UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

COLORADO BONDSHARES — A TAX-EXEMPT FUND

(Exact name of registrant as specified in its charter)

1200 17TH STREET, SUITE 850
DENVER, COLORADO 80202-5808

FRED R. KELLY, JR.
1200 17TH STREET, SUITE 850
DENVER, COLORADO 80202-5808

Registrant’s telephone number, including area code: 303-572-6990

Date of fiscal year end: 09/30

Date of reporting period: 03/31/2010

 

 

TABLE OF CONTENTS

Item 1.		Reports to Stockholders.
Item 2.		Code of Ethics.
Item 3.		Audit Committee Financial Expert.
Item 4.		Principal Accountant Fees and Services.
Item 5.		Audit Committee of Listed Registrants.
Item 6.		Investments.
Item 7.		Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Item 8.		Portfolio Managers of Closed-End Management Investment Companies.
Item 9.		Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchases.
Item 10.		Submission of Matters to a Vote of Security Holders.
Item 11.		Controls and Procedures.
Item 12.		Exhibits.
EX-99.CERT
EX-99.906 CERT

 

May 26, 2010

 

Dear Shareholders:

 

If we have learned any lessons from history, one must conclude that the long-term outlook for bonds in general is not presently positive. Judging from the headlines, major municipalities and states as well as sovereign nations around the world face severe budget deficits and possible default on their debt instruments. Fiscal management of our own federal government once considered the envy of the world is misguided and places the U.S. Treasury at risk of a rating downgrade. Prospects for a future resurgence of inflation or other debt degradation are high and increasing. Some analysts are calling for an imminent second recession on the heels of the one we are already experiencing. With all of these storm clouds gathering on the horizon, how could we at Colorado BondShares possibly be sunny and optimistic about our prospects? Please read on.

 

The not rated bond world is a microcosm of the larger bond universe. While we cannot separate ourselves completely from the fixed income world, there have been times when we react differently from the norm. This, I believe, is one of those times.

 

Yields on not rated municipal bonds are already high by historic standards. And the difference in yield between high grade bonds and not rated bonds has never, ever, been higher. Virtually all other markets and market segments have seen a remarkable bounce back in value except ours. We have watched patiently and cheered as other markets have recovered from the lows. As counter intuitive as this seems, it is about to be our turn. Frankly, this has taken longer than expected but it isn’t really too surprising considering the enormous disintermediation that occurred in our markets a year and a half ago. When a market freezes up, it takes a little while to thaw. That has been happening ever so gradually over the course of the last year but appears to be accelerating.

 

Unlike the ill-conceived securitizations that contributed to the financial woes of 2008, municipal bonds are generally a conservative investment medium and have successfully stood the test of time. No security other than U.S. Treasuries has a lower incidence of default. While structuring many of our credits, management incorporated into the documents, the lessons learned from past recessions so as to avoid defaults and provide appropriate relief mechanisms. Furthermore, we have made the portfolio less risky by maintaining a short average maturity and keeping close to half in cash and cash equivalents. The Fund’s dividend remains competitive. Future supply of tax-exempt bonds coming to market is expected to be relatively low, which would possibly add greater scarcity value to the bonds we hold. Income tax rates will likely rise soon making after tax yields even higher on all municipals than they are today.

 

Our plan for the immediate future is to keep liquid, add to income where possible, reduce risk, buy bargains and ride out the storm. Attached for your review is the semi-annual report which gives a detailed look at the six-month period ended March 31, 2010. Please call us if you develop questions when reviewing this material. Thanks so much for your continued confidence and the business you have sent our way.

 

Sincerely,

 

 

Fred R. Kelly, Jr.

Portfolio Manager

 

Officers and Trustees

George N. Donnelly, Chairman of the Board
of Trustees, Interim President, Secretary,
Treasurer and Trustee

Bruce G. Ely, Trustee

James R. Madden, Trustee

Fred R. Kelly, Jr., Portfolio Manager

 

 

Investment Adviser

 

 

Transfer, Shareholder Servicing, and Dividend

Disbursing Agent

 

 

Distributor

 

 

Custodian of Portfolio Securities

 

 

Independent Registered Public Accounting Firm

 

 

Legal Counsel

 

 

This report is submitted for the general information of the shareholders of Colorado BondShares — A Tax-Exempt Fund. This report must be preceded or accompanied by a Prospectus of the Fund. The prospectus contains information concerning the investment policies and expenses of the portfolio in addition to other pertinent information. Shares of Colorado BondShares — A Tax-Exempt Fund are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.

