Aquila
Narragansett
Insured Tax-Free Income Fund
380 Madison Avenue
Suite 2300
New York, New York 10017
800-453-6864
212-697-6666
Statement of Additional Information
October 31, 1996
Supplemented Novmber 12, 1996
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for the
Fund dated October 31, 1996: 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
("Class Y Shares") of the Fund. References in the Additional
Statement to "the Prospectus" refer to either of these
Prospectuses. The Additional Statement should be read in
conjunction with the Prospectus for the class of shares in which
you are considering investing. Either or both Prospectuses may be
obtained from the Fund's Shareholder Servicing Agent,
Administrative Data Management Corp., by writing to: 581 Main
Street, Woodbridge, New Jersey 07095-1198 or by calling at the
following numbers:
800-637-4633 toll free or 908-855-5731
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New York
10017; or by calling:
800-453-6864 toll free or 212-697-6666
In Rhode Island: 401-453-6864
The Annual Report of the Fund for the fiscal year ended June
30, 1996 will be delivered with the Additional Statement.
TABLE OF CONTENTS
Investment of the Fund's Assets. . . . . . . . . . . . . . .2
Additional Information about the Rhode Island Economy. . . .5
Municipal Bonds. . . . . . . . . . . . . . . . . . . . . . 16
Performance. . . . . . . . . . . . . . . . . . . . . . . . 17
Investment Restrictions. . . . . . . . . . . . . . . . . . 22
Distribution Plan. . . . . . . . . . . . . . . . . . . . . 23
Shareholder Services Plan. . . . . . . . . . . . . . . . . 29
Limitation of Redemptions in Kind. . . . . . . . . . . . . 31
Trustees and Officers. . . . . . . . . . . . . . . . . . . 31
Additional Information as to Management Arrangements . . . 36
Computation of Net Asset Value . . . . . . . . . . . . . . 40
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . 42
Additional Tax Information . . . . . . . . . . . . . . . . 42
Conversion of Class C Shares . . . . . . . . . . . . . . . 42
General Information. . . . . . . . . . . . . . . . . . . . 43
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . 46
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INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters described
below. See the Prospectus for the definition of "Rhode Island
Obligations."
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds and
notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. See Appendix A to this
Additional Statement for further information about the ratings of
Moody's and S&P as to the various rated Rhode Island Obligations
which the Fund may purchase.
The table below gives information as to the percentage of Fund
net assets invested, as of June 30, 1996, in Rhode Island
Obligations in the various rating categories:
Highest rating (1). . . . . . . 100%
Second highest rating (2) . . . . 0%
Third highest rating (3). . . . . 0%
Fourth highest rating (4) . . . . 0%
Unrated Obligations . . . . . 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.
When-Issued and Delayed Delivery Obligations
The Fund may buy Rhode Island Obligations on a when-issued or
delayed delivery basis. The purchase price and the interest rate
payable on the Rhode Island Obligations are fixed on the
transaction date. At the time the Fund makes the commitment to
purchase Rhode Island Obligations on a when-issued or delayed
delivery basis, it will record the transaction and thereafter
reflect the value each day of such Rhode Island 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 Rhode Island Obligations. The Fund places an
amount of assets equal in value to the amount due on the settlement
date for the when-issued or delayed delivery securities being
purchased in a segregated account with the Custodian, which is
marked to market every business day. On delivery dates for such
transactions, the Fund will meet its commitments by selling the
Rhode Island Obligations held in the separate account and/or from
cash flow.
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 (see below), the Fund is unable to predict what
rate the Fund will have in any particular period or periods,
although the rate is not expected to exceed 100%. The factors which
may affect the rate include (i) assuming or moving away from a
defensive position; a defensive position could be assumed by
shortening the average maturity of the portfolio; (ii) the possible
necessary sales of Rhode Island Obligations to meet redemptions;
and (iii) the possibility of purchasing or selling Rhode Island
Obligations without regard to the length of time these obligations
have been held to attempt to take advantage of short-term
differentials in yields on these obligations with the objective of
seeking exempt-interest income while conserving capital. Short-term
trading increases portfolio turnover and transaction costs.
However, the turnover rate could be substantially higher or lower
in any particular period versus that of a prior period.
Insurance Feature
As a matter of practice, insurers of municipal obligations
provide insurance only on issues which on their own credit rating
are of investment grade, i.e., those within the top four credit
ratings of the Nationally Recognized Statistical Rating
Organizations. In some instances, insurers restrict issuance of
insurance to those issues which would be credit rated "A" or better
by those organizations. These practices by the insurers tend to
reduce the risk that they might not be able to respond to the
default in payment of principal or interest on any particular
issue.
In general, New Issue Insurance provides that if an issuer
fails to make payment of principal or interest on an insured Rhode
Island Obligation, the payment will be made promptly by the
insurer. There are no deductible clauses, the insurance is
non-cancelable and the tax-exempt character of any payment in
respect of interest received is not affected. Premiums for such
insurance are not paid by the Fund but are paid once and for all
for the life of the issue at the time the securities are issued,
generally by the issuer and sometimes by the underwriter. The right
to receive the insurance proceeds is a part of the security and is
transferable on any resale.
The following information regarding Municipal Bond Investors
Assurance Corporation ("MBIA"), Financial Guaranty Insurance
Company ("Financial Guaranty") and AMBAC Indemnity Corporation
("AMBAC Indemnity"),has been derived from information furnished by
the insurers. The Fund has not independently verified any of the
information, but the Fund is not aware of facts which would render
such information inaccurate.
AMBAC Indemnity is a Wisconsin-domiciled stock insurance
corporation, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in 50 states and the
District of Columbia. AMBAC Indemnity is a wholly-owned subsidiary
of AMBAC, Inc., a publicly held company. AMBAC Indemnity had
admitted assets of approximately $1.9 billion (unaudited) and
qualified statutory capital of approximately $1.1 billion
(unaudited) as of September 30, 1993. Statutory capital consists of
AMBAC Indemnity's statutory contingency reserve and policyholders'
surplus. The claims-paying ability of AMBAC Indemnity is rated
"AAA" by S&P and "Aaa" by Moody's.
MBIA is a limited liability corporation domiciled in New York
and licensed to do business in 50 states and the District of
Columbia. It is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company. Neither MBIA Inc. nor its
shareholders are obligated to pay the debts of or claims against
MBIA. As of September 30, 1993, MBIA had admitted assets of
approximately $3.0 billion (unaudited), total liabilities of
approximately $2.0 billion (unaudited) and total capital and
surplus of approximately $951 million (unaudited). The
claims-paying ability of MBIA is rated "AAA" by S&P and "Aaa" by
Moody's.
Financial Guaranty is a New York stock insurance company
regulated by the New York State Department of Insurance and
authorized to provide insurance in 49 states and the District of
Columbia. Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company, which is 99% owned by
General Electric Capital Corporation and 1% owned by Sumitomo
Marine and Fire Insurance Company Limited. Neither FGIC Corporation
nor GE Capital Corporation is obligated to pay the debts of or the
claims against Financial Guaranty. As of September 30, 1993,
Financial Guaranty's total capital and surplus was approximately
$745 million. The claims-paying ability of Financial Guaranty is
rated "AAA" by S&P and "Aaa" by Moody's.
Other insurance companies from which the Fund has purchased
insurance from, or Rhode Island Obligations insured by include the
following:
Financial Security Assurance Co., which is owned by U.S. West
Capital Corp. (61%), Public & Employees (22.1%), Fund America
Enterprises (0.5%) and Tokyo Marine & Fire Insurance Co, Ltd.
(7.4%); it is rated Aaa by Moody's and AAA by S&P;
Connie Lee Insurance Company, a semi-public company, owned by
Student Loan Marketing Association (36.0%), Private Shareholders
(30.0%), PA School Employees Retirement System (20%) and the
U.S.Department of Education (14%); it is rated AAA by S&P and not
rated by Moody's; and
Capital Guaranty Insurance Co., owned by Constellation
Investments, Inc. (12.6%), Safeco (3.0%), Sibag Finance Corp.
(1.8%) and 82% by the public; it is rated Aaa by Moody's and AAA by
S&P.
The Fund may also use other insurers. However, the Fund will
seek to ensure that any insurer used will itself have a AAA or Aaa
rating.
ADDITIONAL INFORMATION ABOUT THE RHODE ISLAND ECONOMY
The Fund believes the information summarized below describes
some of the more significant developments relating to Rhode Island
Obligations. The sources of such information include information
provided by and relating to the State of Rhode Island appearing in
the Official Statement dated July 26, 1996 relating to the Rhode
Island Solid Waste Management Corporation Landfill Lease Notes,
1996 Series A due August 1, 1997, as well as other publicly
available documents. The Fund has not independently verified any of
the information contained in such official statement and other
publicly available documents, but is not aware of any facts which
would render such information inaccurate. Rhode Island operates on
a June 30 fiscal year.
State Government Organization and Finances
General
The State is governed by its Constitution, the present form of
which was adopted by the electorate in 1986.
Under the State Constitution, the powers of government are
divided into three branches: legislative, executive and judicial.
The legislative power of the government is vested in the General
Assembly, which consists of a 50 member Senate and a 100 member
House of Representatives. A question approved by the voters in the
November 8, 1994 referendum changes the composition, pay scale and
pension of the General Assembly. Commencing in 2003, there will be
seventy-five (75) members of the House of Representatives and
thirty-eight (38) members of the Senate. They shall be constituted
on the basis of population and the representative districts shall
be as nearly equal in population and as compact in territory as
possible. All members of the General Assembly are elected
biennially from senatorial and representative districts established
by general law on the basis of population. The General Assembly
meets annually beginning on the first Tuesday in January.
The chief executive power of the State is vested in the
Governor and, by succession, the Lieutenant Governor. Each are
elected for four (4) year terms. The Governor is primarily
responsible for the faithful execution of laws enacted by the
General Assembly and for the administration of the State government
through the Executive Department. The State Constitution also
provides for the election of three additional general State
Officers: the Attorney General, Secretary of State and General
Treasurer. Under the State Constitution, the Governor is granted
the power to veto any act adopted by the General Assembly,
provided, however, that any such veto can be overridden by a 3/5
vote of both houses of the General Assembly. The Governor does not
have any power of line-item veto.
The judicial power of the State is vested in the Supreme Court
and such inferior courts as are established by the General
Assembly. The Supreme Court, appointed by the Governor and
confirmed by the Senate, has final revisory and appellate
jurisdiction upon all questions of law and equity. The General
Assembly has also established a Superior Court, Family Court, a
District Court and certain municipal courts in various cities and
towns in the State.
