Securities Act of 1933 No. 33-41043
Investment Company Act of 1940 No. 811-6328
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT CO ACT OF 1940
Amendment No. 11 [X]
TAX FREE FUND OF VERMONT
87 North Main Street, Rutland, Vermont 05701
(802) 773-0674
AGENT FOR SERVICE:
John T. Pearson
87 North Main Street, Rutland, Vermont 05701
It is proposed that this filing will become effective (check
appropriate box): [X] immediately upon filing pursuant to
paragraph (b)
[ ] on __________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on __________ pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Prospectus
April 28, 2000
[LOGO]
Tax Free Fund of Vermont
TAX FREE FUND OF VERMONT
The Fund seeks to achieve the highest level of current income
free from federal and Vermont income taxes that is obtainable
consistent with the prudent investment management of the
shareholders' principal.
This prospectus has information you should know before you
invest. Please read it carefully and keep it with your investment
records.
Although these securities have been registered with the
Securities and Exchange Commission, the Securities and Exchange
Commission has not approved or disapproved them or determined if
this prospectus is accurate or complete. Anyone who informs you
otherwise is committing a crime.
<PAGE>
Table of Contents
Fundamental Goals and Principal Strategies.....................................1
Principal Risks................................................................2
Past Performance...............................................................3
Fees and Expenses .............................................................4
How to Buy Shares .............................................................5
How to Sell Shares ............................................................7
Dividends, Distributions and Tax Consequences..................................9
Management and Capital........................................................10
Other Strategies and Related Risks............................................11
Financial Highlights..........................................................12
Performance Graph ............................................................13
Additional Information........................................................14
i
<PAGE>
Fundamental Goals and
Principal Strategies
Tax Free Fund of Vermont
Fundamental Goal The Fund seeks to achieve the highest level of current income
free from federal and Vermont income taxes that is obtainable consistent with
the prudent investment management of the shareholders' principal.
Principal Strategies The Fund invests at least eighty percent (80%) of its
assets in long term bonds the income of which is exempt from federal and Vermont
income taxes, with its primary focus on individual security selection rather
than attempting to anticipate major interest rate moves. The Fund's
value-oriented buy discipline requires a given security to offer a yield
advantage over others of similar quality or to exhibit stable or improving
credit quality characteristics relative to other securities. Individual issues
must compliment the portfolio's yield objectives, long-term maturity structure
and seek to achieve as much diversification as is prudently achievable given the
single state nature of the Fund. Portfolio securities are sold when price
appreciation causes a security to lose its yield advantage, when credit quality
begins to deteriorate or when opportunity for added portfolio diversification
occurs.
The Fund invests most of its assets on an ongoing basis in investment grade
tax-exempt debt securities of qualified issuers in Vermont, including the State
of Vermont itself, agencies of the State and Vermont municipalities. An
investment grade security is one which is rated by Moody's or Standard & Poor's
in one of their four highest quality ratings or is unrated but of comparable
quality. To maximize the income potential of this portfolio, the portfolio
manager adjusts the portfolio quality mix based upon current yield differentials
and his perception of the overall market risk.
In order to boost portfolio income, the Fund may invest a portion of its assets
in similar debt securities which are not rated but which would, in the judgement
of the portfolio manager, have carried an investment grade rating had they been
rated. The Fund only makes these investments when an unrated security is
supported by a bank letter of credit.
The Fund may respond to changing market and other conditions by adjusting the
type of securities held and the average portfolio maturity and duration. The
Fund also uses other investment strategies and securities. See "Other Strategies
and Related Risks."
(sidebar for page 1)
- -> Tax Free Fund
of Vermont is
Designed for you:
o if you are seeking a conservative long-term investment;
o if you want high income free of federal and Vermont income taxes and are
willing to forego growth of capital to get it; and
o if you can accept the risk of a non-diversified portfolio of fixed income
securities issued primarily by tax-exempt issuers in Vermont.
Don't invest if you are:
o seeking growth of capital;
o making short-term investments;
o investing your emergency reserve money; or
o Aren't subject to Vermont tax
(end of sidebar)
1
<PAGE>
Principal Risks
Risk of Income Investing
The Fund invests only in debt obligations and other income-oriented securities.
Income-oriented securities are exposed to three major risks; interest rate risk,
credit risk and call risk. Shareholders of the Fund will be exposed to these
principal risks. Shareholders of the Fund have an increased risk to credit
exposure because the Fund is non-diversified and because the Fund invests
primarily in debt securities that are affected by the economy of Vermont. Any of
these can make the value of the Fund's portfolio rise or fall, which means you
could lose money.
Interest Rate Risk - When interest rates rise, bond prices fall and when
interest rates fall, bond prices rise. Interest rate risk increases as average
maturity increases. Thus, since the Fund emphasizes longer maturing securities,
you are exposed to greater interest rate risk. The table at left illustrates the
effect of a 1% change in interest rates on three investment grade bonds of
varying maturity. Any income-oriented security is similarly subject to some
degree of interest rate risk.
(sidebar for above paragraph)
- -> Interest Rate Risk
Percent Increase (Decrease) In
The Price of a Par Bond Yielding 5%:
1% 1%
Interest Interest
Bond Rate Rate
Maturity Increase Decrease
- ----------------
Short
2.5 years -2.29% +2.35%
- ----------------
Intermediate
10 years -7.43% +8.17%
- ----------------
Long
20 years -11.55% +13.67%
(end of sidebar)
Credit Risk - Credit risk is associated with a borrower's failure to pay
interest and principal when due. Credit risk increases as overall portfolio
quality decreases. Thus, when the Fund invests in lower-quality securities, you
are exposed to increased credit risk. Credit Risk also increases as
diversification is reduced. Thus, when the Fund invests in more securities of
the same or similar qualified issuers in Vermont, you are also exposed to
increased credit risk.
Call Risk Call risk for qualified tax-exempt bonds (prepayment risk for
qualified tax-exempt mortgage-backed securities) is the possibility that
borrowers will prepay their debt prior to the scheduled maturity date, resulting
in the necessity to reinvest the proceeds at lower interest rates. If interest
rates decline when the Fund is emphasizing longer maturing securities, you are
exposed to greater call risk.
<PAGE>
Past Performance
The degree to which performance varies from year to year is one measure of risk.
The bar chart below shows this year-to-year performance for the Fund since its
inception in 1991. The table below the bar chart compares the Fund's performance
over time to a broad-based securities market index. Both the bar chart and the
table below assume reinvestment of dividends and distributions. Remember that
past performance is not necessarily an indication of how the Fund will perform
in the future.
Tax Free Fund of Vermont
Year-by-Year Total Return (%) as of 12/31 each year:
(The following is a numerical representation of a bar graph)
Year 92 93 94 95 96 97 98 99
Total Return 5.4% 5.3% -.03% 13.0% 4.6% 7.7% 3.8% -3.4%
(End of graph)
Average Annual Total Return as of 12/31/99:
1 Year 5 Years Since
Inception 1
Tax Free Fund of Vermont -3.38% 4.94% 4.35%
Lehman Brothers Municipal Bond Index -2.06% 6.87% 6.31%
Best quarter: 6.23%, for the quarter ended March 31, 1995.
Worst quarter: -2.11%, for the quarter ended March 31, 1994.
- --------------------------------
1 The Fund commenced investment operations on September 18, 1991
3
<PAGE>
Fees and Expenses
Shareholder Fees (fees paid directly from your investment)
Many mutual funds charge shareholder fees such as sales loads, redemption fees
or exchange fees. The Tax Free Fund of Vermont is a no-load investment, which
means that you will not pay any shareholder fees when you buy or redeem shares
of the Fund.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Operating expenses include fees for portfolio management, maintenance of
shareholder accounts, shareholder servicing, accounting and other services.
While the Fund pays these expenses, you bear them indirectly, as the table below
demonstrates.
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
Management Fee 0.70% 2
Other Expenses 0.78%
-------
Total Fund Operating Expenses 1.48%
2 The Management Fee is reduced to 0.60% on Fund total net assets in excess
of $10 million.
Example - This example is intended to help you compare the cost of investing in
the Tax Free Fund of Vermont with cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based upon these assumptions your costs would be as follows:
1 Year 3 Years 5 Years 10 Years
$151 $468 $808 $1,768
4
<PAGE>
How to Buy Shares
Getting Help You may buy shares by mail or telephone and may use the Automatic
Investment Plan, discussed below, to make periodic share purchases. Obtain an
application form or get assistance opening accounts by calling toll-free,
1-800-675-3333, or writing to the Tax Free Fund of Vermont, Inc., 87 North Main
Street, Rutland, Vermont 05701.
