IMPORTANT NOTICE Preliminary Proxy Material
PLEASE READ IMMEDIATELY
AQUILA
CHURCHILL TAX-FREE FUND OF KENTUCKY
380 Madison Avenue, Suite 2300, New York, N.Y. 10017
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
on April 24, 1998
TO SHAREHOLDERS OF THE FUND:
The purpose of this Notice is to advise you that an Annual Meeting
of the Shareholders of Aquila Churchill Tax-Free Fund of Kentucky
(the "Fund") will be held
Place: (a) at the JB Speed Art Museum
2035 South Third Street
Louisville, Kentucky 40208
Time: (b) on April 24, 1998 at 10:00 a.m. local time
Purposes: (c) for the following purposes:
(i) to elect eight Trustees; each Trustee elected
will hold office until the next annual meeting
of the Fund's shareholders or until his or her
successor is duly elected;
(ii) to ratify (that is, to approve) or reject the
selection of KPMG Peat Marwick LLP as the
Fund's independent auditors for the fiscal
year ending December 31, 1998 (Proposal No.
1); and
_____________
Please Note:
If you do not expect to attend the Meeting, you are requested to
indicate voting instructions on the enclosed proxy and to date,
sign and return it in the accompanying stamped envelope. To avoid
unnecessary expense to the Fund, your cooperation is requested in
mailing in your proxy no matter how large or small your holding may
be.
<PAGE>
(iii) to consider a proposed new investment
advisory and administration agreement between the
Fund and Aquila Management Corporation, which
currently serves as the Fund's Administrator, under
which it would become the Fund's investment adviser
by contracting with others at its expense, as well
as continuing to provide administrative services as
heretofore, and under which all advisory fees and
administration fees would be paid to it (Proposal
No. 2);
(iv) to consider a proposed new sub-advisory
agreement between Aquila Management Corporation as
Manager and Banc One Investment Advisors
Corporation as Sub-Adviser (Proposal No. 3);
(iii) to act upon any other matters which may
properly come before the Meeting at the scheduled
time and place or any adjourned meeting or
meetings.
Who Can
Vote What
Shares: (d) To vote at the Meeting, you must have been a
shareholder on the Fund's records at the close of
business on February 2, 1998 (the "record date").
Also, the number of shares of each of the Fund's
three classes of shares that you held at that time
and the respective net asset values of each class
of shares at that time determines the number of
votes you may cast at the Meeting (or any adjourned
meeting or meetings).
By Order of the Board of Trustees
EDWARD M. W. HINES
Secretary
March 13, 1998
ii
<PAGE>
AQUILA
CHURCHILL TAX-FREE FUND OF KENTUCKY
380 Madison Avenue, Suite 2300, New York, New York 10017
PROXY STATEMENT
This annual meeting of the shareholders of Churchill Tax-
Free Fund of Kentucky will consider, in addition to the election
of Trustees and the ratification of the selection of the Fund's
auditors, two special proposals of vital importance to the Fund:
* Action upon a proposed new investment advisory and
administration agreement between the Fund and Aquila
Management Corporation, which currently serves as the
Fund's Administrator, under which it will become the
Fund's investment adviser by contracting with others at
its expense, as well as continuing to provide
administrative services as heretofore, and under which
all advisory fees and administration fees would be paid
to it (Proposal No. 2);
* Action on a proposed new sub-advisory agreement between
Aquila Management Corporation and Banc One Investment
Advisors Corporation as Sub-Adviser; (Proposal No. 3)
The Board of Trustees believes that all of these proposals
are in the best interest of the Fund and its shareholders. Please
read the proxy statement and then indicate your vote on the
enclosed proxy card as soon as possible.
INTRODUCTION
The purpose of the Notice (the first two pages of this
document) is to advise you of the time, place and purposes of an
Annual Meeting of the Shareholders of Aquila Churchill Tax-Free
Fund of Kentucky (the "Fund"). The purpose of this Proxy
Statement (all the rest of this document) is to give you
information on which you may base your decisions as to the
choices, if any, you make on the enclosed proxy card.
This Notice and Proxy Statement are first being mailed on or
about March 13, 1998.
A copy of the Fund's most recent Annual Report and most
recent Semi-Annual Report will be sent to you without charge upon
written request to the Fund's Distributor, Aquila Distributors,
Inc., 380 Madison avenue, Suite 2300, New York, NY 10017 or by
calling 800-872-5859 toll-free or 212-697-6666.
The Fund's founder and administrator (the "Administrator")
is Aquila Management Corporation, 380 Madison Avenue, Suite 2300,
New York, NY 10017. The Fund's investment adviser is Banc One
Investment Advisors Corporation, 416 West Jefferson Street,
Louisville, KY 40202.
The enclosed proxy card authorizes the persons named (or
their substitutes) to vote your shares; the Fund calls these
persons the "proxy holders." As to the election of Trustees you
may authorize the proxy holders to vote your shares for the
entire slate indicated below by marking the appropriate box on
the proxy card or by merely signing and returning your proxy card
with no instructions. Or, you may withhold the authority of the
proxy holders to vote on the election of Trustees by marking the
appropriate box. Also, you may withhold that authority as to any
particular nominee by striking a line through the nominee's name
on the proxy card.
As to the other matters listed on the proxy card, you may
direct the proxy holders to vote your shares on those proposals
by checking the appropriate box "For" or "Against" or instruct
them not to vote your shares on a proposal by checking the
"Abstain" box. If you return your signed proxy card and do not
check any box on a proposal, the proxy holders will vote your
shares for that proposal. Shares held by brokers in "street name"
and not voted or marked as abstentions will not be counted for
purposes of determining a quorum or the vote on any matter.
You may end the power of the proxy holders to vote your
shares after you have signed and returned your proxy card and
before the power is used by (i) so notifying the Fund in writing;
(ii) signing a new and different proxy card (if the Fund receives
it before the old one is used); or (iii) voting your shares in
person or by your duly appointed agent at the meeting.
The Fund is sending you this Notice and Proxy Statement in
connection with the solicitation by its Trustees of proxy cards
("proxies") to be used at the Annual Meeting to be held at the
time and place and for the purposes indicated in the Notice or
any adjourned meeting or meetings. The Fund pays the costs of the
solicitation. Proxies are being solicited by the use of the
mails; they may also be solicited by telephone, facsimile and
personal interviews. Brokerage firms, banks and others may be
requested to forward this Notice and Proxy Statement to
beneficial owners of the Fund's shares so that these owners may
authorize the voting of these shares. The Fund will pay these
firms for their out-of-pocket expenses for doing so.
The Fund has three classes of shares outstanding.