Municipalities
Below the level of State government, Rhode Island is divided
into 39 cities and towns which exercise the functions of local
general government. There is no county governmental structure.
Local executive power is generally placed in a mayor,
administrator/manager or town council form of government, and
legislative power is vested in either a city or town council. As
provided in the State Constitution, municipalities have the right
of self government in all local matters by adopting a "home rule"
charter. Every city or town, however, has the power to levy, assess
and collect taxes, or borrow money, only as specifically authorized
by the General Assembly. Except for matters that are reserved
exclusively to the General Assembly, such as taxation and
elections, the State Constitution restricts the power of the
General Assembly on actions relating to the property, affairs and
government of any city or town which has adopted a "home rule"
charter, to general laws which apply to all cities and towns, but
which shall not affect the form of government of any city or town.
The General Assembly has the power to act in relation to a
particular home rule charter community, provided that such
legislative action shall become effective only upon approval of a
majority of the voters of the affected city or town. Rhode Island
General Law (44-35-10) requires every city and town to adopt a
balanced budget for each fiscal year. Local governments rely
principally upon general real and tangible personal property taxes
and automobile excise taxes for provision of revenue.
During the 1985 Session of the General Assembly, a law was
passed entitled "An Act Providing Property Tax Relief and
Replacement and Establishing a Cap on City and Town Property Tax
Levy Growth". Enacted as section 44-5-2 of the General Laws and
entitled "Maximum Levy", the legislation limits tax levy or rate
increases by municipalities to an increase no greater than 5.5
percent over the previous year. Legislation was also enacted which
authorized tax levy or rate increases of greater than 5.5 percent
in the event that debt service costs on present and future general
obligation debt increase at a rate greater than 5.5 percent. The
legislation also provides for the certification by a state agency
of the appropriate property tax base to be used in computations in
any year when revaluation is being implemented. Provisions of
section 44-5-2 also include authorization to exceed this limitation
in the event of loss of non-property tax revenue, or when an
emergency situation arises and is certified by the State Auditor
General. In such an emergency situation, such levy in excess of a
5.5 percent increase must be approved by a majority of the city or
town governing body or electors voting at the financial town
meeting. The statute was amended to clarify that nothing in the tax
levy cap provisions was intended to constrain the payment of
obligations of cities and towns. The power of the cities and towns
to pay their general obligation bonds and notes is unlimited and
each city or town is required to levy ad valorem taxes upon all the
taxable property for the payment of such bonds and notes and the
interest thereon, without limitation as to rate or amount.
Aid to cities and towns has risen from approximately $389.7
million in FY 1991 to $490.8 million in the Governor's recommended
budget for FY 1997. The largest category of State aid to cities and
towns involves assistance programs for school operations and school
buildings. The general school aid program reimburses communities on
the basis of the relationship between the number of students and
the property wealth and personal income of the community.
In addition to reimbursement of operations costs, state school
construction aid is also provided at levels ranging from 30 percent
to 88 percent of the construction cost of new facilities. The level
is also based upon the relationship between student counts and
community wealth, and takes into consideration the relative weight
of school debt in the particular city or town to its total debt.
Beginning in fiscal year 1991, bond interest payments were included
as reimbursable expenditures along with other project costs for
bonds issued on or after July 1, 1988. A related program provides
approximately $1.8 million to cities and towns in FY 1996 to
provide aid in the construction of libraries.
The distribution formula for school aid was modified in fiscal
year 1995 to weight the distribution more heavily towards districts
with proportionally more children from poorer families. This was
adopted in response to a Superior Court ruling that challenged the
then existing formulae. The Court ruled that minimum guarantee
portions of the distribution formula, certain categories of aid,
and use of "hold-harmless" provisions threatened universal
education opportunity. However, this ruling was subsequently
overturned on appeal in a decision by the Supreme Court of Rhode
Island. The Supreme Court ruled that Rhode Island's statutory
scheme for financing public education does not violate the State's
Constitution.
The Governor and Assembly adopted a new formula for FY 1995
that distributed a total of $413.3 million in total education aid,
according to preliminary expenditure data. It modified the
operations aid formula by eliminating minimum guarantee entitlement
and phasing out the regionalization bonus. The phase out reduces
the regionalization bonus by 40.0 percent in FY 1995. That bonus,
which had been provided to encourage districts to attain
efficiencies through regionalization, was one of the categories
challenged by the Superior Court.
The formula for the FY 1995 education aid budget established
a Poverty Weight Fund. Of the $416.1 million budgeted for education
aid, $46.1 million was distributed through the Poverty Weight Fund.
In addition, $1.7 million of the $416.1 million budgeted for
education aid was distributed through the Distressed District Fund
to assist those communities that were eligible for the FY 1992
retirement deferral option and whose total reimbursable education
expenditures declined between FY 1991 and FY 1992. FY 1995
expenditures included an additional $16.2 million in school
construction aid.
The FY 1996 enacted budget suspended the education aid
formulae, supplanted the Poverty Weight Fund with the Equity Fund,
and calculated education aid using the same reference year as the
1995 aid calculation. Each community receives no less than the
amount budgeted in FY 1995, with an additional $18.5 million
allocated as follows: $2.3 million for conventional public housing
aid, $2.2 million for vocational aid, $1.7 million for regional
bonus, $12.1 million in a non-restricted equity fund, $0.9 million
for school construction aid, $0.7 million for aid to Central Falls
School District, and a reduction of $1.4 million in the State share
of teacher retirement.
The Governor's FY 1997 recommended budget for education aid
totals $451.4 million. This includes $400.5 million in aid to all
school districts, including Central Falls, $17.1 million for
Capital Construction Aid and $33.7 million for the State share of
teacher retirement. This represents a $0.7 million increase in
state support relative to the FY 1996 revised budget. The increase
in funding is primarily due to an increase in Teacher Retirement
obligations of $1.0 million, partially offset by a decrease in
funding for Central Falls School District of $0.3 million, or 1.3
percent.
The Governor's FY 1997 Education Aid distribution maintains
the same categories and level of funding as the FY 1996 revised
budget, with the exception of the reduction in funding for Central
Falls. The distribution of aid between communities has been
adjusted for changes in enrollment between 1993/1994 and 1994/1995
school years. The Governor, recognizing that the current methods of
education aid distribution require evaluation, has created a "Task
Force on School Funding" to study modifications to the current
system of state aid distribution. The Task Force will report to
their recommendations to the Governor and the General Assembly on
or before January 15, 1997.
The Governor's Budget also includes the local general revenue
sharing and payment-in-lieu of taxes programs. The 1987 session of
the General Assembly had enacted legislation which consolidated all
prior revenue sharing components into one general revenue sharing
program and incorporated a distribution formula based upon relative
population, tax effort and personal income of each city and town.
In addition, the State distributes the proceeds of a statewide tax
imposed on the tangible personal property of telephone, telegraph,
cable, express and telecommunications companies. The 1991 General
Assembly passed legislation to dedicate, beginning in fiscal year
1991, an amount equal to one percent of second prior year total
state tax revenues to general state aid. That program has varied
since FY 1991, between no funding in FY 1993 to $13.6 million in FY
1995. In the Governor's recommended FY 1997 Budget, $13.3 million
is provided for local general revenue sharing.
The payment-in-lieu of taxes program authorizes the Assembly
to appropriate and distribute to communities amounts not to exceed
25 percent of the property taxes that would have been collected on
tax exempt properties. These include private colleges, hospitals,
and the correctional facilities. Funding was provided in fiscal
years 1988 ($2.5 million), 1989 ($3.1 million), 1991 ($3.5
million), 1992-1994 ($2.8 million), and 1995 -1996 ($12.2 million).
The Governor's recommended 1997 Budget provides the same amount
($12.2 million) as was provided in FY 1996.
One of the State's municipalities, the City of Central Falls,
has experienced financial difficulties. The Central Falls Review
Commission was established under Chapter 65 of the Public Laws of
1990 and published its report in January of 1991. The report found
the City of Central Falls to be in a serious financial condition
and made thirteen recommendations for city and state action. The
recommendation most widely publicized is the State's assumption of
responsibility for funding education in Central Falls. The FY 1992
enacted budget provided statutory authority for full funding of
educational programs in the City of Central Falls. Full financial
and administrative takeover of the Central Falls school system
occurred July 1, 1992. Another equally important provision
established a continuing review commission which will monitor,
stabilize and improve the fiscal health of the municipality,
particularly in light of the State's unique relationship with, and
investment in, the Central Falls School District.
Budget Procedures
The State budget of revenues and appropriations for
administrative and other expenses of the State is adopted annually
by the General Assembly and is prepared for submission to the
General Assembly, under the supervision of the Governor, by the
State Budget Officer within the Department of Administration.
Preparation and submission of the budget is governed by both the
State Constitution and the general laws of the State, which provide
various limitations on the powers of the General Assembly and
certain guidelines designed to maintain fiscal responsibility.
According to Article IX Section 16 of the Rhode Island
Constitution and the Rhode Island General Laws section 35-3-7, the
Governor must present spending recommendations to the Legislature
on or before the third Wednesday in February, unless extended by
statute. The budget contains a complete plan of estimated revenues
and proposed expenditures with a personnel supplement detailing
number and titles of positions of each agency and estimates of
personnel costs for the next fiscal year.
The budget as proposed by the Governor is considered by the
General Assembly which, under state law, may increase, decrease,
alter or strike out any items in the budget, provided the General
Assembly may not take action which would cause an excess of
appropriations for revenue expenditures over expected revenue
receipts. No appropriation in excess of budget recommendations may
be made by the General Assembly unless it shall provide the
necessary additional revenue to cover such appropriations. The
Governor may veto legislative appropriations bills. However, the
Rhode Island Governor does not have line-item veto authority. The
Legislature may override any veto by a three-fifths majority vote.
Supplemental appropriations measures may be submitted by the
Governor to the General Assembly at any time. Supplemental
appropriations by the General Assembly must be supported by
additional revenues and are subject to the Constitutional
limitation on state expenditures discussed below.
The General Laws of the State provide that, if the General
Assembly fails to pass the annual appropriation bill, the same
amounts as were appropriated in the prior fiscal year shall be
automatically available for expenditure, subject to monthly or
quarterly allotments as determined by the State Budget Officer.
Expenditures for general obligation bond indebtedness of the State
shall be made as required regardless of the passage of the annual
budget or the amount provided for in the prior fiscal year.
The budget as submitted by the Governor is required to contain
a statement of receipts and expenditures for the current fiscal
year, the budget year (next fiscal year), and two prior fiscal
years. Receipt estimates for the current year and budget year are
those adopted by the State Revenue Estimating Conference, as
adjusted by any change to rates recommended by the Governor.
