File Nos. 33-13021 and 811-5086
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933[ X ]
Pre-Effective Amendment No. _______ [ ]
Post-Effective Amendment No. 13 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [ X ]
Amendment No. 14 [ X ]
CHURCHILL TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
380 Madison Avenue, Suite 2300
New York, New York 10017
(Address of Principal Executive Offices)
(212) 697-6666
(Registrant's Telephone Number)
EDWARD M.W. HINES
Hollyer, Brady, Smith, Troxell,
Barrett, Rockett, Hines & Mone
551 Fifth Avenue, 27th Floor
New York, New York 10176
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check
appropriate box):
___
[___] immediately upon filing pursuant to paragraph (b)
[___] on (date) pursuant to paragraph (b)
[___] 60 days after filing pursuant to paragraph (a)(i)
[_X_] on March 29, 1996 pursuant to paragraph (a)(i)
[___] 75 days after filing pursuant to paragraph (a)(ii)
[___] on (date) pursuant to paragraph (a)(ii) of Rule 485.
[___] This post-effective amendment designates a new effec-
tive date for a previous post-effective amendment.
Registrant hereby declares, pursuant to Section (a)(1) of Rule
24f-2 under the Investment Company Act of 1940, that Registrant has
registered an indefinite number of its shares under the Securities
Act of 1933 pursuant to that Section and that the Rule 24f-2 Notice
for Registrant's fiscal year ended December 31, 1994 was filed in
February 1995.
<PAGE>
CHURCHILL TAX-FREE TRUST
CROSS REFERENCE SHEET
Part A of
Form N-1A
Item No. Prospectus Caption(s)
1..............Cover Page
2..............Table of Expenses
3..............Financial Highlights
4..............Introduction; Investment of the Trust's
Assets; Investment Restrictions; General
Information
5..............Management Arrangements
5A.............**
6..............General Information; Dividend and Tax
Information
7..............Net Asset Value per Share; How to Invest in
the Trust; Exchange Privilege
8..............How to Redeem Your Investment; Automatic
Withdrawal Plan; Exchange Privilege
9..............*
Part B of
Form N-1A Statement of Additional Information
Item No. or Prospectus Caption(s)
10.............Cover Page
11.............Cover Page
12.............*
13.............Investment of the Trust's Assets; Municipal
Bonds; Investment Restrictions
14.............Trustees and Officers
15.............General Information (Prospectus caption);
Trustees and Officers
16.............Additional Information as to Management
Arrangements; General Information
17.............Additional Information as to Management
Arrangements
18.............General Information
19.............Limitations of Redemptions in Kind;
Computation of Net Asset Value; Automatic
Withdrawal Plan; Distribution Plan
20.............Additional Tax Information
21.............How to Invest in the Trust (Prospectus
caption); General Information
22.............Performance
* Not applicable or negative answer
** Contained in the annual report of the Registrant
<PAGE>
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue, Suite 2300
New York, NY 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Prospectus March ***, 1996
The Fund is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Kentucky and
Federal income taxes as is consistent with preservation of capital
by investing in municipal obligations which pay interest exempt
from Kentucky 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, Banc One Investment Advisors
Corporation.
This Prospectus concisely states information about the Fund
that a prospective investor should know before investing. A
Statement of Additional Information about the Fund dated March
***, 1995, (the "Additional Statement") has been filed with the
Securities and Exchange Commission and is available without charge
upon written request to Administrative Data Management Corp., 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 this Prospectus. The Additional Statement is
incorporated by reference in its entirety in this 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 Banc One Corporation or its bank or
non-bank affiliates or by any other 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 Transfer Agent: Administrative Data Management Corp.
581 Main Street, Woodbridge, NJ 07095-1198
Call 800-872-5860 toll free or 908-855-5731
For General Inquiries & Yield Information,
Call 800-872-5859 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
Churchill Tax-Free Fund of Kentucky, 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 Commonwealth
of Kentucky, 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 Kentucky. (See
"Introduction.")
Tax-Free Income - The municipal obligations in which the Fund
invests pay interest which is exempt from regular Federal income
taxes and Commonwealth of Kentucky income and ad valorem taxes.
Dividends paid by the Fund from this income are likewise free of
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. In addition, 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 - Only those municipal obligations will be
acquired which, at the time of purchase, are within the four
highest credit ratings assigned by Moody's Investors Service, Inc.
or Standard and 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. An application is in the back of the
Prospectus. (See "How to Invest in the Fund," which includes
applicable sales charge information.)
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. (See "Dividend and
Tax Information.")
Additional Investments - You may make additional investments
at any time and in any amount, directly, or if $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.")
Many Different Issues - Even a small investment in the Fund
allows an investor to have the advantages of a portfolio which
consists of over 167 issues with different maturities. (See
"Investment of the Fund's Assets.")
Local Portfolio Management - Bank One Investment Advisors
Corporation serves as the Fund's Investment Adviser, providing
experienced local professional management. The Adviser is a wholly
owned subsidiary of BANC ONE CORPORATION ("Banc One"). Banc One is
the 8th largest U.S. banking organization based on assets as of
December 31, 1994. As of January 31, 1995, a subsidiary of Banc One
was the largest bank in Kentucky, with $7.1 billion in assets and
133 offices throughout the state. As of October 1, 1995 the Adviser
was responsible for management of over $30 billion of investment
assets, of which over $13 billion are tax-exempt. The Adviser
services Kentucky clients at offices in Louisville and
Lexington.
The Fund is obligated to pay investment advisory fees at
the rate of 0.14 of 1% of average annual net assets to its
Adviser (and administration fees to its Administrator, for total
fees at the rate of up to 0.40 of 1% of average annual net
assets). Both of these fees are subject to increase were the Fund
to discontinue certain payments under the Distribution Plan, so
that together these fees would be payable at an aggregate annual
rate of up to 0.50 of 1%. Payments under the Distribution Plan
began on July 1, 1994. (See "Table of Expenses," "Distribution
Plan" and "Management Arrangements.") Some or all of these fees may
be waived by the Adviser and Administrator. (See "Table of
Expenses" and "Management Arrangements").
Distribution Plan - The Fund's Distribution Plan authorizes
the payment by the Fund of an asset retention service fee at the
rate of 0.15% of average annual net assets. (See "Distribution
Plan.")
Liquidity - Redemptions - By electing Expedited Redemption,
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. 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.
Certain Stabilizing Measures - In an attempt to protect
against changes in the value of its investments and other market
risks, the Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange shares of the Fund into shares of
certain other tax-free municipal bond mutual funds should you
change your state of residence or, if you choose, into certain
money market funds and an equity fund. (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, when shares are
redeemed the proceeds may be more or less than the 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
Kentucky issues, are subject to economic and other conditions
affecting Kentucky. (See "Risks and Special Considerations
Regarding Investment in Kentucky 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.")
Although it has no present intention to do so, the Fund may also to
a limited degree buy and sell futures contracts and options on
futures contracts, but there may be risks associated with these
practices. (See "Certain Stabilizing Measures.")
Statements and Reports - You receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you receive a Semi-Annual Report and
an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
TABLE OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
<S> <C>
Maximum Sales Load Imposed on Purchases 4.00%
Maximum Sales Load Imposed on Reinvested Dividends 0%
Deferred Sales Load 0%
Redemption Fees 0%
Exchange Fee 0%
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Investment Advisory Fee 0.14%
12b-1 Fee (Service fee) 0.15%
All Other Expenses+ 0.46%
Administration Fee 0.26%
Other Expenses+ 0.20%
Total Fund Operating Expenses+ 0.75%
<S> <C> <C> <C> <C>
Example# 1 year 3 years 5 years 10 years
You would pay the following
expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of
each time period $47 $63 $80 $129
<FN>
*Based upon amounts incurred during the most recent fiscal year of
the Fund, restated to reflect current arrangements. On September
11, 1995, Banc One Investment Advisors Corporation became the
Fund's Investment Adviser and at the same time the Fund's
Administration Agreement with the Administrator was changed, so
that the Fund pays the Adviser and the Administrator at the annual
rates of 0.14% and 0.26% of its average annual net assets,
respectively.
</FN>
<FN>
+Absent expense offset in custodian fees for uninvested cash
balances, other expenses would have been incurred at the rate of
0.21% of average net assets and all other expenses would have been
0.47%. Absent this offset, total Fund operating expenses would have
been incurred at the annual rate of 0.76%.
</FN>
<FN>
#The expense example is based upon the above shareholder
transaction expenses (a sales charge of $40 for a $1,000
investment) and annual Fund operating expenses (0.75% of average
net assets). It is also based upon an amount 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 expenses at a
0.75% annual rate; the expense ratio was applied to an assumed
average balance (the year's starting investment plus one-half the
year's results). Each column 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 EXAMPLE ALSO REFLECTS THE MAXIMUM
SALES CHARGE. IN GENERAL, DECREASING SALES CHARGE RATES APPLY AS
INVESTMENT SIZE INCREASES. (SEE "HOW TO INVEST IN THE FUND").
The purpose of the above table is to assist the investor in
understanding the various costs and expenses that an investor in
the Fund will bear directly or indirectly. The assumed 5% annual
return should not be interpreted as a prediction of an actual
return, which may be higher or lower.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
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, 1994 has been audited by KPMG Peat
Marwick LLP, independent auditors, whose report thereon is included
in 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. On October 16, 1989,
Aquila Management Corporation, originally the Fund's Sub-Adviser
and Administrator, became Administrator only. Effective September
11, 1995, Banc One Investment Advisors Corporation became the
Fund's Investment Adviser, replacing PNC Bank, Kentucky, Inc. ("See
Management Arrangements").
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.93 $10.49 $10.39
Income from Investment
Operations:
Net investment
income............... 0.60 0.62 0.66
Net gain (loss) on
securities (both
realized and
unrealized).......... (0.96) 0.47 0.19
Total from Investment
Operations........... (0.36) 1.09 0.85
Less Distributions:
Dividends from
net investment
income............... (0.60) (0.62) (0.66)
Distributions from
capital gains........ - (0.03) (0.09)
Total Distributions.. (0.60) (0.65) (0.75)
Net Asset Value,
End of Period $9.97 $10.93 $10.49
Total Return (not
(reflecting
sales load)............ (3.31)% 10.50% 8.48%
Ratios/Supplemental Data
Net Assets, End of
Period (in thousands) $232,656 $258,632 $192,600
Ratio of Expenses
to Average Net
Assets............... 0.72% 0.59% 0.42%
Ratio of Net Investment
Income to Average Net
Assets............... 5.81% 5.67% 6.21%
Portfolio Turnover
Rate................. 35.25% 31.29% 50.33%
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:
Net Investment
Income................. $0.60 $0.60 $0.63
Ratio of Expenses
to Average Net
Assets................. 0.73% 0.73% 0.68%
Ratio of Net Investment
Income to Average
Net Assets............. 5.80% 5.52% 5.95%
<CAPTION>
1991 1990 1989 1988 1987*
<C> <C> <C> <C> <C>
$10.00 $10.06 $9.53 $9.26 $9.60
0.66 0.65 0.68 0.65 0.25
0.41 (0.03) 0.53 0.26 (0.32)
1.07 0.62 1.21 0.91 (0.07)
(0.66) (0.68) (0.68) (0.64) (0.27)
(0.02) - - - -
(0.68) (0.68) (0.68) (0.64) (0.27)
$10.39 $10.00 $10.06 $9.53 $9.26
10.97% 6.64% 13.09% 10.49% (0.65)%(1)
$114,798 $66,076 $35,652 $19,007 $5,767
0.27% 0.10% 0.08% 0.10% 1.08%(2)
6.53% 6.60% 6.94% 6.87% 5.39%(2)
16.69% 7.67% 3.63% 10.51% 62.83%
$0.60 $0.59 $0.57 $0.58 $0.16
0.84% 0.76% 1.09% 1.21% 3.82%(2)
5.96% 5.94% 5.92% 5.79% 2.66%(2)
<FN>
(1)Not annualized.
</FN>
<FN>
(2)Annualized.
</FN>
<FN>
*For the period from May 21, 1987 (commencement of operations) to
December 31, 1987.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment for
investors who seek income exempt from Kentucky State and regular
Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Kentucky Obligations, as defined below, which
may include obligations of certain non-Kentucky issuers. The Fund
offers you the opportunity to keep assets fully invested in a
vehicle that provides a professionally managed portfolio of
Kentucky 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 Kentucky 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 Kentucky Obligations.
Kentucky 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 Kentucky State and regular
Federal income taxes as is consistent with the preservation of
capital, the Fund will invest in Kentucky Obligations (as defined
below). There is no assurance that the Fund will achieve its
objective, which is a fundamental policy of the Fund.
As used in this Prospectus and the Additional Statement, the
term "Kentucky Obligations" means obligations, including those of
certain non-Kentucky 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 Kentucky income
taxes. Although exempt from regular Federal income tax, interest
paid on certain types of Kentucky 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 Kentucky
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 Kentucky Obligations.
The non-Kentucky bonds or other obligations the interest on
which is exempt under present law from regular Federal and Kentucky
income taxes are the bonds or other obligations issued by or under
the authority of Guam, the Northern Mariana Islands, Puerto Rico
and the Virgin Islands. The Fund will not purchase Kentucky
Obligations of non-Kentucky issuers unless Kentucky Obligations of
Kentucky issuers of the desired quality, maturity and interest rate
are not available. As a Kentucky-oriented fund, at least 65% of the
Fund's total assets will be invested in Kentucky Obligations of
Kentucky issuers. The Fund invests only in Kentucky 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 Kentucky 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 Banc One
Investment Advisors Corporation (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 Kentucky Obligation is downgraded such that it
could not then be purchased by the Fund, or, in the case of an
unrated Kentucky 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 Kentucky
Obligations, i.e., the interest on them is exempt from Kentucky
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 the same 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 Kentucky issues, are
accordingly subject to economic and other conditions affecting
Kentucky. (See "Risk Factors and Special Considerations Regarding
Investment in Kentucky Obligations.")
Certain Stabilizing Measures
In attempting to protect against declines in the value of its
investments and other market risks, 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. Although the
Fund has no current intention of using futures or 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 Kentucky
Obligations caused by interest rate fluctuations. Futures and
options also may provide a hedge against increases in the cost of
securities the Fund intends to purchase.
Although it does not currently do 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. Under an applicable regulatory rule, 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 example, if it is not
possible to close a Futures position, the Fund would continue to be
required to make daily cash payments of variation margin in the
event of adverse price movements. In such a situation, if it has
insufficient cash, the Fund might have to sell portfolio securities
to meet daily variation margin requirements at a time when it may
be disadvantageous to do so. 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. For example, there is
a risk of imperfect correlation where the securities underlying
Futures have different maturities, ratings or geographic mixes than
the security being hedged. The correlation may also be affected by
additions to or deletions from the index which serves as a basis
for a Future. 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 Kentucky Obligations (such as industrial
development bonds and municipal lease/purchase agreements). A
participation interest gives the Fund an undivided interest in the
underlying Kentucky Obligations in the proportion that the Fund's
participation interest bears to the total amount of the underlying
Kentucky 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 Kentucky Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring them.
The Kentucky 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. For example, delivery and payment may take
place a month or more after the date of the transaction. 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
with the Custodian, which is marked to market every business day.
See the Additional Statement for further information.
Limitation to 10% as to Certain Investments
The Fund cannot purchase Kentucky 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 Kentucky Obligations as to which the Fund can
exercise the right to demand payment in full within seven 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.
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets in
(i) Kentucky Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless this 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 Kentucky Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates. If the prevailing interest rates go up
after the Fund buys Kentucky Obligations, the value of these
obligations may go down; if these rates go down, the value of these
obligations may go up. Changes in value and yield based on changes
in prevailing interest rates may have different effects on
short-term Kentucky 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.
Risks and Special Considerations Regarding Investment in Kentucky
Obligations
The following is a discussion of the general factors that
might influence the ability of Kentucky issuers to repay principal
and interest when due on the Kentucky 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.
The Commonwealth of Kentucky ranks first among the States in
the production of coal. Tobacco is the dominant agricultural
product, and Kentucky ranks second among states in the total cash
value of tobacco raised. There is a significant diversification in
the manufacturing mix including tobacco processing plants,
distilleries and durable goods production including automobiles,
heavy machinery, computer appliances and office equipment. Toyota,
a major Japanese automobile manufacturer, has constructed a large
facility in Georgetown, Kentucky. The horse breeding and racing
industry plays an important role both as a significant industry as
well as encouraging tourist business in the state.
Economic problems include a continuing high unemployment rate
in the non-urbanized areas of the State. The Coal Severance Tax is
a significant revenue producer for the state and its political
subdivisions, and any substantial decrease in the amount of coal or
other minerals produced could result in revenue shortfalls.
