UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5047
Tax-Free Fund of Colorado
(Exact name of Registrant as specified in charter)
380 Madison Avenue
New York, New York 10017
(Address of principal executive offices) (Zip code)
Joseph P. DiMaggio
380 Madison Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 697-6666
Date of fiscal year end: 12/31
Date of reporting period: 6/30/05
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2005
[LOGO OF TAX-FREE FUND OF COLORADO:
A SQUARE WITH SILHOUETTES OF TWO MOUNTAINS AND A RISING SUN]
TAX-FREE FUND
OF
COLORADO
A TAX-FREE INCOME INVESTMENT
[LOGO OF THE AQUILA
GROUP OF FUNDS: ONE OF THE
AN EAGLE'S HEAD] AQUILA(SM) GROUP OF FUNDS
[LOGO OF TAX-FREE FUND OF COLORADO:
A SQUARE WITH SILHOUETTES OF TWO
MOUNTAINS AND A RISING SUN]
SERVING COLORADO INVESTORS FOR MORE THAN 15 YEARS
TAX-FREE FUND OF COLORADO
"DON'T WAIT UNTIL TOMORROW"
August, 2005
Dear Fellow Shareholder:
Are there things that you wish that you had done today? Yesterday? 10
years ago? We are all guilty of sometimes putting off to tomorrow things we
really should do today. However, when it comes to investing for one's retirement
and future needs, any delay can prove to be extremely costly.
LIFE EXPECTANCY
As you probably know, continuing advances in medicine and a renewed focus
on healthier life styles have contributed to life expectancy in the United
States reaching an all-time high. The average American can now expect to live
77.6 years. It probably won't surprise you to learn that this increase is in
keeping with historical trends. U.S. life expectancies have risen an average of
2/10th of a year, each and every year since 1990.
AN OPTIMISTIC, YET REALISTIC APPROACH
While it is certainly always hoped for, and may be fully expected, that
plans will come to fruition in exactly the manner anticipated, it is always best
to also have a realistic approach to most future dealings - especially when it
comes to investing and one's retirement planning.
INADEQUACY OF SOCIAL SECURITY -- Coupled with a population that is living
longer is a society which is reproducing less. This is creating a phenomenon
known as "global aging." It is anticipated that before too long, the number of
retired persons will outweigh the number of individuals in the workforce. This
situation may well wreak havoc with the Social Security system.
While we may not realize the full impact of global aging in our lifetimes,
it does bring to light that perhaps it may not be wise to rely solely on Social
Security for one's retirement needs. Many financial experts suggest that one
should plan to have 75% - 80% of their current income available at retirement so
that they can maintain their current standard of living. For many people, Social
Security alone will not even come close to providing this suggested percentage,
if it truly is an accurate estimate.
PRECARIOUSNESS OF PENSION PLANS -- When you read about such industry
leaders as Bethlehem Steel, United Airlines, Enron and WorldCom having
significant financial problems, it reminds us all that our corporate pension
plans may not be 100% safe. Therefore, relying solely upon income from corporate
pension plans for retirement may also not necessarily be a wise thing to do.
INFLATION -- With so much uncertainty in this world today, going back to
the olden days of "placing your savings under your mattress for safe-keeping"
might not seem like such a bad idea. However, while this method is better than
not saving at all, it does not take into consideration the effect of an often
overlooked risk factor - inflation. A dollar placed safely under one's mattress
today may still be there in a few years. But, it is unlikely that it will still
have the same purchasing power
NOT A PART OF THE SEMI-ANNUAL REPORT
that it does today. The dollar may still look and feel the same as it did when
it was first tucked away. But, in actuality, inflation will most likely take a
bite out of its purchasing power. In other words, it will no longer have the
same "bang for the buck."
As you probably are aware, the Consumer Price Index (CPI) measures the
average price of a 'basket' of goods and services at regular intervals. It
should come as no surprise to you that the cost for that basket of goods and
services continues to rise year after year. In fact, as you will note from the
chart below, in the past 20 years, the CPI has come very close to doubling.
YEAR CPI
---- ---
1985 $105.5
1990 $127.4
1995 $150.3
2000 $168.8
2005 $190.7
As you can see, each dollar buys substantially less each year. So, while
one may have enough money to cover their living expenses right at the moment, it
is also important to ask oneself if you will be able to say the same thing 10,
20 or more years from now.
PLAN AHEAD AND DIVERSIFY
Unfortunately, many of us probably know a retired person who has been
forced back to work in order to keep up with their living expenses. And, we may
know someone who has had to adopt a diminished life style in order to keep their
expenses under control.
Our best advice for everyone in order to avoid these types of situations
is to:
1) sit down with a financial professional and develop a sound financial
plan;
2) start saving as early as possible;
3) have a diversified portfolio of investments; and
4) have a diversified pool of resources to rely upon for your
retirement, not depending solely on Social Security or a pension
plan.
No matter where you choose to place your cash reserves - in Tax-Free Fund
of Colorado or elsewhere - don't wait until tomorrow to prepare for your future.
If you haven't already done so, start a savings plan today that will, hopefully,
enable you to reach your goals.
Sincerely,
/s/ Diana P. Herrmann /s/ Lacy B. Herrmann
Diana P. Herrmann Lacy B. Herrmann
President Founder and Chairman Emeritus
NOT A PART OF THE SEMI-ANNUAL REPORT
TAX-FREE FUND OF COLORADO
SCHEDULE OF INVESTMENTS
JUNE 30, 2005
(UNAUDITED)
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (35.6%) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
CITY & County (2.3%)
Denver, Colorado City & County Art Museum
$ 2,000,000 5.000%, 08/01/15 .................................... Aa1/AA+ $ 2,179,860
Denver, Colorado City & County Excise Tax Revenue
1,000,000 5.000%, 09/01/11 FSA Insured ........................ Aaa/AAA 1,090,200
2,260,000 5.000%, 09/01/12 FSA Insured ........................ Aaa/AAA 2,444,439
-------------
Total City & County 5,714,499
-------------
METROPOLITAN DISTRICT (6.0%)
Arapahoe, Colorado Park & Recreation District
1,070,000 5.000%, 12/01/17 FGIC Insured ....................... Aaa/NR 1,157,879
Castle Pines, Colorado Metropolitan District
1,060,000 5.500%, 12/01/07 FSA Insured ........................ Aaa/AAA 1,126,282
Foothills, Colorado Park & Recreational District
1,310,000 5.000%, 12/01/12 FSA Insured ........................ Aaa/NR 1,433,585
1,325,000 5.000%, 12/01/13 FSA Insured ........................ Aaa/NR 1,446,012
1,850,000 5.000%, 12/01/17 MBIA Insured ....................... Aaa/NR 2,001,940
Highlands Ranch, Colorado Metropolitan
District #1, Refunding
1,530,000 6.250%, 09/01/06 MBIA Insured ....................... Aaa/AAA 1,538,109