The State Revenue Estimating Conference was created by the
1990 General Assembly to provide the Governor and the Assembly with
estimates of general revenues. It is composed of the State Budget
Officer, the House Fiscal Advisor, and the Senate Fiscal Advisor,
with the chair rotating among the three. It must meet three times
a year and can be called at any other time by any member, and must
reach consensus on revenues. The 1991 Assembly created a Medical
Assistance and Public Assistance Caseload Estimating Conference,
similar to the Revenue Estimating Conference, to adopt welfare and
medical assistance caseload estimates.
In addition to the preparation of the annual budget, the State
Budget Officer is also authorized and directed by the general laws:
(a) to exercise budgetary control over all State departments; (b)
to operate an appropriation allotment system; (c) to develop
long-term activity and financial programs, particularly capital
improvement programs; and (d) to prepare annually a five year
financial projection of anticipated general revenue receipts and
expenditures, including detail of principal revenue sources and
expenditures by major program areas. The five year financial
projection for 1997 through 2001 was included in the Executive
Summary of the Governor's Budget for FY 1997.
The 1990 Assembly instituted a limit on state expenditures
commencing in FY 1992 such that appropriations do not result in
general fund expenditures exceeding 99.5 percent of general fund
revenues in FY 1993, 98.5 percent in FY 1994 and 98.0 percent
thereafter. The remaining balance is to be deposited into a budget
reserve account, capped at 3 percent of general fund revenues. Once
capped, the excess is deposited in a Capital Account, to be used
for capital projects, debt reduction, and/or debt service. The 1991
Assembly suspended those provisions for FY 1992, but provided that
any revenues received in excess of the amount estimated shall be
deposited in the account, up to one half percent of general
revenues. Excess revenues were received in FY 1993, largely as a
result of medicaid disproportionate share and provider tax
receipts, and an $8.4 million deposit was made into the fund.
The 1992 General Assembly approved placing the spending limits
on the ballot as a constitutional requirement, which the voters
approved on November 3, 1992. The FY 1995 reserve fund balance was
$45.1 million.
Financial Controls
Internal financial controls utilized by the State consist
principally of statutory restrictions on the expenditure of funds
in excess of appropriations, the supervisory powers and functions
exercised by the Department of Administration and the accounting
and audit controls maintained by the State Controller and the
Bureau of Audits. Statutory restrictions include the requirement
that all bills or resolutions introduced in the General Assembly
which, if passed, would have an effect on State or local revenues
or expenditures (unless the bill includes the appropriation of a
specific dollar amount) must be accompanied by a "fiscal note,"
which sets forth such effect. Bills impacting upon State finances
are forwarded to the State Budget Officer who determines the agency
or agencies affected by the bill and is responsible, in cooperation
with such agencies, for the preparation of the fiscal note. The
State Department of Administration is responsible for the
preparation of fiscal notes for bills affecting cities and towns.
In addition, if at any time during a fiscal year the State Budget
Officer determines that actual revenue receipts or resources will
not equal the original estimates upon which appropriations were
based or that spending will exceed appropriations, the Governor,
"for the purpose of maintaining a balanced budget," has the power
to reduce or suspend appropriations for any or all departments
except the General Assembly and its legislative agencies and
commissions.
In the event the Governor reduces or suspends appropriations,
the speaker of the house, senate majority leader and chairpersons
of the house and senate finance committees are required by law to
be notified in writing. Quarterly or monthly allotments of
appropriations are required by law to be provided to the
chairpersons of the house and senate finance committees by the
budget office.
The Department of Administration is required by law to produce
a quarterly report to be made public which incorporates actual
expenditures, encumbrances, and revenues with the projected
revenues and appropriations. The report also contains a projection
of a year-end balance.
The State Controller is required by general law to administer
a comprehensive accounting system which will classify the
transactions of State departments in accordance with the budget
plan, to prescribe a uniform financial, accounting and cost
accounting system for State departments and to approve all orders
for disbursement of funds from the State treasury. In addition to
his or her other duties, the Controller is required to prepare
monthly statements of receipts and disbursements in comparison with
estimates of revenue and allotments of appropriations.
The General Treasurer is responsible for the deposit of cash
receipts; the payment of sums, as may be required from time to time
and upon due authorization from the State Controller; and as Chair
of the State Investment Commission, the investment of all monies in
the State fund structure, as directed by the State Investment
Commission. Major emphasis is placed by the General Treasurer on
cash management in order to insure that there is adequate cash on
hand to meet the obligations of the State as they arise.
The General Treasurer is responsible for the investment of
certain funds and accounts of the State on a day-to-day basis. The
State treasury balance is determined daily. In addition, the
General Treasurer is the custodian of certain other funds and
accounts and in conjunction with the State Investment Commission,
invests the amounts on deposit in such funds and accounts,
including but not limited to the State Employees' and Teachers'
Retirement Trust Fund and the Municipal Employees' Retirement Trust
Fund. The General Treasurer submits a report to the General
Assembly at the close of each fiscal year on the performance of the
State's investments.
The Finance Committee of the House of Representatives is
required by law to provide for a complete post-audit of the
financial transactions and accounts of the State on an annual
basis, which must be performed by the Auditor General, who is
appointed by the Joint Committee on Legislative Affairs of the
General Assembly. This post-audit is performed traditionally on the
basis of financial statements prepared by the State Controller with
specific attention to the violation of laws within the scope of the
audit, illegal or improper expenditures or accounting procedures
and recommendations for accounting and fiscal controls. The Auditor
General is additionally directed to review annually all capital
development programs of the State to determine: (a) the status of
such programs; (b) whether funds are being properly expended; (c)
completion dates; and (d) expended and unexpended fund balances.
The Auditor General also has the power, when directed by the Joint
Committee, to make post-audits and performance audits of all State
and local public bodies or any private entity receiving State
funds.
Rhode Island Economy
General Information
With the establishment of the water-powered Slater Mill in
Pawtucket in 1793, Rhode Island became the cradle of the Industrial
Revolution in America. Over time, the state has developed a modern,
diversified economy providing employment for over 470,000 Rhode
Island residents in both goods and service industries. In 1993,
goods producing industries generated $3.7 billion in earnings and
accounted for 17 percent of Rhode Island's total personal income.
Service industries in the same year generated $10.1 billion in
earnings and accounted for 48 percent of the State's personal
income.
Population Characteristics
Rhode Island's population in 1990 of 1,003,464 was ranked 43rd
among the 50 states and 2nd in density, with an average of 960.3
persons per square mile. Rhode Island's 1.0 million people
represent 0.4 percent of the total United States population. Over
the period 1980 to 1990, the State's population grew by 6 percent,
which is less than the national population growth of 11.3 percent
over the same period. Between 1991 and 1994, the rate of population
growth in Rhode Island was negative.
Personal Income. Total personal income in Rhode Island
increased by 73.2 percent in nominal terms between 1984 and 1994.
In 1994, the Rhode Island economy generated $22.2 billion in
personal income. Rhode Island's per capita income, which in 1994
was $21,948, has grown faster than the national average.
Economy
Composition of Employment. In recent years, Rhode Island's
employment mix has shifted with an increasing proportion of
employment in service producing sectors at the expense of goods
producing sectors. Between 1984 and 1994, employment in the goods
producing industries declined by 25.6 percent (135,000 to 100,500)
while employment in service producing industries grew by 18.5
percent (281,400 to 333,500).
The service and wholesale/retail trade sectors were the
largest source of growth in the service producing industries.
Within the service sector, health services has been the fastest
growing industry group, generating over 15,000 new jobs in the past
10 years.
Manufacturing
In 1993, the manufacturing sector contributed $3.0 billion, or
13.9 percent of Rhode Island's total personal income. Personal
income derived from this sector increased 28 percent between 1983
and 1993.
Rhode Island is the jewelry capital of the world, with over
35,000 employed in jewelry manufacturing, distribution and related
services. Precious metal jewelry, fashion jewelry, crystal,
boutique and novelty items, recognition insignia (such as key
chains and pens, awards, and military insignia) are manufactured
and assembled in Rhode Island and exported worldwide.
Hasbro, the world's second largest toy manufacturer, and
G-Tech, the world's largest supplier of on-line lottery systems,
are headquartered in Rhode Island. Electronic products manufactured
in the state include connectors, circuit boards, uninterruptable
computer power supplies, and wire and cable assemblies. Metrology
equipment, navigation equipment, medical equipment and supplies,
safety goggles, and protective breathing apparatus are also
manufactured here.
Rhode Island's skilled craftsmen produce a wide variety of
metal and plastic components. These components are used by
manufacturers throughout the world and include stampings,
fabricated metal parts, ferrous and non-ferrous castings, machined
parts, tools, dies and molds, wire and wiring products.
Chemical manufacturers located here produce products such as
pigments and dyes, drugs and advanced biomedical products, and
liquid and aerosol consumer products.
Wholesale and Retail Trade
In 1993, the wholesale and retail trade sector contributed
$2.0 billion, or 10 percent, of Rhode Island's total personal
income, and over 14.8 percent of the portion of personal income
derived from earnings. Employment in trade increased 7.3 percent
from 88,600 in 1984 to 95,100 in 1994.
Service
In 1993, the service sector contributed $4.0 billion, or 18.8
percent of Rhode Island's total personal income, and over 28.9
percent of the portion of personal income derived from earnings.
Employment in Rhode Island's service industries increased 37.8
percent from 99,200 in 1984, to 136,700 in 1994. Service is the
largest division of the State's economy with health services,
business services and educational services as the most important
groups.
Business services, engineering, accounting and research are
the fastest growing sectors of Rhode Island's economy, employing
over 29,500 in 1994. Rhode Island companies have developed
extensive system engineering and research facilities to support the
Naval Undersea Warfare Center in Newport. Over 2,600 firms not only
provide business support services for Rhode Island's diversified
economy, but also export these services throughout the United
States and the world.
Health services is the largest employment group in Rhode
Island. There are 14 general hospitals and two voluntary
psychiatric hospitals in Rhode Island. All acute care general
hospitals are approved by the Joint Commission for Accreditation,
and are eligible providers under the Medicate programs. In
addition, there are 110 nursing and personal-care facilities in
Rhode Island.
Annually, Rhode Island's colleges and universities award
almost 16,000 degrees. Three public and nine private colleges and
universities provide enrollment for over 79,000 students, including
55,000 undergraduate, and 8,900 graduate students. The majority of
these students are from other areas of the United States and
foreign countries. Rhode Island's institutions of higher learning
are widely recognized for their prominence in specialized areas:
Brown University's science, medical, and engineering programs, the
Rhode Island School of Design's art and design programs, and the
University of Rhode Island's engineering, pharmacy, and
oceanographic research programs.