Additionally, any federal legislation affecting adversely the
tobacco and/or cigarette industry would have a negative impact on
Kentucky's economy. Although revenue obligations of the state or
its political subdivisions may be payable from a specific project,
there can be no assurances that further economic difficulties and
the resulting impact on state and local government finances will
not adversely affect the market value of the bonds issued by
Kentucky municipalities or political subdivisions or the ability of
the respective entities to pay debt service. Major legislative
initiatives in the area of education reform and medicaid expenses
are having an impact on the Commonwealth's financial profile.
The Commonwealth of Kentucky relies upon sales and use tax,
individual income tax, property tax, corporate income tax,
insurance premium tax, alcohol beverage tax, corporate license tax,
cigarette tax, and horse racing tax for its revenue. The cities,
counties and other local governments are essentially limited to
property taxes, occupational license taxes, utility taxes, transit
and restaurant meals taxes and various license fees for their
revenue. Obligations of non-Kentucky issuers are subject to the
risks of general economic and other factors affecting those
issuers.
Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than two
years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than one
year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal revenue
bonds in other States. See the Additional Statement.
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
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 Kentucky
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 Kentucky 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 Kentucky 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 Fund's net asset value and offering price per share are
determined as of 4:00 p.m. New York time on each day that the New
York Stock Exchange is open (a "business day"). However, Futures
and options on them are valued at the close of the principal
commodities exchange on which they are traded, which may be later
than 4:00 p.m. New York time. The net asset value per share is
determined by dividing the value of the net assets of the Fund
(i.e., the value of the assets less liabilities) by the total
number of shares 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 Kentucky 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
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:
complete the Application provided in this Prospectus and either (i)
order the shares through your investment broker or dealer, if it is
a selected dealer, and include a completed Application; or (ii)
mail the Application with payment to Administrative Data Management
Corp. (the "Agent") at the address on the Application. The
applicable sales charge will apply in either instance. Subsequent
investments are also subject to the applicable sales charges.
The minimum initial investment is $1,000, except as otherwise
stated in this Prospectus or the Additional Statement, 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 any amount (unless you have an
Automatic Withdrawal Plan). Your 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.
You may also make subsequent investments of $50 or more using
electronic funds transfers from your demand account at a Financial
Institution if it is a member of the Automated Clearing House and
if the Agent has received a 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 plus a
sales charge. The offering price determined on any day applies to
all purchase orders received by the Distributor from selected
dealers that day, except that orders received by it after 4:00 p.m.
New York time will receive that day's offering price only if such
orders were received by selected dealers from customers prior to
such time and transmitted to the Distributor prior to its close of
business that day (normally 5:00 p.m. New York time); if not so
transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day. If that day is not a business day your
order will be executed at the price determined on the next business
day. In the case of Telephone Investment your order will be filled
at the next determined offering price. If your order is placed
after the time for determining the net asset value of the 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 and may be suspended by the Distributor when the
Distributor judges it in the Fund's best interest to do so.
The following table shows the amount of the sales charges 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"):
<TABLE>
<CAPTION>
Sales Sales Commis-
Charge Charge sions
as as as
Percentage Approximate Percentage
of Public Percentage of
Amount of Offering of Amount Offering
Purchase Price Invested Price
<S> <C> <C> <C>
Less than $25,000...... 4.00% 4.17% 3.50%
$25,000 but less
than $50,000........ 3.75% 3.90% 3.25%
$50,000 but less
than $100,000....... 3.50% 3.63% 3.00%
$100,000 but less
than $250,000....... 3.00% 3.09% 2.50%
$250,000 but less
than $500,000....... 2.50% 2.56% 2.25%
$500,000 but less
than $1,000,000..... 1.00% 1.01% 1.00%
$1,000,000 but less
than $2,500,000..... .50% .50% .50%
$2,500,000 but less
than $5,000,000..... .25% .25% .25%
$5,000,000 and over.... .10% .10% .10%
</TABLE>
The above schedule of sales charges is applicable to purchases
by a "single purchaser," i.e.: (a) an individual; (b) an
individual, his or her spouse and their children under the age of
21 purchasing shares for his or her own accounts; (c) a trustee or
other fiduciary purchasing shares for a single trust estate or a
single fiduciary account; (d) a pension, profit-sharing or other
employee benefit plan qualified or non-qualified under Section 401
of the Code; and (e) tax-exempt organizations 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.
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
shares of the Fund. Additional compensation will 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 at luxury resorts taken by qualifying
registered representatives and members of their families 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 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.
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 a Payroll Plan. 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 the
payroll investment program (which could take up to ten days), you
must notify your employer.
Reduced Sales Charges
Right of Accumulation: "Single purchasers" may also benefit
from a reduction of the sales charge in accordance with the above
schedule if the cumulative value (at cost or current net asset
value, whichever is higher) of shares purchased with a sales
charge, together with shares previously purchased 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
shares of the Fund through a single selected dealer or through the
Distributor. 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: 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 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
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
shares will not be resold except through redemption. There may be
tax consequences of these purchases. Such purchasers should consult
their own tax counsel. 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 securities 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 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: Shares of the Fund may be
purchased at net asset value without sales charge to the extent
that the purchase price of such shares does not exceed the proceeds
from a redemption (a "Qualified Redemption"), made within 60 days
prior to such purchase, of shares of another investment company on
which a sales charge has been paid. Qualified Redemptions, however,
do not include (i) redemptions of shares of investment companies
sponsored by brokers or dealers of the type known as major wire
houses or (ii) redemptions of shares on which a contingent deferred
sales charge or a redemption fee was paid. Additional information
is available from the Distributor.
To qualify, the following special procedures must be followed:
1. A completed Application (included in this Prospectus) and
payment for the shares to be purchased must be sent to the
Distributor, Aquila Distributors, Inc., 380 Madison Avenue,
Suite 2300, New York, NY 10017 and should not be sent to the
Shareholder Servicing Agent of the Fund, Administrative Data
Management Corp. (This instruction replaces the mailing
address contained on the Application.)
2. The Application must be accompanied by evidence
satisfactory to the Distributor that you have made a Qualified
Redemption in an amount at least equal to the net asset value
of shares to be purchased. Satisfactory evidence includes a
confirmation of the date and the amount of the redemption from
the investment company, its Shareholder Servicing Agent or
your broker or dealer, or a copy of your account statement
with the investment company reflecting the redemption
transaction.
The Fund reserves the right to alter or terminate this
privilege at any time without notice. This Prospectus will be
supplemented to reflect such alteration or termination.
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). Share certificates will not be issued unless you so
request in writing to the Agent. If certificates 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. No certificates will be issued for fractional
shares or to shareholders who have elected Automatic Investment or
Telephone Investment (see "How to Invest in the Fund" above) or
Expedited Redemption (see "How to Redeem Your Investment" below).
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.
Distribution Plan
The Fund has adopted a Distribution 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.
Under the Distribution Plan, the Fund is authorized to make
payments ("Permitted Payments") to Qualified Recipients, which
Permitted Payments shall be made directly, or through the
Distributor 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) 0.15 of 1%
of the average annual net assets of the Fund. "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 Distributor has entered into written
agreements ("Related Agreements") contemplated by the Rule and
which have rendered assistance (whether direct, administrative, or
both) in the distribution and/or retention of the Fund's shares or
servicing of shareholder accounts. (See the Additional Statement
for a description of the Distribution Plan.)
Payments under the Plan commenced as of July 1, 1994. During
the fiscal year ended December 31, 1994, $180,997 was paid under
the Plan to Qualified Recipients, of which, $1,789 was paid to the
Distributor. (See the Additional Statement for a description of the
Distribution Plan.)
Another part of the Distribution 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. Except
for Permitted Payments, the Fund believes that 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.)
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. 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 withdrawal penalties. A redemption may result in
a transaction taxable to you.
If you purchase shares of the Fund through broker-dealers,
banks and other financial institutions which serve as shareholders
of record you must redeem through those institutions, which are
responsible for the prompt transmission of redemption requests. In
all other cases, you may redeem directly from the Fund, but if the
original purchase of shares in your account was not made through a
broker or dealer, a completed purchase Application must have been
received by the Agent before redemption requests can be honored.
For your convenience the Fund offers expedited redemption 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 not
represented by certificates.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments to a
Financial Institution account you have predesignated. See
"Redemption Payments," below for payment methods. Your name
and your account number must be supplied.
To redeem an investment by this method, telephone:
800-872-5860 toll free or 908-855-5731
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 and number, name(s)
and 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: Administrative Data
Management Corp., Attn: Aquilasm Group of Funds, by FAX at
908-855-5730 or by mail at 581 Main Street, Woodbridge, NJ
07095-1198, indicating 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 use the above procedures 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 shares to
be redeemed should be sent in blank (unsigned) to the Fund's
Shareholder Servicing Agent: Administrative Data Management
Corp., Attn: Aquilasm Group of Funds, 581 Main Street,
Woodbridge, NJ 07095-1198, 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.
For the 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. Additional documentation may be
required where shares are held by a corporation, a partnership,
trustee or executor, or if redemption is requested by other than
the shareholder of record. If redemption proceeds of less than
$50,000 are payable to the record holder and are to be sent to the
record address, no signature guarantee is required. 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: Administrative Data Management Corp., Attn:
Aquilasm Group of Funds, 581 Main Street, Woodbridge, NJ
07095-1198, containing:
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. Upon your request, redemption proceeds will also
be wired or transferred through the facilities of the Automated
Clearing House to a predesignated Financial Institution, wherever
possible, if in the amount of $1,000 or more. The Fund may impose
a charge, not exceeding $5.00 per wire redemption, after written
notice to investors who have elected this redemption procedure.
However, 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 action or fee is currently contemplated. If you use a
dealer to arrange for a redemption, you may be required by the
dealer to make a payment to that firm 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 valuation of the net asset value of,
the portfolio securities to be unreasonable or impracticable; or
(iii) for such other periods as the Securities and Exchange
Commission may permit. Payment for redemption of 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. 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 on which a sales charge was paid, or which
were received in exchange for shares on which a sales charge was
paid, in shares of the Fund at the net asset value next determined
after the Agent's receipt of the reinvestment order. This
reinvestment privilege may be exercised only once a year. 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.
AUTOMATIC WITHDRAWAL PLAN
You may establish an Automatic Withdrawal Plan if you own or
purchase shares of the Fund having a net asset value of at least
$5,000. Under an Automatic Withdrawal Plan you will receive a
monthly or quarterly check in a stated amount, not less than $50.
If such a plan is established, all dividends and distributions must
be reinvested in your shareholder account. Redemption of shares to
make payments under the Automatic Withdrawal Plan will give rise to
a gain or loss for tax purposes. See the Automatic Withdrawal Plan
provisions of the Application included in this Prospectus, the
Additional Statement under "Automatic Withdrawal Plan," and
"Dividend and Tax Information" below.
Purchase of additional shares concurrently with withdrawals
are undesirable because of sales charges when purchases are made.
Accordingly, a Planholder 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 Advisory Agreement
Bank One Investment Advisors Corporation (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 , supervisory and certain administrative services. The
Advisory Agreement states that the Adviser shall, at its expense,
provide to the Fund all office space and facilities, equipment and
clerical personnel necessary for the carrying out of the Adviser's
duties under the Advisory Agreement. The Adviser will, 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.
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. 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 and transfer agent or 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 0.17 of
1% of such net asset value (other than a fee allocable by class to
certain shares of the Fund), 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 (other than a fee
allocable by class to certain shares of the Fund), the management
fee shall be payable at the annual rate of 0.14 of 1% of such net
asset value. (Since the Administrator also receives a fee from the
Fund under the Administration Agreement, 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, or, 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, at 0.40% of such net asset
value; see below.) Payments under the Distribution Plan began on
July 1, 1994 and the advisory and administration fees are
currently being accrued at the lower rate . During the Fund's
fiscal year ended December 31, 1994, different advisory and
administration arrangements were in effect. See the Additional
Statement for a description of such arrangements. 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
fee.
The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to its pro-rata portion
(hereafter described) 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 and 1.5% of such assets
in excess of $100 million, or (ii) 25% of the Fund's total annual
investment income. The pro-rata portion, as between the
Administrator and Adviser, is based on the aggregate of the fee of
the Adviser and the fee of the Administrator (exclusive of amounts
paid or to be paid out by the Administrator, if any, for the
applicable period pursuant to the Fund's Distribution Plan.)
The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund; see the
Additional Statement. 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.
The Fund's Custodian is an affiliate of the Adviser. It is
expected that another banking subsidiary of the Adviser's parent,
Banc One Corporation will provide a credit facility to the Fund.
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 the net asset value per share and the dividends
(however, the daily pricing of the Fund's portfolio is the
responsibility of the Adviser under the Advisory Agreement) or, at
its expense and responsibility, delegating these accounting duties
in whole or in part to a company satisfactory to the Fund, and
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 at
the end of each business day at the annual rate of 0.33 of 1% of
such net asset value, 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 (other than a fee allocable by
class to certain shares of the Fund), the annual fee will be
payable at the annual rate of 0.26 of 1% of such net asset value.
Payments under the Distribution Plan began on July 1, 1994 and
administration fees are currently being accrued at the lower rate.
See the Additional Statement for a description of the fund's former
management fees. The Administrator has agreed that the above fee
shall be reduced, but not below zero, by an amount equal to its
pro-rata portion (defined as in the Advisory Agreement) 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 and 1.5% of such assets in excess of $100 million, or
(ii) 25% of the Fund's total annual investment income.
Information about the Adviser,
the Administrator and the Distributor
Bank One Investment Advisors Corporation (the Adviser") is
a wholly owned subsidiary of BANC ONE CORPORATION ("Banc One").
Banc One is the 8th largest U.S. banking organization based on
assets as of December 31, 1994. As of January 31, 1995, a
subsidiary of Banc One was the largest bank in Kentucky, with $7.1
billion in assets and 133 offices throughout the state. The Adviser
is currently responsible for management of over $30 billion of
investment assets, of which over $13 billion are tax-exempt. The
Adviser services Kentucky clients at offices in Louisville and
Lexington. The Fund's portfolio is managed locally in Kentucky by
Mr. Thomas S. Albright, Vice President and Senior Portfolio
Manager, at the New Adviser's Louisville office. As it has been in
the past, since the beginning of the Fund's operations in 1987, the
Fund's investments will continue to be managed so that it will have
a portfolio of quality-oriented (investment grade) securities .
See the Additional Statement as to the legality, under the
Glass-Steagall Act, of the Adviser's acting as the Fund's
investment adviser. In general, under that Act, the Adviser will
not, among other things, be involved in the promotion or
distribution of shares of the Fund.
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 an equity fund. As of September
30, 1995, these funds had aggregate assets of approximately $2.6
billion, of which approximately $1.9 billion consisted of assets
of tax-free municipal bond funds. The Administrator, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann (directly,
through a trust and through share ownership by his wife). See the
Additional Statement for information on Mr. Herrmann .
The Distributor currently handles the distribution of the
shares of fourteen funds (six money market funds, seven tax-free
municipal bond funds and an equity fund) 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 by Mr. Herrmann, will be owned by certain directors
and/or officers of the Administrator and/or the Distributor
including Mr. Herrmann. In anticipation of this transaction, the
Board of Trustees, including a majority of the independent
Trustees, has approved a new Distribution Agreement for the Fund
with no material change from the currently effective Distribution
Agreement.
For the year ended December 31, 1994, fees of $551,174 were
accrued to each of the Fund's former adviser and the Administrator
under an investment advisory agreement and an administration
agreement, respectively, then in effect, which on September 11,
1995 were replaced by the Advisory Agreement and the Administration
Agreement. See the Additional Statement.
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 or market discount, less expenses paid or accrued
including any amortization of any original issue or market premium.
As such net income will vary, the Fund's dividends will also vary.
Dividends so declared are paid monthly within a week before
the end of each calendar month. 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. Shareholders may elect
to have dividends deposited without charge by electronic funds
transfers into an account at a Financial Institution which is a
member of the Automated Clearing House by completing a Ready Access
Features form.
Redeemed shares continue to earn dividends through and
including the day which is 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
day which is 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
Kentucky Obligations in the Fund's portfolio which are allocated as
"exempt-interest dividends" (see below) and is therefore exempt
from regular Federal income tax. This allocation 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
portion of the dividends paid by the Fund will be subject to income
taxes. During the Fund's fiscal year ended December 31, 1994,
93.62% of the Fund's dividends were "exempt-interest dividends,"
and 6.38% of the Fund's dividends were taxable. 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), 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 by a shareholder
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 Kentucky 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 tax-exempt 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 Omnibus Budget Reconciliation Act of 1993 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 long-term capital gains. This is
the case whether the shareholder takes his or her 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. Capital gains are taxed at the same rates as
ordinary income, except that for individuals, trusts and estates
the maximum tax rate on capital gains distributions is 28% even if
the applicable rate on ordinary income for such taxpayers is higher
than 28%.