Account Minimums The minimum initial investment in the Fund is $500. You may add
to your account with as little as $100. Please bear in mind that the Fund may
close your account if it falls below the minimum initial investment (but not if
the decline in value is due solely to market action). You would first be given
60 days written notice. If, during the notice period, you restore your account
to the required minimum, your account will not be redeemed.
Purchase by Mail To open an account, complete and sign the Account Application
form accompanying the Prospectus. Make your check payable to the Tax Free Fund
of Vermont. Mail the application and your check to the Tax Free Fund of Vermont,
87 North Main Street, Rutland, Vermont 05701.
To add to your account ($100 minimum), mail your purchase check to the same
address. Be sure to include the additional investment stub which is attached to
your Fund confirmation statement or include a letter identifying your account
number. If you use overnight or express delivery services, be sure to use the
following address to insure prompt delivery:
Tax Free Fund of Vermont
87 North Main Street, Rutland, Vermont 05701.
Purchase by Bank Wire To open an account or add to an existing account, please
call the Fund, Tax Free Fund of Vermont, toll-free at 1-800-675-3333, before
wiring funds, to advise us of your forthcoming investment, the dollar amount and
the account registration. We will provide you with and account number for your
account. This will insure prompt and accurate handling of your investment.
Following your call to the Fund, instruct your bank to use the following wiring
instructions:
Wire to: Chittenden Bank, ABA Number 011600062
Attn: Tax Free Fund of Vermont
Account No. 21-60-0281-4
For the Account of: (Shareholder(s) Name)
Account No. (Your Account No.)
It is important that the bank wire contain all the information and that the
Transfer Agent receive prior telephone notification to ensure proper credit. The
Fund and its Transfer Agent are not responsible for the consequences of delays
resulting from the banking or Federal Reserve wire system, or from incomplete
wiring instructions.
(sidebar for page 5)
- -> No Load Fund
Unlike many mutual funds, the Tax Free Fund of Vermont is a true NO LOAD fund.
This means that when you buy shares directly from the Fund, no sales commissions
or other distribution charges will deducted from your investment and 100% of
your money will be used to buy Fund shares.The Fund distributes its shares
directly, so you may not buy shares through any broker-dealer and you must make
your application directly to the Fund.
- -> Pricing of Shares
The value of Fund shares rises and falls constantly. The price you pay when you
buy Fund shares is determined at the next calculation of net asset value after
your purchase order is received by the Transfer Agent in proper order. Net asset
value is determined on each day that the New York Stock Exchange is open for
trading, 30 minutes after the close of the Exchange (currently 4:30 p.m., New
York time).
(end of sidebar)
5
<PAGE>
Automatic Investment Plan - The Automatic Investment Plan allows you to purchase
additional shares by an electronic transfer of funds monthly from your bank
checking account, money market account, NOW account or savings account. You
choose the amount (minimum $100) to be automatically deducted from your bank
account each month, and that amount will be used to purchase additional shares
in the Tax Free Fund of Vermont. You may join the Automatic Investment Plan by
completing an Automatic Investment Plan designation on your account application
form. At any time you may cancel your participation in the Plan, change the
amount of purchase or change the day each month on which the shares are
purchased by calling 1-800-675-3333 or by writing to the Tax Free Fund of
Vermont, 87 North Main Street, Rutland, Vermont 05701. The change or
cancellation will be effective not later than five business days following
receipt.
For you to participate in the Plan, your bank or other financial institution
must be an Automated Clearing House member. It will take about 15 days for the
Transfer Agent to process your Automatic Investment Plan enrollment. The Fund
may modify or terminate the Automatic Investment Plan at any time or charge a
service fee, although no such fee is currently contemplated.
Account Conditions - The Fund may reject your application for any reason.
Your purchase request will not be effective until it is actually received in
proper order by the Transfer Agent. The U. S. Postal Service and other
independent delivery services are not agents of the Fund. Therefore, deposit in
the mail or with such services, or receipt at the Transfer Agent's post office
box, does not constitute receipt by the Transfer Agent.
A Social Security or Taxpayer Identification Number (TIN) must be supplied on
the Account Application Form before an account can be established (unless you
have applied for a TIN and the application so indicates). If you fail to furnish
the Fund with a correct TIN, the Fund is required to withhold taxes at the rate
of 31% on all distributions and redemption proceeds.
Payment for purchases must be made in U.S. dollars. Checks must be drawn on U.S.
Banks. Third party checks will not be accepted. If your payment is not received
or you pay with a check or bank wire transfer that does not clear, your purchase
will be canceled and you will be responsible for any losses or expenses incurred
by a Fund including, if applicable, a returned check fee of $20. If you are a
shareholder, the Fund shall act as your Agent to redeem shares from your account
at their then-current net asset value per share to reimburse the Fund for such
losses or expenses.
Certificates will not be issued for your shares unless you request them. In
order to facilitate redemptions and transfers, most shareholders elect not to
receive certificates. If you lose a certificate, you may incur delay and expense
in replacing it.
6
<PAGE>
Getting Help You may sell (redeem) Fund shares by mail or telephone. You also
may use the Systematic Withdrawal Plan to receive regular monthly or quarterly
checks out of your Fund account. There is no charge for redeeming shares; you
receive the full net asset value per share. Get assistance redeeming shares by
calling toll-free, 1-800-675-3333, or by writing to Tax Free Fund of Vermont, 87
North Main Street, Rutland, Vermont 05701.
Selling Shares by Mail - Send a written redemption request letter to the Tax
Free Fund of Vermont, 87 North Main Street, Rutland, Vermont 05701. Your request
must include:
(a) your share certificates, if issued;
(b) your letter of instruction or a stock assignment specifying the
account number, and the number of shares or dollar amount to be
redeemed. This request must be signed by all registered shareholders
in the exact names in which they are registered;
(c) signature guarantees and other documents (see "Signature Guarantees"
page 9).
Please note that if you paid for the shares you are redeeming by check, payment
will not be made until the Transfer Agent can verify that the payment for the
purchase has been, or will be, collected. It may take up to twelve (12) days for
your check to clear.
Selling Shares By Telephone - Make a toll-free telephone call to the Transfer
Agent at 1-800-675-3333. When you call to redeem shares, you will be asked how
many shares, or dollars worth of shares, you wish to redeem, to whom you wish
the proceeds to be sent, and whether the proceeds are to be mailed or wired. To
protect you and the Fund, your redemption proceeds will only be sent to you at
your address of record or to the bank account or person(s) specified in your
Account Application or Telephone Authorization Form currently on file with the
Transfer Agent. Also, the Transfer Agent will use procedures it has established
to confirm your identity and will send a written confirmation of the transaction
to your address of record. Among other things, the Transfer Agent will require
you to provide identifying information, which is unique to you. This may include
a password or other form of personal identification. In addition your call may
be recorded.
The Telephone Redemption Privilege must be authorized in advance. You must
activate this privilege in advance, in writing, in order to use it. By
activating this privilege, you authorize the Fund and the Transfer Agent to act
upon any telephone instructions they believe to be genuine, to (1) redeem shares
from your account and (2) mail or wire the redemption proceeds. Your written
activation request will specify the person(s), bank, account number and/or
address to receive your redemption proceeds. You may activate this privilege
when completing your initial Account Application. But once your account has been
opened you must use a separate Telephone Redemption Authorization Form
(available from the Fund or the Transfer Agent) to activate the privilege or to
change the person(s), bank, account number and/or address designated to receive
your redemption proceeds. Each shareholder must sign
(sidebar to page 7)
- -> Price and timing
The value of Fund shares changes constantly. Whether you sell your shares by
mail or telephone, the price you receive is determined at the next calculation
of net asset value per share after your sale order is received by the Transfer
Agent in proper order. To understand how and when shares are priced, see the
sidebar, "Pricing of Shares," on page 5.
The proceeds of your sale will ordinarily be sent to you within one or two days,
but no later than three (3) days, after receipt of your request.
How to Sell Shares
(end of sidebar)
7
<PAGE>
the Form and provide a signature guarantee and other required documents (see
"Signature Guarantees," page 9). You may cancel the privilege at any time by
telephone or letter.
Risks associated with Telephone Redemption. Redeeming by Telephone is a
convenient service available to shareholders. There are important factors you
should consider before activating the privilege. The Fund and the Transfer Agent
believe that the procedures reasonably protect shareholders from fraudulent
transactions. You should be aware of the Fund's policy that, provided the Fund
follows such procedures, neither the Fund nor any of its service contractors
will be liable for any loss or expense in acting upon any telephone instructions
that are reasonably believed to be genuine. The Fund may restrict or cancel
telephone redemption privileges, or modify the telephone redemption procedures,
for any shareholder or all shareholders, without notice, if the Directors
believe it to be in the best interest of the shareholders.
