Preliminary Proxy Material
IMPORTANT NOTICE
PLEASE READ IMMEDIATELY
TAX-FREE TRUST OF ARIZONA
380 Madison Avenue, Suite 2300, New York, N.Y. 10017
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
on NOVEMBER 7, 1997
TO OUR SHAREHOLDERS:
The purpose of this Notice is to advise you that an Annual
Meeting of the Shareholders of Tax-Free Trust of Arizona (the
"Trust") will be held:
Place: (a) Ritz/Carlton Phoenix
2401 East Camelback Road
Phoenix, AZ 85016
Time: (b) on November 6, 1997 at 1:00 p.m. local time;
Purposes: (c) for the following purposes:
(i) to elect eight Trustees; each Trustee elected
will hold office until the next annual meeting of
the Trust's shareholders or until his or her
successor is duly elected;
(ii) to ratify (that is, to approve) or reject the
selection of KPMG Peat Marwick LLP as the Trust's
independent auditors for the fiscal year ending
June 30, 1998 (Proposal No. 1);
Please Note:
If you do not expect to attend the Meeting, you are requested to
indicate voting instructions on the enclosed proxy and to date,
sign and return it in the accompanying stamped envelope. To avoid
unnecessary expense to the Trust, your cooperation is requested
in mailing in your proxy no matter how large or small your
holding may be.
<PAGE>
(iii) to consider a proposed new investment
advisory and administration agreement between the
Trust and Aquila Management Corporation, which
currently serves as the Trust's Administrator,
under which it would become the Trust's investment
adviser by contracting with others at its expense,
as well as continuing to provide administrative
services as heretofore, and under which all
advisory fees and administration fees would be
paid to it (Proposal No. 2);
(iv) to consider a proposed new sub-advisory
agreement between Aquila Management Corporation as
Manager and Banc One Investment Advisors
Corporation as Sub-Adviser (Proposal No. 3);
(v) to act upon any other matters which may
properly come before the Meeting at the scheduled
time and place or any adjourned meeting or
meetings.
Who Can
Vote What
Shares: (d) To vote at the Meeting, you must have been a
shareholder on the Trust's records at the close of
business on August 20, 1997 (the "record date").
Also, the number of shares of each of the Trust's
three classes of shares that you held at that time
and the respective net asset values of each class
of shares at that time determines the number of
votes you may cast at the Meeting (or any
adjourned meeting or meetings).
By Order of the Board of Trustees
EDWARD M. W. HINES
Secretary
September 20, 1997
(ii)
TAX-FREE TRUST OF ARIZONA
380 Madison Avenue, Suite 2300, New York, New York 10017
PROXY STATEMENT
INTRODUCTION
This annual meeting of the shareholders of Tax-Free Trust of
Arizona will consider, in addition to the election of Trustees
and the ratification of the selection of the Trust's auditors,
two special proposals of vital importance to the Trust:
* Action upon a proposed new investment advisory and
administration agreement between the Trust and Aquila
Management Corporation, which currently serves as the
Trust's Administrator, under which it will become the
Trust's investment adviser by contracting with others
at its expense, as well as continuing to provide
administrative services as heretofore, and under which
all advisory fees and administration fees would be paid
to it (Proposal No. 2);
* Action on a proposed new sub-advisory agreement between
Aquila Management Corporation and Banc One Investment
Advisors Corporation as Sub-Adviser; (Proposal No. 3)
The Board of Trustees believes that all of these proposals
are in the best interest of the Trust and its shareholders.
Please read the proxy statement and then indicate your vote on
the enclosed proxy card as soon as possible.
INTRODUCTION
The purpose of the Notice (the first two pages of this
document) is to advise you of the time, place and purposes of an
Annual Meeting of the Shareholders of Tax-Free Trust of Arizona
(the "Trust"). The purpose of this proxy statement (all the rest
of this document) is to give you information on which you may
base your decisions as to the choices, if any, you make on the
enclosed proxy card.
A copy of the Trust's most recent annual report will be sent
to you without charge upon written request to the Trust's
Distributor, Aquila Distributors, Inc., 380 Madison Avenue, Suite
2300, New York, NY 10017 or by calling 800-437-1020 toll-free or
212-697-6666.