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 distributions and
amounts taxed to shareholders.
The Fund's gains or losses on sales of Kentucky 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 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 Kentucky 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 Kentucky 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.
As of the date of the Prospectus, Congress is considering
a number of changes affecting taxation. It is not possible to
predict which, if any, of such changes will become law.
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. The gain or loss will be long-term if you held the
redeemed shares for over a year, and short-term, if for a year or
less. 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.
Kentucky Tax Information
Since the Fund may, except as indicated below, purchase only
Kentucky Obligations (which, as defined, means obligations,
including those of non-Kentucky issuers, of any maturity which pay
interest which, in the opinion of counsel, is exempt from regular
Federal income taxes and Kentucky income taxes) all of the
exempt-interest dividends paid by the Fund will be excludable from
the shareholder's gross income for Kentucky income tax purposes.
The Fund may also pay "short-term gains distributions" and
"long-term gains distributions," each as discussed under "Dividends
and Distributions" above. Under Kentucky income tax law, short-term
gains distributions are not exempt from Kentucky income tax.
Kentucky taxes long-term gains distributions at its ordinary
individual and corporate rates. The only investment which the Fund
may make other than in Kentucky 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. Under the laws of Kentucky relating to ad valorem
taxation of property, the shareholders rather than the Fund are
considered the owners of the Fund's assets. Each shareholder will
be deemed to be the owner of a pro-rata portion of the Fund.
According to the Kentucky Revenue Cabinet, to the extent that such
portion consists of Kentucky Obligations, it will be exempt from
property taxes, but it will be subject to property taxes on
intangibles to the extent it consists of cash on hand, cash in
out-of-state banks, Futures, options and other nonexempt assets.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Fund and certain tax-free municipal bond funds and an equity fund
(the "Bond or Equity Funds") and certain money market funds (the
"Money-Market Funds"), all of which are in the Aquilasm Group of
Funds and have the same Administrator and Distributor as the Fund.
All exchanges are subject to certain conditions described below. As
of the date of this Prospectus, the Aquila Bond or Equity Funds are
this Fund, Aquila Rocky Mountain Equity Fund, Hawaiian Tax-Free
Trust, Tax-Free Trust of Arizona, Tax-Free Trust of Oregon,
Tax-Free Fund of Colorado, Tax-Free Fund For Utah and Narragansett
Insured Tax-Free Income Fund; the Aquila Money-Market Funds are
Capital Cash Management Trust, Pacific Capital Cash Assets Trust,
Pacific Capital Tax-Free Cash Assets Trust, Pacific Capital U.S.
Treasuries Cash Assets Trust, Prime Cash Fund and Churchill Cash
Reserves Trust.
Under the exchange privilege, once any applicable sales charge
has been paid on shares of any Bond or Equity Fund, those shares
(and any shares acquired as a result of reinvestment of dividends
and/or distributions) may be exchanged any number of times between
Money-Market Funds and Bond or Equity Funds without the payment of
any additional sales charge.
The "Eligible Shares" of any Bond or Equity Fund are those
shares which were (a) acquired by direct purchase with payment of
any applicable sales charge, or which were received in exchange for
shares of another Bond or Equity Fund on which any applicable sales
charge was paid; (b) acquired by exchange for shares of a
Money-Market Fund with payment of the applicable sales charge; (c)
acquired in one or more exchanges between shares of a Money-Market
Fund and a Bond or Equity Fund so long as the shares of the Bond or
Equity Fund were originally purchased as set forth in (a) or (b);
or (d) acquired as a result of reinvestment of dividends and/or
distributions on otherwise Eligible Shares.
If you own Eligible Shares of any Bond or Equity Fund, you may
exchange them for shares of any Money-Market Fund or the shares of
any other Bond or Equity Fund without payment of any sales charge.
If you own shares of a Money-Market Fund which you have
acquired by exchange for Eligible Shares of any Bond or Equity
Fund, you may exchange these shares, and any shares acquired as a
result of reinvestment of dividends and/or distributions on these
shares, for shares of any Bond or Equity Fund without payment of
any sales charge.
Shares of a Money-Market Fund may be exchanged for shares of
another Money-Market Fund or of a Bond or Equity Fund; however, if
the shares of a Money-Market Fund were not acquired by exchange of
Eligible Shares of a Bond or Equity Fund or of shares of a
Money-Market Fund acquired in such an exchange, they may be
exchanged for shares of a Bond or Equity Fund only upon payment of
the applicable sales charge. The shares of the Bond or Equity Fund
so acquired are then Eligible Shares.
This Fund, as well as the other Money-Market Funds and 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, this 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; and (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal to
the minimum investment requirements of the investment company whose
shares are being acquired.
To effect an exchange, you must complete a form which is
available from the Distributor. The exchange will be effected at
the relative exchange prices of the shares being exchanged next
determined after receipt by the Distributor of a properly completed
form. 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 of a Money-Market Fund for
shares of a Bond or Equity Fund as described above, in which case
the exchange price of shares of the Bond or Equity Fund will be its
public offering price.
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 the Additional
Statement); no representation is made as to the deductibility of
any such loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free Money-Market
Fund) are exempt from regular Federal income tax, and to the extent
that a portion or all of the dividends paid by Pacific Capital U.S.
Treasuries Cash Assets Trust (which invests in U.S. Treasury
obligations) are exempt from state income taxes. If your state of
residence is not the same as that of the issuers of obligations in
which a Bond or Equity 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,
invested at the maximum public offering price (offering price
includes sales charge) for 1- and 5-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 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, unlike yield figures, is not limited to
investment performance, but takes into account expenses as well; it
also 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
Fund income net of fee waivers and reimbursement of expenses, if
any, and will assume the payment of the maximum sales charge on the
purchase of shares, but not on reinvestment of income dividends for
which the Fund does not impose a sales charge. 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
Churchill Tax-Free Trust (the "Trust"), a non-diversified
open-end investment company was formed on March 30, 1987, as a
Massachusetts business trust. Its name was changed from "Churchill
Tax-Free Fund of Kentucky" to "Churchill Tax-Free Trust" in June,
1988. The Fund is the original and only active portfolio (series)
of the Trust. The Fund is an open-end, non-diversified management
investment company. (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.
Upon liquidation of the Fund, shareholders are entitled to
share pro-rata in the net assets of the Fund available for
distribution to shareholders. All shares are presently of the same
class; 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 only
as to dividends (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.
Of the shares of the Fund outstanding on March ***, 1996,
BHC Securities, Inc., 100 North 20th Street, Philadelphia, PA held
of record ***** shares (***%). The Fund's management is not aware
of any person beneficially owning more than 5% of its outstanding
shares as of such date. On the basis of information received from
the holder, the Fund's management believes that all of the shares
indicated are held for the benefit of clients of that
institution.
Additional Classes
The Fund believes it would be desirable to offer additional
classes of shares (the "Multiple-Class System") in order to
accommodate, in a cost-effective manner, the service desires and
requirements of a variety of investors. The creation of other
classes will have no effect upon the shares of the Fund now
outstanding or those which would be outstanding at such time as the
Fund begins offering shares of other classes.
It is anticipated that the Fund will offer three classes of
shares: Front-Payment Class Shares ("Class A"), Level-Payment Class
Shares ("Class C"), and Institutional Class Shares ("Class Y").
Retail investors will be entitled to purchase Front-Payment Shares
or Level-Payment Shares or both. Institutional Class Shares will be
offered only to institutions acting for investors in a fiduciary,
advisory, agency custodial or similar capacity, and will not be
offered directly to retail customers.
The Fund believes that such Multiple-Class System might
enhance the scope and depth of its services to existing and
potential shareholders and permit it to facilitate the distribution
of its securities to a further degree. The Multiple-Class System
offers the flexibility of tailoring the payment for shares of the
Fund to the needs and circumstances of the clients of broker-dealer
firms, financial institutions and other organizations. Moreover, to
the extent that assets increase in the Fund due to sale of shares
through the Multiple-Class System, owners of all classes of shares
might benefit from the spreading of the Fund's fixed operating
costs over the larger asset base to a greater extent than might
otherwise be the case. There is, of course, no assurance that any
of these desired results will be achieved.
Implementation of a Multiple-Class System is subject to a
number of conditions. These include: a favorable ruling from the
Internal Revenue Service that implementation of the Multiple-Class
System will not affect the Fund's status as a regulated investment
company under the applicable provisions of the Internal Revenue
Code; the filing and effectiveness of a post-effective amendment to
the Fund's Registration Statement to register with the Securities
and Exchange Commission shares of such classes for sale to
investors; and registration with various state securities
authorities of the shares of the Fund. While it is anticipated that
each of these conditions will be accomplished, there is no
assurance that this will be the case.
Shares of the new classes ("Class C Shares and Class Y
Shares") will not be available for purchase unless and until the
foregoing conditions are met. At such time, all shareholders of the
Fund will be advised as to the availability of shares in the new
classes. It is anticipated that the Fund will be able to offer
shares of the new classes in the Spring of 1996.
Voting Rights
At any meeting of shareholders, shareholders of the Fund
are entitled to one (1) vote for each dollar of net asset value
(determined as of the record date for such meeting) for each full
share held (and fractional votes for fractional shares held).
Shareholders will vote on the election of Trustees and on other
matters submitted to the vote of shareholders. 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>
[LOGO] APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
ADM, ATTN: AQUILA SM GROUP OF FUNDS
581 MAIN STREET, WOODBRIDGE, NJ 07095-1198
1-800-872-5860
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._______________________________________________________________
Custodians First Name Middle Initial Last Name
Custodian for ____________________________________________________
Minors First Name Middle Initial Last Name
Under the ___________UGTMA** _____________________________________
Name of State Minors 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:________________________
Employers Address:___________________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding
(See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
Make check payable to: CHURCHILL TAX-FREE FUND OF KENTUCKY
Amount of investment $ _________________ Minimum initial investment $1,000
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.
C. LETTER OF INTENT
(Check appropriate box)
See Terms of Letter of Intent and Escrow at the end of this application
___ Yes___ No
I/We intend to invest in 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 ___ $1,000,000 ___ $2,500,000 ___ $5,000,000
<PAGE>
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 Churchill Tax-Free Fund of Kentucky Account. To establish this program,
please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $_________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or on the
first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
the Fund toll-free at 1-800-872-5860. 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
(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, Administrative Data Management Corp. (the
Agent) is authorized to redeem sufficient shares from this account at the
then current Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $____________beginning___________.
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial Institution
name, address and your account number.
___________________________________ ___________________________________
First Name Middle Initial Last Name Financial Institution Name
___________________________________ ___________________________________
Street Financial Institution Street Address
___________________________________ ___________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the AquilaSM Group of Funds by telephone.
TO MAKE A TELEPHONE EXCHANGE, CALL THE AGENT AT 1-800-872-5860
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.
TO MAKE AN EXPEDITED REDEMPTION, CALL THE AGENT AT 1-800-872-5860
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
<PAGE>
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,
Administrative Data Management Corp., 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.
<PAGE>
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
1-800-872-5859 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 2c 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 2c 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
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher Douglas Dean
Diana P. Herrmann Ann R. Leven
Theodore T. Mason Anne J. Mills
William J. Nightingale James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Crutcher, Assistant 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
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights....................................... 2
Table of Expenses................................ 4
Financial Highlights............................. 5
Introduction..................................... 6
Investment Of The Fund's Assets.................. 6
Investment Restrictions.......................... 11
Net Asset Value Per Share........................ 11
How To Invest In The Fund........................ 12
How To Redeem Your Investment.................... 16
Automatic Withdrawal Plan........................ 19
Management Arrangements.......................... 19
Dividend And Tax Information..................... 23
Exchange Privilege............................... 26
General Information.............................. 28
Application and Letter of Intent
AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY
A tax-free
income investment
[LOGO]
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue Suite 2300
New York, New York 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Statement of Additional Information March ***, 1996
This Statement of Additional Information (the "Additional Statement")
is not a Prospectus. The Additional Statement should be read in conjunction
with the Prospectus dated March ***, 1996 (the "Prospectus") , of Churchill
Tax-Free Fund of Kentucky (the "Fund"), which may be obtained from the Fund's
transfer and shareholder servicing agent, Administrative Data Management Corp.,
by writing to it at: 581 Main Street, Woodbridge, NJ 07095-1198 or by calling
the following numbers:
800-872-5860 toll free or 908-855-5731
or from Aquila Distributors, Inc., the Fund's Distributor, by writing to it at
380 Madison Avenue, Suite 2300, New York, New York 10017; or by calling:
800-872-5859 toll free or 212-697-6666
The Annual Report of the Fund for the fiscal year ended December 31,
1994 will be delivered with the Additional Statement.
TABLE OF CONTENTS
Investment of the Fund's Assets . . . . . . . . . . . . . . . . . . . . . . 2
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . .12
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Limitation of Redemptions in Kind . . . . . . . . . . . . . . . . . . . . .16
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Additional Information as to Management Arrangements. . . . . . . . . . . .22
Computation of Net Asset Value. . . . . . . . . . . . . . . . . . . . . . .26
Automatic Withdrawal Plan . . . . . . . . . . . . . . . . . . . . . . . . .28
Additional Tax Information. . . . . . . . . . . . . . . . . . . . . . . . .28
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
<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 "Kentucky 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
Kentucky Obligations which the Fund may purchase.
The table below gives information as to the percentage of Fund net assets
invested, as of December 31, 1994, in Kentucky Obligations in the various
rating categories:
Highest rating (1) .............................. 26.6%
Second highest rating (2) ....................... 15.8%
Third highest rating (3)........................ 44.2%
Fourth highest rating (4) ....................... 5.3%
Not rated (5) ................................... 8.1%
100%
(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) .
(5)Bonds not rated by Moody's or S&P are assigned a rating by the Adviser.
Such rating must be the equivalent of one of the above ratings.
When-Issued and Delayed Delivery Obligations
The Fund may buy Kentucky Obligations on a when-issued or delayed
delivery basis. The purchase price and the interest rate payable on the
Kentucky Obligations are fixed on the transaction date. At the time the Fund
makes the commitment to purchase Kentucky Obligations on a when-issued or
delayed delivery basis, it will record the transaction and thereafter reflect
the value each day of such Kentucky 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 Kentucky 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 Kentucky 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, the Fund 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 in fact the Fund may never
do so. The following discussion is intended to explain briefly the workings of
Futures and options on them.
Unlike when the Fund purchases or sells a Kentucky 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 Kentucky 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"). Financial futures contracts based on the
Municipal Bond Index began trading on June 11, 1985. The Municipal Bond Index
is comprised of 40 tax-exempt municipal revenue and general obligation bonds.
Each bond included in the Municipal Bond Index must be rated A or higher by
Moody's or S&P and must have a remaining maturity of 19 years or more. Twice a
month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The
value of the Municipal Bond Index is computed daily according to a formula
based on the price of each bond in the Municipal Bond Index, as evaluated by
six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
There are at present U.S. Government financial futures contracts based on
long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills. U.S. Government Securities Futures have traded longer than
Municipal Bond Index Futures, and the depth and liquidity available in the
trading markets for them are in general greater.
Call Options on Futures Contracts. The 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 Kentucky 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 Kentucky 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 Kentucky Obligations being hedged. If the price of
the Future or option moves less than the price of the Kentucky Obligations
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the Kentucky 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 Kentucky 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 Kentucky 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 Kentucky Obligations which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price of the
Kentucky 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 Kentucky Obligations being hedged if the
historical volatility of the prices of the Kentucky 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 Kentucky 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 Kentucky 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 Kentucky 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 and limits on upward or
downward price movement 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
Kentucky 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 within certain restrictions as to its long and
short positions in Futures under 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), and must represent to
the CFTC that the Fund will operate within such restrictions. 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 the restrictions, the Fund also must, as to its
short positions, use Futures and options solely for bona-fide hedging purposes
within the meaning and intent of the applicable provisions under the CEA. As
to the 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 an obligation 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, 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.
Because of constitutional limitations, the Commonwealth of Kentucky
cannot enter into a financial obligation of more than two years' duration, and
no other municipal issuer within the Commonwealth can enter into a financial
obligation of more than one year's duration. As a consequence, the payment and
security arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal revenue bonds in
other States. For example, most local school construction is financed from the
proceeds of bonds nominally issued by a larger city or county government,
which holds legal title to the school, subject to a year-to-year renewable
leaseback arrangement with the local school district. Similar arrangements are
used to finance many city and county construction projects but in these cases,
the bonds are nominally issued in the name of a public corporation, which
holds title to the project and leases the project back to the city or county
on a year-to-year renewable basis. In both situations, the rent that the
nominal issuer receives from the actual user of the property financed by the
bonds is the only source of any security for the payment of the bonds, so that
a failure by the user to renew the lease in any year will put the bonds into
default. However, there is no reported instance in which a Kentucky school
bond has gone into default. In determining marketability of any such issue,
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.
