IMPORTANT NOTICE
PLEASE READ IMMEDIATELY
AQUILA
TAX-FREE FUND OF COLORADO
380 Madison Avenue, Suite 2300, New York, N.Y. 10017
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
on June 29, 1998
TO SHAREHOLDERS OF THE FUND:
The purpose of this Notice is to advise you that an Annual
Meeting of the Shareholders of Aquila Tax-Free Fund of Colorado
(the "Fund") will be held
Place: (a) at Hyatt Regency Tech Center Denver
7800 Tufts Avenue
Denver, Colorado 80237
Time: (b) on June 29, 1998 at 2:00 p.m. local time;
Purposes: (c) for the following purposes:
(i) to elect seven Trustees; each Trustee
elected will hold office until the next
annual meeting of the Fund's shareholders or
until his or her successor is duly elected;
(ii) to ratify (that is, to approve) or
reject the selection of KPMG Peat Marwick LLP
as the Fund's independent auditors for the
fiscal year ending December 31, 1998
(Proposal No. 1);
Please Note:
If you do not expect to attend the Meeting, you are requested to
indicate voting instructions on the enclosed proxy and to date,
sign and return it in the accompanying stamped envelope. To avoid
unnecessary expense to the Fund, your cooperation is requested in
mailing in your proxy no matter how large or small your holding
may be.
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(iii) to consider a proposed new investment
advisory and administration agreement between the
Fund and Aquila Management Corporation, which
currently serves as the Fund's Administrator,
under which it would become the Fund's investment
adviser by contracting with others at its expense,
as well as continuing to provide administrative
services as heretofore, and under which all
advisory fees and administration fees would be
paid to it (Proposal No. 2);
(iv) to consider a proposed new sub-advisory
agreement between Aquila Management Corporation as
Manager and Banc KPM Investment Management, Inc.
as Sub-Adviser (Proposal No. 3);
(iv) to act upon any other matters which may
properly come before the Meeting at the scheduled
time and place or any adjourned meeting or
meetings.
Who Can
Vote What
Shares: (d) To vote at the Meeting, you must have been a
shareholder on the Fund's records at the
close of business on April 15, 1998 (the
"record date"). Also, the number of shares of
each of the Fund's classes of shares that you
held at that time and the respective net
asset values of each class of shares at that
time determines the number of votes you may
cast at the Meeting (or any adjourned meeting
or meetings).
By Order of the Board of Trustees
EDWARD M. W. HINES
Secretary
May 10, 1998
(ii)
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AQUILA
TAX-FREE FUND OF COLORADO
380 Madison Avenue, Suite 2300, New York, New York 10017
PROXY STATEMENT
INTRODUCTION
The purpose of the Notice (the first two pages of this
document) is to advise you of the time, place and purposes of an
Annual Meeting of the Shareholders of Aquila Tax-Free Fund of
Colorado (the "Fund"). The purpose of this Proxy Statement (all
the rest of this document) is to give you information on which
you may base your decisions as to the choices, if any, you make
on the enclosed proxy card.
This Notice and Proxy Statement are first being mailed on or
about May 10, 1998.
A copy of the Fund's most recent annual report and most
recent semi-annual report will be sent to you without charge upon
written request to the Fund's Distributor, Aquila Distributors,
Inc., 380 Madison Avenue, Suite 2300, New York, NY 10017 or by
calling 800-872-2652 toll-free or 212-697-6666.
The Fund's organizer and administrator (the "Administrator")
is Aquila Management Corporation, 380 Madison Avenue, Suite 2300,
New York, NY 10017. The Fund's investment adviser is KPM
Investment Management, Inc. (the "Adviser"), 1700 Lincoln Street,
Denver Colorado 80203. The Adviser is a wholly owned subsidiary
of KFS Corporation, which is a wholly-owned by Mutual of Omaha
Insurance Company, whose principal office is at Mutual of Omaha
Plaza, Omaha, NE 68175.
The enclosed proxy card authorizes the persons named (or
their substitutes) to vote your shares; the Fund calls these
persons the "proxy holders." As to the election of Trustees you
may authorize the proxy holders to vote your shares for the
entire slate indicated below by marking the appropriate box on
the proxy card or by merely signing and returning your proxy card
with no instructions. Or, you may withhold the authority of the
proxy holders to vote on the election of Trustees by marking the
appropriate box. Also, you may withhold that authority as to any
particular nominee, by striking a line through the nominee's name
on the proxy card.
As to the other matter listed on the proxy card, you may
direct the proxy holders to vote your shares on each proposal by
checking the appropriate box "For" or "Against" or instruct them
not to vote your shares on that proposal by checking the
"Abstain" box. If you return your signed proxy card and do not
check any box on the proposal, the proxy holders will vote your
shares for the proposal.
You may end the power of the proxy holders to vote your
shares after you have signed and returned your proxy card and
before the power is used by (i) so notifying the Fund in writing;
(ii) signing a new and different proxy card (if the Fund receives
it before the old one is used); or (iii) voting your shares in
person or by your duly appointed agent at the meeting. Shares
held by brokers in "street name" and not voted or marked as
abstentions will not be counted for purposes of determining a
quorum.