The Trust's organizer and administrator (the
"Administrator") is Aquila Management Corporation, 380 Madison
Avenue, Suite 2300, New York, NY 10017. The Trust's investment
adviser is Bank One Arizona, NA (the "Adviser"), 241 North
Central Avenue, Phoenix, Arizona. The Adviser is a wholly-owned
subsidiary of BANC ONE CORPORATION, Columbus, Ohio.
This Notice and Proxy Statement are first being mailed on or
about September 20, 1997.
The enclosed proxy card authorizes the persons named (or
their substitutes) to vote your shares; the Trust calls these
persons the "proxy holders." As to the election of Trustees you
may authorize the proxy holders to vote your shares for the
entire slate indicated below by marking the appropriate box on
the proxy card or by merely signing and returning your proxy card
with no instructions. Or, you may withhold the authority of the
proxy holders to vote on the election of Trustees by marking the
appropriate box. Also, you may withhold that authority as to any
particular nominee by striking a line through the nominee's name
on the proxy card.
As to the other matters listed on the proxy card, you may
direct the proxy holders to vote your shares on those proposals
by checking the appropriate box "For" or "Against" or instruct
them not to vote your shares on a proposal by checking the
"Abstain" box. If you return your signed proxy card and do not
check any box on a proposal, the proxy holders will vote your
shares for that proposal. Shares held by brokers in "street name"
and not voted or marked as abstentions will not be counted for
purposes of determining a quorum or the vote on any matter.
You may end the power of the proxy holders to vote your
shares after you have signed and returned your proxy card and
before the power is used by (i) so notifying the Trust in
writing; (ii) signing a new and different proxy card (if the
Trust receives it before the old one is used); or (iii) voting
your shares in person or by your duly appointed agent at the
meeting.
The Trust is sending you this Notice and Proxy Statement in
connection with the solicitation by its Trustees of proxy cards
("proxies") to be used at the Annual Meeting to be held at the
time and place and for the purposes indicated in the Notice or
any adjourned meeting or meetings. The Trust pays the costs of
the solicitation. Proxies are being solicited by the use of the
mails; they may also be solicited by telephone, facsimile and
personal interviews. Brokerage firms, banks and others may be
requested to forward this Notice and Proxy Statement to
beneficial owners of the Trust's shares so that these owners may
authorize the voting of these shares. The Trust will pay these
firms for their out-of-pocket expenses for doing so.
The Trust has three classes of shares outstanding.
Shareholders of the Trust of all three classes are entitled to
vote at the meeting. Each shareholder on the record date is
entitled to one (1) vote for each dollar (and a proportionate
fractional vote for each fraction of a dollar) of net asset value
(determined as of the record date) represented by full and
fractional shares of any class held on the record date. On the
record date the net asset values per share of each of the of the
Trust's classes of shares was Class A Shares, $10.70, Class C
Shares, $10.73 and Class Y Shares $10.72.
On the record date the total number of shares of the Trust
of each class outstanding and entitled to vote was 36,808,273
Class A Shares, 28,009 Class C Shares and 10.4 Class Y Shares.
On the record date, Dean Witter, 5 World Trade Center, New
York, NY 10048 held of record 25,113 Class C Shares (89.7% of the
class) and Alex Brown & Sons, Inc. held of record 1,438 Class C
Shares (5.1% of the Class). On the basis of information received
from the holders, the Trust's management believes that all of the
shares indicated are held for the benefit of clients. Aquila
Management Corporation held of record 10.4 Class Y Shares (100%
of the Class). The Trust's management is not aware of any other
person beneficially owning more than 5% of any class of its
outstanding shares as of such date.
ELECTION OF TRUSTEES
At the Meeting, eight Trustees are to be elected. Whenever
it is stated in this Proxy Statement that a matter is to be acted
on at the Meeting, this means the Meeting held at the scheduled
time or any adjourned meeting or meetings.
Each Trustee elected will serve until the next annual
meeting or until his or her successor is duly elected. The
nominees selected by the Trustees are named in the table below.
See "Introduction" above for information as to how you can
instruct the proxy holders as to the voting of your shares as to
the election of Trustees.
