TAX FREE FUND OF VERMONT, INC.
December 31, 1999
Dear Shareholders:
During 1999, interest rates increased as the Federal Reserve acted to keep
inflation in check. In fact, 1999 may have closed out the 20th Century with the
worst municipal bond market performance in decades. In this environment, the
Fund produced a total return of negative 3.38%, comprised of a dividend of
3.88%, partially offsetting a reduction in net asset value (both realized and
unrealized) of a negative 7.26%. Accordingly, the Fund's net asset value per
share decreased from $10.23 at January 1, 1999 to $9.48 at December 31,1999.
This was due to a combination of factors, including an upward-biased interest
rate environment brought about by monetary policy management as well as a shift
in demand as investors pursued equity and other investment alternatives.
In other areas, the Fund's expense ratio was 1.48% in 1999, a reduction of .03%
from the prior year. This decrease resulted from management's ongoing efforts to
reduce fund expenses despite a decline in Fund assets, which had the tendency to
reduce the Fund's ability to leverage its fixed costs. The Fund's management and
directors are pleased with the direction of the expense ratio but are not
satisfied with the level of the expense ratio and are continuing to take action
to further reduce this ratio.
Looking forward to 2000, we expect interest rates to initially continue to move
upward as a result of monetary policy initiatives by the Federal Reserve. As
market interest rates approach a peak, the Tax Free Fund of Vermont could
benefit investors seeking tax free income. Our efforts will focus on increasing
the Fund's assets by informing investors about the value of owning shares in our
Fund.
Thank you for your confidence in the Tax Free Fund of Vermont. I welcome any
thoughts you might be willing to share about how we might improve our service to
you.
John T. Pearson
President
1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Tax Free Fund of Vermont, Inc.
Rutland, Vermont
We have audited the accompanying statement of assets and liabilities of the Tax
Free Fund of Vermont, Inc., including the portfolio of investments, as of
December 31, 1999, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Tax Free Fund of Vermont, Inc. as of December 31, 1999 and the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 15, 2000
2
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at market value
(identified cost $8,852,700) (Note 1-A) $ 8,473,068
Cash 615
Interest receivable 133,615
Receivable for investment securities sold 49,766
Prepaid expenses and other assets 40,832
-------------
Total assets 8,697,896
-------------
LIABILITIES
Payable for capital stock redeemed 38,128
Accrued expenses 241
-------------
Total liabilities 38,369
-------------
NET ASSETS
(Applicable to 913,610 shares outstanding,
$.01 par value, 10,000,000 shares authorized) $ 8,659,527
=============
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
($8,659,527/913,610) $9.48
======
NET ASSETS
At December 31, 1999, net assets consisted of:
Paid-in capital $ 9,127,479
Accumulated net realized loss on investments (88,320)
Unrealized depreciation of investments (379,632)
-------------
$ 8,659,527
=============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME
Income
<S> <C>
Interest $ 503,683
-------------
Expenses
Investment advisory fees (Note 4) 65,663
Printing and postage 17,617
Audit fees 12,003
Insurance 9,038
Administrative and shareholder services (Note 4) 15,695
Portfolio pricing costs 3,141
Custody fees 2,622
Registration fees 2,831
Directors fees and expenses 9,996
Other 250
-------------
Total expenses 138,856
-------------
Net investment income 364,827
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments sold (88,320)
Net change in unrealized appreciation (depreciation) (599,482)
-------------
Net loss on investments (687,802)
-------------
Net decrease in net assets resulting from operations $ (322,975)
=============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
<PAGE>
TAX FREE FUND OF VERMONT, INC.