Government
In 1993, the government sector contributed $2.3 billion, or
10.8 percent of Rhode Island's total personal income, and over 16.6
percent of the portion of personal income derived from earnings.
Government employment in Rhode Island has increased 7.7 percent
since 1984 from 57,400 to 61,800 in 1994.
The United States Navy maintains a significant presence in
Newport, Rhode Island, the Naval Education and Training Center;
Naval War College; and the Naval Undersea Warfare Center. These
facilities employ over 7,543 military and civilian personnel, and
have an average daily enrollment of almost 2,022 students. The
Naval Undersea Warfare Center, with its major laboratories in
Newport and Middletown, is a prime source of high technology that
provides the Navy its tactical and strategic edge in combat
systems, surface ship sonar, and undersea ranges. In 1994, the
Naval Undersea Warfare Center employed 3,829 people. Many Rhode
Island companies have developed extensive system engineering and
research facilities that provide support to the center.
Defense
In 1994, military personnel, civilian Department of Defense
personnel and private industry defense related employment in Rhode
Island was estimated at 15,887.
Total defense related employment has decreased from a 1987
high of 26,934 to 15,887 in 1994. Total defense contract awards to
Rhode Island firms have decreased from a high of $555 million in
1990, to $410 million in 1994. The Electric Boat Division of
General Dynamics, the largest defense contractor in Rhode Island,
is not included in these contract award totals. Contracts awarded
to the Electric Boat Division of General Dynamics are allocated to
the state of Connecticut.
Economic Forecast
The recession that engulfed the Rhode Island economy appears
to have finally stabilized. After three years of falling
employment, the number of jobs in Rhode Island grew by 0.1 percent
in 1993. Data Resources, Inc. (DRI) forecasters estimate Rhode
Island job growth at an annual rate of 1.4 percent annually from
1994 to 1998 with personal income growth rates averaging 5.4
percent. Real personal income growth is forecast to average 2.2
percent.
The national recession has been longest and deepest in the New
England states. Since 1989, 9.6 percent of all of New England's
non-agricultural jobs have been lost. Rhode Island losses have
paralleled those of the rest of the region. Non-agricultural
employment in Rhode Island fell by 8.9 percent between the 1989
peak and the low point in 1992.
Rhode Island, Massachusetts, Connecticut and Maine rank among
the top 12 states in defense prime contract awards per capita. As
a result, federal defense cutbacks have affected this region
disproportionately. The national recovery did not affect all
regions equally. New England is forecast to continue to lag due to
the restructuring of the defense industry and overbuilding in real
estate markets.
The DRI estimators forecast that the national economy is
beginning to slow with a "soft landing" rather than a recession.
Consumer spending is slowing in response to higher interest rates
and rising debt burdens. Debt accumulation appears to have risen to
earlier peak levels; the rate of accumulation growth does not
appear sustainable.
The Rhode Island outlook is for continued recovery at a
sluggish pace. Non-farm employment has increased one percent
annually over the past three years and is estimated to remain at
1.2 percent annual growth through years 2000. It will continue to
lose manufacturing jobs to foreign competitors, high regulatory
costs, and the end of the Seawolf Program. Services will provide 80
percent of the new jobs created through 2000, reflecting growth in
business services, education, health care, and tourism.
Population growth is expected to average 0.4 percent annually
during FY 1995 - 2000. Population declined 0.2 percent annually
during the past three years as a result of a weak job market,
motivating out-migration. The shrinking labor force contributed to
the reduction of three points off the unemployment rate since the
spring of 1992. The unemployment rate is forecast to grow from the
currently forecast 6.4 percent for 1995 to 6.8 percent in 1996.
The gross state product has rebounded from -3.8 percent change
in 1991 to a high of 3.1 percent in 1994; however, that tracked the
overall growth rate of the U.S. economy. Growth rates are expected
to drop to 1.7 percent in 1995 and further to 1.2 percent in 1996.
Personal income growth also peaked in 1994, at 5.4 percent. Growth
drops to 5.3 percent in 1995 and 4.3 percent in 1996 before
rebounding in 1997.
MUNICIPAL BONDS
The two principal classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, credit
and unlimited taxing power for the payment of principal and
interest. Revenue or special tax bonds are payable only from the
revenues derived from a particular facility or class of facilities
or projects or, in a few cases, from the proceeds of a special
excise or other tax, but are not supported by the issuer's power to
levy unlimited general taxes. There are, of course, variations in
the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous
factors. The yields of municipal bonds depend on, among other
things, general financial conditions, general conditions of the
municipal bond market, size of a particular offering, the maturity
of the obligation and rating of the issue.
Since the Fund may invest in industrial development bonds or
private activity bonds, the Fund may not be an appropriate
investment for entities which are "substantial users" of facilities
financed by those bonds or for investors who are "related persons"
of such users. Generally, an individual will not be a "related
person" under the Internal Revenue Code unless such investor or his
or her immediate family (spouse, brothers, sisters and lineal
descendants) own directly or indirectly in the aggregate more than
50 percent of the equity of a corporation or is a partner of a
partnership which is a "substantial user" of a facility financed
from the proceeds of those bonds. A "substantial user" of such
facilities is defined generally as a "non-exempt person who
regularly uses a part of [a] facility" financed from the proceeds
of industrial development or private activity bonds.
As indicated in the Prospectus, there are certain Rhode Island
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 Rhode Island Obligations due to this tax
consequence. Also, as indicated in the Prospectus, the Fund will
not purchase obligations of Rhode Island issuers the interest on
which is subject to regular Federal income tax. The foregoing may
reduce the number of issuers the obligations of which are available
to the Fund.
As stated in the Prospectus, floating and variable rate demand
notes and participation interests (including municipal
lease/purchase obligations) are considered illiquid unless
determined by the Board of Trustees to be readily marketable. In
determining marketability of any such securities the Board of
Trustees will consider the following factors, not all of which may
be applicable to any particular issue: the quality, maturity and
coupon rate of the issue, ratings received from the nationally
recognized statistical rating organizations and any changes or
prospective changes in such ratings, the likelihood that the issuer
will continue to appropriate the required payments for the issue,
recent purchases and sales of the same or similar issues, the
general market for municipal securities of the same or similar
quality, the Adviser's opinion as to marketability of the issue and
other factors that may be applicable to any particular issue.
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate its past
performance.
Performance quotations by investment companies are subject to
rules of the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used by
the Fund are based on these standardized methods and are computed
separately for each of the Fund's three classes of shares. Prior to
May 1, 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. Each of these and other methods that may be used by the
Fund are described in the following material.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over a 1-year period and
a period since the inception of the operations of the Fund (on
September 10, 1992) that would equate an initial hypothetical
$1,000 investment in shares of each of the Fund's three 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 Conditional Deferred Sales Charge ("CDSC")
imposed on a redemption of Class C shares held for the period is
deducted.In the case of Class Y Shares, the calculation assumes
that no sales charge is deducted and no CDSC is imposed. For all
three classes, it is assumed that on each reinvestment date during
each such period any capital gains are reinvested at net asset
value, and all income dividends are reinvested at net asset value,
without sales charge (because the Fund does not impose any sales
charge on reinvestment of dividends for any class). The computation
further assumes that the entire hypothetical account was completely
redeemed at the end of each such period.
Investors should note that the maximum sales charge (4%)
reflected in the following quotations for Class A Shares is a one
time charge, paid at the time of initial investment. The greatest
impact of this charge is during the early stages of an investment
in the Fund. Actual performance will be affected less by this one
time charge the longer an investment remains in the Fund.
[CAPTION]
<TABLE>
Average Annual Compounded Rates of Return:
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 2.44% .60%(1) .80%(1)
Since
inception on
July 22, 1992 5.24% 0.60%(1) 0.80%(1)
<FN>
(1) Period from May 1, 1996 (inception of class) through June 30, 1996.
</FN>
</TABLE>
These figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-year period
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 three 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.
[CAPTION]
<TABLE>
Total Return
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 2.44% .60%(1) .80%(1)
Since
inception on
July 22, 1992 21.46% 0.60%(1) 0.80%(1)
<FN>
(1) Period from May 1, 1996 (inception of class) through June 30, 1996.</FN>
In general, actual total rate of return will be lower than
average annual rate of return because the average annual rate of
return reflects the effect of compounding. See discussion of the
impact of the sales charge on quotations of rates of return, above.
</TABLE>
Yield
Current yield reflects the income per share earned by the
Fund's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of the
Fund's three classes during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of each class during the base
period net of fee waivers and reimbursements of expenses, if any.
The Fund may also quote a taxable equivalent yield for each of
its three classes of shares which shows the taxable yield that
would be required to produce an after-tax yield equivalent to that
of a fund which invests in tax-exempt obligations. Such yield is
computed by dividing that portion of the yield of the Fund
(computed as indicated above) which is tax-exempt by one minus the
highest applicable combined federal and Rhode Island income tax
rate (and adding the result to that portion of the yield of the
Fund that is not tax-exempt, if any).
The Rhode Island and the combined Rhode Island and federal
income tax rates upon which the Fund's tax equivalent yield
quotations are based are 10.98% and 46.18%, respectively assuming
the maximum effective state rate. The State of Rhode Island
assuming the state income taxes as a percentage of the taxpayer's
Federal Income Tax, thus the actual state rate is effectively
reduced by its deductibility for Federal tax purposes if deductions
are itemized. 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.
[CAPTION]
<TABLE>
Yield for the 30-day period ended June 30, 1996 (the date of the
Fund's most recent audited financial statements:
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
Yield 4.99% 3.76% 3.76%
Taxable
Equivalent
Yield 9.22% 6.95% 6.95%
</TABLE>
These figures were obtained using the Securities and Exchange
Commission formula:
6
Yield = 2 [(a-b + 1) -1]
----
cd
Where:
a = interest earned during the period
b = expenses accrued for the period (net of waivers and
reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative of
the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted current
distribution rate or taxable equivalent distribution rate. The
current distribution rate is computed by (i) dividing the total
amount of dividends per share paid by the Fund during a recent
30-day period by (ii) the current maximum offering price and by
(iii) annualizing the result. A taxable equivalent distribution
rate shows the taxable distribution rate that would be required to
produce an after-tax distribution rate equivalent to the Fund's
current distribution rate (calculated as indicated above). The
current distribution rate can differ from the current yield
computation because it could include distributions to shareholders
from additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains.