Shareholders of the Fund of all three classes are entitled to
vote at the meeting. Each shareholder on the record date is
entitled to one (1) vote for each dollar (and a proportionate
fractional vote for each fraction of a dollar) of net asset value
(determined as of the record date) represented by full and
fractional shares of any class held on the record date. All
matters to come before the meeting, including the election of
Trustees, will be decided by the votes of a majority of the
shares present and voting, except that a different voting
requirement applies to Proposals No. 2 and No. 3. On the record
date the net asset values per share of each of the Fund's classes
of shares was Class A Shares, $10.83, Class C Shares, $10.83 and
Class Y Shares, $10,83.
On the record date, the total number of shares outstanding
for the Fund was 21,845,700. Of the shares of the Fund
outstanding on the record date, BHC Securities, Inc, 2005 Market
Street, Philadelphia, PA held of record 1,469,191 Class A shares
(7.0% of the class) and 13,930 Class C shares (18.7% of the
class); J.C. Bradford & Co. C/F Susan M Berberich, M.D. held
9,992 Class C shares (13.4% of the class); Merrill Lynch Pierce
Fenner & Smith, New Brunswick, NJ held 5,573 Class C shares (7.5%
of the class); National City Bank of Kentucky TTEE Cardinal
Aluminum Co., Cleveland OH held 158,729 Class Y Shares (18.9% of
the class). On the basis of information received from the holders
the Fund's management believes that all of the shares indicated
are held for the benefit of clients. John K. Codey, Louisville,
KY held 10,017 Class C Shares (13.4% of the class); M.L. Koonce,
Mayfield, KY held 6,810 Class C Shares (9.2% of the class); and
Robert E Hatcher and Patricia N. Hatcher JTWROS, Monte Carlo,
Monaco, held 8,512 Class C shares (11.4% of the class). The
Fund's management is not aware of any other person beneficially
owning more than 5% of any class of its outstanding shares as of
such date.
ELECTION OF TRUSTEES
At the Meeting, eight Trustees are to be elected. Whenever
it is stated in this Proxy Statement that a matter is to be acted
on at the Meeting, this means the Meeting held at the scheduled
time or any adjourned meeting or meetings. Each Trustee elected
will serve until the next annual meeting or until his or her
successor is duly elected. The nominees selected by the Trustees
are named in the table below. See "Introduction" above for
information as to how you can instruct the proxy holders as to
the voting of your shares as to the election of Trustees.
Each of the nominees is presently a Trustee, and was
previously elected by the shareholders at the annual meeting of
the Fund held on April 25, 1997. Each Trustee has been a Trustee
since the beginning of the Fund's operations in 1987 and was
either named as a Trustee in the original Declaration of Trust or
was named as a Trustee by such original Trustees, and was also
elected as a Trustee by the Fund's original sole shareholder,
Aquila Management Corporation, except for Mr. Nightingale who has
been a Trustee since 1993, Messrs. Christopher and Mason, who
have been Trustees since 1992 and Ms. Herrmann, who became a
Trustee in 1995. The Trustees and officers as a group own less
than 1% of the outstanding shares of the Fund. Mr. Herrmann is an
interested person of the Fund as that term is defined in the
Investment Company Act of 1940 (the "1940 Act") as an officer of
the Fund and as a Director, officer and shareholder of the
Distributor. Ms. Herrmann is an interested person of the Fund as
a member of his immediate family. Mr. Dean is an interested
person as a trustee of a trust that owns shares of the parent
company of the Adviser. They are so designated by an asterisk.
Described in the following material are the name, positions
with the Fund, age as of February 3, 1997, and business
experience during at least the past five years (other than with
the Fund) of each nominee and all officers of the Fund. All
shares shown as owned by the Trustees are Class A Shares.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, Age: 68, Shares Owned: 561 (1)
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Arizona since 1986; Tax-Free Trust of
Oregon since 1986; Tax-Free Fund of Colorado since 1987; Tax-Free
Fund For Utah since 1992; and Narragansett Insured Tax-Free
Income Fund since 1992; each of which is a tax-free municipal
bond fund, and two equity funds, Aquila Rocky Mountain Equity
Fund since 1993 and Aquila Cascadia Equity Fund, since 1996,
which, together with this Fund are called the Aquila Bond and
Equity Funds; Pacific Capital Cash Assets Trust since 1984;
Churchill Cash Reserves Trust since 1985; Pacific Capital U.S.
Treasuries Cash Assets Trust since 1988; Pacific Capital Tax-Free
Cash Assets Trust since 1988; each of which is a money market
fund, and together with Capital Cash Management Trust ("CCMT")
are called the Aquila Money-Market Funds; and Vice President,
Director, Secretary and formerly Treasurer of Aquila
Distributors, Inc. since 1981, distributor of the above funds;
President and Chairman of the Board of Trustees of CCMT, a money
market fund since 1981, and an Officer and Trustee/Director of
its predecessors since 1974; Chairman of the Board of Trustees
and President of Prime Cash Fund (which is inactive), since 1982
and of Short Term Asset Reserves 1984-1996; President and a
Director of STCM Management Company, Inc., sponsor and sub-
adviser to CCMT; Chairman, President, and a Director since 1984,
of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves,
and Founder and Chairman of several other money market funds;
Director or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest
Global Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and
Trustee of Quest For Value Accumulation Trust, The Saratoga
Advantage Trust, and of the Rochester Group of Funds, each of
which is an open-end investment company; Trustee of Brown
University, 1990-1996 and currently Trustee Emeritus; actively
involved for many years in leadership roles with university,
school and charitable organizations.
(1) Includes 295 shares held of record by Aquila Management
Corporation.
Thomas A. Christopher, Trustee, Age: 50, Shares Owned: 1,580
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 1991 to 1994; Trustee of Churchill Cash Reserves
Trust since 1985; presently active in leadership roles with
various civic, community and church organizations.
Douglas Dean, Trustee, Age: 48, Shares Owned: 5,013
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,Age: 39, Shares Owned: 522
Trustee of Tax-Free Trust of Arizona and Tax-Free Trust of Oregon
since 1994 and Churchill Cash Reserves Trust since 1995, of
Aquila Cascadia Equity Fund since 1996 and of Aquila Rocky
Mountain Equity Fund and Tax-Free Fund for Utah since 1997;
President and Chief Operating Officer of the Administrator since
1997; Senior Vice President and Secretary, formerly Vice
President of the Administrator since 1986 and Director since
1984; Senior Vice President or Vice President and formerly
Assistant Vice President of the Aquila Money-Market Funds since
1986; Vice President of the Aquila Bond and Equity Funds since
1997; Vice President of InCap Management Corporation since 1986
and Director since 1983; Assistant Vice President of Oxford Cash
Management Fund, 1986-1988; Assistant Vice President and formerly
Loan Officer of European American Bank, 1981-1986; daughter of
the Fund'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.
