manager to the Fund and
is responsible for the overall management of the Fund's business and affairs.
Subject to the direction of the Fund's Board of Directors, Vermont Advisors is
responsible and accountable for the actual management of the Fund's portfolio,
including investment management decisions.
INVESTMENT MANAGER
Vermont Advisors, the Fund's investment manager, was incorporated on March, 11,
1991 and has been the Fund's investment manager since the Fund's inception in
1991. John T. Pearson, President, Vermont Advisors, is the portfolio manager for
the Fund. Previous to the establishment of the Fund, Vermont Advisors had no
prior experience in mutual fund investment management. Vermont Advisors is
wholly owned by Mr. Pearson.
Pursuant to its Advisory Agreement with the Fund, dated May 31, 1991, Vermont
Advisors performs investment management functions for the Fund. The Fund pays
Vermont Advisors a fee for its services at an annual rate of 0.70% of the daily
net assets of the Fund and paid monthly.
The Advisory Agreement was approved by the shareholders of the Fund on February
26, 1993, was last approved by the Fund's Board of Directors on April 28, 1996
and will continue in effect until May 30, 1997. Thereafter it will continue in
effect from year to year only so long as such continuance is specifically
approved at least annually by the Board of Directors or by a vote of a majority
of the outstanding shares of the Fund. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
Directors who are not "interested persons", as defined in the Investment Company
Act of 1940, in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated, without penalty, on 60 days
written notice by the Fund or Vermont Advisors or may be terminated by a vote of
shareholders of the Fund. The Agreement will terminate automatically upon its
assignment.
FUND EXPENSES
The Fund will pay all of its expenses. In addition to the investment management
fees discussed above, the principal expenses which the Fund is expected to pay
include expenses for Directors' meetings; shareholder transfer, dividend
disbursing and shareholder services expenses; asset valuation services; security
custodial costs; independent auditor fees; legal expenses; fees payable to
government agencies, including registration and qualification fees of the Fund
and its shares under federal and Vermont state securities laws; distribution
expenses of shareholder materials; and certain extraordinary expenses. In
addition to such expenses, the Fund pays its brokerage commissions, interest
charges and taxes.
Vermont Advisors, pursuant to an Administrative Services Agreement with the
Fund, is obligated to provide certain administrative services including
shareholder transfer and dividend disbursing services to the Fund. Vermont
Advisors is compensated for any such services provided at an annual rate of
0.08%, computed and paid in the same manner as the Advisory Agreement fee. The
Administrative Services Agreement is subject to the same termination provisions
as the Advisory Agreement.
SECURITIES TRANSACTIONS
Under policies established by the Board of Directors, Vermont Advisors selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the Fund,
Vermont Advisors will seek to execute transactions with the lowest cost and/or
highest value to the Fund's shareholders. Neither the Fund nor its advisor is
affiliated with any broker-dealers, except that the Fund and its President are
registered as a broker-dealer and representative, respectively with the State of
Vermont for the purpose of distributing shares of the Fund.
DISTRIBUTION EXPENSES, PORTFOLIO TURNOVER AND FISCAL YEAR
All Fund distribution expenses will be absorbed by the Fund's advisor, Vermont
Advisors. No portion of these costs will be charged to the Fund or its
shareholders. Effective March 1, 1995, Vermont Advisors entered into an
agreement with Windham Financial Services, Inc. ("Windham") whereby Vermont
Advisors agreed to compensate Windham and Windham has accordingly agreed to
provide additional distribution services for shares of the Fund. The Fund will
not trade in securities for short term profits but, when circumstances warrant,
securities may be sold without regard to the time held. The Fund's turnover rate
in 1995 was 182%. The Fund's fiscal year ends December 31.
HOW TO BUY SHARES
Shares of the Fund may be purchased directly from the Fund by bank wire transfer
in Federal Funds or by mail. The initial investment must be at least $500. Any
subsequent investment must be at least $100. You may open an account in the
following manner:
By wire. If this is an initial investment you must first call the Fund at
800-675-3333 to tell us how the account is to be registered, the owner's address
and tax identification number (social security number), the amount being wired,
the name of the wiring bank, and the name and telephone number of the person who
may be contacted in connection with your order. For both initial and subsequent
investments by wire, you should instruct your bank to wire the specified amount,
together with the account number and registration to: Chittenden Bank, ABA#
011600062, Tax Free Fund of Vermont Account No. 21-60-0281-4, your name and Fund
account number. Your bank may charge you for a wire transfer.
By mail. Send your check, payable to "Tax Free Fund of Vermont, Inc.", to Tax
Free Fund of Vermont, Inc., 128 Merchants Row, Rutland, Vermont 05701 together
with one of the following: (a) a completed New Account Order form, if this is a
new account (a form is included with this prospectus); (b) the detachable form
which accompanies the Transfer Agent's confirmation of a prior transaction; (c)
a separate order form which may be obtained from us; or (d) a letter specifying
the dollar value of the shares to be purchased, the account number and the
registered owner of the account.
PURCHASE PRICE, EFFECTIVE DATE AND MINIMUM PURCHASES
There is no sales load charged on a purchase of Fund shares. Purchase payments
are fully invested. The Fund's shares are sold at the net asset value per share
next computed after the Fund receives the purchase order. An initial purchase of
Fund shares must be at least $500. The minimum amount for subsequent purchases
to an account is $100.
TERMS OF OFFERING
Shares are held in "Open Accounts", i.e., they are credited to the shareholder's
account on the Fund's books. No certificates for shares are issued unless
specifically requested in writing by the owner(s) of record of such shares.
If you send a check which does not clear, the Fund may cancel your order and
hold you responsible for any loss incurred by the Fund. The Fund may recover any
loss by redeeming shares held in your account and may restrict or prohibit you
from placing future orders.
All orders for the purchase of shares are subject to acceptance by the Fund
which has the right to reject any order. An order to purchase the Fund's shares
is not binding on the Fund until confirmed in writing by the Transfer Agent. The
Fund recommends that shareholders retain copies of these confirmations.
HOW TO REDEEM SHARES
You may redeem your shares by telephone or mail. Telephone cannot be used to
redeem shares which were purchased by mail within the past 30 days. In order to
redeem by telephone you must have completed the authorization in your account
application. Proceeds for shares redeemed on telephonic order will be mailed by
check or deposited by electronic funds transfer (EFT) only to the name and
address or bank account designated in your account application. The Fund will
not require a signature guarantee (but reserves the right to do so without
notice); however you will be asked to indemnify and hold harmless the Fund, the
Transfer Agent and their officers, agents and employees, from losses, claims,
expenses and liabilities based on actions taken as a result of your
instructions. The staff of the Securities and Exchange Commission is currently
reviewing clauses which indemnify and hold harmless a fund in the event of
shareholder losses due to fund actions based on shareholder instructions.
By telephone. You may call the Fund at 800-675-3333 in Vermont or at 773-0674 in
Rutland. You may redeem shares by telephone only if you have previously filed a
redemption authorization form with the Fund. You may elect on the redemption
authorization form to have checks mailed either to your address or to your bank
account. You must complete and file a new form whenever you wish to change your
existing information. You may request a redemption authorization form.
If you have difficulty in reaching the Fund to implement a telephone redemption
during periods of economic or market changes or if you are unable to reach the
Fund by telephone for any reason you may telephone the Fund's advisor, Vermont
Advisors at (802)-773-0804 and request assistance in
contacting a Fund representative.
By mail. You must send the Fund a written request for redemption, signed by each
registered holder exactly as the shares are registered, signature guarantees if
required by the Fund and, if appropriate, the additional documents required for
redemptions by corporations, executors, administrators, trustees and guardians.