1,000,000 5.750%, 09/01/08 AMBAC Insured ...................... Aaa/AAA 1,082,720
1,730,000 5.750%, 09/01/09 AMBAC Insured ...................... Aaa/AAA 1,907,273
Interstate South, Colorado Metropolitan District
2,165,000 5.750%, 12/01/09 LOC: US Bank ....................... NR/AA- 2,185,827
South Suburban, Colorado Park & Recreational District
1,365,000 5.125%, 12/15/09 FGIC Insured ....................... Aaa/AAA 1,459,158
-------------
Total Metropolitan District 15,338,785
-------------
SCHOOL DISTRICTS (27.3%)
Adams County, Colorado School District #12
1,255,000 5.625%, 12/15/08 FGIC Insured ....................... Aaa/AAA 1,352,903
Adams County, Colorado School District #12
(Adams 12 Five Star Schools)
1,170,000 5.000%, 12/15/12 MBIA Insured Pre-Refunded .......... Aaa/AAA 1,301,403
830,000 5.000%, 12/15/12 MBIA Insured Pre-Refunded .......... Aaa/AAA 916,328
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
SCHOOL DISTRICTS (CONTINUED)
Adams County, Colorado School District #14
$ 1,275,000 5.750%, 12/01/08 FSA Insured ........................ Aaa/AAA $ 1,376,796
Adams County, Colorado School District #14 Refunding
1,200,000 4.500%, 12/01/16 MBIA Insured ....................... Aaa/NR 1,296,732
Adams & Weld Counties, Colorado School District
#027J (Brighton)
1,765,000 4.300%, 12/01/19 FGIC Insured ....................... Aaa/AAA 1,828,522
Adams 12 Five Star Schools Colorado Refunding
Series B
2,000,000 4.250%, 12/15/19 FSA Insured ........................ Aaa/AAA 2,069,960
Arapahoe County, Colorado Cherry Creek
School District #5
1,000,000 5.500%, 12/15/08 .................................... Aa2/AA 1,085,590
2,760,000 5.500%, 12/15/11 .................................... Aa2/AA 3,041,272
2,750,000 5.500%, 12/15/12 .................................... Aa2/AA 3,030,253
Boulder Valley, Colorado School District
1,215,000 5.500%, 12/01/08 FGIC Insured ....................... Aaa/AAA 1,301,751
Clear Creek, Colorado School District
1,000,000 5.000%, 12/01/16 FSA Insured ........................ Aaa/AAA 1,086,170
Denver, Colorado City & County School District #1
Refunding Series A
1,000,000 5.600%, 06/01/08 .................................... Aaa/AAA 1,073,750
Denver, Colorado City & County School District #1
Refunding Series C
3,000,000 4.250%, 12/01/18 FGIC Insured ....................... Aaa/AAA 3,110,610
Douglas & Elbert Counties, Colorado School
District # Re-1, Series 1992
2,000,000 5.250%, 12/15/11 FGIC Insured ....................... Aaa/AAA 2,187,540
El Paso County, Colorado School District #11
1,330,000 6.250%, 12/01/08 .................................... Aa3/AA- 1,470,608
El Paso County, Colorado School District #20
1,000,000 6.150%, 12/15/08 MBIA Insured ....................... Aaa/AAA 1,104,670
1,500,000 5.000%, 12/15/14 FGIC Insured ....................... Aaa/NR 1,646,250
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
SCHOOL DISTRICTS (CONTINUED)
El Paso County, Colorado School District #38
$ 1,110,000 5.700%, 12/01/12 .................................... Aa3/NR $ 1,254,877
El Paso County, Colorado School District #49
1,500,000 5.500%, 12/01/13 FSA Insured ........................ Aaa/AAA 1,695,735
1,000,000 5.250%, 12/01/14 FGIC Insured ....................... Aaa/AAA 1,105,610
1,795,000 5.000%, 12/01/15 FSA Insured ........................ Aaa/AAA 1,977,139
Fremont County, Colorado School District #001
Canon City
1,680,000 5.000%, 12/01/17 MBIA Insured ....................... Aaa/NR 1,833,905
Garfield County, Colorado School District
1,250,000 5.000%, 12/01/17 FSA Insured ........................ Aaa/NR 1,352,662
Jefferson County, Colorado School District # R-1
3,000,000 5.500%, 12/15/09 FGIC Insured ....................... Aaa/AAA 3,285,000
2,340,000 5.250%, 12/15/11 FGIC Insured ....................... Aaa/AAA 2,543,252
1,000,000 5.500%, 12/15/13 FGIC Insured ....................... Aaa/AAA 1,095,000
La Plata County, Colorado School District #9
1,500,000 5.000%, 11/01/18 MBIA Insured ....................... Aaa/NR 1,615,980
Larimer County, Colorado School District #R1
Poudre Refunding Series A
2,100,000 5.250%, 12/15/11 .................................... Aa3/AA- 2,245,572
Mesa County, Colorado School District #51
1,065,000 6.000%, 12/01/06 MBIA Insured ....................... Aaa/AAA 1,113,181
1,000,000 5.200%, 12/01/09 MBIA Insured ....................... Aaa/AAA 1,044,920
Mesa County, Colorado School District # 051
(Grand Junction) Series A
1,500,000 4.350%, 12/01/19 MBIA Insured ....................... Aaa/NR 1,559,850
Pueblo County, Colorado School District #70
1,040,000 5.500%, 12/01/09 AMBAC Insured ...................... Aaa/AAA 1,103,034
1,000,000 5.000%, 12/01/15 FGIC Insured ....................... Aaa/AAA 1,082,960
3,440,000 5.000%, 12/01/16 FGIC Insured ....................... Aaa/AAA 3,711,072
Teller County, Colorado School District #2
Woodland Park
1,265,000 5.000%, 12/01/17 MBIA Insured ....................... Aaa/AAA 1,392,436
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
SCHOOL DISTRICTS (CONTINUED)
Weld & Adams Counties, Colorado School District #3J
$ 1,000,000 5.500%, 12/15/10 AMBAC Insured Pre-Refunded ......... Aaa/AAA $ 1,104,090
Weld County, Colorado School District #2
1,315,000 5.000%, 12/01/15 FSA Insured ........................ Aaa/AAA 1,434,560
Weld County, Colorado School District #3J
1,440,000 4.350%, 12/15/19 FSA Insured ........................ Aaa/NR 1,497,672
Weld County, Colorado School District #6
1,195,000 5.000%, 12/01/15 FSA Insured ........................ Aaa/AAA 1,297,698
Weld County, Colorado School District #8
1,115,000 5.000%, 12/01/15 FSA Insured ........................ Aaa/AAA 1,216,376
1,385,000 5.250%, 12/01/17 FSA Insured ........................ Aaa/AAA 1,530,411
-------------
Total School Districts 69,374,100
-------------
Total General Obligation Bonds 90,427,384
-------------
REVENUE BONDS (63.9%)
ELECTRIC (2.6%)
Colorado Springs, Colorado Utilities Revenue
1,660,000 5.000%, 11/15/17 .................................... Aa2/AA 1,803,391
Colorado Springs, Colorado Utilities Revenue
Subordinated Lien Improvement Series A
1,000,000 5.000%, 11/15/17 .................................... Aa2/AA 1,096,450
Moffat County, Colorado Pollution Control
2,125,000 5.625%, 11/01/06 AMBAC Insured ...................... Aaa/AAA 2,204,093
Platte River, Colorado Power Authority
1,500,000 6.000%, 06/01/07 MBIA Insured ....................... Aaa/AAA 1,589,445
-------------
Total Electric 6,693,379
-------------
HIGHER EDUCATION (10.8%)
Boulder County, Colorado Development Revenue UCAR
1,760,000 5.000%, 09/01/16 MBIA Insured ....................... Aaa/AAA 1,907,154
1,130,000 5.000%, 09/01/17 AMBAC Insured ...................... Aaa/AAA 1,230,864
Colorado Educational & Cultural Facility Authority
Johnson & Wales
860,000 5.000%, 04/01/18 XLCA Insured ....................... Aaa/AAA 923,786
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
HIGHER EDUCATION (CONTINUED)
Colorado Educational & Cultural Facility Authority
University of Colorado Foundation Project
$ 2,110,000 5.000%, 07/01/17 AMBAC Insured ...................... Aaa/AAA $ 2,274,812