The Fund is sending you this Notice and Proxy Statement in
connection with the solicitation by its Trustees of proxy cards
("proxies") to be used at the Annual Meeting to be held at the
time and place and for the purposes indicated in the Notice or
any adjourned meeting or meetings. The Fund pays the costs of the
solicitation. Proxies are being solicited by the use of the
mails; they may also be solicited by telephone, facsimile and
personal interviews. Brokerage firms, banks and others may be
requested to forward this Notice and Proxy Statement to
beneficial owners of the Fund's shares so that these owners may
authorize the voting of these shares. The Fund will pay these
firms for their out-of-pocket expenses for doing so.
The Fund has four classes of shares outstanding (No Class I
Shares were outstanding on the record date). All shareholders of
the Fund are entitled to vote at the meeting. Each shareholder on
the record date is entitled to one (1) vote for each dollar (and
a proportionate fractional vote for each fraction of a dollar) of
net asset value (determined as of the record date) represented by
full and fractional shares of any class held on the record date.
On the record date the net asset value per share of the Fund's
Class A shares was $10.54, of its Class C shares was $10.52 and
of its Class Y Shares was $10.56. The meeting will act upon
matters that affect the Fund as a whole: the election of Trustees
and the action on the selection of auditors (Proposal No. 1). On
matters that affect the Fund as a whole, all shareholders of the
Fund, including the shareholders of all three classes of the Fund
are entitled to vote at the meeting.
On the record date, the total number of shares outstanding
for the Fund was 20,749,848.
Of the Class A Shares of the Fund outstanding on the record
date 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 16,978 shares (15.9% of the
class), and Everen Clearing Corp. (two accounts) held 17, 874
shares and 50,494 shares, (16.7% and 47.4% of the class). Of the
Class Y Shares of the Fund outstanding on the record date, Haws &
Co. held 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.
ELECTION OF TRUSTEES
At the Meeting, seven Trustees are to be elected. Whenever
it is stated in this Proxy Statement that a matter is to be acted
on at the Meeting, this means the Meeting held at the scheduled
time or any adjourned meeting or meetings.
Each Trustee elected will serve until the next annual
meeting or until his or her successor is duly elected. The
nominees selected by the Trustees are named below. See
"Introduction" above for information as to how you can instruct
the proxy holders as to the voting of your shares as to the
election of Trustees.
Each of the nominees is presently a Trustee and was
previously elected by the shareholders at the annual meeting of
the Fund held on June 18, 1997. Except for Mr. Weeks, who has
been a Trustee since 1995, and Dr. Adams, who has been a Trustee
since 1989, every other Trustee has been a Trustee since the
beginning of the Fund's operations in 1987. The Trustees and
officers as a group owned on the record date less than 1% of the
outstanding shares of the Fund. Listed below are the shares of
the Fund owned by each Trustee, all of which are Class A Shares.
In the table below and elsewhere in this Proxy Statement, Aquila
Management Corporation is referred to as the "Administrator" and
the Fund's Distributor, Aquila Distributors, Inc., is referred to
as the "Distributor." Mr. Herrmann is an "interested person" of
the Fund, as that term is defined in the Investment Company Act
of 1940 (the "1940 Act") as an officer of the Fund and a
Director, officer and shareholder of the Distributor. He is so
designated by an asterisk.
Described in the following material are the name, positions
with the Fund, age as of April 15, 1998 and business experience
during at least the past five years (other than with the Fund) of
each nominee and all officers of the Fund.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, Age: 68, Shares owned: 320 (1)
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and Manager
or 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: and 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.
(1) Includes 129 shares owned of record by the Administrator.
Tucker Hart Adams, Trustee, Age: 60, Shares Owned: 354
President of the Adams Group, an economic consulting firm, since
1989; 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, Age: 76, Shares Owned: 473 (2)
Retired; Advisory Director of the Renaissance Companies (design
and construction companies of commercial, industrial and upscale
residential properties) since 1996; Senior Vice President and
Manager of the Trust Division of The Valley National Bank of
Arizona, 1977-1987; Trustee of Tax-Free Fund of Colorado,
Hawaiian Tax-Free Trust, 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.
(2) Held of record by a nominee.
William M. Cole, Trustee, Age: 66, Shares Owned: 1,915
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, Age: 59, Shares Owned: 5,203
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 1985-1986 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, Age: 70, Shares Owned: 542
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, Age: 72, Shares Owned: 4,948
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, Age: 53
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, Age: 63
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, Age: 53
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, Age: 28
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, Age: 73
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of
the Distributor since 1985.
