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>