1,865,000 5.375%, 07/01/18 AMBAC Insured ...................... Aaa/AAA 2,064,219
Colorado Mountain Jr. College District Student
Housing Facilities Enterprise Revenue
1,000,000 4.500%, 06/01/18 MBIA Insured ....................... Aaa/AAA 1,053,970
Colorado Post Secondary Educational Facility
1,170,000 5.500%, 03/01/08 MBIA Insured ....................... Aaa/AAA 1,247,700
Colorado State Board Governors University Enterprise
System Re Vresh Building Revolving Fund Series A
1,485,000 4.250%, 12/01/18 XLCA Insured ....................... Aaa/NR 1,525,214
Colorado State Colleges Board Trustees Auxiliary
System Revenue Refunding Series B
1,035,000 5.000%, 05/15/15 MBIA Insured ....................... Aaa/AAA 1,134,112
Colorado State University System
1,530,000 5.000%, 03/01/17 AMBAC Insured ...................... Aaa/NR 1,659,316
University of Colorado Enterprise System
1,000,000 5.000%, 06/01/11 .................................... Aa3/AA- 1,095,530
2,325,000 5.000%, 06/01/15 AMBAC Insured ...................... Aaa/AAA 2,531,204
1,735,000 5.000%, 06/01/16 .................................... Aa3/AA- 1,895,730
1,000,000 5.250%, 06/01/17 FGIC Insured ....................... Aaa/AAA 1,114,760
1,000,000 4.375%, 06/01/19 FGIC Insured ....................... Aaa/AAA 1,039,990
University of Northern Colorado Auxiliary Facilities
1,365,000 5.750%, 06/01/07 MBIA Insured Pre-Refunded .......... Aaa/AAA 1,377,067
1,745,000 5.750%, 06/01/08 MBIA Insured ....................... Aaa/AAA 1,842,511
1,390,000 5.000%, 06/01/15 AMBAC Insured ...................... Aaa/AAA 1,497,211
-------------
Total Higher Education 27,415,150
-------------
HOSPITAL (3.1%)
Colorado Health Facility Authority Hospital Revenue,
Catholic Health
1,000,000 5.375%, 12/01/09 Aa2/AA 1,071,230
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
HOSPITAL (CONTINUED)
Colorado Health Facility Authority Hospital Revenue,
Sisters of Charity-Leavenworth
$ 1,000,000 5.500%, 12/01/08 MBIA Insured ....................... Aaa/AAA $ 1,078,440
1,500,000 5.250%, 12/01/10 MBIA Insured ....................... Aaa/AAA 1,602,105
Colorado Health Facility Authority
Sisters of Charity - Health Care
1,000,000 6.250%, 05/15/09 AMBAC Insured, ETM ................. Aaa/AAA 1,113,670
Colorado Health Facility Community Provider
Pooled Loan Revenue
10,000 7.200%, 07/15/05 FSA Insured ........................ Aaa/AAA 10,011
Colorado Springs, Colorado Hospital Revenue
1,460,000 5.500%, 12/15/06 MBIA Insured ....................... Aaa/AAA 1,508,297
University Colorado Hospital Authority Hospital
Revenue
1,475,000 5.500%, 11/15/07 AMBAC Insured ...................... Aaa/NR 1,562,099
-------------
Total Hospital 7,945,852
-------------
HOUSING (2.0%)
Adams County, Colorado Multi-Family Housing
Revenue, Brittany Station Series A
1,600,000 5.400%, 09/01/25 FNMA Insured ....................... NR/AAA 1,605,488
Colorado Housing & Finance Authority
405,000 5.000%, 08/01/13 Series 2001 ........................ A1/A+ 413,254
860,000 6.050%, 10/01/16 Series 1999A3 ...................... Aa2/AA+ 875,557
20,000 6.125%, 11/01/23 Series 1998D3 ...................... Aa2/NR 21,537
Colorado Housing & Finance Authority
Multi-Family/Project Bonds
1,575,000 4.250%, 10/01/17 Class II 2004 Series A-3 ........... Aa2/AA 1,614,013
Colorado Housing & Finance Authority, Single
Family Mortgage
90,000 5.625%, 06/01/10 Series 1995D ....................... Aa2/NR 90,072
55,000 5.750%, 11/01/10 Series 1996A ....................... Aa2/NR 55,095
10,000 6.250%, 12/01/12 Series 1994C ....................... Aa2/NR 10,051
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
HOUSING (CONTINUED)
Colorado Housing & Finance Authority, Single
Family Mortgage 2000C3
$ 90,000 5.700%, 10/01/22 .................................... Aa2/AA $ 92,315
Colorado Housing Finance Authority, Single Family
Mortgage Subordinated 2000D
225,000 5.400%, 10/01/12 .................................... A1/A+ 230,830
Denver, Colorado Single Family Mortgage Revenue
130,000 5.000%, 11/01/15 GNMA Insured ....................... NR/AAA 133,916
-------------
Total Housing 5,142,128
-------------
LEASE (8.5%)
Aurora, Colorado COP
2,105,000 5.250%, 12/01/13 AMBAC Insured ...................... Aaa/AAA 2,306,533
Broomfield, Colorado COP
2,500,000 5.100%, 12/01/12 AMBAC Insured ...................... Aaa/NR 2,728,700
Denver, Colorado City and County COP Roslyn Fire
1,835,000 5.000%, 12/01/15 .................................... Aa2/AA 1,993,801
El Paso County, Colorado COP
1,100,000 5.250%, 12/01/09 MBIA Insured ....................... Aaa/AAA 1,196,602
El Paso County, Colorado COP Judicial Building
1,760,000 5.000%, 12/01/16 AMBAC Insured ...................... Aaa/AAA 1,911,659
El Paso County, Colorado COP Pikes Peak
Regional Development Authority
1,925,000 5.000%, 12/01/18 AMBAC Insured ...................... Aaa/AAA 2,092,648
Fort Collins, Colorado Lease COP Series A
3,020,000 4.750%, 06/01/18 AMBAC Insured ...................... Aaa/NR 3,239,614
Fremont County, Colorado COP Refunding and
Improvement Series A
2,075,000 5.000%, 12/15/18 MBIA Insured ....................... Aaa/AAA 2,256,459
Lakewood, Colorado COP
1,440,000 5.200%, 12/01/13 AMBAC Insured ...................... Aaa/AAA 1,566,907
Northern Colorado Water Conservancy District
1,000,000 5.000%, 10/01/15 MBIA Insured ....................... Aaa/AAA 1,089,100
Westminster, Colorado COP
1,055,000 5.350%, 09/01/11 MBIA Insured ....................... Aaa/AAA 1,156,934
-------------
Total Lease 21,538,957
-------------
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
SALES TAX (12.9%)
City of Boulder, Colorado
$ 1,045,000 5.250%, 08/15/10 AMBAC Insured ...................... Aaa/AAA $ 1,132,686
Boulder, Colorado Open Space Acquisition
1,250,000 5.500%, 08/15/12 .................................... Aa1/AA+ 1,379,500
Boulder County, Colorado Open Space
Capital Improvement
3,065,000 5.000%, 07/15/16 MBIA Insured ....................... Aaa/AAA 3,317,372
1,630,000 5.000%, 07/15/17 MBIA Insured ....................... Aaa/AAA 1,757,922
Boulder County, Colorado Sales & Use Tax
Open Space Series A
1,000,000 5.450%, 12/15/12 FGIC Insured ....................... Aaa/AAA 1,101,140
City & County of Denver, Colorado Excise Tax Revenue
2,000,000 5.375%, 09/01/10 FSA Insured ........................ Aaa/AAA 2,179,180
Colorado Springs, Colorado Sales & Use Tax Revenue
Service Sales
1,320,000 5.000%, 12/01/12 .................................... A1/AA 1,419,066
Douglas County, Colorado Sales & Use Tax Open
Space Revenue
1,780,000 5.500%, 10/15/12 FSA Insured ........................ Aaa/AAA 1,973,522
Golden, Colorado Sales & Use Tax
1,265,000 5.000%, 12/01/12 AMBAC Insured ...................... Aaa/AAA 1,388,173
Grand County Colorado School District #002
(East Grand) Refunding & Improvement Series B
1,040,000 4.250%, 12/01/18 FSA Insured ........................ Aaa/AAA 1,078,345
Greeley, Colorado Sales & Use Tax Revenue
1,435,000 4.000%, 10/01/19 MBIA Insured ....................... Aaa/AAA 1,454,215
Jefferson County, Colorado Open Space Sales Tax
1,245,000 5.000%, 11/01/11 FGIC Insured ....................... Aaa/AAA 1,338,325
1,600,000 5.000%, 11/01/13 AMBAC Insured ...................... Aaa/AAA 1,744,400