Richard F. West, Treasurer, Age: 62
Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc., 1986-
1988; Vice President of Lehman Management Co., Inc. and Assistant
Treasurer of Lehman Money Market Funds, 1981-1985; Controller of
Seligman Group of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, Age: 58
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust, 1982-
1985 and Trustee of that Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, Age: 58
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Administrator since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer,
Age: 31
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the
Administrator and the Distributor since 1995; 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 $65,221 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>
The Fund's Administrator is administrator to the Aquilasm
Group of Funds, which consist of tax-free municipal bond funds
and money market funds. As of December 31, 1997, these funds had
aggregate assets of approximately $2.9 billion, of which
approximately $1.9 billion consisted of assets of the tax-free
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). For the year ended December
31, 1997, advisory fees of $437,704 were paid or accrued to the
Adviser. 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. All of the shares of the Distributor are owned by Mr.
Herrmann. During the fiscal year, the Distributor retained
$68,322 in commissions on sales of the Fund's Class A shares.
Under the Fund's Distribution Plan the Distributor received
$4,357 with respect to the Fund's Class A shares. With respect to
the Fund's Class C shares it received $8,921 under the
Distribution Plan and a Shareholder Services Plan.
<PAGE>
Other Information on Trustees
The Trustees have appointed an Audit Committee consisting of
all of the Trustees (the "Independent Trustees") who are not
"interested persons" of the Fund, as that term is defined in the
1940 Act. The Committee (i) recommends to the Board of Trustees
what firm of independent auditors will be selected by the Board
of Trustees (subject to shareholder ratification); (ii) reviews
the methods, scope and result of audits and the fees charged; and
(iii) reviews the adequacy of the Fund's internal accounting
procedures and controls. The Committee held one meeting during
the Fund's last fiscal year. The Board of Trustees does not have
a nominating committee. During the Fund's last fiscal year, the
Board of Trustees held four meetings. Each Trustee attended at
least 75% of the total number of Board meetings and the Audit
Committee meetings (if such Trustee was a member of that
Committee).
RATIFICATION OR REJECTION OF
SELECTION OF INDEPENDENT AUDITORS
(Proposal No. 1)
KPMG Peat Marwick LLP has been selected by the Fund's Board
of Trustees, including a majority of the Independent Trustees, as
the Fund's independent auditors for the fiscal year ending
December 31, 1998; such selection is submitted to the
shareholders for ratification or rejection.
The firm has no direct or indirect financial interest in the
Fund, the Fund's Adviser or the Fund's Administrator. It is
expected that representatives of the firm will not be present at
the meeting but will be available should any matter arise
requiring their presence.
BACKGROUND AND REASONS FOR
PROPOSALS NO. 2 AND NO. 3
Proposals No. 2 and No. 3 are designed to change the form of
the Fund's investment advisory and administration arrangements to
a new structure involving an adviser and a sub-adviser. The
proposed arrangements will not result in any change in overall
management fees paid by the Fund, nor any change in the parties
providing these services. Marketing efforts and positioning of
the Fund will remain the same with a strong local orientation.
The Board of Trustees has unanimously approved the
proposals. As required by law, at least a majority of the
Trustees, including a majority of the independent Trustees,
believe that the new structure would, among other things, enhance
the ability of the Fund to secure stable, continuous, high-
quality local portfolio management services, and would improve
the ability of the Fund to obtain various other services on
beneficial terms.
Under the proposals, Aquila Management Corporation
("Aquila"), which currently serves as the Fund's administrator,
would in addition become investment adviser under a new agreement
(the "Advisory and Administration Agreement") under which it
would also continue to provide the Fund with all administrative
services (Proposal No. 2). Also, under a proposed agreement (the
"Sub-Advisory Agreement") between Aquila and KPM Investment
Management, Inc. ("KPM"), the current investment advisory
agreement would be replaced by one under which Aquila would
appoint KPM as Sub-Adviser to the Fund (Proposal No. 3). Under
the Sub-Advisory Agreement, KPM would continue to provide the
Fund with advisory services of the kind which it currently
provides to the Fund. The duties of the administrator, now
performed under an administration agreement, would be performed
by Aquila under the Advisory and Administration Agreement where
it would be referred to as the "Manager." The current
administration agreement will no longer be needed and will
terminate upon implementation of the proposed agreements.
A majority of the Trustees believe that it is in the best
interest of the shareholders to provide Aquila with the authority
to retain an investment sub-adviser (subject to the approval of
the Board of Trustees and the shareholders) and to terminate a
sub-adviser (subject to the approval of the Board of Trustees) if
it were to deem doing so to be in the best interests of the Fund
and its shareholders. A majority of the Trustees consider that
this authority will enhance Aquila's ability to obtain for the
Fund benefits of stable, continuous, high-quality portfolio
management.
In addition, Aquila has advised the Board of Trustees that
it plans to propose a similar reorganization to other funds in
the Aquilasm Group of Funds. If, as expected, those proposals are
adopted, the following additional reasons support the proposed
reorganization, although there can be no assurance that they will
be realized:
There would be heightened public recognition of the Aquilasm
Group and its funds, and better public relations
possibilities.
The new arrangements would benefit the entire group because
they would tend to increase the negotiating power of Aquila
in dealing with service providers to the funds in various
ways.