A redemption by mail will not become effective until the Fund has received all
the necessary documents in the form it requires. We will furnish a redemption
authorization form at your request.
PAYMENTS TO REDEEMING SHAREHOLDERS
Upon receipt of all the necessary documents to effect a redemption, the Transfer
Agent will normally mail checks or transfer the redemption proceeds by EFT
within three business days. The Fund reserves the right to utilize the full
three business days if, to do otherwise, it would negatively impact other
shareholders. If you purchased the shares to be redeemed by check, the Transfer
Agent will transmit your redemption proceeds immediately upon clearance of your
check, which may take up to fifteen days or more. You may request that
redemption proceeds of $500 or more be transferred by EFT to a bank account. The
signatures on such request may be required to be guaranteed unless the Fund
holds a current redemption authorization specifying that redemption proceeds are
to be sent to your bank account.
Shares redeemed will earn dividends through the date of redemption. In addition
to the redemption proceeds, redeeming shareholders will receive a separate check
for dividends declared but unpaid. If you redeem only a portion of your shares,
you will receive all dividends declared and unpaid on all of your shares on the
next dividend payment date.
REDEMPTION PRICE
The redemption price of the shares redeemed will be their net asset value per
share as calculated in the first determination of net asset value after the Fund
has received all necessary documents for redemption in the form it requires.
SUSPENSION OF REDEMPTION
The Fund may suspend the right of redemption or postpone payment for more than
seven days for any period during which the Exchange is closed, or the Securities
and Exchange Commission determines that trading on the Exchange is restricted,
or when their is an emergency as determined by the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities, or
for such other period as the Commission may by order permit for the protection
of the Fund's shareholders.
GENERAL
A business day, during which purchases and redemptions of Fund shares can become
effective and the transmittal of redemption proceeds can occur, is considered
for Fund purposes as any day the Exchange is open for trading and which is not
an official bank holiday for the bank or banks the Fund uses for deposits into
and disbursements from the Fund. Subject to the limitations described above,
proceeds are normally transferred by EFT or mailed the next business day but in
no event later than three business days after receipt of a proper redemption
request.
The Fund reserves the right, at any time, to terminate, suspend or change the
terms of any redemption method described in this prospectus, except redemption
by mail, and to impose additional fees.
SMALL ACCOUNTS
The Fund may, without your consent, redeem shares in an account whose value has
decreased to less than $500 as a result of redemptions (but not as a result of
market action) if, after 60 days' notice, the value of the account has not been
increased to a $500 minimum.
SHAREHOLDER SERVICES
ACCOUNT STATEMENTS
After each purchase or redemption of shares, the Transfer Agent will send the
shareholder a confirmation indicating the date the transaction was effected, the
number of shares purchased or redeemed, the price per share, and the total
purchase price or redemption proceeds. A statement is also sent to shareholders
whenever an income dividend or capital gain distribution is paid or when a
change in registration, address or dividend option is made.
SCHEDULED CONTRIBUTION AND WITHDRAWAL PLANS
Under a Scheduled Contribution Plan, you may arrange regular monthly or
quarterly investments into your Fund account. Once proper authorization is
given, your bank account will be debited on the same predetermined date each
month or quarter to purchase shares in the Fund. You will receive confirmation
from the Fund for every transaction. This Plan feature is conditioned upon the
Fund receiving proper authorization from you on the application form and the
ability of your bank to participate in these transactions.
Under a Scheduled Withdrawal Plan, if your account has a value of at least
$10,000, you may arrange for regular monthly or quarterly fixed withdrawal
payments. Each payment must be at least $100. Excessive withdrawals may decrease
or deplete the value of your account. Once begun, a Scheduled Withdrawal Plan
may be discontinued at any time without penalty.
Details on shareholder services may be obtained from the Fund by calling toll
free 800-675-3333 in Vermont or 773-0674 in Rutland or by writing Tax Free Fund
of Vermont, Inc., 128 Merchants Row, Rutland, Vermont 05701.
FUND SHARES
The Fund currently issues one class of shares which participate equally in
dividends and distributions and have equal voting, liquidation, and other
rights. When issued and paid for, the shares will be fully paid and
nonassessable by the Fund. Shares will have no other preference, conversion,
exchange or preemptive rights. Shares are transferable, redeemable, and freely
assignable as collateral. There are no sinking fund provisions. The Fund is not
authorized to issue additional classes or series of shares.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. The Fund will hold annual meetings of shareholders
in accordance with Vermont law. The Fund's Articles of Association limit the
liability of the Fund's Directors to the maximum extent permitted by law. As
provided in the Bylaws of the Fund, shareholders have the right to remove
Directors of the Fund.
GENERAL INFORMATION
The Fund is registered as a non-diversified, open-end management investment
company under the Investment Company Act of 1940. The Fund's shares are offered
continuously and are registered for sale under the Securities Act of 1933 and
are qualified for sale in Vermont under the securities laws of Vermont.
Except as otherwise stated in this prospectus or required by law, the Fund
reserves the right to change the terms of the offer stated in this prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
<PAGE>
INVESTMENT ADVISOR
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
CUSTODIAN
Vermont National Bank
87 West Street
Rutland, Vermont 05701
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
INDEPENDENT AUDITORS
Tait, Weller & Baker
Certified Public Accountants
Two Penn Center Plaza
Suite 700
Philadelphia, Pennsylvania 19102-1707
LEGAL COUNSEL
Ryan Smith & Carbine, Ltd.
P. O. Box 310
Mead Building
98 Merchants Row
Rutland, Vermont 05702-0310
This prospectus omits certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission.
Items of information which are thus omitted may be obtained from the
Securities and Exchange Commission upon payment of the fee prescribed by
the Rules and Regulations of such Commission.
TAX FREE FUND OF VERMONT
A No-Load Fund
Prospectus,
April 30, 1997
Investment Advisor
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
Fund Distributor
Tax Free Fund of Vermont, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
Prospectus
April 30, 1997 .
<PAGE>
PART B
TAX FREE FUND OF VERMONT, INC.
128 Merchants Row
Rutland, Vermont 05701
Statement of Additional Information
Dated: April 30, 1997
This statement of additional information is not a Prospectus and should be
read in conjunction with the prospectus of Tax Free Fund of Vermont, Inc. dated
April 30, 1997. A Prospectus may be obtained by writing to the Tax Free Fund of
Vermont, Inc. at 128 Merchants Row, Rutland, Vermont 05701 or calling toll-free
800-675-3333.
Table of Contents
Caption Page in Prospectus
this Statement page cross
reference
Investment Objectives and Policies 2 6
Investment Restrictions 5 11
Management 7 17
The Investment Advisor and Other Services 7 17
Additional Purchase and Redemption Information 10 18, 19
Fund Yield and Performance 11
Tax Information 13 14
Financial Statements 15
Independent Auditors' Report 27
Appendix A-Description of Securities Ratings 28
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 30, 1997.
1
<PAGE>
Investment Objectives and Policies
The Tax Free Fund of Vermont, Inc. (the "Fund") is an open-end
non-diversified management investment company. Shares of the Fund are offered
only in Vermont. The investment objective of the Fund is to provide the highest
level of current income exempt from federal and Vermont state income taxes as is
consistent with the prudent investment management of the principal invested by
shareholders. The Fund pursues its objective by a policy of primarily investing
in high quality "investment grade" municipal bonds and other municipal
securities which are issued by the State of Vermont and its political
subdivisions. These bonds are described in detail on pages 7 and 8 of the
prospectus under "Vermont Municipal Bonds" and "Other Municipal Bonds".
Normally, at least 80% of the Fund's assets will be invested in such securities
and ordinarily, therefore, substantially all of the Fund's assets will generate
income exempt from federal and Vermont state income taxes.
