TAX-FREE TRUST OF ARIZONA
Supplement to
the Prospectuses and Statement of Additional Information
dated October 31, 1997
On November 6, 1997, the shareholders of the Trust approved
the "New Arrangements," described in the Prospectuses and Statement
of Additional Information. Under the New Arrangements, Aquila
Management Corporation, formerly the Trust's Administrator has
become Investment Adviser and Administrator and Banc One Investment
Advisors Corporation has become Sub-Adviser.
The date of this supplement is December 27, 1997
<PAGE>
Tax-Free Trust of Arizona
380 Madison Avenue, Suite 2300
New York, New York 10017
800-437-1020
212-697-6666
Prospectus
Class A Shares
Class C Shares October 31, 1997
The Trust is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Arizona and
regular Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Arizona State and Federal income taxes. These municipal
obligations must, at the time of purchase, either be rated within
the four highest credit ratings (considered as investment grade)
assigned by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or, if unrated, be determined to be of comparable
quality by the Trust's Adviser, Banc One Investment Advisors
Corporation.
The Prospectus concisely states information about the Trust
that you should know before investing. A Statement of Additional
Information about the Trust dated October 31, 1997 (the "Additional
Statement") has been filed with the Securities and Exchange
Commission and is available without charge upon written request to
the Trust's Shareholder Servicing Agent, at the address given
below, or by calling the telephone number(s) given below. The
Additional Statement contains information about the Trust and its
management not included in the Prospectus. The Additional Statement
is incorporated by reference in its entirety in the Prospectus.
Only when you have read both the Prospectus and the Additional
Statement are all material facts about the Trust available to you.
SHARES OF THE TRUST ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE INVESTMENT ADVISORS CORPORATION,
BANK ONE ARIZONA, NA, BANC ONE CORPORATION OR ITS BANK OR NON-BANK
AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE TRUST ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY OR
GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT OR ANY STATE.
AN INVESTMENT IN THE TRUST INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
The Trust's Shareholder Servicing Agent: after November 8, 1997:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-437-1000 toll free
Before November 8, 1997:
Administrative Data Management Corp.
581 Main Street, Woodbridge, NJ 07095-1198
Call 800-437-1000 toll free or 732-855-5731
For General Inquiries & Yield Information,
Call 800-437-1020 toll free or 212-986-8826
The Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
[picture]
Salt River Project - Roosevelt Dam
[picture]
Tucson Water System
[picture]
Sky Harbor International Airport - Terminals 3 & 4
[picture]
Sewer Facility - Sedona
[LOGO]
Tax-Free Trust of Arizona
[picture]
Scottsdale General Obligation Bond for Goldwater Blvd, Thoroughfare
[picture]
Tucson Medical Center - Arizona Science Center
[picture]
Scottsdale Civic Center - houses a public library, police station
and courts
[picture]
Sandra Day O'Connor Elementary School Mesa
The Trust invests in tax-free municipal securities, primarily the
kinds of obligations issued by various communities and political
subdivisions within Arizona. Most of these securities are used to
finance long-term municipal projects; examples are pictured above.
(See "Investment of the Trust's Assets.") The municipal obligations
which financed these particular projects were included in the
Trust's portfolio as of September 30, 1997 and together represented
19.85% of the Trust's portfolio. Since the portfolio is subject to
change, the Trust may not necessarily own these specific securities
at the time of the delivery of this Prospectus.
<PAGE>
HIGHLIGHTS
Tax-Free Trust of Arizona (the "Trust"), founded by Aquila
Management Corporation in 1986 and one of the Aquilasm Group of
Funds, is an open-end mutual fund which invests in tax-free
municipal bonds, the kind of obligations issued by the State of
Arizona, its counties and various other local authorities to
finance such projects throughout Arizona. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the Trust
invests pay interest which is exempt from both regular Federal and
State of Arizona income taxes. Dividends paid by the Trust from
this income are likewise free of both such taxes. It is, however,
possible that in certain circumstances, a small portion of the
dividends paid by the Trust will be subject to income taxes. The
Federal alternative minimum tax ("AMT") may apply to some
investors, but its impact will be limited, since not more than 20%
of the Trust's net assets can be invested in obligations paying
interest which is subject to this tax. The receipt of
exempt-interest dividends from the Trust may result in some portion
of social security payments or railroad retirement benefits being
included in taxable income. Capital gains distributions, if any,
are taxable. (See "Dividend and Tax Information.")
Investment Grade - The Trust will acquire only those municipal
obligations which, at the time of purchase, are within the four
highest credit ratings assigned by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, or are determined by the Adviser
to be of comparable quality. In general, there are nine separate
credit ratings, ranging from the highest to the lowest credit
ratings for municipal obligations. Obligations within the top four
ratings are considered "investment grade," but those in the fourth
rating may have speculative characteristics as well. (See
"Investment of the Trust's Assets.")
Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. (See the
Application, which is in the back of the Prospectus and "How to
Invest in the Trust," which includes applicable sales charge
information.)
Additional Investments - You may make additional investments
at any time and in any amount, directly, or if in an amount of $50
or more, through the convenience of having your investment
electronically transferred from your financial institution account
into the Trust by Automatic Investment or Telephone Investment.
(See "How to Invest in the Trust.")
Alternative Purchase Plans - The Trust provides two
alternative ways for individuals to invest. (See "Alternative
Purchase Plans.") One way permits individual investors to pay
distribution and certain service charges principally at the time
they purchase shares; the other way permits investors to pay such
costs over a period of time, but without paying anything at time of
purchase, much as goods can be purchased on an installment plan.
For this purpose the Trust offers the following classes of shares,
which differ in their expense levels and sales charges:
*Front-Payment Class Shares ("Class A Shares") are
offered to anyone at net asset value plus a sales charge,
paid at the time of purchase, at the maximum rate of 4.0%
of the public offering price, with lower rates for larger
purchases. (See "How to Purchase Class A Shares.") Class
A Shares are subject to an asset retention service fee
under the Trust's Distribution Plan at the rate of 0.15
of 1% of the average annual net assets represented by the
Class A Shares. (See "Distribution Plan.")
* Level-Payment Class Shares ("Class C Shares") are
offered to anyone at net asset value with no sales charge
payable at the time of purchase but with a level charge
for service and distribution fees for six years after the
date of purchase at the aggregate annual rate of 1% of
the average annual net assets of the Class C Shares. (See
"Distribution Plan" and "Shareholder Services Plan for
Class C Shares.") Six years after the date of purchase,
Class C Shares are automatically converted to Class A
Shares. If you redeem Class C Shares before you have held
them for 12 months from the date of purchase you will pay
a contingent deferred sales charge ("CDSC"); this charge
is 1%, calculated on the net asset value of the Class C
Shares at the time of purchase or at redemption,
whichever is less. There is no CDSC after Class C Shares
have been held beyond the applicable period. (See
"Alternative Purchase Plans," "Computation of the Holding
Periods for Class C Shares" and "How to Purchase Class C
Shares.")
The Trust also issues Institutional Class Shares ("Class Y
Shares") that are sold only to certain institutional investors and
Financial Intermediary Class Shares ("Class I Shares") which are
offered and sold only through certain financial intermediaries.
Class Y Shares and Class I Shares are not offered by this
Prospectus.
Class A Shares and Class C Shares are only offered for sale in
certain states. (See "How to Invest in the Trust.") If shares of
the Trust are sold outside those states the Trust may be required
to redeem them. If your state of residence is not Arizona, the
dividends from the Trust may be subject to income taxes of the
state in which you reside. Accordingly, you should consult your tax
adviser before acquiring shares of the Trust.
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to you,
directly deposited into your financial institution account or
automatically reinvested without sales charge in additional shares
of the Trust at the then-current net asset value. Specific classes
of shares will have different dividend amounts due to their
particular expense levels. (See "Dividend and Tax Information.")
Many Different Issues - You have the advantages of a portfolio
which consists of over 235 issues with different maturities. (See
"Investment of the Trust's Assets.")
Local Portfolio Management - The Trust provides you with
experienced, locally-based professional investment management by
Banc One Investment Advisors Corporation, which serves as the
Trust's Investment Adviser. The Trust currently pays fees at a rate
of up to 0.20 of 1% of average annual net assets to each of its
Adviser and Administrator. Total advisory and administration fees
are at a rate of 0.40 of 1% of average annual net assets, although
some or all of these fees may be waived. It is expected that these
arrangements will change. (See "Table of Expenses" and "Management
Arrangements.")
The Adviser is a subsidiary of BANC ONE CORPORATION ("Banc
One"), based in Columbus, Ohio. As of June 30, 1997 the Adviser had
$20 billion under management. Banc One is a multi-bank holding
company, incorporated under the laws of the State of Ohio. As of
June 30, 1997, Banc One operates with more than 1,500 offices in
the states of Arizona, Colorado, Illinois, Indiana, Kentucky,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. As of that date, Banc One, its affiliated banks and its
non-bank subsidiaries had total assets of approximately $140.7
billion.
Redemptions - Liquidity - You may redeem any amount of your
account on any business day at the next determined net asset value
by telephone, FAX or mail request, with proceeds being sent to a
predesignated financial institution, if you have elected Expedited
Redemption. Proceeds will be wired or transferred through the
facilities of the Automated Clearing House, wherever possible, upon
request, if in an amount of $1,000 or more, or will be mailed. For
these and other redemption procedures see "How to Redeem Your
Investment." There are no penalties or redemption fees for
redemption of Class A Shares. However, there is a contingent
deferred sales charge with respect to certain Class A Shares which
have been purchased in amounts of $1 million or more. (See
"Purchase of $1 Million or More.") If you redeem Class C Shares
before you have held them for 12 months from the date of purchase
you will pay a contingent deferred sales charge ("CDSC") at the
rate of 1%. (See "Alternative Purchase Plans" - "Class C Shares.")
Certain Stabilizing Measures - The Trust will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class A or Class C Shares of the
Trust into corresponding classes of shares of other
Aquila-sponsored tax-free municipal bond mutual funds or two
Aquila-sponsored equity funds. You may also exchange them into
shares of the Aquila-sponsored money market funds. The exchange
prices will be the respective net asset values of the shares. (See
"Exchange Privilege.")
Risks and Special Considerations - The share price, determined
on each business day, varies with the market prices of the Trust's
portfolio securities, which fluctuate with market conditions
including prevailing interest rates. Accordingly, the proceeds of
redemptions may be more or less than your original cost. (See
"Factors Which May Affect the Value of the Trust's Investments and
Their Yields.") The Trust's assets, being primarily or entirely
Arizona issues, are subject to economic and other conditions
affecting Arizona. (See "Risk Factors and Special Considerations
Regarding Investment in Arizona Obligations.") Moreover, the Trust
is classified as a "non-diversified" investment company, because it
may choose to invest in the obligations of a relatively limited
number of issuers. (See "Investment of the Trust's Assets.") The
Trust may also, to a limited degree, buy and sell futures contracts
and options on futures contracts, although since inception the
Trust has not done so and has no present intention to do so. There
may be risks associated with these practices. (See "Certain
Stabilizing Measures.")
Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual Report
and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
TABLE OF EXPENSES
<S> <C> <C>
Class A Class C
Shareholder Transaction Expenses Shares Shares
Maximum Sales Charge Imposed on Purchases...... 4.00% None
(as a percentage of offering price)
Maximum Sales Charge Imposed on Reinvested
Dividends.................................... None None
Maximum Deferred Sales Charge.................. None(1) 1.00%(2)
Redemption Fees................................ None None
Exchange Fee................................... None None
Annual Trust Operating Expenses(3)
Arrangements in effect through November 6, 1997
(See "Management Arrangements.")
(as a percentage of average net assets)
Investment Advisory Fee...................... 0.20% 0.20%
12b-1 Fee.................................... 0.15% 0.75%
All Other Expenses(4)........................ 0.38% 0.63%
Administration Fee......................... 0.20% 0.20%
Service Fee................................ None 0.25%
Other Expenses(4).......................... 0.18% 0.18%
Total Trust Operating Expenses(4)............ 0.73% 1.58%
Annual Trust Operating Expenses(3)
Arrangements after November 6, 1997
(See "Management Arrangements.")
(as a percentage of average net assets)
Management Fee(5)............................ 0.40% 0.40%
12b-1 Fee.................................... 0.15% 0.75%
All Other Expenses(4)........................ 0.18% 0.43%
Service Fee(4)............................. None 0.25%
Other Expenses............................. 0.18% 0.18%
Total Trust Operating Expenses(4)............ 0.73% 1.58%
Example (6)
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return and redemption at the end of each time period:
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
Class A Shares $47 $62 $79 $127
Class C Shares
With complete
redemption at
end of period $26 $50 $86 $144(7)
With no
redemption $16 $50 $86 $144(7)
<FN>
(1) Certain shares purchased in transactions of $1 million or more without
a sales charge may be subject to a contingent deferred sales charge of up
to 1% upon redemption during the first four years after purchase. See
"Purchase of $1 Million or More."
</FN>
<FN>
(2) A contingent deferred sales 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.
</FN>
<FN>
(3) Estimated based upon actual expenses incurred by the Trust during its
most recent fiscal year.
</FN>
<FN>
(4) Does not reflect a 0.01% expense offset in custodian fees received for
uninvested cash balances. Reflecting this offset, other expenses, all other
expenses, and total Trust operating expenses for Class A Shares would have
been 0.17%, 0.37% and 0.72%, respectively; for Classs C Shares, these
expenses would have been 0.17%, 0.62% and 1.57%, respectively.
<FN>
(5) Arrangements in effect after November 6, 1997. The Trust pays the
Manager an advisory fee at the annual rate of 0.40 of 1% of average annual
net assets; the Manager pays the Sub-Adviser a sub-advisory fee at the
annual rate of 0.20 of 1% of average annual net assets. (See "Management
Arrangements")
</FN>
<FN>
(6) The expense example is based upon the above shareholder transaction
expenses (in the case of Class A Shares, this includes a sales charge of
$40 for a $1,000 investment) and annual Trust operating expenses. It is
also based upon amounts at the beginning of each year which includes the
prior year's assumed results. A year's results consist of an assumed 5%
annual return less total annual operating expenses; the expense ratio was
applied to an assumed average balance (the year's starting investment plus
one-half the year's results). Each figure represents the cumulative
expenses so determined for the period specified.
</FN>
<FN>
(7) Six years after the date of purchase, Class C Shares are automatically
converted to Class A Shares.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL FUNDS USE
THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE EXAMPLE.
THE EXAMPLE ALSO REFLECTS THE MAXIMUM SALES CHARGE. (SEE "HOW TO INVEST IN
THE TRUST").
The purpose of the above table is to assist the investor in understanding
the various costs that an investor in the Trust will bear directly or
indirectly.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to the
five years ended June 30, 1997 has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon is included in the Trust's
financial statements contained in its Annual Report, which are
incorporated by reference into the Additional Statement. The information
provided in the table should be read in conjunction with the financial
statements and related notes. On April 2, 1990, Aquila Management
Corporation, originally the Trust's Sub-Adviser and Administrator, became
Administrator only. A copy of these financial statements can be obtained
without charge by calling or writing the Shareholder Servicing Agent at
the address and telephone numbers on the cover of the Prospectus.
Class A (1) Class C (2)
Year Period(3)
Year Ended June 30, Ended Ended
1997 1996 1995 6/30/97 6/30/96
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $10.38 $10.37 $10.16 $10.38 $10.45
Income from Investment
Operations:
Net investment income... 0.53 0.55 0.56 0.44 0.13
Net gain (loss) on
securities (both
realized and
unrealized)............ 0.22 0.01 0.21 0.23 (0.07)
Total from Investment
Operations............. 0.75 0.56 0.77 0.67 0.06
Less Distributions:
Dividends from net
investment income...... (0.55) (0.55) (0.56) 0.45 (0.13)
Distributions from
capital gains - - - - -
Total Distributions.... (0.55) (0.55) (0.56) (0.45) (0.13)
Net Asset Value, End
of Period.............. $10.58 $10.38 $10.37 $10.60 $10.38
Total Return (not
reflecting sales load)(%) 7.36 5.49 7.89 6.64 0.57+
Ratios/Supplemental Date
Net Assets, End of
Period (in thousands)($) 391,737 389,083 380,745 200 6
Ratio of Expenses to
Average Net Assets(%).. 0.72 0.72 0.74 1.57+ 0.40+
Ratio of Net Investment
Income to Average
Net Assets(%).......... 5.03 5.30 5.55 4.18 1.17+
Portfolio Turnover
Rate(%)................ 19.98 27.37 34.44 19.98 27.37
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees and the expense offset in custodian fees for uninvested
cash balances would have been:
Net Investment Income($) 0.52 0.55 0.56 0.43 0.04
Ratio of Expenses to
Average Net Assets(%) 0.73 0.73 0.74 1.58 0.40+
Ratio of Net Investment
Income to Average
Net Assets 5.02 5.30 5.55 4.17 1.17+
Year Ended June 30,
1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C>
$10.84 $10.36 $9.92 $9.77 $9.88 $9.47 $9.45
0.57 0.62 0.66 0.66 0.66 0.67 0.67
(0.60) 0.54 0.43 0.15 (0.11) 0.41 0.02
(0.03) 1.16 1.09 0.81 0.55 1.08 0.69
(0.57) (0.62) (0.65) (0.66) (0.66) (0.67) (0.67)
(0.08) (0.06) - - - - -
(0.65) (0.68) (0.65) (0.66) (0.66) (0.67) (0.67)
$10.16 $10.84 $10.36 $9.92 $9.77 $9.88 $9.47
(0.38)% 11.45% 11.36% 8.57% 5.84% 11.86% 7.68%
$372,093 $349,920 $237,433 $175,342 $121,026 $101,584 $83,437
0.70% 0.65% 0.57% 0.58% 0.58% 0.53% 0.51%
5.36% 5.76% 6.37% 6.68% 6.66% 6.76% 6.95%
31.20% 18.78% 23.53% 26.83% 31.11% 24.87% 22.41%
$0.57 $0.61 $0.650 $0.65 $0.64 $0.64 $0.64
0.71% 0.73% 0.70% 0.74% 0.77% 0.78% 0.88%
5.35% 5.67% 6.24% 6.52% 6.47% 6.50% 6.58%
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 1, 1996.
</FN>
<FN>
(3) From April 1, 1996 through June 30, 1996.
</FN>
<FN>
+ Not annualized.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Trust's shares are designed to be a suitable investment
for individuals, corporations, institutions and fiduciaries who
seek income exempt from Arizona State and regular Federal income
taxes.
You may invest in shares of the Trust as an alternative to
direct investments in Arizona Obligations, as defined below, which
may include obligations of certain non-Arizona issuers. The Trust
offers you the opportunity to keep assets fully invested in a
vehicle that provides a professionally managed portfolio of Arizona
Obligations which may, but not necessarily will, be more
diversified, higher yielding, more stable and more liquid than you
might be able to obtain on an individual basis by direct purchase
of Arizona Obligations. Through the convenience of a single
security consisting of shares of the Trust, you are also relieved
of the inconvenience associated with direct investments of fixed
denominations, including the selecting, purchasing, handling,
monitoring call provisions and safekeeping of Arizona Obligations.
Arizona Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes; bond
anticipation notes; construction loan notes; and floating and
variable rate demand notes. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase
contracts for property or equipment. The purposes for which
municipal obligations such as bonds are issued include the
construction of a wide range of public facilities such as highways,
bridges, schools, hospitals, housing, mass transportation, streets
and water and sewer works. Other public purposes for which
municipal obligations may be issued include the refunding of
outstanding obligations, the obtaining of funds for general
operating expenses and the obtaining of funds to lend to other
public institutions and facilities.
INVESTMENT OF THE TRUST'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Arizona State and regular
Federal income taxes as is consistent with the preservation of
capital, the Trust will invest in Arizona Obligations (as defined
below). There is no assurance that the Trust will achieve its
objective, which is a fundamental policy of the Trust. (See
"Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Arizona Obligations" means obligations, including those of
certain non-Arizona issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate counsel,
is exempt from regular Federal income taxes and Arizona income
taxes. Although exempt from regular Federal income tax, interest
paid on certain types of Arizona Obligations, and dividends which
the Trust might pay from this interest, are preference items as to
the Federal alternative minimum tax; for further information, see
"Dividend and Tax Information." As a fundamental policy, at least
80% of the Trust's net assets will be invested in Arizona
Obligations the income paid upon which will not be subject to the
alternative minimum tax; accordingly, the Trust can invest up to
20% of its net assets in obligations which are subject to the
Federal alternative minimum tax. The Trust may refrain entirely
from purchasing these types of Arizona Obligations. (See "Dividend
and Tax Information.")
The non-Arizona bonds or other obligations the interest on
which is exempt under present law from regular Federal and Arizona
income taxes are those issued by or under the authority of Guam,
the Northern Mariana Islands, Puerto Rico and the Virgin Islands.
The Trust will not purchase Arizona Obligations of non-Arizona
issuers unless Arizona Obligations of Arizona issuers of the
desired quality, maturity and interest rate are not available. As
an Arizona-oriented fund, at least 65% of the Trust's total assets
will be invested in Arizona Obligations of Arizona issuers. The
Trust invests only in Arizona Obligations and, possibly, in Futures
and options on Futures (see below) for protective (hedging)
purposes.
In general, there are nine separate credit ratings, ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Trust will have a portfolio of
quality-oriented (investment grade) securities, the Arizona
Obligations which the Trust will purchase must, at the time of
purchase, either (i) be rated within the four highest credit
ratings assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations so
rated, by Banc One Investment Advisors Corporation (the "Adviser"),
the Trust's investment adviser, subject to the direction and
control of the Trust's Board of Trustees. Municipal obligations
rated in the fourth highest credit rating are considered by such
rating agencies to be of medium quality and thus may present
investment risks not present in more highly rated obligations. Such
bonds lack outstanding investment characteristics and may in fact
have speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Arizona Obligation is downgraded such that it could not
then be purchased by the Trust, or, in the case of an unrated
Arizona Obligation, if the Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Trust may purchase, it is the current policy
of the Trust to cause any such obligation to be sold as promptly
thereafter as the Adviser in its discretion determines to be
consistent with the Trust's objectives; such obligation remains in
the Trust's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Trust can purchase industrial
development bonds only if they meet the definition of Arizona
Obligations, i.e., the interest on them is exempt from Arizona
State and regular Federal income taxes.
The Trust is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940 Act").
The Trust also intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code (the "Code").
One of the tests for such qualification under the Code is, in
general, that at the end of each fiscal quarter of the Trust, at
least 50% of its assets must consist of (i) cash; and (ii)
securities which, as to any one issuer, do not exceed 5% of the
value of the Trust's assets. If the Trust had elected to register
under the 1940 Act as a "diversified" investment company, it would
have to meet the same test as to 75% of its assets. The Trust may
therefore not have as much diversification among securities, and
thus diversification of risk, as if it had made this election under
the 1940 Act. In general, the more the Trust invests in the
securities of specific issuers, the more the Trust is exposed to
risks associated with investments in those issuers. The Trust's
assets, being primarily or entirely Arizona issues, are accordingly
subject to economic and other conditions affecting Arizona. (See
"Risk Factors and Special Considerations Regarding Investment in
Arizona Obligations.")
Certain Stabilizing Measures
The Trust will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash and
cash equivalents in attempting to protect against declines in the
value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Trust has no current intention of using futures and options, to
the limited degree described below, these may be used to attempt to
hedge against changes in the market price of the Trust's Arizona
Obligations caused by interest rate fluctuations. Futures and
options could also provide a hedge against increases in the cost of
securities the Trust intends to purchase.
Although it does not currently do so, and since inception has
not done so, the Trust may buy and sell futures contracts relating
to indices on municipal bonds ("Municipal Bond Index Futures") and
to U.S. government securities ("U.S. Government Securities
Futures"); both kinds of futures contracts are "Futures." The Trust
may also write and purchase put and call options on Futures. As a
matter of fundamental policy the Trust will not buy or sell a
Future or an option on a Future if thereafter more than 10% of its
net assets would be in initial or variation margin on such Futures
and options on them, and in premiums on such options. The Trust
will not enter into Futures or options for which the aggregate
initial margins and premiums paid for options exceed 5% of the fair
market value of the Trust's assets. (See the Additional Statement.)
Under normal market conditions, the Trust cannot purchase or sell
Municipal Bond Index Futures, U.S. Government Securities Futures,
or options on Futures if thereafter more than 20% of its total
assets would consist of cash, margin deposits on such Futures and
margin deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or possible
decline in the value of Arizona Obligations.
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Trust's portfolio and
the prices of Futures or options purchased or sold by the Trust;
(ii) incorrect forecasts by the Adviser concerning interest rates
which may result in the hedge being ineffective; and (iii) possible
lack of a liquid secondary market for a Future or option; the
resulting inability to close a Futures or options position could
adversely affect the Trust's hedging ability. For a hedge to be
completely effective, the price change of the hedging instrument
should equal the price change of the security being hedged. The
risk of imperfect correlation of these price changes is increased
as the composition of the Trust's portfolio is divergent from the
debt securities underlying the hedging instrument. To date, the
Adviser has had no experience in the use of Futures or options on
them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits" established
by commodity exchanges which restrict the amount of change in the
contract price allowed during a single trading day. Thus, once a
daily limit is reached, no further trades may be entered into
beyond the limit, thereby preventing the liquidation of open
positions. Prices have in the past reached the daily limit on a
number of consecutive trading days. For further information about
Futures and options, see the Additional Statement.
When and if the Trust determines to use Futures or options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one year,
but permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding one year, in each case upon
not more than 30 days' notice. The issuer of such notes normally
has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus
accrued interest upon a specified number of days' notice to the
noteholders. The interest rate on a floating rate demand note is
based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The
interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
Participation Interests
The Trust may purchase from financial institutions
participation interests in Arizona Obligations (such as industrial
development bonds and municipal lease/purchase agreements). A
participation interest gives the Trust an undivided interest in the
underlying Arizona Obligations in the proportion that the Trust's
participation interest bears to the total amount of the underlying
Arizona Obligations. All such participation interests must meet the
Trust's credit requirements. (See "Limitation to 10% as to Certain
Investments.")
When-Issued and Delayed Delivery Purchases
The Trust may buy Arizona Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring them.
The Arizona Obligations so purchased are subject to market
fluctuation and no interest accrues to the Trust until delivery and
payment take place; their value at the delivery date may be less
than the purchase price. The Trust cannot enter into when-issued
commitments exceeding in the aggregate 15% of the market value of
the Trust's total assets, less liabilities other than the
obligations created by when-issued commitments. If the Trust
chooses to dispose of the right to acquire a when-issued obligation
prior to its acquisition, it could, as with the disposition of any
other portfolio holding, incur a gain or loss due to market
fluctuation; any such gain would be a taxable short-term gain. The
Trust places an amount of assets equal in value to the amount due
on the settlement date for the when-issued or delayed delivery
securities being purchased in a segregated account with the
Custodian, which is marked to market every business day. (See the
Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Trust cannot purchase Arizona Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does not
include any Arizona Obligations as to which the Trust can exercise
the right to demand payment in full within three days and as to
which there is a secondary market. Floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. (See
the Additional Statement.)
Current Policy as to Certain Obligations
The Trust will not invest more than 25% of its total assets in
(i) Arizona Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value
of the Trust's Investments and Their Yields
The value of the Arizona Obligations in which the Trust
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Trust buys Arizona Obligations, the value of
these obligations will normally go down; if these rates go down,
the value of these obligations will normally go up. Changes in
value and yield based on changes in prevailing interest rates may
have different effects on short-term Arizona Obligations than on
long-term obligations. Long-term obligations (which often have
higher yields) may fluctuate in value more than short-term ones.
For this reason, the Trust may, to achieve a defensive position,
shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Arizona Obligations
The following is a discussion of the general factors that
might influence the ability of Arizona issuers to repay principal
and interest when due on the Arizona Obligations contained in the
portfolio of the Trust. Such information is derived from sources
that are generally available to investors and is believed by the
Trust to be accurate, but has not been independently verified and
may not be complete.
The composition of the Arizona economy has changed
significantly in recent years. Arizona has shifted from a
resource-based economy to one based on high-tech manufacturing,
construction and services. The construction sector recently has
shown an upturn from the cyclical lows associated with several
factors. These factors included a slowing in the rate of growth of
population, over-built conditions in most sub-markets and less
favorable tax treatments. The problems associated with the
phenomenal growth experienced during the 1980's boom, i.e., air
quality, transportation and public infrastructure, are being
addressed by the Arizona legislature and other public bodies.
Officials throughout the state have been challenged to manage
budgetary strain and set priorities with fewer available resources.
Whether municipalities can maintain fiscal stability will become
increasingly dependent on growth expectations and municipalities'
willingness to reduce spending and manage revenues. The period of
double-digit increases in the tax base and population and the tax
revenues generated by such growth appears to be over. As such,
Arizona municipalities will have to adapt to a changing and more
constricted fiscal environment.
One of the most significant issues facing Arizona
municipalities is the ability to provide water. The Central Arizona
Project is a three hundred thirty-five mile long water conveyance
system designed to take water from the Colorado River and deliver
it to the Phoenix and Tucson metropolitan areas, to Indian
reservations and to farms for irrigation. The project has been
completed to Tucson, but the start of Arizona's obligation to repay
the Federal government its $1.8 billion share of the project's
costs is still subject to negotiation among the parties. However,
demand for the water is currently only one-third of capacity. The
price of water could increase substantially for cities to cover the
cost of the project. Currently, plans are being discussed to
maintain the project's finances and to boost the demand for the
water, thus spreading the projects costs to all its intended users.
In July, 1994, the Supreme Court of Arizona reversed a lower
court ruling and held that the State's statutory scheme for
financing public education is not in compliance with the State's
constitution. The case was remanded to the lower court to determine
whether, in a reasonable time, the Arizona legislature has taken
action to remedy the financing scheme to bring it into compliance.
In 1997, the most recent attempt by the legislature to comply with
the ruling was found inadequate by a lower court. The Supreme Court
has also ruled that its ruling will be prospective only and that
bonded indebtedness incurred under existing statutes as long as
they are in effect are valid and enforceable. As of the date of
this prospectus, the legislature has not reached agreement on a
permanent solution. It is not possible to predict what further
court or legislative action will be taken or what effect such
action may have on Arizona Obligations in the Trust's portfolio or
the supply of new Arizona Obligations in the future.
In early 1996, a lower court held illegal the practice used by
some localities in Arizona pursuant to which so-called "Capital
Appreciation Bonds" ("CAB"s) are issued. CABs are zero-coupon bonds
that pay no current interest. The ruling affects only one school
district but similar obligations have been issued by other
localities. The Trust does not own any CABs but does own
conventional issues of localities that have issued CABs. The suit
challenged the further practice whereby a municipality includes in
its bonded indebtedness only the initial principal amount of its
CABs. Under this practice, because the entire principal amount of
the CABs is not included, the municipality can issue additional
conventional bonds without exceeding its legal debt limit. In 1996,
the legislature enacted legislation validating all bonds of this
type outstanding on March 31, 1996. However, the restrictions in
the legislation may have an adverse impact on the overall financial
condition of municipalities that have issued CABs and may restrict
their ability to issue additional debt. There may be additional
court challenges to the legislation.
Inasmuch as the Arizona Obligations in which the Trust may
invest from time to time include general obligation bonds, revenue
bonds, industrial development bonds, and special tax assessment
bonds, and the sensitivity of each of these types of investments to
the general and economic factors discussed above may vary
significantly, no assurance can be given as to the effect, if any,
that these factors, individually or in the aggregate, may have on
any individual Arizona Obligation or on the Trust as a whole.
Obligations of non-Arizona issuers are subject to general
economic and other factors affecting those issuers.
INVESTMENT RESTRICTIONS
The Trust has a number of policies about what it can and
cannot do. Certain of these policies, identified in the Prospectus
and in the Additional Statement as "fundamental policies," cannot
be changed unless the holders of a "majority," as defined in the
1940 Act, of the Trust's outstanding shares vote to change them.
(See the Additional Statement for a definition of such a majority.)
All other policies can be changed from time to time by the Board of
Trustees without shareholder approval. Some of the more important
of the Trust's fundamental policies, not otherwise identified in
the Prospectus, are set forth below; others are listed in the
Additional Statement.
1. The Trust invests only in certain limited securities.
The Trust cannot buy any securities other than the Arizona
Obligations meeting the standards stated under "Investment of the
Trust's Assets"; the Trust can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Trust has industry investment requirements.
The Trust cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Trust will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Trust cannot make loans.
The Trust can buy those Arizona Obligations which it is
permitted to buy (see "Investment of the Trust's Assets"); this is
investing, not making a loan. The Trust cannot lend its portfolio
securities.
4. The Trust can borrow only in limited amounts for special
purposes.
The Trust can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage or
pledge its assets only in connection with such borrowing and only
up to the lesser of the amounts borrowed or 5% of the value of its
total assets. However, this shall not prohibit margin arrangements
in connection with the purchase or sale of Municipal Bond Index
Futures, U.S. Government Securities Futures or options on them, or
the payment of premiums on those options. Interest on borrowings
would reduce the Trust's income. Except in connection with
borrowings, the Trust will not issue senior securities. The Trust
will not purchase any Arizona Obligations, Futures or options on
Futures while it has any outstanding borrowings which exceed 5% of
the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Trust's
classes of shares and offering price per share of each class is
determined as of 4:00 p.m., New York time, on each day that the New
York Stock Exchange is open (a "business day"), by dividing the
value of the Trust's net assets (i.e., the value of the assets less
liabilities) allocable to each class by the total number of shares
of such class then outstanding. Determination of the value of the
Trust's assets is subject to the direction and control of the
Trust's Board of Trustees. In general, it is based on market value,
except that Arizona Obligations maturing in 60 days or less are
generally valued at amortized cost; see the Additional Statement
for further information.
ALTERNATIVE PURCHASE PLANS
In this Prospectus the Trust provides you with two alternative
ways to invest in the Trust through two separate classes of shares.
All classes represent interests in the same portfolio of Arizona
Obligations. The primary difference between the classes of shares
offered to individuals lies in their sales charge structures and
ongoing expenses, as described below. You should choose the class
that best suits your own circumstances and needs.
If you choose to purchase Class A Shares you will pay the
applicable sales charge at the time of your purchase. By purchasing
Class C Shares, you will pay a sales charge over a period of six
years after purchase but without paying anything at time of
purchase, much as goods can be purchased on an installment plan.
You are subject to a contingent deferred sales charge, described
below, but only if you redeem your Class C Shares before they have
been held 12 months from your purchase. (See "Computation of
Holding Periods for Class C Shares.")
Class A Shares, "Front-Payment Class Shares," are offered to
anyone at net asset value plus a sales charge, paid at the time of
purchase, at the maximum rate of 4.0% of the public offering price,
with lower rates for larger purchases. When you purchase Class A
Shares, the amount of your investment is reduced by the applicable
sales charge. Class A Shares are subject to an asset retention
service fee under the Trust's Distribution Plan at the rate of 0.15
of 1% of the average annual net assets represented by the Class A
Shares. Certain Class A Shares purchased in transactions of $1
million or more are subject to a contingent deferred sales charge.
(See "Purchase of $1 Million or More.")
Class C Shares, "Level-Payment Class Shares," are offered to
anyone at net asset value with no sales charge payable at purchase
but with a level charge for distribution fees and service fees for
six years after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets represented by the Class C
Shares. (See "Distribution Plan" and "Shareholder Services Plan for
Class C Shares.") Six years after the date of purchase, Class C
Shares, including Class C Shares acquired in exchange for other
Class C Shares under the Exchange Privilege (see "Exchange
Privilege"), are automatically converted to Class A Shares. If you
redeem Class C Shares before you have held them for 12 months from
the date of purchase you will pay a contingent deferred sales
charge ("CDSC") at the rate of 1%, calculated on the net asset
value of the redeemed Class C Shares at the time of purchase or of
redemption, whichever is less. The amount of any CDSC will be paid
to the Distributor. The CDSC does not apply to shares acquired
through the reinvestment of dividends on Class C Shares or to any
Class C Shares held for more than 12 months after purchase. For
purposes of applying the CDSC and determining the time of
conversion, 12-month and six-year holding periods are considered
modified by up to one month depending upon when during a month your
purchase of such shares is made. (See "Computation of Holding
Periods for Class C Shares" and "How to Purchase Class C Shares.")
In determining whether a CDSC is payable on a redemption of
Class C Shares, it will be assumed that the redemption is made
first of any shares acquired as dividends or distributions, second
of any Class C Shares you have held for more than 12 months from
the date of purchase and finally of those Class C Shares as to
which the CDSC is payable which you have held the longest. This
will result in your paying the lowest possible CDSC.
Computation of Holding Periods for Class C Shares
For purposes of determining the holding period for Class C
Shares, all of your purchases made during a calendar month will be
deemed to have been made on the first business day of that month at
the average cost of all purchases made during that month. The
12-month CDSC holding period will end on the first business day of
the 12th calendar month after the date your purchase is deemed to
have been made. Accordingly, the CDSC holding period applicable to
your Class C Shares may be up to one month less than the full 12
months depending upon when your actual purchase was made during a
month. Running of the 12-month CDSC holding period will be
suspended for one month for each period of thirty days during which
you have held shares of a money market fund you have received in
exchange for Class C Shares under the Exchange Privilege. (See
"Exchange Privilege.")