The arrangements potentially increase the standardization of
procedures, e.g. compliance, among the advisers.
The Board of Trustees noted that Aquila is the founder and
organizer of the Fund and has continuously served as its
administrator since 1992, and from 1987 to 1992 as its sub-
adviser. Since 1985, Aquila has formed and sponsored seven state-
specific tax-free municipal bond funds, which have grown to a
total of $1.9 billion in combined assets. These funds and their
years of inception are Hawaiian Tax-Free Trust (1985), Tax-Free
Trust of Oregon (1986), Tax-Free Trust of Arizona (1986),
Churchill Tax-Free Fund of Kentucky (1987), the Fund (1987),
Narragansett Insured Tax-Free Income Fund (1992) and Tax-Free
Fund For Utah (1992). Aquila has also sponsored five money market
funds and two regional capital appreciation equity funds. As of
December 31, 1997, the Aquilasm Group of Funds had combined
assets of approximately $2.9 billion.
By founding the Fund and other state-specific tax-free
municipal bond funds, Aquila has been able to offer to individual
investors in various states a locally-managed, quality-oriented
portfolio of municipal obligations, providing income that is
exempt from state as well as federal income taxes.
Aquila advised the Board of Trustees that a critical
component of high-quality service to investors in its funds is a
close familiarity with the local economy and market conditions
that can only be provided by experienced local portfolio
management. Aquila found that investment advisers that were a
part of, or associated with, major local financial institutions
had the experience and resources to provide this management. The
Aquila bond funds are unusual compared with other such funds in
emphasizing local portfolio management, which has been a major
factor in their acceptance by investors.
Recent years have seen a consolidation in the financial
services industry that has resulted in many prominent local banks
becoming parts of larger national institutions. A number of these
transactions have affected the local advisers of the Fund as well
as other Aquila bond funds. In every instance, Aquila has been
able to secure commitments to continuous local management, but in
some instances it became necessary for Aquila to seek out other
organizations to provide the continuity and quality of service
that investors expect. A majority of the Trustees believe that by
providing Aquila with the authority as to the investment advisory
function contained in the new agreements, the Board would better
enable Aquila to ensure continuity of local portfolio management.
Another anticipated advantage of the proposed arrangements
is that, to the extent extended, as planned, to other Aquila
funds, Aquila expects to improve its ability to negotiate
beneficial terms with service providers, such as transfer agents
and pricing services, under substantially uniform agreements that
would provide services to all of the funds. Because of the
combined size of the funds, Aquila expects that its collective
bargaining position would be enhanced and that costs for these
services may be lower than would be obtained if these
arrangements were negotiated on a piecemeal basis. There can be
no assurance that this will occur.
A majority of the Trustees believe that making Aquila
Manager has definite organizational benefits, including a better
structure for handling any possible future changes. The costs of
the change in structure will be borne by Aquila and not the Fund.
In approving the proposed new arrangements, the Board of
Trustees stipulated that the Sub-Advisory Agreement could provide
for its termination by the Adviser upon reasonable notice,
provided, however, that the Adviser should not terminate the Sub-
Advisory Agreement (and any attempt by the Adviser to terminate
such agreement would be null and void) unless, prior to giving
notice to the Sub-Adviser of such termination, either (i) the
Advisory Agreement had been reapproved by the Board of Trustees
of the Fund, in the manner described in Section 15 of the 1940
Act, in contemplation of the Adviser's managing the investment
portfolio of the Fund without the assistance of a Sub-Adviser;
(ii) a new Sub-Advisory Agreement, to take effect upon the
termination of the existing Sub-Advisory Agreement, had been
approved by the Board of Trustees and the shareholders of the
Fund as contemplated by Section 15 of the 1940 Act; (iii) the
Board had authorized such termination; or (iv) the Adviser had
complied with such other or additional directives and
authorizations of the Board with respect to such termination as
may from time to time be in effect.
Other Changes
The current advisory agreement and the Administration
Agreement provide that fees payable thereunder shall not exceed
certain amounts or percentages of the Fund's net assets or
income. These provisions, which were required by certain State
securities laws, have had no effect on the Fund, due to its size.
The state securities laws were preempted by Federal legislation
in 1996 and accordingly, these provisions, which are no longer
required by law, would not be included in the new agreements.
Other Information About Aquila
Aquila, founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). Aquila's shares are owned as follows:
Elizabeth B. Herrmann 35%
Lacy B. Herrmann 25%
Elizabeth B. Herrmann
1993 Annuity Fund 40%
The names, addresses and principal occupations of the principal
executive officer and each director of Aquila are as follows:
Name Position with Aquila
Lacy B. Herrmann Chairman, Chief Executive Officer
and Director
Diana P. Herrmann President, Chief Operating Officer
and Director
Elizabeth B. Herrmann Director
The address of all of these individuals is 380 Madison
Avenue, Suite 2300, New York, NY 10017.
Other Information about KPM
KPM 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 of the KPM and has been a Vice
President 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 KPM 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.