STATEMENT OF CHANGES IN NET ASSETS
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
<S> <C> <C>
Net investment income $ 364,827 $ 370,084
Net realized gain (loss) on investments (88,320) 29,060
Net change in unrealized appreciation (depreciation) (599,482) (67,046)
------------ -------------
Net increase (decrease) in net assets
resulting from operations (322,975) 332,098
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (364,827) (370,084)
Realized gains on investments (28,283) (15,762)
------------ -------------
Total distributions to shareholders (393,110) (385,846)
CAPITAL SHARE TRANSACTIONS (Note 3)
Increase (decrease) in net assets resulting from
capital share transactions (163,500) 1,713,698
------------ -------------
Total increase (decrease) in net assets (879,585) 1,659,950
NET ASSETS
Beginning of year 9,539,112 7,879,162
------------ -------------
End of year $ 8,659,527 $ 9,539,112
============ =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
<PAGE>
TAX FREE FUND OF VERMONT, INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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)
-------- ------- ------- ------ ------
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 at end of year (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%
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>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
6
<PAGE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Bonds (97.85%)
Maturity Principal Market
Vermont (94.64%) Rate Date Amount Value
------ --------- --------- ---------
<S> <C> <C> <C> <C>
Vermont Educational and
Health Buildings Financing Agency
1993 Revenue Bond
(Norwich University Project) 6.00% 09/01/13 $ 105,000 $ 103,687
1998 Revenue Bond
(Norwich University Project) 5.50% 07/01/21 300,000 263,250
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.10% 02/01/31 275,000 283,618
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.15% 04/15/14 1,145,000 1,186,506
1994 Revenue Bond
(St. Johnsbury Academy Project) 7.375% 04/15/24 325,000 338,813
1993 Revenue Bond
(Champlain College Project) 6.00% 10/01/13 270,000 269,325
1994 Revenue Bond
(Landmark College Project) 7.15% 11/01/14 500,000 536,875
1996 Revenue Bond
(Lyndon Institute) 6.60% 12/01/14 335,000 339,188
1993 Revenue Bond
(Medical Center Hospital) 6.00% 09/01/22 375,000 378,281
1996 Revenue Bond
(Northwestern Medical Center) 6.25% 09/01/18 530,000 487,600
1992 Revenue Bond
(Middlebury College Project) 6.00% 11/01/22 355,000 352,338
1996 Revenue Bond
(Middlebury College Project) 5.375% 11/01/26 100,000 90,750
1999 Revenue Bond
(Middlebury College Project) 5.00% 11/01/38 705,000 577,219
Vermont State Agricultural College
1998 Revenue Bond 4.75% 10/01/29 110,000 86,350
Vermont Housing Finance Agency
Single Family Mortgage-Backed Bond
1990 Series 2 7.30% 05/01/25 150,000 154,125
1989 Series A 7.85% 12/01/29 230,000 233,162
1994 Series 5 6.875% 11/01/16 100,000 103,375
1992 Series 4 6.40% 11/01/25 670,000 682,563
1999 Series 1 5.25% 05/01/29 500,000 432,500
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
7
<PAGE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS - (Continued)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Bonds - (Continued)
Maturity Principal Market
Rate Date Amount Value
<S> <C> <C> <C> <C>
Vermont Housing Finance Agency
Multi-Family Mortgage-Backed Bond
1977 Series 1 6.50% 02/15/17 $ 70,000 $ 70,262
1995 Series A 6.15% 02/15/14 100,000 102,625
1999 Series A 5.125% 02/15/20 400,000 362,000
Vermont Economic Development Authority
Wake Robin 6.00% 03/01/22 200,000 186,000
Wake Robin 6.30% 03/01/33 600,000 575,250
-----------
Total Vermont Bonds 8,195,662
-----------
Puerto Rico (3.21%)
Puerto Rico Industrial,
Medical & Environmental Authority
1994 Revenue Bond
(Ryder Memorial Hospital Project) 6.60% 05/01/14 275,000 277,406
--------- -----------
Total investments in securities
(Cost $8,852,700) (97.85%) (1) 8,473,068
Other assets and liabilities, net (2.15%) 186,459
-----------
Net assets (100%) $ 8,659,527
===========
</TABLE>
(1) The cost of investments for federal income tax purposes amounted to
$8,852,700. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 37,810
Gross unrealized depreciation (417,442)
-----------
Net unrealized depreciation $ (379,632)
===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
8
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Tax Free Fund of Vermont, Inc. (the "Fund") was incorporated under the
laws of the State of Vermont on May 20, 1991. The Fund is registered under
the Investment Company Act of 1940, as amended, as a non-diversified,
open-end investment company. The Fund's investment goal is to seek the
highest level of current income exempt from Federal and Vermont income
taxes for shareholders as is consistent with the prudent investment
management of the principal invested by shareholders.