Theodore T. Mason, Trustee, Age: 62, Shares Owned: 662 (2)
Managing Director of EastWind Power Partners, Ltd. since 1994;
Director of Alumni Association, SUNY Maritime College since 1997;
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
(which is inactive) since 1982; Trustee of Short Term Asset
Reserves, 1984-1986 and 1989-1996, of Hawaiian Tax-Free Trust and
Pacific Capital Cash Assets Trust since 1984, of Churchill Cash
Reserves Trust since 1985, 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.
(2) Held jointly with his wife.
Anne J. Mills, Trustee, Age: 59, Shares Owned: 1037
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, Age: 68, Shares Owned: 1088
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; Director of Yale
International, Inc. (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, Age: 49, Shares Owned: 1551 (2)
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, Age: 53
Senior Vice President of Aquila Rocky Mountain Equity Fund since
1997; Vice President of Tax-Free Fund For Utah since 1992; Vice
President of Churchill Cash Reserves Trust since 1995; Registered
Principal since 1993; Vice President of Aquila Distributors, Inc.
since 1993; Registered Representative of J.J.B. Hilliard, W.L.
Lyons Inc., 1983-1987; Account Manager with IBM Corporation,
1967-1981; Gubernatorial appointee, Kentucky Financial
Institutions Board, since 1993; Chairman, Total Quality
Management for Small Business, 1990-1994; President of
Elizabethtown/Hardin County, Kentucky, Chamber of Commerce, 1989-
1991; President of Elizabethtown Country Club, 1983-1985.
William C. Wallace, Vice President, Age: 62
Vice President of Capital Cash Management Trust and Pacific
Capital Cash Assets Trust since 1984; Senior Vice President of
Hawaiian Tax-Free Trust since 1985 and Vice President, 1984-1985;
Senior Vice President of Tax-Free Trust of Arizona since 1989 and
Vice President, 1986-1988; Vice President of Tax-Free Trust of
Oregon since 1986, of Churchill Tax-Free Fund of Kentucky and
Tax-Free Fund of Colorado since 1987, of Pacific Capital Tax-Free
Cash Assets Trust and Pacific Capital U.S. Treasuries Cash Assets
Trust since 1988 and of Narragansett Insured Tax-Free Income Fund
since 1992; Secretary and Director of STCM Management Company,
Inc. since 1974; President of the Distributor since 1995 and
formerly Vice President of the Distributor, 1986-1992; Member of
the Panel of Arbitrators, American Arbitration Association, since
1978; Assistant Vice President, American Stock Exchange, Market
Development Division, and Director of Marketing, American Gold
Coin Exchange, a subsidiary of the American Stock Exchange, 1976-
1984.
Teresa M. Priest, Vice President, Age: 33
Corporate Safety Director/Human Resource Manager of Ramsey &
Associates, Inc. 1995-1996; Senior Sales Representative of
Bluegrass Cellular, Inc. 1993-1995; Account Executive at Lite
105.5 WASE, 1992; Sales Assistant of J.J.B. Hilliard, W.L. Lyons,
Inc. 1990-1991.
L. Michele Robbins, Vice President, Age: 33
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, Age: 73
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of
the Distributor since 1985.
Richard F. West, Treasurer, Age: 62
Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc., 1986-
1988; Vice President of Lehman Management Co., Inc. and Assistant
Treasurer of Lehman Money Market Funds, 1981-1985; Controller of
Seligman Group of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, Age: 58
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust, 1982-
1985 and Trustee of that Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, Age: 58
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Administrator since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer,
Age: 31
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the
Administrator and the Distributor since 1995; 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, 1997, the Fund paid $72,402 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 two equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Fund and the compensation they
received during the Fund's fiscal year from other funds in the
Aquilasm Group of Funds. None of such Trustees has any pension or
retirement benefits from the Fund or any of the other funds in
the Aquila group.
<TABLE>
<CAPTION>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Fund Group serves
<S> <C> <C> <C>
Thomas A.
Christopher $10,179 $16,899 2
Douglas
Dean $6,948 $13,141 2
Theodore T.
Mason $8,500 $52,279 7
Anne J.
Mills $7,404 $39,424 6
William J.
Nightingale $7,948 $17,931 3
James R.
Ramsey $7,885 $13,620 2
</TABLE>
The Fund's Administrator is administrator to the Aquilasm
Group of Funds which consists of tax-free municipal bond funds,
money market funds and two equity funds. As of December 31, 1997,
these funds had aggregate assets of approximately $2.8 billion,
of which approximately $1.9 billion consisted of assets of the
tax-free municipal bond funds. The Administrator is controlled by
Mr. Lacy B. Herrmann, through share ownership directly, through a
trust and by his wife. During the year ended December 31, 1997,
the Fund paid or accrued $322,582 in advisory fees to the
Adviser. During the year ended December 31, 1997, fees of
$599,081 were paid or accrued to the Administrator under the
Administration Agreement.
The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond funds and two equity funds) including the Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs
relating to prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other promotional
activities. At the date of this proxy statement, there is a
proposed transaction whereby all of the shares of the
Distributor, which are currently owned 75% by Mr. Herrmann and
25% by Diana P. Herrmann, will be owned by certain directors
and/or officers of the Administrator and/or the Distributor
including Mr. Herrmann and Ms. Herrmann. During the fiscal year,
the Distributor retained $37,386 in commissions on sales of the
Fund's Class A shares. Under the Fund's Distribution Plan the
Distributor received $6,454 with respect to the Fund's Class A
shares and $4,961 with respect to the Fund's Class C shares, all
of which was for compensation. In addition, it received $1,653
under the Fund's Shareholder Services Plan.
Other Information on Trustees
The Trustees have appointed an Audit Committee consisting of
all of the Trustees (the "Independent Trustees") who are not
"interested persons," as that term is defined in the 1940 Act.
The Committee (i) recommends to the Board of Trustees what firm
of independent auditors will be selected by the Board of Trustees
(subject to shareholder ratification); (ii) reviews the methods,
scope and result of audits and the fees charged; and (iii)
reviews the adequacy of the Fund's internal accounting
procedures and controls. The Committee held one meeting during
the Fund's last fiscal year. The Board of Trustees does not have
a nominating committee. During the Fund's last fiscal year, the
Board of Trustees held four meetings. All Trustees were present
at least 75% of the total number of Board and (if such Trustee
was a member of that Committee) Audit Committee meetings.
RATIFICATION OR REJECTION OF SELECTION OF
INDEPENDENT AUDITORS
(Proposal No. 1)
KPMG Peat Marwick LLP is being recommended as the Fund's
independent auditors for the fiscal year ending December 31,
1998; such selection is submitted to the shareholders for
ratification or rejection.