Other Performance Quotations
With respect to those categories of investors who are
permitted to purchase Class A Shares of the Fund at net asset
value, the Fund may quote a "Current Distribution for Net Asset
Value Investments." This rate is computed by (i) dividing the total
amount of dividends per share paid by the Fund during a recent
30-day period by (ii) the current net asset value of the Fund and
by (iii) annualizing the result. Figures for yield, total return
and other measures of performance for Net Asset Value Investments
may also be quoted. These will be derived as described above with
the substitution of net asset value for public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are published, they will be accompanied
by calculations of current yield in accordance with the formula of
the Securities and Exchange Commission.
The Fund may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect of
taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and capital
gains distributions in additional shares. The examples used will be
for illustrative purposes only and are not representations by the
Fund of past or future yield or return.
From time to time, in reports and promotional literature, the
Fund may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices of
broad groups of unmanaged securities considered to be
representative of, or similar to, the Fund's portfolio holdings,
such as:
Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales charges
into consideration. The method of calculating total return data on
indices utilizes actual dividends on ex-dividend dates accumulated
for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars
(highest). Morningstar ratings are calculated from the funds'
three-, five-, and ten-year average annual returns (when available)
and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are
adjusted for fees and sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars, and the bottom
10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices," a monthly corporate government index publication which
lists principal, coupon and total return on over 100 different
taxable bond indices which Merrill Lynch tracks. They also list the
par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly
publication which tracks principal, coupon and total return on the
Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as well
as all the components of these Indices.
The Consumer Price Index, prepared by the U.S. Bureau of Labor
Statistics, is a commonly used measure of inflation. The Index
shows changes in the cost of selected consumer goods and does not
represent a return on an investment vehicle.
From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK,
BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL
STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be
cited.
INVESTMENT RESTRICTIONS
The Fund has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the 1940
Act) of the Fund's outstanding shares vote to change them. Under
that Act, the vote of the holders of a "majority" of the Fund's
outstanding shares means the vote of the holders of the lesser of
(a) 67% or more of the Fund's shares present at a meeting or
represented by proxy if the holders of more than 50% of its shares
are so present or represented; or (b) more than 50% of the Fund's
outstanding shares. Those fundamental policies not set forth in the
Prospectus are set forth below.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Rhode Island
Obligations (discussed under "Investment of the Fund's Assets" in
the Prospectus). Therefore the Fund cannot buy any voting
securities, any commodities or commodity contracts, any mineral
related programs or leases, any shares of other investment
companies or any warrants, puts, calls or combinations thereof.
The Fund cannot purchase or hold the securities of any issuer
if, to its knowledge, Trustees, Directors or officers of the Fund
or its Adviser individually owning beneficially more than 0.5 of 1%
of the securities of that issuer together own in the aggregate more
than 5% of such securities.
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.
4. The Fund is not an underwriter.
The Fund cannot engage in the underwriting of securities, that
is, the selling of securities for others. Also, it cannot invest in
restricted securities. Restricted securities are securities which
cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Fund's Distribution Plan has three parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II) and to certain defensive provisions (Part III).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser or
the Distributor. The Distributor will consider shares which are not
Qualified Holdings of such unrelated broker-dealers to be Qualified
Holdings of the Distributor and will authorize Permitted Payments
to the Distributor with respect to such shares whenever Permitted
Payments are being made under the Plan.
Part I of the Plan applies only to the Front-Payment Shares
Class ("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 Board of Trustees
of the Fund, 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.
During the fiscal years ended June 30, 1996, 1995 and 1994,
respectively, $55,194, $48,132 and $38,571 was paid to Qualified
Recipients under the Plan, of which $1,008, $940 and $988,
respectively, was retained by the Distributor.All of such payments
related to shares now designated as Class A Shares.
The Distributor shall have sole authority (i) as to the
selection of any Qualified Recipient or Recipients; (ii) not to
select any Qualified Recipient; and (iii) the amount of Class A
Permitted Payments, if any, to each Qualified Recipient provided
that the total Class A Permitted Payments to all Qualified
Recipients do not exceed the amount set forth above. The
Distributor is authorized, but not directed, to take into account,
in addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Front-Payment Class
Shares, including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Fund may be effected; assisting shareholders in
designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records; assisting
in processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in connection
with customer orders to purchase or redeem shares; verifying and
guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated
accounts; furnishing (either alone or together with other reports
sent to a shareholder by such person) monthly and year-end
statements and confirmations of purchases and redemptions;
transmitting, on behalf of the Fund, proxy statements, annual
reports, updating prospectuses and other communications from the
Fund to its shareholders; receiving, tabulating and transmitting to
the Fund proxies executed by shareholders with respect to meetings
of shareholders of the Fund; and providing such other related
services as the Distributor or a shareholder may request from time
to time; and (c) the possibility that the Qualified Holdings of the
Qualified Recipient would be redeemed in the absence of its
selection or continuance as a Qualified Recipient. Notwithstanding
the foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified Recipient.
Amounts within the above limits accrued to a Qualified Recipient
but not paid during a fiscal year may be paid thereafter; if less
than the full amount is accrued to all Qualified Recipients, the
difference will not be carried over to subsequent years.
While Part I is in effect, the Fund's Distributor shall report
at least quarterly to the Fund's Trustees in writing for their
review on the following matters: (i) all Class A Permitted Payments
made under Section 9 of the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor,
sub-adviser or Administrator paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the Act, of the Fund, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part I originally went into effect when it was approved (i) by
a vote of the Trustees, including the Independent Trustees, with
votes cast in person at a meeting called for the purpose of voting
on Part I of the Plan; and (ii) by a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities of
the Front-Payment Class Shares class (or of any predecessor class
or category of shares, whether or not designated as a class) and a
vote of holders of at least a "majority" (as so defined) of the
outstanding voting securities of the Level-Payment Class Shares
and/or of any other class whose shares are convertible into
Front-Payment Class Shares. Part I has continued, and will, unless
terminated as hereinafter provided, continue in effect, until the
December 31 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 May 1, 1996 or (ii) Class A
Plan Agreements entered into thereafter.
Provisions relating to Class C Shares (Part II)
Part II of the Plan applies only to the Level-Payment Shares
Class ("Class C Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors, Inc.
(the "Distributor"), including but not limited to any principal
underwriter of the Fund, with which the Fund or the Distributor has
entered into written agreements in connection with Part II ("Class
C Plan Agreements") and which have rendered assistance (whether
direct, administrative, or both) in the distribution and/or
retention of the Fund's Level-Payment Class Shares or servicing of
shareholder accounts with respect to such shares. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Level-Payment Class Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers, other
customers, other contacts, investment advisory clients, or other
clients, if the Qualified Recipient was, in the sole judgment of
the Distributor, instrumental in the purchase and/or retention of
such shares and/or in providing administrative assistance or other
services in relation thereto.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class C Permitted Payments")
to Qualified Recipients, which Class C Permitted Payments may be
made directly, or through the Distributor or shareholder servicing
agent as disbursing agent, which may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or for
any fiscal year which is not a full fiscal year), 0.75 of 1% of the
average annual net assets of the Fund represented by the
Level-Payment Class Shares. Such payments shall be made only out of
the Fund's assets allocable to the Level-Payment Class Shares. The
Distributor shall have sole authority (i) as to the selection of
any Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class C Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class C Permitted Payments to all Qualified Recipients do not
exceed the amount set forth above. The Distributor is authorized,
but not directed, to take into account, in addition to any other
factors deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient; (b) the extent to
which the Qualified Recipient has, at its expense, taken steps in
the shareholder servicing area with respect to holders of Level-
Payment Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options, account
designations and addresses; providing necessary personnel and
facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy statements,
annual reports, updating prospectuses and other communications from
the Fund to its shareholders; receiving, tabulating and
transmitting to the Fund proxies executed by shareholders with
respect to meetings of shareholders of the Fund; and providing such
other related services as the Distributor or a shareholder may
request from time to time; and (c) the possibility that the
Qualified Holdings of the Qualified Recipient would be redeemed in
the absence of its selection or continuance as a Qualified
Recipient. Notwithstanding the foregoing two sentences, a majority
of the Independent Trustees (as defined below) may remove any
person as a Qualified Recipient. Amounts within the above limits
accrued to a Qualified Recipient but not paid during a fiscal year
may be paid thereafter; if less than the full amount is accrued to
all Qualified Recipients, the difference will not be carried over
to subsequent years.
While Part II is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which the
amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the Fund,
the Adviser, the Administrator or the Distributor, such person
shall agree to furnish to the Distributor for transmission to the
Board of Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part 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 Shares Class. Part II has continued, and will,
unless terminated as hereinafter provided, continue in effect,
until the December 31 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 May 1, 1996 or (ii) Class C
Plan Agreements entered into thereafter.
Defensive Provisions (Part III)
Another part of the Plan (Part III) states that if and to the
extent that any of the payments listed below are considered to be
"primarily intended to result in the sale of" shares issued by the
Fund within the meaning of Rule 12b-1, such payments are authorized
under the Plan: (i) the costs of the preparation of all reports and
notices to shareholders and the costs of printing and mailing such
reports and notices to existing shareholders, irrespective of
whether such reports or notices contain or are accompanied by
material intended to result in the sale of shares of the Fund or
other funds or other investments; (ii) the costs of the preparation
and setting in type of all prospectuses and statements of
additional information and the costs of printing and mailing all
prospectuses and statements of additional information to existing
shareholders; (iii) the costs of preparation, printing and mailing
of any proxy statements and proxies, irrespective of whether any
such proxy statement includes any item relating to, or directed
toward, the sale of the Fund's shares; (iv) all legal and
accounting fees relating to the preparation of any such reports,
prospectuses, statements of additional information, proxies and
proxy statements; (v) all fees and expenses relating to the
registration or qualification of the Fund and/or its shares under
the securities or "Blue-Sky" laws of any jurisdiction; (vi) all
fees under the Securities Act of 1933 and the 1940 Act, including
fees in connection with any application for exemption relating to
or directed toward the sale of the Fund's shares; (vii) all fees
and assessments of the Investment Company Institute or any
successor organization, irrespective of whether some of its
activities are designed to provide sales assistance; (viii) all
costs of the preparation and mailing of confirmations of shares
sold or redeemed or share certificates, and reports of share
balances; and (ix) all costs of responding to telephone or mail
inquiries of investors or prospective investors.
The Plan states that while it is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund shall be committed to the discretion of such
disinterested Trustees but that nothing in the Plan shall prevent
the involvement of others in such selection and nomination if the
final decision on any such selection and nomination is approved by
a majority of such disinterested Trustees.
