PROSPECTUS
TAX FREE FUND OF VERMONT
128 Merchants Row, Suite 611
Rutland, Vermont 05701
(802) 773-0674
(800) 675-3333
This Prospectus is a concise statement of information about the tax Free Fund of
Vermont (the "Fund") that you should know before investing. This Prospectus
should be kept for future reference.
A statement containing additional information about the Fund, Dated April 30,
1999 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
writing or calling us at the address or phone number listed above. The Statement
of Additional Information is hereby incorporated by reference into this
Prospectus. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Prospectus, the Statement of Additional
Information, material incorporated by reference, and other information regarding
registrants that file electronically with the Commission.
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 PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Summary 2
Fund Expenses 2
Financial Highlights 3
Organization of the Fund 4
Investment Objectives 5
Investment Policies and Restrictions 6
Management of the Fund 7
Determining Net Asset Value 9
Buying Shares 10
Selling Shares 11
Dividends 13
Taxes 13
Performance Calculations 14
How to Reach Us 14
SUMMARY
Investors in our Fund are investors seeking tax-free income derived from
municipal securities. See "Investment Objectives".
MANAGER AND DISTRIBUTOR
Vermont Fund Advisors, Inc. ("VFA") serves as Investment Adviser to the Fund.
The Fund distributes its shares. The Fund offers one class of shares of
beneficial interest. See "Management of the Fund" for more information.
PURCHASES AND REDEMPTIONS
The Fund has no sales load, no redemption fees and no exchange fees. The minimum
initial investment is $500.00 and there is no minimum amount for subsequent
investments. See "Buying Shares" for more information on how easy it is to
invest. Shares are redeemable by check or wire. If a shareholder elects to
redeem shares by wire transfer, the shareholder's own bank may impose a wire
charge. If the Custodian imposes a wire charge upon the Transfer Agent, this may
be passed on to the shareholder. See "Selling Shares."
FACTORS TO CONSIDER
An investment in our Fund, as with any mutual fund, includes risks that vary
depending upon the Fund's investment policies. Investment in the Fund may
involve greater risk than investment in a Fund with a portfolio of municipal
securities from throughout the country. This additional risk is due to the
possibility of an economic or political development unique to a single state.
There is no assurance that the investment objective of the Fund will be
achieved. The Fund's return and net asset value will fluctuate.
FUND EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None
Redemption Fees
(as a percentage of amount redeemed, if applicable) None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets):
Management Fee (after fee reimbursements) 0.70%
Other expenses (after fee reimbursements):
Transfer Agent Fee 0.08%
All other expenses 0.73%
Total other expenses 0.81%
Total fund operating expenses 1.51%
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each period.
1Year $ 15
3 Years $ 47
5 Years $ 82
10 Years $ 178
You would pay the same expenses on the same investment, assuming no redemption.
The purpose of this table is to help you understand the various costs and
expenses that you, as a shareholder, will bear directly or indirectly. The table
should not be considered a representation of past or future expenses. Actual
expenses and returns on investment may be greater or lesser than those shown.
For further information concerning advisory fees, see the section entitled
Investment Adviser and Advisory Agreements. In addition, more complete
information on costs and expenses is found in the Statement of Additional
Information.
Annual fund operating expenses (as a percentage of average net assets) are based
on actual amounts incurred for the fiscal year ended December 31, 1998.
The Fund's Investment Adviser may waive management fees and assume and pay other
operating expenses to reduce expenses which could be passed on to the
shareholders.
FINANCIAL HIGHLIGHTS
The financial highlights in the table below have been audited by Tait, Weller
and Baker, independent auditors for the years ended December 31, 1993, 1994,
1995, 1996, 1997 and 1998 and by KPMG Peat Marwick for the year ended December
31, 1992 and the period ended December 31, 1991. Financial statements for the
years ended December 31, 1998 and 1997 and the independent auditors' report
thereon are included in the Statement of Additional Information.
SELECTED PER SHARE DATA AND RATIOS
Selected data for a share outstanding for the years ended December 31, 1992
through December 31, 1998 and for the period September 18, 1991 (commencement of
investment operations) to December 31, 1991 are as follows:
Selected data for a share outstanding:
<TABLE>
<CAPTION>
Period
9/18/91
For the years ended December 31,
through
Dec 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991
---- ---- ----- ---- ---- ----- ---- ----
Net Asset Value, beginning of year $10.29 $9.97 $9.96 $9.30 $9.86 $9.88 $9.93 $10.00
------ ----- ----- ----- ----- ----- ----- ------
Income From Investment Operations:
Net investment income 0.43 0.43 0.43 0.49 0.53 0.53 0.56 0.18
Net gains or losses on securities,
(both realized and unrealized) (0.04) 0.32 0.01 0.66 0.56 (0.02) (0.05) (0.07)
------ ---- ----- ---- ----- ------ ------ ------
Total from investment operations 0.39 0.75 0.44 1.15 (0.03) 0.51 0.51 0.11
---- ----- ---- ---- ------ ----- ---- -----
Less Distributions:
Distributions (from capital gains) (0.02) -- -- -- -- -- -- --
Dividends
(from net investment income) (0.43) (0.43) (0.43) (0.49) (0.53) (0.53) (0.56) (0.18)
Returns of capital
total distributions -- -- -- -- -- -- -- --
Net asset value, end of year $10.23 $10.29 $9.97 $ 9.96 $ 9.30 $9.86 $9.88 $9.93
Total return (%) 3.82% 7.74 4.56 12.65 (0.27) 5.26 5.35 3.90*
Net assets, end of year
(in thousands): $9,539 7,879 7,219 6,961 5,786 5,875 2,885 249
Ratio of expenses to
average net assets(%) 1.51% 1.72 1.55 1.49 1.66 2.48 1.25 0.50*
Ratio of net investment income
to average net assets(%) 4.16% 4.26 4.41 5.06 5.61 5.34 5.77 6.00*
Portfolio turnover rate (%) 41% 60 98 182 44 61 172 49
* Annualized
</TABLE>
ORGANIZATION OF THE FUND
Tax Free Fund of Vermont, Inc. is a Vermont Corportation organized under the
laws of the State of Vermont on May 20, 1991. The Fund offers shares of common
stock with a par value of $0.01 per share. Each share has one vote. Fractional
shares have proportionate voting rights and participate pro-rata in dividends
and distributions.
