Tax-Free Fund of Colorado
380 Madison Avenue Suite 2300
New York, NY 10017
800-USA-COL2 (800-872-2652)
212-697-6666
Prospectus
Class A Shares
Class C Shares April 30, 1998
The Fund is a mutual fund whose objective is to seek to provide as
high a level of current income exempt from Colorado and regular
Federal income taxes as is consistent with preservation of capital
by investing in municipal obligations which pay interest exempt
from Colorado State and Federal income taxes. These municipal
obligations must, at the time of purchase, either be rated within
the four highest credit ratings (considered as investment grade)
assigned by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or, if unrated, be determined to be of comparable
quality by the Fund's Adviser, KPM Investment Management, Inc.
This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund dated April 30, 1998, (the "Additional
Statement") has been filed with the Securities and Exchange
Commission and is available without charge upon written request to
the Fund's Shareholder Servicing Agent, at the address given below,
or by calling the telephone number(s) given below. The Additional
Statement contains information about the Fund and its management
not included in the Prospectus. The Additional Statement is
incorporated by reference in its entirety in the Prospectus. Only
when you have read both the Prospectus and the Additional Statement
are all material facts about the Fund available to you.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY ANY BANK. SHARES OF THE FUND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY OR
GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
The Fund's Shareholder Servicing Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-872-2651 toll free
For General Inquiries & Yield Information,
Call 800-872-2652 toll free or 212-697-6666
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TAX-FREE FUND OF COLORADO
[PICTURE]
Poudre Valley Hospital
[PICTURE]
E-470 Tollway
[PICTURE]
Platte River Power Authority
[PICTURE]
Snowmass Village
[PICTURE]
Community College of Aurora
[PICTURE]
University of Colorado
The Fund invests in tax-free municipal securities, primarily
the kinds of obligations issued by various communities and
political subdivisions within Colorado. Most of these securities
are used to finance long-term municipal projects; examples are
pictured above. (See "Investment of the Fund's Assets.") The
municipal obligations which financed these particular projects were
included in the Fund's portfolio as of April 24, 1998, and together
represented 14.5% of the Fund's portfolio. Since the portfolio is
subject to change, the Fund may not necessarily own these specific
securities at the time of the delivery of this Prospectus.
<PAGE>
HIGHLIGHTS
Tax-Free Fund of Colorado, founded by Aquila Management
Corporation in 1987 and one of the Aquilasm Group of Funds, is an
open-end mutual fund which invests in tax-free municipal bonds, the
kind of obligations issued by the State of Colorado, its counties
and various other local authorities to finance such long-term
public purpose projects as schools, universities, housing,
transportation, utilities, hospitals and water and sewer facilities
throughout Colorado. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the Fund
invests pay interest which is exempt from both regular Federal and
State of Colorado income taxes. Dividends paid by the Fund from
this income are likewise free of both such taxes. It is, however,
possible that in certain circumstances a small portion of the
dividends paid by the Fund will be subject to income taxes. The
Federal alternative minimum tax may apply to some investors, but
its impact will be limited since not more than 20% of the Fund's
net assets can be invested in obligations paying interest which is
subject to this tax. The receipt of exempt-interest dividends from
the Fund may result in some portion of social security payments or
railroad retirement benefits being included in taxable income.
Capital gains distributions, if any, are taxable. (See "Dividend
and Tax Information.")
Investment Grade - The Fund will acquire only those municipal
obligations which, at the time of purchase, are within the four
highest credit ratings assigned by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, or are determined by the Adviser
to be of comparable quality. In general there are nine separate
credit ratings, ranging from the highest to the lowest credit
ratings for municipal obligations. Obligations within the top four
ratings are considered "investment grade," but those in the fourth
rating may have speculative characteristics as well. (See
"Investment of the Fund's Assets.")
Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. (See the
Application, which is in the back of the Prospectus, and "How to
Invest in the Fund," which includes applicable sales charge
information.)
Additional Investments - You may make additional investments
at any time and in any amount, directly or, if in an amount of $50
or more, through the convenience of having your investment
electronically transferred from your financial institution account
into the Fund by Automatic Investment or Telephone Investment. (See
"How to Invest in the Fund.")
Alternative Purchase Plans - The Fund provides two alternative
ways for individuals to invest. (See "Alternative Purchase Plans.")
One way permits individual investors to pay distribution and
certain service charges principally at the time they purchase
shares; the other way permits investors to pay such costs over a
period of time, but without paying anything at time of purchase,
much as goods can be purchased on an installment plan. For this
purpose the Fund offers the following classes of shares, which
differ in their expense levels and sales charges:
Front-Payment Class Shares ("Class A Shares") are offered to
anyone at net asset value plus a sales charge, paid at the
time of purchase, at the maximum rate of 4.0% of the public
offering price, with lower rates for larger purchases. (See
"How to Purchase Class A Shares.") Class A Shares are subject
to an asset retention service fee under the Fund's
Distribution Plan at the rate of 0.05 of 1% of the average
annual net assets represented by the Class A Shares. (See
"Distribution Plan.")
Level-Payment Class Shares ("Class C Shares") are offered to
anyone at net asset value with no sales charge payable at the
time of purchase but with a level charge for service and
distribution fees for six years after the date of purchase at
the aggregate annual rate of 1% of the average annual net
assets of the Class C Shares. (See "Distribution Plan" and
"Shareholder Services Plan for Class C Shares.") Six years
after the date of purchase, Class C Shares are automatically
converted to Class A Shares. If you redeem Class C Shares
before you have held them for 12 months from the date of
purchase you will pay a contingent deferred sales charge
("CDSC"); this charge is 1%, calculated on the net asset value
of the Class C Shares at the time of purchase or at
redemption, whichever is less. There is no CDSC after Class C
Shares have been held beyond the applicable period. (See
"Alternative Purchase Plans," "Computation of the Holding
Periods for Class C Shares" and "How to Purchase Class C
Shares.")
The Fund also offers Institutional Class Shares ("Class Y
Shares") that are sold only to certain institutional investors and
Financial Intermediary Class Shares ("Class I Shares") which are
offered and sold only through certain financial intermediaries.
Class Y Shares and Class I Shares are not offered by this
Prospectus.
Class A Shares and Class C Shares are only offered for sale in
certain states. (See "How to Invest in the Fund.") If shares of the
Fund are sold outside those states the Fund can redeem them. If
your state of residence is not Colorado, the dividends from the
Fund may be subject to income taxes of the state in which you
reside. Accordingly, you should consult your tax adviser before
acquiring shares of the Fund.
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to you,
directly deposited into your financial institution account or
automatically reinvested without sales charge in additional shares
of the Fund at the then-current net asset value. Specific classes
of shares will have different dividend amounts due to their
particular expense levels. (See "Dividend and Tax Information.")
Many Different Issues - You have the advantages of a portfolio
which consists of over 154 issues with different maturities. (See
"Investment of the Fund's Assets.")
Local Portfolio Management - KPM Investment Management, Inc.
(the "Adviser") serves as the Fund's investment adviser. It is a
wholly-owned subsidiary of KFS Corporation, a member of the Mutual
of Omaha Companies. The Fund's portfolio is managed in the
Adviser's Denver office. Founded in 1981, the Adviser provides
discretionary equity, fixed-income and balanced account management
to mutual funds, retirement plans, foundations, endowments and high
net-worth individuals and currently manages over $1 billion of
clients' assets.
The Fund is obligated to pay investment advisory fees at the
rate of 0.20 of 1% of average annual net assets to the Adviser and
administration fees at the rate of 0.30 of 1% of such net assets to
its Administrator (for total fees at the rate of 0.50 of 1% of
average annual net assets). These fees are subject to reduction
when the Fund makes certain payments under the Distribution Plan.
(See "Table of Expenses," "Distribution Plan" and "Management
Arrangements.") Some or all of these fees may be waived by the
Adviser and Administrator. These arrangements are proposed to be
changed. (See "Management Arrangements.")
Redemptions - Liquidity - You may redeem any amount of your
account on any business day at the next determined net asset value
by telephone, FAX or mail request, with proceeds being sent to a
predesignated financial institution, if you have elected Expedited
Redemption. Proceeds will be wired or transferred through the
facilities of the Automated Clearing House, wherever possible, upon
request, if in an amount of $1,000 or more, or will be mailed. For
these and other redemption procedures see "How to Redeem Your
Investment." There are no penalties or redemption fees for
redemption of Class A Shares. However, there is a contingent
deferred sales charge with respect to certain Class A Shares which
have been purchased in amounts of $1 million or more (see "Purchase
of $1 Million or More"). If you redeem Class C Shares before you
have held them for 12 months from the date of purchase you will pay
a contingent deferred sales charge ("CDSC") at the rate of 1%. (See
"Alternative Purchase Plans"- "Class C Shares.")
Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class A or Class C Shares of the
Fund into corresponding classes of shares of other Aquila tax-free
municipal bond mutual funds or two Aquila equity funds. You may
also exchange them into shares of the Aquila money market funds.
The exchange prices will be the respective net asset values of the
shares. (See "Exchange Privilege.")
Risks and Special Considerations - The share price, determined
on each business day, varies with the market prices of the Fund's
portfolio securities, which fluctuate with market conditions,
including prevailing interest rates. Accordingly, the proceeds of
redemptions may be more or less than your original cost. (See
"Factors Which May Affect the Value of the Fund's Investments and
Their Yields.") The Fund's assets, being primarily or entirely
Colorado issues, are subject to economic and other conditions
affecting Colorado. (See "Risk Factors and Special Considerations
Regarding Investment in Colorado Obligations.") Moreover, the Fund
is classified as a "non-diversified" investment company, because it
may choose to invest in the obligations of a relatively limited
number of issuers. (See "Investment of the Fund's Assets.") The
Fund may also, to a limited degree, buy and sell futures contracts
and options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may be
risks associated with these practices. (See "Certain Stabilizing
Measures.")
Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual Report
and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
TABLE OF EXPENSES
Class A Class C
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases 4.00% None
(as a percentage of the offering price)
Maximum Sales Charge Imposed on Reinvested Dividends None None
Maximum Deferred Sales Charge None(1) 1.00%(2)
Redemption Fees None None
Exchange Fee None None
Annual Fund Operating Expenses(3)
(as a percentage of average net assets)
Investment Advisory Fee 0.20%(5) 0.20%(6)
12b-1 Fee 0.05%(5) 0.75%
All Other Expenses(4) 0.50% 0.75%
Administration Fee 0.30%(5) 0.30%(6)
Service Fee None 0.25%
Other Expenses(4) 0.20% 0.20%
Total Fund Operating Expenses(4) 0.75% 1.70%
Example(7)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $47 $63 $80 $129
Class C Shares
With complete redemption
at end of period $27 $54 $92 $152(8)
With no redemption $17 $54 $92 $152(8)
<FN>
(1) Certain shares purchased in transactions of $1 million or more
without a sales charge may be subject to a contingent deferred sales
charge of up to 1% upon redemption during the first four years after
purchase. See "Purchase of $1 Million or More".
</FN>
<FN>
(2) A contingent deferred sales charge of 1% is imposed on the
redemption proceeds of the shares (or on the original price, whichever
is lower) if redeemed during the first 12 months after purchase.
</FN>
<FN>
(3) Estimated based upon amounts incurred by the Fund during its most
recent fiscal year.
</FN>
<FN>
(4) Other expenses do not reflect a 0.03% expense offset in custodian
fees received for uninvested cash balances. Reflecting this amount,
other expenses, all other expenses, and total Fund operating expenses for
Class A Shares would have been 0.17%, 0.47%, and 0.72%; for Class C
Shares, these expenses would have been 0.17%, 0.72% and 1.67%.
</FN>
<FN>
(5) The shareholders of the Fund have approved a change in the Fund's
Distribution Plan which would increase 12b-1 fee payments from 0.05 of
1% of the assets of the Fund allocable to Class A Shares to 0.15 of 1%
of such assets. However, on implementation of such change the advisory
and administration fees payable by the Fund will be reduced so that the
overall expenses of the Fund will remain the same. Implementation of
the change was to have occurred on October 1, 1996 but has been
indefinitely postponed. When and if the change is implemented the
Prospectus will be supplemented. See "Distribution Plan."
</FN>
<FN>
(6) As discussed in note 5, upon implementation of new fee arrangements
for Class A Shares, the advisory fee and the administration fee for
Class C Shares will also be reduced from an annual rate of 0.20% to
0.16%, and from 0.30% to 0.24%, respectively.
</FN>
<FN>
(7) The expense example is based upon the above shareholder transaction
expenses (in the case of Class A Shares, this includes a sales charge
of $40 for a $1,000 investment) and annual Fund operating expenses. It
is also based upon amounts at the beginning of each year which includes
the prior year's assumed results. A year's results consist of an
assumed 5% annual return less total operating expenses; the expense
ratio was applied to an assumed average balance (the year's starting
investment plus one-half the year's results). Each figure represents
the cumulative expenses so determined for the period specified.
</FN>
<FN>
(8) Six years after the date of purchase, Class C Shares are
automatically converted to Class A Shares. Because of the effect of the
asset-based 12b-1 fee and service fee on Class C Shares, long term Class
C shareholders could pay the economic equivalent of an amount greater then
the maximum front-end sales charge allowed under applicable regulations.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT
ALL MUTUAL FUNDS USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF
PREPARING THE ABOVE EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE
INTERPRETED AS A PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE HIGHER OR
LOWER. THE EXAMPLE ALSO REFLECTS THE MAXIMUM SALES CHARGE. (SEE "HOW TO
INVEST IN THE FUND").
The purpose of the above table is to assist the investor in understanding
the various costs that an investor in the Fund will bear directly or
indirectly.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to
the five years ended December 31, 1997 has been audited by KPMG Peat
Marwick LLP, independent auditors, whose report thereon is included
with the Fund's financial statements contained in its Annual Report,
which are incorporated by reference into the Additional Statement.
The information provided in the table should be read in conjunction
with the financial statements and related notes. The Fund's Annual
Report contains additional information about the Fund's performance
and is available upon request without charge.
Class C(4)(+)
Class A(3)(+) Year Period*
Year ended December 31, Ended Ended
1997 1996 1995 1994 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.41 $10.56 $9.82 $10.77 $10.41 $10.31
Income from Investment
Operations:
Net investment income 0.50 0.52 0.54 0.55 0.40 0.28
Net gain (loss) on
securities
(both realized
and unrealized) 0.23 (0.13) 0.74 (0.95) 0.21 0.12
Total from Investment
Operations 0.73 0.39 1.28 (0.40) 0.61 0.40
Less Distributions:
Dividends from net
investment income (0.52) (0.54) (0.54) (0.55) 0.42 (0.30)
Distributions from
capital gains - - - - - -
Total Distributions (0.52) (0.54) (0.54) (0.55) (0.42) (0.30)
Net Asset Value, End of
Period $10.62 $10.41 $10.56 $9.82 $10.60 $10.41
Total Return (not
reflecting
sales charge)(%) 7.21 3.78 13.28 (3.80) 5.99 3.78(1)
Ratios/Supplemental Data
Net Assets, End of
Period
($ in thousands) 216,321 214,392 219,306 199,075 1,036 915
Ratio of Expenses to
Average
Net Assets(%) 0.72 0.69 0.63 0.57 1.66 1.64(2)
Ratio of Net Investment
Income to Average Net
Assets(%) 4.81 5.03 5.21 5.36 3.84 4.08(2)
Portfolio Turnover
rate(%) 22.66 10.96 14.20 15.53 22.66 10.96
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and
the expense offset in custodian fees for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income 0.50 0.51 0.52 0.53 0.40 0.27
Ratio of Expenses to
Average Net Assets(%) 0.75 0.75 0.77 0.76 1.69 1.70(2)
Ratio of Net Investment
Income to Average Net
Assets(%) 4.78 4.97 5.07 5.17 3.81 4.02(2)
<CAPTION>
Class A(3)(+)
1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C>
$10.38 $10.18 $9.77 $9.80 $9.66 $9.51
0.57 0.61 0.62 0.64 0.67 0.63
0.55 0.28 0.41 (0.03) 0.14 0.14
1.12 0.89 1.03 0.61 0.81 0.77
(0.57) (0.61) (0.62) (0.64) (0.67) (0.62)
(0.16) (0.08) - - - -
(0.73) (0.69) (0.62) (0.64) (0.67) (0.62)
$10.77 $10.38 $10.18 $9.77 $9.80 $9.66
11.10 9.00 10.96 6.59 8.59 8.84
222,277 174,031 129,760 88,086 55,901 22,884
0.53 0.45 0.43 0.27 0.14 0.06
5.32 5.90 6.25 6.56 6.62 6.72
20.89 25.88 25.47 23.73 34.29 8.13
0.55 0.59 0.58 0.59 0.57 0.55
0.73 0.70 0.80 0.75 1.00 1.41
5.12 5.65 5.88 6.08 5.73 5.37
<FN>
(1) Not annualized.
</FN>
<FN>
(2) Annualized.
</FN>
<FN>
(3) Designated as Class A Shares on April 30, 1996.
</FN>
<FN>
(4) New Class of Shares established on April 30, 1996.
</FN>
<FN>
* For the period from April 30, 1996 to December 31, 1996.
</FN>
<FN>
+ On April 19, 1991, Norwest Bank Denver, National Association,
originally the Fund's Investment Adviser, became Sub-Adviser
and Norwest Bank Minnesota, National Association became
Investment Adviser upon completion of a merger with Norwest
Corporation. On October 1, 1992, Kirkpatrick, Pettis, Smith,
Polian Inc. became the Fund's Investment Adviser. On July 1,
1994, Kirkpatrick, Pettis, Smith, Polian Inc.'s wholly-owned
subsidiary, KPM Investment Management, Inc., became the Fund's
Adviser. On June 13, 1989, Aquila Management Corporation,
originally the Fund's Sub-Adviser and Administrator became
Administrator only. (See "Management Arrangements").
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment for
investors who seek income exempt from Colorado State and regular
Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Colorado Obligations, as defined below, which
may include obligations of certain non-Colorado issuers. The Fund
offers you the opportunity to keep assets fully invested in a
vehicle that provides a professionally managed portfolio of
Colorado Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Colorado Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments of
fixed denominations, including the selecting, purchasing, handling,
monitoring call provisions and safekeeping of Colorado Obligations.
Colorado Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes; bond
anticipation notes; construction loan notes and floating and
variable rate demand notes. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase
contracts for property or equipment. The purposes for which
municipal obligations such as bonds are issued include the
construction of a wide range of public facilities such as airports,
highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public
purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, the obtaining of funds for
general operating expenses and the obtaining of funds to lend to
other public institutions and facilities.
INVESTMENT OF THE FUND'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Colorado State and regular
Federal income taxes as is consistent with the preservation of
capital, the Fund will invest in Colorado Obligations (as defined
below). There is no assurance that the Fund will achieve its
objective, which is a fundamental policy of the Fund. (See
"Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Colorado Obligations" means obligations, including those of
certain non-Colorado issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate counsel,
is exempt from regular Federal income taxes and not subject to
Colorado income taxes. Although exempt from regular Federal income
tax, interest paid on certain types of Colorado Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Colorado Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Colorado
Obligations. (See "Dividend and Tax Information.")
The non-Colorado bonds or other obligations the interest on
which is exempt under present law from regular Federal and Colorado
income taxes are those issued by or under the authority of Guam,
the Northern Mariana Islands, Puerto Rico and the Virgin Islands.
The Fund will not purchase Colorado Obligations of non-Colorado
issuers unless Colorado Obligations of Colorado issuers of the
desired quality, maturity and interest rate are not available. As
a Colorado-oriented fund, at least 65% of the Fund's total assets
will be invested in Colorado Obligations of Colorado issuers. The
Fund invests only in Colorado Obligations and, possibly, in Futures
and options on Futures (see below) for protective (hedging)
purposes.
In general, there are nine separate credit ratings ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Fund will have a portfolio of quality
oriented (investment grade) securities, the Colorado Obligations
which the Fund will purchase must, at the time of purchase, either
(i) be rated within the four highest credit ratings assigned by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"); or (ii) if unrated, be determined to be of
comparable quality to municipal obligations so rated by KPM
Investment Management, Inc. (the "Adviser"), subject to the
direction and control of the Fund's Board of Trustees. Municipal
obligations rated in the fourth highest credit rating are
considered by such rating agencies to be of medium quality and thus
may present investment risks not present in more highly rated
obligations. Such bonds lack outstanding investment characteristics
and may in fact have speculative characteristics as well; changes
in economic conditions or other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments
than is the case for higher grade bonds. If after purchase the
rating of any rated Colorado Obligation is downgraded such that it
could not then be purchased by the Fund, or, in the case of an
unrated Colorado Obligation, if the Adviser determines that the
unrated obligation is no longer of comparable quality to those
rated obligations which the Fund may purchase, it is the current
policy of the Fund to cause any such obligation to be sold as
promptly thereafter as the Adviser in its discretion determines to
be consistent with the Fund's objectives; such obligation remains
in the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Fund can purchase industrial
development bonds only if they meet the definition of Colorado
Obligations, i.e., the interest on them is exempt from Colorado
State and regular Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940 Act").
The Fund also intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code (the "Code").
One of the tests for such qualification under the Code is, in
general, that at the end of each fiscal quarter of the Fund, at
least 50% of its assets must consist of (i) cash; and (ii)
securities which, as to any one issuer, do not exceed 5% of the
value of the Fund's assets. If the Fund had elected to register
under the 1940 Act as a "diversified" investment company, it would
have to meet a similar test as to 75% of its assets. The Fund may
therefore not have as much diversification among securities, and
thus diversification of risk, as if it had made this election under
the 1940 Act. In general, the more the Fund invests in the
securities of specific issuers, the more the Fund is exposed to
risks associated with investments in those issuers. The Fund's
assets, being primarily or entirely Colorado issues, are
accordingly subject to economic and other conditions affecting
Colorado. (See "Risk Factors and Special Considerations Regarding
Investment in Colorado Obligations.")
Certain Stabilizing Measures
The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash and
cash equivalents in attempting to protect against declines in the
value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Fund has no current intention of using futures and options, to
the limited degree described below, these may be used to attempt to
hedge against changes in the market price of the Fund's Colorado
Obligations caused by interest rate fluctuations. Futures and
options could also provide a hedge against increases in the cost of
securities the Fund intends to purchase.
Although it does not currently do so, and since inception has
not done so, the Fund may buy and sell futures contracts relating
to indices on municipal bonds ("Municipal Bond Index Futures") and
to U.S. government securities ("U.S. Government Securities
Futures"); both kinds of futures contracts are "Futures." The Fund
may also write and purchase put and call options on Futures.
As a matter of fundamental policy the Fund will not buy or
sell a Future or an option on a Future if thereafter more than 10%
of its net assets would be in initial or variation margin on such
Futures and options on them, and in premiums on such options. The
Fund will not enter into Futures or options for which the aggregate
initial margins and premiums paid for options exceed 5% of the fair
market value of the Fund's assets. (See the Additional Statement.)
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and the
prices of Futures or options purchased or sold by the Fund; (ii)
incorrect forecasts by the Adviser concerning interest rates which
may result in the hedge being ineffective; and (iii) possible lack
of a liquid secondary market for a Future or option; the resulting
inability to close a Futures or options position could adversely
affect the Fund's hedging ability.
For a hedge to be completely effective, the price change of
the hedging instrument should equal the price change of the
security being hedged. The risk of imperfect correlation of these
price changes is increased as the composition of the Fund's
portfolio is divergent from the debt securities underlying the
hedging instrument. To date, the Adviser has had no experience in
the use of Futures or options on them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits" established
by commodity exchanges which restrict the amount of change in the
contract price allowed during a single trading day. Thus, once a
daily limit is reached, no further trades may be entered into
beyond the limit, thereby preventing the liquidation of open
positions. Prices have in the past reached the daily limit on a
number of consecutive trading days. For further information about
Futures and options, see the Additional Statement.
When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one year,
but permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding one year, in each case upon
not more than 30 days' notice. The issuer of such notes normally
has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus
accrued interest upon a specified number of days' notice to the
noteholders. The interest rate on a floating rate demand note is
based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The
interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Colorado Obligations (such as industrial
development bonds and municipal lease/purchase agreements). A
participation interest gives the Fund an undivided interest in the
underlying Colorado Obligations in the proportion that the Fund's
participation interest bears to the total amount of the underlying
Colorado Obligations. All such participation interests must meet
the Fund's credit requirements. (See "Limitation to 10% as to
Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Colorado Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring them.
The Colorado Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery and
payment take place; their value at the delivery date may be less
than the purchase price. The Fund cannot enter into when-issued
commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments. If the Fund chooses
to dispose of the right to acquire a when-issued obligation prior
to its acquisition, it could, as with the disposition of any other
portfolio holding, incur a gain or loss due to market fluctuation;
any such gain would be a taxable short-term gain. The Fund 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. (See the Additional Statement for further
information.)
Limitation to 10% as to Certain Investments
The Fund cannot purchase Colorado Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does not
include any Colorado Obligations as to which the Fund can exercise
the right to demand payment in full within three days and as to
which there is a secondary market. Floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. (See
the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets in
(i) Colorado Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value of the
Fund's Investments and Their Yields
The value of the Colorado Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Colorado Obligations, the value of
these obligations will normally go down; if these rates go down,
the value of these obligations will normally go up. Changes in
value and yield based on changes in prevailing interest rates may
have different effects on short-term Colorado Obligations than on
long-term obligations. Long-term obligations (which often have
higher yields) may fluctuate in value more than short-term ones.
For this reason, the Fund may, to achieve a defensive position,
shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Colorado Obligations
The following is a discussion of the general factors that
might influence the ability of Colorado issuers to repay principal
and interest when due on the Colorado Obligations contained in the
portfolio of the Fund. Such information is derived from sources
that are generally available to investors and is believed by the
Fund to be accurate, but has not been independently verified and
may not be complete.
Because of limitations contained in the state constitution,
the State of Colorado issues no general obligation bonds secured by
the full faith and credit of the state. Several agencies and
instrumentalities of state government are authorized by statute to
issue bonds secured by revenues from specific projects and
activities. Additionally, the state currently is authorized to
issue short-term revenue anticipation notes.
There are approximately 2,000 units of local government in
Colorado, including counties, statutory cities and towns, home-rule
cities and counties, school districts and a variety of water,
irrigation, and other special districts and special improvement
districts, all with various constitutional and statutory authority
to levy taxes and incur indebtedness. The major source of revenue
for funding such indebtedness is the ad valorem property tax, which
presently is levied and collected solely at the local level,
although the state is also authorized to levy such taxes. There is
a statutory restriction on the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions in Colorado
without electoral approval.
In 1992, an amendment to the Constitution of the State of
Colorado was approved and went into effect. In general, the effect
of the amendment was to limit the ability of the State and local
governments to increase revenues and expenditures, issue debt and
enter into other financial obligations and raise taxes.
Colorado's economy is diversified and the state has become the
services center for the Rocky Mountain region. The state's economy
includes agriculture, manufacturing (especially high technology and
communications), construction, tourism (ski resorts and national
parks) and mining (primarily oil production). Colorado has
recovered from economic difficulties experienced during the past
several years, which caused state government revenue shortfalls at
that time.
Employment in Colorado is diversified among services, trade,
government and manufacturing. Employment growth in Colorado has
exceeded that of the United States as a whole since 1989.
It can be expected that federal deficit reduction measures
will have significant direct and indirect impact on the economy of
the state as a whole and on specific localities with a large
presence of federal activity. As a result of all these factors,
there can be no assurance that further economic difficulties and
their impact on state and local government finances will not
adversely affect the market value of the Colorado Obligations held
by the Fund or the ability of the respective obligors to pay debt
service on certain of such obligations. Obligations of non-Colorado
issuers are subject to the risks of general economic and other
factors affecting those issuers.
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and cannot
do. Certain of these policies, identified in the Prospectus and in
the Additional Statement as "fundamental policies," cannot be
changed unless the holders of a "majority," as defined in the 1940
Act, of the Fund's outstanding shares vote to change them. (See the
Additional Statement for a definition of such a majority.) All
other policies can be changed from time to time by the Board of
Trustees without shareholder approval. Some of the more important
of the Fund's fundamental policies, not otherwise identified in the
Prospectus, are set forth below; others are listed in the
Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Colorado
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Fund has industry investment requirements.
The Fund 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 Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Colorado Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund 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 Fund's income. Except in connection with
borrowings, the Fund will not issue senior securities. The Fund
will not purchase any Colorado Obligations, Futures or options on
Futures while it has any outstanding borrowings which exceed 5% of
the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time, on
each day that the New York Stock Exchange is open (a "business
day"), by dividing the Fund's net assets (i.e. the value of the
assets less liabilities), allocable to each class by the total
number of shares of such class then outstanding. Determination of
the value of the Fund's assets is subject to the direction and
control of the Fund's Board of Trustees. In general, it is based on
market value, except that Colorado Obligations maturing in 60 days
or less are generally valued at amortized cost; see the Additional
Statement for further information.
ALTERNATIVE PURCHASE PLANS
In this Prospectus the Fund provides you with two alternative
ways to invest in the Fund through two separate classes of shares.