Your Class C Shares will automatically convert to Class A
Shares six years after the date of purchase, together with a
pro-rata portion of all Class C Shares representing dividends and
other distributions paid in additional Class C Shares. The Class C
Shares so converted will no longer be subject to the higher
expenses borne by the Class C Shares. The conversion will be
effected at relative net asset values on the first business day of
the month following that in which the sixth anniversary of your
purchase of the Class C Shares occurred, except as noted below.
Accordingly, the holding period applicable to your Class C Shares
may be up to one month more than the six years depending upon when
your actual purchase was made during a month. Because the per share
value of Class A Shares may be higher than that of Class C Shares
at the time of conversion, you may receive fewer Class A Shares
than the number of Class C Shares converted. If you have made one
or more exchanges of Class C Shares among the Aquila-sponsored
tax-free municipal bond funds or equity funds under the Exchange
Privilege, the six-year holding period is deemed to have begun on
the date you purchased your original Class C Shares of the Trust or
of another of the Aquila bond or equity funds. The six-year holding
period will be suspended by one month for each period of thirty
days during which you hold shares of a money market fund you have
received in exchange for Class C Shares under the Exchange
Privilege. (See "Exchange Privilege.")
The following chart summarizes the principal differences
between Class A Shares and Class C Shares.
<TABLE>
<CAPTION>
Class A Class C
<S> <C> <C>
Initial Sales Maximum of 4% of the None
Charge Public Offering Price
Contingent None (except for Maximum CDSC of 1%
Deferred certain purchases if shares redeemed
Sales Charge over $1 Million) before 12 months;
0% after 12 months
Distribution 0.15 of 1% Distribution fee of 0.75
and Service of 1% and a service
Fees fee of 0.25 of 1% for
a total of 1%, payable
for six years
Other Initial Sales Charge Shares convert to
Information waived or reduced Class A Shares
in some cases after six years
</TABLE>
Factors to Consider in Choosing Classes of Shares
This discussion relates to the major differences between Class
A Shares and Class C Shares. It is recommended that any investment
in the Trust be considered long-term in nature.
Over time, the cumulative total cost of the 1% annual service
and distribution fees on the Class C Shares will equal or exceed
the total cost of the initial 4% maximum initial sales charge and
0.15 of 1% annual fee payable for Class A Shares. For example, if
equal amounts were paid at the same time for Class A Shares (where
the amount invested is reduced by the amount of the sales charge)
and for Class C Shares (which carry no sales charge at the time of
purchase) and the net asset value per share remained constant over
time, the total of such costs for Class C Shares would equal the
total of such costs for Class A Shares after approximately four and
two-thirds years. This example assumes no redemptions and
disregards the time value of money. Purchasers of Class C Shares
have all of their investment dollars invested from the time of
purchase, without having their investment reduced at the outset by
the initial sales charge payable for Class A Shares. If you invest
in Class A Shares you will pay the entire sales charge at the time
of purchase. Accordingly, if you expect to redeem your shares
within a reasonably short time after purchase, you should consider
the total cost of such an investment in Class A Shares compared
with a similar investment in Class C Shares. The example under
"Table of Expenses" shows the effect of Trust expenses for both
classes if a hypothetical investment in each of the classes is held
for 1, 3, 5 and 10 years. (See the Table of Expenses.)
Dividends and other distributions paid by the Trust with
respect to shares of each class are calculated in the same manner
and at the same time. The dividends actually paid with respect to
Class C Shares will be lower than those paid on Class A Shares
because Class C Shares bear higher distribution and service fees
and will have a higher expense ratio. In addition, the dividends of
each class can vary because each class will bear certain
class-specific charges. For example, each class will bear the costs
of printing and mailing annual reports to its own shareholders.
HOW TO INVEST IN THE TRUST
The Trust's shares may be purchased through any investment
broker or dealer (a "selected dealer") which has a sales agreement
with Aquila Distributors, Inc. (the "Distributor") or through the
Distributor. There are two ways to make an initial investment: (i)
order the shares through your investment broker or dealer, if it is
a selected dealer; or (ii) mail the Application with payment to the
Trust's Shareholder Servicing Agent (the "Agent") at the address on
the Application. If you purchase Class A Shares the applicable
sales charge will apply in either instance. Subsequent investments
are also subject to the applicable sales charges. You are urged to
complete an Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment. Unless your initial investment is specified to be made
in Class C Shares, it will be made in Class A Shares.
The minimum initial investment for Class A Shares and Class C
Shares is $1,000, except as otherwise stated in the Prospectus or
Additional Statement. You may also make an initial investment of at
least $50 by establishing an Automatic Investment Program. To do
this you must open an account for automatic investments of at least
$50 each month and make an initial investment of at least $50. (See
below and "Automatic Investment Program" in the Application.) Such
investment must be drawn in United States dollars on a United
States commercial or savings bank, a credit union or a United
States branch of a foreign commercial bank (each of which is a
"Financial Institution"). You may make subsequent investments in
the same class of shares in any amount (unless you have an
Automatic Withdrawal Plan). Your subsequent investment may be made
through a selected dealer or by forwarding payment to the Agent,
with the name(s) of account owner(s), the account number, the name
of the Trust and the class of shares to be purchased. With
subsequent investments, please send the pre-printed stub attached
to the Trust's confirmations.
Subsequent investments of $50 or more in shares of the same
class as your initial investment can be made by electronic funds
transfer from your demand account at a Financial Institution. To
use electronic funds transfer for your purchases, your Financial
Institution must be a member of the Automated Clearing House and
the Agent must have received your completed Application designating
this feature, or, after your account has been opened, a Ready
Access Features form available from the Distributor or the Agent.
A pre-determined amount can be regularly transferred for investment
("Automatic Investment"), or single investments can be made upon
receipt by the Agent of telephone instructions from anyone
("Telephone Investment"). The maximum amount of each Telephone
Investment is $50,000. Upon 30 days' written notice to
shareholders, the Trust may modify or terminate these investment
methods at any time or charge a service fee, although no such fee
is currently contemplated.
The offering price is the net asset value per share for Class
C Shares and the net asset value per share plus the applicable
sales charge for Class A Shares. The offering price determined on
any day applies to all purchase orders received by the Agent from
selected dealers that day, except that orders received by it after
4:00 p.m. New York time will receive that day's offering price only
if such orders were received by selected dealers from customers
prior to such time and transmitted to the Distributor prior to its
close of business that day (normally 5:00 p.m. New York time); if
not so transmitted, such orders will be filled at the next
determined offering price. Selected dealers are required to
transmit orders promptly. Investments by mail are made at the
offering price next determined after receipt of the purchase order
by the Agent. Purchase orders received on other than a business day
will be executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day. If that day is not a business day your
order will be executed at the price determined on the next business
day. In the case of Telephone Investment your order will be filled
at the next determined offering price. If your order is placed
after the time for determining the net asset value of the Trust
shares for any day it will be executed at the price determined on
the following business day. The sale of shares will be suspended
during any period when the determination of net asset value is
suspended and may be suspended by the Distributor when the
Distributor judges it in the Trust's best interest to do so.
At the date of the Prospectus, Class A Shares and Class C
Shares of the Trust are available only in the following states:
Arizona, California, Colorado, District of Columbia, Florida,
Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Massachusetts,
Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, New
York, Ohio, Oregon, Pennsylvania, Texas, Utah, Washington and
Wisconsin.
If you do not reside in one of these states, you should not
purchase shares of the Trust. If Class A Shares or Class C Shares
of the Trust are sold outside of these states, the Trust can redeem
them. Such a redemption may result in a loss to you and may have
tax consequences.
In addition, if your state of residence is not Arizona, the
dividends from the Trust may not be exempt from income tax of the
state in which you reside. Accordingly, you should consult your tax
adviser before acquiring shares of the Trust.
How to Purchase Class A Shares
(Front-Payment Class Shares)
The following table shows the amount of the sales charge to a
"single purchaser" (defined below) together with the dealer
discounts paid to dealers and the agency commissions paid to
brokers (collectively called the "commissions") for purchases of
Class A Shares:
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
as as Commissions
Percentage Approximate as of
of Public Percentage Percentage
Offering of Amount of Offering
Price Invested Price
<S> <C> <C> <C>
Less than $25,000......... 4.00% 4.17% 3.00%
$25,000 but less
than $50,000........... 3.75% 3.90% 3.00%
$50,000 but less
than $100,000.......... 3.50% 3.63% 2.75%
$100,000 but less
than $250,000......... 3.25% 3.36% 2.75%
$250,000 but less
than $500,000......... 3.00% 3.09% 2.50%
$500,000 but less
than $1,000,000....... 2.50% 2.56% 2.25%
For purchases of $1 million or more see "Purchase of $1 Million or More,"
below.
</TABLE>
The table of sales charges is applicable to purchases of Class
A Shares by a "single purchaser," i.e.: (a) an individual; (b) an
individual together with his or her spouse and their children under
the age of 21 purchasing Class A Shares for his, her or their own
accounts; (c) a trustee or other fiduciary purchasing Class A
Shares for a single trust estate or a single fiduciary account; and
(d) a tax-exempt organization enumerated in Section 501(c)(3) or
(13) of the Code.
Upon notice to all selected dealers, the Distributor may
reallow up to the full amount of the applicable sales charge as
shown in the above schedule during periods specified in such
notice. During periods when all or substantially all of the entire
sales charge is reallowed, such selected dealers may be deemed to
be underwriters as that term is defined in the Securities Act of
1933.
Purchase of $1 Million or More
Class A Shares issued under the following circumstances are
called "CDSC Class A Shares": (i) Class A Shares issued in a single
purchase of $1 million or more by a single purchaser; and (ii) all
Class A Shares issued in a single purchase to a single purchaser
the value of which, when added to the value of the CDSC Class A
Shares and Class A Shares on which a sales charge has been paid,
already owned at the time of such purchase, equals or exceeds $1
million. CDSC Class A Shares also include certain Class A Shares
issued under the program captioned "Special Dealer Arrangements,"
below. CDSC Class A Shares do not include (i) Class A Shares
purchased without sales charge pursuant to the terms described
under "General," below and (ii) Class A Shares purchased in
transactions of less than $1 million and when certain special
dealer arrangements are not in effect under "Certain Investment
Companies" set forth under "Reduced Sales Charges," below.
When you purchase CDSC Class A Shares you will not pay a sales
charge at the time of purchase, and the Distributor will pay to any
dealer effecting such a purchase an amount equal to 1% of the sales
price of the shares purchased for purchases of $1 million but less
than $2.5 million, 0.50 of 1% for purchases of $2.5 million but
less than $5 million, and 0.25 of 1% for purchases of $5 million or
more.
If you redeem all or part of your CDSC Class A Shares during
the four years after your purchase of such shares, at the time of
redemption you will be required to pay to the Distributor a special
contingent deferred sales charge based on the lesser of (i) the net
asset value of your redeemed CDSC Class A Shares at the time of
purchase or (ii) the net asset value of your redeemed CDSC Class A
Shares at the time of redemption (the "Redemption Value"). The
special charge will be an amount equal to 1% of the Redemption
Value if the redemption occurs within the first two years after
purchase, and 0.50 of 1% of the Redemption Value if the redemption
occurs within the third or fourth year after purchase. The special
charge will apply to redemptions of CDSC Class A Shares purchased
without a sales charge pursuant to a Letter of Intent, as described
below under "Reduced Sales Charges for Certain Purchases of Class
A Shares." The special charge does not apply to Class A Shares
acquired through the reinvestment of dividends on CDSC Class A
Shares or to any CDSC Class A Shares held for more than four years
after purchase. In determining whether the special charge is
applicable, it will be assumed that the CDSC Class A Shares you
have held the longest are the first CDSC Class A Shares to be
redeemed, unless you instruct the Agent otherwise. It will also be
assumed that if you have both CDSC Class A Shares and non-CDSC
Class A Shares the non-CDSC Class A Shares will be redeemed first.
For purposes of determining the holding period for CDSC Class
A Shares, all of your purchases made during a calendar month will
be deemed to have been made on the first business day of that month
at the average cost of all purchases made during that month. The
four-year holding period will end on the first business day of the
48th calendar month after the date your purchase is deemed to have
been made. Accordingly, the CDSC holding period applicable to your
CDSC Class A Shares may be up to one month less than the full 48
months depending upon when your actual purchase was made during a
month. Running of the 48-month CDSC holding period will be
suspended for one month for each period of thirty days during which
you have held shares of a money market fund you have received in
exchange for CDSC Class A Shares under the Exchange Privilege. (See
"Exchange Privilege.")
Reduced Sales Charges for Certain Purchases of
Class A Shares
Right of Accumulation: If you are a "single purchaser" you may
benefit from a reduction of the sales charge in accordance with the
above schedule for subsequent purchases of Class A Shares if the
cumulative value (at cost or current net asset value, whichever is
higher) of Class A Shares you have previously purchased with a
sales charge and still own, together with Class A Shares of your
subsequent purchase with such a charge, amounts to $25,000 or more.
Letters of Intent: The foregoing schedule of reduced sales
charges will also be available to "single purchasers" who enter
into a written Letter of Intent (included in the Application)
providing for the purchase, within a thirteen-month period, of
Class A Shares of the Trust through a single selected dealer or
through the Distributor. Class A Shares of the Trust which you
previously purchased during a 90-day period prior to the date of
receipt by the Distributor of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For further details, including escrow provisions, see
the Letter of Intent provisions of the Application.
General: Class A Shares may be purchased at the next
determined net asset value by the Trust's Trustees and officers, by
the directors, officers and certain employees, retired employees
and representatives of the Adviser and its parent and affiliates,
the Administrator and the Distributor, by selected dealers and
brokers and their officers and employees, by certain persons
connected with firms providing legal, advertising or public
relations assistance, by certain family members of, and plans for
the benefit of, the foregoing, and for the benefit of trust or
similar clients of banking institutions over which these
institutions have full investment authority if the Trust or the
Distributor has entered into an agreement relating to such
purchases. Except for the last category, purchasers must give
written assurance that the purchase is for investment and that the
Class A Shares will not be resold except through redemption. There
may be tax consequences of these purchases. Such purchasers should
consult their own tax counsel. Class A Shares may also be issued at
net asset value in a merger, acquisition or exchange offer made
pursuant to a plan of reorganization to which the Trust is a party.
The Trust permits the sale of its Class A Shares at prices
that reflect the reduction or elimination of the sales charge to
investors who are members of certain qualified groups meeting the
following requirements. A qualified group is (i) a group or
association, or a category of purchasers who are represented by a
fiduciary, professional or other representative (other than a
registered broker-dealer), which (ii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its
costs of distributing Class A Shares; (iii) gives its endorsement
or authorization (if it is a group or association) to an investment
program to facilitate solicitation of its membership by a broker or
dealer; and (iv) complies with the conditions of purchase that are
set forth in any agreement entered into between the Trust and the
group, representative or broker or dealer. At the time of purchase
you must furnish the Distributor with information sufficient to
permit verification that the purchase qualifies for a reduced sales
charge, either directly or through a broker or dealer.
Certain Investment Companies: Class A Shares of the Trust may
be purchased at net asset value without sales charge (except as set
forth below under "Special Dealer Arrangements") to the extent that
the aggregate net asset value of such Class A Shares does not
exceed the proceeds from a redemption (a "Qualified Redemption"),
made within 120 days prior to such purchase, of shares of another
investment company on which a sales charge, including a contingent
deferred sales charge, has been paid. Additional information is
available from the Distributor.
To qualify, the following special procedures must be followed:
1. A completed Application (included in the Prospectus) and
payment for the Class A Shares to be purchased must be sent to the
Distributor, Aquila Distributors, Inc., 380 Madison Avenue, Suite
2300, New York, NY 10017 and should not be sent to the Shareholder
Servicing Agent of the Trust. (This instruction replaces the
mailing address contained on the Application.)
2. The Application must be accompanied by evidence
satisfactory to the Distributor that the prospective shareholder
has made a Qualified Redemption in an amount at least equal to the
net asset value of the Class A Shares to be purchased. Satisfactory
evidence includes a confirmation of the date and the amount of the
redemption from the investment company, its transfer agent or the
investor's broker or dealer, or a copy of the investor's account
statement with the investment company reflecting the redemption
transaction.
3. You must complete and return to the Distributor a Transfer
Request Form, which is available from the Distributor.
The Trust reserves the right to alter or terminate this
privilege at any time without notice. The Prospectus will be
supplemented to reflect such alteration or termination.
Special Dealer Arrangements: During certain periods determined
by the Distributor, the Distributor (not the Trust) will pay to any
dealer effecting a purchase of Class A Shares of the Trust using
the proceeds of a Qualified Redemption the lesser of (i) 1% of such
proceeds or (ii) the same amounts described under "Purchase of $1
Million or More," above on the same terms and conditions. Class A
Shares of the Trust issued in such a transaction will be CDSC Class
A Shares and if you thereafter redeem all or part of such shares
during the four-year period from the date of purchase you will be
subject to the special contingent deferred sales charge described
under "Purchase of $1 Million or More," above, on the same terms
and conditions. Whenever the Special Dealer Arrangements are in
effect the Prospectus will be supplemented.
How to Purchase Class C Shares
(Level-Payment Class Shares)
Level-Payment Class Shares (Class C Shares) are offered at net
asset value with no sales charge payable at purchase. A level
charge is imposed for service and distribution fees for the first
six years after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Trust represented by
the Class C Shares. If you redeem Class C Shares before you have
held them for 12 months from the date of purchase you will pay a
contingent deferred sales charge ("CDSC"). The CDSC is charged at
the rate of 1%, calculated on the net asset value of the redeemed
Class C Shares at the time of purchase or at redemption, whichever
is less. There is no CDSC after Class C Shares have been held
beyond the applicable period. The CDSC does not apply to Class C
Shares acquired through the reinvestment of dividends on Class C
Shares.
The Distributor will pay to any dealer effecting a purchase of
Class C Shares an amount equal to 1% of the sales price of the
Class C Shares purchased.
Additional Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of any
class of shares of the Trust. Additional compensation may include
payment or partial payment for advertising of the Trust's shares,
payment of travel expenses, including lodging, incurred in
connection with attendance at sales seminars taken by qualifying
registered representatives to locations within or outside of the
United States, other prizes or financial assistance to securities
dealers in offering their own seminars or conferences. In some
instances, such compensation may be made available only to certain
dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Dealers may not use sales of
the Trust's shares to qualify for the incentives to the extent such
may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers,
Inc. The cost to the Distributor of such promotional activities and
such payments to participating dealers will not exceed the amount
of the sales charges in respect of sales of all classes of shares
of the Trust effected through such participating dealers, whether
retained by the Distributor or reallowed to participating dealers.
No such additional compensation to dealers in connection with sales
of shares of the Trust will affect the price you pay for shares or
the amount that the Trust will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Systematic Payroll Investments
If your employer has established with the Trust a Systematic
Payroll Investment Plan ("Payroll Plan") you may arrange for
systematic investments into the Trust through a Payroll Plan.
Investments can be made in either Class A Shares or Class C Shares.
In order to participate in a Payroll Plan, you should make
arrangements with your own employer's payroll department, and you
must complete and sign any special application forms which may be
required by your employer. You must also complete the Application
included in the Prospectus. Once your application is received and
put into effect, under a Payroll Plan the employer will make a
deduction from payroll checks in an amount you determine, and will
remit the proceeds to the Trust. An investment in the Trust will be
made for you at the offering price, which includes applicable sales
charges determined as described above, when the Trust receives the
funds from your employer. The Trust will send a confirmation of
each transaction to you. To change the amount of or to terminate
your participation in the Payroll Plan (which could take up to ten
days), you must notify your employer.
Confirmations and Share Certificates
All purchases of shares will be confirmed and credited to you
in an account maintained for you at the Agent in full and
fractional shares of the Trust (rounded to the nearest 1/1000th of
a share).
No share certificates will be issued for Class C Shares. Share
certificates for Class A Shares will be issued only if you so
request in writing to the Agent. All share certificates previously
issued by the Trust represent Class A Shares. No certificates will
be issued for fractional Class A Shares or if you have elected
Automatic Investment or Telephone Investment for Class A Shares
(see "How to Invest in the Trust" above) or Expedited Redemption
(see "How to Redeem Your Investment" below). If certificates for
Class A Shares are issued at your request, Expedited Redemption
Methods described below will not be available. In addition, you may
incur delay and expense if you lose the certificates.
The Trust and the Distributor reserve the right to reject any
order for the purchase of shares. In addition, the offering of
shares may be suspended at any time and resumed at any time
thereafter.
Distribution Plan
The Trust has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended to
result in the sale of its shares except pursuant to a written plan
adopted under the Rule. The Plan has three parts.
Under one part of the Plan, the Trust is authorized to make
payments with respect to Class A Shares ("Class A Permitted
Payments") to Qualified Recipients, which payments shall be made
through the Distributor or shareholder servicing agent as
disbursing agent and may not exceed, for any fiscal year of the
Trust (as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any fiscal
year which is not a full fiscal year), 0.15 of 1% of the average
annual net assets represented by the Class A Shares of the Trust.
Such payments shall be made only out of the Trust's assets
allocable to the Class A Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including but
not limited to any principal underwriter of the Trust, with which
the Trust or Distributor has entered into written agreements and
which have rendered assistance (whether direct, administrative, or
both) in the distribution and/or retention of the Trust's Class A
Shares or servicing of accounts of shareholders owning Class A
Shares.
Permitted Payments under the Plan commenced July 1,
1994.During the fiscal year ended June 30, 1997, $589,361 was paid
to Qualified Recipients with respect to Class A Shares, of which
$17,669 was retained by the Distributor. All of such payments were
for compensation. (See the Additional Statement for a description
of the Distribution Plan.)
Whenever the Trust makes Class A Permitted Payments, the
aggregate annual rate of the advisory fee and administration fee
otherwise payable by the Trust will be reduced from 0.50 of 1% to
0.40 of 1% of the Trust's average annual net assets. (See
"Management Arrangements.")
Under another part of the Plan, the Trust is authorized to
make payments with respect to Class C Shares ("Class C Permitted
Payments") to Qualified Recipients. Class C Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal year
of the Trust (as adjusted for any part or parts of a fiscal year
during which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.75 of 1% of the
average annual net assets represented by the Class C Shares of the
Trust. Such payments shall be made only out of the Trust's assets
allocable to the Class C Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including but
not limited to any principal underwriter of the Trust, with which
the Distributor has entered into written agreements and which have
rendered assistance (whether direct, administrative, or both) in
the distribution and/or retention of the Trust's Class C Shares or
servicing of accounts of shareholders owning Class C Shares.
Payments with respect to Class C Shares during the first year after
purchase are paid to the Distributor and thereafter to other
Qualified Recipients. During the fiscal year ended June 30, 1997,
$337 was paid under the Plan with respect to Class C Shares, of
which the Distributor received $337. All of such payments were for
compensation.
Another part of the Plan is designed to protect against any
claim against or involving the Trust that some of the expenses
which might be considered to be sales-related which the Trust pays
or may pay come within the purview of the Rule. The Trust believes
that except for Permitted Payments it is not financing any such
activity and does not consider any payment enumerated in this part
of the Plan as so financing any such activity. However, it might be
claimed that some of the expenses the Trust pays come within the
purview of the Rule. If and to the extent that any payment as
specifically listed in the Plan (see the Additional Statement) is
considered to be primarily intended to result in or as indirect
financing of any activity which is primarily intended to result in
the sale of Trust shares, these payments are authorized under the
Plan. In addition, if the Administrator, out of its own funds,
makes payment for distribution expenses such payments are
authorized. (See the Additional Statement.)
Shareholder Services Plan for Class C Shares
Under a Shareholder Services Plan, the Trust is authorized to
make payments with respect to Class C Shares ("Service Fees") to
Qualified Recipients. Service Fees shall be paid through the
Distributor or shareholder servicing agent as disbursing agent, and
may not exceed, for any fiscal year of the Trust (as adjusted for
any part or parts of a fiscal year during which payments under the
Plan are not accruable or for any fiscal year which is not a full
fiscal year), 0.25 of 1% of the average annual net assets
represented by the Class C Shares of the Trust. Such payments shall
be made only out of the Trust's assets represented by the Class C
Shares. "Qualified Recipients" means broker-dealers or others
selected by the Distributor, including but not limited to any
principal underwriter of the Trust, with which the Trust or the
Distributor has entered into written agreements and which have
agreed to provide personal services to holders of Class C Shares
and/or maintenance of Class C Shares shareholder accounts. (See the
Additional Statement.) Service Fees with respect to Class C Shares
will be paid to the Distributor. Under this Plan during the fiscal
year ended June 30, 1997 payments of $113 were made.
HOW TO REDEEM YOUR INVESTMENT
You may redeem all or any part of your shares at the net asset
value next determined after acceptance of your redemption request
at the Agent (subject to any applicable contingent deferred sales
charge for redemptions of Class C Shares and CDSC Class A Shares).
For redemptions of Class C Shares and CDSC Class A Shares, at the
time of redemption a sufficient number of additional shares will be
redeemed to pay for any applicable contingent deferred sales
charge. Redemptions can be made by the various methods described
below. There is no minimum period for any investment in the Trust,
except for shares recently purchased by check, Automatic Investment
or Telephone Investment as discussed below. Except for CDSC Class
A Shares (see "Purchase of $1 Million or More") there are no
redemption fees or withdrawal penalties for Class A Shares. Class
C Shares are subject to a contingent deferred sales charge if
redeemed before they have been held 12 months from the date of
purchase. (See "Alternative Purchase Plans.") A redemption may
result in a transaction taxable to you. If you own both Class A
Shares and Class C Shares and do not specify which you wish to
redeem, it will be assumed that you wish to redeem Class A Shares.
For your convenience the Trust offers expedited redemption for
all classes of shares to provide you with a high level of liquidity
for your investment.
Expedited Redemption Methods
(Non-Certificate Shares)
You have the flexibility of two expedited methods of
initiating redemptions. They are available as to shares of any
class not represented by certificates.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Trust and the
check is sent to your address of record, provided that there has
not been a change of your address of record during the 30 days
preceding your redemption request. You can make only one request
for telephone redemption by check in any 7-day period.
See "Redemption Payments," below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-437-1000 toll free
Note: The Trust, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
2. By FAX or Mail. You may also request redemption payments to
a predesignated Financial Institution account by a letter of
instruction sent after November 8, 1997 to: PFPC Inc., 400 Bellevue
Parkway, Wilmington, DE 19809. Before November 8, 1997 send your
letter of instructions to Administrative Data Management Corp.,
Attn: Aquilasm Group of Funds, by FAX at 732-855-5730 or by mail at
581 Main Street, Woodbridge, NJ 07095-1198. The letter must provide
account name(s), account number, amount to be redeemed, and any
payment directions and be signed by the registered holder(s).
Signature guarantees are not required. See "Redemption Payments",
below for payment methods.
If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access Features
form and provide the required information concerning your Financial
Institution account number. The Financial Institution account must
be in the exclusive name(s) of the shareholder(s) as registered
with the Trust. You may change the designated Financial Institution
account at any time by completing and returning a Ready Access
Features form. For protection of your assets, this form requires
signature guarantees and possible additional documentation.
Regular Redemption Method
(Certificate and Non-Certificate Shares)
1. Certificate Shares. Certificates representing Class A
Shares to be redeemed with payment instructions should be sent
(after November 8, 1997) in blank (unsigned) to the Trust's
Shareholder Servicing Agent: PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809. Before November 8, 1997 send your
certificates to Administrative Data Management Corp., Attn:
Aquilasm Group of Funds, 581 Main Street, Woodbridge, NJ 07095-1198.
A stock assignment form signed by the registered shareholder(s)
exactly as the account is registered must also be sent to the
Shareholder Servicing Agent.
For your own protection, it is essential that certificates be
mailed separately from signed redemption documentation. Because of
possible mail problems, it is also recommended that certificates be
sent by registered mail, return receipt requested.
For a redemption request to be in "proper form," the signature
or signatures must be the same as in the registration of the
account. In a joint account, the signatures of both shareholders
are necessary. Signature guarantees may be required if sufficient
documentation is not on file with the Agent. Additional
documentation may be required where shares are held by certain
types of shareholders such as corporations, partnerships, trustees
or executors, or if redemption is requested by other than the
shareholder of record. If redemption proceeds of $50,000 or less
are payable to the record holder and are to be sent to the record
address, no signature guarantee is required, except as noted above.
In all other cases, signatures must be guaranteed by a member of a
national securities exchange, a U.S. bank or trust company, a
state-chartered savings bank, a federally chartered savings and
loan association, a foreign bank having a U.S. correspondent bank,
a participant in the Securities Transfer Association Medallion
Program (STAMP), the Stock Exchanges Medallion Program (SEMP) or
the New York Stock Exchange, Inc. Medallion Signature Program
(MSP). A notary public is not an acceptable signature guarantor.
2. Non-Certificate Shares. If you own non-certificate shares
registered on the books of the Trust, and you have not elected
Expedited Redemption to a predesignated Financial Institution
account, you must use the Regular Redemption Method. Under this
redemption method you should send a letter of instruction (after
November 8, 1997) to: to the Trust's Shareholder Servicing Agent:
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809. Before
november 8, 1997 send your letter to Administrative Data Management
Corp., Attn: Aquilasm Group of Funds, 581 Main Street, Woodbridge,
NJ 07095-1198. The letter must contain:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will be
mailed to your address as registered with the Trust);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated above.
Redemption Payments
Redemption payments will ordinarily be mailed to you at your
address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will, wherever
possible, be wired or transferred through the facilities of the
Automated Clearing House to the Financial Institution account
specified in the Expedited Redemption section of your Application
or Ready Access Features form. The Trust may impose a charge, not
exceeding $5.00 per wire redemption, after written notice to
shareholders who have elected this redemption procedure. The Trust
has no present intention of making this charge. Upon 30 days'
written notice to shareholders, the Trust may modify or terminate
the use of the Automated Clearing House to make redemption payments
at any time or charge a service fee, although no such fee is
presently contemplated. If any such changes are made, the
Prospectus will be supplemented to reflect them. If you use a
broker or dealer to arrange for a redemption, you may be charged a
fee for this service.
The Trust will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven days
after acceptance of such a redemption request. However, the right
of redemption may be suspended or the date of payment postponed (i)
during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is
restricted as determined by the Securities and Exchange Commission
by rule or regulation; (ii) during periods in which an emergency,
as determined by the Securities and Exchange Commission, exists
which causes disposal of, or determination of the net asset value
of, the portfolio securities to be unreasonable or impracticable;
or (iii) for such other periods as the Securities and Exchange
Commission may permit. Payment for redemption of shares recently
purchased by check (irrespective of whether the check is a regular
check or a certified, cashier's or official bank check) or by
Automatic Investment or Telephone Investment may be delayed up to
15 days or until (i) the purchase check or Automatic Investment or
Telephone Investment has been honored or (ii) the Agent has
received assurances by telephone or in writing from the Financial
Institution on which the purchase check was drawn, or from which
the funds for Automatic Investment or Telephone Investment were
transferred, satisfactory to the Agent and the Trust, that the
purchase check or Automatic Investment or Telephone Investment will
be honored. Possible delays in payment of redemption proceeds can
be eliminated by using wire payments or Federal Reserve drafts to
pay for purchases.
If the Trustees determine that it would be detrimental to the
best interests of the remaining shareholders of the Trust to make
payment wholly or partly in cash, the Trust may pay the redemption
price in whole or in part by the distribution in kind of securities
from the portfolio of the Trust, in lieu of cash, in conformity
with applicable rules of the Securities and Exchange Commission.
(See the Additional Statement for details.)
The Trust has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such shares
is less than $500 as a result of shareholder redemptions or failure
to meet the minimum investment level under an Automatic Purchase
Program. If the Board elects to do this shareholders who are
affected will receive prior written notice and will be permitted 60
days to bring their accounts up to the minimum before this
redemption is processed.
Reinvestment Privilege
You may reinvest without payment of any additional sales
charge all or part of any redemption proceeds within 120 days of a
redemption of shares in shares of the Trust of the same class as
the shares redeemed at the net asset value next determined after
the Agent receives your reinvestment order. In the case of Class C
Shares or CDSC Class A Shares on which a contingent deferred sales
charge was deducted at the time of redemption, the Distributor will
refund to you the amount of such sales charge, which will be added
to the amount of the reinvestment. The Class C Shares or CDSC Class
A Shares issued on reinvestment will be deemed to have been
outstanding from the date of your original purchase of the redeemed
shares, less the period from redemption to reinvestment. The
reinvestment privilege for any class may be exercised only once a
year, unless otherwise approved by the Distributor. If you have
realized a gain on the redemption of your shares, the redemption
transaction is taxable, and reinvestment will not alter any capital
gains tax payable. If there has been a loss on the redemption, some
or all of the loss may be tax deductible, depending on the amount
reinvested and the length of time between the redemption and the
reinvestment. You should consult your own tax advisor on this
matter.
AUTOMATIC WITHDRAWAL PLAN
You may establish an Automatic Withdrawal Plan if you own or
purchase Class A Shares of the Trust having a net asset value of at
least $5,000. The Automatic Withdrawal Plan is not available for
Class C Shares.
Under an Automatic Withdrawal Plan you will receive a monthly
or quarterly check in a stated amount, not less than $50. If such
a plan is established, all dividends and distributions must be
reinvested in your shareholder account. Redemption of Class A
Shares to make payments under the Automatic Withdrawal Plan will
give rise to a gain or loss for tax purposes. (See the Automatic
Withdrawal Plan provisions of the Application included in the
Prospectus, the Additional Statement under "Automatic Withdrawal
Plan," and "Dividend and Tax Information" below.)
Purchases of additional Class A Shares concurrently with
withdrawals are undesirable because of sales charges when purchases
are made. Accordingly, you may not maintain an Automatic Withdrawal
Plan while simultaneously making regular purchases. While an
occasional lump sum investment may be made, such investment should
normally be an amount at least equal to three times the annual
withdrawal or $5,000, whichever is less.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Trust are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Trust's Trustees and officers and provides
further information about them.
Current Arrangements
On November 6, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described below under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect.
In either event, the Prospectus will be supplemented to reflect the
arrangements that are in effect.
The Advisory Agreement
Banc One Investment Advisors Corporation (the "Adviser"),
supervises the investment program of the Trust and the composition
of its portfolio.
The services of the Adviser are rendered under an Investment
Advisory Agreement (the "Advisory Agreement") which provides,
subject to the control of the Board of Trustees, for investment
supervision and for either keeping the accounting records of the
Trust, including the computation of the net asset value per share
and the dividends, or, at the Adviser's expense and responsibility,
delegating these accounting duties in whole or in part to a company
satisfactory to the Trust. The Advisory Agreement states that the
Adviser shall, at its expense, provide to the Trust all office
space and facilities, equipment and clerical personnel necessary
for the carrying out of the Adviser's duties under the Advisory
Agreement.
Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Trust and of
those Trustees, if any, who are affiliated with the Adviser. Under
the Advisory Agreement, the Trust bears the cost of preparing and
setting in type its prospectuses, statements of additional
information, and reports to shareholders and the costs of printing
or otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. Under the Advisory Agreement, all
costs and expenses not expressly assumed by the Adviser or by the
Administrator under the Administration Agreement or by the Trust's
Distributor (principal underwriter) are paid by the Trust. The
Advisory Agreement lists examples of such expenses borne by the
Trust, the major categories of such expenses being: legal and audit
expenses, custodian and transfer agent, or shareholder servicing
agent fees and expenses, stock issuance and redemption costs,
certain printing costs, registration costs of the Trust and its
shares under Federal and State securities laws, interest, taxes and
brokerage commissions, and non-recurring expenses, including
litigation.
Under the Advisory Agreement, the Trust pays a fee payable
monthly and computed on the net asset value of the Trust as of the
close of business each business day at the annual rate of 0.25 of
1% of such net assets, provided, however, that for any day that the
Trust pays or accrues a fee under the Distribution Plan of the
Trust based upon the assets of the Trust, the annual investment
advisory fee shall be payable at the annual rate of 0.20 of 1% of
such net asset value. Since the Administrator also receives a fee
from the Trust under the Administration Agreement and the Trust
pays or accrues a fee under the Distribution Plan of the Trust
based upon the assets of the Trust, the total investment advisory
and administration fees which the Trust currently pays are at the
annual rate of 0.40 of 1% of such net assets, but for any day on
which the Trust does not pay or accrue a fee under the Distribution
Plan, these may be as much as 0.50 of 1%; see below. Payments under
the Distribution Plan with respect to assets of the Trust began
July 1, 1994 and as of that date the Advisory and Administration
fees were reduced as described above. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Trust, each waive all or part of any
such fees. In practice, the rate of these fee waivers tends to
decline as assets of the Trust increase.
The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to one-half of the amount, if
any, by which the total expenses of the Trust in any fiscal year,
exclusive of taxes, interest and brokerage fees, shall exceed the
lesser of (i) 2.5% of the first $30 million of average annual net
assets of the Trust plus 2% of the next $70 million of such assets
and 1.5% of such assets in excess of $100 million, or (ii) 25% of
the Trust's total annual investment income.
