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: 06/30/08
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2008
[LOGO OF TAX-FREE FUND OF COLORADO: A SQUARE WITH
SILLHOUETTES 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 GROUP OF FUNDS(SM)
[LOGO OF TAX-FREE FUND OF COLORADO:
A SQUARE WITH SILHOUETTES OF TWO
MOUNTAINS AND A RISING SUN]
SERVING COLORADO INVESTORS FOR MORE THAN TWO DECADES
TAX-FREE FUND OF COLORADO
"A MORE PREDICTABLE RIDE"
August, 2008
Dear Fellow Shareholder:
If you've read any of our previous shareholder communications, you know
that we try to skip the financial jargon and speak in terms with which we
believe the average person can relate and understand.
The recent movements in the stock market got us to thinking about how risk
tolerance mirrors choosing rides at an amusement park.
In our younger days, we always enjoyed the thrill of roller coasters. If
you're like us, you can vividly remember holding your breath with anticipation
as you climbed and climbed to the top, never knowing just when you would finally
get there. Then, just as you began to relax, the roller coaster would begin its
decline. The ride to the bottom seemed like it would never end as you laughed,
screamed, and implored the heavens to let you make it through alive.
Much of what has transpired in the stock market over the last year or so
has reminded us of our younger roller coaster riding days. Of course, the ride
to the "top" of the market is always exhilarating. But, as we've matured, we've
come to realize that roller coasters have lost some of their allure.
We no longer find adrenaline-pumping adventures so attractive. While you
can be brought to dizzying heights, some dramatic lows are also inevitable. For
those of us who don't have the stomach for this type of volatility, especially
with our investment money, a more stable alternative may be the ticket.
We like to think of investing in a tax-free municipal bond fund, such as
Tax-Free Fund of Colorado, as more like riding the swings at a county fair.
There is definitely some up and down movement, but you usually don't go quite
that far. In general, you know what to expect next and the ride is fairly
pleasant.
NOT A PART OF THE SEMI-ANNUAL REPORT
Of course, we believe that there is a place in everyone's life for roller
coasters. But, as one matures, it might be prudent to have the more stable
predictable swings begin to play a larger role. After all, what good are highs
if they are often followed by lows?
Sincerely,
[PHOTO OMITTED]
/s/ Lacy B. Herrmann /s/ Diana P. Herrmann
Lacy B. Herrmann Diana P. Herrmann
Founder and Chairman Emeritus President
NOT A PART OF THE SEMI-ANNUAL REPORT
TAX-FREE FUND OF COLORADO
SCHEDULE OF INVESTMENTS
JUNE 30, 2008 (UNAUDITED)
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (28.9%) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
CITY & COUNTY (1.0%)
Denver, Colorado City & County Art Museum
$ 2,000,000 5.000%, 08/01/15 ........................................ Aa1/AA+ $ 2,102,160
-------------
Total City & County ..................................... 2,102,160
-------------
METROPOLITAN DISTRICT (7.5%)
Arapahoe, Colorado Park & Recreation District
1,070,000 5.000%, 12/01/17 FGIC Insured ........................... A3/NR 1,102,367
Aspen Grove Business Improvement District,
Colorado Refunding
1,150,000 4.750%, 12/01/21Radian Insured .......................... NR/A 1,108,600
Fiddlers Business Improvement District Greenwood
Village, Colorado Refunding & Capital
Improvement-Senior Lien-Series 1
1,000,000 5.000%, 12/01/22 ACA Insured ............................ NR/NR* 905,270
Foothills, Colorado Park & Recreational District
1,310,000 5.000%, 12/01/12 FSA Insured ............................ Aaa/NR 1,382,115
1,325,000 5.000%, 12/01/13 FSA Insured ............................ Aaa/NR 1,392,257
Fraser Valley Metropolitan Recreational District,
Colorado
1,375,000 5.000%, 12/01/25 ........................................ NR/A 1,376,980
Highlands Ranch, Colorado Metropolitan District #1,
Refunding
1,000,000 5.750%, 09/01/08 AMBAC Insured .......................... Aaa/AA 1,006,040
1,730,000 5.750%, 09/01/09 AMBAC Insured .......................... Aaa/AA 1,799,356
Hyland Hills Metro Park & Recreation District,
Colorado Special Revenue Refunding &
Improvement
1,275,000 4.375%, 12/15/26 ACA Insured ............................ NR/NR* 989,629
Lincoln Park, Colorado Metropolitan District,
Refunding & Improvement
1,535,000 5.625%, 12/01/20 ........................................ NR/BBB- 1,563,536
North Metro Fire Rescue District, Colorado
1,200,000 4.625%, 12/01/20 AMBAC Insured .......................... Aaa/AA 1,240,080
South Suburban, Colorado Park & Recreational District
1,365,000 5.125%, 12/15/09 FGIC Insured ........................... Aa3/NR 1,379,305
-------------
Total Metropolitan District ............................. 15,245,535
-------------
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
SCHOOL DISTRICTS (20.4%)
Adams County, Colorado School District #12
(Adams 12 Five Star Schools)
$ 1,170,000 5.000%, 12/15/12 MBIA Insured ........................... Aaa/AAA $ 1,229,272
830,000 5.000%, 12/15/12 MBIA Insured Pre-Refunded .............. Aaa/AAA 878,696
Arapahoe County, Colorado Cherry Creek School
District #5
1,000,000 5.500%, 12/15/08 ........................................ Aa2/AA 1,016,490
2,760,000 5.500%, 12/15/11 Pre-Refunded ........................... Aa2/AA 2,881,578
2,750,000 5.500%, 12/15/12 Pre-Refunded ........................... Aa2/AA 2,871,137
Clear Creek, Colorado School District
1,000,000 5.000%, 12/01/16 FSA Insured ............................ Aaa/AAA 1,049,520
Douglas & Elbert Counties, Colorado School
District #Re-1, Series 1992
2,000,000 5.250%, 12/15/11 FGIC Insured Pre-Refunded .............. Aa2/AA- 2,082,480
El Paso County, Colorado School District #11
Colorado Springs
1,330,000 6.250%, 12/01/08 ........................................ Aa3/AA- 1,353,102
El Paso County, Colorado School District #20
1,000,000 6.150%, 12/15/08 MBIA Insured ........................... Aa3/AA 1,018,710
1,500,000 5.000%, 12/15/14 FGIC Insured ........................... Aa3/NR 1,582,455
El Paso County, Colorado School District #38
1,110,000 5.700%, 12/01/12 Pre-Refunded ........................... Aa3/NR 1,184,514
El Paso County, Colorado School District #49
1,500,000 5.500%, 12/01/13 FSA Insured Pre-Refunded ............... Aaa/AAA 1,637,955
1,000,000 5.250%, 12/01/14 FGIC Insured Pre-Refunded .............. Aa3/AA- 1,069,390
Garfield County, Colorado School District
1,250,000 5.000%, 12/01/17 FSA Insured ............................ Aaa/NR 1,305,700
Jefferson County, Colorado School District #R-1
3,000,000 5.500%, 12/15/09 FGIC Insured Pre-Refunded .............. Aa3/AA- 3,079,920
1,000,000 5.500%, 12/15/13 FGIC Insured Pre-Refunded .............. Aa3/AA- 1,026,640
La Plata County, Colorado School District #9
1,500,000 5.000%, 11/01/18 MBIA Insured Pre-Refunded .............. Aa3/NR 1,601,985
Larimer County, Colorado School District #R1
Poudre Series A Refunding
2,100,000 5.250%, 12/15/11 ........................................ Aa3/NR 2,119,299
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
SCHOOL DISTRICTS (CONTINUED)
Pueblo County, Colorado School District #70
$ 1,000,000 5.000%, 12/01/15 FGIC Insured ........................... A2/AA- $ 1,034,140
3,440,000 5.000%, 12/01/16 FGIC Insured ........................... A2/AA- 3,546,330
Teller County, Colorado School District #2
Woodland Park
1,265,000 5.000%, 12/01/17 MBIA Insured ........................... Aaa/AA 1,347,655
Weld and Adams Counties, Colorado School
District #3J
1,000,000 5.500%, 12/15/10 AMBAC Insured Pre-Refunded ............. Aaa/AA 1,044,780
Weld County, Colorado School District #2
1,315,000 5.000%, 12/01/15 FSA Insured ............................ Aaa/AAA 1,388,324
Weld County, Colorado School District #6