All classes represent interests in the same portfolio of Colorado
Obligations. The classes of shares offered to individuals differ in
their sales charge structures and ongoing expenses, as described
below. You should choose the class that best suits your own
circumstances and needs.
If you choose to purchase Class A Shares you will pay the
applicable sales charge at the time of your purchase. By purchasing
Class C Shares, you will pay a sales charge over a period of six
years after purchase but without paying anything at time of
purchase, much as goods can be purchased on an installment plan.
You are subject to a contingent deferred sales charge, described
below, but only if you redeem your Class C Shares before they have
been held 12 months from your purchase. (See "Computation of
Holding Periods for Class C Shares.")
* Class A Shares, "Front-Payment Class Shares," are offered to
anyone at net asset value plus a sales charge, paid at the
time of purchase, at the maximum rate of 4.0% of the public
offering price, with lower rates for larger purchases. When
you purchase Class A Shares, the amount of your investment is
reduced by the applicable sales charge.Class A Shares are
subject to an asset retention service fee under the Fund's
Distribution Plan at the rate 0.05 of 1% of the average annual
net assets represented by Class A Shares up to $250 million
and 0.15 of 1% of such assets over $250 million. Certain Class
A Shares purchased in transactions of $1 million or more are
subject to a contingent deferred sales charge. (See "Purchase
of $1 Million or More.")
* Class C Shares, "Level-Payment Class Shares," are offered to
anyone at net asset value with no sales charge payable at
purchase but with a level charge for distribution fees and
service fees for six years after the date of purchase at the
aggregate annual rate of 1% of the average annual net assets
represented by Class C Shares. (See "Distribution Plan" and
"Shareholder Services Plan for Class C Shares.") Six years
after the date of purchase, Class C Shares, including Class C
Shares acquired in exchange for other Class C Shares under the
Exchange Privilege (see "Exchange Privilege"), are
automatically converted to Class A Shares. If you redeem Class
C Shares before you have held them for 12 months from the date
of purchase you will pay a contingent deferred sales charge at
the rate of 1%, calculated on the net asset value of the
redeemed Class C Shares at the time of purchase or of
redemption, whichever is less. The amount of any CDSC will be
paid to the Distributor. The CDSC does not apply to shares
acquired through the reinvestment of dividends on Class C
Shares or to any Class C Shares held for more than 12 months
after purchase. For purposes of applying the CDSC and
determining the time of conversion, 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. (See "Computation of Holding Periods for Class
C Shares" and "How to Purchase Class C Shares.")
In determining whether a CDSC is payable on a redemption of
Class C Shares, it will be assumed that the redemption is made
first of any shares acquired as dividends or distributions, second
of any Class C Shares you have held for more than 12 months from
the date of purchase and finally of those Class C Shares as to
which the CDSC is payable which you have held the longest. This
will result in your paying the lowest possible CDSC.
Computation of Holding Periods for Class C Shares
For purposes of determining the holding period for Class C
Shares, all of your purchases made during a calendar month will be
deemed to have been made on the first business day of that month at
the average cost of all purchases made during that month. The
12-month CDSC holding period will end on the first business day of
the 12th calendar month after the date your purchase is deemed to
have been made. Accordingly, the CDSC holding period applicable to
your Class C Shares may be up to one month less than the full 12
months depending upon when your actual purchase was made during a
month. Running of the 12-month CDSC holding period will be
suspended for one month for each period of thirty days during which
you have held shares of a money market fund you have received in
exchange for Class C Shares under the Exchange Privilege. (See
"Exchange Privilege.")
Your Class C Shares will automatically convert to Class A
Shares six years after the date of purchase, together with a
pro-rata portion of all Class C Shares representing dividends and
other distributions paid in additional Class C Shares. The Class C
Shares so converted will no longer be subject to the higher
expenses borne by the Class C Shares. The conversion will be
effected at relative net asset values on the first business day of
the month following that in which the sixth anniversary of your
purchase of the Class C Shares occurred, except as noted below.
Accordingly, the holding period applicable to your Class C Shares
may be up to one month more than the six years depending upon when
your actual purchase was made during a month. Because the per share
value of Class A Shares may be higher than that of Class C Shares
at the time of conversion, you may receive fewer Class A Shares
than the number of Class C Shares converted. If you have made one
or more exchanges of Class C Shares among the Aquila-sponsored
tax-free municipal bond funds or equity funds under the Exchange
Privilege, the six-year holding period is deemed to have begun on
the date you purchased your original Class C Shares of the Fund or
of another of the Aquila bond or equity funds. The six-year holding
period will be suspended by one month for each period of thirty
days during which you hold shares of a money market fund you have
received in exchange for Class C Shares under the Exchange
Privilege. (See "Exchange Privilege.")
The following chart summarizes the principal differences
between Class A Shares and Class C Shares.
<TABLE>
<CAPTION>
Class A Class C
<S> <C> <C>
Initial Sales Maximum of 4% of the None
Charge public offering price
Contingent None (except for certain Maximum CDSC of 1% if shares
Deferred purchases over $1 Million) redeemed before 12 months;
Sales Charge 0% after 12 months
Distribution and 0.05 of 1% Distribution fee of 0.75 of
Service Fees 1% and a service fee of 0.25
of 1% for a total of 1%,
payable for six years
Other Information Initial sales charge waived Shares convert to Class A
or reduced in some cases Shares after six years
</TABLE>
Factors to Consider in Choosing Classes of Shares
This discussion relates to the major differences between Class
A Shares and Class C Shares. It is recommended that any investment
in the Fund be considered long-term in nature.
Over time, the cumulative total cost of the 1% annual service
and distribution fees on the Class C Shares will equal or exceed
the total cost of the initial 4% maximum initial sales charge and
0.05 of 1% annual fee payable for Class A Shares. For example, if
equal amounts were paid at the same time for Class A Shares (where
the amount invested is reduced by the amount of the sales charge)
and for Class C Shares (which carry no sales charge at the time of
purchase) and the net asset value per share remained constant over
time, the total of such costs for Class C Shares would equal the
total of such costs for Class A Shares after approximately four and
two-thirds years. This example assumes no redemptions and
disregards the time value of money. Purchasers of Class C Shares
have all of their investment dollars invested from the time of
purchase, without having their investment reduced at the outset by
the initial sales charge payable for Class A Shares. If you invest
in Class A Shares you will pay the entire sales charge at the time
of purchase. Accordingly, if you expect to redeem your shares
within a reasonably short time after purchase, you should consider
the total cost of such an investment in Class A Shares compared
with a similar investment in Class C Shares. The example under
"Table of Expenses" shows the effect of Fund expenses for both
classes if a hypothetical investment in each of the classes is held
for 1, 3, 5 and 10 years. (See the Table of Expenses.)
Dividends and other distributions paid by the Fund with
respect to shares of each class are calculated in the same manner
and at the same time. The dividends actually paid with respect to
Class C Shares will be lower than those paid on Class A Shares
because Class C Shares bear higher distribution and service fees
and will have a higher expense ratio. In addition, the dividends of
each class can vary because each class will bear certain
class-specific charges. For example, each class will bear the costs
of printing and mailing annual reports to its own shareholders.
HOW TO INVEST IN THE FUND
The Fund's shares may be purchased through any investment
broker or dealer (a "selected dealer") which has a sales agreement
with Aquila Distributors, Inc. (the "Distributor") or through the
Distributor. There are two ways to make an initial investment: (i)
order the shares through your investment broker or dealer, if it is
a selected dealer; or (ii) mail the Application with payment to the
Fund's Shareholder Servicing Agent (the "Agent") at the address on
the Application. If you purchase Class A Shares, the applicable
sales charge will apply in either instance. Subsequent investments
are also subject to the applicable sales charges. You are urged to
complete an Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment. Unless your initial investment is specified to be made
in Class C Shares, it will be made in Class A Shares.
The minimum initial investment for Class A Shares and Class C
Shares is $1,000, except as otherwise stated in the Prospectus or
Additional Statement. You may also make an initial investment of at
least $50 by establishing an Automatic Investment Program. To do
this you must open an account for automatic investments of at least
$50 each month and make an initial investment of at least $50. (See
below and "Automatic Investment Program" in the Application.) Such
investment must be drawn in United States dollars on a United
States commercial or savings bank, credit union or a United States
branch of a foreign commercial bank (each of which is a "Financial
Institution"). You may make subsequent investments in the same
class of shares in any amount (unless you have an Automatic
Withdrawal Plan). Your subsequent investment may be made through a
selected dealer or by forwarding payment to the Agent, with the
name(s) of account owner(s), the account number, the name of the
Fund and the class of shares to be purchased. With subsequent
investments, please send the pre-printed stub attached to the
Fund's confirmations.
Subsequent investments of $50 or more in shares of the same
class as your initial investment can be made by electronic funds
transfer from your demand account at a Financial Institution. To
use electronic funds transfer for your purchases, your Financial
Institution must be a member of the Automated Clearing House and
the Agent must have received your completed Application designating
this feature, or, after your account has been opened, a Ready
Access Features form available from the Distributor or the Agent.
A pre-determined amount can be regularly transferred for investment
("Automatic Investment"), or single investments can be made upon
receipt by the Agent of telephone instructions from anyone
("Telephone Investment"). The maximum amount of each Telephone
Investment is $50,000. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate these investment
methods at any time or charge a service fee, although no such fee
is currently contemplated.
The offering price is the net asset value per share for Class
C Shares and the net asset value per share plus the applicable
sales charge for Class A Shares. The offering price determined on
any day applies to all purchase orders received by the Agent from
selected dealers that day, except that orders received by it after
4:00 p.m. New York time will receive that day's offering price only
if such orders were received by selected dealers from customers
prior to such time and transmitted to the Distributor prior to its
close of business that day (normally 5:00 p.m. New York time); if
not so transmitted, such orders will be filled at the next
determined offering price. Selected dealers are required to
transmit orders promptly. Investments by mail are made at the
offering price next determined after receipt of the purchase order
by the Agent. Purchase orders received on other than a business day
will be executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day, except that if that day is not a business
day your order will be executed at the price determined on the next
business day. In the case of Telephone Investment your order will
be filled at the next determined offering price. If your order is
placed after the time for determining the net asset value of the
Fund shares for any day it will be executed at the price determined
on the following business day. The sale of shares will be suspended
during any period when the determination of net asset value is
suspended. The Fund and the Distributor reserve the right to reject
any order for the purchase of shares. In addition, the offering of
shares may be suspended at any time and resumed at any time
thereafter.
At the date of the Prospectus, Class A Shares and Class C
Shares of the Fund are available only in the following states:
Colorado, Arizona, California, District of Columbia, Florida,
Georgia, Hawaii, Indiana, Maryland, Missouri, Nevada, New Jersey,
New Mexico (Class A Shares only), New York, Texas, Virginia and
Washington (Class A Shares only).
If you do not reside in one of these states you should not
purchase shares of the Fund. If Class A Shares or Class C Shares of
the Fund are sold outside of these states the Fund can redeem them.
Such a redemption may result in a loss to you and may have tax
consequences. In addition, if your state of residence is not
Colorado, the dividends from the Fund may not be exempt from income
tax of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of the Fund.
How to Purchase Class A Shares
(Front-Payment Class Shares)
The following table shows the amount of the sales charge to a
"single purchaser" (defined below) together with the dealer
discounts paid to dealers and the agency commissions paid to
brokers (collectively called the "commissions") for Class A Shares:
<TABLE>
<CAPTION>
Sales Sales
Charge as Charge as
Percentage Approximate Commissions
of Public Percentage as Percentage
Offering of Amount of Offering
Amount of Purchase Price Invested Price
<S> <C> <C> <C>
Less than $25,000........ 4.00% 4.17% 3.00%
$25,000 but less than
$50,000.................. 3.75% 3.90% 3.00%
$50,000 but less than
$100,000................. 3.50% 3.63% 2.75%
$100,000 but less than
$250,000................. 3.25% 3.36% 2.75%
$250,000 but less than
$500,000................. 3.00% 3.09% 2.50%
$500,000 but less than
$1,000,000............... 2.50% 2.56% 2.25%
</TABLE>
For purchases of $1 million or more see "Purchase of $1 Million
or More," below.
The table of sales charges is applicable to purchases of Class
A Shares by a "single purchaser," i.e.: (a) an individual; (b) an
individual together with his or her spouse and their children under
the age of 21 purchasing Class A Shares for his, her or their own
accounts; (c) a trustee or other fiduciary purchasing Class A
Shares for a single trust estate or a single fiduciary account; and
(d) a tax-exempt organization enumerated in Section 501(c)(3) or
(13) of the Code.
Upon notice to all selected dealers, the Distributor may
reallow up to the full amount of the applicable sales charge as
shown in the above schedule during periods specified in such
notice. During periods when all or substantially all of the entire
sales charge is reallowed, such selected dealers may be deemed to
be underwriters as that term is defined in the Securities Act of
1933.
Purchase of $1 Million or More
Class A Shares issued under the following circumstances are
called "CDSC Class A Shares": (i) Class A Shares issued in a single
purchase of $1 million or more by a single purchaser; and (ii) all
Class A Shares issued in a single purchase to a single purchaser
the value of which, when added to the value of the CDSC Class A
Shares and Class A Shares on which a sales charge has been paid,
already owned at the time of such purchase, equals or exceeds $1
million. CDSC Class A Shares also include certain Class A Shares
issued under the program captioned "Special Dealer Arrangements,"
below. CDSC Class A Shares do not include (i) Class A Shares
purchased without sales charge pursuant to the terms described
under "General," below and (ii) Class A Shares purchased in
transactions of less than $1 million and when certain special
dealer arrangements are not in effect under "Certain Investment
Companies" set forth under "Reduced Sales Charges," below.
When you purchase CDSC Class A Shares you will not pay a sales
charge at the time of purchase, and the Distributor will pay to any
dealer effecting such a purchase an amount equal to 1% of the sales
price of the shares purchased for purchases of $1 million but less
than $2.5 million, 0.50 of 1% for purchases of $2.5 million but
less than $5 million, and 0.25 of 1% for purchases of $5 million or
more.
If you redeem all or part of your CDSC Class A Shares during
the four years after your purchase of such shares, at the time of
redemption you will be required to pay to the Distributor a special
contingent deferred sales charge based on the lesser of (i) the net
asset value of your redeemed CDSC Class A Shares at the time of
purchase or (ii) the net asset value of your redeemed CDSC Class A
Shares at the time of redemption (the "Redemption Value"). The
special charge will be an amount equal to 1% of the Redemption
Value if the redemption occurs within the first two years after
purchase, and 0.50 of 1% of the Redemption Value if the redemption
occurs within the third or fourth year after purchase. The special
charge will apply to redemptions of CDSC Class A Shares purchased
without a sales charge pursuant to a Letter of Intent, as described
below under "Reduced Sales Charges for Certain Purchases of Class
A Shares." The special charge does not apply to Class A Shares
acquired through the reinvestment of dividends on CDSC Class A
Shares or to any CDSC Class A Shares held for more than four years
after purchase. In determining whether the special charge is
applicable, it will be assumed that the CDSC Class A Shares you
have held the longest are the first CDSC Class A Shares to be
redeemed, unless you instruct the Agent otherwise. It will also be
assumed that if you have both CDSC Class A Shares and non-CDSC
Class A Shares the non-CDSC Class A Shares will be redeemed first.
For purposes of determining the holding period for CDSC Class
A Shares, all of your purchases made during a calendar month will
be deemed to have been made on the first business day of that month
at the average cost of all purchases made during that month. The
four-year holding period will end on the first business day of the
48th calendar month after the date your purchase is deemed to have
been made. Accordingly, the CDSC holding period applicable to your
CDSC Class A Shares may be up to one month less than the full 48
months depending upon when your actual purchase was made during a
month. Running of the 48-month CDSC holding period will be
suspended for one month for each period of thirty days during which
you have held shares of a money market fund you have received in
exchange for CDSC Class A Shares under the Exchange Privilege. (See
"Exchange Privilege.")
Reduced Sales Charges for Certain Purchases of Class A Shares
Right of Accumulation: If you are a "single purchaser" you may
benefit from a reduction of the sales charge in accordance with the
above schedule for subsequent purchases of Class A Shares if the
cumulative value (at cost or current net asset value, whichever is
higher) of Class A Shares you have previously purchased with a
sales charge and still own, together with Class A Shares of your
subsequent purchase with such a charge, amounts to $25,000 or more.
Letters of Intent: The foregoing schedule of reduced sales
charges will also be available to "single purchasers" who enter
into a written Letter of Intent (included in the Application)
providing for the purchase, within a thirteen-month period, of
Class A Shares of the Fund through a single selected dealer or
through the Distributor. Class A Shares of the Fund which you
previously purchased during a 90-day period prior to the date of
receipt by the Distributor of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For further details, including escrow provisions, see
the Letter of Intent provisions of the Application.
General: Class A Shares may be purchased at the next
determined net asset value by the Fund's Trustees and officers, by
the directors, officers and certain employees, retired employees
and representatives of the Adviser and its parent and affiliates,
the Administrator and the Distributor, by selected dealers and
brokers and their officers and employees, by certain persons
connected with firms providing legal, advertising or public
relations assistance, by certain family members of, and plans for
the benefit of, the foregoing, and for the benefit of trust or
similar clients of banking institutions over which these
institutions have full investment authority if the Fund or the
Distributor has entered into an agreement relating to such
purchases. Except for the last category, purchasers must give
written assurance that the purchase is for investment and that the
Class A Shares will not be resold except through redemption. There
may be tax consequences of these purchases. Such purchasers should
consult their own tax counsel. Class A Shares may also be issued at
net asset value in a merger, acquisition or exchange offer made
pursuant to a plan of reorganization to which the Fund is a party.
The Fund permits the sale of its Class A Shares at prices that
reflect the reduction or elimination of the sales charge to
investors who are members of certain qualified groups meeting the
following requirements. A qualified group (i) 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 (ii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its
costs of distributing Class A Shares; (iii) gives its endorsement
or authorization (if it is a group or association) to an investment
program to facilitate solicitation of its membership by a broker or
dealer; and (iv) complies with the conditions of purchase that are
set forth in any agreement entered into between the Fund and the
group, representative or broker or dealer. At the time of purchase
you must furnish the Distributor with information sufficient to
permit verification that the purchase qualifies for a reduced sales
charge, either directly or through a broker or dealer.
Certain Investment Companies: Class A Shares of the Fund may
be purchased at net asset value without sales charge (except as
set forth below under "Special Dealer Arrangements") to the extent
that the aggregate net asset value of such Class A Shares does not
exceed the proceeds from a redemption (a "Qualified Redemption"),
made within 120 days prior to such purchase, of shares of another
investment company on which a sales charge, including a contingent
deferred sales charge, has been paid. Additional information is
available from the Distributor.
To qualify, the following special procedures must be followed:
1. A completed Application (included in the Prospectus) and
payment for the Class A Shares to be purchased must be sent to
the Distributor, Aquila Distributors, Inc., 380 Madison
Avenue, Suite 2300, New York, NY 10017 and should not be sent
to the Fund's Shareholder Servicing Agent. (This instruction
replaces the mailing address contained on the Application.)
2. The Application must be accompanied by evidence
satisfactory to the Distributor that the prospective
shareholder has made a Qualified Redemption in an amount at
least equal to the net asset value of the Class A Shares to be
purchased. Satisfactory evidence includes a confirmation of
the date and the amount of the redemption from the investment
company, its transfer agent or the investor's broker or
dealer, or a copy of the investor's account statement with the
investment company reflecting the redemption transaction.
3. You must complete and return to the Distributor a Transfer
Request Form, which is available from the Distributor.
The Fund 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 Fund) will pay to any
dealer effecting a purchase of Class A Shares of the Fund using the
proceeds of a Qualified Redemption the lesser of (i) 1% of such
proceeds or (ii) the same amounts described under "Purchase of $1
Million or More" above, on the same terms and conditions. Class A
Shares of the Fund issued in such a transaction will be CDSC Class
A Shares and if you thereafter redeem all or part of such shares
during the four-year period from the date of purchase you will be
subject to the special contingent deferred sales charge described
under "Purchase of $1 Million or More," above, on the same terms
and conditions. Whenever the Special Dealer Arrangements are in
effect the Prospectus will be supplemented.
How to Purchase Class C Shares
(Level-Payment Class Shares)
Level-Payment Class Shares (Class C Shares) are offered at net
asset value with no sales charge payable at purchase. A level
charge is imposed for service and distribution fees for the first
six years after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Fund represented by
the Class C Shares. If you redeem Class C Shares before you have
held them for 12 months from the date of purchase you will pay a
contingent deferred sales charge ("CDSC"). The CDSC is charged at
the rate of 1%, calculated on the net asset value of the redeemed
Class C Shares at the time of purchase or at redemption, whichever
is less. There is no CDSC after Class C Shares have been held
beyond the applicable period. The CDSC does not apply to Class C
Shares acquired through the reinvestment of dividends on Class C
Shares.
The Distributor will pay to any dealer effecting a purchase of
Class C Shares an amount equal to 1% of the sales price of the
Class C Shares purchased.
Additional Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of any
class of shares of the Fund. Additional compensation may include
payment or partial payment for advertising of the Fund's shares,
payment of travel expenses, including lodging, incurred in
connection with attendance at sales seminars taken by qualifying
registered representatives to locations within or outside of the
United States, other prizes or financial assistance to securities
dealers in offering their own seminars or conferences. In some
instances, such compensation may be made available only to certain
dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Dealers may not use sales of
the Fund's shares to qualify for the incentives to the extent such
may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers,
Inc. The cost to the Distributor of such promotional activities and
such payments to participating dealers will not exceed the amount
of the sales charges in respect of sales of all classes of shares
of the Fund effected through such participating dealers, whether
retained by the Distributor or reallowed to participating dealers.
No such additional compensation to dealers in connection with sales
of shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Systematic Payroll Investments
If your employer has established with the Fund a Systematic
Payroll Investment Plan ("Payroll Plan") you may arrange for
systematic investments into the Fund through the Payroll Plan.
Investments can be made in either Class A Shares or Class C Shares.
In order to participate in a Payroll Plan, you should make
arrangements with your own employer's payroll department, and you
must complete and sign any special application forms which may be
required by your employer. You must also complete the Application
included in the Prospectus. Once your application is received and
put into effect, under a Payroll Plan the employer will make a
deduction from payroll checks in an amount you determine, and will
remit the proceeds to the Fund. An investment in the Fund will be
made for you at the offering price, which includes applicable sales
charges determined as described above, when the Fund receives the
funds from your employer. The Fund will send a confirmation of each
transaction to you. To change the amount of or to terminate your
participation in the Payroll Plan (which could take up to ten
days), you must notify your employer.
Confirmations and Share Certificates
All purchases of shares will be confirmed and credited to you
in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share).
No share certificates will be issued for Class C Shares. Share
certificates for Class A Shares will be issued only if you so
request in writing to the Agent. All share certificates previously
issued by the Fund represent Class A Shares. No certificates will
be issued for fractional Class A Shares or if you have elected
Automatic Investment or Telephone Investment for Class A Shares
(see "How to Invest in the Fund" above) or Expedited Redemption.
(See "How to Redeem Your Investment" below). If certificates for
Class A Shares are issued at your request, Expedited Redemption
Methods described below will not be available. In addition, you may
incur delay and expense if you lose the certificates.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended to
result in the sale of its shares except pursuant to a written plan
adopted under the Rule. The Plan has four parts.
Under one part of the Plan, the Fund is authorized to make
payments with respect to Class A Shares ("Class A Permitted
Payments") to Qualified Recipients, which payments shall be made
through the Distributor or shareholder servicing agent as
disbursing agent and may not exceed, for any fiscal year of the
Fund (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), with respect to net assets
of the Fund up to $250 million represented by the Class A Shares of
the Fund, 0.05 of 1% of average annual net assets and 0.15 of 1%
with respect to such assets above that amount. Such payments shall
be made only out of the Fund's assets allocable to the Class A
Shares. "Qualified Recipients" means broker-dealers or others
selected by the Distributor, including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements and which have
rendered assistance (whether direct, administrative, or both) in
the distribution and/or retention of the Fund's Class A Shares or
servicing of accounts of shareholders owning Class A Shares.
The Board of Trustees and shareholders have approved certain
changes to the Plan, the Investment Advisory Agreement (the
"Advisory Agreement") and the Administration Agreement (the
"Administration Agreement") of the Fund which will allow the Fund
to make payments to Qualified Recipients, as defined in the Plan,
at an annual rate of 0.15 of 1% of all of the Fund's average annual
net assets represented by Class A Shares. The proposed increased
payments will be accompanied by matching reductions in fees payable
currently to the Adviser and Administrator. The annual rates of the
advisory fee will be reduced from 0.20 of 1% to 0.16 of 1% and the
rate of the administration fee will be reduced from 0.30 of 1% to
0.24 of 1% of the Fund's average annual net assets. The combined
payments of these fees will accordingly remain at the current level
of 0.55 of 1% of the average annual net assets represented by the
Class A Shares. Implementation of this change was to have taken
place on the earlier of the first day of the calendar quarter after
the quarter in which the Fund's net assets exceed $250 million
(which has not yet occurred) or October 1, 1996. At the date of the
Prospectus, management of the Fund has determined that
implementation of the changes should be indefinitely postponed.
When and if it is determined to implement the changes the
Prospectus will be supplemented.
Under another part of the Plan, the Fund is authorized to make
payments with respect to Class C Shares ("Class C Permitted
Payments") to Qualified Recipients. Class C Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal year
of the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.75 of 1% of the
average annual net assets represented by the Class C Shares of the
Fund. Such payments shall be made only out of the Fund's assets
allocable to the Class C Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Class C Shares or servicing of accounts of shareholders
owning Class C Shares. Payments with respect to Class C Shares
during the first year after purchase are paid to the Distributor
and thereafter to other Qualified Recipients.
Permitted Payments under the Plan commenced July 1,
1994.During the fiscal year ended December 31, 1997, $107,821 was
paid to Qualified Recipients with respect to Class A Shares, of
which $4,357 was retained by the Distributor. During the same
period, $7,193 was paid to Qualified Recipients with respect to
Class C Shares, of which $6,724 was retained by the Distributor.
All of such payments were for compensation. (See the Additional
Statement for a description of the Distribution Plan.)
A third part of the plan authorizes "Permitted Payments" with
respect to the Fund's Class I Shares. (See "General Information.")
Another part of the Plan is designed to protect against any
claim against or involving the Fund that some of the expenses which
might be considered to be sales-related which the Fund pays or may
pay come within the purview of the Rule. The Fund believes that
except for Permitted Payments it is not financing any such activity
and does not consider any payment enumerated in this part of the
Plan as so financing any such activity. However, it might be
claimed that some of the expenses the Fund pays come within the
purview of the Rule. If and to the extent that any payment as
specifically listed in the Plan (see the Additional Statement) is
considered to be primarily intended to result in or as indirect
financing of any activity which is primarily intended to result in
the sale of Fund shares, these payments are authorized under the
Plan. In addition, if the Administrator, out of its own funds,
makes payment for distribution expenses such payments are
authorized. (See the Additional Statement.)
Shareholder Services Plan for Class C Shares
Under a Shareholder Services Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Service Fees") to
Qualified Recipients. Service Fees shall be paid through the
Distributor or shareholder servicing agent as disbursing agent, and
may not exceed, for any fiscal year of the Fund (as adjusted for
any part or parts of a fiscal year during which payments under the
Plan are not accruable or for any fiscal year which is not a full
fiscal year), 0.25 of 1% of the average annual net assets
represented by the Class C Shares of the Fund. Such payments shall
be made only out of the Fund's assets represented by the Class C
Shares. "Qualified Recipients" means broker-dealers or others
selected by the Distributor, including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements and which have
agreed to provide personal services to holders of Class C Shares
and/or maintenance of Class C Shares shareholder accounts. (See the
Additional Statement.) Service Fees with respect to Class C Shares
will be paid to the Distributor. During the fiscal year ended
December 31, 1997, $2,397 of Service Fees was paid to Qualified
Recipients with respect to the Fund's Class C Shares of which
$2,397 was retained by the Distributor.
HOW TO REDEEM YOUR INVESTMENT
You may redeem all or any part of your shares at the net asset
value next determined after acceptance of your redemption request
at the Agent (subject to any applicable contingent deferred sales
charge for redemptions of Class C Shares and CDSC Class A Shares).
For redemptions of Class C Shares and CDSC Class A Shares, at the
time of redemption a sufficient number of additional shares will be
redeemed to pay for any applicable contingent deferred sales
charge. Redemptions can be made by the various methods described
below. There is no minimum period for any investment in the Fund,
except for shares recently purchased by check, Automatic Investment
or Telephone Investment as discussed below. Except for CDSC Class
A Shares (see "Purchase of $1 Million or More") there are no
redemption fees or withdrawal penalties for Class A Shares. Class
C Shares are subject to a contingent deferred sales charge if
redeemed before they have been held 12 months from the date of
purchase. (See "Alternative Purchase Plans.") A redemption may
result in a transaction taxable to you. If you own both Class A
Shares and Class C Shares and do not specify which you wish to
redeem, it will be assumed that you wish to redeem Class A Shares.
For your convenience the Fund offers expedited redemption for
both classes of shares to provide you with a high level of
liquidity for your investment.