The firm has no direct or indirect financial interest in the
Fund, the Fund's Adviser or the Fund's Administrator. It is
expected that representatives of the firm will not be present at
the meeting but will be available should any matter arise
requiring their presence.
BACKGROUND AND REASONS FOR
PROPOSALS NO. 2 AND NO. 3
Proposals No. 2 and No. 3 are designed to change the form of
the Fund's investment advisory and administration arrangements to
a new structure involving an adviser and a sub-adviser. The
proposed arrangements will not result in any change in overall
management fees paid by the Fund, nor any change in the parties
providing these services. Marketing efforts and positioning of
the Fund will remain the same with a strong local orientation.
The Board of Trustees believes that the new structure would,
among other things, enhance the ability of the Fund to secure
stable, continuous, high-quality local portfolio management
services, and would improve the ability of the Fund to obtain
various other services on beneficial terms.
Under the proposals, Aquila Management Corporation
("Aquila"), which currently serves as the Fund's administrator,
would in addition become investment adviser under a new agreement
(the "Advisory and Administration Agreement") under which it
would also continue to provide the Fund with all administrative
services (Proposal No. 2). Also, under a proposed agreement (the
"Sub-Advisory Agreement") between Aquila and Banc One Investment
Advisors Corporation ("BOIAC"), the current investment advisory
agreement would be replaced by one under which Aquila would
appoint BOIAC as Sub-Adviser to the Fund (Proposal No. 3). Under
the Sub-Advisory Agreement, BOIAC would continue to provide the
Fund with advisory services of the kind which it currently
provides to the Fund. The duties of the administrator, now
performed under an administration agreement, would be performed
by Aquila under the Advisory and Administration Agreement where
it would be referred to as the "Manager." The current
administration agreement will no longer be needed and will
terminate upon implementation of the proposed agreements.
The Board of Trustees believes that it is in the best
interest of the shareholders to provide Aquila with the authority
to retain an investment sub-adviser (subject to the approval of
the Board of Trustees and the shareholders) and to terminate a
sub-adviser (subject to the approval of the Board of Trustees) if
it were to deem doing so to be in the best interests of the Fund
and its shareholders. The Board of Trustees considers that this
authority will enhance Aquila's ability to obtain for the Fund
benefits of stable, continuous, high-quality portfolio
management.
In addition, Aquila has advised the Board of Trustees that
it plans to propose a similar reorganization to other funds in
the Aquilasm Group of Funds. If, as expected, those proposals are
adopted, the following additional reasons support the proposed
reorganization, although there can be no assurance that they will
be realized:
There would be heightened public recognition of the Aquilasm
Group and its funds, and better public relations
possibilities.
The new arrangements would benefit the entire group because
they would tend to increase the negotiating power of Aquila
in dealing with service providers to the funds in various
ways.
The arrangements potentially increase the standardization of
procedures, e.g. compliance, among the advisers.
The Board of Trustees noted that Aquila is the founder and
organizer of the Fund and has continuously served as its
administrator since 1992. Since 1985, Aquila has formed and
sponsored seven state-specific tax-free municipal bond funds,
which have grown to a total of $1.9 billion in combined assets.
These funds and their years of inception are Hawaiian Tax-Free
Fund (1985), Tax-Free Fund of Oregon (1986), Tax-Free Trust of
Arizona (1986), Tax-Free Fund of Colorado (1987), the Fund
(1987), Narragansett Insured Tax-Free Income Fund (1992) and Tax-
Free Fund For Utah (1992). Aquila has also sponsored five money
market funds and two regional capital appreciation equity funds.
As of December 31, 1997, the Aquilasm Group of Funds had combined
assets of approximately $2.8 billion.
By founding the Fund and other state-specific tax-free
municipal bond funds, Aquila has been able to offer to individual
investors in various states a locally-managed, quality-oriented
portfolio of municipal obligations, providing income that is
exempt from state as well as federal income taxes.
Aquila advised the Board of Trustees that a critical
component of high-quality service to investors in its funds is a
close familiarity with the local economy and market conditions
that can only be provided by experienced local portfolio
management. Aquila found that investment advisers that were a
part of, or associated with, major local financial institutions
had the experience and resources to provide this management. The
Aquila bond funds are unusual compared with other such funds in
emphasizing local portfolio management, which has been a major
factor in their acceptance by investors.
Recent years have seen a consolidation in the financial
services industry that has resulted in many prominent local banks
becoming parts of larger national institutions. A number of these
transactions have affected the local advisers of other Aquila
bond funds. In every instance, Aquila has been able to secure
commitments to continuous local management, but in some instances
it became necessary for Aquila to seek out other organizations to
provide the continuity and quality of service that investors
expect. The Board of Trustees believes that by providing Aquila
with the authority as to the investment advisory function
contained in the new agreements, the Board would better enable
Aquila to ensure continuity of local portfolio management.
Another anticipated advantage of the proposed arrangements
is that, to the extent extended, as planned, to other Aquila
funds, Aquila expects to improve its ability to negotiate
beneficial terms with service providers, such as transfer agents
and pricing services, under substantially uniform agreements that
would provide services to all of the funds. Because of the
combined size of the funds, Aquila expects that its collective
bargaining position would be enhanced and that costs for these
services may be lower than would be obtained if these
arrangements were negotiated on a piecemeal basis. There can be
no assurance that this will occur.
The Board of Trustees believes that making Aquila Manager
has definite organizational benefits, including a better
structure for handling any possible future changes. The costs of
the change in structure will be borne by Aquila and not the Fund.
In approving of the proposed new arrangements, the Board of
Trustees stipulated that the Sub-Advisory Agreement could provide
for its termination by the Adviser upon reasonable notice,
provided, however, that the Adviser should not terminate the Sub-
Advisory Agreement (and any attempt by the Adviser to terminate
such agreement would be null and void) unless, prior to giving
notice to the Sub-Adviser of such termination, either (i) the
Advisory Agreement had been reapproved by the Board of Trustees
of the Fund, in the manner described in Section 15 of the 1940
Act, in contemplation of the Adviser's managing the investment
portfolio of the Fund without the assistance of a Sub-Adviser;
(ii) a new Sub-Advisory Agreement, to take effect upon the
termination of the existing Sub-Advisory Agreement, had been
approved by the Board of Trustees and the shareholders of the
Fund as contemplated by Section 15 of the 1940 Act; (iii) the
Board had authorized such termination; or (iv) the Adviser had
complied with such other or additional directives and
authorizations of the Board with respect to such termination as
may from time to time be in effect.