1,195,000 5.000%, 12/01/15 FSA Insured Pre-Refunded ............... Aaa/AAA 1,268,325
Weld County, Colorado School District #8
1,115,000 5.000%, 12/01/15 FSA Insured Pre-Refunded ............... Aaa/AAA 1,192,191
1,385,000 5.250%, 12/01/17 FSA Insured Pre-Refunded ............... Aaa/AAA 1,494,983
-------------
Total School Districts .................................. 41,305,571
-------------
Total General Obligation Bonds .......................... 58,653,266
-------------
REVENUE BONDS (71.0%)
ELECTRIC (2.0%)
Colorado Springs, Colorado Utilities Revenue
1,660,000 5.000%, 11/15/17 ........................................ Aa2/AA 1,736,659
Colorado Springs, Colorado Utilities Revenue
Subordinated Lien Improvement Series A
1,000,000 5.000%, 11/15/17 ........................................ Aa2/AA 1,053,250
Colorado Springs, Colorado Utilities Revenue
Subordinated Lien Improvement Series B
1,160,000 5.000%, 11/15/23 ........................................ Aa2/AA 1,196,273
-------------
Total Electric .......................................... 3,986,182
-------------
HIGHER EDUCATION (13.7%)
Boulder, Colorado Development Revenue UCAR
1,760,000 5.000%, 09/01/16 MBIA Insured ........................... A2/AA 1,838,426
1,880,000 5.000%, 09/01/27 MBIA Insured ........................... A2/AA 1,904,515
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
HIGHER EDUCATION (CONTINUED)
Colorado Educational & Cultural Facility Authority,
Johnson & Wales
$ 860,000 5.000%, 04/01/18 XLCA Insured ........................... A3/BBB- $ 878,129
Colorado Educational & Cultural Facility Authority,
Regis University Project
1,695,000 5.000%, 06/01/24 Radian Insured ......................... Aa3/A 1,644,252
Colorado Educational & Cultural Facility Authority,
University of Colorado Foundation Project
2,110,000 5.000%, 07/01/17 AMBAC Insured .......................... Aaa/AA 2,247,277
1,865,000 5.375%, 07/01/18 AMBAC Insured .......................... Aaa/AA 2,012,335
Colorado Mountain Jr. College District Student
Housing Facilities Enterprise Revenue
1,000,000 4.500%, 06/01/18 MBIA Insured ........................... A2/AA 1,014,040
Colorado State Board of Governors University
Enterprise System, Series A, Refunding
and Improvement
425,000 5.000%, 03/01/17 Prerefunded, ETM ....................... Aaa/NR 454,444
Colorado State Board of Governors University
Enterprise System, Series A, Refunding
and Improvement
1,105,000 5.000%, 03/01/17 AMBAC Insured .......................... Aaa/NR 1,152,935
Colorado State COP UCDHSC Fitzsimons Academic
Projects Series B
3,135,000 5.250%, 11/01/25 MBIA Insured ........................... A2/AA 3,236,699
University of Colorado Enterprise System
1,000,000 5.000%, 06/01/11 ........................................ Aa3/AA- 1,051,900
2,325,000 5.000%, 06/01/15 AMBAC Insured Pre-Refunded ............. Aaa/AA 2,464,477
1,735,000 5.000%, 06/01/16 Pre-Refunded ........................... Aa3/AA- 1,853,067
1,000,000 5.250%, 06/01/17 FGIC Insured Pre-Refunded .............. Aa3/AA- 1,079,240
University of Colorado Enterprise System Revenue,
Refunding & Improvement
3,350,000 5.000%, 06/01/24 FGIC Insured ........................... Aa3/AA- 3,426,447
University of Northern Colorado Auxiliary Facilities
1,390,000 5.000%, 06/01/15 AMBAC Insured .......................... Aaa/AA 1,430,880
-------------
Total Higher Education .................................. 27,689,063
-------------
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
HOSPITAL (8.3%)
Colorado Health Facility Authority Hospital Revenue,
Valley View Hospital Association, Refunding
$ 1,000,000 5.500%, 05/15/28 ........................................ NR/BBB $ 980,980
Colorado Health Facility Authority Hospital Revenue,
Catholic Health
1,000,000 4.750%, 09/01/25 FSA Insured ............................ Aaa/AAA 980,390
Colorado Health Facility Authority Hospital Revenue,
Catholic Health Initiatives Series A
1,500,000 5.000%, 09/01/21 ........................................ Aa2/AA 1,535,220
Colorado Health Facility Authority Hospital Revenue,
Poudre Valley Health Care Series F Refunding
2,800,000 5.000%, 03/01/25 ........................................ Baa1/BBB+ 2,668,596
Colorado Health Facility Authority Hospital Revenue,
Sisters of Charity - Health Care
1,000,000 6.250%, 05/15/09 AMBAC Insured, Pre-Refunded ............ Aaa/AA 1,035,430
Colorado Health Facility Authority Hospital Revenue,
Sisters of Charity - Leavenworth
1,000,000 5.500%, 12/01/08 MBIA Insured ........................... Aa2/AA 1,011,410
1,500,000 5.250%, 12/01/10 MBIA Insured ........................... Aa2/AA 1,516,950
Colorado Health Facility Authority Hospital Revenue,
Evangelical Lutheran Project Refunding
1,000,000 5.250%, 06/01/21 ........................................ A3/A- 1,003,160
2,000,000 5.250%, 06/01/24 ........................................ A3/A- 1,959,780
Denver, Colorado Health & Hospital Authority
Healthcare, Revenue Series A Refunding
2,000,000 5.000%, 12/01/18 ........................................ NR/BBB 1,996,700
1,230,000 5.000%, 12/01/20 ........................................ NR/BBB 1,205,449
Park Hospital District Larimer County, Colorado
Limited Tax Revenue
1,010,000 4.500%, 01/01/21 Assured Guaranty Insured ............... Aaa/AAA 1,018,959
-------------
Total Hospital .......................................... 16,913,024
-------------
HOUSING (1.3%)
Colorado Housing & Finance Authority
350,000 6.050%, 10/01/16 Series 1999A3 .......................... Aa2/NR 353,549
10,000 6.125%, 11/01/23 Series 1998D3 .......................... Aa2/NR 10,030
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
HOUSING (CONTINUED)
Colorado Housing & Finance Authority, Single
Family Program Refunding
$ 165,000 5.000%, 08/01/13 Series 2001 Series B ................... A1/A+ $ 163,819
Colorado Housing Finance Authority, Single
Family Mortgage
5,000 5.625%, 06/01/10 Series 1995D ........................... Aaa/NR 5,052
5,000 5.750%, 11/01/10 Series 1996A ........................... Aaa/NR 5,011
Colorado Housing Finance Authority, Single
Family Mortgage
35,000 5.700%, 10/01/22 Series 2000C3 .......................... Aa2/AA 35,126
Colorado Housing Finance Authority, Single
Family Mortgage Class III Series A-5
2,000,000 5.000%, 11/01/34 ........................................ A1/A+ 1,988,480
Colorado Housing Finance Authority, Single
Family Mortgage Subordinated
75,000 5.400%, 10/01/12 Series 2000D ........................... A1/A+ 75,482
Denver, Colorado Single Family Mortgage Revenue
85,000 5.000%, 11/01/15 GNMA Insured ........................... NR/AAA 85,468
-------------
Total Housing ........................................... 2,722,017
-------------
LEASE (12.0%)
Adams 12 Five Star Schools COP
1,770,000 4.625%, 12/01/24 ........................................ A1/A+ 1,719,360
Aurora, Colorado COP
2,105,000 5.250%, 12/01/13 AMBAC Insured Pre-Refunded ............. Aaa/AA 2,226,901
Broomfield, Colorado COP
2,500,000 5.100%, 12/01/12 AMBAC Insured .......................... Aa3/NR 2,565,425
Colorado Educational & Cultural Facilities Authority
Revenue, Ave Maria School Project Refunding
1,000,000 4.850%, 12/01/25 Radian Insured ......................... Aa3/A 937,760
Denver, Colorado City and County COP (Roslyn Fire)
1,835,000 5.000%, 12/01/15 ........................................ Aa2/AA 1,913,116
El Paso County, Colorado COP
1,100,000 5.250%, 12/01/09 MBIA Insured ........................... A1/AA 1,136,542
El Paso County, Colorado COP (Judicial Building)
1,760,000 5.000%, 12/01/16 AMBAC Insured Pre-Refunded ............. Aaa/AA 1,863,294
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
LEASE (CONTINUED)
El Paso County, Colorado COP (Pikes Peak Regional
Development Authority)
$ 1,925,000 5.000%, 12/01/18 AMBAC Insured .......................... Aaa/AA $ 2,022,540
Fort Collins, Colorado Lease COP Series A