All of the nominees are presently Trustees and were elected
by the shareholders in October, 1996. Mr. Herrmann, Mr. Courtney,
Mr. Ensign and Ms. Mills have been Trustees since the beginning
of the Trust's operations in March 1986, were named as a Trustee
either in the original Declaration of Trust or by such original
Trustees, and were also elected as a Trustee by the Trust's sole
original shareholder, Aquila Management Corporation, the Trust's
Administrator (the "Administrator"). Mr. Albrecht and Mr. Carlson
have been Trustees since 1987. Ms. Herrmann and Mr. Lucking have
been Trustees since 1994. 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
Mr. Herrmann's 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 Trustees are
so designated by an asterisk. The beneficial ownership of shares,
all of which are Class A Shares, indicated below as of the record
date, includes voting and investment control unless otherwise
indicated. Shares are given to the nearest full share. As a group
the officers and Trustees own less than 1% of the Trust's
outstanding shares.
Described in the following material are the name, positions
with the Trust, age as of the record date and business experience
during at least the past five years (other than with the Trust)
of each nominee and all officers of the Trust.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, Age: 68, Shares Owned: 192.4
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: 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; and 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; 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, Age: 72, Shares Owned: 6,520
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, Age: 74, Shares Owned: 4,097
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, Age: 63, Share Owned: 625
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, Age: 68, Shares Owned: 645 (1)
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.
(1) Held jointly with his wife.
Diana P. Herrmann*, Trustee, Age: 39, Shares Owned: 457.8
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, Age: 54, Shares Owned: 1,215.4
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, Age: 58, Shares Owned: 727.3
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, Age: 61
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, Age: 42
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, Age: 35
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, Age: 73
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, Age:61
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, Age: 67
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, Age: 57
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,
Age: 31
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.
[CAPTION]
<TABLE>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquila 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
William T.
Quinsler $8,450 8,450 1
</TABLE>
The Administrator is administrator to the Aquilasm Group of
Funds which consists of tax-free municipal bond funds, money
market funds and two equity funds. As of July 31, 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 is controlled by
Mr. Lacy B. Herrmann, through share ownership directly, through a
trust and by his wife. For the year ended June 30, 1997, fees of
$782,451 were accrued to each of the Adviser under the advisory
agreement and the Administrator under the Trust's administration
agreement. During the fiscal year ended June 30, 1997, Permitted
Payments of $589,361 were made under the Trust's Distribution
Plan to Qualified Recipients with respect to Class A Shares of
the Trust, of which the Distributor received $17,669, and $1,815
of Permitted Payments were made to Qualified Recipients with
respect to Class C Shares of the Trust, of which the Distributor
received $337. The Distributor received $113 under the Trust's
Shareholder Services Plan.
The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond 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 proxy statement, 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.
Other Information on Trustees
The Trustees have appointed an Audit Committee consisting of
all of the Trustees (the "Independent Trustees") who are not
"interested persons," as that term is defined in the 1940 Act.
The Committee (i) recommends to the Board of Trustees what firm
of independent auditors will be selected by the Board of Trustees
(subject to shareholder ratification); (ii) reviews the methods,
scope and result of audits and the fees charged; and (iii)
reviews the adequacy of the Trust's internal accounting
procedures and controls. The Committee held two meetings during
the Trust's last fiscal year. The Board of Trustees does not have
a nominating committee. During the Trust's last fiscal year, the
Board of Trustees held four meetings. All current Trustees were
present for at least 75% of the total number of Board meetings
and Audit Committee Meetings (if such Trustee was a member of
that Committee).
RATIFICATION OR REJECTION OF SELECTION OF
INDEPENDENT AUDITORS
(Proposal No. 1)
KPMG Peat Marwick LLP, which is currently serving as the
Trust's auditors, has been selected by the Trust's Board of
Trustees, including a majority of the Independent Trustees, as
the Trust's independent auditors for the fiscal year ending June
30, 1998, and such selection is submitted to the shareholders for
ratification or rejection.
The firm has no direct or indirect financial interest in the
Trust, the Trust's Adviser or the Trust's Administrator. It is
expected that representatives of the firm will not be present at
the meeting but will be available should any matter arise
requiring their presence.
BACKGROUND AND REASONS FOR
PROPOSALS NO. 2 AND NO. 3
Proposals No. 2 and No. 3 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.