Expedited Redemption Methods
(Non-Certificate Shares)
You have the flexibility of two expedited methods of
initiating redemptions. They are available as to shares of either
class not represented by certificates.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Fund and the
check is sent to your address of record, provided that there
has not been a change of your address of record during the 30
days preceding your redemption request. You can make only one
request for telephone redemption by check in any 7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-872-2651 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
2. By FAX or Mail. You may also request redemption payments
to a predesignated Financial Institution account by a letter
of instruction sent to: PFPC Inc., by FAX at 302-791-1777 or
by mail to 400 Bellevue Parkway, Wilmington, DE 19809,
indicating account name(s), account number, amount to be
redeemed, and any payment directions, signed by the registered
holder(s). Signature guarantees are not required. See
"Redemption Payments" below for payment methods.
If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access Features
form and provide the required information concerning your Financial
Institution account number. The Financial Institution account must
be in the exclusive name(s) of the shareholder(s) as registered
with the Fund. You may change the designated Financial Institution
account at any time by completing and returning a Ready Access
Features form. For protection of your assets, this form requires
signature guarantees and possible additional documentation.
Regular Redemption Method
(Certificate and Non-Certificate Shares)
1. Certificate Shares. Certificates representing Class A
Shares to be redeemed should be sent in blank (unsigned) to
the Fund's Shareholder Servicing Agent: PFPC Inc., 400
Bellevue Parkway, Wilmington, DE 19809 with payment
instructions. A stock assignment form signed by the registered
shareholder(s) exactly as the account is registered must also
be sent to the Shareholder Servicing Agent.
For your own protection, it is essential that certificates be
mailed separately from signed redemption documentation. Because of
possible mail problems, it is also recommended that certificates be
sent by registered mail, return receipt requested.
For a redemption request to be in "proper form," the signature
or signatures must be the same as in the registration of the
account. In a joint account, the signatures of both shareholders
are necessary. Signature guarantees may be required if sufficient
documentation is not on file with the Agent. Additional
documentation may be required where shares are held by certain
types of shareholders such as corporations, partnerships, trustees
or executors, or if redemption is requested by other than the
shareholder of record. If redemption proceeds of $50,000 or less
are payable to the record holder and are to be sent to the record
address, no signature guarantee is required, except as noted above.
In all other cases, signatures must be guaranteed by a member of a
national securities exchange, a U.S. bank or trust company, a
state-chartered savings bank, a federally chartered savings and
loan association, a foreign bank having a U.S. correspondent bank,
a participant in the Securities Transfer Association Medallion
Program (STAMP), the Stock Exchanges Medallion Program (SEMP) or
the New York Stock Exchange, Inc. Medallion Signature Program
(MSP). A notary public is not an acceptable signature guarantor.
2. Non-Certificate Shares. If you own non-certificate shares
registered on the books of the Fund, and you have not elected
Expedited Redemption to a predesignated Financial Institution
account, you must use the Regular Redemption Method. Under
this redemption method you should send a letter of instruction
to the Fund's Shareholder Servicing Agent: PFPC Inc., 400
Bellevue Parkway, Wilmington, DE 19809, containing:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated above.
Redemption Payments
Redemption payments will ordinarily be mailed to you at your
address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will, wherever
possible, be wired or transferred through the facilities of the
Automated Clearing House to the Financial Institution account
specified in the Expedited Redemption section of your Application
or Ready Access Features form. The Fund may impose a charge, not
exceeding $5.00 per wire redemption, after written notice to
shareholders who have elected this redemption procedure. The Fund
has no present intention of making this charge. Upon 30 days'
written notice to shareholders, the Fund may modify or terminate
the use of the Automated Clearing House to make redemption payments
at any time or charge a service fee, although no such fee is
presently contemplated. If any such changes are made, the
Prospectus will be supplemented to reflect them. If you use a
broker or dealer to arrange for a redemption, it may charge you a
fee for this service.
The Fund will normally make payment for all shares redeemed on
the next business day (see "Net Asset Value Per Share") following
acceptance of the redemption request made in compliance with one of
the redemption methods specified above. Except as set forth below,
in no event will payment be made more than seven days after
acceptance of such a redemption request. However, the right of
redemption may be suspended or the date of payment postponed (i)
during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is
restricted as determined by the Securities and Exchange Commission
by rule or regulation; (ii) during periods in which an emergency,
as determined by the Securities and Exchange Commission, exists
which causes disposal of, or determination of the net asset value
of, the portfolio securities to be unreasonable or impracticable;
or (iii) for such other periods as the Securities and Exchange
Commission may permit. Payment for redemption of shares recently
purchased by check (irrespective of whether the check is a regular
check or a certified, cashier's or official bank check) or by
Automatic Investment or Telephone Investment may be delayed up to
15 days or until (i) the purchase check or Automatic Investment or
Telephone Investment has been honored or (ii) the Agent has
received assurances by telephone or in writing from the Financial
Institution on which the purchase check was drawn, or from which
the funds for Automatic Investment or Telephone Investment were
transferred, satisfactory to the Agent and the Fund, that the
purchase check or Automatic Investment or Telephone Investment will
be honored. Possible delays in payment of redemption proceeds can
be eliminated by using wire payments or Federal Reserve drafts to
pay for purchases.
If the Trustees determine that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by the distribution in kind of
securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. (See the Additional Statement for details.)
The Fund has the right to compel the redemption of shares held
in any account if the aggregate net asset value of such shares is
less than $500 as a result of shareholder redemptions or failure to
meet the minimum investment level under an Automatic Purchase
Program. If the Board elects to do this, shareholders who are
affected will receive prior written notice and will be permitted 60
days to bring their accounts up to the minimum before this
redemption is processed.
Reinvestment Privilege
You may reinvest without payment of any additional sales
charge all or part of any redemption proceeds within 120 days of a
redemption of shares in shares of the Fund of the same class as the
shares redeemed at the net asset value next determined after the
Agent receives your reinvestment order. In the case of Class C
Shares or CDSC Class A Shares on which a contingent deferred sales
charge was deducted at the time of redemption, the Distributor will
refund to you the amount of such sales charge, which will be added
to the amount of the reinvestment. The Class C Shares or CDSC Class
A Shares issued on reinvestment will be deemed to have been
outstanding from the date of your original purchase of the redeemed
shares, less the period from redemption to reinvestment. The
reinvestment privilege for any class may be exercised only once a
year, unless otherwise approved by the Distributor. If you have
realized a gain on the redemption of your shares, the redemption
transaction is taxable, and reinvestment will not alter any capital
gains tax payable. If there has been a loss on the redemption, some
or all of the loss may be tax deductible, depending on the amount
reinvested and the length of time between the redemption and the
reinvestment. You should consult your own tax advisor on this
matter.
AUTOMATIC WITHDRAWAL PLAN
You may establish an Automatic Withdrawal Plan if you own or
purchase Class A Shares of the Fund having a net asset value of at
least $5,000. The Automatic Withdrawal Plan is not available for
Class C Shares.
Under an Automatic Withdrawal Plan you will receive a monthly
or quarterly check in a stated amount, not less than $50. If such
a plan is established, all dividends and distributions must be
reinvested in your shareholder account. Redemption of Class A
Shares to make payments under the Automatic Withdrawal Plan will
give rise to a gain or loss for tax purposes. (See the Automatic
Withdrawal Plan provisions of the Application included in the
Prospectus, the Additional Statement under "Automatic Withdrawal
Plan," and "Dividend and Tax Information" below.)
Purchases of additional Class A Shares concurrently with
withdrawals are undesirable because of sales charges when purchases
are made. Accordingly, you may not maintain an Automatic Withdrawal
Plan while simultaneously making regular purchases. While an
occasional lump sum investment may be made, such investment should
normally be an amount at least equal to three times the annual
withdrawal or $5,000, whichever is less.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
The Board of Trustees has approved changes in the management
arrangements described below under which the Administrator will
become Investment Adviser and Administrator and the Adviser will
become Sub-Adviser. The change will not result in any change of
personnel or any change in overall management fees. The proposed
changes will be submitted for consideration by the shareholders of
the Fund at the annual meting of shareholders June 29, 1998. If
approved by the shareholders, the new arrangements will go into
effect at that time and the Prospectus will be supplemented.
The Advisory Agreement
KPM Investment Management, Inc. (the "Adviser") supervises the
investment program of the Fund and the composition of its
portfolio. The services of the Adviser are rendered under an
Investment Advisory Agreement (the "Advisory Agreement") which
provides, subject to the control of the Board of Trustees, for
investment supervision of the Fund; at the Adviser's expense
providing for pricing of the Fund's portfolio daily using a pricing
service or other sources of pricing information satisfactory to the
Fund and, unless otherwise directed by the Board of Trustees,
providing for pricing of the Fund's portfolio at least quarterly
using another such source satisfactory to the Fund. Fund accounting
services are performed by the Administrator.
Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Fund and of
those Trustees, if any, who are affiliated with the Adviser.
Additionally, the Adviser agrees that it shall, at the Adviser's
expense, provide to the Fund all office space, facilities,
equipment and clerical personnel necessary for the carrying out of
the Adviser's duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund bears the cost of
preparing and setting in type its prospectuses, statements of
additional information, and reports to shareholders and the costs
of printing or otherwise producing and distributing those copies of
such prospectuses, statements of additional information and reports
as are sent to its shareholders. Under the Advisory Agreement, all
costs and expenses not expressly assumed by the Adviser or by the
Administrator under the Administration Agreement, or by the Fund's
Distributor (principal underwriter), are paid by the Fund. The
Advisory Agreement lists examples of such expenses borne by the
Fund, the major categories of such expenses being: legal and audit
expenses, custodian, transfer agent and shareholder servicing agent
fees and expenses, stock issuance and redemption costs, certain
printing costs, registration costs of the Fund and its shares under
Federal and State securities laws, interest, taxes and brokerage
commissions, and non-recurring expenses, including litigation.
Under the Advisory Agreement, the Fund pays a fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.20 of
1% of the Fund's net assets, provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan of
the Fund based upon the assets of the Fund, the annual fee shall be
payable at the annual rate of 0.20 of 1% of such assets up to $250
million and at the annual rate of 0.16 of 1% of such net asset
value with respect to assets of the Fund above that amount.
The total investment advisory and administration fees which
the Fund pays are at the annual rate of 0.50 of 1% of such net
assets, since the Administrator also receives a fee from the Fund
under the Administration Agreement; see below. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Fund, each waive all or part of any such
fees. In practice, the rate of these fee waivers tends to decline
as assets of the Fund increase.
The Board of Trustees and shareholders of the Fund have
approved certain changes to the Advisory Agreement with reductions
in fees payable to the Adviser from an annual rate of 0.20 of 1% to
0.16 of 1% of all of the Fund's average annual net assets. These
reductions will be accompanied by reductions in the fees payable to
the Administrator (see "Administration Agreement") and will match
an increase in payments under the Fund's Distribution Plan to keep
the combined payments of the Fund at current levels. (See
"Distribution Plan.") The changes were not to be implemented until
the earlier of October 1, 1996 or the first day of the next
succeeding calendar quarter after the quarter in which the net
assets of the Fund exceed $250 million. At the date of the
Prospectus, implementation of these changes has been postponed
indefinitely. When and if it is determined to implement these
changes the Prospectus will be supplemented. Until such time the
current arrangements will remain in effect. (See "Distribution
Plan.")
The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to its pro-rata portion (based
upon the aggregate fees of the Adviser and the Administrator) of
the amount, if any, by which the total expenses of the Fund in any
fiscal year, exclusive of taxes, interest and brokerage fees, shall
exceed the lesser of (i) 2.5% of the first $30 million of average
annual net assets of the Fund plus 2% of the next $70 million of
such assets plus 1.5% of its average annual net assets in excess of
$100 million, or (ii) 25% of the Fund's total annual investment
income.
The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund. Under these
provisions, the Adviser is authorized to consider sales of shares
of the Fund or of any other investment company or companies having
the same investment adviser, sub-adviser, administrator or
principal underwriter as the Fund. See the Additional Statement for
a description of these provisions and prior advisory arrangements.
The Administration Agreement
Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at its
own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as is
necessary in connection with the maintenance of the headquarters of
the Fund and pays all compensation of the Fund's Trustees, officers
and employees who are affiliated persons of the Administrator.
Under the Administration Agreement, subject to the control of
the Fund's Board of Trustees, the Administrator provides all
administrative services to the Fund other than those relating to
its investment portfolio. Such administrative services include but
are not limited to maintaining books and records of the Fund,
either keeping the accounting records of the Fund, including the
computation of net asset value per share and the dividends or, at
its expense and responsibility, delegating such duties in whole or
in part to a company satisfactory to the Fund (however, the daily
pricing of the Fund's portfolio is the responsibility of the
Adviser under the Advisory Agreement), overseeing all relationships
between the Fund and its transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the negotiation of
agreements in relation thereto, the supervision and coordination of
the performance of such agreements, and the overseeing of all
administrative matters which are necessary or desirable for
effective operation of the Fund and for the sale, servicing, or
redemption of the Fund's shares. See the Additional Statement for
a further description of functions listed in the Administration
Agreement as part of such duties.
Under the Administration Agreement, the Fund pays a fee
payable monthly and computed on the net asset value of the Fund as
of the close of business each business day at the annual rate of
0.30 of 1% of the Fund's net assets, provided, however, that for
any day that the Fund pays or accrues a fee under the Distribution
Plan of the Fund based upon the assets of the Fund, the annual fee
shall be payable at the annual rate of 0.30 of 1% of such assets up
to $250 million (the "Base Amount"), and at the annual rate of 0.24
of 1% of such net asset value with respect to assets of the Fund
above $250 million. The Administrator agrees that the above fee
shall be reduced, but not below zero, by an amount equal to its
pro-rata portion (based upon the aggregate fees of the Adviser and
the Administrator) of the amount, if any, by which the total
expenses of the Fund in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5% of
the first $30 million of average annual net assets of the Fund plus
2% of the next $70 million of such assets plus 1.5% of its average
annual net assets in excess of $100 million, or (ii) 25% of the
Fund's total annual investment income.
The Board of Trustees has approved certain changes to the
Administration Agreement with reductions in fees payable to the
Administrator from an annual rate of 0.30 of 1% to 0.24 of 1% of
all of the Fund's average annual net assets. These reductions will
be accompanied by reductions in the fees payable to the Adviser
(see "Advisory Agreement") and will match an increase in payments
under the Fund's Distribution Plan to keep the combined payments of
the Fund at current levels. (See "Distribution Plan.") The changes
were not to be implemented until the earlier of October 1, 1996 or
the first day of the next succeeding calendar quarter after the
quarter in which the net assets of the Fund exceed $250 million. At
the date of the Prospectus, implementation of these changes has
been postponed indefinitely. When and if it is determined to
implement these changes the Prospectus will be supplemented. Until
such time the current arrangements will remain in effect.
Information as to the Adviser,
the Administrator and the Distributor
The Adviser is a wholly-owned subsidiary of KFS Corporation,
a member of the Mutual of Omaha Companies. The Fund's portfolio is
managed in the Adviser's Denver office. Founded in 1981, the
Adviser provides discretionary equity fixed-income and balanced
account management to mutual funds, retirement plans, foundations,
endowments and high net-worth individuals and currently manages
over $1 billion of clients' assets.
Mr. Christopher Johns is the Fund's portfolio manager. Mr.
Johns is First Vice President and has been a Vice President of the
Adviser since 1992. From 1984 through 1992, he was a portfolio
manager at United Bank of Denver (now Norwest Bank, Denver) when
it acted as investment adviser to the Fund. He was formerly a
portfolio manager of Toledo Trust Company. He holds the degree of
BBA in Finance from the University of Cincinnati. Mr. John
Wyszynski is the back-up portfolio manager. He has been employed by
the Adviser since 1993 as a Vice President. He has 14 years
experience in managing Colorado Obligations having worked at
several firms including Kirchner Moore and First Interstate Bank of
Denver. He has an MBA in Finance and Accounting from the University
of Chicago.
The Adviser has its primary office at 10250 Regency Circle,
Omaha, NE 68114 and its Denver office is located at One Norwest
Center, 1700 Lincoln Street, Denver, CO 80203. Since 1983, the
Adviser has been wholly-owned by Mutual of Omaha Insurance Company,
whose principal office is at Mutual of Omaha Plaza, Omaha, NE
68175.
For the year ended December 31, 1997, advisory fees of
$437,704 were paid or accrued to the Adviser.
The Fund's Administrator is founder and administrator to the
Aquilasm Group of Funds, which consists of tax-free municipal bond
funds, money market funds and two equity funds. As of December 31,
1997, these funds had aggregate assets of approximately $2.8
billion, of which approximately $1.9 billion consisted of assets of
the tax-free municipal bond funds. The Administrator, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann (directly,
through a trust and through share ownership by his wife). See the
Additional Statement for information on Mr. Herrmann.
During the year ended December 31, 1997, administration fees
of $656,555 were paid or accrued to the Administrator under the
Administration Agreement of which $5,270 was voluntarily waived.
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 Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs relating
to prospectuses and reports as well as the costs of supplemental
sales literature, advertising and other promotional activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which are
currently owned 75% by Mr. Herrmann and 25% by Diana P. Herrmann,
will be owned by certain directors and/or officers of the
Administrator and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined below,
as dividends on every day, including weekends and holidays, on
those shares outstanding for which payment was received by the
close of business on the preceding business day. Net income for
dividend purposes includes all interest income accrued by the Fund
since the previous dividend declaration, including accretion of any
original issue discount, less expenses paid or accrued. As such net
income will vary, the Fund's dividends will also vary. The
per-share dividends of Class C Shares will be lower than the per
share dividends on the Class A Shares as a result of the higher
service and distribution fees applicable to those shares. In
addition, the dividends of each class can vary because each class
will bear certain class-specific charges. Dividends and other
distributions paid by the Fund with respect to each class of its
shares are calculated at the same time and in the same manner.
It is the Fund's present policy to pay dividends so that they
will be received or credited by approximately the first day of each
month. On the Application or by completing a Ready Access Features
form, you may elect to have dividends deposited without charge by
electronic funds transfers into your account at a Financial
Institution if it is a member of the Automated Clearing House.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid by
the Agent to a selected dealer; or (ii) the third day on which the
New York Stock Exchange is open after the day on which the net
asset value of the redeemed shares has been determined (see "How To
Redeem Your Investment").
Net investment income includes amounts of income from the
Colorado Obligations in the Fund's portfolio which are allocated as
"exempt-interest dividends." "Exempt-interest dividends" are exempt
from regular Federal income tax. The allocation of "exempt-interest
dividends" will be made by the use of one designated percentage
applied uniformly to all income dividends declared during the
Fund's tax year. Such designation will normally be made in the
first month after the end of each of the Fund's fiscal years as to
income dividends paid in the prior year. It is possible that in
certain circumstances, a small portion of the dividends paid by the
Fund will be subject to income taxes. During the Fund's fiscal year
ended December 31, 1997, 96.87% of the Fund's dividends were
"exempt-interest dividends." For the calendar year 1997, 3.13% of
the total dividends paid were taxable as ordinary income. The
percentage of income designated as tax-exempt for any particular
dividend may be different from the percentage of the Fund's income
that was tax-exempt during the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid
out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions to
shareholders, and from short- and long-term gains distributions (if
any) and any other distributions that do not qualify as
"exempt-interest dividends," if shareholders do not comply with
provisions of the law relating to the furnishing of taxpayer
identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the Agent
or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be automatically
reinvested in full and fractional shares of the Fund at net asset
value on the record date for the dividend or distribution or other
date fixed by the Board of Trustees. An election to receive cash
will continue in effect until written notification of a change is
received by the Agent. All shareholders, whether their dividends
are received in cash or are being reinvested, will receive a
monthly account summary indicating the current status of their
investment. There is no fixed dividend rate. Corporate shareholders
of the Fund are not entitled to any deduction for dividends
received from the Fund.
Tax Information
The Fund qualified during its last fiscal year as a "regulated
investment company" under the Code, and intends to continue to so
qualify. If it does so qualify, it will not be liable for Federal
income taxes on amounts paid by it as dividends and distributions.
However, the Code contains a number of complex tests relating to
such qualification and it is possible although not likely that the
Fund might not meet one or more of these tests in any particular
year. If it does not so qualify, it would be treated for tax
purposes as an ordinary corporation, would receive no tax deduction
for payments made to shareholders and would be unable to pay
dividends or distributions which would qualify as "exempt-interest
dividends" or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under the
Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income earned
by the Fund on Colorado Obligations will be excludable from gross
income of the shareholders for regular Federal income tax purposes.
Capital gains dividends are not included in exempt-interest
dividends. Although "exempt-interest dividends" are not taxed, each
taxpayer must report the total amount of tax-exempt interest
(including exempt-interest dividends from the Fund) received or
acquired during the year.
The Code requires that either gains realized by the Fund on
the sale of municipal obligations acquired after April 30, 1993 at
a price which is less than face or redemption value be included as
ordinary income to the extent such gains do not exceed such
discount or that the discount be amortized and included ratably in
taxable income. There is an exception to the foregoing treatment
if the amount of the discount is less than 0.25% of face or
redemption value multiplied by the number of years from acquisition
to maturity. The Fund will report such ordinary income in the
years of sale or redemption rather than amortize the discount and
report it ratably. To the extent the resultant ordinary taxable
income is distributed to shareholders, it will be taxable to them
as ordinary income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates) are
reportable by shareholders as gain from the sale or exchange of a
capital asset held for more than one year. This is the case whether
the shareholder takes the distribution in cash or elects to have
the distribution reinvested in Fund shares and regardless of the
length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to shareholders
as ordinary income. Capital losses of the Fund are not distributed
but carried forward by the Fund to offset gains in later years and
thereby lessen the later-year capital gains dividends and amounts
taxed to shareholders.
The Fund's gains or losses on sales of Colorado Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of the
Fund will also include gains and losses on Futures and options, if
any, including gains and losses actually realized on sales and
exchanges and gains and losses deemed to be realized. Those deemed
to be realized are on Futures and options held by the Fund at
year-end, which are "marked to the market," that is, deemed sold
for fair market value. Net gains or losses realized and deemed
realized on Futures and options will be reportable by the Fund as
long-term to the extent of 60% of the gains or losses and
short-term to the extent of 40% regardless of the actual holding
period of such investments.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders to
enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under rules
used by the Internal Revenue Service for determining when borrowed
funds are deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Fund may be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares. The receipt of exempt-interest dividends from the Fund by
an individual shareholder may result in some portion of any social
security payments or railroad retirement benefits received by the
shareholder or the shareholder's spouse being included in taxable
income. Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds or
private activity bonds should consult their own tax advisers before
purchasing shares.
While interest from all Colorado Obligations is tax-exempt for
purposes of computing the shareholder's regular tax, interest from
so-called private activity bonds issued after August 7, 1986,
constitutes a tax preference for both individuals and corporations
and thus will enter into a computation of the alternative minimum
tax. Whether or not that computation will result in a tax will
depend on the entire content of the taxpayer's return. The Fund
will not invest in the types of Colorado Obligations which would
give rise to interest that would be subject to alternative minimum
taxation if more than 20% of its net assets would be so invested,
and may refrain from investing in that type of bond completely. The
20% limit is a fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current earnings,
this adjustment will tend to make it more likely that corporate
shareholders will be subject to the alternative minimum tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid for
the shares. If you are required to pay a contingent deferred sales
charge at the time of redemption, the amount of that charge will
reduce the amount of your gain or increase the amount of your loss
as the case may be. Your gain or loss will be long-term if you held
the redeemed shares for over 18 months, mid-term if you held the
redeemed shares for over one year but not more than 18 months and
short-term, if for a year or less. Long term capital gains are
currently taxed at a maximum rate of 20%, mid-term capital gains
are currently taxed at a maximum rate of 28%, and short-term gains
are currently taxed at ordinary income tax rates. However, if
shares held for six months or less are redeemed and you have a
loss, two special rules apply: the loss is reduced by the amount of
exempt-interest dividends, if any, which you received on the
redeemed shares, and any loss over and above the amount of such
exempt-interest dividends is treated as a long-term loss to the
extent you have received capital gains dividends on the redeemed
shares.
Tax Effect of Conversion
Class C Shares will automatically convert to Class A Shares
approximately six years after purchase. No gain or loss will be
recognized by the Fund or its shareholders upon such conversions;
each shareholder's adjusted tax basis in the Class A Shares
received upon conversion will equal the shareholder's adjusted tax
basis in the Class C Shares held immediately before the conversion;
and each shareholder's holding period for the Class A Shares
received upon conversion will include the period for which the
shareholder held as capital assets the converted Class C Shares
immediately before conversion.
Colorado Tax Information
Dividends and distributions made by the Fund to Colorado
individuals, trusts, estates and corporations subject to the
Colorado income tax will generally be treated for Colorado income
tax purposes in the same manner as they are treated under the Code
for Federal income tax purposes. Since the Fund may, except as
indicated below, purchase only Colorado Obligations (which, as
defined, means obligations, including those of non-Colorado
issuers, of any maturity which pay interest which, in the opinion
of counsel, is exempt from regular Federal income taxes and
Colorado income taxes), none of the exempt-interest dividends paid
by the Fund will be subject to Colorado income tax. The Fund may
also pay "short-term gains distributions" and "long-term gains
distributions," each as discussed under "Dividends and
Distributions" above. Under Colorado income tax law, each
short-term gains distribution will be treated as a short-term gain
and each long-term gains distribution will be treated as a
long-term capital gain. The only investment which the Fund may make
other than in Colorado Obligations is in Futures and options on
them. Any gains on Futures and options (including gains imputed
under the Code) paid as part or all of a short-term gains
distribution or a long-term gains distribution will be taxed as
indicated above.
Persons or entities who are not Colorado residents should not
be subject to Colorado income taxation on dividends and
distributions made by the Fund unless the nonresident employs his
or her interest in the Fund in a business, trade, profession or
occupation carried on in Colorado but may be subject to other state
and local taxes. As intangibles, shares of the Fund will be exempt
from Colorado property taxes.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Fund and certain tax-free municipal bond funds and two equity
funds(together with this Fund, the "Bond or Equity Funds") and
certain money market funds (the "Money-Market Funds"), all of which
are sponsored by Aquila Management Corporation and Aquila
Distributors, Inc., and have the same Administrator and Distributor
as the Fund. All exchanges are subject to certain conditions
described below. As of the date of the Prospectus, the Aquila Bond
or Equity Funds are this Fund, Aquila Rocky Mountain Equity Fund,
Aquila Cascadia Equity Fund, Hawaiian Tax-Free Trust, Tax-Free
Trust of Arizona, Tax-Free Trust of Oregon, Churchill Tax-Free Fund
of Kentucky, 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 Fund including the Fund for shares of the same class of
any other Bond or Equity Fund, or for shares of any Money Market
Fund, without the payment of a sales charge or any other fee, and
there is no limit on the number of exchanges you can make from fund
to fund. However, the following important information should be
noted:
(1) CDSCs upon redemptions of shares acquired through
exchanges. If you exchange shares 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 the exchanges that have taken place since the
original purchase.
(2) Extension of Holding Periods by owning Money-Market Funds.
Any period of 30 days or more during which Money-Market shares
received on an exchange of CDSC Class A Shares or Class C Shares
are held is not counted in computing the applicable holding period
for CDSC Class A Shares or Class C Shares.
(3) Originally purchased Money Market Fund shares. Shares of
a Money Market Fund (and any shares acquired as a result of
reinvestment of dividends and/or distributions on these shares)
acquired directly in a purchase (or in exchange for Money Market
Fund Shares that were themselves directly purchased), rather than
in exchange for shares of a Bond or Equity Fund, may be exchanged
for shares of any class of any Bond or Equity Fund that the
investor is otherwise qualified to purchase, but the shares
received in such an exchange will be subject to the same sales
charge, if any, that they would have been subject to had they been
purchased rather than acquired in exchange for Money Market Fund
shares. If the shares received in exchange are shares that would be
subject to a CDSC if purchased directly, the holding period
governing the CDSC will run from the date of the exchange, not from
the date of the purchase of Money Market Shares.
This Fund, 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 Fund 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:
800-872-2651 toll free
Note: The Fund, 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 Fund's shares. (See "How to
Invest in the Fund.")
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the realization
of a capital gain or loss, depending on the cost or other tax basis
of the shares exchanged and the holding period (see "Tax Effects of
Redemptions" and the Additional Statement); no representation is
made as to the deductibility of any such loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free money-market
Fund) are exempt from regular Federal income tax, and to the extent
that a portion or all of the dividends paid by Pacific Capital U.S.
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.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's performance
including current yield, taxable equivalent yield, various
expressions of total return, current distribution rate and taxable
equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase, at
the maximum public offering price (offering price includes any
applicable sales charge) for 1-, 5- and 10-year periods and for a
period since the inception of the Fund, to the extent applicable,
through the end of such periods, assuming reinvestment (without
sales charge) of all distributions. The Fund may also furnish total
return quotations for other periods or based on investments at
various applicable sales charge levels or at net asset value. For
such purposes total return equals the total of all income and
capital gains paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the
original investment, expressed as a percentage of the purchase
price. (See the Additional Statement.)
