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
Prospectus
May 1, 2000
Class A Shares
Class C Shares
Churchill Tax-Free Fund of Kentucky is a mutual fund
that seeks to provide you as high a level of current income
exempt from Kentucky state and regular Federal income taxes
as is consistent with preservation of capital. The Fund
invests in municipal obligations that pay interest exempt
from Kentucky state and Federal income taxes and are of
investment grade quality.
For purchase, redemption or account inquiries contact the
Fund's Shareholder Servicing Agent:
PFPC Inc.* 400 Bellevue Parkway * Wilmington, DE 19809
Call 800-872-5860 toll free
For general inquiries & yield information
Call 800-872-5859 toll free or 212-697-6666
The Securities and Exchange Commission has not approved or
disapproved the Fund's securities or passed upon the
adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
<PAGE>
THE FUND'S OBJECTIVE, INVESTMENT STRATEGIES AND MAIN RISKS
"What is the Fund's objective?"
The Fund's objective is to provide you as high a level
of current income exempt from Kentucky state and regular
Federal income taxes as is consistent with preservation of
capital.
"What is the Fund's investment strategy?"
The Fund invests in tax-free municipal obligations that
pay interest exempt from Kentucky state and regular Federal
income taxes. We call these "Kentucky Obligations." In
general, all or almost all of these obligations are issued
by the State of Kentucky, its counties and various other
local authorities; at least 65% of the portfolio will always
consist of obligations of these issuers. These obligations
can be of any maturity but the Fund's average portfolio
maturity has traditionally been been between 15 and 18
years.
At the time of purchase, an obligation must be
considered "investment grade."
The Sub-Adviser selects obligations for the Fund's
portfolio to best achieve the Fund's objectives. The Sub-
Adviser evaluates specific obligations for purchase by
considering various characteristics including quality, maturity
and coupon rate.
The interest paid on certain types of Kentucky Obligations
may be subject to the Federal alternative minimum tax ("AMT").
At least 80% of the Fund's net assets must be invested in tax-
exempt Kentucky Obligations whose interest is not subject to
AMT.
"What are the main risks of investing in the Fund?"
Among the risks of investing in shares of the Fund and
its portfolio of securities are the following:
Loss of money is a risk of investing in the Fund.
The Fund's assets, being primarily or entirely Kentucky
issues, are subject to economic and other conditions
affecting Kentucky. Adverse local events, such as a downturn
in the Kentucky economy, could affect the value of the
Fund's portfolio.
There are two types of risk associated with any fixed-
income debt securities such as Kentucky Obligations:
interest rate risk and credit risk.
* Interest rate risk relates to fluctuations in market
value arising from changes in interest rates. If
interest rates rise, the value of debt securities,
including Kentucky Obligations, will normally decline.
All fixed-rate debt securities, even the most highly
rated Kentucky Obligations, are subject to interest
rate risk. Kentucky Obligations with longer maturities
generally have a more pronounced reaction to interest
rate changes than shorter-term securities.
* Credit risk relates to the ability of the particular
issuers of the Kentucky Obligations the Fund owns to
make periodic interest payments as scheduled and
ultimately repay principal at maturity.
An investment in the Fund is not a deposit in Banc One
Corporation, Banc One Investment Advisors Corporation or
their bank or non-bank affiliates or by any other bank and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
The Fund is classified as a "non-diversified"
investment company under the Investment Company Act of 1940
(the "1940 Act"). Thus, compared with "diversified" funds,
it may invest a greater percentage of its assets in
obligations of a particular issuer and may therefore not
have as much diversification among securities, and thus
diversification of risk. 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.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
RISK/RETURN BAR CHART AND PERFORMANCE TABLE
The bar chart and table shown below provide an indication of
the risks of investing in Churchill Tax-Free Fund of
Kentucky by showing changes in performance of the Fund's
Class A Shares from year to year over a ten-year period and
by showing how the Fund's average annual returns for one,
five and ten years compare to a broad measure of market
performance. How the Fund has performed in the past is not
necessarily an indication of how the Fund will perform in
the future.
<TABLE>
<CAPTION>
[Bar Chart]
Annual Total Returns
1990-1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14% 13.75
XXXX
12% XXXX
11.20 XXXX
10% XXXX 10.50 XXXX
XXXX XXXX XXXX
8% XXXX 8.48 XXXX XXXX 8.08
6.45 XXXX XXXX XXXX XXXX XXXX
6% XXXX XXXX XXXX XXXX XXXX XXXX
XXXX XXXX XXXX XXXX XXXX XXXX 5.13
4% XXXX XXXX XXXX XXXX XXXX 4.17 XXXX XXXX
XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
2% XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
0% XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
- -2% XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX -1.51
XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX
- -4% XXXX XXXX XXXX XXXX -3.31 XXXX XXXX XXXX XXXX XXXX
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Calendar Years
During the 10-year period shown in the bar chart, the
highest return for a quarter was 5.77% (quarter ended March
31, 1995) and the lowest return for a quarter was -3.97%
(quarter ended March 31, 1994).
Note: The Fund's Class A Shares are sold subject to a
maximum 4% sales load which is not reflected in the bar
chart. If the sales load were reflected, returns would be
less than those shown above.
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Since
For the Period Ended 1-Year 5-Year 10-Years inception of
December 31, 1999 the Fund
<S> <C> <C> <C> <C>
Churchill Tax-Free Fund of Kentucky
Class A Shares (1) -5.45% 4.93% 5.75% 6.32%*
Churchill Tax-Free Fund of Kentucky
Class C Shares -3.42%*** N/A N/A 3.66%**
Lehman Brothers Quality Intermediate
Municipal Bond Index****
0.29% 6.24 6.38 6.51%*
4.97%**
<FN>
(1) The average annual total returns shown do reflect the
maximum 4% sales load.
</FN>
<FN>
*From commencement of operations on May 21, 1987.
</FN>
<FN>
**From commencement of new class of shares on April 1, 1996.
</FN>
<FN>
***The average annual total return for Class C shares for
one year assumes redemption at the end of the year and
payment of 1% CDSC.
</FN>
<FN>
****The Lehman Brothers Quality Intermediate Municipal Bond
Index is nationally oriented and consists of an unmanaged
mix of investment-grade intermediate-term municipal
securities of issuers throughout the United States.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay
if you buy and hold shares of the Fund.
Class A Class C
Shares Shares
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases.....
(as a percentage of offering price) 4.00% None
Maximum Deferred Sales Charge (Load)..None(1) 1.00%(2)
(as a percentage of the lesser of
redemption value or purchase price)
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends or
Distributions
(as a percentage of offering price).....None None
Redemption Fees..........................None None
Exchange Fees............................None None
Annual Fund Operating Expenses (expenses that are
deducted from the Fund's assets)
Management Fees ..........................0.40% 0.40%
Distribution
and /or Service (12b-1) Fee 0.15% 0.75%
All Other Expenses:
Service Fee.....................None 0.25%
Other Expenses (3)..............0.17% 0.16%
Total All Other Expenses (3).............0.17% 0.41%
Total Annual Fund
Operating Expenses (3)...................0.72% 1.56%
<FN>
(1) If you buy Class A Shares in transactions of $1 million
or more there is no sales charge but you will be subject to
a contingent deferred sales charge of up to 1% if you redeem
your shares during the first two years after purchase and
0.50 of 1% during the third and fourth years after purchase
</FN>
<FN>
(2) A contingent deferred sales charge of 1% is imposed on
the redemption proceeds of the shares if redeemed during the
first 12 months after purchase.
</FN>
<FN>
(3) Does not reflect a 0.01% offset in Fund expenses
received in the year ended December 31, 1999 for uninvested
cash balances. Reflecting this offset for that year, other
expenses, all other expenses and total annual Fund operating
expenses were 0.16%, 0.16% and 0.71%, respectively, for
Class A Shares; for Class C Shares, these expenses were
0.15%, 0.40% and 1.55%, respectively.
</FN>
</TABLE>
Example
This Example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other
mutual funds.
The Example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year, you
reinvest all dividends and distributions, and that the
Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A Shares............$471 $621 $785 $1,259
Class C Shares............$259 $493 $850 $1,417(4)
You would pay the following expenses if you did not redeem your Class
C Shares:
Class C Shares............$159 $493 $850 $1,417(4)
<FN>
(4) Six years after the date of purchase, Class C Shares are
automatically converted to Class A Shares. Over time long-term
Class C Shareholders could pay the economic equivalent of an
amount that is more than the maximum front-end sales charge
allowed under applicable regulations because of the 12b-1 fee and
service fee. Because these fees are paid out of the Fund's assets
on an on-going basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types
of sales charges.
</FN>
</TABLE>
<PAGE>
INVESTMENT OF THE FUND'S ASSETS
"Is the Fund right for me?"
The shares of the Fund are designed to be a suitable
investment for individuals, corporations, institutions and
fiduciaries who seek income exempt from Kentucky state and
regular Federal income taxes.
Kentucky Obligations
The Fund invests in Kentucky Obligations which are a
type of municipal obligation. They pay interest which bond
counsel or other appropriate counsel deems to be exempt from
regular Federal and Commonwealth of Kentucky income taxes.
They include obligations of Kentucky issuers and certain non-
Kentucky issuers, of any maturity.
At the time of purchase, the Fund's Kentucky Obligations
must be of investment grade quality. This means that they must
either
*be rated within the four highest credit ratings 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 Sub-Adviser, Banc One Investment Advisors
Corporation.
The obligations of non-Kentucky issuers that the Fund
can purchase as Kentucky Obligations are those issued by or
under the authority of Guam, the Northern Mariana Islands,
Puerto Rico and the Virgin Islands. Interest paid on these
obligations is currently exempt from regular Federal and
Kentucky income taxes. The Fund purchases the obligations of
these issuers only when obligations of Kentucky issuers with
the appropriate characteristics of quality, maturity and
coupon rate are unavailable.
Municipal Obligations
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 public purposes.
There are two principal classifications of municipal
obligations: "notes" and "bonds." Notes generally have
maturities of one year or less, while bonds are paid back
over longer periods.
The various public purposes for which municipal
obligations are issued include:
* obtaining funds for general operating expenses,
* refunding outstanding obligations,
* obtaining funds for loans to other public
institutions and facilities, and
* funding the construction of highways, bridges,
schools, hospitals, housing, mass transportation,
streets and water and sewer works.
Municipal obligations include:
* tax, revenue or bond anticipation notes,
* construction loan notes,
* project notes, which sometimes carry a U.S.
government guarantee,
* municipal lease/purchase agreements, which are
similar to installment purchase contracts for
property or equipment, and
*floating and variable rate demand notes.
<PAGE>
Churchill Tax-Free Fund of Kentucky
[PICTURE]
Jefferson Co. Hospital Revenue
[PICTURE]
Jefferson Co. Pollution Control
[PICTURE]
Hardin County Water District
[PICTURE]
Higher Education
[PICTURE]
Kentucky Turnpike Authority
[PICTURE]
Kenton Co. Airport Board
[PICTURE]
Scott C. School District
[PICTURE]
Warren County Kentucky Judicial Center
[PICTURE]
Lexington-Fayette UCG, KY Government
[PICTURE]
Project-UK Library
[PICTURE]
The Fund invests in tax-free municipal securities, primarily
the kinds of obligations issued by various communities and
political subdivisions within Kentucky. Most of these
securities are used in general to finance construction of
long-term municipal projects; examples are pictured above.
The municipal obligations that financed these particular
projects were included in the Fund's portfolio as of March
27,2000, and together represented 14.45% of the Fund's
portfolio. Since the portfolio is subject to change, the
Fund may not necessarily own these specific securities at
the time of the delivery of this Prospectus.
<PAGE>
"What factors may affect the value of the Fund's investments
and their yields?"
Change in prevailing interest rates is the most common
factor that affects the value of the obligations in the
Fund's portfolio. Any such change may have different effects
on short-term and long-term Kentucky Obligations. Long-term
obligations (which usually have higher yields) may fluctuate
in value more than short-term ones. Thus, the Fund may
shorten the average maturity of its portfolio when it
believes that prevailing interest rates may rise. While this
strategy may promote one part of the Fund's objective,
preservation of capital, it may also result in a lower level
of income.
"What are the main risk factors 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 Kentucky
Obligations that the Fund owns. The Fund has derived this
information from sources that are generally available to
investors and believes it to be accurate, but it has not
been independently verified and it may not be complete.
The Commonwealth of Kentucky continues to rank among
the top coal producers in the country. Tobacco is the
dominant agricultural product. Kentucky ranks second among
the states in the total cash value of tobacco raised. There
is significant diversification in the manufacturing sector
of the Commonwealth's economy. A few examples include the
production of automobiles and trucks, heavy machinery and
other durable goods, appliances and computer equipment.
There continues to be growth in auto parts/components
producers that supply the Toyota Motors facility in
Georgetown, Kentucky. Strong demand has led to major
expansions of the Ford Truck plant at Louisville. Tobacco
processing plants and distilleries produce items for export
throughout the world. Thoroughbred horse breeding and racing
are important to the economy, as is tourism.
Economic concerns include a relatively high
unemployment rate in the non-urbanized areas of the
Commonwealth. 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. Any federal legislation that adversely affects
the tobacco and/or cigarette industry would have a negative
impact on Kentucky's economy. The effects of the recent
legal settlement between the tobacco companies and
individual states, including Kentucky, are now just
beginning to be felt.
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,
because resources for other matters will be reduced or tax
levels will be increased, or a combination of both may
occur.
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.
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.
FUND MANAGEMENT
"How is the Fund managed?"
Aquila Management Corporation, 380 Madison Avenue,
Suite 2300, New York, NY 10017, the Manager, is the Fund's
investment adviser under an Advisory and Administration
Agreement. It has delegated its investment advisory duties,
including portfolio management, to Banc One Investment
Advisors Corporation, the Sub-Adviser, under a sub-advisory
agreement described below. The Manager is also responsible
for administrative services, including providing for the
maintenance of the headquarters of the Fund, overseeing
relationships between the Fund and the service providers to
the Fund, either keeping the accounting records of the Fund
or, at its expense and responsibility, delegating such
duties in whole or in part to a company satisfactory to the
Fund, maintaining the Fund's books and records and providing
other administrative services.
The Sub-Adviser provides the Fund with local advisory
services.
Under the Sub-Advisory Agreement, the Sub-Adviser
provides for investment supervision, including supervising
continuously the investment program of the Fund and the
composition of its portfolio, determining what securities
will be purchased or sold by the Fund and arranging for the
purchase and the sale of securities held in the portfolio of
the Fund; and, at the Sub-Adviser's expense, pricing of the
Fund's portfolio daily.
Under the Advisory and Administration Agreement, the
Fund pays the Manager 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 is payable at the annual rate of 0.40 of 1%
of such net asset value.
Information about the Sub-Adviser and the Manager
The Sub-Adviser, with a local office at 416 West
Jefferson Street, Louisville, KY 40202, is a wholly-owned
subsidiary of BANC ONE CORPORATION ("BANC ONE"). As of
December 31, 1999, the Sub-Adviser acted as investment
adviser to municipal bond funds with combined assets in
excess of $4.5 billion, of which approximately $360 million
were obligations of Kentucky issuers. BANC ONE is a multi-
bank holding company, headquartered in Chicago. with
operations in 33 states. It is the nation's fourth largest
bank holding company with assets of approximately $270
billion. The Sub-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 Portfolio
Manager, at the Sub-Adviser's Louisville office. He has
served in this capacity since September, 1995, when the
Sub-Adviser became adviser to the Fund. From 1981 to 1995 he
was employed by Liberty National Bank, the Sub-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
Sub-Adviser's Fixed Income Fund Sub-Committee. Mr. Albright
attended the University of Louisville.
The Fund's Manager, Aquila Management Corporation, 380
Madison Avenue, New York, NY 10017, is founder and Manager
and/or administrator to the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money-market
funds and equity funds. As of December 31, 1999, these funds
had aggregate assets of approximately $3.0 billion, of which
approximately $1.8 billion consisted of assets of the
tax-free municipal bond funds. The Manager, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann,
directly, through a trust and through share ownership by his
wife.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York
time, on each day that the New York Stock Exchange is open
(a "business day"), by dividing the value of the Fund's net
assets (which means the value of the assets less
liabilities) allocable to each class by the total number of
shares of such class outstanding at that time. In general,
net asset value of the Fund's shares is based on portfolio
market value, except that Kentucky Obligations maturing in
60 days or less are generally valued at amortized cost. The
price at which a purchase or redemption of shares is
effected is based on the next calculated net asset value
after your purchase or redemption order is received in
proper form. The New York Stock Exchange annually announces
the days on which it will not be open. The most recent
announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the Exchange may close on days not included in that
announcement.
PURCHASES
"Are there alternate purchase plans?"
The Fund provides individuals with alternate ways to
purchase shares through two separate classes of shares
(Class A and Class C). Although the classes have different
sales charge structures and ongoing expenses, they both
represent interests in the same portfolio of Kentucky
Obligations. You should choose the class that best suits
your own circumstances and needs.
"Can I purchase shares of the Fund?"
You can purchase shares of the Fund if you live in
Kentucky or in one of the other states listed below. You
should not purchase shares of the Fund if you do not reside
in one of the following states. Otherwise, the Fund can
redeem the shares you purchased. This may cause you to
suffer a loss and may have tax consequences.
Also, if you do not reside in Kentucky, dividends from
the Fund may be subject to state income taxes of the state
in which you do reside. Therefore, you should consult your
tax adviser before buying shares of the Fund.
On the date of this Prospectus, Class A and C Shares
are available only in:
Kentucky *Alabama * District of Columbia *Florida * Georgia
* Hawaii * * Illinois * Indiana * Missouri * New Jersey *
New York * Ohio * Pennsylvania *Tennessee
If you are a resident of Texas you may purchase Class A
Shares only.
"How much money do I need to invest?"
Option I
*Initially, $1,000.
*Subsequently, any amount (for investments in shares of
the same class).
Option II
*$50 or more if an Automatic Investment Program is
established
*Subsequently, any amount you specify ($50 or more).
*You are not permitted to maintain both an Automatic
Investment Program and an Automatic Withdrawal Plan
simultaneously.
Under either option, your investment must be drawn in United
States dollars on a United States commercial bank, savings
bank or credit union or a United States branch of a foreign
commercial bank (each of which is a "Financial
Institution").
"How do I purchase shares?"
You may purchase the Fund's shares:
* through an investment broker or dealer, or a bank or
financial intermediary, that has a sales agreement with the
Distributor, Aquila Distributors, Inc., in which case that
institution will take action on your behalf, and you will
not personally perform the steps indicated below; or
* directly through the Distributor, by mailing payment
to the Fund's Agent, PFPC Inc.
* The price you will pay is net asset value plus a
sales charge for Class A Shares and net asset value for
Class C Shares. (See "What price will I pay for the Fund's
shares?")
In either instance, all purchases of Class A Shares are
subject to the applicable sales charge.
Opening an Account Adding to An Account
* Make out a check for * Make out a check for
the investment amount the investment amount
payable to payable to Churchill
Churchill Tax-Free Fund of Tax-Free Fund
Kentucky. of Kentucky.
* Complete the Application * Fill out the pre-
printed
included with the Prospectus, stub attached
indicating the features to the Fund's
you wish to authorize. confirmations
or supply the name(s)
of account owner(s),
the account number, and
the name of the
Fund.
* Send your check and * Send your check and
completed application completed application
to your dealer or to your dealer or
to the Fund's to the Fund's
Agent, PFPC Inc. Agent, PFPC Inc.
Unless you indicate otherwise, your investment will be
made in Class A Shares.
"Can I transfer funds electronically?"
You can have funds transferred electronically, in
amounts of $50 or more, from your Financial Institution if
it is a member of the Automated Clearing House. You may make
investments through two electronic transfer features,
"Automatic Investment" and "Telephone Investment."
* Automatic Investment: You can authorize a pre-
determined amount to be regularly transferred from your
account.
* Telephone Investment: You can make single investments
of up to $50,000 by telephone instructions to the Agent.
Before you can transfer funds electronically, the
Fund's Agent must have your completed application
authorizing these features. Or, if you initially decide not
to choose these conveniences and then later wish to do so,
you must complete a Ready Access Features Form which is
available from the Distributor or Agent, or if your account
is set up so that your broker or dealer makes these sorts of
changes, request your broker or dealer to make them. The
Fund may modify or terminate these investment methods or
charge a service fee, upon 30 days' written notice to
shareholders.
REDEEMING YOUR INVESTMENT
You may redeem some or all of your shares by a request
to the Agent. Shares will be redeemed at the next net asset
value determined after your request has been received in
proper form.
There is no minimum period for investment in the Fund,
except for shares recently purchased by check or by
Automatic or Telephone Investment as discussed below.
If you own both Class A and C Shares and do not specify
which class you wish to redeem, we will redeem your Class A
Shares.
Certain shares are subject to a contingent deferred
sales charge, or CDSC. These are:
*Class C Shares held for less than 12 months (from
the date of purchase).
*CDSC Class A Shares.
Upon redemption, enough additional shares will be
redeemed to pay for any applicable CDSC.
A redemption may result in a tax liability for you.
"How can I redeem my investment?"
By mail, send instructions to:
PFPC Inc.
Attn: Aquilasm Group of Funds
400 Bellevue Parkway
Wilmington, Delaware 19809
By telephone, call:
800-872-5860
By FAX, send
instructions to:
302-791-3055
For liquidity and convenience, the Fund offers expedited
redemption.
Expedited Redemption Methods
(Non-Certificate Shares Only)
You may request expedited redemption for any shares not
issued in certificate form in two ways:
1 By Telephone. The Agent will take instructions from
anyone by telephone to redeem shares and make payments:
a) to a Financial Institution account you have
previously specified; or
b) by check in the amount of $50,000 or less, mailed to
the same name and address (which has been unchanged for
the past 30 days) as the account from which you are
redeeming. You may only redeem by check via telephone
request once in any 7-day period.
Telephoning the Agent
Whenever you telephone the Agent, please be prepared to
supply:
account name(s) and number
name of the caller
the social security number registered to the account
personal identification.
Note: Check the accuracy of your confirmation
statements immediately. The Fund, the Agent, and the
Distributor are not responsible for losses resulting from
unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify a caller's
identity. The Agent may record calls.
2 By FAX or Mail. You may request redemption payments
to a predesignated Financial Institution account by a letter
of instruction sent to the Agent: PFPC Inc., by FAX at
302-791-3055 or by mail to 400 Bellevue Parkway, Wilmington,
DE 19809. The letter, signed by the registered
shareholder(s) (no signature guarantee is required), must
indicate:
account name(s)
account number
amount to be redeemed
any payment directions.
To have redemption proceeds sent directly to a
Financial Institution account, you must complete the
Expedited Redemption section of the Application or a Ready
Access Features Form. You will be required to provide (1)
details about your Financial Institution account, (2)
signature guarantees and (3) possible additional
documentation.
The name(s) of the shareholder(s) on the Financial
Institution account must be identical to those on the Fund's
records of your account.
You may change your designated Financial Institution
account at any time by completing and returning a revised
Ready Access Features Form.
Regular Redemption Method
(Certificate and Non-Certificate Shares)
Certificate Shares. Mail to the Fund's Agent: (1) blank
(unsigned) certificates for Class A Shares to be redeemed,
(2) redemption instructions and (3) a stock assignment form.
To be in "proper form," items (2) and (3) above must be
signed by the registered shareholder(s) exactly as the
account is registered. For a joint account, both shareholder
signatures are necessary.
For your protection, mail certificates separately from
signed redemption instructions. We recommend that
certificates be sent by registered mail, return receipt
requested.
We may require additional documentation for certain
types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by
someone other than the shareholder of record. The Agent may
require signature guarantees if insufficient documentation
is on file.
We do not require a signature guarantee for redemptions
up to $50,000, payable to the record holder, and sent to the
address of record, except as noted above. In all other
cases, signatures must be guaranteed.
Your signature may be guaranteed by any:
member of a national securities exchange
U.S. bank or trust company
state-chartered savings bank
federally chartered savings and loan association
foreign bank having a U.S. correspondent
bank; or
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.
Non-Certificate Shares. You must use the Regular
Redemption Method if you have not chosen Expedited
Redemption to a predesignated Financial Institution account.