1,080,000 5.000%, 11/01/14 AMBAC Insured ...................... Aaa/AAA 1,171,076
1,695,000 4.000%, 11/01/18 AMBAC Insured ...................... Aaa/AAA 1,723,984
Lakewood, Colorado Sales & Use Tax Revenue
1,040,000 5.250%, 12/01/09 .................................... NR/AA 1,128,213
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
SALES TAX (CONTINUED)
Larimer County, Colorado Sales Tax Revenue Bond
$ 1,000,000 5.500%, 12/15/12 AMBAC Insured ...................... Aaa/AAA $ 1,111,900
Longmont, Colorado Sales & Use Tax
1,875,000 5.500%, 11/15/14 .................................... NR/AA 2,080,856
Thornton, Colorado Sales Tax
1,000,000 5.000%, 09/01/14 FSA Insured ........................ Aaa/AAA 1,082,340
Westminster, Colorado Sales Tax Revenue
1,175,000 5.500%, 12/01/07 FGIC Insured ....................... Aaa/AAA 1,248,473
1,710,000 5.000%, 12/01/17 AMBAC Insured ...................... Aaa/AAA 1,850,442
-------------
Total Sales Tax 32,661,130
-------------
TRANSPORTATION (4.4%)
Arapahoe County, Colorado E-470 Vehicle
Registration Revenue Bonds
1,000,000 5.450%, 08/31/07 MBIA Insured Pre-Refunded .......... Aaa/AAA 1,034,540
Colorado Department of Transportation-Transportation
Revenue Anticipation Note
1,000,000 6.000%, 06/15/13 AMBAC Insured Pre-Refunded ......... Aaa/AAA 1,140,630
Northwest Parkway, Colorado Public Highway
Authority Series A
2,515,000 5.150%, 06/15/14 AMBAC Insured ...................... Aaa/AAA 2,776,761
Regional Transportation District Colorado COP
1,190,000 5.000%, 06/01/15 AMBAC Insured ...................... Aaa/AAA 1,291,447
1,510,000 4.850%, 06/01/18 AMBAC Insured ...................... Aaa/AAA 1,606,821
Regional Transportation District Colorado
Sales Tax Revenue
2,000,000 5.000%, 11/01/13 FGIC Insured ....................... Aaa/AAA 2,171,140
1,000,000 5.000%, 11/01/16 FGIC Insured ....................... Aaa/AAA 1,103,040
-------------
Total Transportation 11,124,379
-------------
WATER & SEWER (16.9%)
Boulder, Colorado Water & Sewer Revenue
1,000,000 5.400%, 12/01/14 .................................... Aa2/AA+ 1,105,720
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
WATER & SEWER (CONTINUED)
Broomfield, Colorado Sewer and Waste Water Revenue
$ 1,985,000 5.000%, 12/01/15 AMBAC Insured ...................... Aaa/NR $ 2,165,516
1,000,000 5.000%, 12/01/16 AMBAC Insured ...................... Aaa/NR 1,086,750
Broomfield, Colorado Water Activity Enterprise
1,500,000 5.300%, 12/01/12 MBIA Insured ....................... Aaa/NR 1,658,205
1,730,000 5.250%, 12/01/13 MBIA Insured ....................... Aaa/NR 1,910,128
2,190,000 5.000%, 12/01/16 MBIA Insured ....................... Aaa/NR 2,378,712
2,290,000 5.000%, 12/01/17 MBIA Insured ....................... Aaa/NR 2,478,078
Centennial, Colorado Water & Sewer District
1,750,000 5.800%, 12/01/07 FSA Insured ........................ Aaa/AAA 1,790,250
Colorado Clean Water Revenue
830,000 5.375%, 09/01/10 .................................... Aaa/AAA 893,769
170,000 5.375%, 09/01/10 .................................... Aaa/AAA 182,106
Colorado Metro Wastewater Reclamation District
1,270,000 5.250%, 04/01/09 .................................... Aa2/AA 1,345,489
Colorado Water Resource & Power Development
Authority
215,000 6.000%, 09/01/06 .................................... Aaa/AAA 216,178
1,000,000 5.550%, 11/01/13 FGIC Insured ....................... Aaa/AAA 1,110,440
2,675,000 5.000%, 09/01/16 MBIA Insured ....................... Aaa/AAA 2,951,542
1,855,000 5.000%, 09/01/17 MBIA Insured ....................... Aaa/AAA 2,037,680
2,095,000 4.000%, 09/01/19 .................................... Aaa/AAA 2,115,845
Colorado Water Resource Power Development
Authority Clean Water Revenue Series A
1,375,000 5.000%, 09/01/12 .................................... Aaa/AAA 1,515,401
260,000 5.000%, 09/01/12 .................................... Aaa/AAA 285,025
Colorado Water Resource Power Development
Authority Clean Water Revenue Series B
820,000 5.500%, 09/01/09 .................................... Aaa/AAA 886,076
180,000 5.500%, 09/01/09 .................................... Aaa/AAA 193,883
Denver, Colorado City and County Wastewater
Revenue
1,560,000 5.000%, 11/01/15 FGIC Insured ....................... Aaa/AAA 1,700,400
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
WATER & SEWER (CONTINUED)
Lafayette, Colorado Water Revenue
$ 1,625,000 5.000%, 12/01/17 MBIA Insured ....................... Aaa/AAA $ 1,773,866
Left Hand, Colorado Water District, Series 1996
1,530,000 5.750%, 11/15/08 MBIA Insured ....................... Aaa/AAA 1,592,393
Northglenn, Colorado Water & Sewer
1,010,000 5.750%, 12/01/06 FSA Insured ........................ Aaa/AAA 1,052,238
Pueblo, Colorado Board Water Works
1,000,000 5.500%, 11/01/10 FSA Insured ........................ Aaa/AAA 1,114,220
Thornton, Colorado, Refunding
2,000,000 5.600%, 12/01/06 FSA Insured ........................ Aaa/AAA 2,079,540
Thornton, Colorado Water Enterprise Revenue
1,445,000 4.500%, 12/01/18 MBIA Insured ....................... Aaa/AAA 1,526,642
Ute, Colorado Water Conservancy District
1,570,000 5.500%, 06/15/12 MBIA Insured ....................... Aaa/AAA 1,734,567
Widefield, Colorado Water & Sanitation District Water
& Sewer Refunding & Improvement
1,870,000 4.500%, 12/01/19 MBIA Insured ....................... Aaa/AAA 1,966,585
-------------
Total Water & Sewer 42,847,244
-------------
MISCELLANEOUS REVENUE (2.7%)
Denver, Colorado City & County Helen Bonfils
Project
2,275,000 5.875%, 12/01/09 .................................... NR/AA- 2,430,929
South Suburban, Colorado Park & Recreational
District
1,000,000 6.000%, 11/01/07 .................................... Baa2/NR 1,045,400
Thornton, Colorado Development Authority
1,230,000 5.750%, 12/01/06 MBIA Insured ....................... Aaa/AAA 1,281,439
Thornton, Colorado Development Authority Tax
Increment North Washington Street Urban
Renewal Project
1,040,000 4.500%, 12/01/18 MBIA Insured ....................... Aaa/AAA 1,098,760
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ---------------- ----------------------------------------------------- ---------- -------------
MISCELLANEOUS REVENUE (CONTINUED)
Westminster, Colorado Golf Course Activity
$ 1,000,000 5.400%, 12/01/13 Radian Group, Inc. Insured ......... NR/AA $ 1,066,980
-------------
Total Miscellaneous Revenue 6,923,508
-------------
Total Revenue Bonds 162,291,727
-------------
Total Investments (cost $239,389,289*) .............. 99.5% 252,719,111
Other assets less liabilities ....................... 0.5 1,230,392
----- -------------
Net Assets .......................................... 100.0% $ 253,949,503
===== =============
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED)
Highest rating(1) ................................... 83.0%
Second highest rating(2) ............................ 16.3
Third highest rating(3) ............................. 0.3
Fourth highest rating(4) ............................ 0.4
-----
100.0%
=====
(1) Aaa of Moody's or AAA of A&P.
(2) Aa of Moody's or AA of S&P.
(3) A of Moody's or S&P.
(4) Baa of Moody's or BBB of S&P.
* See note 4.