The Board of Trustees believes that the new structure would,
among other things, contribute to the stability, continuity and
quality of local portfolio management, and would improve the
ability of the Trust to obtain various services on beneficial
terms.
Under the proposals, 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 (Proposal No. 2). 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 (Proposal No. 3). 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.
The Board of Trustees believes that it is in the best
interest of the shareholders to provide Aquila with additional
authority to supervise the investment advisory function, with the
power to retain an investment sub-adviser (subject to the
approval of the Board of Trustees and the shareholders) and to
terminate a sub-adviser (subject to the approval of the Board of
Trustees) if it were to deem doing so to be in the best interests
of the Trust and its shareholders. The Board of Trustees
considers that this authority will improve Aquila's ability to
obtain for the Trust benefits of stability, continuity and
quality of portfolio management.
In addition, Aquila has advised the Board of Trustees that
it plans to propose a similar reorganization to other funds in
the Aquilasm Group of Trusts. If, as expected, those proposals
are adopted, the following additional reasons support the
proposed reorganization, although there can be no assurance that
they will be realized:
* There would be heightened public recognition of the
Aquilasm Group and its funds, and better public
relations possibilities.
* The new arrangements would benefit the entire group
because it would tend to increase the negotiating power
of Aquila in dealing with service providers to the
funds in various ways.
* The arrangements potentially increase the
standardization of procedures, e.g. compliance, among
the advisers.
The Board of Trustees noted that Aquila is the founder and
organizer of the Trust and has continuously served as its
administrator since 1992. Since 1985, Aquila has formed and
sponsored seven state-specific tax-free municipal bond funds,
which have grown to a total of $1.9 billion in combined assets.
These funds and their years of inception are Hawaiian Tax-Free
Trust (1985), Tax-Free Trust of Oregon (1986), the Trust (1986),
Tax-Free Fund of Colorado (1987), Churchill Tax-Free Fund of
Kentucky (1987), Narragansett Insured Tax-Free Income Fund (1992)
and Tax-Free Fund For Utah (1992). Aquila has also sponsored five
money market funds and two regional capital appreciation equity
funds. As of July 31, 1997, the Aquilasm Group of Trusts had
combined assets of approximately $2.8 billion.
By founding the Trust and other state-specific tax-free
municipal bond funds, Aquila has been able to offer to individual
investors in various states a locally-managed, quality-oriented
portfolio of municipal obligations, providing income that is
exempt from state as well as federal income taxes.
Aquila advised the Board of Trustees that a critical
component of high-quality service to investors in its funds is a
close familiarity with the local economy and market conditions
that can only be provided by experienced local portfolio
management. Aquila found that investment advisers that were a
part of, or associated with, major local financial institutions
had the experience and resources to provide this management. The
Aquila bond funds are unusual compared with other such funds in
emphasizing local portfolio management, which has been a major
factor in their acceptance by investors.
Recent years have seen a consolidation in the financial
services industry that has resulted in many prominent local banks
becoming parts of larger national institutions. A number of these
transaction have affected the local advisers of other Aquila bond
funds. In every instance, Aquila has been able to secure
commitments to continuous local management, but in some instances
it became necessary for Aquila to seek out other organizations to
provide the continuity and quality of service that investors
expect. The Board of Trustees believes that by providing Aquila
with explicit authority to supervise the investment advisory
function, the Board would better enable Aquila to ensure
continuity and quality of local portfolio management.
Another anticipated advantage of the proposed arrangements
is that, to the extent extended, as planned, to other Aquila bond
funds, Aquila expects to improve its ability to negotiate
beneficial terms with service providers, such as transfer agents
and pricing services, under substantially uniform agreements that
would provide services to all of the bond funds. Because of the
combined size of the bond funds, Aquila expects that its
collective bargaining position would be enhanced and that costs
for these services may be lower than would be obtained if these
arrangements were negotiated on a piecemeal basis. There can be
no assurance that this will occur.
The Board of Trustees believes that making Aquila Manager
has definite organizational benefits, including a better
structure for handling any possible future changes. The costs of
the change in structure will be borne by Aquila and not the
Trust.