While the Fund may not change this policy or any of the other fundamental
investment policies described in the prospectus or in this Statement of
Additional Information without shareholder approval, other investment policies
set forth in this Statement of Additional Information may be changed by the Fund
upon notice but without such approval.
There can be no assurance, as is true with all investment companies, that
the Fund will achieve its investment objectives.
In addition to the risks associated with investment in any municipal bond
fund, such as default by issuers or fluctuation in interest rates which will
inversely affect asset value, investors in the Fund should consider the greater
risks of the Fund's concentration versus the safety that comes with a less
concentrated investment portfolio and should compare yields available on the
Fund to those of more diversified portfolios before making an investment
decision. Although the Fund is a non-diversified investment company, the
permitted concentration of investments in municipal securities of Vermont
issuers may present greater risks than in the case of an investment company with
a more geographically dispersed portfolio. Certain of those risks are discussed
below in "Special Risk Factors - Vermont Municipal Bonds".
Vermont Municipal Bonds
Vermont Municipal Bonds may include general obligation bonds of the State
of Vermont and other qualifying issuers and their political subdivisions within
Vermont. Vermont Municipal Bonds may be general obligation bonds or revenue
bonds and may have fixed or floating interest rate provisions. See page 7 of the
prospectus for a detailed description of Vermont Municipal Bonds.
Other Municipal Bonds
The Fund may invest in municipal securities issued by territories and
possessions of the United States and their agencies and instrumentalities (Other
Municipal Bonds), whose interest income is exempt, in the opinion of counsel for
the issuer, from federal and state income taxes including Vermont state income
taxes. The Fund may invest in Other Municipal Bonds because suitable Vermont
Municipal Bonds are not available, because yields, maturities or credit quality
on Other Municipal Bonds may be preferable to comparable elements available on
Vermont Municipal Bonds, or to add the issuer diversification of Other Municipal
Bonds to the Fund's investment portfolio. Except for identity of the issuer,
Other Municipal Bonds must meet all of the fundamental investment policy
requirements of the Fund and are subject to all
2
<PAGE>
of the investment restrictions of the Fund. Under normal circumstances, the Fund
does not expect any of its dividends paid to shareholders to be subject to
Vermont state income tax liability but the Fund cannot assure shareholders that
such circumstances will continuously prevail in the future.
Municipal Securities
The terms "Vermont Municipal Bonds" and "Other Municipal Bonds" as used in
the prospectus and this statement of additional information means obligations
issued by or on behalf of territories and possessions of the United States or
their political subdivisions, agencies and instrumentalities, the interest from
which is exempt from federal income taxes. The interest from these obligations
is also exempt in the opinion of counsel for the issuer, from all state income
taxes, including Vermont. The obligations in which the Fund invests are limited
to those securities which at the time of purchase, are:
1. Municipal notes rated MIG-1/VMIG-1, MIG-2/VMIIG-2 or MIG-3/VMIG-3 by
Moody's or SP-1, SP-2 or SP-3 by S & P, or, if not rated, are of equivalent
investment quality as determined by the Investment Manager and ultimately
reviewed by the Directors; or
2. Municipal bonds rated Baa or higher by Moody's, BBB or higher by either
S & P or Fitch's or, if not rated, are of equivalent investment quality as
determined by the Investment Manager and ultimately reviewed by the Directors;
or
3. Other types of municipal securities, provided that such obligations are
rated Prime-1 by Moody's, A-1 or higher by S & P or, if not rated, are of
equivalent investment quality as determined by the Investment Manager and
ultimately reviewed by the Directors. (See Appendix A for a description of these
ratings.)
Alternative Minimum Tax
Under current federal income tax law, interest on tax-exempt municipal
securities issued after August 7, 1986 and used to finance "qualified private
activities" (e.g., industrial development bonds) will be treated as an item of
tax preference for purposes of the alternative minimum tax ("AMT") imposed on
individuals and corporations, though for regular income tax purposes such
interest will remain fully tax-exempt. Also, under the same law, interest on all
tax-exempt obligations will be included in "adjusted net book income" of
corporations for AMT purposes. As the Fund may purchase "qualified private
activity" municipal securities in order to introduce additional issuer diversity
into the Fund's portfolio or to obtain somewhat higher yields than other
comparable municipal securities, a portion not expected to exceed 20% of the
Fund's tax-exempt dividends may constitute tax preference income for those
shareholders subject to the AMT.
Taxable Securities
Although the Fund expects to be primarily invested in municipal securities,
in order to maintain a temporary defensive policy it may elect to invest up to
100% of its assets in taxable money market securities and may otherwise elect to
maintain up to 35% of its assets in such securities for liquidity purposes or
when such action is deemed to be in the best interests of shareholders (see
"Temporary Defensive Policy" and "Temporary Investments" on page 9 of the
Prospectus). Such taxable money market securities are limited to remaining
maturities of one year or less at the time of the Fund's investment. Taxable
money market securities eligible for purchase by the Fund are limited to the
following securities:
3
<PAGE>
1. Marketable obligations of, or guaranteed by, the United States Government,
its agencies or instrumentalities; or
2. Commercial paper of prime quality rated A-2 or higher by Standard &
Poor's (S&P) or Prime-2 or higher by Moody's Investor's Services
(Moody's).
Variable Rate Obligations
The interest rate payable on certain municipal securities in which the Fund
may invest, called "variable- rate" obligations, are not permanently fixed and
may fluctuate based upon changes in market rates. The interest rate payable on a
variable rate municipal security is adjusted either at pre-designated periodic
intervals or whenever there is a change in the market rate to which the
security's interest rate is tied. Other features may include the right of the
Fund to demand prepayment of the principal amount of the obligation prior to its
stated maturity date and the right of the issuer to prepay the principal amount
prior to maturity. The main benefit of a variable rate municipal security is
that the interest rate adjustment minimizes changes in the market value of the
obligation which would be induced by changes in interest rates in general. As a
result, the purchase of variable rate municipal securities tends to improve the
ability of the Fund to maintain a stable net asset value per share and to sell
obligations prior to maturity at a price more nearly approximating the full
principal amount.
Borrowed Money
The Fund may borrow up to 5% of the value of its net assets for the purpose
of providing liquidity. The Fund may require this liquidity in order to provide
immediate funds for redemptions in excess of available cash on hand and/or until
the proceeds from the sale(s) of securities held by the Fund are realized. The
Fund may not borrow for any other purpose. The Fund does not presently
anticipate it will borrow funds and presently the Fund has no borrowings
outstanding and has no arrangements in place with any lender for such
borrowings.
Restricted Securities
The Fund may purchase restricted securities up to 10% of its asset value.
Restricted securities are obligations that meet all of the investment policies
of the Fund but which are not registered by the issuer for sale to the general
public under the Securities Act of 1933 and appropriate state securities laws.
In certain cases, the terms of the purchase agreement pertaining to such
restricted securities may require the issuer to register such securities,
subject to certain conditions, at the request of the owner of such securities.
Registration of these securities would allow for such securities to be sold to
the public on an unrestricted basis. Alternatively, restricted securities owned
by the Fund may not be resold to the public but may be sold privately if the
Fund can make the necessary purchase arrangements with prospective buyer(s). The
Fund may also hold restricted securities to maturity.