The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Trust. (See the
Additional Statement.) Under these provisions, the Adviser is
authorized to consider sales of shares of the Trust or of any other
investment company or companies having the same investment adviser,
sub-adviser, administrator or principal underwriter as the Trust.
The Trust's Custodian is an affiliate of the Adviser. It is
expected that another banking subsidiary of the Adviser's parent,
Banc One Corporation will provide a credit facility to the Trust.
The Administration Agreement
Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at its
own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as is
necessary in connection with the maintenance of the headquarters of
the Trust and pays all compensation of the Trust's Trustees,
officers and employees who are affiliated persons of the
Administrator.
Under the Administration Agreement, subject to the control of
the Trust's Board of Trustees, the Administrator provides all
administrative services to the Trust other than those relating to
its investment portfolio and the maintenance of its accounting
books and records. Such administrative services include but are not
limited to maintaining books and records (other than accounting
books and records) of the Trust, and overseeing all relationships
between the Trust and its transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the negotiation of
agreements in relation thereto, the supervision and coordination of
the performance of such agreements, and the overseeing of all
administrative matters which are necessary or desirable for
effective operation of the Trust and for the sale, servicing, or
redemption of the Trust's shares. (See the Additional Statement for
a further description of functions listed in the Administration
Agreement as part of such duties.)
Under the Administration Agreement, the Trust pays a fee
payable monthly and computed on the net asset value of the Trust at
the end of each business day at the annual rate of 0.25 of 1% of
such net asset value, provided, however, that for any day that the
Trust pays or accrues a fee under the Distribution Plan of the
Trust based upon the assets of the Trust, the annual administration
fee will be payable at the annual rate of 0.20 of 1% of such net
asset value. The administration fee was so reduced as of July 1,
1994. (See "Advisory Agreement," above.) The Administrator has
agreed that the above fee shall be reduced, but not below zero, by
an amount equal to one-half of the amount, if any, by which the
total expenses of the Trust in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5% of
the first $30 million of average annual net assets of the Trust
plus 2% of the next $70 million of such assets and 1.5% of such
assets in excess of $100 million, or (ii) 25% of the Trust's total
annual investment income.
New Arrangements
The new arrangements are designed to change the form of the
Trust's investment advisory and administration arrangements to a
new structure involving an adviser and a sub-adviser. The proposed
arrangements will not result in any change in overall management
fees paid by the Trust, nor any change in the parties providing
these services. Marketing efforts and positioning of the Trust will
remain the same with a strong local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which currently serves as the Trust's administrator,
would in addition become investment adviser under a new agreement
(the "Advisory and Administration Agreement") under which it would
also continue to provide the Trust with all administrative
services. Also, under a proposed agreement (the "Sub-Advisory
Agreement") between Aquila and Banc One Investment Advisors
Corporation ("BOIAC"), the current investment advisory agreement
would be replaced by one under which Aquila would appoint BOIAC as
Sub-Adviser to the Trust. Under the Sub-Advisory Agreement, BOIAC
would continue to provide the Trust with advisory services of the
kind which it currently provides to the Trust. The duties of the
administrator, now performed under an administration agreement,
would be performed by Aquila under the Advisory and Administration
Agreement where it would be referred to as the "Manager." The
current administration agreement will no longer be needed and will
terminate upon approval of the proposed agreements.
On November 6, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described above under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect.
In either event, the Prospectus will be supplemented to reflect the
arrangements that are in effect.
The new Investment Advisory and Administration Agreement
between the Trust and the Manager has several parts, most of which
are substantially identical to corresponding provisions in the
Trust's former advisory agreements and administration agreement.
The Advisory and Administration Agreement contains provisions
relating to investment advice for the Trust and management of its
portfolio that are substantially identical to prior advisory
agreements, except that the Manager has the power to delegate its
advisory functions to a Sub-Adviser, which it will employ at its
own expense. It has delegated these duties to BOIAC (the
"Sub-Adviser"). The Advisory and Administration Agreement contains
provisions relating to administrative services that are
substantially identical to those contained in the Trust's current
administration agreement.
Description of the New Investment Advisory
and Administration Agreement
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Trust, the Manager shall:
(i) supervise continuously the investment program of the Trust
and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Trust;
(iii) arrange for the purchase and the sale of securities held
in the portfolio of the Trust; and
(iv) at its expense provide for pricing of the Trust's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Trust and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Trust's portfolio at least quarterly using
another such source satisfactory to the Trust.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the Manager
may at its own expense delegate to a qualified organization
("Sub-Adviser"), affiliated or not affiliated with the Manager, any
or all of the above duties. Any such delegation of the duties set
forth in (i), (ii) or (iii) above shall be by a written agreement
(the "Sub-Advisory Agreement") approved as provided in Section 15
of the Investment Company Act of 1940. The Manager has delegated
all of such functions to the Sub-Adviser the Sub-Advisory
Agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Trust, the Manager shall provide all administrative services to
the Trust other than those relating to its investment portfolio
which have been delegated to a Sub-Adviser of the Trust under a
Sub-Advisory Agreement; as part of such administrative duties, the
Manager shall:
(i) provide office space, personnel, facilities and equipment
for the performance of the following functions and for the
maintenance of the headquarters of the Trust;
(ii) oversee all relationships between the Trust and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the negotiation
of agreements in relation thereto, the supervision and
coordination of the performance of such agreements, and the
overseeing of all administrative matters which are necessary
or desirable for the effective operation of the Trust and for
the sale, servicing or redemption of the Trust's shares;
(iii) either keep the accounting records of the Trust,
including the computation of net asset value per share and the
dividends (provided that if there is a Sub-Adviser, daily
pricing of the Trust's portfolio shall be the responsibility
of the Sub-Adviser under the Sub-Advisory Agreement) or, at
its expense and responsibility, delegate such duties in whole
or in part to a company satisfactory to the Trust;
(iv) maintain the Trust's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Trust's shareholders
and Trustees, reports to and other filings with the Securities
and Exchange Commission and any other governmental agencies,
and tax returns, and oversee the insurance relationships of
the Trust;
(v) prepare, on behalf of the Trust and at the Trust's
expense, such applications and reports as may be necessary to
register or maintain the registration of the Trust and/or its
shares under the securities or "Blue-Sky" laws of all such
jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Trust and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Trust's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory and Administration Agreement contains provisions
relating to compliance of the investment program, responsibility of
the Manager for any investment program managed by it, allocation of
brokerage, and responsibility for errors that are substantially the
same as the corresponding provisions in the Sub-Advisory Agreement.
(See the Additional Statement.)
The Advisory and Administration Agreement provides that the
Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Trust who are affiliated
persons of the Manager.
The Trust bears the costs of preparing and setting in type its
prospectuses, statements of additional information and reports to
its shareholders, and the costs of printing or otherwise producing
and distributing those copies of such prospectuses, statements of
additional information and reports as are sent to its shareholders.
All costs other costs and expenses not expressly assumed by the
Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Trust, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its Trustees
other than those affiliated with the Manager or such adviser,
administrator or principal underwriter; (v) legal and audit
expenses; (vi) custodian and transfer agent, or shareholder
servicing agent, fees and expenses; (vii) expenses incident to the
issuance of its shares (including issuance on the payment of, or
reinvestment of, dividends); (viii) fees and expenses incident to
the registration under Federal or State securities laws of the
Trust or its shares; (ix) expenses of preparing, printing and
mailing reports and notices and proxy material to shareholders of
the Trust; (x) all other expenses incidental to holding meetings of
the Trust's shareholders; and (xi) such non-recurring expenses as
may arise, including litigation affecting the Trust and the legal
obligations for which the Trust may have to indemnify its officers
and Trustees.
Under the Advisory and Administration Agreement, the Trust
will pay to Aquila a fee payable monthly and computed on the net
asset value of the Trust as of the close of business each business
day at the annual rate of 0.50 of 1% of such net asset value,
provided, however, that for any day that the Trust pays or accrues
a fee under the Distribution Plan of the Trust based upon the
assets of the Trust (other than a fee allocable by class to certain
shares of the Trust), the annual management fee shall be payable at
the annual rate of 0.40 of 1% of such net asset value. Under the
Sub-Advisory Agreement, Aquila will pay a fee to the Sub-Adviser
payable monthly and computed on the net asset value of the Trust as
of the close of business each business day at the annual rate of
0.25 of 1% of such net asset value, provided, however, that for any
day that the Trust pays or accrues a fee under the Distribution
Plan of the Trust based upon the assets of the Trust (other than a
fee allocable by class to certain shares of the Trust), the annual
sub-advisory fee shall be payable at the annual rate of 0.20 of 1%
of such net asset value.
Payments under the Trust's Distribution Plan began in 1994. In
the opinion of the Trust's management, there is no foreseeable
possibility that the current payments under the Distribution Plan
will be eliminated.
The Advisory and Administration Agreement provides that the
Sub-Advisory Agreement may provide for its termination by the
Manager upon reasonable notice, provided, however, that the Manager
agrees not to terminate the Sub-Advisory Agreement except in
accordance with such authorization and direction of the Board of
Trustees, if any, as may be in effect from time to time.
The Advisory and Administration Agreement provides that it may
be terminated by the Manager at any time without penalty upon
giving the Trust sixty days' written notice (which notice may be
waived by the Trust) and may be terminated by the Trust at any time
without penalty upon giving the Manager sixty days' written notice
(which notice may be waived by the Manager), provided that such
termination by the Trust shall be directed or approved by a vote of
a majority of its Trustees in office at the time or by a vote of
the holders of a majority (as defined in the Act) of the voting
securities of the Trust outstanding and entitled to vote. The
specific portions of the Advisory Agreement which relate to
providing investment advisory services will automatically terminate
in the event of the assignment (as defined in the Act) of the
Advisory Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Trust as of the close of business each business day shall be
reduced to the annual rate of 0.25 of 1% of such net asset value,
provided, however, that for any day that the Trust pays or accrues
a fee under the Distribution Plan of the Trust based upon the
assets of the Trust (other than a fee allocable by class to certain
shares of the Trust), the annual fee shall be payable at the annual
rate of 0.20 of 1% of such net asset value.
The New Sub-Advisory Agreement
The Manager has delegated investment advisory responsibility
to BOIAC (the "Sub-Adviser"), which supervises the investment
program of the Trust and the composition of its portfolio.
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser,
which provides, subject to the control of the Board of Trustees,
for investment supervision and at the Sub-Adviser's expense for
pricing of the Trust's portfolio daily using a pricing service or
other source of pricing information satisfactory to the Trust and,
unless otherwise directed by the Board of Trustees, for pricing of
the Trust's portfolio at least quarterly using another such source
satisfactory to the Trust. The Sub-Advisory Agreement states that
the Sub-Adviser shall, at its expense, provide to the Trust all
office space and facilities, equipment and clerical personnel
necessary for the carrying out of the Sub-Adviser's duties under
the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Trust as of the close of business each business
day at the annual rate of 0.25 of 1% of such net asset value,
provided, however, that for any day that the Trust pays or accrues
a fee under the Distribution Plan of the Trust based upon the
assets of the Trust (other than a fee allocable by class to certain
shares of the Trust), the annual management fee shall be payable at
the annual rate of 0.20 of 1% of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Trust; see the
Additional Statement. Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Trust or of any other
investment company or companies having the same investment adviser,
sub-adviser, administrator or principal underwriter as the Trust.
Information about BOIAC
The Adviser is a subsidiary of BANC ONE CORPORATION ("Banc
One"), based in Columbus, Ohio. As of June 30, 1997 the Adviser had
$20 billion under management. Banc One is a multi-bank holding
company, incorporated under the laws of the State of Ohio. As of
June 30, 1997, Banc One operates with more than 1,500 offices in
the states of Arizona, Colorado, Illinois, Indiana, Kentucky,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. As of that date, Banc One, its affiliated banks and its
non-bank subsidiaries had total assets of approximately $140.7
billion.
Todd Curtis is the officer of the Adviser who manages the
Trust's portfolio. He has served as such since the inception of the
Trust in March, 1986. Mr. Curtis is Vice President and Fixed Income
Fund Manager of Banc One Investment Advisors Corporation and held
similar positions with The Valley National Bank of Arizona, NA, the
name of the Adviser before it was acquired by Banc One. He is a
member of the Adviser's Fixed Income Funds Sub-Committee. He is a
graduate of Cornell College, has received an MBA degree from
Arizona State University and is a Chartered Financial Analyst.
For the Trust's fiscal year ended June 30, 1997, fees of
$782,451 were payable to each of the Adviser and the Administrator.
Information about the Administrator
and the Distributor
The Trust's Administrator is founder and administrator to the
Aquilasm Group of Funds, which consists of tax-free municipal bond
funds, money market funds and two equity funds. As of June 30,
1997, these funds had aggregate assets of approximately $2.8
billion, of which approximately $1.9 billion consisted of assets of
the tax-free municipal bond funds. The Administrator, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann (directly,
through a trust and through share ownership by his wife). (See the
Additional Statement for information on Mr. Herrmann.)
The Distributor currently handles the distribution of the
shares of fourteen funds (seven tax-free municipal bond funds, five
money market funds and two equity funds) including the Trust. Under
the Distribution Agreement, the Distributor is responsible for the
payment of certain printing and distribution costs relating to
prospectuses and reports as well as the costs of supplemental sales
literature, advertising and other promotional activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which are
currently owned 75% by Mr. Herrmann and 25% by Diana P. Herrmann,
will be owned by certain directors and/or officers of the
Administrator and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Trust will declare all of its net income, as defined
below, as dividends on every day, including weekends and holidays,
on those shares outstanding for which payment was received by the
close of business on the preceding business day. Net income for
dividend purposes includes all interest income accrued by the Trust
since the previous dividend declaration, including accretion of any
original issue discount, less expenses paid or accrued. As such net
income will vary, the Trust's dividends will also vary. The
per-share dividends of Class C Shares will be lower than the per
share dividends on the Class A Shares as a result of the higher
service and distribution fees applicable to those shares. In
addition, the dividends of each class can vary because each class
will bear certain class-specific charges. Dividends and other
distributions paid by the Trust with respect to each class of its
shares are calculated at the same time and in the same manner.
It is the Trust's present policy to pay dividends so that they
will be received or credited by approximately the first day of each
month. On the Application or by completing a Ready Access Features
form, you may elect to have dividends deposited without charge by
electronic funds transfers into your account at a Financial
Institution if it is a member of the Automated Clearing House.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid by
the Agent to a selected dealer; or (ii) the third day on which the
New York Stock Exchange is open after the day on which the net
asset value of the redeemed shares has been determined. (See "How
To Redeem Your Investment.")
Net investment income includes amounts of income from the
Arizona Obligations in the Trust's portfolio which are allocated as
"exempt-interest dividends." "Exempt-interest dividends" are exempt
from regular Federal income tax. The allocation of "exempt-interest
dividends" will be made by the use of one designated percentage
applied uniformly to all income dividends declared during the
Trust's tax year. Such designation will normally be made in the
first month after the end of each of the Trust's fiscal years as to
income dividends paid in the prior year. It is possible that in
certain circumstances, a small portion of the dividends paid by the
Trust will be subject to income taxes. During the Trust's fiscal
year ended June 30, 1997, 2.90% of the Trust's dividends were
"exempt-interest dividends." For the calendar year 1996, 97.03% of
the total dividends paid were taxable. The percentage of income
designated as tax-exempt for any particular dividend may be
different from the percentage of the Trust's income that was
tax-exempt during the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid
out after that date; the Trust may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Trust may be required to impose
backup withholding at a rate of 31% upon payment of redemptions to
shareholders, and from short- and long-term gains distributions (if
any) and any other distributions that do not qualify as
"exempt-interest dividends," if shareholders do not comply with
provisions of the law relating to the furnishing of taxpayer
identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the Agent
or by filing an appropriate application prior to a given
ex-dividend date, dividends and distributions will be automatically
reinvested in full and fractional shares of the Trust of the same
class at net asset value on the record date for the dividend or
distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All
shareholders, whether their dividends are received in cash or are
being reinvested, will receive a monthly account summary indicating
the current status of their investment. There is no fixed dividend
rate. Corporate shareholders of the Trust are not entitled to any
deduction for dividends received from the Trust.
Tax Information
The Trust qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as dividends
and distributions. However, the Code contains a number of complex
tests relating to such qualification and it is possible although
not likely that the Trust might not meet one or more of these tests
in any particular year. If it does not so qualify, it would be
treated for tax purposes as an ordinary corporation, would receive
no tax deduction for payments made to shareholders and would be
unable to pay dividends or distributions which would qualify as
"exempt-interest dividends" or "capital gains dividends," as
discussed below.
The Trust intends to qualify during each fiscal year under the
Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends which are derived from net income earned
by the Trust on Arizona Obligations will be excludable from gross
income of the shareholders for regular Federal income tax purposes.
Capital gains dividends are not included in exempt-interest
dividends. Although "exempt-interest dividends" are not taxed, each
taxpayer must report the total amount of tax-exempt interest
(including exempt-interest dividends from the Trust) received or
acquired during the year.
The Code requires that either gains realized by the Trust on
the sale of municipal obligations acquired after April 30, 1993 at
a price which is less than face or redemption value be included as
ordinary income to the extent such gains do not exceed such
discount or that the discount be amortized and included ratably in
taxable income. There is an exception to the foregoing treatment if
the amount of the discount is less than 0.25% of face or redemption
value multiplied by the number of years from acquisition to
maturity. The Trust will report such ordinary income in the years
of sale or redemption rather than amortize the discount and report
it ratably. To the extent the resultant ordinary taxable income is
distributed to shareholders, it will be taxable to them as ordinary
income.
Capital gains dividends (net long-term gains over net
short-term losses which the Trust distributes and so designates)
are reportable by shareholders as gain from the sale or exchange of
a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects to
have the distribution reinvested in Trust shares and regardless of
the length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to shareholders
as ordinary income. Capital losses of the Trust are not distributed
but carried forward by the Trust to offset gains in later years and
thereby lessen the later-year capital gains dividends and amounts
taxed to shareholders.
The Trust's gains or losses on sales of Arizona Obligations
will be long-term or short-term depending upon the length of time
the Trust has held such obligations. Capital gains and losses of
the Trust will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by the
Trust at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized and
deemed realized on Futures and options will be reportable by the
Trust as long-term to the extent of 60% of the gains or losses and
short-term to the extent of 40% regardless of the actual holding
period of such investments.
Information as to the tax status of the Trust's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders to
enable them to purchase or carry shares of the Trust may not be
deducted for regular Federal tax purposes. In addition, under rules
used by the Internal Revenue Service for determining when borrowed
funds are deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Trust may be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares. The receipt of exempt-interest dividends from the Trust by
an individual shareholder may result in some portion of any social
security payments or railroad retirement benefits received by the
shareholder or the shareholder's spouse being included in taxable
income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds or
private activity bonds should consult their own tax advisers before
purchasing shares.
While interest from all Arizona Obligations is tax-exempt for
purposes of computing the shareholder's regular tax, interest from
so-called private activity bonds issued after August 7, 1986,
constitutes a tax preference for both individuals and corporations
and thus will enter into a computation of the alternative minimum
tax. Whether or not that computation will result in a tax will
depend on the entire content of the taxpayer's return. The Trust
will not invest in the types of Arizona Obligations which would
give rise to interest that would be subject to alternative minimum
taxation if more than 20% of its net assets would be so invested,
and may refrain from investing in that type of bond completely. The
20% limit is a fundamental policy of the Trust.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current earnings,
this adjustment will tend to make it more likely that corporate
shareholders will be subject to the alternative minimum tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Trust you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid for
the shares. If you are required to pay a contingent deferred sales
charge at the time of redemption, the amount of that charge will
reduce the amount of your gain or increase the amount of your loss
as the case may be. Your gain or loss will be long-term if you held
the redeemed shares for over 18 months, mid-term if you held the
redeemed shares for over one year but not more than 18 months and
short-term, if for a year or less. Long term capital gains are
currently taxed at a maximum rate of 20%, mid-term capital gains
are currently taxed at a maximum rate of 28%, and short-term gains
are currently taxed at ordinary income tax rates. However, if
shares held for six months or less are redeemed and you have a
loss, two special rules apply: the loss is reduced by the amount of
exempt-interest dividends, if any, which you received on the
redeemed shares, and any loss over and above the amount of such
exempt-interest dividends is treated as a long-term loss to the
extent you have received capital gains dividends on the redeemed
shares.
Tax Effect of Conversion
Class C Shares will automatically convert to Class A Shares
approximately six years after purchase. No gain or loss will be
recognized by the Trust or its shareholders upon such conversions;
each shareholder's adjusted tax basis in the Class A Shares
received upon conversion will equal the shareholder's adjusted tax
basis in the Class C Shares held immediately before the conversion;
and each shareholder's holding period for the Class A Shares
received upon conversion will include the period for which the
shareholder held as capital assets the converted Class C Shares
immediately before conversion.
Arizona Tax Information
In the opinion of special Arizona counsel for the Trust, under
existing law, shareholders of the Trust will not be subject to
Arizona income tax on exempt-interest dividends received from the
Trust to the extent that such dividends are attributable to
interest on tax-exempt obligations of the State of Arizona and its
political subdivisions ("Local Obligations") or on obligations
issued by the Territories of Guam, Northern Mariana Islands, Puerto
Rico and the Virgin Islands ("Territorial Obligations"). Other
distributions from the Trust, including those related to long-term
and short-term capital gains, will be subject to Arizona income
tax.
In the event that interest paid on any Local Obligation is
determined to be includable in federal gross income, the Trust has
been advised by special Arizona counsel that, in its opinion,
exempt-interest dividends received by the shareholders of the Trust
attributable to interest on Local Obligations will, nevertheless,
not be subject to Arizona income taxes.
Although interest on Territorial Obligations is included in
Arizona gross income by Arizona law, applicable federal laws
specifically exempt such income from state and local taxation. The
Trust has been advised by special Arizona counsel that, in its
opinion, the applicable federal laws will preempt any contrary
result under Arizona law such that exempt-interest dividends
attributable to interest paid on Territorial Obligations will be
exempt from Arizona income taxes.
Arizona law does not permit a deduction for interest paid or
accrued on indebtedness incurred or continued to purchase or carry
obligations, the interest on which is exempt from Arizona income
tax.
Shareholders of the Trust should consult their tax advisers
about other state and local tax consequences of their investment in
the Trust.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Trust and certain tax-free municipal bond funds and equity funds
(the "Bond or Equity Funds") and certain money market funds (the
"Money-Market Funds"), all of which are sponsored by Aquila
Management Corporation and Aquila Distributors, Inc., and have the
same Administrator and Distributor as the Trust. All exchanges are
subject to certain conditions described below. As of the date of
the Prospectus, the Aquila-sponsored Bond or Equity Funds are this
Trust, Aquila Rocky Mountain Equity Fund, Aquila Cascadia Equity
Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Oregon, Tax-Free
Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Tax-Free
Fund For Utah and Narragansett Insured Tax-Free Income Fund. At the
date of this Prospectus, the Aquila-sponsored Money-Market Funds
are Capital Cash Management Trust, Pacific Capital Cash Assets
Trust (Original Shares), Pacific Capital Tax-Free Cash Assets Trust
(Original Shares), Pacific Capital U.S. Treasuries Cash Assets
Trust (Original Shares) and Churchill Cash Reserves Trust.
Generally, you can exchange shares of a given class of a Bond
or Equity Fund including the Trust for shares of the same class of
any other Bond or Equity Fund, or for shares of any Money Market
Fund, without the payment of a sales charge or any other fee, and
there is no limit on the number of exchanges you can make from fund
to fund. However, the following important information should be
noted:
(1) CDSCs upon redemptions of shares acquired through
exchanges. If you exchange shares of the following categories, no
CDSC will be imposed at the time of exchange, but the shares you
receive in exchange for them will be subject to the applicable CDSC
if you redeem them before the requisite holding period (extended,
if required) has expired:
- CDSC Class A Shares (See "Purchase of $1 Million or
More");
- Class C Shares: and
- Shares of a Money Market Fund that were received in
exchange for CDSC Class A Shares or Class C Shares.
If the shares you redeem would have incurred a CDSC if you had
not made any exchanges, then the same CDSC will be imposed upon the
redemption regardless the exchanges that have taken place since the
original purchase.
(2) Extension of Holding Periods by owning Money-Market Funds
Any period of 30 days or more during which Money-Market shares
received on an exchange of CDSC Class A Shares or Class C Shares
are held is not counted in computing the applicable holding period
for CDSC Class A Shares or Class C Shares.
(3) Originally purchased Money Market Fund shares. Shares of
a Money Market Fund (and any shares acquired as a result of
reinvestment of dividends and/or distributions on these shares)
acquired directly in a purchase (or in exchange for Money Market
Fund Shares that were themselves directly purchased), rather than
in exchange for shares of a Bond or Equity Fund, may be exchanged
for shares of any class of any Bond or Equity Fund that the
investor is otherwise qualified to purchase, but the shares
received in such an exchange will be subject to the same sales
charge, if any, that they would have been subject to had they been
purchased rather than acquired in exchange for Money Market Fund
shares. If the shares received in exchange are shares that would be
subject to a CDSC if purchased directly, the holding period
governing the CDSC will run from the date of the exchange, not from
the date of the purchase of Money Market Shares.
This Trust, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into its
shares, if shares of the fund into which exchange is desired are
not available for sale in your state of residence. The Trust may
also modify or terminate this exchange privilege at any time. In
the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take effect
on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset value
of the shares surrendered for exchange are at least equal to the
minimum investment requirements of the investment company whose
shares are being acquired and (iii) the ownership of the accounts
from which and to which the exchange is made are identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-437-1000 toll free
Note: The Trust, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
Exchanges will be effected at the relative exchange prices of
the shares being exchanged next determined after receipt by the
Agent of your exchange request. The exchange prices will be the
respective net asset values of the shares, unless a sales charge is
to be deducted in connection with an exchange of shares, in which
case the exchange price of shares of a Bond or Equity Fund will be
their public offering price. Prices for exchanges are determined in
the same manner as for purchases of the Trust's shares. (See "How
to Invest in the Trust.")
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the realization
of a capital gain or loss, depending on the cost or other tax basis
of the shares exchanged and the holding period (see "Tax Effects of
Redemptions" and the Additional Statement); no representation is
made as to the deductibility of any such loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free money-market
Fund) are exempt from regular Federal income tax, and to the extent
that a portion or all of the dividends paid by Pacific Capital U.S.
Treasuries Cash Assets Trust (which invests in U.S. Treasury
obligations) are exempt from state income taxes. Dividends paid by
Aquila Rocky Mountain Equity Fund and Aquila Cascadia Equity Fund
are taxable. If your state of residence is not the same as that of
the issuers of obligations in which a tax-free municipal bond fund
or a tax-free money-market fund invests, the dividends from that
fund may be subject to income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of such a bond fund or a tax-free money-market fund under
the exchange privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Trust's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate and
taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase,
invested at the maximum public offering price (offering price
includes any applicable sales charge) for 1-, 5- and 10-year
periods and for a period since the inception of the Trust, to the
extent applicable, through the end of such periods, assuming
reinvestment (without sales charge) of all distributions. The Trust
may also furnish total return quotations for other periods or based
on investments at various applicable sales charge levels or at net
asset value. For such purposes total return equals the total of all
income and capital gains paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change in
the value of the original investment, expressed as a percentage of
the purchase price. (See the Additional Statement. )
Current yield reflects the income per share earned by each of
the Trust's portfolio investments; it is calculated by (i) dividing
the Trust's net investment income per share during a recent 30-day
period by (ii) the maximum public offering price on the last day of
that period and by (iii) annualizing the result. Taxable equivalent
yield shows the yield from a taxable investment that would be
required to produce an after-tax yield equivalent to that of the
Trust, which invests in tax-exempt obligations. It is computed by
dividing the tax-exempt portion of the Trust's yield (calculated as
indicated) by one minus a stated income tax rate and by adding the
product to the taxable portion (if any) of the Trust's yield. (See
the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities and
Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will be
paid to the Trust's shareholders. Dividends or distributions paid
to shareholders are reflected in the current distribution rate or
taxable equivalent distribution rate which may be quoted to
shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Trust
during a recent 30-day period by (ii) the current maximum offering
price and by (iii) annualizing the result. A taxable equivalent
distribution rate shows the taxable distribution rate that would be
required to produce an after-tax distribution rate equivalent to
the Trust's distribution rate (calculated as indicated above). The
current distribution rate differs from the current yield
computation because it could include distributions to shareholders
from sources, if any, other than dividends and interest, such as
short-term capital gains or return of capital. If distribution
rates are quoted in advertising, they will be accompanied by
calculations of current yield in accordance with the formula of the
Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Trust's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum sales
charge, if any, on the purchase of shares, but not on reinvestment
of income dividends. The investment results of the Trust, like all
other investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent what an
investment may earn in the future or what the Trust's yield, tax
equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period. The
annual report of the Trust contains additional performance
information that will be made available upon request and without
charge.
Description of the Trust and Its Shares
The Trust is an open-end, non-diversified management
investment company organized in 1985 as a Massachusetts business
trust. It commenced operations in June, 1986. (See "Investment of
the Trust's Assets" for further information about the Trust's
status as "non-diversified.") The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares
and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial
interests in the Trust. Each share represents an equal
proportionate interest in the Trust with each other share of its
class; shares of the respective classes represent proportionate
interests in the Trust in accordance with their respective net
asset values. Upon liquidation of the Trust, shareholders are
entitled to share pro-rata in the net assets of the Trust available
for distribution to shareholders, in accordance with the respective
net asset values of the shares of each of the Trust's classes at
that time. All shares are presently divided into four classes;
however, if they deem it advisable and in the best interests of
shareholders, the Board of Trustees of the Trust may create
additional classes of shares, which may differ from each other as
provided in rules and regulations of the Securities and Exchange
Commission or by exemptive order. The Board of Trustees may, at its
own discretion, create additional series of shares, each of which
may have separate assets and liabilities (in which case any such
series will have a designation including the word "Series"). (See
the Additional Statement for further information about possible
additional series.) Shares are fully paid and non-assessable,
except as set forth under the caption "General Information" in the
Additional Statement; the holders of shares have no pre-emptive or
conversion rights.
In addition to Class A Shares and Class C Shares, which are
offered by this Prospectus, the Trust also has (i) Institutional
Class Shares ("Class Y Shares"), which are offered only to
institutions acting for investors in a fiduciary, advisory, agency,
custodial or similar capacity and are not offered directly to
retail customers and (ii) Financial Intermediary Class Shares
("Class I Shares"), which are offered and sold only through certain
financial intermediaries. Class Y Shares and Class I Shares are
offered are offered by a separate prospectus, which can be obtained
by calling the Trust at 800-872-5859.
The primary distinction among the Trust's classes of shares
lies in their different sales charge structures and ongoing
expenses, which are likely to be reflected in differing yields and
other measures of investment performance. All classes represent
interests in the same portfolio of Arizona Obligations and have the
same rights, except that each class bears the separate expenses, if
any, of its participation in the Distribution Plan and Shareholder
Services Plan and has exclusive voting rights with respect to such
participation.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders will
vote on the election of Trustees and on other matters submitted to
the vote of shareholders. Shares vote by classes on any matter
specifically affecting one or more classes, such as an amendment of
an applicable part of the Distribution Plan. No amendment may be
made to the Declaration of Trust without the affirmative vote of
the holders of a majority of the outstanding shares of the Trust,
except that the Trust's Board of Trustees may change the name of
the Trust. The Trust may be terminated (i) upon the sale of its
assets to another issuer, or (ii) upon liquidation and distribution
of the assets of the Trust, in either case if such action is
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
<PAGE>
APPLICATION FOR TAX-FREE TRUST OF ARIZONA
FOR CLASS A OR CLASS C SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
After November 8, 1997: PFPC Inc., ATTN: Aquilasm Group of Funds
400 Bellevue Parkway, Wilmington, DE 19809
Before November 8, 1997: ADM, ATTN: Aquilasm Group of Funds
581 Main Street, Woodbridge, NJ 07095-1198 Tel.# 1-800-437-1000
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.______________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for __________________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** ___________________________________________
Name of State Minor's Social Security Number
4. _____________________________________________________________________
_____________________________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of the
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust
may be registered in the name of the Plan or Trust itself.)
________________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
________________________________________________________________________
Street or PO Box City
_________________________________ (______)_______________________
State Zip Daytime Phone Number
Occupation:________________________Employer:____________________________
Employer's Address:_____________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding (See
certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
______________________________ ____________________________________
Dealer Name Branch Number
______________________________ ____________________________________
Street Address Rep. Number/Name
______________________________ (_________)_________________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Indicate Class of Shares)
__ Class A Shares (Front-Payment Class)
__ Class C Shares (Level-Payment Class)
Indicate Method of Payment (For either method, make check payment to
TAX-FREE TRUST OF ARIZONA)
__ Initial Investment $______________ (Minimum $1,000)
__ Automatic Investment $______________ (Minimum $50)
For Automatic Investments of at least $50 per month, you must complete
Step 3, Section A, Step 4, Sections A & B and attached a PRE-PRINTED
DEPOSIT SLIP OR VOIDED CHECK.
IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE MADE IN
CLASS A SHARES.
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be: ___ Reinvested ___ Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would like you to
deposit the dividend. (A Financial Institution is a commercial bank,
savings bank or credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested in
your Tax-Free Trust of Arizona Account. To establish this program, please
complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
the Trust toll-free at 1-800-437-1000. To establish this program, please
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. LETTER OF INTENT
APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this application.
___ Yes ___ No
I/We intend to invest in Class A Shares of the Trust during the
13-month period from the date of my/our first purchase pursuant to
this Letter (which purchase cannot be more than 90 days prior to the
date of this Letter), an aggregate amount (excluding any reinvestment
of dividends or distributions) of at least $25,000 which, together with
my/our present holdings of Trust shares (at public offering price on date
of this Letter), will equal or exceed the minimum amount checked below:
___ $25,000 ___ $50,000 ___ $100,000 ___ $250,000
___ $500,000 ___ $1,000,000 ___ $2,500,000 ___ $5,000,000
D. AUTOMATIC WITHDRAWAL PLAN
APPLICABLE TO CLASS A SHARES ONLY.
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks prior to
1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, the Trust's Shareholder
Servicing Agent (the "Agent") is authorized to redeem sufficient shares
from this account at the then current Net Asset Value, in accordance
with the terms below:
Dollar Amount of each withdrawal $ ______________beginning______________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
________________________________________ ___________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ____________________________________
Street Financial Institution Street Address
_______________________________ ____________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
E. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
person's telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorney's fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account listed.
Cash proceeds in any amount from the redemption of shares will be
mailed or wired, whenever possible, upon request, if in an amount of
$1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Trust
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ _____________________________________
Account Registration Financial Institution Account Number
_______________________________ _____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ _____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITOR'S AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the
Agent, and to pay such sums in accordance therewith, provided my/our account
has sufficient funds to cover such drafts or debits. I/We further agree that
your treatment of such orders will be the same as if I/we personally signed
or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number __________________________________
Name and Address where my/our account is maintained
Name of Financial Institution__________________________________________
Street Address_________________________________________________________
City_______________________________State _________________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account
is registered
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors,
Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit
in the normal course of business initiated by the Agent (except any
loss due to your payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in writing
of any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle or pay
any such claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any
such electronic debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Trust and has received and
read a current Prospectus of the Trust and agrees to its terms.
- - I/We authorize the Trust and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Trust and its agents may cancel the
purchase transaction and are authorized to liquidate other shares or
fractions thereof held in my/our Trust account to make up any
deficiency resulting from any decline in the net asset value of shares
so purchased and any dividends paid on those shares. I/We authorize the
Trust and its agents to correct any transfer error by a debit or credit
to my/our Financial Institution account and/or Trust account and to
charge the account for any related charges. I/We acknowledge that
shares purchased either through Automatic Investment or Telephone
Investment are subject to applicable sales charges.
- - The Trust, the Agent and the Distributor and their Trustees,
directors, employees and agents will not be liable for acting upon
instructions believed to be genuine, and will not be responsible for
any losses resulting from unauthorized telephone transactions if the
Agent follows reasonable procedures designed to verify the identity of
the caller. The Agent will request some or all of the following
information: account name and number; name(s) and social security
number registered to the account and personal identification; the
Agent may also record calls. Shareholders should verify the accuracy
of confirmation statements immediately upon receipt. Under penalties
of perjury, the undersigned whose Social Security (Tax I.D.) Number is
shown above certifies (i) that Number is my correct taxpayer
identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned
further certifies, under penalties of perjury, that either (a) no such
Number has been issued, and a Number has been or will soon be applied
for; if a Number is not provided to you within sixty days, the
undersigned understands that all payments (including liquidations) are
subject to 31% withholding under federal tax law, until a Number is
provided and the undersigned may be subject to a $50 I.R.S. penalty; or
(b) that the undersigned is not a citizen or resident of the U.S.; and
either does not expect to be in the U.S. for 183 days during each
calendar year and does not conduct a business in the U.S. which would
receive any gain from the Trust, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ __________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ __________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment, Expedited
Redemption and Direct Deposit of Dividends) are effective 15 days after
this form is received in good order by the Trust's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Trust or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Trust reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access features form which may be obtained from Aquila
Distributors at 1-800-437-1020 and send it to the Agent together
with a "voided" check or pre-printed deposit slip from the new
account. The new Financial Institution change is effective in 15
days after this form is received in good order by the Trust's Agent.