In approving of the proposed new arrangements, the Board of
Trustees stipulated that the Sub-Advisory Agreement could provide
for its termination by the Adviser upon reasonable notice,
provided, however, that the Adviser should not terminate the Sub-
Advisory Agreement (and any attempt by the Adviser to terminate
such agreement would be null and void) unless, prior to giving
notice to the Sub-Adviser of such termination, either (i) the
Advisory Agreement had been reapproved by the Board of Trustees
of the Trust, in the manner described in Section 15 of the 1940
Act, in contemplation of the Adviser's managing the investment
portfolio of the Trust without the assistance of a Sub-Adviser;
(ii) a new Sub-Advisory Agreement, to take effect upon the
termination of the existing Sub-Advisory Agreement, had been
approved by the Board of Trustees and the shareholders of the
Trust as contemplated by Section 15 of the 1940 Act; (iii) the
Board had authorized such termination; or (iv) the Adviser had
complied with such other or additional directives and
authorizations of the Board with respect to such termination as
may from time to time be in effect.
Other Changes
The current advisory agreement and the Administration
Agreement provide that fees payable thereunder shall not exceed
certain amounts or percentages of the Trust's net assets or
income. These provisions, which were required by certain State
securities laws, have had no effect on the Trust, due to its
size. The state securities laws were preempted by Federal
legislation in 1996 and accordingly, these provisions, which are
no longer required by law would not be included in the new
agreements.
Other Information About Aquila
Aquila, founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). Aquila's shares are owned as follows:
Elizabeth B. Herrmann 35%
Lacy B. Herrmann 25%
Elizabeth B. Herrmann
1993 Annuity Trust 40%
The names, addresses and principal occupations of the
principal executive officer and each director of Aquila are as
follows:
Name Position with Aquila
Lacy B. Herrmann Chairman, Chief Executive Officer
and Director
Diana P. Herrmann President, Chief Operating Officer
and Director
Elizabeth B. Herrmann Director.
The address of all of these individuals is 380 Madison
Avenue, Suite 2300, New York, NY 10017.
Aquila Distributors, Inc. (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.
Other Information about BOIAC
The Trustees noted that Banc One Investment Advisors
Corporation ("BOIAC") is a wholly-owned subsidiary of Bank One,
NA, in turn a wholly owned subsidiary of Banc One Ohio
Corporation, a bank holding company, which is in turn a wholly
owned subsidiary of BANC ONE CORPORATION ("Banc One"), also a
bank holding company. The Trust has been advised that no single
shareholder owns more than 10% of the outstanding voting
securities of Banc One.
The Trustees noted that Banc One currently has affiliate
banking organizations in Kentucky, Arizona, Colorado, Illinois,
Indiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. On a consolidated basis, Banc One had assets of over
$101.8 billion as of December 31, 1996. The Adviser was
responsible for management of over $5.2 billion of investments in
municipal obligations, of which $2.3 billion were held in mutual
funds. The Adviser services Arizona clients at offices in
Phoenix.
The Trustees noted that BOIAC been the Trust's adviser since
1996, when it assumed advisory responsibilities from an
affiliate, Bank One Arizona, N.A., with no change in personnel
responsible for services to the Trust. Bank One Arizona had acted
as the Trust's investment adviser, (pursuant to an agreement
approved by the shareholders of the Trust in October, 1992) since
1993, when BANC ONE CORPORATION acquired the Trust's former
investment adviser Valley National Bank, N.A., which had acted as
such since inception of the Trust in 1986.
The Trustees noted that Todd Curtis is the officer of BOIAC
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 and held similar positions with The Valley National Bank
of Arizona, NA. He is a member of the BOIAC'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.
BOIAC has advised the Trust that it 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 BOIAC,
it is permitted under current Federal banking laws to perform the
services for the Trust required by the current advisory agreement
and the proposed sub-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 in those capacities.
In the event BOIAC is prohibited from acting as the Trust's
investment sub-adviser, it is probable that the Trust's Manager
or the Trustees would recommend to the shareholders the selection
of another qualified sub-adviser.
BOIAC 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 BOIAC may not be involved in the promotion or
distribution of shares of the Trust and that Trust accounts
administered by BOIAC 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,
BOIAC in its capacity as a fiduciary, may purchase shares of the
Trust. Collective investment funds operated by BOIAC may not
purchase shares of the Trust.