General
Yields on municipal securities are dependent on a variety of factors,
including the general condition of the municipal bond, note and money markets,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. Municipal securities with longer maturities tend to produce higher
yields and generally are subject to greater price movements than obligations
with shorter maturities. An increase in interest rates will generally reduce the
market value of the Fund's investments, and a decline in interest rates will
generally increase the value of the Fund's investments. There can be no
assurance, as is true with all investment companies, that the Fund's objectives
will be achieved. The achievement of the Fund's investment objectives is
dependent in part on the continuing ability of the issuers of municipal
4
<PAGE>
securities in which the Fund invests to meet their obligations for the payment
of principal and interest when due. Municipal securities historically have not
been subject to registration with the Securities and Exchange Commission,
although there have been proposals which would require registration in the
future. The Fund generally will hold securities for indefinite periods or to
maturity rather than follow a practice of short-term trading. The Fund may seek,
however, to improve it's income in accordance with it's investment objective by
selling certain securities prior to maturity to take advantage of yield
disparities that occur in securities markets.
After purchase by the Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event requires sale of such security by the Fund, but Vermont Advisors will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by S&P, Moody's or Fitch
Investors Service may change as a result of changes in such organizations or
changes in their rating systems, Vermont Advisors will attempt to substitute
comparable ratings.
Obligations of issuers of municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Code. In addition, the obligations
of such issuers may become subject to laws enacted in the future by Congress,
state legislatures, or referenda extending the time for payment of principal
and/or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes.
Except as otherwise provided above, the Fund's investment objectives and
policies are not designated "fundamental policies" within the meaning of the
Investment Company Act of 1940 and may, therefore, be changed without a
shareholder vote.
Portfolio Turnover
Portfolio turnover for the Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities owned by the Fund to the average
monthly value of portfolio securities owned by the Fund, not including
securities maturing in less than twelve months. The Fund normally invests
principally in long term municipal securities with the intention of retaining
such securities in its portfolio and therefore expects to have a normal turnover
ratio of less than 40%. The Fund's portfolio turnover ratio was 98% and 182% in
1996 and 1995, respectively. For the years 1996 and beyond, the Fund estimates
that its portfolio turnover rate will not exceed 40% annually.
Investment Restrictions
The following are the Fund's fundamental investment limitations set forth
in their entirety. The Fund may not:
(1) with respect to at least 50% of the Fund's total assets, purchase the
securities of any single issuer (except the United States government, its
agencies or its instrumentalities), if it would cause, during the entire period
beginning with the end of any calendar quarter and ending thirty days
thereafter, (a) more than 5% of the Fund's total assets to be invested in the
securities of such issuer (including repurchase agreements with any one bank),
or (b) more than 10% of any class of securities of such issuer would be owned by
the Fund. For this purpose, the State of Vermont, each political subdivision of
the State, and each district, authority, agency or instrumentality of the State
or any of its political subdivisions will be deemed to be a separate issuer and
all indebtedness of any issuer will be deemed to be a single class of
securities;
5
<PAGE>
(2) issue senior securities;
(3) make short sales of securities;
(4) purchase any securities on margin, except for such short term credits
as are necessary for the clearance of transactions;
(5) borrow money, except from banks as a temporary measure for purposes of
meeting redemption requests and/or bond purchase commitments and then only in an
amount not exceeding 5% of the Fund's total asset value;
(6) underwrite any issue of securities, except to the extent that our
purchase of municipal securities directly from the issuer (either alone or as
one of a group of bidders) may be deemed to be an underwriting of such
securities;
(7) purchase or otherwise acquire any securities which are illiquid if, as
a result, more than 10% of the Fund's total assets would be invested in such
securities;
(8) purchase equity securities or securities convertible into equity
securities;
(9) purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal bonds or other obligations secured by real estate or
interests therein;
(10) purchase or sell commodities or commodity contracts;
(11) make loans, except through the purchase of debt securities in
accordance with the Fund's investment objective, policies and restrictions;
(12) invest in oil, gas or other mineral exploration or development
programs;
(13) invest in companies for the purpose of exercising management or
control;
(14) purchase securities of other investment companies, except the Fund may
purchase securities of other open-end diversified investment companies which
hold tax-exempt portfolios, but only in the open market where no commissions are
payable for the purchase of such securities, only to the extent that the Fund at
all times owns less than 3% of the voting shares of each such investment company
in which the Fund has purchased such shares, only to the extent the Fund has not
acquired shares of any such investment company having a value in excess of 5% of
the Fund's total asset value, only to the extent the Fund has not acquired
shares of all such investment company having a value in excess of 10% of the
Fund's total asset value, and, within these limitations, only in amounts and for
purposes of providing sufficient liquidity to allow the Fund to transact its
day-to-day business operations including shareholder redemptions and settlement
of securities transactions;
(15) purchase the securities of any issuer if, as a result, more than 5% of
the Fund's total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation;
(16) pledge or hypothecate any Fund assets, except that the purchase of
securities on a "when issued" basis is not deemed to be a pledge of assets;
(17) purchase any security, other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities, if, as a
result, more than 25% of the Fund's total asset value (50% in
6
<PAGE>
the case of securities which are general obligations of the State of Vermont)
would be invested in the securities of issuers having their principal business
activities in the same industry;
(18) write or invest in put or call options, or any combination thereof.
Management
The Directors and principal officers of the Fund and their primary
occupations during the past five years are set forth below. An asterisk precedes
those Directors who are considered "interested persons" as defined in the
Investment Company Act of 1940.
<TABLE>
<S> <C> <C>
Directors and Officers
Name and Address Office(s) Held Principal Occupation Last Five Years
STEPHEN A. CARBINE Director Vice President, Kinney, Pike, Bell
212 Grove Street and Conner (insurance brokers) since
Rutland, Vermont 05701 1982.
JOHN T. PEARSON* Director, President, Director, President and sole
13 Victoria Drive Chief Executive Officer shareholder of Vermont Fund
Rutland, Vermont 05701 and Treasurer Advisors, Inc. since May, 1991.
Previously, Vice President Finance
and Administration and Treasurer,
Vermont Yankee Nuclear Power Corp.,
August, 1982 to May, 1991.
WINFRED A. THOMAS Director Vice President, Clinton F. Thomas
Countryside Estates Agency (insurance brokers), since
Rutland, Vermont 05701 1982.
</TABLE>
Principal Shareholders
As of April 30, 1997, Mr. Justin J. Mueller, P. O. Box 646, Manchester,
Vermont, owned beneficially 7.5% of the Fund's shares outstanding. There were no
other shareholders of the Fund known by the Fund to own of record or
beneficially 5 percent (5%) or more of the Fund's outstanding equity securities.
All shares are owned both of record and beneficially. All Officers and Directors
of the Fund as a group own 0.5% of the Fund's shares.
Investment Advisor and Other Services
Investment Advisor
The Fund's investment advisor, Vermont Fund Advisors, Inc.
(Vermont Advisors), is a Vermont Corporation with its principal office at 128
Merchants Row, Rutland, Vermont 05701. Vermont Advisors is controlled through
ownership by one of the Fund's Directors, Mr. John T. Pearson. Mr. Pearson is an
"affiliated person" (as defined in the Investment Company Act of 1940) of both
the Fund and Vermont Advisors. Mr. Pearson is Chairman, Director and President
of the Fund and President and Director of Vermont Advisors. Mr. Pearson has
held these positions since 1991. Mr. Pearson has been professionally
7
<PAGE>
involved in corporate finance since 1969 and in fixed income investment
management since 1983.
Advisory Agreement
The Fund does not maintain its own security research capability, but has
contracted with Vermont Advisors for investment advice and management. In
accordance with the Advisory Agreement between the Fund and Vermont Advisors,
Vermont Advisors has the sole and exclusive responsibility for the investment
decisions for the Fund subject to the objectives and investment policies and
restrictions of the Fund and subject to the supervision of the Fund's Board of
Directors. Vermont Advisors also furnishes, at its own expense, office
facilities, equipment and personnel for servicing the investments of the Fund.