You cannot redeem shares by telephone if you hold the stock certificates
representing the shares you are redeeming or if you paid for the shares with a
personal, corporate, or government check and your payment has been on the
Transfer Agent's books for less than 12 days earlier. During drastic economic
and market changes, telephone redemption services may be difficult to implement.
If you are unable to contact the Transfer Agent by telephone, you may redeem
shares by mail.
Systematic Withdrawal Plan - You may have regular monthly checks sent to you or
someone you designate by authorizing the Transfer Agent to redeem the necessary
number of shares from your Fund account on the 25th of each month to make the
payments requested. Payments must be at least $10 and your Fund account must
have a value of at least $500 to begin a Systematic Withdrawal Plan. If the 25th
day falls on a Saturday, Sunday or holiday, the redemption will take place the
next business day. Your check will usually be mailed within one or two business
days of the redemption date, but in no case later than seven days. Checks will
be made out to you exactly as your account is registered with the Transfer
Agent. If you designate someone other than yourself to receive the checks, your
signature must be guaranteed on the plan application (see "Signature
Guarantees," page 9). Shares you hold certificates for may not be included in,
or redeemed under, this plan. Costs of administering the plan are borne by the
Fund. You should be aware that, like all sales of Fund shares, systematic
withdrawals reduce the value of your account with the Fund and result in
realized capital gains or losses. You may stop your participation in the Plan at
any time upon written notice to the Fund or Transfer Agent. The Fund or Transfer
Agent may terminate the Plan upon thirty day's written notice. Applications and
further details may be obtained by writing or calling the Tax Free Fund of
Vermont.
Redemptions in Kind - You will generally receive cash (or a check) when you
redeem your Fund shares. It is possible, however, that conditions may arise
which would, in the opinion of the Directors, make it undesirable for the Fund
to pay for all redemptions in cash. In such case, the Board of Directors may
authorize payment to be made in portfolio securities or other property of the
Fund. Securities delivered in payment of redemptions would be valued at the same
value assigned to them in computing the net asset value per share. Shareholders
receiving them would incur brokerage costs when these securities are sold. The
Fund has made an irrevocable commitment to pay, in cash, to any shareholder of
record during any ninety-day
8
<PAGE>
period the lesser of (a) $100,000 or (b) one percent (1%) of the Fund's net
asset value at the beginning of such period.
Signature Guarantees - A signature guarantee is a widely accepted way to protect
you, the Fund, and the Transfer Agent from fraud, and to be certain that you are
the person who has authorized a redemption from, or change to, your account.
Signature guarantees may be required for all (1) change of registration
requests, and (2) requests to establish or change telephone redemption,
exchange, or systematic withdrawal privileges other than through your initial
account application. The Fund may require a signature guarantee under other
circumstances. The Fund will honor signature guarantees from acceptable
financial institutions such as banks, savings and loan associations, trust
companies, credit unions, brokers and dealers, registered securities
associations and clearing agencies. A signature guarantee may not be provided by
a notary public.
The signature guarantee must appear on:
o your written request;
o a separate instrument of assignment ("power of attorney") which should
specify the total number of shares to be redeemed; or
o all stock certificates tendered for redemption.
In addition to requiring signature guarantees for redemptions and certain
shareholder services, other supporting legal documents may be required in the
case of estates, trusts, guardianships, custodianships, corporations,
partnerships, pension or profit sharing plans, and other organizations. For
example, a corporation (or partnership) may be required to submit a "Corporate
Resolution" (or "Certification of Partnership") indicating the names, titles and
required number of signatures authorized to act on its behalf. The application
or letter of instruction must be signed by such duly authorized officer(s) and
the corporate seal affixed. You may avoid time delays by calling the Transfer
Agent for assistance before sending your service request.
Dividends, Distributions and Tax Consequences
Dividends and Distributions - You will receive dividends from net investment
income, if any, monthly. You will also receive net realized capital gains
distributions, including short-term gains, if any, during September and/or
December. All dividends and distributions will automatically be paid to you,
depending on your designation on the Account Application Form, either by check
or in additional shares of the Fund at the then current net asset value on
"ex-date," which is normally the day following the record date. You may choose
to receive dividend distributions and/or capital gain distributions in cash by
checking the appropriate box on the Account Application Form when you open your
account. You may change how you receive dividends and distributions by sending a
letter of instruction to the Transfer Agent. If you elect payment of
distributions in cash, you may designate a person or entity other than yourself
to receive such distributions. The name and address of the desired recipient
should be indicated in the Account Application Form or in a separate, signed
statement accompanying the Account Application Form.
9
<PAGE>
Income dividends are declared on a per share basis daily and are paid monthly;
therefore the value of each share is not affected by either the declaration or
payment of income dividends. Capital gain distributions are, however, paid on a
per-share basis once per year. At the time of such a payment, therefore, the
value of each share will be reduced by the amount of the capital gain
distribution payment. Keep in mind that if you purchase shares shortly before
the distribution and payment of capital gains, you will pay the full price for
the shares and then receive some portion of the price back as a taxable dividend
or distribution.
Tax Consequences - During the time you hold the Fund's shares, you may be
subject to Federal tax on the Fund's distributions, whether you receive them in
additional shares or cash. The monthly dividends that the Fund intends to make
are normally exempt from both federal and Vermont income tax liability, but may
be subject to taxation under the federal Alternative Minimum Tax computation.
Annual capital gain distributions that the Fund intends to make will be taxed as
capital gains. Capital gains may be taxable at different rates, depending upon
the length of time the Fund holds its assets. The Fund's distributions will
primarily be ordinary income exempt from federal and Vermont income tax
liability.
When you sell your shares in the Fund, any gain on the transaction may be
subject to federal and Vermont tax.
Management and Capital
Investment Manager - Vermont Fund Advisors, Inc. has been investment manager of
the Fund since the Fund was first offered to the public in 1991. Its duties
include on-going management of the Fund's investment portfolio and business
affairs. In addition, the investment manager provides an executive officer to
the Fund and supplies office space, equipment and services not otherwise
provided by the Fund. The investment adviser's compensation during the last
fiscal year was 0.70% from the Fund, based on the Fund's total net assets. When
and if the Fund's total net assets exceed $10 million, the investment adviser's
compensation decreases to 0.60% of the Fund's total net assets in excess of $10
million.
Portfolio Managers - Dr. William Hahn has served as portfolio manager of the
Fund since February 2000 and was recently elected President of the Fund. Mr.
Hahn is employed by the investment adviser, Vermont Fund Advisers, Inc., and is
also an associate professor of finance at the College of St. Joseph, Rutland,
Vermont. His investment management experience dates back to 1982 and includes
management of a $30 million investment portfolio including taxable and
tax-exempt fixed income securities for a Vermont banking institution. He
graduated from Ball State University and holds an MBA in Finance from the
University of Toledo
10
<PAGE>
Other Strategies and Related Risks
Debt Securities - The Fund invests in tax-exempt investment grade debt
securities of qualified issuers in Vermont. The Fund may also invest a portion
of its assets in similar securities of qualified issuers in the Commonwealth of
Puerto Rico, the United States Virgin Islands and the Territory of Guam.
Tax-exempt investment grade debt securities of qualified issuers, for the Fund's
purposes, include:
o those backed by the full faith and credit of the State of Vermont or any of
its political subdivisions (such as municipalities within Vermont and
agencies of the State of Vermont); and
o those backed by revenues to be derived by the issuer from its operations
and/or the investment of the proceeds of the debt securities, (such as
securities issued by the Vermont Municipal Bond Bank, the Vermont Housing
Finance Agency, the Vermont Student Assistance Corporation and the Vermont
Educational and Health Buildings finance Agency).
The investment manager relies, in part, on the quality ratings assigned by
Moody's, Standard & Poor's and other rating services. But there is risk
associated with such reliance. Rating agencies evaluate the credit risk--the
safety of principal and interest payments--but not market value, which is
affected by interest rate trends, economic conditions and other factors,
including those unique to an issuer or industry. Rating agencies may fail to
move quickly enough to change ratings in response to changing circumstances and
may not reflect the fine shadings of risks within a given quality grade. For
example, two bonds rated the same are not likely to be precisely the same in
quality. The investment manager performs independent analyses in attempting to
identify issuers within a given quality grade that, because of improving
fundamental or other factors, are likely to result in improving quality, greater
market value and lower risk.