Other Changes
The current advisory agreement and the Administration
Agreement provide that fees payable thereunder shall not exceed
certain amounts or percentages of the Fund's net assets or
income. These provisions, which were required by certain State
securities laws, have had no effect on the Fund, due to its size.
The state securities laws were preempted by Federal legislation
in 1996 and accordingly, these provisions, which are no longer
required by law, would not be included in the new agreements.
Other Information About Aquila
Aquila, founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). Aquila's shares are owned as follows:
Elizabeth B. Herrmann 35%
Lacy B. Herrmann 25%
Elizabeth B. Herrmann
1993 Annuity Fund 40%
The names, addresses and principal occupations of the principal
executive officer and each director of Aquila are as follows:
Name Position with Aquila
Lacy B. Herrmann Chairman, Chief Executive Officer
and Director
Diana P. Herrmann President, Chief Operating Officer
and Director
Elizabeth B. Herrmann Director
The address of all of these individuals is 380 Madison
Avenue, Suite 2300, New York, NY 10017.
Other Information about BOIAC
The Trustees noted that Banc One Investment Advisors
Corporation ("BOIAC") is a wholly-owned subsidiary of Bank One,
NA, in turn a wholly owned subsidiary of Banc One Ohio
Corporation, a bank holding company, which is in turn a wholly
owned subsidiary of BANC ONE CORPORATION ("Banc One"), also a
bank holding company. The Fund has been advised that no single
shareholder owns more than 10% of the outstanding voting
securities of Banc One.
The Trustees noted that Banc One currently has affiliate
banking organizations in Kentucky, Arizona, Colorado, Illinois,
Indiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. On a consolidated basis, Banc One had assets of over
$101.8 billion as of December 31, 1996. The Adviser was
responsible for management of over $5.2 billion of investments in
municipal obligations, of which $2.3 billion were held in mutual
funds. The Adviser services Kentucky clients at offices in
Louisville.
The Trustees noted that BOIAC has been the Fund's adviser
since 1995. The Fund's advisory agreement was last submitted to
the shareholders for approval in 1995.
The Fund's portfolio is managed locally in Kentucky by Mr.
Thomas S. Albright, Vice President and Senior Portfolio Manager,
at the Adviser's Louisville office. He has served in this
capacity since September, 1995, when the Adviser became adviser
to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank, the Adviser's local predecessor, where he was
responsible for management of its investment portfolio. He also
served as President of Liberty Investment Services, Inc., that
bank's full service brokerage subsidiary. Mr. Albright is a
member of the Adviser's Fixed Income Fund Sub-Committee. Mr.
Albright attended the University of Louisville.
BOIAC has advised the Fund that it is subject to the Glass-
Steagall Act. The Glass-Steagall Act, among other things,
prohibits, with certain exceptions, banks and bank holding
companies from engaging in the business of issuing, underwriting,
selling or distributing securities and from affiliating with
companies engaged in those activities. In April 1971, the United
States Supreme Court held, in Investment Company Institute v.
Camp, that certain provisions of the Glass-Steagall Act
applicable to both national and Federal Reserve member banks
prohibit any such bank from operating a collective investment
fund. The fund which was the subject of litigation was registered
as an open-end investment company, and participations in the fund
were offered on a continuous basis directly by the bank.
Subsequent to that decision, the Board of Governors of the
Federal Reserve System amended its Regulation Y to forbid a bank
holding company or subsidiary thereof from organizing, sponsoring
or controlling a registered open-end investment company
continuously engaged in distributing its shares but to permit a
non-banking subsidiary of a bank holding company to serve as
investment adviser to a registered investment company, subject to
a number of terms and conditions. The validity of this amendment
to Regulation Y, as it relates to closed-end investment
companies, was upheld by the Supreme Court in February, 1981 in
Board of Governors v. Investment Company Institute. In addition,
the Comptroller of the Currency has taken the position that a
national bank having fiduciary powers may act as investment
advisor to an open-end investment company. In the view of BOIAC,
it is permitted under current Federal banking laws to perform the
services for the Fund required by the current advisory agreement
and the proposed sub-advisory agreement. However, future changes
in federal or state statutes and regulations relating to the
permissible activities of banks and bank holding companies,
including their bank and non-bank subsidiaries, as well as future
judicial or administrative decisions and interpretations of
present and future statutes and regulations, might at some future
time prevent it from continuing to serve in those capacities.
In the event BOIAC is prohibited from acting as the Fund's
investment sub-adviser, it is probable that the Fund's Manager or
the Trustees would recommend to the shareholders the selection of
another qualified sub-adviser.
BOIAC believes that it must comply with the position of the
Comptroller of the Currency referred to above and, because not
legally applicable to a national bank acting as an investment
adviser, need not comply with the provisions of Regulation Y (and
the interpretations thereof) of the Board of Governors of the
Federal Reserve System that specify the terms on which a non-
banking subsidiary of a bank holding company may serve as
investment adviser to an open-end investment company.
Among the restrictions imposed by the Comptroller of the
Currency are that BOIAC may not be involved in the promotion or
distribution of shares of the Fund and that Fund accounts
administered by BOIAC may not purchase shares of the Fund unless
lawfully authorized by the instrument creating the relationship
or by court order or by local law. Under Kentucky law, if the
portfolios of that investment company or investment trust consist
of investments permitted by the applicable fiduciary instrument,
BOIAC, in its capacity as a fiduciary, may purchase shares of the
Fund. Collective investment funds operated by BOIAC may not
purchase shares of the Fund.
The Chief Executive Officer and directors of BOIAC are as
follows:
Position(s)
Held with
Banc One
Name Investment Advisors Principal Occupation
Michael J. Director Executive Vice President
McMennamin and Chief Financial Officer
BANC ONE CORPORATION
Frederick L. Director Chairman and Chief Executive
Cullen President and Chief Financial
Officer, Bank One, NA and
President and Chief Executive
Officer, Banc One Ohio Corporation
David R. Director Chairman and Chief Executive
Meuse Officer, Banc One Capital Holdings
Corporation
Garrett Director President and Chief Executive
Jamison Officer, Fiduciary and
Banc One Investment Management
and Fund Group
Geoff Director Senior Managing Director, Banc
Von Kuhn One Institutional Asset and Fund
Group
Michael V. Secretary Attorney, BANC ONE CORPORATION
Wible
David J. Chairman and Chairman and Chief Executive
Kundert Chief Officer, Banc One Investment
Executive Management and Fund Group
Officer
The address of these persons is 1111 Polaris Parkway, Columbus, OH 43240.