The Plan states that while it is in effect, the Fund's
Administrator and Distributor shall report at least quarterly to
the Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this Plan,
the identity of the Qualified Recipient of each Payment, and the
purposes for which the amounts were expended; (ii) all costs of
each item of cost specified in the Plan (making estimates of such
costs where necessary or desirable) during the preceding calendar
or fiscal quarter; and (iii) all fees of the Fund to the
distributor, sub-adviser or administrator paid or accrued during
such quarter. In addition if any such Qualified Recipient is an
affiliate, as that term is defined in the Act, of the Fund, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund as defined in
the 1940 Act and who have no direct or indirect financial interest
in the operation of the Plan or in any agreements related to the
Plan. The Plan, unless terminated as hereinafter provided,
continues in effect from year to year only so long as such
continuance is specifically approved at least annually by the
Fund's Board of Trustees and its Independent Trustees with votes
cast in person at a meeting called for the purpose of voting on
such continuance. In voting on the implementation or continuance of
the Plan, those Trustees who vote to approve such implementation or
continuance must conclude that there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders. The Plan
may be terminated at any time by vote of a majority of the
Independent Trustees or by the vote of the holders of a "majority"
(as defined in the 1940 Act) of the outstanding voting securities
of the Fund. The Plan may not be amended to increase materially the
amount of payments to be made without shareholder approval and all
amendments must be approved in the manner set forth above as to
continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act as
now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by Rule
18f-3, with respect to each outstanding class of shares of the
Fund.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares of the Fund of "Service Fees" within the meaning of
Article III, Section 26(b)(9) of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. The Services Plan
applies only to the Class C Shares of the Fund (regardless of
whether such class is so designated or is redesignated by some
other name).
As used in the Services Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors, Inc.
(the "Distributor"), including but not limited to the Distributor
and any other principal underwriter of the Fund, who have, pursuant
to written agreements with the Fund or the Distributor, agreed to
provide personal services to shareholders of Level-Payment Class
Shares and/or maintenance of Level-Payment Class Shares shareholder
accounts. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level-Payment Class Shares beneficially owned by
such Qualified Recipient's customers, clients or other contacts.
"Administrator" shall mean Aquila Management Corporation or any
successor serving as sub-adviser or administrator of the Fund.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Service Fees") to Qualified
Recipients, which Service Fees (i) may be paid directly or through
the Distributor or shareholder servicing agent as disbursing agent
and (ii) may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Services Plan are not accruable or for any
fiscal year which is not a full fiscal year), 0.25 of 1% of the
average annual net assets of the Fund represented by the
Level-Payment Class Shares. Such payments shall be made only out of
the Fund's assets allocable to the Level-Payment Class Shares. The
Distributor shall have sole authority with respect to the selection
of any Qualified Recipient or Recipients and the amount of Service
Fees, if any, paid to each Qualified Recipient, provided that the
total Service Fees paid to all Qualified Recipients may not exceed
the amount set forth above and provided, further, that no Qualified
Recipient may receive more than 0.25 of 1% of the average annual
net asset value of shares sold by such Recipient. The Distributor
is authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a) the
amount of the Qualified Holdings of the Qualified Recipient and (b)
the extent to which the Qualified Recipient has, at its expense,
taken steps in the shareholder servicing area with respect to
holders of Level-Payment Class Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Fund may
be effected; assisting shareholders in designating and changing
dividend options, account designations and addresses; providing
necessary personnel and facilities to establish and maintain
shareholder accounts and records; assisting in processing purchase
and redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer orders
to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; and
providing such other related services as the Distributor or a
shareholder may request from time to time. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees (as
defined below) may remove any person as a Qualified Recipient.
Amounts within the above limits accrued to a Qualified Recipient
but not paid during a fiscal year may be paid thereafter; if less
than the full amount is accrued to all Qualified Recipients, the
difference will not be carried over to subsequent years.
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
Investment Company Act of 1940, as amended (the "1940 Act"), of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Services Plan has been approved by a vote of the Trustees,
including those Trustees who, at the time of such vote, were not
"interested persons" (as defined in the 1940 Act) of the Fund and
had no direct or indirect financial interest in the operation of
the Services Plan or in any agreements related to the Services Plan
(the "Independent Trustees"), with votes cast in person at a
meeting called for the purpose of voting on the Services Plan. It
will continue in effect for a period of more than one year from its
original effective date only so long as such continuance is
specifically approved at least annually as set forth in the
preceding sentence. It may be amended in like manner and may be
terminated at any time by vote of the Independent Trustees.
The Services Plan shall also be subject to all applicable
terms and conditions of Rule 18f-3 under the Act as now in force or
hereafter amended.
While the Services Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others in
such selection and nomination if the final decision on any such
selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1 percent of the net
asset value of the Fund during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such
limitation, the Fund will have the option of redeeming the excess
in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets
into cash. The method of valuing securities used to make
redemptions in kind will be the same as the method of valuing
portfolio securities described under "Net Asset Value Per Share" in
the Prospectus, and such valuation will be made as of the same time
the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their affiliations, if
any, with the Administrator or the Distributor, and the principal
occupations of such persons during at least the past five years are
set forth below. As of the date of this Additional Statement, the
Trustees and officers of the Fund as a group owned less than 1% of
its outstanding shares. Mr. Herrmann is an interested person, as
that term is defined in the 1940 Act, of the Fund as an officer of
the Fund and as a Director, officer and shareholder of the
Distributor. He is so designated by an asterisk.
Lacy B. Herrmann*, President and Chairman of the Board of Trustees,
380 Madison Avenue, New York, New York 10017
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Pacific Capital Cash Assets
Trust since 1984; Churchill Cash Reserves Trust since 1985; Pacific
Capital U.S. Treasuries Cash Assets Trust since 1988; Pacific
Capital Tax-Free Cash Assets Trust since 1988; each of which is a
money market fund, and together with Capital Cash Management Trust
("CCMT") are called the Aquila Money-Market Funds; and Hawaiian
Tax-Free Trust since 1984; Tax-Free Trust of Arizona since 1986;
Tax-Free Trust of Oregon since 1986; Tax-Free Fund of Colorado
since 1987; Churchill Tax-Free Fund of Kentucky since 1987; and
Tax-Free Fund For Utah since 1992; each of which is a tax-free
municipal bond fund, and two equity funds, Aquila Rocky Mountain
Equity Fund since 1993 and Aquila Cascadia Equity Fund since 1996,
which, together with this Fund are called the Aquila Bond and
Equity Funds; Vice President, Director, Secretary and formerly
Treasurer of Aquila Distributors, Inc. since 1981, distributor of
the above funds; President and Chairman of the Board of Trustees of
CCMT, a money market fund since 1981, and an Officer and
Trustee/Director of its predecessors since 1974; Chairman of the
Board of Trustees and President of Prime Cash Fund (which is
inactive), since 1982 and of Short Term Asset Reserves 1984-1996;
President and a Director of STCM Management Company, Inc., sponsor
and sub-adviser to CCMT; Chairman, President, and a Director since
1984, of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves, and
Founder and Chairman of several other money market funds; Director
or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest Global
Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and Trustee
of Quest For Value Accumulation Trust, The Saratoga Advantage
Trust, and of the Rochester Group of Funds, each of which is an
open-end investment company; Trustee of Brown University, 1990-1996
and currently Trustee Emeritus; actively involved for many years in
leadership roles with university, school and charitable
organizations.
Vernon R. Alden, Trustee, 420 Boylston Street, Suite 403, Boston,
Massachusetts 02116
Director of Colgate Palmolive Company since 1974, Digital Equipment
Corporation, a computer manufacturing corporation, since 1959,
Intermet Corporation, an independent foundry, since 1986, and
Sonesta International Hotels Corporation since 1978; Chairman of
the Board and Executive Committee of The Boston Company, Inc., a
financial services company, 1969-1978; Trustee of Tax-Free Trust of
Oregon since 1988, of Hawaiian Tax-Free Trust, Pacific Capital Cash
Assets Trust, Pacific Capital Tax-Free Cash Assets Trust and
Pacific Capital U.S. Treasuries Cash Assets Trust since 1989, of
Cascades Cash Fund, 1989-1994 and of Aquila Cascadia Equity Fund
since 1996; Associate Dean and member of the faculty of Harvard
University Graduate School of Business Administration, 1951-1962;
member of the faculty and Program Director of Harvard Business
School - University of Hawaii Advanced Management Program, summer
of 1959 and 1960; President of Ohio University, 1962-1969; Chairman
of The Japan Society of Boston, Inc., and member of several
Japan-related advisory councils; Chairman of the Massachusetts
Business Development Council and the Massachusetts Foreign Business
Council, 1978-1983; Trustee of the Boston Symphony Orchestra since
1975; Chairman of the Massachusetts Council on the Arts and
Humanities, 1972-1984; Member of the Board of Fellows of Brown
University, 1969-1986; Trustee and member of the Executive
Committee, Plimoth Plantation; trustee of various other cultural
and educational organizations; Honorary Consul General of the Royal
Kingdom of Thailand.
Paul Y. Clinton, Trustee, 946 Morris Avenue, Bryn Mawr,
Pennsylvania 19010
Principal of Clinton Management Associates, a financial and venture
capital consulting firm; formerly Director of External Affairs of
Kravco Corporation, a national real estate owner and developer,
1984-1995; formerly President of Essex Management Corporation, a
management and financial consulting company, 1979-1983; Trustee of
Capital Cash Management Trust since 1979 and of Prime Cash Fund
(which is inactive), since 1993; Trustee of Short Term Asset
Reserves 1984-1996; general partner of Capital Growth Fund, a
venture capital partnership, 1979-1982; President of Geneve Corp.,
a venture capital fund, 1970-1978; formerly Chairman of Woodland
Capital Corp., a small business investment company; formerly Vice
President, W.R. Grace & Co; Director or Trustee of OCC Cash
Reserves, Inc., Oppenheimer Quest Global Value Fund, Inc.,
Oppenheimer Quest Value Fund, Inc., and Trustee of Quest For Value
Accumulation Trust, and of the Rochester Group of Funds, each of
which is an open-end investment company.
David A. Duffy, Trustee, 36 Reliance Drive, Poppasquash Point,
Bristol, Rhode Island 02809
President, Duffy & Shanley, Inc., an advertising, marketing and
public relations firm since 1973; Chairman, Rhode Island Public
Telecommunications Authority and Rhode Island Sports Council;
Member of the Governor's Commission on Bias and Prejudice; Officer
of numerous civic, religious and educational organizations
including the Rhode Island and Southeastern New England Region of
the National Conference of Christians & Jews, the Greater
Providence Chamber of Commerce, the Strategic Planning Committee of
the Diocese of Providence and the Board of Trustees of Providence
College; he has been the recipient of numerous awards for public
service.