The Chief Executive Officer and directors of BOIAC are as
follows:
Position(s)
Held with
Name Banc One
Advisors Principal Occupation
Michael J. Director Executive Vice
McMennamin President and Chief Financial
Officer BANC ONE CORPORATION
Frederick L. Director Chairman and Chief Executive
Cullen Officer, Bank One, NA and
President and Chief Executive
Officer, Banc One Ohio
Corporation
David R. Director Chairman and Chief Executive
Meuse Officer, Banc One Capital
Holdings Corporation
Garrett Director President and Chief Executive
Jamison Officer, Fiduciary and
Specialized Services Group,
Banc One Investment Management
and Trust Group
Geoff Director Senior Managing Director, Banc
Von Kuhn One Institutional Asset
Management Services Group,
Banc One Investment Management
and Trust Group
Michael V. Secretary Attorney, BANC ONE CORPORATION
Wible
David J. Chairman and Chairman and Chief Executive
Kundert Chief Officer, Banc One Investment
Executive Management and Trust Group
Officer
The address of these persons is 1111 Polaris Parkway,
Columbus, OH 43240.
BOIAC acts as investment adviser to the following investment
companies, which have similar investment objectives to those of
the Trust:
Annual Fee
(With Waiver/
Fund Name Net Assets Without Waivers)
The One Group $486,664,000 .35%/.45%
Municipal Income Fund
The One Group $462,853,000 .40%/.60%
Intermediate Tax-Free
Bond Fund
The One Group Ohio $163,602,000 .30%/.60%
Municipal Bond Fund
The One Group Kentucky $124,783,000 .40%/.45%
Municipal Bond Fund
The One Group Arizona $257,255,000 .40%/.45%
Municipal Bond Fund
The One Group Louisiana $165,671,000 .40%/.60%
Municipal Bond Fund
The One Group West $ 97,692,000 .40%/.45%
Virginia Municipal
Bond Fund
Churchill Tax-Free $114,050,222 .28%/.33%
Fund of Kentucky
Fee Arrangements
There will be no increase in overall management fees paid by
the Trust as a result of the new arrangements. 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.
Annual Fee Rates
(Fee rates are annual rates as a percentage of the Trust's
average daily net assets.)
<TABLE>
<CAPTION>
Under
arrangements
Type of payment Under arrangements if Proposals 2
made by the Trust currently in effect and 3 are
adopted
<S> <C> <C>
Advisory fee 0.20 of 1% 0.40 of 1%
(Sub-Advisory fee
paid by the Adviser) 0 (0.20 of 1%)
Administration fee 0.20 of 1% 0
Total Payments
by the Trust 0.40 of 1% 0.40 of 1%
</TABLE>
The following table shows the advisory and administration
fees the Trust paid during its last fiscal year, the fees it
would have paid if the proposed arrangements had been in effect
during that fiscal year and the percentage change.
<TABLE>
<CAPTION>
Type of payment Amount Amount that would Difference between
by the Trust actually paid have been paid the old and new
if the new arrangements as a
arrangements percentage of the
had been in effect old arrangements
<S> <C> <C> <C>
Advisory fee $782,451 $1,564,902 200%
(Sub-Advisory
fee Paid by
the Adviser) 0 ($782,451) N/A
Administration
fee $782,451 0 0%
Total payments $1,564,902 $1,564,902 0%
</TABLE>
Proposals No. 2 and No. 3 are designed to operate together.
Neither separately will have the intended results. Neither
proposal will be implemented unless both are approved by
shareholders. Accordingly, the proposed new Investment Advisory
and Administration Agreement and the proposed Sub-Advisory
Agreement will go into effect upon approval by shareholders of
both Proposals No. 2 and 3. If these proposals are not both
approved, the current arrangements will remain in effect. The
Board of Trustees will consider what further action is
appropriate, which could include calling another shareholder
meeting.
The Trustees also noted that in addition to the foregoing
matters, Aquila has more than twelve years of experience in
forming and administering tax-exempt municipal bond funds,
including identifying and securing the services of competent
local investment advisers. The Trustees also noted that Aquila
had secured the agreement of BOIAC to serve as the Trust's Sub-
Adviser on the terms described in Proposal No. 3.
For the reasons set forth above, at an in-person meeting
called and held for the purpose in June, 1997, the Board of
Trustees, including a majority of the Trustees who are not
parties to the Advisory and Administration Agreement or the Sub-
Advisory Agreement or "interested persons" (as defined in the
1940 Act) of any such party (the "Independent Trustees"), voted
to approve the Advisory Agreement and Sub-Advisory Agreement.