<PAGE>
BOIAC acts as investment adviser to the following investment companies,
which have similar investment objectives to those of the Fund:
<TABLE>
<CAPTION>
Annual Fee
(With Waiver/
Fund Name Net Assets Without Waivers)
<S> <C> <C>
The One Group $486,664,000 .35%/.45%
Municipal Income Fund
The One Group $462,853,000 .40%/.60%
Intermediate Tax-Free
Bond Fund
The One Group Ohio $163,602,000 .30%/.60%
Municipal Bond Fund
The One Group Kentucky $124,783,000 .40%/.45%
Municipal Bond Fund
The One Group Arizona $257,255,000 .40%/.45%
Municipal Bond Fund
The One Group Louisiana $165,671,000 .40%/.60%
Municipal Bond Fund
The One Group West $ 97,692,000 .40%/.45%
Virginia Municipal
Bond Fund
Tax-Free Trust of $399,336,000 .14%
Arizona
</TABLE>
<TABLE>
<CAPTION>
Annual Fee Rates
(Fee rates are annual rates as a percentage of the Fund's average
daily net assets.)
Under
arrangements
Type of payment Under arrangements if Proposals 2
made by the Fund currently in effect and 3 are adopted
<S> <C> <C>
Advisory fee 0.14 of 1% 0.40 of 1%
(Sub-Advisory fee
paid by the Adviser) 0 (0.14 of 1%)
Administration fee 0.26 of 1% 0
Total Payments
by the Fund 0.40 of 1% 0.40 of 1%
</TABLE>
The following table shows the advisory and administration fees the
Fund paid during its last fiscal year, the fees it would have paid if the
proposed arrangements had been in effect during that fiscal year and the
percentage change.
<TABLE>
<CAPTION>
Type of payment Amount Amount that would Difference between
by the Fund actually paid have been paid the old and new
if the new arrangements as a
arrangements percentage of the
had been in effect old arrangements
<S> <C> <C> <C>
Advisory fee $322,582 $921,663 286%
(Sub-Advisory
fee Paid by
the Adviser) 0 ($322,582) N/A
Administration
fee $599,081 0 0%
Total payments $921,663 $921,663 0%
</TABLE>
Proposals No. 2 and No. 3 are designed to operate together.
Neither separately will have the intended results. Neither
proposal will be implemented unless both are approved by
shareholders. Accordingly, the proposed new Investment Advisory
and Administration Agreement and the proposed Sub-Advisory
Agreement will go into effect upon approval by shareholders of
both Proposals No. 2 and 3. If these proposals are not both
approved, the current arrangements will remain in effect. The
Board of Trustees will consider what further action is
appropriate, which could include calling another shareholder
meeting.
The Trustees also noted that in addition to the foregoing
matters, Aquila has more than twelve years of experience in
forming and administering tax-exempt municipal bond funds,
including identifying and securing the services of competent
local investment advisers. The Trustees also noted that Aquila
had secured the agreement of BOIAC to serve as the Fund's Sub-
Adviser on the terms described in Proposal No. 3.
For the reasons set forth above, at an in-person meeting
called and held for the purpose in June, 1997, the Board of
Trustees, including a majority of the Trustees who are not
parties to the Advisory and Administration Agreement or the Sub-
Advisory Agreement or "interested persons" (as defined in the
1940 Act) of any such party (the "Independent Trustees"), voted
to approve the Advisory Agreement and Sub-Advisory Agreement.
ACTION ON A NEW INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
WHICH WILL PROVIDE THAT ALL ADVISORY FEES AND ADMINISTRATION FEES
WILL BE PAID TO AQUILA MANAGEMENT CORPORATION ALTHOUGH COMBINED
ADVISORY AND ADMINISTRATION FEES WILL REMAIN AT THE CURRENT LEVEL
(PROPOSAL NO. 2)
The new Investment Advisory and Administration Agreement
(the "Advisory Agreement") has several parts, most of which are
substantially identical to corresponding provisions in the Fund's
former advisory agreements and administration agreement. The
Advisory Agreement contains provisions relating to investment
advice for the Fund and management of its portfolio that are
substantially identical to prior advisory agreements, except that
the Adviser has the power to delegate its advisory functions to a
Sub-Adviser, which it will employ at its own expense. The
Advisory Agreement contains provisions relating to administrative
services that are substantially identical to those contained in
the Fund's current and prior administration agreements. In the
following description, Aquila is referred to as the "Manager."
Description of the Investment Advisory and Administration
Agreement
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Fund, the
Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory Agreement provides that, subject to the
termination provisions described below, the Manager may at its
own expense delegate to a qualified organization ("Sub-Adviser"),
affiliated or not affiliated with the Manager, any or all of the
above duties. Any such delegation of the duties set forth in (i),
(ii) or (iii) above shall be by a written agreement (the "Sub-
Advisory Agreement") approved as provided in Section 15 of the
Investment Company Act of 1940. The Manager will delegate all of
such functions to BOIAC under the proposed Sub-Advisory
Agreement. See "Background and Reasons for Proposals No. 2 and
No. 3."
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Fund, the
Manager shall provide all administrative services to the Fund
other than those relating to its investment portfolio which have
been delegated to a Sub-Adviser of the Fund under a Sub-Advisory
Agreement; as part of such administrative duties, the Manager
shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement) or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory Agreement contains provisions relating to
compliance of the investment program, responsibility of the
Manager for any investment program managed by it, allocation of
brokerage, and responsibility for errors that are substantially
the same as the corresponding provisions in the Sub-Advisory
Agreement. See Proposal No. 3.
The Advisory Agreement provides that the Manager shall, at
its own expense, provide office space, facilities, equipment, and
personnel for the performance of its functions thereunder and
shall pay all compensation of Trustees, officers, and employees
of the Fund who are affiliated persons of the Manager.
The Fund shall bear the costs of preparing and setting in
type its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to Aquila a fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rate of 0.50 of 1% of such net asset value,
provided, however, that for any day that the Fund pays or accrues
a fee under the Distribution Plan of the Fund based upon the
assets of the Fund, the annual management fee shall be payable at
the annual rate of 0.40 of 1% of such net asset value.
The Advisory Agreement provides that the Sub-Advisory
Agreement may provide for its termination by the Manager upon
reasonable notice, provided, however, that the Manager agrees not
to terminate the Sub-Advisory Agreement except in accordance with
such authorization and direction of the Board of Trustees, if
any, as may be in effect from time to time.
The Advisory Agreement provides that it will become
effective on the date of its approval by the shareholders of the
Fund and will, unless terminated as hereinafter provided,
continue in effect until the June 30 next preceding the first
anniversary of the effective date of the Advisory Agreement, and
from year to year thereafter, but only so long as such
continuance is specifically approved at least annually (1) by a
vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of
any such party, with votes cast in person at a meeting called for
the purpose of voting on such approval, or (2) by a vote of the
holders of a "majority" (as so defined) of the outstanding voting
securities of the Fund and by such a vote of the Trustees.