3,020,000 4.750%, 06/01/18 AMBAC Insured .......................... Aaa/NR 3,114,013
Fremont County, Colorado COP Refunding &
Improvement Series A
2,075,000 5.000%, 12/15/18 MBIA Insured ........................... A2/AA 2,149,949
Lakewood, Colorado COP
1,440,000 5.200%, 12/01/13 AMBAC Insured Pre-Refunded ............. Aaa/AA 1,521,720
Northern Colorado Water Conservancy District COP
1,000,000 5.000%, 10/01/15 MBIA Insured ........................... A2/AA 1,047,770
Rangeview Library District Project Colorado COP
1,000,000 5.000%, 12/15/28 AGC Insured ............................ Aaa/AAA 1,017,080
Westminster, Colorado COP
1,055,000 5.350%, 09/01/11 MBIA Insured Pre-Refunded .............. Aaa/AAA 1,101,399
-------------
Total Lease ............................................. 24,336,869
-------------
SALES TAX (13.7%)
Boulder, Colorado
1,045,000 5.250%, 08/15/10 AMBAC Insured .......................... Aaa/AA 1,074,438
Boulder, Colorado Open Space Acquisition
1,250,000 5.500%, 08/15/12 ........................................ Aa1/AA+ 1,322,025
Boulder, Colorado Open Space Capital Improvement
3,065,000 5.000%, 07/15/16 MBIA Insured ........................... Aa2/AA 3,204,795
1,630,000 5.000%, 07/15/17 MBIA Insured ........................... Aa2/AA 1,696,911
Boulder, Colorado Sales & Use Tax Open Space
Series A
1,000,000 5.450%, 12/15/12 FGIC Insured Pre-Refunded .............. Baa3/AA- 1,053,000
Colorado Springs, Colorado Sales & Use Tax
Revenue Service Sales
1,320,000 5.000%, 12/01/12 ........................................ A1/AA+ 1,348,459
Denver, Colorado City & County Excise Tax Revenue
2,000,000 5.375%, 09/01/10 FSA Insured ............................ Aaa/AAA 2,063,000
1,000,000 5.000%, 09/01/11 FSA Insured Pre-Refunded ............... Aaa/AAA 1,049,700
2,260,000 5.000%, 09/01/12 FSA Insured Pre-Refunded ............... Aaa/AAA 2,372,322
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
SALES TAX (CONTINUED)
Douglas County, Colorado Sales & Use Tax Open
Space Revenue
$ 1,780,000 5.500%, 10/15/12 FSA Insured ............................ Aaa/AAA $ 1,875,800
Golden, Colorado Sales & Use Tax
1,265,000 5.000%, 12/01/12 AMBAC Insured .......................... Aaa/AA 1,324,227
Jefferson County, Colorado Open Space Sales Tax
1,600,000 5.000%, 11/01/13 AMBAC Insured .......................... Aaa/AA 1,671,632
1,080,000 5.000%, 11/01/14 AMBAC Insured .......................... Aaa/AA 1,123,524
Lakewood, Colorado Sales & Use Tax Revenue
1,040,000 5.250%, 12/01/09 ........................................ NR/AAA 1,078,948
Larimer County, Colorado Sales Tax Revenue Bond
1,000,000 5.500%, 12/15/12 AMBAC Insured .......................... Aaa/AA 1,064,710
Longmont, Colorado Sales & Use Tax
1,875,000 5.500%, 11/15/14 Pre-Refunded ........................... NR/AA+ 1,992,300
Park Meadows Business Implementation District,
Colorado Shared Sales Tax Revenue Bond
1,500,000 5.300%, 12/01/27 ........................................ NR/NR* 1,411,560
Thornton, Colorado Sales Tax
1,000,000 5.000%, 09/01/14 FSA Insured ............................ Aaa/AAA 1,042,950
-------------
Total Sales Tax ......................................... 27,770,301
-------------
TRANSPORTATION (7.7%)
Colorado Department of Transportation - Tax
Revenue Anticipation Note
1,000,000 6.000%, 06/15/13 AMBAC Insured Pre-Refunded ............. Aaa/AA 1,066,410
E-470 Public Highway Authority Colorado
Revenue Series D2
4,000,000 5.000%, 09/01/39 MBIA Insured ........................... A2/AA 4,010,560
Northwest Parkway, Colorado Public Highway
Authority Series A
2,515,000 5.150%, 06/15/14 AMBAC Insured .......................... Aaa/AA 2,672,791
Regional Transportation District, Colorado COP
1,190,000 5.000%, 06/01/15 AMBAC Insured .......................... Aaa/AA 1,231,781
Regional Transportation District, Colorado COP,
Series A
3,500,000 5.000%, 06/01/25 AMBAC Insured .......................... Aaa/AA 3,536,505
Regional Transportation District, Colorado Sales
Tax Revenue
2,000,000 5.000%, 11/01/13 FGIC Insured ........................... Aa3/AAA 2,082,120
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
TRANSPORTATION (CONTINUED)
Walker Field, Colorado Public Airport Authority
Airport Revenue
$ 1,000,000 5.000%, 12/01/22 ........................................ Baa3/NR $ 910,680
-------------
Total Transportation .................................... 15,510,847
-------------
WATER & SEWER (11.2%)
Boulder, Colorado Water & Sewer Revenue
1,000,000 5.400%, 12/01/14 Pre-Refunded ........................... Aa2/AA+ 1,061,390
Broomfield, Colorado Sewer and Waste Water Revenue
1,985,000 5.000%, 12/01/15 AMBAC Insured .......................... Aaa/NR 2,062,852
1,000,000 5.000%, 12/01/16 AMBAC Insured .......................... Aaa/NR 1,035,130
Broomfield, Colorado Water Activity Enterprise
1,500,000 5.300%, 12/01/12 MBIA Insured ........................... A2/NR 1,588,545
1,730,000 5.250%, 12/01/13 MBIA Insured ........................... A2/NR 1,821,033
Colorado Clean Water Revenue
830,000 5.375%, 09/01/10 Pre-Refunded ........................... Aaa/AAA 834,855
170,000 5.375%, 09/01/10 Un-Refunded portion .................... Aaa/AAA 170,746
Colorado Metro Wastewater Reclamation District
1,270,000 5.250%, 04/01/09 ........................................ Aa2/AA+ 1,272,070
Colorado Water Resource & Power Development
Authority
2,675,000 5.000%, 09/01/16 MBIA Insured ........................... A2/AA 2,839,165
1,855,000 5.000%, 09/01/17 MBIA Insured ........................... A2/AA 1,956,357
Colorado Water Resource & Power Development
Authority Clean Water Revenue Series A
1,375,000 5.000%, 09/01/12 Pre-Refunded ........................... Aaa/AAA 1,455,589
260,000 5.000%, 09/01/12 Un-Refunded portion .................... Aaa/AAA 273,874
Colorado Water Resource & Power Development
Authority Clean Water Revenue Series B
820,000 5.500%, 09/01/09 Pre-Refunded ........................... Aaa/AAA 824,961
180,000 5.500%, 09/01/09 Un-Refunded portion .................... Aaa/AAA 180,889
Colorado Water Resource & Power Development
Authority Small Water Resource Series A
600,000 5.550%, 11/01/13 FGIC Insured Un-Refunded portion ....... Baa3/NR 624,912
400,000 5.550%, 11/01/13 FGIC Insured Pre-Refunded .............. Baa3/NR 424,328
Denver, Colorado City and County Wastewater Revenue
1,560,000 5.000%, 11/01/15 FGIC Insured ........................... Aa3/AA 1,635,878
Pueblo, Colorado Board Water Works
1,000,000 5.500%, 11/01/10 FSA Insured ............................ Aaa/AAA 1,060,860
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- -------- -------------
WATER & SEWER (CONTINUED)
Ute, Colorado Water Conservancy District
$ 1,570,000 5.500%, 06/15/12 MBIA Insured ........................... Aaa/AA $ 1,641,341
-------------
Total Water & Sewer ..................................... 22,764,775
-------------
MISCELLANEOUS REVENUE (1.1%)
Denver, Colorado City & County Helen Bonfils Project
1,205,000 5.875%, 12/01/09 ........................................ NR/A+ 1,206,928
Westminster, Colorado Golf Course Activity
1,000,000 5.400%, 12/01/13 Radian Group, Inc. Insured ............. NR/A 1,014,680
-------------
Total Miscellaneous Revenue ............................. 2,221,608
-------------
Total Revenue Bonds ..................................... 143,914,686
-------------
Total Investments (cost $199,019,495 - note 4) .......... 99.9% 202,567,952
Other assets less liabilities ........................... 0.1 210,420
------ -------------
100.0% $202,778,372
====== ============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING PORTFOLIO+
---------------------------------------- ----------
Aaa of Moody's or AAA of S&P ....................... 40.6%
Aa of Moody's or AA of S&P ......................... 44.2
A of Moody's or S&P ................................ 8.4
Baa of Moody's or BBB of S&P ....................... 5.1