TERMS OF LETTER OF INTENT AND ESCROW
By checking Box 3c and signing the Application, the investor is
entitled to make each purchase at the public offering price applicable
to a single transaction of the dollar amount checked above, and agrees
to be bound by the terms and conditions applicable to Letters of Intent
appearing below.
The investor is making no commitment to purchase shares, but if the
investor's purchases within thirteen months from the date of the
investor's first purchase do not aggregate $25,000, or, if such purchases
added to the investor's present holdings do not aggregate the minimum
amount specified above, the investor will pay the increased amount of
sales charge prescribed in the terms of escrow below.
The commission to the dealer or broker, if any, named herein shall be
at the rate applicable to the minimum amount of the investor's specified
intended purchases checked above. If the investor's actual purchases do
not reach this minimum amount, the commissions previously paid to the
dealer will be adjusted to the rate applicable to the investor's total
purchases. If the investor's purchases exceed the dollar amount of the
investor's intended purchases and pass the next commission break-point,
the investor shall receive the lower sales charge, provided that the
dealer returns to the Distributor the excess of commissions previously
allowed or paid to him over that which would be applicable to the amount
of the investor's total purchases.
The investor's dealer or broker shall refer to this Letter of Intent
in placing any future purchase orders for the investor while this Letter
is in effect.
The escrow shall operate as follows:
1. Out of the initial purchase (or subsequent purchases if necessary), 3%
of the dollar amount specified in the Letter of Intent (computed to the
nearest full share) shall be held in escrow in shares of the Trust by
the Agent. All dividends and any capital distributions on the escrowed
shares will be credited to the investor's account.
2. If the total minimum investment specified under the Letter is completed
within a thirteen-month period, the escrowed shares will be promptly
released to the investor. However, shares disposed of prior to
completion of the purchase requirement under the Letter will be
deducted from the amount required to complete the investment commitment.
3. If the total purchases pursuant to the Letter are less than the amount
specified in the Letter as the intended aggregate purchases, the
investor must remit to the Distributor an amount equal to the difference
between the dollar amount of sales charges actually paid and the amount
of sales charges which would have been paid if the total amount
purchased had been made at a single time. If such difference in sales
charges is not paid within twenty days after receipt of a request from
the Distributor or the dealer, the Distributor will, within sixty days
after the expiration of the Letter, redeem the number of escrowed
shares necessary to realize such difference in sales charges. Full
shares and any cash proceeds for a fractional share remaining after
such redemption will be released to the investor. The escrow of shares
will not be released until any additional sales charge due has been
paid as stated in this section.
4. By checking Box 3c and signing the Application, the investor
irrevocably constitutes and appoints the Agent or the Distributor as
his attorney to surrender for redemption any or all escrowed shares
on the books of the Trust.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees
to the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Trust purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Trust. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may
be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Trust
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Trust) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Trust's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Trust. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal incapacity
of the Planholder. Upon termination of the Plan by the Agent or the
Trust, shares remaining unredeemed will be held in an uncertificated
account in the name of the Planholder, and the account will continue
as a dividend-reinvestment, uncertificated account unless and until
proper instructions are received from the Planholder, his executor or
guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Trust, the Planholder will be deemed to have appointed any
successor transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while simultaneously
making regular purchases. While an occasional lump sum investment may
be made, such investment should normally be an amount equivalent to
three times the annual withdrawal or $5,000, whichever is less.
<PAGE>
INVESTMENT ADVISER
Banc One Investment Advisors Corporation
Bank One Center
241 North Central Avenue
Phoenix, Arizona 85004
ADMINISTRATOR AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Philip E. Albrecht
Arthur K. Carlson
Thomas W. Courtney
William L. Ensign
Diana P. Herrmann
John C. Lucking
Anne J. Mills
OFFICERS
Lacy B. Herrmann, President
William C. Wallace, Senior Vice President
Susan A. Cook, Vice President
Kristian P. Kjolberg, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, 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
After November 8, 1997:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Before November 8, 1997:
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights
Table of Expenses
Financial Highlights
Introduction
Investment Of The Trust's Assets
Investment Restrictions
Net Asset Value Per Share
Alternative Purchase Plans
How To Invest In The Trust
How To Redeem Your Investment
Automatic Withdrawal Plan
Management Arrangements
Dividend And Tax Information
Exchange Privilege
General Information
Application and Letter Of Intent
LOGO
TAX-FREE TRUST OF
ARIZONA
A TAX-FREE
INCOME INVESTMENT
PROSPECTUS
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
TAX-FREE TRUST OF ARIZONA
380 MADISON AVENUE, SUITE 2300
NEW YORK, NEW YORK 10017
800-437-1020
212-697-6666
Prospectus
Class Y Shares
Class I Shares October 31, 1997
The Trust is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Arizona and
regular Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Arizona State and Federal income taxes. These municipal
obligations must, at the time of purchase, either be rated within
the four highest credit ratings (considered as investment grade)
assigned by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or, if unrated, be determined to be of comparable
quality by the Trust's Adviser, Banc One Investment Advisors
Corporation.
The Prospectus concisely states information about the Trust
that you should know before investing. A Statement of Additional
Information about the Trust dated October 31, 1997 (the "Additional
Statement") has been filed with the Securities and Exchange
Commission and is available without charge upon written request to
the Trust's Shareholder Servicing Agent, at the address given
below, or by calling the telephone number(s) given below. The
Additional Statement contains information about the Trust and its
management not included in the Prospectus. The Additional Statement
is incorporated by reference in its entirety in the Prospectus.
Only when you have read both the Prospectus and the Additional
Statement are all material facts about the Trust available to you.
SHARES OF THE TRUST ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE INVESTMENT ADVISORS CORPORATION,
BANK ONE ARIZONA, NA, BANC ONE CORPORATION OR ITS BANK OR NON-BANK
AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE TRUST ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY OR
GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT OR ANY STATE.
AN INVESTMENT IN THE TRUST INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
The Trust's Shareholder Servicing Agent: after November 8, 1997:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-437-1000 toll free
Before November 8, 1997:
Administrative Data Management Corp.
581 Main Street, Woodbridge, NJ 07095-1198
Call 800-437-1000 toll free or 732-855-5731
FOR GENERAL INQUIRIES & YIELD INFORMATION,
CALL 800-437-1020 TOLL FREE OR 212-986-8826
The Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
HIGHLIGHTS
Tax-Free Trust of Arizona (the "Trust"), founded by Aquila
Management Corporation in 1986 and one of the Aquilasm Group of
Funds, is an open-end mutual fund which invests in tax-free
municipal bonds, the kind of obligations issued by the State of
Arizona, its counties and various other local authorities to
finance such long-term projects as schools, roads, hospitals water
facilities and other vital public purpose projects throughout
Arizona. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the Trust
invests pay interest which is exempt from both regular Federal and
State of Arizona income taxes. Dividends paid by the Trust from
this income are likewise free of both such taxes. It is, however,
possible that in certain circumstances, a small portion of the
dividends paid by the Trust will be subject to income taxes. The
Federal alternative minimum tax ("AMT") may apply to some
investors, but its impact will be limited, since not more than 20%
of the Trust's net assets can be invested in obligations paying
interest which is subject to this tax. The receipt of
exempt-interest dividends from the Trust may result in some portion
of social security payments or railroad retirement benefits being
included in taxable income. Capital gains distributions, if any,
are taxable. (See "Dividend and Tax Information.")
Investment Grade - The Trust will acquire only those municipal
obligations which, at the time of purchase, are within the four
highest credit ratings assigned by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, or are determined by the Adviser
to be of comparable quality. In general, there are nine separate
credit ratings, ranging from the highest to the lowest credit
ratings for municipal obligations. Obligations within the top four
ratings are considered "investment grade" but those in the fourth
rating may have speculative characteristics as well. (See
"Investment of the Trust's Assets.")
Initial Investment - - You may open your account for Class Y
Shares with any purchase of $100,000 or more for fiduciary
accounts and $250,000 for all other eligible purchasers. These
minimums do not apply to shareholders with accounts open on October
1, 1997. (See the Application, which is in the back of the
Prospectus.) Class I Shares are sold only through financial
intermediaries, which may have their own minimum investment
requirement. (See "How to Invest in the Trust.")
Additional Investments - - You may make additional investments
in Class Y Shares at any time and in any amount, directly or, if in
an amount of $50 or more, through the convenience of having your
investment electronically transferred from your financial
institution account into the Trust by Automatic Investment or
Telephone Investment. Additional investments in Class I Shares can
be made only through financial intermediaries, which may have their
own requirements for subsequent investments. (See "How to Invest in
the Trust.")
Alternative Purchase Plans - The Trust provides alternative
ways to invest. (See "How to Invest in the Trust.") For this
purpose the Trust offers classes of shares, which differ in their
expense levels and sales charges. This Prospectus offers:
Institutional Class Shares ("Class Y Shares") are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity, and are
not offered directly to retail customers. Class Y Shares
are offered at net asset value with no sales charge, no
redemption fee, no contingent deferred sales charge and
no distribution fee. (See "How to Purchase Class Y
Shares.")
Financial Intermediary Class Shares ("Class I Shares")
are offered and sold only through financial
intermediaries with which Aquila Distributors, Inc. (the
"Distributor") has entered into sales agreements, and are
not offered directly to retail customers. Class I Shares
are offered at net asset value with no sales charge and
no redemption fee or contingent deferred sales charge,
although a financial intermediary may charge a fee for
effecting a purchase or other transaction on behalf of
its customers. Class I Shares may carry a distribution
fee of up to 0.25 of 1% of average annual net assets
allocable to Class I Shares, currently 0.10 of 1% of such
net assets, and a services fee of 0.25 of 1% of such
assets. (See "How to Purchase Class I Shares.")
The Trust's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares, ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Trust and Its Shares.")
At the date of the Prospectus, Class Y Shares and Class I
Shares are registered for sale only in certain states. (See "How to
Invest in the Trust.") If Class Y Shares or Class I Shares of the
Trust are sold outside those states, except to certain
institutional investors, the Trust can redeem them. If your state
of residence is not Arizona, dividends from the Trust may be
subject to income taxes of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Trust.
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends on Class Y Shares are paid by
check mailed to you, directly deposited into your financial
institution account or automatically reinvested without sales
charge in additional Class Y Shares at the then-current net asset
value. All arrangements for the payment of dividends with respect
to Class I Shares, including reinvestment of dividends, must be
made through financial intermediaries. (See "Dividend and Tax
Information.")
Many Different Issues - You have the advantages of a portfolio
which consists of over 235 issues with different maturities. (See
"Investment of the Trust's Assets.")
Local Portfolio Management - The Trust provides you with
experienced, locally-based professional investment management by
Banc One Investment Advisors Corporation, which serves as the
Trust's Investment Adviser. The Trust currently pays fees at a rate
of up to 0.20 of 1% of average annual net assets to each of its
Adviser and Administrator. Total advisory and administration fees
are at a rate of 0.40 of 1% of average annual net assets, although
some or all of these fees may be waived. It is expected that these
arrangements will change. (See "Table of Expenses" and "Management
Arrangements.")
The Adviser is a subsidiary of BANC ONE CORPORATION ("Banc
One"), based in Columbus, Ohio. As of June 30, 1997 the Adviser had
$20 billion under management. Banc One is a multi-bank holding
company, incorporated under the laws of the State of Ohio. As of
June 30, 1997, Banc One operates with more than 1,500 offices in
the states of Arizona, Colorado, Illinois, Indiana, Kentucky,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. As of that date, Banc One, its affiliated banks and its
non-bank subsidiaries had total assets of approximately $140.7
billion.
Redemptions - Liquidity - You may redeem any amount of your
Class Y Shares account on any business day at the next determined
net asset value by telephone, FAX or mail request, with proceeds
being sent to a predesignated financial institution, if you have
elected Expedited Redemption. Proceeds will be wired or transferred
through the facilities of the Automated Clearing House, wherever
possible, upon request, if in an amount of $1,000 or more, or will
be mailed. For these and other redemption procedures see "How to
Redeem Your Investment." All arrangements for redemptions of Class
I Shares must be made through financial intermediaries. The Trust
does not impose redemption fees for redemption of Class Y Shares or
Class I Shares. However, financial intermediaries may charge a fee
for effecting redemptions.
Certain Stabilizing Measures - The Trust will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class Y Shares of the Trust into
Class Y Shares of other Aquila-sponsored tax-free municipal bond
mutual funds, or two Aquila sponsored equity funds. You may also
exchange them into shares of the Aquila-sponsored money market
funds. Similar exchangability is available to Class I Shares to the
extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. The exchange prices will be
the respective net asset values of the shares. (See "Exchange
Privilege.")
Risks and Special Considerations - The share price, determined
on each business day, varies with the market prices of the Trust's
portfolio securities, which fluctuate with market conditions
including prevailing interest rates. Accordingly, the proceeds of
redemptions may be more or less than your original cost. (See
"Factors Which May Affect the Value of the Trust's Investments and
Their Yields.") The Trust's assets, being primarily or entirely
Arizona issues, are subject to economic and other conditions
affecting Arizona. (See "Risk Factors and Special Considerations
Regarding Investment in Arizona Obligations.") Moreover, the Trust
is classified as a "non-diversified" investment company, because it
may choose to invest in the obligations of a relatively limited
number of issuers. (See "Investment of the Trust's Assets.") The
Trust may also, to a limited degree, buy and sell futures contracts
and options on futures contracts, although since inception the
Trust has not done so and has no present intention to do so. There
may be risks associated with these practices. (See "Certain
Stabilizing Measures.")
Statements and Reports - You will receive statements of your
Class Y Shares account monthly as well as each time you add to your
account or take money out. Financial intermediaries provide their
own statements of Class I Shares accounts. Additionally, you will
receive a Semi-Annual Report and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
TABLE OF EXPENSES
Class I Class Y
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases......... None None
(as a percentage of the offering price)
Maximum Sales Charge Imposed on
Reinvested Dividends ........................... None None
Maximum Deferred Sales Charge .................... None None
Redemption Fees .................................. None None
Exchange Fee ..................................... None None
Annual Trust Operating Expenses (1)
Arrangements in effect through November 6, 1997
(See "Management Arrangements.")
(as a percentage of average net assets)
Investment Advisory Fee........................... 0.20% 0.20%
12b-1 Fee (2)..................................... 0.10% None
All Other Expenses................................ 0.63% 0.38%
Administration Fee ........................... 0.20% 0.20%
Other Expenses (3)............................ 0.43% 0.18%
Total Trust Operating Expenses (3)................ 0.93% 0.58%
Annual Trust Operating Expenses (1)
Arrangements after November 6, 1997
(See "Management Arrangements.")
(as a percentage of average net assets)
Management Fee (4)........................... 0.40% 0.40%
12b-1 Fee (2)................................ 0.10% None
All Other Expenses (3)....................... 0.43% 0.18%
Total Trust Operating Expenses (3)........... 0.93% 0.58%
Example (5)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
Class I Shares....... $9 $30 $51 $114
Class Y Shares....... $6 $19 $32 $73
<FN>
(1) Estimated based on amount incurred by the Trust's Class Y Shares during
its most recent fiscal year, restated to reflect current arrangements.
</FN>
<FN>
(2) Current rates; up to 0.25% can be authorized.
</FN>
<FN>
(3) Does not reflect a 0.01% expense offset in custodian fees for uninvested
cash balances. Reflecting this offset and based on estimates for Class I,
all other expenses and total Trust operating expenses for Class I Shares
would have been 0.42% and 0.92%, respectively; for Class Y Shares these
expenses would have been 0.17% and 0.57%, respectively. Operating expenses
for Class I Shares include 0.25% Service fee. (See "Shareholder Services
Plan for Class I Shares.")
</FN>
<FN>
(4) The Trust pays the Manager an advisory fee at the annual rate of 0.40
of 1% of average annual net assets; the Manager pays the Sub-Adviser a sub-
advisory fee at the annual rate of 0.20 of 1% of average annual net assets.
(See "Management Arrangements")
</FN>
<FN>
(5) The expense example is based upon the above annual Trust-operating
expenses. It is also based upon amounts at the beginning of each year
which includes the prior year's assumed results. A year's results
consist of an assumed 5% annual return less total operating
expenses; the expense ratio was applied to an assumed average balance
(the year's starting investment plus one-half the year's results).
Each figure represents the cumulative expenses so determined for the
period specified.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT
ALL MUTUAL FUNDS USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF
PREPARING THE ABOVE EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE
INTERPRETED AS A PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE HIGHER OR
LOWER.
The purpose of the above table is to assist the investor in
understanding the various costs that an investor in the Trust will bear
directly or indirectly.
<PAGE>
<TABLE>
<CAPTION>
The table shown below for Class A Shares is for information
purposes only. Class A Shares are not offered by this Prospectus.
No historical information exists for Class I Shares, which were
established on October 31, 1997.
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to the
five years ended June 30, 1997 has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon is included in the Trust's
financial statements contained in its Annual Report, which are
incorporated by reference into the Additional Statement. The information
provided in the table should be read in conjunction with the financial
statements and related notes. On April 2, 1990, Aquila Management
Corporation, originally the Trust's Sub-Adviser and Administrator, became
Administrator only. A copy of these financial statements can be obtained
without charge by calling or writing the Shareholder Servicing Agent at
the address and telephone numbers on the cover of the Prospectus.
Class A (1) Class Y (2)
Year Ended June 30, Year Period
1997 1996 1995 Ended Ended
6/30/97 6/30/96
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........ $10.38 $10.37 $10.16 $10.38 $10.45
Income from Investment
Operations:
Net investment income...... 0.53 0.55 0.56 0.70 0.15
Net gain (loss) on
securities (both
realized and
unrealized)................ 0.22 0.01 0.21 0.21 (0.07)
Total from Investment
Operations................. 0.75 0.56 0.77 0.91 0.08
Less Distributions:
Dividends from net
investment income.......... (0.55) (0.55) (0.56) 0.70 (0.15)
Distributions from
capital gains.............. - - - - -
Total Distributions........ (0.55) (0.55) (0.56) 0.70 (0.15)
Net Asset Value, End
of Period.................. $10.58 $10.38 $10.37 $10.59 $10.38
Total Return (not
reflecting sales load)(%).. 7.36 5.49 7.89 9.10 0.76+
Ratios/Supplemental Data
Net Assets, End of
Period (in thousands) 391.737 389,083 380,745 0.1 0.1
Ratio of Expenses to
Average Net Assets(%)...... 0.72 0.72 0.74 0.57 0.15+
Ratio of Net Investment
Income to Average
Net Assets(%).............. 5.03 5.30 5.55 5.18 1.42+
Portfolio Turnover
Rate(%).................... 19.98 27.37 34.44 19.98 27.37
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees and the expense offset in custodian fees for uninvested
cash balances would have been:
Net Investment Income(%)...... 0.52 0.55 0.56 0.70 0.15
Ratio of Expenses to
Average Net Assets(%)........ 0.73 0.73 0.74 0.58 0.15+
Ratio of Net Investment
Income to Average
Net Assets(%)................ 5.02 5.30 5.55 5.17 1.42+
Year Ended June 30,
1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C>
$10.84 $10.36 $9.92 $9.77 $9.88 $9.47 $9.45
0.57 0.62 0.66 0.66 0.66 0.67 0.67
(0.60) 0.54 0.43 0.15 (0.11) 0.41 0.02
(0.03) 1.16 1.09 0.81 0.55 1.08 0.69
(0.57) (0.62) (0.65) (0.66) (0.66) (0.67) (0.67)
0.08 0.06 - - - - -
(0.65) (0.68) (0.65) (0.66) (0.66) (0.67) (0.67)
$10.16 $10.84 $10.36 $9.92 $9.77 $9.88 $9.47
(0.38)% 11.45% 11.36% 8.57% 5.84% 11.86% 7.68%
372,093 349,920 237,433 175,342 121,026 101,584 83,437
0.70% 0.65% 0.57% 0.58% 0.58% 0.53% 0.51%
5.36% 5.76% 0.37% 6.68% 6.66% 6.76% 6.95%
31.20% 18.78% 23.53% 26.83% 31.11% 24.87% 22.41%
0.57 0.61 0.65 0.65 0.64 0.64 0.64
0.71% 0.73% 0.70% 0.74% 0.77% 0.78% 0.88%
5.35% 5.67% 6.24 6.52% 6.47% 6.50% 6.58%
<FN>
(1)Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2)New Class of Shares established on April 1, 1996.
</FN>
<FN>
(3) From April 1, 1996 through June 30, 1996.
<FN>
+Not annualized.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Trust's shares are designed to be a suitable investment
for individuals, corporations, institutions and fiduciaries who
seek income exempt from Arizona State and regular Federal income
taxes.
You may invest in shares of the Trust as an alternative to
direct investments in Arizona Obligations, as defined below, which
may include obligations of certain non-Arizona issuers. The Trust
offers you the opportunity to keep assets fully invested in a
vehicle that provides a professionally managed portfolio of Arizona
Obligations which may, but not necessarily will, be more
diversified, higher yielding, more stable and more liquid than you
might be able to obtain on an individual basis by direct purchase
of Arizona Obligations. Through the convenience of a single
security consisting of shares of the Trust, you are also relieved
of the inconvenience associated with direct investments of fixed
denominations, including the selecting, purchasing, handling,
monitoring call provisions and safekeeping of Arizona Obligations.
Arizona Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes; bond
anticipation notes; construction loan notes; and floating and
variable rate demand notes. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase
contracts for property or equipment. The purposes for which
municipal obligations such as bonds are issued include the
construction of a wide range of public facilities such as highways,
bridges, schools, hospitals, housing, mass transportation, streets,
and water and sewer works. Other public purposes for which
municipal obligations may be issued include the refunding of
outstanding obligations, the obtaining of funds for general
operating expenses and the obtaining of funds to lend to other
public institutions and facilities.
INVESTMENT OF THE TRUST'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Arizona State and regular
Federal income taxes as is consistent with the preservation of
capital, the Trust will invest in Arizona Obligations (as defined
below). There is no assurance that the Trust will achieve its
objective, which is a fundamental policy of the Trust. (See
"Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Arizona Obligations" means obligations, including those of
certain non-Arizona issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate counsel,
is exempt from regular Federal income taxes and Arizona income
taxes. Although exempt from regular Federal income tax, interest
paid on certain types of Arizona Obligations, and dividends which
the Trust might pay from this interest, are preference items as to
the Federal alternative minimum tax; for further information, see
"Dividend and Tax Information." As a fundamental policy, at least
80% of the Trust's net assets will be invested in Arizona
Obligations the income paid upon which will not be subject to the
alternative minimum tax; accordingly, the Trust can invest up to
20% of its net assets in obligations which are subject to the
Federal alternative minimum tax. The Trust may refrain entirely
from purchasing these types of Arizona Obligations. (See "Dividend
and Tax information.")
The non-Arizona bonds or other obligations the interest on
which is exempt under present law from regular Federal and Arizona
income taxes are those issued by or under the authority of Guam,
the Northern Mariana Islands, Puerto Rico and the Virgin Islands.
The Trust will not purchase Arizona Obligations of non-Arizona
issuers unless Arizona Obligations of Arizona issuers of the
desired quality, maturity and interest rate are not available. As
an Arizona-oriented fund, at least 65% of the Trust's total assets
will be invested in Arizona Obligations of Arizona issuers. The
Trust invests only in Arizona Obligations and, possibly, in Futures
and options on Futures (see below) for protective (hedging)
purposes.
In general, there are nine separate credit ratings, ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Trust will have a portfolio of
quality-oriented (investment grade) securities, the Arizona
Obligations which the Trust will purchase must, at the time of
purchase, either (i) be rated within the four highest credit
ratings assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations so
rated, by Banc One Investment Advisors Corporation (the "Adviser"),
the Trust's investment adviser, subject to the direction and
control of the Trust's Board of Trustees. Municipal obligations
rated in the fourth highest credit rating are considered by such
rating agencies to be of medium quality and thus may present
investment risks not present in more highly rated obligations. Such
bonds lack outstanding investment characteristics and may in fact
have speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Arizona Obligation is downgraded such that it could not
then be purchased by the Trust, or, in the case of an unrated
Arizona Obligation, if the Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Trust may purchase, it is the current policy
of the Trust to cause any such obligation to be sold as promptly
thereafter as the Adviser in its discretion determines to be
consistent with the Trust's objectives; such obligation remains in
the Trust's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Trust can purchase industrial
development bonds only if they meet the definition of Arizona
Obligations, i.e., the interest on them is exempt from Arizona
State and regular Federal income taxes.
The Trust is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940 Act").
The Trust also intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code (the "Code").
One of the tests for such qualification under the Code is, in
general, that at the end of each fiscal quarter of the Trust, at
least 50% of its assets must consist of (i) cash; and (ii)
securities which, as to any one issuer, do not exceed 5% of the
value of the Trust's assets. If the Trust had elected to register
under the 1940 Act as a "diversified" investment company, it would
have to meet the same test as to 75% of its assets. The Trust may
therefore not have as much diversification among securities, and
thus diversification of risk, as if it had made this election under
the 1940 Act. In general, the more the Trust invests in the
securities of specific issuers, the more the Trust is exposed to
risks associated with investments in those issuers. The Trust's
assets, being primarily or entirely Arizona issues, are accordingly
subject to economic and other conditions affecting Arizona. (See
"Risk Factors and Special Considerations Regarding Investment in
Arizona Obligations.")
Certain Stabilizing Measures
The Trust will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash and
cash equivalents in attempting to protect against declines in the
value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Trust has no current intention of using futures and options, to
the limited degree described below, these may be used to attempt to
hedge against changes in the market price of the Trust's Arizona
Obligations caused by interest rate fluctuations. Futures and
options could also provide a hedge against increases in the cost of
securities the Trust intends to purchase.
Although it does not currently do so, and since inception has
not done so, the Trust may buy and sell futures contracts relating
to indices on municipal bonds ("Municipal Bond Index Futures") and
to U.S. government securities ("U.S. Government Securities
Futures"); both kinds of futures contracts are "Futures." The Trust
may also write and purchase put and call options on Futures. As a
matter of fundamental policy the Trust will not buy or sell a
Future or an option on a Future if thereafter more than 10% of its
net assets would be in initial or variation margin on such Futures
and options on them, and in premiums on such options. The Trust
will not enter into Futures or options for which the aggregate
initial margins and premiums paid for options exceed 5% of the fair
market value of the Trust's assets. (See the Additional Statement.)
Under normal market conditions, the Trust cannot purchase or sell
Municipal Bond Index Futures, U.S. Government Securities Futures,
or options on Futures if thereafter more than 20% of its total
assets would consist of cash, margin deposits on such Futures and
margin deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or possible
decline in the value of Arizona Obligations.
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Trust's portfolio and
the prices of Futures or options purchased or sold by the Trust;
(ii) incorrect forecasts by the Adviser concerning interest rates
which may result in the hedge being ineffective; and (iii) possible
lack of a liquid secondary market for a Future or option; the
resulting inability to close a Futures or options position could
adversely affect the Trust's hedging ability. For a hedge to be
completely effective, the price change of the hedging instrument
should equal the price change of the security being hedged. The
risk of imperfect correlation of these price changes is increased
as the composition of the Trust's portfolio is divergent from the
debt securities underlying the hedging instrument. To date, the
Adviser has had no experience in the use of Futures or options on
them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits" established
by commodity exchanges which restrict the amount of change in the
contract price allowed during a single trading day. Thus, once a
daily limit is reached, no further trades may be entered into
beyond the limit, thereby preventing the liquidation of open
positions. Prices have in the past reached the daily limit on a
number of consecutive trading days. For further information about
Futures and options, see the Additional Statement.
When and if the Trust determines to use Futures or options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one year,
but permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding one year, in each case upon
not more than 30 days' notice. The issuer of such notes normally
has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus
accrued interest upon a specified number of days' notice to the
noteholders. The interest rate on a floating rate demand note is
based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The
interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
Participation Interests
The Trust may purchase from financial institutions
participation interests in Arizona Obligations (such as industrial
development bonds and municipal lease/purchase agreements). A
participation interest gives the Trust an undivided interest in the
underlying Arizona Obligations in the proportion that the Trust's
participation interest bears to the total amount of the underlying
Arizona Obligations. All such participation interests must meet the
Trust's credit requirements. (See "Limitation to 10% as to Certain
Investments.")
When-Issued and Delayed Delivery Purchases
The Trust may buy Arizona Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring them.
The Arizona Obligations so purchased are subject to market
fluctuation and no interest accrues to the Trust until delivery and
payment take place; their value at the delivery date may be less
than the purchase price. The Trust cannot enter into when-issued
commitments exceeding in the aggregate 15% of the market value of
the Trust's total assets, less liabilities other than the
obligations created by when-issued commitments. If the Trust
chooses to dispose of the right to acquire a when-issued obligation
prior to its acquisition, it could, as with the disposition of any
other portfolio holding, incur a gain or loss due to market
fluctuation; any such gain would be a taxable short-term gain. The
Trust places an amount of assets equal in value to the amount due
on the settlement date for the when-issued or delayed delivery
securities being purchased in a segregated account with the
Custodian, which is marked to market every business day. (See the
Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Trust cannot purchase Arizona Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does not
include any Arizona Obligations as to which the Trust can exercise
the right to demand payment in full within three days and as to
which there is a secondary market. Floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. (See
the Additional Statement.)
Current Policy as to Certain Obligations
The Trust will not invest more than 25% of its total assets in
(i) Arizona Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value
of the Trust's Investments and Their Yields
The value of the Arizona Obligations in which the Trust
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Trust buys Arizona Obligations, the value of
these obligations will normally go down; if these rates go down,
the value of these obligations will normally go up. Changes in
value and yield based on changes in prevailing interest rates may
have different effects on short-term Arizona Obligations than on
long-term obligations. Long-term obligations (which often have
higher yields) may fluctuate in value more than short-term ones.
For this reason, the Trust may, to achieve a defensive position,
shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Arizona Obligations
The following is a discussion of the general factors that
might influence the ability of Arizona issuers to repay principal
and interest when due on the Arizona Obligations contained in the
portfolio of the Trust. Such information is derived from sources
that are generally available to investors and is believed by the
Trust to be accurate, but has not been independently verified and
may not be complete.
The composition of the Arizona economy has changed
significantly in recent years. Arizona has shifted from a
resource-based economy to one based on high-tech manufacturing,
construction and services. The construction sector recently has
shown an upturn from the cyclical lows associated with several
factors. These factors included a slowing in the rate of growth of
population, over-built conditions in most sub-markets and less
favorable tax treatments. The problems associated with the
phenomenal growth experienced during the 1980's boom, i.e., air
quality, transportation and public infrastructure, are being
addressed by the Arizona legislature and other public bodies.
Officials throughout the state have been challenged to manage
budgetary strain and set priorities with fewer available resources.
Whether municipalities can maintain fiscal stability will become
increasingly dependent on growth expectations and municipalities'
willingness to reduce spending and manage revenues. The period of
double-digit increases in the tax base and population and the tax
revenues generated by such growth appears to be over. As such,
Arizona municipalities will have to adapt to a changing and more
constricted fiscal environment.
One of the most significant issues facing Arizona
municipalities is the ability to provide water. The Central Arizona
Project is a three hundred thirty-five mile long water conveyance
system designed to take water from the Colorado River and deliver
it to the Phoenix and Tucson metropolitan areas, to Indian
reservations and to farms for irrigation. The project has been
completed to Tucson, but the start of Arizona's obligation to repay
the Federal government its $1.8 billion share of the project's
costs is still subject to negotiation among the parties. However,
demand for the water is currently only one-third of capacity. The
price of water could increase substantially for cities to cover the
cost of the project. Currently, plans are being discussed to
maintain the project's finances and to boost the demand for the
water, thus spreading the projects costs to all its intended users.
In July, 1994, the Supreme Court of Arizona reversed a lower
court ruling and held that the State's statutory scheme for
financing public education is not in compliance with the State's
constitution. The case was remanded to the lower court to determine
whether, in a reasonable time, the Arizona legislature has taken
action to remedy the financing scheme to bring it into compliance.
In 1997, the most recent attempt by the legislature to comply with
the ruling was found inadequate by a lower court. The Supreme Court
has also ruled that its ruling will be prospective only and that
bonded indebtedness incurred under existing statutes as long as
they are in effect are valid and enforceable. As of the date of
this prospectus, the legislature has not reached agreement on a
permanent solution. It is not possible to predict what further
court or legislative action will be taken or what effect such
action may have on Arizona Obligations in the Trust's portfolio or
the supply of new Arizona Obligations in the future.
In early 1996, a lower court held illegal the practice used by
some localities in Arizona pursuant to which so-called "Capital
Appreciation Bonds" ("CAB"s) are issued. CABs are zero-coupon bonds
that pay no current interest. The ruling affects only one school
district but similar obligations have been issued by other
localities. The Trust does not own any CABs but does own
conventional issues of localities that have issued CABs. The suit
challenged the further practice whereby a municipality includes in
its bonded indebtedness only the initial principal amount of its
CABs. Under this practice, because the entire principal amount of
the CABs is not included, the municipality can issue additional
conventional bonds without exceeding its legal debt limit. In 1996,
the legislature enacted legislation validating all bonds of this
type outstanding on March 31, 1996. However, the restrictions in
the legislation may have an adverse impact on the overall financial
condition of municipalities that have issued CABs and may restrict
their ability to issue additional debt. There may be additional
court challenges to the legislation.
Inasmuch as the Arizona Obligations in which the Trust may
invest from time to time include general obligation bonds, revenue
bonds, industrial development bonds, and special tax assessment
bonds, and the sensitivity of each of these types of investments to
the general and economic factors discussed above may vary
significantly, no assurance can be given as to the effect, if any,
that these factors, individually or in the aggregate, may have on
any individual Arizona Obligation or on the Trust as a whole.
Obligations of non-Arizona issuers are subject to general
economic and other factors affecting those issuers.
INVESTMENT RESTRICTIONS
The Trust has a number of policies about what it can and
cannot do. Certain of these policies, identified in the Prospectus
and in the Additional Statement as "fundamental policies," cannot
be changed unless the holders of a "majority," as defined in the
1940 Act, of the Trust's outstanding shares vote to change them.
(See the Additional Statement for a definition of such a majority.)
All other policies can be changed from time to time by the Board of
Trustees without shareholder approval. Some of the more important
of the Trust's fundamental policies, not otherwise identified in
the Prospectus, are set forth below; others are listed in the
Additional Statement.
1. The Trust invests only in certain limited securities.
The Trust cannot buy any securities other than the Arizona
Obligations meeting the standards stated under "Investment of the
Trust's Assets"; the Trust can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Trust has industry investment requirements.
The Trust cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Trust will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Trust cannot make loans.
The Trust can buy those Arizona Obligations which it is
permitted to buy (see "Investment of the Trust's Assets"); this is
investing, not making a loan. The Trust cannot lend its portfolio
securities.
4. The Trust can borrow only in limited amounts for special
purposes.
The Trust can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage or
pledge its assets only in connection with such borrowing and only
up to the lesser of the amounts borrowed or 5% of the value of its
total assets. However, this shall not prohibit margin arrangements
in connection with the purchase or sale of Municipal Bond Index
Futures, U.S. Government Securities Futures or options on them, or
the payment of premiums on those options. Interest on borrowings
would reduce the Trust's income. Except in connection with
borrowings, the Trust will not issue senior securities. The Trust
will not purchase any Arizona Obligations, Futures or options on
Futures while it has any outstanding borrowings which exceed 5% of
the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Trust's
classes of shares and offering price per share of each class is
determined as of 4:00 p.m., New York time, on each day that the New
York Stock Exchange is open (a "business day"), by dividing the
value of the Trust's net assets (i.e., the value of the assets less
liabilities) allocable to each class by the total number of shares
of such class then outstanding. Determination of the value of the
Trust's assets is subject to the direction and control of the
Trust's Board of Trustees. In general, it is based on market value,
except that Arizona Obligations maturing in 60 days or less are
generally valued at amortized cost; see the Additional Statement
for further information.
HOW TO INVEST IN THE TRUST
This Prospectus offers two separate classes of shares. All
classes represent interests in the same portfolio of Arizona
Obligations.
Institutional Class Shares ("Class Y Shares") are offered only
to institutions acting for investors in a fiduciary, advisory,
agency, custodial or similar capacity, and are not offered
directly to retail customers. Class Y Shares are offered at
net asset value with no sales charge, no redemption fee, no
contingent deferred sales charge and no distribution fee.