To redeem by this method, send a letter of instruction to
the Fund's Agent, which includes:
account name(s)
account number
dollar amount or number of shares to be
redeemed or a statement that all shares held in
the account are to be redeemed
payment instructions (we normally mail
redemption proceeds to your address as registered
with the Fund)
signature(s) of the registered shareholder(s)
signature guarantee(s), if required, as indicated
above.
"When will I receive the proceeds of my redemption?"
Redemption proceeds are normally sent on the next
business day following receipt in proper form of your
redemption request. Except as described below, payments will
normally be sent to your address of record within 7 days.
Redemption Method of Payment Charges
Under $1,000 Check None
$1,000 or more Check or, if and None
as you requested on your
Application or Ready
Access Features Form,
wired or transferred
through the Automated
Clearing House to your
Financial Institution account
Through a broker
/dealer Check or wire, to your None,
broker/dealer however, your
broker/dealer
may charge a
fee.
Although the Fund does not currently intend to, it can
charge up to $5.00 per wire redemption, after written notice
to shareholders who have elected this redemption procedure.
Upon 30 days' written notice to shareholders the Fund may
modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service
fee, although no such fee is presently contemplated. If any
such changes are made, the Prospectus will be supplemented
to reflect them.
The Fund may delay payment for redemption of shares
recently purchased by check (including certified, cashier's
or official bank check) or by Automatic Investment or
Telephone Investment up to 15 days after purchase; however,
payment for redemption will not be delayed after (i) the
check or transfer of funds has been honored, or (ii) the
Agent receives satisfactory assurance that your Financial
Institution will honor the check or transfer of funds. You
can eliminate possible delays by paying for purchased shares
with wired funds or Federal Reserve drafts.
The Fund has the right to postpone payment or suspend
redemption rights during certain periods. These periods may
occur (i) when the New York Stock Exchange is closed for
other than weekends and holidays, (ii) when the Securities
and Exchange Commission (the "SEC") restricts trading on the
New York Stock Exchange, (iii) when the SEC determines an
emergency exists which causes disposal of, or determination
of the value of, the portfolio securities to be unreasonable
or impracticable, and (iv) during such other periods as the
SEC may permit.
The Fund can redeem your shares if their value totals
less than $500 as a result of redemptions or failure to meet
and maintain the minimum investment level under an Automatic
Investment program. Before such a redemption is made, we
will send you a notice giving you 60 days to make additional
investments to bring your account up to the minimum.
Redemption proceeds may be paid in whole or in part by
distribution of the Fund's portfolio securities ("redemption
in kind") in conformity with SEC rules. This method will
only be used if the Board of Trustees determines that
payments partially or wholly in cash would be detrimental to
the best interests of the remaining shareholders.
"Are there any reinvestment privileges?"
If you reinvest proceeds of redemption within 120 days
of a redemption you will not have to pay any additional
sales charge on the reinvestment. You must reinvest in the
same class as the shares redeemed. You may exercise this
privilege only once a year, unless otherwise approved by the
Distributor.
The Distributor will refund to you any CDSC deducted at
the time of redemption by adding it to the amount of your
reinvestment.
Reinvestment will not alter the tax consequences of
your original redemption.
"Is there an Automatic Withdrawal Plan?"
Yes, but it is only available for Class A Shares. Under
an Automatic Withdrawal Plan you can arrange to receive a
monthly or quarterly check in a stated amount, not less than
$50.
ALTERNATE PURCHASE PLANS
"How do the different arrangements for Class A Shares and
Class C Shares affect the cost of buying, holding and
redeeming shares, and what else should I know about the two
classes?"
In this Prospectus the Fund provides you with two
alternative ways to invest in the Fund through two separate
classes of shares. All classes represent interests in the
same portfolio of Kentucky Obligations. The classes of
shares offered to individuals differ in their sales charge
structures and ongoing expenses, as described below. You
should choose the class that best suits your own
circumstances and needs.
Class A Shares Class C Shares
"Front-Payment "Level-Payment
Shares" Shares"
Initial Class A Shares are None. Class C
Sales offered at net asset Shares are offered
Charge value plus a maximum at net asset value
sales charge of 4%, with no sales
paid at the time of charge payable at
purchase. Thus, the time of
your investment is purchase.
reduced by the
applicable sales
charge.
Contingent None (except for A maximum CDSC of
Deferred certain purchases of 1% is imposed upon
Sales $1 million or more). the redemption of
Charge Class C Shares held
("CDSC") for less than 12
months. No CDSC
applies to Class C
Shares acquired
through the
reinvestment of
dividends or
distributions.
Distribution An asset retention There is a level
and Service service fee of 0.15 charge for
Fees of 1% is imposed on distribution and
the average annual service fees for 6
net assets years after the
represented by the date of purchase
Class A Shares. at the
aggregate annual
rate of 1% of the
average net assets
represented by the
Class C Shares.
Other The initial sales Class C Shares,
Information charge is waived or together with a
reduced in some pro- rata portion
cases. Larger of all Class C
purchases qualify Shares acquired
for lower sales through
charges. reinvestment of
dividends and other
distributions paid
in additional Class
C Shares,
automatically
convert to Class A
Shares after 6
years.
Systematic Payroll Investments
You can make systematic investments into either Class A
Shares or Class C Shares each pay period if your employer
has established a Systematic Payroll Investment Plan with
the Fund. To participate in the payroll plan, you must make
your own arrangements with your employer's payroll
department, which may include completing special forms.
Additionally, the Fund requires that you complete the
application included with this Prospectus. Once your
application is received by the Fund and a new account is
opened, under the payroll plan your employer will deduct a
preauthorized amount from each payroll check. This amount
will then be sent directly to the Fund for purchase of
shares at the then current offering price, which includes
any applicable sales charge. You will receive a confirmation
from the Fund for each transaction. Should you wish to
change the dollar amount or end future systematic payroll
investments, you must notify your employer directly. Changes
may take up to ten days.
"What price will I pay for the Fund's shares?"
Class A Shares Offering Class C Shares Offering
Price Price
Net asset value per share Net asset value per share
plus the applicable sales charge
You will receive that day's offering price on purchase
orders, including Telephone Investments and investments by
mail, received in proper form prior to 4:00 p.m. New York
time. Dealers have the added flexibility of transmitting
orders received prior to 4:00 p.m. New York time to the
Distributor or Agent before the Distributor's close of
business that day (normally 5:00 p.m. New York time) and
still receiving that day's offering price. Otherwise, orders
will be filled at the next determined offering price.
Dealers are required to submit orders promptly. Purchase
orders received on a non-business day, including those for
Automatic Investment, will be executed on the next
succeeding business day. The sale of shares will be
suspended (1) during any period when net asset value
determination is suspended or, (2) when the Distributor
judges it is in the Fund's best interest to do so.
"What are the sales charges for purchases of Class A
Shares?"
The following table shows the amount of sales charge
incurred by a "single purchaser" of Class A Shares. A
"single purchaser" is:
* an individual;
* an individual, together with his or her
spouse, and/or any children under 21 years of age
purchasing shares for their account;
* a trustee or other fiduciary purchasing
shares for a single trust estate or fiduciary
account; or
* a tax-exempt organization as detailed in
Section 501(c)(3) or (13) of the Internal Revenue
Code.
I II III
Sales Charge as Sales Charge as
Percentage of Approximate
Public Percentage of
Amount of Purchase Offering Price Amount Invested
Less than $25,000 4.00% 4.17%
$25,000 but less
than $50,000 3.75% 3.90%
$50,000 but less
than $100,000 3.50% 3.63%
$100,000 but less
than $250,000 3.25% 3.36%
$250,000 but less
than $500,000 3.00% 3.09%
$500,000 but less
than $1,000,000 2.50% 2.56%
For purchases of $1 million or more see "Sales Charges for
Purchases of $1 Million or More."
For example:
If you pay $10,000 (Column I), your sales charge would be
4.00% or $400 (Column II). ($10,000 x .04 = $400)
The value of your account, after deducting the sales charge
from your payment, would increase by $9,600. (This would be
the initial value of your account if you opened it with the
$10,000 purchase.) ($10,000 - $400 = $9,600)
The sales charge as a percentage of the increase in the
value of your account would be 4.17% (Column III). ($400 /
$9,600 = .0416666 or 4.17%)
Sales Charges for Purchases of $1 Million or More
You will not pay a sales charge at the time of purchase
when you purchase "CDSC Class A Shares." CDSC Class A Shares
are Class A Shares issued under the following circumstances:
(i) Class A Shares issued in a single
purchase of $1 million or more by a single
purchaser; and
(ii) all Class A Shares issued to a single
purchaser in a single purchase when the value of
the purchase, together with the value of the
purchaser's other CDSC Class A Shares and Class A
Shares on which a sales charge has been paid,
equals or exceeds $1 million.
If you redeem all or part of your CDSC Class A Shares
during the four years after you purchase them, you must pay
a special contingent deferred sales charge upon redemption.
You will pay 1% of the Redemption Value if you redeem
within the first two years after purchase, and 0.50 of 1% of
the Redemption Value if you redeem within the third or
fourth year.
The "Redemption Value" of your shares is the lesser of:
(i) the net asset value when you purchased the CDSC Class A
Shares you are redeeming; or (ii) the net asset value at the
time of your redemption.
This special charge also applies to CDSC Class A Shares
purchased without a sales charge pursuant to a Letter of
Intent.
Reduced Sales Charges for Certain Purchases of Class A
Shares
Right of Accumulation
"Single purchasers" may qualify for a reduced sales
charge in accordance with the above schedule when making
subsequent purchases of Class A Shares.
Letters of Intent
"Single Purchasers" may also qualify for reduced sales
charges, in accordance with the above schedule, after a
written Letter of Intent (included with the Application) is
received by the Distributor.
General
Class A Shares may be purchased without a sales charge
by certain classes of purchasers.
Certain Investment Companies
If you redeem shares of an investment company (not a
member of the Aquilasm Group of Funds) on which you have
paid a sales charge, you can invest the proceeds within 120
days in Class A Shares of the Fund without paying a sales
charge. You can get additional information from the
Distributor.
"What are the sales, service and distribution charges for
Class C Shares?"
* No sales charge at time of purchase.
* Annual fees for service and distribution at a combined
annual rate of 1% of average annual net assets of the
Fund represented by Class C Shares.
* After six years, Class C Shares automatically convert
to Class A Shares, which bear lower service and
distribution fees.
Redemption of Class C Shares
* 1% charge if redeemed within the first 12 months after
purchase. This contingent deferred sales charge, or
CDSC, is calculated based on the lesser of the net
asset value at the time of purchase or at the time of
redemption.
* No CDSC applies if Class C Shares are held for 12
months after purchase.
* Shares acquired by reinvestment of dividends or
distributions are not subject to any CDSC.
Broker/Dealer Compensation - Class C Shares
The Distributor will pay 1% of the sales price to any
broker/dealer executing a Class C Share purchase.
"What about Confirmations?"
A statement will be mailed to you confirming each
purchase of shares in the Fund. Additionally, your account
at the Agent will be credited in full and fractional shares
(rounded to the nearest 1/1000th of a share).
General
The Fund and the Distributor may 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.}
"Is there a Distribution Plan or a Services Plan?"
The Fund has adopted a Distribution Plan (the "Plan")
under the Investment Company Act of 1940's Rule 12b-1 in
order to:
(i) permit the Fund to finance activities
primarily intended to result in the sale of its
shares;
(ii) permit the Manager, out of its own funds, to
make payment for distribution expenses; and
(iii) protect the Fund against any claim that some of
the expenses which it pays or may pay might be considered to
be sales-related and therefore come within the purview of
the Rule.
Pursuant to the Plan, the Fund makes payments with
respect to both Class A and Class C Shares under agreements
to certain broker/dealers, or others who have (i) rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's shares or (ii)
assisted in the servicing of shareholder accounts.
For any fiscal year, these payments may not exceed 0.15
of 1% for Class A Shares and 0.75 of 1% for Class C Shares,
of the average annual net assets represented by each class.
Because these distribution fees are paid out of assets on an
ongoing basis, over time these fees will increase the cost
of your investment and may cost you more than paying other
types of sales charges.
For any class, these payments are made only from the
assets allocable to that class. Whenever the Fund makes
Class A Permitted Payments, the aggregate annual rate of the
advisory fee and administration fee otherwise payable by the
Fund will be reduced from 0.50 of 1% to 0.40 of 1% of the
Fund's average annual net assets.
Shareholder Services Plan for Class C Shares
The Fund's Shareholder Services Plan authorizes it to
pay a service fee under agreements to certain qualified
recipients who have agreed to provide personal services to
Class C shareholders and/or maintain their accounts. For any
fiscal year, such fees may not exceed 0.25 of 1% of the
average annual net assets represented by Class C Shares.
Payment is made only out of the Fund's assets represented by
Class C Shares.
Service fees with respect to Class C Shares will be
paid to the Distributor during the first year after purchase
and thereafter to other qualified recipients.
"Transfer on Death" Registration (Both Classes)
The Fund generally permits "transfer on death" ("TOD")
registration of shares, so that on the death of the
shareholder the shares are transferred to a designated
beneficiary or beneficiaries. Ask the Agent or your broker-
dealer for the Transfer on Death Registration Request Form.
With it you will receive a copy of the TOD Rules of the
Aquilasm Group of Funds, which specify how the registration
becomes effective and operates. By opening a TOD Account,
you agree to be bound by the TOD Rules.
DIVIDENDS AND DISTRIBUTIONS
"How are dividends and distributions paid?"
The Fund pays dividends and other distributions with
respect to each class of shares. The Fund calculates its
dividends and other distributions with respect to each class
at the same time and in the same manner. Net income for
dividend purposes includes all interest income accrued by
the Fund since the previous dividend declaration less
expenses paid or accrued. Net income also includes any
original issue discount, which occurs if the Fund purchases
an obligation for less than its face amount. The discount
from the face amount is treated as additional income earned
over the life of the obligation. Because the Fund's income
varies, so will the Fund's dividends. There is no fixed
dividend rate. It is expected that most of the Fund's
dividends will be comprised of interest income. The
dividends and distributions of each class can vary due to
certain class-specific charges. The Fund will declare all of
its net income 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.
Redeemed shares continue to earn dividends through and
including the earlier of:
1. the day prior to the day when
redemption proceeds are mailed, wired or
transferred by the Automated Clearing
House or the Agent or paid by the Agent
to a selected dealer; or
2. the third day the New York Stock
Exchange is open after the day the net
asset value of the redeemed shares was
determined.
The Fund's present policy is to pay dividends so they
will be received or credited by approximately the first day
of each month.
Dividends and distributions will automatically be
reinvested in full and fractional shares of the Fund of the
same class at net asset value on the record date for the
dividend or distribution, unless you elect otherwise.
You may choose to have all or any part of the payments
for dividends or distributions paid in cash. You can elect
to have the cash portion of your dividends or distributions
deposited, without charge, by electronic funds transfers
into your account at a financial institution, if it is a
member of the Automated Clearing House.
You can make any of these elections on the Application,
by a Ready Access Features Form or by a letter to the Agent.
Your election to receive some or all of your dividends and
distributions in cash will be effective as of the next
payment of dividends after it has been received in proper
form by the Agent. It will continue in effect until the
Agent receives written notification of a change.
All shareholders, whether their dividends and
distributions are received in cash or reinvested, will
receive a monthly statement indicating the current status of
their investment account with the Fund.
If you do not comply with laws requiring you to furnish
taxpayer identification numbers and report dividends, the
Fund may be required to impose backup withholding at a rate
of 31% upon payment of redemptions to shareholders and on
capital gains distributions (if any) and any other
distributions that do not qualify as "exempt-interest
dividends."
TAX INFORMATION
Net investment income includes income from Kentucky
Obligations in the portfolio which the Fund allocates as
"exempt-interest dividends." Such dividends are exempt from
regular Federal income tax. The Fund will allocate
"exempt-interest dividends" by applying one designated
percentage to all income dividends it declares during its
tax year. It will normally make this designation in the
first month following its fiscal year end for dividends paid
in the prior year.
It is possible that, under certain circumstances, a
small portion of dividends paid by the Fund will be subject
to income taxes. During the Fund's fiscal year ended
December 31, 1999, the following percentages of the Fund's
dividends were exempt interest dividends: Class A Shares,
98.84%; Class C Shares, 98.05%. For the calendar year 1999,
the following percentages of total dividends paid were
taxable as ordinary income: Class A Shares, 1.16%; Class C
Shares, 1.95%. The percentage of tax-exempt income from any
particular dividend may differ from the percentage of the
Fund's tax-exempt income during the dividend period.
Net capital gains of the Fund, if any, 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 intends to qualify during each fiscal year
under the Internal Revenue Code to pay "exempt-interest
dividends" to its shareholders. "Exempt-interest dividends"
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 "exempt-interest dividends" are not
taxed, each taxpayer must report the total amount of
tax-exempt interest (including "exempt-interest dividends"
from the Fund) received or acquired during the year.
The Fund will treat as ordinary income in the year
received certain gains on Kentucky Obligations it acquired
after April 30, 1993 and sells for less than face or
redemption value. Those gains will be taxable to you as
ordinary income, if distributed.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so
designates) are reportable by shareholders as gains from the
sale or exchange of a capital asset held for more than a
year. This is the case whether the shareholder reinvests the
distribution in shares of the Fund or receives it in cash,
regardless of the length of time the investment is held.
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 reduce future capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Kentucky
Obligations will be deemed long-or short-term, depending
upon the length of time the Fund holds these obligations.
You will receive information on the tax status of the
Fund's dividends and distributions annually.
Special Tax Matters
Under the Internal Revenue Code, interest on loans
incurred by shareholders to enable them to purchase or carry
shares of the Fund may not be deducted for regular Federal
tax purposes. In addition, under rules used by the Internal
Revenue Service for determining when borrowed funds are
deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Fund may be
considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the
purchase of shares.
If you or your spouse are receiving Social Security or
railroad retirement benefits, a portion of these benefits
may become taxable, if you receive exempt-interest dividends
from the Fund.
If you, or someone related to you, is a "substantial
user" of facilities financed by industrial development or
private activity bonds, you should consult your own tax
adviser before purchasing shares of the Fund.
Interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax.
However, 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 ("AMT").
Whether or not that computation will result in a tax will
depend on the entire content of your return. The Fund will
not invest more than 20% of its assets in the types of
Kentucky Obligations that pay interest subject to AMT. An
adjustment required by the Internal Revenue Code will tend
to make it more likely that corporate shareholders will be
subject to AMT. They should consult their tax advisers.
"What should I know about Kentucky Taxes?"
All of the exempt-interest dividends from Kentucky
Obligations 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. 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, futures, options and other nonexempt assets.
Shareholders of the Fund should consult their tax
advisers about other state and local tax consequences of
their investment in the Fund.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The financial highlights table is intended to help you
understand the Fund's financial performance for the
designated periods of the Fund's operations. Certain
information reflects financial results for a single Fund
share. The total returns in the table represent the rate
that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG
LLP, whose report, along with the Fund's financial
statements, is included in the annual report, is
incorporated by reference into the SAI and is available upon
request.
Class A(1) Class C(2)
Year ended December 31, Year Ended
December 31,
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period .............$10.81 $10.81 $10.55 $10.81 $10.81
Income from Investment
Operations:
Net investment income .. 0.52 0.53 0.55 0.43 0.44
Net gain (loss) on
securities (both
realized and
unrealized) .........(0.68) 0.01 0.27 (0.69) 0.01
Total from Investment
Operations ..........(0.16) 0.54 0.82 (0.26) 0.45
Less Distributions:
Dividends from net
investment income ...(0.53) (0.53) (0.55) (0.44) (0.44)
Distributions from
capital gains .......(0.03) (0.01) (0.01) (0.03) (0.01)
Total Distributions ...(0.56) (0.54) (0.56) (0.47) (0.45)
Net Asset Value, End of
Period ................$10.09 $10.81 $10.81 $10.08 $10.81
Total Return
(not reflecting
sales charge)(%) ...... (1.51) 5.13 8.08 (2.45) 4.24
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) ..... 205,842 229,667 226,477 1,932 949
Ratio of Expenses to
Average Net
Assets (%) .......... 0.72 0.73 0.73 1.56 1.59
Ratio of Net Investment
Income to Average Net
Assets (%) ........... 4.95 4.89 5.19 4.09 4.04
Portfolio Turnover
Rate (%) ............... 6.35 12.79 22.39 6.35 12.79
The expense ratios after giving effect to the expense offset for
uninvested cash balances were:
Ratio of Expenses
to Average Net Assets(%)
0.71 0.72 0.72 1.55 1.57
<CAPTION>
Class A(1) Class C(3)
Year Ended December 31, Period Ended 12/31/96
1996 1995
<C> <C> <C>
$10.71 $9.97 $10.47
0.55 0.60 0.37
(0.12) 0.74 0.11
0.43 1.34 0.48
(0.59) (0.60) (0.40)
- - -
(0.59) (0.60) (0.40)
$10.55 $10.71 $10.55
4.17 13.75 4.72+
222,889 230,270 433
0.75 0.80 1.56*
5.22 5.74 4.34*
8.94 17.09 8.94
0.74 0.79 1.55
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 1, 1996.
</FN>
<FN>
(3) For the period from April 1, 1996 through December 31, 1996.
</FN>
<FN>
+ Not annualized.
</FN>
<FN>
* Annualized.
</FN>
<FN>
Note: Effective September 11, 1995 Banc One Investment Advisors
Corporation became the Fund's Investment Adviser replacing PNC
Bank Kentucky, Inc. and effective on May 1, 1998, pursuant to new
management arrangements, was appointed as the Fund's Investment
Sub-Adviser.
</FN>
</TABLE>
<PAGE>
APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
FOR CLASS A OR CLASS C SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
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.
** Uniform Gifts/Transfers to Minors Act.
Please type or print name(s) 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 organization. If a trust, include
the
name(s) of trustees in which account will be registered and
the
name and date of the trust instrument. An account for a
pension
or profit sharing plan or trust maybe 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 area non-U.S. citizen or resident and not subject to
back-up withholding(See certification in Step 4, Section B,
below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by dealer or broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
Indicate method of payment (For either method, make check
payment to: CHURCHILL TAX-FREE FUND OF KENTUCKY)
Indicate class of shares:
__ Class A Shares (Front-Payment Class)
__ Class C Shares (Level-Payment Class)
IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE
MADE IN CLASS A SHARES.
__ Initial Investment $_________ (Minimum $1,000)
__ Automatic Investment $________ (Minimum $50)
For Automatic Investments of at least $50 per month, you must
complete Step 3, Section A, Step 4, Sections A & B and ATTACH A
PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK.
B. DISTRIBUTIONS
Income dividends and capital gains distributions are
automatically reinvested in additional shares at net asset
value unless otherwise indicated below.
You can have any portion of either type reinvested, with
the balance paid in cash, by indicating a percent below:
Income 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 theFinancial 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 1B.
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 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. LETTER OF INTENT
APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this
application
___ Yes ___ No
I/We intend to invest, in Class A Shares of the Fund during
the 13-month period from the date of my/our first purchase
pursuant to this Letter (which purchase cannot be more than
90 days prior to the date of this Letter), an aggregate
amount (excluding any reinvestment of dividends or
distributions) of at least $25,000 which, together with
my/our present holdings of Fund shares (at public offering
price on date of this Letter), will equal or exceed the
minimum amount checked below:
___ $25,000 ___ $50,000 ___ $100,000 ___ $250,000
___ $500,000
D. AUTOMATIC WITHDRAWAL PLAN
(Minimum investment $5,000)
APPLICABLE TO CLASS A SHARES ONLY.
Application must be received in good order at least 2 weeks
prior to first actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this
account, subject to the terms of the Automatic Withdrawal Plan
Provisions set forth below. To realize the amount stated below,
PFPC Inc.(the Agent) is authorized to redeem sufficient shares
from this account at the then current net asset value, in
accordance with the terms below:
Dollar amount of each withdrawal $
______________beginning________________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is
payable to a Financial Institution for your account, indicate
Financial Institution name, address and your account number
._______________________________
_________________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________
__________________________________
Street Financial Institution Street
Address
_______________________________
___________________________________
City State Zip City State Zip
____________________________________
Financial Institution
Account Number
E. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your
name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our
or any other persons telephone instructions to execute the
exchange of shares of one Aquila-sponsored fund for shares
of another Aquila-sponsored fund with identical shareholder
registration in the manner described in the Prospectus.
Except for gross negligence in acting upon such
telephoneinstructions, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless
the Agent, eachof 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,
resultingfrom acceptance of, or acting or failure to act
upon, this authorization.