Defensive Strategy - The Fund may hold short-term cash reserves and short-term
securities to satisfy the liquidity needs of the Fund as determined by the
investment manager. In addition, the Fund may take temporary defensive positions
inconsistent with the Fund's principal investment strategies, by holding
short-term securities and cash without percentage limitations, if the portfolio
manager believes that it is advisable in responding to adverse market, economic,
political or other conditions. During periods when, and to the extent that, a
Fund holds short-term securities and cash, the fundamental goal of the Fund may
not be realized and the income realized may be subject to federal and Vermont
income tax.
11
<PAGE>
Financial Highlights
The financial highlights table for the Fund is intended to help you
understand the Fund's financial performance for the past five years.
Certain information reflects financial results for a single Fund share. The
total returns in the table represent the rate that an investor would have
earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information has been audited by Tait,
Weller & Baker, whose report, along with the Fund's financial statements,
are included in the Annual Report, which is available upon request.
<TABLE>
<CAPTION>
TAX FREE FUND OF VERMONT
For a share outstanding throughout each year
Years Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year$ ...... $ 10.23 $ 10.29 $ 9.97 $ 9.96 $ 9.30
----------------------------------------------------------------
Income from investment operations
Net investment income .................. .39 .43 .43 .43 .49
Net gain (loss) on securities
(both realized and unrealized) ......... (.72) (.04) .32 .01 .66
----------------------------------------------------------------
Total from investment operations ... (.33) .39 .75 .44 1.15
----------------------------------------------------------------
Less Distributions from
Net investment income .................. (.39) (.43) (.43) (.43) (.49)
Realized gains on investments .......... (.03) (.02) -- -- --
----------------------------------------------------------------
Total distributions ................ (.42) (.45) (.43) (.43) (.49)
----------------------------------------------------------------
Net asset value, end of year ............. $ 9.48 $ 10.23 $ 10.29 $ 9.97 $ 9.96
================================================================
Total Return ....................... (3.38)% 3.82% 7.74% 4.56% 12.65%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $ 8,660 $ 9,539 $ 7,879 $ 7,219 $ 6,961
Ratio of expenses to average net assets 1.48% 1.51% 1.72% 1.55% 1.49%
Ratio of net investment income
to average net assets ................ 3.88% 4.16% 4.26% 4.41% 5.06%
Portfolio turnover ....................... 50% 41% 60% 98% 182%
</TABLE>
12
<PAGE>
(the following is a numerical representation of a graph)
<TABLE>
<CAPTION>
$10,000 Investment in Fund Compared to Lehman Muni Bond Index
9/18/91 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lehman Municipal Bund Index 10,000 10,389 11,198 12,565 11,915 13,995 14,950 15,931 16,963 16,614
Tax Free Fund of Vermont 10,000 10,110 10,651 11,211 11,181 12,595 13,169 14,188 14,730 14,232
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return: 1 Year 2 Year Inception
<S> <C> <C> <C>
Tax Free Fund of Vermont -3.38% 4.94% 4.35%
Lehmna Brothers Municipal
Bond Index -2.06% 6.87% 6.31%
</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 one year, five year, and period
from its inception through December 31,1999. The Fund has generally under
performed 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 1999, contrary to prior year patterns, the
rise in interest rates and decline in bond prices 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.
13
<PAGE>
TAX FREE FUND OF VERMONT
Additional Information
The Tax Free Fund of Vermont provides additional information about the Fund in
its Annual Report to Shareholders and its Statement of Additional Information
(SAI), both of which are incorporated by reference in their entirety into this
Prospectus.
Call or Write the Tax Free Fund of Vermont toll-free 1-800-675-3333 if you want
more information, like the SAI and the Fund's Annual Report. During business
hours, friendly, experienced personnel will answer your questions, provide
investment forms and applications, assist with shareholder needs and provide
current share prices. After hours, current prices are provided on a recorded
phone line and you may leave messages for our service personnel to be addressed
the next business day. You may also write to the Tax Free Fund of Vermont, 87
North Main Street, Rutland, Vermont 05701.
Contact the Securities and Exchange Commission to obtain information about the
Tax Free Fund of Vermont, including the Fund's SAI. The Tax Free Fund of
Vermont's file can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-800-SEC-0330. Reports and other information about the Fund are also
available on the Commission's Internet site, and copies of this information may
be obtained, upon payment of a duplicating fee, by writing the Public Reference
Section of the Commission, Washington, DC 20549-6009.
Investment Company Act File No. 811-6328
14
<PAGE>
Statement of Additional Information
April 28, 2000
TAX FREE FUND
OF VERMONT
87 North Main Street
Rutland, Vermont 05701
1-800-675-3333 Toll-Free
1-802-773-0674 Local Rutland, Vermont Area
This Statement of Additional Information (SAI) is not a
prospectus. A copy of the Fund's prospectus is available upon
written or telephone request to the Tax Free Fund of Vermont,
at the address and phone numbers shown above, at no charge.
The SAI should be read in conjunction with the prospectus for
an understanding of the Fund. The Annual Report of the Tax
Free Fund of Vermont is incorporated by reference into the
SAI, and is also available free of charge by calling our
toll-free number.
<PAGE>
Table of Contents
History of the Fund....................................................1
Investment Strategies and Risks........................................1
Investment Limitations.................................................5
Purchase and Redemption of Shares......................................6
Brokerage..............................................................8
Management of the Fund.................................................8
Principal Holders of Securities........................................8
Capital Stock and Voting..............................................11
Taxation of the Fund..................................................12
Performance Data......................................................13
Financial Statements..................................................15
Debt Securities Ratings...............................................15
i
<PAGE>
History of the Fund
The Tax Free Fund of Vermont (the "Fund") is an open-end management investment
company, commonly known as a "mutual fund". Organized in 1991 as a Vermont
corporation, it currently offers its shares to residents of Vermont who are
seeking income free of Vermont and federal taxes. The Fund is not diversified.
Investment Strategies and Risks
The fundamental goal of the Fund as described in the prospectus, and the
investment limitations, described beginning on page 6 in this Statement of
Additional Information ("SAI"), may be changed only by an affirmative vote of a
majority of the outstanding securities of the Fund for which a change is
proposed3. All other strategies and limitations adopted by the Fund may be
changed by a majority vote of the Board of Directors. However, should the
Directors adopt a material change, shareholders would be provided a 60-day prior
notice, in writing, and the prospectus would be amended.
The Fund employs a few investment strategies in addition to those discussed in
the prospectus. These strategies, and the risks they bring to the Fund, are as
follows.
Non-Diversified Portfolio - Under normal market conditions, except for a small
cash position which usually would not exceed 3% of the Fund's assets, it is the
investment policy of the Fund to invest at least 65% of its assets in Vermont
Municipal Bonds (see "Vermont Municipal Bonds" below). Further, the Fund
anticipates that under normal market conditions it will as a matter of
fundamental investment policy invest a minimum of 80% of its assets in a
combination of tax exempt Vermont Municipal Bonds and tax exempt Other Municipal
Bonds (see "Other Municipal Bonds" below).
The Fund incurs greater risk because of the Fund's portfolio concentration in
securities of qualified Vermont issuers versus the safety that comes with a less
concentrated investment portfolio. 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.
Further, because Vermont is a small rural state, the ability to diversify the
Fund's portfolio even within the universe of qualified tax-exempt Vermont
issuers is more limited than would be the case if the Fund invested in other,
larger states.
Vermont Municipal Bonds
The primary purpose of investing in a portfolio of municipal securities the
majority of which are Vermont Municipal Bonds is the special tax treatment
accorded to Vermont resident investors. However, payment of interest and
preservation of principal is dependent upon the continuing ability of the
Vermont issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. The Fund will therefore have a
significant proportion of its assets invested in a concentrated geographic,
political and economic region. Therefore, economic or political changes within
or affecting Vermont or the issuers of securities held by the Fund could have a
significant effect on the market value and credit quality of securities held by
the Fund and on the net asset value of the Fund's shares. Investors should
consider the greater risk of the Fund's concentration of its assets in Vermont
Municipal Bonds versus the safety that comes with a less
- -----------------------------------
3 Under the Investment Company Act of 1940, as amended, a "vote of the majority
of the outstanding securities" means the vote, at the annual or special meeting
of security holders duly called, of (I) 67% or more of the voting securities
present at the meeting, if the holders of more than 50% of the outstanding
securities are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities, whichever is less.
1
<PAGE>
concentrated investment portfolio and should compare yields available on the
Fund's portfolio with those of more diversified portfolios before making an
investment decision.