We are registered as a non-diversified, open-end investment company of the
management type under the Investment Company Act of 1940. Our shares, which are
offered continuously, are registered for sale under the Securities Act of 1933.
Our shares are qualified for sale in Vermont under it's the securities laws. We
offer and redeem our shares at current net asset value.
INVESTMENT OBJECTIVES
Our Fund has an investment objective of realizing the highest level of
tax-exempt income available without undue risk to principal by investing in
Vermont municipal securities. Of course, no mutual fund offered by us or anyone
else can guarantee that the investment objective will be met.
The interest earned on these securities, in the opinion of bond counsel for the
issuers, is exempt from federal and Vermont state income taxation. In conformity
with Guidelines of the Securities and Exchange Commission, our Fund has a
fundamental policy that during periods of normal market conditions either (1)
the Funds' assets will be invested so that at least 80% of the income will be
tax-exempt or (2) the Fund will have at least 80% of its net assets invested in
tax-exempt securities. In addition, under normal market conditions, at least 65%
of the value of the Fund's assets will be invested in Vermont municipal
securities issued by Vermont municipalities or governmental units.
Yields on Vermont municipal securities is dependent on a variety of factors,
including the maturity and quality of the particular obligation, the size of the
total offering, conditions in the municipal securities markets and general
monetary and economic conditions. Generally, issues of shorter maturity and/or
higher quality pay lower yields than issues of longer maturity and/or lower
quality. The market values of Vermont municipal securities vary depending upon
available yields both in the municipal securities markets and in the short-term
money markets. Therefore, the net asset value of our shares will change as
interest rates fluctuate, generally declining as interest rates rise and rising
as interest rates fall. The types of municipal securities and the general
characteristics of each type are described in the "Statement of Additional
Information".
The inherent risk associated with investment in municipal securities is the risk
of default. Payment on most of the municipal securities held by the Fund depends
upon revenue generated by the property financed by the securities; the
securities are not general obligations of the issuer. In addition, the net asset
value of our shares may be impacted by the general economic situation in the
country and/or within Vermont. The limitation of our investments to a single
state may involve greater risk than if we invested in municipal securities
throughout the country, due to the possibility of an economic or political
development in Vermont which could uniquely affect the ability of issuers to
meet the debt obligations of the securities. The economy of Vermont is supported
by agricultural products, tourism, recreation, manufacturing and service
professions. A decline in the tourism and recreation markets could affect
Vermont in a manner more severe than the effect on many other states.
The Vermont non-agricultural economy is diversified primarily among tourism,
recreation and related businesses, manufacturing, professional, financial and
commercial services, government activities and agriculture. Agriculture in
Vermont is concentrated in dairy farming. No single segment of the economy has a
dominant impact on the overall Vermont economy and Domestic Product.
The economy of Vermont is of such diversification that an economic decline in a
single segment of the state's economy would not necessarily lead to the
non-payment of debt service on municipal bonds. A national economic decline
could impact the ability of municipalities to pay debt service, if the decline
impacted various industries and business sectors within Vermont.
TAX-FREE FUND OF VERMONT
This Fund is a diversified fund of long-term maturity bonds where the nominal
maturity will almost always average 10 years or more and will generally average
approximately 20 years. A fairly level stream of income is important to the Fund
and net asset value per share can fluctuate moderately. The portfolio had a
weighted average nominal maturity of 21.6 years and a weighted average effective
maturity of 7.8 years as of December 31, 1998.
INVESTMENT POLICIES AND RESTRICTIONS
Our Fund has fundamental policies of investing at least 80% of the value of the
assets in securities meeting the following quality standards:
A) Bonds rated at the time of purchase within the four highest grades assigned
by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa) or Standard &
Poor's Corporation ("S&P") (AAA, AA, A, BBB). According to Moody's, bonds rated
Baa are medium-grade and possess some speculative characteristics. A BBB rating
by S&P indicates a satisfactory degree of safety and capacity for repayment, but
more vulnerability to adverse economic conditions or changing circumstances.
These bonds have speculative characteristics, and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
B) Notes rated at the time of purchase within the three highest grades assigned
by Moody's (MIG 1, MIG 2, MIG 3); and bonds and notes not rated by Moody's or
S&P within the grades specified above, but secured by the full faith and credit
of the United States government (e.g., refunded or defeased bonds secured by
United States Treasury Bills or Notes).
C) No more than 20% of the value of our total assets in any of the municipal
bond series will be invested in securities which are not rated. The Fund will
not purchase securities which in the opinion of the Investment Adviser would not
have been rated in one of the grades specified above. In addition, our
Investment Adviser will make its own evaluation of each security it selects for
each portfolio and will continue to evaluate each portfolio security so long as
we hold it.
As an additional matter of fundamental policy, except as indicated below, the
only securities we will purchase for the Fund are those producing income exempt
from both Federal and Vermont income taxes.
The investment policies may not be changed without approval of the holders of a
majority of the outstanding shares of the Fund. The only exception to these
policies is that we may temporarily invest up to 100% of the value of our total
assets in certain taxable obligations when, in the judgment of our Investment
Adviser, abnormal market conditions make it advantageous to assume a defensive
posture in taxable obligations. We also reserve the right to hold such cash
reserves as the Investment Adviser deems necessary for temporary defensive
purposes.
The taxable obligations and cash equivalents in which we may invest on a
temporary basis include obligations of the U.S. Government and its agencies and
instrumentalities; certificates of deposit, banker's acceptances and other
short-term debt obligations of United States and Canadian banks with total
assets of at least $1,000,000,000; commercial paper rated A-2 or better by S&P
or Prime-2 or better by Moody's; and repurchase agreements relating to an
underlying security in which we are authorized to invest.