F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution
account listed.
Cash proceeds in any amount from the redemption of
shares will be mailed or wired, whenever possible, upon
request, if in an amount of $1,000 or more to my/our
account at a Financial Institution. The
FinancialInstitution account must be in the same name(s) as
this Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________
____________________________________
Account Registration Financial Institution Account
Number
_______________________________
____________________________________
Financial Institution Name Financial Institution
Transit/Routing
Number
_______________________________
____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to
charge to my/our account any drafts or debits drawn on
my/our account initiated by the Agent, PFPC Inc., and to
pay such sums in accordance therewith, provided my/our
account has sufficient funds to cover such drafts or
debits. I/We further agree that your treatment of such
orders will be the same as if I/we personally signed or
initiated the drafts or debits. I/We understand that this
authority will remain in effect until you receive my/our
written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for
any reason, you shall have no liabilities.
Financial Institution Account Number
_____________________________________
Name and Address where my/our account is maintained
Name of Financial
Institution_____________________________________________
Street
Address_________________________________________________________
___
City___________________________________________State _________
Zip _______
Name(s) and Signature(s) of Depositor(s) as they appear where
account is
registered
______________________________________________
(Please Print)
X_____________________________________________
__________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________
__________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request,
Aquila Distributors, Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items
transmitted pursuant to the above authorization shall be
subject to the provisions of the Operating Rules of the
National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may
suffer in connection with the execution and issuance of any
electronic debit in the normal course of business
initiated by the Agent (except any loss due to your payment
of any amount drawn against insufficient or uncollected
funds), provided that you promptly notify us in writing of
any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle
or pay any such claim without the written permission of the
Distributor.
3 To indemnify you for any loss including your reasonable
costs and expenses in the event that you dishonor, with or
without cause, any such electronic debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is
of legal age to purchase shares of the Fund and has received and
read a current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic
Investment or Telephone Investment, if my/our account at
the Financial Institution has insufficient funds, the Fund
and its agents may cancel the purchase transaction and are
authorized to liquidate other shares or fractions thereof
held in my/our Fund account to make up any deficiency
resulting from any decline in the net asset value of shares
so purchased and any dividends paid on those shares. I/We
authorize the Fund and its agents to correct any transfer
error by a debit or credit to my/our Financial Institution
account and/or Fund account and to charge the account for
any related charges. I/We acknowledge that shares purchased
either through Automatic Investment or Telephone Investment
are subject to applicable sales charges.
- - The Fund, the Agent and the Distributor and their
trustees, directors, employees and agents will not be
liable for acting upon instructions believed to be genuine,
and will not be responsible for any losses resulting from
unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify the identity of
the caller. The Agent will request some or all of the
following information: account name and number; name(s)
and social security number registered to the account and
personal identification; the Agent may also record calls.
Shareholders should verify the accuracy of confirmation
statements immediately upon receipt. Under penalties of
perjury, the undersigned whose Social Security (Tax I.D.)
Number is shown above certifies (i) that number is my
correct taxpayer identification number and (ii) currently I
am not under IRS notification that I am subject to backup
withholding (line out (ii) if under notification). If no
such number is shown, the undersigned further certifies,
under penalties of perjury, that either (a) no such number
has been issued, and a number has been or will soon be
applied for; if a Number is not provided to you within
sixty days, the undersigned understands that all payments
(including liquidations) are subject to 31% withholding
under federal tax law, until a number is provided and the
undersigned may be subject to a $50 I.R.S. penalty; or (b)
that the undersigned is not a citizen or resident of the
U.S.; and either does not expect to be in the U.S. for 183
days during each calendar year and does not conduct a
business in the U.S. which would receive any gain from the
Fund, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR
A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ ____________________________
_________
Individual (or Custodian) Joint Registrant, if any
Date
__________________________ ____________________________
_________
Corporate Officer, Partner, Title
Date
Trustee, etc.
* For trusts, corporations or associations, this form must
be accompanied by proof of authority to sign, such as a
certified copy of the corporate resolution or a certificate
of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone
Investment, Expedited Redemption and Direct Deposit of
Dividends) are effective 15 days after this form is
received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days
after the Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature,
without prior notice, if in its judgment your use of any
feature involves unusual effort or difficulty in the
administration of your account.
- - The Fund reserves the right to alter, amend or terminate
any or all features or to charge a service fee upon 30 days
written notice to shareholders except if additional notice
is specifically required by the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must
complete a Ready Access Features Form which may be obtained
from Aquila Distributors at 1-800-872-5859 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 3c and signing the Application, the
investor is entitled to make each purchase at the public
offering price applicable to a single transaction of the
dollar amount checked above, and agrees to be bound by the
terms and conditions applicable to Letters of Intent
appearing below.
The investor is making no commitment to purchase
shares, but if the investor's purchases within thirteen
months from the date of the investor's first purchase do
not aggregate $25,000, or, if such purchases added to the
investor's present holdings do not aggregate the minimum
amount specified above, the investor will pay the increased
amount of sales charge prescribed in the terms of escrow
below.
The commission to the dealer or broker, if any, named
herein shall be at the rate applicable to the minimum
amount of the investor's specified intended purchases
checked above. If the investor's actual purchases do not
reach this minimum amount, the commissions previously paid
to the dealer will be adjusted to the rate applicable to
the investor's total purchases. If the investor's purchases
exceed the dollar amount of the investor's intended
purchases and pass the next commission break-point, the
investor shall receive the lower sales charge, provided
that the dealer returns to the Distributor the excess of
commissions previously allowed or paid to him over that
which would be applicable to the amount of the investor's
total purchases.
The investor's dealer or broker shall refer to this
Letter of Intent in placing any future purchase orders for
the investor while this letter is in effect.
The escrow shall operate as follows:
1. Out of the initial purchase (or subsequent purchases if
necessary), 3% of the dollar amount specified in the Letter
of Intent (computed to the nearest full share) shall be
held in escrow in shares of the Fund by the Agent. All
dividends and any capital distributions on the escrowed
shares will be credited to the investor's account.
2. If the total minimum investment specified under the
letter is completed within a thirteen-month period, the
escrowed shares will be promptly released to the investor.
However, shares disposed of prior to completion of the
purchase requirement under the letter will be deducted from
the amount required to complete the investment commitment.
3. If the total purchases pursuant to the letter are less
than the amount specified in the letter as the intended
aggregate purchases, the investor must remit to the
Distributor an amount equal to the difference between the
dollar amount of sales charges actually paid and the amount
of sales charges which would have been paid if the total
amount purchased had been made at a single time. If such
difference in sales charges is not paid within twenty days
after receipt of a request from the Distributor or the
dealer, the Distributor will, within sixty days after the
expiration of the letter, redeem the number of escrowed
shares necessary to realize such difference in sales
charges. Full shares and any cash proceeds for a fractional
share remaining after such redemption will be released to
the investor. The escrow of shares will not be released
until any additional sales charge due has been paid as
stated in this section.
4. By checking Box 3c and signing the Application, the
investor irrevocably constitutes and appoints the Agent or
the Distributor as his attorney to surrender for redemption
any or all escrowed shares on the books of the Fund.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant
agrees to the terms and conditions applicable to such
plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan
(the "Plan") as agent for the person (the "Planholder") who
executed the Plan authorization.
2. Certificates will not be issued for shares of the Fund
purchased for and held under the Plan, but the Agent will
credit all such shares to the Planholder on the records of
the Fund. Any share certificates now held by the Planholder
may be surrendered unendorsed to the Agent with the
application so that the shares represented by the
certificate may be held under the Plan.
3. Dividends and distributions will be reinvested in shares
of the Fund at net asset value without a sales charge.
4. Redemptions of shares in connection with disbursement
payments will be made at the net asset value per share in
effect at the close of business on the last business day of
the month or quarter.
5. The amount and the interval of disbursement payments and
the address to which checks are to be mailed may be
changed, at any time, by the Planholder on written
notification to the Agent. The Planholder should allow at
least two weeks time in mailing such notification before
the requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by
written notice (in proper form in accordance with the
requirements of the then current Prospectus of the Fund) to
redeem all, or any part of, the shares held under the Plan.
In such case the Agent will redeem the number of shares
requested at the net asset value per share in effect in
accordance with the Fund's usual redemption procedures and
will mail a check for the proceeds of such redemption to
the Planholder.
7. The Plan may, at any time, be terminated by the
Planholder on written notice to the Agent, or by the Agent
upon receiving directions to that effect from the Fund. The
Agent will also terminate the Plan upon receipt of evidence
satisfactory to it of the death or legal incapacity of the
Planholder. Upon termination of the Plan by the Agent or
the Fund, shares remaining unredeemed will be held in an
ncertificated 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>
MANAGER AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Carroll F. Knicely
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Diana P. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Robbins, Senior Vice President
Teresa M. Blair, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue
New York, New York 10017
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
<PAGE>
This Prospectus concisely states information about the
Fund that you should know before investing. A Statement of
Additional Information about the Fund (the "SAI") has been
filed with the Securities and Exchange Commission. The SAI
contains information about the Fund and its management not
included in this Prospectus. The SAI is incorporated by
reference in its entirety in this Prospectus. Only when you
have read both this Prospectus and the SAI are all material
facts about the Fund available to you.
You can get additional information about
the Fund's investments in the Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and
investment strategies that significantly affected the
Fund's performance during its last fiscal year. You can get
the SAI and the Fund's annual and semi-annual reports
without charge, upon request by calling 800-872-5860 toll
free.
In addition, you can review and copy
information about the Fund (including the SAI) at the
Public Reference Room of the SEC in Washington, D.C.
Information on the operation of the Public Reference Room
is available by calling 1-202-942-8090. Reports and other
information about the Fund are also available on the EDGAR
Database on the SEC's Internet site at http://www.sec.gov.
Copies of this information can be obtained, for a
duplicating fee, by E-mail request to [email protected] or
by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
This Prospectus should be read and retained for future
reference
TABLE OF CONTENTS
The Fund's Objective, Investment Strategies
and Main Risks...................................
Risk/Return Bar Chart and Performance Table .....
Fees and Expenses of the Fund...................
Investment of the Fund's Assets.................
Fund Management.................................
Net Asset Value Per Share........................
Purchases .......................................
Redeeming Your Investment........................
Alternate Purchase Plans.........................
Dividends and Distributors......................
Tax Information..................................
Financial Highlights.............................
Application and Letter of Intent.................
The file number under which the Fund is registered
with the SEC under the
Investment Company Act of 1940 is 811-5086.
<PAGE>
Churchill Tax-Free Fund of Kentucky
One of The
Aquilasm Group Of Funds
A tax-free
income investment
PROSPECTUS
To receive a free copy of the Fund's SAI, annual or semi-
annual report, or other information about the Fund, or to
make shareholder inquiries call:
the Fund's Shareholder Servicing Agent at
800-872-5860 toll free
or you can write to:
PFPC Inc
400 Bellevue Parkway
Wilmington, DE 19809
For general inquiries and yield information, call 800-872-
5859 or 212-697-6666
This Prospectus should be read and retained for future
reference
<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
Prospectus
May 1, 2000
Class Y Shares
Class I Shares
Churchill Tax-Free Fund of Kentucky is a mutual
fund that seeks to provide you as high a level of current
income exempt from Kentucky state and regular Federal income
taxes as is consistent with preservation of capital. The Fund
invests in municipal obligations that pay interest exempt from
Kentucky state and regular Federal income taxes and are of
investment grade quality.
For purchase, redemption or account inquiries contact the
Fund's Shareholder Servicing Agent:
PFPC Inc. * 400 Bellevue Parkway * Wilmington, DE 19809
Call 800-872-5860 toll free
For general inquiries & yield information
800-872-5859 toll free or 212-697-6666
The Securities and Exchange Commission has not approved or
disapproved the Fund's securities or passed upon the
adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
THE FUND'S OBJECTIVE, INVESTMENT STRATEGIES AND MAIN RISKS
"What is the Fund's objective?"
The Fund's objective is to provide you as high a level
of current income exempt from Kentucky state and regular
Federal income taxes as is consistent with preservation of
capital.
"What is the Fund's investment strategy?"
The Fund invests in tax-free municipal
obligations that pay interest exempt from Kentucky state and
regular Federal income taxes. We call these "Kentucky
Obligations." In general, all or almost all of these
obligations are issued by the State of Kentucky, its counties
and various other local authorities; at least 65% of the
portfolio will always consist of obligations of these issuers.
These obligations can be of any maturity but the Fund's average
portfolio maturity has traditionally been between 15 and 18
years. At the time of purchase, an obligation must be
considered "investment grade."
The Sub-Adviser selects obligations for the
Fund's portfolio to best achieve the Fund's objectives. The Sub-
Adviser evaluates specific obligations for purchase by
considering various characteristics including quality, maturity
and coupon rate.
The interest paid on certain types of
Kentucky Obligations may be subject to the Federal alternative
minimum tax ("AMT"). At least 80% of the Fund's net assets must
be invested in tax-exempt Kentucky Obligations whose interest
is not subject to AMT.
"What are the main risks of investing in the Fund?"
Among the risks of investing in shares of the Fund and
its portfolio of securities are the following:
Loss of money is a risk of investing in the Fund.
The Fund's assets, being primarily or entirely Kentucky
issues, are subject to economic and other conditions
affecting Kentucky. Adverse local events, such as a downturn
in the Kentucky economy, could affect the value of the
Fund's portfolio.
There are two types of risk associated with any fixed-
income debt securities such as Kentucky Obligations:
interest rate risk and credit risk.
* Interest rate risk relates to fluctuations in market
value arising from changes in interest rates. If
interest rates rise, the value of debt securities,
including Kentucky Obligations, will normally decline.
All fixed-rate debt securities, even the most highly
rated Kentucky Obligations, are subject to interest
rate risk. Kentucky Obligations with longer maturities
generally have a more pronounced reaction to interest
rate changes than shorter-term securities.
* Credit risk relates to the ability of the particular
issuers of the Kentucky Obligations the Fund owns to
make periodic interest payments as scheduled and
ultimately repay principal at maturity.
An investment in the Fund is not a
deposit in Banc One Corporation, Banc One Investment
Advisors Corporation or their bank or non-bank affiliates or
by any other bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other
government agency.
The Fund is classified as a "non-diversified"
investment company under the Investment Company Act of 1940
(the "1940 Act"). Thus, compared with "diversified" funds,
it may invest a greater percentage of its assets in
obligations of a particular issuer and may therefore not
have as much diversification among securities, and thus
diversification of risk. 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.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
RISK/RETURN BAR CHART AND PERFORMANCE TABLE
The bar chart and table shown below provide an
indication of the risks of investing in Churchill Tax-Free
Fund of Kentucky by showing changes in the performance of
the Fund's Class Y Shares from year to year and over a three-
year period by showing how the Fund's average annual returns
for one, five and ten years compare to a broad measure of
market performance. How the Fund has performed in the past
is not necessarily an indication of how the Fund will
perform in the future.
<TABLE>
<CAPTION>
[Bar Chart]
Annual Total Returns
1997-1999
<S> <C> <C>
10% 8.34
XXXX
8% XXXX
XXXX
6% XXXX
XXXX 5.26%
4% XXXX XXXX
XXXX XXXX
2% XXXX XXXX
XXXX XXXX
0% XXXX XXXX
XXXX XXXX XXXX
XXXX XXXX -1.46
1997 1998 1999
Calendar Years
During the period shown in the bar chart, the highest return
for a quarter was 2.77% (quarter ended June 30, 1997) and
the lowest return for a quarter was -1.16% (quarter ended
June 30,1999).
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Since
For the Period Ended 1-Year inception*
December 31, 1999
<S> <C> <C>
Churchill Tax-Free Fund of Kentucky
Class Y Shares -1.46% 4.68%
Churchill Tax-Free Fund of Kentucky
Class I Shares ** N/A N/A
Lehman Brothers Quality Intermediate
Municipal Bond Index *** 0.29% 4.97%
<FN>
*From commencement of Class Y Shares on April 1, 1996.
</FN>
<FN>
**Commencement of Class I Shares was on January 31, 1998. To
date no Class I Shares have been sold.
</FN>
<FN>
***The Lehman Brothers Quality Intermediate Municipal Bond
Index is nationally oriented and consists of an unmanaged
mix of investment-grade intermediate-term municipal
securities of issuers throughout the United States.
</FN>
</TABLE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay
if
you buy and hold shares of the Fund. No Class I Shares are
currently outstanding.
<TABLE>
<CAPTION>
Class I Class Y
Shares Shares
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases.........................None None
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load).........None None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends or Distributions
(as a percentage of offering price)........None None
Redemption Fees..............................None None
Exchange Fees................................None None
Annual Fund Operating Expenses (expenses that are
deducted from the Fund's assets)
Management Fees .............................0.40% 0.40%
Distribution (12b-1) Fee.....................0.10%(1) None
All Other Expenses (2).......................0.36% 0.17%
Total Annual Fund Operating Expenses (2).....0.86% 0.57%
<FN>
(1) Current rate; up to 0.25% can be authorized. </FN>
<FN>
(2) Does not reflect a 0.01% offset in Fund expenses
received in the year ended December 31, 1999 for uninvested
cash balances. Reflecting this offset for that year, all
other expenses and total annual Fund operating expenses were
0.35% and 0.85%, respectively, for Class I Shares; for Class
Y Shares, these expenses were 0.16% and 0.56%, respectively.
Other expenses for the two classes differ because Class I
Shares bear program costs for financial intermediaries of
0.25%, which includes transfer agent services, and charges
common to both classes of 0.11%; Class Y Shares bear only
the common charges of 0.11% and an allocation for transfer
agent services of 0.06%
</FN>
</TABLE>
Example
This Example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other
mutual funds.
The Example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year, that
you reinvest all dividends and distributions, and that the
Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class I Shares.......... $88 $274 $477 $1,061
Class Y Shares...........$58 $183 $318 $714
</TABLE>
<PAGE>
INVESTMENT OF THE FUND'S ASSETS
"Is the Fund right for me?"
The shares of the Fund are designed to be a suitable
investment for individuals, corporations, institutions and
fiduciaries who seek income exempt from Kentucky state and
regular Federal income taxes.
The Fund offers Institutional Class Shares ("Class Y
Shares") only to institutions acting for investors in a
fiduciary, advisory, agency, custodial or similar capacity. The
Fund offers Financial Intermediary Class Shares ("Class I
Shares") only through financial intermediaries with which
Aquila Distributors, Inc. (the "Distributor") has entered into
sales agreements. The Fund does not sell the shares of either
class directly to retail customers.
Kentucky Obligations
The Fund invests in Kentucky Obligations which are a
type of municipal obligation. They pay interest which bond
counsel or other appropriate counsel deems to be exempt from
regular Federal and Commonwealth of Kentucky income taxes.
They include obligations of Kentucky issuers and certain non-
Kentucky issuers, of any maturity
At the time of purchase, the Fund's Kentucky Obligations
must be of investment grade quality. This means that they must
either
* be rated within the four highest credit ratings 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 Sub-Adviser, Banc One Investment Advisors
Corporation.
The obligations of non-Kentucky issuers that the Fund can
purchase as Kentucky Obligations are those issued by or
under the authority of Guam, the Northern Mariana Islands,
Puerto Rico and the Virgin Islands. Interest paid on these
obligations is currently exempt from regular Federal and
Kentucky income taxes. The Fund purchases the obligations of
these issuers only when obligations of Kentucky issuers with
the appropriate characteristics of quality, maturity and
coupon rate are unavailable.
Municipal Obligations
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 public purposes.
There are two principal classifications of municipal
obligations: "notes" and "bonds." Notes generally have
maturities of one year or less, while bonds are paid back
over longer periods.
The various public purposes for which municipal obligations
are issued include:
* obtaining funds for general operating
expenses,
* refunding outstanding obligations,
* obtaining funds for loans to other public
institutions and facilities, and
* funding the construction of highways,
bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works.
Municipal obligations include:
* tax, revenue or bond anticipation notes,
* construction loan notes,
* project notes, which sometimes carry a U.S.
Government guarantee,
* municipal lease/purchase agreements, which
are similar to installment purchase contracts for
property or equipment, and
* floating and variable rate demand notes
"What factors may affect the value of the Fund's investments
and their yields?"
Change in prevailing interest rates is the most common
factor that affects the value of the obligations in the
Fund's portfolio. Any such change may have different effects
on short-term and long-term Kentucky Obligations. Long-term
obligations (which usually have higher yields) may fluctuate
in value more than short-term ones. Thus, the Fund may
shorten the average maturity of its portfolio when it
believes that prevailing interest rates may rise. While this
strategy may promote one part of the Fund's objective,
preservation of capital, it may also result in a lower level
of income.
"What are the main risk factors 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 Kentucky
Obligations that the Fund owns. The Fund has derived this
information from sources that are generally available to
investors and believes it to be accurate, but it has not
been independently verified and it may not be complete.
The Commonwealth of Kentucky continues to rank among
the top coal producers in the country. Tobacco is the
dominant agricultural product. Kentucky ranks second among
the states in the total cash value of tobacco raised. There
is significant diversification in the manufacturing sector
of the Commonwealth's economy. A few examples include the
production of automobiles and trucks, heavy machinery and
other durable goods, appliances and computer equipment.
There continues to be growth in auto parts/components
producers that supply the Toyota Motors facility in
Georgetown, Kentucky. Strong demand has led to major
expansions of the Ford Truck plant at Louisville. Tobacco
processing plants and distilleries produce items for export
throughout the world. Thoroughbred horse breeding and racing
are important to the economy, as is tourism.
Economic concerns include a relatively high
unemployment rate in the non-urbanized areas of the
Commonwealth. 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. Any federal legislation that adversely affects
the tobacco and/or cigarette industry would have a negative
impact on Kentucky's economy. The effects of the recent
legal settlement between the tobacco companies and
individual states, including Kentucky, are now just
beginning to be felt.
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,
because resources for other matters will be reduced or tax
levels will be increased, or a combination of both may
occur.
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.
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.
FUND MANAGEMENT
"How is the Fund managed?"
Aquila Management Corporation, 380 Madison Avenue,
Suite 2300, New York, NY 10017, the Manager, is the Fund's
investment adviser under an Advisory and Administration
Agreement. It has delegated its investment advisory duties,
including portfolio management, to Banc One Investment
Advisors Corporation, the Sub-Adviser, under a sub-advisory
agreement described below. The Manager is also responsible
for administrative services, including providing for the
maintenance of the headquarters of the Fund, overseeing
relationships between the Fund and the service providers to
the Fund, either keeping the accounting records of the Fund
or, at its expense and responsibility, delegating such
duties in whole or in part to a company satisfactory to the
Fund, maintaining the Fund's books and records and providing
other administrative services.
The Sub-Adviser provides the Fund with local advisory
services.
Under the Sub-Advisory Agreement, the Sub-Adviser
provides for investment supervision, including supervising
continuously the investment program of the Fund and the
composition of its portfolio, determining what securities
will be purchased or sold by the Fund and arranging for the
purchase and the sale of securities held in the portfolio of
the Fund, and, at the Sub-Adviser's expense, pricing of the
Fund's portfolio daily.
Under the Advisory and Administration Agreement, the
Fund pays the Manager 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 is payable at the annual rate of 0.40 of 1%
of such net asset value.
Information about the Sub-Adviser and the Manager
The Sub-Adviser, with a local office at 416 West
Jefferson Street, Louisville, KY 40202, is a wholly-owned
subsidiary of BANC ONE CORPORATION ("BANC ONE"). As of
December 31, 1999, the Sub-Adviser acted as investment
adviser to municipal bond funds with combined assets in
excess of $4.5 billion, of which approximately $360 million
were obligations of Kentucky issuers. BANC ONE is a multi-
bank holding company, headquartered in Chicago. with
operations in 33 states. It is the nation's fourth largest
bank holding company with assets of approximately $270
billion. The Sub-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 Portfolio
Manager, at the Sub-Adviser's Louisville office. He has
served in this capacity since September, 1995, when the
Sub-Adviser became adviser to the Fund. From 1981 to 1995 he
was employed by Liberty National Bank, the Sub-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
Sub-Adviser's Fixed Income Fund Sub-Committee. Mr. Albright
attended the University of Louisville.