As indicated in the Prospectus, there are certain Kentucky 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 Kentucky Obligations due to
this tax consequence. Also, as indicated in the Prospectus, the Fund will not
purchase obligations of Kentucky 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.
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. 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- and 5-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 to the value such an investment would
have if it were completely redeemed at the end of each such period. The
calculation assumes the maximum sales charge is deducted from the hypothetical
initial $1,000 purchase, 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). 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 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.
The average annual compounded rates of return for the Fund for the 1- and
5-year periods ended December 31, 1994, were -7.22% and 5.65%, respectively.
The average annual compounded rate of return for the Fund from inception to
December 31, 1994, was 6.66%.
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. 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. The
total return for the Fund for the 1- and 5-year periods ended December 31,
1994, were -7.22% and 31.61%, respectively. The total return for the Fund from
inception to December 31, 1994, was 63.42%. In general, actual total rate of
return will be lower than the 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 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 during the base period net of fee waivers and reimbursements of
expenses, if any. The yield for the Fund for the 30-day period ended on
December 31, 1994, (the date of the Fund's most recent audited financial
statements, which are included in the Fund's annual report for the year ended
December 31, 1994) was 5.78%.
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
Taxable Equivalent Yield
The Fund may also quote a taxable equivalent yield 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 Kentucky income tax rate (and adding the result to that
portion of the yield of the Fund that is not tax-exempt, if any). The taxable
equivalent yield for the Fund for the 30-day period ended on December 31,
1994, (the date of the Fund's most recent audited financial statements, which
are included in the Fund's annual report for the year ended December 31, 1994)
was 10.09%.
The Kentucky and the combined Kentucky and federal income tax rates upon
which the Fund's tax equivalent yield quotations are based are 6.0% and 44.34%
respectively. 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.
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. If distribution rates are
published, they will be accompanied by calculations of current yield in
accordance with the formula of the Securities and Exchange Commission.
Other Performance Quotations
With respect to those categories of investors who are permitted to
purchase 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.
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 that 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 Kentucky 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
As used in the Fund's Distribution Plan (the "Plan"), "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 Distributor has entered into written agreements ("Related Agreements")
contemplated by the Rule and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of the Fund's
shares or servicing of shareholder accounts.
"Qualified Holdings" means, as to any Qualified Recipient, all Fund
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 Fund shares and/or in providing administrative assistance in
relation thereto.
At the present time most of the outstanding shares of the Fund would be
considered Qualified Holdings of various broker-dealers unaffiliated with the
Distributor, including a broker-dealer affiliated with the Adviser. 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, except that shares
representing investment in the Fund by the Adviser of assets over which it has
control will not be considered Qualified Holdings of any person.
Under the Plan, subject to the direction and control of the Trustees, the
Fund will be authorized to make payments ("Permitted Payments") to Qualified
Recipients, which Permitted Payments shall be made directly, or through the
Distributor 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) 0.15 of 1% of the average annual net assets of the Fund.
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.
Under the Plan the Distributor will 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 Permitted Payments, if any, to
each Qualified Recipient provided that the total Permitted Payments to all
Qualified Recipients do not exceed the amount set forth above.
The Distributor is authorized under the Plan, 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, 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 Administrator 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.
The Plan also 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 also states that whenever, the Administrator (i) makes any
payment directly or through the Distributor for additional compensation to
dealers in connection with sales of shares of the Fund which 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 trips taken by qualifying registered representatives and
members of their families to locations within or outside of the United States,
other prizes or financial assistance to securities dealers in offering their
own seminars or conferences, or other items described in the Fund's
prospectus, in amounts that will not exceed the amount of the sales charges in
respect of sales of shares of the Fund effected through such participating
dealers whether retained by Distributor or reallowed to participating dealers,
or (ii) bears the costs, not borne by the Fund's Distributor, of printing and
distributing all copies of the Fund's prospectuses, statements of additional
information and reports to shareholders which are not sent to the Fund's
shareholders, or the costs of supplemental sales literature and advertising,
such payments are authorized.
The Plan states that it is recognized that, in view of the bearing by the
Administrator of certain distribution expenses, the profits, if any, of the
Administrator are dependent primarily on the administration fees paid by the
Fund to the Administrator and that its profits, if any, would be less, or
losses, if any, would be increased due to the bearing by it of such expenses.
If and to the extent that any such administration fees paid by the Fund might,
in view of the foregoing, be considered as indirectly financing any activity
which is primarily intended to result in the sale of shares issued by the
Fund, the payment of such fees is authorized by the Plan.
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
shall report at least quarterly to the Fund's Board of Trustees in writing all
costs of each item specified in the second preceding paragraph (making
estimates of such costs where necessary or desirable) during the preceding
calendar or fiscal quarter.
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.
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. 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. Ms.
Herrmann is an interested person as a member of his immediate family. Ms.
Leven is an interested person as a beneficiary of a trust that owns shares of
the parent company of the Adviser. They are so designated by an asterisk.
As of Janaury ***, 1996, 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 of the Fund and President and a Director of the Administrator since
1984; Founder, President and Chairman of the Board of Trustees of Hawaiian
Tax-Free Trust since 1984, of Tax-Free Trust of Arizona and Tax-Free Trust of
Oregon since 1986, of Tax-Free Fund of Colorado since 1987 and of Tax-Free
Fund For Utah and Narragansett Insured Tax-Free Income Fund since 1992, all of
which are tax-free municipal bond funds, and an equity fund, Aquila Rocky
Mountain Equity Fund since 1993, to all of which the Administrator is
administrator and which are referred to as the "Bond and Equity Funds";
Chairman and President, Chief Executive Officer (Chairman of the Board of
Trustees and/or President) and Trustee of Capital Cash Management Trust
("CCMT"), since 1981 and Founder and executive officer (since 1974) of CCMT
and its predecessor; Founder, President and Chairman of the Board of Trustees
of Prime Cash Fund since 1982, of Short Term Asset Reserves and Pacific
Capital Cash Assets Trust since 1984, of Churchill Cash Reserves Trust since
1985, of Pacific Capital Tax-Free Cash Assets Trust and of Pacific Capital
U.S. Treasuries Cash Assets Trust since 1988 and of Cascades Cash Fund,
1989-1994, all of which are money market funds to which the Administrator is
administrator and which are referred to as the "Money Funds"; Vice President,
a Director and Secretary since 1981 (formerly Treasurer) of the Distributor,
which is distributor (i.e., principal underwriter) for the Money Funds and the
Bond and Equity Funds; President and a Director of STCM Management Company,
Inc., 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; Director or Trustee of the various Quest
for Value Funds, a group of stock, bond and money market mutual funds, since
1983; Director of Saratoga Advantage Trust, a group of mutual funds, since
1994; Trustee of Brown University since 1990; actively involved for many years
in leadership roles with university, school and charitable organizations.
Thomas A. Christopher, Trustee, 459 West Green Street, Danville, Kentucky
40422
Shareholder of Robinson, Hughes & Christopher, C.P.A.s, P.S.C., since 1977;
President of A Good Place for Fun, Inc., a sports facility, since 1987; active
member of the American Institute of Certified Public Accountants; Board of
Directors of the Kentucky Society of CPAs; Trustee of Churchill Cash Reserves
Trust since 1985; presently active in leadership roles with various civic,
community and church organizations.
Douglas Dean, Trustee, 106 West Vine Street, Suite 600, Lexington, Kentucky
40507
Founder and President of Dean, Dorton & Ford P.S.C., a public accounting firm,
since 1979; previously Staff Accountant, Tax Supervisor and Tax Manager with
Coopers & Lybrand, a public accounting firm; Trustee of Trent Equity Fund, an
equity mutual fund, 1992-1994; Trustee of Churchill Cash Reserves Trust since
1995; Active as an officer and board member of various charitable and
community organizations.
Diana P. Herrmann*, Trustee, 380 Madison Avenue, New York, New York 10017
Senior Vice President and Secretary and formerly Vice President of the
Administrator since 1986 and Director since 1984; Trustee of Tax-Free Trust of
Oregon and Tax-Free Trust of Arizona since 1994; Vice President of InCap
Management Corporation since 1986 and Director since 1983; Vice President and
formerly Assistant Vice President of the Money Funds since 1986; Assistant
Vice President of Oxford Cash Management Fund, 1986-1988; Assistant Vice
President and formerly Loan Officer of European American Bank, 1981-1986;
daughter of the Trust's President; Trustee of the Leopold Schepp Foundation
(academic scholarships) since 1995; actively involved in mutual fund and trade
associations and in college and other volunteer organizations.
Ann R. Leven*, Trustee, 785 Park Avenue, Apartment 20A, New York, NY 10021
Treasurer of the National Gallery of Art, Washington, D.C., since 1994, Deputy
Treasurer, 1990-1994; Treasurer of the Smithsonian Institution, Washington,
D.C., 1984-1990; President of ARL Associates, strategic consultants, since
1983; Vice President/Senior Corporate Planning Officer of The Chase Manhattan
Bank, N.A., 1979-1983; Treasurer of The Metropolitan Museum of Art, 1972-1979;
Trustee of Short Term Asset Reserves , 1984-1993, of Tax-Free Trust of Oregon
since 1986, of Cascades Cash Fund, 1989-1994, and of Churchill Cash Reserves
Trust since 1995; Trustee of Oxford Cash Management Fund, 1987-1988; Director
of the Delaware Group of mutual funds since 1989; Adjunct Professor at
Columbia University Graduate School of Business Administration since 1975;
Trustee of the American Red Cross Endowment Fund, 1985-1990; Member of the
Visiting Committee of Harvard Business School, 1979-1985; Member of the Board
of Overseers of The Amos Tuck School, Dartmouth College, 1978-1984; Staff
Director of the Presidential Task Force on the Arts and Humanities, 1981;
Director of Alliance Capital Reserves Fund, a money market fund, 1978-1979.
Theodore T. Mason, Trustee, 26 Circle Drive, Hastings-on-Hudson, New York
10706
Managing Director of EastWind Power Partners, Ltd. since 1994; Director of
Cogeneration Development of Willamette Industries, Inc., a forest products
company, 1991-1993; Vice President of Corporate Development of Penntech
Papers, Inc., 1978-1991; Vice President of Capital Projects for the same
company, 1977-1978; Vice Chairman of the Board of Trustees of CCMT since 1981;
Trustee and Vice President, 1976-1981, and formerly Director of its
predecessor; Director of STCM Management Company, Inc.; Vice Chairman of the
Board of Trustees and Trustee of Prime Cash Fund since 1982; Trustee of Short
Term Asset Reserves, 1984-1986 and since 1989, of Hawaiian Tax-Free Trust and
Pacific Capital Cash Assets Trust since 1984, of Churchill Cash Reserves Trust
since 1985 and of Pacific Capital Tax-Free Cash Assets Trust and Pacific
Capital U.S. Treasuries Cash Assets Trust since 1988; Vice President and
Trustee of Oxford Cash Management Fund, 1983-1989; Vice President of Trinity
Liquid Assets Trust, 1983-1985; President and Director of Ted Mason Venture
Associates, Inc., a venture capital consulting firm, 1972-1980; Advisor to the
Commander, U.S. Maritime Defense Zone Atlantic, 1984-1988; National Vice
President, Surface/Subsurface, Naval Reserve Association, 1985-1987; National
Vice President, Budget and Finance, for the same Association, 1983-1985;
Commanding Officer of four Naval Reserve Units, 1974-1985; Captain, USNR,
1978-1988.
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 since 1994; Director of the American
Baptist Foundation since 1985; Trustee of Brown University; Trustee of
Churchill Cash Reserves Trust since 1985, of Tax-Free Trust of Arizona since
1986, of Tax-Free Fund of Colorado and Capital Cash Management Trust since
1987 and of Tax-Free Fund For Utah since 1994.
William J. Nightingale, Trustee, 3 Forest Street, New Canaan, Connecticut
06840
Chairman and founder (1975) and Senior Advisor since 1995 of Nightingale &
Associates, Inc., a general management consulting firm focusing on interim
management, divestitures, turnaround of troubled companies, corporate
restructuring and financial advisory services; President, Chief Executive
Officer and Director of Bali Company, Inc., a manufacturer of women's apparel,
which became a subsidiary of Hanes Corporation, 1970-1975; prior to that, Vice
President and Chief Financial Officer of Hanes Corporation after being Vice
President-Corporate Development and Planning of that company, 1968-1970;
formerly Senior Associate of Booz, Allen & Hamilton, management consultants,
after having been Marketing Manager with General Mills, Inc.; Trustee of
Narragansett Insured Tax-Free Income Fund since 1992 and of Churchill Cash
Reserves Trust since 1993; Director of Spreckels Industries, Inc. (beet sugar
processing and various industrial manufacturing companies); Glasstech Inc.
(glass bending equipment and engineering) and Ring's End, Inc. (retail lumber
and building supply chain).
James R. Ramsey, Trustee, 109 Wetherby Building, Western Kentucky University,
Bowling Green, Kentucky 42101
Vice President for Finance and Administration, and Professor of Economics,
Western Kentucky University; Trustee of Churchill Cash Reserves Trust since
1995; Chief State Economist and Executive Director of the Office for Financial
Management and Economic Analysis of the Commonwealth of Kentucky, 1981-1992;
Adjunct Professor of the University of Kentucky; Assistant Dean and Director
of Public Administration of Loyola University in New Orleans, Louisiana,
1978-1981; Assistant Professor of Public Finance and Administration of Loyola
University, 1977-1981; Assistant Professor of Economics, Middle Tennessee
State University, 1975-1977; published numerous articles, monographs and
working papers on economics and fiscal management.
Jerry G. McGrew, Senior Vice President, P.O. Box 662, Radcliff, Kentucky
40159
Vice President since 1987; Vice President of Tax-Free Fund For Utah since
1992; 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 Tax-Free Fund of Colorado since 1987,
of Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital U.S.
Treasuries Cash Assets Trust since 1988 and of Narragansett Insured Tax-Free
Income Fund since 1992; Secretary and Director of STCM Management Company,
Inc. since 1974; President of the Distributor since 1995 and formerly Vice
President of the Distributor, 1986-1992; Member of the Panel of Arbitrators,
American Arbitration Association, since 1978; Assistant Vice President,
American Stock Exchange, Market Development Division, and Director of
Marketing, American Gold Coin Exchange, a subsidiary of the American Stock
Exchange, 1976-1984.
L. Michele Crutcher, Assistant Vice President, 4277 Bardstown Road,
Elizabethtown, Kentucky 42701
Registered Representative of Aquila Distributors, Inc. since 1995; Investment
Broker, 1990-1994; Sales Assistant, 1984-1990, J.J.B. Hilliard, W.L. Lyons,
Inc.; active in Elizabethtown Emmaus Community, United Way of Hardin County,
Elizabethtown Junior Women's Club, Big Brothers/Big Sisters, and Fund for the
Arts.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New York, New
York 10017
Chief Financial Officer of the Money Funds and the Bond and Equity Funds since
1991; Treasurer of the Money Funds and the Bond and Equity Funds, 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 Money Funds and the 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 Money Funds and
the 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 Money Funds and the Bond and Equity Funds since
1995; Vice President of the Money 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 Money Funds and the Bond and Equity Funds since
1995; Counsel to the Administrator and the Distributor since 1995; formerly a
Legal Associate for Oppenheimer Management Corporation, 1993-1995.
Compensation of Trustees
The Fund does not pay fees to Trustees affiliated with the
Administrator or to any of the Fund's officers. During the fiscal year ended
December 31, 1994, the Fund paid $68,859 in fees and reimbursement of expenses
to its other Trustees. The Fund is one of the 14 funds in the Aquilasm Group
of Funds, which consist of tax-free municipal bond funds, money market funds
and an equity fund. 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. Messrs. Dean and Ramsey and Ms. Levin were elected Trustees of another
fund in August 1995 and received no compensation from that fund during the
Fund's fiscal year ended December 31, 1994. 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>
Thomas J.
Christopher $6,754 $12,776 2
Douglas
Dean $8,054 $8,054 2
Ann R.
Leven $6,425 $17,675 3
Theodore T.
Mason $6,487 $39,840 8
Anne J.
Mills $6,369 $26,621 6
William J.
Nightingale $6,200 $13,150 3
James R.
Ramsey $7,624 $7,624 2
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
Additional Information as to the Advisory Agreement
The Investment Advisory Agreement (the "Advisory Agreement") between
the Fund and the Adviser contains the provisions described below, in
addition to those described in the Prospectus. The Advisory Agreement became
effective on September 11, 1995. Prior to that date, PNC Bank, Kentucky, Inc.
acted as the Fund's investment adviser under a former advisory agreement that
terminated on that date.
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.
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 sub-adviser, Administrator 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.
During the fiscal year ended December 31, 1994, all of the Fund's
transactions were principal transactions and no brokerage commissions were
paid.