 

 

FUND EXPENSES (unaudited)

 

The following examples are intended to help you understand the ongoing costs (in dollars) of investing in the Fund and compare these costs with those of other mutual funds. The examples (actual and hypothetical 5% return) are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

As a shareholder of Colorado BondShares — A Tax-Exempt Fund (the “Fund”) you can incur two types of costs:

 

 

Actual Fund Expenses

 

The first line of the table below provides information about actual account values and actual expenses. The “Ending Account Value” shown is derived from the Fund’s actual return, which includes the effect of Fund expenses. You can estimate the expenses that you paid over the period by using the information below together with the amount you invested. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given in the first line under the heading “Expenses Paid During Period.”

 

Hypothetical Example for Comparison Purposes

 

The second line of the table below provides information that is intended to help you compare the ongoing costs of investing in the Fund with those of other mutual funds. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% rate of return per year before expenses. The results do not apply to your investment because the return used is not the Fund’s actual return. This information is useful for making comparisons with the 5% hypothetical examples that appear in shareholder reports of other funds.

 

Six Months Ended March 31, 2010

 

 

¹The expenses shown in this table are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period.

 

Please note that expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect any transaction costs, such as sales charges. If transaction costs were included, your total costs would have been higher. You can find more information about the Fund’s expenses in the Financial Statements section of this report. For additional information on operating costs please see the Fund’s prospectus.

CREDIT QUALITY (Unaudited)

 

Colorado BondShares — A Tax-Exempt Fund

Based on a Percentage of Total Net Assets as of March 31, 2010

 

 

SECTOR BREAKDOWN (Unaudited)

 

Colorado BondShares A — Tax-Exempt Fund

Based on a Percentage of Total Net Assets as of March 31, 2010

 

 

*Cash & cash equivalents include cash, receivables less liabilities.

 

**Short-term securities include securities with a maturity date of one year or redemption feature of one year or less, as identified in Schedule of Investments.

 

***This category includes 9.3% pre-refunded bonds which are securities that are collateralized by an amount sufficient to pay both principal and interest.

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited)
March 31, 2010

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

 

 

G.O. — General Obligation

GID — General Improvement District

LID — Local Improvement District

LTD — Limited

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Statement of Assets and Liabilities (unaudited)

March 31, 2010

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Statement of Operations (unaudited)

For the Six Months Ended March 31, 2010

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Statements of Changes in Net Assets (unaudited)

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Financial Highlights

 

 

 

 

See accompanying notes to financial statements.

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited)

 

 

Colorado BondShares — A Tax-Exempt Fund (the “Fund”) is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management company. The Fund’s investment objectives are to maximize income exempt from federal income taxes and from personal income taxes of the State of Colorado to the extent consistent with the preservation of capital and to seek opportunities for capital appreciation. The Fund’s investment adviser is Freedom Funds Management Company (“Freedom Funds”). The following is a summary of significant accounting policies consistently followed by the Fund.

 

 

The preparation of financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. This 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 income and expenses during the reporting period. Actual results could differ from those estimates. These financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the reporting period. The following summarizes the significant accounting policies of the Fund:

 

 

Securities for which there is no last sales price are valued by an independent pricing service based on evaluated prices which consider such factors as transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities, or are fair valued by management.

 

Securities for which market quotations are not readily available (or are otherwise no longer valid or reliable) are valued at fair value determined in accordance with procedures approved by the Board of Trustees. This can occur in the event of, among other things, natural disasters, acts of terrorism, market disruptions, intra-day trading halts, and extreme market volatility. The determination of fair value involves subjective judgments. As a result, using fair value to price a security may result in a price materially different from the prices used by other mutual funds to determine net asset value or the price that may be realized upon the actual sale of the security. Short-term holdings are valued at current market quotations or amortized cost whichever management believes best approximates fair value.

 

ASC 820-10 Fair Value Measurements and Disclosures establishes a fair value hierarchy that classifies securities based on valuation techniques used to measure fair value and distinguish between observable inputs (market data obtained from independent sources) and the reporting entities own assumptions which are not readily observable to market participants. The fair value hierarchy gives

 

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

 

Level 1 Inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 Inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3 Inputs: Significant unobservable inputs for the asset or liability including management’s own assumptions. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

The following table summarizes the valuation of the Fund’s investments as defined by ASC 820-10 hierarchy levels as of March 31, 2010:

 

 

 

 

 

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

In reference to ASC 820-10-4, the category breakdown for 03/31/2010 is depicted as follows:

 

 

From September 30, 2009 to March 31, 2010, there were no Level 1 securities.