ACTION ON A NEW INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT WHICH WILL PROVIDE
THAT ALL ADVISORY FEES AND ADMINISTRATION
FEES WILL BE PAID TO AQUILA MANAGEMENT
CORPORATION ALTHOUGH COMBINED ADVISORY AND
ADMINISTRATION FEES WILL REMAIN AT THE
CURRENT LEVEL
(PROPOSAL NO. 2)
The new Investment Advisory and Administration Agreement
(the "Advisory Agreement") has several parts, most of which are
substantially identical to corresponding provisions in the
Trust's former advisory agreements and administration agreement.
The Advisory 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 Adviser has the power to delegate its advisory functions to a
Sub-Adviser, which it will employ at its own expense. The
Advisory Agreement contains provisions relating to administrative
services that are substantially identical to those contained in
the Trust's current and prior administration agreements. In the
following description, Aquila is referred to as the "Manager."
Description of the Investment Advisory and Administration
Agreement
The Advisory 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 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 will delegate all of
such functions to BOIAC under the proposed Sub-Advisory
Agreement. See "Background and Reasons for Proposals No. 2 and
No. 3."
The Advisory 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) maintain the Trust's books and records, (other than
accounting 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;
(iv) 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;
(v) 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 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 Proposal No. 3.
The Advisory Agreement provides that the Manager shall, at
its own expense, provide office space, facilities, equipment, and
personnel for the performance of its functions thereunder and
shall pay all compensation of Trustees, officers, and employees
of the Trust who are affiliated persons of the Manager.
The Trust shall bear 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 and expenses not
expressly assumed by the Manager under the agreement or otherwise
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
sub-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.
The Advisory 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 Agreement provides that it will become
effective on the date of its approval by the shareholders of the
Trust and will, unless terminated as hereinafter provided,
continue in effect until the December 31 next preceding the
second anniversary of the effective date of the Advisory
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
Agreement or "interested persons" (as defined in the 1940 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 Advisory 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 1940 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 1940
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 0.27 of 1% of
such net asset value. The Manager agrees that it will not
exercise its termination rights for at least three years from the
effective date of the Advisory Agreement, except for regulatory
reasons.
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENT DESCRIBED ABOVE BE
APPROVED. See "Background and Reasons for Proposals No. 2 and No.
3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Trust, is
required for the approval of this Proposal No. 2. Under the 1940
Act, the vote of the holders of a majority of the outstanding
shares of the Trust means the vote of the holders of the lesser
of (a) 67% or more of the shares of the Trust present at the
Meeting or represented by proxy if the holders of more than 50%
of such shares are so present or represented, or (b) more than
50% of the outstanding shares of the Trust, with one (1) vote for
each dollar ( and a proportionate fractional vote for each
fraction of a dollar) of net asset value (determined as of the
record date) represented by full and fractional shares of all of
the Trust's three classes of shares.
ACTION UPON A PROPOSED NEW SUB-ADVISORY
AGREEMENT BETWEEN AQUILA MANAGEMENT
CORPORATION AS MANAGER AND BOIAC AS SUB-
ADVISER
(PROPOSAL NO. 3)
The proposed Sub-Advisory Agreement (the "Sub-Advisory
Agreement") has substantially the same terms as the current
advisory Agreement, except that the Sub-Advisory Agreement is
with the Manager and not with the Trust, the compensation of the
Sub-Advisor is paid by the Manager and not by the Trust and the
state-imposed expense limitation described above has been
eliminated.
The Sub-Advisory Agreement provides that the Manager
appoints BOIAC as Sub-Adviser to render, to the Manager and to
the Trust, investment research and advisory services as set forth
below under the supervision of the Manager and subject to the
approval and direction of the Board of Trustees of the Trust.
The Sub-Advisory Agreement provides that the Sub-Adviser will act
as managerial investment adviser to the Trust with respect to the
investment of the Trust's assets, and will supervise and arrange
the purchase of securities for and the sale of securities held in
the portfolio of the Trust.