PORTFOLIO ABBREVIATIONS:
------------------------
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificates of Participation
ETM - Escrowed to Maturity
FGIC - Financial Guaranty Insurance Co.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance
NR - Not Rated
UCAR - University Corporation for Atmospheric Research
XLCA - XL Capital Assurance
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2005
(UNAUDITED)
ASSETS
Investments at value (cost $239,389,289) ......................................... $252,719,111
Interest receivable .............................................................. 1,719,812
Receivable for Fund shares sold .................................................. 260,071
Other assets ..................................................................... 2,864
------------
Total assets ..................................................................... 254,701,858
------------
LIABILITIES
Cash overdraft ..................................................................... 6,148
Payable for Fund shares redeemed ................................................... 292,307
Dividends payable .................................................................. 255,130
Management fee payable ............................................................. 104,405
Distribution and service fees payable .............................................. 42,731
Accrued expenses ................................................................... 51,634
------------
Total liabilities .................................................................. 752,355
------------
NET ASSETS ............................................................................. $253,949,503
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 238,854
Additional paid-in capital ......................................................... 241,033,648
Net unrealized appreciation on investments (note 4) ................................ 13,329,822
Net realized loss on investments ................................................... (346,266)
Overdistributed net investment income .............................................. (306,555)
------------
$253,949,503
============
CLASS A
Net Assets ......................................................................... $223,954,960
============
Capital shares outstanding ......................................................... 21,064,730
============
Net asset value and redemption price per share ..................................... $ 10.63
============
Offering price per share (100/96 of $10.63 adjusted to nearest cent) ............... $ 11.07
============
CLASS C
Net Assets ......................................................................... $ 14,234,157
============
Capital shares outstanding ......................................................... 1,341,457
============
Net asset value and offering price per share ....................................... $ 10.61
============
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if redeemed
during the first 12 months after purchase) ...................................... $ 10.61*
============
CLASS Y
Net Assets ......................................................................... $ 15,760,386
============
Capital shares outstanding ......................................................... 1,479,244
============
Net asset value, offering and redemption price per share ........................... $ 10.65
============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
INVESTMENT INCOME:
Interest income ................................................... $ 5,704,013
Expenses:
Management fee (note 3) ........................................... $ 631,069
Distribution and service fees (note 3) ............................ 127,695
Transfer and shareholder servicing agent fees ..................... 75,233
Trustees' fees and expenses (note 8) .............................. 70,452
Legal fees (note 3) ............................................... 45,743
Shareholders' reports and proxy statements ........................ 31,679
Custodian fees .................................................... 14,396
Auditing and tax fees ............................................. 11,015
Insurance ......................................................... 8,268
Registration fees and dues ........................................ 6,367
Chief compliance officer (note 3) ................................. 2,253
Miscellaneous ..................................................... 20,740
------------
Total expenses .................................................... 1,044,910
Expenses paid indirectly (note 6) ................................. (3,908)
------------
Net expenses ...................................................... 1,041,002
------------
Net investment income ............................................. 4,663,011
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ............. 13,936
Change in unrealized appreciation on investments .................. (936,212)
------------
Net realized and unrealized gain (loss) on investments ............ (922,276)
------------
Net change in net assets resulting from operations ................ $ 3,740,735
============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
---------------- -----------------
OPERATIONS:
Net investment income ............................................. $ 4,663,011 $ 9,628,069
Net realized gain (loss) from securities transactions ............. 13,936 (360,056)
Change in unrealized appreciation on investments .................. (936,212) (2,870,215)
------------ ------------
Change in net assets from operations ............................ 3,740,735 6,397,798
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ............................................. (4,456,129) (9,247,370)
Class C Shares:
Net investment income ............................................. (220,199) (472,310)
Class Y Shares:
Net investment income ............................................. (312,183) (588,272)
------------ ------------
Change in net assets from distributions ......................... (4,988,511) (10,307,952)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ......................................... 9,963,058 26,103,958
Reinvested dividends and distributions ............................ 2,844,424 6,078,032
Cost of shares redeemed ........................................... (14,498,199) (34,073,005)
------------ ------------
Change in net assets from capital share transactions .............. (1,690,717) (1,891,015)
------------ ------------
Change in net assets ............................................ (2,938,493) (5,801,169)
NET ASSETS:
Beginning of period ............................................... 256,887,996 262,689,165
------------ ------------
End of period* .................................................... $253,949,503 $256,887,996
============ ============
* Includes undistributed (overdistrubuted) net investment income of: $ (306,555) $ 18,945
============ ============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (UNAUDITED)
1. ORGANIZATION
Tax-Free Fund of Colorado (the "Fund"), a non-diversified, open-end
investment company, was organized in February, 1987 as a Massachusetts business
trust and commenced operations on May 21, 1987. The Fund is authorized to issue
an unlimited number of shares and, since its inception to April 30, 1996,
offered only one class of shares. On that date, the Fund began offering two
additional classes of shares, Class C and Class Y shares. All shares outstanding
prior to that date were designated as Class A shares and are sold with a
front-payment sales charge and bear an annual distribution fee. Class C shares
are sold with a level-payment sales charge with no payment at time of purchase
but level service and distribution fees from date of purchase through a period
of six years thereafter. A contingent deferred sales charge of 1% is assessed to
any Class C shareholder who redeems shares of this Class within one year from
the date of purchase. Class C Shares, together with a pro-rata portion of all
Class C Shares acquired through reinvestment of dividends and other
distributions paid in additional Class C Shares, automatically convert to Class
A Shares after 6 years. The Class Y shares are only offered to institutions
acting for an investor in a fiduciary, advisory, agency, custodian or similar
capacity and are not offered directly to retail investors. Class Y shares are
sold at net asset value without any sales charge, redemption fees, contingent
deferred sales charge or distribution or service fees. On April 30, 1998, the
Fund established Class I shares, which are offered and sold only through
financial intermediaries and are not offered directly to retail investors. Class
I Shares are sold at net asset value without any sales charge, redemption fees,
or contingent deferred sales charge. Class I Shares carry a distribution and
service fee. As of the report date no Class I Shares were outstanding. All
classes of shares represent interests in the same portfolio of investments and
are identical as to rights and privileges but differ with respect to the effect
of sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities
of more than 60 days are valued at fair value each business day based upon
information provided by a nationally prominent independent pricing service
and periodically verified through other pricing services. In the case of
securities for which market quotations are readily available, securities
are valued by the pricing service at the mean of bid and asked quotations.
If market quotations or a valuation from the pricing service is not
readily available, the security is valued at fair value determined under
procedures established by and under the general supervision of the Board
of Trustees. Securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at
purchase is 60 days or less, or by amortizing their unrealized
appreciation or depreciation on the 61st day prior to maturity, if their
term to maturity at purchase exceeds 60 days.
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Interest income is recorded daily on the accrual basis and is adjusted for
amortization of premium and accretion of original issue and market
discount.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The Fund
intends to make distributions of income and securities profits sufficient
to relieve it from all, or substantially all, Federal income and excise
taxes.
d) MULTIPLE CLASS ALLOCATIONS: All income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses are
allocated daily to each class of shares based on the relative net assets
of each class. Class-specific expenses, which include distribution and
service fees and any other items that are specifically attributed to a
particular class, are charged directly to such class.
e) USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Aquila Investment Management LLC (the "Manager"), a wholly-owned
subsidiary of Aquila Management Corporation, the Fund's founder and sponsor,
serves as the Manager for the Fund under an Advisory and Administration
Agreement with the Fund. The portfolio management of the Fund has been delegated
to a Sub-Adviser as described below. Under the Advisory and Administration
Agreement, the Manager provides all administrative services to the Fund, other
than those relating to the day-to-day portfolio management. The Manager's
services include providing the office of the Fund and all related services as
well as overseeing the activities of the Sub-Adviser and managing relationships
with all the various support organizations to the Fund such as the shareholder
servicing agent, custodian, legal counsel, auditors and distributor and
additionally maintaining the Fund's accounting books and records. For its
services, the Manager is entitled to receive a fee which is payable monthly and
computed as of the close of business each day at the annual rate of 0.50 of 1%
on the Fund's net assets.
Kirkpatrick Pettis Capital Management, Inc. (the "Sub-Adviser"), a
wholly-owned subsidiary of the Davidson Companies, serves as the Investment
Sub-Adviser for the Fund under a Sub-Advisory Agreement between the Manager and
the Sub-Adviser. Under this agreement, the Sub-Adviser continuously provides,
subject to oversight of the Manager and the Board of Trustees of the Fund, the
investment program of the Fund and the composition of its portfolio, arranges
for the purchases and sales of portfolio securities, and provides for daily
pricing of the Fund's portfolio. For its services, the Sub-Adviser is entitled
to receive a fee from the Manager which is payable monthly and computed as of
the close of business each day at the annual rate of 0.20 of 1% on the Fund's
average net assets.
Under a Compliance Agreement with the Manager, the Manager is compensated
for Chief Compliance Officer related services provided to enable the Fund to
comply with Rule 38a-1 of the Investment Company Act of 1940.
Specific details as to the effect of the Fund's payments under its
Distribution Plan, as described below, on the above management fees and as to
the nature and extent of the services provided by the Manager and the
Sub-Adviser are more fully defined in the Fund's Prospectus and Statement of
Additional Information.
b) DISTRIBUTION AND SERVICE FEES:
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of
the Plan, with respect to Class A Shares, the Fund is authorized to make service
fee payments to broker-dealers or others ("Qualified Recipients") selected by
Aquila Distributors, Inc. (the "Distributor"), including, but not limited to,
any principal underwriter of the Fund, with which the Distributor has entered
into written agreements contemplated by the Rule and which have rendered
assistance in the distribution and/or retention of the Fund's shares or
servicing of shareholder accounts. The Fund currently makes payment of this
distribution fee at the annual rate of 0.05 of 1% of the Fund's average net
assets represented by Class A Shares. The Board of Trustees and shareholders
approved an amendment to the Fund's Distribution Plan applicable to Class A
Shares which will permit the Fund to make service fee payments at the rate of up
to 0.15 of 1% on the entire net assets represented by Class A Shares. For the
six months ended June 30, 2005, distribution fees on Class A Shares amounted to
$55,651 of which the Distributor retained $1,829.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C shares or
servicing of shareholder accounts. These payments are made at the annual rate of
0.75% of the Fund's average net assets represented by Class C Shares and for the
six months ended June 30, 2005, amounted to $54,033. In addition, under a
Shareholder Services Plan, the Fund is authorized to make service fee payments
with respect to Class C Shares to Qualified Recipients for providing personal
services and/or maintenance of shareholder accounts. These payments are made at
the annual rate of 0.25 of 1% of the Fund's average net assets represented
by Class C Shares and for the six months ended June 30, 2005 amounted to
$18,011. The total of these payments with respect to Class C Shares amounted to
$72,044 of which the Distributor retained $14,638.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as the exclusive
distributor of the Fund's shares. Through agreements between the Distributor and
various broker-dealer firms ("dealers"), the Fund's shares are sold primarily
through the facilities of these dealers having offices within Colorado, with the
bulk of sales commissions inuring to such dealers. For the six months ended June
30, 2005, total commissions on sales of Class A Shares amounted to $205,774 of
which the Distributor received $37,786.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2005, the Fund incurred $44,624 of legal
fees allocable to Hollyer Brady Barrett & Hines LLP, counsel to the Fund, for
legal services in conjunction with the Fund's ongoing operations. The Secretary
of the Fund is a Partner of Hollyer Brady Barrett & Hines LLP.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2005, purchases of securities and
proceeds from the sales of securities aggregated $14,534,981 and $15,635,747,
respectively.