The Fund's Manager, Aquila Management Corporation, 380
Madison Avenue, New York, NY 10017, is founder and Manager
and/or administrator to the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money market
funds and equity funds. As of December 31, 1999, these funds
had aggregate assets of approximately $3.0 billion, of which
approximately $1.8 billion consisted of assets of the
tax-free municipal bond funds. The Manager, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann,
directly, through a trust and through share ownership by his
wife.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York
time, on each day that the New York Stock Exchange is open
(a "business day"), by dividing the value of the Fund's net
assets (which means the value of the assets less
liabilities) allocable to each class by the total number of
shares of such class outstanding at that time. In general,
net asset value of the Fund's shares is based on portfolio
market value, except that Kentucky Obligations maturing in
60 days or less are generally valued at amortized cost. The
price at which a purchase or redemption of shares is
effected is based on the next calculated net asset value
after your purchase or redemption order is received in
proper form. The New York Stock Exchange annually announces
the days on which it will not be open. The most recent
announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the Exchange may close on days not included in that
announcement.
PURCHASES
"Are there alternate purchase plans?"
Yes. See "Alternate Purchase Plans below. This Prospectus
offers two separate classes of shares. All classes represent
interests in the same portfolio of Kentucky Obligations.
"Can I purchase shares of the Fund?"
You can purchase shares of the Fund if you live in
Kentucky or in one of the other states listed below. You
should not purchase shares of the Fund if you do not reside
in one of the following states. Otherwise, the Fund can
redeem the shares you purchased. This may cause you to
suffer a loss and may have tax consequences.
Also, if you do not reside in Kentucky, dividends from
the Fund may be subject to state income taxes of the state
in which you do reside. Therefore, you should consult your
tax adviser before buying shares of the Fund.
On the date of this Prospectus, Class Y Shares are
available only in:
*Kentucky *Alabama *District of Columbia *Florida * Georgia
* Hawaii * * Illinois * Indiana * Missouri * New Jersey *
New York * Pennsylvania
Class I Shares are available only in:
* District of Columbia * Florida * Illinois * Missouri * New
Jersey
"How Much Money Do I Need to Invest?"
For Class Y Shares:
$1,000. Subsequent investments can be in any amount.
Class I Shares:
Financial intermediaries can set their own requirements
for initial and subsequent investments.
Your investment must be drawn in United States dollars
on a United States commercial bank, savings bank or credit
union or a United States branch of a foreign commercial bank
(each of which is a "Financial Institution").
"How do I purchase shares?"
You may purchase Class Y Shares:
* through an investment broker or dealer, or a bank or
financial intermediary, that has a sales agreement with
the Distributor, Aquila Distributors, Inc., in which
case that institution will take action on your behalf,
and you will not personally perform the steps indicated
below; or
* directly through the Distributor, by mailing payment to
the Fund's Agent, PFPC Inc.
* The price you will pay is net asset value for both
Class Y Shares and Class I Shares. (See "What price
will I pay for the Fund's shares?")
You may purchase Class I Shares only through a financial
intermediary.
Opening a Class Y Shares Adding to a Class Y
Shares Account
* Make out a check for * Make out a check for
the investment amount the investment amount
payable to payable to
Churchill Tax-Free Fund of Churchill Tax-Free Fund
Kentucky. of Kentucky.
* Complete the Application * Fill out the pre-printed
included with the Prospectus, stub attached
indicating the features to the Fund's
you wish to authorize. confirmations
or supply the name(s)
of account owner(s),
the account number, and
the name of the Fund.
* Send your check and * Send your check and
completed application completed application
to your dealer or to your dealer or
to the Fund's to the Fund's
Agent, PFPC Inc. Agent, PFPC Inc.
"Can I transfer funds electronically?"
You can have funds transferred electronically, in
amounts of $50 or more, from your Financial Institution if
it is a member of the Automated Clearing House. You may make
investments through two electronic transfer features,
"Automatic Investment" and "Telephone Investment."
* Automatic Investment: You can authorize a pre-
determined amount to be regularly transferred from your
account.
* Telephone Investment: You can make single investments
of up to $50,000 by telephone instructions to the
Agent.
Before you can transfer funds electronically, the
Fund's Agent must have your completed application
authorizing these features. Or, if you initially decide not
to choose these conveniences and then later wish to do so,
you must complete a Ready Access Features Form which is
available from the Distributor or Agent, or if your account
is set up so that your broker or dealer makes these sorts of
changes, request your broker or dealer to make them. The
Fund may modify or terminate these investment methods or
charge a service fee, upon 30 days' written notice to
shareholders.
REDEEMING YOUR INVESTMENT
Redeeming Class Y Shares
You may redeem some or all of your shares by a request
to the Agent. Shares will be redeemed at the next net asset
value determined after your request has been received in
proper form.
There is no minimum period for investment in the Fund,
except for shares recently purchased by check or by
Automatic or Telephone Investment as discussed below.
A redemption may result in a tax liability for you.
"How can I redeem my investment?"
By mail, send instructions to:
PFPC Inc.
Attn: Aquilasm Group of Funds
400 Bellevue Parkway
Wilmington, Delaware 19809
By telephone, call:
800-872-5860
By FAX, send
instructions to:
302-791-3055
For liquidity and convenience, the Fund offers expedited
redemption for Class Y Shares.
Expedited Redemption Methods
You may request expedited redemption in two ways:
1. By Telephone. The Agent will take instructions from
anyone by telephone to redeem shares and make payments:
a) to a Financial Institution account you have
previously specified; or
b) by check in the amount of $50,000 or less, mailed to
the same name and address (which has been unchanged for
the past 30 days) as the account from which you are
redeeming. You may only redeem by check via telephone
request once in any 7-day period.
Telephoning the Agent
Whenever you telephone the Agent, please be prepared to
supply:
account name(s) and number
name of the caller
the social security number registered to the account
personal identification.
Note: Check the accuracy of your confirmation
statements immediately. The Fund, the Agent, and the
Distributor are not responsible for losses resulting from
unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify a caller's
identity. The Agent may record calls.
2. By FAX or Mail. You may request redemption payments
to a predesignated Financial Institution account by a
letter of instruction sent to the Agent: PFPC Inc., by
FAX at 302-791-3055 or by mail to 400 Bellevue Parkway,
Wilmington, DE 19809. The letter, signed by the
registered shareholder(s) (no signature guarantee is
required), must indicate:
account name(s)
account number
amount to be redeemed
any payment directions.
To have redemption proceeds sent directly to a
Financial Institution account, you must complete the
Expedited Redemption section of the Application or a Ready
Access Features Form. You will be required to provide (1)
details about your Financial Institution account, (2)
signature guarantees and (3) possible additional
documentation.
The name(s) of the shareholder(s) on the Financial
Institution account must be identical to those on the Fund's
records of your account.
You may change your designated Financial Institution account
at any time by completing and returning a revised Ready
Access Features Form.
Regular Redemption Method
To redeem by the regular redemption method, send a
letter of instruction to the Fund's Agent, which includes:
account name(s)
account number
dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed
payment instructions (we normally mail redemption
proceeds to your address as registered with the Fund)
signature(s) of the registered shareholder(s) and
signature guarantee(s), if required, as indicated
below.
To be in "proper form," your letter must be signed by
the registered shareholder(s) exactly as the account is
registered. For a joint account, both shareholder signatures
are necessary.
We may require additional documentation for certain
types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by
someone other than the shareholder of record. The Agent may
require signature guarantees if insufficient documentation
is on file.
We do not require a signature guarantee for redemptions
up to $50,000, payable to the record holder, and sent to the
address of record, except as noted above. In all other
cases, signatures must be guaranteed.
Your signature may be guaranteed by any:
member of a national securities exchange
U.S. bank or trust company
state-chartered savings bank
federally chartered savings and loan association
foreign bank having a U.S. correspondent bank; or
participant in the Securities Transfer Association
Medallion Program ("STAMP"), the Stock Exchanges
Medallion Program ("SEMP") or the New York Stock
Exchange, Inc. Medallion Signature Program ("MSP").
A notary public is not an acceptable signature
guarantor.
Redemption of Class I Shares
You may redeem all or any part of your
Class I Shares at the net asset value next determined after
receipt in proper form of your redemption request by your
financial intermediary. Redemption requests for Class I
Shares must be made through a financial intermediary and
cannot be made directly. Financial intermediaries may charge
a fee for effecting redemptions. There is no minimum period
for any investment in the Fund. The Fund does not impose
redemption fees or penalties on redemption of Class I
Shares. A redemption may result in a transaction taxable to
you.
"When will I receive the proceeds of my redemption?"
Redemption proceeds for Class Y Shares are normally
sent on the next business day following receipt in proper
form of your redemption request. Except as described below,
payments will normally be sent to your address of record
within 7 days.
Redemption Method of Payment Charges
Under $1,000 Check None
$1,000 or more Check or, if and None
as you requested
on your Application
or Ready Access Features
Form, wired or
transferred through
the Automated Clearing
House to your Financial
Institution account
Through a broker/
dealer Check or wire, to your None, however
broker/dealer your
broker/dealer
may charge a
fee.
Although the Fund does not currently intend to, it can
charge up to $5.00 per wire redemption, after written notice
to shareholders who have elected this redemption procedure.
Upon 30 days' written notice to shareholders the Fund may
modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service
fee, although no such fee is presently contemplated. If any
such changes are made, the Prospectus will be supplemented
to reflect them.
Redemption payments for Class I Shares are made to
financial intermediaries.
The Fund may delay payment for redemption of shares
recently purchased by check (including certified, cashier's
or official bank check) or by Automatic Investment or
Telephone Investment up to 15 days after purchase; however,
payment for redemption will not be delayed after (i) the
check or transfer of funds has been honored, or (ii) the
Agent receives satisfactory assurance that your Financial
Institution will honor the check or transfer of funds. You
can eliminate possible delays by paying for purchased shares
with wired funds or Federal Reserve drafts.
The Fund has the right to postpone payment or suspend
redemption rights during certain periods. These periods may
occur (i) when the New York Stock Exchange is closed for
other than weekends and holidays, (ii) when the Securities
and Exchange Commission (the "SEC") restricts trading on the
New York Stock Exchange, (iii) when the SEC determines an
emergency exists which causes disposal of, or determination
of the value of, the portfolio securities to be unreasonable
or impracticable, and (iv) during such other periods as the
SEC may permit.
The Fund can redeem your shares if their value totals less
than $500 as a result of redemptions or failure to meet and
maintain the minimum investment level under an Automatic
Investment program. Before such a redemption is made, we will
send you a notice giving you 60 days to make additional
investments to bring your account up to the minimum.
Redemption proceeds may be paid in whole or in part by
distribution of the Fund's portfolio securities ("redemption in
kind") in conformity with SEC rules. This method will only be
used if the Board of Trustees determines that payments
partially or wholly in cash would be detrimental to the best
interests of the remaining shareholders.
"Is there an Automatic Withdrawal Plan?"
Yes, but it is only available for Class Y Shares. Under
an Automatic Withdrawal Plan you can arrange to receive a
monthly or quarterly check in a stated amount, not less than
$50.
ALTERNATE PURCHASE PLANS
Distribution Arrangements
In this Prospectus the Fund provides you with two
alternative ways to invest in the Fund through two separate
classes of shares. All classes represent interests in the
same portfolio of Kentucky Obligations.
Class Y Shares Class I Shares
"Institutional Class" "Financial
Intermediary Class"
Initial Sales None None. Financial
Charge Intermediaries may
charge a fee for
purchase of shares.
Contingent None None
Deferred Sales
Charge ("CDSC")
Distributions and None Distribution fee of
Service Fees up to 0.25 of 1% of
average annual net
assets allocable to
Class I Shares,
currently 0.10 of1%
of such net assets,
and a services fee
of 0.25 of 1% of
such assets.
"What price will I pay for the Fund's shares?"
The offering price for Class Y Shares is the net asset
value per share. You will receive that day's offering price on
purchase orders, including Telephone Investments and
investments by mail, received in proper form prior to 4:00 p.m.
New York time. Dealers have the added flexibility of
transmitting orders received prior to 4:00 p.m. New York time
to the Distributor or Agent before the Distributor's close of
business that day (normally 5:00 p.m. New York time) and still
receiving that day's offering price. Otherwise, orders will be
filled at the next determined offering price. Dealers are
required to submit orders promptly. Purchase orders received on
a non-business day, including those for Automatic Investment,
will be executed on the next succeeding business day. The sale
of shares will be suspended (1) during any period when net
asset value determination is suspended or (2) when the
Distributor judges it is in the Fund's best interest to do so.
The offering price for Class I Shares is the net asset
value per share. The offering price determined on any day
applies to all purchases received by each financial
intermediary prior to 4:00 p.m. New York time on any
business day. Purchase orders received by financial
intermediaries after that time will be filled at the next
determined offering price.
"What about confirmations and share certificates?"
A statement will be mailed to you confirming each
purchase of Class Y Shares in the Fund. Additionally, your
account at the Agent will be credited in full and fractional
shares (rounded to the nearest 1/1000th of a share).
Purchases of Class I Shares will be confirmed by financial
intermediaries. The Fund will not issue certificates for
Class Y Shares or Class I Shares.
General
The Fund and the Distributor may 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.
"Is there a Distribution Plan or a Services Plan?"
The Fund has adopted a Distribution Plan (the "Plan")
under the Investment Company Act of 1940's Rule 12b-1 in
order to:
(i) permit the Fund to finance activities
primarily intended to result in the sale of its
shares;
(ii) permit the Manager, out of its own funds, to
make payment for distribution expenses; and
(iii) protect the Fund against any claim that some
of the expenses which it pays or may pay might be
considered to be sales-related and therefore come
within the purview of the Rule.
`
No payments are made with respect to assets represented
by Class Y Shares.
Under the Plan, the Fund makes payments with respect to
Class I Shares under agreements to certain broker/dealers, or
others who have (i) rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention
of the Fund's shares or (ii) assisted in the servicing of
shareholder accounts.
For any fiscal year, payments with respect to Class I
Shares through the Distributor or Agent, are made at a rate
set from time to time by the Board of Trustees (currently
0.10 of 1%) but not more than 0.25 of 1% of the average
annual net assets represented by the Class I Shares of the
Fund. Such payments can be made only out of the Fund's
assets allocable to the Class I Shares. Because these
distributions and fees are paid out of assets on an ongoing
basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of
sales charges.
Whenever the Fund makes Class A permitted payments, the
aggregate annual rate of the advisory fee and sub-advisory
fee otherwise payable by the Fund will be reduced from 0.50
of 1% to 0.40 of 1% of the Fund's average annual net assets.
Shareholder Services Plan for Class I Shares
The Fund's Shareholder Services Plan authorizes it to pay
a service fee under agreements to certain qualified recipients
who have agreed to provide personal services to Class I
shareholders and/or maintain their accounts. For any fiscal
year, such fees may not exceed 0.25 of 1% of the average annual
net assets represented by Class I Shares. Payment is made only
out of the Fund's assets represented by Class I Shares. No
payments are made with respect to assets represented by Class Y
Shares.
Transfer on Death" Registration (Not available for Class I
Shares)
If you own Class Y Shares, the Fund generally permits
"transfer on death" ("TOD") registration of shares, so that
on the death of the shareholder the shares are transferred
to a designated beneficiary or beneficiaries. Ask the Agent
or your broker-dealer for the Transfer on Death Registration
Request Form. With it you will receive a copy of the TOD
Rules of the Aquilasm Group of Funds, which specify how the
registration becomes effective and operates. By opening a
TOD Account, you agree to be bound by the TOD Rules. This
service is not available for Class I Shares.
DIVIDENDS AND DISTRIBUTIONS
"How are dividends and distributions paid?"
The Fund pays dividends and other distributions with
respect to each class of shares. The Fund calculates its
dividends and other distributions with respect to each class at
the same time and in the same manner. Net income for dividend
purposes includes all interest income accrued by the Fund since
the previous dividend declaration less expenses paid or
accrued. Net income also includes any original issue discount,
which occurs if the Fund purchases an obligation for less than
its face amount. The discount from the face amount is treated
as additional income earned over the life of the obligation.
Because the Fund's income varies, so will the Fund's dividends.
There is no fixed dividend rate. It is expected that most of
the Fund's dividends will be comprised of interest income. The
dividends and distributions of each class can vary due to
certain class-specific charges. The Fund will declare all of
its net income 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.
Redeemed shares continue to earn dividends through and
including the earlier of:
1. the day prior to the day when redemption proceeds are
mailed, wired or transferred by the Automated Clearing House or
the Agent or paid by the Agent to a selected dealer; or
2. the third day the New York Stock Exchange is open after
the day the net asset value of the redeemed shares was
determined.
The Fund's present policy is to pay dividends so they will
be received or credited by approximately the first day of each
month.
Dividends and distributions will automatically be
reinvested in full and fractional shares of the Fund of the
same class at net asset value on the record date for the
dividend or distribution.
If you own or purchase Class Y Shares, you may choose to
have all or any part of the payments for dividends or
distributions paid in cash. You can elect to have the cash
portion of dividends or distributions deposited, without
charge, by electronic funds transfers into your account at a
financial institution, if it is a member of the Automated
Clearing House.
You can make any of these elections on the Application, by
a Ready Access Features Form or by a letter to the Agent. Your
election to receive some or all of your dividends and
distributions in cash will be effective as of the next payment
of dividends after it has been received in proper form by the
Agent. It will continue in effect until the Agent receives
written notification of a change.
All arrangements for the payment of dividends and
distributions with respect to Class I Shares, including
reinvestment of dividends, must be made through financial
intermediaries.
All Class Y shareholders, whether their dividends or
distributions are received in cash or reinvested, will receive
a monthly statement indicating the current status of their
investment account with the Fund. Financial intermediaries
provide their own statements of Class I Shares accounts.
If you do not comply with laws requiring you to furnish
taxpayer identification numbers and report dividends, the Fund
may be required to impose backup withholding at a rate of 31%
upon payment of redemptions to shareholders and on capital
gains distributions (if any) and any other distributions that
do not qualify as "exempt-interest dividends."
TAX INFORMATION
Net investment income includes income from Kentucky
Obligations in the portfolio which the Fund allocates as
"exempt-interest dividends." Such dividends are exempt from
regular Federal income tax. The Fund will allocate
"exempt-interest dividends" by applying one designated
percentage to all income dividends it declares during its
tax year. It will normally make this designation in the
first month following its fiscal year end for dividends paid
in the prior year.
It is possible that, under certain circumstances, a
small portion of dividends paid by the Fund will be subject
to income taxes. During the Fund's fiscal year ended
December 31, 1999, 98.89% of the Fund's dividends with
respect to Class Y Shares were exempt interest dividends.
For the calendar year 1999, 1.11% of total dividends paid
with respect to Class Y Shares were taxable as ordinary
income. The percentage of tax-exempt income from any
particular dividend may differ from the percentage of the
Fund's tax-exempt income during the dividend period. No
Class I Shares were outstanding during that period.
Net capital gains of the Fund, if any, 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 intends to qualify during each fiscal year
under the Code to pay "exempt-interest dividends" to its
shareholders. "Exempt-interest dividends" 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
"exempt-interest dividends" are not taxed, each taxpayer
must report the total amount of tax-exempt interest
(including "exempt-interest dividends" from the Fund)
received or acquired during the year.
The Fund will treat as ordinary income in the year
received certain gains on Kentucky Obligations it acquired
after April 30, 1993 and sells for less than face or
redemption value. Those gains will be taxable to you as
ordinary income, if distributed.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so
designates) are reportable by shareholders as gains from the
sale or exchange of a capital asset held for more than a
year. This is the case whether the shareholder reinvests the
distribution in shares of the Fund or receives it in cash,
regardless of the length of time the investment is held.
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 reduce future capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Kentucky
Obligations will be deemed long- or short-term, depending
upon the length of time the Fund holds these obligations.
You will receive information on the tax status of the
Fund's dividends and distributions annually.
Special Tax Matters
Under the Code, interest on loans incurred by
shareholders to enable them to purchase or carry shares of
the Fund may not be deducted for regular Federal tax
purposes. In addition, under rules used by the Internal
Revenue Service for determining when borrowed funds are
deemed used for the purpose of purchasing or carrying
particular assets, the purchase of shares of the Fund may be
considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the
purchase of shares.
If you or your spouse are receiving Social Security or
railroad retirement benefits, a portion of these benefits
may become taxable, if you receive exempt-interest dividends
from the Fund.
If you, or someone related to you, is a "substantial
user" of facilities financed by industrial development or
private activity bonds, you should consult your own tax
adviser before purchasing shares of the Fund.
Interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax.
However, 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 ("AMT").
Whether or not that computation will result in a tax will
depend on the entire content of your return. The Fund will
not invest more than 20% of its assets in the types of
Kentucky Obligations that pay interest subject to AMT. An
adjustment required by the Code will tend to make it more
likely that corporate shareholders will be subject to AMT.
They should consult their tax advisers.
"What should I know about Kentucky Taxes?"
All of the exempt-interest dividends from Kentucky
Obligations 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. 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, futures, options and other nonexempt assets.
Shareholders of the Fund should consult their tax
advisers about other state and local tax consequences of
their investment in the Fund.
<PAGE>
<TABLE>
<CAPTION>
The table shown below for Class A Shares is for information purposes
only. Class A Shares are not offered by this Prospectus. No
historical information exists for Class I Shares, none of which
were outstanding during the period indicated.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The financial highlights table is intended to help you understand the
Fund's financial performance for the designated periods of the
Fund's operations. Certain information reflects financial results
for a single Fund share. The total returns in the table represent
the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends
and distributions). This information has been audited by KPMG
LLP, whose report, along with the Fund's financial statements, is
included in the annual report, is incorporated by reference into
the SAI and is available upon request.
Class A(1) Class Y(2)
Year ended December 31, Year Ended
December 31,
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period .............$10.81 $10.81 $10.55 $10.82 $10.82
Income from Investment
Operations:
Net investment income 0.52 0.53 0.55 0.53 0.54
Net gain (loss) on
securities (both
realized and
unrealized) ........ (0.68) 0.01 0.27 0.69 0.02
Total from Investment
Operations ..........(0.16) 0.54 0.82 0.16 0.56
Less Distributions:
Dividends from net
investment income ...(0.53) (0.53) (0.55) (0.54) (0.55)
Distributions from
capital gains ..... (0.03). (0.01) (0.01) (0.03) (0.01)
Total Distributions .. (0.56). (0.54) (0.56) (0.57) (0.56)
Net Asset Value, End of
Period ............... $10.09 $10.81 $10.81 $10.09 $10.82
Total Return (not reflecting
sales charge)(%) ..... (1.51) 5.13 8.08 (1.46) 5.26
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) .....205,842 229,667 226,477 13,346 14.335
Ratio of Expenses to
Average Net
Assets (%) .......... 0.72 0.73 0.73 0.57 0.58
Ratio of Net Investment
Income to Average Net
Assets (%) ........... 4.95 4.89 5.19 5.09 5.03
Portfolio Turnover
Rate (%) ............... 6.35 12.79 22.39 5.03 12.79
The expense ratios after giving effect to the expense offset for
uninvested cash balances were:
Ratio of Expenses
to Average Net Assets(%)
0.71 0.72 0.72 0.56 0.57
<CAPTION>
Class A(1) Class Y(3)
Year Ended December 31, Period Ended 12/31/96
1996 1995
<C> <C> <C>
$10.71 $9.97 $10.47
0.55 0.60 0.43
(0.12) 0.74 0.11
0.43 1.34 0.54
(0.59) (0.60) (0.46)
- - -
(0.59) (0.60) (0.46)
$10.55 $10.71 $10.55
4.17 13.75 5.24+
222,889 230,270 5,823
0.75 0.80 0.58*
5.22 5.74 5.41*
8.94 17.09 8.94
0.74 0.79 0.56*
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 1, 1996.
</FN>
<FN>
(3) For the period from April 1, 1996 through December 31, 1996.
</FN>
<FN>
+ Not annualized.
</FN>
<FN>
* Annualized.
</FN>
<FN>
Note: Effective September 11, 1995 Banc One Investment Advisors
Corporation became the Fund's Investment Adviser replacing PNC
Bank Kentucky, Inc. and effective on May 1, 1998, pursuant to new
management arrangements, was appointed as the Fund's Investment
Sub-Adviser.
</FN>
</TABLE>
<PAGE>
APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
FOR CLASS I AND Y SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
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.