Not rated* ......................................... 1.7
------
100.0%
======
+ Calculated using the highest rating of the two rating
services.
* Any security not rated (NR) by either credit rating service
must be determined by the Investment Sub-Adviser to have
sufficient quality to be ranked in the top four ratings if a
credit rating were to be assigned by a rating service.
PORTFOLIO ABBREVIATIONS:
--------------------------------------------------------------------
ACA - American Capital Assurance Financial Guaranty Corp.
AGC - Assured Guaranty Corp.
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificates of Participation
ETM - Escrowed to Maturity
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance
GNMA - Government National Mortgage Association
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, 2008 (UNAUDITED)
ASSETS
Investments at value (cost $199,019,495) ........................................... $ 202,567,952
Interest receivable ................................................................ 1,509,245
Receivable for Fund shares sold .................................................... 150,501
Other assets ....................................................................... 16,258
-------------
Total assets ....................................................................... 204,243,956
-------------
LIABILITIES
Cash overdraft ..................................................................... 1,083,791
Dividends payable .................................................................. 176,147
Management fee payable ............................................................. 83,937
Payable for Fund shares redeemed ................................................... 59,612
Distribution and service fees payable .............................................. 15,565
Accrued expenses ................................................................... 46,532
-------------
Total liabilities .................................................................. 1,465,584
-------------
NET ASSETS ............................................................................ $ 202,778,372
=============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 200,214
Additional paid-in capital ......................................................... 199,580,236
Net unrealized appreciation on investments (note 4) ................................ 3,548,457
Accumulated net realized loss on investments ....................................... (408,402)
Distributions in excess of net investment income ................................... (142,133)
-------------
$ 202,778,372
=============
CLASS A
Net Assets ......................................................................... $ 185,327,854
=============
Capital shares outstanding ......................................................... 18,298,427
=============
Net asset value and redemption price per share ..................................... $ 10.13
=============
Offering price per share (100/96 of $10.13 adjusted to nearest cent) ............... $ 10.55
=============
CLASS C
Net Assets ......................................................................... $ 9,738,572
=============
Capital shares outstanding ......................................................... 963,396
=============
Net asset value and offering price per share ....................................... $ 10.11
=============
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) ...................................... $ 10.11*
=============
CLASS Y
Net Assets ......................................................................... $ 7,711,946
=============
Capital shares outstanding ......................................................... 759,574
=============
Net asset value, offering and redemption price per share ........................... $ 10.15
=============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
INVESTMENT INCOME:
Interest income ...................................... $ 4,682,074
EXPENSES:
Management fee (note 3) .............................. $ 507,784
Distribution and service fees (note 3) ............... 95,507
Transfer and shareholder servicing agent fees ........ 84,061
Trustees' fees and expenses (note 8) ................. 49,835
Legal fees (note 3) .................................. 33,463
Shareholders' reports and proxy statements ........... 26,019
Custodian fees (note 6) .............................. 11,948
Registration fees and dues ........................... 8,904
Auditing and tax fees ................................ 8,679
Insurance ............................................ 4,505
Chief compliance officer (note 3) .................... 2,135
Miscellaneous ........................................ 23,580
-------------
Total expenses ....................................... 856,420
Expenses paid indirectly (note 6) .................... (7,256)
-------------
Net expenses ......................................... 849,164
-------------
Net investment income ................................ 3,832,910
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions 340,151
Change in unrealized appreciation on investments ..... (2,166,531)
-------------
Net realized and unrealized gain (loss) on investments (1,826,380)
-------------
Net change in net assets resulting from operations ... $ 2,006,530
=============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2008 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2007
---------------- -----------------
OPERATIONS:
Net investment income ..................................... $ 3,832,910 $ 7,759,543
Net realized gain (loss) from securities transactions ..... 340,151 (206,241)
Change in unrealized appreciation on investments .......... (2,166,531) (1,296,578)
------------- -------------
Change in net assets from operations .................... 2,006,530 6,256,724
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ..................................... (3,717,790) (7,672,295)
Class C Shares:
Net investment income ..................................... (148,275) (342,777)
Class Y Shares:
Net investment income ..................................... (135,060) (232,447)
------------- -------------
Change in net assets from distributions ................. (4,001,125) (8,247,519)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ................................. 14,400,977 18,965,362
Reinvested dividends and distributions .................... 2,192,615 4,637,380
Cost of shares redeemed ................................... (13,693,757) (35,203,765)
------------- -------------
Change in net assets from capital share transactions ...... 2,899,835 (11,601,023)
------------- -------------
Change in net assets .................................... 905,240 (13,591,818)
NET ASSETS:
Beginning of period ....................................... 201,873,132 215,464,950
------------- -------------
End of period* ............................................ $ 202,778,372 $ 201,873,132
============= =============
* Includes distributions in excess of net investment income
and undistributed net investment income of: ............. $ (142,133) $ 26,082
============= =============
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2008 (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 in good
faith 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) FAIR VALUE MEASUREMENTS: The Fund adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 157 (FAS 157), "Fair
Value Measurements", effective January 1, 2008. FAS 157 established a
three-tier hierarchy of inputs to establish classification of fair value
measurements for disclosure purposes. Inputs may be observable or
unobservable. Observable inputs reflect the assumptions market
participants would use in pricing the asset or liability developed based
on market data obtained from sources independent of the reporting entity.