Robert L. Krakoff, Trustee, 257 Commonwealth Avenue, Boston,
Massachusetts 02116
Chairman and Chief Executive Officer of Advanstar Holdings, Inc.,
since 1996. Chairman and Chief Executive Officer of Cahners
Publishing Company 1991-1996; President of Cahners Publishing
Company 1989-1991; Executive Vice President of that company,
1985-1989; President of Cahners Exposition Group, a division of
that company, 1979-1985; Vice President of that company, 1973-1985;
Trustee of Capital Cash Management Trust since 1976; Director of
Centennial Capital Special Fund, Inc. until 1979; Trustee of
Trinity Liquid Assets Trust, 1982-1991; Director of Reed Elsevier
International PLC (an international publishing firm) since
1990-1996; Director of Freedom Communications, Inc. since 1996.
William J. Nightingale, Trustee, 1266 East Main Street, Stamford
Connecticut 06902
Chairman and founder (1975) and Senior Advisor since 1995 of
Nightingale & Associates, Inc., a general management consulting
firm focusing on interim management, divestitures, turnaround of
troubled companies, corporate restructuring and financial advisory
services; President, Chief Executive Officer and Director of Bali
Company, Inc., a manufacturer of women's apparel, which became a
subsidiary of Hanes Corporation, 1970-1975; prior to that, Vice
President and Chief Financial Officer of Hanes Corporation after
being Vice President-Corporate Development and Planning of that
company, 1968-1970; formerly Senior Associate of Booz, Allen &
Hamilton, management consultants, after having been Marketing
Manager with General Mills, Inc.; Trustee of Churchill Cash
Reserves Trust and Churchill Tax-Free Fund of Kentucky since 1993;
Director of Yale International, Inc. (various industrial
manufacturing companies); Glasstech Inc. (glass bending equipment
and engineering) and Ring's End, Inc. (retail lumber and building
supply chain).
J. William Weeks, Trustee, 380 Madison Avenue, New York, New York
10017
Trustee of Tax-Free Fund of Colorado since 1995; Senior Vice
President of Tax-Free Fund of Colorado 1992-1995; Vice President of
Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust
of Oregon and Churchill Tax-Free Fund of Kentucky, 1990-1995;
Senior Vice President or Vice President of the Bond and Equity
Funds and Vice President of Short Term Asset Reserves and Pacific
Capital Cash Assets Trust, 1984-1988; President and Director of
Weeks & Co., Inc., financial consultants, since 1978; limited
partner and investor in various real estate partnerships since
1988; Partner of Alex. Brown & Sons, investment bankers, 1966-1976;
Vice President of Finance and Assistant to the President of Howard
Johnson Company, a restaurant and motor lodge chain, 1961-1966;
formerly with Blyth & Co., Inc., investment bankers.
Stephen J. Caridi, Vice President, 380 Madison Avenue, New York,
New York, 10017
Vice President of the Distributor since 1995, Assistant Vice
President, 1988-1995, Marketing Associate, 1986-1988; Vice
President of Tax-Free Fund For Utah since 1993; Mutual Funds
coordinator of Prudential Bache Securities, 1984-1986; Account
Representative of Astoria Federal Savings and Loan Association,
1979-1984.
William C. Wallace, Vice President, 380 Madison Avenue, New York,
New York 10017
Vice President of Capital Cash Management Trust and Pacific Capital
Cash Assets Trust since 1984; Senior Vice President of Hawaiian
Tax-Free Trust since 1985 and Vice President, 1984-1985; Senior
Vice President of Tax-Free Trust of Arizona since 1989 and Vice
President, 1986-1988; Vice President of Tax-Free Trust of Oregon
since 1986, of Churchill Tax-Free Fund of Kentucky and Tax-Free
Fund of Colorado since 1987, of Pacific Capital Tax-Free Cash
Assets Trust and Pacific Capital U.S. Treasuries Cash Assets Trust
since 1988; Secretary and Director of STCM Management Company, Inc.
since 1974; President of the Distributor since 1995 and formerly
Vice President of the Distributor, 1986-1992; Member of the Panel
of Arbitrators, American Arbitration Association, since 1978;
Assistant Vice President, American Stock Exchange, Market
Development Division, and Director of Marketing, American Gold Coin
Exchange, a subsidiary of the American Stock Exchange, 1976-1984.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer of
Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of the
Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New York
10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond and
Equity Funds and of Aquila Distributors, Inc. since 1992; Associate
Director of Furman Selz Incorporated, 1991-1992; Vice President of
Scudder, Stevens & Clark, Inc. and Treasurer of Scudder
Institutional Funds, 1989-1991; Vice President of Lazard Freres
Institutional Funds Group, Treasurer of Lazard Freres Group of
Investment Companies and HT Insight Funds, Inc., 1986-1988; Vice
President of Lehman Management Co., Inc. and Assistant Treasurer of
Lehman Money-Market Funds, 1981-1985; Controller of Seligman Group
of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New York
10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines & Mone
LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary of the
Aquila Money-Market Funds and the Aquila Bond and Equity Funds
since 1982; Secretary of Trinity Liquid Assets Trust, 1982-1985 and
Trustee of that Trust, 1985-1986; Secretary of Oxford Cash
Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New York,
New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995 and Vice President of the Aquila
Money-Market Funds since 1990; Vice President of the Administrator
since 1990; Investment Services Consultant and Bank Services
Executive of Wright Investors' Service, a registered investment
adviser, 1983-1989; Member of the American Finance Association, the
Western Finance Association and the Society of Quantitative
Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995; Counsel to the Administrator and
the Distributor since 1995; formerly a Legal Associate for
Oppenheimer Management Corporation, 1993-1995.
Compensation of Trustees
The Fund does not pay fees to Trustees affiliated with the
Administrator or to any of the Fund's officers. During the fiscal
year ended June 30, 1996, the Fund paid $21,798 in fees and
reimbursement of expenses to its other Trustees. The Fund is one of
the 14 funds in the Aquilasm Group of Funds, which consist of
tax-free municipal bond funds, money market funds and two equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Fund and the compensation they
received during the Fund's fiscal year from other funds in the
Aquilasm Group of Funds.None of such Trustees has any pension or
retirement benefits from the Fund or any of the other funds in the
Aquila group.
[CAPTION]
<TABLE>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Fund Group now serves
<S> <C> <C> <C>
Vernon R.
Alden $983 $33,315 7
Paul Y.
Clinton $407 $3,246 2
David A.
Duffy $1,150 $1,150 1
Robert L.
Krakoff $650 $2,100 2
William J.
Nightingale $3,014 $15,239 3
J. William
Weeks $1,850 $6,017 2
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
Additional Information as to the Advisory Agreement
The Investment Advisory Agreement (the "Advisory Agreement")
between the Fund and Citizens Trust Company (the "Adviser")
contains the provisions described below, in addition to those
described in the Prospectus.
The Advisory Agreement may be terminated by the Adviser at any
time without penalty upon giving the Fund sixty days' written
notice, and may be terminated by the Fund at any time without
penalty upon giving the Adviser sixty days' written notice,
provided that such termination by the Fund shall be directed or
approved by the vote of a majority of all its Trustees in office at
the time or by the vote of the holders of a majority (as defined in
the 1940 Act) of its voting securities at the time outstanding and
entitled to vote; it automatically terminates in the event of its
assignment (as so defined).
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations thereunder, the Adviser is not liable for any loss
sustained by the adoption of any investment policy or the purchase,
sale or retention of any security and permits the Adviser to act as
investment adviser for any other person, firm or corporation. The
Fund agrees to indemnify the Adviser to the full extent permitted
under the Fund's Declaration of Trust.
The Advisory Agreement states that it is agreed that the
Adviser shall have no responsibility or liability for the accuracy
or completeness of the Fund's Registration Statement under the
Securities Act of 1933 and the 1940 Act, except for the information
supplied in writing by the Adviser specifically for inclusion
therein.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Advisory Agreement contains the following provisions as to
the Fund's portfolio transactions. In connection with its duties to
arrange for the purchase and sale of the Fund's portfolio
securities, the Adviser shall select such broker-dealers
("dealers") as shall, in the Adviser's judgment, implement the
policy of the Fund to achieve "best execution," i.e., prompt,
efficient and reliable execution of orders at the most favorable
net price. The Adviser shall cause the Fund to deal directly with
the selling or purchasing principal or market maker without
incurring brokerage commissions unless the Adviser determines that
better price or execution may be obtained by paying such
commissions; the Fund expects that most transactions will be
principal transactions at net prices and that the Fund will incur
little or no brokerage costs. The Fund understands that purchases
from underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked price.
In allocating transactions to dealers, the Adviser is authorized to
consider, in determining whether a particular dealer will provide
best execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as well
as the difficulty of the transaction in question, and thus need not
pay the lowest spread or commission available if the Adviser
determines in good faith that the amount of commission is
reasonable in relation to the value of the brokerage and research
services provided by the dealer, viewed either in terms of the
particular transaction or the Adviser's overall responsibilities as
to the accounts as to which it exercises investment discretion. If,
on the foregoing basis, the transaction in question could be
allocated to two or more dealers, the Adviser is authorized, in
making such allocation, to consider (i) whether a dealer has
provided research services, as further discussed below; and (ii)
whether a dealer has sold shares of the Fund or any other
investment company or companies having the Adviser as its
investment adviser or having the same Administrator, sub-adviser or
principal underwriter as the Fund. Such research may be in written
form or through direct contact with individuals and may include
quotations on portfolio securities and information on particular
issuers and industries, as well as on market, economic or
institutional activities. The Fund recognizes that no dollar value
can be placed on such research services or on execution services,
that such research services may or may not be useful to the Fund
and/or other accounts of the Adviser and that research received by
such other accounts may or may not be useful to the Fund.
During the fiscal year ended June 30, 1996 all of the Fund's
transactions were principal transactions and no brokerage
commissions were paid.
For the year ended June 30, 1996, fees of $84,631 and $99,350,
respectively, were accrued to the Adviser under the Fund's advisory
agreement and to the Administrator under the Fund's administration
agreement, of which $74,614 and 94,003, respectively, were waived.
In addition, the Administrator reimbursed the Fund $205,443 in
expenses. During the Fund's fiscal year ended June 30, 1995, fees
of $73,783 and $86,615 were accrued to the Adviser and
Administrator, respectively, all of which were waived. In addition,
the Administrator reimbursed the Fund for other expenses in the
amount of $197,821. During the Fund's fiscal year ended June 30,
1994, fees of $59,048 and $69,317 were accrued to the Adviser and
Administrator, respectively, all of which were waived; during that
period the Administrator reimbursed expenses of the Fund in the
amount of $196,726.
