Aquilasm Group
of Funds
Tax-Free Trust of Arizona
380 Madison Avenue Suite 2300
New York, NY 10017
800-437-1020
212-697-6666
Statement
of Additional
Information
November 1, 1999
as supplemented December 13, 1999
This Statement of Additional Information (the "SAI") is not
a Prospectus. There are two Prospectuses for the Trust dated
November 1, 1999: 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 Shares ("Class Y Shares") and Financial Intermediary Class
Shares ("Class I Shares") of the Trust. References in the SAI to
"the Prospectus" refer to either of these Prospectuses. The SAI
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, PFPC Inc., by writing to it at: 400 Bellevue
Parkway, Wilmington, DE 19809 or by calling at the following
number:
800-437-1000 toll free
or from Aquila Distributors, Inc., the Trust's Distributor, by
writing to it at
380 Madison Avenue, Suite 2300, New York, New York 10017;
or by calling: 800-437-1020 toll free
or 212-697-6666
Financial Statements
The financial statements for the Trust for the year ended
June 30, 1999, which are contained in the Annual Report for that
fiscal year, are hereby incorporated by reference into the SAI.
Those financial statements have been audited by KPMG LLP,
independent auditors, whose report thereon is incorporated herein
by reference. The Annual Report of the Trust for the fiscal year
ended June 30, 1999, can be obtained without charge by calling
any of the toll-free numbers listed above. The Annual Report will
be delivered with the SAI.
TABLE OF CONTENTS
Trust History
Investment Strategies and Risks
Trust Policies
Management of the Trust
Ownership of Securities
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Capital Stock
Purchase, Redemption, and Pricing of Shares
Additional Tax Information
Underwriters
Performance
Appendix A
<PAGE>
TAX-FREE TRUST OF ARIZONA
Statement of Additional Information
TRUST HISTORY
The Trust is a Massachusetts business trust formed in 1986.
The Trust is an open-end, non-diversified management
investment company.
INVESTMENT STRATEGIES AND RISKS
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.
Rating agencies consider municipal obligations rated in the
fourth highest credit rating to be of medium quality. Thus, they
may present investment risks which do not exist with more highly
rated obligations. Such obligations possess less attractive
investment characteristics. 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.
See Appendix A to this SAI 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, 1999, in Arizona
Obligations in the various rating categories:
Highest rating (1) . . . . . . . . . . . . . . . . . . . . .55.8%
Second highest rating (2). . . . . . . . . . . . . . . . . .28.1%
Third highest rating (3) . . . . . . . . . . . . . . . . . .10.7%
Fourth highest rating (4). . . . . . . . . . . . . . . . . . 3.9%
Not rated: . . . . . . . . . . . . . . . . . . . . . . . . . 1.5%
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.
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) owns 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.
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, which is marked to market every business
day. On delivery dates for such transactions, the Trust will
meet its commitments by selling the assets 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 Sub-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 the Trust does not presently do so and may in fact
never do so, it 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. 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 Securities 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-traded 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 Sub-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 has 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 is
also 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 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 restrictions it has committed to
pursuant to 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 from qualifications 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 as to its Futures and options activities due to
requirements other than those described in this paragraph; the
Trust will, as to long positions, be required to abide by the
more restrictive of the two requirements.) 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.
The "sale" of a Future means the acquisition by the Trust of
an obligation to deliver an amount of cash equal to a specified
dollar amount times the difference between the value of the index
or government security at the close of the last trading day of
the Future and the price at which the Future is originally struck
(which the Trust anticipates will be lower because of a
subsequent rise in interest rates and a corresponding decline in
the index value). This is referred to as having a "short" Futures
position. The "purchase" of a Future means the acquisition by the
Trust of a right to take delivery of such an amount of cash. In
this case, the Trust anticipates that the closing value will be
higher than the price at which the Future is originally struck.
This is referred to as having a "long" futures position. No
physical delivery of the bonds making up the index or the U.S.
government securities, as the case may be, is made as to either a
long or a short futures position.
TRUST POLICIES
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 the 1940 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 and in "Investment Strategies and Risks" in the
SAI), 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 Fund, its Adviser or Sub-Adviser who individually own
beneficially more than 0.5% 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.
5. 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.
6. 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.
7. 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.
8. 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.
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.
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 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.
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, the Trust is unable to
predict what rate the Trust will have in any particular period or
periods, although such rate is not expected to exceed 100%.
However, the rate could be substantially higher or lower in any
particular period.
MANAGEMENT OF THE TRUST
The Board of Trustees
The business and affairs of the Trust are managed under the
direction and control of its Board of Trustees. The Board of
Trustees has authority over every aspect of the Trust's
operations, including approval of the advisory and sub-advisory
agreements and their annual renewal, the contracts with all other
service providers and payments under the Trust's Distribution
Plan and Shareholder Services Plan.