Financial Intermediary Class Shares ("Class I Shares") are
offered and sold only through financial intermediaries with
which Aquila Distributors, Inc. (the "Distributor") has
entered into sales agreements, and are not offered directly to
retail customers. Class I Shares are offered at net asset
value with no sales charge and no redemption fee or contingent
deferred sales charge, although a financial intermediary may
charge a fee for effecting a purchase or other transaction on
behalf of its customers. Class I Shares may carry a
distribution fee of up to 0.25 of 1% of average annual net
assets allocable to Class I Shares, currently 0.10 of 1% of
such net assets, and a services fee of 0.25 of 1% of such
assets. (See "Distribution Plan" and "Shareholder Services
Plan.")
The Trust's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares, ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Trust and Its Shares.")
At the date of the Prospectus, Class Y Shares of the Trust are
registered for sale only in Arizona, California, Colorado, District
of Columbia, Florida, Hawaii, Idaho, Illinois, Indiana, Minnesota,
Missouri, Nevada, New Jersey, New York and Pennsylvania.
At the date of the Prospectus, Class I Shares of the Trust are
registered for sale only in Arizona and New York.
If you do not reside in one of those states you should not
purchase shares of the Trust. If shares are sold outside of those
states except to certain institutional investors, the Trust can
redeem them. Such a redemption may result in a loss to you and may
have tax consequences. In addition, if your state of residence is
not Arizona, the dividends from the Trust may not be exempt from
income tax of the state in which you reside. Accordingly, you
should consult your tax adviser before acquiring shares of the
Trust.
How to Purchase Class Y Shares
Class Y Shares of the Trust may be purchased through any
investment broker or dealer (a "selected dealer") which has a sales
agreement with Aquila Distributors, Inc. (the "Distributor") or
through the Distributor. There are two ways to make an initial
investment: (i) order the shares through your investment broker or
dealer, if it is a selected dealer; or (ii) mail the Application
with payment to the Trust's Shareholder Servicing Agent (the
"Agent") at the address on the Application. There is no sales
charge on initial or subsequent investments. You are urged to
complete an Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment.
The minimum initial investment for Class Y Shares is $100,000
for fiduciaries and $250,000 for all other eligible purchasers,
except that this limitation does not apply to shareholders with
accounts open on October 31, 1997, or as otherwise stated in the
Prospectus or Additional Statement. Such investment must be drawn
in United States dollars on a United States commercial or savings
bank or credit union or a United States branch of a foreign
commercial bank (each of which is a "Financial Institution"). You
may make subsequent investments in Class Y Shares in any amount
(unless you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number and the name of the Trust. With subsequent
investments, please send the pre-printed stub attached to the
Trust's confirmations.
Subsequent investments of $50 or more in Class Y Shares can be
made by electronic funds transfer from your demand account at a
Financial Institution. To use electronic funds transfer for your
purchases, your Financial Institution must be a member of the
Automated Clearing House and the Agent must have received your
completed Application designating this feature, or, after your
account has been opened, a Ready Access Features form available
from the Distributor or the Agent. A pre-determined amount can be
regularly transferred for investment ("Automatic Investment"), or
single investments can be made upon receipt by the Agent of
telephone instructions from anyone ("Telephone Investment"). The
maximum amount of each Telephone Investment is $50,000. Upon 30
days' written notice to shareholders, the Trust may modify or
terminate these investment methods at any time or charge a service
fee, although no such fee is currently contemplated.
How to Purchase Class I Shares
Initial and subsequent investments in Class I Shares must be
made through financial intermediaries and cannot be made directly.
Financial intermediaries may set minimum amounts for initial
purchase and subsequent investments in Class I Shares and may
charge a fee for effecting a purchase or other transaction on
behalf of customers. Financial intermediaries that make Class I
Shares of the Trust and other mutual funds available to their
customers may offer distinct services, may have their own charges
for services and may impose their own minimum requirements for
initial and subsequent investments. Customers of financial
intermediaries should read the Prospectus in light of the terms of
their accounts with financial intermediaries. Financial
intermediaries that have entered into specific agreements with the
Trust may enter confirmed purchase orders on behalf of clients and
customers, with payment to follow not later than the Trust's
pricing of Class I Shares on the following business day. If payment
is not received by that time the financial intermediary could be
held liable for resulting fees or losses.
Offering Price
The offering price for Class Y Shares is the net asset value
per share. The offering price determined on any day applies to all
purchase orders received by the Agent from selected dealers that
day, except that orders received by it after 4:00 p.m. New York
time will receive that day's offering price only if such orders
were received by selected dealers from customers prior to such time
and transmitted to the Distributor prior to its close of business
that day (normally 5:00 p.m. New York time); if not so transmitted,
such orders will be filled at the next determined offering price.
Selected dealers are required to transmit orders promptly.
Investments by mail are made at the offering price next determined
after receipt of the purchase order by the Agent. Purchase orders
received on other than a business day will be executed on the next
succeeding business day. Purchases by Automatic Investment and
Telephone Investment will be executed on the first business day
occurring on or after the date an order is considered received by
the Agent at the price determined on that day. In the case of
Automatic Investment your order will be executed on the date you
specified for investment at the price determined on that day. If
that day is not a business day your order will be executed at the
price determined on the next business day. In the case of Telephone
Investment your order will be filled at the next determined
offering price. If your order is placed after the time for
determining the net asset value of the Trust shares for any day, it
will be executed at the price determined on the following business
day. The sale of shares will be suspended during any period when
the determination of net asset value is suspended and may be
suspended by the Distributor when the Distributor judges it in the
Trust's best interest to do so.
The offering price for Class I Shares is the net asset value
per share. The offering price determined on any day applies to all
purchases received by each financial intermediary prior to 4:00
p.m. New York time on any business day. Purchase orders received by
financial intermediaries after that time will be filled at the next
determined offering price.
Possible Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of any
class of shares of the Trust. Additional compensation may include
payment or partial payment for advertising of the Trust's shares,
payment of travel expenses, including lodging, incurred in
connection with attendance at sales seminars taken by qualifying
registered representatives to locations within or outside of the
United States, other prizes or financial assistance to securities
dealers in offering their own seminars or conferences. In some
instances, such compensation may be made available only to certain
dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Dealers may not use sales of
the Trust's shares to qualify for the incentives to the extent such
may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers,
Inc. The cost to the Distributor of such promotional activities and
such payments to participating dealers will not exceed the amount
of the sales charges in respect of sales of all classes of shares
of the Trust effected through such participating dealers, whether
retained by the Distributor or reallowed to participating dealers.
No such additional compensation to dealers in connection with sales
of shares of the Trust will affect the price you pay for shares or
the amount that the Trust will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Confirmations and Share Certificates
All purchases of Class Y Shares will be confirmed and credited
to you in an account maintained for you at the Agent in full and
fractional shares of the Trust (rounded to the nearest 1/1000th of
a share). Purchases of Class I Shares will be confirmed by
financial intermediaries. No share certificates will be issued for
Class Y Shares or Class I Shares.
The Trust and the Distributor reserve the right to reject any
order for the purchase of shares. In addition, the offering of
shares may be suspended at any time and resumed at any time
thereafter.
Distribution Plan
The Trust has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended to
result in the sale of its shares except pursuant to a written plan
adopted under the Rule. No payments under the Plan from assets
represented by Class Y Shares are authorized.
Under a part of the Plan, the Trust is authorized to make
payments with respect to Class I Shares ("Class I Permitted
Payments") to Qualified Recipients. Class I Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal year
of the Trust (as adjusted for any part or parts of a fiscal year
during which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), at a rate set from
time to time by the Board of Trustees (currently 0.10 of 1%) but
not more than 0.25 of 1% of the average annual net assets
represented by the Class I Shares of the Trust. Such payments shall
be made only out of the Trust's assets allocable to the Class I
Shares. "Qualified Recipients" means financial intermediaries
selected by the Distributor with which the Trust or the Distributor
has entered into written agreements to act in such capacity.
The Plan contains provisions designed to protect against any
claim against or involving the Trust that some of the expenses
which might be considered to be sales-related which the Trust pays
or may pay come within the purview of the Rule. The Trust believes
that except for payments made with respect to Class A Shares and
Class C Shares it is not financing any such activity and does not
consider any payment enumerated in such provisions as so financing
any such activity. If and to the extent that any payment as
specifically listed in the Plan (see the Additional Statement) is
considered to be primarily intended to result in or as indirect
financing of any activity which is primarily intended to result in
the sale of Trust shares, these payments are authorized under the
Plan. In addition, if the Administrator, out of its own funds,
makes payment for distribution expenses such payments are
authorized. (See the Additional Statement.)
Shareholder Services Plan for Class I Shares
Under a Shareholder Services Plan, (the "Plan") the Trust is
authorized to make payments with respect to Class I Shares
("Service Payments") to Qualified Recipients. Fees paid under the
Plan are subject to such limits as may be necessary for Class I
Shares to qualify as a "no-load" class for purposes of the Conduct
Rules of the National Association of Securities Dealers, Inc.
("NASD"). The current limitation is as follows: fees paid under the
Plan that satisfy the definition of "service fees" in Rule 2830(d)
of the Conduct Rules of the National Association of Securities
Dealers, Inc. may not exceed an amount equal to the difference
between (i) 0.25 of 1% of the average annual net assets of the
Trust represented by Class I Shares and (ii) the amount paid under
the Trust's Distribution Plan with respect to the assets
represented by the Class I Shares. That is, the total payments
under both plans will be less than 0.25 of 1% of such net assets.
Where necessary or appropriate, the Independent Trustees, or such
appropriate officer or officers of the Trust as they may designate,
shall, with the advice of counsel, determine what fees paid under
this Plan are to be deemed "service fees." The Trust's management
believes that, in general, fees allocable to activities such as
sub-accounting and record-keeping are not "service fees," while
fees allocable to activities such as account service are "service
fees." In like manner, allocation of payments among activities is
also determined by the Independent Trustees or their delegates.
Subject to the foregoing, Service Payments may not exceed, for any
fiscal year of the Trust (as adjusted for any part or parts of a
fiscal year during which payments under the Plan are not accruable
or for any fiscal year which is not a full fiscal year), 0.25 of 1%
of the average annual net assets represented by the Class I Shares
of the Trust. Such payments shall be made only out of the Trust's
assets represented by the Class I Shares.
"Qualified Recipients" means broker-dealers or others selected
by the Distributor, including but not limited to any principal
underwriter of the Trust, with which the Trust or the Distributor
has entered into written agreements to provide personal services to
Class I Shares shareholders, maintenance of Class I Shares
shareholder accounts and/or pursuant to specific agreements
entering of confirmed purchase orders on behalf of customers or
clients and which have provided services to holders of Class I
Shares and/or maintenance of Class I Shares shareholder accounts.
The Distributor is authorized, but not directed, to take into
account, in addition to any other factors deemed relevant by it,
the following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares, including
without limitation, (i) activities relating to sub-accounting and
record-keeping, including the providing of necessary personnel and
facilities to establish and maintain shareholder accounts and
records, and (ii) activities relating to account service, such as
assisting shareholders in designating and changing dividend
options, account designations and addresses; answering customer
inquiries regarding account status and history and the manner in
which purchases and redemptions of shares of the Trust may be
effected; transmitting and receiving funds in connection with
customer orders to purchase or redeem shares, including, where
appropriate, arranging for the wiring of funds; assisting in
processing purchase and redemption transactions; and verifying and
guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated
accounts. A majority of the Independent Trustees (as defined in the
Plan) may remove any person as a Qualified Recipient and no fees
shall be paid pursuant to the Plan for activities primarily
intended to result in the sale of shares of the Trust or to finance
sales or sales promotion expenses. No fees shall be paid, or be
deemed to have been paid, for any of the listed activities to the
extent that such payments are deemed by the Independent Trustees to
be intended for distribution. Service Payments shall be paid
through the Distributor or shareholder servicing agent as
disbursing agent. (See the Additional Statement.)
HOW TO REDEEM YOUR INVESTMENT
Redemption of Class Y Shares
You may redeem all or any part of your Class Y Shares at the
net asset value next determined after acceptance of your redemption
request at the Agent. Redemptions can be made by the various
methods described below. There is no minimum period for any
investment in the Trust, except for shares recently purchased by
check, Automatic Investment or Telephone Investment as discussed
below. There are no redemption fees or penalties on redemption of
Class Y Shares. A redemption may result in a transaction taxable to
you.
For your convenience the Trust offers expedited redemption for
Class Y Shares to provide you with a high level of liquidity for
your investment.
Expedited Redemption Methods
You have the flexibility of two expedited methods of
initiating redemptions of Class Y Shares.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Trust and
the check is sent to your address of record, provided that
there has not been a change of your address of record during
the 30 days preceding your redemption request. You can make
only one request for telephone redemption by check in any
7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-437-1000 toll free
Note: The Trust, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
2. By FAX or Mail. You may also request redemption payments to
a predesignated Financial Institution account by a letter of
instruction sent after November 8, 1997 to: PFPC Inc., 400 Bellevue
Parkway, Wilmington, DE 19809. Before November 8, 1997 send your
letter of instructions to Administrative Data Management Corp.,
Attn: Aquilasm Group of Funds, by FAX at 732-855-5730 or by mail at
581 Main Street, Woodbridge, NJ 07095-1198. The letter must provide
account name(s), account number, amount to be redeemed, and any
payment directions and be signed by the registered holder(s).
Signature guarantees are not required. See "Redemption Payments"
below for payment methods.
If you wish to have redemption proceeds sent directly to a
Financial Institution Account you should so elect on the Expedited
Redemption section of the Application or the Ready Access Features
form and provide the required information concerning your Financial
Institution account number. The Financial Institution account must
be in the exclusive name(s) of the shareholder(s) as registered
with the Trust. You may change the designated Financial Institution
account at any time by completing and returning a Ready Access
Features form. For protection of your assets, this form requires
signature guarantees and possible additional documentation.
Regular Redemption Method
If you own Class Y Shares and you have not elected Expedited
Redemption to a predesignated Financial Institution account, you
must use the Regular Redemption Method. Under this redemption
method you should send a letter of instruction (after November 8,
1997) to the Trust's Shareholder Servicing Agent: PFPC Inc., 400
Bellevue Parkway, Wilmington, DE 19809. Before November 8, 1997
send your letter to Administrative Data Management Corp., Attn:
Aquilasm Group of Funds, 581 Main Street, Woodbridge, NJ 07095-1198.
The letter must contain:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Trust);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated below.
For your redemption request to be in "proper form," the
signature or signatures must be the same as in the registration of
the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required if
sufficient documentation is not on file with the Agent. Additional
documentation may be required where shares are held by certain
types of shareholders such as corporations, partnerships, trustees
or executors, or if redemption is requested by other than the
shareholder of record. If redemption proceeds of $50,000 or less
are payable to the record holder and are to be sent to the record
address, no signature guarantee is required, except as noted above.
In all other cases, signatures must be guaranteed by a member of a
national securities exchange, a U.S. bank or trust company, a
state-chartered savings bank, a federally chartered savings and
loan association, a foreign bank having a U.S. correspondent bank,
a participant in the Securities Transfer Association Medallion
Program (STAMP), the Stock Exchanges Medallion Program (SEMP) or
the New York Stock Exchange, Inc. Medallion Signature Program
(MSP). A notary public is not an acceptable signature guarantor.
Redemption of Class I Shares
You may redeem all or any part of your Class I Shares at the
net asset value next determined after acceptance of your redemption
request by your financial intermediary. Redemption requests for
Class I Shares must be made through a financial intermediary and
cannot to be made directly. Financial intermediaries may charge a
fee for effecting redemptions. There is no minimum period for any
investment in the Trust. The Trust does not impose redemption fees
or penalties on redemption of Class I Shares. A redemption may
result in a transaction taxable to you.
Redemption Payments
Redemption payments with respect to Class Y Shares will
ordinarily be mailed to you at your address of record. If you so
request and the amount of your redemption proceeds is $1,000 or
more, the proceeds will, wherever possible, be wired or transferred
through the facilities of the Automated Clearing House to the
Financial Institution account specified in the Expedited Redemption
section of your Application or Ready Access Features form. The
Trust may impose a charge, not exceeding $5.00 per wire redemption,
after written notice to shareholders who have elected this
redemption procedure. The Trust has no present intention of making
this charge. Upon 30 days' written notice to shareholders, the
Trust may modify or terminate the use of the Automated Clearing
House to make redemption payments at any time or charge a service
fee, although no such fee is presently contemplated. If any such
changes are made, the Prospectus will be supplemented to reflect
them. If you use a broker or dealer to arrange for a redemption, it
may charge you a fee for this service. Redemption payments for
Class I Shares are made to financial intermediaries.
The Trust will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven days
after acceptance of such a redemption request. However, the right
of redemption may be suspended or the date of payment postponed (i)
during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is
restricted as determined by the Securities and Exchange Commission
by rule or regulation; (ii) during periods in which an emergency,
as determined by the Securities and Exchange Commission, exists
which causes disposal of, or valuation of the net asset value of,
the portfolio securities to be unreasonable or impracticable; or
(iii) for such other periods as the Securities and Exchange
Commission may permit. Payment for redemption of Class Y Shares
recently purchased by check (irrespective of whether the check is
a regular check or a certified, cashier's or official bank check)
or by Automatic Investment or Telephone Investment may be delayed
up to 15 days or until (i) the purchase check or Automatic
Investment or Telephone Investment has been honored or (ii) the
Agent has received assurances by telephone or in writing from the
Financial Institution on which the purchase check was drawn, or
from which the funds for Automatic Investment or Telephone
Investment were transferred, satisfactory to the Agent and the
Trust, that the purchase check or Automatic Investment or Telephone
Investment will be honored. Possible delays in payment of
redemption proceeds of Class Y Shares can be eliminated by using
wire payments or Federal Reserve drafts to pay for purchases.
If the Trustees determine that it would be detrimental to the
best interests of the remaining shareholders of the Trust to make
payment wholly or partly in cash, the Trust may pay the redemption
price in whole or in part by the distribution in kind of securities
from the portfolio of the Trust, in lieu of cash, in conformity
with applicable rules of the Securities and Exchange Commission.
(See the Additional Statement for details.)
The Trust has the right to compel the redemption of Class Y
Shares held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions or
failure to meet the minimum investment level under an Automatic
Purchase Program. If the Board elects to do this shareholders who
are affected will receive prior written notice and will be
permitted 60 days to bring their accounts up to the minimum before
this redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
If you had a Class Y shareholder account on October 31, 1997,
you may establish an Automatic Withdrawal Plan if you own or
purchase Class Y Shares of the Trust having a net asset value of at
least $5,000. Under an Automatic Withdrawal Plan you will receive
a monthly or quarterly check in a stated amount, not less than $50.
If such a plan is established, all dividends and distributions must
be reinvested in your shareholder account. Redemption of shares to
make payments under the Automatic Withdrawal Plan will give rise to
a gain or loss for tax purposes. (See the Automatic Withdrawal Plan
provisions of the Application included in the Prospectus, the
Additional Statement under "Automatic Withdrawal Plan," and
"Dividend and Tax Information" below.)
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Trust are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Trust's Trustees and officers and provides
further information about them.
Current Arrangements
On November 6, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described below under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect
and the Prospectus will be supplemented to reflect the arrangements
that are in effect.
The Advisory Agreement
Banc One Investment Advisors Corporation (the "Adviser"),
supervises the investment program of the Trust and the composition
of its portfolio.
The services of the Adviser are rendered under an Investment
Advisory Agreement (the "Advisory Agreement") which provides,
subject to the control of the Board of Trustees, for investment
supervision and for either keeping the accounting records of the
Trust, including the computation of the net asset value per share
and the dividends, or, at the Adviser's expense and responsibility,
delegating these accounting duties in whole or in part to a company
satisfactory to the Trust. The Advisory Agreement states that the
Adviser shall, at its expense, provide to the Trust all office
space and facilities, equipment and clerical personnel necessary
for the carrying out of the Adviser's duties under the Advisory
Agreement.
Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Trust and of
those Trustees, if any, who are affiliated with the Adviser. Under
the Advisory Agreement, the Trust bears the cost of preparing and
setting in type its prospectuses, statements of additional
information, and reports to shareholders and the costs of printing
or otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. Under the Advisory Agreement, all
costs and expenses not expressly assumed by the Adviser or by the
Administrator under the Administration Agreement or by the Trust's
Distributor (principal underwriter) are paid by the Trust. The
Advisory Agreement lists examples of such expenses borne by the
Trust, the major categories of such expenses being: legal and audit
expenses, custodian and transfer agent, or shareholder servicing
agent fees and expenses, stock issuance and redemption costs,
certain printing costs, registration costs of the Trust and its
shares under Federal and State securities laws, interest, taxes and
brokerage commissions, and non-recurring expenses, including
litigation.
Under the Advisory Agreement, the Trust pays a fee payable
monthly and computed on the net asset value of the Trust as of the
close of business each business day at the annual rate of 0.25 of
1% of such net assets, provided, however, that for any day that the
Trust pays or accrues a fee under the Distribution Plan of the
Trust based upon the assets of the Trust, the annual investment
advisory fee shall be payable at the annual rate of 0.20 of 1% of
such net asset value. Since the Administrator also receives a fee
from the Trust under the Administration Agreement and the Trust
pays or accrues a fee under the Distribution Plan of the Trust
based upon the assets of the Trust, the total investment advisory
and administration fees which the Trust currently pays are at the
annual rate of 0.40 of 1% of such net assets, but for any day on
which the Trust does not pay or accrue a fee under the Distribution
Plan, these may be as much as 0.50 of 1%; see below. Payments under
the Distribution Plan with respect to assets of the Trust began
July 1, 1994 and as of that date the Advisory and Administration
fees were reduced as described above. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Trust, each waive all or part of any
such fees. In practice, the rate of these fee waivers tends to
decline as assets of the Trust increase.
The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to one-half of the amount, if
any, by which the total expenses of the Trust in any fiscal year,
exclusive of taxes, interest and brokerage fees, shall exceed the
lesser of (i) 2.5% of the first $30 million of average annual net
assets of the Trust plus 2% of the next $70 million of such assets
and 1.5% of such assets in excess of $100 million, or (ii) 25% of
the Trust's total annual investment income.
The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Trust. (See the
Additional Statement.) Under these provisions, the Adviser is
authorized to consider sales of shares of the Trust or of any other
investment company or companies having the same investment adviser,
sub-adviser, administrator or principal underwriter as the Trust.
The Trust's Custodian is an affiliate of the Adviser. It is
expected that another banking subsidiary of the Adviser's parent,
Banc One Corporation will provide a credit facility to the Trust.
The Administration Agreement
Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at its
own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as is
necessary in connection with the maintenance of the headquarters of
the Trust and pays all compensation of the Trust's Trustees,
officers and employees who are affiliated persons of the
Administrator.
Under the Administration Agreement, subject to the control of
the Trust's Board of Trustees, the Administrator provides all
administrative services to the Trust other than those relating to
its investment portfolio and the maintenance of its accounting
books and records. Such administrative services include but are not
limited to maintaining books and records (other than accounting
books and records) of the Trust, and overseeing all relationships
between the Trust and its transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the negotiation of
agreements in relation thereto, the supervision and coordination of
the performance of such agreements, and the overseeing of all
administrative matters which are necessary or desirable for
effective operation of the Trust and for the sale, servicing, or
redemption of the Trust's shares. (See the Additional Statement for
a further description of functions listed in the Administration
Agreement as part of such duties.)
Under the Administration Agreement, the Trust pays a fee
payable monthly and computed on the net asset value of the Trust at
the end of each business day at the annual rate of 0.25 of 1% of
such net asset value, provided, however, that for any day that the
Trust pays or accrues a fee under the Distribution Plan of the
Trust based upon the assets of the Trust, the annual administration
fee will be payable at the annual rate of 0.20 of 1% of such net
asset value. The administration fee was so reduced as of July 1,
1994. (See "Advisory Agreement," above.) The Administrator has
agreed that the above fee shall be reduced, but not below zero, by
an amount equal to one-half of the amount, if any, by which the
total expenses of the Trust in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5% of
the first $30 million of average annual net assets of the Trust
plus 2% of the next $70 million of such assets and 1.5% of such
assets in excess of $100 million, or (ii) 25% of the Trust's total
annual investment income.
New Arrangements
The new arrangements are designed to change the form of the
Trust's investment advisory and administration arrangements to a
new structure involving an adviser and a sub-adviser. The proposed
arrangements will not result in any change in overall management
fees paid by the Trust, nor any change in the parties providing
these services. Marketing efforts and positioning of the Trust will
remain the same with a strong local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which currently serves as the Trust's administrator,
would in addition become investment adviser under a new agreement
(the "Advisory and Administration Agreement") under which it would
also continue to provide the Trust with all administrative
services. Also, under a proposed agreement (the "Sub-Advisory
Agreement") between Aquila and Banc One Investment Advisors
Corporation ("BOIAC"), the current investment advisory agreement
would be replaced by one under which Aquila would appoint BOIAC as
Sub-Adviser to the Trust. Under the Sub-Advisory Agreement, BOIAC
would continue to provide the Trust with advisory services of the
kind which it currently provides to the Trust. The duties of the
administrator, now performed under an administration agreement,
would be performed by Aquila under the Advisory and Administration
Agreement where it would be referred to as the "Manager." The
current administration agreement will no longer be needed and will
terminate upon approval of the proposed agreements.
On November 6, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described above under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect
and the Prospectus will be supplemented to reflect the arrangements
that are in effect.
The new Investment Advisory and Administration Agreement
between the Trust and the Manager has several parts, most of which
are substantially identical to corresponding provisions in the
Trust's former advisory agreements and administration agreement.
The Advisory and Administration Agreement contains provisions
relating to investment advice for the Trust and management of its
portfolio that are substantially identical to prior advisory
agreements, except that the Manager has the power to delegate its
advisory functions to a Sub-Adviser, which it will employ at its
own expense. It has delegated these duties to Banc One Investment
Advisors Corporation (the "Sub-Adviser"). The Advisory and
Administration Agreement contains provisions relating to
administrative services that are substantially identical to those
contained in the Trust's current administration agreement.
Description of the New Investment Advisory
and Administration Agreement
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Trust, the Manager shall:
(i) supervise continuously the investment program of the Trust
and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Trust;
(iii) arrange for the purchase and the sale of securities held
in the portfolio of the Trust; and
(iv) at its expense provide for pricing of the Trust's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Trust and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Trust's portfolio at least quarterly using
another such source satisfactory to the Trust.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the Manager
may at its own expense delegate to a qualified organization
("Sub-Adviser"), affiliated or not affiliated with the Manager, any
or all of the above duties. Any such delegation of the duties set
forth in (i), (ii) or (iii) above shall be by a written agreement
(the "Sub-Advisory Agreement") approved as provided in Section 15
of the Investment Company Act of 1940. The Manager has delegated
all of such functions to the Sub-Adviser in the Sub-Advisory
Agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Trust, the Manager shall provide all administrative services to
the Trust other than those relating to its investment portfolio
which have been delegated to a Sub-Adviser of the Trust under the
Sub-Advisory Agreement; as part of such administrative duties, the
Manager shall:
(i) provide office space, personnel, facilities and equipment
for the performance of the following functions and for the
maintenance of the headquarters of the Trust;
(ii) oversee all relationships between the Trust and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the negotiation
of agreements in relation thereto, the supervision and
coordination of the performance of such agreements, and the
overseeing of all administrative matters which are necessary
or desirable for the effective operation of the Trust and for
the sale, servicing or redemption of the Trust's shares;
(iii) either keep the accounting records of the Trust,
including the computation of net asset value per share and the
dividends (provided that if there is a Sub-Adviser, daily
pricing of the Trust's portfolio shall be the responsibility
of the Sub-Adviser under the Sub-Advisory Agreement) or, at
its expense and responsibility, delegate such duties in whole
or in part to a company satisfactory to the Trust;
(iv) maintain the Trust's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Trust's shareholders
and Trustees, reports to and other filings with the Securities
and Exchange Commission and any other governmental agencies,
and tax returns, and oversee the insurance relationships of
the Trust;
(v) prepare, on behalf of the Trust and at the Trust's
expense, such applications and reports as may be necessary to
register or maintain the registration of the Trust and/or its
shares under the securities or "Blue-Sky" laws of all such
jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Trust and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Trust's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory and Administration Agreement contains provisions
relating to compliance of the investment program, responsibility of
the Manager for any investment program managed by it, allocation of
brokerage, and responsibility for errors that are substantially the
same as the corresponding provisions in the Sub-Advisory Agreement.
(See the Additional Statement.)
The Advisory and Administration Agreement provides that the
Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Trust who are affiliated
persons of the Manager.
The Trust bears the costs of preparing and setting in type its
prospectuses, statements of additional information and reports to
its shareholders, and the costs of printing or otherwise producing
and distributing those copies of such prospectuses, statements of
additional information and reports as are sent to its shareholders.
All other costs and expenses not expressly assumed by the Manager,
administrator or principal underwriter or by any Sub-Adviser shall
be paid by the Trust, including, but not limited to (i) interest
and taxes; (ii) brokerage commissions; (iii) insurance premiums;
(iv) compensation and expenses of its Trustees other than those
affiliated with the Manager or such adviser, administrator or
principal underwriter; (v) legal and audit expenses; (vi) custodian
and transfer agent, or shareholder servicing agent, fees and
expenses; (vii) expenses incident to the issuance of its shares
(including issuance on the payment of, or reinvestment of,
dividends); (viii) fees and expenses incident to the registration
under Federal or State securities laws of the Trust or its shares;
(ix) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Trust; (x) all
other expenses incidental to holding meetings of the Trust's
shareholders; and (xi) such non-recurring expenses as may arise,
including litigation affecting the Trust and the legal obligations
for which the Trust may have to indemnify its officers and
Trustees.
Under the Advisory and Administration Agreement, the Trust
will pay to Aquila a fee payable monthly and computed on the net
asset value of the Trust as of the close of business each business
day at the annual rate of 0.50 of 1% of such net asset value,
provided, however, that for any day that the Trust pays or accrues
a fee under the Distribution Plan of the Trust based upon the
assets of the Trust (other than a fee allocable by class to certain
shares of the Trust), the annual management fee shall be payable at
the annual rate of 0.40 of 1% of such net asset value. Under the
Sub-Advisory Agreement, Aquila will pay a fee to the Sub-Adviser
payable monthly and computed on the net asset value of the Trust as
of the close of business each business day at the annual rate of
0.25 of 1% of such net asset value, provided, however, that for any
day that the Trust pays or accrues a fee under the Distribution
Plan of the Trust based upon the assets of the Trust (other than a
fee allocable by class to certain shares of the Trust), the annual
sub-advisory fee shall be payable at the annual rate of 0.20 of 1%
of such net asset value.
Payments under the Trust's Distribution Plan began in 1994. In
the opinion of the Trust's management, there is no foreseeable
possibility that the current payments under the Distribution Plan
will be eliminated.
The Advisory and Administration Agreement provides that the
Sub-Advisory Agreement may provide for its termination by the
Manager upon reasonable notice, provided, however, that the Manager
agrees not to terminate the Sub-Advisory Agreement except in
accordance with such authorization and direction of the Board of
Trustees, if any, as may be in effect from time to time.
The Advisory and Administration Agreement provides that it may
be terminated by the Manager at any time without penalty upon
giving the Trust sixty days' written notice (which notice may be
waived by the Trust) and may be terminated by the Trust at any time
without penalty upon giving the Manager sixty days' written notice
(which notice may be waived by the Manager), provided that such
termination by the Trust shall be directed or approved by a vote of
a majority of its Trustees in office at the time or by a vote of
the holders of a majority (as defined in the Act) of the voting
securities of the Trust outstanding and entitled to vote. The
specific portions of the Advisory Agreement which relate to
providing investment advisory services will automatically terminate
in the event of the assignment (as defined in the Act) of the
Advisory Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Trust as of the close of business each business day shall be
reduced to the annual rate of 0.25 of 1% of such net asset value,
provided, however, that for any day that the Trust pays or accrues
a fee under the Distribution Plan of the Trust based upon the
assets of the Trust (other than a fee allocable by class to certain
shares of the Trust), the annual fee shall be payable at the annual
rate of 0.20 of 1% of such net asset value.
The New Sub-Advisory Agreement
The Manager has delegated investment advisory responsibility
to BOIAC (the "Sub-Adviser"), which supervises the investment
program of the Trust and the composition of its portfolio.
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser (the
"Sub-Advisory Agreement") which provides, subject to the control of
the Board of Trustees, for investment supervision and at the
Sub-Adviser's expense for pricing of the Trust's portfolio daily
using a pricing service or other source of pricing information
satisfactory to the Trust and, unless otherwise directed by the
Board of Trustees, for pricing of the Trust's portfolio at least
quarterly using another such source satisfactory to the Trust. The
Sub-Advisory Agreement states that the Sub-Adviser shall, at its
expense, provide to the Trust all office space and facilities,
equipment and clerical personnel necessary for the carrying out of
the Sub-Adviser's duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager agrees to
pay the Sub-Adviser, and the Sub-Adviser agrees to accept as full
compensation for all services rendered by the Sub-Adviser as such,
a management fee payable monthly and computed on the net asset
value of the Trust as of the close of business each business day at
the annual rate of 0.25 of 1% of such net asset value, provided,
however, that for any day that the Trust pays or accrues a fee
under the Distribution Plan of the Trust based upon the assets of
the Trust (other than a fee allocable by class to certain shares of
the Trust), the annual management fee shall be payable at the
annual rate of 0.20 of 1% of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Trust; see the
Additional Statement. Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Trust or of any other
investment company or companies having the same investment adviser,
sub-adviser, administrator or principal underwriter as the Trust.
Information about BOIAC
The Adviser is a subsidiary of BANC ONE CORPORATION ("Banc
One"), based in Columbus, Ohio. As of June 30, 1997 the Adviser had
$20 billion under management. Banc One is a multi-bank holding
company, incorporated under the laws of the State of Ohio. As of
June 30, 1997, Banc One operates with more than 1,500 offices in
the states of Arizona, Colorado, Illinois, Indiana, Kentucky,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. As of that date, Banc One, its affiliated banks and its
non-bank subsidiaries had total assets of approximately $140.7
billion.
Todd Curtis is the officer of the Adviser who manages the
Trust's portfolio. He has served as such since the inception of the
Trust in March, 1986. Mr. Curtis is Vice President and Fixed Income
Fund Manager of Banc One Investment Advisors Corporation and held
similar positions with The Valley National Bank of Arizona, NA, the
name of the Adviser before it was acquired by Banc One. He is a
member of the Adviser's Fixed Income Funds Sub-Committee. He is a
graduate of Cornell College, has received an MBA degree from
Arizona State University and is a Chartered Financial Analyst.
For the Trust's fiscal year ended June 30, 1997, fees of
$782,451 were payable to each of the Adviser and the Administrator.
Information about the Administrator
and the Distributor
The Trust's Administrator is founder of and administrator to
the Aquilasm Group of Funds, which consists of tax-free municipal
bond funds, money market funds and two equity funds. As of June 30,
1997, these funds had aggregate assets of approximately $2.8
billion, of which approximately $1.9 billion consisted of assets of
the tax-free municipal bond funds. The Administrator, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann (directly,
through a trust and through share ownership by his wife). (See the
Additional Statement for information on Mr. Herrmann.)
The Distributor currently handles the distribution of the
shares of fourteen funds (seven tax-free municipal bond funds, five
money market funds and two equity funds) including the Trust. Under
the Distribution Agreement, the Distributor is responsible for the
payment of certain printing and distribution costs relating to
prospectuses and reports as well as the costs of supplemental sales
literature, advertising and other promotional activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which are
currently owned 75% by Mr. Herrmann and 25% by Diana P. Herrmann,
will be owned by certain directors and/or officers of the
Administrator and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Trust will declare all of its net income, as defined
below, as dividends on every day, including weekends and holidays,
on those shares outstanding for which payment was received by the
close of business on the preceding business day. Net income for
dividend purposes includes all interest income accrued by the Trust
since the previous dividend declaration, including accretion of any
original issue discount, less expenses paid or accrued. As such net
income will vary, the Trust's dividends will also vary. Dividends
and other distributions paid by the Trust with respect to each
class of its shares are calculated at the same time and in the same
manner. In addition, the dividends of each class can vary because
each class will bear certain class-specific charges.
It is the Trust's present policy to pay dividends so that they
will be received or credited by approximately the first day of each
month. Holders of Class Y Shares may elect to have dividends
deposited without charge by electronic funds transfers into an
account at a Financial Institution which is a member of the
Automated Clearing House by completing a Ready Access Features
form. All arrangements for the payment of dividends with respect to
Class I Shares, including reinvestment of dividends, must be made
through financial intermediaries.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid by
the Agent to a selected dealer; or (ii) the third day on which the
New York Stock Exchange is open after the day on which the net
asset value of the redeemed shares has been determined. (See "How
To Redeem Your Investment.")