Current yield reflects the income per share earned by each of
the Fund's portfolio investments; it is calculated by (i) dividing
the Fund's net investment income per share during a recent 30-day
period by (ii) the maximum public offering price on the last day of
that period and by (iii) annualizing the result. Taxable equivalent
yield shows the yield from a taxable investment that would be
required to produce an after-tax yield equivalent to that of the
Fund, which invests in tax-exempt obligations. It is computed by
dividing the tax-exempt portion of the Fund's yield (calculated as
indicated) by one minus a stated income tax rate and by adding the
product to the taxable portion (if any) of the Fund's yield. (See
the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities and
Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will be
paid to the Fund's shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate or
taxable equivalent distribution rate which may be quoted to
shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
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 Fund's distribution rate (calculated as indicated above). The
current distribution rate differs from the current yield
computation because it could include distributions to shareholders
from sources, if any, other than dividends and interest, such as
short-term capital gains or return of capital. If distribution
rates are quoted in advertising, they will be accompanied by
calculations of current yield in accordance with the formula of the
Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of expenses,
if any, and will assume the payment of the maximum sales charge, if
any, on the purchase of shares, but not on reinvestment of income
dividends. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment
may earn in the future or what the Fund's yield, tax equivalent
yield, distribution rate, taxable equivalent distribution rate or
total return may be in any future period. The annual report of the
Fund contains additional performance information that will be made
available upon request and without charge.
Description of the Fund and Its Shares
The Fund is an open-end, non-diversified management investment
company organized in 1987 as a Massachusetts business trust. (See
"Investment of the Fund's Assets" for further information about the
Fund's status as "non-diversified.")
The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares and to divide or
combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in
the Fund. Each share represents an equal proportionate interest in
the Fund with each other share of its class; shares of the
respective classes represent proportionate interests in the Fund in
accordance with their respective net asset values. Upon liquidation
of the Fund, shareholders are entitled to share pro-rata in the net
assets of the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund'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
Fund may create additional classes of shares, which may differ from
each other as provided in rules and regulations of the Securities
and Exchange Commission or by exemptive order. The Board of
Trustees may, at its own discretion, create additional series of
shares, each of which may have separate assets and liabilities (in
which case any such series will have a designation including the
word "Series"). See the Additional Statement for further
information about possible additional series. Shares are fully paid
and non-assessable, except as set forth under the caption "General
Information" in the Additional Statement; the holders of shares
have no pre-emptive or conversion rights, except that Class C
Shares automatically convert to Class A Shares after being held for
six years.
In addition to Class A Shares and Class C Shares, which are
offered by this Prospectus, the Fund also has (i) Institutional
Class Shares ("Class Y Shares"), which are offered only to
institutions acting for investors in a fiduciary, advisory, agency,
custodial or similar capacity and are not offered directly to
retail customers and (ii) Financial Intermediary Class Shares
("Class I Shares"), which are offered and sold only through certain
financial intermediaries. Class Y Shares and Class I Shares are
offered by a separate prospectus, which can be obtained by calling
the Fund at 800-872-2652.
The primary distinction among the Fund's four classes of
shares lies in their different sales charge structures and ongoing
expenses, which are likely to be reflected in differing yields and
other measures of investment performance. All four classes
represent interests in the same portfolio of Colorado 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.
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies on
do not properly process date-related information and data involving
the year 2000 and after. The Administrator is taking steps that it
believes are reasonable to address this problem in its own computer
systems and to obtain assurances that comparable steps are being
taken by the other major service providers to the Fund. The
Administrator has also requested the Fund's portfolio manager to
attempt to evaluate the potential impact of this problem on the
issuers of securities in which the Fund invests. At this time there
can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders will
vote on the election of Trustees and on other matters submitted to
the vote of shareholders. Shares vote by classes on any matter
specifically affecting one or more classes, such as an amendment of
an applicable part of the Distribution Plan. No amendment may be
made to the Declaration of Trust without the affirmative vote of
the holders of a majority of the outstanding shares of the Fund
except that the Fund's Board of Trustees may change the name of the
Fund. The Fund may be terminated (i) upon the sale of its assets to
another issuer, or (ii) upon liquidation and distribution of the
assets of the Fund, in either case if such action is approved by
the vote of the holders of a majority of the outstanding shares of
the Fund. If not so terminated, the Fund will continue
indefinitely.
<PAGE>
APPLICATION FOR TAX-FREE FUND OF COLORADO
FOR CLASS A OR CLASS C SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
Tel.# 1-800-872-2651
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for ____________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** _____________________________________
Name of State Minor's Social Security Number
4. ____________________________________________________
____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of
the Trust Instrument. Account for a Pension or Profit Sharing Plan or
Trust may be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
____________________________________________________
Street or PO Box City
_______________________________(______)______________
State Zip Daytime Phone Number
Occupation:________________________Employer:________________________
Employer's Address:__________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding (See
certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2
PURCHASES OF SHARES
A. INITIAL INVESTMENT
Indicate method of payment (For either method, make check
payment to: TAX-FREE FUND OF COLORADO)
Indicate class of shares:
__ Class A Shares (Front-Payment Class)
__ Class C Shares (Level-Payment Class)
IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE MADE IN
CLASS A SHARES.
__ Initial Investment $_________ (Minimum $1,000)
__ Automatic Investment $________ (Minimum $50)
For Automatic Investment of at least $50 per month, you must complete
Step 3, Section A, Step 4, Sections A & B and ATTACH A PRE-PRINTED
DEPOSIT SLIP OR VOIDED CHECK.
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be:___ Reinvested ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK showing the
Financial Institution account where I/we would like you to deposit
the dividend. (A Financial Institution is a commercial bank, savings
bank or credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested
in your Tax-Free Fund of Colorado Account. To establish this program,
please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or on
the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
toll-free at 1-800-872-2651. To establish this program, please complete
Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. LETTER OF INTENT
APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this application
___ Yes ___ No
I/We intend to invest in Class A Shares of the Fund during the 13-month
period from the date of my/our first purchase pursuant to this Letter
(which purchase cannot be more than 90 days prior to the date of this
Letter), an aggregate amount (excluding any reinvestment of dividends
or distributions) of at least $25,000 which, together with my/our present
holdings of Fund shares (at public offering price on date of this Letter),
will equal or exceed the minimum amount checked below:
___ $25,000 ___ $50,000 ___ $100,000 ___ $250,000 ___ $500,000
D. AUTOMATIC WITHDRAWAL PLAN
(Minimum investment $5,000)
APPLICABLE TO CLASS A SHARES ONLY.
Application must be received in good order at least 2 weeks prior to 1st
actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, PFPC Inc. ("the Agent")
is authorized to redeem sufficient shares from this account at the then
current Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $ ______________beginning________________ .
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
_______________________________ ____________________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ____________________________________
Street Financial Institution Street Address
_______________________________ ____________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
E. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
persons telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorneys fees, resulting from
acceptance of, or acting or failure to act upon, this Authorization.
F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account listed.
Cash proceeds in any amount from the redemption of shares will be
mailed or wired, whenever possible, upon request, if in an amount of
$1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Fund
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ ____________________________________
Account Registration Financial Institution Account Number
_________________________ _____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ _____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT YOU MUST
ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to
my/our account any drafts or debits drawn on my/our account initiated
by the Agent, PFPC Inc., and to pay such sums in accordance therewith,
provided my/our account has sufficient funds to cover such drafts or
debits. I/We further agree that your treatment of such orders will be
the same as if I/we personally signed or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number _____________________________________
Name and Address where my/our account is maintained
Name of Financial Institution______________________________________________
Street Address_____________________________________________________________
City___________________________________________State _________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account is
registered
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila
Distributors, Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit in
the normal course of business initiated by the Agent (except any loss
due to your payment of any amount drawn against insufficient or uncollected
funds), provided that you promptly notify us in writing of any claim
against you with respect to the same, and further provided that you will
not settle or pay or agree to settle or pay any such claim without the
written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any such
electronic debit.
STEP 4
Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of legal
age to purchase shares of the Fund and has received and read a current
Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these instructions
for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution has
insufficient funds, the Fund and its agents may cancel the purchase
transaction and are authorized to liquidate other shares or fractions
thereof held in my/our Fund account to make up any deficiency resulting
from any decline in the net asset value of shares so purchased and any
dividends paid on those shares. I/We authorize the Fund and its agents to
correct any transfer error by a debit or credit to my/our Financial
Institution account and/or Fund account and to charge the account for any
related charges. I/We acknowledge that shares purchased either through
Automatic Investment or Telephone Investment are subject to applicable
sales charges.
- - The Fund, the Agent and the Distributor and their Trustees, directors,
employees and agents will not be liable for acting upon instructions
believed to be genuine, and will not be responsible for any losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify the identity of the caller. The
Agent will request some or all of the following information: account name
and number; name(s) and social security number registered to the account
and personal identification; the Agent may also record calls. Shareholders
should verify the accuracy of confirmation statements immediately upon
receipt. Under penalties of perjury, the undersigned whose Social Security
(Tax I.D.) Number is shown above certifies (i) that Number is my correct
taxpayer identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned further
certifies, under penalties of perjury, that either (a) no such Number has
been issued, and a Number has been or will soon be applied for; if a
Number is not provided to you within sixty days, the undersigned
understands that all payments (including liquidations) are subject to 31%
withholding under federal tax law, until a Number is provided and the
undersigned may be subject to a $50 I.R.S. penalty; or (b) that the
undersigned is not a citizen or resident of the U.S.; and either does
not expect to be in the U.S. for 183 days during each calendar year and
does not conduct a business in the U.S. which would receive any gain from
the Fund, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ ____________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ ____________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment, Expedited
Redemption and Direct Deposit of Dividends) are effective 15 days after
this form is received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access features form which may be obtained from Aquila Distributors
at 1-800-872-2652 and send it to the Agent together with a "voided" check
or pre-printed deposit slip from the new account. The new Financial
Institution change is effective in 15 days after this form is received in
good order by the Fund's Agent.
TERMS OF LETTER OF INTENT AND ESCROW
By checking Box 3c and signing the Application, the investor is
entitled to make each purchase at the public offering price applicable
to a single transaction of the dollar amount checked above, and agrees
to be bound by the terms and conditions applicable to Letters of Intent
appearing below.
The investor is making no commitment to purchase shares, but if the
investor's purchases within thirteen months from the date of the
investor's first purchase do not aggregate $25,000, or, if such purchases
added to the investor's present holdings do not aggregate the minimum
amount specified above, the investor will pay the increased amount of
sales charge prescribed in the terms of escrow below.
The commission to the dealer or broker, if any, named herein shall
be at the rate applicable to the minimum amount of the investor's
specified intended purchases checked above. If the investor's actual
purchases do not reach this minimum amount, the commissions previously
paid to the dealer will be adjusted to the rate applicable to the
investor's total purchases. If the investor's purchases exceed the
dollar amount of the investor's intended purchases and pass the next
commission break-point, the investor shall receive the lower sales
charge, provided that the dealer returns to the Distributor the excess
of commissions previously allowed or paid to him over that which would
be applicable to the amount of the investor's total purchases.
The investor's dealer or broker shall refer to this Letter of Intent
in placing any future purchase orders for the investor while this Letter
is in effect.
The escrow shall operate as follows:
1. Out of the initial purchase (or subsequent purchases if necessary),
3% of the dollar amount specified in the Letter of Intent (computed
to the nearest full share) shall be held in escrow in shares of the
Fund by the Agent. All dividends and any capital distributions on the
escrowed shares will be credited to the investor's account.
2. If the total minimum investment specified under the Letter is completed
within a thirteen-month period, the escrowed shares will be promptly
released to the investor. However, shares disposed of prior to completion
of the purchase requirement under the Letter will be deducted from the
amount required to complete the investment commitment.
3. If the total purchases pursuant to the Letter are less than the amount
specified in the Letter as the intended aggregate purchases, the investor
must remit to the Distributor an amount equal to the difference between
the dollar amount of sales charges actually paid and the amount of sales
charges which would have been paid if the total amount purchased had been
made at a single time. If such difference in sales charges is not paid
within twenty days after receipt of a request from the Distributor or the
dealer, the Distributor will, within sixty days after the expiration of
the Letter, redeem the number of escrowed shares necessary to realize
such difference in sales charges. Full shares and any cash proceeds for a
fractional share remaining after such redemption will be released to the
investor. The escrow of shares will not be released until any additional
sales charge due has been paid as stated in this section.
4. By checking Box 3c and signing the Application, the investor
irrevocably constitutes and appoints the Agent or the Distributor as his
attorney to surrender for redemption any or all escrowed shares on the
books of the Fund.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees to the
terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Fund. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may be
held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will
be made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address
to which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon receipt
of evidence satisfactory to it of the death or legal incapacity of the
Planholder. Upon termination of the Plan by the Agent or the Fund, shares
remaining unredeemed will be held in an uncertificated account in the name
of the Planholder, and the account will continue as a dividend-
reinvestment, uncertificated account unless and until proper instructions
are received from the Planholder, his executor or guardian, or as
otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any successor
transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made. Accordingly,
a Planholder may not maintain this Plan while simultaneously making
regular purchases. While an occasional lump sum investment may be made,
such investment should normally be an amount equivalent to three times
the annual withdrawal or $5,000, whichever is less.
<PAGE>
INVESTMENT ADVISER
KPM Investment Management, Inc.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
William M. Cole
Anne J. Mills
J. William Weeks
John G. Welles
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Jean M. Smith, Vice President
Jessica Wiltshire, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights......................................
Table of Expenses...............................
Financial Highlights............................
Introduction....................................
Investment Of The Fund's Assets.................
Investment Restrictions.........................
Net Asset Value Per Share.......................
Alternative Purchase Plans......................
How To Invest In The Fund.......................
How To Redeem Your Investment...................
Automatic Withdrawal Plan.......................
Management Arrangements.........................
Dividend And Tax Information....................
Exchange Privilege..............................
General Information.............................
Application and Letter of Intent
AQUILA
[LOGO]
Tax-Free Fund
of
Colorado
A tax-free
income investment
[LOGO]
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Tax-Free Fund of Colorado
380 Madison Avenue Suite 2300
New York, NY 10017
800-USA-COL2 (800-872-2652)
212-697-6666
Prospectus
Class Y Shares
Class I Shares April 30, 1998
The Fund is a mutual fund whose objective is to seek to provide as
high a level of current income exempt from Colorado and regular
Federal income taxes as is consistent with preservation of capital
by investing in municipal obligations which pay interest exempt
from Colorado State and Federal income taxes. These municipal
obligations must, at the time of purchase, either be rated within
the four highest credit ratings (considered as investment grade)
assigned by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, or, if unrated, be determined to be of comparable
quality by the Fund's Adviser, KPM Investment Management, Inc.
This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund (the "Additional Statement") dated April
30, 1998, has been filed with the Securities and Exchange
Commission and is available without charge upon written request to
the Fund's Shareholder Servicing Agent, at the address given below,
or by calling the telephone number(s) given below. The Additional
Statement contains information about the Fund and its management
not included in the Prospectus. The Additional Statement is
incorporated by reference in its entirety in the Prospectus. Only
when you have read both the Prospectus and the Additional Statement
are all material facts about the Fund available to you.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY ANY BANK. SHARES OF THE FUND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY OR
GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
The Fund's Shareholder Servicing Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-872-2651 toll free
For General Inquiries & Yield Information,
Call 800-872-2652 toll free or 212-697-6666
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
HIGHLIGHTS
Tax-Free Fund of Colorado, founded by Aquila Management
Corporation in 1987 and one of the Aquilasm Group of Funds, is an
open-end mutual fund which invests in tax-free municipal bonds, the
kind of obligations issued by the State of Colorado, its counties
and various other local authorities to finance such long-term
public purpose projects as schools, universities, housing,
transportation, utilities, hospitals and water and sewer facilities
throughout Colorado. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the Fund
invests pay interest which is exempt from both regular Federal and
State of Colorado income taxes. Dividends paid by the Fund from
this income are likewise free of both such taxes. It is, however,
possible that in certain circumstances a small portion of the
dividends paid by the Fund will be subject to income taxes. The
Federal alternative minimum tax may apply to some investors, but
its impact will be limited since not more than 20% of the Fund's
net assets can be invested in obligations paying interest which is
subject to this tax. The receipt of exempt-interest dividends from
the Fund may result in some portion of social security payments or
railroad retirement benefits being included in taxable income.
Capital gains distributions, if any, are taxable. (See "Dividend
and Tax Information.")
Investment Grade - The Fund will acquire only those municipal
obligations which, at the time of purchase, are within the four
highest credit ratings assigned by Moody's Investors Service, Inc.
or Standard & Poor's Corporation, or are determined by the Adviser
to be of comparable quality. In general there are nine separate
credit ratings, ranging from the highest to the lowest credit
ratings for municipal obligations. Obligations within the top four
ratings are considered "investment grade," but those in the fourth
rating may have speculative characteristics as well. (See
"Investment of the Fund's Assets.")
Alternative Purchase Plans -- The Fund provides alternative
ways to invest. (See "How to Invest in the Fund.") For this purpose
the Fund offers classes of shares, which differ in their expense
levels and sales charges. This Prospectus offers the following
classes of shares:
Institutional Class Shares ("Class Y Shares") are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity, and are
not offered directly to retail customers. Class Y Shares
are offered at net asset value with no sales charge, no
redemption fee, no contingent deferred sales charge and
no distribution fee. (See "How to Purchase Class Y
Shares.")
Financial Intermediary Class Shares ("Class I Shares")
are offered and sold only through financial
intermediaries with which the Aquila Distributors, Inc.
the ("Distributor") has entered into sales agreements,
and are not offered directly to retail customers. Class
I Shares are offered at net asset value with no sales
charge and no redemption fee or contingent deferred sales
charge, although a financial intermediary may charge a
fee for effecting a purchase or other transaction on
behalf of its customers. Class I Shares may carry a
distribution fee of up to 0.25 of 1% of average annual
net assets allocable to Class I Shares, currently 0.10 of
1% of such net assets, and a services fee of 0.25 of 1%
of such assets. (See "How to Purchase Class I Shares.")
The Fund's other classes of shares, Front-Payment Class Shares
("Class A Shares") and Level-Payment Class Shares ("Class C
Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of the Prospectus, Class Y Shares and Class I
Shares are registered for sale only in certain states. (See "How to
Invest in the Fund.") If Class Y Shares or Class I Shares of the
Fund are sold outside those states, except to certain institutional
investors, the Fund can redeem them. If your state of residence is
not Colorado, dividends from the Fund may be subject to income
taxes of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of the Fund.
Initial Investment - - You may open your account for Class Y
Shares with any purchase of $100,000 or more for fiduciary accounts
and $250,000 for all other eligible purchasers. These minimums do
not apply to shareholders with accounts open on April 30, 1998.
(See the Application, which is in the back of the Prospectus.)
Class I Shares are sold only through financial intermediaries,
which may have their own minimum investment requirement. (See "How
to Invest in the Fund.")
Additional Investments - You may make additional investments
in Class Y Shares at any time and in any amount, directly or, if in
an amount of $50 or more, through the convenience of having your
investment electronically transferred from your financial
institution account into the Fund by Automatic Investment or
Telephone Investment. Additional investments in Class I Shares can
be made only through financial intermediaries, which may have their
own requirements for subsequent investments. (See "How to Invest in
the Fund.")
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends on Class Y Shares are paid by
check mailed to you, directly deposited into your financial
institution account or automatically reinvested without sales
charge in additional Class Y Shares at the then-current net asset
value. All arrangements for the payment of dividends with respect
to Class I Shares, including reinvestment of dividends, must be
made through financial intermediaries. (See "Dividend and Tax
Information.")
Many Different Issues - You have the advantages of a portfolio
which consists of over 154 issues with different maturities. (See
"Investment of the Fund's Assets.")
Local Portfolio Management - KPM Investment Management, Inc.
(the "Adviser") serves as the Fund's investment adviser. It is a
wholly-owned subsidiary of KFS Corporation, a member of the Mutual
of Omaha Companies. The Fund's portfolio is managed in the
Adviser's Denver office. Founded in 1981, the Adviser provides
discretionary equity, fixed-income and balanced account management
to mutual funds, retirement plans, foundations, endowments and high
net-worth individuals and currently manages over $1 billion of
clients' assets.
The Fund is obligated to pay investment advisory fees at the
rate of 0.20 of 1% of average annual net assets to the Adviser and
administration fees at the rate of 0.30 of 1% of such net assets to
its Administrator (for total fees at the rate of 0.50 of 1% of
average annual net assets). These fees are subject to reduction
when the Fund makes certain payments under the Distribution Plan.
(See "Table of Expenses," "Distribution Plan" and "Management
Arrangements.") Some or all of these fees may be waived by the
Adviser and Administrator. These arrangements are proposed to be
changed. (See "Management Arrangements.")
Redemptions - Liquidity - You may redeem any amount of your
Class Y Shares account on any business day at the next determined
net asset value by telephone, FAX or mail request, with proceeds
being sent to a predesignated financial institution, if you have
elected Expedited Redemption. Proceeds will be wired or transferred
through the facilities of the Automated Clearing House, wherever
possible, upon request, if in an amount of $1,000 or more, or will
be mailed. For these and other redemption procedures see "How to
Redeem Your Investment." All arrangements for redemptions of Class
I Shares must be made through financial intermediaries. The Fund
does not impose redemption fees for redemption of Class Y Shares or
Class I Shares. However, financial intermediaries may charge a fee
for effecting redemptions.
Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class Y Shares of the Fund into
Class Y Shares of other Aquila-sponsored tax-free municipal bond
mutual funds or two Aquila-sponsored equity funds. You may also
exchange them into shares of the Aquila-sponsored money market
funds. Similar exchangability is available to Class I Shares to the
extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. The exchange prices will be
the respective net asset values of the shares. (See "Exchange
Privilege.")
Risks and Special Considerations - The share price, determined
on each business day, varies with the market prices of the Fund's
portfolio securities, which fluctuate with market conditions,
including prevailing interest rates. Accordingly, the proceeds of
redemptions may be more or less than your original cost. (See
"Factors Which May Affect the Value of the Fund's Investments and
Their Yields.") The Fund's assets, being primarily or entirely
Colorado issues, are subject to economic and other conditions
affecting Colorado. (See "Risk Factors and Special Considerations
Regarding Investment in Colorado Obligations.") Moreover, the Fund
is classified as a "non-diversified" investment company, because it
may choose to invest in the obligations of a relatively limited
number of issuers. (See "Investment of the Fund's Assets.") The
Fund may also, to a limited degree, buy and sell futures contracts
and options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may be
risks associated with these practices. (See "Certain Stabilizing
Measures.")
Statements and Reports - You will receive statements of your
Class Y Shares account monthly as well as each time you add to your
account or take money out. Financial intermediaries provide their
own statements of Class I Shares accounts. Additionally, you will
receive a Semi-Annual Report and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
TABLE OF EXPENSES
Class I Class Y
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of the offering price)
Maximum Sales Charge Imposed on Reinvested
Dividends None None
Maximum Deferred Sales Charge None None
Redemption Fees None None
Exchange Fee None None
Annual Fund Operating Expenses(1)
(as a percentage of average net assets)
Investment Advisory Fee 0.20% 0.20%
12b-1 Fee(2) 0.10% None
All Other Expenses(3) 0.75% 0.50%
Administration Fee 0.30% 0.30%
Other Expenses(3) 0.45% 0.20%
Total Fund Operating Expenses(3) 1.05% 0.70%
Example(4)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class I Shares $11 $33 $58 $128
Class Y Shares $7 $22 $39 $87
<FN>
(1) Estimated based upon amounts incurred by the Fund's Class Y Shares
during its most recent fiscal year, restated to reflect current
arrangements.
</FN>
<FN>
(2) Current rates; up to 0.25% can be authorized.
</FN>
<FN>
(3) Does not reflect a 0.03% expense offset in custodian fees received
for uninvested cash balances. Reflect this offset and based on estimates
for Class I, other expenses, all other expenses, and total Fund operating
expenses for Class I Shares would have been 0.42%, 0.72% and 1.02%,
respectively; for Class Y Shares, these expenses would have been 0.17%,
0.47%, and 0.67%, respectively. Operating expenses for Class I Shares
include a 0.25% Service fee. (See "Shareholder Services Plan for Class I
Shares.")
</FN>
<FN>
(4) The expense example is based upon the annual Fund operating
expenses. It is also based upon amounts at the beginning of each year
which includes the prior year's assumed results. A year's results
consist of an assumed 5% annual return less total operating
expenses; the expense ratio was applied to an assumed average balance
(the year's starting investment plus one-half the year's results).
Each figure represents the cumulative expenses so determined for the
period specified.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL
MUTUAL FUNDS USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING
THE ABOVE EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE INTERPRETED
AS A PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE HIGHER OR LOWER.
The purpose of the above table is to assist the investor in
understanding the various costs that an investor in the Fund will
bear directly or indirectly.
<PAGE>
The table shown below for Class A Shares is for information purposes
only. Class A Shares are not offered by this Prospectus.
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to
the five years ended December 31, 1997 has been audited by KPMG Peat
Marwick LLP, independent auditors, whose report thereon is included
with the Fund's financial statements contained in its Annual Report,
which are incorporated by reference into the Additional Statement.
The information provided in the table should be read in conjunction
with the financial statements and related notes. The Fund's Annual
Report contains additional information about the Fund's performance
and is available upon request without charge.
Class A(3)(+) Class Y(4)(+)
Year Period
Year ended December 31, Ended Ended
1997 1996 1995 1994 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.41 $10.56 $9.82 $10.77 $10.41 $10.38
Income from Investment
Operations:
Net investment income 0.50 0.52 0.54 0.55 0.52 0.38
Net gain (loss) on
securities (both
realized and unrealized) 0.23 (0.13) 0.74 (0.95) 0.25 0.12
Total from Investment
Operations 0.73 0.39 1.28 (0.40) 0.77 0.50
Less Distributions:
Dividends from net
investment income (0.52) (0.54) (0.54) (0.55) (0.54) (0.40)
Distributions from
capital gains - - - - - -
Total Distributions (0.52) (0.54) (0.54) (0.55) (0.54) (0.40)
Net Asset Value, End of
Period $10.62 $10.41 $10.56 $9.82 $10.64 $10.41
Total Return (not
reflecting sales
charge)(%) 7.21 3.78 13.28 (3.80) 7.65 4.87(1)
Ratios/Supplemental Data
Net Assets, End of Period
($ in thousands) 216,321 214,392 219,306 199,075 5,668 0.1
Ratio of Expenses to
Average Net Assets($) 0.72 0.69 0.63 0.57 0.67 0.64(2)
Ratio of Net Investment
Income to Average Net
Assets(%) 4.81 5.03 5.21 5.36 4.79 5.08(2)
Portfolio Turnover
Rate(%) 22.66 10.96 14.20 15.53 22.66 10.96
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and
the expense offset in custodian fees for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income(%) 0.50 0.51 0.52 0.53 0.52 0.37
Ratio of Expenses to
Average Net Assets(%) 0.75 0.75 0.77 0.76 0.70 0.70(2)
Ratio of Net Investment
Income to Average Net
Assets(%) 4.78 4.97 5.07 5.17 4.76 5.02(2)
<CAPTION> Class A(3)(+)
1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C>
$10.38 $10.18 $9.77 $9.80 $9.66 $9.51
0.57 0.61 0.62 0.64 0.67 0.63
0.55 0.28 0.41 (0.03) 0.14 0.14
1.12 0.89 1.03 0.61 0.81 0.77
(0.57) (0.61) (0.62) (0.64) (0.67) (0.62)
(0.16) (0.08) - - - -
(0.73) (0.69) (0.62) (0.64) (0.67) (0.62)
$10.77 $10.38 $10.18 $9.77 $9.80 $9.66
11.10 9.00 10.96 6.59 8.59 8.84
222,277 174,031 129,760 88,086 55,901 22,884
0.53 0.45 0.43 0.27 0.14 0.06
5.32 5.90 6.25 6.56 6.62 6.72
20.89 25.88 25.47 23.73 34.29 8.13
0.55 0.59 0.58 0.59 0.57 0.55
0.73 0.70 0.80 0.75 1.00 1.41
5.12 5.65 5.88 6.08 5.73 5.37
<FN>
(1) Not annualized.
</FN>
<FN>
(2) Annualized.
</FN>
<FN>
(3) Designated as Class A Shares on April 30, 1996.
</FN>
<FN>
(4) New Class of Shares established on April 30, 1996.
</FN>
<FN>
* For the period from April 30, 1996 to December 31, 1996.
</FN>
<FN>
+ On April 19, 1991, Norwest Bank Denver, National Association,
originally the Fund's Investment Adviser, became Sub-Adviser
and Norwest Bank Minnesota, National Association became
Investment Adviser upon completion of a merger with Norwest
Corporation. On October 1, 1992, Kirkpatrick, Pettis, Smith,
Polian Inc. became the Fund's Investment Adviser. On July 1,
1994, Kirkpatrick, Pettis, Smith's wholly-owned subsidiary, KPM
Investment Management Inc., became the Fund's Adviser. On June 13,
1989, Aquila Management Corporation, originally the Fund's Sub-Adviser
and Administrator became Administrator only. (See "Management
Arrangements").