Vermont Municipal Bonds include general obligation bonds of the State of
Vermont, its political subdivisions, agencies and authorities. Vermont Municipal
Bonds also include debt obligations of those issuers which provide funds for
various public purposes, including the construction or improvement of a wide
range of public facilities such as airports, bridges, highways, hospitals,
housing, jails, mass transportation, nursing homes, parks, public buildings,
recreational facilities, school facilities, streets and water and sewer works.
Other public purposes for which Vermont Municipal Bonds may be issued include
the refunding of outstanding obligations, the anticipation of taxes, the funding
of student loans and student housing, community development, the purchase of
street maintenance and fire fighting equipment, or any authorized corporate
purpose of the issuer.
The two principal classifications of Vermont Municipal Bonds are general
obligation bonds and limited obligation (or revenue) bonds. General obligation
bonds are obligations involving credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Limited obligation bonds, including
industrial revenue bonds, are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a specific revenue source, such as the user of the facility. The credit
quality of limited obligation bonds is usually directly related to the owner or
user of the facilities, or to a third-party guarantor or insurer, if any.
Certain agencies of the State of Vermont created by the Vermont legislature
issue limited obligation bonds, which are not general obligations of the State
of Vermont. The Fund may invest in both general and limited obligations which
are Vermont Municipal Bonds, but the Fund will not invest in limited obligation
Vermont Municipal Bonds in such a manner that more than 25% of the Fund's assets
would be concentrated in any particular industry or group of industries. The
interest on Vermont Municipal Bonds may bear a fixed rate or be payable at a
variable or floating rate.
Other Municipal Bonds
The Fund may purchase investment grade obligations issued by territories and
possessions of the United States and their respective agencies and
instrumentalities (collectively "Other Municipal Bonds"), whose interest income
is exempt, in the opinion of bond counsel for the issuer, from federal and state
income taxes. Presently, the principal issuers of Other Municipal Bonds are
Puerto Rico, the United States Virgin Islands, and the trusteeships of Guam and
the Marianas Islands and their agencies, instrumentalities and political
subdivisions. Interest income on Other Municipal Bonds will also be exempt from
Vermont income taxes. Except for the identity of the issuer, investments by the
Fund in Other Municipal Bonds must meet all of the fundamental investment policy
requirements of the Fund, are subject to all of the investment restrictions of
the Fund and in all other respects may have any of the investment terms,
conditions and characteristics as regards Vermont Municipal Bonds.
Credit Quality - Vermont and Other Municipal Bonds purchased by the Fund will be
what are commonly referred to as "investment grade" securities, which must be
rated, at the time of purchase, within the four highest quality ratings as
determined by either Moody's Investors Service ("Moody's") or Standard & Poor's
Corporation ("S & P"). Currently, these quality ratings are Baa and higher for
Moody's and BBB and higher for S & P. Bonds rated Baa by Moody's may have some
speculative characteristics.
Generally, the higher the credit rating of a security the less subject the
security is to a change in market value. Accordingly, higher rated securities
carry relatively lower rates of interest, which makes it more difficult for the
2
<PAGE>
Fund to achieve that portion of the investment objective related to providing
the highest level of current income. Lower rated securities, including
securities rated Baa/BBB, may achieve higher current income, but are subject to
relatively greater fluctuation in market value than are higher rated securities.
The Fund may also invest up to 20% of its assets in Vermont Municipal Bonds or
Other Municipal Bonds that are unrated, if such bonds are comparable, in the
opinion of the Fund's manager, in creditworthiness to other obligations in which
the Fund may invest.
Average Maturity - The weighted average maturity of the securities in the Fund's
portfolio will vary with market conditions, interest rate trends and the
availability of qualifying securities. Under normal market conditions the
weighted average maturity of the Fund's portfolio is expected to range between
ten and twenty five years.
Securities with longer maturities are more volatile with regard to changes in
market value resulting from changes in interest rates than are securities with
shorter maturities. Therefore, the Fund's portfolio with a weighted average
maturity greater than ten years will, with the same change in interest rates or
other market conditions, have a larger change in market value than a portfolio
of securities with a shorter weighted average maturity. These changes in market
value will generally be in the opposite direction to changes in interest rates.
Therefore, an increase in interest rates can generally be expected to cause a
decline in the value of the Fund's portfolio of securities and a corresponding
decline in the Fund's net asset value. Also, over time, the credit quality of
any security in the portfolio may change and the risk of such change increases
with increases in the average weighted maturity of the portfolio. Credit quality
changes can affect the market value of the Fund's portfolio and the net asset
value per share of the Fund.
Defensive Strategy and Short Term Securities - The Fund may hold cash or short
term securities to satisfy liquidity needs of the Fund or because of conditions
in the securities markets or economic, political or other conditions have
created a significant potential for or have begun to cause significant
disruption of the underlying value of or the market for any security in which
the Fund has invested. When the Fund's advisor implements a defensive strategy,
the Fund will seek to invest in very high quality fixed income securities with
strong liquidity and relatively short maturities. The income derived from
investment in such securities may be taxable. To the extent the Fund implements
a defensive strategy, the Fund is not pursuing its investment objectives.
When-Issued Securities - Municipal securities are frequently offered on a "when
issued" basis. When offered the price, generally expressed in yield terms, is
fixed at the time the commitment to purchase is made (the "trade date"), but
delivery and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month after the trade date of
municipal bonds and notes. During the period between the trade date and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. When-issued securities may be sold prior to the settlement date,
but the Fund makes when-issued commitments only with the intention of actually
acquiring the securities. To facilitate such acquisitions at the time of
settlement, the Fund will maintain, for short periods of time, cash or short
term liquid investments having a value equal to or greater than such
commitments. When the Fund makes a commitment to purchase a security on a
when-issued basis, the Fund doesn't record the transaction and reflect the value
of the security in determining the net asset value until the trade date. The
Fund, as long as it is obligated to
3
<PAGE>
purchase the security, is subject to changes in the market value of the security
and the Fund could sustain unrealized gains or losses resulting from such market
changes. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, the Fund can incur a realized gain or loss.
Standby Commitments - The portfolio may purchase municipal securities together
with the right to resell them to the seller at an agreed-upon price or yield
within specified periods prior to their maturity dates. Such a right to resell
is commonly known as a "standby commitment" and the total price which the Fund
pays for securities with a standby commitment may be higher than the price which
otherwise would be paid. The primary purpose of this practice is to permit the
Fund to be as fully invested as practical in municipal securities while
maintaining the necessary flexibility and liquidity to meet unanticipated
redemptions. In this regard, the Fund acquires standby commitments solely to
improve the Fund's liquidity and doesn't exercise its rights thereunder for
trading purposes. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the Fund's policy is to enter into standby commitment transactions only with
municipal securities dealers which are determined by the Fund management to
present minimal credit risks.
The acquisition of a standby commitment does not affect the valuation or
maturity of the underlying municipal securities. Standby commitments acquired by
the portfolio are valued at zero in determining net asset value. Where the Fund
pays directly or indirectly for a standby commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Standby commitments do not affect the average weighted maturity of the Fund's
assets.
Short-Term Trading and Portfolio Turnover - Generally, the Fund intends to
invest for long-term purposes. However, the Fund may engage in short-term
trading of securities and reserves full freedom with respect to portfolio
turnover. During periods of rapid changes in economic conditions and security
price levels, portfolio turnover may be higher than when conditions are more
stable. If the Fund's portfolio turnover rate is increased it may result in
greater transaction costs relative to other mutual funds and may have tax and
other consequences.
Computer-Related - The Fund's service providers have prepared software that so
far in 2000 has performed according to expectations, and although, management is
not aware of any further potential issues that might develop, there can be no
assurances that such software will continue to perform as modified.
Restricted Securities - It is the Fund's policy not to invest in restricted and
other illiquid securities (including repurchase agreements maturing in more than
seven days) if, as a result, more than 10% of the Fund's total assets are
invested in such securities. It may be difficult to sell restricted securities
at prices representing their fair market value. If registration of restricted
securities is necessary, a considerable period of time may elapse between the
decision to sell and the effective date of the registration statement. During
that time, the price of the securities to be sold may be affected by adverse
market conditions.
Borrowing - The Fund's fundamental investment policies permit it to borrow money
from banks in an amount up to 5% on a secured or unsecured basis as a temporary
measure for purposes of meeting redemption requests and/or to purchase bonds and
to pay interest on such loans. The Fund has not employed borrowing in the past
and has no current intention of employing it in the future. The Fund does
reserve the right, however, to borrow for these purposes in the event of
unsettled market conditions at any time in the future.