KPM 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, KPM has been
wholly-owned by Mutual of Omaha Insurance Company, whose
principal office is at Mutual of Omaha Plaza, Omaha, NE 68175.
The Chief Executive Officer and directors of KPM are as follows:
Position(s)
Held with
KPM Investment
Name Management Inc. Principal Occupation
Randall D. Greer President, CEO, Chairman, President and
Chairman Chairman, KPM Investment
Management, Inc.
John W. Weekly Director Chairman and CEO
Mutual of Omaha
John A. Sturgeon Director President
Mutual of Omaha
Peter N. Lahti Director Chairman, President, CEO
Kirkpatrick, Pettis, Smith
Polian, Inc. and
KFS Corporation
KPM does no act as investment adviser to any investment companies, which
have similar investment objectives to those of the Fund.
Annual Fee Rates
(Fee rates are annual rates as a percentage of the Fund's average daily net
assets.)
<TABLE>
<CAPTION>
Under
arrangements
Type of payment Under arrangements if Proposals 2
made by the Fund currently in effect and 3 are adopted
<S> <C> <C>
Advisory fee 0.20 of 1% 0.50 of 1%
(Sub-Advisory fee
paid by the Adviser) 0 (0.20 of 1%)
Administration fee 0.30 of 1% 0
Total Payments
by the Fund 0.50 of 1% 0.50 of 1%
</TABLE>
The following table shows the advisory and administration fees the
Fund paid during its last fiscal year, the fees it would have paid if the
proposed arrangements had been in effect during that fiscal year and the
percentage change.
<TABLE>
<CAPTION>
Type of payment Amount Amount that would Difference between
by the Fund actually paid have been paid the old and new
if the new arrangements as a
arrangements percentage of the
had been in effect old arrangements
<S> <C> <C> <C>
Advisory fee $437,704 $1,094,259(1) 250%
(Sub-Advisory
fee Paid by
the Adviser) 0 ($437,704) N/A
Administration
fee $656,555(1) 0 0%
Total payments $1,094,259(1) $1,094,259(1) 0%
<FN>
(1) Net of waiver of $5,270 of administration fee.
</FN>
</TABLE>
Proposals No. 2 and No. 3 are designed to operate together.
Neither separately will have the intended results. Neither
proposal will be implemented unless both are approved by
shareholders. Accordingly, the proposed new Investment Advisory
and Administration Agreement and the proposed Sub-Advisory
Agreement will go into effect upon approval by shareholders of
both Proposals No. 2 and 3. If these proposals are not both
approved, the current arrangements will remain in effect. The
Board of Trustees will consider what further action is
appropriate, which could include calling another shareholder
meeting.
The Trustees also noted that in addition to the foregoing
matters, Aquila has more than twelve years of experience in
forming and administering tax-exempt municipal bond funds,
including identifying and securing the services of competent
local investment advisers. The Trustees also noted that Aquila
had secured the agreement of KPM to serve as the Fund's Sub-
Adviser on the terms described in Proposal No. 3.
For the reasons set forth above, at an in-person meeting
called and held for the purpose in March 1998, the unanimous
Board of Trustees, including a majority of the Trustees who are
not parties to the Advisory and Administration Agreement or the
Sub-Advisory Agreement or "interested persons" (as defined in the
1940 Act) of any such party (the "Independent Trustees"), voted
to approve the Advisory Agreement and Sub-Advisory Agreement.
ACTION ON A NEW INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
WHICH WILL PROVIDE THAT ALL ADVISORY FEES AND ADMINISTRATION FEES
WILL BE PAID TO AQUILA MANAGEMENT CORPORATION ALTHOUGH COMBINED
ADVISORY AND ADMINISTRATION FEES WILL REMAIN AT THE CURRENT LEVEL
(PROPOSAL NO. 2)
The new Investment Advisory and Administration Agreement
(the "Advisory Agreement") has several parts, most of which are
substantially identical to corresponding provisions in the Fund's
former advisory agreements and administration agreement. The
Advisory Agreement contains provisions relating to investment
advice for the Fund and management of its portfolio that are
substantially identical to prior advisory agreements, except that
the Adviser has the power to delegate its advisory functions to a
Sub-Adviser, which it will employ at its own expense. The
Advisory Agreement contains provisions relating to administrative
services that are substantially identical to those contained in
the Fund's current and prior administration agreements. In the
following description, Aquila is referred to as the "Manager."
Description of the Investment Advisory and Administration
Agreement
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Fund, the
Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory Agreement provides that, subject to the
termination provisions described below, the Manager may at its
own expense delegate to a qualified organization ("Sub-Adviser"),
affiliated or not affiliated with the Manager, any or all of the
above duties. Any such delegation of the duties set forth in (i),
(ii) or (iii) above shall be by a written agreement (the "Sub-
Advisory Agreement") approved as provided in Section 15 of the
Investment Company Act of 1940. The Manager will delegate all of
such functions to KPM under the proposed Sub-Advisory Agreement.
See "Background and Reasons for Proposals No. 2 and No. 3."