Vermont Advisors has arranged for its officers or employees to serve without
compensation from the Fund as Directors of the Fund if duly elected to such
positions by the shareholders of the Fund.
Under the Advisory Agreement, the Fund pays Vermont Advisors a monthly
investment advisory and management fee equivalent on an annual basis to 0.7 of
1% of its average daily net assets. The fee is accrued daily and paid monthly.
Average daily net assets, for purposes of calculating the fee, are defined as
the Fund's total assets minus its total liabilities at the close of each
business day. Under the Advisory Agreement, a total of $47,757 and $45,485 was
payable in fees to Vermont Advisors by the Fund in 1996 and 1995, respectively.
There is no limitation with regard to fees and expenses in the Advisory
Agreement but Vermont Advisors may, at its sole discretion, voluntarily waive,
for any period(s) of time, any amounts due it by the Fund under the Advisory
Agreement. Vermont Advisors does not presently plan to waive a portion of the
fees due under the Advisory Agreement in 1997 and does not presently plan to
reimburse the Fund for any expenses in 1997.
In connection with the Advisory Agreement, Vermont Advisors agreed to
perform distribution services for the Fund and to absorb all of the costs
associated with distributing the shares of the Fund. However, on June 25, 1993
the Directors of the Fund authorized the Fund to distribute shares of the Fund
and relieved Vermont Advisors from its obligation to perform such distribution
services. Vermont Advisors continues to be obligated to absorb all of the costs
associated with distributing the shares of the Fund. Effective March 1, 1995,
Vermont Advisors entered into an agreement with Windham Financial Services, Inc.
("Windham") whereby Vermont Advisors agreed to compensate Windham and Windham
has accordingly agreed to provide additional distribution services for shares of
the Fund.
The Advisory Agreement between the Fund and Vermont Advisors was last
approved by the Directors of the Fund, including a majority of the Directors who
are not interested persons of the Fund, on April 30, 1996, and was approved by a
vote of the shareholders of the Fund on February 26, 1993.
The Fund's Advisory Agreement with Vermont Advisors continues in effect
until May 30, 1997 and thereafter from year to year only if approved annually
(a) by the Fund's Board of Directors or by a vote of a majority of the
outstanding voting securities of the Fund and (b) by a vote of a majority of
Directors of the Fund who are not parties to the Advisory Agreement or
interested persons (as defined in the Investment Company Act of 1940) of any
such party, cast in person at a meeting of the Board of Directors of the Fund
called for the purpose of voting on such approval. The Fund's Advisory Agreement
may be terminated by the Fund on 60 days' notice to Vermont Advisors, and
terminates automatically upon its assignment.
8
<PAGE>
Dividend Disbursing, Administrative and Accounting
Services Agreement
Vermont Advisors also acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to a Dividend Disbursing,
Administrative and Accounting Services Agreement (Services Agreement) between
the Fund and Vermont Advisors. Under the Services Agreement, Vermont Advisors
provides to the Fund, without limitation, the following services: (1) the
calculation of the net asset value per share, including the pricing of the
Fund's portfolio of securities, at such times and in such manner as is specified
in the Fund's current prospectus and statement of additional information, (2)
upon receipt of monies for the purchase of the Fund's shares or the receipt of
redemption requests with respect to the Fund's shares outstanding, the
calculation of the number of shares to be purchased or redeemed, respectively,
(3) upon the Fund's distribution of dividends, the calculation of the number of
additional shares of the Fund to be received by each shareholder of the Fund who
has elected to reinvest dividends and the mailing or transfer of funds to each
shareholder who has elected to receive dividends in cash, (4) the provision of
transfer agency services, (5) the creation and maintenance of all records
relating to the business of the Fund as the Fund may from time to time
reasonably request, (6) the preparation of tax forms, reports, notices, proxy
statements, proxies and other shareholder communications and the mailing of such
documents to shareholders of the Fund and (7) the provision of such other
dividend disbursing, transfer agency, shareholder, administrative and accounting
services as the Fund and Vermont Advisors may from time to time agree upon.
As compensation for such services, the Fund pays Vermont Advisors a monthly
fee based upon the Fund's average daily net assets. The fee is .08 of 1% of the
Fund's average daily net assets on an annual basis. Average daily net assets is
calculated in the same manner for the Services Agreement as for the Advisory
Agreement. The Fund also reimburses Vermont Advisors for its out-of-pocket
expenses in connection with Vermont Advisors's provision of services under the
Services Agreement. Under the Services Agreement, a total of $5,707 and $5,213
was paid in fees to Vermont Advisors by the Fund in 1996 and 1995, respectively.
These fees are in addition to fees paid by the Fund to Vermont Advisors under
the Advisory Agreement.
The Services Agreement between the Fund and Vermont Advisors was last
approved by the Directors of the Fund, including a majority of the Directors who
are not interested persons of the Fund, on April 30, 1996, and was approved by a
vote of the shareholders of the Fund on February 26, 1993.
A majority of the disinterested Directors of the Fund specifically found,
in the course of their review of the Services Agreement, that such agreement is
in the best interests of the Fund and its shareholders, the services to be
performed pursuant to such agreement are services required for the operation of
the Fund, Vermont Advisors can provide services the nature and quality of which
are at least equal to those provided by others offering the same or similar
services and the fees for such services are fair and reasonable in light of the
usual and customary charges made by others for services of the same nature and
quality. The Fund's Services Agreement with Vermont Advisors continues from year
to year only if approved annually in the same manner as is required for the
approval of the Advisory Agreement. The Fund's Services Agreement may be
terminated by the Fund on 60 days' notice to Vermont Advisors, and terminates
automatically upon its assignment.
Custodian and Independent Accountant Services
The Vermont National Bank serves as Custodian for the securities held by
the Fund and will insure that such securities are kept in a safe and secure
manner. The Custodian's address is 87 West Street, Rutland, Vermont 05701.
9
<PAGE>
The Fund's independent accountant is Tait, Weller & Baker, Two Penn Center
Plaza, Suite 700, Philadelphia, Pennsylvania, 19102-1707. Tate, Weller & Baker
will audit the books and records of the Fund annually and will report on the
Fund's financial statements.
Other Fund Expenses
The Fund also pays for printing of prospectuses and other reports to
shareholders and all expenses and fees related to the registration and filing
with the Securities and Exchange Commission and with regulatory authorities in
the State of Vermont. The Fund pays all other expenses incurred in its
operations, including custody, portfolio valuation services, shareholder
communications, association memberships, legal, fidelity bond, insurance and
auditing costs; fees and expenses of Directors who are not affiliated with
Vermont Advisors; clerical, accounting, administrative and other office costs;
costs of maintenance of the Fund's existence; and interest charges, taxes,
brokerage fees, and commissions.
Portfolio Transactions and Allocation of Brokerage
As the Fund's portfolio is composed exclusively of debt securities, most of
the Fund's portfolio transactions are effected with dealers without the payment
of brokerage commissions, but rather at net prices which usually include a
spread or markup. The Fund paid no brokerage commissions in the years 1994 and
1995, respectively. In making portfolio purchases and sales on behalf of the
Fund, Vermont Advisors seeks the most favorable net price consistent with the
best trade execution. Frequently, however, Vermont Advisors may select a dealer
to execute a particular transaction without contacting all dealers who might be
able to complete such transaction because of the volatility of the bond market,
the often thin supply of securities sought by the Fund and the desire of the
Fund to accept a particular price for a security because the price offered by
the dealer selected meets the Fund's guidelines for profit, yield or both.