** Uniform Gifts/Transfers to Minors Act.
Please type or print name(s) exactly as account is to be
registered
1._______________________________________________________________
_
First Name Middle Initial Last Name Social Security
Number
2.______________________________________________________________
__
First Name Middle Initial Last Name Social Security
Number
3.______________________________________________________________
__
Custodian's First Name Middle Initial Last Name
Custodian for
____________________________________________________
Minor's First Name Middle Initial Last
Name
Under the ___________UGTMA**
_____________________________________
Name of State Minors Social Security Number
4. ____________________________________________________
____________________________________________________
(Name of corporation or organization. If a trust, include
the name(s) of trustees in which account will be registered
and the name and date of the trust instrument.An account
for a pension or profit sharing plan or trust may be
registered in the name of the plan or trust itself.)
________________________________________________________________
___
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
____________________________________________________
Street or PO Box City
_______________________________(______)______________
State Zip Daytime Phone Number
Occupation:________________________Employer:____________________
____
Employer's
Address:__________________________________________________
Street Address: City State
Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if
you
are a non-U.S. citizen or resident and not subject to back-up
withholding .(See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by dealer or broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2
PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Indicate class of shares)
Make check payment to CHURCHILL TAX-FREE FUND OF KENTUCKY
__ Initial Investment $______________ (Minimum $1,000)
(Indicate class of shares)
__ Class I Shares
__ Class Y Shares
B. DISTRIBUTIONS
Income dividends and capital gains distributions are
automatically reinvested in additional shares at net asset
value unless otherwise indicated below.
You can have any portion of either type reinvested, with
the balance paid in cash, by indicating a percent below:
Income 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 1B.
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 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 first actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this
account, subject to the terms of the Automatic Withdrawal
Plan Provisions set forth below. To realize the amount
stated below, PFPC Inc. (the "Agent") is authorized to
redeem sufficient shares from this account at the then
current net asset value, in accordance with the terms
below:
Dollar amount of each withdrawal $
______________beginning________________
Minimum: $50
Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check
is
payable to a Financial Institution for your account, indicate
Financial Institution name, address and your account number.
_______________________________
______________________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________
______________________________________
Street Financial Institution
Street Address
_______________________________
______________________________________
City State Zip City State Zip
____________________________________
Financial Institution
Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in
your name within the Aquila SM Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our
or any other persons telephone instructions to execute the
exchange of shares of one Aquila-sponsored fund for shares
of another Aquila-sponsored fund with identical shareholder
registration in the manner described in the Prospectus.
Except for gross negligence in acting upon such telephone
instructions, and subject to the conditions set forth
herein, I/we understand and agree to hold harmless the
Agent, each of the Aquila Funds, and their respective
officers, directors, trustees,employees, agents and
affiliates against any liability, damage, expense,claim or
loss, including reasonable costs and attorneys fees,
resulting from acceptance of, or acting or failure to act
upon, this authorization.
E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution
account listed.
Cash proceeds in any amount from the redemption of
shares will be mailed or wired, whenever possible, upon
request, if in an amount of $1,000 or more to my/our
account at a Financial Institution. The Financial
Institution account must be in the same name(s) as this
Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________
____________________________________
Account Registration Financial Institution Account
Number
_______________________________
____________________________________
Financial Institution Name Financial Institution
Transit/Routing
Number
_______________________________
____________________________________
Street City State Zip
STEP 4
Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to
charge to my/our account any drafts or debits drawn on
my/our account initiated by the Agent, PFPC Inc., and to
pay such sums in accordance therewith, provided my/our
account has sufficient funds to cover such drafts or
debits. I/We further agree that your treatment of such
orders will be the same as if I/we personally signed or
initiated the drafts or debits.
I/We understand that this authority will remain in effect
until you receive my/our written instructions to cancel
this service. I/We also agree that if any such drafts or
debits are dishonored, for any reason, you shall have no
liabilities.
Financial Institution Account Number
_____________________________________
Name and Address where my/our account is maintained
Name of Financial
Institution_____________________________________________
Street
Address_________________________________________________________
___
City___________________________________________State _________
Zip _______
Name(s) and Signature(s) of Depositor(s) as they appear where
account is
registered
______________________________________________
(Please Print)
X_____________________________________________
__________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________
__________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request,
Aquila Distributors, Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items
transmitted pursuant to the above authorization shall be
subject to the provisions of the Operating Rules of the
National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may
suffer in connection with the execution and issuance of
any electronic debit in the normal course of business
initiated by the Agent (except any loss due to your
payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in
writing of any claim against you with respect to the same,
and further rovided 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 trusts,corporations or associations, this form must
be accompanied by proof of authority to sign, such as a
certified copy of the corporate resolution or a certificate
of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone
Investment, Expedited Redemption and Direct Deposit of
Dividends) are effective 15 days after this form is
received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days
after the Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature,
without prior notice, if in its judgment your use of any
feature involves unusual effort or difficulty in the
administration of your account.
- - The Fund reserves the right to alter, amend or terminate
any or all features or to charge a service fee upon 30 days
written notice to shareholders except if additional notice
is specifically required by the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must
complete a Ready Access Features Form which may be obtained
from Aquila Distributors at 1-800-872-5859 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.
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 epresented 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>
MANAGER AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Carroll F. Knicely
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Diana P. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Robbins, Senior Vice President
Teresa M. Blair, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue
New York, New York 10017
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
<PAGE>
This Prospectus concisely states information about the
Fund that you should know before investing. A Statement of
Additional Information about the Fund. (the "SAI") has been
filed with the Securities and Exchange Commission. The SAI
contains information about the Fund and its management not
included in this Prospectus. The SAI is incorporated by
reference in its entirety in this Prospectus. Only when you
have read both this Prospectus and the SAI are all material
facts about the Fund available to you.
You can get additional information about
the Fund's investments in the Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during its last fiscal year. You can get the SAI
and the Fund's annual and semi-annual reports without
charge, upon request by calling 800-872-5860 toll free.
In addition, you can review and copy
information about the Fund (including the SAI) at the Public
Reference Room of the SEC in Washington, D.C. Information on
the operation of the Public Reference Room is available by
calling 1-202-942-8090. Reports and other information about
the Fund are also available on the EDGAR Database on the
SEC's Internet site at http://www.sec.gov. Copies of this
information can be obtained, for a duplicating fee, by E-
mail request to [email protected] or by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102.
This Prospectus should be read and retained for future
reference
TABLE OF CONTENTS
The Fund's Objective, Investment Strategies
and Main Risks...................................
Risk/Return Bar Chart and Performance Table .....
Fees and Expenses of the Fund...................
Investment of the Fund's Assets.................
Fund Management.................................
Net Asset Value Per Share........................
Purchases .......................................
Redeeming Your Investment........................
Alternate Purchase Plans.........................
Dividends and Distributors......................
Tax Information..................................
Financial Highlights.............................
Application
The file number under which the Fund is registered
with the SEC under the
Investment Company Act of 1940 is 811-5086.
Churchill Tax-Free Fund of Kentucky
One of The
Aquilasm Group Of Funds
A tax-free
income investment
PROSPECTUS
To receive a free copy of the Fund's SAI, annual or semi-
annual report, or other information about the Fund, or to
make shareholder inquiries call:
the Fund's Shareholder Servicing Agent at
800-872-5860 toll free
or you can write to:
PFPC Inc
400 Bellevue Parkway
Wilmington, DE 19809
For general inquiries and yield information, call 800-872-
5859 or 212-697-6666
This Prospectus should be read and retained for future
reference
<PAGE>
Aquila
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue Suite 2300
New York, NY 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Statement
of Additional
Information May 1, 2000
This Statement of Additional Information
(the "SAI") is not a Prospectus. There are two Prospectuses
for the Fund dated May 1, 2000: one Prospectus describes
Front-Payment Class Shares ("Class A Shares") and Level-
Payment Class Shares ("Class C Shares") of the Fund and the
other describes Institutional Class Shares ("Class Y
Shares") and Financial Intermediary Class Shares ("Class I
Shares") of the Fund. References in the SAI to "the
Prospectus" refer to either of these Prospectuses. The SAI
should be read in conjunction with the Prospectus for the
class of shares in which you are considering investing.
Either or both Prospectuses may be obtained from the Fund's
Shareholder Servicing Agent, PFPC Inc., by writing to it at:
400 Bellevue Parkway, Wilmington, DE 19809 or by calling:
800-872-5860 toll free
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
Financial Statements
The financial statements for the Fund for
the year ended December 31, 1999, which are contained in the
Annual Report for that fiscal year, are hereby incorporated
by reference into the SAI. Those financial statements have
been audited by KPMG LLP, independent auditors, whose report
thereon is incorporated herein by reference. The Annual
Report of the Fund for the fiscal year ended December 31,
1999 can be obtained without charge by calling any of the
toll-free numbers listed above. The Annual Report will be
delivered with the SAI.
TABLE OF CONTENTS
Fund History
Investment Strategies and Risks
Fund Policies
Management of the Fund
Ownership of Securities
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Capital Stock
Purchase, Redemption, and Pricing of Shares
Additional Tax Information
Underwriters
Performance
Appendix A
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
Statement of Additional Information
FUND HISTORY
Churchill Tax-Free Trust (the "Trust"), 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.
INVESTMENT STRATEGIES AND RISKS
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P")
represent their respective opinions of the quality of the
municipal bonds and notes which they undertake to rate. It
should be emphasized, however, that ratings are general and
not absolute standards of quality. Consequently, obligations
with the same maturity, stated interest rate and rating may
have different yields, while obligations of the same
maturity and stated interest rate with different ratings may
have the same yield.
Rating agencies consider municipal obligations rated in
the fourth highest credit rating to be of medium quality.
Thus, they may present investment risks which do not exist
with more highly rated obligations. Such obligations possess
less attractive investment characteristics. Changes in
economic conditions or other circumstances are more likely
to lead to a weakened capacity to make principal and
interest payments than is the case for higher grade bonds.
See Appendix A to this SAI for further information
about the ratings of Moody's and S&P as to the various rated
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, 1999, in Kentucky Obligations in the various rating
categories:
Highest rating (1) 62.1%
Second highest rating (2) 25.7%
Third highest rating (3) 9.8%
Fourth highest rating (4) 1.4%
Not rated: 1.0%
100.0%
(1) Aaa of Moody's or AAA of S&P.
(2) Aa of Moody's or AA of S&P.
(3) A of Moody's or A of S&P.
(4) Baa of Moody's or BBB of S&P.
Municipal Bonds
The two principal classifications of municipal bonds
are "general obligation" bonds and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its
full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue or special tax
bonds are payable only from the revenues derived from a
particular facility or class of facilities or projects or,
in a few cases, from the proceeds of a special excise or
other tax, but are not supported by the issuer's power to
levy unlimited general taxes. There are, of course,
variations in the security of municipal bonds, both within a
particular classification and between classifications,
depending on numerous factors. The yields of municipal bonds
depend on, among other things, general financial conditions,
general conditions of the municipal bond market, the size of
a particular offering, the maturity of the obligation and
the 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 that are "substantial
users" of facilities financed by those bonds or for
investors who are "related persons" of such users.
Generally, an individual will not be a "related person"
under the Internal Revenue Code unless such investor or his
or her immediate family (spouse, brothers, sisters and
lineal descendants) owns directly or indirectly in the
aggregate more than 50 percent of the equity of a
corporation or is a partner of a partnership which is a
"substantial user" of a facility financed from the proceeds
of those bonds. A "substantial user" of such facilities is
defined generally as a "non-exempt person who regularly uses
a part of [a] facility" financed from the proceeds of
industrial development or private activity bonds.
As indicated in the Prospectus, there are certain
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 that are available to the Fund.
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 Sub-Adviser's opinion as
to marketability of the issue and other factors that may be
applicable to any particular issue.
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, which is marked to market every
business day. On delivery dates for such transactions, the
Fund will meet its commitments by selling the assets held in
the separate account and/or from cash flow.
Determination of the Marketability of Certain Securities
In determining marketability of floating and variable
rate demand notes and participation interests (including
municipal lease/purchase obligations) the Board of Trustees
will consider the following factors, not all of which may be
applicable to any particular issue: the quality, maturity
and coupon rate of the issue, ratings received from the
nationally recognized statistical rating organizations and
any changes or prospective changes in such ratings, the
likelihood that the issuer will continue to appropriate the
required payments for the issue, recent purchases and sales
of the same or similar issues, the general market for
municipal securities of the same or similar quality, the Sub-
Adviser's opinion as to marketability of the issue and other
factors that may be applicable to any particular issue.
Futures Contracts and Options
Although the Fund does not presently do so and may in
fact never do so, it is permitted to buy and sell futures
contracts relating to municipal bond indices ("Municipal
Bond Index Futures") and to U.S. Government securities
("U.S. Government Securities Futures," together referred to
as "Futures"), and exchange-traded options based on Futures
as a possible means to protect the asset value of the Fund
during periods of changing interest rates. The following
discussion is intended to explain briefly the workings of
Futures and options on them which would be applicable if the
Fund were to use 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 Securities Futures
contracts based on long-term Treasury bonds, Treasury notes,
GNMA Certificates and three-month Treasury bills. U.S.
Government Securities Futures have traded longer than
Municipal Bond Index Futures, and the depth and liquidity
available in the trading markets for them are in general
greater.
Call Options on Futures Contracts. The Fund may also
purchase and sell exchange-traded call and put options on
Futures. The purchase of a call option on a Future is
analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to
either the Future upon which it is based, or upon the price
of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying
debt securities. Like the purchase of a futures contract,
the 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 Futures to
attempt to protect against the price volatility of the
Fund's Kentucky Obligations is that the Sub-Adviser could be
incorrect in its expectations as to the extent of various
interest rate movements or the time span within which the
movements take place. For example, if the 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 securities
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 decides 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 or limits on upward or downward
price movements which could at times make it difficult or
impossible to liquidate existing positions.
Regulatory Aspects of Futures and Options
The Fund will, due to requirements under the Investment
Company Act of 1940 (the "1940 Act"), deposit in a
segregated account 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 as to its long and short
positions in Futures in conformity with restrictions it has
committed to pursuant to a rule (the "CFTC Rule") adopted by
the Commodity Futures Trading Commission ("CFTC") under the
Commodity Exchange Act (the "CEA") to be eligible for the
exclusion provided by the CFTC Rule from qualifications as a
"commodity pool operator" (as defined under the CEA). Under
these restrictions the 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 as to its Futures and options activities due to
requirements other than those described in this paragraph;
the Fund will, as to long positions, be required to abide by
the more restrictive of the two requirements.) The
"underlying commodity value" of a Future or option is
computed by multiplying the size of the Future by the daily
settlement price of the Future or option.
The "sale" of a Future means the acquisition by the
Fund of an obligation to deliver an amount of cash equal to
a specified dollar amount times the difference between the
value of the index or government security at the close of
the last trading day of the Future and the price at which
the Future is originally struck (which the Fund anticipates
will be lower because of a subsequent rise in interest rates
and a corresponding decline in the index value). This is
referred to as having a "short" Futures position. The
"purchase" of a Future means the acquisition by the Fund of
a right to take delivery of such an amount of cash. In this
case, the Fund anticipates that the closing value will be
higher than the price at which the Future is originally
struck. This is referred to as having a "long" futures
position. No physical delivery of the bonds making up the
index or the U.S. government securities, as the case may be,
is made as to either a long or a short futures position.
FUND POLICIES
Investment Restrictions
The Fund has a number of policies concerning what it
can and cannot do. Those that are called fundamental
policies cannot be changed unless the holders of a
"majority" (as defined in the 1940 Act) of the Fund's
outstanding shares vote to change them. Under the 1940 Act,
the vote of the holders of a "majority" of the Fund's
outstanding shares means the vote of the holders of the
lesser of (a) 67% or more of the Fund's shares present at a
meeting or represented by proxy if the holders of more than
50% of its shares are so present or represented; or (b) more
than 50% of the Fund's outstanding shares. Those fundamental
policies not set forth in the Prospectus are set forth
below:
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than Kentucky
Obligations (discussed under "Investment of the Fund's
Assets" in the Prospectus and in "Investment Strategies and
Risks" in the SAI), Municipal Bond Index Futures, U.S.
Government Securities Futures and options on such Futures;
therefore the 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.
5. 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.
6. 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.
7. 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.
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.
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.
MANAGEMENT OF THE FUND
The Board of Trustees
The business and affairs of the Fund are managed under
the direction and control of its Board of Trustees. The
Board of Trustees has authority over every aspect of the
Fund's operations, including approval of the advisory and
sub-advisory agreements and their annual renewal, the
contracts with all other service providers and payments
under the Fund's Distribution Plan and Shareholder Services
Plan.
Trustees and Officers
The Trustees and officers of the Fund, their ages,
their affiliations, if any, with the Manager or the
Distributor and their principal occupations during at least
the past five years are set forth below. None of the
Trustees or officers of the Fund is affiliated with the Sub-
Adviser. Mr. Herrmann is an interested person of the Fund as
that term is defined in the Investment Company Act of 1940
(the "1940 Act") as an officer of the Fund and a director,
officer and shareholder of the Manager and the Distributor.
Ms. Herrmann is an interested person of the Fund as an
officer of the Fund and as an officer, director and
shareholder of the Manager and as a shareholder of the
Distributor. Each is also an interested person as a member
of the immediate family of the other. Mr. Dean is an
interested person of the Fund as a trustee of a trust that
holds securities of the Sub-Adviser's corporate parent. They
are so designated by an asterisk.
In the following material Hawaiian Tax-Free Trust, Tax-
Free Trust of Arizona, Tax-Free Trust of Oregon, Tax-Free
Fund of Colorado, Churchill Tax-Free Fund of Kentucky (this
Fund), Narragansett Insured Tax-Free Income Fund and Tax-
Free Fund For Utah, each of which is a tax-free municipal
bond fund, are called the "Aquila Bond Funds"; Pacific
Capital Cash Assets Trust, Churchill Cash Reserves Trust,
Pacific Capital U.S. Government Securities Cash Assets
Trust, Pacific Capital Tax-Free Cash Assets Trust, Capital
Cash Management Trust and Capital Cash U.S. Government
Securities Trust, each of which is a money-market fund, are
called the "Aquila Money-Market Funds"; and Aquila Cascadia
Equity Fund and Aquila Rocky Mountain Equity Fund are called
the "Aquila Equity Funds."
<TABLE>
<CAPTION>
Name, Position Business Experience
with the Fund,
Address, Age
<S> <C> <C>
Lacy B. Herrmann* Founder and Chairman of the Board
Chairman of Aquila Management Corporation,
of the the sponsoring organization and
Board of Manager or Administrator and/or
Trustees Adviser or Sub-Adviser to the Aquila
380 Madison Avenue Money-Market Funds, the Aquila Bond
New York, New York Funds and the Aquila Equity Funds,
10017 and Founder, Chairman of the Board of
Age: 70 Trustees and (currently or until 1998)
President of each since its
establishment, beginning in 1984;
Director of Aquila Distributors, Inc.,
distributor of the above funds, since
1981 and formerly Vice President or
Secretary, 1981-1998; President and a
Director of STCM Management Company,
Inc., sponsor and sub-adviser to
Capital Cash Management Trust; Founder
and Chairman of several other money-
market funds; Director or Trustee of
OCC Cash Reserves, Inc. and Quest For
Value Accumulation Trust, and Director
or Trustee of Oppenheimer Quest Value
Fund, Inc., Oppenheimer Quest Global
Value Fund, Inc. and Oppenheimer
Rochester Group of Funds, each of which
is an open-end investment company;
Trustee of Brown University, 1990-1996
and currently Trustee Emeritus;
actively involved for many years in
leadership roles with university,
school and charitable organizations.
Thomas A. Shareholder of Robinson, Hughes &
Christopher Christopher, C.P.A.s, P.S.C., since 1977;
Trustee President of A Good Place for Fun, Inc.,
459 Martin Luther a sports facility, since 1987; active
King Blvd., Danville, member of the American Institute of
Kentucky 40422 Certified Public Accountants; Board of
Age: 52 Directors of the Kentucky Society of C.P.A.s
1991 to 1994; Trustee of Churchill Cash
Reserves Trust since 1985 and of
Churchill Tax-Free Fund of Kentucky
(this Fund) since 1992; presently
active in leadership roles with various
civic, community and church
organizations.
Douglas Dean * Founder and President of Dean,
Trustee Dorton& Ford P.S.C., a public
106 West Vine Street accounting firm, since 1979;
Suite 600, previously employed by Coopers &
Lexington, Lybrand, a public accounting
Kentucky 40507 firm; member of the American Institute
Age: 51 of Certified Public Accountants and Kentucky
Society of Certified Public
Accountants; accredited in business
valuation by the American Institute of
Certified Public Accountants; Trustee
of Trent Equity Fund, an equity mutual
fund, 1992-1994; Trustee of Churchill
Cash Reserves Trust since 1995 and
Churchill Tax-Free Fund of Kentucky
(this Fund) since 1987; active as an
officer and board member of various
charitable and community organizations.
Diana P. Herrmann * President and Chief Operating
Trustee and Officer of the Manager/Administrator
President since 1997, a Director since 1984,Secretary
380 Madison Avenue since 1986 and previously its Executive
New York, New York Vice President, Senior Vice President
10017 or Vice President, 1986-1997; President
Age: 42 of various Aquila Bond and Money-Market Funds
since
1998; Assistant Vice President, Vice
President, Senior Vice President or
Executive Vice President of Aquila
Money-Market, Bond and Equity Funds
since 1986; Trustee of a number of
Aquila Money-Market, Bond and Equity
Funds since 1995; Trustee of Reserve
Money-Market Funds,1999-2000 and of
Reserve Private Equity Series,1998-
2000; Assistant Vice President and
formerly Loan Officer of European
American Bank, 1981-1986; daughter of
the Trust's Chairman; Trustee of the
Leopold Schepp Foundation (academic
scholarships) since 1995; actively
involved in mutual fund and trade
associations and in college and other
volunteer organizations.
Carroll F. Knicely President of Associated
Trustee Publications Inc., Glasgow,
505 Augusta Circle, Kentucky; Director and member
Glasgow, Kentucky of the Executive Board of West
42141 Kentucky Corporation and Director and
Age: 71 Secretary-Treasurer of South Gate Plaza,
Inc. (owner and developer of shopping
centers and commercial real estate);
Director, Vice President and Treasurer
of Knicely and Knicely, Inc. (owner and
developer of rental properties and
residential real estate); Trustee of
Campbellsville University,
Campbellsville, Kentucky since 1997;
Trustee of Churchill Cash Reserves
Trust and Churchill Tax-Free Fund of
Kentucky (this Fund) since 1998; Editor
and Publisher of Kentucky newspaper
group, 1957-1990; Secretary of Commerce
of the Commonwealth of Kentucky, 1983-
1988; Commissioner of Commerce of the
Commonwealth of Kentucky, 1978-1979;
currently active in real estate
development, commercial and residential
subdivision and regional economic
development planning under Kentucky
State government sponsorship.
Theodore T. Mason Executive Director of Louisiana
Trustee Power Partners, LLC since 1999
26 Circle Drive, and of East Wind Power Partners
Hastings-on-Hudson, since 1994; First Vice President
New York 10706 of the Alumni Association of SUNY
Age: 64 Maritime College(Second Vice President,
1998-2000) and Director of the same
organization 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 Capital Cash
Management Trust 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. Government
Securities Cash Assets Trust since 1988
and of Churchill Tax-Free Fund of
Kentucky (this Fund) since 1992;
Trustee of OCC Accumulation Trust and
the OCC Cash Reserves, Inc. since 1999;
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 Vice President for Business
Trustee Affairs of Ottawa University
167 Glengarry Place since 1992; IBM Corporation,
Castle Rock, 1965-1991; Budget Review Officer
Colorado 80104 of the American Baptist Churches
Age: 61 /USA, 1994-1997; Director of the American
Baptist Foundation, 1985-1996 and since
1998; Trustee of Brown University, 1992-
1999; Trustee of Churchill Cash
Reserves Trust since 1985, of Tax-Free
Trust of Arizona since 1986, of
Churchill Tax-Free Fund of Kentucky
(this Fund), Tax-Free Fund of Colorado
and Capital Cash Management Trust since
1987 and of Tax-Free Fund For Utah
since 1994.
William J. Chairman and founder (1975) and Senior
Nightingale Advisor since 1995 of Nightingale &
Trustee Associates, L.L.C., a general management
1266 East Main Street consulting firm focusing on
Stamford, Connecticut interim management, divestitures,
06902 turnaround of troubled companies,
Age: 70 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 and Churchill Tax-Free
Fund of Kentucky (this Fund) since
1993; Director of Kasper A.S.L. Ltd.,
an apparel company, since 1997, of
Ring's End, Inc., a building materials
and construction company, since 1989,
and of Furr's/Bishop's Inc., operator
of a chain of restaurants, since 1998.