At June 30, 2005, the aggregate tax cost for all securities was
$239,368,097. At June 30, 2005 the aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $13,352,204 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted to
$1,189 for a net unrealized appreciation of $13,351,015.
5. PORTFOLIO ORIENTATION
Since the Fund invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Colorado, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Colorado and whatever
effects these may have upon Colorado issuers' ability to meet their obligations.
6. EXPENSES
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees and other Fund
expenses whenever there are uninvested cash balances. The Statement of
Operations reflects the total expenses before any offset, the amount of offset
and the net expenses. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in income-producing assets
rather than leave cash on deposit.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
CLASS A SHARES:
Proceeds from shares sold ... 750,078 $ 7,975,581 1,760,071 $ 18,949,465
Reinvested distributions .... 243,228 2,579,869 516,057 5,531,026
Cost of shares redeemed ..... (1,090,718) (11,569,313) (2,622,852) (28,078,616)
---------- ----------- ---------- -----------
Net change ............... (97,412) (1,013,863) (346,724) (3,598,125)
---------- ----------- ---------- -----------
CLASS C SHARES:
Proceeds from shares sold ... 77,354 819,023 370,611 3,973,438
Reinvested distributions .... 10,825 114,596 24,433 261,462
Cost of shares redeemed ..... (173,331) (1,838,611) (430,961) (4,581,119)
---------- ----------- ---------- -----------
Net change ............... (85,152) (904,992) (35,917) (346,219)
---------- ----------- ---------- -----------
CLASS Y SHARES:
Proceeds from shares sold ... 109,767 1,168,454 296,183 3,181,055
Reinvested distributions .... 14,090 149,959 26,651 285,544
Cost of shares redeemed ..... (102,515) (1,090,275) (131,896) (1,413,270)
---------- ----------- ---------- -----------
Net change ............... 21,342 228,138 190,938 2,053,329
---------- ----------- ---------- -----------
Total transactions in Fund shares (161,222) $ (1,690,717) (191,703) $ (1,891,015)
========== =========== ========== ===========
8. TRUSTEES' FEES AND EXPENSES
At June 30, 2005 there were 7 Trustees, one of which is affiliated with
the Manager and is not paid any fees. The total amount of Trustees' services and
attendance fees paid during the six months ended June 30, 2005 was $54,600, to
cover carrying out their responsibilities and attendance at regularly scheduled
quarterly Board Meetings and meetings of the Independent Trustees held prior to
each quarterly Board Meeting. When additional or special meetings are held, the
meeting fees are paid to those Trustees in attendance. Trustees' are reimbursed
for their expenses such as travel, accommodations and meals incurred in
connection with attendance at Board Meetings and the Annual Meeting of
Shareholders. For the six months ended June 30, 2005, such meeting-related
expenses amounted to $15,852.
9. SECURITIES TRADED ON A WHEN-ISSUED BASIS
The Fund may purchase or sell securities on a when-issued basis.
When-issued transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the
time of entering into the transaction. Beginning on the date the Fund enters
into a when-issued transaction, cash or other liquid securities are segregated
in an amount equal to or greater than the amount of the when-issued transaction.
These transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
10. INCOME TAX INFORMATION AND DISTRIBUTIONS
The Fund declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share, in cash,
or in a combination of both, at the shareholder's option. Net realized capital
gains, if any, are distributed annually and are taxable.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net investment
income to be exempt from regular Federal and State of Colorado income taxes.
However, due to the distribution levels maintained by the Fund and the
differences between financial statement reporting and Federal income tax
reporting requirements, distributions made by the Fund may not be the same as
the Fund's net investment income, and/or net realized securities gains. In this
regard, the Fund credited distributions in excess of net investment income in
the amount of $682,680 and debited additional paid-in capital in the amount of
$682,680 at December 31, 2004. This adjustment had no impact on the Fund's
aggregate net assets at December 31, 2004. Further, a small portion of the
dividends may, under some circumstances, be subject to taxes at ordinary income
and/or capital gain rates.
At December 31, 2004, the Fund had a capital loss carryover of $360,056
which expires on December 31, 2012. This carryover is available to offset future
net realized gains on securities transactions to the extent provided for in the
Internal Revenue Code. To the extent that this loss carryover is used to offset
future realized capital gains, it is probable the gains so offset will not be
distributed.
The tax character of distributions:
YEAR ENDED DECEMBER 31,
2004 2003
----------- -----------
Net tax-exempt income $ 9,625,055 $ 9,331,870
Ordinary income 682,897 562,097
Capital gain 0 18,155
----------- -----------
$10,307,952 $ 9,912,122
=========== ===========
As of December 31, 2004, the components of distributable earnings on a tax
basis were as follows:
Unrealized appreciation $14,284,833
Accumulated net realized loss (360,056)
-----------
$13,924,777
===========
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments.
11. CHANGE IN PRINCIPAL ACCOUNTANTS
KPMG LLP was previously the principal accountants for the Tax-Free Fund of
Colorado (the "Fund"). On July 27, 2005 KPMG LLP resigned as the principal
accountants of the Fund and Tait, Weller and Baker was engaged as the principal
accountants to audit the Fund's financial statements for the fiscal year of
2005. The decision was made by the Audit Committee of the Board of Trustees.
The audit reports of KPMG LLP on the Fund's financial statements as of and
for the years ended December 31, 2004 and 2003 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the two fiscal years ended December 31,
2004 and 2003 and the subsequent interim period through July 27, 2005, there
were no reportable events or disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to the satisfaction of
KPMG LLP would have caused them to make reference in connection with their
opinion to the subject matter of the disagreements.