For the years ended December 31, 1994, 1993 and 1992 the fees accrued
to the former investment adviser under the advisory agreement in effect until
September 11, 1995 were $551,174, $572,222 and $383,254 respectively, of which
in 1993 and 1992, respectively, $159,133 and $173,078 were voluntarily
waived.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its Shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981,
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank
affiliates to act as investment advisers to registered closed-end investment
companies. In the Board of Governors case, the Supreme Court also stated that
if a national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment
company would not violate the Glass-Steagall Act. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
The Adviser has represented to the Fund that it possesses the legal
authority to perform the investment advisory services contemplated by the
agreement and described in the Prospectus and the Additional Statement without
violation of applicable statutes and regulations. Future changes in either
federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or
affiliates of those entities, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent or restrict the Adviser from continuing to perform such services
for the Fund. Depending upon the nature of any changes in the services which
could be provided by the Adviser, the Board of Trustees of the Fund would
review the Fund's relationship with the Adviser and consider taking all action
necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of BANC ONE CORPORATION subsidiary banks
or their correspondent banks in connection with customer purchases of Shares
of the Fund, these banks might be required to alter materially or discontinue
the services offered by them to customers. It is not anticipated, however,
that any change in the Fund's method of operations would affect its net asset
value per share or result in financial losses to any customer.
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.
The Administration Agreement went into effect on September 11, 1995, replacing
a former administration agreement with similar terms except for the provision
of fund accounting services and fee arrangements. See the Prospectus.
Subject to the control of the Fund's Board of Trustees, the
Administrator also provides all administrative services to the Fund other than
those relating to its investment portfolio; as part of such duties, the
Administrator (i) provides office space, personnel, facilities, and equipment
for the performance of the following functions and for the maintenance of the
Fund's headquarters; (ii) oversees 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; (iii) provides to the Adviser and to the Fund statistical and other
factual information and advice regarding economic factors and trends, but does
not generally furnish advice or make recommendations regarding the purchase or
sale of securities; (iv) under the New Administration Agreement the
Administrator either keeps the accounting records of the Fund, including the
computation of net asset value per share and the dividends (provided that
pricing of the Fund's portfolio shall be the responsibility of the Adviser
under the Advisory Agreement) or, at its expense and responsibility, delegates
such duties in whole or in part to a company satisfactory to the Fund, and
under the Former Administration Agreement and the New Administration
Agreement, the Administrator maintains the Fund's other books and records and
prepares (or assists 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 oversees the insurance
relationships of the Fund; (v) prepares, on the Fund's behalf and at its
expense, such applications and reports as may be necessary to register or
maintain its registration or that of its shares under the securities or
"Blue-Sky" laws of all such jurisdictions as may be required from time to
time; and (vi) responds to any inquiries or other communications from
shareholders and broker-dealers, or if any such inquiry or communication is
more properly to be responded to by the Fund's shareholder servicing and
transfer agent or distributor, oversees such shareholder servicing and
transfer agent's or distributor's response thereto. 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.
For the years ended December 31, 1994, 1993 and 1992 the fees accrued
to the Administrator under a former administration agreement in effect until
September 11, 1995, were $551,174, $572,222 and $383,170 respectively of which
in 1993 and 1992, respectively, $159,133 and $174,372 were voluntarily waived.
In addition, during the year ended December 31, 1992 the Administrator
reimbursed expenses of the Fund in the amounts of $35,265.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined as of 4:00 p.m.,
New York time, on each day that the New York Stock Exchange is open by
dividing the value of the Fund's net assets by the total number of its shares
then outstanding. However, Futures and options on them are valued at the last
sales price on the principal commodities exchange on which the Future or
option is traded or, if there are no sales, at the mean between the bid and
asked prices as of the close of that exchange; such close may be later than
4:00 p.m.,New York time. Securities having a remaining maturity of less than
sixty days when purchased and securities originally purchased with maturities
in excess of sixty days but which currently have maturities of sixty days or
less are valued at cost adjusted for amortization of premiums and accretion of
discounts. All other portfolio securities are valued at the mean between bid
and asked quotations which, for Kentucky Obligations, may be obtained from a
reputable pricing service or from one or more broker-dealers dealing in
Kentucky Obligations, either of which may, in turn, obtain quotations from
broker-dealers or banks which deal in specific issues. However, since Kentucky
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 Kentucky 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 Kentucky 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, 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 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 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 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
Any shareholder who owns or purchases shares of the Fund having a net
asset value of at least $5,000 may establish an Automatic Withdrawal Plan
under which he or she 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
the account. Monthly or quarterly payments paid to shareholders may not be
considered as a yield or income on investment.
ADDITIONAL TAX INFORMATION
Any investor who incurs a sales commission on purchase shares of one
mutual fund (the original fund) and who then sells such shares or exchanges
them for shares of a different mutual fund without having held them at least
91 days 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 the investor's gain or reduce his or her
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.
GENERAL INFORMATION
Additional Series
Shares of each Series of the Trust created by the Board of Trustees are
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
are allocated among Series in a manner acceptable to the Board of Trustees. As
of the date of this Additional Statement, the Fund is the only operational
Series of the Trust.
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. The Rule contains special
provisions for cases in which an advisory contract is approved by one or more,
but not all, Series. A change in investment policy may go into effect as to
one or more Series whose holders so approve the change, even though the
required vote is not obtained as to the holders of other affected Series.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the 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. If any Series of the Trust were to be unable to meet the
obligations attributable to it (which, as is the case with the Fund, is
relatively remote), the other Series would be subject to such obligations,
with corresponding increase in the risk of the shareholder liability mentioned
in the prior sentence.
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 or she 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
or her office.
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company 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.
Underwriting Commissions
During the year ended December 31, 1994, the aggregate dollar amount of
sales charges on sales of shares in the Fund was $782,897 and the amount
retained by the Distributor was $51,057.
Financial Statements
The financial statements for the Fund for the fiscal year ended December
31, 1994, 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.
Moody's Investors Service. A brief description of the applicable Moody's
Investors Service rating symbols and their meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess
the strongest investment attributes are designated by the symbols Aa1, A1,
Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating categories for
short-term obligations, all of which define an investment grade situation.
These are designated Moody's Investment Grade as MIG 1 through MIG 4. In the
case of variable rate demand obligations (VRDOs), two ratings are assigned;
one representing an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an evaluation of
the degree of risk associated with the demand feature. The short-term rating
assigned to the demand feature of VRDOs is designated as VMIG. When no rating
is applied to the long or short-term aspect of a VRDO, it will be designated
NR. Issues or the features associated with MIG or VMIG ratings are identified
by date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issuer's specific structural
or credit features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality.
Margins of protection are ample although not
so large as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access
for refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of
an investment security is present and
although not distinctly or predominantly
speculative, there is specific risk.
<PAGE>
INVESTMENT ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Ann R. Leven
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Crutcher, Assistant 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
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY
A TAX-FREE
INCOME INVESTMENT
[LOGO]
STATEMENT OF
ADDITIONAL
INFORMATION
One Of The
Aquilasm Group Of Funds
<PAGE>
CHURCHILL TAX-FREE TRUST
PART C: OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements of the Churchill Tax-Free Fund
of Kentucky Portfolio:
Included in Part A:
Financial Highlights
Incorporated by reference into Part B:
Report of Independent Certified Public
Accountants
Statement of Investments as of December 31,
1994
Statement of Assets and Liabilities as of
December 31, 1994
Statement of Operations for the year ended
December 31, 1994
Statement of Changes in Net Assets for the
years ended December 31, 1994 and 1993
Notes to Financial Statements
Included in Part C:
Consent of Independent Certified Public
Accountants
(b) Exhibits of the Churchill Tax-Free Fund of Kentucky
Portfolio:
(1) Supplemental Declaration of Trust (iv)
(2) By-laws (i)
(3) Not applicable
(4) Specimen share certificate (ii)
(5) Investment Advisory Agreement (viii)
(6) (a) Distribution Agreement (iv)
(6) (b) Sales Agreement for brokerage firms (v)
(6) (c) Sales Agreement for financial institu-
tions (v)
(7) Not applicable
(8) Custody Agreement (viii)
(9) (a) Transfer Agency Agreement (iii)
(9) (b) Administration Agreement (viii)
(10) Opinion and consent of counsel (ii)
(11) Not applicable
(12) Not applicable
(13) Agreement with initial shareholder (ii)
(14) Not applicable
(15) Distribution Plan (vi)
(16) Schedule for computation of performance quota-
tions (vii)
(i) Filed as an exhibit to Registrant's Initial Registra-
tion Statement dated March 31, 1987 and incorporated
herein by reference.
(ii) Filed as an exhibit to Registrant's Pre-Effective
Amendment No. 1 dated May 15, 1987 and incorporated
herein by reference.
(iii) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 6 dated April 28, 1989 and incorporated
herein by reference.
(iv) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 7 dated March 1, 1990 and incorporated
herein by reference.
(v) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 8 dated April 29, 1991 and incorporated
herein by reference.
(vi) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 11 dated February 25, 1994 and
incorporated herein by reference.
(vii) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 12 dated April 25, 1995 and
incorporated herein by reference.
(viii) Filed herewith.
ITEM 25. Persons Controlled By Or Under Common Control With Registrant
None
ITEM 26. Number of Holders of Securities
As of April 20 1995, Registrant had 5,136 hol-
ders of record of its shares, all in the Churchill
Tax-Free Fund of Kentucky portfolio.
ITEM 27. Indemnification
Subdivision (c) of Section 12 of Article SEVENTH of
Registrant's Supplemental Declaration of Trust,
filed as Exhibit 1 to Registrant's Post-Effective
Amendment No. 7 dated March 1, 1990, is incorpora-
ted herein by reference.
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted
to Trustees, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission
such indemnification is against public policy as
expressed in that Act and is, therefore, unenfor-
ceable. In the event that a claim for indemnifica-
tion against such liabilities (other than the pay-
ment by Registrant of expenses incurred or paid by
a Trustee, officer, or controlling person of Regis-
trant in the successful defense of any action,
suit, or proceeding) is asserted by such Trustee,
officer, or controlling person in connection with
the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of
whether such indemnification by it is against pub-
lic policy as expressed in the Act and will be go-
verned by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
Banc One Investment Advisors Corporation, Regis-
trant's investment adviser, performs investment ad-
visory services for mutual fund and other clients.
For information as to the business, profession, vo-
cation, or employment of a substantial nature of
its Directors and officers, reference is made to
the Form ADV filed by it under the Investment Advi-
sers Act of 1940.
ITEM 29. Principal Underwriters
(a) Aquila Distributors, Inc. serves as principal un-
derwriter to Capital Cash Management Trust,
Churchill Cash Reserves Trust,
Hawaiian Tax-Free Trust, Narragansett Insured Tax-
Free Income Fund, Pacific Capital Cash Assets
Trust, Pacific Capital Tax-Free Cash Assets Trust,
Pacific Capital U.S. Treasuries Cash Assets Trust,
Prime Cash Fund, Short Term Asset Reserves, Tax-
Free Fund For Utah, Tax-Free Fund of Colorado, Tax-
Free Trust of Arizona, Aquila Rocky Mountain Equity
Fund and Tax-Free Trust of Oregon,in addition to
serving as the Registrant's principal underwriter.
(b) For information about the Directors and officers of
Aquila Distributors, Inc., reference is made to the
Form BD filed by it under the Securities Exchange
Act of 1934.
(c) Not applicable.
ITEM 30. Location of Accounts and Records
All such accounts, books, and other documents are
maintained by the adviser, the administrator, the
transfer agent, and the custodian, whose addresses
appear on the back cover pages of the Prospectus
and the Statement of Additional Information.
ITEM 31. Management Services
Not applicable.
ITEM 32. Undertakings
(a) Not applicable.
(b) Not applicable.
<PAGE>
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Consent
To the Trustees and Shareholders of
Churchill Tax-Free Fund of Kentucky:
We consent to the use of our report dated January 31, 1995 incorporated herein
by reference and to the reference to our firm under the heading "Financial
Highlights" in the Prospectus.
New York, New York KPMG Peat Marwick LLP
January 25, 1996 /s/KPMG Peat Marwick LLP
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement or Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 26th day of January, 1996.
CHURCHILL TAX-FREE TRUST
(Registrant)
By/s/Lacy B. Herrmann
-----------------------
Lacy B. Herrmann, President
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/Lacy B. Herrmann 1/26/96
- ---------------------- President, Chairman of -----------
Lacy B. Herrmann the Board and Trustee
(Principal Executive
Officer)
/s/Thomas A. Christopher 1/26/96
- ---------------------- Trustee -----------
Thomas A. Christopher
/s/Douglas Dean 1/26/96
- ---------------------- Trustee -----------
Douglas Dean
/s/Diana P. Herrmann 1/26/96
- ---------------------- Trustee -----------
Diana P. Herrmann
/s/Ann R. Leven 1/26/96
- ---------------------- Trustee -----------
Ann R. Leven
/s/Theodore T. Mason 1/26/96
- ---------------------- Trustee -----------
Theodore T. Mason
/s/Anne J. Mills 1/26/96
- ---------------------- Trustee -----------
Anne J. Mills
/s/William J. Nightingale 1/26/96
- ---------------------- Trustee -----------
William J. Nightingale
/s/James R. Ramsey 1/26/96
- ---------------------- Trustee -----------
James R. Ramsey
/s/Rose F. Marotta 1/26/96
- ---------------------- Chief Financial Officer -----------
Rose F. Marotta (Principal Financial and
Accounting Officer)
<PAGE>
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
Exhibit Exhibit Page
Number Name Number
5 Investment Advisory Agreement
8 Custody Agreement
9(b) Administration Agreement
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, made as of July 17, 1995, by and between
CHURCHILL TAX-FREE TRUST (the "Trust"), a Massachusetts business
trust, 380 Madison Avenue, Suite 2300, New York, New York 10017,
and BANC ONE INVESTMENT ADVISORS CORPORATION (the "Adviser")
W I T N E S S E T H :
WHEREAS, the Business Trust and the Adviser wish to enter
into an Investment Advisory Agreement referred to hereafter as
"this Agreement," with respect to a portfolio of the Business
Trust entitled Churchill Tax-Free Fund of Kentucky (the "Fund");
NOW THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable
consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. In General
The Adviser agrees, all as more fully set forth herein, to
act as managerial investment adviser to the Fund with respect to
the investment of the Fund's assets, and to supervise and arrange
the purchase of securities for and the sale of securities held in
the portfolio of the Fund.
2. Duties and Obligations of the Adviser With Respect To
Investment of the Assets of the Fund
(a) Subject to the succeeding provisions of this
section and subject to the direction and control of the Board of
Trustees of the Business Trust, the 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; 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.
(b) Any investment program furnished by the Adviser
under this section shall at all times conform to, and be in
accordance with, any requirements imposed by: (1) the Investment
Company Act of l940 (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
Business Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Business Trust;
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.
(c) The Adviser shall give the Fund the benefit of its
best judgment and effort in rendering services hereunder, but the
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
Adviser. Nothing herein contained shall, however, be construed
to protect the Adviser against any liability to the Fund or its
security holders by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason
of its reckless disregard of its obligations and duties under
this Agreement.
(d) Nothing in this Agreement shall prevent the Adviser
or any affiliated person (as defined in the Act) of the 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 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 Adviser expressly represents
that it will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations to the Fund
under this Agreement. It is agreed that the Adviser shall have
no responsibility or liability for the accuracy or completeness
of the Business Trust's Registration Statement under the Act and
the Securities Act of 1933, except for information supplied by
the Adviser for inclusion therein. The Adviser shall promptly
inform the Business Trust as to any information concerning the
Adviser appropriate for inclusion in such Registration Statement,
or as to any transaction or proposed transaction which might
result in an assignment of the Agreement. The Business Trust
agrees to indemnify the Adviser to the full extent permitted by
the Business Trust's Declaration of Trust.
(e) 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, as agent
for the Fund, 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 Business Trust understands that
purchases from underwriters include a commission or concession
paid by the issuer to the underwriter and that principal
transactions placed through dealers include a spread between the
bid and asked prices. In allocating transactions to dealers, the
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 sub-adviser, administrator 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 Business Trust recognizes that no
dollar value can be placed on such research services or on
execution services, that such research services may or may not be
useful to the 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.
3. Allocation of Expenses
The Adviser agrees that it will furnish the Fund, at the
Adviser's expense, all office space, facilities, equipment and
clerical personnel necessary for carrying out its duties under
this Agreement. The Adviser agrees that it will supply, or cause
to be supplied, to any sub-adviser, administrator or principal
underwriter of the Fund all necessary financial information in
connection with such sub-adviser's, administrator's or principal
underwriter's duties under any agreement between such sub-
adviser, administrator or principal underwriter and the Business
Trust. The Adviser will also pay all compensation of the Fund's
officers, employees, and Trustees, if any, who are affiliated
persons of the Adviser. The Fund agrees to 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 Adviser under this
Agreement or by such sub-adviser, administrator or principal
underwriter 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 Adviser 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 Business Trust may have to indemnify its officers and
Trustees.