Investors should recognize that, in periods of declining interest rates, the
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates, the yield of the Fund will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Fund will likely be invested in portfolio instruments producing
lower yields than the balance of the Fund's portfolio, reducing the current
yield of the Fund. In periods of rising interest rates, the opposite can be
true.
BORROWING OF MONEY
The Fund is not permitted to borrow money in excess of 5% of its total net
assets. The Fund has not borrowed money since its inception and has no plans to
borrow money.
ASSET COMPOSITION
The weighted average ratings of the securities held by the Fund on December 31,
1998, the ending date of the fiscal year, were:
Aaa/AAA Aa/AA A/A Baa/BBB NR(total)
Municipal Bonds 24.7% 8.2% 18.3% 40.2% 8.6%
The Board of Directors of the Fund, acting upon information furnished by the
Investment Adviser, has determined that the unrated bonds held by the Fund were
comparable to bonds rated Baa/BBB.
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of three individuals, two of whom are not
"interested persons" of the Fund as defined in the Investment Company Act of
1940. The Directors of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed upon the
directors or Directors of investment companies by the Investment Company Act of
1940. The Directors of the Fund are:
John T. Pearson, President of the Fund and Vermont Fund Advisors, Inc.*
Stephen A. Carbine, Vice President, Kinney, Pike Bell and Connor, Inc.,
Win Thomas, President of Thomas Insurance Agency
*John T. Pearson is an "interested person" of the Fund's Investment Adviser and
of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
of 1940 by virtue of his officership, directorship and/or employment with
Vermont Fund Advisors, Inc. Vermont Fund Advisors, Inc. also serves as the
Fund's Transfer Agent. The other Directors are the non-interested Directors of
the Fund.
Except as otherwise noted, each individual has held the office indicated, or
other offices in the same company, for the last five years.
John T. Stephen A. Win
Name of Person, Position Pearson Carbine Thomas
Aggregate Compensation from Fund $0 $1,400 $1,400
Pension or Retirement Benefits Accrued
As Part of Fund Expenses None None None
Estimated Annual Benefits Upon Retirement None None None
Total Compensation From Fund
and Fund Complex Paid to Directors $0 $1,400 $1,400
INVESTMENT ADVISOR AND ADVISORY AGREEMENTS
Our investment activities are managed by Vermont Fund Advisors, Inc., 128
Merchants Row, Suite 611, Rutland, Vermont 05701 Vermont Fund Advisors, Inc. was
formed in 1991. Vermont Fund Advisors, Inc. also serves as Transfer Agent.
Vermont Fund Advisors, Inc., may enter into sub-shareholder servicing agreements
with commercial banks, investment advisers, or other entities to provide
assistance in maintaining books, accounts and records of shareholders. Under the
terms of the shareholder servicing agreement, the Fund and its shareholders may
be required to pay for the costs of such servicing agreements.
Vermont Fund Advisors, Inc. serves as the Investment Adviser for the Fund
pursuant to an Investment Advisory Agreement dated as of May 31, 1991. This
agreement will continue in effect until May 30, 1999 and may be continued
thereafter for annual periods if renewed. Subject to the direction of the
Directors, Vermont Fund Advisors, Inc. is responsible for the actual management
of the Fund's portfolio. The compensation paid to the Investment Adviser as
presented on page 3 is inclusive of certain administrative services and
provision of office space, certain facilities and equipment as well as personnel
for management of the Fund. The compensation paid to the Investment Adviser
pursuant to the Investment Advisory Agreements is a percentage of the daily net
assets of the Fund as follows:
Range of Total Assets (in dollars) Up to $10 Million Over $10 Million
Advisory fee percentage of daily net assets 0.70% 0.60%
Vermont Fund Advisors, Inc. has reserved the right to voluntarily subsidize the
Fund at its sole option.
In addition, the Fund has entered into a Transfer Agent/Shareholder Service
Agreement with Vermont Fund Advisors, Inc. The agreement provides for a fee
computed on the average daily net asset value at the annual rate of .08% and the
payment and/or reimbursement of certain supplies, maintenance and equipment
costs incurred on behalf of the Fund for the provision of Transfer Agent
services.
FUND PORTFOLIO MANAGER
The person primarily responsible for the day-to-day management of the Fund is
John T. Pearson, President of the Investment Adviser. Mr. Pearson has been
Portfolio Manager since the inception of the Fund in 1991.
YEAR 2000
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if computer
systems used by the Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
The Adviser is taking steps that it believes are reasonably designed to address
the Year 2000 issue with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Fund's other
major service providers. There can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
DETERMINING NET ASSET VALUE
The price used when you buy or sell shares in the Fund is the next net asset
value computed after we receive your order in proper form. The net asset value
per share of the Fund is determined separately at the close of trading on the
New York Stock Exchange each day the Exchange is open for trading by dividing
the total value of the assets of the Fund, minus liabilities, by the total
number of shares outstanding. The value of your investment in the Fund is not
reduced by a sales charge or commission.
The securities in which we invest are traded almost exclusively in the
over-the-counter market. We value 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 we
believe that available quotations are not current or representative, we value
securities at prices we believe will best reflect the fair value. In such cases,
and in the case of other assets, fair value is determined in good faith in
accordance with procedures approved in advance by our Board of Directors,
consistently applied by or under the supervision of our officers, and monitored
by the Board on an ongoing basis.
BUYING SHARES
Our goal is to make doing business with us as easy as possible. You can buy
shares at the next net asset value computed after we receive your investment in
proper form as described below. There is no sales charge or load.
TERMS OF OFFERING
If you send us a check which does not clear, we may cancel your order and hold
you responsible for any loss which we have incurred. We may recover our loss by
redeeming shares held in your account, and we may prohibit or restrict you from
placing future orders.
We retain the right to reject any order, and to raise or lower the minimum
investment size for any persons or class of persons. An order to purchase shares
is not binding on us until confirmed in writing by the Transfer Agent.