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
--------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/05 ---------------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ........... $ 10.68 $ 10.84 $ 10.82 $ 10.32 $ 10.31 $ 9.98
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income+ ..................... 0.20 0.40 0.41 0.43 0.45 0.46
Net gain (loss) on securities (both realized
and unrealized) ......................... (0.04) (0.13) 0.05 0.52 0.02 0.35
-------- -------- -------- -------- -------- --------
Total from investment operations ........... 0.16 0.27 0.46 0.95 0.47 0.81
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ....... (0.21) (0.43) (0.44) (0.45) (0.46) (0.48)
Distributions from capital gains ........... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions ........................ (0.21) (0.43) (0.44) (0.45) (0.46) (0.48)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 10.63 $ 10.68 $ 10.84 $ 10.82 $ 10.32 $ 10.31
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) ..... 1.53%* 2.57% 4.32% 9.36% 4.64% 8.30%
Ratios/supplemental data
Net assets, end of period (in thousands) ... $223,955 $226,070 $233,109 $215,195 $187,022 $179,816
Ratio of expenses to average net assets .... 0.78%** 0.75% 0.74% 0.75% 0.76% 0.78%
Ratio of net investment income to average
net assets .............................. 3.74%** 3.76% 3.81% 4.05% 4.27% 4.53%
Portfolio turnover rate .................... 5.75%* 12.55 6.16% 6.95% 14.56% 22.45%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets .... 0.77%** 0.74% 0.74% 0.74% 0.75% 0.77%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/05 -----------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ...... $ 10.66 $ 10.82 $ 10.80 $ 10.30 $ 10.29 $ 9.97
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income+ ................. 0.15 0.30 0.31 0.31 0.34 0.37
Net gain (loss) on securities (both
realized and unrealized) ............ (0.04) (0.13) 0.04 0.53 0.03 0.33
------- ------- ------- ------- ------- -------
Total from investment operations ....... 0.11 0.17 0.35 0.84 0.37 0.70
------- ------- ------- ------- ------- -------
Less distributions (note 10):
Dividends from net investment income ... (0.16) (0.33) (0.33) (0.34) (0.36) (0.38)
Distributions from capital gains ....... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions .................... (0.16) (0.33) (0.33) (0.34) (0.36) (0.38)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 10.61 $ 10.66 $ 10.82 $ 10.80 $ 10.30 $ 10.29
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) 1.05%* 1.60% 3.33% 8.32% 3.64% 7.18%
Ratios/supplemental data
Net assets, end of period (in thousands) $14,234 $15,210 $15,820 $ 9,109 $ 1,909 $ 897
Ratio of expenses to average net assets 1.73%** 1.70% 1.69% 1.68% 1.69% 1.73%
Ratio of net investment income to
average net assets .................. 2.80%** 2.81% 2.83% 2.99% 3.25% 3.60%
Portfolio turnover rate ................ 5.75%* 6.16% 6.16% 6.95% 14.56% 22.45%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets 1.72%** 1.68% 1.68% 1.67% 1.68% 1.72%
CLASS Y
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/05 -----------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ...... $ 10.71 $ 10.86 $ 10.84 $ 10.33 $ 10.33 $ 10.00
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income+ ................. 0.20 0.41 0.42 0.44 0.45 0.46
Net gain (loss) on securities (both
realized and unrealized) ............ (0.05) (0.12) 0.04 0.52 0.02 0.35
------- ------- ------- ------- ------- -------
Total from investment operations ....... 0.15 0.29 0.46 0.96 0.47 0.81
------- ------- ------- ------- ------- -------
Less distributions (note 10):
Dividends from net investment income ... (0.21) (0.44) (0.44) (0.45) (0.47) (0.48)
Distributions from capital gains ....... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions .................... (0.21) (0.44) (0.44) (0.45) (0.47) (0.48)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............ $ 10.65 $ 10.71 $ 10.86 $ 10.84 $ 10.33 $ 10.33
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) 1.46%* 2.73% 4.37% 9.50% 4.59% 8.36%
Ratios/supplemental data
Net assets, end of period (in thousands) $15,760 $15,608 $13,760 $ 7,482 $ 4,312 $ 4,417
Ratio of expenses to average net assets 0.73%** 0.70% 0.69% 0.69% 0.71% 0.73%
Ratio of net investment income to
average net assets .................. 3.79%** 3.81% 3.85% 4.07% 4.32% 4.58%
Portfolio turnover rate ................ 5.75%* 12.55% 6.16% 6.95% 14.56% 22.45%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets 0.72%** 0.69% 0.69% 0.69% 0.70% 0.72%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED)
As a shareholder of the Fund, you may incur two types of costs: (1)
transaction costs, including front-end sales charges with respect to Class A
shares or contingent deferred sales charges ("CDSC") with respect to Class C
shares; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other Fund expenses. The tables below are intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The tables below are based on an investment of $1,000 invested on January
1, 2005 and held for the six months ended June 30, 2005.
ACTUAL EXPENSES
This table provides information about actual account values and actual
expenses. You may use the information provided in this table, together with the
amount you invested, to estimate the expenses that you paid over the period. To
estimate the expenses you paid on your account, divide your ending account value
by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During the Period".
FOR THE SIX MONTHS ENDED JUNE 30, 2005
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 1.53% $1,000.00 $1,015.30 $3.87
- --------------------------------------------------------------------------------
Class C 1.05% $1,000.00 $1,010.50 $8.60
- --------------------------------------------------------------------------------
Class Y 1.46% $1,000.00 $1,014.60 $3.62
- --------------------------------------------------------------------------------
(1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE
APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES.
TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
(2) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.72% AND
0.72% FOR THE FUND'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO
REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Trust's actual
return. The hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the period. You may
use the information provided in this table to compare the ongoing costs of
investing in the Trust and other mutual funds. To do so, compare this 5.00%
hypothetical example relating to the Trust with the 5.00% hypothetical examples
that appear in the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs,
with respect to Class A shares. The example does not reflect the deduction of
the applicable sales charges or contingent deferred sales charges ("CDSC") with
respect to Class C shares. Therefore, the table is useful in comparing ongoing
costs only, and will not help you determine the relative total costs of owning
different mutual funds. In addition, if these transaction costs were included,
your costs would have been higher.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,021.45 $3.59
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,017.20 $7.87
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,022.20 $2.83
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.71%, 1.56% AND
0.56% FOR THE TRUST'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 183/366 (TO
REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT AND THE SUB-ADVISORY
AGREEMENT
Renewal until April 30, 2006 of the Advisory and Administration Agreement
(the "Advisory Agreement") between the Tax-Free Fund of Colorado (the "Fund")
and the Manager and the Sub-Advisory Agreement (the "Sub-Advisory Agreement")
between the Manager and Kirkpatrick Pettis Capital Management, Inc. (the
"Sub-Adviser") was approved by the Board of Trustees and the Independent
Trustees in March, 2005. At a meeting called and held for that purpose at which
a majority of the Independent Trustees were present in person, the following
materials were considered:
o Copies of the agreements to be renewed;
o A term sheet describing the material terms of the agreements;
o The Annual Report of the Fund for the year ended December 31, 2004;
o A report of the Manager containing data about the performance of the
Fund, data about its fees, expenses and purchases and redemptions
together with comparisons of such data with similar data about other
comparable funds, as well as data as to the profitability of the
Manager and the Sub-Adviser; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees noted that they had approved the Sub-Advisory Agreement in
December 2004, and had submitted it for approval by the shareholders, who had
approved it earlier in the day. They noted that the Sub-Adviser has been acting
as such since January 1, 2005, when it assumed the sub-advisory role and had
been using the same personnel and essentially the same operations as the former
sub-adviser. They had received the representation of the Sub-Adviser that its
operations during the period since January 1, 2005 were essentially the same as
those of the former sub-adviser and accordingly, they deemed the materials
relating to the former sub-adviser during the calendar year 2004 to be relevant
in considering renewal of the Sub-Advisory Agreement.
The Trustees reviewed materials relevant to, and considered, the following
factors:
ADVISORY AGREEMENT
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER.
The Manager has provided all administrative services to the Fund and has
arranged for the Sub-Adviser (and previously, the former sub-adviser) to provide
local management of the Fund's portfolio. The Trustees noted that the Manager
had arranged to have the Sub-Adviser employ as portfolio manager for the Fund
the individual who served in that capacity with the former sub-adviser, Mr.
Christopher Johns, and had established facilities for credit analysis of the
Fund's portfolio securities. Mr. Johns, based in Denver, has provided local
information regarding specific holdings in the Fund's portfolio. The portfolio
manager has also been available to provide the brokerage and financial planner
community with information generally about the Fund's portfolio, with which that
community can assess the Fund as an investment vehicle for residents of Colorado
in light of prevailing interest rates and local economic conditions.
The Board considered that the Manager had provided all services the Board
deemed necessary or appropriate, including the specific services that the Board
has determined are required for the Fund, given that its purpose is to provide
shareholders with as high a level of current income exempt from Colorado state
and regular Federal income taxes as is consistent with preservation of capital.
The Board concluded that the services provided were appropriate and
satisfactory and that the Fund would be well served if they continued.
Evaluation of this factor weighed in favor of renewal of the Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND.
The Board determined it appropriate to consider the Fund's performance.
For the calendar year ended December 31, 2004 the Fund's average annual rate of
return for Class A Shares was 2.57%; the net asset value of Class A Shares was
$10.84 at the beginning of the year and $10.68 at the end. Performance for the
other classes was similar.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors and with national averages. It
was noted that the materials provided by the Manager indicated that compared to
the five largest competitive Colorado funds, the Fund has had investment
performance that is somewhat below that of its peers for one-, five- and
ten-year periods, with lower rates of return explained by the Fund's generally
higher-quality portfolio and generally shorter average maturities. The Board
considered these results to be consistent with the purposes of the Fund.
The Board concluded that the performance of the Fund, in light of market
conditions, was appropriate and satisfactory. Evaluation of this factor
indicated to the Trustees that renewal of the Advisory Agreement would be
appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUND.
The information provided in connection with renewal contained expense data
for the Fund and its local competitors as well as data for all single-state
tax-free municipal bond funds nationwide, including data for all such front-end
load funds of a comparable asset size. The materials also showed the
profitability to the Manager of its services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
appropriate as compared to those being paid by its local competitors and
single-state tax-free municipal bond funds nationwide.