4. Compensation of the Adviser
(a) The Business Trust agrees to pay the Adviser, and
the Adviser agrees to accept as full compensation for all
services rendered by the 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 0.17 of 1% of such net asset value, 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
(other than a fee allocable by class to certain shares of the
Fund), the annual management fee shall be payable at the annual
rate of 0.14 of 1% of such net asset value.
(b) The Adviser agrees that the fee under (a) above
shall be reduced, but not below zero, by an amount equal to its
pro-rata portion (hereafter described) 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
and 1.5% of such assets in excess of $100 million, or (ii) 25% of
the Fund's total annual investment income. The payment of the
fee under (a) above at the end of any month will be reduced or
postponed so that at no time will there be any accrued but unpaid
liability under this expense limitation, subject to readjustment
during the year. The pro rata portion, as between the
Administrator and Adviser, is based on the aggregate of the fee
of the Adviser and the fee of the Administrator (exclusive of
amounts paid or to be paid out by the Administrator, if any, for
the applicable period pursuant to the Fund's Distribution Plan).
5. Duration and Termination
(a) This Amended and Restated Investment Advisory
Agreement shall become effective on September 11, 1995, and shall
continue for 120 days thereafter unless during that period it is
approved by the shareholders of the Fund, in which case it shall,
unless terminated as hereinafter provided, continue in effect
until the June 30 next preceding the second anniversary of the
effective date of this 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 Business Trust's
Board of Trustees, including a vote of a majority of the Trustees
who are not parties to this 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.
(b) This Agreement may be terminated by the Adviser at
any time without penalty upon giving the Business Trust sixty
days' written notice (which notice may be waived by the Business
Trust) and may be terminated by the Business Trust at any time
without penalty upon giving the Adviser sixty days' written
notice (which notice may be waived by the Adviser), provided that
such termination by the Business Trust shall be directed or
approved by a vote of a majority of its Trustees in office at the
time or by a vote of the holders of a majority (as defined in the
Act) of the voting securities of the Fund outstanding and
entitled to vote. This Agreement shall automatically terminate in
the event of its assignment (as defined in the Act).
6. Disclaimer of Shareholder Liability
The Adviser understands that the obligations of this
Agreement are not binding upon any shareholder of the Fund
personally, but bind only the Business Trust's property; the
Adviser represents that it has notice of the provisions of the
Business Trust's Declaration of Trust disclaiming shareholder
liability for acts or obligations of the Fund.
7. Notices of Meetings
The Business Trust agrees that notice of each meeting
of the Board of Trustees of the Business Trust will be sent to
the Adviser and that the Business Trust will make appropriate
arrangements for the attendance (as persons present by
invitation) of such person or persons as the Adviser may
designate.
IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized
officers and their seals to be hereunto affixed, all as of the
day and year first above written.
ATTEST: Churchill Tax-Free Trust
________________________ By:___________________________________
Lacy B. Herrmann
Assistant Secretary President and Chairman
ATTEST: Banc One Investment Advisors Corporation
________________________ By:___________________________________
CUSTODY AGREEMENT
THIS AGREEMENT, is made as of March 30, 1995, by and between
CHURCHILL TAX-FREE FUND OF KENTUCKY, a business trust organized
under the laws of the Commonwealth of Massachusetts (the "Trust"),
and BANK ONE TRUST COMPANY, N.A., a banking company organized under
the laws of the United States (the "Custodian").
WITNESSETH:
WHEREAS, the Trust desires that Securities and cash of the
Trust be held and administered by the Custodian pursuant to this
Agreement; and
WHEREAS, the Trust is an open-end management investment
company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Custodian represents that it is a bank having the
qualifications prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements
herein made, the Trust and the Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1.1 "Authorized Person" means any Officer or other person
duly authorized by resolution of the Board of Trustees to give Oral
Instructions and Written Instructions on behalf of the Trust and
named in Exhibit B hereto or in such resolutions of the Board of
Trustees, certified by an Officer, as may be received by the
Custodian from time to time.
1.2 "Board of Trustees" shall mean the Trustees from time to
time serving under the Trust's Declaration of Trust, dated March
24, 1987, as from time to time amended.
1.3 "Book-Entry System" shall mean a federal book-entry
system as provided in Subpart O of Treasury Circular No. 300, 31
CFR 306, in Subpart B of 31 CFR Part 350, or in such book-entry
regulations of federal agencies as are substantially in the form of
such Subpart O.
1.4 "Business Day" shall mean any day recognized as a
settlement day by The New York Stock Exchange, Inc. and any other
day for which the Fund computes the net asset value of the Fund.
1.5 "Fund" shall mean any of the individual investment
portfolios of the Trust, including any additional portfolios
hereafter created, as each are or will be identified in Exhibit A
hereto; provided, however, that in the event that the Trust
consists of only one such portfolio, "Fund" shall refer to the
Trust.
1.6 "NASD" shall mean The National Association of Securities
Dealers, Inc.
1.7 "Officer" shall mean the President, any Senior Vice
President, Vice President or Assistant Vice President, the
Secretary, any Assistant Secretary, the Chief Financial Officer,
the Treasurer, or any Assistant Treasurer of the Trust.
1.8 "Oral Instructions" shall mean instructions orally
transmitted to and accepted by the Custodian because such
instructions are: (i) reasonably believed by the Custodian to have
been given by an Authorized Person, (ii) recorded and kept among
the records of the Custodian made in the ordinary course of
business and (iii) orally confirmed by the Custodian. The Trust
shall cause all Oral Instructions to be confirmed by Written
Instructions. If such Written Instructions confirming Oral
Instructions are not received by the Custodian prior to a
transaction, it shall in no way affect the validity of the
transaction or the authorization thereof by the Trust. If Oral
Instructions vary from the Written Instructions which purport to
confirm them, the Custodian shall notify the Trust of such variance
but such Oral Instructions will govern unless the Custodian has not
yet acted.
1.9 "Custody Account" shall mean any account in the name of
a Fund, which is provided for in Section 3.2 below, or of the
Trust.
1.10 "Proper Instructions" shall mean Oral Instructions or
Written Instructions. Proper Instructions may be continuing
Written Instructions when deemed appropriate by both parties.
1.11 "Securities Depository" shall mean The Participants Trust
Company or The Depository Trust Company and (provided that the
Custodian shall have received a copy of a resolution of the Board
of Trustees, certified by an Officer, specifically approving the
use of such clearing agency as a depository for the Trust) any
other clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities and Exchange Act of
1934 (the "1934 Act"), which acts as a system for the central
handling of Securities where all Securities of any particular class
or series of an issuer deposited within the system are treated as
fungible and may be transferred or pledged by bookkeeping entry
without physical delivery of the Securities.
1.12 "Securities" shall include, without limitation, common
and preferred stocks, bonds, call options, put options, debentures,
notes, bank certificates of deposit, bankers' acceptances,
mortgage-backed securities, other money market instruments or other
obligations, and any certificates, receipts, warrants or other
instruments or documents representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other
rights or interests therein, or any similar property or assets that
the Custodian has the facilities to clear and to service.
1.13 "Shares" shall mean the units of beneficial interest
issued by the Trust.
1.14 "Written Instructions" shall mean (i) written
communications actually received by the Custodian and signed by one
or more persons as the Board of Trustees shall have from time to
time authorized, or (ii) communications by telex or any other such
system from a person or persons reasonably believed by the
Custodian to be Authorized, or (iii) communications transmitted
electronically through the Institutional Delivery System (IDS), or
any other similar electronic instruction system acceptable to the
Custodian and approved by resolutions of the Board of Trustees, a
copy of which, certified by an Officer, shall have been delivered
to the Custodian.
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 Appointment. The Trust hereby constitutes and appoints
the Custodian as custodian of all Securities and cash owned by or
in the possession of the Trust at any time during the period of
this Agreement, provided that such Securities or cash at all times
shall be and remain the property of the Trust.
2.2 Acceptance. The Custodian hereby accepts appointment as
such custodian and agrees to perform the duties thereof as
hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 Segregation. All Securities and non-cash property held
by the Custodian for the account of the Fund, except Securities
maintained in a Securities Depository or Book-Entry System, shall
be physically segregated from other Securities and non-cash
property in the possession of the Custodian and shall be identified
as subject to this Agreement.
3.2 Custody Account. The Custodian shall open and maintain
in its trust department a custody account in the name of each Fund,
subject only to draft or order of the Custodian, in which the
Custodian shall enter and carry all Securities, cash and other
assets of the Fund which are delivered to it.
3.3 Appointment of Agents. Subject to the continuing
approval of the Board of Trustees, the Custodian may appoint, and
at any time remove, any domestic bank or trust company, and is
qualified to act as a custodian under the 1940 Act, as sub-
custodian to hold Securities and cash of the Funds and to carry out
such other provisions of this Agreement as it may determine, and
may also open and maintain one or more banking accounts with such
a bank or trust company (any such accounts to be in the name of the
Custodian and subject only to its draft or order), provided,
however, that the appointment of any such agent shall not relieve
the Custodian of any of its obligations or liabilities under this
Agreement.
3.4 Delivery of Assets to Custodian. The Fund shall deliver,
or cause to be delivered, to the Custodian all of the Fund's
Securities, cash and other assets, including (a) all payments of
income, payments of principal and capital distributions received by
the Fund with respect to such Securities, cash or other assets
owned by the Fund at any time during the period of this Agreement,
and (b) all cash received by the Fund for the issuance, at any time
during such period, of Shares. The Custodian shall not be
responsible for such Securities, cash or other assets until
actually received by it.
3.5 Securities Depositories and Book-Entry Systems. The
Custodian may deposit and/or maintain Securities of the Funds in a
Securities Depository or in a Book-Entry System, subject to the
following provisions:
(a) Prior to a deposit of Securities of the Funds in any
Securities Depository or Book-Entry System, the Fund
shall deliver to the Custodian a resolution of the Board
of Trustees, certified by an Officer, authorizing and
instructing the Custodian on an on-going basis to deposit
in such Securities Depository or Book-Entry System all
Securities eligible for deposit therein and to make use
of such Securities Depository or Book-Entry System to the
extent possible and practical in connection with its
performance hereunder, including, without limitation, in
connection with settlements of purchases and sales of
Securities, loans of Securities, and deliveries and
returns of collateral consisting of Securities.
(b) Securities of a Fund kept in a Book-Entry System or
Securities Depository shall be kept in an account
("Depository Account") of the Custodian in such Book-
Entry System or Securities Depository which includes only
assets held by the Custodian as a fiduciary, custodian or
otherwise for customers.
(c) The records of the Custodian and the Custodian's account
on the books of the Book-Entry System and Securities
Depository as the case may be, with respect to Securities
of a Fund maintained in a Book-Entry System or Securities
Depository shall, by book-entry or otherwise, identify
such Securities as belonging to the Fund.
(d) If Securities purchases by the Fund are to be held in a
Book-Entry System or Securities Depository, the Custodian
shall pay for such Securities upon (i) receipt of advice
from the Book-Entry System or Securities Depository that
such Securities have been transferred to the Depository
Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for
the account of the Fund. If Securities sold by the Fund
are held in a Book-Entry System or Securities Depository,
the Custodian shall transfer such Securities upon (i)
receipt of advice from the Book-Entry System or
Securities depository that payment for such Securities
has been transferred to the Depository Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Fund.
(e) Upon request, the Custodian shall provide the Fund with
copies of any report (obtained by the Custodian from a
Book-Entry System or Securities Depository in which
Securities of the Fund is kept) on the internal
accounting controls and procedures for safeguarding
Securities deposited in such Book-Entry System or
Securities Depository.
(f) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to the
Trust for any loss or damage to the Trust resulting (i)
from the use of a Book-Entry System or Securities
Depository by reason of any negligence or willful
misconduct on the part of the Custodian or any sub-
custodian appointed pursuant to Section 3.3 above or any
of its or their employees, or (ii) from failure of the
Custodian or any such sub-custodian to enforce
effectively such rights as it may have against a Book-
Entry System or Securities Depository. At its election,
the Trust shall be subrogated to the rights of the
Custodian with respect to any claim against a Book-Entry
System or Securities Depository or any other person for
any loss or damage to the Funds arising from the use of
such Book-Entry System or Securities Depository, if and
to the extent that the Custodian has been made whole for
any such loss or damage.
3.6 Disbursement of Moneys from Custody Accounts. Upon
receipt of Proper Instructions, the Custodian shall disburse moneys
from a Custody Account but only in the following cases:
(a) For the purchase of Securities for the Fund but only upon
compliance with Section 4.1 of this Agreement and only
(i) in the case of Securities (other than options on
Securities, futures contracts and options on futures
contracts), against the delivery to the Custodian (or any
sub-custodian appointed pursuant to Section 3.3 above) of
such Securities registered as provided in Section 3.9
below in proper form for transfer, or if the purchase of
such Securities is effected through a Book-Entry System
or Securities Depository, in accordance with the
conditions set forth in Section 3.5 above; (ii) in the
case of options on Securities, against delivery to the
Custodian (or such sub-custodian) of such receipts as are
required by the customs prevailing among dealers in such
options; (iii) in the case of futures contracts and
options on futures contracts, against delivery to the
Custodian (or such sub-custodian) of evidence of title
thereto in favor of the Trust or any nominee referred to
in Section 3.9 below; and (iv) in the case of repurchase
or reverse repurchase agreements entered into between the
Trust and a bank which is a member of the Federal Reserve
System or between the Trust and a primary dealer in U.S.
Government securities, against delivery of the purchased
Securities either in certificate form or through an entry
crediting the Custodian's account at a Book-Entry System
or Securities Depository for the account of the Fund with
such Securities;
(b) In connection with the conversion, exchange or surrender,
as set forth in Section 3.7(f) below, of Securities owned
by the Fund;
(c) For the payment of any dividends or capital gain
distributions declared by the Fund;
(d) In payment of the redemption price of Shares as provided
in Section 5.1 below;
(e) For the payment of any expense or liability incurred by
the Trust, including but not limited to the following
payments for the account of a Fund: interest; taxes;
administration, investment management, investment
advisory, accounting, auditing, transfer agent,
custodian, trustee and legal fees; and other operating
expenses of a Fund; in all cases, whether or not such
expenses are to be in whole or in part capitalized or
treated as deferred expenses;
(f) For transfer in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-
dealer registered under the 1934 Act and a member of the
NASD, relating to compliance with rules of The Options
Clearing Corporation and of any registered national
securities exchange (or of any similar organization or
organizations) regarding escrow or other arrangements in
connection with transactions by the Trust;
(g) For transfer in accordance with the provisions of any
agreement among the Trust, the Custodian, and a futures
commission merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of
the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or
organizations) regarding account deposits in connection
with transactions by the Trust;
(h) For the funding of any uncertificated time deposit or
other interest-bearing account with any banking
institution (including the Custodian), which deposit or
account has a term of one year or less; and
(i) For any other proper purposes, but only upon receipt, in
addition to Proper Instructions, of a copy of a
resolution of the Board of Trustees, certified by an
Officer, specifying the amount and purpose of such
payment, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom such
payment is to be made.
3.7 Delivery of Securities from Fund Custody Accounts. Upon
receipt of Proper Instructions, the Custodian shall release and
deliver Securities from a Custody Account but only in the following
cases:
(a) Upon the sale of Securities for the account of a Fund but
only against receipt of payment therefor in cash, by
certified or cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry
System or Securities Depository, in accordance with the
provisions of Section 3.5 above;
(c) To an offeror's depository agent in connection with
tender or other similar offers for Securities of a Fund;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(d) To the issuer thereof or its agent (i) for transfer into
the name of the Trust, the Custodian or any sub-custodian
appointed pursuant to Section 3.3 above, or of any
nominee or nominees of any of the foregoing, or (ii) for
exchange for a different number of certificates or other
evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
Securities are to be delivered to the Custodian;
(e) To the broker selling Securities, for examination in
accordance with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization
or readjustment of the issuer of such Securities, or
pursuant to provisions for conversion contained in such
Securities, or pursuant to any deposit agreement,
including surrender or receipt of underlying Securities
in connection with the issuance or cancellation of
depository receipts; provided that, in any such case, the
new Securities and cash, if any, are to be delivered to
the Custodian;
(g) Upon receipt of payment therefor pursuant to any
repurchase or reverse repurchase agreement entered into
by a Fund;
(h) In the case of warrants, rights or similar Securities,
upon the exercise thereof, provided that, in any such
case, the new Securities and cash, if any, are to be
delivered to the Custodian;
(i) For delivery in connection with any loans of Securities
of a Fund, but only against receipt of such collateral as
the Trust shall have specified to the Custodian in Proper
Instructions;
(j) For delivery as security in connection with any
borrowings by the Trust on behalf of a Fund requiring a
pledge of assets by such Fund, but only against receipt
by the Custodian of the amounts borrowed;
(k) Pursuant to any authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization
of the Trust or a Fund;
(l) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-
dealer registered under the 1934 Act and a member of the
NASD, relating to compliance with the rules of The
Options Clearing Corporation and of any registered
national securities exchange (or of any similar
organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Trust
on behalf of a Fund;
(m) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of a Fund, the
Custodian, and a futures commission merchant registered
under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading
Commission and/or any contract market (or any similar
organization or organizations) regarding account deposits
in connection with transactions by the Trust on behalf of
a Fund; or
(n) For any other proper corporate purposes, but only upon
receipt, in addition to Proper Instructions, of a copy of
a resolution of the Board of Trustees, certified by an
Officer, specifying the Securities to be delivered,
setting forth the purpose for which such delivery is to
be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom
delivery of such Securities shall be made.