The Sub-Advisory Agreement provides in general that subject
to the direction and control of the Manager and the Board of
Trustees of the Trust, the Sub-Adviser 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;
(iv) either keep 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, to delegate these accounting duties in whole
or in part to a company satisfactory to the Trust.
(v) 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; and
(vi) consult with the Manager in connection with its duties
thereunder.
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 and to the Trust the benefit of its
best judgment and effort in rendering services thereunder, 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 under the Agreement 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 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 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 second 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 1940 Act) or the termination of the
Advisory and Administration 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.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED SUB-ADVISORY
AGREEMENT DESCRIBED ABOVE BE APPROVED. See "Background and
Reasons for Proposals No. 2 and No. 3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Trust, is
required for the approval of this Proposal No. 3. See Proposal
No. 2 for a description of such a majority.
RECEIPT OF SHAREHOLDER PROPOSALS
Under the proxy rules of the Securities and Exchange
Commission, shareholder proposals meeting tests contained in
those rules may, under certain conditions, be included in the
Trust's proxy statement and proxy card for a particular annual
meeting. One of these conditions relates to the timely receipt by
the Trust of any such proposal. Under these rules, proposals
submitted for inclusion in the proxy material for the Trust's
next annual meeting after the meeting to which this Proxy
Statement relates must be received by the Trust not less than 120
days before the anniversary of the date stated in this Proxy
Statement for the first mailing of this Proxy Statement. The date
for such submission could change, depending on the scheduled date
for the next annual meeting; if so, the Trust will so advise you.
The fact that the Trust receives a shareholder proposal in a
timely manner does not insure its inclusion in the Trust's proxy
material, since there are other requirements in the proxy rules
relating to such inclusion.
OTHER BUSINESS
The Trust does not know of any other matter which will come
up for action at the Meeting. If any other matter or matters
properly come up for action at the Meeting, including any
adjournment of the Meeting, the proxy holders will vote the
shares which the proxy cards entitle them to vote in accordance
with their judgment on such matter or matters. That is, by
signing and returning your proxy card, you give the proxy holders
discretionary authority as to any such matter or matters.
<PAGE>
TAX-FREE TRUST OF ARIZONA
PROXY FOR SHAREHOLDERS MEETING
NOVEMBER 6, 1997
PROXY SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned shareholder of TAX-FREE TRUST OF ARIZONA
(the "Trust") does hereby appoint LACY B. HERRMANN, DIANA P.
HERRMANN and EDWARD M. W. HINES, or either of them, as attorneys
and proxies of the undersigned, with full power of substitution,
to attend the Annual Meeting of Shareholders of the Trust to be
held on November 6, 1997, at The Ritz-Carlton, 2401 East
Camelback Road, Phoenix, AZ 85016 at 1:00 p.m. local time, and at
all adjournments thereof, and thereat to vote the shares held in
the name of the undersigned on the record date for said meeting
on the matters listed below.
Please mark your proxy, date and sign it below and return it
promptly in the accompanying envelope which requires no postage
if mailed in the United States.
Management recommends a vote FOR all nominees listed below
and FOR the proposals listed below. The shares represented
hereby will be voted as indicated below or FOR if no choice is
indicated.
As to any other matter said attorneys shall vote in
accordance with their best judgment.
Election of Trustees---.
__
[__] FOR all nominees listed below
__
[__] VOTE WITHHELD for all nominees listed
below
(Instructions: To withhold authority to vote for any one or more
of the nominees, strike a line through the name of that nominee
or the names of such nominees in the list below.)
LACY B. HERRMANN; PHILIP E. ALBRECHT; ARTHUR K. CARLSON;
THOMAS W. COURTNEY; WILLIAM L. ENSIGN; DIANA P. HERRMANN;
JOHN C. LUCKING; ANNE J. MILLS;
Action on selection of KPMG Peat
Marwick as independent
auditors;
__ __ __
(Proposal No. 1) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Investment
Advisory and Administration Agreement with
Aquila Management Corporation
__ __ __
(Proposal No. 2) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Sub-Advisory
Agreement with Banc one Investment
Advisors Corporation
Dated: ____________ ______, 1997
Month Day
__________________________________
SIGNATURE(S)
__________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing
as a custodian, attorney, executor, administrator, trustee,
guardian, etc., please sign your full title as such. Joint
owners should each sign.