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Fund, the
Manager shall provide all administrative services to the Fund
other than those relating to its investment portfolio which have
been delegated to a Sub-Adviser of the Fund under a Sub-Advisory
Agreement; as part of such administrative duties, the Manager
shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement) or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory Agreement contains provisions relating to
compliance of the investment program, responsibility of the
Manager for any investment program managed by it, allocation of
brokerage, and responsibility for errors that are substantially
the same as the corresponding provisions in the Sub-Advisory
Agreement. See Proposal No. 3.
The Advisory Agreement provides that the Manager shall, at
its own expense, provide office space, facilities, equipment, and
personnel for the performance of its functions thereunder and
shall pay all compensation of Trustees, officers, and employees
of the Fund who are affiliated persons of the Manager.
The Fund shall bear the costs of preparing and setting in
type its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to Aquila 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 0.50 of 1% of such net asset value,
provided, however, that for any day that the Fund pays or accrues
a fee under the part of the Distribution Plan of the Fund
applicable to Class A shares of the Fund, the annual management
fee shall be payable at the annual rate of 0.40 of 1% of such net
asset value. Implementation of payment under the Distribution
Plan 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 this proxy statement, management
of the Fund has determined that implementation of the changes
should be indefinitely postponed.
The Advisory Agreement provides that the Sub-Advisory
Agreement may provide for its termination by the Manager upon
reasonable notice, provided, however, that the Manager agrees not
to terminate the Sub-Advisory Agreement except in accordance with
such authorization and direction of the Board of Trustees, if
any, as may be in effect from time to time.
The Advisory Agreement provides that it will become
effective on the date of its approval by the shareholders of the
Fund and will, unless terminated as hereinafter provided,
continue in effect until the April 30 next preceding the first
anniversary of the effective date of the Advisory Agreement, and
from year to year thereafter, but only so long as such
continuance is specifically approved at least annually (1) by a
vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of
any such party, with votes cast in person at a meeting called for
the purpose of voting on such approval, or (2) by a vote of the
holders of a "majority" (as so defined) of the outstanding voting
securities of the Fund and by such a vote of the Trustees.
The Advisory Agreement provides that it may be terminated by
the Manager at any time without penalty upon giving the Fund
sixty days' written notice (which notice may be waived by the
Fund) and may be terminated by the Fund at any time without
penalty upon giving the Manager sixty days' written notice (which
notice may be waived by the Manager), provided that such
termination by the Fund shall be directed or approved by a vote
of a majority of its Trustees in office at the time or by a vote
of the holders of a majority (as defined in the 1940 Act) of the
voting securities of the Fund outstanding and entitled to vote.
The specific portions of the Advisory Agreement which relate to
providing investment advisory services will automatically
terminate in the event of the assignment (as defined in the 1940
Act) of the Advisory Agreement, but all other provisions relating
to providing services other than investment advisory services
will not terminate, provided however, that upon such an
assignment the annual fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day shall be reduced to the annual rate of 0.30 of 1% of such net
asset value. [Distribution Plan effect to be added]
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENT DESCRIBED ABOVE BE
APPROVED. See "Background and Reasons for Proposals No. 2 and No.
3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Fund, is
required for the approval of this Proposal No. 2. Under the 1940
Act, the vote of the holders of a majority of the outstanding
shares of the Fund means the vote of the holders of the lesser of
(a) 67% or more of the shares of the Fund present at the Meeting
or represented by proxy if the holders of more than 50% of such
shares are so present or represented, or (b) more than 50% of the
outstanding shares of the Fund, with one (1) vote for each dollar
( and a proportionate fractional vote for each fraction of a
dollar) of net asset value (determined as of the record date)
represented by full and fractional shares of all of the Fund's
three classes of shares.
The meeting can be adjourned by the affirmative vote of a
majority of the shares present in person or by proxy. In voting
for an adjournment, the proxies will consider all relevant
factors, including possible delay of receipt of proxies and
whether or not a substantial number of negative votes have been
cast with respect to any proposal. The shares of shareholders who
have voted by proxy against a proposal will be voted against
adjournment.
ACTION UPON A PROPOSED NEW
SUB-ADVISORY AGREEMENT BETWEEN AQUILA MANAGEMENT CORPORATION
AS MANAGER AND KPM AS SUB-ADVISER
(PROPOSAL NO. 3)
The proposed Sub-Advisory Agreement (the "Sub-Advisory
Agreement") has substantially the same terms as the current
advisory Agreement, except that the Sub-Advisory Agreement is
with the Manager and not with the Fund, the compensation of the
Sub-Advisor is paid by the Manager and not by the Fund and the
state-imposed expense limitation described above has been
eliminated.
The Sub-Advisory Agreement provides that the Manager
appoints KPM as Sub-Adviser to render, to the Manager and to the
Fund, investment research and advisory services as set forth
below under the supervision of the Manager and subject to the
approval and direction of the Board of Trustees of the Fund. The
Sub-Advisory Agreement provides that the Sub-Adviser will act as
managerial investment adviser to the Fund with respect to the
investment of the Fund's assets, and will supervise and arrange
the purchase of securities for and the sale of securities held in
the portfolio of the Fund.