 

Fixed-income securities owned by the Fund are subject to interest-rate risk, credit risk, prepayment risk and market risk. The Fund invests in non-rated securities which may be subject to a greater degree of credit risk and risk of loss of income and principal and may be more sensitive to economic conditions than lower yielding, higher rated fixed income securities. The Fund concentrates its investments in Colorado and, therefore, may be impacted by specific events, issuers or factors affecting Colorado. The Fund may have more credit risk related to the economic conditions of Colorado than a portfolio with a broader geographical diversification.

 

 

The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code, as amended, applicable to regulated investment companies and to distribute all its net investment income and any net realized gain on investments not offset by capital loss carryforwards to shareholders. The Fund distributes investment income monthly and due to the tax-exempt nature of its investments the income is generally non-taxable to the shareholders. The Fund distributes net realized capital gains, if any, to its shareholders at least annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatment of tax allocations.

 

The Fund has adopted ASC 740-10 for income tax purposes. ASC 740-10 provides guidance on how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements.

 

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

ASC 740-10 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax return to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The adoption of ASC 740-10 did not result in the recording of any tax benefit or expense in the current period. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations.

 

ASC 740-10 requires management of the fund to analyze all open tax years, as defined by statute of limitations, for all major jurisdictions, including federal and certain state tax authorities. As of March 31, 2010, the Fund did not have a liability for any unrecognized tax benefits. The Fund has no examinations in progress and is not aware of any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly change in the next twelve months.

 

 

The Fund discontinues the accrual of interest income on municipal bonds when the securities become delinquent as to payment of principal or interest, or when the Fund’s investment adviser determines that an uncertainty exists as to the realization of all or a portion of the principal balance. The face amount of bonds for which the accrual of interest income has been discontinued approximates $10,968,009 and such bonds have a value of $2,046,493 or less than 1% of net assets, as of March 31, 2010. These securities have been identified on the accompanying Schedule of Investments.

 

 

Investment transactions are accounted for on the date the investments are purchased or sold (trade date). Purchases and sales of securities, other than short-term securities, aggregated $5,450,000 and $21,759,342, respectively.

 

Dividends to shareholders are declared each business day and paid monthly. Distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses from investment transactions are calculated using the identified-cost basis, which is the same basis the Fund uses for federal income tax purposes. Interest income is recorded on the accrual basis.

 

Variable rate demand notes (VRDN) purchased by the Fund may be put back to the designated remarketing agent for the issue at par, for settlement within seven days, and accordingly are treated as short-term holdings. These notes bear interest at a rate that resets daily, weekly or monthly. On March 31, 2010, the interest rates paid on these notes ranged from 0.27% to 1.55%.

 

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

 

The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Also, due to timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Fund.

 

 

The Fund may purchase securities on a when-issued basis with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and may increase or decrease in value prior to the delivery date. The Fund maintains segregated assets with a market value equal to or greater than the amount of its purchases commitments. The Fund did not have any when-issued securities at March 31, 2010.

 

 

The Fund has an unlimited number of no par value shares of beneficial interest authorized. Transactions in shares of beneficial interest were as follows:

 

 

 

Management fees paid to Freedom Funds were in accordance with the investment advisory agreement with the Fund which provides for an annual fee equivalent to 0.5% of the net assets of the Fund. Freedom Funds pays all expenses associated with advertising, marketing, and distributing the Fund’s shares and serves as the transfer agent, dividend disbursing agent, and registrar for the Fund. Freedom Funds provided certain transfer agency and shareholder services as part of the management fee

 

Colorado BondShares
A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

arrangement for the period ended March 31, 2010. Transfer agency expenses on the Statement of Operations represent direct expenses charged to the Fund by third parties.

 

Allen Insurance, an affiliate of the investment advisor, acted as agent for the Fidelity Bond and the Errors and Omissions insurance policy maintained by the Fund and as a result received compensation in the form of commissions. The policies were provided by Traveler’s Insurance Company and all the commissions referred to above were paid by Travelers. Allen Insurance received no compensation directly from the assets of the Fund.

 

 

Expenses paid indirectly by the Fund represent earnings credits on cash balances maintained with the Fund’s custodian bank, UMB Bank, N.A. The earnings credits resulted in offsetting custodian fees of $5,485, for the year ended March 31, 2010.