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment for
investors who seek income exempt from Colorado State and regular
Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Colorado Obligations, as defined below, which
may include obligations of certain non-Colorado issuers. The Fund
offers you the opportunity to keep assets fully invested in a
vehicle that provides a professionally managed portfolio of
Colorado Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Colorado Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments of
fixed denominations, including the selecting, purchasing, handling,
monitoring call provisions and safekeeping of Colorado Obligations.
Colorado Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes; bond
anticipation notes; construction loan notes and floating and
variable rate demand notes. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase
contracts for property or equipment. The purposes for which
municipal obligations such as bonds are issued include the
construction of a wide range of public facilities such as airports,
highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public
purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, the obtaining of funds for
general operating expenses and the obtaining of funds to lend to
other public institutions and facilities.
INVESTMENT OF THE FUND'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Colorado State and regular
Federal income taxes as is consistent with the preservation of
capital, the Fund will invest in Colorado Obligations (as defined
below). There is no assurance that the Fund will achieve its
objective, which is a fundamental policy of the Fund. (See
"Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Colorado Obligations" means obligations, including those of
certain non-Colorado issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate counsel,
is exempt from regular Federal income taxes and not subject to
Colorado income taxes. Although exempt from regular Federal income
tax, interest paid on certain types of Colorado Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Colorado Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Colorado
Obligations. (See "Dividend and Tax Information.")
The non-Colorado bonds or other obligations the interest on
which is exempt under present law from regular Federal and Colorado
income taxes are those issued by or under the authority of Guam,
the Northern Mariana Islands, Puerto Rico and the Virgin Islands.
The Fund will not purchase Colorado Obligations of non-Colorado
issuers unless Colorado Obligations of Colorado issuers of the
desired quality, maturity and interest rate are not available. As
a Colorado-oriented fund, at least 65% of the Fund's total assets
will be invested in Colorado Obligations of Colorado issuers. The
Fund invests only in Colorado Obligations and, possibly, in Futures
and options on Futures (see below) for protective (hedging)
purposes.
In general, there are nine separate credit ratings ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Fund will have a portfolio of quality
oriented (investment grade) securities, the Colorado Obligations
which the Fund will purchase must, at the time of purchase, either
(i) be rated within the four highest credit ratings assigned by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"); or (ii) if unrated, be determined to be of
comparable quality to municipal obligations so rated by KPM
Investment Management, Inc. (the "Adviser"), subject to the
direction and control of the Fund's Board of Trustees. Municipal
obligations rated in the fourth highest credit rating are
considered by such rating agencies to be of medium quality and thus
may present investment risks not present in more highly rated
obligations. Such bonds lack outstanding investment characteristics
and may in fact have speculative characteristics as well; changes
in economic conditions or other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments
than is the case for higher grade bonds. If after purchase the
rating of any rated Colorado Obligation is downgraded such that it
could not then be purchased by the Fund, or, in the case of an
unrated Colorado Obligation, if the Adviser determines that the
unrated obligation is no longer of comparable quality to those
rated obligations which the Fund may purchase, it is the current
policy of the Fund to cause any such obligation to be sold as
promptly thereafter as the Adviser in its discretion determines to
be consistent with the Fund's objectives; such obligation remains
in the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Fund can purchase industrial
development bonds only if they meet the definition of Colorado
Obligations, i.e., the interest on them is exempt from Colorado
State and regular Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940 Act").
The Fund also intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code (the "Code").
One of the tests for such qualification under the Code is, in
general, that at the end of each fiscal quarter of the Fund, at
least 50% of its assets must consist of (i) cash; and (ii)
securities which, as to any one issuer, do not exceed 5% of the
value of the Fund's assets. If the Fund had elected to register
under the 1940 Act as a "diversified" investment company, it would
have to meet a similar test as to 75% of its assets. The Fund may
therefore not have as much diversification among securities, and
thus diversification of risk, as if it had made this election under
the 1940 Act. In general, the more the Fund invests in the
securities of specific issuers, the more the Fund is exposed to
risks associated with investments in those issuers. The Fund's
assets, being primarily or entirely Colorado issues, are
accordingly subject to economic and other conditions affecting
Colorado. (See "Risk Factors and Special Considerations Regarding
Investment in Colorado Obligations.")
Certain Stabilizing Measures
The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash and
cash equivalents in attempting to protect against declines in the
value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Fund has no current intention of using futures and options, to
the limited degree described below, these may be used to attempt to
hedge against changes in the market price of the Fund's Colorado
Obligations caused by interest rate fluctuations. Futures and
options could also provide a hedge against increases in the cost of
securities the Fund intends to purchase.
Although it does not currently do so, and since inception has
not done so, the Fund may buy and sell futures contracts relating
to indices on municipal bonds ("Municipal Bond Index Futures") and
to U.S. government securities ("U.S. Government Securities
Futures"); both kinds of futures contracts are "Futures." The Fund
may also write and purchase put and call options on Futures.
As a matter of fundamental policy the Fund will not buy or
sell a Future or an option on a Future if thereafter more than 10%
of its net assets would be in initial or variation margin on such
Futures and options on them, and in premiums on such options. The
Fund will not enter into Futures or options for which the aggregate
initial margins and premiums paid for options exceed 5% of the fair
market value of the Fund's assets. (See the Additional Statement.)
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and the
prices of Futures or options purchased or sold by the Fund; (ii)
incorrect forecasts by the Adviser concerning interest rates which
may result in the hedge being ineffective; and (iii) possible lack
of a liquid secondary market for a Future or option; the resulting
inability to close a Futures or options position could adversely
affect the Fund's hedging ability.
For a hedge to be completely effective, the price change of
the hedging instrument should equal the price change of the
security being hedged. The risk of imperfect correlation of these
price changes is increased as the composition of the Fund's
portfolio is divergent from the debt securities underlying the
hedging instrument. To date, the Adviser has had no experience in
the use of Futures or options on them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits" established
by commodity exchanges which restrict the amount of change in the
contract price allowed during a single trading day. Thus, once a
daily limit is reached, no further trades may be entered into
beyond the limit, thereby preventing the liquidation of open
positions. Prices have in the past reached the daily limit on a
number of consecutive trading days. For further information about
Futures and options, see the Additional Statement.
When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one year,
but permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding one year, in each case
upon not more than 30 days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the note plus
accrued interest upon a specified number of days' notice to the
noteholders. The interest rate on a floating rate demand note is
based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The
interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Colorado Obligations (such as industrial
development bonds and municipal lease/purchase agreements). A
participation interest gives the Fund an undivided interest in the
underlying Colorado Obligations in the proportion that the Fund's
participation interest bears to the total amount of the underlying
Colorado Obligations. All such participation interests must meet
the Fund's credit requirements. (See "Limitation to 10% as to
Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Colorado Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring them.
The Colorado Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery and
payment take place; their value at the delivery date may be less
than the purchase price. The Fund cannot enter into when-issued
commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments. If the Fund chooses
to dispose of the right to acquire a when-issued obligation prior
to its acquisition, it could, as with the disposition of any other
portfolio holding, incur a gain or loss due to market fluctuation;
any such gain would be a taxable short-term gain. The Fund 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. See the Additional Statement for further
information.
Limitation to 10% as to Certain Investments
The Fund cannot purchase Colorado Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does not
include any Colorado Obligations as to which the Fund can exercise
the right to demand payment in full within three days and as to
which there is a secondary market. Floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. (See
the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets in
(i) Colorado Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value of
the Fund's Investments and Their Yields
The value of the Colorado Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Colorado Obligations, the value of
these obligations will normally go down; if these rates go down,
the value of these obligations will normally go up. Changes in
value and yield based on changes in prevailing interest rates may
have different effects on short-term Colorado Obligations than on
long-term obligations. Long-term obligations (which often have
higher yields) may fluctuate in value more than short-term ones.
For this reason, the Fund may, to achieve a defensive position,
shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Colorado Obligations
The following is a discussion of the general factors that
might influence the ability of Colorado issuers to repay principal
and interest when due on the Colorado Obligations contained in the
portfolio of the Fund. Such information is derived from sources
that are generally available to investors and is believed by the
Fund to be accurate, but has not been independently verified and
may not be complete.
Because of limitations contained in the state constitution,
the State of Colorado issues no general obligation bonds secured by
the full faith and credit of the state. Several agencies and
instrumentalities of state government are authorized by statute to
issue bonds secured by revenues from specific projects and
activities. Additionally, the state currently is authorized to
issue short-term revenue anticipation notes.
There are approximately 2,000 units of local government in
Colorado, including counties, statutory cities and towns, home-rule
cities and counties, school districts and a variety of water,
irrigation, and other special districts and special improvement
districts, all with various constitutional and statutory authority
to levy taxes and incur indebtedness. The major source of revenue
for funding such indebtedness is the ad valorem property tax, which
presently is levied and collected solely at the local level,
although the state is also authorized to levy such taxes. There is
a statutory restriction on the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions in Colorado
without electoral approval.
In 1992, an amendment to the Constitution of the State of
Colorado was approved and went into effect. In general, the effect
of the amendment was to limit the ability of the State and local
governments to increase revenues and expenditures, issue debt and
enter into other financial obligations and raise taxes.
Colorado's economy is diversified and the state has become the
services center for the Rocky Mountain region. The state's economy
includes agriculture, manufacturing (especially high technology and
communications), construction, tourism (ski resorts and national
parks) and mining (primarily oil production). Colorado has
recovered from economic difficulties experienced during the past
several years, which caused state government revenue shortfalls at
that time.
Employment in Colorado is diversified among services, trade,
government and manufacturing. Employment growth in Colorado has
exceeded that of the United States as a whole since 1989.
It can be expected that federal deficit reduction measures
will have significant direct and indirect impact on the economy of
the state as a whole and on specific localities with a large
presence of federal activity. As a result of all these factors,
there can be no assurance that further economic difficulties and
their impact on state and local government finances will not
adversely affect the market value of the Colorado Obligations held
by the Fund or the ability of the respective obligors to pay debt
service on certain of such obligations. Obligations of non-Colorado
issuers are subject to the risks of general economic and other
factors affecting those issuers.
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and cannot
do. Certain of these policies, identified in the Prospectus and in
the Additional Statement as "fundamental policies," cannot be
changed unless the holders of a "majority," as defined in the 1940
Act, of the Fund's outstanding shares vote to change them. (See the
Additional Statement for a definition of such a majority.) All
other policies can be changed from time to time by the Board of
Trustees without shareholder approval. Some of the more important
of the Fund's fundamental policies, not otherwise identified in the
Prospectus, are set forth below; others are listed in the
Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Colorado
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Fund has industry investment requirements.
The Fund 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 Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Colorado Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund 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 Fund's income. Except in connection with
borrowings, the Fund will not issue senior securities. The Fund
will not purchase any Colorado Obligations, Futures or options on
Futures while it has any outstanding borrowings which exceed 5% of
the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time, on
each day that the New York Stock Exchange is open (a "business
day"), by dividing the value of the Fund's net assets (i.e., the
value of the assets less liabilities) allocable to each class by
the total number of shares of such class then outstanding.
Determination of the value of the Fund's assets is subject to the
direction and control of the Fund's Board of Trustees. In general,
it is based on market value, except that Colorado Obligations
maturing in 60 days or less are generally valued at amortized cost;
see the Additional Statement for further information.
HOW TO INVEST IN THE FUND
This Prospectus offers two separate classes of shares. All
classes represent interests in the same portfolio of Colorado
Obligations.
Institutional Class Shares ("Class Y Shares") are offered only
to institutions acting for investors in a fiduciary, advisory,
agency, custodial or similar capacity, and are not offered
directly to retail customers. Class Y Shares are offered at
net asset value with no sales charge, no redemption fee, no
contingent deferred sales charge and no distribution fee.
Financial Intermediary Class Shares ("Class I Shares") are
offered and sold only through financial intermediaries with
which Aquila Distributors, Inc. (the "Distributor") has
entered into sales agreements, and are not offered directly to
retail customers. Class I Shares are offered at net asset
value with no sales charge and no redemption fee or contingent
deferred sales charge, although a financial intermediary may
charge a fee for effecting a purchase or other transaction on
behalf of its customers. Class I Shares may carry a
distribution fee of up to 0.25 of 1% of average annual net
assets allocable to Class I Shares, currently 0.10 of 1% of
such net assets, and a service fee of 0.25 of 1% of such
assets. (See "Distribution Plan" and "Shareholder Services
Plan for Class I Shares.")
The Fund's other classes of shares, Front-Payment Class Shares
("Class A Shares") and Level-Payment Class Shares ("Class C
Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of the Prospectus, Class Y Shares of the Fund are
registered for sale only in Colorado, California, District of
Columbia, Florida, Georgia, Hawaii, Indiana, Missouri, Nevada, New
Jersey, New York and Virginia. Class I Shares of the Fund are
registered for sale only in Colorado and New York.
If you do not reside in one of those states you should not
purchase shares. If shares are sold outside of those states except
to certain institutional investors, the Fund can redeem them. Such
a redemption may result in a loss to you and may have tax
consequences. In addition, if your state of residence is not
Colorado, the dividends from the Fund may not be exempt from income
tax of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of the Fund. The
Fund and the Distributor reserve the right to reject any order for
the purchase of shares. In addition, the offering of shares may be
suspended at any time and resumed at any time thereafter.
How to Purchase Class Y Shares
Institutional Class Shares ("Class Y Shares") are offered only
to institutional investors for investments held in a fiduciary,
advisory, agency, custodial or similar capacity, or through them to
their clients, 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.
Class Y Shares of the Fund may be purchased through any
investment broker or dealer (a "selected dealer") which has a sales
agreement with Aquila Distributors, Inc. (the "Distributor") or
through the Distributor. There are two ways to make an initial
investment: (i) order the shares through your investment broker or
dealer, if it is a selected dealer; or (ii) mail the Application
with payment to the Fund's Shareholder Servicing Agent (the
"Agent"), at the address on the Application. There is no sales
charge on initial or subsequent investments. You are urged to
complete an Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment.
The minimum initial investment for Class Y Shares is $100,000
for fiduciaries and $250,000 for all other eligible purchasers,
except that this limitation does not apply to shareholders with
accounts open on April 30, 1998, or as otherwise stated in the
Prospectus or Additional Statement. Such investment must be drawn
in United States dollars on a United States commercial or savings
bank or credit union or a United States branch of a foreign
commercial bank (each of which is a "Financial Institution"). You
may make subsequent investments in Class Y Shares in any amount
(unless you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number and the name of the Fund. With subsequent
investments, please send the pre-printed stub attached to the
Fund's confirmations.
Subsequent investments of $50 or more in Class Y Shares can be
made by electronic funds transfer from your demand account at a
Financial Institution. To use electronic funds transfer for your
purchases, your Financial Institution must be a member of the
Automated Clearing House and the Agent must have received your
completed Application designating this feature, or, after your
account has been opened, a Ready Access Features form available
from the Distributor or the Agent. A pre-determined amount can be
regularly transferred for investment ("Automatic Investment"), or
single investments can be made upon receipt by the Agent of
telephone instructions from anyone ("Telephone Investment"). The
maximum amount of each Telephone Investment is $50,000. Upon 30
days' written notice to shareholders, the Fund may modify or
terminate these investment methods at any time or charge a service
fee, although no such fee is currently contemplated.
How to Purchase Class I Shares
Initial and subsequent investments in Class I Shares must be
made through financial intermediaries and cannot be made directly.
Financial intermediaries may set minimum amounts for initial
purchase and subsequent investments in Class I Shares and may
charge a fee for effecting a purchase or other transaction on
behalf of customers. Financial intermediaries that make Class I
Shares of the Fund and other mutual funds available to their
customers may offer distinct services, may have their own charges
for services and may impose their own minimum requirements for
initial and subsequent investments. Customers of financial
intermediaries should read the Prospectus in light of the terms of
their accounts with financial intermediaries. Financial
intermediaries that have entered into specific agreements with the
Fund may enter confirmed purchase orders on behalf of clients and
customers, with payment to follow not later than the Fund's pricing
of Class I Shares on the following business day. If payment is not
received by that time the financial intermediary could be held
liable for resulting fees or losses.
Offering Price
The offering price for Class Y Shares is the net asset value
per share. The offering price determined on any day applies to all
purchase orders received by the Agent from selected dealers that
day, except that orders received by it after 4:00 p.m. New York
time will receive that day's offering price only if such orders
were received by selected dealers from customers prior to such time
and transmitted to the Distributor prior to its close of business
that day (normally 5:00 p.m. New York time); if not so transmitted,
such orders will be filled at the next determined offering price.
Selected dealers are required to transmit orders promptly.
Investments by mail are made at the offering price next determined
after receipt of the purchase order by the Agent. Purchase orders
received on other than a business day will be executed on the next
succeeding business day. Purchases by Automatic Investment and
Telephone Investment will be executed on the first business day
occurring on or after the date an order is considered received by
the Agent at the price determined on that day. In the case of
Automatic Investment your order will be executed on the date you
specified for investment at the price determined on that day,
except that,if that day is not a business day your order will be
executed at the price determined on the next business day. In the
case of Telephone Investment your order will be filled at the next
determined offering price. If your order is placed after the time
for determining the net asset value of the Fund shares for any
day, it will be executed at the price determined on the following
business day. The sale of shares will be suspended during any
period when the determination of net asset value is suspended.
The offering price for Class I Shares is the net asset value
per share. The offering price determined on any day applies to all
purchases received by each financial intermediary prior to 4:00
p.m. New York time on any business day. Purchase orders received by
financial intermediaries after that time will be filled at the next
determined offering price.
Possible Compensation for Dealers
The Distributor, at its own expense, may provide additional
compensation to dealers in connection with sales of any class of
shares of the Fund. Additional compensation may include payment or
partial payment for advertising of the Fund's shares, payment of
travel expenses, including lodging, incurred in connection with
attendance at sales seminars taken by qualifying registered
representatives to locations within or outside of the United
States, other prizes or financial assistance to securities dealers
in offering their own seminars or conferences. In some instances,
such compensation may be made available only to certain dealers
whose representatives have sold or are expected to sell significant
amounts of such shares. Dealers may not use sales of the Fund's
shares to qualify for the incentives to the extent such may be
prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. The
cost to the Distributor of such promotional activities and such
payments to participating dealers will not exceed the amount of the
sales charges in respect of sales of all classes of shares of the
Fund effected through such participating dealers, whether retained
by the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or the
amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Confirmations and Share Certificates
All purchases of Class Y Shares will be confirmed and credited
to you in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share). Purchases of Class I Shares will be confirmed by
financial intermediaries. No share certificates will be issued for
Class Y Shares or Class I Shares.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended to
result in the sale of its shares except pursuant to a written plan
adopted under the Rule. No payments under the Plan from assets
represented by Class Y Shares are authorized.
Under a part of the Plan, the Fund is authorized to make
payments with respect to Class I Shares ("Class I Permitted
Payments") to Qualified Recipients. Class I Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal year
of the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), at a rate set from
time to time by the Board of Trustees (currently 0.10 of 1%) but
not more than 0.25 of 1% of the average annual net assets
represented by the Class I Shares of the Fund. Such payments shall
be made only out of the Fund's assets allocable to the Class I
Shares. "Qualified Recipients" means financial intermediaries
selected by the Distributor with which the Fund or the Distributor
has entered into written agreements to act in such capacity.
The Plan contains provisions designed to protect against any
claim against or involving the Fund that some of the expenses which
might be considered to be sales-related which the Fund pays or may
pay come within the purview of the Rule. The Fund believes that
except for payments made with respect to Class A Shares and Class
C Shares under other parts of the Plan, and with respect to Class
I Shares as discussed above,it is not financing any such activity
and does not consider any payment enumerated in such provisions as
so financing any such activity. If and to the extent that any
payment as specifically listed in the Plan (see the Additional
Statement) is considered to be primarily intended to result in or
as indirect financing of any activity which is primarily intended
to result in the sale of Fund shares, these payments are authorized
under the Plan. In addition, if the Administrator, out of its own
funds, makes payment for distribution expenses such payments are
authorized. (See the Additional Statement.)
Shareholder Services Plan for Class I Shares
Under a Shareholder Services Plan, (the "Plan") the Fund is
authorized to make payments with respect to Class I Shares
("Service Payments") to Qualified Recipients. Fees paid under the
Plan are subject to such limits as may be necessary for Class I
Shares to qualify as a "no-load" class for purposes of the Conduct
Rules of the National Association of Securities Dealers, Inc.
("NASD"). The current limitation is as follows: fees paid under the
Plan that satisfy the definition of "service fees" in Rule 2830(d)
of the Conduct Rules of the National Association of Securities
Dealers, Inc. may not exceed an amount equal to the difference
between (i) 0.25 of 1% of the average annual net assets of the Fund
represented by Class I Shares and (ii) the amount paid under the
Fund's Distribution Plan with respect to the assets represented by
the Class I Shares. That is, the total payments under both plans
will be not exceed 0.25 of 1% of such net assets. Where necessary
or appropriate, the Independent Trustees, or such appropriate
officer or officers of the Fund as they may designate, shall, with
the advice of counsel, determine what fees paid under this Plan are
to be deemed "service fees." The Fund's management believes that,
in general, fees allocable to activities such as sub-accounting and
record-keeping are not "service fees," while fees allocable to
activities such as account service are "service fees." In like
manner, allocation of payments among activities is also determined
by the Independent Trustees or their delegates. Subject to the
foregoing, Service Payments may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any fiscal
year which is not a full fiscal year), 0.25 of 1% of the average
annual net assets represented by the Class I Shares of the Fund.
Such payments shall be made only out of the Fund's assets
represented by the Class I Shares.
"Qualified Recipients" means broker-dealers or others selected
by the Distributor, including but not limited to any principal
underwriter of the Fund, with which the Fund or the Distributor has
entered into written agreements to provide personal services to
Class I Shares shareholders, maintenance of Class I Shares
shareholder accounts and/or pursuant to specific agreements
entering of confirmed purchase orders on behalf of customers or
clients and which have provided services to holders of Class I
Shares and/or maintenance of Class I Shares shareholder accounts.
The Distributor is authorized, but not directed, to take into
account, in addition to any other factors deemed relevant by it,
the following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares, including
without limitation, (i) activities relating to sub accounting and
record-keeping, including the providing of necessary personnel and
facilities to establish and maintain shareholder accounts and
records, and (ii) activities relating to account service, such as
assisting shareholders in designating and changing dividend
options, account designations and addresses; answering customer
inquiries regarding account status and history and the manner in
which purchases and redemptions of shares of the Fund may be
effected; transmitting and receiving funds in connection with
customer orders to purchase or redeem shares, including, where
appropriate, arranging for the wiring of funds; assisting in
processing purchase and redemption transactions; and verifying and
guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated
accounts. A majority of the Independent Trustees (as defined in the
Plan) may remove any person as a Qualified Recipient and no fees
shall be paid pursuant to the Plan for activities primarily
intended to result in the sale of shares of the Fund or to finance
sales or sales promotion expenses. No fees shall be paid, or be
deemed to have been paid, for any of the listed activities to the
extent that such payments are deemed by the Independent Trustees to
be intended for distribution. Service Payments shall be paid
through the Distributor or shareholder servicing agent as
disbursing agent. (See the Additional Statement.)
HOW TO REDEEM YOUR INVESTMENT
Redemption of Class Y Shares
You may redeem all or any part of your Class Y Shares at the
net asset value next determined after acceptance of your redemption
request at the Agent. Redemptions can be made by the various
methods described below. There is no minimum period for any
investment in the Fund, except for shares recently purchased by
check, Automatic Investment or Telephone Investment as discussed
below. There are no redemption fees or penalties on redemption of
Class Y Shares. A redemption may result in a transaction taxable to
you.
For your convenience the Fund offers expedited redemption for
Class Y Shares to provide you with a high level of liquidity for
your investment.
Expedited Redemption Methods
You have the flexibility of two expedited methods of
initiating redemptions of Class Y Shares.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Fund and the
check is sent to your address of record, provided that there
has not been a change of your address of record during the 30
days preceding your redemption request. You can make only one
request for telephone redemption by check in any 7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-872-2651 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
2. By FAX or Mail. You may also request redemption payments to
a predesignated Financial Institution account by a letter of
instruction sent to: PFPC Inc., by FAX at 302-791-1777 or by
mail to 400 Bellevue Parkway, Wilmington, DE 19809. The letter
must provide account name(s), account number, amount to be
redeemed, and any payment directions, signed by the registered
holder(s). Signature guarantees are not required. See
"Redemption Payments" below for payment methods.
If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access Features
form and provide the required information concerning your Financial
Institution account number. The Financial Institution account must
be in the exclusive name(s) of the shareholder(s) as registered
with the Fund. You may change the designated Financial Institution
account at any time by completing and returning a Ready Access
Features form. For protection of your assets, this form requires
signature guarantees and possible additional documentation.
Regular Redemption Method
If you own Class Y Shares registered on the books of the Fund,
and you have not elected Expedited Redemption to a predesignated
Financial Institution account, you must use the Regular Redemption
Method. Under this redemption method you should send a letter of
instruction to the Fund's Shareholder Servicing Agent: PFPC Inc.,
400 Bellevue Parkway, Wilmington, DE 19809. The letter must
contain:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated below.
For your redemption request to be in "proper form," the
signature or signatures must be the same as in the registration of
the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required if
sufficient documentation is not on file with the Agent. Additional
documentation may be required where shares are held by certain
types of shareholders such as corporations, partnerships, trustees
or executors, or if redemption is requested by other than the
shareholder of record. If redemption proceeds of $50,000 or less
are payable to the record holder and are to be sent to the record
address, no signature guarantee is required, except as noted above.
In all other cases, signatures must be guaranteed by a member of a
national securities exchange, a U.S. bank or trust company, a
state-chartered savings bank, a federally chartered savings and
loan association, a foreign bank having a U.S. correspondent bank,
a participant in the Securities Transfer Association Medallion
Program (STAMP), the Stock Exchanges Medallion Program (SEMP) or
the New York Stock Exchange, Inc. Medallion Signature Program
(MSP). A notary public is not an acceptable signature guarantor.
Redemption of Class I Shares
You may redeem all or any part of your Class I Shares at the
net asset value next determined after acceptance of your redemption
request by your financial intermediary. Redemption requests for
Class I Shares must be made through a financial intermediary and
cannot to be made directly. Financial intermediaries may charge a
fee for effecting redemptions. There is no minimum period for any
investment in the Fund. The Fund does not impose redemption fees or
penalties on redemption of Class I Shares. A redemption may result
in a transaction taxable to you.
Redemption Payments
Redemption payments for Class Y Shares will ordinarily be
mailed to you at your address of record. If you so request and the
amount of your redemption proceeds is $1,000 or more, the proceeds
will, wherever possible, be wired or transferred through the
facilities of the Automated Clearing House to the Financial
Institution account specified in the Expedited Redemption section
of your Application or Ready Access Features form. The Fund may
impose a charge, not exceeding $5.00 per wire redemption, after
written notice to shareholders who have elected this redemption
procedure. The Fund has no present intention of making this charge.
Upon 30 days' written notice to shareholders, the Fund may modify
or terminate the use of the Automated Clearing House to make
redemption payments at any time or charge a service fee, although
no such fee is presently contemplated. If any such changes are
made, the Prospectus will be supplemented to reflect them. If you
use a broker or dealer to arrange for a redemption, it may charge
you a fee for this service. Redemption payments for Class I Shares
are made to financial intermediaries.
The Fund will normally make payment for all shares redeemed on
the next business day (see "Net Asset Value Per Share") following
acceptance of the redemption request made in compliance with one of
the redemption methods specified above. Except as set forth below,
in no event will payment be made more than seven days after
acceptance of such a redemption request. However, the right of
redemption may be suspended or the date of payment postponed (i)
during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is
restricted as determined by the Securities and Exchange Commission
by rule or regulation; (ii) during periods in which an emergency,
as determined by the Securities and Exchange Commission, exists
which causes disposal of, or determination of the net asset value
of, the portfolio securities to be unreasonable or impracticable;
or (iii) for such other periods as the Securities and Exchange
Commission may permit. Payment for redemption of shares recently
purchased by check (irrespective of whether the check is a regular
check or a certified, cashier's or official bank check) or by
Automatic Investment or Telephone Investment may be delayed up to
15 days or until (i) the purchase check or Automatic Investment or
Telephone Investment has been honored or (ii) the Agent has
received assurances by telephone or in writing from the Financial
Institution on which the purchase check was drawn, or from which
the funds for Automatic Investment or Telephone Investment were
transferred, satisfactory to the Agent and the Fund, that the
purchase check or Automatic Investment or Telephone Investment will
be honored. Possible delays in payment of redemption proceeds for
Class Y Shares can be eliminated by using wire payments or Federal
Reserve drafts to pay for purchases.
If the Trustees determine that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by the distribution in kind of securities
from the portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Securities and Exchange Commission. (See
the Additional Statement for details.)