The Sub-Advisory Agreement provides in general that subject
to the direction and control of the Manager and the Board of
Trustees of the Fund, the Sub-Adviser shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund; and
(v) consult with the Manager in connection with its duties
thereunder.
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform
to, and be in accordance with, any requirements imposed by: (1)
the Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Trust and By-Laws
of the Fund as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Fund.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall give to the Manager and to the Fund the benefit of its best
judgment and effort in rendering services thereunder, but the
Sub-Adviser shall not be liable for any loss sustained by reason
of the adoption of any investment policy or the purchase, sale or
retention of any security, whether or not such purchase, sale or
retention shall have been based upon (i) its own investigation
and research or (ii) investigation and research made by any other
individual, firm or corporation, if such purchase, sale or
retention shall have been made and such other individual, firm or
corporation shall have been selected in good faith by the Sub-
Adviser. Under the Sub-Advisory Agreement, the Sub-Adviser will
not be liable for any error in judgment or for any loss suffered
by the Fund or its security holders in connection with the
matters to which the Agreement relates, except a loss resulting
from wilful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard
by it of its obligations and duties under the Agreement.
The Sub-Advisory Agreement provides that nothing in it shall
prevent the Sub-Adviser or any affiliated person (as defined in
the Act) of the Sub-Adviser from acting as investment adviser or
manager for any other person, firm or corporation and shall not
in any way limit or restrict the Sub-Adviser or any such
affiliated person from buying, selling or trading any securities
for its own or their own accounts or for the accounts of others
for whom it or they may be acting, provided, however, that the
Sub-Adviser expressly represents that, while acting as Sub-
Adviser, it will undertake no activities which, in its judgment,
will adversely affect the performance of its obligations to the
Fund under the Agreement. It is agreed that the Sub-Adviser
shall have no responsibility or liability for the accuracy or
completeness of the Fund's Registration Statement under the Act
and the Securities Act of 1933, except for information supplied
by the Sub-Adviser for inclusion therein. The Sub-Adviser shall
promptly inform the Fund as to any information concerning the
Sub-Adviser appropriate for inclusion in such Registration
Statement, or as to any transaction or proposed transaction which
might result in an assignment (as defined in the Act) of the
Agreement. To the extent that the Manager is indemnified under
the Fund's Declaration of Trust with respect to the services
provided under the Agreement by the Sub-Adviser, the Manager
agrees to provide the Sub-Adviser the benefits of such
indemnification.
The Sub-Advisory Agreement provides that in connection with
its duties to arrange for the purchase and sale of the Fund's
portfolio securities, the Sub-Adviser shall select such broker-
dealers ("dealers") as shall, in the Sub-Adviser's judgment,
implement the policy of the Fund to achieve "best execution,"
i.e., prompt, efficient, and reliable execution of orders at the
most favorable net price. The Sub-Adviser shall cause the Fund
to deal directly with the selling or purchasing principal or
market maker without incurring brokerage commissions unless the
Sub-Adviser determines that better price or execution may be
obtained by paying such commissions; the 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 prices. In allocating transactions to
dealers, the Sub-Adviser is authorized to consider, in
determining whether a particular dealer will provide best
execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as
well as the difficulty of the transaction in question, and thus
need not pay the lowest spread or commission available if the
Sub-Adviser determines in good faith that the amount of
commission is reasonable in relation to the value of the
brokerage and research services provided by the dealer, viewed
either in terms of the particular transaction or the Sub-
Adviser's overall responsibilities. If, on the foregoing basis,
the transaction in question could be allocated to two or more
dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the 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 and that such research services may or may not
be useful to the Fund and may be used for the benefit of the Sub-
Adviser or its other clients.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Fund as are required by applicable law and regulation, and
agrees that all records which it maintains for the Fund on behalf
of the Manager shall be the property of the Fund and shall be
surrendered promptly to the Fund or the Manager upon request. The
Sub-Adviser agrees to furnish to the Manager and to the Board of
Trustees of the Fund such periodic and special reports as each
may reasonably request.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall bear all of the expenses it incurs in fulfilling its
obligations under the Agreement. In particular, but without
limiting the generality of the foregoing: the Sub-Adviser shall
furnish the Fund, at the Sub-Adviser's expense, all office space,
facilities, equipment and clerical personnel necessary for
carrying out its duties under the Agreement. The Sub-Adviser
shall supply, or cause to be supplied, to any investment adviser,
administrator or principal underwriter of the Fund all necessary
financial information in connection with such adviser's,
administrator's or principal underwriter's duties under any
agreement between such adviser, administrator or principal
underwriter and the Fund. The Sub-Adviser will also pay all
compensation of the Fund's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rate of 0.20 of 1% of such net asset value,
provided, however, that for any day that the Fund pays or accrues
a fee under the part of the Distribution Plan of the Fund
applicable to Class A shares of the Fund, the annual management
fee shall be payable at the annual rate of 0.16 of 1% of such net
asset value.