 

 

From time to time the Fund may be involved in certain disputes and legal actions arising in the ordinary course of its business. While it is not feasible to predict or determine the outcome of these proceedings, in management’s opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on its financial position or results of operations. However, litigation is subject to inherent uncertainties, and an adverse result in these matters may arise from time to time that may harm the Fund’s business.

 

 

Purchase accrued interest is typically a component of a municipal bond purchase and is paid on settlement date. The accrual period begins on the last interest payment (or original issue date) and runs through the day immediately preceding the settlement date. The Fund has purchased three bonds from the Meadows Metropolitan Districts No. 1, 2 and 7 with an aggregate balance of purchase accrued of $44,026,872 (99.08% of the March 31, 2010 balance of $44,435,834). Since this amount bears interest at the rate of 7.999% and will be received over an uncertain period of years, it has been fair valued in accordance with ASC 820-10 Fair Value Measurements and Disclosures.

 

 

Management has evaluated the possibility of subsequent events in the Fund’s financial statements through the date of this report. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements through this date.

Officers and Trustees of the Fund (unaudited)

 

The following tables list the trustees and officers of the Fund, together with their address, age, positions held with the Fund, the term of each office held and the length of time served in each office, principal business occupations during the past five years and other directorships, if any, held by each trustee and officer. Each trustee and officer has served in that capacity for the Fund continuously since originally elected or appointed. The Board supervises the business activities of the Fund. Each trustee serves as a trustee until termination of the Fund unless the Trustee dies, resigns, retires, or is removed.

 

Non-Interested Trustees

 

 

 

*George N. Donnelly is an “interested person” of the Fund as defined in the Investment Company Act of 1940 (the “1940 Act”) by virtue of his position as both an officer and a trustee of the Fund as described in the table above. None of the trustees nor the officers of the Fund has any position with the Investment Adviser, the principal underwriter of the Fund, the distribution agent of the Fund, the service agent of the Fund or the custodian of the Fund, or any affiliates thereof. There is no family relationship between any officers and trustees of the Fund.

Other Information (Unaudited)

 

Proxy Voting Record

 

The Fund does not invest in equity securities. Accordingly, there were no matters relating to a portfolio security considered during the 12 months ended June 30, 2009 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 or you may call us at 1-800-572-0069.

 

Quarterly Statement of Investments

 

The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at http://www.sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800-732-0330 or you may call us at 1-800-572-0069.

 

(This page intentionally left blank)

 

Item 2. CODE OF ETHICS.

Not required in this filing.

Item 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not required in this filing.

Item 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not required in this filing.

Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

Item 6. INVESTMENTS.

(a) Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this report.
(b) Not applicable.

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 registrant has not adopted procedures by which shareholders may recommend nominees to the registrant’s board of trustees.

Item 11. CONTROLS AND PROCEDURES.

(a) The registrant has adopted and maintained disclosure controls and procedures (as such term is defined in Rules 30a-3(c) under the Investment Company Act of 1940, as amended (the “Act”)) that are designed to ensure that information required to be disclosed in the registrant’s reports under the Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is accumulated and communicated to the registrant’s management, including its principal executive officer and principal financial officer to allow for timely decisions regarding required disclosure.

As required by Rule 30a-3(b) of the Act, the registrant carried out an evaluation under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures within the 90-day period prior to the filing date of this report. Based on the foregoing, the registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures were effective, as of that date.

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

ITEM 12. EXHIBITS.

(a)(1)		Not applicable (See Item 2(f)(3) of this report).
(a)(2)(i)           (99.302)		Interim President’s (Principal Executive Officer) Section 302 Certification
(a)(2)(ii)           (99.302)		Interim Treasurer’s (Principal Financial Officer) Section 302 Certification
(a)(3)		Not applicable.
(b)           (99.906)		Combined Interim President & Treasurer (Principal Executive Officer and Principal Financial Officer) Section 906 Certification

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.

		COLORADO BONDSHARES — A TAX-EXEMPT FUND
	By:	/s/ George N. Donnelly
		George N. Donnelly,
		Interim President, Secretary and Treasurer
		Date: June 10, 2010

     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.

		/s/ George N. Donnelly
		George N. Donnelly,
		Interim President, Secretary and Treasurer
		(Principal Executive Officer and Principal Financial Officer)
		Date: June 10, 2010