INITIAL INVESTMENT
Your initial investment for the Fund need only be $500.00 and there is no
minimum amount for any subsequent investment.
BY WIRE
If this is an initial investment you must first call us to tell us the
following:
How the account is to be registered; Name of series in which you wish to invest;
Your address; Your tax identification number; Amount being wired; and Name of
wiring bank.
Our wire instructions are directed to the Chittenden Bank, Burlington, Vermont
as follows: Chittenden Bank, ABA # 011600062, Tax Free Fund of Vermont, Account
# 21-60-0281-4.
If you are adding to an existing account please call us with your name and
account number.
BY MAIL
Make your check payable to the series you want to invest in and send your check
to:
Tax Free Fund of Vermont, Inc.
128 Merchants Row, Suite 611
Rutland, Vermont 05701
Along with one of the following:
A completed new account form (if new account); or
The detachable stub which you will find at the bottom of your most recent
account statement; or A letter specifying your Fund account number.
AUTOMATIC PURCHASE PLAN
Once your account is open, you may make investments automatically by authorizing
the Tax Free Fund of Vermont to draw on your bank account. Please call us at
1-800-675-3333 for more information.
SELLING SHARES
You may sell all or part of the shares in your account at any time without any
penalties or sales commissions. To do so, simply use one of the methods
described below. We will not require a signature guarantee (but reserve the
right to do so); however, on your account application, 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 the result of your instructions. The Fund will utilize
reasonable procedures, such as recording a telephone redemption request or
making inquiries of information which should only be known to the shareholder
and the Fund, to confirm that instructions communicated by telephone or in
writing are genuine. If reasonable procedures are followed by the Fund, it will
not be liable for losses due to unauthorized or fraudulent telephone
instructions. The Securities and Exchange Commission is currently considering
the propriety of the requirement of indemnification and hold harmless
provisions.
BY TELEPHONE
In Rutland (802) 773-0674
Toll Free Nationwide Number (800) 675-3333
All accounts will automatically receive telephone redemption privileges unless
indicated otherwise on the initial application form. We will mail or wire the
money only to the address or bank account previously filed with us. Changes to
any redemption instructions must be made in writing and signed by all owners.
The telephone cannot be used to redeem shares for which you hold certificates of
beneficial interest or which were purchased by mail within the past 30 days.
BY MAIL
You must send us a written request for redemption, signed by each registered
holder exactly as the shares are registered along with (if applicable):
Any certificates of beneficial interest; and/or Documents required by
Corporations, Executors, Administrators, Directors and Guardians.
PAYMENT OF REDEMPTION PROCEEDS
The Transfer Agent will normally mail a check or wire redemption proceeds the
business day following the receipt of necessary documents in required form.
There is no charge to you by the Fund for wiring redemption proceeds. However,
your own bank may impose a wire charge on your account to which the funds are
wired.
We reserve the right on all redemptions to delay payment seven days if to do
otherwise would negatively affect existing shareholders.
Shares redeemed to close an account will earn dividends through the date of
redemption. In addition to the redemption proceeds, redeeming shareholders will
receive dividends declared but unpaid. If you redeem only a portion of your
shares, you will receive all dividends declared and unpaid on all your shares on
the next dividend payment date.
REDEMPTION PRICE
The redemption price of 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 in the form it requires.
SUSPENSION OF REDEMPTION
We may suspend the right of redemption or postpone payment for more than seven
days during any of the following events:
The New York Stock Exchange is closed;
The Securities and Exchange Commission (the "Commission") determines trading on
the Exchange is restricted;
There is an emergency as determined by the Commission where it is not reasonably
practicable for us to dispose of securities; and/or
For such other period as the Commission may by order permit for the protection
of the shareholders.
REDEMPTION BY THE FUND
If your account balance falls below $100 as a result of shareholder redemption
and not simply market valuation change, we may redeem your shares and close out
your account. We will give you notice no earlier than the 15th of the month
following the month in which your account falls below $100, and you will have 30
days from the date of the notice to bring the account up to $100 before we take
any action.
TRANSFER AND EXCHANGE OF SHARES
You may transfer your shares to another owner. An transfer is treated for
federal tax purposes as a redemption and purchase of shares and may result in
the realization of a capital gain or loss, depending on the cost or other tax
basis of the shares exchanged. No representation is made as to the deductibility
of any such loss. The Transfer Agent will provide you with information about the
documents required.
WITHDRAWAL PLAN
You may withdraw fixed or variable amounts from your account at regular
intervals. Once begun, a withdrawal plan may be discontinued at any time without
penalty.
INACTIVE ACCOUNTS
If your Account is inactive (i.e., you do not make any deposits or withdrawals)
and you have not otherwise communicated with us about your Account for the
period provided by law, we will be required to transfer the balance of your
Account as "abandoned property" to the appropriate state authority.
DIVIDENDS
Generally, we declare dividends for the Fund each business day. The Fund pays
such dividends as of the last business day of each month.. If no other business
day(s) intervenes between a weekend or holiday on which the New York Stock
Exchange is closed, then dividends will be paid on the last business day of the
month. The Directors have the authority to change dividend payment dates.
Net investment income consists of all interest income accrued on portfolio
securities less all expenses. Capital gains, if any, will normally be
distributed between October 31 and December 31 in order to comply with federal
income tax regulations. See Statement of Additional Information. Income
dividends and capital gains distributions will be paid in additional shares by
credit to the shareholder's account or in cash at the shareholder's election.
Any such election remains in effect until the Transfer Agent receives notice
terminating the election at least three days before the payment date of a
dividend or distribution. The available elections are indicated on the new
account application form.
TAXES
The Fund has qualified as a "regulated investment company" (RIC) under the
Internal Revenue Code. Accordingly, we must distribute at least 90% of our net
income earned in any year. Ordinarily, the dividends we pay our shareholders
will be exempt interest dividends which will be excludable from gross income for
federal and Vermont income tax purposes. Distributions of income from
investments in non-municipal securities or net short-term capital gains or net
long-term capital gains exceeding our capital loss carry forwards (if any) will
be taxable as more fully described in the "Statement of Additional Information."