Net investment income includes amounts of income from the
Arizona Obligations in the Trust's portfolio which are allocated as
"exempt-interest dividends." "Exempt-interest dividends" are exempt
from regular Federal income tax. The allocation of "exempt-interest
dividends" will be made by the use of one designated percentage
applied uniformly to all income dividends declared during the
Trust's tax year. Such designation will normally be made in the
first month after the end of each of the Trust's fiscal years as to
income dividends paid in the prior year. It is possible that in
certain circumstances, a small portion of the dividends paid by the
Trust will be subject to income taxes. During the Trust's fiscal
year ended June 30, 1997, 97.10% of the Trust's dividends were
"exempt-interest dividends." For the calendar year 1996, 2.97% of
the total dividends paid were taxable. (These amounts relate to
dividends on Class A Shares; no or only a nominal amount of Class
Y Shares were outstanding during those periods.) The percentage of
income designated as tax-exempt for any particular dividend may be
different from the percentage of the Trust's income that was
tax-exempt during the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid
out after that date; the Trust may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Trust may be required to impose
backup withholding at a rate of 31% upon payment of redemptions to
Class Y shareholders, and from short- and long-term gains
distributions (if any) and any other distributions that do not
qualify as "exempt-interest dividends," if Class Y shareholders do
not comply with provisions of the law relating to the furnishing of
taxpayer identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the Agent
or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions with respect to Class
Y Shares will be automatically reinvested in full and fractional
Class Y Shares of the Trust of the same class at net asset value on
the record date for the dividend or distribution or other date
fixed by the Board of Trustees. An election to receive cash will
continue in effect until written notification of a change is
received by the Agent. All Class Y shareholders, whether their
dividends are received in cash or are being reinvested, will
receive a monthly account summary indicating the current status of
their investment. There is no fixed dividend rate. Corporate
shareholders of the Trust are not entitled to any deduction for
dividends received from the Trust.
Tax Information
The Trust qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as dividends
and distributions. However, the Code contains a number of complex
tests relating to such qualification and it is possible although
not likely that the Trust might not meet one or more of these tests
in any particular year. If it does not so qualify, it would be
treated for tax purposes as an ordinary corporation, would receive
no tax deduction for payments made to shareholders and would be
unable to pay dividends or distributions which would qualify as
"exempt-interest dividends" or "capital gains dividends," as
discussed below.
The Trust intends to qualify during each fiscal year under the
Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends which are derived from net income earned
by the Trust on Arizona Obligations will be excludable from gross
income of the shareholders for regular Federal income tax purposes.
Capital gains dividends are not included in exempt-interest
dividends. Although "exempt-interest dividends" are not taxed, each
taxpayer must report the total amount of tax-exempt interest
(including exempt-interest dividends from the Trust) received or
acquired during the year.
The Code requires that either gains realized by the Trust on
the sale of municipal obligations acquired after April 30, 1993 at
a price which is less than face or redemption value be included as
ordinary income to the extent such gains do not exceed such
discount or that the discount be amortized and included ratably in
taxable income. There is an exception to the foregoing treatment if
the amount of the discount is less than 0.25% of face or redemption
value multiplied by the number of years from acquisition to
maturity. The Trust will report such ordinary income in the years
of sale or redemption rather than amortize the discount and report
it ratably. To the extent the resultant ordinary taxable income is
distributed to shareholders, it will be taxable to them as ordinary
income.
Capital gains dividends (net long-term gains over net
short-term losses which the Trust distributes and so designates)
are reportable by shareholders as gain from the sale or exchange of
a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects to
have the distribution reinvested in Trust shares and regardless of
the length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to shareholders
as ordinary income. Capital losses of the Trust are not distributed
but carried forward by the Trust to offset gains in later years and
thereby lessen the later-year capital gains dividends and amounts
taxed to shareholders.
The Trust's gains or losses on sales of Arizona Obligations
will be long-term or short-term depending upon the length of time
the Trust has held such obligations. Capital gains and losses of
the Trust will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by the
Trust at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized and
deemed realized on Futures and options will be reportable by the
Trust as long-term to the extent of 60% of the gains or losses and
short-term to the extent of 40% regardless of the actual holding
period of such investments.
Information as to the tax status of the Trust's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders to
enable them to purchase or carry shares of the Trust may not be
deducted for regular Federal tax purposes. In addition, under rules
used by the Internal Revenue Service for determining when borrowed
funds are deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Trust may be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares. The receipt of exempt-interest dividends from the Trust by
an individual shareholder may result in some portion of any social
security payments or railroad retirement benefits received by the
shareholder or the shareholder's spouse being included in taxable
income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds or
private activity bonds should consult their own tax advisers before
purchasing shares.
While interest from all Arizona Obligations is tax-exempt for
purposes of computing the shareholder's regular tax, interest from
so-called private activity bonds issued after August 7, 1986,
constitutes a tax preference for both individuals and corporations
and thus will enter into a computation of the alternative minimum
tax. Whether or not that computation will result in a tax will
depend on the entire content of the taxpayer's return. The Trust
will not invest in the types of Arizona Obligations which would
give rise to interest that would be subject to alternative minimum
taxation if more than 20% of its net assets would be so invested,
and may refrain from investing in that type of bond completely. The
20% limit is a fundamental policy of the Trust.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current earnings,
this adjustment will tend to make it more likely that corporate
shareholders will be subject to the alternative minimum tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Trust you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid for
the shares. If you are required to pay a contingent deferred sales
charge at the time of redemption, the amount of that charge will
reduce the amount of your gain or increase the amount of your loss
as the case may be. Your gain or loss will be long-term if you held
the redeemed shares for over 18 months, mid-term if you held the
redeemed shares for over one year but not more than 18 months and
short-term, if for a year or less. Long term capital gains are
currently taxed at a maximum rate of 20%, mid-term capital gains
are currently taxed at a maximum rate of 28%, and short-term gains
are currently taxed at ordinary income tax rates. However, if
shares held for six months or less are redeemed and you have a
loss, two special rules apply: the loss is reduced by the amount of
exempt-interest dividends, if any, which you received on the
redeemed shares, and any loss over and above the amount of such
exempt-interest dividends is treated as a long-term loss to the
extent you have received capital gains dividends on the redeemed
shares.
Arizona Tax Information
In the opinion of special Arizona counsel for the Trust, under
existing law, shareholders of the Trust will not be subject to
Arizona income tax on exempt-interest dividends received from the
Trust to the extent that such dividends are attributable to
interest on tax-exempt obligations of the State of Arizona and its
political subdivisions ("Local Obligations") or on obligations
issued by the Territories of Guam, Northern Mariana Islands, Puerto
Rico and the Virgin Islands ("Territorial Obligations"). Other
distributions from the Trust, including those related to long-term
and short-term capital gains, will be subject to Arizona income
tax.
In the event that interest paid on any Local Obligation is
determined to be includable in federal gross income, the Trust has
been advised by special Arizona counsel that, in its opinion,
exempt-interest dividends received by the shareholders of the Trust
attributable to interest on Local Obligations will, nevertheless,
not be subject to Arizona income taxes.
Although interest on Territorial Obligations is included in
Arizona gross income by Arizona law, applicable federal laws
specifically exempt such income from state and local taxation. The
Trust has been advised by special Arizona counsel that, in its
opinion, the applicable federal laws will preempt any contrary
result under Arizona law such that exempt-interest dividends
attributable to interest paid on Territorial Obligations will be
exempt from Arizona income taxes.
Arizona law does not permit a deduction for interest paid or
accrued on indebtedness incurred or continued to purchase or carry
obligations, the interest on which is exempt from Arizona income
tax.
Shareholders of the Trust should consult their tax advisers
about other state and local tax consequences of their investment in
the Trust.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Trust and certain tax-free municipal bond funds and equity funds
(the "Bond or Equity Funds") and certain money market funds (the
"Money-Market Funds"), all of which are sponsored by Aquila
Management Corporation and Aquila Distributors, Inc., and have the
same Administrator and Distributor as the Trust. All exchanges are
subject to certain conditions described below. As of the date of
the Prospectus, the Aquila-sponsored Bond or Equity Funds are this
Trust, Aquila Rocky Mountain Equity Fund, Aquila Cascadia Equity
Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Oregon, Tax-Free
Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Tax-Free
Fund For Utah and Narragansett Insured Tax-Free Income Fund. At the
date of this Prospectus, the Aquila-sponsored Money-Market Funds
are Capital Cash Management Trust, Pacific Capital Cash Assets
Trust (Original Shares), Pacific Capital Tax-Free Cash Assets Trust
(Original Shares), Pacific Capital U.S. Treasuries Cash Assets
Trust (Original Shares) and Churchill Cash Reserves Trust.
Class Y Shares of the Trust may be exchanged only for Class Y
Shares of the Bond or Equity Funds or for shares of a Money-Market
Fund. Similar exchangability is available to Class I Shares to the
extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. All exchanges of Class I
Shares must be made through your financial intermediary.
Under the Class Y exchange privilege, once Class Y Shares of
any Bond or Equity Fund have been purchased, those shares (and any
Class Y Shares acquired as a result of reinvestment of dividends
and/or distributions) may be exchanged any number of times between
Money-Market Funds and Class Y Shares of the Bond or Equity Funds
without the payment of any sales charge, provided that the
applicable minimum investment requirements for purchase of Class Y
Shares are met. (See "How to Purchase Class Y Shares.")
The "Class Y Eligible Shares" of any Bond or Equity Fund are
those shares which were (a) acquired by direct purchase including
by exchange by an institutional investor from a Money-Market Fund,
or which were received in exchange for Class Y Shares of another
Bond or Equity Fund; or (b) acquired as a result of reinvestment of
dividends and/or distributions on otherwise Class Y Eligible
Shares. Shares of a Money-Market Fund not acquired in exchange for
Class Y Eligible Shares of a Bond or Equity Fund can be exchanged
for Class Y Shares of a Bond or Equity Fund only by persons
eligible to make an initial purchase of Class Y Shares.
This Trust, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into its
shares, if shares of the fund into which exchange is desired are
not available for sale in your state of residence. The Trust may
also modify or terminate this exchange privilege at any time. In
the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take effect
on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset value
of the shares surrendered for exchange are at least equal to the
minimum investment requirements of the investment company whose
shares are being acquired and (iii) the ownership of the accounts
from which and to which the exchange is made are identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-437-1000 toll free
Note: The Trust, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
Exchanges of Class Y Shares will be effected at the relative
net asset values of the Class Y Shares being exchanged next
determined after receipt by the Agent of your exchange request.
Exchanges of Class I Shares will be effected at the relative net
asset values of the Class I Shares being exchanged next determined
after receipt by the financial intermediary of your exchange
request.
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the realization
of a capital gain or loss, depending on the cost or other tax basis
of the shares exchanged and the holding period (see "Tax-Effects of
Redemptions" and the Additional Statement); no representation is
made as to the deductibility of any such loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free
money-market Fund) are exempt from regular Federal income tax, and
to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. Treasuries Cash Assets Trust (which invests in
U.S. Treasury obligations) are exempt from state income taxes.
Dividends paid by Aquila Rocky Mountain Equity Fund and Aquila
Cascadia Equity Fund are taxable. If your state of residence is not
the same as that of the issuers of obligations in which a tax-free
municipal bond fund or a tax-free money-market fund invests, the
dividends from that fund may be subject to income tax of the state
in which you reside. Accordingly, you should consult your tax
adviser before acquiring shares of such a bond fund or a tax-free
money-market fund under the exchange privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Trust's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate and
taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase, at
the maximum public offering price (offering price includes any
applicable sales charge) for 1- 5- and 10-year periods and for a
period since the inception of the Trust, to the extent applicable,
through the end of such periods, assuming reinvestment (without
sales charge) of all distributions. The Trust may also furnish
total return quotations for other periods or based on investments
at various applicable sales charge levels or at net asset value.
For such purposes total return equals the total of all income and
capital gains paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the
original investment, expressed as a percentage of the purchase
price. (See the Additional Statement.)
Current yield reflects the income per share earned by each of
the Trust's portfolio investments; it is calculated by (i) dividing
the Trust's net investment income per share during a recent 30-day
period by (ii) the maximum public offering price on the last day of
that period and by (iii) annualizing the result. Taxable equivalent
yield shows the yield from a taxable investment that would be
required to produce an after-tax yield equivalent to that of the
Trust, which invests in tax-exempt obligations. It is computed by
dividing the tax-exempt portion of the Trust's yield (calculated as
indicated) by one minus a stated income tax rate and by adding the
product to the taxable portion (if any) of the Trust's yield. (See
the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities and
Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will be
paid to the Trust's shareholders. Dividends or distributions paid
to shareholders are reflected in the current distribution rate or
taxable equivalent distribution rate which may be quoted to
shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Trust
during a recent 30-day period by (ii) the current maximum offering
price and by (iii) annualizing the result. A taxable equivalent
distribution rate shows the taxable distribution rate that would be
required to produce an after-tax distribution rate equivalent to
the Trust's distribution rate (calculated as indicated above). The
current distribution rate differs from the current yield
computation because it could include distributions to shareholders
from sources, if any, other than dividends and interest, such as
short-term capital gains or return of capital. If distribution
rates are quoted in advertising, they will be accompanied by
calculations of current yield in accordance with the formula of the
Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Trust's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum sales
charge, if any, on the purchase of shares, but not on reinvestment
of income dividends. The investment results of the Trust, like all
other investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent what an
investment may earn in the future or what the Trust's yield, tax
equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period. The
annual report of the Trust contains additional performance
information that will be made available upon request and without
charge.
Description of the Trust and Its Shares
The Trust is an open-end, non-diversified management
investment company organized in 1985 as a Massachusetts business
trust. It commenced operations in June, 1986. (See "Investment of
the Trust's Assets" for further information about the Trust's
status as "non-diversified"). The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares
and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial
interests in the Trust. Each share represents an equal
proportionate interest in the Trust with each other share of its
class; shares of the respective classes represent proportionate
interests in the Trust in accordance with their respective net
asset values. Upon liquidation of the Trust, shareholders are
entitled to share pro-rata in the net assets of the Trust available
for distribution to shareholders, in accordance with the respective
net asset values of the shares of each of the Trust's classes at
that time. All shares are presently divided into four classes;
however, if they deem it advisable and in the best interests of
shareholders, the Board of Trustees of the Trust may create
additional classes of shares (subject to rules and regulations of
the Securities and Exchange Commission or by exemptive order) or
the Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a designation
including the word "Series"). (See the Additional Statement for
further information about possible additional series.) Shares are
fully paid and non-assessable, except as set forth under the
caption "General Information" in the Additional Statement; the
holders of shares have no pre-emptive or conversion rights.
The other two classes of shares of the Trust are Front-Payment
Class Shares ("Class A Shares") and Level-Payment Class Shares
("Class C Shares"), which are fully described in a separate
prospectus that can be obtained by calling the Trust at
800-437-1020.
The primary distinction among the Trust's classes of shares
lies in their different sales charge structures and ongoing
expenses, which are likely to be reflected in differing yields and
other measures of investment performance. All classes represent
interests in the same portfolio of Arizona Obligations and have the
same rights, except that each class bears the separate expenses, if
any, of its Distribution Plan and has exclusive voting rights with
respect to its Plan. There are no distribution fees with respect to
Class Y Shares.
The Trust's Distribution Plan has four parts. In addition to
the provisions relating to Class I Shares and the defensive
provisions described above, Parts I and II of the Plan authorize
payments, to certain "Qualified Recipients," out of the Trust
assets allocable to the Class A Shares and Class C Shares,
respectively. (See the Additional Statement.) The Trust has also
adopted a Shareholder Services Plan under which the Trust is
authorized to make certain payments out of the Trust assets
allocable to the Class C Shares. (See the Additional Statement.)
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders will
vote on the election of Trustees and on other matters submitted to
the vote of shareholders. Shares vote by classes on any matter
specifically affecting one or more classes, such as an amendment of
an applicable part of the Distribution Plan. No amendment may be
made to the Declaration of Trust without the affirmative vote of
the holders of a majority of the outstanding shares of the Trust,
except that the Trust's Board of Trustees may change the name of
the Trust. The Trust may be terminated (i) upon the sale of its
assets to another issuer, or (ii) upon liquidation and distribution
of the assets of the Trust, in either case if such action is
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
<PAGE>
APPLICATION FOR TAX-FREE TRUST OF ARIZONA
FOR CLASS Y SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
After November 8, 1997: PFPC Inc., ATTN: Aquilasm Group of Funds
400 Bellevue Parkway, Wilmington, DE 19809
Before November 8, 1997: ADM, ATTN: Aquilasm Group of Funds
581 Main Street, Woodbridge, NJ 07095-1198 Tel.# 1-800-437-1000
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.______________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for __________________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** ___________________________________________
Name of State Minor's Social Security Number
4. _____________________________________________________________________
_____________________________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of the
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust
may be registered in the name of the Plan or Trust itself.)
________________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
________________________________________________________________________
Street or PO Box City
_________________________________ (______)_______________________
State Zip Daytime Phone Number
Occupation:________________________Employer:____________________________
Employer's Address:_____________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding (See
certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
______________________________ ____________________________________
Dealer Name Branch Number
______________________________ ____________________________________
Street Address Rep. Number/Name
______________________________ (_________)_________________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Make check payment to TAX-FREE TRUST OF ARIZONA)
__ Initial Investment $______________ (Minimum $1,000 for shareholders
with Class Y Shares accounts before October 31, 1997)
(After October 31, 1997:
Minimum $100,000 for fiduciaries and $250,000 for all other
eligible purchasers)
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be: ___ Reinvested ___ Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would like you to
deposit the dividend. (A Financial Institution is a commercial bank,
savings bank or credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested in
your Tax-Free Trust of Arizona Account. To establish this program, please
complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
the Trust toll-free at 1-800-437-1000. To establish this program, please
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. AUTOMATIC WITHDRAWAL PLAN
(Available only to shareholders who had Class Y Shares accounts before
October 31, 1997)
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks prior to
1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, the Trust's Shareholder
Servicing Agent (the "Agent") is authorized to redeem sufficient shares
from this account at the then current Net Asset Value, in accordance
with the terms below:
Dollar Amount of each withdrawal $ ______________beginning______________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
________________________________________ ___________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ____________________________________
Street Financial Institution Street Address
_______________________________ ____________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
person's telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorney's fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account listed.
Cash proceeds in any amount from the redemption of shares will be
mailed or wired, whenever possible, upon request, if in an amount of
$1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Trust
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ _____________________________________
Account Registration Financial Institution Account Number
_______________________________ _____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ _____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITOR'S AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the
Agent, and to pay such sums in accordance therewith, provided my/our account
has sufficient funds to cover such drafts or debits. I/We further agree that
your treatment of such orders will be the same as if I/we personally signed
or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number __________________________________
Name and Address where my/our account is maintained
Name of Financial Institution__________________________________________
Street Address_________________________________________________________
City_______________________________State _________________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account
is registered
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors,
Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit
in the normal course of business initiated by the Agent (except any
loss due to your payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in writing
of any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle or pay
any such claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any
such electronic debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Trust and has received and
read a current Prospectus of the Trust and agrees to its terms.
- - I/We authorize the Trust and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Trust and its agents may cancel the
purchase transaction and are authorized to liquidate other shares or
fractions thereof held in my/our Trust account to make up any
deficiency resulting from any decline in the net asset value of shares
so purchased and any dividends paid on those shares. I/We authorize the
Trust and its agents to correct any transfer error by a debit or credit
to my/our Financial Institution account and/or Trust account and to
charge the account for any related charges. I/We acknowledge that
shares purchased either through Automatic Investment or Telephone
Investment are subject to applicable sales charges.
- - The Trust, the Agent and the Distributor and their Trustees,
directors, employees and agents will not be liable for acting upon
instructions believed to be genuine, and will not be responsible for
any losses resulting from unauthorized telephone transactions if the
Agent follows reasonable procedures designed to verify the identity of
the caller. The Agent will request some or all of the following
information: account name and number; name(s) and social security
number registered to the account and personal identification; the
Agent may also record calls. Shareholders should verify the accuracy
of confirmation statements immediately upon receipt. Under penalties
of perjury, the undersigned whose Social Security (Tax I.D.) Number is
shown above certifies (i) that Number is my correct taxpayer
identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned
further certifies, under penalties of perjury, that either (a) no such
Number has been issued, and a Number has been or will soon be applied
for; if a Number is not provided to you within sixty days, the
undersigned understands that all payments (including liquidations) are
subject to 31% withholding under federal tax law, until a Number is
provided and the undersigned may be subject to a $50 I.R.S. penalty; or
(b) that the undersigned is not a citizen or resident of the U.S.; and
either does not expect to be in the U.S. for 183 days during each
calendar year and does not conduct a business in the U.S. which would
receive any gain from the Trust, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ __________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ __________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment, Expedited
Redemption and Direct Deposit of Dividends) are effective 15 days after
this form is received in good order by the Trust's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Trust or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Trust reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access features form which may be obtained from Aquila
Distributors at 1-800-437-1020 and send it to the Agent together
with a "voided" check or pre-printed deposit slip from the new
account. The new Financial Institution change is effective in 15
days after this form is received in good order by the Trust's Agent.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees
to the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Trust purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Trust. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may
be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Trust
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Trust) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Trust's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Trust. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal incapacity
of the Planholder. Upon termination of the Plan by the Agent or the
Trust, shares remaining unredeemed will be held in an uncertificated
account in the name of the Planholder, and the account will continue
as a dividend-reinvestment, uncertificated account unless and until
proper instructions are received from the Planholder, his executor or
guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Trust, the Planholder will be deemed to have appointed any
successor transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while simultaneously
making regular purchases. While an occasional lump sum investment may
be made, such investment should normally be an amount equivalent to
three times the annual withdrawal or $5,000, whichever is less.
<PAGE>
INVESTMENT ADVISER
Banc One Investment Advisors Corporation
Bank One Center
241 North Central Avenue
Phoenix, Arizona 85004
ADMINISTRATOR AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Philip E. Albrecht
Arthur K. Carlson
Thomas W. Courtney
William L. Ensign
Diana P. Herrmann
John C. Lucking
Anne J. Mills
OFFICERS
Lacy B. Herrmann, President
William C. Wallace, Senior Vice President
Susan A. Cook, Vice President
Kristian P. Kjolberg, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, 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
After November 8, 1997:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Before November 8, 1997:
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights
Table of Expenses
Financial Highlights
Introduction
Investment Of The Trust's Assets
Investment Restrictions
Net Asset Value Per Share
How To Invest In The Trust
How To Redeem Your Investment
Automatic Withdrawal Plan
Management Arrangements
Dividend And Tax Information
Exchange Privilege
General Information
Application
LOGO
TAX-FREE TRUST OF
ARIZONA
A TAX-FREE
INCOME INVESTMENT
PROSPECTUS
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
Tax-Free Trust of Arizona
380 Madison Avenue, Suite 2300
New York, New York 10017
800-437-1020
212-697-6666
STATEMENT
OF ADDITIONAL INFORMATION
October 31, 1997
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for the
Trust dated October 31, 1997: one Prospectus describes Front-
Payment Class Shares ("Class A Shares") and Level-Payment Class
Shares ("Class C Shares") of the Trust and the other describes
Institutional Class ("Class Y Shares") and Financial Intermediary
Class Shares ("Class I Shares") of the Trust. References in the
Additional Statement to "the Prospectus" refer to either of these
Prospectuses. The Additional Statement should be read in
conjunction with the Prospectus for the class of shares in which
you are considering investing. Either or both Prospectuses may be
obtained from the Trust's Shareholder Servicing Agent, (after
November 8, 1997) PFPC Inc., 400 Bellevue Parkway, Wilmington, DE
19809 or by calling the following number:
800-437-1000 toll free
or from Aquila Distributors, Inc., the Trust's Distributor, by
writing to 380 Madison Avenue, Suite 2300, New York, New York
10017; or by calling: 800-437-1020 toll free or 212-986-8826.
The Annual Report of the Trust for the fiscal year ended June
30, 1997, will be delivered with the Additional Statement.
TABLE OF CONTENTS
Investment of the Trust's Assets . . . . . . . . . . . . . . . .2
Municipal Bonds. . . . . . . . . . . . . . . . . . . . . . . . .7
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . .8
Investment Restrictions. . . . . . . . . . . . . . . . . . . . 13
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . 15
Shareholder Services Plan. . . . . . . . . . . . . . . . . . . 23
Limitation of Redemptions in Kind. . . . . . . . . . . . . . . 26
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . 26
Additional Information as to Management Arrangements . . . . . 31
Computation of Net Asset Value . . . . . . . . . . . . . . . . 38
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . 40
Additional Tax Information . . . . . . . . . . . . . . . . . . 40
Conversion of Class C Shares . . . . . . . . . . . . . . . . . 41
General Information. . . . . . . . . . . . . . . . . . . . . . 41
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . 44
<PAGE>
INVESTMENT OF THE TRUST'S ASSETS
The investment objective and policies of the Trust are
described in the Prospectus, which refers to the matters described
below. See the Prospectus for the definition of "Arizona
Obligations."
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds and
notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. See Appendix A to this
Additional Statement for further information about the ratings of
Moody's and S&P as to the various rated Arizona Obligations which
the Trust may purchase.
The table below gives information as to the percentage of
Trust net assets invested, as of June 30, 1997, in Arizona
Obligations in the various rating categories.
Highest rating (1) . . . . . . . . . . . . . . . 49.9%
Second highest rating (2). . . . . . . . . . . . 30.8%
Third highest rating (3) . . . . . . . . . . . . 12.7%
Fourth highest rating and below (4). . . . . . . . 3.2%
Unrated Obligations. . . . . . . . . . . . . . . 3.4%
100.0%
(1) Aaa of Moody's or AAA of S&P.
(2) Aa of Moody's or AA of S&P.
(3) A of Moody's or A of S&P.
(4) Baa of Moody's or BBB of S&P.
When-Issued and Delayed Delivery Obligations
The Trust may buy Arizona Obligations on a when-issued or
delayed delivery basis. The purchase price and the interest rate
payable on the Arizona Obligations are fixed on the transaction
date. At the time the Trust makes the commitment to purchase
Arizona Obligations on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value each
day of such Arizona Obligations in determining its net asset value.
The Trust will make commitments for such when-issued transactions
only when it has the intention of actually acquiring the Arizona
Obligations. The Trust places an amount of assets equal in value to
the amount due on the settlement date for the when-issued or
delayed delivery securities being purchased in a segregated account
with the Custodian, which is marked to market every business day.
On delivery dates for such transactions, the Trust will meet its
commitments by selling the Arizona Obligations held in the separate
account and/or from cash flow.
Determination of the Marketability of Certain Securities
In determining marketability of floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) the Board of Trustees will consider the
following factors, not all of which may be applicable to any
particular issue: the quality, maturity and coupon rate of the
issue, ratings received from the nationally recognized statistical
rating organizations and any changes or prospective changes in such
ratings, the likelihood that the issuer will continue to
appropriate the required payments for the issue, recent purchases
and sales of the same or similar issues, the general market for
municipal securities of the same or similar quality, the Adviser's
opinion as to marketability of the issue and other factors that may
be applicable to any particular issue.
Futures Contracts and Options
Although it does not currently do so, the Trust is permitted
to buy and sell futures contracts relating to municipal bond
indices ("Municipal Bond Index Futures") and to U.S. Government
securities ("U.S. Government Securities Futures," together referred
to as "Futures"), and exchange-traded options based on Futures as
a possible means to protect the asset value of the Trust during
periods of changing interest rates, although in fact the Trust may
never do so. The following discussion is intended to explain
briefly the workings of Futures and options on them which would be
applicable if the Trust were to use them.
Unlike when the Trust purchases or sells an Arizona
Obligation, no price is paid or received by the Trust upon the
purchase or sale of a Future. Initially, however, when such
transactions are entered into, the Trust will be required to
deposit with the futures commission merchant ("broker") an amount
of cash or Arizona Obligations equal to a varying specified
percentage of the contract amount. This amount is known as initial
margin. Subsequent payments, called variation margin, to and from
the broker, will be made on a daily basis as the price of the
underlying index or security fluctuates making the Future more or
less valuable, a process known as marking to market. Insolvency of
the broker may make it more difficult to recover initial or
variation margin. Changes in variation margin are recorded by the
Trust as unrealized gains or losses. Margin deposits do not involve
borrowing by the Trust and may not be used to support any other
transactions. At any time prior to expiration of the Future, the
Trust may elect to close the position by taking an opposite
position which will operate to terminate the Trust's position in
the Future. A final determination of variation margin is then made.
Additional cash is required to be paid by or released to the Trust
and it realizes a gain or a loss. Although Futures by their terms
call for the actual delivery or acceptance of cash, in most cases
the contractual obligation is fulfilled without having to make or
take delivery. All transactions in the futures markets are subject
to commissions payable by the Trust and are made, offset or
fulfilled through a clearing house associated with the exchange on
which the contracts are traded. Although the Trust intends to buy
and sell Futures only on an exchange where there appears to be an
active secondary market, there is no assurance that a liquid
secondary market will exist for any particular Future at any
particular time. In such event, or in the event of an equipment
failure at a clearing house, it may not be possible to close a
Futures position.
Municipal Bond Index Futures currently are based on a
long-term municipal bond index developed by the Chicago Board of
Trade ("CBT") and The Bond Buyer (the "Municipal Bond Index").
Financial futures contracts based on the Municipal Bond Index began
trading on June 11, 1985. The Municipal Bond Index is comprised of
40 tax-exempt municipal revenue and general obligation bonds. Each
bond included in the Municipal Bond Index must be rated A or higher
by Moody's or S&P and must have a remaining maturity of 19 years or
more. Twice a month new issues satisfying the eligibility
requirements are added to, and an equal number of old issues are
deleted from, the Municipal Bond Index. The value of the Municipal
Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index Futures contract is traded only on
the CBT. Like other contract markets, the CBT assures performance
under futures contracts through a clearing corporation, a nonprofit
organization managed by the exchange membership which is also
responsible for handling daily accounting of deposits or
withdrawals of margin.
There are at present U.S. Government financial futures
contracts based on long-term Treasury bonds, Treasury notes, GNMA
Certificates and three-month Treasury bills. U.S. Government
Securities Futures have traded longer than Municipal Bond Index
Futures, and the depth and liquidity available in the trading
markets for them are in general greater.
Call Options on Futures Contracts. The Trust may also purchase
and sell exchange related call and put options on Futures. The
purchase of a call option on a Future is analogous to the purchase
of a call option on an individual security. Depending on the
pricing of the option compared to either the Future upon which it
is based, or upon the price of the underlying debt securities, it
may or may not be less risky than ownership of the Futures contract
or underlying debt securities. Like the purchase of a Futures
contract, the Trust may purchase a call option on a Future to hedge
against a market advance when the Trust is not fully invested.
The writing of a call option on a Future constitutes a partial
hedge against declining prices of the securities which are
deliverable upon exercise of the Future. If the price at expiration
of the Future is below the exercise price, the Trust will retain
the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the Trust's
portfolio holdings.
Put Options on Futures Contracts. The purchase of put options
on a Future is analogous to the purchase of protective put options
on portfolio securities. The Trust may purchase a put option on a
Future to hedge the Trust's portfolio against the risk of rising
interest rates.
The writing of a put option on a Future constitutes a partial
hedge against increasing prices of the securities which are
deliverable upon exercise of the Future. If the Future price at
expiration is higher than the exercise price, the Trust will retain
the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the
Trust intends to purchase.
The writer of an option on a Future is required to deposit
initial and variation margin pursuant to requirements similar to
those applicable to Futures. Premiums received from the writing of
an option will be included in initial margin. The writing of an
option on a Future involves risks similar to those relating to
Futures.
Risk Factors in Futures Transactions and Options
One risk in employing Futures or options on Futures to attempt
to protect against the price volatility of the Trust's Arizona
Obligations is that the Adviser could be incorrect in its
expectations as to the extent of various interest rate movements or
the time span within which the movements take place. For example,
if the Trust sold a Future in anticipation of an increase in
interest rates, and then interest rates went down instead, the
Trust would lose money on the sale.
Another risk as to Futures or options on them arises because
of the imperfect correlation between movement in the price of the
Future and movements in the prices of the Arizona Obligations which
are the subject of the hedge. The risk of imperfect correlation
increases as the composition of the Trust's portfolio diverges from
the municipal bonds included in the applicable index or from the
security underlying the U.S. Government Securities Futures. The
price of the Future or option may move more than or less than the
price of the Arizona Obligations being hedged. If the price of the
Future or option moves less than the price of the Arizona
Obligations which are the subject of the hedge, the hedge will not
be fully effective but, if the price of the Arizona Obligations
being hedged has moved in an unfavorable direction, the Trust would
be in a better position than if it had not hedged at all. If the
price of the Arizona Obligations being hedged has moved in a
favorable direction, this advantage will be partially offset by the
Future or option. If the price of the Future or option moved more
than the price of the Arizona Obligations, the Trust will
experience either a loss or gain on the Future or option which will
not be completely offset by movements in the price of the Arizona
Obligations which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of the Arizona
Obligations being hedged and movements in the price of the Futures
or options, the Trust may buy or sell Futures or options in a
greater dollar amount than the dollar amount of the Arizona
Obligations being hedged if the historical volatility of the prices
of the Arizona Obligations being hedged is less than the historical
volatility of the debt securities underlying the hedge. It is also
possible that, where the Trust has sold Futures or options to hedge
its portfolio against decline in the market, the market may advance
and the value of the Arizona Obligations held in the Trust's
portfolio may decline. If this occurred the Trust would lose money
on the Future or option and also experience a decline in value of
its portfolio securities.
Where Futures or options are purchased to hedge against a
possible increase in the price of Arizona Obligations before the
Trust is able to invest in them in an orderly fashion, it is
possible that the market may decline instead; if the Trust then
concludes not to invest in them at that time because of concern as
to possible further market decline or for other reasons, the Trust
will realize a loss on the Futures or options that is not offset by
a reduction in the price of the Arizona Obligations which it had
anticipated purchasing.
The particular municipal bonds comprising the index underlying
Municipal Bond Index Futures will vary from the bonds held by the
Trust. The correlation of the hedge with such bonds may be affected
by disparities in the average maturity, ratings, geographical mix
or structure of the Trust's investments as compared to those
comprising the Index, and general economic or political factors. In
addition, the correlation between movements in the value of the
Municipal Bond Index may be subject to change over time, as
additions to and deletions from the Municipal Bond Index alter its
structure. The correlation between U.S. Government Securities
Futures and the municipal bonds held by the Trust may be adversely
affected by similar factors and the risk of imperfect correlation
between movements in the prices of such Futures and the prices of
Municipal Bonds held by the Trust may be greater.
Trading in Municipal Bond Index Futures may be less liquid
than that in other Futures. The trading of Futures and options also
is subject to certain market risks, such as inadequate trading
activity or limits on upward or downward price movements, which
could at times make it difficult or impossible to liquidate
existing positions.
Regulatory Aspects of Futures and Options
The Trust will, due to requirements under the Investment
Company Act of 1940 (the "1940 Act"), deposit in a segregated
account with its custodian bank Arizona Obligations maturing in one
year or less or cash, in an amount equal to the fluctuating market
value of long Futures or options it has purchased, less any margin
deposited on long positions.
The Trust must operate as to its long and short positions in
Futures in conformity with a rule (the "CFTC Rule") adopted by the
Commodity Futures Trading Commission ("CFTC") under the Commodity
Exchange Act (the "CEA") to be eligible for the exclusion provided
by the CFTC Rule as a "commodity pool operator" (as defined under
the CEA). Under these restrictions the Trust will not, as to any
positions, whether long, short or a combination thereof, enter into
Futures or options for which the aggregate initial margins and
premiums paid for options exceed 5% of the fair market value of its
assets. Under the restrictions, the Trust also must, as to its
short positions, use Futures and options solely for bona-fide
hedging purposes within the meaning and intent of the applicable
provisions under the CEA. As to the Trust's long positions which
are used as part of its portfolio strategy and are incidental to
its activities in the underlying cash market, the "underlying
commodity value" (see below) of its Futures must not exceed the sum
of (i) cash set aside in an identifiable manner, or short-term U.S.
debt obligations or other U.S. dollar-denominated high quality
short-term money market instruments so set aside, plus any funds
deposited as margin; (ii) cash proceeds from existing investments
due in 30 days and (iii) accrued profits held at the futures
commission merchant. (There is described above the segregated
account which the Trust must maintain with its custodian bank as to
its Futures and options activities due to requirements other than
those of the CFTC Rule; the Trust will, as to long positions, be
required to abide by the more restrictive of this other requirement
or the above requirements of the CFTC Rule.) The "underlying
commodity value" of a Future or option is computed by multiplying
the size of the Future by the daily settlement price of the Future
or option.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage
computed by taking the lesser of purchases or sales of portfolio
securities for a year and dividing it by the monthly average value
of such securities during the year, excluding certain short-term
securities. Since the turnover rate of the Trust will be affected
by a number of factors (see below), the Trust is unable to predict
what rate the Trust will have in any particular period or periods,
although the rate is not expected to exceed 100%. The factors which
may affect the rate include (i) assuming or moving away from a
defensive position; a defensive position could be assumed by
shortening the average maturity of the portfolio; (ii) the possible
necessary sales of Arizona Obligations to meet redemptions; and
(iii) the possibility of purchasing or selling Arizona Obligations
without regard to the length of time these obligations have been
held to attempt to take advantage of short-term differentials in
yields on these obligations with the objective of seeking
exempt-interest income while conserving capital. Short-term trading
increases portfolio turnover and transaction costs. However, the
rate could be substantially higher or lower in any particular
period.