The Fund has the right to compel the redemption of shares held
in any account if the aggregate net asset value of such shares is
less than $500 as a result of shareholder redemptions or failure to
meet the minimum investment level under an Automatic Purchase
Program. If the Board elects to do this, shareholders who are
affected will receive prior written notice and will be permitted 60
days to bring their accounts up to the minimum before this
redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
If you had a Class Y Shares account with the Fund before April
30, 1998, you may establish an Automatic Withdrawal Plan if you own
or purchase Class Y Shares of the Fund having a net asset value of
at least $5,000. The Automatic Withdrawal Plan is not otherwise
available through this Prospectus to investors. Under an Automatic
Withdrawal Plan you will receive a monthly or quarterly check in a
stated amount, not less than $50. If such a plan is established,
all dividends and distributions must be reinvested in your
shareholder account. Redemption of shares to make payments under
the Automatic Withdrawal Plan will give rise to a gain or loss for
tax purposes. (See the Automatic Withdrawal Plan provisions of the
Application included in the Prospectus, the Additional Statement
under "Automatic Withdrawal Plan," and "Dividend and Tax
Information" below.)
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
The Board of Trustees has approved changes in the management
arrangements described below under which the Administrator will
become Investment Adviser and Administrator and the Adviser will
become Sub-Adviser. The change will not result in any change of
personnel or any change in overall management fees. The proposed
changes will be submitted for consideration by the shareholders of
the Fund at the annual meeting of shareholders on June 29, 1998. If
approved by the shareholders, the new arrangements will go into
effect at that time and the Prospectus will be supplemented.
The Advisory Agreement
KPM Investment Management, Inc. (the "Adviser") supervises the
investment program of the Fund and the composition of its
portfolio. The services of the Adviser are rendered under an
Advisory Agreement (the" Advisory Agreement", which provides,
subject to the control of the Board of Trustees, for investment
supervision of the Fund; at the Adviser's expense providing for
pricing of the Fund's portfolio daily using a pricing service or
other sources of pricing information satisfactory to the Fund and,
unless otherwise directed by the Board of Trustees, providing for
pricing of the Fund's portfolio at least quarterly using another
such source satisfactory to the Fund. Fund accounting services are
performed by the Administrator.
Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Fund and of
those Trustees, if any, who are affiliated with the Adviser.
Additionally, the Adviser agrees that it shall, at the Adviser's
expense, provide to the Fund all office space, facilities,
equipment and clerical personnel necessary for the carrying out of
the Adviser's duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund bears the cost of
preparing and setting in type its prospectuses, statements of
additional information, and reports to shareholders and the costs
of printing or otherwise producing and distributing those copies of
such prospectuses, statements of additional information and reports
as are sent to its shareholders. Under the Advisory Agreement, all
costs and expenses not expressly assumed by the Adviser or by the
Administrator under the Administration Agreement, or by the Fund's
Distributor (principal underwriter), are paid by the Fund. The
Advisory Agreement lists examples of such expenses borne by the
Fund, the major categories of such expenses being: legal and audit
expenses, custodian, transfer agent and shareholder servicing agent
fees and expenses, stock issuance and redemption costs, certain
printing costs, registration costs of the Fund and its shares under
Federal and State securities laws, interest, taxes and brokerage
commissions, and non-recurring expenses, including litigation.
Under the Advisory Agreement, the Fund pays a fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.20 of
1% of the Fund's net assets, provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan of
the Fund based upon the assets of the Fund, the annual fee shall be
payable at the annual rate of 0.20 of 1% of such assets up to $250
million and at the annual rate of 0.16 of 1% of such net asset
value with respect to assets of the Fund above that amount.
The total investment advisory and administration fees which
the Fund pays are at the annual rate of 0.50 of 1% of such net
assets, since the Administrator also receives a fee from the Fund
under the Administration Agreement; see below. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Fund, each waive all or part of any such
fees. In practice, the rate of these fee waivers tends to decline
as assets of the Fund increase.
The Board of Trustees and shareholders of the Fund have
approved certain changes to the Advisory Agreement with reductions
in fees payable to the Adviser from an annual rate of 0.20 of 1% to
0.16 of 1% of all of the Fund's average annual net assets. These
reductions will be accompanied by reductions in the fees payable to
the Administrator (see "Administration Agreement") and will match
an increase in payments under the Fund's Distribution Plan to keep
the combined payments of the Fund at current levels. The changes
were not to be implemented until the earlier of October 1, 1996 or
the first day of the next succeeding calendar quarter after the
quarter in which the net assets of the Fund exceed $250 million. At
the date of the Prospectus, implementation of these changes has
been postponed indefinitely. When and if it is determined to
implement these changes the Prospectus will be supplemented. Until
such time the current arrangements will remain in effect.
The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to its pro-rata portion (based
upon the aggregate fees of the Adviser and the Administrator) of
the amount, if any, by which the total expenses of the Fund in any
fiscal year, exclusive of taxes, interest and brokerage fees, shall
exceed the lesser of (i) 2.5% of the first $30 million of average
annual net assets of the Fund plus 2% of the next $70 million of
such assets plus 1.5% of its average annual net assets in excess of
$100 million, or (ii) 25% of the Fund's total annual investment
income.
The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund. Under these
provisions, the Adviser is authorized to consider sales of shares
of the Fund or of any other investment company or companies having
the same investment adviser, sub-adviser, administrator or
principal underwriter as the Fund. See the Additional Statement for
a description of these provisions and prior advisory arrangements.
The Administration Agreement
Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at its
own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as is
necessary in connection with the maintenance of the headquarters of
the Fund and pays all compensation of the Fund's Trustees, officers
and employees who are affiliated persons of the Administrator.
Under the Administration Agreement, subject to the control of
the Fund's Board of Trustees, the Administrator provides all
administrative services to the Fund other than those relating to
its investment portfolio. Such administrative services include but
are not limited to maintaining books and records of the Fund,
either keeping the accounting records of the Fund, including the
computation of net asset value per share and the dividends or, at
its expense and responsibility, delegating such duties in whole or
in part to a company satisfactory to the Fund (however, the daily
pricing of the Fund's portfolio is the responsibility of the
Adviser under the Advisory Agreement), overseeing all
relationships between the Fund and its transfer agent, custodian,
legal counsel, auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the supervision and
coordination of the performance of such agreements, and the
overseeing of all administrative matters which are necessary or
desirable for effective operation of the Fund and for the sale,
servicing, or redemption of the Fund's shares. See the Additional
Statement for a further description of functions listed in the
Administration Agreement as part of such duties.
Under the Administration Agreement, the Fund pays a fee
payable monthly and computed on the net asset value of the Fund as
of the close of business each business day at the annual rate of
0.30 of 1% of the Fund's net assets, provided, however, that for
any day that the Fund pays or accrues a fee under the Distribution
Plan of the Fund based upon the assets of the Fund, the annual fee
shall be payable at the annual rate of 0.30 of 1% of such assets up
to $250 million (the "Base Amount"), and at the annual rate of 0.24
of 1% of such net asset value with respect to assets of the Fund
above $250 million. The Administrator agrees that the above fee
shall be reduced, but not below zero, by an amount equal to its
pro-rata portion (based upon the aggregate fees of the Adviser and
the Administrator) of the amount, if any, by which the total
expenses of the Fund in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5% of
the first $30 million of average annual net assets of the Fund plus
2% of the next $70 million of such assets plus 1.5% of its average
annual net assets in excess of $100 million, or (ii) 25% of the
Fund's total annual investment income.
The Board of Trustees has approved certain changes to the
Administration Agreement with reductions in fees payable to the
Administrator from an annual rate of 0.30 of 1% to 0.24 of 1% of
all of the Fund's average annual net assets. These reductions will
be accompanied by reductions in the fees payable to the Adviser
(see "Advisory Agreement") and will match an increase in payments
under the Fund's Distribution Plan to keep the combined payments of
the Fund at current levels. The changes were not to be implemented
until the earlier of October 1, 1996 or the first day of the next
succeeding calendar quarter after the quarter in which the net
assets of the Fund exceed $250 million. At the date of the
Prospectus, implementation of these changes has been postponed
indefinitely. When and if it is determined to implement these
changes the Prospectus will be supplemented. Until such time the
current arrangements will remain in effect.
Information as to the Adviser,
the Administrator and the Distributor
The Adviser is a wholly-owned subsidiary of KFS Corporation,
a member of the Mutual of Omaha Companies. The Fund's portfolio is
managed in the Adviser's Denver office. Founded in 1981, the
Adviser provides discretionary equity, fixed-income and balanced
account management to mutual funds, retirement plans, foundations,
endowments and high net-worth individuals and currently manages
over $1 billion of clients' assets.
Mr. Christopher Johns is the Fund's portfolio manager. Mr.
Johns is First Vice President and has been a Vice President of the
Adviser since 1992. From 1984 through 1992, he was a portfolio
manager at United Bank of Denver (now Norwest Bank, Denver) when it
acted as investment adviser to the Fund. He was formerly a
portfolio manager of Toledo Trust Company. He holds the degree of
BBA in Finance from the University of Cincinnati. Mr. John
Wyszynski is the back-up portfolio manager. He has been employed by
the Adviser since 1993 as a Vice President. He has 14 years
experience in managing Colorado Obligations having worked at
several firms including Kirchner Moore and First Interstate Bank of
Denver. He has an MBA in Finance and Accounting from the University
of Chicago.
The Adviser has its primary office at 10250 Regency Circle,
Omaha, NE 68114 and its Denver office is located at One Norwest
Center, 1700 Lincoln Street, Denver, CO 80203. Since 1983, the
Adviser has been wholly-owned by Mutual of Omaha Insurance Company,
whose principal office is at Mutual of Omaha Plaza, Omaha, NE
68175.
For the year ended December 31, 1997, advisory fees of
$437,704 were paid or accrued to the Adviser.
The Fund's Administrator is founder and administrator to the
Aquilasm Group of Funds, which consists of tax-free municipal bond
funds, money market funds and two equity funds. As of December 31,
1997, these funds had aggregate assets of approximately $2.8
billion, of which approximately $1.9 billion consisted of assets of
the tax-free municipal bond funds. The Administrator, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann (directly,
through a trust and through share ownership by his wife). See the
Additional Statement for information on Mr. Herrmann.
During the year ended December 31, 1997, administration fees
of $656,555 were paid or accrued to the Administrator under the
Administration Agreement of which $5,270 was voluntarily waived.
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 Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs relating
to prospectuses and reports as well as the costs of supplemental
sales literature, advertising and other promotional activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which are
currently owned 75% by Mr. Herrmann and 25% by Diana P. Herrmann,
will be owned by certain directors and/or officers of the
Administrator and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined below,
as dividends on every day, including weekends and holidays, on
those shares outstanding for which payment was received by the
close of business on the preceding business day. Net income for
dividend purposes includes all interest income accrued by the Fund
since the previous dividend declaration, including accretion of any
original issue discount, less expenses paid or accrued. As such net
income will vary, the Fund's dividends will also vary. Dividends
and other distributions paid by the Fund with respect to each class
of its shares are calculated at the same time and in the same
manner. In addition, the dividends of each class can vary because
each class will bear certain class-specific charges.
It is the Fund's present policy to pay dividends so that they
will be received or credited by approximately the first day of each
month. On the Application or by completing a Ready Access Features
form, you may elect to have dividends deposited without charge by
electronic funds transfers into your account at a Financial
Institution if it is a member of the Automated Clearing House.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid by
the Agent to a selected dealer; or (ii) the third day on which the
New York Stock Exchange is open after the day on which the net
asset value of the redeemed shares has been determined. (See "How
To Redeem Your Investment.")
Net investment income includes amounts of income from the
Colorado Obligations in the Fund's portfolio which are allocated as
"exempt-interest dividends." "Exempt-interest dividends" are exempt
from regular Federal income tax. The allocation of "exempt-interest
dividends" will be made by the use of one designated percentage
applied uniformly to all income dividends declared during the
Fund's tax year. Such designation will normally be made in the
first month after the end of each of the Fund's fiscal years as to
income dividends paid in the prior year. It is possible that in
certain circumstances, a small portion of the dividends paid by the
Fund will be subject to income taxes. During the Fund's fiscal year
ended December 31, 1997, 96.87% of the Fund's dividends were
"exempt-interest dividends." For the calendar year 1997, 3.13% of
the total dividends paid were taxable as ordinary income. The
percentage of income designated as tax-exempt for any particular
dividend may be different from the percentage of the Fund's income
that was tax-exempt during the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid
out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions to
shareholders, and from short- and long-term gains distributions (if
any) and any other distributions that do not qualify as
"exempt-interest dividends," if shareholders do not comply with
provisions of the law relating to the furnishing of taxpayer
identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the Agent
or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be automatically
reinvested in full and fractional shares of the Fund at net asset
value on the record date for the dividend or distribution or other
date fixed by the Board of Trustees. An election to receive cash
will continue in effect until written notification of a change is
received by the Agent. All shareholders, whether their dividends
are received in cash or are being reinvested, will receive a
monthly account summary indicating the current status of their
investment. There is no fixed dividend rate. Corporate shareholders
of the Fund are not entitled to any deduction for dividends
received from the Fund.
Tax Information
The Fund qualified during its last fiscal year as a "regulated
investment company" under the Code, and intends to continue to so
qualify. If it does so qualify, it will not be liable for Federal
income taxes on amounts paid by it as dividends and distributions.
However, the Code contains a number of complex tests relating to
such qualification and it is possible although not likely that the
Fund might not meet one or more of these tests in any particular
year. If it does not so qualify, it would be treated for tax
purposes as an ordinary corporation, would receive no tax deduction
for payments made to shareholders and would be unable to pay
dividends or distributions which would qualify as "exempt-interest
dividends" or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under the
Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income earned
by the Fund on Colorado Obligations will be excludable from gross
income of the shareholders for regular Federal income tax purposes.
Capital gains dividends are not included in exempt-interest
dividends. Although "exempt-interest dividends" are not taxed, each
taxpayer must report the total amount of tax-exempt interest
(including exempt-interest dividends from the Fund) received or
acquired during the year.
The Code requires that either gains realized by the Fund on
the sale of municipal obligations acquired after April 30, 1993 at
a price which is less than face or redemption value be included as
ordinary income to the extent such gains do not exceed such
discount or that the discount be amortized and included ratably in
taxable income. There is an exception to the foregoing treatment if
the amount of the discount is less than 0.25% of face or redemption
value multiplied by the number of years from acquisition to
maturity. The Fund will report such ordinary income in the years of
sale or redemption rather than amortize the discount and report it
ratably. To the extent the resultant ordinary taxable income is
distributed to shareholders, it will be taxable to them as ordinary
income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates) are
reportable by shareholders as gain from the sale or exchange of a
capital asset held for more than one year. This is the case whether
the shareholder takes the distribution in cash or elects to have
the distribution reinvested in Fund shares and regardless of the
length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to shareholders
as ordinary income. Capital losses of the Fund are not distributed
but carried forward by the Fund to offset gains in later years and
thereby lessen the later-year capital gains dividends and amounts
taxed to shareholders.
The Fund's gains or losses on sales of Colorado Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of the
Fund will also include gains and losses on Futures and options, if
any, including gains and losses actually realized on sales and
exchanges and gains and losses deemed to be realized. Those deemed
to be realized are on Futures and options held by the Fund at
year-end, which are "marked to the market," that is, deemed sold
for fair market value. Net gains or losses realized and deemed
realized on Futures and options will be reportable by the Fund as
long-term to the extent of 60% of the gains or losses and
short-term to the extent of 40% regardless of the actual holding
period of such investments.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders to
enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under rules
used by the Internal Revenue Service for determining when borrowed
funds are deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Fund may be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares. The receipt of exempt-interest dividends from the Fund by
an individual shareholder may result in some portion of any social
security payments or railroad retirement benefits received by the
shareholder or the shareholder's spouse being included in taxable
income. Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds or
private activity bonds should consult their own tax advisers before
purchasing shares.
While interest from all Colorado Obligations is tax-exempt for
purposes of computing the shareholder's regular tax, interest from
so-called private activity bonds issued after August 7, 1986,
constitutes a tax preference for both individuals and corporations
and thus will enter into a computation of the alternative minimum
tax. Whether or not that computation will result in a tax will
depend on the entire content of the taxpayer's return. The Fund
will not invest in the types of Colorado Obligations which would
give rise to interest that would be subject to alternative minimum
taxation if more than 20% of its net assets would be so invested,
and may refrain from investing in that type of bond completely. The
20% limit is a fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current earnings,
this adjustment will tend to make it more likely that corporate
shareholders will be subject to the alternative minimum tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid for
the shares. If you are required to pay a contingent deferred sales
charge at the time of redemption, the amount of that charge will
reduce the amount of your gain or increase the amount of your loss
as the case may be. Your gain or loss will be long-term if you held
the redeemed shares for over 18 months, mid-term if you held the
redeemed shares for over one year but not more than 18 months and
short-term, if for a year or less. Long term capital gains are
currently taxed at a maximum rate of 20%, mid-term capital gains
are currently taxed at a maximum rate of 28%, and short-term gains
are currently taxed at ordinary income tax rates. However, if
shares held for six months or less are redeemed and you have a
loss, two special rules apply: the loss is reduced by the amount of
exempt-interest dividends, if any, which you received on the
redeemed shares, and any loss over and above the amount of such
exempt-interest dividends is treated as a long-term loss to the
extent you have received capital gains dividends on the redeemed
shares.
Colorado Tax Information
Dividends and distributions made by the Fund to Colorado
individuals, trusts, estates and corporations subject to the
Colorado income tax will generally be treated for Colorado income
tax purposes in the same manner as they are treated under the Code
for Federal income tax purposes. Since the Fund may, except as
indicated below, purchase only Colorado Obligations (which, as
defined, means obligations, including those of non-Colorado
issuers, of any maturity which pay interest which, in the opinion
of counsel, is exempt from regular Federal income taxes and
Colorado income taxes), none of the exempt-interest dividends paid
by the Fund will be subject to Colorado income tax. The Fund may
also pay "short-term gains distributions" and "long-term gains
distributions," each as discussed under "Dividends and
Distributions" above. Under Colorado income tax law, each
short-term gains distribution will be treated as a short-term gain
and each long-term gains distribution will be treated as a
long-term capital gain. The only investment which the Fund may make
other than in Colorado Obligations is in Futures and options on
them. Any gains on Futures and options (including gains imputed
under the Code) paid as part or all of a short-term gains
distribution or a long-term gains distribution will be taxed as
indicated above.
Persons or entities who are not Colorado residents should not
be subject to Colorado income taxation on dividends and
distributions made by the Fund unless the nonresident employs his
or her interest in the Fund in a business, trade, profession or
occupation carried on in Colorado but may be subject to other state
and local taxes. As intangibles, shares of the Fund will be exempt
from Colorado property taxes.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Fund and certain tax-free municipal bond funds and two equity funds
(together with this Fund, the "Bond or Equity Funds") and certain
money market funds (the "Money-Market Funds"), all of which are
sponsored by Aquila Management Corporation and Aquila Distributors,
Inc., and have the same Administrator and Distributor as the Fund.
All exchanges are subject to certain conditions described below. As
of the date of the Prospectus, the Aquila Bond or Equity Funds are
this Fund, Aquila Rocky Mountain Equity Fund, Aquila Cascadia
Equity Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona,
Tax-Free Trust of Oregon, Churchill Tax-Free Fund of Kentucky,
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.
Class Y Shares of the Fund may be exchanged only for Class Y
Shares of the Bond or Equity Funds or for shares of a Money-Market
Fund. Similar exchangability is available to Class I Shares to the
extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. All exchanges of Class I
Shares must be made through your financial intermediary.
Under the Class Y exchange privilege, once Class Y Shares of
any Bond or Equity Fund have been purchased, those shares (and any
Class Y Shares acquired as a result of reinvestment of dividends
and/or distributions) may be exchanged any number of times between
Money-Market Funds and Class Y Shares of the Bond or Equity Funds
without the payment of any sales charge, provided that the
applicable minimum investment requirements for purchase of Class Y
Shares are met. (See "How to Purchase Class Y Shares.")
Shares of a Money-Market Fund not acquired in exchange for
Class Y Eligible Shares of a Bond or Equity Fund can be exchanged
for Class Y Shares of a Bond or Equity Fund only by persons
eligible to make an initial purchase of Class Y Shares.
This Fund, 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 Fund 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:
800-872-2651 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed to
verify the identity of the caller. The Agent will request some or
all of the following information: account name(s) and number, name
of the caller, the social security number registered to the account
and personal identification. The Agent may also record calls. You
should verify the accuracy of confirmation statements immediately
upon receipt.
Exchanges of Class Y Shares will be effected at the relative
net asset values of the Class Y Shares being exchanged next
determined after receipt by the Agent of your exchange request.
Exchanges of Class I Shares will be effected at the relative net
asset values of the Class I Shares being exchanged next determined
after receipt by the financial intermediary of your exchange
request.
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the realization
of a capital gain or loss, depending on the cost or other tax basis
of the shares exchanged and the holding period (see "Tax Effects of
Redemptions" and the Additional Statement); no representation is
made as to the deductibility of any such loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free
money-market Fund) are exempt from regular Federal income tax, and
to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. 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.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's performance
including current yield, taxable equivalent yield, various
expressions of total return, current distribution rate and taxable
equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase, at
the maximum public offering price (offering price includes any
applicable sales charge) for 1-, 5- and 10-year periods and for a
period since the inception of the Fund, to the extent applicable,
through the end of such periods, assuming reinvestment (without
sales charge) of all distributions. The Fund may also furnish total
return quotations for other periods or based on investments at
various applicable sales charge levels or at net asset value. For
such purposes total return equals the total of all income and
capital gains paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the
original investment, expressed as a percentage of the purchase
price. (See the Additional Statement.)
Current yield reflects the income per share earned by each of
the Fund's portfolio investments; it is calculated by (i) dividing
the Fund's net investment income per share during a recent 30-day
period by (ii) the maximum public offering price on the last day of
that period and by (iii) annualizing the result. Taxable equivalent
yield shows the yield from a taxable investment that would be
required to produce an after-tax yield equivalent to that of the
Fund, which invests in tax-exempt obligations. It is computed by
dividing the tax-exempt portion of the Fund's yield (calculated as
indicated) by one minus a stated income tax rate and by adding the
product to the taxable portion (if any) of the Fund's yield. (See
the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities and
Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will be
paid to the Fund's shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate or
taxable equivalent distribution rate which may be quoted to
shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
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 Fund's distribution rate (calculated as indicated above). The
current distribution rate differs from the current yield
computation because it could include distributions to shareholders
from sources, if any, other than dividends and interest, such as
short-term capital gains or return of capital. If distribution
rates are quoted in advertising, they will be accompanied by
calculations of current yield in accordance with the formula of the
Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of expenses,
if any, and will assume the payment of the maximum sales charge, if
any, on the purchase of shares, but not on reinvestment of income
dividends. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment
may earn in the future or what the Fund's yield, tax equivalent
yield, distribution rate, taxable equivalent distribution rate or
total return may be in any future period. The annual report of the
Fund contains additional performance information that will be made
available upon request and without charge.
Description of the Fund and Its Shares
The Fund is an open-end, non-diversified management investment
company organized in 1987 as a Massachusetts business trust. (See
"Investment of the Fund's Assets" for further information about the
Fund's status as "non-diversified.")
The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares and to divide or
combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in
the Fund. Each share represents an equal proportionate interest in
the Fund with each other share of its class; shares of the
respective classes represent proportionate interests in the Fund in
accordance with their respective net asset values. Income, direct
liabilities and direct operating expenses of each series will be
allocated directly to each series, and general liabilities and
expenses, if any, of the Fund will be allocated among the series in
a manner acceptable to the Board of Trustees. Upon liquidation of
the Fund, shareholders are entitled to share pro-rata in the net
assets of the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund'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
Fund may create additional classes of shares (subject to rules and
regulations of the Securities and Exchange Commission or by
exemptive order) or the Board of Trustees may, at its own
discretion, create additional series of shares, each of which may
have separate assets and liabilities (in which case any such series
will have a designation including the word "Series"). See the
Additional Statement for further information about possible
additional series. Shares are fully paid and non-assessable, except
as set forth under the caption "General Information" in the
Additional Statement; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically convert
to Class A Shares after being held for six years.
The other two classes of shares of the Fund are Front-Payment
Class Shares ("Class A Shares") and Level-Payment Class Shares
("Class C Shares"), which are fully described in a separate
prospectus that can be obtained by calling the Fund at
800-872-2652.
The primary distinction among the Fund's four classes of
shares lies in their different sales charge structures and ongoing
expenses, which are likely to be reflected in differing yields and
other measures of investment performance. All four classes
represent interests in the same portfolio of Colorado 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. There are no Distribution fees with
respect to Class Y Shares.
The Fund's Distribution Plan has four parts. In addition to
the provisions described above under "Distribution Plan," Parts I
and II of the Plan authorize payments, to certain "Qualified
Recipients," out of the Fund assets allocable to the Class A Shares
and Class C Shares, respectively. (See the Additional Statement.)
The Fund has also adopted a Shareholder Services Plan under which
the Fund is authorized to make certain payments out of the Fund
assets allocable to the Class C Shares. (See the Additional
Statement.)
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies on
do not properly process date-related information and data involving
the year 2000 and after. The Administrator is taking steps that it
believes are reasonable to address this problem in its own computer
systems and to obtain assurances that comparable steps are being
taken by the other major service providers to the Fund. The
Administrator has also requested the Fund's portfolio manager to
attempt to evaluate the potential impact of this problem on the
issuers of securities in which the Fund invests. At this time there
can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders will
vote on the election of Trustees and on other matters submitted to
the vote of shareholders. Shares vote by classes on any matter
specifically affecting one or more classes, such as an amendment
of an applicable part of the Distribution Plan. No amendment may be
made to the Declaration of Trust without the affirmative vote of
the holders of a majority of the outstanding shares of the Fund
except that the Fund's Board of Trustees may change the name of the
Fund. The Fund may be terminated (i) upon the sale of its assets to
another issuer, or (ii) upon liquidation and distribution of the
assets of the Fund, in either case if such action is approved by
the vote of the holders of a majority of the outstanding shares of
the Fund. If not so terminated, the Fund will continue
indefinitely.
<PAGE>
APPLICATION FOR TAX-FREE FUND OF COLORADO
FOR CLASS I and Y SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
Tel.# 1-800-872-2651
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1._________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2._________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3._________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for ____________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** _____________________________________
Name of State Minor's Social Security Number
4. ____________________________________________________
____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s)
of Trustees in which account will be registered and the name and date
of the Trust Instrument. Account for a Pension or Profit Sharing Plan
or Trust may be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
____________________________________________________
Street or PO Box City
_______________________________(______)______________
State Zip Daytime Phone Number
Occupation:________________________Employer:________________________
Employer's Address:__________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you
are a non-U.S. Citizen or resident and not subject to back-up
withholding (See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2
PURCHASES OF SHARES
A. INITIAL INVESTMENT
Indicate Method of Payment (For either method, make check
payable to: TAX-FREE FUND OF COLORADO)
___Initial Investment $ ______________ (Minimum $100,000 for
Fiduciaries and $250,000 for all other eligible purchasers.)
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be:___ Reinvested ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would like you
to deposit the dividend. (A Financial Institution is a commercial
bank, savings bank or credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested
in your Tax-Free Fund of Colorado Account. To establish this program,
please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or on
the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
toll-free at 1-800-872-2651. To establish this program, please complete
Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. AUTOMATIC WITHDRAWAL PLAN
Available only to Shareholders who had Class Y Shares before
April 30, 1998.
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks prior to 1st
actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, PFPC Inc. ("the Agent")
is authorized to redeem sufficient shares from this account at the then
current Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $ ______________beginning________________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
______________________________________ ______________________________
First Name Middle Initial Last Name Financial Institution Name
______________________________________ ______________________________
Street Financial Institution Street Address
______________________________________ ______________________________
City State Zip City State Zip
_________________________________
Financial Institution Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your
name within the Aquila SM Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
persons telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorneys fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account
listed.
Cash proceeds in any amount from the redemption of shares will
be mailed or wired, whenever possible, upon request, if in an amount
of $1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Fund
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ ____________________________________
Account Registration Financial Institution Account Number
_______________________________ ____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ ____________________________________
Street City State Zip
STEP 4
Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT YOU MUST
ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to
my/our account any drafts or debits drawn on my/our account initiated
by the Agent, PFPC Inc., and to pay such sums in accordance therewith,
provided my/our account has sufficient funds to cover such drafts or
debits. I/We further agree that your treatment of such orders will be
the same as if I/we personally signed or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number _____________________________________
Name and Address where my/our account is maintained
Name of Financial Institution_____________________________________________
Street Address____________________________________________________________
City___________________________________________State _________ Zip _______
Name(s) and Signature(s) of Depositor(s) as they appear where account is
registered
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila
Distributors, Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit in
the normal course of business initiated by the Agent (except any loss
due to your payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in writing of
any claim against you with respect to the same, and further provided
that you will not settle or pay or agree to settle or pay any such
claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any such
electronic debit.
STEP 4
Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Fund and has received and read a
current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these instructions
for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Fund and its agents may cancel the purchase
transaction and are authorized to liquidate other shares or fractions
thereof held in my/our Fund account to make up any deficiency resulting
from any decline in the net asset value of shares so purchased and any
dividends paid on those shares. I/We authorize the Fund and its agents
to correct any transfer error by a debit or credit to my/our Financial
Institution account and/or Fund account and to charge the account for
any related charges. I/We acknowledge that shares purchased either
through Automatic Investment or Telephone Investment are subject to
applicable sales charges.