You should consult your tax adviser about the effects of investments in the Fund
on your federal and Vermont income tax liability.
PERFORMANCE CALCULATIONS
All yield figures are based on historical earnings and are not intended to
indicate future performance.
Total returns are calculated for specified periods by finding the compounded
rate of return that will equal the total amount redeemed at the specified
redemption date versus the initial amount invested. Average annual total return
calculations consider reinvestment of all dividends and all other distributions
less all expenses.
Yield quotations are based on a 30 day period in accordance with Securities and
Exchange Commission computation formulas as more fully described in the
Statement of Additional Information.
Taxable equivalent yield is the yield that an investor would have to earn from
fully taxable investments, before the investor had paid federal and any
applicable Vermont income taxes, in order to equal a tax-free yield.
FUND PERFORMANCE
The Annual Report of the Tax Free Fund of Vermont contains a discussion and
graphs reflecting its performance during the most recently completed fiscal
year. A copy of the Annual Report may be obtained by writing or calling us at
the numbers listed on the back cover. Performance may also be judged by
comparing the series' performance to other mutual funds with comparable
investment objectives through various mutual fund or market indices or rankings
such as those provided by Barrons, Forbes, Fortune, Money Magazine and
Morningstar . Periodically, information from these publications may be included
in advertisements, sales literature and reports to shareholders.
HOW TO REACH US
TAX-FREE FUND OF VERMONT
128 Merchants Row, Suite 611
Rutland, Vermont 05701
1-800-675-3333 Toll Free
1-802-773-0674 Voice
1-802-773-2392 Fax
INVESTMENT ADVISER
and
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Vermont Fund Advisors, Inc
128 Merchants Row, Suite 611
Rutland, Vermont 05701
1-802-773-0674 Voice
1-802-773-2392 Fax
[email protected]
CUSTODIAN
Vermont National Bank
43 West Street
Rutland, Vermont 05701
INDEPENDENT AUDITORS
Tait, Weller and Baker
Certified Public Accountants
Eight Penn Center Plaza
Suite 800
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Ryan, Smith & Carbine, Ltd.
P. O. Box 310
Mead Building
98 Merchants Row
Rutland, Vermont 05701
This prospectus omits certain 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 the Commission.
<PAGE>
PART B
TAX FREE FUND OF VERMONT, INC.
128 Merchants
Row
Rutland, Vermont 05701
Statement of Additional Information
Dated: April 30, 1999
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, 1999. 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.
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Table of Contents
Caption Page in
this Prospectus
Statement page cross reference
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Investment Objectives and Policies 2 5
Investment Restrictions 5 6
Management 7 7
The Investment Advisor and Other Services 7 8
Additional Purchase and Redemption Information 10 10, 11
Fund Yield and Performance 11
Tax Information 13 13
Financial Statements 15
Independent Auditors' Report 27
Appendix A-Description of Securities Ratings 28
</TABLE>
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, 1999.
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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". 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.
The Fund may also invest in municipal securities issued by territories and
possessions of the United States and their agencies and instrumentalities whose
interest income is exempt, in the opinion of counsel for the issuer, from
federal and state income taxes including Vermont state income taxes. These
securities are also referred to herein as "Vermont Municipal Bonds" due to the
tax-exempt nature of their interest for federal and Vermont income tax purposes.
The Fund may invest in these bonds because suitable municipal bonds issued by
Vermont issuers are not available, because yields, maturities or credit quality
on these bonds may be preferable to comparable elements available on municipal
bonds issued by Vermont entities, or to add the issuer diversification to the
Fund's investment portfolio. Except for identity of the issuer, all Vermont
Municipal Bonds must meet all of the fundamental investment policy requirements
of the Fund and are subject to all 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.
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Municipal Securities
The terms "Vermont 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:
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1. Marketable obligations of, or guaranteed by, the United States
Government, its agencies or instrument- alities; 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
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 41% and 60% in
1998 and 1997, respectively. For the years 1999 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;
(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 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.
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Directors and Officers
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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, 1999, Mr. Justin J. Mueller, P. O. Box 646, Manchester,
Vermont, owned beneficially 6.6% 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 1.0% 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 involved in corporate
finance since 1969 and in fixed income investment management since 1983.
<PAGE>
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 up to $10,000,000 and 0.6% on average daily
net assets in excess of $10,000,000. The fee is accrued daily and accrued
amounts are paid not less frequently than 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 $60,852 and $52,115 was payable in fees to Vermont
Advisors by the Fund in 1998 and 1997, 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 1999 and does not presently plan to reimburse the Fund for any
expenses in 1999.
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 May 11, 1998, 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, 1999 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.
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 $7,039 and $6,109
was paid in fees to Vermont Advisors by the Fund in 1998 and 1997, 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 May 11, 1998, 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.
The Fund's independent accountant is Tait, Weller & Baker, Two Penn Center
Plaza, Suite 700, Philadelphia, Pennsylvania, 19102-1707. Tait, 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 1997 and
1998, 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 1998: 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 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 March 31, 1999 is 4.49%.
The yield was computed by dividing the net income per share earned during the
period by the net asset value per share on March 31, 1999.
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 March 31,
1999 is 7.71%. The tax equivalent yield was computed by dividing the yield of
4.49% 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 1998 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 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.