James R. Ramsey Governor's Senior Policy Advisor
Trustee and State Budget Director since
Office of State 1999; Professor of Economics,
Budget Director, University of Louisville, since
Suite 109 1999; Vice Chancellor for Finance
700 Capitol Avenue, and Administration of the
Frankfort, Kentucky University of North Carolina at
40601 Chapel Hill, 1998 to 1999;
Age: 51 Trustee of Churchill Tax-Free Fund of
Kentucky (this Fund) since 1987 and of
Churchill Cash Reserves Trust since
1995. Previously Vice President for
Finance and Administration at Western
Kentucky University, State Budget
Director for the Commonwealth of
Kentucky, Chief State Economist and
Executive Director for the Office of
Financial Management and Economic
Analysis for the Commonwealth of
Kentucky, Adjunct Professor at the
University of Kentucky, Associate
Professor at Loyola University-New
Orleans and Assistant Professor at
Middle Tennessee State University;
served on numerous civic and corporate
boards; consultant to Federal, State
and local governments and to private
business.
Jerry G. McGrew President of Aquila
Senior Vice Distributors, Inc. since 1998,
President Registered Principal since 1993, Senior
5331 Fayette Street Vice President, 1997-1998, and Vice
Houston, Texas President, 1993-1997; Senior Vice
77056 President of Aquila Rocky Mountain
Age: 55 Equity Fund since 1996; Senior Vice
President of Churchill Tax-Free Fund of
Kentucky (this Fund) since 1994, and of
Tax-Free Fund of Colorado and Tax-Free
Fund For Utah since 1997; Vice
President of Churchill Cash Reserves
Trust since 1995; 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, 1993-
1997; 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; Director-at
Large, Houston Alliance for the
Mentally Ill (AMI), since 1998.
L. Michele Robbins Senior Vice President of
Senior Vice Churchill Tax-Free Fund
President of Kentucky (this Fund) since
8499 Hardinsburg 1996; Assistant Vice President,
Road, Cecilia 1995-1996; Registered Representative
Kentucky 42724 of Aquila Distributors, Inc. since
Age: 35 1995; Investment Broker, 1990-1994;
Sales Assistant, 1984-1990, J.J.B.
Hilliard,
W.L. Lyons, Inc.
Terri M. Blair Vice President of Churchill
Vice Tax-Free Fund of Kentucky(this
President Fund) since 1996; Corporate
800 Edlin Lane, Safety Director /Human Resource
Elizabethtown, Manager of Ramsey & Associates,
Kentucky 42701 Inc. 1995-1996; Senior Sales
Age: 35 Representative of Bluegrass Cellular,
Inc. 1993-1995.
Rose F. Marotta Chief Financial Officer
Chief Financial of the Aquila Money-
Officer Market, Bond and Equity
380 Madison Avenue Funds since 1991 and
New York, New York Treasurer, 1981-1991; formerly
10017 Treasurer of the predecessor of
Age: 75 Capital Cash Management Trust;
Treasurer and Director of STCM
Management Company, Inc., since 1974;
Treasurer of InCap Management
Corporation since 1982, of the Manager
since 1984 and of the Distributor ,1985-
2000.
Richard F. West Treasurer of the Aquila Money-
Treasurer Market, Bond and Equity Funds
380 Madison Avenue and of Aquila Distributors,
New York, New York Inc. since 1992; Associate
10017 Director of Furman Selz Incorporated,
Age: 64 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 Partner of Hollyer Brady
Secretary Smith Troxell Barrett
551 Fifth Avenue Rockett Hines & Mone
New York, New York LLP, attorneys, since 1989
10176 and counsel, 1987-1989;
Age: 60 Secretary of the Aquila Money-Market,
Bond and Equity Funds since 1982;
Secretary of Trinity Liquid Assets
Trust, 1982-1985 and Trustee of that
Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon Assistant Secretary of the
Assistant Aquila Money-Market, Bond and
Secretary Equity Funds since 1995 and Vice
380 Madison Avenue President of the Aquila
New York, New York Money-Market Funds since 1990;
10017 Vice President of the Manager
Age: 60 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.
</TABLE>
The Fund does not currently pay fees to any of the Fund's
officers or to Trustees affiliated with the Manager or the
Sub-Adviser. For its fiscal year ended December 31, 1999,
the Fund paid a total of $76,080 in compensation and
reimbursement of expenses to the Trustees. No other
compensation or remuneration of any type, direct or
contingent, was paid by the Fund to its Trustees.
The Fund is one of the 15 funds in the Aquilasm Group
of Funds, which consist of tax-free municipal bond funds,
money- market funds and equity funds. The following table
lists the compensation of all Trustees who received
compensation from the 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.
Name Compensation Compensation Number of
from the from all boards on
Fund funds in the which the
Aquilasm Trustee
Group serves
Thomas A.
Christopher $8,300 $13,250 2
Douglas
Dean $6,950 $11,650 2
Carroll
Knicely $7,318 $12,050 2
Theodore T.
Mason $7,050 $49,484 7
Anne J.
Mills $6,600 $35,850 6
William J.
Nightingale $6,250 $17,600 3
James R.
Ramsey $7,529 $12,450 2
Class A Shares may be purchased without a sales charge
by certain of the Fund's Trustees and officers. (See
"Reduced Sales Charges for Class A Shares," below.)
OWNERSHIP OF SECURITIES
On April 4, 2000, the following institutional holders held
5% or more of the Fund's outstanding shares. 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
Name and address Number of shares Percent of class
of the institutional
holder
Merrill Lynch Pierce
Fenner & Smith,
Jacksonville, FL 5,580
Class C Shares 5.5%
Advest Inc.,
Hartford, CT 10,968 5.7%
Class C Shares
National City Bank of Kentucky
TTEE Cardinal Aluminum Co.,
Cleveland OH 250,457 19.5%
Class Y Shares
Danky & Co.,
Danville, KY 119,224 10.8%
Class Y Shares
a nominee of
Central Kentucky
Trust Co,
Danville, KY 811,083 64.0%
Class Y Shares
Additional 5% shareholders
Ray N. Cossey
and Elizabeth A.
Cossey TEES,
Bowling Green, KY 21,806 7.0%
Class C Shares
Daniel H. Lail,
Jr. and Beulah E.
Lail TEES;
Lexington, KY 13,544 7.0%
Class C Shares
James and Edith
Garrison
Murray, KY 41,144 21.2%
Class C Shares
James Robert Hall,
Springfield, KY 10,788 5.6%.
Class C Shares
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.
Management Ownership
As of the date of this SAI, all of the Trustees and
officers as a group owned less than 1% of its outstanding
shares.
INVESTMENT ADVISORY AND OTHER SERVICES
Information about the Sub-Adviser, the Manager and the
Distributor
The Sub-Adviser services Kentucky clients at offices in
Louisville and Lexington, Kentucky. As 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.
The Fund's Manager is founder and Manager and/or
administrator to the Aquilasm Group of Funds, which consists
of tax-free municipal bond funds, money-market funds and
equity funds. As of December 31, 1999, these funds had
aggregate assets of approximately $3.0 billion, of which
approximately $1.8 billion consisted of assets of the
tax-free municipal bond funds. The Manager, which was
founded in 1984, is controlled by Mr. Lacy B. Herrmann,
directly, through a trust and through share ownership by his
wife.
Mr. Herrmann and Ms. Herrmann are affiliated with the
Fund as officers and Trustees. Mr. Herrmann controls the
Manager, as described above, and Ms. Herrmann is an officer
and a director of the Manager.
Under the Advisory and Administration Agreement, the
Fund will pay to the Manager 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 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 management fee shall be payable
at the annual rate of 0.14 of 1% of such net asset value.
Management Fees
During the fiscal years ended December 31, 1999, 1998 and
1997 the Fund incurred Management fees as follows:
Manager Sub-Adviser Related Information
1999 $949,606
1998 $958,774 Includes fees paid
to the Manager as
administrator and to
the Sub-Adviser as
adviser under
arrangements in
effect until April
1998
1997 $599,081 $322,582 Paid under former
advisory and
administration
agreements then
in effect
Aquila Distributors, Inc. 380 Madison Avenue, Suite
2300, New York, NY 10017 is the Fund's Distributor. The
Distributor currently handles the distribution of the shares
of fourteen funds (six 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.
The shares of the Distributor are owned 72% by Mr.
Herrmann and other members of his immediate family, 24% by
Diana P. Herrmann and the balance by an officer of the
Distributor.
The Advisory and Administration Agreement
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of
Trustees of the 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 and Administration Agreement provides
that, subject to the termination provisions described below,
the Manager may at its own expense delegate to a qualified
organization ("Sub-Adviser"), affiliated or not affiliated
with the Manager, any or all of the above duties. Any such
delegation of the duties set forth in (i), (ii) or (iii)
above shall be by a written agreement (the "Sub-Advisory
Agreement") approved as provided in the Investment Company
Act of 1940. The Manager has delegated all of such functions
to the Sub-Adviser in the Sub-Advisory Agreement.
The Advisory and Administration Agreement also provides
that subject to the direction and control of the Board of
Trustees of the 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 the
Sub-Advisory Agreement; as part of such administrative
duties, the Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the 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 and Administration Agreement contains
provisions relating to compliance of the investment program,
responsibility of the Manager for any investment program
managed by it, allocation of brokerage, and responsibility
for errors that are substantially the same as the
corresponding provisions in the Sub-Advisory Agreement.
The Advisory and Administration Agreement provides that
the Manager shall, at its own expense, pay all compensation
of Trustees, officers, and employees of the Fund who are
affiliated persons of the Manager.
The Fund bears the costs of preparing and setting in
type its prospectuses, statements of additional information
and reports to its shareholders, and the costs of printing
or otherwise producing and distributing those copies of such
prospectuses, statements of additional information and
reports as are sent to its shareholders. All costs and
expenses not expressly assumed by the Manager under the
agreement or otherwise by the Manager, administrator or
principal underwriter or by any Sub-Adviser shall be paid by
the 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.
The Advisory and Administration 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
and Administration Agreement which relate to providing
investment advisory services will automatically terminate in
the event of the assignment (as defined in the 1940 Act) of
the Advisory and Administration Agreement, but all other
provisions relating to providing services other than
investment advisory services will not terminate, provided
however, that upon such an assignment the annual fee payable
monthly and computed on the net asset value of the Fund as
of the close of business each business day shall be reduced
to the annual rate of 0.26 of 1% of such net asset value.
The Sub-Advisory Agreement
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the
Sub-Adviser, which provides, subject to the control of the
Board of Trustees, for investment supervision and at the
Sub-Adviser's expense for pricing of the 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, for pricing of the Fund's
portfolio at least quarterly using another such source
satisfactory to the Fund. The Sub-Advisory Agreement states
that the Sub-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
Sub-Adviser's duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times
conform to, and be in accordance with, any requirements
imposed by: (1) the Investment Company Act of 1940 (the
"Act") and any rules or regulations in force thereunder; (2)
any other applicable laws, rules and regulations; (3) the
Declaration of Trust and By-Laws of the 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, as defined therein,
and to the Fund the benefit of its best judgment and effort
in rendering services hereunder, but the Sub-Adviser shall
not be liable for any loss sustained by reason of the
adoption of any investment policy or the purchase, sale or
retention of any security, whether or not such purchase,
sale or retention shall have been based upon (i) its own
investigation and research or (ii) investigation and
research made by any other individual, firm or corporation,
if such purchase, sale or retention shall have been made and
such other individual, firm or corporation shall have been
selected in good faith by the Sub-Adviser. Nothing therein
contained shall, however, be construed to protect the
Sub-Adviser against any liability to the 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 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
by the Sub-Adviser, the Manager agrees to provide the
Sub-Adviser the benefits of such indemnification.
The Sub-Advisory Agreement contains
provisions regarding brokerage described below.
The Sub-Advisory Agreement provides that the
Sub-Adviser agrees to maintain, and to preserve for the
periods prescribed, such books and records with respect to
the portfolio transactions of the 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 became effective on May 1,
1998 and provides that it shall, unless terminated as
therein provided, continue in effect until the June 30 next
preceding the first anniversary of the effective date of the
Agreement, and from year to year thereafter, but only so
long as such continuance is specifically approved at least
annually (1) by a vote of the 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 Act) or the termination of the Investment
Advisory and Administration Agreement. The Sub-Adviser
agrees that it will not exercise its termination rights for
at least three years from the effective date of the
Agreement, except for regulatory reasons.
Underwriting Commissions
During the fiscal years ended December
31, 1999, 1998 and 1997 the aggregate dollar amount of sales
charges on sales of shares in the Fund was $251,996,
$354,069 and $451,516, respectively, and the amount retained
by the Distributor was $21,878, $27,253 and $37,896,
respectively.
In connection with sales of Class A Shares, the
Distributor pays a portion of the sales charge on such
shares to dealers in the form of discounts and to brokers in
the form of agency commissions (together, "Commissions"), in
amounts that vary with the size of the sales charge as
follows:
Sales Charge as
Percentage Commissions
of Public as Percentage
Offering of Offering
Price Price
4.00% 3.00%
3.75% 3.00%
3.50% 2.75%
3.25% 2.75%
3.00% 2.50%
2.50% 2.25%
Distribution Plan
The Fund's Distribution Plan has four parts, relating
respectively to distribution payments with respect to Class
A Shares (Part I), to distribution payments relating to
Class C Shares (Part II), to distribution payments relating
to Class I Shares (Part III) and to certain defensive
provisions (Part IV).
At the date of the SAI, most of the outstanding shares
of the Fund would be considered Qualified Holdings of
various broker-dealers unaffiliated with the Manager, Sub-
Adviser or Distributor. The Distributor will consider shares
which are not Qualified Holdings of such unrelated
broker-dealers to be Qualified Holdings of the Distributor
and will authorize Permitted Payments to the Distributor
with respect to such shares whenever Permitted Payments are
being made under the Plan.
Provisions Relating to Class A Shares (Part I)
Part I of the Plan applies only to the Front-Payment
Class Shares ("Class A Shares") of the Fund (regardless of
whether such class is so designated or is redesignated by
some other name).
As used in Part I of the Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not
limited to any principal underwriter of the Fund, with which
the Fund or the Distributor has entered into written
agreements in connection with Part I ("Class A Plan
Agreements") and which have rendered assistance (whether
direct, administrative, or both) in the distribution and/or
retention of the Fund's Front-Payment Class Shares or
servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any
Qualified Recipient, all Front-Payment Class Shares
beneficially owned by such Qualified Recipient, or
beneficially owned by its brokerage customers, other
customers, other contacts, investment advisory clients, or
other clients, if the Qualified Recipient was, in the sole
judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation
thereto.
Subject to the direction and control of the Fund's
Board of Trustees, the Fund may make payments ("Class A
Permitted Payments") to Qualified Recipients, which Class A
Permitted Payments may be made directly, or through the
Distributor or shareholder servicing agent as disbursing
agent, which may not exceed, for any fiscal year of the Fund
(as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.15 of 1% of
the average annual net assets of the Fund represented by the
Front-Payment Class Shares. Such payments shall be made only
out of the Fund's assets allocable to the Front-Payment
Class Shares.
The Distributor shall have sole authority (i) as to the
selection of any Qualified Recipient or Recipients; (ii) not
to select any Qualified Recipient; and (iii) as to the
amount of Class A Permitted Payments, if any, to each
Qualified Recipient provided that the total Class A
Permitted Payments to all Qualified Recipients do not exceed
the amount set forth above. The Distributor is authorized,
but not directed, to take into account, in addition to any
other factors deemed relevant by it, the following: (a) the
amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Front-Payment Class Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and
history, and the manner in which purchases and redemptions
of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary
personnel and facilities to establish and maintain
shareholder accounts and records; assisting in processing
purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes
in shareholder designated accounts; furnishing (either alone
or together with other reports sent to a shareholder by such
person) monthly and year-end statements and confirmations of
purchases and redemptions; transmitting, on behalf of the
Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the
Fund proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such
other related services as the Distributor or a shareholder
may request from time to time; and (c) the possibility that
the Qualified Holdings of the Qualified Recipient would be
redeemed in the absence of its selection or continuance as a
Qualified Recipient. Notwithstanding the foregoing two
sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried
over to subsequent years.
While Part I is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing
for their review on the following matters: (i) all Class A
Permitted Payments made under the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for
which the amounts were expended; and (ii) all fees of the
Fund to the Manager, Sub-Adviser or Distributor paid or
accrued during such quarter. In addition, if any such
Qualified Recipient is an affiliated person, as that term is
defined in the 1940 Act, of the Fund, Manager, Sub-Adviser
or Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the
Fund an accounting, in form and detail satisfactory to the
Board of Trustees, to enable the Board of Trustees to make
the determinations of the fairness of the compensation paid
to such affiliated person, not less often than annually.
Part I originally went into effect when it was approved
(i) by a vote of the Trustees, including the Independent
Trustees, with votes cast in person at a meeting called for
the purpose of voting on Part I of the Plan; and (ii) by a
vote of holders of at least a "majority" (as so defined) of
the outstanding voting securities of the Front-Payment Class
Shares (or of any predecessor class or category of shares,
whether or not designated as a class) and a vote of holders
of at least a "majority" (as so defined) of the outstanding
voting securities of the Level- Payment Class Shares and/or
of any other class whose shares are convertible into Front-
Payment Class Shares. Part I has continued, and will, unless
terminated as hereinafter provided, continue in effect,
until the April 30 next succeeding such effectiveness, and
from year to year thereafter only so long as such
continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes
cast in person at a meeting called for the purpose of voting
on such continuance. Part I may be terminated at any time
by the vote of a majority of the Independent Trustees or by
the vote of the holders of a "majority" (as defined in the
1940 Act) of the outstanding voting securities of the Fund
to which Part I applies. Part I may not be amended to
increase materially the amount of payments to be made
without shareholder approval of the class or classes of
shares affected by Part I as set forth in (ii) above, and
all amendments must be approved in the manner set forth in
(i) above.
In the case of a Qualified Recipient which is a
principal underwriter of the Fund, the Class A Plan
Agreement shall be the agreement contemplated by Section
15(b) of the 1940 Act since each such agreement must be
approved in accordance with, and contain the provisions
required by, the Rule. In the case of Qualified Recipients
which are not principal underwriters of the Fund, the Class
A Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the
Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class A Plan Agreements entered into thereafter.
Provisions relating to Class C Shares (Part II)
Part II of the Plan applies only to the Level-Payment
Shares Class ("Class C Shares") of the Fund (regardless of
whether such class is so designated or is redesignated by
some other name).
As used in Part II of the Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not
limited to any principal underwriter of the Fund, with which
the Fund or the Distributor has entered into written
agreements in connection with Part II ("Class C Plan
Agreements") and which have rendered assistance (whether
direct, administrative, or both) in the distribution and/or
retention of the Fund's Level-Payment Class Shares or
servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level- Payment Class Shares beneficially
owned by such Qualified Recipient, or beneficially owned by
its brokerage customers, other customers, other contacts,
investment advisory clients, or other clients, if the
Qualified Recipient was, in the sole judgment of the
Distributor, instrumental in the purchase and/or retention
of such shares and/or in providing administrative
assistance or other services in relation thereto.
Subject to the direction and control of the Fund's
Board of Trustees, the Fund may make payments ("Class C
Permitted Payments") to Qualified Recipients, which Class C
Permitted Payments may be made directly, or through the
Distributor or shareholder servicing agent as disbursing
agent, which may not exceed, for any fiscal year of the Fund
(as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.75 of 1% of
the average annual net assets of the Fund represented by the
Level- Payment Class Shares. Such payments shall be made
only out of the Fund's assets allocable to the Level-Payment
Class Shares. The Distributor shall have sole authority (i)
as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and
(iii) the amount of Class C Permitted Payments, if any, to
each Qualified Recipient provided that the total Class C
Permitted Payments to all Qualified Recipients do not exceed
the amount set forth above. The Distributor is authorized,
but not directed, to take into account, in addition to any
other factors deemed relevant by it, the following: (a) the
amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Level- Payment Class Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and
history, and the manner in which purchases and redemptions
of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary
personnel and facilities to establish and maintain
shareholder accounts and records; assisting in processing
purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes
in shareholder designated accounts; furnishing (either alone
or together with other reports sent to a shareholder by such
person) monthly and year-end statements and confirmations of
purchases and redemptions; transmitting, on behalf of the
Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the
Fund proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such
other related services as the Distributor or a shareholder
may request from time to time; and (c) the possibility that
the Qualified Holdings of the Qualified Recipient would be
redeemed in the absence of its selection or continuance as a
Qualified Recipient. Notwithstanding the foregoing two
sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried
over to subsequent years.
While Part II is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in
writing for their review on the following matters: (i) all
Class C Permitted Payments made under the Plan, the identity
of the Qualified Recipient of each payment, and the purposes
for which the amounts were expended; and (ii) all fees of
the Fund to the Manager, Sub-Adviser or Distributor paid or
accrued during such quarter. In addition, if any such
Qualified Recipient is an affiliated person, as that term is
defined in the 1940 Act, of the Fund, Manager, Sub-Adviser
or Distributor such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the
Fund an accounting, in form and detail satisfactory to the
Board of Trustees, to enable the Board of Trustees to make
the determinations of the fairness of the compensation paid
to such affiliated person, not less often than annually.
Part II originally went into effect when it was
approved (i) by a vote of the Trustees, including the
Independent Trustees, with votes cast in person at a meeting
called for the purpose of voting on Part II of the Plan; and
(ii) by a vote of holders of at least a "majority" (as so
defined) of the outstanding voting securities of the Level-
Payment Class Shares. Part II has continued, and will,
unless terminated as therein provided, continue in effect,
until the April 30 next succeeding such effectiveness, and
from year to year thereafter only so long as such
continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes
cast in person at a meeting called for the purpose of voting
on such continuance. Part II may be terminated at any time
by the vote of a majority of the Independent Trustees or by
the vote of the holders of a "majority" (as defined in the
1940 Act) of the outstanding voting securities of the Fund
to which Part II applies. Part II may not be amended to
increase materially the amount of payments to be made
without shareholder approval of the class or classes of
shares affected by Part II as set forth in (ii) above, and
all amendments must be approved in the manner set forth in
(i) above.
In the case of a Qualified Recipient which is a
principal underwriter of the Fund, the Class C Plan
Agreement shall be the agreement contemplated by Section
15(b) of the 1940 Act since each such agreement must be
approved in accordance with, and contain the provisions
required by, the Rule. In the case of Qualified Recipients
which are not principal underwriters of the Fund, the Class
C Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the
Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class C Plan Agreements entered into thereafter.
Provisions relating to Class I Shares (Part III)
Part III of the Plan applies only to the Financial
Intermediary Class Shares ("Class I Shares") of the Fund
(regardless of whether such class is so designated or is
redesignated by some other name).
As used in Part III of the Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not
limited to any principal underwriter of the Fund, with which
the Fund or the Distributor has entered into written
agreements in connection with Part III ("Class I Plan
Agreements") and which have rendered assistance (whether
direct, administrative, or both) in the distribution and/or
retention of the Fund's Class I Shares or servicing of
shareholder accounts with respect to such shares. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Class I Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers,
other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was,
in the sole judgment of the Distributor, instrumental in the
purchase and/or retention of such shares and/or in providing
administrative assistance or other services in relation
thereto.