The Advisory Agreement provides that it may be terminated by
the Manager at any time without penalty upon giving the Fund
sixty days' written notice (which notice may be waived by the
Fund) and may be terminated by the Fund at any time without
penalty upon giving the Manager sixty days' written notice (which
notice may be waived by the Manager), provided that such
termination by the Fund shall be directed or approved by a vote
of a majority of its Trustees in office at the time or by a vote
of the holders of a majority (as defined in the 1940 Act) of the
voting securities of the Fund outstanding and entitled to vote.
The specific portions of the Advisory Agreement which relate to
providing investment advisory services will automatically
terminate in the event of the assignment (as defined in the 1940
Act) of the Advisory Agreement, but all other provisions relating
to providing services other than investment advisory services
will not terminate, provided however, that upon such an
assignment the annual fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day shall be reduced to the annual rate of 0.17 of 1% of such net
asset value.
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENT DESCRIBED ABOVE BE
APPROVED. See "Background and Reasons for Proposals No. 2 and No.
3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Fund, is
required for the approval of this Proposal No. 2. Under the 1940
Act, the vote of the holders of a majority of the outstanding
shares of the Fund means the vote of the holders of the lesser of
(a) 67% or more of the shares of the Fund present at the Meeting
or represented by proxy if the holders of more than 50% of such
shares are so present or represented, or (b) more than 50% of the
outstanding shares of the Fund, with one (1) vote for each dollar
( and a proportionate fractional vote for each fraction of a
dollar) of net asset value (determined as of the record date)
represented by full and fractional shares of all of the Fund's
three classes of shares.
The meeting can be adjourned by the affirmative vote of a
majority of the shares present in person or by proxy. In voting
for an adjournment, the proxies will consider all relevant
factors, including possible delay of receipt of proxies and
whether or not a substantial number of negative votes have been
cast with respect to any proposal. The shares of shareholders who
have voted by proxy against a proposal will be voted against
adjournment.
ACTION UPON A PROPOSED NEW
SUB-ADVISORY AGREEMENT BETWEEN AQUILA MANAGEMENT CORPORATION
AS MANAGER AND BOIAC AS SUB-ADVISER
(PROPOSAL NO. 3)
The proposed Sub-Advisory Agreement (the "Sub-Advisory
Agreement") has substantially the same terms as the current
advisory Agreement, except that the Sub-Advisory Agreement is
with the Manager and not with the Fund, the compensation of the
Sub-Advisor is paid by the Manager and not by the Fund and the
state-imposed expense limitation described above has been
eliminated.
The Sub-Advisory Agreement provides that the Manager
appoints BOIAC as Sub-Adviser to render, to the Manager and to
the Fund, investment research and advisory services as set forth
below under the supervision of the Manager and subject to the
approval and direction of the Board of Trustees of the Fund. The
Sub-Advisory Agreement provides that the Sub-Adviser will act as
managerial investment adviser to the Fund with respect to the
investment of the Fund's assets, and will supervise and arrange
the purchase of securities for and the sale of securities held in
the portfolio of the Fund.
The Sub-Advisory Agreement provides in general that subject
to the direction and control of the Manager and the Board of
Trustees of the Fund, the Sub-Adviser shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund; and
(v) consult with the Manager in connection with its duties
thereunder.
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform
to, and be in accordance with, any requirements imposed by: (1)
the Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Trust and By-Laws
of the Fund as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Fund.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall give to the Manager and to the Fund the benefit of its best
judgment and effort in rendering services thereunder, but the
Sub-Adviser shall not be liable for any loss sustained by reason
of the adoption of any investment policy or the purchase, sale or
retention of any security, whether or not such purchase, sale or
retention shall have been based upon (i) its own investigation
and research or (ii) investigation and research made by any other
individual, firm or corporation, if such purchase, sale or
retention shall have been made and such other individual, firm or
corporation shall have been selected in good faith by the Sub-
Adviser. Under the Sub-Advisory Agreement, the Sub-Adviser will
not be liable for any error in judgment or for any loss suffered
by the Fund or its security holders in connection with the
matters to which the Agreement relates, except a loss resulting
from wilful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard
by it of its obligations and duties under the Agreement.
The Sub-Advisory Agreement provides that nothing in it shall
prevent the Sub-Adviser or any affiliated person (as defined in
the Act) of the Sub-Adviser from acting as investment adviser or
manager for any other person, firm or corporation and shall not
in any way limit or restrict the Sub-Adviser or any such
affiliated person from buying, selling or trading any securities
for its own or their own accounts or for the accounts of others
for whom it or they may be acting, provided, however, that the
Sub-Adviser expressly represents that, while acting as Sub-
Adviser, it will undertake no activities which, in its judgment,
will adversely affect the performance of its obligations to the
Fund under the Agreement. It is agreed that the Sub-Adviser
shall have no responsibility or liability for the accuracy or
completeness of the Fund's Registration Statement under the Act
and the Securities Act of 1933, except for information supplied
by the Sub-Adviser for inclusion therein. The Sub-Adviser shall
promptly inform the Fund as to any information concerning the
Sub-Adviser appropriate for inclusion in such Registration
Statement, or as to any transaction or proposed transaction which
might result in an assignment (as defined in the Act) of the
Agreement. To the extent that the Manager is indemnified under
the Fund's Declaration of Trust with respect to the services
provided under the Agreement by the Sub-Adviser, the Manager
agrees to provide the Sub-Adviser the benefits of such
indemnification.