Trustees and Officers
The Trustees and officers of the Trust, their ages, their
affiliations, if any, with the Manager or the Distributor and
their principal occupations during at least the past five years
are set forth below. None of the Trustees or officers of the
Trust is affiliated with the Sub-Adviser. Mr. Herrmann is an
interested person of the Trust as that term is defined in the
Investment Company Act of 1940 (the "1940 Act") as an officer of
the Trust and a director, officer and shareholder of the Manager
and the Distributor. Ms. Herrmann is an interested person of the
Trust as an officer of the Trust and of the Manager and as a
shareholder of the Distributor. Each is also an interested person
as a member of the immediate family of the other. Mr. Carlson is
an interested person of the Trust as a security holder of the
Sub-Adviser's parent, BANK ONE CORPORATION.
Lacy B. Herrmann* Chairman Founder and Chairman of
380 Madison Avenue of the the Board of Aquila
New York, New York Board of Management Corporation,
10017 Trustees the sponsoring
Age: 70 organization and Manager
or Administrator and/or
Adviser or Sub-Adviser to
the Aquila Money-Market
Funds, the Aquila Bond
Funds and the Aquila
Equity Funds, and
Founder, Chairman of the
Board of Trustees and
(currently or until 1998)
President of each since
its establishment,
beginning in 1984;
Director of Aquila
Distributors, Inc.,
distributor of the above
funds, since 1981 and
formerly Vice President
or Secretary, 1981-1998;
President and a Director
of STCM Management
Company, Inc., sponsor
and sub-adviser to CCMT;
Founder and Chairman of
several other money
market funds; Director or
Trustee of OCC Cash
Reserves, Inc. and Quest
For Value Accumulation
Trust, and Director or
Trustee of Oppenheimer
Quest Value Fund, Inc.,
Oppenheimer Quest Global
Value Fund, Inc. and
Oppenheimer 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.
Arthur K. Carlson* Trustee Retired; Advisory
8702 North Via La Serena Director of the
Paradise Valley, Arizona Renaissance Companies
85253 (design and construction
Age: 77 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, Tax-Free
Trust of Arizona (this
Trust) and Pacific
Capital Cash Assets Trust
since 1987, of Pacific
Capital Tax-Free Cash
Assets Trust and Pacific
Capital U.S. Government
Securities 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 past
Director of Mercy
Healthcare of Arizona,
Phoenix, Arizona;
Director of Northern
Arizona University
Foundation since 1990,
presently or formerly an
officer and/or director
of various other
community and
professional
organizations.
Thomas W. Courtney Trustee President of Courtney
P.O. Box 8186 Associates, Inc., a
Naples, Florida 33941 venture capital firm,
Age: 66 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,
of Tax-Free Trust of
Arizona (this Trust)
since 1986 and of Pacific
Capital Tax-Free Cash
Assets Trust and Pacific
Capital U.S. Government
Securities Cash Assets
Trust since 1988; Trustee
of numerous Oppenheimer
Capital and Oppenheimer
Management Funds.
William L. Ensign Trustee Planning and
766 Holly Drive North Architectural
Annapolis, MD 20401 Consultant; Acting
Age: 70 Architect of the United
States Capital 1995-1997;
Assistant Architect of
the United States Capital
1980-1995; previously
President and CEO, McLeod
Ferrara Ensign, an
international planning
and design firm based in
Washington DC; Fellow and
former Director of the
American Institute of
Architects; District of
Columbia Zoning
Commissioner 1989-1997;
member, U.S. Capitol
Police Board 1995-1997,
National Advisory Council
on Historic Preservation
1989-1997, National
Capital Memorial
Commission 1989-1997;
Acting Director of the
U.S. Botanic Garden
1995-1997; Trustee,
National Building Museum
1995-1997; Trustee of
Tax-Free Trust of Arizona
(this Trust) since 1986
and of Tax-Free Fund For
Utah since 1991; Trustee
of Oxford Cash Management
Fund, 1983-1989.