Unobservable inputs reflect the reporting entity's own assumptions about
the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. The Fund's investments in their entirety are assigned
levels based upon the observability.
The three-tier hierarchy of inputs is summarized below:
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities.
The following is a summary of the valuation inputs, representing 100% of
the Fund's investments, used to value the Fund's net assets as of June 30,
2008:
Valuation Inputs Investments in Securities
---------------- -------------------------
Level 1 - Quoted Prices ........................ $ --
Level 2 - Other Significant Observable Inputs .. 202,567,952
Level 3 - Significant Unobservable Inputs ...... --
-------------
Total .......................................... $ 202,567,952
=============
c) 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.
d) 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.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
("FIN 48") was adopted on June 29, 2007. Management has reviewed the tax
positions for each of the open tax years (2004-2007) and has determined
that the implementation of FIN 48 did not have a material impact on the
Fund's financial statements.
e) 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.
f) 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.
g) RECLASSIFICATION OF CAPITAL ACCOUNTS: Accounting principles generally
accepted in the United States of America require that certain components
of net assets relating to permanent differences be reclassified between
financial and tax reporting. These reclassifications have no effect on net
assets or net asset value per share. On December 31, 2007 the Fund
increased undistributed net investment income by $492,495 and decreased
additional paid-in capital by $492,495 due primarily to differing book/tax
treatment of distributions and bond amortization.
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 average 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 nature and extent of the services provided by
the Manager and the Sub-Adviser are more fully defined in the Trust'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 permits 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, 2008, distribution fees on Class A Shares amounted to
$46,659 of which the Distributor retained $1,821.
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, 2008, amounted to $36,636. 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, 2008 amounted to $12,212.
The total of these payments with respect to Class C Shares amounted to $48,848
of which the Distributor retained $10,636.
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 brokerage and advisory firms ("intermediaries"), the Fund's shares are
sold primarily through the facilities of these intermediaries having offices
within Colorado, with the bulk of sales commissions inuring to such
intermediaries. For the six months ended June 30, 2008, total commissions on
sales of Class A Shares amounted to $153,615 of which the Distributor received
$30,142.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2008, the Fund incurred $32,346 of legal
fees allocable to Butzel Long PC, counsel to the Fund, for legal services in
conjunction with the Fund's ongoing operations. The Secretary of the Fund is a
shareholder of that firm.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2008, purchases of securities and
proceeds from the sales of securities aggregated $31,842,791 and $16,588,087,
respectively.
At June 30, 2008, the aggregate tax cost for all securities was
$198,990,295. At June 30, 2008 the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost amounted to
$5,046,516 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $1,468,859 for a net
unrealized appreciation of $3,577,657.
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.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED
JUNE 30, 2008 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2007
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold .... 1,075,770 $ 11,029,268 1,543,026 $ 15,781,661
Reinvested distributions ..... 203,837 2,087,772 430,513 4,399,250
Cost of shares redeemed ...... (1,096,822) (11,248,051) (3,031,187) (30,993,982)
------------ ------------ ------------ ------------
Net change ................ 182,785 1,868,989 (1,057,648) (10,813,071)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold .... 94,056 959,420 151,365 1,544,571
Reinvested distributions ..... 7,341 75,032 18,231 185,929
Cost of shares redeemed ...... (172,840) (1,768,626) (276,171) (2,819,549)
------------ ------------ ------------ ------------
Net change ................ (71,443) (734,174) (106,575) (1,089,049)
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold .... 234,685 2,412,289 159,917 1,639,130
Reinvested distributions ..... 2,909 29,811 5,095 52,201
Cost of shares redeemed ...... (65,839) (677,080) (135,641) (1,390,234)
------------ ------------ ------------ ------------
Net change ................ 171,755 1,765,020 29,371 301,097
------------ ------------ ------------ ------------
Total transactions in Fund shares 283,097 $ 2,899,835 (1,134,852) $(11,601,023)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At June 30, 2008 there were 7 Trustees, one of which is affiliated with
the Manager and is not paid any fees. The total amount of Trustees' service and
attendance fees paid during the six months ended June 30, 2008 was $37,936, 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 meetings (Audit, Nominating,
Shareholder and 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, 2008, such meeting-related expenses amounted to $11,899.
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. Net realized capital gains, if any, are distributed annually
and are taxable. Dividends and capital gains distributions are paid in
additional shares at the net asset value per share, in cash, or in a combination
of both, at the shareholder's option.
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. At
December 31, 2007, the Fund had a capital loss carryover of $742,836 of which
$245,339 expires in 2012, $296,973 expires in 2014, and $200,524 expires in
2015. 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.
As of December 31, 2007, there were post-October capital loss deferrals of
$5,717, which will be recognized in the following year.
The tax character of distributions:
Year Ended December 31,
2007 2006
---------- ----------
Net tax-exempt income $7,755,024 $8,611,722
Ordinary income 492,495 610,351
---------- ----------
$8,247,519 $9,222,073
========== ==========
As of December 31, 2007, the components of distributable earnings on a tax
basis were as follows:
Undistributed tax-exempt income $ 118,745
Unrealized appreciation 5,741,070
Accumulated net realized loss (742,836)
----------
$5,116,979
==========
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments.
11. RECENT DEVELOPMENTS
a) THE DAVIS CASE: In May, 2007, the U. S. Supreme Court agreed to hear an
appeal in DEPARTMENT OF REVENUE OF KENTUCKY V. DAVIS, a case concerning
the constitutionality of differential tax treatment for interest from
in-state vs. out-of-state municipal securities, a practice which is common
among the majority of the states. On May 19, 2008, the U. S. Supreme Court
upheld the right of states to tax interest on out-of-state municipal bonds
while exempting their own state's bond interest from taxation. The U. S.