Subject to the direction and control of the Fund's
Board of Trustees, the Fund may make payments ("Class I
Permitted Payments") to Qualified Recipients, which Class I
Permitted Payments may be made directly, or through the
Distributor or shareholder servicing agent as disbursing
agent, which may not exceed, for any fiscal year of the Fund
(as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any
fiscal year which is not a full fiscal year), a rate fixed
for time to time by the Board of Trustees, initially 0.10 of
1% of the average annual net assets of the Fund represented
by the Class I Shares, but not more than 0.25 of 1% of such
assets. Such payments shall be made only out of the Fund's
assets allocable to Class I Shares. The Distributor shall
have sole authority (i) as to the selection of any Qualified
Recipient or Recipients; (ii) not to select any Qualified
Recipient; and (iii) the amount of Class I Permitted
Payments, if any, to each Qualified Recipient provided that
the total Class I Permitted Payments to all Qualified
Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into
account, in addition to any other factors deemed relevant by
it, the following: (a) the amount of the Qualified Holdings
of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Class
I Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be
effected; assisting shareholders in designating and changing
dividend options, account designations and addresses;
providing necessary personnel and facilities to establish
and maintain shareholder accounts and records; assisting in
processing purchase and redemption transactions; arranging
for the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes
in shareholder designated accounts; furnishing (either alone
or together with other reports sent to a shareholder by such
person) monthly and year-end statements and confirmations of
purchases and redemptions; transmitting, on behalf of the
Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the
Fund proxies executed by shareholders with respect to
meetings of shareholders of the Fund; and providing such
other related services as the Distributor or a shareholder
may request from time to time; and (c) the possibility that
the Qualified Holdings of the Qualified Recipient would be
redeemed in the absence of its selection or continuance as a
Qualified Recipient. Notwithstanding the foregoing two
sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried
over to subsequent years.
While Part III is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in
writing for their review on the following matters: (i) all
Class I Permitted Payments made under the Plan, the identity
of the Qualified Recipient of each payment, and the purposes
for which the amounts were expended; and (ii) all fees of
the Fund to the Manager, Sub-Adviser or Distributor paid or
accrued during such quarter. In addition, if any such
Qualified Recipient is an affiliated person, as that term is
defined in the Act, of the Fund, Manager, Sub-Adviser or
Distributor such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the
Fund an accounting, in form and detail satisfactory to the
Board of Trustees, to enable the Board of Trustees to make
the determinations of the fairness of the compensation paid
to such affiliated person, not less often than annually.
Part III originally went into effect when it was
approved (i) by a vote of the Trustees, including the
Independent Trustees, with votes cast in person at a meeting
called for the purpose of voting on Part III of the Plan;
and (ii) by a vote of holders of at least a "majority" (as
so defined) of the outstanding voting securities of the
Class I Shares Class. Part III has continued, and will,
unless terminated as thereinafter provided, continue in
effect, until the April 30 next succeeding such
effectiveness, and from year to year thereafter only so long
as such continuance is specifically approved at least
annually by the Fund's Trustees and its Independent Trustees
with votes cast in person at a meeting called for the
purpose of voting on such continuance. Part III may be
terminated at any time by the vote of a majority of the
Independent Trustees or by the vote of the holders of a
"majority" (as defined in the 1940 Act) of the outstanding
voting securities of the Fund to which Part III applies.
Part III may not be amended to increase materially the
amount of payments to be made without shareholder approval
of the class or classes of shares affected by Part III as
set forth in (ii) above, and all amendments must be approved
in the manner set forth in (i) above.
In the case of a Qualified Recipient which is a
principal underwriter of the Fund, the Class I Plan
Agreement shall be the agreement contemplated by Section
15(b) of the 1940 Act since each such agreement must be
approved in accordance with, and contain the provisions
required by, the Rule. In the case of Qualified Recipients
which are not principal underwriters of the Fund, the Class
I Plan Agreements with them shall be (i) their agreements
with the Distributor with respect to payments under the
Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class I Plan Agreements entered into thereafter.
Defensive Provisions (Part IV)
Another part of the Plan (Part IV) states that if and
to the extent that any of the payments listed below are
considered to be "primarily intended to result in the sale
of" shares issued by the Fund within the meaning of Rule
12b-1, such payments are authorized under the Plan: (i) the
costs of the preparation of all reports and notices to
shareholders and the costs of printing and mailing such
reports and notices to existing shareholders, irrespective
of whether such reports or notices contain or are
accompanied by material intended to result in the sale of
shares of the Fund or other funds or other investments; (ii)
the costs of the preparation and setting in type of all
prospectuses and statements of additional information and
the costs of printing and mailing all prospectuses and
statements of additional information to existing
shareholders; (iii) the costs of preparation, printing and
mailing of any proxy statements and proxies, irrespective of
whether any such proxy statement includes any item relating
to, or directed toward, the sale of the Fund's shares; (iv)
all legal and accounting fees relating to the preparation of
any such reports, prospectuses, statements of additional
information, proxies and proxy statements; (v) all fees and
expenses relating to the registration or qualification of
the Fund and/or its shares under the securities or
"Blue-Sky" laws of any jurisdiction; (vi) all fees under the
Securities Act of 1933 and the 1940 Act, including fees in
connection with any application for exemption relating to or
directed toward the sale of the Fund's shares; (vii) all
fees and assessments of the Investment Company Institute or
any successor organization, irrespective of whether some of
its activities are designed to provide sales assistance;
(viii) all costs of the preparation and mailing of
confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all
costs of responding to telephone or mail inquiries of
investors or prospective investors.
The Plan states that while it is in effect, the
selection and nomination of those Trustees of the Fund who
are not "interested persons" of the Fund shall be committed
to the discretion of such disinterested Trustees but that
nothing in the Plan shall prevent the involvement of others
in such selection and nomination if the final decision on
any such selection and nomination is approved by a majority
of such disinterested Trustees.
The Plan 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 therein provided, continues in effect from
year to year only so long as such continuance is
specifically approved at least annually by the Fund's Board
of Trustees and its Independent Trustees with votes cast in
person at a meeting called for the purpose of voting on such
continuance. In voting on the implementation or continuance
of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that the Plan will benefit the Fund
and its shareholders. The Plan may be terminated at any time
by vote of a majority of the Independent Trustees or by the
vote of the holders of a "majority" (as defined in the 1940
Act) of the outstanding voting securities of the Fund. The
Plan may not be amended to increase materially the amount of
payments to be made without shareholder approval and all
amendments must be approved in the manner set forth above as
to continuance of the Plan.
The Plan and each Part of it shall also be subject to
all applicable terms and conditions of Rule 18f-3 under the
1940 Act as now in force or hereafter amended.
Specifically, but without limitation, the provisions of Part
IV shall be deemed to be severable, within the meaning of
and to the extent required by Rule 18f-3, with respect to
each outstanding class of shares of the Fund.
Payments Under the Plan
During the fiscal years ended December 31, 1999, 1998
and 1997, payments were made only under Part I and Part II
of the Plan. All payments were to Qualified Recipients and
were made were for compensation. During those periods, no
payments were made under Part III or Part IV of the Plan.
Payments to Qualified Recipients
During the fiscal years ended December
31, 1999, 1998 and 1997, $331,919, $340,056 and $333,695,
respectively, was paid to Qualified Recipients under Part I
of the Plan with respect to Class A Shares, of which $7,455,
$8,641 and $6,454, respectively, was retained by the
Distributor; $11,170, $6,637 and $4,961, respectively, was
paid under Part II of the Plan to Qualified Recipients with
respect to the Fund's Class C Shares of which $7,616, $5,934
and $4,961, respectively, (including amounts retained by the
Distributor under the Shareholder Services Plan described
below) was retained by the Distributor.
Shareholder Services Plan
The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to
Class C Shares and Class I Shares of the Fund of "Service
Fees" within the meaning of the Conduct Rules of the
National Association of Securities Dealers, Inc. The
Services Plan applies only to the Class C Shares and Class I
Shares of the Fund (regardless of whether such class is so
designated or is redesignated by some other name).
Provisions for Level-Payment Class Shares (Part I)
As used in Part I of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by
Aquila Distributors, Inc. (the "Distributor"), including but
not limited to the Distributor and any other principal
underwriter of the Fund, who have, pursuant to written
agreements with the Fund or the Distributor, agreed to
provide personal services to shareholders of Level-Payment
Class Shares and/or maintenance of Level-Payment Class
Shares shareholder accounts. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Level-Payment Class
Shares beneficially owned by such Qualified Recipient's
customers, clients or other contacts. "Manager" shall mean
Aquila Management Corporation or any successor serving as
sub-adviser or administrator of the Fund.
Subject to the direction and control of the Fund's
Board of Trustees, the Fund may make payments ("Service
Fees") to Qualified Recipients, which Service Fees (i) may
be paid directly or through the Distributor or shareholder
servicing agent as disbursing agent and (ii) may not exceed,
for any fiscal year of the Fund (as adjusted for any part or
parts of a fiscal year during which payments under the
Services Plan are not accruable or for any fiscal year which
is not a full fiscal year), 0.25 of 1% of the average annual
net assets of the Fund represented by the Level-Payment
Class Shares. Such payments shall be made only out of the
Fund's assets allocable to the Level-Payment Class Shares.
The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and
the amount of Service Fees, if any, paid to each Qualified
Recipient, provided that the total Service Fees paid to all
Qualified Recipients may not exceed the amount set forth
above and provided, further, that no Qualified Recipient may
receive more than 0.25 of 1% of the average annual net asset
value of shares sold by such Recipient. The Distributor is
authorized, but not directed, to take into account, in
addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Level-
Payment Class Shares, including without limitation, any or
all of the following activities: answering customer
inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the
Fund may be effected; assisting shareholders in designating
and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption
transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and
guaranteeing shareholder signatures in connection with
redemption orders and transfers and changes in shareholder
designated accounts; and providing such other related
services as the Distributor or a shareholder may request
from time to time. Notwithstanding the foregoing two
sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried
over to subsequent years. Service Fees with respect to Class
C Shares will be paid to the Distributor. During the fiscal
years ended December 31, 1999, 1998 and 1997, $3,723, $2,212
and $1,653, respectively, was paid to the Distributor.
Provisions for Financial Intermediary Class Shares (Part II)
As used in Part II of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by
Aquila Distributors, Inc. (the "Distributor"), including but
not limited to the Distributor and any other principal
underwriter of the Fund, who have, pursuant to written
agreements with the Fund or the Distributor, agreed to
provide personal services to shareholders of Financial
Intermediary Class Shares, maintenance of Financial
Intermediary Class Shares shareholder accounts and/or
pursuant to specific agreements entering confirmed purchase
orders on behalf of customers or clients. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Financial Intermediary Class Shares beneficially owned by
such Qualified Recipient's customers, clients or other
contacts. "Manager" shall mean Aquila Management Corporation
or any successor serving as sub-adviser or administrator of
the Fund.
Subject to the direction and control of the Fund's
Board of Trustees, the Fund may make payments ("Service
Fees") to Qualified Recipients, which Service Fees (i) may
be paid directly or through the Distributor or shareholder
servicing agent as disbursing agent and (ii) may not exceed,
for any fiscal year of the Fund (as adjusted for any part or
parts of a fiscal year during which payments under the
Services Plan are not accruable or for any fiscal year which
is not a full fiscal year), 0.25 of 1% of the average annual
net assets of the Fund represented by the Financial
Intermediary Class Shares. Such payments shall be made only
out of the Fund's assets allocable to the Financial
Intermediary Class Shares. The Distributor shall have sole
authority with respect to the selection of any Qualified
Recipient or Recipients and the amount of Service Fees, if
any, paid to each Qualified Recipient, provided that the
total Service Fees paid to all Qualified Recipients may not
exceed the amount set forth above and provided, further,
that no Qualified Recipient may receive more than 0.25 of 1%
of the average annual net asset value of shares sold by such
Recipient. The Distributor is authorized, but not directed,
to take into account, in addition to any other factors
deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient and (b) the
extent to which the Qualified Recipient has, at its expense,
taken steps in the shareholder servicing area with respect
to holders of Financial Intermediary Class Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and
history, and the manner in which purchases and redemptions
of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary
personnel and facilities to establish and maintain
shareholder accounts and records; assisting in processing
purchase and redemption transactions; arranging for the
wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes
in shareholder designated accounts; and providing such other
related services as the Distributor or a shareholder may
request from time to time. Notwithstanding the foregoing two
sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried
over to subsequent years. No Class I Shares were outstanding
during the year ended December 31, 1999.
General Provisions
While the Services Plan is in effect, the Fund's
Distributor shall report at least quarterly to the Fund's
Trustees in writing for their review on the following
matters: (i) all Service Fees paid under the Services Plan,
the identity of the Qualified Recipient of each payment, and
the purposes for which the amounts were expended; and (ii)
all fees of the Fund to the Distributor paid or accrued
during such quarter. In addition, if any Qualified
Recipient is an "affiliated person," as that term is defined
in the 1940 Act, of the Fund, Manager, Sub-Adviser or
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the
Fund an accounting, in form and detail satisfactory to the
Board of Trustees, to enable the Board of Trustees to make
the determinations of the fairness of the compensation paid
to such affiliated person, not less often than annually.
The Services Plan has been approved by a vote of the
Trustees, including those Trustees who, at the time of such
vote, were not "interested persons" (as defined in the 1940
Act) of the Fund and had no direct or indirect financial
interest in the operation of the Services Plan or in any
agreements related to the Services Plan (the "Independent
Trustees"), with votes cast in person at a meeting called
for the purpose of voting on the Services Plan. It will
continue in effect for a period of more than one year from
its original effective date only so long as such continuance
is specifically approved at least annually as set forth in
the preceding sentence. It may be amended in like manner and
may be terminated at any time by vote of the Independent
Trustees.
The Services Plan shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940
Act as now in force or hereafter amended.
While the Services Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not
"interested persons" of the Fund, as that term is defined in
the 1940 Act, shall be committed to the discretion of such
disinterested Trustees. Nothing therein shall prevent the
involvement of others in such selection and nomination if
the final decision on any such selection and nomination is
approved by a majority of such disinterested Trustees.
Codes of Ethics
The Fund, the Manager and the Distributor have adopted
codes of ethics pursuant to Rule 17j-1 under the 1940 Act.
The codes permit personnel of these organizations who are
subject to the codes to purchase securities, including the
types of securities in which the Fund invests, but only in
compliance with the provisions of the codes.
Transfer Agent, Custodian and Auditors
The Fund's Shareholder Servicing Agent (transfer agent)
is PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809.
The Fund's Custodian, Bank One Fund Company, N.A., 100
East Broad Street, Columbus, Ohio 43271, is responsible for
holding the Fund's assets.
The Fund's auditors, KPMG LLP, 757 Third Avenue, New
York, New York, 10017, perform an annual audit of the Fund's
financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
During the fiscal years ended December 31, 1999, 1998
and 1997 all of the Fund's transactions were principal
transactions and no brokerage was paid.
Brokerage allocation and other practices relating to
purchases and sales of the Fund's securities are set forth
in the Sub-Advisory Agreement. It provides that 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.
CAPITAL STOCK
The Fund has four classes of shares.
* Front-Payment Class Shares ("Class A Shares") are
offered to anyone at net asset value plus a sales
charge, paid at the time of purchase, at the maximum
rate of 4.0% of the public offering price, with lower
rates for larger purchases. Class A Shares are subject
to an asset retention service fee under the Fund's
Distribution Plan at the rate of 0.15 of 1% of the
average annual net assets represented by the Class A
Shares.
* Level-Payment Class Shares ("Class C Shares") are
offered to anyone at net asset value with no sales
charge payable at the time of purchase but with a level
charge for service and distribution fees for six years
after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Class C
Shares. Six years after the date of purchase, Class C
Shares are automatically converted to Class A Shares.
If you redeem Class C Shares before you have held them
for 12 months from the date of purchase you will pay a
contingent deferred sales charge ("CDSC"); this charge
is 1%, calculated on the net asset value of the Class C
Shares at the time of purchase or at redemption,
whichever is less. There is no CDSC after Class C
Shares have been held beyond the applicable period. For
purposes of applying the CDSC and determining the time
of conversion, the 12-month and six-year holding
periods are considered modified by up to one month
depending upon when during a month your purchase of
such shares is made.
Institutional Class Shares ("Class Y Shares") are
offered only to institutions acting for investors in a
fiduciary, advisory, agency, custodial or similar
capacity, and are not offered directly to retail
customers. Class Y Shares are offered at net asset
value with no sales charge, no redemption fee, no
contingent deferred sales charge and no distribution
fee.
Financial Intermediary Class Shares ("Class I Shares")
are offered and sold only through financial
intermediaries with which Aquila Distributors, Inc. has
entered into sales agreements, and are not offered
directly to retail customers. Class I Shares are
offered at net asset value with no sales charge and no
redemption fee or contingent deferred sales charge,
although a financial intermediary may charge a fee for
effecting a purchase or other transaction on behalf of
its customers. Class I Shares may carry a distribution
fee of up to 0.25 of 1% of average annual net assets
allocable to Class I Shares, currently 0.10 of 1% of
such net assets, and a service fee of 0.25 of 1% of
such assets.
The Fund's four classes of shares differ in their sales
charge structures and on-going expenses, which are likely to
be reflected in differing yields and other measures of
investment performance. All four classes represent interests
in the same portfolio of Kentucky Obligations and have the
same rights, except that each class bears the separate
expenses, if any, of its participation in the Distribution
Plan and Shareholder Services Plan and has exclusive voting
rights with respect to such participation.
At any meeting of shareholders, shareholders are
entitled to one vote for each dollar of net asset value
(determined as of the record date for the meeting) per share
held (and proportionate fractional votes for fractional
dollar amounts). Shareholders will vote on the election of
Trustees and on other matters submitted to the vote of
shareholders. Shares vote by classes on any matter
specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment, whether or not affecting the rights of the
shareholders, may be made to the Declaration of Trust
without the affirmative vote of the holders of a majority of
the outstanding shares of the Fund, except that the Fund's
Board of Trustees may change the name of the Fund.
The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares and to
divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an
equal proportionate interest in the Fund with each other
share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance
with their respective net asset values. Upon liquidation of
the Fund, shareholders are entitled to share pro-rata in the
net assets of the Fund available for distribution to
shareholders, in accordance with the respective net asset
values of the shares of each of the Fund's classes at that
time. All shares are presently divided into four classes;
however, if they deem it advisable and in the best interests
of shareholders, the Board of Trustees of the Fund may
create additional classes of shares, which may differ from
each other as provided in rules and regulations of the
Securities and Exchange Commission or by exemptive order.
The Board of Trustees may, at its own discretion, create
additional series of shares, each of which may have separate
assets and liabilities (in which case any such series will
have a designation including the word "Series"). Shares are
fully paid and non-assessable, except as set forth in the
next paragraph; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically
convert to Class A Shares after being held for six years.
The Fund is an entity of the type commonly known as a
"Massachusetts business trust." 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 trust. 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 does, however, contain an
express disclaimer of shareholder liability for acts or
obligations of the Fund. 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. In the event the Fund had two or more
Series, and if any such Series were to be unable to meet the
obligations attributable to it (which, as is the case with
the Fund, is relatively remote), the other Series would be
subject to such obligations, with a corresponding increase
in the risk of the shareholder liability mentioned in the
prior sentence.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
The following supplements the information about
purchase, redemption and pricing of shares set forth in the
Prospectus.
Sales Charges for Purchases of $1 Million or More of Class A
Shares
You will not pay a sales charge at the time of purchase
when you purchase "CDSC Class A Shares." CDSC Class A Shares
are Class A Shares issued under the following circumstances:
(i) Class A Shares issued in a single
purchase of $1 million or more by a single
purchaser; and
(ii) all Class A Shares issued to a single
purchaser in a single purchase when the value of
the purchase, together with the value of the
purchaser's other CDSC Class A Shares and Class A
Shares on which a sales charge has been paid,
equals or exceeds $1 million.
See "Special Dealer Arrangements" for other
circumstances under which Class A Shares are considered CDSC
Class A Shares. CDSC Class A Shares do not include: (i)Class
A Shares purchased without a sales charge as described under
"General" below and (ii)Class A Shares purchased in
transactions of less than $1 million when certain special
dealer arrangements are not in effect under "Certain
Investment Companies" set forth under "Reduced Sales
Charges," below.
Broker/Dealer Compensation - Class A Shares
Upon notice to all selected dealers, the Distributor
may distribute up to the full amount of the applicable sales
charge to broker/dealers. Under the Securities Act of 1933,
broker/dealers may be deemed to be underwriters during
periods when they receive all, or substantially all, of the
sales charge.
Redemption of CDSC Class A Shares
If you redeem all or part of your CDSC Class A Shares
during the four years after you purchase them, you must pay
a special contingent deferred sales charge upon redemption.
You will pay 1% of the shares' redemption value or
purchase cost, whichever is less, if you redeem within the
first two years after purchase, and 0.50 of 1% of that value
if you redeem within the third or fourth year.
This special charge also applies to CDSC Class A Shares
purchased without a sales charge pursuant to a Letter of
Intent (see "Reduced Sales Charges for Certain Purchases of
Class A Shares"). This special charge will not apply to
shares acquired through the reinvestment of dividends or
distributions on CDSC Class A Shares or to CDSC Class A
Shares held for longer than four years. When redeeming
shares, the Agent will redeem the CDSC Class A Shares held
the longest, unless otherwise instructed. If you own both
CDSC and non-CDSC Class A Shares, the latter will be
redeemed first.
The Fund will treat all CDSC Class A Shares purchases
made during a calendar month as if they were made on the
first business day of that month at the average cost of all
purchases made during that month. Therefore, the four-year
holding period will end on the first business day of the
48th calendar month after the date of those purchases.
Accordingly, the holding period may, in fact, be one month
less than the full 48 depending on when your actual purchase
was made. If you exchange your CDSC Class A Shares for
shares of an Aquila money-market fund (see "Exchange
Privilege"), running of the 48-month holding period for
those exchanged shares will be suspended.
Broker/Dealer Compensation - CDSC Class A Shares
The Distributor currently intends to pay any dealer
executing a purchase of CDSC Class A Shares as follows:
Amount of Purchase Amount Distributed
to
Broker/Dealer as a %
of Purchase Price
$1 millon but less than $2.5 million 1%
$2.5 million but less than $5 million 0.50 of 1%
$5 million or more 0.25 of 1%
Reduced Sales Charges for Certain Purchases of Class A
Shares
Right of Accumulation
"Single purchasers" may qualify for a reduced sales
charge in accordance with the above schedule when making
subsequent purchases of Class A Shares. A reduced sales
charge applies if the cumulative value (based on purchase
cost or current net asset value, whichever is higher) of
Class A Shares previously purchased with a sales charge,
together with Class A Shares of your subsequent purchase,
also with a sales charge, amounts to $25,000 or more.
Letters of Intent
"Single purchasers" may also qualify for reduced sales
charges, in accordance with the above schedule, after a
written Letter of Intent (included in the Application) is
received by the Distributor. The Letter of Intent confirms
that you intend to purchase, within a thirteen month period,
Class A Shares of the Fund through a single selected dealer
or the Distributor. Class A Shares of the Fund which you
previously purchased within 90 days prior to the
Distributor's receipt of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For more information, including escrow
provisions, see Letter of Intent provisions of the
Application.
General
Class A Shares may be purchased without a sales charge
by:
* the Fund's Trustees and officers,
* the directors, officers and certain
employees, retired employees and representatives
of the Manager, Sub-Adviser, Distributor, and
their parents and/or affiliates,
* selected dealers and brokers and their
officers and employees,
* certain persons connected with firms
providing legal, advertising or public relations
assistance,
* certain family members of, and plans for the
benefit of, the foregoing, and
* plans for the benefit of trust or similar
clients of banking institutions over which these
institutions have full investment authority, if
the Distributor has an agreement relating to such
purchases.
Except for the last category, purchasers must give
written assurance that the purchase is for investment and
that the Class A Shares will not be resold except through
redemption. Since there may be tax consequences of these
purchases, your tax advisor should be consulted.
Class A Shares may also be issued without a sales
charge in a merger, acquisition or exchange offer made
pursuant to a plan of reorganization to which the Fund is a
party.
The Fund permits the sale of its Class A Shares at
prices that reflect the reduction or elimination of the
sales charge to investors who are members of certain
qualified groups.
A qualified group is a group or
association, or a category of purchasers who are represented
by a fiduciary, professional or other representative ,
including a registered broker-dealer that is acting as a
registered investment adviser or certified financial planner
for investors participating in comprehensive fee programs
(but not any other broker-dealer), which
(i) satisfies uniform criteria which enable the
Distributor to realize economies of scale in its
costs of distributing shares;
(ii) gives its endorsement or authorization (if it
is a group or association) to an investment
program to facilitate solicitation of its
membership by a broker or dealer; and
(iii) complies with the conditions of purchase that make
up an agreement between the Fund and the group,
representative or broker or dealer.
At the time of purchase, the Distributor must receive
information sufficient to permit verification that the
purchase qualifies for a reduced sales charge, either
directly or through a broker or dealer.