Diana P. Herrmann* President President and Chief
380 Madison Avenue Trustee Operating Officer of the
New York, New York Manager since 1997,
10017 a Director since 1984,
Age: 41 Secretary since 1986 and
previously its Executive
Vice President, Senior
Vice President or Vice
President, 1986-1997;
President of various
Aquila Bond and
Money-Market Funds since
1998; Assistant Vice
President, Vice
President, Senior Vice
President or Executive
Vice President of Aquila
Money-Market, Bond and
Equity Funds since 1986;
Trustee of a number of
Aquila Money-Market, Bond
and Equity Funds since
1995; Trustee of Reserve
Money-Market Funds since
1999 and Reserve Private
Equity Series since 1998;
Assistant Vice President
and formerly Loan Officer
of European American
Bank, 1981-1986; daughter
of the Trust's Chairman;
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 President, Econ-Linc, an
7537 N. Central Av. economic consulting firm,
Phoenix, Arizona since 1995; Consulting
850206 Economist, Bank One
Age: 56 Arizona, formerly Valley
National Bank of Arizona)
1994-1996; Chief
Economist, Valley
National Bank of Arizona,
1987-1994; Municipal bond
analyst and government
securities institutional
sales representative,
Valley National Bank of
Arizona, 1984-1987;
Financial Analyst, Phelps
Dodge Corporation (a
mining company)
1980-1984; Director of
New Mexico and Arizona
Land Company since 1993;
Director of Northern
Arizona University
Investment Committee
since 1997; Director SANU
Resources and SHRI
(privately held mining
and exploration
companies) since 1996;
Director: Arizona
Historical Foundation and
The Arizona Mining and
Mineral Museum
Foundation. Member: Joint
Legislative Budget
Committee Economic
Advisory Panel; Western
Blue Chip Economic
Forecast Panel; The
Economic Club of Phoenix;
The Arizona Economic
Roundtable; The National
Association of Business
Economists and the
National Association of
Corporate Directors.
Anne J. Mills Trustee Vice President for
7030 East Shooting Business Affairs of
Star Way, Scottsdale Ottawa University since
Arizona 85262 1992; Director of
Age: 60 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,
1994-1997; Director of
the American Baptist
Foundation 1985-1996 and
since 1998; Trustee of
Brown University 1992-
1997; Trustee of
Churchill Cash Reserves
Trust since 1985, of
Tax-Free Trust of Arizona
(this Trust) since 1986,
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.
Susan A. Cook, Senior Registered Representative
6220 E. Thomas Road Vice of Aquila Distributors,
Scottsdale, Arizona President Inc. since 1993; Account
85251 Executive, SG Cowen &
Age: 44 Company, Members of the
New York Stock Exchange,
1988-1991. Institutional
Sales at Robertson,
Stephens and Montgomery
Securities, 1981-1986.
Kimball L. Young, Senior Co-Founder of Lewis
2049 Herbert Avenue, Vice Young Robertson &
Salt Lake City, Utah President Burningham,Inc., an NASD
84108 licensed broker dealer
Age: 53 providing public finance
services to Utah local
governments 1995-present.
Senior Vice President of
Tax-Free Trust of Arizona
(this Trust), Tax-Free
Fund For Utah and Aquila
Rocky Mountain Equity
Fund. Formerly Senior
Vice President-Public
Finance, Kemper
Securities Inc., Salt
Lake City, Utah,
1979-1984.
Alan R. Stockman Vice Vice President of
6220 E. Thomas Road President Tax-Free Trust of Arizona
Scottsdale, Arizona (this Trust) and Aquila
Age: 45 Rocky Mountain Equity
Fund since 1999; Bank One
Commercial Client
Services, 1997-1999;
National Bank of Arizona
Account Executive (Zions
Investment Securities
Inc.), Phoenix, Arizona
1996-1997; Investment
Department Manager,
National Bank of Alaska,
Anchorage, Alaska
1984-1995.
Rose F. Marotta Chief Chief Financial Officer
380 Madison Avenue Financial of the Aquila Money-
New York, New York Officer Market, Bond and Equity
10017 Funds since 1991 and
Age: 75 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 Manager since 1984
and of the Distributor
since 1985.
Richard F. West Treasurer Treasurer of the Aquila
380 Madison Avenue, Money-Market, Bond
New York, New York 10017 and Equity Funds and
Age: 63 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 Partner of Hollyer Brady
551 Fifth Avenue Smith Troxell Barrett
New York, New York 10176 Rockett Hines & Mone
Age: 59 LLP, attorneys, since
1989 and counsel,
1987-1989; Secretary of
the Aquila Money-Market,
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 Assistant Secretary of
380 Madison Avenue Secretary the Aquila Money-Market,
New York, New York Bond and Equity Funds
10017 since 1995 and Vice
Age: 59 President of the Aquila
Money-Market Funds since
1990; Vice President of
the Manager 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.
The Trust does not currently pay fees to any of the Trust's
officers or to Trustees affiliated with the Manager or the
Sub-Adviser. For its fiscal year ended June 30, 1999, the Trust
paid a total of $70,423 in compensation and reimbursement of
expenses to the Trustees. No other compensation or remuneration
of any type, direct or contingent, was paid by the Trust to its
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 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.