Supreme Court said differential tax treatment for interest from in-state
vs. out-of-state municipal securities does not discriminate against
interstate commerce, but rather promotes the financing of essential
governmental services.
b) INSURERS: Over the past few months, municipal bond insurance companies
have been under review by the three major rating agencies: Standard &
Poor's, Moody's and Fitch. The ratings of some of the insurance companies
have now either been downgraded and/or have a negative outlook. The
financial markets continue to assess the severity of the losses caused by
the subprime credit crisis and its impact on municipal bond insurance
companies and the prices of insured municipal bonds.
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
--------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/08 ---------------------------------------------------------------
(UNAUDITED) 2007 2006 2005 2004 2003
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ............ $ 10.23 $ 10.32 $ 10.42 $ 10.68 $ 10.84 $ 10.82
Income (loss) from investment operations:
Net investment income ........................ 0.19++ 0.39++ 0.39+ 0.39+ 0.40+ 0.41+
Net gain (loss) on securities (both realized
and unrealized) ........................... (0.09) (0.07) (0.07) (0.23) (0.13) 0.05
-------- -------- -------- -------- -------- --------
Total from investment operations ............. 0.10 0.32 0.32 0.16 0.27 0.46
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ......... (0.20) (0.41) (0.42) (0.42) (0.43) (0.44)
Distributions from capital gains ............. -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions .......................... (0.20) (0.41) (0.42) (0.42) (0.43) (0.44)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .................. $ 10.13 $ 10.23 $ 10.32 $ 10.42 $ 10.68 $ 10.84
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) ...... 1.00%* 3.21% 3.11% 1.53% 2.57% 4.32%
Ratios/supplemental data
Net assets, end of period (in thousands) ..... $185,328 $185,283 $197,926 $218,111 $226,070 $233,109
Ratio of expenses to average net assets ...... 0.80%** 0.80% 0.79% 0.79% 0.75% 0.74%
Ratio of net investment income to average
net assets ................................ 3.81%** 3.80% 3.76% 3.73% 3.76% 3.81%
Portfolio turnover rate ...................... 8.32%* 8.77% 7.48% 10.57% 12.55% 6.16%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets ...... 0.79%** 0.79% 0.78% 0.79% 0.74% 0.74%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily average shares
method.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS (continued)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/08 --------------------------------------------------------
(UNAUDITED) 2007 2006 2005 2004 2003
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ............ $ 10.21 $ 10.30 $ 10.40 $ 10.66 $ 10.82 $ 10.80
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income ........................ 0.15++ 0.29++ 0.29+ 0.29+ 0.30+ 0.31+
Net gain (loss) on securities (both
realized and unrealized) ................... (0.10) (0.06) (0.07) (0.23) (0.13) 0.04
------- ------- ------- ------- ------- -------
Total from investment operations ............. 0.05 0.23 0.22 0.06 0.17 0.35
------- ------- ------- ------- ------- -------
Less distributions (note 10):
Dividends from net investment income ......... (0.15) (0.32) (0.32) (0.32) (0.33) (0.33)
Distributions from capital gains ............. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions .......................... (0.15) (0.32) (0.32) (0.32) (0.33) (0.33)
------- ------- ------- ------- ------- -------
Net asset value, end of period .................. $ 10.11 $ 10.21 $ 10.30 $ 10.40 $ 10.66 $ 10.82
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) ...... 0.53%* 2.24% 2.14% 0.57% 1.60% 3.33%
Ratios/supplemental data
Net assets, end of period (in thousands) ..... $ 9,739 $10,563 $11,760 $13,003 $15,210 $15,820
Ratio of expenses to average net assets ...... 1.75%** 1.75% 1.74% 1.74% 1.70% 1.69%
Ratio of net investment income to
average net assets ......................... 2.86%** 2.85% 2.81% 2.78% 2.81% 2.83%
Portfolio turnover rate ...................... 8.32%* 8.77% 7.48% 10.57% 12.55% 6.16%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets ...... 1.74%** 1.74% 1.73% 1.74% 1.69% 1.68%
CLASS Y
------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/08 --------------------------------------------------------
(UNAUDITED) 2007 2006 2005 2004 2003
------- ------- ------- ------- ------- -------
Net asset value, beginning of period ............ $ 10.25 $ 10.35 $ 10.44 $ 10.71 $ 10.86 $ 10.84
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income ........................ 0.20++ 0.40++ 0.40+ 0.40+ 0.41+ 0.42+
Net gain (loss) on securities (both
realized and unrealized) ................... (0.09) (0.08) (0.07) (0.24) (0.12) 0.04
------- ------- ------- ------- ------- -------
Total from investment operations ............. 0.11 0.32 0.33 0.16 0.29 0.46
------- ------- ------- ------- ------- -------
Less distributions (note 10):
Dividends from net investment income ......... (0.21) (0.42) (0.42) (0.43) (0.44) (0.44)
Distributions from capital gains ............. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions .......................... (0.21) (0.42) (0.42) (0.43) (0.44) (0.44)
------- ------- ------- ------- ------- -------
Net asset value, end of period .................. $ 10.15 $ 10.25 $ 10.35 $ 10.44 $ 10.71 $ 10.86
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) ...... 1.04%* 3.17% 3.26% 1.49% 2.73% 4.37%
Ratios/supplemental data
Net assets, end of period (in thousands) ..... $ 7,712 $ 6,027 $ 5,779 $14,671 $15,608 $13,760
Ratio of expenses to average net assets ...... 0.75%** 0.75% 0.75% 0.74% 0.70% 0.69%
Ratio of net investment income to
average net assets ......................... 3.86%** 3.84% 3.82% 3.77% 3.81% 3.85%
Portfolio turnover rate ...................... 8.32%* 8.77% 7.48% 10.57% 12.55% 6.16%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average net assets ...... 0.74%** 0.73% 0.74% 0.74% 0.69% 0.69%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily 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 table below is 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 table below is based on an investment of $1,000 invested on January 1,
2008 and held for the six months ended June 30, 2008.
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".
SIX MONTHS ENDED JUNE 30, 2008
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 1.00% $1,000.00 $1,010.00 $ 3.95
- --------------------------------------------------------------------------------
Class C 0.53% $1,000.00 $1,005.30 $ 8.68
- --------------------------------------------------------------------------------
Class Y 1.04% $1,000.00 $1,010.40 $ 3.70
- --------------------------------------------------------------------------------
(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 0.79%, 1.74% AND
0.74% FOR THE FUND'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (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 Fund'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 Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund 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
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.
SIX MONTHS ENDED JUNE 30, 2008
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $ 1,000.00 $ 1,020.93 $ 3.97
- --------------------------------------------------------------------------------
Class C 5.00% $ 1,000.00 $ 1,016.21 $ 8.72
- --------------------------------------------------------------------------------
Class Y 5.00% $ 1,000.00 $ 1,021.18 $ 3.72
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.79%, 1.74% AND
0.74% FOR THE FUND'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (TO
REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila 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 at
http://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 http://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 1-800-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, 2008 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 June 27, 2008. The holders of shares representing 77% 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.