4
<PAGE>
Investment Limitations
The following are the Fund's fundamental investment limitations set forth in
their entirety. The Fund may not:
o 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, 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;
o issue senior securities;
o make short sales of securities;
o purchase any securities on margin, except for such short term credits as
are necessary for the clearance of transactions;
o 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;
o 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;
o 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;
o purchase equity securities or securities convertible into equity
securities;
o 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;
o purchase or sell commodities or commodity contracts;
o make loans, except through the purchase of debt securities in accordance
with the Fund's investment objective, policies and restrictions;
o invest in oil, gas or other mineral exploration or development programs;
o invest in companies for the purpose of exercising management or control;
o 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
5
<PAGE>
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;
o 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;
o 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;
o 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;
o write or invest in put or call options, or any combination thereof.
Purchase and Redemption of Shares
In addition to the following services and procedures, the prospectus describes
basic information you should know about purchasing and redeeming shares of the
Fund.
Regular Account - The regular account allows you to make voluntary investments
at any time. Available to individuals, custodians, corporations, trusts, estates
and others, investors are free to make additions and withdrawals to or from
their account as often as they wish. When you make an initial investment in the
Fund, a shareholder account is opened in accordance with your registration
instructions. Each time there is a transaction in your account, such as an
additional investment or the reinvestment of a dividend or distribution, you
will receive, from the Transfer Agent, a confirmation statement. It will show
the current transaction and all prior transactions in your account during the
calendar year to date, along with a summary of the status of the account as of
the transaction date. Shareholder certificates are issued only for full shares
and only upon the specific request of the shareholder. You may request that the
Transfer Agent issue share certificates representing all or part of the full
shares in your account.
Transfer of Registration - If you wish to transfer shares to another owner, send
a written request to the Tax Free Fund of Vermont, 87 North Main Street,
Rutland, Vermont 05701. Your request should include:
o the Fund name and existing account registration;
o signature(s) of the registered owner(s) exactly as the signature(s)
appear(s) on the account registration;
o the new account registration, address, social security or taxpayer
identification number and how dividends and capital gains are to be
distributed;
o stock certificates, if issued, for the shares being transferred;
6
<PAGE>
o signature guarantees and other documents, if other documents are required
for transfer by corporations, administrators, executors, trustees,
guardians and other entities (See "Signature Guarantees" in the
Prospectus). If you have any questions about transferring shares, call the
Transfer Agent, toll-free at (800) 675-3333.
Purchase, Redemption and Pricing of Shares - The purchase price of shares of the
Fund is the net asset value next determined after a purchase or redemption order
is received. An order received prior to the close of the New York Stock Exchange
("Exchange") will be executed at the price computed on the date of receipt; and
an order received after the close of the Exchange will be executed at the price
computed on the next business day. An order to purchase shares is not binding on
the Fund until it has been confirmed in writing by our Transfer Agent, or other
arrangements made with the Fund, in the case of orders utilizing wire transfer
of funds, and payment has been received. The Fund reserves the right, in its
sole discretion, to:
o suspend the offering of its shares;
o reject purchase orders; and
o to reduce or waive the minimum for initial and subsequent investments for
certain fiduciary accounts or under circumstances where certain economies
can be achieved in sales of the Fund's shares.
The Fund may suspend redemption privileges or postpone the date of payment: (i)
during any period that the New York Stock Exchange is closed, or trading on the
Exchange is restricted, as determined by the Securities and Exchange Commission
(the "Commission"); (ii) during any period when an emergency exists, as defined
by the rules of the Commission, as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets; and (iii) for such other periods as the
Commission may permit.
When Shares are Priced - The net asset value of the Fund is determined
approximately 30 minutes after the close of trading of the New York Stock
Exchange, currently 4:30 p.m., New York City time. The net asset value is
computed every day the Exchange is open for business, except the Fund may not
compute net asset value on:
o days during which no Fund shares are tendered for redemption and no order
to purchase or sell Fund shares is received by the Fund.
At this writing, the Exchange is open for business every Monday through Friday,
except for the following holidays:, Fourth of July, Labor Day, Election Day,
Thanksgiving Day, Christmas, New Year's Day, Presidents Day, Good Friday, and
Memorial Day.
How Shares are Priced - Net asset value per share is determined by dividing the
total value of all Fund securities and other assets, less liabilities, by the
total number of shares then outstanding. Net asset value does not include
interest on fixed income securities which is distributed daily to shareholder
accounts. Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service are determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities and any
developments related to specific securities. Short-term instruments are valued
at cost, which approximates market. Other assets and securities, for which no
quotations are readily available, will be valued in good faith at fair value
using methods determined by the Board of Directors.
7
<PAGE>
Involuntary Redemptions - The Board of Directors has the right to involuntarily
redeem any shareholder account which falls below a minimum account value of $500
as discussed in the Prospectus under "How to Sell Shares."
Brokerage
It is the Fund's intention to seek the best possible price and execution for
securities bought and sold. The investment manager directs the execution of
portfolio transactions. Neither the Fund nor the investment manager is
affiliated with any securities broker-dealer. The Fund does not normally pay
commissions on the purchases and sales of tax-exempt bonds and has not paid any
such commissions since the inception of the Fund. The Fund does not direct
trades to brokers who provide the Fund or the investment manager with services
useful to the Fund's daily operations ("directed brokerage arrangements").
Management of the Fund
Directors and Officers - The Fund is a corporation organized under Vermont law.
The business of the Fund is managed by the Board of Directors. The Directors
elect officers who are responsible for the day-to-day operations of the Fund and
who execute policies formulated by the Directors. One Director of the Fund is
also a control person of the Fund's investment adviser, as shown below.
<TABLE>
<S> <C> <C>
Positions Held Principal Occupation(s)
Name, Address and Age with the Trust During Past 5 Years
Stephen A. Carbine Director Vice President, Kinney, Pike, Bell and
212 Grove Street Conner (insurance brokers)
Rutland, Vermont 05701
Age 55
John T. Pearson* Director Owner and Director of Vermont Fund
128 Merchants Row, Advisors, Inc.
Suite 611
Rutland, Vermont 05701
Age 55
Winfred A. Thomas Director Vice President, Clinton F. Thomas Agency
Countryside Estates (insurance brokers)
Rutland, Vermont 05701
Age 51
William H. Hahn President Associate Professor, College of St.
PO Box 244 Joseph
Wallingford, VT 05773
Age 54
</TABLE>
* Director is deemed to be an "interested person" of the Fund as defined in the
Investment Company Act of 1940.
Principal Shareholders - As of March 31, 2000, Mr. Justin J. Mueller, P. O. Box
646, Manchester, Vermont, owned beneficially 7.4% of the Fund's shares
outstanding. There were no other shareholders of the
8
<PAGE>
Fund known by the Fund to own of record or beneficially 5 percent (5%) or more
of the Fund's outstanding equity securities. All shares are owned both of record
and beneficially. All Officers and Directors of the Fund as a group own 0.8% of
the Fund's shares.
The Director and officer of the Fund who is an "interested person" received no
salary or fees from the Fund. Directors of the Fund who are not interested
persons of the Fund currently receive $500 per meeting of the Board of Directors
attended by them, plus related expenses, if any. The Fund does not provide
pension or retirement benefits to the Directors and officers.
The compensation of Fund's Directors for the fiscal year ended December 31,
1999, was as follows:
Directors' Fees and Expenses
Name and Position Paid by the Fund
Stephen A. Carbine, Director $3,000
John T. Pearson * Director, President and ---
Treasurer
Winfred A. Thomas, Director $3,000
o Mr. Pearson is compensated by the investment adviser.
Investment Adviser - The Fund has employed Vermont Fund Advisors, Inc. as
investment adviser for the Fund. The duties of the investment adviser include
the following:
o exclusive responsibility for the provision of continuous supervision of the
Fund's investment portfolio;
o overall management of the Fund's business affairs (subject to the
supervision of the Directors); and
o provision of office facilities, equipment and personnel for servicing the
investments of the Fund.
In connection with the Advisory Agreement between the Fund and Vermont Fund
Advisors, Vermont Fund Advisors is obligated to absorb all of the costs
associated with distributing shares of the Fund. Effective March 1, 1995,
Vermont Fund Advisers entered into an agreement with Windham Financial Services,
Inc.("Windham") whereby Vermont Fund Advisors agreed to compensate Windham and
Windham has accordingly agreed to provide additional distribution services for
the Fund.
John T. Pearson is the sole stockholder of the investment adviser. Mr. Pearson
is the President and Chief Executive Officer of the investment adviser and
serves as President and Chairman of the Board of Directors of the Fund.