MUNICIPAL BONDS
The two principal classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, credit
and unlimited taxing power for the payment of principal and
interest. Revenue or special tax bonds are payable only from the
revenues derived from a particular facility or class of facilities
or projects or, in a few cases, from the proceeds of a special
excise or other tax, but are not supported by the issuer's power to
levy unlimited general taxes. There are, of course, variations in
the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous
factors. The yields of municipal bonds depend on, among other
things, general financial conditions, general conditions of the
municipal bond market, the size of a particular offering, the
maturity of the obligation and rating of the issue.
Since the Trust may invest in industrial development bonds or
private activity bonds, the Trust may not be an appropriate
investment for entities which are "substantial users" of facilities
financed by those bonds or for investors who are "related persons"
of such users. Generally, an individual will not be a "related
person" under the Internal Revenue Code unless such investor or his
or her immediate family (spouse, brothers, sisters and lineal
descendants) own directly or indirectly in the aggregate more than
50 percent of the equity of a corporation or is a partner of a
partnership which is a "substantial user" of a facility financed
from the proceeds of those bonds. A "substantial user" of such
facilities is defined generally as a "non-exempt person who
regularly uses a part of [a] facility" financed from the proceeds
of industrial development or private activity bonds.
As indicated in the Prospectus, there are certain Arizona
Obligations the interest on which is subject to the Federal
alternative minimum tax on individuals. While the Trust may
purchase these obligations, it may, on the other hand, refrain from
purchasing particular Arizona Obligations due to this tax
consequence. Also, as indicated in the Prospectus, the Trust will
not purchase obligations of Arizona issuers the interest on which
is subject to regular Federal income tax. The foregoing may reduce
the number of issuers of obligations which are available to the
Trust.
As stated in the Prospectus, floating and variable rate demand
notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. In
determining marketability of any such securities, the Board of
Trustees will consider the following factors, not all of which may
be applicable to any particular issue: the quality, maturity and
coupon rate of the issue, ratings received from the nationally
recognized statistical rating organizations and any changes or
prospective changes in such ratings, the likelihood that the issuer
will continue to appropriate the required payments for the issue,
recent purchases and sales of the same or similar issues, the
general market for municipal securities of the same or similar
quality, the Adviser's opinion as to marketability of the issue and
other factors that may be applicable to any particular issue.
PERFORMANCE
As noted in the Prospectus, the Trust may from time to time
quote various performance figures to illustrate its past
performance.
Performance quotations by investment companies are subject to
rules of the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Trust be accompanied by certain standardized
performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used by
the Trust are based on these standardized methods and are computed
separately for each of the Trust's three classes of shares. Prior
to April 1, 1996, the Trust had outstanding only one class of
shares which are currently designated "Class A Shares." On that
date the Trust began to offer shares of two other classes, Class C
Shares and Class Y Shares. During most of the historical periods
listed below, there were no Class C Shares or Class Y Shares
outstanding and the information below relates solely to Class A
Shares unless otherwise indicated. Class I Shares were first
offered on October 31, 1997 and none were outstanding during the
periods indicated. Each of these and other methods that may be used
by the Trust are described in the following material.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5- and 10-year
periods and a period since the inception of the Trust (on March 13,
1986) that would equate an initial hypothetical $1,000 investment
in shares of each of the Trust's three classes to the value such an
investment would have if it were completely redeemed at the end of
each such period.
In the case of Class A Shares, the calculation assumes the
maximum sales charge is deducted from the hypothetical initial
$1,000 purchase. In the case of Class C Shares, the calculation
assumes the applicable Contingent Deferred Sales Charge ("CDSC")
imposed on a redemption of Class C Shares held for the period is
deducted.
In the case of Class Y Shares, the calculation assumes that no
sales charge is deducted and no CDSC is imposed. For all three
classes, it is assumed that on each reinvestment date during each
such period any capital gains are reinvested at net asset value,
and all income dividends are reinvested at net asset value, without
sales charge (because the Trust does not impose any sales charge on
reinvestment of dividends for any class). The computation further
assumes that the entire hypothetical account was completely
redeemed at the end of each such period.
Investors should note that the maximum sales charge (4%)
reflected in the following quotations for Class A Shares is a one
time charge, paid at the time of initial investment. The greatest
impact of this charge is during the early stages of an investment
in the Trust. Actual performance will be affected less by this one
time charge the longer an investment remains in the Trust.
Average Annual Compounded Rates of Return:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.09% 5.59% 9.10%
Five Years 5.42% N/A N/A
Ten Years 7.22% N/A N/A
Since
inception on
March 13,
1986 7.11% 5.95%(1) 8.02%(1)
<FN>
(1) Period from April 1, 1996 (inception of the class) through June 30, 1997.
</FN>
</TABLE>
These figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1- and 5-year
period or the period since inception, at the end of
each such period.
Total Return
As discussed in the Prospectus, the Trust may quote total
rates of return in addition to its average annual total return.
Such quotations are computed in the same manner as the Trust's
average annual compounded rate, except that such quotations will be
based on the Trust's actual return for a specified period as
opposed to its average return over the periods described above.
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.09% 5.59% 9.10%
Five Years 30.27% N/A N/A
Ten Years 100.76% N/A N/A
Since
inception on
March 13,
1986 117.44% 7.47%(1) 10.09%(1)
<FN>
(1) Period from April 1, 1996 (inception of the class) through June 30, 1997.
</FN>
</TABLE>
In general, actual total rate of return will be lower than average
annual rate of return because the average annual rate of return
reflects the effect of compounding. See discussion of the impact of
the sales charge on quotations of rates of return, above.
Yield
Current yield reflects the income per share earned by the
Trust's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of the
Trust's three classes during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of each class during the base
period net of fee waivers and reimbursements of expenses, if any.
The Trust may also quote a taxable equivalent yield for each
of its three classes of shares which shows the taxable yield that
would be required to produce an after-tax yield equivalent to that
of a fund which invests in tax-exempt obligations. Such yield is
computed by dividing that portion of the yield of the Trust
(computed as indicated above) which is tax-exempt by one minus the
highest applicable combined federal and Arizona income tax rate
(and adding the result to that portion of the yield of the Trust
that is not tax-exempt, if any).
The Arizona and the combined Arizona and federal income tax
rates upon which the Trust's tax equivalent yield quotations are
based are 5.60% and 42.24% respectively. The latter rate reflects
currently-enacted Federal income tax law. From time to time, as any
changes to such rates become effective, tax equivalent yield
quotations advertised by the Trust will be updated to reflect such
changes. Any tax rate increases will tend to make a tax-free
investment, such as the Trust, relatively more attractive than
taxable investments. Therefore, the details of specific tax
increases may be used in Trust sales Material.
Yield for the 30-day period ended June 30, 1997 (the date of the
Trust's most recent audited financial statements:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
Yield 4.43% 3.75% 6.65%
Taxable
Equivalent
Yield 7.67% 6.49% 11.52%
</TABLE>
These figures were obtained using the Securities and Exchange
Commission formula:
6
Yield = 2 [(a-b + 1) -1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period
(net of waivers and reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative of
the amounts which were or will be paid to the Trust's shareholders.
Amounts paid to shareholders are reflected in the quoted current
distribution rate or taxable equivalent distribution rate. The
current distribution rate is computed by (i) dividing the total
amount of dividends per share paid by the Trust during a recent
30-day period by (ii) the current maximum offering price and by
(iii) annualizing the result. A taxable equivalent distribution
rate shows the taxable distribution rate that would be required to
produce an after-tax distribution rate equivalent to the Trust's
current distribution rate (calculated as indicated above). The
current distribution rate can differ from the current yield
computation because it could include distributions to shareholders
from additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains.
Other Performance Quotations
With respect to those categories of investors who are
permitted to purchase shares of the Trust at net asset value, the
Trust may quote a "Current Distribution for Net Asset Value
Investments." This rate is computed by (i) dividing the total
amount of dividends per share paid by the Trust during a recent
30-day period by (ii) the current net asset value of the Trust and
by (iii) annualizing the result. Figures for yield, total return
and other measures of performance for Net Asset Value Investments
may also be quoted. These will be derived as described above with
the substitution of net asset value for public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with the
formula of the Securities and Exchange Commission.
The Trust may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect of
taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and capital
gains distributions in additional shares. The examples used will be
for illustrative purposes only and are not representations by the
Trust of past or future yield or return.
From time to time, in reports and promotional literature, the
Trust may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices of
broad groups of unmanaged securities considered to be
representative of, or similar to, the Trust's portfolio holdings,
such as:
Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales charges
into consideration. The method of calculating total return data on
indices utilizes actual dividends on ex-dividend dates accumulated
for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars
(highest). Morningstar ratings are calculated from the funds'
three-, five-, and ten-year average annual returns (when available)
and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are
adjusted for fees and sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars, and the bottom
10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices," a monthly corporate government index publication which
lists principal, coupon and total return on over 100 different
taxable bond indices which Merrill Lynch tracks. They also list the
par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly
publication which tracks principal, coupon and total return on the
Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as well
as all the components of these Indices.
The Consumer Price Index, prepared by the U.S. Bureau of Labor
Statistics, is a commonly used measure of inflation. The Index
shows changes in the cost of selected consumer goods and does not
represent a return on an investment vehicle.
From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK,
BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL
STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be
cited.
INVESTMENT RESTRICTIONS
The Trust has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the 1940
Act) of the Trust's outstanding shares vote to change them. Under
that Act, the vote of the holders of a "majority" of the Trust's
outstanding shares means the vote of the holders of the lesser of
(a) 67% or more of the Trust's shares present at a meeting or
represented by proxy if the holders of more than 50% of its shares
are so present or represented; or (b) more than 50% of the Trust's
outstanding shares. Those fundamental policies not set forth in the
Prospectus are set forth below:
1. The Trust invests only in certain limited securities.
The Trust cannot buy any securities other than Arizona
Obligations (discussed under "Investment of the Trust's Assets" in
the Prospectus), Municipal Bond Index Futures, U.S. Government
Securities Futures and options on such Futures; therefore the Trust
cannot buy any voting securities, any commodities or commodity
contracts other than Municipal Bond Index Futures and U.S.
Government Securities Futures, any mineral related programs or
leases, any shares of other investment companies or any warrants,
puts, calls or combinations thereof other than on Futures.
The Trust cannot purchase or hold the securities of any issuer
if, to its knowledge, Trustees, Directors or officers of the Trust
or its Adviser individually owning beneficially more than 0.5 of 1%
of the securities of that issuer together own in the aggregate more
than 5% of such securities.
The Trust cannot buy real estate or any non-liquid interests
in real estate investment trusts; however, it can buy any
securities which it can otherwise buy even though the issuer
invests in real estate or has interests in real estate.
2. The Trust does not buy for control.
The Trust cannot invest for the purpose of exercising control
or management of other companies.
3. The Trust does not sell securities it does not own or borrow
from brokers to buy securities.
Thus, it cannot sell short or buy on margin; however, the
Trust can make margin deposits in connection with the purchase or
sale of Municipal Bond Index Futures, U.S. Government Securities
Futures and options on them, and can pay premiums on these options.
4. The Trust is not an underwriter.
The Trust cannot engage in the underwriting of securities,
that is, the selling of securities for others. Also, it cannot
invest in restricted securities. Restricted securities are
securities which cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Trust's Distribution Plan has four parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II), to distribution payments relating to Class I
Shares (Part III) and to certain defensive provisions (Part IV).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Trust would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser or
the Distributor. The Distributor will consider shares which are not
Qualified Holdings of such unrelated broker-dealers to be Qualified
Holdings of the Distributor and will authorize Permitted Payments
to the Distributor with respect to such shares whenever Permitted
Payments are being made under the Plan.
Part I of the Plan applies only to the Front-Payment Class
Shares ("Class A Shares") of the Trust (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part I of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors, Inc.
(the "Distributor"), including but not limited to any principal
underwriter of the Trust, with which the Trust or the Distributor
has entered into written agreements in connection with Part I
("Class A Plan Agreements") and which have rendered assistance
(whether direct, administrative, or both) in the distribution
and/or retention of the Trust's Front-Payment Class Shares or
servicing of shareholder accounts with respect to such shares.
"Qualified Holdings" shall mean, as to any Qualified Recipient, all
Front-Payment Class Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers, other
customers, other contacts, investment advisory clients, or other
clients, if the Qualified Recipient was, in the sole judgment of
the Distributor, instrumental in the purchase and/or retention of
such shares and/or in providing administrative assistance or other
services in relation thereto.
Subject to the direction and control of the Trust's Board of
Trustees , the Trust may make payments ("Class A Permitted
Payments") to Qualified Recipients, which Class A Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Trust (as adjusted for any part
or parts of a fiscal year during which payments under the Plan are
not accruable or for any fiscal year which is not a full fiscal
year), 0.15 of 1% of the average annual net assets of the Trust
represented by the Front-Payment Class Shares. Such payments shall
be made only out of the Trust's assets allocable to the Front-
Payment Class Shares. The Distributor shall have sole authority (i)
as to the selection of any Qualified Recipient or Recipients; (ii)
not to select any Qualified Recipient; and (iii) the amount of
Class A Permitted Payments, if any, to each Qualified Recipient
provided that the total Class A Permitted Payments to all Qualified
Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into account,
in addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Front-Payment Class
Shares, including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Trust may be effected; assisting shareholders in
designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting
in processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in connection
with customer orders to purchase or redeem shares; verifying and
guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated
accounts; furnishing (either alone or together with other reports
sent to a shareholder by such person) monthly and year-end
statements and confirmations of purchases and redemptions;
transmitting, on behalf of the Trust, proxy statements, annual
reports, updating prospectuses and other communications from the
Trust to its shareholders; receiving, tabulating and transmitting
to the Trust proxies executed by shareholders with respect to
meetings of shareholders of the Trust; and providing such other
related services as the Distributor or a shareholder may request
from time to time; and (c) the possibility that the Qualified
Holdings of the Qualified Recipient would be redeemed in the
absence of its selection or continuance as a Qualified Recipient.
Notwithstanding the foregoing two sentences, a majority of the
Independent Trustees (as defined below) may remove any person as a
Qualified Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part I is in effect, the Trust's Distributor shall
report at least quarterly to the Trust's Trustees in writing for
their review on the following matters: (i) all Class A Permitted
Payments made under Section 9 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which the
amounts were expended; and (ii) all fees of the Trust to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Trust, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Trust an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part I originally went into effect when it was approved (i) by
a vote of the Trustees, including the Independent Trustees, with
votes cast in person at a meeting called for the purpose of voting
on Part I of the Plan; and (ii) by a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities of
the Front-Payment Class Shares (or of any predecessor class or
category of shares, whether or not designated as a class) and a
vote of holders of at least a "majority" (as so defined) of the
outstanding voting securities of the Level-Payment Class Shares
and/or of any other class whose shares are convertible into Front-
Payment Class Shares. Part I has continued, and will, unless
terminated as hereinafter provided, continue in effect, until the
April 30 next succeeding such effectiveness, and from year to year
thereafter only so long as such continuance is specifically
approved at least annually by the Trust's Trustees and its
Independent Trustees with votes cast in person at a meeting called
for the purpose of voting on such continuance. Part I may be
terminated at any time by the vote of a majority of the Independent
Trustees or by the vote of the holders of a "majority" (as defined
in the 1940 Act) of the outstanding voting securities of the Trust
to which Part I applies. Part I may not be amended to increase
materially the amount of payments to be made without shareholder
approval of the class or classes of shares affected by Part I as
set forth in (ii) above, and all amendments must be approved in the
manner set forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Trust, the Class A Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since each
such agreement must be approved in accordance with, and contain the
provisions required by, the Rule. In the case of Qualified
Recipients which are not principal underwriters of the Trust, the
Class A Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Trust's
Distribution Plan in effect prior to April 1, 1996 or (ii) Class A
Plan Agreements entered into thereafter.
Provisions relating to Class C Shares (Part II)
Part II of the Plan applies only to the Level-Payment Class
Shares ("Class C Shares") of the Trust (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors, Inc.
(the "Distributor"), including but not limited to any principal
underwriter of the Trust, with which the Trust or the Distributor
has entered into written agreements in connection with Part II
("Class C Plan Agreements") and which have rendered assistance
(whether direct, administrative, or both) in the distribution
and/or retention of the Trust's Level-Payment Class Shares or
servicing of shareholder accounts with respect to such shares.
"Qualified Holdings" shall mean, as to any Qualified Recipient, all
Level-Payment Class Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers, other
customers, other contacts, investment advisory clients, or other
clients, if the Qualified Recipient was, in the sole judgment of
the Distributor, instrumental in the purchase and/or retention of
such shares and/or in providing administrative assistance or other
services in relation thereto.
Subject to the direction and control of the Trust's Board of
Trustees , the Trust may make payments ("Class C Permitted
Payments") to Qualified Recipients, which Class C Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Trust (as adjusted for any part
or parts of a fiscal year during which payments under the Plan are
not accruable or for any fiscal year which is not a full fiscal
year), 0.75 of 1% of the average annual net assets of the Trust
represented by the Level-Payment Class Shares. Such payments shall
be made only out of the Trust's assets allocable to the
Level-Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class C Permitted Payments, if any, to each Qualified
Recipient provided that the total Class C Permitted Payments to all
Qualified Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into account,
in addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Level-Payment Class
Shares, including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Trust may be effected; assisting shareholders in
designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting
in processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in connection
with customer orders to purchase or redeem shares; verifying and
guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated
accounts; furnishing (either alone or together with other reports
sent to a shareholder by such person) monthly and year-end
statements and confirmations of purchases and redemptions;
transmitting, on behalf of the Trust, proxy statements, annual
reports, updating prospectuses and other communications from the
Trust to its shareholders; receiving, tabulating and transmitting
to the Trust proxies executed by shareholders with respect to
meetings of shareholders of the Trust; and providing such other
related services as the Distributor or a shareholder may request
from time to time; and (c) the possibility that the Qualified
Holdings of the Qualified Recipient would be redeemed in the
absence of its selection or continuance as a Qualified Recipient.
Notwithstanding the foregoing two sentences, a majority of the
Independent Trustees (as defined below) may remove any person as a
Qualified Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part II is in effect, the Trust's Distributor shall
report at least quarterly to the Trust's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which the
amounts were expended; and (ii) all fees of the Trust to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Trust, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Trust an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part II originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees, with
votes cast in person at a meeting called for the purpose of voting
on Part II of the Plan; and (ii) by a vote of holders of at least
a "majority" (as so defined) of the outstanding voting securities
of the Level-Payment Class Shares. Part II has continued, and
will, unless terminated as hereinafter provided, continue in
effect, until the April 30 next succeeding such effectiveness, and
from year to year thereafter only so long as such continuance is
specifically approved at least annually by the Trust's Trustees and
its Independent Trustees with votes cast in person at a meeting
called for the purpose of voting on such continuance. Part II may
be terminated at any time by the vote of a majority of the
Independent Trustees or by the vote of the holders of a "majority"
(as defined in the 1940 Act) of the outstanding voting securities
of the Trust to which Part II applies. Part II may not be amended
to increase materially the amount of payments to be made without
shareholder approval of the class or classes of shares affected by
Part II as set forth in (ii) above, and all amendments must be
approved in the manner set forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Trust, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since each
such agreement must be approved in accordance with, and contain the
provisions required by, the Rule. In the case of Qualified
Recipients which are not principal underwriters of the Trust, the
Class C Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Trust's
Distribution Plan in effect prior to April 1, 1996 or (ii) Class C
Plan Agreements entered into thereafter.
Provisions relating to Class I Shares (Part III)
Part III of the Plan applies only to the Financial
Intermediary Class Shares ("Class I Shares") of the Trust
(regardless of whether such class is so designated or is
redesignated by some other name).
As used in Part III of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors, Inc.
(the "Distributor"), including but not limited to any principal
underwriter of the Trust, with which the Trust or the Distributor
has entered into written agreements in connection with Part III
("Class I Plan Agreements") and which have rendered assistance
(whether direct, administrative, or both) in the distribution
and/or retention of the Trust's Class I Shares or servicing of
shareholder accounts with respect to such shares. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all Class I
Shares beneficially owned by such Qualified Recipient, or
beneficially owned by its brokerage customers, other customers,
other contacts, investment advisory clients, or other clients, if
the Qualified Recipient was, in the sole judgment of the
Distributor, instrumental in the purchase and/or retention of such
shares and/or in providing administrative assistance or other
services in relation thereto.
Subject to the direction and control of the Trust's Board of
Trustees, the Trust may make payments ("Class I Permitted
Payments") to Qualified Recipients, which Class I Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Trust (as adjusted for any part
or parts of a fiscal year during which payments under the Plan are
not accruable or for any fiscal year which is not a full fiscal
year), at a rate fixed for time to time by the Board of Trustees,
initially 0.10 of 1% of the average annual net assets of the Trust
represented by the Class I Shares, but not more than 0.25 of 1% of
such assets. Such payments shall be made only out of the Trust's
assets allocable to Class I Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class C Permitted Payments, if any, to each Qualified
Recipient provided that the total Class I Permitted Payments to all
Qualified Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into account,
in addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and history,
and the manner in which purchases and redemptions of shares of the
Trust may be effected; assisting shareholders in designating and
changing dividend options, account designations and addresses;
providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in processing
purchase and redemption transactions; arranging for the wiring of
funds; transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts;
furnishing (either alone or together with other reports sent to a
shareholder by such person) monthly and year-end statements and
confirmations of purchases and redemptions; transmitting, on behalf
of the Trust, proxy statements, annual reports, updating
prospectuses and other communications from the Trust to its
shareholders; receiving, tabulating and transmitting to the Trust
proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and providing such other related
services as the Distributor or a shareholder may request from time
to time; and (c) the possibility that the Qualified Holdings of the
Qualified Recipient would be redeemed in the absence of its
selection or continuance as a Qualified Recipient. Notwithstanding
the foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified Recipient.
Amounts within the above limits accrued to a Qualified Recipient
but not paid during a fiscal year may be paid thereafter; if less
than the full amount is accrued to all Qualified Recipients, the
difference will not be carried over to subsequent years.
While Part III is in effect, the Trust's Distributor shall
report at least quarterly to the Trust's Trustees in writing for
their review on the following matters: (i) all Class I Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which the
amounts were expended; and (ii) all fees of the Trust to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Trust, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Trust an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part III originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees, with
votes cast in person at a meeting called for the purpose of voting
on Part III of the Plan; and (ii) by a vote of holders of at least
a "majority" (as so defined) of the outstanding voting securities
of the Class I Shares Class. Part III has continued, and will,
unless terminated as thereinafter provided, continue in effect,
until the April 30 next succeeding such effectiveness, and from
year to year thereafter only so long as such continuance is
specifically approved at least annually by the Trust's Trustees and
its Independent Trustees with votes cast in person at a meeting
called for the purpose of voting on such continuance. Part II may
be terminated at any time by the vote of a majority of the
Independent Trustees or by the vote of the holders of a "majority"
(as defined in the 1940 Act) of the outstanding voting securities
of the Trust to which Part III applies. Part III may not be amended
to increase materially the amount of payments to be made without
shareholder approval of the class or classes of shares affected by
Part III as set forth in (ii) above, and all amendments must be
approved in the manner set forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Trust, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since each
such agreement must be approved in accordance with, and contain the
provisions required by, the Rule. In the case of Qualified
Recipients which are not principal underwriters of the Trust, the
Class I Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Trust's
Distribution Plan in effect prior to April 1, 1996 or (ii) Class I
Plan Agreements entered into thereafter.
Payments Under the Plan
During the fiscal years ended June 30, 1997, 1996 and 1995,
$589,361, $584,611, and $554,324, respectively, were paid under the
Plan with respect to Class A Shares to Qualified Recipients. Of
those amounts, $17,669, $17,199 and $16,689, respectively, were
paid to the Distributor. All of such payments were for
compensation. During the fiscal year ended June 30, 1997, $14,765
was paid with respect to Class C Shares all of which was retained
by the Distributor. All of such payments were for compensation. No
payments were made with respect to Class C Shares for the fiscal
year ended June 30, 1996; no Class C Shares were outstanding before
that time.
Defensive Provisions (Part IV)
Another part of the Plan (Part IV) states that if and to the
extent that any of the payments listed below are considered to be
"primarily intended to result in the sale of" shares issued by the
Trust within the meaning of Rule 12b-1, such payments are
authorized under the Plan: (i) the costs of the preparation of all
reports and notices to shareholders and the costs of printing and
mailing such reports and notices to existing shareholders,
irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares of
the Trust or other funds or other investments; (ii) the costs of
the preparation and setting in type of all prospectuses and
statements of additional information and the costs of printing and
mailing all prospectuses and statements of additional information
to existing shareholders; (iii) the costs of preparation, printing
and mailing of any proxy statements and proxies, irrespective of
whether any such proxy statement includes any item relating to, or
directed toward, the sale of the Trust's shares; (iv) all legal and
accounting fees relating to the preparation of any such reports,
prospectuses, statements of additional information, proxies and
proxy statements; (v) all fees and expenses relating to the
registration or qualification of the Trust and/or its shares under
the securities or "Blue-Sky" laws of any jurisdiction; (vi) all
fees under the Securities Act of 1933 and the 1940 Act, including
fees in connection with any application for exemption relating to
or directed toward the sale of the Trust's shares; (vii) all fees
and assessments of the Investment Company Institute or any
successor organization, irrespective of whether some of its
activities are designed to provide sales assistance; (viii) all
costs of the preparation and mailing of confirmations of shares
sold or redeemed or share certificates, and reports of share
balances; and (ix) all costs of responding to telephone or mail
inquiries of investors or prospective investors.
The Plan states that while it is in effect, the selection and
nomination of those Trustees of the Trust who are not "interested
persons" of the Trust shall be committed to the discretion of such
disinterested Trustees but that nothing in the Plan shall prevent
the involvement of others in such selection and nomination if the
final decision on any such selection and nomination is approved by
a majority of such disinterested Trustees.
The Plan states that while it is in effect, the Trust's
Administrator and Distributor shall report at least quarterly to
the Trust's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this Plan,
the identity of the Qualified Recipient of each Payment, and the
purposes for which the amounts were expended; (ii) all costs of
each item of cost specified in the Plan (making estimates of such
costs where necessary or desirable) during the preceding calendar
or fiscal quarter; and (iii) all fees of the Trust to the
distributor, sub-adviser or administrator paid or accrued during
such quarter. In addition if any such Qualified Recipient is an
affiliate, as that term is defined in the Act, of the Trust, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Trust an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Plan defines as the Trust's Independent Trustees those
Trustees who are not "interested persons" of the Trust as defined
in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related
to the Plan. The Plan, unless terminated as thereinafter provided,
continues in effect from year to year only so long as such
continuance is specifically approved at least annually by the
Trust's Board of Trustees and its Independent Trustees with votes
cast in person at a meeting called for the purpose of voting on
such continuance. In voting on the implementation or continuance of
the Plan, those Trustees who vote to approve such implementation or
continuance must conclude that there is a reasonable likelihood
that the Plan will benefit the Trust and its shareholders. The Plan
may be terminated at any time by vote of a majority of the
Independent Trustees or by the vote of the holders of a "majority"
(as defined in the 1940 Act) of the outstanding voting securities
of the Trust. The Plan may not be amended to increase materially
the amount of payments to be made without shareholder approval and
all amendments must be approved in the manner set forth above as to
continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act as
now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by Rule
18f-3, with respect to each outstanding class of shares of the
Trust.
SHAREHOLDER SERVICES PLAN
The Trust has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares and Class I Shares of the Trust of "Service Fees" within
the meaning of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. The Services Plan applies
only to the Class C Shares and Class I Shares of the Trust
(regardless of whether such class is so designated or is
redesignated by some other name).
Provisions for Level-Payment Class Shares (Part I)
As used in the Part I of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to the Distributor and any other principal underwriter of the
Trust, who have, pursuant to written agreements with the Trust or
the Distributor, agreed to provide personal services to
shareholders of Level-Payment Class Shares and/or maintenance of
Level-Payment Class Shares shareholder accounts. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Level-Payment Class Shares beneficially owned by such Qualified
Recipient's customers, clients or other contacts. "Administrator"
shall mean Aquila Management Corporation or any successor serving
as sub-adviser or administrator of the Trust.
Subject to the direction and control of the Trust's Board of
Trustees, the Trust may make payments ("Service Fees") to Qualified
Recipients, which Service Fees (i) may be paid directly or through
the Distributor or shareholder servicing agent as disbursing agent
and (ii) may not exceed, for any fiscal year of the Trust (as
adjusted for any part or parts of a fiscal year during which
payments under the Services Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.25 of 1% of the
average annual net assets of the Trust represented by the
Level-Payment Class Shares. Such payments shall be made only out of
the Trust's assets allocable to the Level-Payment Class Shares. The
Distributor shall have sole authority with respect to the selection
of any Qualified Recipient or Recipients and the amount of Service
Fees, if any, paid to each Qualified Recipient, provided that the
total Service Fees paid to all Qualified Recipients may not exceed
the amount set forth above and provided, further, that no Qualified
Recipient may receive more than 0.25 of 1% of the average annual
net asset value of shares sold by such Recipient. The Distributor
is authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a) the
amount of the Qualified Holdings of the Qualified Recipient and (b)
the extent to which the Qualified Recipient has, at its expense,
taken steps in the shareholder servicing area with respect to
holders of Level-Payment Class Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Trust
may be effected; assisting shareholders in designating and changing
dividend options, account designations and addresses; providing
necessary personnel and facilities to establish and maintain
shareholder accounts and records; assisting in processing purchase
and redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer orders
to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; and
providing such other related services as the Distributor or a
shareholder may request from time to time. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified Recipient.
Amounts within the above limits accrued to a Qualified Recipient
but not paid during a fiscal year may be paid thereafter; if less
than the full amount is accrued to all Qualified Recipients, the
difference will not be carried over to subsequent years. During the
fiscal year ended June 30, 1997, $113 was paid under the Part I of
the Plan with respect to Class C Shares, all of which was paid to
the Distributor.
Provisions for Financial Intermediary Class Shares (Part II)
As used in Part II of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to the Distributor and any other principal underwriter of the
Trust, who have, pursuant to written agreements with the Trust or
the Distributor, agreed to provide personal services to
shareholders of Financial Intermediary Class Shares, maintenance of
Financial Intermediary Class Shares shareholder accounts and/or
pursuant to specific agreements entering confirmed purchase orders
on behalf of customers or clients. "Qualified Holdings" shall mean,
as to any Qualified Recipient, all Financial Intermediary Class
Shares beneficially owned by such Qualified Recipient's customers,
clients or other contacts. "Administrator" shall mean Aquila
Management Corporation or any successor serving as sub-adviser or
administrator of the Trust.
Subject to the direction and control of the Trust's Board of
Trustees, the Trust may make payments ("Service Fees") to Qualified
Recipients, which Service Fees (i) may be paid directly or through
the Distributor or shareholder servicing agent as disbursing agent
and (ii) may not exceed, for any fiscal year of the Trust (as
adjusted for any part or parts of a fiscal year during which
payments under the Services Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.25 of 1% of the
average annual net assets of the Trust represented by the Financial
Intermediary Class Shares. Such payments shall be made only out of
the Trust's assets allocable to the Financial Intermediary Class
Shares. The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and the
amount of Service Fees, if any, paid to each Qualified Recipient,
provided that the total Service Fees paid to all Qualified
Recipients may not exceed the amount set forth above and provided,
further, that no Qualified Recipient may receive more than 0.25 of
1% of the average annual net asset value of shares sold by such
Recipient. The Distributor is authorized, but not directed, to take
into account, in addition to any other factors deemed relevant by
it, the following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Financial Intermediary
Class Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Trust may be effected; assisting
shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and
facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from time
to time. Notwithstanding the foregoing two sentences, a majority of
the Independent Trustees (as defined below) may remove any person
as a Qualified Recipient. Amounts within the above limits accrued
to a Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While the Services Plan is in effect, the Trust's Distributor
shall report at least quarterly to the Trust's Trustees in writing
for their review on the following matters: (i) all Service Fees
paid under the Services Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Trust to the Distributor
paid or accrued during such quarter. In addition, if any Qualified
Recipient is an "affiliated person," as that term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), of the
Trust, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Trust an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Services Plan has been approved by a vote of the Trustees,
including those Trustees who, at the time of such vote, were not
"interested persons" (as defined in the 1940 Act) of the Trust and
had no direct or indirect financial interest in the operation of
the Services Plan or in any agreements related to the Services Plan
(the "Independent Trustees"), with votes cast in person at a
meeting called for the purpose of voting on the Services Plan. It
will continue in effect for a period of more than one year from its
original effective date only so long as such continuance is
specifically approved at least annually as set forth in the
preceding sentence. It may be amended in like manner and may be
terminated at any time by vote of the Independent Trustees.
The Services Plan shall also be subject to all applicable
terms and conditions of Rule 18f-3 under the Act as now in force or
hereafter amended.
While the Services Plan is in effect, the selection and
nomination of those Trustees of the Trust who are not "interested
persons" of the Trust, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others in
such selection and nomination if the final decision on any such
selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Trust has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Trust is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1 percent of the net
asset value of the Trust during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such
limitation, the Trust will have the option of redeeming the excess
in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets
into cash. The method of valuing securities used to make
redemptions in kind will be the same as the method of valuing
portfolio securities described under "Net Asset Value Per Share" in
the Prospectus, and such valuation will be made as of the same time
the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their affiliations, if
any, with the Administrator or the Distributor, and the principal
occupations of such persons during at least the past five years are
set forth below. As of the date of the Additional Statement, the
Trustees and officers of the Trust as a group owned less than 1% of
its outstanding shares. Mr. Herrmann is an interested person, as
that term is defined in the Investment Company Act of 1940 (the
"1940 Act"), of the Trust as an officer of the Trust and as a
Director, officer and shareholder of the Trust's Distributor. Ms.
Herrmann is an interested person of the Trust as a member of his
immediate family. Mr. Carlson and Mr. Lucking are interested
persons of the Trust as security holders of the Adviser's parent,
BANC ONE CORPORATION. Interested persons are so designated by an
asterisk.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, 380 Madison Avenue, New York, New York 10017
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Oregon since 1986; Tax-Free Fund of
Colorado since 1987; Churchill Tax-Free Fund of Kentucky since
1987; Tax-Free Fund For Utah since 1992; and Narragansett Insured
Tax-Free Income Fund since 1992; each of which is a tax-free
municipal bond fund, and two equity funds, Aquila Rocky Mountain
Equity Fund since 1993 and Aquila Cascadia Equity Fund, since 1996,
which, together with this Trust are called the Aquila Bond and
Equity Funds; and Pacific Capital Cash Assets Trust since 1984;
Churchill Cash Reserves Trust since 1985; Pacific Capital U.S.
Treasuries Cash Assets Trust since 1988; Pacific Capital Tax-Free
Cash Assets Trust since 1988; each of which is a money market fund,
and together with Capital Cash Management Trust ("CCMT") are called
the Aquila Money-Market Funds; Vice President, Director, Secretary
and formerly Treasurer of Aquila Distributors, Inc. since 1981,
distributor of the above funds; President and Chairman of the Board
of Trustees of CCMT, a money market fund since 1981, and an Officer
and Trustee/Director of its predecessors since 1974; Chairman of
the Board of Trustees and President of Prime Cash Fund (which is
inactive), since 1982 and of Short Term Asset Reserves 1984-1996;
President and a Director of STCM Management Company, Inc., sponsor
and sub-adviser to CCMT; Chairman, President, and a Director since
1984, of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves, and
Founder and Chairman of several other money market funds; Director
or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest Global
Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and Trustee
of Quest For Value Accumulation Trust, The Saratoga Advantage
Trust, and of the Rochester Group of Funds, each of which is an
open-end investment company; Trustee of Brown University, 1990-1996
and currently Trustee Emeritus; actively involved for many years in
leadership roles with university, school and charitable
organizations.
Philip E. Albrecht, C.F.A., Trustee, 1485 Gulf of Mexico Drive,
Longboat Key, Florida, 34228
Retired; Senior Vice President, Investments of National Securities
& Research Corporation, 1973-1984; Vice President of Research of
Merrill Lynch, Pierce, Fenner & Smith, 1949-1973; past President of
The New York Society of Security Analysts; former officer and
Director of The Financial Analysts Federation; former officer and
Trustee of the Institute of Chartered Financial Analysts; active in
a similar capacity with various other professional organizations;
Trustee of Tax-Free Fund For Utah since 1992.