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Trust Group serves
Arthur K. Carlson $8,904 $57,550 7
Thomas W. Courtney $9,450 $47,304 5
William L. Ensign $10,516 $13,408 2
John C. Lucking $9,150 $9,150 1
Anne J. Mills $10,670 $34,572 6
OWNERSHIP OF SECURITIES
Of shares of the Trust outstanding on August 2, 1999, Zions
First National Bank, P.O. Box 30880, Salt Lake City, Utah held of
record 204,435 Class Y Shares (8.84% of the class). On the basis
of information received from those holders, the Trust's
management believes that all of such shares are held for the
benefit of clients. The Trust's management is not aware of any
other person owning of record or beneficially 5% or more of the
shares of any class of Trust's outstanding shares as of that
date.
Management Ownership
As of the date of this SAI, all of the Trustees and officers
as a group owned less than 1% of its outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
Information about the Sub-Adviser, the Manager and the
Distributor
Management Fees
During the fiscal years ended June 30, 1999, 1998 and 1997
the Trust incurred Management fees as follows:
Manager Sub-Adviser
1999 $1,605,996
1998 $279,112(1) $279,112(1)
$1,022,516
1997 $782,451(1) $782,451(1)
(1) Paid under the advisory and administration agreements
then in effect.
Aquila Distributors, Inc. 380 Madison Avenue, Suite 2300,
New York, NY 10017 is the Trust's Distributer. 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.
The shares of the Distributor are owned 72% by Mr. Herrmann
and other members of his immediate family, 24% by Diana P.
Herrmann and the balance by an officer of the Distributor.
The 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 also 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.
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 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.
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 1940 Act) of
the voting securities of the Trust outstanding and entitled to
vote. The specific portions of the Advisory and Administration
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 and Administration
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 0.26 of 1% of such net asset value.
The Sub-Advisory Agreement
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 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 by the Sub-Adviser, the
Manager agrees to provide the Sub-Adviser the benefits of such
indemnification.
The Sub-Advisory Agreement contains provisions relating to
brokerage allocation and other practices described below.
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 became effective on May 1, 1998
and provides that it shall, unless terminated as therein
provided, continue in effect until the June 30 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
In 1971 the United States Supreme Court held in Investment
Company Institute v. Camp that the federal statute commonly
referred to as the Glass-Steagall Act prohibits a national bank
from operating a fund for the collective investment of managing
agency accounts. Subsequently, the Board of Governors of the
Federal Reserve System(the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such
decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company
Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment
company continuously engaged in the issuance of its Shares, but
(b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to
such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System
v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies. In the Board of
Governors case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
investment companies, a national bank performing investment
advisory services for an investment company would not violate the
Glass-Steagall Act. In addition, state securities laws on this
issue may differ from the interpretations of federal law
expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
The Sub-Adviser has represented to the Trust that it
possesses the legal authority to perform the investment advisory
services contemplated by the agreement and described in the
Prospectus and the Additional Statement without violation of
applicable statutes and regulations. Future changes in either
federal or state statutes and regulations relating to the
permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further
judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent or
restrict the Sub-Adviser from continuing to perform such services
for the Trust. Depending upon the nature of any changes in the
services which could be provided by the Sub-Adviser, the Board of
Trustees of the Trust would review the Trust's relationship with
the Sub-Adviser and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative
action prohibit or restrict the proposed activities of BANK ONE
CORPORATION subsidiary banks or their correspondent banks in
connection with customer purchases of shares of the Trust, these
banks might be required to alter materially or discontinue the
services offered by them to customers. It is not anticipated,
however, that any change in the Trust's method of operations
would affect its net asset value per share or result in financial
losses to any customer.
The Sub-Adviser is an affiliate of a bank holding company.
Therefore, it is subject to applicable federal banking laws and
regulations. The Sub-Adviser has been advised that the
Sub-Adviser may perform the advisory services for the Trust
required by the Sub-Advisory Agreement, without violating
federal banking laws and regulations. Moreover, it has been
advised that changes in federal banking laws and regulations
related to the permissible activities of national banks,
subsidiaries of national banks, and national banks and their
subsidiaries that are affiliates of a bank holding company, as
well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations,
could prevent the Sub-Adviser from continuing to serve as
investment sub-adviser to the Trust or could restrict the
services which the Sub-Adviser is permitted to perform for the
Trust.
In the event that the Sub-Adviser is prohibited from acting
as the Trust's investment adviser, it is probable that the Board
of Trustees of the Business Trust would either recommend to the
shareholders the selection of another qualified adviser or, if
that course of action appeared impractical, that the Trust be
liquidated.
Underwriting Commissions
During the fiscal years ended June 30, 1999, 1998 and 1997,
the aggregate dollar amount of sales charges on sales of shares
in the Trust was $1,133,195, $978,632 and $1,066,813,
respectively, and the amount retained by the Distributor was
$212,007, $150,455 and $77,956 respectively.