DOLLAR AMOUNT OF VOTES
----------------------
TRUSTEE FOR WITHHELD
------- --- --------
Tucker Hart Adams $157,325,318 $ 1,102,814
Thomas A. Christopher $157,310,587 $ 1,117,535
Gary C. Cornia $157,327,743 $ 1,100,390
Diana P. Herrmann $157,253,176 $ 1,174,967
Lyle W. Hillyard $157,330,843 $ 1,096,290
John C. Lucking $157,336,009 $ 1,092,124
Anne J. Mills $157,204,594 $ 1,504,940
2. To ratify the selection of Tait, Weller & Baker LLP as the Fund's
independent registered public accounting firm.
DOLLAR AMOUNT OF VOTES
----------------------
FOR AGAINST ABSTAIN
--- ------- -------
$153,911,445 $722,944 $3,793,734
A Special Meeting of Shareholders of Tax-Free Fund of Colorado (the "Fund") was
held on June 27, 2008. The holders of shares representing 50.379% 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 act on an Advisory and Administration Agreement.
DOLLAR AMOUNT OF VOTES
----------------------
FOR AGAINST ABSTAIN
--- ------- -------
$97,602,323 $1,373,521 $4,181,206
2. To act on a new Sub-Advisory Agreement.
DOLLAR AMOUNT OF VOTES
----------------------
FOR AGAINST ABSTAIN
--- ------- -------
$95,619,953 $1,757,841 $5,779,254
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT AND THE SUB-ADVISORY
AGREEMENT
Renewal until April 30, 2009 of the Advisory and Administration Agreement
(the "Advisory Agreement") between 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, 2008. 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, 2007;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees review, containing data
about the performance of the Fund, data about its fees, expenses and
purchases and redemptions of capital stock 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 considered the Advisory and Administration Agreement and the
Sub-Advisory Agreement separately as well as in conjunction with each other to
determine their combined effects on the Fund. The Trustees reviewed materials
relevant to, and considered, the factors set forth below, and as to each
agreement reached the conclusions described.
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER AND THE
SUB-ADVISER.
The Manager has provided all administrative services to the Fund. The
Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian. The Board considered that the Manager had established and
maintained a strong culture of ethical conduct and regulatory compliance
The Manager has arranged for the Sub-Adviser to provide local management
of the Fund's portfolio. The Trustees noted that the Sub-Adviser employed Mr.
Christopher Johns as portfolio manager for the Fund, and had provided 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 and has met with the
brokerage and financial planner community and with investors and prospective
investors to provide them with information generally about the Fund's portfolio,
with which to 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 and 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. It noted that compared to other Colorado state-specific
municipal bond funds, the portfolio of the Fund was of significantly higher
quality and contained no securities subject to the alternative minimum tax.
The Board concluded that a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the Advisory Agreement and the
Sub-Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND, THE MANAGER AND THE SUB-ADVISER.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors and with national averages and
with benchmark indices. It was noted that the materials provided by the Manager
indicated that compared to the five largest competitive Colorado funds, the Fund
had investment performance that was higher than all but one of its peers for the
one-year period while lower than its peers for the five- and ten-year periods,
with rates of return explained in part by the Fund's generally higher-quality
portfolio and generally shorter average maturities. Furthermore, the Trustees
noted that in the past year the Fund's net asset value generally fluctuated
modestly compared to the local Colorado competitors.
The Board concluded that the performance of the Fund was acceptable in
light of market conditions, the length of its average maturities, its investment
objectives and its long-standing emphasis on minimizing risk. Evaluation of this
factor indicated to the Trustees that renewal of the Advisory Agreement and
Sub-Advisory Agreement would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND THE SUB-ADVISER AND THEIR AFFILIATES FROM THEIR RELATIONSHIPS 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
sales charge funds of a comparable asset size. The materials also showed the
profitability to the Manager and the 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
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide, being less than the national average.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Manager and the
Sub-Adviser did not argue against approval of the fees to be paid under the
Advisory Agreement or the Sub-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
declined in recent years. 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 and Sub-Advisory Agreement should be renewed without addition
of breakpoints at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND THE SUB-ADVISER AND THEIR
AFFILIATES FROM THEIR RELATIONSHIPS WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and Sub-Adviser and their affiliates, by providing services to a number
of funds or other investment clients 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
Sub-Adviser and their 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.
CONSIDERATION OF NEW ADVISORY AND ADMINISTRATION AGREEMENT IN CONNECTION WITH
PROPOSED CHANGES IN OWNERSHIP OF THE PARENT COMPANY OF THE MANAGER
BASIS FOR THE TRUSTEES' APPROVAL OF THE NEW ADVISORY AGREEMENT
The Board of Trustees and the independent Trustees approved the renewal
until April 30, 2009 of the now-current Advisory and Administration Agreement
(the "Current Advisory Agreement") in March 2008 at a meeting called and held
for that purpose at which a majority of the independent Trustees were present in
person. They additionally approved the New Advisory Agreement at that meeting.
In connection with the renewal of the Current Advisory Agreement, the
following materials were considered:
o Copies of the agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended December 31, 2007;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees' review, containing data
about the performance of the Fund, data about its fees, expenses and
purchases and redemptions of capital stock 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
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees considered the Current Advisory Agreement separately as well
as in conjunction with the Current Sub-Advisory Agreement to determine their
combined effects on the Fund. The Trustees reviewed materials relevant to, and
considered, the factors set forth below, and as to the agreement reached the
conclusions described.
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER.
The Manager has provided all administrative services to the Fund. The
Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian. The Board considered that the Manager had established and
maintained a strong culture of ethical conduct and regulatory compliance.
The Manager has arranged for the Sub-Adviser to provide local management
of the Fund's portfolio.
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 a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the Current Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and with
benchmark indices. It was noted that the materials provided by the Manager
indicated that compared to the five largest competitive Colorado funds, the Fund
has had an average annual return that was higher than all but one of its peers
for the one-year period,
while lower than its peers for the five- and ten-year periods, with rates of
return explained in part by the Fund's generally higher-quality portfolio and
generally shorter average maturities. Furthermore, the Trustees noted that in
the past year the Fund's net asset value generally fluctuated modestly compared
to the local Colorado competitors. The Fund considers its local competitors to
be Colorado-oriented funds that invest chiefly in high-quality Colorado
municipal obligations.
The Board concluded that the performance of the Fund was acceptable in
light of market conditions, the length of its average maturities, its investment
objectives and its long-standing emphasis on minimizing risk. Evaluation of this
factor indicated to the Trustees that renewal of the Current 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 THEIR RELATIONSHIPS 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
sales charge 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
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Manager did not
argue against approval of the fees to be paid under the Current 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 average net asset
size had declined in recent years. 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 indicated that
the Fund's fees were already lower than what those of its peers would be at
comparable asset levels, including those with breakpoints. Evaluation of this
factor indicated to the Board that the Current 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 THEIR
RELATIONSHIPS 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 or other
investment clients 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.