Compensation of the investment adviser, based upon the Fund's daily total net
assets, is at the following annual rates: o 0.70% on the first $10 million; and
o 0.60% on total net assets in excess of $10 million.
Investment Management fees are accrued daily on the books of the Fund and are
paid on an accrued basis not less frequently than monthly.
Management fees for the Fund were $65,663, $60,852 and $52,115, respectively,
for the fiscal years ended December 31, 1999, 1998 and 1997. Although not
obligated to do so, the investment manager may reimburse a
9
<PAGE>
portion of the operating expenses of a Fund for any fiscal year. No such
reimbursements were made to the Fund for the fiscal years ended December 31,
1999, 1998 and 1997.
The Fund's Advisory Agreement with Vermont Fund Advisors was last approved by
the Directors of the Fund on May 11, 1999 and continues in effect until May 30,
2000.
Transfer Agent and Administrative Services Vermont Fund 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 Fund Advisors. Under
the Services Agreement, Vermont Fund Advisors provides to the Fund, without
limitation, the following services:
o 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,
o 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;
o 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;
o the provision of transfer agency services;
o the creation and maintenance of all records relating to the business of the
Fund as the Fund may from time to time reasonably request;
o 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
o 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 Fund Advisors a
monthly fee based upon the Fund's total daily net assets. The fee is .08% of the
Fund's total daily net assets on an annual basis. The Fund also reimburses
Vermont Fund Advisors for its out-of-pocket expenses in connection with Vermont
Fund Advisors's provision of services, supplies and equipment under the Services
Agreement. Under the Services Agreement, a total of $7,707, $7,039 and $6,109
were paid in fees to Vermont Fund Advisors by the Fund in 1999, 1998 and 1997,
respectively. These fees are in addition to fees paid by the Fund to Vermont
Fund Advisors under the Advisory Agreement.
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 Fund Advisors can provide services the nature and quality of
which are at least equal to those provided by others
10
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 Fund 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 Fund Advisors, and terminates automatically upon its assignment.
Independent Auditors - The firm of Tait, Weller & Baker of Philadelphia, PA has
been retained by the Board of Directors to perform an independent audit of the
books and records of the Fund. Tait, Weller & Baker will also prepare the Fund's
federal and state tax returns for the fiscal year ending December 31, 1999, and
will consult with the Fund as to matters of accounting and federal and state
income taxation for the fiscal year ending December 31, 2000.
Custodian - Vermont National Bank, 47 West Street, Rutland, Vermont, 05701,
serves as custodian for the securities held by the Fund and insures that such
securities of the Fund are held in a safe and secure manner (either in its
possession or in its favor through "book entry systems" authorized by the Fund
in accordance with the Investment Company Act of 1940), collects all income and
effects all securities transactions on behalf of the Fund.
Capital Stock and Voting
The capital of the Fund consists of ten million shares of common stock, par
value $0.01 per share ("shares"). The Fund is a Vermont corporation and is
governed by the Investment Company Act of 1940 and rules thereunder (the "Act").
Shares are issued fully paid and non-assessable and each share represents an
equal proportionate interest in the Fund with every other outstanding share of
the Fund. In the event of liquidation, shareholders of the Fund are entitled to
share pro rate in the net assets of the Fund available for distribution to
shareholders. Shares of the Fund, when issued, are fully paid and non-assessable
and have no preemptive, subscription or conversion rights. Shareholders are
entitled to one vote for each full share and a fractional vote for each
fractional share held. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors and, in this event, the holders of the
remaining shares voting will not be able to elect any Directors. The Bylaws of
the Fund provide that, if elected, the Directors will hold office for a term of
one year until the next annual meeting of the Fund, except that: (1) any
Director may resign; (2) any Director may be removed only with cause and by a
vote of a majority of shareholders entitled to vote in person or by proxy at a
meeting called for that purpose. In case a vacancy shall for any reason exist,
the vacancy shall be filled by a majority of the remaining Directors, subject to
the provisions of Section 16(a) of the 1940 Act. There will be an annual meeting
of shareholders for the purpose of electing Directors.
11
<PAGE>
Taxation of the Fund
Federal Taxes - The Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code).
As a regulated investment company, the Fund will not be subject to federal
income tax to the extent it distributes its net taxable income and its net
capital gains to its shareholders. In order to qualify for tax treatment as a
regulated investment company under the code, the fund will be required, among
other things, to distribute annually at least 90% of its taxable income other
than its net capital gains to shareholders.
The Code also contains a provision imposing a 4% non-deductible federal excise
tax 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. The Fund intends to make dividend and capital
gain distributions in such a manner as to avoid the payment of any excise tax
A capital gains distribution paid shortly after shares have been purchased,
although in effect a return of investment, is subject to federal income
taxation. Dividends from taxable net investment income, if any, along with
capital gains, will be taxable to shareholders whether received in cash or
shares and no matter how long the shares have been held, even if they reduce the
net asset value of shares below your cost and thus, in effect, result in a
return of a part of your investment. Any loss realized upon the redemption or
exchange of shares within six months from their date of purchase will be treated
as a long-term capital loss to the extent of distributions received of net
long-term capital gains during such six-month period.
Under current law, 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.
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.
Vermont Taxes - By qualifying as a "regulated investment company" for Federal
income tax purposes, the Fund is not subject to Vermont income taxes on net
income and net capital gains, if any, that are distributed to the Fund's
shareholders. Dividends paid by the Fund to shareholders which qualify as
"exempt interest dividends" for Federal income tax purposes are also excludable
from shareholders' gross income for Vermont state income tax purposes so long as
the total assets of the Fund are invested in Vermont Municipal Bonds and Other
Municipal Bonds as defined in the prospectus. All other dividends and
distributions, as well as any earnings we receive from taxable investments and
any capital gains we realize from any investments, will have the same general
consequences to shareholders for Vermont state income tax purposes as they have
12
<PAGE>
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.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and related Treasury Regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
Treasury Regulations. The Code and Regulations are subject to change by
legislative or administrative action at any time. Investors should consult with
their own advisors for the effect of any state or local taxation and for more
complete information of federal taxation.
Performance Data
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.
Total Return The Fund may, from time to time, advertise certain total return
information. Such total return data is calculated assuming that all dividends
and distributions by a Fund are reinvested in Fund shares. The average annual
total return for the Fund for the indicated period ended on March 31, 2000 is
set forth below:
One Year Five Year Since
Period Period Inception4
Tax Free Fund of Vermont -2.07% +4.08% +4.44%
4 The Fund commenced investment operations September 18, 1991.
Yield Calculations The Fund's yield for the thirty day period ended March 31,
1999 was 4.71%. 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, 2000.
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.
13
<PAGE>
The Fund's tax equivalent yield for the thirty day period ended March 31, 2000
was 8.06%. The tax equivalent yield was computed by dividing the yield of 4.71%
earned during the period by a one minus a combined Federal and Vermont income
tax rate of 41.5%.
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 1999 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 5 Tax Tax Federal
Bracket 6 Bracket and 5.0% 5.5% 6.0% 6.5%
single joint as a % of Vermont Then taxable equivalent yield is:
return return Federal Tax Tax Bracket
Due
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,750 to $43,050 to
$62,450 $104,050 28% 24% 32.8% 7.44% 8.19% 8.93% 9.68%
$62,451 to $104,051 to
$130,250 $158,550 31% 24% 36.1% 7.83% 8.61% 9.39% 10.18%
$130,251 to $158,551 to
$283,150 $283,150 36% 24% 41.5% 8.55% 9.41% 10.26% 11.12%
$283,151 & $283,151 &
above above 39.6% 24% 45.5% 9.15% 10.06% 10.98% 11.89%
</TABLE>
- ------------------------------------
5 Net amount subject to federal and Vermont state income taxes after deductions
and exemptions. Assumes ordinary income only.
6 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.
14
<PAGE>
Financial Statements
The books of the Fund will be audited at least once each year by independent
public accountants. Financial Statements of the Fund, as of December 31, 1999,
together with the Report of the Fund's independent accountants thereon, are
reflected in the Fund's Annual Report to Shareholders, incorporated herein by
reference. A copy of the Annual Report will accompany the Prospectus or
Statement of Additional Information at no charge whenever requested by a
shareholder or prospective shareholder. Shareholders will receive annual audited
and semi-annual unaudited reports when published and will receive written
confirmation of all confirmable transactions in their account.