In connection with sales of Class A Shares, the Distributor
pays a portion of the sales charge on such shares to dealers in
the form of discounts and to brokers in the form of agency
commissions (together, "Commissions"), in amounts that vary with
the size of the sales charge as follows:
Sales Charge as
Percentage Commissions
of Public as Percentage
Offering of Offering
Price Price
4.00% 3.00%
3.75% 3.00%
3.50% 2.75%
3.25% 2.75%
3.00% 2.50%
2.50% 2.25%
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 SAI, most of the outstanding shares of
the Trust would be considered Qualified Holdings of various
broker-dealers unaffiliated with the Manager, Sub-Adviser or
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) as to 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 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 Manager,
Sub-Adviser or Distributor paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Trust,
Manager, Sub-Adviser or 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 class (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 Shares
Class ("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 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 Manager,
Sub-Adviser or Distributor paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Trust,
Manager, Sub-Adviser or 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 therein 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 I 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
Manager, Sub-Adviser or Distributor 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, Manager, Sub-Adviser or 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 III 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 I 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.
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 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 therein
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 IV 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.
Payments Under the Plan
During the fiscal years ended June 30, 1999, 1998 and 1997
payments were made only under Part I and Part II of the Plan. All
payments were to Qualified Recipients and were made were for
compensation. During those periods, no payments were made under
Part III or Part IV of the Plan.
Payments to Qualified Recipients
During the fiscal years ended June 30, 1999, 1998 and 1997,
$598,973, $592,052 and $589,361, respectively, were paid under
Part I of the Plan to Qualified Recipients. Of those amounts,
$23,262, $21,386 and $17,669, respectively, were paid to the
Distributor. All of such payments were for compensation.
During the Trust's fiscal years ended June 30, 1999, 1998
and 1997, $8,802, $3,466 and $337, respectively, were paid to
Qualified Recipients under Part II of the Plan with respect to
the Trust's Class C Shares, of which $5,986, $3,174, $337
respectively, was retained by the Distributor. All of such
payments were for compensation. Payments with respect to Class C
Shares during the first year after purchase are paid to the
Distributor and thereafter to other Qualified Recipients.
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 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. "Manager" 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. Service Fees with respect to Class C Shares
will be paid to the Distributor. During the fiscal years ended
June 30, 1999, 1998 and 1997, $2,933, $1,156 and $113,
respectively, was paid under the Part I of the Plan with respect
to Class C Shares, all of which was paid to the Distributor. All
of such payments were for compensation.
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.
"Manager" 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. No Class I Shares
were outstanding during the year ended June 30, 1999.
General Provisions
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 1940 Act, of the Trust, Manager,
Sub-Adviser or 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 1940 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 therein 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.
Transfer Agent, Custodian and Auditors
The Trust's Shareholder Servicing Agent (transfer agent) is
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
The Trust's Custodian, Bank One Trust Company, N.A., 100
East Broad Street, Columbus, Ohio 43271, is responsible for
holding the Trust's assets.
The Trust's auditor, KPMG LLP, 345 Park Avenue, New York,
New York, 10154, performs an annual audit of the Trust's
financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokerage allocation and other practices relating to
purchases and sales of the Trust's securities are set forth in
the description of the Sub-Advisory Agreement. It provides that
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.
During the fiscal years ended June 30, 1999, 1998 and 1997
all of the Trust's transactions were principal transactions and
no brokerage commissions were paid.
CAPITAL STOCK
The Trust has four classes of shares.
* 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. 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.
* 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. 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. For purposes of applying
the CDSC and determining the time of conversion, the
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.
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. 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.
The Trust's four classes of shares differ 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 four 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.
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, whether or not affecting the rights of the
shareholders, 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 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").
Shares are fully paid and non-assessable, except as set forth in
the next paragraph; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically
convert to Class A Shares after being held for six years.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." 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
does, however, contain an express disclaimer of shareholder
liability for acts or obligations of the Trust. 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.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
In addition to information about purchase, redemption and
pricing of shares set forth in the Prospectus, the Trust provides
additional services and information.
Sales Charges for Purchases of $1 Million or More of Class A
Shares
You will not pay a sales charge at the time of purchase when
you purchase "CDSC Class A Shares." CDSC Class A Shares are Class
A Shares issued under the following circumstances:
(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 to a single purchaser in
a single purchase when the value of the purchase,
together with the value of the purchaser's other CDSC
Class A Shares and Class A Shares on which a sales
charge has been paid, equals or exceeds $1 million:
See "Special Dealer Arrangements" for other circumstances
under which Class A Shares are considered CDSC Class A Shares.
CDSC Class A Shares do not include: (i)Class A Shares purchased
without a sales charge as described under "General" below and
(ii)Class A Shares purchased in transactions of less than $1
million when certain special dealer arrangements are not in
effect under "Certain Investment Companies" set forth under
"Reduced Sales Charges," below.