<TABLE>
<CAPTION>
Tax Equivalent Yields for Vermont Residents
Taxable Federal Vermont Combined If the tax-exempt yield is:
Income** Tax Tax Federal
Bracket* Bracket and
as a % of Vermont 5.0% 5.5% 6.0% 6.5%
single joint Federal Tax Tax Bracket* Then taxable equivalent yield is:
return return Due
$25,350 to $42,350 to
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61,400 $102,300 28% 25% 33.0% 7.47% 8.21% 8.96% 9.71%
$61,401 to $102,301 to
$128,100 $155,950 31% 25% 36.3% 7.86% 8.64% 9.43% 10.21%
$128,101 to $155,951 to
$278,450 $278,450 36% 25% 41.8% 8.58% 9.44% 10.30% 11.16%
$278,451 & $268,451 &
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, 1998 is 3.82%. The Fund's average annual total return for the
period from September 18, 1991 (inception of operations) through December 31,
1997 is 5.44%. The one year total return was computed by assuming an initial
investment of $1,000 in shares of the Fund on January 1, 1998 and calculating
the redemption value of those shares on December 31, 1998, assuming reinvestment
of all dividends paid during 1998.
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 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 1996, taxpayers are taxed at a rates from 20% to 28% on all capital
gains income.
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 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 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 $250 annually.
Financial Statements
Following are the Fund's Financial Statements and notes thereto dated
December 31, 1998 and the Independent Auditors' Report dated February 10, 1999:
<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.
<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.
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, 1998
and Total Return calculation for year ended December 31,
19978- Exhibit A.
Item 26. Number of Holders of Securities
As of April 30, 1998, there are 300 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 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
<TABLE>
<CAPTION>
Tax Free Fund of Vermont, Inc.
Average Annual Return Calculation per SEC Item 22:
Tax Free Fund of Vermont - Total Return Calcualtion for Year 1998: Exhibit A, Page 2
Shares Total Annualiz Return:
Date $ Invested NAV Bought Shares $ Value (incepti1 year 3 Years 5 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/97 0.0308962 10.29 0.412 137.724 1417.175 0.057 0.077 0.082 0.059
01/31/98 0.04049126 10.32 0.540 138.264 1426.884 0.057 0.084 0.076 0.059
02/28/98 0.03745107 10.29 0.503 138.767 1427.914 0.057 0.077 0.067 0.055
03/31/98 0.03824994 10.27 0.517 139.284 1430.447 0.056 0.086 0.064 0.057
04/30/98 0.0381925 10.23 0.520 139.804 1430.195 0.056 0.069 0.064 0.055
05/31/98 0.03883629 10.29 0.528 140.332 1444.012 0.056 0.071 0.060 0.057
06/30/98 0.03738359 10.27 0.511 140.842 1446.452 0.056 0.062 0.065 0.055
07/31/98 0.03599233 10.23 0.496 141.338 1445.887 0.055 0.046 0.062 0.055
08/31/98 0.0350255 10.29 0.481 141.819 1459.318 0.056 0.058 0.063 0.055
09/30/98 0.03317973 10.34 0.455 142.274 1471.115 0.056 0.058 0.064 0.056
10/30/98 0.03302632 10.28 0.457 142.731 1467.277 0.055 0.050 0.060 0.056
11/30/98 0.03177408 10.27 0.442 143.173 1470.385 0.055 0.047 0.055 0.057
12/31/98 0.04642497 10.23 0.650 143.823 1471.305 0.054 0.038 0.053 0.056
</TABLE>
Exhibit A, Page 1
Tax Free Fund of Vermont
SEC Yield Calculation
(with and w/o waived expenses)
Tot 30 Day Int 42,483.68660
less:
Tot 30 Day Exp 9,909.64000
equals:
Net Int Income 32,574.04660
divided by:
Avg Sh Out*NAV 8,443,712.60755
equals:
fraction 0.00386
Plus:
One (1) 1.00386
exponentiated:
6th Power 1.023371113
minus:
One (1) 0.023371113
equals:
Two (2) 0.046742226
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. 7
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, 1999.
TAX FREE FUND OF VERMONT, INC.
- --------------------------------------------------------------
John T. Pearson,
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 9
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
______________________________________________ Director April 30, 1999
STEPHEN A. CARBINE
______________________________________________ Director April 30, 1999
JOHN T. PEARSON
______________________________________________ Director April 30, 1999
WINFRED A. THOMAS
December 31, 1998
Dear Shareholders,
1998 was a relatively good year for the Tax Free Fund of Vermont. During a
period encompassing some of the lowest interest rates in decades, the Fund
produced a total return of 3.82%, comprised of an tax free dividend yield of
4.2% offset in small part by a loss on investments (both realized and
unrealized) of 0.4%. The dividend performance was relatively strong during a
year when most yields on Vermont municipal bonds dove to under 5%, while the
small investment loss reflected ongoing market price fluctuations in the Fund's
portfolio throughout 1998. Nevertheless, the Fund's net asset value per share
remained relatively stable during 1998, decreasing from $10.29 at the beginning
of 1998 to $10.23 by year-end. Also, for the first time in the Fund's history,
the Fund distributed a capital gain to shareholders in December equivalent to
approximately 1.5 cents per share.
In other areas, the Fund reduced its expense ratio to 1.51% in 1998, a reduction
of over 12% from the prior year's ratio. Nonetheless, the Fund's management and
directors are not satisfied with the current expense ratio and are continuing to
pursue efforts to further reduce the expense ratio in 1999. The Directors acted
in May of 1998 to reduce the management fee payable to the adviser from 0.7% to
0.6% on all assets in excess of $10 million; this reduction should contribute to
lower expense ratios as the Fund continues to grow its asset base. The Fund also
achieved the lowest turnover ratio in its history, 41%, further contributing to
reduced portfolio trading costs and thereby increasing returns available to
shareholders.
Shareholders recognized the Fund's solid performance by investing in the Fund an
additional $1.7 million, net of redemptions, to increase total net assets to
over $9.5 million during a period when continued strong performance by the
equity markets dampened investor enthusiasm for bond funds in general.
The management and Directors of the Fund are aggressively and comprehensively
pursuing resolution of all Y2K computer processing issues which could impact on
the Fund, its adviser and its transfer agent and anticipate that the Fund will
be Y2K compliant well before the new millenium rings in.
We are looking towards 1999 with great anticipation. We expect it may be a year
in which equity market performance could decline and accordingly bond funds in
general, and the Tax Free Fund of Vermont in particular, could benefit from
investors seeking more conservative investment alternatives than offered by the
equity markets. We appreciate your confidence in the Tax Free Fund of Vermont
and we welcome your comments at any time.