3.8 Actions Not Requiring Proper Instructions. Unless
otherwise instructed by the Trust, the Custodian shall with respect
to all Securities held for a Fund;
(a) Subject to Section 7.4 below, collect on a timely basis
all income and other payments to which the Trust is
entitled either by law or pursuant to custom in the
securities business;
(b) Present for payment and, subject to Section 7.4 below,
collect on a timely basis the amount payable upon all
Securities which may mature or be called, redeemed, or
retired, or otherwise become payable;
(c) Endorse for collection, in the name of the Trust, checks,
drafts and other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary
form for Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the federal income tax
laws or the laws or regulations of any other taxing
authority now or hereafter in effect, and prepare and
submit reports to the Internal Revenue Service ("IRS")
and to the Trust at such time, in such manner and
containing such information as is prescribed by the IRS;
(f) Hold for a Fund, either directly or, with respect to
Securities held therein, through a Book-Entry System or
Securities Depository, all rights and similar securities
issued with respect to Securities of the Fund; and
(g) In general, and except as otherwise directed in Proper
Instructions, attend to all non-discretionary details in
connection with sale, exchange, substitution, purchase,
transfer and other dealings with Securities and assets of
the Fund.
3.9 Registration and Transfer of Securities. All Securities
held for a Fund that are issued or issuable only in bearer form
shall be held by the Custodian in that form, provided that any such
Securities shall be held in a Book-Entry System for the account of
the Trust on behalf of a Fund, if eligible therefor. All other
Securities held for a Fund may be registered in the name of the
Trust on behalf of such Fund, the Custodian, or any sub-custodian
appointed pursuant to Section 3.3 above, or in the name of any
nominee of any of them, or in the name of a Book-Entry System,
Securities Depository or any nominee of either thereof; provided,
however, that such Securities are held specifically for the account
of the Trust on behalf of a Fund. The Trust shall furnish to the
Custodian appropriate instruments to enable the Custodian to hold
or deliver in proper form for transfer, or to register in the name
of any of the nominees hereinabove referred to or in the name of a
Book-Entry System or Securities Depository, any Securities
registered in the name of a Fund.
3.10 Records. (a) The Custodian shall maintain, by Fund,
complete and accurate records with respect to Securities, cash or
other property held for the Trust, including (i) journals or other
records of original entry containing an itemized daily record in
detail of all receipts and deliveries of Securities and all
receipts and disbursements of cash; (ii) ledgers (or other records)
reflecting (A) Securities in transfer, (B) Securities in physical
possession, (C) monies and Securities borrowed and monies and
Securities loaned (together with a record of the collateral
therefor and substitutions of such collateral), (D) dividends and
interest received, and (E) dividends receivable and interest
accrued; and (iii) cancelled checks and bank records related
thereto. The Custodian shall keep such other books and records of
the Trust as the Trust shall reasonably request, or as may be
required by the 1940 Act, including, but not limited to Section 31
and Rule 31a-1 and 31a-2 promulgated thereunder.
(b) All such books and records maintained by the Custodian
shall (i) be maintained in a form acceptable to the Trust and in
compliance with rules and regulations of the Securities and
Exchange Commission, (ii) be the property of the Trust and at all
times during the regular business hours of the Custodian be made
available upon request for inspection by duly authorized officers,
employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be
maintained by Rule 31a-1 under the 1940 Act, be preserved for the
periods prescribed in Rule 31a-2 under the 1940 Act.
3.11 Fund Reports by Custodian. The Custodian shall furnish
the Trust with a daily activity statement by Fund and a summary of
all transfers to or from the Custody Account on the day following
such transfers. At least monthly and from time to time, the
Custodian shall furnish the Trust with a detailed statement, by
Fund, of the Securities and moneys held for the Trust under this
Agreement.
3.12 Other Reports by Custodian. The Custodian shall provide
the Trust with such reports, as the Trust may reasonably request
from time to time, on the internal accounting controls and
procedures for safeguarding Securities, which are employed by the
Custodian or any sub-custodian appointed pursuant to Section 3.3
above.
3.13 Proxies and Other Materials. The Custodian shall cause
all proxies, if any, relating to Securities which are not
registered in the name of a Fund, to be promptly executed by the
registered holder of such Securities, without indication of the
manner in which such proxies are to be voted, and shall include all
other proxy materials, if any, promptly deliver to the Trust such
proxies, all proxy soliciting materials, and all notices to the
holders of such Securities.
3.14 Information on Corporate Actions. The Custodian will
promptly notify the Trust of corporate actions, limited to those
Securities registered in nominee name and to those Securities held
at a Depository or sub-Custodian acting as agent for the Custodian.
The Custodian will be responsible only if the notice of such
corporate actions is published by the Financial Card Service, J.J.
Kenny's Munibase System, Depository Trust Reorganization Notices,
Xcitek Inc., Standard & Poor's Called Bond Listing or The Wall
Street Journal or received by first class mail from the agent. For
market announcements not yet received and distributed by the
Custodian's services, the Trust will inform its custody
representative with appropriate instructions. The Custodian will,
upon receipt of the Trusts's response within the required deadline,
effect such action for receipt or payment for the Trust. For those
responses received after the deadline, the Custodian will effect
such action for receipt or payment, subject to the limitations of
the agent(s) effecting such actions. The Custodian will promptly
notify the Trust for put options only if the notice is received by
first class mail from the agent. The Trust will provide or cause
to be provided to the Custodian with all relevant information
contained in the prospectus for any security which has unique
put/option provisions and provide the Custodian with specific
tender instructions at least ten business days prior to the
beginning date of the tender period.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.1 Purchase of Securities. Promptly upon each purchase of
Securities for the Trust, Written Instructions shall be delivered
to the Custodian, specifying (a) the Fund making the purchase, (b)
the name of the issuer or writer of such Securities, and the title
or other description thereof, (c) the number of shares, principal
amount (and accrued interest, if any) or other units purchased, (d)
the date of purchase and settlement, (e) the purchase price per
unit, (f) the total amount payable upon such purchase, and (g) the
name of the person to whom such amount is payable. The Custodian
shall upon receipt of such Securities purchased by a Fund pay out
of the moneys held for the account of such Fund the total amount
specified in such Written Instructions to the person named therein.
The Custodian shall not be under any obligation to pay out moneys
to cover the cost of a purchase of Securities for a Fund, if in the
relevant Custody Account there is insufficient cash available to
the Fund for which such purchase was made.
4.2 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for the purchase of
Securities for a Fund is made by the Custodian in advance of
receipt for the account of the Fund of the Securities purchased but
in the absence of specific Written or Oral Instructions to so pay
in advance, the Custodian shall be liable to the Fund for such
Securities to the same extent as if the Securities had been
received by the Custodian.
4.3 Sale of Securities. Promptly upon each sale of
Securities by a Fund, Written Instructions shall be delivered to
the Custodian, specifying (a) the Fund making the purchase, (b) the
name of the issuer or writer of such Securities, and the title or
other description thereof, (c) the number of shares, principal
amount (and accrued interest, if any), or other units sold, (d) the
date of sale and settlement (e) the sale price per unit, (f) the
total amount payable upon such sale, and (g) the person to whom
such Securities are to be delivered. Upon receipt of the total
amount payable to the Trust as specified in such Written
Instructions, the Custodian shall deliver such Securities to the
person specified in such Written Instructions. Subject to the
foregoing, the Custodian may accept payment in such form as shall
be satisfactory to it, and may deliver Securities and arrange for
payment in accordance with the customs prevailing among dealers in
Securities.
4.4 Delivery of Securities Sold. Notwithstanding Section 4.3
above or any other provision of this Agreement, the Custodian, when
instructed to deliver Securities against payment, shall be
entitled, if so directed in Written Instructions and if in
accordance with generally accepted market practice, to deliver such
Securities prior to actual receipt of final payment therefor. In
any such case, the Trust shall bear the risk that final payment for
such Securities may not be made or that such Securities may be
returned or otherwise held or disposed of by or through the person
to whom they were delivered, and the Custodian shall have no
liability for any of the foregoing.
4.5 Payment for Securities Sold, etc. In its sole discretion
and from time to time, the Custodian may credit the relevant
Custody Account, prior to actual receipt of final payment thereof,
with (i) proceeds from the sale of Securities which it has been
instructed to deliver against payment, (ii) proceeds from the
redemption of Securities or other assets of the Trust, and (iii)
income from cash, Securities or other assets of the Trust. Any
such credit shall be conditional upon actual receipt by the
Custodian of final payment and may be reversed if final payment is
not actually received in full. The Custodian may, in its sole
discretion and from time to time, permit the Trust to use funds so
credited to its Custody Account in anticipation of actual receipt
of final payment. Any such funds shall be repayable immediately
upon demand made by the Custodian at any time prior to the actual
receipt of all final payments in anticipation of which funds were
credited to the Custody Account.
4.6 Advances by Custodian for Settlement. If the Custodian
should, in its sole discretion, advance funds to the Trust to
facilitate the settlement of transactions on behalf of a Fund in
its Custody Account, then such advance shall be repayable
immediately upon demand made by the Custodian and shall bear
interest from the date incurred at a rate per annum (based on a
360-day year from the actual number of days involved) equal to 1%
over the Federal Funds rate in effect from time to time as
announced by The Wall Street Journal under the section entitled
Money Rates, or any successor title, such rate to be adjusted on
the effective date of any changes in such rate.
ARTICLE V
REDEMPTION OF TRUST SHARES
5.1 Transfer of Funds. From such funds as may be available
for the purpose in the relevant Custody Account, and upon receipt
of Proper Instructions specifying that the funds are required to
redeem Shares of a Fund, the Custodian shall wire each amount
specified in such Proper Instructions to or through such bank as
the Trust may designate with respect to such amount in such Proper
Instructions.
5.2 No Duty Regarding Paying Banks. The Custodian shall not
be under any obligation to effect payment or distribution by any
bank designated in Proper Instructions given pursuant to Section
5.1 above of any amount paid by the Custodian to such bank in
accordance with such Proper Instructions.
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of and in conformity with Proper Instructions,
the Custodian shall establish and maintain a segregated account or
accounts for and on behalf of each Fund, into and from which
account or accounts may be transferred cash and/or Securities,
including Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement among
the Trust, the Custodian and a broker-dealer registered
under the 1934 Act and a member of the NASD (or any
futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity
Futures Trading commission or any registered contract
market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Trust,
(b) for purposes of segregating cash or Securities in
connection with securities options purchased or written
by a Fund or in connection with financial futures
contracts (or options thereon) purchased or sold by a
Fund,
(c) which constitute collateral for loans of Securities made
by a Fund,
(d) for purposes of compliance by the Trust with requirements
under the 1940 Act for the maintenance of segregated
accounts by registered investment companies in connection
with reverse repurchase agreements and when-issued,
delayed delivery and firm commitment transactions, and
(e) for other proper corporate purposes, but only upon
receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of Trustees,
certified by an Officer, setting forth the purpose or
purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
ARTICLE VII
CONCERNING THE CUSTODIAN
7.1 Standard of Care. The Custodian shall be held to the
exercise of reasonable care in carrying out its obligations under
this Agreement, and shall be without liability to the Trust for any
loss, damage, cost, expense (including attorneys' fees and
disbursements), liability or claim unless such loss, damages, cost,
expense, liability or claim arises from negligence, bad faith or
willful misconduct on its part or on the part of any sub-custodian
appointed pursuant to Section 3.3 above. The Custodian shall be
entitled to rely on and may act upon advice of counsel on all
matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. The Custodian shall
promptly notify the Trust of any action taken or omitted by the
Custodian pursuant to advice of counsel. The Custodian shall not
be under any obligation at any time to ascertain whether the Trust
is in compliance with the 1940 Act, the regulations thereunder, the
provisions of the Trust's charter documents or by-laws, or its
investment objectives and policies as then in effect.
7.2 Actual Collection Required. The Custodian shall not be
liable for, or considered to be custodian of, any cash belonging to
the Trust or any money represented by a check, draft or other
instrument for the payment of money, until the Custodian or its
agents actually receive such cash or collect on such instrument.
7.3 No Responsibility for title, etc. So long as and to the
extent that it is in the exercise of reasonable care, the Custodian
shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received or delivered by
it pursuant to this Agreement.
7.4 Limitation on Duty to Collect. The Custodian shall not
be required to enforce collection, by legal means or otherwise, of
any money or property due and payable with respect to Securities
held for the Trust if such Securities are in default or payment is
not made after due demand or presentation. The Custodian shall
inform the Trust promptly of any such default or failure to make
payment.
7.5 Reliance Upon Documents and Instructions. The Custodian
shall be entitled to rely upon any certificate, notice or other
instrument in writing received by it and reasonably believed by it
to be genuine. The Custodian shall be entitled to rely upon any
Oral Instructions and/or any Written Instructions actually received
by it pursuant to this Agreement.
7.6 Express Duties Only. The Custodian shall have no duties
or obligations whatsoever except such duties and obligations as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the
Custodian.
7.7 Cooperation. The Custodian shall cooperate with and
supply necessary information to the entity or entities appointed by
the Trust to keep the books of account of the Trust and/or compute
the value of the assets of the Trust. The Custodian shall take all
such reasonable actions as the Trust may from time to time request
to enable the Trust to obtain, from year to year, favorable
opinions from the Trust's independent accountants with respect to
the Custodian's activities hereunder in connection with (a) the
preparation of the Trust's filings on Form N-1A and Form N-SAR and
any other reports required by the Securities and Exchange
Commission, and (b) the fulfillment by the Trust of any other
requirements of the Securities and Exchange Commission.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. The Trust shall indemnify and hold
harmless the Custodian and any sub-custodian appointed pursuant to
Section 3.3 above, and any nominee of the Custodian or of such sub-
custodian from and against any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability
(including, without limitation, liability arising under the
Securities Act of 1933, the 1934 Act, the 1940 Act, and any state
or foreign securities and/or banking laws) or claim arising
directly or indirectly (a) from the fact that Securities are
registered in the name of any such nominee, or (b) from any action
or inaction by the Custodian or such sub-custodian (i) at the
request or direction of or in reliance on the advice of the Trust,
or (ii) upon Proper Instructions, or (c) generally, from the
performance of its obligations under this Agreement or any sub-
custody agreement with a sub-custodian appointed pursuant to
Section 3.3 above or, in the case of any such sub-custodian, from
the performance of its obligations under such custody agreement,
provided that neither the Custodian nor any such sub-custodian
shall be indemnified and held harmless from and against any such
loss, damage, cost, expense, liability or claim arising from the
Custodian's or such sub-custodian's negligence, bad faith or
willful misconduct.
8.2 Indemnity to be Provided. If the Trust requests the
Custodian to take any action with respect to Securities, which may,
in the opinion of the Custodian, result in the Custodian or its
nominee becoming liable for the payment of money or incurring
liability of some other form, the Custodian shall not be required
to take such action until the Trust shall have provided indemnity
therefor to the Custodian in an amount and form satisfactory to the
Custodian.
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Trust shall be liable for any
failure or delay in performance of its obligations under this
Agreement arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control, including, without
limitation, acts of God; earthquakes; fires; floods; wars; civil or
military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its
reasonable control as may cause interruption, loss or malfunction
of utility, transportation, computer (hardware or software) or
telephone communication service; accidents; labor disputes, acts of
civil or military authority; governmental actions; or inability to
obtain labor, material, equipment or transportation; provided,
however, that the Custodian in the event of a failure or delay
shall use its best efforts to ameliorate the effects of any such
failure or delay.
ARTICLE X
EFFECTIVE PERIOD; TERMINATION
10.1 Effective Period. This Agreement shall become effective
as of the date first set forth above and shall continue in full
force and effect until terminated as hereinafter provided.
10.2 Termination. Either party hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not less
than ninety (90) days after the date of the giving of such notice.