Debt Securities Ratings
Description of Commercial Paper Ratings
Moody's Investors Service, Inc., in rating commercial paper, considers various
factors including the following: (1) evaluation of the management of the issuer;
(2) evaluation of the issuer's industry or industries and an appraisal of the
risks which may be inherent in certain areas; (3) evaluation of the issuer's
products in relation to competition and customer acceptance; (4) liquidity; (5)
amount, type and maturity of schedules of long-term debt; (6) trend of earnings
over a period of years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparation to meet such obligations. Based on the foregoing,
"P-1", "P-2" and "P-3" represent relative rankings (P-1 being the highest) of
companies that receive a Moody's rating.
Standard & Poor's Corporation describes its highest ("A") rating for commercial
paper, with the numbers 1, 2 and 3 being used to denote relative strength within
the "A" classification as follows: liquidity ratios are adequate to meet cash
requirements; long-term senior debt rating should be "A" or better; in some
instances "BBB" credit ratings may be allowed if other factors outweigh the "BBB
rating. The issuer should have access to at least two additional channels of
borrowing. Basic earnings and cash flow should have an upward trend, with
allowances made for unusual circumstances. Typically, the issuer' s industry
should be well established and the issuer should have a strong position within
its industry. The reliability and quality of management should be unquestioned.
Description of Bond Ratings
Description of Moody's Investors Service, Inc.'s Corporate Bond Ratings:
15
<PAGE>
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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.
They are rated lower than the best bonds because margins of protection may not
be as large in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements that make the long-term risks
appear somewhat larger than in Aaa securities.
A: Bonds rated A possess many favorable investment attributes and are to be
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interested 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 a desirable investment.
Assurance of interest and principal payments or of 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 payment of principal or
interest.
Ca: Bonds rated Ca represent obligations that are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
Description of Standard & Poor's Corporation's Bond Ratings:
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, and in the majority of instances they
differ from AAA issues only in small degree.
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 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 for bonds in the A category.
16
<PAGE>
BB, B, CCC, CC: Bonds rated BB, B, CCC an 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 exposures or adverse conditions.
17
<PAGE>
PART C
THE TAX FREE FUND OF VERMONT
FORM N-1A
Post-Effective Amendment No. 9
OTHER INFORMATION
1
<PAGE>
ITEM 23. Exhibits
(a) Articles of Association - Incorporated herein by reference to
Post-Effective Amendment No. 8 on Form N-1A (File No. 811-41043) as filed
with the Commission on June 22, 1999.
(b) By Laws - Incorporated herein by reference to Post-Effective Amendment No.
8 on Form N-1A (File No. 811-41043) as filed with the Commission on June
22, 1999.
(c) Instruments Defining Rights of Security Holders - See Articles of
Association, paragraphs 1, 2 and 3, and see also By-Laws, Articles II and
V, both Incorporated herein by reference to Post-Effective Amendment No. 8
on Form N-1A (File No. 811-41043) as filed with the Commission on June 22,
1999.
(d) Investment Management Agreement, as Amended - Incorporated herein by
reference to Post-Effective Amendment No. 8 on Form N-1A (File No.
811-41043) as filed with the Commission on June 22, 1999.
(e) Not Applicable
(f) Not Applicable
(g) Custody Agreement, Green Mountain Bank - Incorporated herein by reference
to Post-Effective Amendment No. 8 on Form N-1A (File No. 811-41043) as
filed with the Commission on June 22, 1999.
(h) Transfer Agent and Dividend Disbursing Agent Service Agreement -
Incorporated herein by reference to Post-Effective Amendment No. 8 on Form
N-1A (File No. 811-41043) as filed with the Commission on June 22, 1999.
(i) Opinion and Consent of Counsel - Incorporated herein by reference to
Post-Effective Amendment No. 8 on Form N-1A (File No. 811-41043) as filed
with the Commission on June 22, 1999.
(j) Consent of Auditors - enclosed.
(k) Annual Audited Report to Shareholders, December 31, 1999 - Incorporated by
reference, filed February 25, 2000, accession number 0000930356-00-000014
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule - enclosed.
(o) Not Applicable
ITEM 24. Persons Controlled By or Under Common Control with Registrant
To the knowledge of Registrant, the Registrant is not controlled by or under
common control with any other person.
ITEM 25. Indemnification
Article VIII, Sections 8.1 through 8.6 of the Bylaws of the Fund, attached as
Exhibit (b) of Item 23, provides for indemnification of certain persons acting
on behalf of the Fund. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons by the Fund's Articles of Association and By-Laws, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in said Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Fund reserves the right to purchase Professional Indemnity insurance
coverage, the terms and conditions of which would conform generally to the
standard coverage available to the investment company industry. Such coverage
for the Fund would generally include losses incurred on account of any alleged
negligent act, error or omission committed in connection with operation of the
Fund, but excluding losses incurred arising out of any dishonest, fraudulent,
criminal or malicious act committed or alleged to have been committed by the
Fund. Such coverage for trustees and officers would generally include losses
incurred by reason of any actual or alleged breach
1
<PAGE>
of duty, neglect, error, misstatement, misleading statement or other act of
omission committed by such person in such a capacity, but would generally
exclude losses incurred on account of personal dishonesty, fraudulent breach of
trust, lack of good faith or intention to deceive or defraud, or willful failure
to act prudently. Similar coverage by separate policies may be afforded the
investment manager and its directors, officers and employees.
ITEM 26. Business and Other Connections of Investment Adviser
See Part B, "Trustees and Officers," for the activities and affiliations of the
officers and directors of the Investment Adviser. Currently, in addition to
serving as Investment Adviser to the Fund, the investment adviser provides
financial advisory and consulting services to municipalities other qualified
tax-exempt issuers in Vermont and New Hampshire and serves as the Fund's
Transfer Agent and Dividend Disbursing Agent.
ITEM 27. Principal Underwriters
Inapplicable.
ITEM 28. Location of Accounts and Records
All account books and records not normally held by the Custodian are held by the
Fund in the care of William H. Hahn, 87 North Main Street, Rutland, Vermont
05701.
ITEM 29. Management Services
Inapplicable.
ITEM 30. Undertakings
Registrant, if requested to do so by the holders of at least 10% of the
Registrant's outstanding shares, undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal of a Director or
Directors and further undertakes to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company Act of 1940.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant certifies that it meets all of the requirements for
effectiveness of this registration statement under rule 485(a) under the
Securities Act and has duly caused this registration statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Rutland, and
State of Vermont on the 28th day of April, 2000.
THE TAX FREE FUND OF VERMONT
By: /s/William H. Hahn
-----------------------------
William H. Hahn
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/Stephen A. Carbine Director 06/22/99
- ---------------------------- ------------- ----------
Stephen A. Carbine (Title) (Date)
*/s/John T. Pearson Director 06/22/99
- ---------------------------- ------------- ----------
John T. Pearson (Title) (Date)
/s/Winfred A. Thomas Director 06/22/99
- ---------------------------- ------------- ----------
Winfred A. Thomas (Title) (Date)
3
<PAGE>
EXHIBITS
TAX FREE FUND OF VERMONT
FORM N-1A
INDEX OF EXHIBITS
(Numbers coincide with Item 23 of Form N-1A)
(j) Consent of Auditors - enclosed.
(n) Financial Data Schedule - enclosed
EXHIBIT (j)
Consent of Auditors
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in Post-Effective Amendment to the
Registration Statement on Form N-1A of The Tax Free Fund of Vermont and to the
use of our report dated February 15, 2000 on the financial statements and
financial highlights of the Fund. Such financial statements and financial
highlights appear in the 1999 Annual Report to Shareholders which is
included in the Statement of Additional Information.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 5, 2000
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The following FDS has been rounded to the nearest thousand.
</LEGEND>
<CIK> 0000875730
<NAME> TAX FREE FUND OF VERMONT
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<INVESTMENTS-AT-COST> 8,853
<INVESTMENTS-AT-VALUE> 8,473
<RECEIVABLES> 183
<ASSETS-OTHER> 42
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,698
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38
<TOTAL-LIABILITIES> 38
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,127
<SHARES-COMMON-STOCK> 914
<SHARES-COMMON-PRIOR> 932
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (88)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (380)
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<NET-INVESTMENT-INCOME> 365
<REALIZED-GAINS-CURRENT> (88)
<APPREC-INCREASE-CURRENT> (600)
<NET-CHANGE-FROM-OPS> (323)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (365)
<DISTRIBUTIONS-OF-GAINS> (28)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 141
<NUMBER-OF-SHARES-REDEEMED> 187
<SHARES-REINVESTED> 28
<NET-CHANGE-IN-ASSETS> (880)
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<ACCUMULATED-GAINS-PRIOR> 0
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</TABLE>