Yours truly,
John T. Pearson
President
<TABLE>
<CAPTION>
THE FOLLOWING DATA IS PRESENTED IN A GRAPH FORMAT ON THE ANNUAL REPORT
Date Fund Index
<S> <C> <C> <C>
9/18/91 $10,000.00 $10,000.00
12/31/91 $10,110.00 $10,389.00
12/31/92 $10,651.00 $11,198.00
12/31/93 $11,211.00 $12,565.00
12/31/94 $11,181.00 $11,915.00
12/31/95 $12,595.00 $13,995.00
12/31/96 $13,169.00 $14,590.00
12/31/97 $14,188.00 $15,931.00
12/31/98 $14,730.00 $16,963.00
</TABLE>
The above graph shows the results of a $10,000 investment in the Tax Free Fund
of Vermont compared to the Lehman Municipal Bond Index and the average annual
return for the Tax Free Fund of Vermont for the period from its inception
through December 31, 1998. The Fund has generally underperformed the Index
during periods of rising bond prices and declining interest rates and has
generally outperformed the index during periods of declining bond prices and
rising interest rates. This relative performance trend is due primarily to the
fact that Vermont municipal bonds are of higher credit quality and are less
volatile in price than municipal bonds in general. The Fund's portfolio reflects
this phenomenon. Also, the Fund's returns are after fees and expenses of the
Fund, while the returns of the Lehman Municipal Bond Index are without any fees
or expenses. During 1998, the rise in bond prices and decline in interest rates
coupled with the absence of fees and expenses from the return achieved by the
Index resulted in the Index achieving a higher total return than the Fund.
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, 1998, 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, 1998, 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, 1998 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
February 10, 1999
<PAGE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
Investments in securities at market value
<S> <C>
(identified cost $9,056,104) (Note 1-A) $ 9,275,954
Cash 96,558
Interest receivable 127,931
Prepaid expenses and other assets 38,984
-------------
Total assets 9,539,427
LIABILITIES
Accrued expenses 315
NET ASSETS
(Applicable to 932,265 shares outstanding,
$.01 par value, 10,000,000 shares authorized) $ 9,539,112
=============
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
($9,539,112 / 932,265) $10.23
======
NET ASSETS
At December 31, 1998, net assets consisted of:
Paid-in capital $ 9,290,985
Accumulated net realized gain on investments 28,277
Unrealized appreciation of investments 219,850
-------------
$ 9,539,112
</TABLE>
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME
Income
<S> <C>
Interest $ 504,497
----------
Expenses
Investment advisory fees (Note 4) 60,852
Printing and postage 22,221
Audit fees 11,540
Insurance 8,946
Administrative and shareholder services (Note 4) 14,768
Portfolio pricing costs 3,594
Custody fees 2,394
Registration fees 967
Directors fees and expenses 8,196
Other 935
------------------------------------------------------
Total expenses 134,413
----------
Net investment income 370,084
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments sold 29,060
Net change in unrealized appreciation (67,046)
Net loss on investments (37,986)
----------
Net increase in net assets resulting from operations $ 332,098
==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
---- ----
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income $ 370,084 $ 317,970
Net realized gain on investments 29,060 147,794
Net change in unrealized appreciation (67,046) 98,475
------------ -------------
Net increase in net assets resulting from operations 332,098 564,239
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (370,084) (317,970)
Realized gains on investments (15,762) -
------------ -------------
Total distributions to shareholders (385,846) (317,970)
CAPITAL SHARE TRANSACTIONS (Note 3)
Increase in net assets resulting from
capital share transactions 1,713,698 414,136
------------ -------------
Total increase in net assets 1,659,950 660,405
NET ASSETS
Beginning of year 7,879,162 7,218,757
------------ -------------
End of year $ 9,539,112 $ 7,879,162
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TAX FREE FUND OF VERMONT, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
- -------------------------------------------------------------------------------
Years ended December 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
NET ASSET VALUE
Beginning of year ............................ $ 10.29 $ 9.97 $ 9.96 $ 9.30 $ 9.86
--------- --------- --------- --------- ---------
Income from investment operations
Net investment income ..................... .43 .43 .43 .49 .53
Net gain (loss) on securities
(both realized and unrealized) ......... (.04) .32 .01 .66 (.56)
--------- --------- --------- --------- ---------
Total income from investment operations ... .39 .75 .44 1.15 (.03)
--------- --------- --------- --------- ---------
Less distributions from
Net investment income ..................... (.43) (.43) (.43) (.49) (.53)
Realized gains on investments ............. (.02) -- --
--------- --------- --------- --------- ---------
Total distributions ....................... (.45) (.43) (.43) (.49) (.53)
--------- --------- --------- --------- ---------
End of year $ ................................ 10.23 $ 10.29 $ 9.97 $ 9.96 $ 9.30
========= ========= ========= ========= =========
TOTAL RETURN .................................... 3.82% 7.74% 4.56% 12.65% (.27)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (000's) ............ $ 9,539 $ 7,879 $ 7,219 $ 6,961 $ 5,786
Ratio of
Expenses to average net assets ............ 1.51% 1.72% 1.55% 1.49% 1.66%
Net investment income to average net assets 4.16% 4.26% 4.41% 5.06% 5.61%
PORTFOLIO TURNOVER .............................. 41% 60% 98% 182% 44%
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
TAX FREE FUND OF VERMONT, INC.