The Sub-Advisory Agreement provides that in connection with
its duties to arrange for the purchase and sale of the Fund's
portfolio securities, the Sub-Adviser shall select such broker-
dealers ("dealers") as shall, in the Sub-Adviser's judgment,
implement the policy of the Fund to achieve "best execution,"
i.e., prompt, efficient, and reliable execution of orders at the
most favorable net price. The Sub-Adviser shall cause the Fund
to deal directly with the selling or purchasing principal or
market maker without incurring brokerage commissions unless the
Sub-Adviser determines that better price or execution may be
obtained by paying such commissions; the Fund expects that most
transactions will be principal transactions at net prices and
that the Fund will incur little or no brokerage costs. The Fund
understands that purchases from underwriters include a commission
or concession paid by the issuer to the underwriter and that
principal transactions placed through dealers include a spread
between the bid and asked prices. In allocating transactions to
dealers, the Sub-Adviser is authorized to consider, in
determining whether a particular dealer will provide best
execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as
well as the difficulty of the transaction in question, and thus
need not pay the lowest spread or commission available if the
Sub-Adviser determines in good faith that the amount of
commission is reasonable in relation to the value of the
brokerage and research services provided by the dealer, viewed
either in terms of the particular transaction or the Sub-
Adviser's overall responsibilities. If, on the foregoing basis,
the transaction in question could be allocated to two or more
dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund. Such research may be in
written form or through direct contact with individuals and may
include quotations on portfolio securities and information on
particular issuers and industries, as well as on market,
economic, or institutional activities. The Fund recognizes that
no dollar value can be placed on such research services or on
execution services and that such research services may or may not
be useful to the Fund and may be used for the benefit of the Sub-
Adviser or its other clients.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Fund as are required by applicable law and regulation, and
agrees that all records which it maintains for the Fund on behalf
of the Manager shall be the property of the Fund and shall be
surrendered promptly to the Fund or the Manager upon request. The
Sub-Adviser agrees to furnish to the Manager and to the Board of
Trustees of the Fund such periodic and special reports as each
may reasonably request.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall bear all of the expenses it incurs in fulfilling its
obligations under the Agreement. In particular, but without
limiting the generality of the foregoing: the Sub-Adviser shall
furnish the Fund, at the Sub-Adviser's expense, all office space,
facilities, equipment and clerical personnel necessary for
carrying out its duties under the Agreement. The Sub-Adviser
shall supply, or cause to be supplied, to any investment adviser,
administrator or principal underwriter of the Fund all necessary
financial information in connection with such adviser's,
administrator's or principal underwriter's duties under any
agreement between such adviser, administrator or principal
underwriter and the Fund. The Sub-Adviser will also pay all
compensation of the Fund's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rate of 0.17 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.
The Sub-Advisory Agreement provides that it will become
effective, if approved by the shareholders of the Fund, on April
30, 1998 (the "Effective Date") and shall, unless terminated as
thereinafter provided, continue in effect until the June 30 next
preceding the first anniversary of the effective date of the
Agreement, and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually (1)
by a vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund and by such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be
terminated by the Sub-Adviser at any time without penalty upon
giving the Manager and the Fund sixty days' written notice (which
notice may be waived). It may be terminated by the Manager or the
Fund at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Fund shall be
directed or approved by a vote of a majority of its Trustees in
office at the time or by a vote of the holders of a majority (as
defined in the Act) of the voting securities of the Fund
outstanding and entitled to vote. The Sub-Advisory Agreement will
automatically terminate in the event of its assignment (as
defined in the 1940 Act) or the termination of the Advisory and
Administration Agreement.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED SUB-
ADVISORY AGREEMENT DESCRIBED ABOVE BE APPROVED. See "Background
and Reasons for Proposals No. 2 and No. 3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Fund, is
required for the approval of this Proposal No. 3. See Proposal
No. 2 for a description of such a majority.
RECEIPT OF
SHAREHOLDER PROPOSALS
Under the proxy rules of the Securities and Exchange
Commission, shareholder proposals meeting tests contained in
those rules may, under certain conditions, be included in the
Fund's proxy statement and proxy card for a particular annual
meeting. One of these conditions relates to the timely receipt by
the Fund of any such proposal. Under these rules, proposals
submitted for inclusion in the proxy material for the Fund's next
annual meeting after the meeting to which this Proxy Statement
relates must be received by the Fund not less than 120 days
before the anniversary of the date stated on the first page of
this Proxy Statement relating to the first mailing of this Proxy
Statement. The date for such submission could change, depending
on the scheduled date for the next annual meeting; if so, the
Fund will so advise you.
The fact that the Fund receives a shareholder proposal in a
timely manner does not insure its inclusion in the Fund's proxy
material, since there are other requirements in the proxy rules
relating to such inclusion.
OTHER BUSINESS
The Fund does not know of any other matter which will come
up for action at the Meeting. If any other matter or matters
properly come up for action at the Meeting, including any
adjournment of the Meeting, the proxy holders will vote the
shares which the proxy cards entitle them to vote in accordance
with their judgment on such matter or matters. That is, by
signing and returning your proxy card, you give the proxy holders
discretionary authority as to any such matter or matters.
<PAGE>
Preliminary Proxy Material
AQUILA
CHURCHILL TAX-FREE FUND OF KENTUCKY
PROXY FOR SHAREHOLDERS MEETING APRIL 24, 1998
PROXY SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned shareholder of CHURCHILL TAX-FREE FUND OF
KENTUCKY (the "Fund") does hereby appoint LACY B. HERRMANN, DIANA
P. HERRMANN and EDWARD M. W. HINES, or either of them, as
attorneys and proxies of the undersigned, with full power of
substitution, to attend the Annual Meeting of Shareholders of the
Fund to be held on April 24, 1998, at the JB Speed Art Museum,
2035 South Third Street, Louisville, Kentucky 40208 at 10:00 a.m.
local time, and at all adjournments thereof, and thereat to vote
the shares held in the name of the undersigned on the record date
for said meeting on the matters listed below.
Please mark your proxy, date and sign it below and return it
promptly in the accompanying envelope which requires no postage
if mailed in the United States.
MANAGEMENT RECOMMENDS A VOTE FOR ALL NOMINEES LISTED BELOW
AND FOR THE PROPOSALS LISTED BELOW. THE SHARES REPRESENTED
HEREBY WILL BE VOTED AS INDICATED BELOW OR FOR IF NO CHOICE IS
INDICATED.
As to any other matter said attorneys shall vote in
accordance with their best judgment.
Please indicate your vote by an "X" in the appropriate box
below.
Election of Trustees---.
__
[__] FOR all nominees listed below
__
[__] VOTE WITHHELD for all nominees listed
below
(Instructions: To withhold authority to vote for any one or more
of the nominees, strike a line through the name of that nominee
or the names of such nominees in the list below.)
LACY B. HERRMANN, THOMAS A. CHRISTOPHER, DOUGLAS DEAN,
DIANA P. HERRMANN, THEODORE T. MASON,
ANNE J. MILLS, WILLIAM J. NIGHTINGALE, JAMES R. RAMSEY
Action on selection of KPMG Peat
Marwick LLP as independent auditors
__ __ __
(Proposal No. 1) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Investment
Advisory and Administration Agreement with
Aquila Management Corporation
__ __ __
(Proposal No. 2) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Sub-Advisory
Agreement with Banc One Investment
Advisers Corporation
__ __ __
(Proposal No. 3) FOR [__] AGAINST [__] ABSTAIN [__]
Dated: ____________ ______, 1998
Month Day
__________________________________
SIGNATURE(S)
__________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing
as a custodian, attorney, executor, administrator, trustee,
guardian, etc., please sign your full title as such. Joint
owners should each sign.