Arthur K. Carlson*, Trustee, 8702 North Via La Serena, Paradise
Valley, Arizona 85253
Retired; Advisory Director of the Renaissance Companies (design and
construction companies of commercial, industrial and upscale
residential properties) since 1996; Senior Vice President and
Manager of the Trust Division of The Valley National Bank of
Arizona, 1977-1987; Trustee of Tax-Free Fund of Colorado, Hawaiian
Tax-Free Trust, and Pacific Capital Cash Assets Trust since 1987,
of Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital
U.S. Treasuries Cash Assets Trust since 1988 and of Aquila Rocky
Mountain Equity Fund since 1993; previously Vice President of
Investment Research at Citibank, New York City, and prior to that
Vice President and Director of Investment Research of Irving Trust
Company, New York City; past President of The New York Society of
Security Analysts and currently a member of the Phoenix Society of
Financial Analysts; formerly Director of the Financial Analysts
Federation; past Chairman of the Board and, currently, Director of
Mercy Healthcare of Arizona, Phoenix, Arizona since 1990; Director
of Northern Arizona University Foundation since 1990; present or
formerly an officer and/or director of various other community and
professional organizations.
Thomas W. Courtney, C.F.A., Trustee, P.O. Box 8186, Naples,
Florida 33941
President of Courtney Associates, Inc., a venture capital firm,
since 1988; General Partner of Trivest Venture Fund, 1983-1988;
President of Federated Investment Counseling Inc., 1975-1982;
President of Boston Company Institutional Investors, Inc.,
1970-1975; formerly a Director of the Financial Analysts
Federation; Trustee of Hawaiian Tax-Free Trust and Pacific Capital
Cash Assets Trust since 1984, and of Pacific Capital Tax-Free Cash
Assets Trust and Pacific Capital U.S. Treasuries Cash Assets Trust
since 1988; Director or Trustee of OCC Cash Reserves, Inc.,
Oppenheimer Quest Global Value Fund, Inc., Oppenheimer Quest Value
Fund, Inc., and Trustee of Quest For Value Accumulation Trust and
of the Rochester Group of Funds, each of which is an open-end
investment company.
William L. Ensign, Trustee, 2928 Cortland Place N.W., Washington,
D.C. 20008
Assistant Architect of the United States Capital, Washington, D.C.
since 1980; formerly President and Chief Executive Officer of
McLeod Ferrara Ensign, a planning, architectural, and interior
design firm, in Washington D.C. and Maryland; a Fellow and former
member of the Board of Directors of the American Institute of
Architects and past President of the Washington-Metropolitan
Chapter of the A.I.A.; active in the National Trust for Historic
Preservation; designee to the Advisory Council on Historic
Preservation; designee to the Zoning Commission of the District of
Columbia since 1989; Trustee Tax-Free Fund For Utah since 1991;
Trustee of Oxford Cash Management Fund, 1983-1989.
Diana P. Herrmann*, Trustee, 380 Madison Avenue, New York, New
York 10017
Trustee of Tax-Free Trust of Oregon since 1994, of Churchill
Tax-Free Fund of Kentucky and Churchill Cash Reserves Trust since
1995, of Aquila Cascadia Equity Fund since 1996 and of Aquila Rocky
Mountain Equity Fund and Tax-Free Fund for Utah since 1997;
President and Chief Operating Officer of the Administrator since
1997; Senior Vice President and Secretary, formerly Vice President
of the Administrator since 1986 and Director since 1984; Senior
Vice President or Vice President and formerly Assistant Vice
President of the Aquila Money-Market Funds since 1986; Vice
President of the Aquila Bond and Equity Funds since 1997; Vice
President of InCap Management Corporation since 1986 and Director
since 1983; Assistant Vice President of Oxford Cash Management
Fund, 1986-1988; Assistant Vice President and formerly Loan Officer
of European American Bank, 1981-1986; daughter of the Trust's
President; Trustee of the Leopold Schepp Foundation (academic
scholarships) since 1995; actively involved in mutual fund and
trade associations and in college and other volunteer
organizations.
John C. Lucking*, Trustee, 7537 North Central Avenue, Phoenix,
Arizona 85020
Consulting Economist for Econ-Linc since 1995; Consulting Economist
of Bank One Arizona (formerly Valley National bank of Arizona)
1994-1996; Chief Economist of that bank, 1987-1994; Municipal bond
analyst and Government Securities salesman, 1984-1987; Financial
Analyst of Phelps Dodge Corporation (a mining company) 1980-1984;
Director of New Mexico and Arizona Land Company since 1993.
Anne J. Mills, Trustee, 7030 East Shooting Star Way, Scottsdale,
Arizona 85262
Vice President for Business Affairs of Ottawa University since
1992; Director of Customer Fulfillment, U.S. Marketing and Services
Group, IBM Corporation, 1990-1991; Director of Business
Requirements of that Group, 1988-1990; Director of Phase Management
of that Group, 1985-1988; Budget Review Officer of the American
Baptist Churches/USA since 1994; Director of the American Baptist
Foundation since 1985; Trustee of Brown University; Trustee of
Churchill Cash Reserves Trust since 1985, of Churchill Tax-Free
Fund of Kentucky, Tax-Free Fund of Colorado and Capital Cash
Management Trust since 1987 and of Tax-Free Fund For Utah since
1994.
William C. Wallace, Senior Vice President, 380 Madison Avenue, New
York, New York 10017
Vice President of Capital Cash Management Trust and Pacific Capital
Cash Assets Trust since 1984; Senior Vice President of Hawaiian
Tax-Free Trust since 1985 and Vice President, 1984-1985; Vice
President of Tax-Free Trust of Oregon since 1986, of Churchill
Tax-Free Fund of Kentucky and Tax-Free Fund of Colorado since 1987,
of Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital
U.S. Treasuries Cash Assets Trust since 1988 and of Narragansett
Insured Tax-Free Income Fund since 1992; Secretary and Director of
STCM Management Company, Inc. since 1974; President of the
Distributor since 1995 and formerly Vice President of the
Distributor, 1986-1992; Member of the Panel of Arbitrators,
American Arbitration Association, since 1978; Assistant Vice
President, American Stock Exchange, Market Development Division,
and Director of Marketing, American Gold Coin Exchange, a
subsidiary of the American Stock Exchange, 1976-1984.
Susan A. Cook, Vice President, 6220 E. Thomas Road, Scottsdale,
Arizona 85251
Registered Representative of Aquila Distributors, Inc. since 1993;
Vice President of Cowen & Company, Members of the New York Stock
Exchange, 1988-1991. Institutional Sales and Trading at Robertson,
Stephens, & Montgomery Securities in San Francisco, CA, 1981-1986.
Kristian P. Kjolberg, Vice President, 8712 E. Via de Commercio #9,
Scottsdale, Arizona 85258
Registered Representative of Aquila Distributors, Inc. since 1995;
Financial Adviser and Registered Representative of Sentra
Securities Corporation, 1992-1995; Financial Adviser of Prudential
Insurance Company, 1990-1992.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer of
Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of the
Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New York
10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond and
Equity Funds and of Aquila Distributors, Inc. since 1992; Associate
Director of Furman Selz Incorporated, 1991-1992; Vice President of
Scudder, Stevens & Clark, Inc. and Treasurer of Scudder
Institutional Funds, 1989-1991; Vice President of Lazard Freres
Institutional Funds Group, Treasurer of Lazard Freres Group of
Investment Companies and HT Insight Funds, Inc., 1986-1988; Vice
President of Lehman Management Co., Inc. and Assistant Treasurer of
Lehman Money Market Funds, 1981-1985; Controller of Seligman Group
of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust,
1982-1985 and Trustee of that Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995 and Vice President of the Aquila
Money-Market Funds since 1990; Vice President of the Administrator
since 1990;Investment Services Consultant and Bank Services
Executive of Wright Investors' Service, a registered investment
adviser, 1983-1989; Member of the American Finance Association, the
Western Finance Association and the Society of Quantitative
Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995; Counsel to the Administrator and
the Distributor since 1995; formerly a Legal Associate for
Oppenheimer Management Corporation, 1993-1995.
Compensation of Trustees
The Trust does not pay fees to Trustees affiliated with the
Administrator or to any of the Trust's officers. During the fiscal
year ended June 30, 1997, the Trust paid $88,816 in fees and
reimbursement of expenses to its other Trustees. The Trust is one
of the 14 funds in the Aquilasm Group of Funds, which consist of
tax-free municipal bond funds, money market funds and two equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Trust and the compensation they
received during the Trust's fiscal year from other funds in the
Aquilasm Group of Funds. None of such Trustees has any pension or
retirement benefits from the Trust or any of the other funds in the
Aquila group.
<TABLE>
<CAPTION>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Trust Group now serves
<S> <C> <C> <C>
Philip E.
Albrecht $10,965 $13,236 2
Arthur K.
Carlson $10,924 $63,323 7
Thomas W.
Courtney $11,875 $54,340 5
William L.
Ensign $3,800 $4,500 2
John C.
Lucking $10,550 $10,500 1
Anne J.
Mills $10,816 $36,526 6
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
Current Arrangements
On November 7, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described below under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect.
In either event, the Additional Statement will be supplemented to
reflect the arrangements that are in effect.
The Investment Advisory Agreement (the "Advisory Agreement")
between the Trust and Banc One Investment Advisors Corporation (the
"Adviser") contains the provisions described below, in addition to
those described in the Prospectus.
The Advisory Agreement may be terminated by the Adviser at any
time without penalty upon giving the Trust sixty days' written
notice, and may be terminated by the Trust at any time without
penalty upon giving the Adviser sixty days' written notice,
provided that such termination by the Trust shall be directed or
approved by the vote of a majority of all its Trustees in office at
the time or by the vote of the holders of a majority (as defined in
the 1940 Act) of its voting securities at the time outstanding and
entitled to vote; it automatically terminates in the event of its
assignment (as so defined).
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations thereunder, the Adviser is not liable for any loss
sustained by the adoption of any investment policy or the purchase,
sale or retention of any security and permits the Adviser to act as
investment adviser for any other person, firm or corporation. The
Trust agrees to indemnify the Adviser to the full extent permitted
under the Trust's Declaration of Trust.
The Advisory Agreement states that it is agreed that the
Adviser shall have no responsibility or liability for the accuracy
or completeness of the Trust's Registration Statement under the
Securities Act of 1933 and the 1940 Act, except for the information
supplied in writing by the Adviser specifically for inclusion
therein.
The Advisory Agreement contains the following provisions as to
the Trust's portfolio transactions. In connection with its duties
to arrange for the purchase and sale of the Trust's portfolio
securities, the Adviser shall select such broker-dealers
("dealers") as shall, in the Adviser's judgment, implement the
policy of the Trust to achieve "best execution," i.e., prompt,
efficient and reliable execution of orders at the most favorable
net price. The Adviser shall cause the Trust to deal directly with
the selling or purchasing principal or market maker without
incurring brokerage commissions unless the Adviser determines that
better price or execution may be obtained by paying such
commissions; the Trust expects that most transactions will be
principal transactions at net prices and that the Trust will incur
little or no brokerage costs. The Trust understands that purchases
from underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked price.
In allocating transactions to dealers, the Adviser is authorized to
consider, in determining whether a particular dealer will provide
best execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as well
as the difficulty of the transaction in question, and thus need not
pay the lowest spread or commission available if the Adviser
determines in good faith that the amount of commission is
reasonable in relation to the value of the brokerage and research
services provided by the dealer, viewed either in terms of the
particular transaction or the Adviser's overall responsibilities as
to the accounts as to which it exercises investment discretion. If,
on the foregoing basis, the transaction in question could be
allocated to two or more dealers, the Adviser is authorized, in
making such allocation, to consider (i) whether a dealer has
provided research services, as further discussed below; and (ii)
whether a dealer has sold shares of the Trust or any other
investment company or companies having the Adviser as its
investment adviser or having the same Administrator, sub-adviser or
principal underwriter as the Trust. Such research may be in written
form or through direct contact with individuals and may include
quotations on portfolio securities and information on particular
issuers and industries, as well as on market, economic or
institutional activities. The Trust recognizes that no dollar value
can be placed on such research services or on execution services,
that such research services may or may not be useful to the Trust
and/or other accounts of the Adviser and that research received by
such other accounts may or may not be useful to the Trust.
During the fiscal years ended June 30, 1997, 1996 and 1995,
all of the Trust's transactions were principal transactions and no
brokerage commissions were paid.
For the fiscal years ended June 30, 1997, 1996 and 1995, the
fees payable to the Adviser under the Advisory Agreement then in
effect were $782,451, $777,661 and $739,438.
Additional Information as to the Administration Agreement
The Administration Agreement (the "Administration Agreement")
between Aquila Management Corporation, as Administrator, and the
Trust contains the provisions described below in addition to those
described in the Prospectus.
Subject to the control of the Trust's Board of Trustees, the
Administrator provides all administrative services to the Trust
other than those relating to its investment portfolio. As part of
such duties, the Administrator (i) provides office space,
personnel, facilities and equipment for the performance of the
following functions and for the maintenance of the Trust's
headquarters; (ii) oversees all relationships between the Trust and
its transfer agent, custodian, legal counsel, auditors and
principal underwriter, including the negotiation, subject to the
approval of the Trust's Board of Trustees, of agreements in
relation thereto, the supervision and coordination of the
performance of such agreements, and the overseeing of all
administrative matters which are necessary or desirable for
effective operation and for the sale, servicing, or redemption of
the Trust's shares; (iii) provides to the Adviser and to the Trust
statistical and other factual information and advice regarding
economic factors and trends, but does not generally furnish advice
or make recommendations regarding the purchase or sale of
securities; (iv) maintains the Trust's books and records and
prepares (or assists counsel and auditors in the preparation of)
all required proxy statements, reports to shareholders and
Trustees, reports to and other filings with the Securities and
Exchange Commission and any other governmental agencies, and tax
returns, and oversees the Trust's insurance relationships; (v)
prepares, on the Trust's behalf and at its expense, such
applications and reports as may be necessary to register or
maintain the Trust's registration or that of its shares under the
securities or "Blue-Sky" laws of all such jurisdictions as may be
required from time to time; and (vi) responds to any inquiries or
other communications from shareholders and broker-dealers, or if
any such inquiry or communication is more properly to be responded
to by the Trust's shareholder servicing and transfer agent or
distributor, oversees such shareholder servicing and transfer
agent's or distributor's response thereto. Since the Trust pays its
own legal and audit expenses, to the extent that the Trust's
counsel and accountants prepare or assist in the preparation of
prospectuses, proxy statements and reports to shareholders, the
costs of such preparation or assistance are paid by the Trust.
Under the Administration Agreement, the Administrator is
responsible for the payment of certain printing and distribution
costs that are not borne by the Distributor, relating to
prospectuses, reports and sales literature to other than existing
shareholders. See above as to the expenses for which the
Administrator is also responsible under the Distribution Plan.
The Administration Agreement may be terminated at any time
without penalty by the Administrator upon sixty days' written
notice to the Trust and the Adviser; it may be terminated by the
Trust at any time without penalty upon giving the Administrator
sixty days' written notice, provided that such termination by the
Trust shall be directed or approved by a vote of a majority of the
Trustees in office at the time, including a majority of the
Trustees who are not interested persons of the Trust. In either
case the notice provision may be waived.
The Administration Agreement provides that the Administrator
shall not be liable for any error in judgement or for any loss
suffered by the Trust in connection with the matters to which the
Administration Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence of the
Administrator in the performance of its duties, or from reckless
disregard by it of its obligations and duties under the
Administration Agreement. The Trust agrees to indemnify the
Administrator to the full extent permitted by the Declaration of
Trust.
For the fiscal years ended June 30, 1997, 1996 and 1995, the
fees payable to the Administrator under the Administration
Agreement then in effect were $782,451, $777,661 and $739,438,
respectively.
New Arrangements
On November 6, 1997, the arrangements described below under
"New Arrangements" will be submitted to the shareholders for
approval. If approved by the shareholders of the Trust the New
Arrangements will be in effect and those described above under
"Current Arrangements" will be superseded. If the New Arrangements
are not approved by the shareholders, the New Arrangements will not
go into effect and the Current Arrangements will remain in effect.
In either event, the Additional Statement will be supplemented to
reflect the arrangements that are in effect.
Additional Information about the Investment Advisory and
Administration Agreement
The Advisory and Administration Agreement provides that it
will become effective on the date of its approval by the
shareholders of the Trust and will, unless terminated as
thereinafter provided, continue in effect until the April 30 next
preceding the first anniversary of the effective date of the
Advisory and Administration Agreement, and from year to year
thereafter, but only so long as such continuance is specifically
approved at least annually (1) by a vote of the Trust's Board of
Trustees, including a vote of a majority of the Trustees who are
not parties to the Advisory and Administration Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities of
the Trust and by such a vote of the Trustees.
Additional Information about the Sub-Advisory Agreement
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform to,
and be in accordance with, any requirements imposed by: (1) the
Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Trust and By-Laws of
the Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Trust; and (5) the
fundamental policies of the Trust, as reflected in its registration
statement under the Act or as amended by the shareholders of the
Trust.
The Sub-Advisory Agreement provides that the Sub-Adviser shall
give to the Manager, as defined therein, and to the Trust the
benefit of its best judgment and effort in rendering services
hereunder, but the Sub-Adviser shall not be liable for any loss
sustained by reason of the adoption of any investment policy or the
purchase, sale or retention of any security, whether or not such
purchase, sale or retention shall have been based upon (i) its own
investigation and research or (ii) investigation and research made
by any other individual, firm or corporation, if such purchase,
sale or retention shall have been made and such other individual,
firm or corporation shall have been selected in good faith by the
Sub-Adviser. Nothing therein contained shall, however, be construed
to protect the Sub-Adviser against any liability to the Trust or
its security holders by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations and duties under the
Agreement.
The Sub-Advisory Agreement provides that nothing in it shall
prevent the Sub-Adviser or any affiliated person (as defined in the
Act) of the Sub-Adviser from acting as investment adviser or
manager for any other person, firm or corporation and shall not in
any way limit or restrict the Sub-Adviser or any such affiliated
person from buying, selling or trading any securities for its own
or their own accounts or for the accounts of others for whom it or
they may be acting, provided, however, that the Sub-Adviser
expressly represents that, while acting as Sub-Adviser, it will
undertake no activities which, in its judgment, will adversely
affect the performance of its obligations to the Trust under the
Agreement. It is agreed that the Sub-Adviser shall have no
responsibility or liability for the accuracy or completeness of the
Trust's Registration Statement under the Act and the Securities Act
of 1933, except for information supplied by the Sub-Adviser for
inclusion therein. The Sub-Adviser shall promptly inform the Trust
as to any information concerning the Sub-Adviser appropriate for
inclusion in such Registration Statement, or as to any transaction
or proposed transaction which might result in an assignment (as
defined in the Act) of the Agreement. To the extent that the
Manager is indemnified under the Trust's Declaration of Trust with
respect to the services provided hereunder by the Sub-Adviser, the
Manager agrees to provide the Sub-Adviser the benefits of such
indemnification.
The Sub-Advisory Agreement provides that in connection with
its duties to arrange for the purchase and sale of the Trust's
portfolio securities, the Sub-Adviser shall select such
broker-dealers ("dealers") as shall, in the Sub-Adviser's judgment,
implement the policy of the Trust to achieve "best execution,"
i.e., prompt, efficient, and reliable execution of orders at the
most favorable net price. The Sub-Adviser shall cause the Trust to
deal directly with the selling or purchasing principal or market
maker without incurring brokerage commissions unless the
Sub-Adviser determines that better price or execution may be
obtained by paying such commissions; the Trust expects that most
transactions will be principal transactions at net prices and that
the Trust will incur little or no brokerage costs. The Trust
understands that purchases from underwriters include a commission
or concession paid by the issuer to the underwriter and that
principal transactions placed through dealers include a spread
between the bid and asked prices. In allocating transactions to
dealers, the Sub-Adviser is authorized to consider, in determining
whether a particular dealer will provide best execution, the
dealer's reliability, integrity, financial condition and risk in
positioning the securities involved, as well as the difficulty of
the transaction in question, and thus need not pay the lowest
spread or commission available if the Sub-Adviser determines in
good faith that the amount of commission is reasonable in relation
to the value of the brokerage and research services provided by the
dealer, viewed either in terms of the particular transaction or the
Sub-Adviser's overall responsibilities. If, on the foregoing basis,
the transaction in question could be allocated to two or more
dealers, the Sub-Adviser is authorized, in making such allocation,
to consider (i) whether a dealer has provided research services, as
further discussed below; and (ii) whether a dealer has sold shares
of the Trust. Such research may be in written form or through
direct contact with individuals and may include quotations on
portfolio securities and information on particular issuers and
industries, as well as on market, economic, or institutional
activities. The Trust recognizes that no dollar value can be placed
on such research services or on execution services and that such
research services may or may not be useful to the Trust and may be
used for the benefit of the Sub-Adviser or its other clients.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Trust as are required by applicable law and regulation, and
agrees that all records which it maintains for the Trust on behalf
of the Manager shall be the property of the Trust and shall be
surrendered promptly to the Trust or the Manager upon request. The
Sub-Adviser agrees to furnish to the Manager and to the Board of
Trustees of the Trust such periodic and special reports as each may
reasonably request.
The Sub-Advisory Agreement provides that the Sub-Adviser shall
bear all of the expenses it incurs in fulfilling its obligations
under the Agreement. In particular, but without limiting the
generality of the foregoing: the Sub-Adviser shall furnish the
Trust, at the Sub-Adviser's expense, all office space, facilities,
equipment and clerical personnel necessary for carrying out its
duties under the Agreement. The Sub-Adviser shall supply, or cause
to be supplied, to any investment adviser, administrator or
principal underwriter of the Trust all necessary financial
information in connection with such adviser's, administrator's or
principal underwriter's duties under any agreement between such
adviser, administrator or principal underwriter and the Trust. The
Sub-Adviser will also pay all compensation of the Trust's officers,
employees, and Trustees, if any, who are affiliated persons of the
Sub-Adviser.
The Sub-Advisory Agreement provides that it will become
effective on the day it is approved by the shareholders of the
Trust (the "Effective Date") and shall, unless terminated as
thereinafter provided, continue in effect until the December 31
next preceding the first anniversary of the effective date of the
Agreement, and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually (1) by
a vote of the Trust's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities of
the Trust and by such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be terminated
by the Sub-Adviser at any time without penalty upon giving the
Manager and the Trust sixty days' written notice (which notice may
be waived). It may be terminated by the Manager or the Trust at any
time without penalty upon giving the Sub-Adviser sixty days'
written notice (which notice may be waived by the Sub-Adviser),
provided that such termination by the Trust shall be directed or
approved by a vote of a majority of its Trustees in office at the
time or by a vote of the holders of a majority (as defined in the
Act) of the voting securities of the Trust outstanding and entitled
to vote. The Sub-Advisory Agreement will automatically terminate in
the event of its assignment (as defined in the Act) or the
termination of the Investment Advisory Agreement. The Sub-Adviser
agrees that it will not exercise its termination rights for at
least three years from the effective date of the Agreement, except
for regulatory reasons.
Glass-Steagall Act and Certain Other Banking Laws
The Adviser is subject to the Glass-Steagall Act. The
Glass-Steagall Act, among other things, prohibits, with certain
exceptions, banks and bank holding companies from engaging in the
business of issuing, underwriting, selling or distributing
securities and from affiliating with companies engaged in those
activities. In April 1971, the United States Supreme Court held, in
Investment Company Institute v. Camp, that certain provisions of
the Glass-Steagall Act applicable to both national and Federal
Reserve member banks prohibit any such bank from operating a
collective investment fund. The fund which was the subject of
litigation was registered as an open-end investment company, and
participations in the fund were offered on a continuous basis
directly by the bank. Subsequent to that decision, the Board of
Governors of the Federal Reserve System amended its Regulation Y to
forbid a bank holding company or subsidiary thereof from
organizing, sponsoring or controlling a registered open-end
investment company continuously engaged in distributing its shares
but to permit a non-banking subsidiary of a bank holding company to
serve as investment adviser to a registered investment company,
subject to a number of terms and conditions. The validity of this
amendment to Regulation Y, as it relates to closed-end investment
companies, was upheld by the Supreme Court in February, 1981 in
Board of Governors v. Investment Company Institute. In addition,
the Comptroller of the Currency has taken the position that a
national bank having fiduciary powers may act as investment advisor
to an open-end investment company. In the view of the Adviser, it
is permitted under current Federal banking laws to perform the
services for the Trust required by the Advisory Agreement; however,
future changes in federal or state statutes and regulations
relating to the permissible activities of banks and bank holding
companies, including their bank and non-bank subsidiaries, as well
as future judicial or administrative decisions and interpretations
of present and future statutes and regulations, might at some
future time prevent it from continuing to serve as the investment
adviser to the Trust.
In the event the Adviser is prohibited from acting as the
Trust's investment adviser, it is probable that the Trust's
Trustees would recommend to the shareholders the selection of
another qualified adviser.
The Adviser believes that it must comply with the position of
the Comptroller of the Currency referred to above and, because not
legally applicable to a national bank acting as an investment
adviser, need not comply with the provisions of Regulation Y (and
the interpretations thereof) of the Board of Governors of the
Federal Reserve System that specify the terms on which a
non-banking subsidiary of a bank holding company may serve as
investment adviser to an open-end investment company.
Among the restrictions imposed by the Comptroller of the
Currency are that the Adviser may not be involved in the promotion
or distribution of shares of the Trust and that Trust accounts
administered by the Adviser may not purchase shares of the Trust
unless lawfully authorized by the instrument creating the
relationship or by court order or by local law. Under Arizona law,
if the portfolios of that investment company or investment trust
consist of investments permitted by the applicable fiduciary
instrument, the Adviser in its capacity as a fiduciary, may
purchase shares of the Trust. Collective investment funds operated
by the Adviser may not purchase shares of the Trust.
COMPUTATION OF NET ASSET VALUE
The net asset value of the shares of each of the Trust's
classes of shares is determined as of 4:00 p.m. New York time on
each day that the New York Stock Exchange is open by dividing the
value of the Trust's net assets allocable to each class by the
total number of shares of such class then outstanding. However,
Futures and options on them are valued at the last sales price on
the principal commodities exchange on which the Future or option is
traded or, if there are no sales, at the mean between the bid and
asked prices as of the close of that exchange; such close may be
later than 4:00 p.m. New York time. Securities having a remaining
maturity of less than sixty days when purchased and securities
originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at
cost adjusted for amortization of premiums and accretion of
discounts. All other portfolio securities are valued at the mean
between bid and asked quotations which, for Arizona Obligations,
may be obtained from a reputable pricing service or from one or
more broker-dealers dealing in Arizona Obligations, either of which
may, in turn, obtain quotations from broker-dealers or banks which
deal in specific issues. However, since Arizona Obligations are
ordinarily purchased and sold on a "yield" basis by banks or
dealers which act for their own account and do not ordinarily make
continuous offerings, quotations obtained from such sources may be
subject to greater fluctuations than is warranted by prevailing
market conditions. Accordingly, some or all of the Arizona
Obligations in the Trust's portfolio may be priced, with the
approval of the Trust's Board of Trustees, by differential
comparisons to the market in other municipal bonds under methods
which include consideration of the current market value of tax-free
debt instruments having varying characteristics of quality, yield
and maturity. Any securities or assets for which market quotations
are not readily available are valued at their fair value as
determined in good faith under procedures established by and under
the general supervision and responsibility of the Trust's Board of
Trustees. In the case of Arizona Obligations, such procedures may
include "matrix" comparisons to the prices for other tax-free debt
instruments on the basis of the comparability of their quality,
yield, maturity and other special factors, if any, involved. With
the approval of the Trust's Board of Trustees, the Adviser may at
its own expense and without reimbursement from the Trust employ a
pricing service, bank or broker-dealer experienced in such matters
to perform any of the above described functions.
As indicated above, the net asset value per share of the
Trust's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, that Exchange may close on days not
included in that announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number
of instances in which the Trust's Class A Shares are sold or issued
on a basis other than the maximum public offering price, that is,
the net asset value plus the highest sales charge. Some of these
relate to lower or eliminated sales charges for larger purchases,
whether made at one time or over a period of time as under a Letter
of Intent or right of accumulation. (See the table of sales charges
in the Prospectus.) The reasons for these quantity discounts are,
in general, that (i) they are traditional and have long been
permitted in the industry and are therefore necessary to meet
competition as to sales of shares of other funds having such
discounts; and (ii) they are designed to avoid an unduly large
dollar amount of sales charge on substantial purchases in view of
reduced selling expenses. Quantity discounts are made available to
certain related persons ("single purchasers") for reasons of family
unity and to provide a benefit to tax-exempt plans and
organizations.
The reasons for the other instances in which there are reduced
or eliminated sales charges for Class A Shares are as follows.
Exchanges at net asset value are permitted because a sales charge
has already been paid on the shares exchanged. Sales without sales
charge are permitted to Trustees, officers and certain others due
to reduced or eliminated selling expenses and/or since such sales
may encourage incentive, responsibility and interest and an
identification with the aims and policies of the Trust. Limited
reinvestments of redemptions of Class A Shares and Class C Shares
at no sales charge are permitted to attempt to protect against
mistaken or incompletely informed redemption decisions. Shares may
be issued at no sales charge in plans of reorganization due to
reduced or eliminated sales expenses and since, in some cases, such
issuance is exempted in the 1940 Act from the otherwise applicable
restrictions as to what sales charge must be imposed. In no case in
which there is a reduced or eliminated sales charge are the
interests of existing shareholders adversely affected since, in
each case, the Trust receives the net asset value per share of all
shares sold or issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A Shares or Class Y Shares of the
Trust having a net asset value of at least $5,000 you may establish
an Automatic Withdrawal Plan under which you will receive a monthly
or quarterly check in a stated amount, not less than $50. Stock
certificates will not be issued for shares held under an Automatic
Withdrawal Plan. All dividends and distributions must be
reinvested. Shares will be redeemed on the last business day of the
month or quarter as may be necessary to meet withdrawal payments.
Redemption of shares for withdrawal purposes may reduce or
even liquidate your account. The monthly or quarterly payments paid
to you may not be considered as a yield or income on investment.
ADDITIONAL TAX INFORMATION
If you incur a sales commission on a purchase of shares of one
mutual fund (the original fund) and sell or exchange them for
shares of a different mutual fund without having held them at least
91 days, you must reduce the tax basis for the shares sold or
exchanged to the extent that the standard sales commission charged
for acquiring shares in the exchange or later acquiring shares of
the original fund or another fund is reduced because of the
shareholder's having owned the original fund shares. The effect of
the rule is to increase your gain or reduce your loss on the
original fund shares. The amount of the basis reduction on the
original fund shares, however, is added on the investor's basis for
the fund shares acquired in the exchange or later acquired. The
provision applies to commissions charged after October 3, 1989.
CONVERSION OF CLASS C SHARES
Level-Payment Class Shares ("Class C Shares") of the Trust,
which you hold will automatically convert to Front-Payment Class
Shares ("Class A Shares") of the Trust based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the sixth
anniversary of the your initial purchase of such Class C Shares
occurs. For these purposes, the date of your initial purchase shall
mean (1) the first business day of the month in which such Class C
Shares were issued to you, or (2) for Class C Shares of the Trust
you have obtained through an exchange or series of exchanges under
the Exchange Privilege (see "Exchange Privilege" in the
Prospectus), the first business day of the month in which you made
the original purchase of Class C Shares so exchanged. For
conversion purposes, Class C Shares purchased through reinvestment
of dividends or other distributions paid in respect of Class C
Shares will be held in a separate sub-account. Each time any Class
C Shares in your regular account (other than those in the
sub-account) convert to Class A Shares, a pro-rata portion of the
Class C Shares in the sub-account will also convert to Class A
Shares. The portion will be determined by the ratio that your Class
C Shares then converting to Class A Shares bears to the total of
your Class C Shares not acquired through reinvestment of dividends
and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the dividends
and other distributions paid on Class A Shares and Class C Shares
will not result in "preferential dividends" under the Code; and (2)
the conversion of shares does not constitute a taxable event. If
the conversion feature ceased to be available, the Class C Shares
of the Trust would not be converted and would continue to be
subject to the higher ongoing expenses of the Class C Shares beyond
six years from the date of purchase. The Trust has no reason to
believe that these conditions for the availability of the
conversion feature will not continue to be met.
If the Trust implements any amendments to its Distribution
Plan that would increase materially the costs that may be borne
under such Distribution Plan by Class A Shares shareholders, Class
C Shares will stop converting into Class A Shares unless a majority
of Class C Shares shareholders, voting separately as a class,
approve the proposal.
GENERAL INFORMATION
Possible Additional Series
If an additional Series were created by the Board of Trustees,
shares of each such Series would be entitled to vote as a Series
only to the extent permitted by the 1940 Act (see below) or as
permitted by the Board of Trustees. Income and operating expenses
would be allocated among the Trust and the additional series in a
manner acceptable to the Board of Trustees.
Under Rule 18f-2 under the 1940 Act, any matter required to be
submitted to shareholder vote is not deemed to have been
effectively acted upon unless approved by the holders of a
"majority" (as defined in that Rule) of the voting securities of
each Series affected by the matter. Such separate voting
requirements do not apply to the election of trustees or the
ratification of the selection of accountants. Rule 18f-2 contains
special provisions for cases in which an advisory contract is
approved by one or more, but not all, Series. A change in
investment policy may go into effect as to one or more Series whose
holders so approve the change, even though the required vote is not
obtained as to the holders of other affected Series.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Trust may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. For shareholder
protection, however, an express disclaimer of shareholder liability
for acts or obligations of the Trust is contained in the
Declaration of Trust which requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into
or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of the Trust's property of any
shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
the relatively remote circumstances in which the Trust itself would
be unable to meet its obligations. In the event the Trust had two
or more Series, and if any such Series were to be unable to meet
the obligations attributable to it (which, as is the case with the
Trust, is relatively remote), the other Series would be subject to
such obligations, with a corresponding increase in the risk of the
shareholder liability mentioned in the prior sentence.
The Declaration of Trust further indemnifies the Trustees of
the Trust out of the property of the Trust and provides that they
will not be liable for errors of judgment or mistakes of fact or
law; but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
Ownership of the Trust's Shares
Of the Class C Shares of the Trust outstanding on September
30, 1997, Dean Witter Inc., 5 World Trade Center, New York, NY
10048 held of record 28,481 shares (87.1% of the class). On the
basis of information received from the holder, the Trust believes
that all of such shares are held for the benefit of clients. Of the
Class Y Shares of the Trust outstanding on the same date, Aquila
Management Corporation held of record 10.57 shares (100% of the
class). The Trust's management is not aware of any other person
beneficially owning more than 5% its Class C Shares or Class Y
Shares nor of any person beneficially owning more than 5% of its
Class A Shares as of such date.
Custodian and Auditors
The Trust's Custodian, Bank One Trust Company, N.A. is
responsible for holding the Trust's assets. The Trust's Custodian
is an affiliate of the Adviser.
The Trust's auditors, KPMG Peat Marwick LLP, perform an annual
audit of the Trust's financial statements.
Underwriting Commissions
During the Trust's fiscal year ended June 30, 1997 the
aggregate dollar amount of sales charges on sales of shares of the
Trust was $1,066,813 and the amount retained by the Distributor was
$77,956.
Financial Statements
The financial statements of the Trust for the fiscal year
ended June 30, 1997, which are contained in the Annual Report for
that fiscal year,are hereby incorporated by reference into the
Additional Statement. The financial statements as of the end of the
Trust's fiscal year have been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon is incorporated herein
by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Municipal Bond Ratings
Standard & Poor's. A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment may
take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price
or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization
or other arrangement under the laws of bankruptcy and
other laws affecting creditors rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category
than in higher rated categories.
Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Standard and Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing the
designation SP-1 are deemed very strong or to have strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+)
designation. Notes bearing the designation SP-2 are deemed to have
a satisfactory capacity to pay principal and interest.
Moody's Investors Service. A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's Investment
Grade as MIG 1 through MIG 4. In the case of variable rate demand
obligations (VRDOs), two ratings are assigned; one representing an
evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an
evaluation of the degree of risk associated with the demand
feature. The short-term rating assigned to the demand feature of
VRDOs is designated as VMIG. When no rating is applied to the long
or short-term aspect of a VRDO, it will be designated NR. Issues or
the features associated with MIG or VMIG ratings are identified by
date of issue, date of maturity or maturities or rating expiration
date and description to distinguish each rating from other ratings.
Each rating designation is unique with no implication as to any
other similar issue of the same obligor. MIG ratings terminate at
the retirement of the obligation while VMIG rating expiration will
be a function of each issuer's specific structural or credit
features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality.
Margins of protection are ample although not
so large as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access
for refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of
an investment security is present and
although not distinctly or predominantly
speculative, there is specific risk.
<PAGE>
INVESTMENT ADVISER
Banc One Investment Advisors Corporation
Bank One Center
241 North Central Avenue
Phoenix, Arizona 85004
ADMINISTRATOR AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Philip E. Albrecht
Arthur K. Carlson
Thomas W. Courtney
William L. Ensign
Diana P. Herrmann
John C. Lucking
Anne J. Mills
OFFICERS
Lacy B. Herrmann, President
William C. Wallace, Senior Vice President
Susan A. Cook, Vice President
Kristian P. Kjolberg, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, 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
After November 8, 1997:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Before November 8, 1997:
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TAX-FREE TRUST OF
ARIZONA
A TAX-FREE
INCOME INVESTMENT
LOGO
STATEMENT OF ADDITIONAL INFORMATION
ONE OF THE
AQUILASM GROUP OF FUNDS