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
December 31, 1998
- -------------------------------------------------------------------------------
Municipal Bonds (97.24%)
Maturity Principal Market
Vermont (87.85%) Rate Date Amount Value
---- ------------ ------- --------
Vermont Educational and
Health Buildings Financing Agency
1993 Revenue Bond
<S> <C> <C> <C> <C>
(Norwich University Project) 6.00% 09/01/13 $ 105,000 $ 109,988
1998 Revenue Bond
(Norwich University Project) 5.50% 07/01/21 250,000 250,938
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.10% 02/01/31 275,000 292,531
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.15% 04/15/14 1,145,000 1,229,444
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.375% 04/15/14 325,000 351,000
1996 Revenue Bond
(St. Michaels College) 5.90% 04/01/11 150,000 161,625
1993 Revenue Bond
(Champlain College Project) 6.00% 10/01/13 260,000 273,650
1994 Revenue Bond
(Landmark College Project) 7.15% 11/01/14 500,000 563,125
1996 Revenue Bond
(Lyndon Institute) 6.60% 12/01/14 35,000 364,731
1993 Revenue Bond
(Medical Center Hospital) 6.00% 09/01/22 550,000 595,375
1996 Revenue Bond
(Northwestern Medical Center) 6.25% 09/01/18 530,000 557,162
1992 Revenue Bond
(Middlebury College Project) 6.00% 11/01/22 125,000 135,625
1996 Revenue Bond
(Middlebury College Project) 5.375% 11/01/26 100,000 102,500
1996 Revenue Bond
(Middlebury College Project) 5.50% 11/01/16 150,000 156,188
Vermont State Agricultural College
1998 Revenue Bond 4.75% 10/01/29 925,000 874,125
Vermont Municipal Bond Bank
1996 Series 1 6.00% 12/01/26 300,000 327,000
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1998
- -------------------------------------------------------------------------------
Municipal Bonds - (Continued)
Maturity Principal Market
Rate Date Amount Value
Vermont Housing Finance Agency
Single Family Mortgage-Backed Bond
1990 Series 2 7.30% 05/01/25 $ 285,000 $ 298,538
1989 Series A 7.85% 12/01/29 300,000 307,866
1994 Series 5 6.875% 11/01/16 100,000 107,625
1992 Series 4 6.40% 11/01/25 670,000 711,037
Vermont Housing Finance Agency
Multi-Family Mortgage-Backed Bond
1977 Series 1 6.50% 2/15/17 70,000 70,350
1995 Series A 6.15% 02/15/14 100,000 108,125
Vermont Student Assistance Corp.
1992 Series B 6.70% 12/15/12 395,000 432,031
-------------
Total Vermont Bonds 8,380,579
-------------
Puerto Rico (7.27%)
Puerto Rico Electric Power Authority
1995 Revenue Bond, Series X 5.50% 07/01/25 225,000 231,187
Puerto Rico Industrial,
Medical & Environmental Authority
1994 Revenue Bond
(Ryder Memorial Hospital Project) 6.60% 05/01/14 425,000 462,188
-------------
Total Puerto Rico Bonds 693,375
-------------
U.S. Virgin Islands (2.12%)
U.S. Virgin Islands Public Finance Authority
1998 Series A 5.50% 10/01/22 200,000 202,000
-------------
Total investments in securities
(Cost $9,056,104) (97.24%) (1) 9,275,954
Other assets and liabilities, net (2.76%) 263,158
-------------
Net assets (100%) $ 9,539,112
=============
(1) The cost of investments for federal income tax purposes amounted to
$9,056,104. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at December 31, 1998 are as follows:
Gross unrealized appreciation $ 249,434
Gross unrealized depreciation (29,584)
----------
Net unrealized appreciation $ 219,850
==========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- -------------------------------------------------------------------------------
(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.
(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, 1998
- -------------------------------------------------------------------------------
(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 $4,921,981 and $3,556,528, respectively.
(3) CAPITAL SHARE TRANSACTIONS
<TABLE>
<CAPTION>
Transactions in shares of the Fund for the years ended December 31, 1998
and 1997, were as follows:
1998 1997
------------------------ ---------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 215,465 $ 2,214,463 130,732 $ 1,316,230
Shares issued in reinvestment of dividends 26,291 270,112 21,950 221,620
Shares redeemed (74,969) (770,877) (111,499) (1,123,714)
-------- ------------ ---------- --------------
Net increase 166,787 $ 1,713,698 41,183 $ 414,136
======== ============ ========== ==============
</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.
This fee is reduced to .6% of average daily net assets over $10 million.
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, 1998.
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, 1998, administrative services
fees paid by the Fund totaled $7,039.
The president, director and sole shareholder of the Advisor also serves as
president and as a director of the Fund. Officers of the Fund and
interested directors receive no compensation directly from the Fund.
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1998
- -------------------------------------------------------------------------------
(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.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
</LEGEND>
<CIK> 0000875730
<NAME> TAX FREE FUND OF VERMONT, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 11,088,372
<INVESTMENTS-AT-VALUE> 11,342,742
<RECEIVABLES> 196,803
<ASSETS-OTHER> 564,030
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,103,575
<PAYABLE-FOR-SECURITIES> 100,733
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,958
<TOTAL-LIABILITIES> 123,691
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,411,157
<SHARES-COMMON-STOCK> 1,083,896
<SHARES-COMMON-PRIOR> 851,801
<ACCUMULATED-NII-CURRENT> 554,985
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (240,628)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 254,370
<NET-ASSETS> 11,979,884
<DIVIDEND-INCOME> 92,693
<INTEREST-INCOME> 663,737
<OTHER-INCOME> 0
<EXPENSES-NET> 144,899
<NET-INVESTMENT-INCOME> 611,531
<REALIZED-GAINS-CURRENT> 14,114
<APPREC-INCREASE-CURRENT> 123,347
<NET-CHANGE-FROM-OPS> 748,992
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 569,758
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 287,143
<NUMBER-OF-SHARES-REDEEMED> 109,884
<SHARES-REINVESTED> 54,837
<NET-CHANGE-IN-ASSETS> 2,427,296
<ACCUMULATED-NII-PRIOR> 513,212
<ACCUMULATED-GAINS-PRIOR> (254,742)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 145
<AVERAGE-NET-ASSETS> 10,733
<PER-SHARE-NAV-BEGIN> 11.00
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.14
<PER-SHARE-DIVIDEND> (0.68)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.05
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