Certain Investment Companies
Class A Shares of the Fund may be purchased without
sales charge from proceeds of a redemption, made within 120
days prior to such purchase, of shares of an investment
company (not a member of the Aquilasm Group of Funds) on
which a sales charge, including a contingent deferred sales
charge, has been paid. Additional information is available
from the Distributor.
To qualify, follow these special procedures:
1. Send a completed Application (included with
the Prospectus) and payment for the shares to be
purchased directly to the Distributor, Aquila
Distributors, Inc., 380 Madison Avenue, Suite
2300, New York, NY 10017-2513. Do not send this
material to the address indicated on the
Application.
2. Your completed Application must be
accompanied by evidence satisfactory to the
Distributor that you, as the prospective
shareholder, have made a qualifying redemption in
an amount at least equal to the net asset value of
the Class A Shares to be purchased.
Satisfactory evidence includes a confirmation
of the date and the amount of the redemption from
the investment company, its transfer agent or the
investor's broker or dealer, or a copy of the
investor's account statement with the investment
company reflecting the redemption transaction.
3. Complete and return to the Distributor a
Transfer Request Form, which is available from the
Distributor.
The Fund reserves the right to alter or terminate this
privilege at any time without notice. The Prospectus will be
supplemented to reflect such alteration or termination.
Special Dealer Arrangements
The Distributor (not the Fund) will pay to any dealer
with which it has made prior arrangements and which effects
a purchase of Class A Shares of the Fund from the proceeds
of a qualifying redemption of the shares of an investment
company (not a member of the Aquilasm Group of Funds) up to
1% of the purchase. The shareholder, however, will not be
subject to any sales charge.
Dealer payments will be made in up to four payments of
0.25 of 1% of the proceeds over a four-year period. The
first payment will be made subsequent to receipt of the
proper documentation detailed above. Future payments, over
the remaining years, will be made at the end of the quarter
of the anniversary month that the purchase of Class A Shares
took place, with respect to any part of the investment that
remains in the Fund during the entire time period. No
payments will be made with respect to any shares redeemed
during the four-year period.
Additional Compensation for Broker-Dealers
The Distributor may compensate broker-dealers, above
the normal sales commissions, in connection with sales of
any class of shares. However, broker-dealers may receive
levels of compensation which differ as between classes of
shares sold.
The Distributor, not the Fund, will pay these
additional expenses. Therefore, the price you pay for shares
and the amount that the Fund receives from your payment will
not be affected.
Additional compensation may include full or partial
payment for:
* advertising of the Fund's shares;
* payment of travel expenses, including
lodging, for attendance at sales seminars by
qualifying registered representatives; and/or
* other prizes or financial assistance to
broker-dealers conducting their own seminars or
conferences.
Such compensation may be limited to broker-dealers
whose representatives have sold or are expected to sell
significant amounts of the Fund's shares. However, broker-
dealers may not use sales of the Fund's shares to qualify
for additional compensation to the extent such may be
prohibited by the laws of any state or self-regulatory
agency, such as the National Association of Securities
Dealers, Inc.
The cost to the Distributor of such promotional
activities and such payments to participating dealers will
not exceed the amount of the sales charges in respect of
sales of all classes of shares of the Fund effected through
such participating dealers, whether retained by the
Distributor or reallowed to participating dealers. Any of
the foregoing payments to be made by the Distributor may be
made instead by the Manager out of its own funds, directly
or through the Distributor.
Automatic Withdrawal Plan
You may establish an Automatic Withdrawal Plan if you
own or purchase Class A Shares or Class Y Shares of the Fund
having a net asset value of at least $5,000. The Automatic
Withdrawal Plan is not available for Class C Shares or Class
I Shares.
Under an Automatic Withdrawal Plan you will receive a
monthly or quarterly check in a stated amount, not less than
$50. If such a plan is established, all dividends and
distributions must be reinvested in your shareholder
account. Redemption of Class A Shares to make payments under
the Automatic Withdrawal Plan will give rise to a gain or
loss for tax purposes. (See the Automatic Withdrawal Plan
provisions of the Application included with the Prospectus.)
Purchases of additional Class A Shares concurrently
with withdrawals are undesirable because of sales charges
when purchases are made. Accordingly, you may not maintain
an Automatic Withdrawal Plan while simultaneously making
regular purchases. While an occasional lump sum investment
may be made, such investment should normally be an amount at
least equal to three times the annual withdrawal or $5,000,
whichever is less.
Share Certificates
You may obtain share certificates for full Class A
Shares only if you make a written request to the Agent. All
share certificates previously issued by the Fund represent
Class A Shares. If you lose the certificates, you may incur
delay and expense when redeeming shares or having the
certificates reissued.
Class A Share certificates will not be issued:
* for fractional Class A Shares;
* if you have selected Automatic Investment or
Telephone Investment for Class A Shares; or
* if you have selected Expedited Redemption.
However, if you specifically request, Class A
Share certificates will be issued with a
concurrent automatic suspension of Expedited
Redemption on your account.
Share certificates will not be issued for Class C
Shares, Class Y Shares or Class I Shares.
Reinvestment privilege
If you reinvest proceeds of redemption within 120 days
of a redemption you will not have to pay any additional
sales charge on the reinvestment. You must reinvest in the
same class as the shares redeemed. You may exercise this
privilege only once a year, unless otherwise approved by the
Distributor.
The Distributor will refund to you any CDSC deducted at
the time of redemption by adding it to the amount of your
reinvestment. The Class C or CDSC Class A Shares purchased
upon reinvestment will be deemed to have been outstanding
from the date of your original purchase of the redeemed
shares, less the period from redemption to reinvestment.
Reinvestment will not alter the tax consequences of
your original redemption.
Exchange Privilege
There is an exchange privilege as set forth below among
this Fund, certain tax-free municipal bond funds and equity
funds (together with the Fund, the "Bond or Equity Funds")
and certain money-market funds (the "Money-Market Funds"),
all of which are sponsored by Aquila Management Corporation
and Aquila Distributors, Inc., and have the same Manager or
Administrator and Distributor as the Fund. All exchanges are
subject to certain conditions described below. As of the
date of the SAI, the Aquila-sponsored Bond or Equity Funds
are this Fund, Aquila Rocky Mountain Equity Fund, Aquila
Cascadia Equity Fund, Hawaiian Tax-Free Trust, Tax-Free
Trust of Arizona, Tax-Free Trust of Oregon, 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, Capital Cash U.S. Government
Securities Trust, Pacific Capital Cash Assets Trust
(Original Shares), Pacific Capital Tax-Free Cash Assets
Trust (Original Shares), Pacific Capital U.S. Government
Securities Cash Assets Trust (Original Shares) and Churchill
Cash Reserves Trust.
Generally, you can exchange shares of a given class of
a Bond or Equity Fund including the Fund for shares of the
same class of any other Bond or Equity Fund, or for shares
of any Money-Market Fund, without the payment of a sales
charge or any other fee, and there is no limit on the number
of exchanges you can make from fund to fund. Such
exchangability is available to Class I Shares to the extent
that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. All exchanges of
Class I Shares must be made through your financial
intermediary.
The following important information should be noted:
(1) CDSCs Upon Redemptions of Shares Acquired Through
Exchanges. If you exchange shares subject to a CDSC, no CDSC
will be imposed at the time of exchange, but the shares you
receive in exchange for them will be subject to the
applicable CDSC if you redeem them before the requisite
holding period (extended, if required) has expired.
If the shares you redeem would have incurred a CDSC if
you had not made any exchanges, then the same CDSC will be
imposed upon the redemption regardless of the exchanges that
have taken place since the original purchase.
(2) Extension of Holding Periods by Owning Money-Market
Funds. Any period of 30 days or more during which
Money-Market Fund shares received on an exchange of CDSC
Class A Shares or Class C Shares are held is not counted in
computing the applicable holding period for CDSC Class A
Shares or Class C Shares.
(3) Originally Purchased Money-Market Fund Shares.
Shares of a Money-Market Fund (and any shares acquired as a
result of reinvestment of dividends and/or distributions on
these shares) acquired directly in a purchase (or in
exchange for Money-Market Fund shares that were themselves
directly purchased), rather than in exchange for shares of a
Bond or Equity Fund, may be exchanged for shares of any
class of any Bond or Equity Fund that the investor is
otherwise qualified to purchase, but the shares received in
such an exchange will be subject to the same sales charge,
if any, that they would have been subject to had they been
purchased rather than acquired in exchange for Money-Market
Fund shares. If the shares received in exchange are shares
that would be subject to a CDSC if purchased directly, the
holding period governing the CDSC will run from the date of
the exchange, not from the date of the purchase of Money-
Market Fund shares.
This Fund, as well as the Money-Market Funds and other
Bond or Equity Funds, reserves the right to reject any
exchange into its shares, if shares of the fund into which
exchange is desired are not available for sale in your state
of residence. The Fund may also modify or terminate this
exchange privilege at any time. In the case of termination,
the Prospectus will be appropriately supplemented. No such
modification or termination shall take effect on less than
60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to
the conditions that (i) the shares being acquired are
available for sale in your state of residence; (ii) the
aggregate net asset value of the shares surrendered for
exchange is at least equal to the minimum investment
requirements of the investment company whose shares are
being acquired and (iii) the ownership of the accounts from
which and to which the exchange is made are identical.
The Agent will accept telephone exchange instructions
from anyone. To make a telephone exchange telephone:
800-872-5860 toll free
Note: The Fund, the Agent, and the Distributor will not
be responsible for any losses resulting from unauthorized
telephone transactions if the Agent follows reasonable
procedures designed to verify the identity of the caller.
The Agent will request some or all of the following
information: account name(s) and number, name of the caller,
the social security number registered to the account and
personal identification. The Agent may also record calls.
You should verify the accuracy of confirmation statements
immediately upon receipt.
Exchanges will be effected at the relative exchange
prices of the shares being exchanged next determined after
receipt by the Agent of your exchange request. The exchange
prices will be the respective net asset values of the
shares, unless a sales charge is to be deducted in
connection with an exchange of shares, in which case the
exchange price of shares of a Bond or Equity Fund will be
their public offering price. Prices for exchanges are
determined in the same manner as for purchases of the Fund's
shares.
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost
or other tax basis of the shares exchanged and the holding
period (see "Tax Effects of Redemptions"); no representation
is made as to the deductibility of any such loss should such
occur.
Dividends paid by the Money-Market Funds are taxable,
except to the extent that a portion or all of the dividends
paid by Pacific Capital Tax-Free Cash Assets Trust (a
tax-free money-market fund) are exempt from regular Federal
income tax, and to the extent that a portion or all of the
dividends paid by Pacific Capital U.S. Government Securities
Cash Assets Trust (which invests in U.S. Government
obligations) are exempt from state income taxes. Dividends
paid by Aquila Rocky Mountain Equity Fund and Aquila
Cascadia Equity Fund are taxable. If your state of residence
is not the same as that of the issuers of obligations in
which a tax-free municipal bond fund or a tax-free
money-market fund invests, the dividends from that fund may
be subject to income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before
acquiring shares of such a bond fund or a tax-free
money-market fund under the exchange privilege arrangement.
If you are considering an exchange into one of the
funds listed above, you should send for and carefully read
its Prospectus.
Conversion of Class C Shares
Conversion of Class C Shares into Class A Shares will
be effected at relative net asset values on the first
business day of the month following that in which the sixth
anniversary of your purchase of the Class C Shares occurred,
except as noted below. Accordingly, the holding period
applicable to your Class C Shares may be up to one month
more than the six years depending upon when your actual
purchase was made during a month. Because the per share
value of Class A Shares may be higher than that of Class C
Shares at the time of conversion, you may receive fewer
Class A Shares than the number of Class C Shares converted.
If you have made one or more exchanges of Class C Shares
among the Aquila-sponsored Bond Funds or Equity Funds under
the Exchange Privilege, the six-year holding period is
deemed to have begun on the date you purchased your original
Class C Shares of the Fund or of another of the Aquila bond
or equity funds. The six-year holding period will be
suspended by one month for each period of thirty days during
which you hold shares of a Money-Market Fund you have
received in exchange for Class C Shares under the Exchange
Privilege.
"Transfer on Death" Registration (Not Available for Class I
Shares)
Each of the funds in the Aquilasm Group of Funds now
permits registration of its shares in beneficiary form,
subject to the funds' rules governing Transfer on Death
("TOD") registration, if the investor resides in a state
that has adopted the Uniform Transfer on Death Security
Registration Act (a "TOD State"; for these purposes,
Missouri is deemed to be a TOD State). This form of
registration allows you to provide that, on your death, your
shares are to be transferred to the one or more persons that
you specify as beneficiaries. To register shares of the Fund
in TOD form, complete the special TOD Registration Request
Form and review the Rules Governing TOD Registration; both
are available from the Agent. The Rules, which are subject
to amendment upon 60 days' notice to TOD account owners,
contain important information regarding TOD accounts with
the Fund; by opening such an account you agree to be bound
by them, and failure to comply with them may result in your
shares' not being transferred to your designated
beneficiaries. If you open a TOD account with the Fund that
is otherwise acceptable but, for whatever reason, neither
the Fund nor the Agent receives a properly completed TOD
Registration Request Form from you prior to your death, the
Fund reserves the right not to honor your TOD designation,
in which case your account will become part of your estate.
You are eligible for TOD registration only if, and as
long as, you reside in a TOD State. If you open a TOD
account and your account address indicates that you do not
reside in a TOD State, your TOD registration will be
ineffective and the Fund may, in its discretion, either open
the account as a regular (non-TOD) account or redeem your
shares. Such a redemption may result in a loss to you and
may have tax consequences. Similarly, if you open a TOD
account while residing in a TOD State and later move to a
non-TOD State, your TOD registration will no longer be
effective. In both cases, should you die while residing in a
non-TOD State the Fund reserves the right not to honor your
TOD designation. At the date of this SAI, most states are
TOD States.
Computation of Net Asset Value
The net asset value of the shares of each of the Fund's
classes is determined as of 4:00 p.m., New York time, on
each day that the New York Stock Exchange is open, by
dividing the value of the Fund's net assets allocable to
each class by the total number of its shares of such class
then outstanding. Securities having a remaining maturity of
less than sixty days when purchased and securities
originally purchased with maturities in excess of sixty days
but which currently have maturities of sixty days or less
are valued at cost adjusted for amortization of premiums and
accretion of discounts. All other portfolio securities are
valued at the mean between bid and asked quotations which,
for 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.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a
number of instances in which the Fund's Class A Shares are
sold or issued on a basis other than the maximum public
offering price, that is, the net asset value plus the
highest sales charge. Some of these relate to lower or
eliminated sales charges for larger purchases, whether made
at one time or over a period of time as under a Letter of
Intent or right of accumulation. (See the table of sales
charges in the Prospectus.) The reasons for these quantity
discounts are, in general, that (i) they are traditional and
have long been permitted in the industry and are therefore
necessary to meet competition as to sales of shares of other
funds having such discounts; and (ii) they are designed to
avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses.
Quantity discounts are made available to certain related
persons ("single purchasers") for reasons of family unity
and to provide a benefit to tax-exempt plans and
organizations.
The reasons for the other instances in which there are
reduced or eliminated sales charges for Class A Shares are
as follows. Exchanges at net asset value are permitted
because a sales charge has already been paid on the shares
exchanged. Sales without sales charge are permitted to
Trustees, officers and certain others due to reduced or
eliminated selling expenses and/or since such sales may
encourage incentive, responsibility and interest and an
identification with the aims and policies of the Fund.
Limited reinvestments of redemptions of Class A Shares and
Class C Shares at no sales charge are permitted to attempt
to protect against mistaken or incompletely informed
redemption decisions. Shares may be issued at no sales
charge in plans of reorganization due to reduced or
eliminated sales expenses and since, in some cases, such
issuance is exempted in the 1940 Act from the otherwise
applicable restrictions as to what sales charge must be
imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the
Fund receives the net asset value per share of all shares
sold or issued.
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.
ADDITIONAL TAX INFORMATION
Certain Exchanges
If you incur a sales commission on a purchase of shares
of one mutual fund (the original fund) and then sell such
shares or exchange them for shares of a different mutual
fund without having held them at least 91 days, you must
reduce the tax basis for the shares sold or exchanged to the
extent that the standard sales commission charged for
acquiring shares in the exchange or later acquiring shares
of the original fund or another fund is reduced because of
the shareholder's having owned the original fund shares. The
effect of the rule is to increase your gain or reduce your
loss on the original fund shares. The amount of the basis
reduction on the original fund shares, however, is added on
the investor's basis for the fund shares acquired in the
exchange or later acquired.
Tax Status of the Fund
During its last fiscal year, the Fund qualified as a
"regulated investment company" under the Internal Revenue
Code and intends to continue such qualification. A
regulated investment company is not liable for federal
income taxes on amounts paid by it as dividends and
distributions.
The Code, however, contains a number of complex
qualifying tests. Therefore, it is possible, although not
likely, that the Fund might not meet one or more of these
tests in any particular year. If the Fund fails to qualify,
it would be treated for tax purposes as an ordinary
corporation. As a consequence, it would receive no tax
deduction for payments made to shareholders and would be
unable to pay dividends and distributions which would
qualify as "exempt-interest dividends" or "capital gains
dividends."
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference
between the proceeds received in the redemption and the
amount you paid for the shares. If you are required to pay a
contingent deferred sales charge at the time of redemption,
the amount of that charge will reduce the amount of your
gain or increase the amount of your loss as the case may be.
Your gain or loss will be long-term if you held the redeemed
shares for over one year and short-term if for a year or
less. Long-term capital gains are currently taxed at a
maximum rate of 20% and short-term gains are currently taxed
at ordinary income tax rates. However, if shares held for
six months or less are redeemed and you have a loss, two
special rules apply: the loss is reduced by the amount of
exempt-interest dividends, if any, which you received on the
redeemed shares, and any loss over and above the amount of
such exempt-interest dividends is treated as a long-term
loss to the extent you have received capital gains dividends
on the redeemed shares.
Tax Effect of Conversion
When Class C Shares automatically convert to Class A
Shares, approximately six years after purchase, you will
recognize no gain or loss. Your adjusted tax basis in the
Class A Shares you receive upon conversion will equal your
adjusted tax basis in the Class C Shares you held
immediately before conversion. Your holding period for the
Class A Shares you receive will include the period you held
the converted Class C Shares.
UNDERWRITERS
Aquila Distributors, Inc. acts as the Fund's principal
underwriter in the continuous public offering of all of the
Fund's classes of shares. The Distributor is not obligated
to sell a specific number of shares. Under the Distribution
Agreement, the Distributor is responsible for the payment of
certain printing and distribution costs relating to
prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other
promotional activities.
(1) (2) (3) (4)
(5)
Name of Net Under- Compensation Brokerage
Other
Principal writing on Commissions
Compen-
Underwriter Discounts Redemptions
sation
and and Repurchases
Commissions
Aquila $21,878 None None
None(1)
Distributors
Inc.
(1) Amounts paid to the Distributor under the Fund's
Distribution Plan described in the Prospectus are for
compensation.
PERFORMANCE
As noted in the Prospectus, the Fund may from time to
time quote various performance figures to illustrate its
past performance.
Performance quotations by investment companies are
subject to rules of the Securities and Exchange Commission
("SEC"). These rules require the use of standardized
performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund
be accompanied by certain standardized performance
information computed as required by the SEC. Current yield
and average annual compounded total return quotations used
by the Fund are based on these standardized methods and are
computed separately for each of the Fund's classes of
shares. Each of these and other methods that may be used by
the Fund are described in the following material. Prior to
April 6, 1996, the Fund had outstanding only one class of
shares which are currently designated "Class A Shares." On
that date the Fund began to offer shares of two other
classes, Class C Shares and Class Y Shares. During most of
the historical periods listed below, there were no Class C
Shares or Class Y Shares outstanding and the information
below relates solely to Class A Shares unless otherwise
indicated. Class I Shares were first offered on April 30,
1998 and none were outstanding during the periods indicated.
Total Return
Average annual total return is determined by finding
the average annual compounded rates of return over 1-, 5-
and 10-year periods and a period since the inception of the
operations of the Fund (on May 21, 1987) that would equate
an initial hypothetical $1,000 investment in shares of each
of the Fund's classes to the value such an investment would
have if it were completely redeemed at the end of each such
period.
In the case of Class A Shares, the calculation assumes
the maximum sales charge is deducted from the hypothetical
initial $1,000 purchase. In the case of Class C Shares, the
calculation assumes the applicable contingent deferred sales
charge ("CDSC") imposed on a redemption of Class C Shares
held for the period is deducted. In the case of Class Y
Shares, the calculation assumes that no sales charge is
deducted and no CDSC is imposed. For all classes, it is
assumed that on each reinvestment date during each such
period any capital gains are reinvested at net asset value,
and all income dividends are reinvested at net asset value,
without sales charge (because the Fund does not impose any
sales charge on reinvestment of dividends for any class).
The computation further assumes that the entire hypothetical
account was completely redeemed at the end of each such
period.
Investors should note that the maximum sales charge
(4%) reflected in the following quotations for Class A
Shares is a one-time charge, paid at the time of initial
investment. The greatest impact of this charge is during the
early stages of an investment in the Fund. Actual
performance will be affected less by this one time charge
the longer an investment remains in the Fund. Sales charges
at the time of purchase are payable only on purchases of
Class A Shares of the Fund.
Average Annual Compounded Rates of Return
(through December 31, 1999):
Class A Shares Class C Shares Class Y Shares
One Year -5.45% -3.42% -1.46%
Five Years 4.93% N/A N/A
Ten Years 5.75% N/A N/A
Since
inception on
May 21, 1987 6.32% 3.66%(1) 4.68%(1)
(1) Period from April 30, 1996 (inception of class) through
December 31, 1999.
These figures were calculated according to the
following SEC formula:
P(1+T)n = ERV
where
P = a hypothetical initial payment of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the 1-, 5- and 10-year periods
or the period since inception, at the end of
each such period.
As discussed in the Prospectus, the Fund may quote
total rates of return in addition to its average annual
total return for each of its classes of shares. Such
quotations are computed in the same manner as the Fund's
average annual compounded rate, except that such quotations
will be based on the Fund's actual return for a specified
period as opposed to its average return over the periods
described above.
Total Return (through December 31, 1999):
Class A Shares Class C Shares Class Y
Shares
One Year -5.45% -3.42% -
1.46%
Five Years 27.20% N/A
N/A
Ten Years 74.93% N/A N/A
Since
inception on
May 21, 1987 116.66% 14.11%(1) 18.27%(1)
(1) Period from April 30, 1996 (inception of class) through
December 31, 1999.
Yield
Current yield reflects the income per share earned by
the Fund's portfolio investments. Current yield is
determined by dividing the net investment income per share
earned for each of the Fund's classes of shares during a
30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to
all shareholders of each class during the base period net of
fee waivers and reimbursements of expenses, if any.
The Fund may also quote a taxable equivalent yield for
each of its classes of shares which shows the taxable yield
that would be required to produce an after-tax yield
equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion
of the yield of the 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 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. The
latter rate reflects currently-enacted Federal income tax
law. From time to time, as any changes to such rates become
effective, tax equivalent yield quotations advertised by the
Fund will be updated to reflect such changes. Any tax rate
increases will tend to make a tax-free investment, such as
the Fund, relatively more attractive than taxable
investments. Therefore, the details of specific tax
increases may be used in Fund sales material.
Yield for the 30-day period ended December 31,
1999 (the date of the Fund's most recent audited financial
statements):
Class A Shares Class C Shares Class Y Shares
Yield 4.68% 4.01%
5.03%
Taxable
Equivalent
Yield 7.99% 6.85%
8.59%
These figures were obtained using the Securities and
Exchange Commission formula:
Yield = 2 [(a-b + 1)6 -1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of waivers and
reimbursements)
c = the average daily number of shares outstanding
during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last
day of
the period
Current Distribution Rate
Current yield and tax equivalent yield, which are
calculated according to a formula prescribed by the SEC, are
not indicative of the amounts which were or will be paid to
the Fund's shareholders. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable
equivalent distribution rate. The current distribution rate
is computed by (i) dividing the total amount of dividends
per share paid by the Fund during a recent 30-day period by
(ii) the current maximum offering price and by (iii)
annualizing the result. A taxable equivalent distribution
rate shows the taxable distribution rate that would be
required to produce an after-tax distribution rate
equivalent to the Fund's current distribution rate
(calculated as indicated above). The current distribution
rate can differ from the current yield computation because
it could include distributions to shareholders from
additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains.
<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.