Decisions with respect to placement of the Fund's portfolio transactions
are made by Vermont Advisors. The primary consideration in making these
decisions is availability of securities of issuers which the Fund desires to
accumulate or dispose of, efficiency in the execution of orders and obtaining
the most favorable net price for the Fund. When consistent with these
objectives, business may be placed with broker-dealers who furnish investment
research or securities inventory location services to the Fund. Such research
services include advice, both directly and in writing, as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or the identity of purchasers or sellers of
securities; the providing of analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. These research services allow Vermont Advisors to supplement its
own investment research activities and obtain the views and information of
individuals and research staffs of many different securities firms in the course
of making investment decisions for the Fund. To the extent portfolio
transactions are effected with broker-dealers who furnish research services to
Vermont Advisors, Vermont Advisors receives a benefit, not measurable in dollar
amounts, without providing any direct monetary benefit to the Fund from these
transactions.
Vermont Advisors has not entered into any formal or informal agreements
with any broker-dealers, nor does it maintain any "formula" which must be
followed in connection with the placement of the Fund's portfolio transactions
in exchange for research services provided to Vermont Advisors.
Additional Purchase and Redemption Information
The Fund is open for business and its net asset value per share is
calculated on every day the New York Stock Exchange (Exchange) is open for
trading. The Exchange has designated the following holiday closings for the
remainder of 1997: Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The holiday closing schedule may be changed by the Exchange.
The close of the Fund's
10
<PAGE>
business day will coincide with the close of business of the Exchange (normally
4:00 p.m. Eastern time). The Fund will determine the net asset value by 5:30
p.m. each business day. When the Exchange is closed, or when trading is
restricted for any reason other than its customary weekend or holiday closings,
or under emergency circumstances as determined by the Securities and Exchange
Commission to merit such action, the Fund will determine the net asset value at
the close of business, the time of which will coincide with the closing of the
Exchange. To the extent that Fund securities are traded in other markets on days
the Exchange is closed, (and the Fund is not open for business), the Fund's net
asset value per share may be significantly affected on days when investors do
not have access to the Fund to purchase or redeem shares.
Underwriters
The shares of the Fund are distributed continuously by the Fund on a best
efforts basis. No underwriting commissions are paid by the Fund.
Fund Yield and Performance
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's share price, yield and total return
fluctuates in response to market conditions and other factors, and the value of
the Fund's shares when redeemed may be more or less than their original cost.
Yield Calculations
The Fund's yield for the thirty day period ended December 31, 1996 is
4.15%. The yield was computed by dividing the net income per share earned during
the period by the net asset value per share on December 31, 1996.
Yields used in advertising the Fund are computed by dividing the Fund's
interest income for a given 30 day or one month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and analyzing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock and
bond funds. In general, interest income is reduced with respect to bonds trading
at a premium over their par value by subtracting a portion of the premium from
income on a daily basis, and is increased with respect to bonds trading at a
discount by adding a portion of the discount to daily income. Capital gains and
losses generally are excluded from the calculation.
The Fund's tax equivalent yield for the thirty day period ended December
31, 1996 is 7.13%. The tax equivalent yield was computed by dividing the yield
of 4.15% earned during the period by a one minus a combined Federal and Vermont
income tax rate of 41.76%.
The tax equivalent yield of the Fund is the rate an investor would have to
earn from a fully taxable investment in order to equal the Fund's yield after
taxes. Tax equivalent yields are calculated by dividing the Fund's yield by the
result of one minus a stated combined federal and Vermont state tax rate. If
only a portion of the Fund's yield is tax exempt, only that portion is adjusted
in the calculation.
The following table, based on current federal and Vermont state 1996 tax
tables, may be used to indicate a shareholder's approximate effective combined
federal and Vermont state tax bracket and taxable-equivalent yields. It gives
the approximate yield a taxable security must provide at various income brackets
to produce after-tax yields equivalent to those of tax exempt obligations
yielding from 5.0% to 6.5%. Of course, no assurance can be given that the Fund
will achieve any specific tax-exempt yield. While the Fund
11
<PAGE>
invests principally in obligations the interest from which is exempt from
federal and Vermont state income taxes, other income received by the Fund may be
taxable by either or both federal and Vermont state governments.
Tax Equivalent Yields for Vermont Residents
<TABLE>
<S> <C> <C> <C> <C>
Taxable Federal Vermont Combined If the tax-exempt yield is:
Income** Tax Tax Federal
Bracket* Bracket and 5.0% 5.5% 6.0% 6.5%
single joint as a % of Vermont Then taxable equivalent yield is:
return return Federal Tax Tax Bracket*
Due
$25,452 to $44,256 to
$53,724 $89,676 28% 25% 33.0% 7.47% 8.21% 8.96% 9.71%
$53,724 to $89,676 to
$122,748 $151,848 31% 25% 36.3% 7.86% 8.64% 9.43% 10.21%
$122,748 to $151,848 to
$265,200 $267,900 36% 25% 41.8% 8.58% 9.44% 10.30% 11.16%
$265,200 & $267,900 &
above above 39.6% 25% 45.6% 9.19% 10.11% 11.03% 11.94%
</TABLE>
* Excludes the impact of the phaseout of personal exemptions, limitation on
itemized deductions and other credits, exclusions and adjustments which may
raise a taxpayer's marginal combined federal and Vermont state tax rate. An
increase in a shareholder's marginal tax rate would increase that shareholder's
tax-equivalent yield. Vermont tax rates are based on Federal tax paid which is
estimated for each bracket shown.
**Net amount subject to federal and Vermont state income taxes after
deductions and exemptions. Assumes ordinary income only.
Income calculated for the purpose of determining the Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for the Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Total Return Calculations
The Fund's average annual total return for the one year period ended
December 31, 1996 is 4.56%. The Fund's average annual total return for the
period from September 18, 1991 (inception of operations) through December 31,
1996 is 5.33%. The one year total return was computed by assuming an initial
investment of $1,000 in shares of the Fund on January 1, 1996 and calculating
the redemption value of those shares on December 31, 1996, assuming reinvestment
of all dividends paid during 1996.
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<PAGE>
Total returns quoted in advertising reflect all aspects of the Fund's
return, including the effect of reinvesting dividends and capital gain
distributions (if any), and any change in the Fund's net asset value per share
(NAV) over the period. Average annual total returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in the Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate that would equal 100%
growth on a compounded basis in ten years. While average annual total returns
are a convenient means of comparing investment alternatives, investors should
realize that, the Fund's performance is not constant over time, but changes from
year to year, and that average annual total returns represent averaged figures
as opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments and/or a series of redemptions, over
any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
The Fund's performance may be compared in advertising to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, especially those with similar objectives. The Fund may compare and
contrast in advertising the relative advantages of investing in a mutual fund
versus an individual municipal bond. The Fund may be compared to the 20-Bond
Index. The 20-Bond Index, published by the Bond Buyer, consists of 20 general
obligation bonds that mature in 20 years. The average credit rating of the 20
bonds is roughly equivalent to the A1 rating of Moody's Investors Service. The
Fund may also compare its performance to the Lehman Brothers Municipal Bond
Index. The Lehman Brothers Municipal Bond Index is a total return performance
benchmark for the tax-exempt market. Returns and attributes for the Index are
calculated monthly using over 8,000 municipal bonds. The Index is composed of
bonds that are rated 'A' or better by Moody's, have maturing dates of greater
than one year and are not in danger of being called within six months.
The Fund may advertise examples of periodic investment plans, including the
principle of dollar cost averaging. In such a program, the investor invests a
fixed dollar amount in the Fund at periodic intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price intervals.
Tax Information
Federal Tax Information
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code. By qualifying as a regulated investment company the Fund
is relieved of Federal income taxes on all net income and all net realized
capital gains, if any, that the Fund distributes to shareholders. In order to so
qualify, the Fund must (i) derive at least 90% of its gross income from
dividends, interest and gains from the sale or other disposition of securities,
(ii) derive less than 30% of its gross income from the sale or other disposition
of securities held less than three months, (iii) meet certain diversification
tests as to its
13
<PAGE>
investments in securities and (iv) distribute to shareholders at least 90% of
the Fund's net tax exempt and net taxable income earned in any year.