The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles.
(A) SECURITY VALUATION
Portfolio securities are valued by an independent pricing service
using market quotations, prices provided by market makers, or
estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics, in accordance
with procedures established in good faith by the Board of Directors.
(B) SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date. Realized
gains and losses are recorded on the specific identification method.
Interest income is accrued on a daily basis. Bond premiums and
discounts are amortized/accreted as required by the Internal Revenue
Code.
(C) INCOME TAXES
It is the Fund's policy to qualify as a regulated investment company
by complying with the requirements of the Internal Revenue Code
applicable to regulated investment companies, including the
distribution of all taxable income to the Fund's shareholders.
Therefore, no Federal income tax provision is required. By qualifying
as a "regulated investment company" for Federal income tax purposes,
the Fund is not subject to Vermont income taxes on net income and net
capital gains, if any, that are distributed to the Fund's
shareholders. Dividends paid by the Fund to shareholders which qualify
as "exempt interest dividends" for Federal income tax purposes are
also excludable from shareholders' gross income for Vermont state
income tax purposes so long as the total assets of the Fund are
invested in Vermont Municipal Bonds and Other Municipal Bonds as
defined in the prospectus.
(D) DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to declare daily and distribute monthly to its
shareholders dividends from net investment income and to declare and
distribute annually net realized long-term capital gains, if any.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to
differing treatment of post-October capital losses. Each distribution
will be made in shares or, at the option of the shareholder, in cash.
9
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1999
- --------------------------------------------------------------------------------
(E) USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) PURCHASES AND SALES OF SECURITIES
Costs of purchases and proceeds from sales of securities for the Fund for
the year ended December 31, 1999 aggregated $4,548,839 and $4,602,478,
respectively.
(3) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31, 1999
and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 140,629 $ 1,418,617 215,465 $ 2,214,463
Shares issued in reinvestment of dividends 27,637 273,576 26,291 270,112
Shares redeemed (186,921) (1,855,693) (74,969) (770,877)
-------- ----------- ------- -----------
Net increase (decrease) (18,655) $ (163,500) 166,787 $ 1,713,698
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
As compensation for its management services, the Fund has agreed to pay
Vermont Fund Advisors, Inc. (the "Advisor") a fee computed at the annual
rate of .7% (seven-tenths of 1 percent) of average daily net asset value.
This fee is reduced to .6% of average daily net assets over $10 million.
However, the Advisor may voluntarily waive or refund investment advisory
fees payable to it under the Advisory Agreement and assume and pay or
otherwise reimburse the Fund for other operating expenses to whatever
extent deemed necessary and appropriate. There was no reimbursement made by
the Advisor for the year ended December 31, 1999.
In addition, the Fund has entered into an Administrative Services Agreement
with the Advisor. The Agreement provides for a fee computed at a rate of
.08% (eight-one hundredths of 1 percent) on the average daily net asset
value of the Fund to be paid for administrative services received by the
Fund. For the year ended December 31, 1999, administrative services fees
paid by the Fund totaled $7,707.
The director and sole shareholder of the Advisor also serves as president
and as a director of the Fund. Officers of the Fund and interested
directors receive no compensation directly from the Fund.
10
<PAGE>
TAX FREE FUND OF VERMONT, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1999
- --------------------------------------------------------------------------------
(5) CONCENTRATION OF CREDIT RISK
The Fund invests a substantial proportion of its investments in debt
obligations issued by the State of Vermont and its political sub-divisions,
agencies and public authorities to obtain funds for various public
purposes. The Fund is more susceptible to factors adversely affecting
issuers of Vermont municipal securities than is a fund that is not
concentrated in these issuers to the same extent.
11
<PAGE>