Broker/Dealer Compensation - Class A Shares
Upon notice to all selected dealers, the Distributor may
distribute up to the full amount of the applicable sales charge
to broker/dealers. Under the Securities Act of 1933,
broker/dealers may be deemed to be underwriters during periods
when they receive all, or substantially all, of the sales charge.
Redemption of CDSC Class A Shares
If you redeem all or part of your CDSC Class A Shares during
the four years after you purchase them, you must pay a special
contingent deferred sales charge upon redemption.
You will pay 1% of the Redemption Value if you redeem within
the first two years after purchase, and 0.50 of 1% of the
Redemption Value if you redeem within the third or fourth year.
This charge is based on the "Redemption Value" of your
shares which is the lesser of: (i) the net asset value when you
purchased the CDSC Class A Shares you are redeeming; or (ii) the
net asset value at the time of your redemption.
This special charge also applies to CDSC Class A Shares
purchased without a sales charge pursuant to a Letter of Intent
(see "Reduced Sales Charges for Certain Purchases of Class A
Shares"). This special charge will not apply to shares acquired
through the reinvestment of dividends or distributions on CDSC
Class A Shares or to CDSC Class A Shares held for longer than
four years. When redeeming shares, the Agent will redeem the CDSC
Class A Shares held the longest, unless otherwise instructed. If
you own both CDSC and non-CDSC Class A Shares, the latter will be
redeemed first.
The Trust will treat all CDSC Class A Shares purchases made
during a calendar month as if they were made on the first
business day of that month at the average cost of all purchases
made during that month. Therefore, the four-year holding period
will end on the first business day of the 48th calendar month
after the date of those purchases. Accordingly, the holding
period may, in fact, be one month less than the full 48 depending
on when your actual purchase was made. If you exchange your CDSC
Class A Shares for shares of an Aquila money-market fund (see
"Exchange Privilege" in the Additional Statement), running of the
48-month holding period for those exchanged shares will be
suspended.
Broker/Dealer Compensation - CDSC Class A Shares
The Distributor currently intends to pay any dealer executing a
purchase of CDSC Class A Shares as follows:
Amount of Purchase Amount Distributed
to
Broker/Dealer as a %
of Purchase Price
$1 millon but less than $2.5 million 1%
$2.5 million but less than $5 million 0.50 of 1%
$5 million or more 0.25 of 1%
Reduced Sales Charges for Certain Purchases of Class A Shares
Right of Accumulation
"Single Purchasers" may qualify for a reduced sales charge
in accordance with the above schedule when making subsequent
purchases of Class A Shares. A reduced sales charge applies if
the cumulative value (based on purchase cost or current net asset
value, whichever is higher) of Class A Shares previously
purchased with a sales charge, together with Class A Shares of
your subsequent purchase, also with a sales charge, amounts to
$25,000 or more.
Letters of Intent
"Single Purchasers" may also qualify for reduced sales
charges, in accordance with the above schedule, after a written
Letter of Intent (included in the Application) is received by the
Distributor. The Letter of Intent confirms that you intend to
purchase, within a thirteen month period, Class A Shares of the
Trust through a single selected dealer or the Distributor. Class
A Shares of the Trust which you previously purchased within 90
days prior to the Distributor's receipt of your Letter of Intent
and which you still own may also be included in determining the
applicable reduction. For more information, including escrow
provisions, see Letter of Intent provisions of the Application.
General
Class A Shares may be purchased without a sales charge by:
* the Trust's Trustees and officers,
* the directors, officers and certain employees, retired
employees and representatives of the Adviser,
Administrator, Distributor and their parents and/or
affiliates,
* selected dealers and brokers and their officers and
employees,
* certain persons connected with firms providing legal,
advertising or public relations assistance,
* certain family members of, and plans for the benefit
of, the foregoing,
* and plans for the benefit of trust or similar clients
of banking institutions over which these institutions
have full investment authority, if the Distributor has
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. Since
there may be tax consequences of these purchases, your tax
advisor should be consulted.
Class A Shares may also be issued without a sales charge 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.
A qualified group is 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
(i) satisfies uniform criteria which enable the Distributor
to realize economies of scale in its costs of
distributing shares;
(ii) 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
(iii) complies with the conditions of purchase that make up
an agreement between the Trust and the group,
representative or broker or dealer.
At the time of purchase, the Distributor must receive
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 without sales
charge from proceeds of a redemption, made within 120 days prior
to such purchase, of shares of an investment company (not a
member of the Aquilasm Group of Funds) on which a sales charge,
including a contingent deferred sales charge, has been paid.
Additional information is available from the Distributor.
To qualify, follow these special procedures:
1. Send a completed Application (included with the
Prospectus) and payment for the shares to be purchased
directly to the Distributor, Aquila Distributors, Inc.,
380 Madison Avenue, Suite 2300, New York, NY
10017-2513. Do not send this material to the address
indicated on the Application.