The Sub-Advisory Agreement provides that it will become
effective, if approved by the shareholders of the Fund, on July
1, 1998 (the "Effective Date") and shall, unless terminated as
thereinafter provided, continue in effect until the April 30 next
preceding the first anniversary of the effective date of the
Agreement, and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually (1)
by a vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund and by such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be
terminated by the Sub-Adviser at any time without penalty upon
giving the Manager and the Fund sixty days' written notice (which
notice may be waived). It may be terminated by the Manager or the
Fund at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Fund shall be
directed or approved by a vote of a majority of its Trustees in
office at the time or by a vote of the holders of a majority (as
defined in the Act) of the voting securities of the Fund
outstanding and entitled to vote. The Sub-Advisory Agreement will
automatically terminate in the event of its assignment (as
defined in the 1940 Act) or the termination of the Advisory and
Administration Agreement.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED SUB-
ADVISORY AGREEMENT DESCRIBED ABOVE BE APPROVED. See "Background
and Reasons for Proposals No. 2 and No. 3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Fund is
required for the approval of this Proposal No. 3. See Proposal
No. 2 for a description of such a majority.
RECEIPT OF
SHAREHOLDER PROPOSALS
Under the proxy rules of the Securities and Exchange
Commission, shareholder proposals meeting tests contained in
those rules may, under certain conditions, be included in the
Fund's proxy statement and proxy card for a particular annual
meeting. No shareholder proposals have been received. One of the
conditions under the proxy rules relates to the timely receipt by
the Fund of any such proposal. Under these rules, proposals
submitted for inclusion in the proxy material for the Fund's next
annual meeting after the meeting to which this Proxy Statement
relates must be received by the Fund not less than 120 days
before the anniversary of the date stated on the first page of
this Proxy Statement relating to the first mailing of this Proxy
Statement. The date for such submission could change, depending
on the scheduled date for the next annual meeting; if so, the
Fund will so advise you.
The fact that the Fund receives a shareholder proposal in a
timely manner does not insure its inclusion in the Fund's proxy
material, since there are other requirements in the proxy rules
relating to such inclusion.
OTHER BUSINESS
The Fund does not know of any other matter which will come
up for action at the Meeting. If any other matter or matters
properly come up for action at the Meeting, including any
adjournment of the Meeting, the proxy holders will vote the
shares which the proxy cards entitle them to vote in accordance
with their judgment on such matter or matters. That is, by
signing and returning your proxy card, you give the proxy holders
discretionary authority as to any such matter or matters.
<PAGE>
AQUILA
TAX-FREE FUND OF COLORADO
PROXY FOR SHAREHOLDERS MEETING JUNE 29, 1998
PROXY SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned shareholder of AQUILA TAX-FREE FUND OF
COLORADO (the "Fund") does hereby appoint LACY B. HERRMANN, DIANA
P. HERRMANN and EDWARD M. W. HINES, or any of them, as attorneys
and proxies of the undersigned, with full power of substitution,
to attend the Annual Meeting of Shareholders of the Fund to be
held at Hyatt Regency Tech Center Denver, 7800 Tufts Avenue,
Denver, Colorado 80237, on June 29, 1998 at 2:00 p.m. local time
and at all adjournments thereof, and thereat to vote the shares
held in the name of the undersigned on the record date for said
meeting on the matters listed below.
Please mark your proxy, date and sign it below and return it
promptly in the accompanying envelope which requires no postage
if mailed in the United States.
Management recommends a vote FOR all nominees listed below
and FOR the proposals listed below. The shares represented
hereby will be voted as indicated below or FOR if no choice is
indicated.
As to any other matter said attorneys shall vote in
accordance with their best judgment.
Please indicate your vote by an "X" in the appropriate box
below
Election of Trustees---.
__
[__] FOR all nominees listed below
__
[__] VOTE WITHHELD for all nominees listed
below
(Instructions: To withhold authority to vote for any one or more
of the nominees, strike a line through the name of that nominee
or the names of such nominees in the list below.)
LACY B. HERRMANN; TUCKER HART ADAMS; ARTHUR K. CARLSON;
WILLIAM M. COLE; ANNE J. MILLS; J. WILLIAM WEEKS; JOHN G. WELLES
Ratification of selection of KPMG Peat
Marwick LLP as independent auditors
__ __ __
(Proposal No. 1) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Investment
Advisory and Administration Agreement with
Aquila Management Corporation
__ __ __
(Proposal No. 2) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Sub-Advisory
Agreement with KPM Investment
Management Inc.
__ __ __
(Proposal No. 3) FOR [__] AGAINST [__] ABSTAIN [__]
Dated: ____________ ______, 1998
Month Day
__________________________________
SIGNATURE(S)
__________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing
as a custodian, attorney, executor, administrator, trustee,
guardian, etc., please sign your full title as such. Joint
owners should each sign.