In connection with approval of the New Agreement and recommendation that
the shareholders of the Fund approve that agreement, the Trustees noted that
that agreement is substantially the same as the Current Advisory Agreement
except for its starting date and accordingly the materials considered in
connection with the Annual Review, and the reasons for renewing the Current
Advisory Agreement, apply to the New
Advisory Agreement as well. In addition, as noted above, in addressing the
desirability of replacing the Current Advisory Agreement with the New Advisory
Agreement, the Trustees considered a wide range of information relevant to the
ongoing and future continuity of management of the Fund, including:
o Representations by representatives of AMC and the Manager that the
o Proposed change of control was not expected to result in a
change in the personnel or operations of the Manager or
Sub-Adviser; and
o Investment approach or style of the Manager with respect to
the Fund, or the services provided by them to the Fund, would
not change.
o The fact that the
o Transaction will not result in
Any change to the advisory fees paid by the Fund or the
Fund's total expense ratio; and
A change in the costs of the services to be provided by
the Manager.
o Fund has operated in compliance with its investment objective
and restrictions.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the independent Trustees, concluded
that the New Advisory Agreement should be approved and recommended that the
shareholders of the Fund vote to approve the New Advisory Agreement for an
initial one-year term.
CONSIDERATION OF NEW SUB-ADVISORY AGREEMENT IN CONNECTION WITH TERMINATION OF
CURRENT ADVISORY AND ADMINISTRATION AGREEMENT IN CONNECTION WITH PROPOSED
CHANGES IN OWNERSHIP OF THE PARENT COMPANY OF THE MANAGER
BASIS FOR THE TRUSTEES' APPROVAL OF THE NEW SUB-ADVISORY AGREEMENT.
The Board of Trustees and the independent Trustees approved the renewal
until April 30, 2009 of the now-current Sub-Advisory Agreement (the "Current
Sub-Advisory Agreement") in March 2008 at a meeting called and held for that
purpose at which a majority of the independent Trustees were present in person.
They additionally approved the New Sub-Advisory Agreement at that meeting.
In connection with the renewal of the Current Sub-Advisory Agreement, the
following materials were considered:
o Copies of the agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended December 31, 2007;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees' review, containing data
about the performance of the Fund, data about its fees, expenses and
purchases and redemptions of capital stock together with comparisons
of such data with similar data about other comparable funds, as well
as data as to the profitability of the Sub-Adviser; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees considered the Current Sub-Advisory Agreement separately as
well as in conjunction with Current Advisory Agreement to determine their
combined effects on the Fund. The Trustees reviewed materials relevant to, and
considered, the factors set forth below, and as to the agreement reached the
conclusions described.
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE SUB-ADVISER.
The Manager has arranged for the Sub-Adviser to provide local management
of the Fund's portfolio. The Trustees noted that the Sub-Adviser employs Mr.
Johns as portfolio manager for the Fund and Mr. Robert Schultz, as back-up
portfolio manager and research analyst, and have provided facilities for credit
analysis of the Fund's portfolio securities. Mr. Johns, based in Denver,
Colorado, has provided local information regarding specific holdings in the
Fund's portfolio. The portfolio manager has also been available to and has met
with the brokerage and financial planner community and with investors and
prospective investors to provide them with information generally about the
Fund's portfolio, with which to 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. It noted that compared to other Colorado state-specific municipal bond
funds, the portfolio of the Fund was of significantly higher quality and
contained no securities subject to the alternative minimum tax.
The Board concluded that a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the Current Sub-Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE SUB-ADVISER.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and with
benchmark indices. It was noted that the materials provided by the Manager
indicated that compared to the five largest competitive Colorado funds, the Fund
has had an average annual return that was higher than all but one of its peers
for the one-year period, while lower than its peers for the five- and ten-year
periods, with rates of return explained in part by the Fund's generally
higher-quality portfolio and generally shorter average maturities. Furthermore,
the Trustees noted that in the past year the Fund's net asset value generally
fluctuated modestly compared to the local Colorado competitors. The Fund
considers its local competitors to be Colorado-oriented funds that invest
chiefly in high-quality Colorado municipal obligations.
The Board concluded that the performance of the Fund was acceptable in
light of market conditions, the length of its average maturities, its investment
objectives and its long-standing emphasis on minimizing risk. Evaluation of this
factor indicated to the Trustees that renewal of the Current Sub-Advisory
Agreement would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
SUB-ADVISER AND ITS AFFILIATES FROM THEIR RELATIONSHIPS 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
sales charge funds of a comparable asset size. The materials also showed the
profitability to the Sub-Adviser 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
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide and by the Fund's local competitors.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Sub-Adviser did
not argue against approval of the fees to be paid under the Current Sub-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 average net asset
size had declined in recent years. 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 indicated that
the Fund's fees were already lower than what those of its peers would be at
comparable asset levels, including those with breakpoints. Evaluation of this
factor indicated to the Board that the Current Sub-Advisory Agreement should be
renewed without addition of breakpoints at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE SUB-ADVISER AND ITS AFFILIATES FROM
THEIR RELATIONSHIPS WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Sub-Adviser and its affiliates, by providing services to a number of funds or
other investment clients 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 Sub-Adviser 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.
In connection with approval of the New Sub-Advisory Agreement and
recommendation that the shareholders of the Fund approve it, the Trustees noted
that that agreement is substantially the same as the Current Sub-Advisory
Agreement except for its starting date and accordingly the materials considered
in connection with the Annual Review, and the reasons for renewing the Current
Sub-Advisory Agreement, apply to the New Sub-Advisory Agreement as well. In
addition, as noted above, in addressing the desirability of replacing the
Current Sub-Advisory Agreement with the New Sub-Advisory Agreement, the Trustees
considered a wide range of information relevant to the ongoing and future
continuity of management of the Fund, including:
o Representations by representatives of the Sub-Adviser that the
o Proposed change of control of the Manager was not expected to
result in a change in the personnel or operations of the
Sub-Adviser; and
o Investment approach or style of the Sub-Adviser with respect
to the Fund, or the services provided by it to the Fund, would
not change.
o The fact that the
o Transaction will not result in
Any change to the advisory fees paid by the Fund or the
Fund's total expense ratio; and
A change in the costs of the services to be provided by
the Sub-Adviser.
o Fund has operated in compliance with its investment objective
and restrictions.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the independent Trustees, concluded
that the New Sub-Advisory Agreement should be approved and recommended that the
shareholders of the Fund vote to approve the New Sub-Advisory Agreement for an
initial one-year term.
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
Gary C. Cornia, Vice Chair
Tucker Hart Adams
Thomas A. Christopher
Diana P. Herrmann
Lyle W. Hillyard
John C. Lucking
TRUSTEE EMERITUS
J. William Weeks
OFFICERS
Diana P. Herrmann, President
Stephen J. Caridi, Senior 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
TRANSFER AND SHAREHOLDER SERVICING AGENT
PNC Global Investment Servicing
101 Sabin Street
Pawtucket, RI 02860
CUSTODIAN
JPMORGAN CHASE BANK, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite 2400
Philadelphia, PA 19103
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. SCHEDULE OF INVESTMENTS.
Included in Item 1 above
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Directors of the Registrant has adopted a Nominating
Committee Charter which provides that the Nominating Committee (the 'Committee')
may consider and evaluate nominee candidates properly submitted by shareholders
if a vacancy among the Independent Trustees of the Registrant occurs and if,
based on the Board's then current size, composition and structure, the Committee
determines that the vacancy should be filled. The Committee will consider
candidates submitted by shareholders on the same basis as it considers and
evaluates candidates recommended by other sources. A copy of the qualifications
and procedures that must be met or followed by shareholders to properly submit
a nominee candidate to the Committee may be obtained by submitting a request
in writing to the Secretary of the Registrant.
ITEM 11. 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 filing 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 12. EXHIBITS.
(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 4, 2008
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Chief Financial Officer and Treasurer
September 4, 2008
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 4, 2008
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 4, 2008
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.