The Board, having considered that the foregoing indicated that the Fund
was being well managed and that its fees were appropriate, further concluded
that the costs of the services and the profitability to the Manager and the
Distributor did not argue against approval of the fees to be paid under the
Advisory Agreement.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS.
Data provided to the Trustees showed that the Fund's asset size had been
generally increasing in recent years. However, they concluded that the uncertain
interest rate environment might make it difficult to achieve substantial growth
in assets in the near future. The Trustees also noted that the materials
indicate that the Fund's fees are already generally lower than those of its
peers, including those with breakpoints. Evaluation of this factor indicated to
the Board that the Advisory Agreement should be renewed without addition of
breakpoints at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATES FROM THE
RELATIONSHIP WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliates, by providing services to a number of funds including
the Fund, were able to spread costs as they would otherwise be unable to do. The
Board noted that while that produces efficiencies and increased profitability
for the Manager and its affiliates, it also makes their services available to
the Fund at favorable levels of quality and cost which are more advantageous to
the Fund than would otherwise have been possible.
SUB-ADVISORY AGREEMENT
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE SUB-ADVISER.
The Sub-Adviser (and previously, the former sub-adviser) has provided
local management of the Fund's portfolio. The Trustees noted that the
Sub-Adviser has employed as portfolio manager for the Fund the individual who
served in that capacity with the former sub-adviser, Mr. Christopher Johns, and
had established facilities for credit analysis of the Fund's portfolio
securities. Mr. Johns, based in Denver, has provided local information regarding
specific holdings in the Fund's portfolio. The portfolio manager has also been
available to provide the brokerage and financial planner community with
information generally about the Fund's portfolio, with which that community can
assess the Fund as an investment vehicle for residents of Colorado in light of
prevailing interest rates and local economic conditions.
The Board considered that the Sub-Adviser had provided all services the
Board deemed necessary or appropriate, including the specific services that the
Board has determined are required for the Fund, given that its purpose is to
provide shareholders with as high a level of current income exempt from Colorado
state and regular Federal income taxes as is consistent with preservation of
capital.
The Board concluded that the services provided were appropriate and
satisfactory and that the Fund would be well served if they continued.
Evaluation of this factor weighed in favor of renewal of the Sub-Advisory
Agreement would be appropriate.
THE INVESTMENT PERFORMANCE OF THE FUND.
The Board determined it appropriate to consider the Fund's performance.
For the calendar year ended December 31, 2004 the Fund's average annual rate of
return for Class A Shares was 2.57%; the net asset value of Class A Shares was
$10.84 at the beginning of the year and $10.68 at the end. Performance for the
other classes were similar.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors and with national averages. It
was noted that the materials provided by the Manager indicated that compared to
the five largest competitive Colorado funds, the Fund has had investment
performance that is somewhat below that of its peers for one-, five- and
ten-year periods, with lower rates of return explained by the Fund's generally
higher-quality portfolio and generally shorter average maturities. The Board
considered these results to be consistent with the purposes of the Fund.
The Board concluded that the performance of the Fund, in light of market
conditions, was appropriate and satisfactory. Evaluation of this factor
indicated to the Trustees that renewal of the Sub-Advisory Agreement.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUND.
The information provided in connection with renewal contained expense data
for the Fund and its local competitors as well as data for all single-state
tax-free municipal bond funds nationwide, including data for all such front-end
load funds of a comparable asset size. The materials also showed the
profitability to the Sub-Adviser and former sub-adviser of their services to the
Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
appropriate as compared to those being paid by its local competitors and
single-state tax-free municipal bond funds nationwide.
The Board, having considered that the foregoing indicated that the Fund
was being well managed and that its fees were appropriate, further concluded
that the costs of the services and the profitability to the Sub-Adviser did not
argue against approval of the fees to be paid under the Advisory Agreement.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS.
Data provided to the Trustees showed that the Fund's asset size had been
generally increasing in recent years. However, they concluded that the uncertain
interest rate environment might make it difficult to achieve substantial growth
in assets in the near future. The Trustees also noted that the materials
indicate that the Fund's fees are already generally lower than those of its
peers, including those with breakpoints. Evaluation of this factor indicated to
the Board that the Sub-Advisory Agreement should be renewed without addition of
breakpoints at this time.
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquilasm Group of Funds
produce is automatically sent to you and all other shareholders. Specifically,
you are routinely sent the entire list of portfolio securities of your Fund
twice a year in the semi-annual and annual reports you receive. Additionally, we
prepare, and have available, portfolio listings at the end of each quarter.
Whenever you may be interested in seeing a listing of your Fund's portfolio
other than in your shareholder reports, please check our website
(www.aquilafunds.com) or call us at 1-800-437-1020.
The Fund additionally files a complete list of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms
N-Q are available free of charge on the SEC website at www.sec.gov. You may also
review or, for a fee, copy the forms at the SEC's Public Reference Room in
Washington, DC or by calling 800-SEC-0330.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROXY VOTING RECORD (UNAUDITED)
The Fund does not invest in equity securities. Accordingly, there were no
matters relating to a portfolio security considered at any shareholder meeting
held during the 12 months ended June 30, 2005 with respect to which the Fund was
entitled to vote. Applicable regulations require us to inform you that the
foregoing proxy voting information is available on the SEC website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Tax-Free Fund of Colorado (the "Fund") was
held on March 10, 2005. The holders of shares representing 82% of the total net
asset value of the shares entitled to vote were present in person or by proxy.
At the meeting, the following matters were voted upon and approved by the
shareholders (the resulting votes are presented below).
1. To elect Trustees.
Number of votes:
TRUSTEE FOR WITHHELD
------- --- --------
Tucker Hart Adams 19,780,604 88,163
Thomas A. Christopher 19,794,372 74,394
Gary C. Cornia 19,785,575 83,192
Diana P. Herrmann 19,799,482 69,285
John C. Lucking 19,803,271 65,496
Anne J. Mills 19,801,141 67,626
J. William Weeks 19,794,115 74,652
2. To ratify the selection of KPMG LLP as the Trust's independent registered
public accounting firm.
Number of Votes:
FOR AGAINST ABSTAIN
--- ------- -------
19,695,877 75,027 97,862
3. Action on proposed Sub-Advisory Agreement.
FOR AGAINST ABSTAIN
--- ------- -------
19,444,611 113,054 311,101
(THIS PAGE INTENTIONALLY LEFT BLANK)
FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
AQUILA MANAGEMENT CORPORATION
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
KIRKPATRICK PETTIS CAPITAL
MANAGEMENT, INC.
1600 Broadway, Suite 1100
Denver, Colorado 80202
BOARD OF TRUSTEES
Anne J. Mills, Chair
Tucker Hart Adams
Thomas A. Christopher
Gary C. Cornia
Diana P. Herrmann
John C. Lucking
J. William Weeks
OFFICERS
Diana P. Herrmann, President
Stephen J. Caridi, Senior Vice President
Emily T. Rae, Vice President
Robert W. Anderson, Chief Compliance Officer
Joseph P. DiMaggio, Chief Financial Officer and Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
760 Moore Road
King of Prussia, Pennsylvania 19406
Further information is contained in the Prospectus, which must precede or
accompany this report.
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
905: Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940) as of a date within 90 days of the fling of this report, the registrant's
chief financial and executive officers have concluded that the disclosure
controls and procedures of the registrant are appropriately designed to ensure
that information required to be disclosed in the registrant's reports that are
filed under the Securities Exchange Act of 1934 are accumulated and communicated
to registrant's management, including its principal executive officer(s) and
principal financial officer(s), to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms adopted by the Securities and Exchange
Commission.
(b) There have been no significant changes in registrant's internal controls or
in other factors that could significantly affect registrant's internal controls
subsequent to the date of the most recent evaluation, including no significant
deficiencies or material weaknesses that required corrective action.
ITEM 10. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act
of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
TAX-FREE FUND OF COLORADO
By: /s/ Diana P. Herrmann
- - ---------------------------------
President and Trustee
September 9, 2005
By: /s/ Joseph P. DiMaggio
- - -----------------------------------
Chief Financial Officer and Treasurer
September 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Diana P. Herrmann
- - ---------------------------------
Diana P. Herrmann
President and Trustee
September 9, 2005
By: /s/ Joseph P. DiMaggio
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Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 9, 2005
TAX-FREE FUND OF COLORADO
EXHIBIT INDEX
(a) (2) Certifications of principal executive officer
and principal financial officer as required by Rule 30a-2(a)
under the Investment Company Act of 1940.
(b) Certification of chief executive officer and chief financial
officer as required by Rule 30a-2(b) of the Investment Company Act
of 1940.