2. Your completed Application must be accompanied by
evidence satisfactory to the Distributor that you, as
the prospective shareholder, have 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. 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
redemption of an investment company (that is not a member of the
Aquilasm Group of Funds), up to 1% of the proceeds. The
shareholder, however, shall not be subject to any sales charge.
These arrangements will be in effect through October 31, 2000
unless extended or earlier terminated by a supplement to the
Prospectus.
Dealer payments will be made in up to 4 payments of 0.25 of
1% of the proceeds over a four-year period. The first payment
will be made subsequent to receipt of the proper documentation
detailed above. Future payments, over the remaining years, will
be made at the end of the quarter of the anniversary month that
the purchase of Class A Shares took place, with respect to any
part of the investment that remains in the Trust during the
entire time period. No payments will be made with respect to any
shares redeemed during the four-year period.
Additional Compensation for Broker/Dealers
The Distributor may compensate broker/dealers, above the
normal sales commissions, in connection with sales of any class
of shares. However, broker/dealers may receive levels of
compensation which differ as between classes of share sold.
The Distributor, not the Trust, will pay these additional
expenses. Therefore, the price you pay for shares and the amount
that the Trust receives from your payment will not be affected.
Additional compensation may include full or partial payment
for:
* advertising of the Trust's shares;
* payment of travel expenses, including lodging, for
attendance at sales seminars by qualifying registered
representatives; and/or
* other prizes or financial assistance to broker/dealers
conducting their own seminars or conferences.
Such compensation may be limited to broker/dealers whose
representatives have sold or are expected to sell significant
amounts of the Trust's shares. However, broker/dealers may not
use sales of the Trust's shares to qualify for additional
compensation to the extent such may be prohibited by the laws of
any state or 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. 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.
Automatic Withdrawal Plan
You may establish an 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. The Automatic Withdrawal Plan
is not available for Class C Shares or Class I 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.
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.
Share Certificates
You may obtain Share certificates for full Class A Shares
only if you make a written request to the Agent. All share
certificates previously issued by the Trust represent Class A
Shares. If you lose the certificates, you may incur delay and
expense when redeeming shares or having the certificates
reissued.
Share certificates will not be issued:
* for fractional Class A Shares;
* if you have selected Automatic Investment or Telephone
Investment for Class A Shares.
* if you have selected Expedited Redemption. However, if
you specifically request, Class A Share certificates
will be issued with a concurrent automatic suspension
of Expedited Redemption on your account.
Share certificates will not be issued for Class C Shares,
Class Y Shares or Class I Shares.
Reinvestment privilege
If you reinvest proceeds of redemption within 120 days of a
redemption you will not have to pay any additional sales charge
on the reinvestment. You must reinvest in the same class as the
shares redeemed. You may exercise this privilege only once a
year, unless otherwise approved by the Distributor.
The Distributor will refund to you any CDSC deducted at the
time of redemption by adding it to the amount of your
reinvestment. The Class C or CDSC Class A Shares purchased upon
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.
Reinvestment will not alter the tax consequences of your
original redemption.
Exchange Privilege
There is an exchange privilege as set forth below among this
Trust, certain tax-free municipal bond funds and equity funds
(together with the Trust, 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 Manager or 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, Churchill Tax-Free Fund of
Kentucky, Tax-Free Fund of Colorado, Tax-Free Fund For Utah and
Narragansett Insured Tax-Free Income Fund; the Aquila
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. Government Securities Cash Assets Trust (Original Shares)
and Churchill Cash Reserves Trust.
Generally, you can exchange shares of a given class of a
Bond or Equity Funds 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. 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. However, the following important
information should be noted:
(1) CDSCs Upon Redemptions of Shares Acquired Through
Exchanges. If you exchange shares subject to a CDSC, 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.
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 of 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
Fund 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 Fund 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 is 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 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 SAI); 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. Government Securities Cash Assets Trust
(which invests in U.S. Government 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.
Conversion of Class C Shares
Conversion of Class C Shares into Class A Shares 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 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 Fond
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.
"Transfer on Death" Registration (Not Available for Class I
Shares)
Each of the funds in the Aquilasm Group of Funds now permits
registration of its shares in beneficiary form, subject to the
funds' rules governing Transfer on Death ("TOD") registration, if
the investor resides in a state that has adopted the Uniform
Transfer on Death Security Registration Act (a "TOD State"; for
these purposes, Missouri is deemed to be a TOD State). This form
of registration allows you to provide that, on your death, your
shares are to be transferred to the one or more persons (to a
maximum of three) that you specify as beneficiaries. To register
shares of the Trust in TOD form, complete the special TOD
Registration Request Form and review the Rules Governing TOD
Registration; both are available from the Agent. The Rules, which
are subject to amendment upon 60 days' notice to TOD account
owners, contain important information regarding TOD accounts with
the Trust; by opening such an account you agree to be bound by
them, and failure to comply with them may result in your shares'
not being transferred to your designated beneficiaries. If you
open a TOD account with the Trust that is otherwise acceptable
but, for whatever reason, neither the Trust nor the Agent
receives a properly completed TOD Registration Request Form from
you prior to your death, the Trust reserves the right not to
honor your TOD designation, in which case your account will
become part of your estate.