- - The Fund, the Agent and the Distributor and their Trustees, directors,
employees and agents will not be liable for acting upon instructions
believed to be genuine, and will not be responsible for any losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify the identity of the caller. The
Agent will request some or all of the following information: account
name and number; name(s) and social security number registered to the
account and personal identification; the Agent may also record calls.
Shareholders should verify the accuracy of confirmation statements
immediately upon receipt. Under penalties of perjury, the undersigned
whose Social Security (Tax I.D.) Number is shown above certifies (i)
that Number is my correct taxpayer identification number and (ii)
currently I am not under IRS notification that I am subject to backup
withholding (line out (ii) if under notification). If no such Number
is shown, the undersigned further certifies, under penalties of perjury,
that either (a) no such Number has been issued, and a Number has been
or will soon be applied for; if a Number is not provided to you within
sixty days, the undersigned understands that all payments (including
liquidations) are subject to 31% withholding under federal tax law,
until a Number is provided and the undersigned may be subject to a $50
I.R.S. penalty; or (b) that the undersigned is not a citizen or resident
of the U.S.; and either does not expect to be in the U.S. for 183 days
during each calendar year and does not conduct a business in the U.S.
which would receive any gain from the Fund, or is exempt under an income
tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ ____________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ ____________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment,
Expedited Redemption and Direct Deposit of Dividends) are effective
15 days after this form is received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access features form which may be obtained from Aquila Distributors
at 1-800-872-2652 and send it to the Agent together with a "voided" check
or pre-printed deposit slip from the new account. The new Financial
Institution change is effective in 15 days after this form is received in
good order by the Fund's Agent.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees to
the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Fund. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may be
held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will
be made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address
to which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal incapacity
of the Planholder. Upon termination of the Plan by the Agent or the Fund,
shares remaining unredeemed will be held in an uncertificated account
in the name of the Planholder, and the account will continue as a
dividend-reinvestment, uncertificated account unless and until proper
instructions are received from the Planholder, his executor or guardian,
or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any successor
transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while simultaneously
making regular purchases. While an occasional lump sum investment may be
made, such investment should normally be an amount equivalent to three
times the annual withdrawal or $5,000, whichever is less.
<PAGE>
INVESTMENT ADVISER
KPM Investment Management, Inc.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
William M. Cole
Anne J. Mills
J. William Weeks
John G. Welles
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Jean M. Smith, Vice President
Jessica Wiltshire, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights......................................
Table of Expenses...............................
Financial Highlights............................
Introduction....................................
Investment Of The Fund's Assets.................
Investment Restrictions.........................
Net Asset Value Per Share.......................
How To Invest In The Fund.......................
How To Redeem Your Investment...................
Automatic Withdrawal Plan.......................
Management Arrangements.........................
Dividend And Tax Information....................
Exchange Privilege..............................
General Information.............................
Application
AQUILA
[LOGO]
Tax-Free Fund
of
Colorado
A tax-free
income investment
[LOGO]
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Aquila
Tax-Free Fund of Colorado
380 Madison Avenue Suite 2300
New York, NY 10017
800-USA-COL2 (800-872-2652)
212-697-6666
Statement
of Additional
Information April 30, 1998
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for the
Fund dated April 30, 1998: one Prospectus describes Front-Payment
Class Shares ("Class A Shares") and Level-Payment Class Shares
("Class C Shares") of the Fund and the other describes
Institutional Class Shares ("Class Y Shares") of the Fund and
Financial Intermediary Class Shares ("Class I Shares"). References
in the Additional Statement to "the Prospectus" refer to either of
these Prospectuses. The Additional Statement should be read in
conjunction with the Prospectus for the class of shares in which
you are considering investing. Either or both Prospectuses may be
obtained from the Fund's Shareholder Servicing Agent, PFPC Inc. by
writing to: 400 Bellevue Parkway, Wilmington, DE 19809 or by
calling at the following numbers:
800-872-2651 toll free
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to 380 Madison Avenue, Suite 2300, New York, New York
10017; or by calling:
800-872-2652 toll free or 212-697-6666
The Annual Report of the Fund for the fiscal year ended
December 31, 1997 (audited) will be delivered with the Additional
Statement.
TABLE OF CONTENTS
Investment of the Fund's Assets . . . . . . . . . . . . . . . .2
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . .7
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Restrictions. . . . . . . . . . . . . . . . . . . . 15
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . 16
Shareholder Services Plan. . . . . . . . . . . . . . . . . . . 22
Limitation of Redemptions in Kind. . . . . . . . . . . . . . . 24
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . 25
Additional Information as to Management Arrangements . . . . . 30
Computation of Net Asset Value . . . . . . . . . . . . . . . . 33
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . 34
Additional Tax Information . . . . . . . . . . . . . . . . . . 34
Conversion of Class C Shares . . . . . . . . . . . . . . . . . 35
General Information. . . . . . . . . . . . . . . . . . . . . . 36
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . 37
<PAGE>
INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters described
below. See the Prospectus for the definition of "Colorado
Obligations."
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds and
notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. See Appendix A to this
Additional Statement for further information about the ratings of
Moody's and S&P as to the various rated Colorado Obligations which
the Fund may purchase.
The table below gives information as to the percentage of Fund
net assets invested, as of December 31, 1997, in Colorado
Obligations in the various rating categories:
Highest rating (1) . . . . . . . . . . . . . . . 70.2%
Second highest rating (2). . . . . . . . . . . . 20.9%
Third highest rating (3) . . . . . . . . . . . . . 7.6%
Fourth highest rating(4) . . . . . . . . . . . . . 1.3%
Unrated. . . . . . . . . . . . . . . . . . . . . . 0.0
100.0%
(1) Aaa of Moody's or AAA of S&P (or other highest rating).
(2) Aa of Moody's or AA of S&P (or other second highest rating).
(3) A of Moody's or A of S&P (or other third highest rating).
(4) Baa of Moody's or BBB of S&P (or other fourth highest rating).
When-Issued and Delayed Delivery Obligations
The Fund may buy Colorado Obligations on a when-issued or
delayed delivery basis. The purchase price and the interest rate
payable on the Colorado Obligations are fixed on the transaction
date. At the time the Fund makes the commitment to purchase
Colorado Obligations on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value each
day of such Colorado Obligations in determining its net asset
value. The Fund will make commitments for such when-issued
transactions only when it has the intention of actually acquiring
the Colorado Obligations. The Fund places an amount of assets equal
in value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account with the Custodian, which is marked to market
every business day. On delivery dates for such transactions, the
Fund will meet its commitments by selling the Colorado Obligations
held in the separate account and/or from cash flow.
Determination of the Marketability of Certain Securities
In determining marketability of floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) the Board of Trustees will consider the
following factors, not all of which may be applicable to any
particular issue: the quality, maturity and coupon rate of the
issue, ratings received from the nationally recognized statistical
rating organizations and any changes or prospective changes in such
ratings, the likelihood that the issuer will continue to
appropriate the required payments for the issue, recent purchases
and sales of the same or similar issues, the general market for
municipal securities of the same or similar quality, the Adviser's
opinion as to marketability of the issue and other factors that may
be applicable to any particular issue.
Futures Contracts and Options
Although the Fund does not presently 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 Fund during
periods of changing interest rates, although the Fund may never do
so. The following discussion is intended to explain briefly the
workings of Futures and options on them which would be applicable
if the Fund were to use them.
Unlike when the Fund purchases or sells a Colorado Obligation,
no price is paid or received by the Fund upon the purchase or sale
of a Future. Initially, however, when such transactions are entered
into, the Fund will be required to deposit with the futures
commission merchant ("broker") an amount of cash or Colorado
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 Fund as unrealized
gains or losses. Margin deposits do not involve borrowing by the
Fund and may not be used to support any other transactions. At any
time prior to expiration of the Future, the Fund may elect to close
the position by taking an opposite position which will operate to
terminate the Fund'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 Fund 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
Fund and are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded.
Although the Fund 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").
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 Fund may also purchase
and sell exchange-related call and put options on Futures. The
purchase of a call option on a Future is analogous to the purchase
of a call option on an individual security. Depending on the
pricing of the option compared to either the Future upon which it
is based, or upon the price of the underlying debt securities, it
may or may not be less risky than ownership of the Futures
contract or underlying debt securities. Like the purchase of a
Futures contract, the Fund may purchase a call option on a Future
to hedge against a market advance when the Fund 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 Fund will retain the
full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund'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 Fund may purchase a put option on a
Future to hedge the Fund'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 Fund will retain
the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the
Fund 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 them to attempt to
protect against the price volatility of the Fund's Colorado
Obligations is that the Adviser could be incorrect in its
expectations as to the extent of various interest rate movements
or the time span within which the movements take place. For
example, if the Fund sold a Future in anticipation of an increase
in interest rates, and then interest rates went down instead, the
Fund 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 Colorado Obligations
which are the subject of the hedge. The risk of imperfect
correlation increases as the composition of the Fund'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 Colorado Obligations being hedged. If
the price of the Future or option moves less than the price of the
Colorado Obligations which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the Colorado
Obligations being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at
all. If the price of the Colorado 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 Colorado Obligations,
the Fund 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 Colorado Obligations which are the subject of the
hedge. To compensate for the imperfect correlation of movements in
the price of the Colorado Obligations being hedged and movements in
the price of the Futures or options, the Fund may buy or sell
Futures or options in a greater dollar amount than the dollar
amount of the Colorado Obligations being hedged if the historical
volatility of the prices of the Colorado Obligations being hedged
is less than the historical volatility of the debt securities
underlying the hedge. It is also possible that, where the Fund has
sold Futures or options to hedge its portfolio against decline in
the market, the market may advance and the value of the Colorado
Obligations held in the Fund's portfolio may decline. If this
occurred the Fund 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 Colorado Obligations before the
Fund is able to invest in them in an orderly fashion, it is
possible that the market may decline instead; if the Fund then
concludes not to invest in them at that time because of concern as
to possible further market decline or for other reasons, the Fund
will realize a loss on the Futures or options that is not offset by
a reduction in the price of the Colorado 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
Fund. The correlation of the hedge with such bonds may be affected
by disparities in the average maturity, ratings, geographical mix
or structure of the Fund'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 Fund 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 Fund 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 Fund will, due to requirements under the Investment
Company Act of 1940 (the "1940 Act"), deposit in a segregated
account with its custodian bank Colorado 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 Fund must operate as to its long and short positions in
Futures under in conformity with a rule (the "CFTC Rule") adopted
by the Commodity Futures Trading Commission ("CFTC") under the
Commodity Exchange Act (the "CEA") to be eligible for the exclusion
provided by the CFTC Rule as a "commodity pool operator" (as
defined under the CEA). Under these restrictions the Fund 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 these restrictions the Fund 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 Fund'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 Fund must maintain with its custodian bank as to
its Futures and options activities due to requirements other than
those of the CFTC Rule; the Fund will, as to long positions, be
required to abide by the more restrictive of this other requirement
or the above requirements of the CFTC Rule.) The "underlying
commodity value" of a Future or option is computed by multiplying
the size of the Future by the daily settlement price of the Future
or option.
The "sale" of a Future means the acquisition by the Fund 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 Fund 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 Fund of a
right to take delivery of such an amount of cash. In this case, the
Fund 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.
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 Fund will be affected by
a number of factors, the Fund is unable to predict what rate the
Fund 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.
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 Fund may invest in industrial development bonds or
private activity bonds, the Fund may not be an appropriate
investment for entities which are "substantial users" of facilities
financed by those bonds or for investors who are "related persons"
of such users. Generally, an individual will not be a "related
person" under the Internal Revenue Code unless such investor or his
or her immediate family (spouse, brothers, sisters and lineal
descendants) own directly or indirectly in the aggregate more than
50 percent of the equity of a corporation or is a partner of a
partnership which is a "substantial user" of a facility financed
from the proceeds of those bonds. A "substantial user" of such
facilities is defined generally as a "non-exempt person who
regularly uses a part of [a] facility" financed from the proceeds
of industrial development or private activity bonds.
As indicated in the Prospectus, there are certain Colorado
Obligations the interest on which is subject to the Federal
alternative minimum tax on individuals. While the Fund may purchase
these obligations, it may, on the other hand, refrain from
purchasing particular Colorado Obligations due to this tax
consequence. Also, as indicated in the Prospectus, the Fund will
not purchase obligations of Colorado 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
Fund.
Additional Information Regarding a Colorado Constitutional
Provision
The following information is derived from sources that are
generally available to investors and is believed by the Fund to be
accurate, but has not been independently verified and may not be
complete.
General Description. At the November 3, 1992 general election,
Colorado voters approved an amendment to the Colorado Constitution,
which is commonly referred to as Amendment 1 and now constitutes
Section 20 of Article X of the Colorado Constitution ("Amendment
1"). Amendment 1 imposes various limits and new requirements on the
State of Colorado and other Colorado local governments (each of
which is referred to in this section as a "governmental unit"). Any
of the following actions, for example, now requires prior voter
approval: (1) any increase in a governmental unit's spending from
one year to the next in excess of the rate of inflation plus a
"growth factor" based on: (A) for school districts, the percentage
change in the school district's student enrollment, (B) for the
state, the percentage change in state population, and (C) for other
governmental units, the net percentage change in actual value of
all real property in the governmental unit from construction of
taxable real property improvements, minus destruction of similar
improvements, and additions to, minus deletions from, taxable real
property; (2) any increase in the real property tax revenues of a
local governmental unit (not including the state) from one year to
the next in excess of inflation plus the appropriate "growth
factor" referred to in clause (1) above; (3) any new tax, tax rate
increase, mill levy increase, valuation for assessment ratio
increase for a property class, extension of an expiring tax or a
tax policy change directly causing a net tax revenue gain; and (4)
except for refinancing bonded indebtedness at a lower interest rate
or adding new employees to existing pension plans, creation of any
multiple-fiscal year direct or indirect debt or other financial
obligation whatsoever without adequate present cash reserves
pledged irrevocably and held for payments in all future fiscal
years. Elections on such matters may only be held on the same day
as a state general election, at the governmental unit's regular
biennial election or on the first Tuesday in November of
odd-numbered years, and must be conducted in accordance with
procedures described in Amendment 1.
Amendment 1 also requires that revenue collected, kept or
spent in violation of its provisions be refunded, with interest,
and requires each governmental unit to have created an emergency
reserve of 1% of its fiscal year spending in 1993, increasing to 2%
in 1994 and 3% in 1995 and subsequent years. The last sentence of
paragraph (1) of Amendment 1 provides that "[w]hen [a governmental
unit's] annual...revenue is less than annual payments on general
obligation bonds, pensions, and final court judgments, [the voter
approval requirement for mill levy and other tax increases referred
to in clause (3) of the preceding paragraph and the voter approval
requirement for spending and real property tax revenue increases
referred to in clauses (1) and (2) of the preceding paragraph]
shall be suspended to provide for the deficiency." The second
sentence of paragraph (1) of Amendment 1 provides that the
"preferred interpretation [of Amendment 1] shall reasonably
restrain most the growth of government."
Court Interpretations. Many of the provisions of Amendment 1
are ambiguous, are the subject of much debate and likely will not
be clarified until courts rule on their meanings. In September,
1994, the Supreme Court of Colorado ruled that (i) the ballot
questions, authorizing issuance of bonds and the related increase
in taxes to pay such bonds in a single ballot question, did not
violate the provisions of the Amendment and (ii) in approving the
ballot questions the related electorates authorized the adjusting
of the tax rates as necessary to repay the specific debt incurred
pursuant to the ballot questions (e.g. authorized mill levy rate
increases in response to declines in assessed value of property),
provided that the tax rate increases are consistent with the stated
estimate of the final fiscal year dollar amount of the tax increase
set forth in the ballot questions. Although this ruling has been
seen as meaning that general obligation bonds continue to exist in
Colorado and that it is not necessary to have a separate vote on
bonds and taxes to pay for the bonds, in January, 1995, the
plaintiffs applied to the United States Supreme court for a writ of
certiorari. It is not possible to predict whether the Supreme Court
will grant the writ or if it takes jurisdiction of the case what
further rulings the Supreme Court would make, or what course
further proceedings in the case might take.
There are a number of other lawsuits pending regarding
Amendment 1. The "Littleton Public Schools case" was filed on
January 25, 1993 in Arapahoe County District Court (Case No.
93-CV-185) by three taxpayers against Arapahoe County School
District Number Six, a/k/a/ Littleton Public Schools, challenging
increases in the school district's mill levy for, among other
things, increased debt service on general obligation bonds that
were outstanding prior to the adoption of Amendment 1. After a
trial to the court, the judge ruled that the school district had
received the "prior voter approval" for an increase in its mill
levy to pay general obligation bonds at the time when the bonds
were originally approved by the voters and, thus, upheld the school
district's increased mill levy imposed after the passage of
Amendment 1. The plaintiff taxpayers have appealed the decision of
the judge. The issues in the other lawsuits relate to the conduct
of elections, the wording of ballot issues and election notices,
the interpretation of the definitions of "district" and
"enterprise" in Amendment 1, whether the remarketing of debt
constitutes "creation" of debt, and the compliance with rate
covenants that may conflict with the revenue and spending limits of
Amendment 1. Other lawsuits regarding Amendment 1 may be filed in
the future. It is not possible to predict when final decisions in
any of the pending actions or any future actions regarding
Amendment 1 will be issued.
PERFORMANCE
As noted in the Prospectus, the Fund 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 Fund 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 Fund are based on these standardized methods and are computed
separately for each of the Fund's three classes of shares. Prior to
April 30, 1996, the Fund had outstanding only one class of shares
which are currently designated "Class A Shares." On that date the
Fund 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 April 30, 1998, and
none were outstanding during the periods indicated. Each of these
and other methods that may be used by the Fund are described in the
following material.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5- and 10- year
periods and a period since the inception of the operations of the
Fund (on May 21, 1987) that would equate an initial hypothetical
$1,000 investment in shares of each of the Fund'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
three classes, it is assumed that on each reinvestment date during
each such period any capital gains are reinvested at net asset
value, and all income dividends are reinvested at net asset value,
without sales charge (because the Fund 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 Fund. Actual performance will be affected less by this one
time charge the longer an investment remains in the Fund. Sales
charges at the time of purchase are payable only on purchases of
Class A Shares of the Fund.
Average Annual Compounded Rates of Return:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 2.95% 4.95% 7.55%
Five Years 5.28% N/A N/A
Ten Years 7.01% N/A N/A
Since
inception on
May 21, 1987 6.80% 5.91%(1) 8.19%(1)
<FN>
(1) Period from April 30, 1996 (inception of class) through
December 31, 1997.
</FN>
</TABLE>
These figures were calculated according to the following SEC
formula:
n
P(1+T) =ERV
where
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1- and 5-year
periods or the period since inception, at the end
of each such period.
As discussed in the Prospectus, the Fund 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 Fund's average annual compounded rate, except that
such quotations will be based on the Fund's actual return for a
specified period as opposed to its average return over the periods
described above.
Total Return
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 2.95% 4.95% 7.55%
Five Years 29.32% N/A N/A
Ten Years 96.85% N/A N/A
Since
inception on
May 21, 1987 101.1% 10.08% 14.07%
<FN>
(1) Period from April 30, 1997 (inception of class) through
December 31, 1997.
</FN>
</TABLE>
In general, actual total rate of return will be lower than
average annual rate of return because the average annual rate of
return reflects the effect of compounding. See discussion of the
impact of the sales charge on quotations of rates of return, above.
Yield
Current yield reflects the income per share earned by the
Fund's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of the
Fund's three classes during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of each class during the base
period net of fee waivers and reimbursements of expenses, if any.
The Fund may also quote a taxable equivalent yield for each of
its three classes of shares which shows the taxable yield that
would be required to produce an after-tax yield equivalent to that
of a fund which invests in tax-exempt obligations. Such yield is
computed by dividing that portion of the yield of the Fund
(computed as indicated above) which is tax-exempt by one minus the
highest applicable combined federal and Colorado income tax rate
(and adding the result to that portion of the yield of the Fund
that is not tax-exempt, if any).
The Colorado and the combined Colorado and federal income tax
rates upon which the Fund's tax equivalent yield quotations are
based are 5.0% and 43.75% 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 Fund will be updated to reflect such
changes. Any tax rate increases will tend to make a tax-free
investment, such as the Fund, relatively more attractive than
taxable investments. Therefore, the details of specific tax
increases may be used in Fund sales material.
Yield for the 30-day period ended December 31, 1997 (the date
of the Fund's most recent audited financial statements):
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
Yield 3.56% 2.76% 3.75%
Taxable
Equivalent
Yield 6.12% 4.75% 6.45%
</TABLE>
These figures were obtained using the Securities and Exchange
Commission formula:
6
Yield = 2 [(a-b + 1) -1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of waivers and
reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative of
the amounts which were or will be paid to the Fund'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 Fund 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 Fund's
current distribution rate (calculated as indicated above). The
current distribution rate can differ from the current yield
computation because it could include distributions to shareholders
from additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains.
Other Performance Quotations
With respect to those categories of investors who are
permitted to purchase Class A Shares of the Fund at net asset
value, the Fund may quote a "Current Distribution for Net Asset
Value Investments." This rate is computed by (i) dividing the total
amount of dividends per share paid by the Fund during a recent
30-day period by (ii) the current net asset value of the Fund and
by (iii) annualizing the result. Figures for yield, total return
and other measures of performance for Net Asset Value Investments
may also be quoted. These will be derived as described above with
the substitution of net asset value for public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with the
formula of the Securities and Exchange Commission.
The Fund may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect of
taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and capital
gains distributions in additional shares. The examples used will be
for illustrative purposes only and are not representations by the
Fund of past or future yield or return.
From time to time, in reports and promotional literature, the
Fund may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices of
broad groups of unmanaged securities considered to be
representative of, or similar to, the Fund's portfolio holdings,
such as:
Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales charges
into consideration. The method of calculating total return data on
indices utilizes actual dividends on ex-dividend dates accumulated
for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars
(highest). Morningstar ratings are calculated from the funds'
three-, five-, and ten-year average annual returns (when available)
and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are
adjusted for fees and sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars, and the bottom
10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices," a monthly corporate government index publication which
lists principal, coupon and total return on over 100 different
taxable bond indices which Merrill Lynch tracks. They also list the
par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly
publication which tracks principal, coupon and total return on the
Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as well
as all the components of these Indices.
The Consumer Price Index, prepared by the U.S. Bureau of Labor
Statistics, is a commonly used measure of inflation. The Index
shows changes in the cost of selected consumer goods and does not
represent a return on an investment vehicle.
From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK,
BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL
STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be
cited.
INVESTMENT RESTRICTIONS
The Fund 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 Fund's outstanding shares vote to change them. Under
the 1940 Act, the vote of the holders of a "majority" of the Fund's
outstanding shares means the vote of the holders of the lesser of
(a) 67% or more of the Fund'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 Fund's
outstanding shares. Those fundamental policies not set forth in the
Prospectus are set forth below:
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than Colorado
Obligations (discussed under "Investment of the Fund's Assets" in
the Prospectus), Municipal Bond Index Futures, U.S. Government
Securities Futures and options on Futures; therefore the Fund
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 Fund 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 Fund does not buy for control.
The Fund cannot invest for the purpose of exercising control
or management of other companies.
3. The Fund 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 Fund
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 Fund is not an underwriter.
The Fund cannot engage in the underwriting of securities, that
is, the selling of securities for others. Also, it cannot invest in
restricted securities. Restricted securities are securities which
cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Fund's Distribution Plan has four parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II) to distribution payments relating to Class I
Shares (Part III) and to certain defensive provisions (Part IV).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser or
the Distributor. The Distributor will consider shares which are not
Qualified Holdings of such unrelated broker-dealers to be Qualified
Holdings of the Distributor and will authorize Permitted Payments
to the Distributor with respect to such shares whenever Permitted
Payments are being made under the Plan.
Part I of the Plan applies only to the Front-Payment Class
Shares ("Class A Shares") of the Fund (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 Fund, with which the Fund 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 Fund'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.
At the date of this Additional Statement, subject to the
direction and control of the Fund's Board of Trustees, the Fund 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
Fund (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), 0.05 of 1% of the average
annual net assets of the Fund represented by the Front-Payment
Class Shares up to $250 million and 0.15 of 1% of such net assets
above $250 million. Such payments shall be made only out of the
Fund's assets allocable to the Front-Payment Class Shares. The
Distributor shall have sole authority (i) as to the selection of
any Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class A Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class A Permitted Payments to all Qualified Recipients do not
exceed the amount set forth above. The Distributor is authorized,
but not directed, to take into account, in addition to any other
factors deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient; (b) the extent to
which the Qualified Recipient has, at its expense, taken steps in
the shareholder servicing area with respect to holders of
Front-Payment Class Shares, including without limitation, any or
all of the following activities: answering customer inquiries
regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund 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 Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the Fund
proxies executed by shareholders with respect to meetings of
shareholders of the Fund; 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. As noted
in the Prospectus, the shareholders of the Fund have approved a
change in the Distribution Plan that would allow the above payments
at the annual rate of 0.15 of 1% of all of the average annual net
assets of the Fund represented by the Front- Payment Shares class
of shares. Implementation of this change, which was to have taken
place on October 1, 1996, has been indefinitely postponed. When and
if it is determined to implement the change the Additional
Statement will be supplemented.
While Part I is in effect, the Fund's Distributor shall report
at least quarterly to the Fund's Trustees in writing for their
review on the following matters: (i) all Class A Permitted Payments
made under Section 9 of the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor,
sub-adviser or Administrator paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Fund, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Fund 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 herein provided, continue in effect, until the June
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 Fund'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 Fund
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 Fund, 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 Fund, the
Class A Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Fund'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 Fund (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 Fund, with which the Fund 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 Fund'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 Fund's Board of
Trustees, the Fund 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 Fund (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 Fund represented by the
Level-Payment Class Shares. Such payments shall be made only out of
the Fund'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 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 Fund 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 Fund, proxy statements,
annual reports, updating prospectuses and other communications from
the Fund to its shareholders; receiving, tabulating and
transmitting to the Fund proxies executed by shareholders with
respect to meetings of shareholders of the Fund; 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 Fund's Distributor shall
report at least quarterly to the Fund'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 Fund to the Distributor,
sub-adviser or Administrator paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Fund, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Fund 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 Fund'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 Fund
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 Fund, 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 Fund, the
Class C Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Fund's
Distribution Plan in effect prior to April 30, 1996 or (ii) Class
C Plan Agreements entered into thereafter.
Payments under the Plan
During the fiscal year ended December 31, 1997, $107,821 was
paid to Qualified Recipients with respect to Class A Shares, of
which $4,357 was retained by the Distributor. During the same
period, $7,193 was paid to Qualified Recipients with respect to
Class C Shares, of which $6,724 was retained by the Distributor.
During the fiscal year ended December 31, 1996, $107,593 was paid
to qualified Recipients with respect to Class A Shares, of which
$2,606 was retained by the Distributor. No or nominal payments were
made with respect to Class C Shares. During the fiscal year ended
December 31, 1995, $106,748 was paid to Qualified Recipients with
respect to what are now designated Class A Shares of which $2,553
was retained by the Distributor. All of such payments were for
compensation.
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 Fund
(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 Fund, with which the Fund 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 Fund'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 Fund's Board of
Trustees, the Fund 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 Fund (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 Fund 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 Fund's assets allocable to
Class I Shares. The Distributor shall have sole authority (i) as to
the selection of any Qualified Recipient or Recipients; (ii) not to
select any Qualified Recipient; and (iii) the amount of Class C
Permitted Payments, if any, to each Qualified Recipient provided
that the total Class I Permitted Payments to all Qualified
Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into account,
in addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and history,
and the manner in which purchases and redemptions of shares of the
Fund 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 Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the Fund
proxies executed by shareholders with respect to meetings of
shareholders of the Fund; 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 Fund's Distributor shall
report at least quarterly to the Fund'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 Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the Fund,
the Adviser, the Administrator or the Distributor, such person
shall agree to furnish to the Distributor for transmission to the
Board of Trustees of the Fund 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 herein 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 Fund'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 Fund
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 Fund, 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 Fund, the
Class I Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the Fund'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
Fund 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 Fund 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 Fund'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 Fund 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 Fund'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 Fund who are not "interested
persons" of the Fund shall be committed to the discretion of such
disinterested Trustees but that nothing in the Plan shall prevent
the involvement of others in such selection and nomination if the
final decision on any such selection and nomination is approved by
a majority of such disinterested Trustees.
The Plan states that while it is in effect, the Fund's
Administrator and Distributor shall report at least quarterly to
the Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this Plan,
the identity of the Qualified Recipient of each Payment, and the
purposes for which the amounts were expended; (ii) all costs of
each item of cost specified in the Plan (making estimates of such
costs where necessary or desirable) during the preceding calendar
or fiscal quarter; and (iii) all fees of the Fund to the
distributor, sub-adviser or administrator paid or accrued during
such quarter. In addition if any such Qualified Recipient is an
affiliate, as that term is defined in the 1940 Act, of the Fund,
the Adviser, the Administrator or the Distributor, such person
shall agree to furnish to the Distributor for transmission to the
Board of Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund 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 hereinafter provided,
continues in effect from year to year only so long as such
continuance is specifically approved at least annually by the
Fund'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 Fund 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 Fund. The Plan may not be amended to increase materially the
amount of payments to be made without shareholder approval and all
amendments must be approved in the manner set forth above as to
continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act as
now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by Rule
18f-3, with respect to each outstanding class of shares of the
Fund.