If a successor custodian shall have been appointed by the Board of
Trustees, the Custodian shall, upon receipt of a notice of
acceptance by the successor custodian, on such specified date of
termination (a) deliver directly to the successor custodian all
Securities (other than Securities held in a Book-Entry System or
Securities Depository) and cash then owned by the Trust and held by
the Custodian as custodian, and (b) transfer any Securities held in
a Book-Entry System or Securities Depository to an account of or
for the benefit of the Trust at the successor custodian, provided
that the Trust shall have paid to the Custodian all fees, expenses
and other amounts to the payment or reimbursement of which it shall
then be entitled. Upon such delivery and transfer, the Custodian
shall be relieved of all obligations under this Agreement. The
Trust may at any time immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the
Custodian by regulatory authorities in the State of Ohio or upon
the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.
10.3 Failure to Appoint Successor Custodian. If a successor
custodian is not designated by the Trust on or before the date of
termination specified pursuant to Section 10.1 above, then the
Custodian shall have the right to deliver to a bank or trust
company of its own selection, which is (a) a "Bank" as defined in
the 1940 Act, (b) has aggregate capital, surplus and undivided
profits as shown on its then most recent published report of not
less than $25 million, and (c) is doing business in New York, New
York, all Securities, cash and other property held by the Custodian
under this Agreement and to transfer to an account of or for the
Trust at such bank or trust company all Securities of the Trust
held in a Book-Entry System or Securities Depository. Upon such
delivery and transfer, such bank or trust company shall be the
successor custodian under this Agreement and the Custodian shall be
relieved of all obligations under this Agreement. If, after
reasonable inquiry, the Custodian cannot find a successor custodian
as contemplated in this Section 10.3, then the Custodian shall have
the right to deliver to the Trust all Securities and cash then
owned by the Trust and to transfer any Securities held in a Book-
Entry System or Securities Depository to an account of or for the
Trust. Thereafter, the Trust shall be deemed to be its own
custodian with respect to the Trust and the Custodian shall be
relieved of all obligations under this Agreement.
ARTICLE XI
COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to compensation as agreed upon
from time to time by the Trust and the Custodian. The fees and
other charges in effect on the date hereof and applicable to the
Funds are set forth in Exhibit C attached hereto.
ARTICLE XII
LIMITATION OF LIABILITY
The Trust is a business trust organized under the laws of the
Commonwealth of Massachusetts and under a Declaration of Trust, to
which reference is hereby made a copy of which is on file at the
office of the Secretary of State of Massachusetts as required by
law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of the Trust entered into in the name of
the Trust or on behalf thereof by any of the Trustees, officers,
employees or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, officers,
employees, agents or shareholders of the Trust or the Funds
personally, but bind only the assets of the Trust, and all persons
dealing with any of the Funds of the Trust must look solely to the
assets of the Trust belonging to such Fund for the enforcement of
any claims against the Trust.
ARTICLE XIII
NOTICES
Unless otherwise specified herein, all demands, notices,
instructions, and other communications to be given to a party
hereunder shall be in writing and shall be sent or delivered to the
party at the address set forth after its name herein below:
To the Trust:
CHURCHILL TAX-FREE FUND OF KENTUCKY
380 Madison Avenue
New York, NY 10017
Attn: Mr. Richard F. West, Treasurer and Mr.
William Killeen, Senior Operations
Officer
Telephone: (212)-697-6666
Facsimile: (212)-687-5373
To the Custodian:
BANK ONE TRUST COMPANY, N.A.,
100 East Broad Street
Columbus, OH 43271-0187
Attention: Mr. Robert F. Schultz, Senior Trust
Officer
Telephone: (614)-248-5445
Facsimile: (614)-248-2554
or at such other address as either party shall have provided to the
other by notice given in accordance with this Article XIII.
Writing shall include transmission by or through teletype,
facsimile, central processing unit connection, on-line terminal and
magnetic tape.
ARTICLE XIV
MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio.
14.2 No Waiver. No failure by either party hereto to exercise
and no delay by such party in exercising, any right hereunder shall
operate as a waiver thereof. The exercise by either party hereto
of any right hereunder shall not preclude the exercise of any other
right, and the remedies provided herein are cumulative and not
exclusive of any remedies provided at law or in equity.
14.3 Amendments. This Agreement cannot be changed orally and
no amendment to this Agreement shall be effective unless evidenced
by an instrument in writing executed by the parties hereto.
14.4 Counterparts. This Agreement may be executed in one or
more counterparts, and by the parties hereto on separate
counterparts, each of which shall be deemed an original but all of
which together shall constitute but one and the same instrument.
14.5 Severability. If any provision of this Agreement shall
be invalid, illegal or unenforceable in any respect under any
applicable law, the validity, legality and enforceability of the
remaining provisions shall not be affected or impaired thereby.
14.6 Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this
Agreement shall not be assignable by either party hereto without
the written consent of the other party hereto.
14.7 Headings. The headings of sections in this Agreement are
for convenience of reference only and shall not affect the meaning
or construction of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered in its name and on its
behalf by its representatives thereunto duly authorized, all as of
the day and year first above written.
ATTEST: CHURCHILL TAX-FREE FUND
OF KENTUCKY
By:
Assistant Secretary President
ATTEST: BANK ONE TRUST COMPANY, N.A.
By:
Senior Trust Officer
<PAGE>
EXHIBIT A
Name of Fund (if different from
the Trust Date Added (if
different from
date of original
Custody Agreement
<PAGE>
EXHIBIT B
I, Richard F. West, Treasurer, and I, Patricia Craven, Assistant
Secretary, of CHURCHILL TAX-FREE FUND OF KENTUCKY, a Massachusetts
business trust (the "Fund"), do hereby certify that:
The following individuals have been duly authorized by the Board of
Trustees of the Fund in conformity with the Fund's Declaration of
Trust and By-Laws to give Oral Instructions and Certificate on
behalf of the Fund, and the signatures set forth opposite their
respective names are their true and correct signatures:
NAME SIGNATURE
Lacy B. Herrmann _____________________________
Rose F. Marotta _____________________________
Richard F. West _____________________________
William C. Wallace _____________________________
Diana P. Herrmann _____________________________
Charles E. Childs III _____________________________
John M. Herndon _____________________________
William Killeen _____________________________
Patricia A. Craven _____________________________
________________________ _____________________________
Richard F. West, Patricia A. Craven,
Treasurer Assistant Secretary
<PAGE>
EXHIBIT C
Compensation of Custodian - Equity Fund/Money Market Funds
Whereas Article XI of the Custody Agreement between Churchill Tax-
Free Fund of Kentucky and Bank One Trust Company, N.A. stipulates
that the compensation of Custodian shall be agreed upon by the
Trust and Custodian, the following is hereby agreed:
The compensation of the Custodian shall be computed according to
the following schedule:
I. Activity Fee:
A. $5.00 per book entry security transaction.
For the purpose of this agreement, a "transaction "
includes, but is not limited to, a purchase sale,
maturity, redemption, tender, exchange, deposit,
withdrawal, and collateral movement of a security.
B. $28.00 per ineligible security transaction.
C. $10.00 per principal paydown on amortized issues.
II. Other Activity Fees:
A. $5.00 per wire.
B. $2.00 per outgoing check from custody account.
III. Overdraft Charges:
As described in Section 4.6 of the Custody Agreement,
overdraft charges will be at 100 basis points above the
Fed Funds rate.
An earnings credit using the most recent 90-day T-bill auction rate
applied to 90% of each day's positive collected balance will reduce
custody, FDIC and other fees as allowed by law. For each month
that the charges exceed the earnings credit, the deficiency shall
be paid to Custodian. For each month that the earnings credit
exceeds the charges, the Custodian shall carry such surplus credits
forward to subsequent month(s) and calendar year(s) until utilized.
Custodian is to be reimbursed for out of pocket expenses deemed to
be exceptional.
The above fee schedule will remain in effect until March 31, 1998
and thereafter unless changed.
As stated by the Custodian in bidding to provide custody services
to the Fund, if at any time the Fund is not completely satisfied
with the Custodian's service levels, the Custodian will cease to
charge custody fees until its responsiveness and accuracy meet the
requirements of the Fund.
<PAGE>
EXHIBIT C
Compensation of Custodian - Bond Funds
Whereas Article XI of the Custody Agreement between Churchill Tax-
Free Fund of Kentucky and Bank One Trust Company, N.A. stipulates
that the compensation of Custodian shall be agreed upon by the
Trust and Custodian, the following is hereby agreed:
The compensation of the Custodian shall be computed according to
the following schedule:
I. Annual Holding Fee:
.00006 times the market value of assets held
II. Activity Fee:
A. $5.00 per book entry security transaction.
For the purpose of this agreement, a "transaction "
includes, but is not limited to, a purchase sale,
maturity, redemption, tender, exchange, deposit,
withdrawal, and collateral movement of a security.
B. $28.00 per ineligible security transaction.
C. $10.00 per principal paydown on amortized issues.
II. Other Activity Fees:
A. $5.00 per wire.
B. $2.00 per outgoing check from custody account.
III. Overdraft Charges:
As described in Section 4.6 of the Custody Agreement,
overdraft charges will be at 100 basis points above the
Fed Funds rate.
An earnings credit using the most recent 90-day T-bill auction rate
applied to 90% of each day's positive collected balance will reduce
custody, FDIC and other fees as allowed by law. For each month
that the charges exceed the earnings credit, the deficiency shall
be paid to Custodian. For each month that the earnings credit
exceeds the charges, the Custodian shall carry such surplus credits
forward to subsequent month(s) and calendar year(s) until utilized.
Custodian is to be reimbursed for out of pocket expenses deemed to
be exceptional.
The above fee schedule will remain in effect until March 31, 1998
and thereafter unless changed.
As stated by the Custodian in bidding to provide custody services
to the Fund, if at any time the Fund is not completely satisfied
with the Custodian's service levels, the Custodian will cease to
charge custody fees until its responsiveness and accuracy meet the
requirements of the Fund.
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
THIS AGREEMENT, made as of July 17, 1995, by and between
CHURCHILL TAX-FREE TRUST (the "Business Trust"), a Massachusetts
business trust, 380 Madison Avenue, Suite 2300, New York, New
York 10017 and Aquila Management Corporation (the
"Administrator"), a New York corporation, 380 Madison Avenue,
Suite 2300, New York, New York 10017
W I T N E S S E T H
WHEREAS, the Business Trust and the Administrator wish to
amend the Administration Agreement between them dated December
16.1992 so that it shall be as herein set forth (referred to
hereafter as "this Agreement") with respect to a portfolio of the
Business Trust entitled Churchill Tax-Free Fund of Kentucky (the
"Fund");
NOW THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable
consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. In General.
The Administrator shall perform (at its own expense) the
functions set forth more fully herein for the Fund and for the
investment adviser for the Fund (the "Adviser").
2. Duties and Obligations of the Adviser and Administrator to
the Fund and to Each Other.
(a) Subject to the succeeding provisions of this section and
subject to the direction and control of the Board of Trustees of
the Business Trust, the Administrator shall provide all
administrative services to the Fund other than those services
relating to the investment portfolio of the Fund and the
maintenance of its accounting books and records; as part of such
duties, the Administrator 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 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 the effective operation of the Fund and for
the sale, servicing or redemption of the Fund's shares;
(iii) provide to the Adviser and the Fund statistical and
other factual information and advice regarding economic
factors and trends, but shall not generally furnish advice
or make recommendations regarding the purchase or sale of
securities;
(iv) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that daily pricing of the Fund's
portfolio shall be the responsibility of the Adviser under
the Advisory Agreement) or, at its expense and
responsibility, delegate such duties in whole or in part to
a company satisfactory to the Fund;
(v) 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;
(vi) 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;
(vii) 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.
(b) Any activities performed by the Administrator under this
section 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 Business Trust as
amended and restated from time to time; (4) any policies and
determinations of the Board of Trustees of the Business Trust;
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.
(c) The Administrator assumes no responsibility under this
Agreement other than to render the services called for hereunder,
and specifically assumes no responsibilities for investment
advice or the investment or reinvestment of the Fund's assets.
(d) The Administrator shall not be liable for any error in
judgment or for any loss suffered by the Fund in connection with
the matters to which this 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 this
Agreement.
(e) Nothing in this Agreement shall prevent the
Administrator or any officer thereof from acting as investment
adviser, sub-adviser, administrator or manager for any other
person, firm, or corporation, and shall not in any way limit or
restrict the Administrator or any of its officers, stockholders
or employees 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
Administrator expressly represents that it will undertake no
activities which, in its judgment, will adversely affect the
performance of its obligations to the Adviser or the Fund under
this Agreement. The Business Trust shall indemnify the
Administrator to the full extent permitted by the Business
Trust's Declaration of Trust.
3. Allocation of Expenses.
The Administrator shall, at its own expense, provide office
space, facilities, equipment, and personnel for the performance
of its functions hereunder and shall pay all compensation of
Trustees, officers, and employees of the Fund who are affiliated
persons of the Administrator.
4. Compensation of the Administrator.
(a) The Business Trust shall pay the Administrator, and the
Administrator shall accept as full compensation for all services
rendered hereunder, a fee payable monthly and computed on the net
asset value of the Fund at the end of each business day at the
annual rate of 0.33 of 1% of such net asset value, 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 (other than a fee allocable by class to certain shares
of the Fund), the annual management fee shall be payable at the
annual rate of 0.26 of 1% of such net asset value.
(b) The above fee shall be reduced, but not below zero, by
an amount equal to its pro-rata portion (hereafter described) 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 and 1.5% of such assets in excess of $100
million, or (ii) 25% of the Fund's total annual investment
income. The payment of the above fee at the end of any month
will be reduced or postponed so that at no time will there be any
accrued but unpaid liability under this expense limitation,
subject to readjustment during the year. The pro-rata portion,
as between the Administrator and Adviser, is based on the
aggregate of the fee of the Adviser and the fee of the
Administrator (exclusive of amounts paid or to be paid out by the
Administrator, if any, for the applicable period pursuant to the
Fund's Distribution Plan).
5. Duration and Termination.
(a) This Agreement shall become effective on September 11,
1995, after approval by a vote of a majority of the Trustees who
are not parties to this 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
and shall, unless terminated as hereinafter provided, continue in
effect until the June 30 next preceding the first anniversary of
the effective date of this Agreement, and from year to year
thereafter.
(b) This Agreement may be terminated by the Administrator at
any time without penalty upon giving the Adviser and the Business
Trust sixty days' written notice (which notice may be waived by
them) and may be terminated by the Business Trust at any time
without penalty upon giving the Administrator sixty days' written
notice (which notice may be waived by the Administrator) provided
that such termination by the Business Trust shall be directed or
approved by a vote of a majority of its Trustees in office at the
time, including a majority of the Trustees who are not interested
persons (as defined in the Act) of the Business Trust.
(c) This Agreement may not be amended, nor shall any
successor agreement between the parties be executed or delivered,
to increase the compensation of the Administrator without the
vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to this 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, and the vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund.
6. Disclaimer of Shareholder Liability
The Administrator understands that the obligations of this
Agreement are not binding upon any shareholder of the Fund
personally, but bind only the Fund's property; the Administrator
represents that it has notice of the provisions of the Business
Trust's Declaration of Trust disclaiming shareholder liability
for acts or obligations of the Business Trust.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their duly authorized officers and
their seals to be hereunto affixed, all as of the day and year
first above written.
ATTEST: Churchill Tax-Free Trust
________________________ By:___________________________________
ATTEST: Aquila Management Corporation
_______________________ By:___________________________________
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMI-ANNUAL REPORT DATED JUNE 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000812006
<NAME> CHURCILL TAX-FREE FUND OF KENTUCKY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 236,522,246
<INVESTMENTS-AT-VALUE> 240,694,042
<RECEIVABLES> 4,938,457
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 245,632,499
<PAYABLE-FOR-SECURITIES> 974,295
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,083,802
<TOTAL-LIABILITIES> 2,058,097
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 240,947,014
<SHARES-COMMON-STOCK> 23,372,295
<SHARES-COMMON-PRIOR> 23,346,417
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,544,408)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,171,796
<NET-ASSETS> 243,574,402
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,000,412
<OTHER-INCOME> 0
<EXPENSES-NET> 895,597
<NET-INVESTMENT-INCOME> 7,104,815
<REALIZED-GAINS-CURRENT> (257,782)
<APPREC-INCREASE-CURRENT> 10,889,487
<NET-CHANGE-FROM-OPS> 17,736,520
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,104,815
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 988,923
<NUMBER-OF-SHARES-REDEEMED> 1,347,610
<SHARES-REINVESTED> 384,565
<NET-CHANGE-IN-ASSETS> 25,878
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 241,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 895,597
<AVERAGE-NET-ASSETS> 241,795,215
<PER-SHARE-NAV-BEGIN> 9.97
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> .30
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 10.42
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