Distribution of net short term capital gains the Fund may realize from the
sale of municipal or other securities will be taxable to the Fund's shareholders
as short-term capital gains. Distribution of net long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains, regardless of
how long the shareholder has held the shares in respect of which the
distributions are paid. The tax effect of dividends, whether taxable or exempt,
on the Fund's shareholders is the same whether such dividends are in the form of
cash or additional shares.
The Internal Revenue Code prohibits investors from deducting for Federal
income tax purposes, interest paid on loans made or continued for the purpose of
purchasing or carrying shares of a mutual fund, such as the Fund, that
distributes exempt interest dividends. Under rules of the Internal Revenue
Service, there are circumstances in which purchases of shares of the Fund may be
considered to have been made with borrowed funds, even though the borrowed funds
are not directly traceable to the share purchases.
If in any fiscal year the Fund has taxable income, the Fund will use the
actual earned method of allocating taxable and nontaxable income. The Fund will
also allocate expenses between taxable and nontaxable income. In any such year,
the percentage of quarterly dividends that are exempt will vary from quarter to
quarter.
The Tax Reform Act of 1986 (the "1986 Act") has resulted in multiple
revisions of the federal tax laws. The following summary discusses some of the
more important changes in the 1986 Act that affects the Fund and its
shareholders.
Excise Tax
The 1986 Act contains a provision which discourages shareholders from
deferring tax on dividend income received from a regulated investment company.
Under the provision, a 4% non-deductible federal excise tax is levied on
undistributed Fund income unless the Fund distributes at least (a) 98% of
calendar year ordinary income during the calendar year; (b) 98% of capital gain
net income earned in the year ending October 31 by December 31; and (c) 100% of
any undistributed capital gain net income from the prior October 31 measurement
period and 100% of any undistributed ordinary income from the prior December 31
measurement period.
Capital Gains
Long term and short term capital gains distributions to a corporation will
be taxed at the regular corporate tax rate. The highest corporate tax rate is
34%. The 60% long term capital gain deduction for individuals has been repealed;
therefore, all long term and short term capital gains distributions will be
taxed at the individual rates in effect at the date of the distribution.
Effective in 1990, certain individual taxpayers at higher income levels became
subject to a maximum tax rate of 33%. This rate applies regardless of the
character of the income which caused the taxable income to reach this
"surcharge" bracket. At still higher income levels, some taxpayers will have
been taxed at a flat 28% rate on all income and will have lost the benefit of
personal and dependent exemptions.
Exempt Interest Dividends
Under the present tax law, if the stock of the Fund is held for six months
or less, any loss on the sale or exchange of that stock would be disallowed to
the extent the taxpayer received exempt interest dividends with respect to that
stock. The Treasury Department is authorized under current law to issue
regulations which it has not done to date which would further shorten the six
month requirement to a period not less
14
<PAGE>
than the greater of 31 days or the period between regular dividend
distributions, if the Fund distributes at least 90% of its net tax-exempt
interest.
Tax Exempt Bonds
Under laws currently in effect, interest on obligations of the territories
and possessions of the United States, including Puerto Rico, the United States
Virgin Islands and the Trusteeships of Guam and the Marianas Islands and the
political subdivisions, agencies and instrumentalities of these governmental
entities is generally tax exempt. Interest on non-governmental purpose bonds,
such as industrial revenue bonds, issued by qualified government entities is
taxable unless the bonds are issued to finance certain specified exempt
activities, are used for development of industrial park sites or are exempt
small issues. Furthermore, bonds issued for activities of non-governmental
persons are referred to collectively as "non-essential" bonds. The Fund does not
intend to purchase "non-essential" purpose bonds.
Tax Status of the Fund
As a regulated investment company, the Fund is qualified to pay "exempt
interest dividends", provided that at least 50% of the Fund's total assets are
invested in municipal securities at the close of each quarter of the calendar
year. Ordinarily, dividends paid from net income earned by the Fund on
investments in Vermont and Other Municipal Bonds will be exempt interest
dividends. Shareholders receiving exempt interest dividends may exclude them
from gross income for Federal income tax purposes. However, dividends the Fund
may earn from investments in nonmunicipal securities will be fully taxable as
interest income.
The above analysis is not all-inclusive and is subject to federal law and
regulations.
Vermont State Tax Information
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. All other dividends and
distributions, as well as any earnings we receive from taxable investments and
any capital gains we realize from any investments, will have the same general
consequences to shareholders for Vermont state income tax purposes as they have
for Federal income tax purposes. This means that dividends paid by the Fund will
ordinarily be excludable from gross income for Vermont income tax purposes.
Under current Vermont tax law, the Fund is subject to a corporate tax which
shall not exceed the corporate minimum tax of $150 annually.
Financial Statements
Following are the Fund's Financial Statements and notes thereto dated
December 31, 1996 and the Independent Auditors' Report dated January 10, 1997:
15
<PAGE>
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, 1996, 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 five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. 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, 1996, 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 five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
January 10, 1997
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value
(identified cost $6,882,625) (Note 1-A) $ 7,071,045
Cash 5,737
Receivable for
Investments sold 40,115
Interest 76,598
Prepaid expenses and other assets 37,604
Due from investment advisor 3,721
Total assets 7,234,820
LIABILITIES
Payable for capital stock redeemed 15,913
Accrued expenses 150
Total liabilities 16,063
NET ASSETS
(Applicable to 724,304 shares outstanding,
$.01 par value, 10,000,000 shares authorized) $ 7,218,757
============
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
($7,218,757 / 724,304) $9.97
=====
NET ASSETS
At December 31, 1996, net assets consisted of:
Paid-in capital $ 7,159,032
Accumulated net realized loss on investments (128,695)
Unrealized appreciation of investments 188,420
------------
$ 7,218,757
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Income
Interest $ 427,261
----------
Expenses
Investment advisory fees (Note 4) 47,757
Printing and postage 20,136
Audit fees 10,500
Insurance 9,630
Administrative and shareholder services (Note 4) 10,982
Portfolio pricing costs 2,008
Custody fees 2,929
Registration fees 162
Directors fees and expenses 5,917
Other 956
----------
Total expenses 110,977
----------
Net investment income 316,284
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments sold 55,649
Net change in unrealized appreciation (48,332)
Net gain on investments 7,317
Net increase in net assets resulting from operations $ 323,601
==========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31, 1996 and 1995
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1996 1995
---- ----
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income $ 316,284 $ 328,788
Net realized gain (loss) on investments 55,649 (22,154)
Net change in unrealized appreciation (48,332) 447,528
------------ ------------
Net increase in net assets resulting from operations 323,601 754,162
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (316,284) (328,788)
CAPITAL SHARE TRANSACTIONS (Note 3)
Increase in net assets resulting from
capital share transactions 250,708 749,279
------------ ------------
Total increase in net assets 258,025 1,174,653
NET ASSETS
Beginning of year 6,960,732 5,786,079
------------ ------------
End of year $ 7,218,757 $ 6,960,732
============ ============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
TAX FREE FUND OF VERMONT, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Years ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
NET ASSET VALUE
Beginning of period $9.96 $9.30 $9.86 $9.88 $9.93
----- ----- ----- ----- -----
Income from investment operations
Net investment income .43 .49 .53 .53 .56
Net gain (loss) on securities (both realized and unrealized) .01 .66 (.56) (.02) (.05)
------- ------- ------- ------- -------
Total from investment operations .44 1.15 (.03) .51 .51
------- ------ ------- ------- -------
Less distributions from
Net investment income (.43) (.49) (.53) (.53) (.56)
Realized capital gains - - - - -
--------- --------- --------- --------- ------
(.43) (.49) (.53) (.53) (.56)
-------- ------- ------- ------- -------
End of period $9.97 $9.96 $9.30 $9.86 $9.88
===== ===== ===== ===== =====
TOTAL RETURN 4.56% 12.65% (.27)% 5.26% 5.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (000's) $7,219 $6,961 $5,786 $5,875 $2,885
Ratio of
Expenses to average net assets 1.55% 1.49% 1.66% 2.48% 1.25%
Net investment income to average net assets 4.41% 5.06% 5.61% 5.34% 5.77%
PORTFOLIO TURNOVER 98% 182% 44% 61% 172%
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- -------------------------------------------------------------------------------
(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 $128,695, of which $53,609
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 gain 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.