You are eligible for TOD registration only if, and as long
as, you reside in a TOD State. If you open a TOD account and your
account address indicates that you do not reside in a TOD State,
your TOD registration will be ineffective and the Trust may, in
its discretion, either open the account as a regular (non-TOD)
account or redeem your shares. Such a redemption may result in a
loss to you and may have tax consequences. Similarly, if you open
a TOD account while residing in a TOD State and later move to a
non-TOD State, your TOD registration will no longer be effective.
In both cases, should you die while residing in a non-TOD State
the Trust reserves the right not to honor your TOD designation.
At the date of this SAI, most states are TOD States.
Computation of Net Asset Value
The net asset value of the shares of each of the Trust's
classes 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 its shares of such class then outstanding. 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, the 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.
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.
ADDITIONAL TAX INFORMATION
Certain Exchanges
If you incur a sales commission on a purchase of shares of
one mutual fund (the original fund) and then sell such shares 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.
Tax Status of the Trust
During its last fiscal year, the Trust qualified as a
"regulated investment company" under the Code and intends to
continue such qualification. A regulated investment company is
not liable for federal income taxes on amounts paid by it as
dividends and distributions.
The Code, however, contains a number of complex qualifying
tests. Therefore, it is possible, although not likely, that the
Trust might not meet one or more of these tests in any particular
year. If the Trust fails to qualify, it would be treated for tax
purposes as an ordinary corporation. As a consequence, it would
receive no tax deduction for payments made to shareholders and
would be unable to pay dividends and distributions which would
qualify as "exempt-interest dividends" or "capital gains
dividends."
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. For redemptions made after January
1, 1998, your gain or loss will be long-term if you held the
redeemed shares for over one year and short-term if for a year or
less. Long-term capital gains are currently taxed at a maximum
rate of 20% 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
When Class C Shares automatically convert to Class A Shares,
approximately six years after purchase, you will recognize no
gain or loss. Your adjusted tax basis in the Class A Shares you
receive upon conversion will equal your adjusted tax basis in the
Class C Shares you held immediately before conversion. Your
holding period for the Class A Shares you receive will include
the period you held the converted Class C Shares.
UNDERWRITERS
Aquila Distributors, Inc. acts as the Trust's principal
underwriter in the continuous public offering of all of the
Trust's classes of shares. The Distributor is not obligated to
sell a specific number of shares. 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.
(1) (2) (3) (4) (5)
Name of Net Under- Compensation Brokerage Other
Principal writing on Redemptions Commissions Compen-
Underwriter Discounts and sation
and Repurchases
Commissions
Aquila $212,007 None None None(1)
Distributors
Inc.
(1) Amounts paid to the Distributor under the Trust's
Distribution Plan described in the Prospectus are for
compensation.
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 classes of shares.
Each of these and other methods that may be used by the Trust are
described in the following material. Prior to April 6, 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 January
31, 1998 and none were outstanding during the periods indicated.
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 operations of the
Trust (on June 16, 1986) that would equate an initial
hypothetical $1,000 investment in shares of each of the Trust's
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
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.
Sales charges at the time of purchase are payable only on
purchases of Class A Shares of the Trust.
Average Annual Compounded Rates of Return:
Class A Shares Class C Shares Class Y Shares
One Year -1.84% 0.26% 2.28%
Five Years 5.27% N/A N/A
Ten Years 6.27% N/A N/A
Since
inception on
March 13, 1986 6.79% 4.80%(1) 6.44%(1)
(1) Period from April 1, 1996 (inception of class) through June
30, 1999.
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-, 5- and
10-year periods or the period since inception, at
the end of each such period.
As discussed in the Prospectus, the Trust may quote total
rates of return in addition to its average annual total return
for each of its classes of shares. 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.
Total Return
Class A Shares Class C Shares Class Y Shares
One Year -1.84% 0.26% 2.28%
Five Years 29.30% N/A N/A
Ten Years 83.71% N/A N/A
Since
inception on
March 13, 1986 139.67% 16.45%(1) 22.47%(1)
(1) Period from April 1, 1996 (inception of class) through June
30, 1999.
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 classes of shares 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 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 9.0% and 46.12%, 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, 1999 (the date of the
Trust's most recent audited financial statements):
Class A Shares Class C Shares Class Y Shares
Yield 4.13% 3.47% 4.46%
Taxable
Equivalent
Yield 7.15% 6.01% 7.72%
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.
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.
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.