SHAREHOLDER SERVICES PLAN
The Fund 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 Fund 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 Fund
(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 Fund,
who have, pursuant to written agreements with the Fund or the
Distributor, agreed to provide personal services to shareholders of
Level-Payment Class Shares and/or maintenance of Level- Payment
Class Shares shareholder accounts. "Qualified Holdings" shall mean,
as to any Qualified Recipient, all Level-Payment Class Shares
beneficially owned by such Qualified Recipient's customers, clients
or other contacts. "Administrator" shall mean Aquila Management
Corporation or any successor serving as sub-adviser or
administrator of the Fund.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund 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 Fund (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 Fund represented by the
Level-Payment Class Shares. Such payments shall be made only out of
the Fund'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 Fund 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 year ended December 31, 1997, $2,397
was paid to the Distributor.
Provisions for Financial Intermediary Class Shares (Part II)
As used in Part II of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to the Distributor and any other principal underwriter of the Fund,
who have, pursuant to written agreements with the Fund or the
Distributor, agreed to provide personal services to shareholders of
Financial Intermediary Class Shares, maintenance of Financial
Intermediary Class Shares shareholder accounts and/or pursuant to
specific agreements entering confirmed purchase orders on behalf of
customers or clients. "Qualified Holdings" shall mean, as to any
Qualified Recipient, all Financial Intermediary Class Shares
beneficially owned by such Qualified Recipient's customers, clients
or other contacts. "Administrator" shall mean Aquila Management
Corporation or any successor serving as sub-adviser or
administrator of the Fund.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund 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 Fund (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 Fund represented by the Financial
Intermediary Class Shares. Such payments shall be made only out of
the Fund'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 Fund 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.
General Provisions
While the Services Plan is in effect, the Fund's Distributor
shall report at least quarterly to the Fund'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 Fund 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 Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the Distributor
for transmission to the Board of Trustees of the Fund 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 Fund 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 Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others in
such selection and nomination if the final decision on any such
selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the
1940 Act, pursuant to which the Fund 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 Fund during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such
limitation, the Fund will have the option of redeeming the excess
in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets
into cash. The method of valuing securities used to make
redemptions in kind will be the same as the method of valuing
portfolio securities described under "Net Asset Value Per Share" in
the Prospectus, and such valuation will be made as of the same time
the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their affiliations, if
any, with the Administrator 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 Fund is affiliated
with the Adviser. Mr. Herrmann is an "interested person" of the
Fund, as that term is defined in the 1940 Act, as an officer of the
Fund and a Director, officer and shareholder of the Distributor.
As of the date of this Additional Statement, all of the
Trustees and officers as a group owned less than 1% of its
outstanding shares.
Lacy B. Herrmann*, President and Chairman of the Board of Trustees,
380 Madison Avenue, New York, New York 10017
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Arizona since 1986; Tax-Free Trust of
Oregon since 1986; Churchill Tax-Free Fund of Kentucky since 1987;
Tax-Free Fund For Utah since 1992; and Narragansett Insured
Tax-Free Income Fund since 1992; each of which is a tax-free
municipal bond fund, and two equity funds, Aquila Rocky Mountain
Equity Fund since 1993 and Aquila Cascadia Equity Fund, since 1996,
which, together with this Fund are called the Aquila Bond and
Equity Funds; Pacific Capital Cash Assets Trust since 1984;
Churchill Cash Reserves Trust since 1985; Pacific Capital U.S.
Government Securities Trust since 1988; Pacific Capital Tax-Free
Cash Assets Trust since 1988; each of which is a money market fund,
and together with Capital Cash Management Trust ("CCMT") are called
the Aquila Money-Market Funds; Vice President, Director, Secretary
and formerly Treasurer of Aquila Distributors, Inc. since 1981,
distributor of the above funds; President and Chairman of the Board
of Trustees of CCMT, a money market fund since 1981, and an Officer
and Trustee/Director of its predecessors since 1974; Chairman of
the Board of Trustees and President of Prime Cash Fund (which is
inactive), since 1982 and of Short Term Asset Reserves 1984-1996;
President and a Director of STCM Management Company, Inc., sponsor
and sub-adviser to CCMT; Chairman, President, and a Director since
1984, of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves, and
Founder and Chairman of several other money market funds; Director
or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest Global
Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and Trustee
of Quest For Value Accumulation Trust, The Saratoga Advantage
Trust, and of the Rochester Group of Funds, each of which is an
open-end investment company; Trustee of Brown University, 1990-1996
and currently Trustee Emeritus; actively involved for many years in
leadership roles with university, school and charitable
organizations.
Tucker Hart Adams, Trustee, 4822 Alteza Drive, Colorado Springs,
Colorado 80917
President of the Adams Group, an economic consulting firm, since
1989; Trustee of Aquila Rocky Mountain Equity Fund since 1993; Vice
President of United Banks of Colorado, 1985-1988; Chief Economist
of United Banks of Colorado, 1981-1988; Director of University
Hospital, 1990-1994; Director of the Colorado Health Facilities
Authority; Vice Chair of the University of Colorado Foundation;
currently or formerly an officer or director of numerous
professional and community organizations.
Arthur K. Carlson, Trustee, 8702 North Via La Serena, Paradise
Valley, Arizona 85253
Retired; Advisory Director of the Renaissance Companies (design and
construction companies of commercial, industrial and upscale
residential properties) since 1996; Senior Vice President and
Manager of the Trust Division of The Valley National Bank of
Arizona, 1977-1987; Hawaiian Tax-Free Trust, Tax-Free Trust of
Arizona 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;present or formerly an officer and/or director of
various other community and professional organizations.
William M. Cole, Trustee, 852 Ramapo Way, Westfield, New Jersey
07090
President of Cole International, Inc., financial and shipping
consultants, since 1974; President of Cole Associates, shopping
center and real estate developers, 1974-1976; President of Seatrain
Lines, Inc., 1970-1974; former General Partner of Jones & Thompson,
international shipping brokers; Trustee of Pacific Capital Cash
Assets Trust since 1984, of Hawaiian Tax-Free Trust since 1985,
Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital U.S.
Government Securities Trust since 1988; Chairman of Cole Group, a
financial consulting and real estate firm, since 1985.
Anne J. Mills, Trustee, 167 Glengarry Place, Castle Pines Village,
Castle Rock, Colorado 80104
Vice President for Business Affairs of Ottawa University since
1992; Director of Customer Fulfillment, U.S. Marketing and Services
Group, IBM Corporation, 1990-1991; Director of Business
Requirements of that Group, 1988-1990; Director of Phase Management
of that Group, 1985-1988; Budget Review Officer of the American
Baptist Churches/USA, 1994-1997; Director of the American Baptist
Foundation, 1985-1996 and since 1998; Trustee of Brown University;
Trustee of Churchill Cash Reserves Trust since 1985, of Tax-Free
Trust of Arizona since 1986, of Churchill Tax-Free Fund of Kentucky
and Capital Cash Management Trust since 1987 and of Tax-Free Fund
For Utah since 1994.
J. William Weeks, Trustee, 380 Madison Avenue, New York, New York
10017
Trustee of Narragansett Insured Tax-Free Income Fund since 1995;
Senior Vice President of Narragansett Insured Tax-Free Income Fund,
1992-1995; Vice President of Hawaiian Tax-Free Trust, Tax-Free
Trust of Arizona, Tax-Free Trust of Oregon and Churchill Tax-Free
Fund of Kentucky, 1990-1995; Senior Vice President or Vice
President of the Bond and Equity Funds and Vice President of Short
Term Asset Reserves and Pacific Capital Cash Assets Trust,
1984-1988; President and Director of Weeks & Co., Inc., financial
consultants, since 1978; limited partner and investor in various
real estate partnerships since 1988; Partner of Alex. Brown & Sons,
investment bankers, 1966-1976; Vice President of Finance and
Assistant to the President of Howard Johnson Company, a restaurant
and motor lodge chain, 1961-1966; formerly with Blyth & Co., Inc.,
investment bankers.
John G. Welles, Trustee, 1133 Race Street 11 South, Denver,
Colorado 80206
Retired; Executive Director Emeritus of the Denver Museum of
Natural History since 1995; Director of the Museum, 1987-1994;
Regional Administrator of Region VIII, U.S. Environmental
Protection Agency, 1983-1987; Vice President for Planning and
Public Affairs of the Colorado School of Mines, 1974-1983; Member
of the Board of Directors of Intra West Mortgage Corporation,
1976-1983; Member of the Board of Directors of the Gulf of Maine
Foundation; formerly head of the Industrial Economics Division of
the University of Denver Research Institute, consultant to the
United Nations Conference on the Human Environment and to Business
International, and Chairman of the Colorado Front Range Project;
formerly Vice President and member of Ethics Commission of the
American Association of Museums.
Jerry G. McGrew, Senior Vice President, P.O. Box 662, Radcliff,
Kentucky 40159
Senior Vice President of Aquila Rocky Mountain Equity Fund since
1997; Senior Vice President of Churchill Tax-Free Fund of Kentucky
since 1994, Vice President since 1987; Vice President of Tax-Free
Fund For Utah since 1992; Vice President of Churchill Cash Reserves
Trust since 1995; Registered Principal since 1993; Vice President
of Aquila Distributors, Inc. since 1993; Registered Representative
of J.J.B. Hilliard, W.L. Lyons Inc., 1983-1987; Account Manager
with IBM Corporation, 1967-1981; Gubernatorial appointee, Kentucky
Financial Institutions Board, since 1993; Chairman, Total Quality
Management for Small Business, 1990-1994; President of
Elizabethtown/Hardin County, Kentucky, Chamber of Commerce, 1989-
1991; President of Elizabethtown Country Club, 1983-1985.
William C. Wallace, Vice President, 380 Madison Avenue, New York,
New York 10017
Vice President of Capital Cash Management Trust and Pacific Capital
Cash Assets Trust since 1984; Senior Vice President of Hawaiian
Tax-Free Trust since 1985 and Vice President, 1984-1985; Senior
Vice President of Tax-Free Trust of Arizona since 1989 and Vice
President, 1986-1988; Vice President of Tax-Free Trust of Oregon
since 1986, of Churchill Tax-Free Fund of Kentucky since 1987, of
Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital U.S.
Government Securities Trust since 1988 and of Narragansett Insured
Tax-Free Income Fund since 1992; Secretary and Director of STCM
Management Company, Inc. since 1974; President of the Distributor
since 1995 and formerly Vice President of the Distributor,
1986-1992; Member of the Panel of Arbitrators, American Arbitration
Association, since 1978; Assistant Vice President, American Stock
Exchange, Market Development Division, and Director of Marketing,
American Gold Coin Exchange, a subsidiary of the American Stock
Exchange, 1976-1984.
Jean M. Smith, Vice President, 410 17th Street, Suite 1715,
Denver, Colorado 80208
Assistant Treasurer of Bradford Trust Company, 1977-1978; Staff
Supervisor of Wood Struthers & Winthrop, an investment advisory
firm, 1976-1977; Client Administrator of Bradford Trust Company,
1972-1976.
Jessica L. Wiltshire, Vice President, 410 17th Street, Suite 1715,
Denver, Colorado 80202
Investor Representative with Oppenheimer Funds, 1996-1997; Sales
Representative for Tax-Free Fund of Colorado and Aquila Rocky
Mountain Equity Fund, 1993-1996.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer of
Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of the
Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New York
10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond and
Equity Funds and of Aquila Distributors, Inc. since 1992; Associate
Director of Furman Selz Incorporated, 1991-1992; Vice President of
Scudder, Stevens & Clark, Inc. and Treasurer of Scudder
Institutional Funds, 1989-1991; Vice President of Lazard Freres
Institutional Funds Group, Treasurer of Lazard Freres Group of
Investment Companies and HT Insight Funds, Inc., 1986-1988; Vice
President of Lehman Management Co., Inc. and Assistant Treasurer of
Lehman Money Market Funds, 1981-1985; Controller of Seligman Group
of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust,
1982-1985 and Trustee of that Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995 and Vice President of the Aquila
Money-Market Funds since 1990; Vice President of the Administrator
since 1990; Investment Services Consultant and Bank Services
Executive of Wright Investors' Service, a registered investment
adviser, 1983-1989; Member of the American Finance Association, the
Western Finance Association and the Society of Quantitative
Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995; Counsel to the Administrator and
the Distributor since 1995; Secretary of the Distributor since
1997; formerly a Legal Associate for Oppenheimer Management
Corporation, 1993-1995.
Compensation of Trustees
For its fiscal year ended December 31, 1997, the Fund paid a
total of $59,804 in compensation and reimbursement of expenses to
those Trustees to whom it pays fees. No other compensation or
remuneration of any type, direct or contingent, was paid by the
Fund to its Trustees. The Fund does not pay fees to Trustees
affiliated with the Administrator or to any of its officers. The
Fund is one of the 14 funds in the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money market funds and
two equity funds. The following table lists the compensation of all
Trustees who received compensation from the Fund and the
compensation they received during the Fund's fiscal year from other
funds in the Aquilasm Group of Funds. None of such Trustees has any
pension or retirement benefits from the Fund or any of the other
funds in the Aquila group.
<TABLE>
<CAPTION>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Fund Group now serves
<S> <C> <C> <C>
Tucker H.
Adams $8,135 $9,985 2
Arthur K.
Carlson $7,794 $59,122 7
William M.
Cole $7,799 $47,061 5
Anne J.
Mills $9,042 $39,424 6
J. William
Weeks $9,106 $14,744 2
John G.
Welles $8,470 $8,470 1
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
The Board of Trustees has approved changes in the management
arrangements described below under which the Administrator will
become Investment Adviser and Administrator and the Adviser will
become Sub-Adviser. The change will not result in any change of
personnel or any change in overall management fees. The proposed
changes will be submitted for consideration by the shareholders of
the Fund at the annual meeting of shareholders on June 29, 1998. If
approved by the shareholders, the new arrangements will go into
effect at that time and the Prospectus and Additional Statement
will be supplemented.
Additional Information as to the Advisory Agreement
The Investment Advisory Agreement (the "Advisory Agreement")
between the Fund and KPM Investment Management, Inc. (the
"Adviser") contains the provisions described below, in addition to
those described in the Prospectus.
The Advisory Agreement contains the following provisions as to
the Fund's portfolio transactions. In connection with its duties to
arrange for the purchase and sale of the Fund's portfolio
securities, the Adviser shall select such broker-dealers
("dealers") as shall, in the Adviser's judgment, implement the
policy of the Fund to achieve "best execution," i.e., prompt,
efficient and reliable execution of orders at the most favorable
net price. The Adviser shall cause the Fund to deal directly with
the selling or purchasing principal or market maker without
incurring brokerage commissions unless the Adviser determines that
better price or execution may be obtained by paying such
commissions; the Fund expects that most transactions will be
principal transactions at net prices and that the Fund will incur
little or no brokerage costs. The Fund understands that purchases
from underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked price.
In allocating transactions to dealers, the Adviser is authorized to
consider, in determining whether a particular dealer will provide
best execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as well
as the difficulty of the transaction in question, and thus need not
pay the lowest spread or commission available if the Adviser
determines in good faith that the amount of commission is
reasonable in relation to the value of the brokerage and research
services provided by the dealer, viewed either in terms of the
particular transaction or the Adviser's overall responsibilities as
to the accounts as to which it exercises investment discretion. If,
on the foregoing basis, the transaction in question could be
allocated to two or more dealers, the Adviser is authorized, in
making such allocation, to consider (i) whether a dealer has
provided research services, as further discussed below; and (ii)
whether a dealer has sold shares of the Fund or any other
investment company or companies having the Adviser as its
investment adviser or having the same Administrator, sub-adviser or
principal underwriter as the Fund. 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 Fund recognizes that no dollar value
can be placed on such research services or on execution services,
that such research services may or may not be useful to the Fund
and/or other accounts of the Adviser and that research received by
such other accounts may or may not be useful to the Fund.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Advisory Agreement may be terminated by the Adviser at any
time without penalty upon giving the Fund sixty days' written
notice, and may be terminated by the Fund at any time without
penalty upon giving the Adviser sixty days' written notice,
provided that such termination by the Fund shall be directed or
approved by the vote of a majority of all its Trustees in office at
the time or by the vote of the holders of a majority (as defined in
the 1940 Act) of its voting securities at the time outstanding and
entitled to vote; it automatically terminates in the event of its
assignment (as so defined).
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations thereunder, the Adviser is not liable for any loss
sustained by the adoption of any investment policy or the purchase,
sale or retention of any security and permits the Adviser to act as
investment adviser for any other person, firm or corporation. The
Fund agrees to indemnify the Adviser to the full extent permitted
under the Fund's Declaration of Trust.
The Advisory Agreement states that it is agreed that the
Adviser shall have no responsibility or liability for the accuracy
or completeness of the Fund's Registration Statement under the
Securities Act of 1933 and the 1940 Act, except for the information
supplied by the Adviser for inclusion therein.
During the fiscal year ended December 31, 1997, all of the
Fund's transactions were principal transactions and no brokerage
commissions were paid.
Former Advisory Arrangements
From the commencement of the Fund's operations in 1987 until
April 19, 1991, Norwest Bank Denver, National Association ("NBD"),
formerly known as United Bank of Denver National Association,
provided investment advisory and other services to the Fund. It
acted as the Fund's investment adviser under an investment advisory
agreement until April 19, 1991, when, upon completion of the merger
of NBD's parent, Norwest Colorado, Inc. ("NCI"), formerly known as
United Banks of Colorado, into Norwest Corporation ("Norwest"), one
of the banking subsidiaries of Norwest, Norwest Bank Minnesota,
National Association ("Norwest Bank") became investment adviser to
the Fund under an advisory agreement (the "Former Advisory
Agreement"), and NBD, which after the merger became an indirect
subsidiary of Norwest, became sub-adviser to the Fund under a
sub-advisory agreement (the "Former Sub-Advisory Agreement"). Both
agreements were approved by the shareholders of the Fund on March
28, 1991, went into effect on April 19, 1991 and remained in effect
until terminated on October 1, 1992, when an advisory agreement
with Kirkpatrick, Pettis, Smith, Polian, Inc. ("Kirkpatrick,
Pettis") went into effect. That Agreement remained in effect until
June 8, 1994 when the current Advisory Agreement went into effect.
On July 1, 1994, with the approval of the Board of Trustees,
Kirkpatrick, Pettis transferred the Advisory Agreement to its
wholly owned subsidiary, the Adviser, which has acted as the Fund's
adviser since that time using the same personnel. In 1996,
Kirkpatrick, Pettis transferred ownership of the adviser to KFS
Corporation, another subsidiary of their corporate parent, Mutual
of Omaha Insurance Company.
For the year ended December 31, 1997, advisory fees of
$437,704 were paid or accrued to the Adviser. For the year ended
December 31, 1996, advisory fees of $429,661 were paid or accrued
to the Adviser, of which $7,388 was voluntarily waived. For the
year ended December 31, 1995, advisory fees of $427,046 were paid
or accrued to the Adviser, of which $49,985 was voluntarily waived.
Additional Information as to the Administration Agreement
The Administration Agreement (the "Administration Agreement")
between Aquila Management Corporation, as Administrator, and the
Fund contains the provisions described below in addition to those
described in the Prospectus.
Since the Fund pays its own legal and audit expenses, to the
extent that the Fund's counsel and accountants prepare or assist in
the preparation of prospectuses, proxy statements and reports to
shareholders, the costs of such preparation or assistance are paid
by the Fund.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Administration Agreement may be terminated at any time
without penalty by the Administrator upon sixty days' written
notice to the Fund and the Adviser; it may be terminated by the
Fund at any time without penalty upon giving the Administrator
sixty days' written notice, provided that such termination by the
Fund shall be directed or approved by a vote of a majority of the
Trustees in office at the time, including a majority of the
Trustees who are not interested persons of the Fund. In either case
the notice provision may be waived.
The Administration Agreement provides that the Administrator
shall not be liable for any error in judgement or for any loss
suffered by the Fund in connection with the matters to which the
Administration Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence of the
Administrator in the performance of its duties, or from reckless
disregard by it of its obligations and duties under the
Administration Agreement. The Fund agrees to indemnify the
Administrator to the full extent permitted by the Declaration of
Trust.
During the year ended December 31, 1997, administration fees
of $656,555 were paid or accrued to the Administrator under the
Administration Agreement of which $5,270 was voluntarily waived.
During the years ended December 31, 1996 and 1995 respectively,
administration fees of $644,125 and $640,488 were paid or accrued
to the Administrator under the Administration Agreement of which
$99,853 and $228,480, respectively was voluntarily waived.
COMPUTATION OF NET ASSET VALUE
The net asset value of the shares of each of the Fund's three
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 Fund'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 Colorado Obligations,
may be obtained from a reputable pricing service or from one or
more broker-dealers dealing in Colorado Obligations, either of
which may, in turn, obtain quotations from broker-dealers or banks
which deal in specific issues. However, since Colorado 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 Colorado
Obligations in the Fund's portfolio may be priced, with the
approval of the Fund'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 Fund's Board of
Trustees. In the case of Colorado 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 Fund's Board of Trustees, the Adviser may at
its own expense and without reimbursement from the Fund 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
Fund's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, that Exchange may close on days not
included in that announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number
of instances in which the Fund'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 Fund. 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 Fund receives the net asset value per share of all
shares sold or issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A Shares or Class Y Shares (Plan
only available to shareholders with Class Y accounts on October 31,
1997) of the Fund having a net asset value of at least $5,000 you
may establish an Automatic Withdrawal Plan under which you will
receive a monthly or quarterly check in a stated amount, not less
than $50. Stock certificates will not be issued for shares held
under an Automatic Withdrawal Plan. All dividends and distributions
must be reinvested. Shares will be redeemed on the last business
day of the month or quarter as may be necessary to meet withdrawal
payments.
Redemption of shares for withdrawal purposes may reduce or
even liquidate your account. The monthly or quarterly payments paid
to you may not be considered as a yield or income on investment.
ADDITIONAL TAX INFORMATION
If you incur a sales commission on 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.
CONVERSION OF CLASS C SHARES
Level-Payment Class Shares ("Class C Shares") of the Fund
which you hold will automatically convert to Front-Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the sixth
anniversary of the your initial purchase of such Class C Shares
occurs. For these purposes, the date of your initial purchase shall
mean (1) the first business day of the month in which such Class C
Shares were issued to you, or (2) for Class C Shares of the Fund
you have obtained through an exchange or series of exchanges under
the Exchange Privilege (see "Exchange Privilege" in the
Prospectus), the first business day of the month in which you made
the original purchase of Class C Shares so exchanged. For
conversion purposes, Class C Shares purchased through reinvestment
of dividends or other distributions paid in respect of Class C
Shares will be held in a separate sub-account. Each time any Class
C Shares in your regular account (other than those in the
sub-account) convert to Class A Shares, a pro-rata portion of the
Class C Shares in the sub-account will also convert to Class A
Shares. The portion will be determined by the ratio that your Class
C Shares then converting to Class A Shares bears to the total of
your Class C Shares not acquired through reinvestment of dividends
and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the dividends
and other distributions paid on Class A Shares and Class C Shares
will not result in "preferential dividends" under the Code; and (2)
the conversion of shares does not constitute a taxable event. If
the conversion feature ceased to be available, the Class C Shares
of the Fund would not be converted and would continue to be subject
to the higher ongoing expenses of the Class C Shares beyond six
years from the date of purchase. The Fund has no reason to believe
that these conditions for the availability of the conversion
feature will not continue to be met.
If the Fund implements any amendments to its Distribution Plan
that would increase materially the costs that may be borne under
such Distribution Plan by Class A Shares shareholders, Class C
Shares will stop converting into Class A Shares unless a majority
of Class C Shares shareholders, voting separately as a class,
approve the proposal.
GENERAL INFORMATION
Possible Additional Series
If additional Series (as discussed in the Prospectus) were
created by the Board of Trustees, shares of each such Series would
be entitled to vote as a Series only to the extent permitted by the
1940 Act (see below) or as permitted by the Board of Trustees.
Income and operating expenses would be allocated among two or more
series in a manner acceptable to the Board of Trustees.
Under Rule 18f-2 under the 1940 Act, as to any investment
company which has two or more Series outstanding, on any matter
required to be submitted to shareholder vote, such matter is not
deemed to have been effectively acted upon unless approved by the
holders of a "majority" (as defined in that Rule) of the voting
securities of each Series affected by the matter. Such separate
voting requirements do not apply to the election of trustees or the
ratification of the selection of accountants. Rule 18f-2 contains
special provisions for cases in which an advisory contract is
approved by one or more, but not all, Series. A change in
investment policy may go into effect as to one or more Series whose
holders so approve the change, even though the required vote is not
obtained as to the holders of other affected Series.
Ownership of Securities
Of the Class A Shares of the Fund outstanding on April 23,
1998, Merrill, Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 30561,
New Brunswick, NJ held of record 1,173,337 shares (5.4%). On the
basis of information received from those holders, the Fund's
management believes that all of such shares are held for the
benefit of clients.
Of the Class C Shares of the Fund outstanding on that date,
PaineWebber F/B/O held of record 16,978 shares (15.9% of the
class), and Everen Clearing Corp. (two accounts) held of record
17,874 shares and 50,494 shares, (16.7% and 47.4% of the class). On
the basis of information received from those holders, the Fund's
management believes that all of such shares are held for the
benefit of clients.
Of the Class Y Shares of the Fund outstanding on that date,
Haws & Co. held of record 139,112 shares (31.5% of the class) and
Heritage Trust & Asset Management Inc., 200 Grand Avenue, Grand
Junction, CO held of record 286,913 shares (64.9% of the class). On
the basis of information received from those holders, the Fund's
management believes that all of such shares are held for the
benefit of clients.
The Fund's management is not aware of any other person owning
of record or beneficially 5% or more of the shares of any class of
Fund's outstanding shares as of that date.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable as
partners for the obligations of the Fund. For shareholder
protection, however, an express disclaimer of shareholder liability
for acts or obligations of the Fund 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 Fund or the Trustees. The Declaration of Trust provides for
indemnification out of the Fund's property of any shareholder held
personally liable for the obligations of the Fund. The Declaration
of Trust also provides that the Fund shall, upon request, assume
the defense of any claim made against any shareholder for any act
or obligation of the Fund 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 Fund itself would be unable to meet its
obligations.
The Declaration of Trust further indemnifies the Trustees of
the Fund out of the property of the Fund, and provides that they
will not be liable for errors of judgment or mistakes of fact or
law; but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
Underwriting Commissions
During the year ended December 31, 1997, the aggregate dollar
amount of sales charges on sales of shares in the Fund was $377,482
and the amount retained by the Distributor was $68,322.
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company, N.A., is
responsible for holding the Fund's assets.
The Fund's auditors, KPMG Peat Marwick LLP, perform an annual
audit of the Fund's financial statements.
The financial statements for the Fund for the year ended
December 31, 1997 which are contained in the Annual Report for
that fiscal year, are hereby incorporated by reference into the
Additional Statement. Those financial statements have been audited
by KPMG Peat Marwick LLP, independent auditors, whose report
thereon is incorporated herein by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Municipal Bond Ratings
Standard & Poor's. A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment may
take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price
or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the highest
rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher
rated categories.
Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Standard & Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing the
designation SP-1 are deemed very strong or to have strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+)
designation. Notes bearing the designation SP-2 are deemed to have
a satisfactory capacity to pay principal and interest.
Moody's Investors Service. A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in
Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's Investment
Grade as MIG 1 through MIG 4. In the case of variable rate demand
obligations (VRDOs), two ratings are assigned; one representing an
evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an
evaluation of the degree of risk associated with the demand
feature. The short-term rating assigned to the demand feature of
VRDOs is designated as VMIG. When no rating is applied to the long
or short-term aspect of a VRDO, it will be designated NR. Issues or
the features associated with MIG or VMIG ratings are identified by
date of issue, date of maturity or maturities or rating expiration
date and description to distinguish each rating from other ratings.
Each rating designation is unique with no implication as to any
other similar issue of the same obligor. MIG ratings terminate at
the retirement of the obligation while VMIG rating expiration will
be a function of each issuer's specific structural or credit
features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality. Margins
of protection are ample although not so large
as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access for
refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of an
investment security is present and although
not distinctly or predominantly speculative,
there is specific risk.
<PAGE>
INVESTMENT ADVISER
KPM Investment Management, Inc.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
William M. Cole
Anne J. Mills
J. William Weeks
John G. Welles
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Jean M. Smith, Vice President
Jessica Wiltshire, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
AQUILA
[LOGO]
Tax-Free Fund
of
Colorado
A tax-free
income investment
[LOGO]
STATEMENT OF
ADDITIONAL
INFORMATION
One Of The
Aquilasm Group Of Funds