- -------------------------------------------------------------------------------
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
- -------------------------------------------------------------------------------
(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 aggregated $7,750,427 and $6,679,140, respectively.
(3) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31, 1996
and 1995, were as follows:
<TABLE>
<S> <C> <C>
1996 1995
-------------------------- ------------------------
Shares Amount Shares Amount
Shares sold 113,580 $ 1,126,288 122,190 $ 1,192,833
Shares issued in
reinvestment of dividends 19,836 196,725 21,900 213,767
Shares redeemed (108,155) (1,072,305) (67,474) (657,321)
---------- ------------- --------- ------------
Net increase 25,261 $ 250,708 76,616 $ 749,279
=========== ============= ========= ============
</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, 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 year ended December 31, 1996, administrative services
fees paid by the Fund totaled $5,707.
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.
- -------------------------------------------------------------------------------
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
- -------------------------------------------------------------------------------
(5) CONCENTRATION OF CREDIT RISK
The Fund invests a substantial proportion 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.
- -------------------------------------------------------------------------------
<PAGE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Municipal Bonds (97.95%)
Maturity Principal Market
Vermont (97.95%) Rate Date Amount Value
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(St. Michael's College) 6.0% 04/01/21 $ 100,000 $ 101,500
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.1% 02/01/31 275,000 293,219
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.15% 04/15/14 1,115,000 1,187,475
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.375% 04/15/24 225,000 240,750
1993 Revenue Bond
(Champlain College Project) 6.0% 10/01/13 260,000 266,825
1994 Revenue Bond
(Landmark College Project) 7.15% 11/01/14 500,000 553,125
1996 Revenue Bond
(Lyndon Institute) 6.60% 12/01/14 335,000 350,912
1996 Revenue Bond
(Northwestern Medical Center) 6.25% 09/01/18 360,000 355,050
Swanton Village, Vermont
1993 Electric System
Revenue Bond 6.7% 12/01/23 1,750,000 1,855,000
Vermont Housing Finance Agency
Single Family Mortgage-Backed Bond
1990 Series 2 7.3% 05/01/25 275,000 285,313
1989 Series A 7.85% 12/01/29 265,000 276,594
1988 Series B 8.1% 06/01/22 380,000 396,150
1990 Series 1 8.15% 05/01/25 150,000 158,437
1994 Series 5 6.875% 11/01/16 100,000 105,000
Vermont Housing Finance Agency
Multi-Family Mortgage-Backed Bond
1977 Series 1 6.50% 02/15/17 110,000 110,026
Vermont Student Assistance Corp.
1993 Series D 6.70% 12/15/12 285,000 303,169
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Municipal Bonds - (Continued)
Maturity Principal Market
Vermont Rate Date Amount Value
Champlain, Vermont
Waste District
General Obligation Bonds 7.125% 10/01/06 200,000 232,500
------------
Total Vermont Bonds 7,071,045
Total investments in securities
(Cost $6,882,625) (97.95%) (1) 7,071,045
Other assets and liabilities,
net (2.05%) 147,712
------------
Net assets (100%) $7,218,757
==========
</TABLE>
(1) The cost of investments for federal income tax purposes amounted to
$6,882,625. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at December 31, 1996 are as follows:
Gross unrealized appreciation $206,486
Gross unrealized depreciation (18,066)
---------
Net unrealized appreciation $188,420
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
Appendix A - Description of Securities Ratings
Ratings of Municipal Notes
MOODY'S INVESTORS SERVICE, INC.
MIG-1/VMIG-1: the best quality.
MIG-2/VMIG-2: high quality, with margins of protection ample though not so
large as in the preceding group.
MIG-3/VMIG-3: favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established
STANDARD & POOR'S CORPORATION
SP-1: very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2: satisfactory capacity to pay principal and interest.
SP-3 - Speculative capacity to pay principal and interest.
Ratings of Municipal Debt Securities
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge".
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered medium grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements;their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which/ are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
26
<PAGE>
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest .
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded on balance as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
27
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Tax Free Fund of Vermont, Inc.
Report of Independent Auditors - Included in Part B of the
Registration Statement. Portfolio Investments - Included in Part B
of the Registration Statement. Statement of Assets and Liabilities
- Included in Part B of the Registration Statement. Statement of
Operations - Included in Part B of the Registration Statement.
Statement of Changes in Net Assets - Included in Part B of the
Registration Statement. Financial Highlights - Included in Part B
of the Registration Statement. Notes to Financial Statements -
Included in Part B of the Registration Statement.
(b) Exhibits:
(16) Yield calculation for 30 day period ended December 31, 1996
and Total Return calculation for year ended December 31, 1996
- Exhibit A.
Item 26. Number of Holders of Securities
As of April 30, 1997, there are 282 holders of the common stock of
the Registrant.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser, Vermont Fund Advisors, Inc., provides
investment advisory services to one to a limited number of
individual accounts. Vermont Fund Advisors also performs
financial and general management consulting services. During
the past two years, Mr. John T. Pearson, President has
performed all services provided by Vermont Fund Advisors, Inc.
Item 29. Principal Underwriters
The Registrant distributes its own securities
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment No. 6
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Rutland, and State of Vermont on the
30th day of April, 1997.
TAX FREE FUND OF VERMONT, INC.
/s/ John T. Pearson
------------------------------
John T. Pearson, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 6
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
______________________________________________ Director April 30, 1997
STEPHEN A. CARBINE
______________________________________________ Director April 30, 1997
JOHN T. PEARSON
______________________________________________ Director April 30, 1997
WINFRED A. THOMAS
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000875730
<NAME> Tax Free Fund of Vermont, Inc.
<SERIES>
<NUMBER> 001
<NAME> Tax Free Fund of Vermont
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 6,882,625
<INVESTMENTS-AT-VALUE> 7,071,045
<RECEIVABLES> 116,713
<ASSETS-OTHER> 47,062
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,234,820
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,063
<TOTAL-LIABILITIES> 16,063
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,159,032
<SHARES-COMMON-STOCK> 724,304
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (128,695)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 188,420
<NET-ASSETS> 7,218,757
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 427,261
<OTHER-INCOME> 0
<EXPENSES-NET> 110,977
<NET-INVESTMENT-INCOME> 316,284
<REALIZED-GAINS-CURRENT> 55,649
<APPREC-INCREASE-CURRENT> (48,332)
<NET-CHANGE-FROM-OPS> 323,601
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (316,284)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 113,580
<NUMBER-OF-SHARES-REDEEMED> (108,155)
<SHARES-REINVESTED> 19,836
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47,757
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 110,977
<AVERAGE-NET-ASSETS> 7,174,898
<PER-SHARE-NAV-BEGIN> 9.96
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> .01
<PER-SHARE-DIVIDEND> (.43)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.97
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
