[Logo]
[Logo] Tax Free
Fund of
Vermont
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
Annual
Report to
Shareholders
December 31, 1996
<PAGE>
December 31, 1996
To the Shareholders of
Tax Free Fund of Vermont:
During 1996 two principal factors affected the market for and returns
generated by investments in tax exempt bonds. First, interest rates remained
relatively low throughout 1996, resulting in modest yields on tax exempt
bonds that were unattractive when compared to the gains produced in the
equity markets throughout 1996. Second, while interest rates rose modestly
during the first half of 1996, later in the year rates declined and, as a
result, rates in general remained essentially unchanged from the beginning of
the year. Because of these factors, it is important for investors in tax
exempt bonds to manage their investments in a manner that will add value and
increase their investment returns above the returns produced by the
relatively low yields available in the tax exempt bond market. One principal
manner to accomplish this management objective during 1996 and beyond is to
seek out special situations that can add value to a tax exempt investment
portfolio.
Throughout 1996 and beyond, the Fund's management has recognized the value of
discovering special situations in Vermont tax exempt bonds which could
produce superior returns. In early 1996, the Fund held a large position in an
issue of Vermont hospital bonds which were refinanced by the issuer. The Fund
was well positioned to realize a substantial capital gain for our
shareholders on these bonds and, as a result, the Fund's performance during
1996 was well above average nationally compared to funds of its type.
During 1997, the Fund plans to continue this strategy of bringing more value
to your investment in the Fund by identifying and investing in bonds that
have characteristics likely to result in potential gains for our
shareholders.
Thank you for your interest in and support of the Fund throughout 1996. We
will to work diligently to provide you with excellent Fund performance during
1997.
Yours truly,
/s/ John T. Pearson
John T. Pearson
President
<PAGE>
[Tabular Representation of Line Chart]
$10,000 Investment in Fund Compared to
Lehman Muni Bond Index
- ----------------------------
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR INCEPTION
4.56% 5.43% 5.34%
- ----------------------------
<TABLE>
<CAPTION>
9/18/91 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C>
Tax Free Fund of Vermont $10,000 $10,110 $10,651 $11,211 $11,181 $12,595 $13,169
Lehman Muni Index 10,000 10,389 11,198 12,565 11,915 13,995 14,590
</TABLE>
The graph above compares the increase in value of a $10,000 investment in the
Tax Free Fund of Vermont, Inc. with the performance of the Lehman Muni Bond
Index. The objective of the graph is to permit you to compare the performance of
the Fund with the current market and to give perspective to market conditions
and investments strategies and techniques pursued by the investment manager that
materially affected the performance of the Fund. The Lehman Muni Bond Index
reflects reinvestment of dividends but not the expenses of the Fund.
During 1995 the Fund restructured its portfolio of bondholdings in order to
more fully realize the potential capital gains that could result if the
issuers of certain of the Fund's bondholdings should decide to refinance such
bondholdings. In early 1996 one such refinancing occurred and accordingly the
Fund realized a substantial capital gain for its shareholders. As a result,
the Fund realized an average annual total return of 4.56% for the year 1996
compared to an average annual total return of 4.18% for the Lehman Muni Bond
Index (the "Index"). This comparative performance is shown in the graph
above.
During 1995 and prior years, the Fund's performance was substantially less
volatile than the Index primarily because the Fund included in its portfolio
a substantial percentage of housing finance agency bonds which, on average,
carried higher yields and had smaller price movements than the Index
portfolio. This reduced volatility meant that the Fund underperformed the
Index in years when interest rates were declining and bond prices were
increasing and outperformed the index in years when interest rates were
increasing and bond prices correspondingly were declining.
Shareholders should also realize that the Index does not include any
brokerage fees or other transaction costs incurred in the trading of
municipal bonds while the Fund's comparative performance includes all fees
and expenses of the Fund.
1
<PAGE>
TAIT, WELLER & BAKER
Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Tax Free Fund of Vermont, Inc.
Rutland, Vermont
We have audited the accompanying statement of assets and liabilities of the
Tax Free Fund of Vermont, Inc., including the portfolio of investments, as of
December 31, 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.
/s/ Tait, Weller & Baker
Philadelphia, Pennsylvania
January 10, 1997
2
<PAGE>
Tax Free Fund of Vermont, Inc.
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Maturity Principal Market
Municipal Bonds (97.95%) Rate Date Amount Value
---- -------- --------- ------
<S> <C> <C> <C> <C>
Vermont (97.95%)
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
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
=============
(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
=============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
<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.
4
<PAGE>
STATEMENT OF OPERATIONS
Year ended December 31, 1996
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
==========
See accompanying notes to financial statements.
5
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
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>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
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.
6
<PAGE>
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.
E. Use of Estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996
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>
<CAPTION>
1996 1995
---------------------------- --------------------------
Shares Amount Shares Amount
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
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.
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.
8