Glass-Steagall Act and Certain Other Banking Laws
The Adviser is a trust company organized under the laws of the
state of Rhode Island and a subsidiary of Citizens Financial Group,
Inc. ("CFG") a registered bank holding company. Therefore, it is
subject to applicable state and federal banking laws and
regulations. Federal banking laws and regulations presently
prohibit a bank holding company or affiliate from sponsoring,
organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, and generally
from underwriting, selling or distributing securities, such as
shares of the Fund.
The Adviser believes that it may perform the advisory services
for the Fund, with certain restrictions as enumerated below,
without violating state or federal banking laws and regulations
relating to the permissible activities of a trust company and
subsidiaries and affiliates of a bank holding company. Regulation
Y also prohibits a bank holding company and its subsidiaries from
engaging, directly or indirectly in the issue, flotation,
underwriting, public sale or distribution of securities of any
investment company for which it acts as investment adviser. The
conduct of securities brokerage activities by a bank holding
company or its subsidiaries, when conducted in combination with
investment advisory activities, is not deemed to be underwriting,
public sale or distribution of securities. The Adviser may
therefore act as agent and act upon the order and for the account
of the brokerage customers to purchase or sell shares of the Fund.
The Adviser may also recommend to its brokerage customers the
purchase of shares of the Fund and may mail the Fund's prospectus
to existing brokerage customers. The Adviser shall not, however,
make unsolicited mailings to the general public who are not
existing customers.
The Adviser must comply with the provisions of Regulation Y
(and the interpretations thereof) of the Board of Governors of the
Federal Reserve System that specify the terms on which a subsidiary
of a bank holding company may serve as investment adviser to an
open-end investment company. Among the restrictions imposed by the
Board of Governors are that the Adviser may not purchase shares of
the Fund for its own account or for discretionary accounts managed
by it, extend credit to the Fund or accept securities of the Fund
as collateral for a loan whose purpose is to purchase securities of
the Fund.
Changes in federal or state banking laws and regulations
related to the permissible activities of a trust company or
subsidiaries and affiliates of a bank holding company, as well as
judicial or administrative decisions or interpretations of present
and future statutes and regulations, could prevent the Adviser from
continuing to serve as investment adviser to the Fund or could
restrict the services which the Adviser is permitted to perform for
the Fund.
In the event that the Adviser is prohibited from acting as the
Fund's investment adviser, it is probable that the Board of
Trustees of the Fund would either recommend to the shareholders the
selection of another qualified adviser or, if that course of action
appeared impractical, that the Fund be liquidated.
Additional Information as to the Administration Agreement
The Administration Agreement (the "Administration Agreement")
between Aquila Management Corporation, as Administrator, and the
Fund contains the provisions described below in addition to those
described in the Prospectus.
Subject to the control of the Fund's Board of Trustees, the
Administrator provides all administrative services to the Fund
other than those relating to its investment portfolio. As part of
such duties, the Administrator (i) provides office space,
personnel, facilities and equipment for the performance of the
following functions and for the maintenance of the Fund's
headquarters; (ii) oversees all relationships between the Fund and
its transfer agent, custodian, legal counsel, auditors and
principal underwriter, including the negotiation, subject to the
approval of the Fund's Board of Trustees, of agreements in relation
thereto, the supervision and coordination of the performance of
such agreements, and the overseeing of all administrative matters
which are necessary or desirable for effective operation and for
the sale, servicing, or redemption of the Fund's shares; (iii)
provides to the Adviser and to the Fund statistical and other
factual information and advice regarding economic factors and
trends, but does not generally furnish advice or make
recommendations regarding the purchase or sale of securities; (iv)
maintains the Fund's books and records and prepares (or assists
counsel and auditors in the preparation of) all required proxy
statements, reports to shareholders and Trustees, reports to and
other filings with the Securities and Exchange Commission and any
other governmental agencies, and tax returns, and oversees the
Fund's insurance relationships; (v) prepares, on the Fund's behalf
and at its expense, such applications and reports as may be
necessary to register or maintain the Fund's registration or that
of its shares under the securities or "Blue-Sky" laws of all such
jurisdictions as may be required from time to time; and (vi)
responds to any inquiries or other communications from shareholders
and broker-dealers, or if any such inquiry or communication is more
properly to be responded to by the Fund's shareholder servicing and
transfer agent or distributor, oversees such shareholder servicing
and transfer agent's or distributor's response thereto. Since the
Fund pays its own legal and audit expenses, to the extent that the
Fund's counsel and accountants prepare or assist in the preparation
of prospectuses, proxy statements and reports to shareholders, the
costs of such preparation or assistance are paid by the Fund.
Under the Administration Agreement, the Administrator is
responsible for the payment of certain printing and distribution
costs that are not borne by the Distributor, relating to
prospectuses, reports and sales literature to other than existing
shareholders. See above as to the expenses for which the
Administrator is also responsible under the Distribution Plan.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Administration Agreement may be terminated at any time
without penalty by the Administrator upon sixty days' written
notice to the Fund and the Adviser; it may be terminated by the
Fund at any time without penalty upon giving the Administrator
sixty days' written notice, provided that such termination by the
Fund shall be directed or approved by a vote of a majority of the
Trustees in office at the time, including a majority of the
Trustees who are not interested persons of the Fund. In either case
the notice provision may be waived.
The Administration Agreement provides that the Administrator
shall not be liable for any error in judgement or for any loss
suffered by the Fund in connection with the matters to which the
Administration Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence of the
Administrator in the performance of its duties, or from reckless
disregard by it of its obligations and duties under the
Administration Agreement. The Fund agrees to indemnify the
Administrator to the full extent permitted by the Declaration of
Trust.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined at 4:00
p.m. New York time on each day the New York Stock Exchange is open
by dividing the value of the Fund's net assets by the total number
of its shares then outstanding. 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, so long as the Board of Trustees has determined that
amortized cost represents fair value for such securities. All other
portfolio securities are valued at the mean between bid and asked
quotations which, for Rhode Island Obligations, may be obtained
from a reputable pricing service or from one or more broker/dealers
dealing in Rhode Island Obligations, either of which may, in turn,
obtain quotations from broker/dealers or banks which deal in
specific issues. However, since Rhode Island 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 Rhode Island
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 Rhode Island Obligations, such procedures
may include "matrix" comparisons to the prices for other tax-free
debt instruments on the basis of the comparability of their
quality, yield, maturity and other special factors, if any,
involved. With the approval of the Fund's Board of Trustees, the
Adviser may at its own expense and without reimbursement from the
Fund employ a pricing service, bank or broker/dealer experienced in
such matters to perform any of the above described functions.
As indicated above, the net asset value per share of the
Fund's shares are determined on each day that the New York Stock
Exchange is open. That Exchange annually announces the days on
which it will not be open. The most recent announcement indicates
that it will not be open on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. However, that Exchange may
close on days not included in that announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a number
of instances in which the Fund's shares are sold or issued on a
basis other than the maximum public offering price, that is, the
net asset value plus the highest sales charge. Some of these relate
to lower or eliminated sales charges for larger purchases, whether
made at one time or over a period of time as under a Letter of
Intent or right of accumulation. (See the table of sales charges in
the Prospectus.) The reasons for these quantity discounts are, in
general, that (i) they are traditional and have long been permitted
in the industry and are therefore necessary to meet competition as
to sales of shares of other funds having such discounts; and (ii)
they are designed to avoid an unduly large dollar amount of sales
charge on substantial purchases in view of reduced selling
expenses. Quantity discounts are made available to certain related
persons ("single purchasers") for reasons of family unity and to
provide a benefit to tax exempt plans and organizations.
The reasons for the other instances in which there are reduced
or eliminated sales charges are as follows. Exchanges at net asset
value are permitted because a sales charge has already been paid on
the shares exchanged. Sales without sales charge are permitted to
Trustees, officers and certain others due to reduced or eliminated
selling expenses and/or since such sales may encourage incentive,
responsibility and interest and an identification with the aims and
policies of the Fund. Limited reinvestments of redemptions at no
sales charge are permitted to attempt to protect against mistaken
or incompletely informed redemption decisions. Shares may be issued
at no sales charge in plans of reorganization due to reduced or
eliminated sales expenses and since, in some cases, such issuance
is exempted in the 1940 Act from the otherwise applicable
restrictions as to what sales charge must be imposed. In no case in
which there is a reduced or eliminated sales charge are the
interests of existing shareholders adversely affected since, in
each case, the Fund receives the net asset value per share of all
shares sold or issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A or Y Shares of the Fund having
a net asset value of at least $5,000 you may establish an Automatic
Withdrawal Plan under which you will receive a monthly or quarterly
check in a stated amount, not less than $50. Stock certificates
will not be issued for shares held under an Automatic Withdrawal
Plan. All dividends and distributions must be reinvested. Shares
will be redeemed on the last business day of the month or quarter
as may be necessary to meet withdrawal payments.
Redemption of shares for withdrawal purposes may reduce or
even liquidate the account. Monthly or quarterly payments paid to
shareholders may not be considered as a yield or income on
investment.
ADDITIONAL TAX INFORMATION
Any investor who incurs a sales commission on a purchase of
shares of one mutual fund (the original fund) and who then sells
such shares or exchanges them for shares of a different mutual fund
without having held them at least 91 days must reduce the tax basis
for the shares sold or exchanged to the extent that the standard
sales commission charged for acquiring shares in the exchange or
later acquiring shares of the original fund or another fund is
reduced because of the shareholder's having owned the original fund
shares. The effect of the rule is to increase the investor's gain
or reduce his or her loss on the original fund shares. The amount
of the basis reduction on the original fund shares, however, is
added on the investor's basis for the fund shares acquired in the
exchange or later acquired. The provision applies to commissions
charged after October 3, 1989.
CONVERSION OF CLASS C SHARES
Level-Payment Class Shares ("Class C Shares") of the Fund,
which you hold will automatically convert to Front-Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the sixth
anniversary of the your initial purchase of such Class C Shares
occurs. For these purposes, the date of your initial purchase shall
mean (1) the first business day of the month in which such Class C
Shares were issued to you, or (2) for Class C Shares of the Fund
you have obtained through an exchange or series of exchanges under
the Exchange Privilege (see "Exchange Privilege" in the
Prospectus), the first business day of the month in which you made
the original purchase of Class C Shares so exchanged. For
conversion purposes, Class C Shares purchased through reinvestment
of dividends or other distributions paid in respect of Class C
Shares will be held in a separate sub-account. Each time any Class
C Shares in your regular account (other than those in the
sub-account) convert to Class A Shares, a pro-rata portion of the
Class C Shares in the sub-account will also convert to Class A
Shares. The portion will be determined by the ratio that your Class
C Shares then converting to Class A Shares bears to the total of
your Class C Shares not acquired through reinvestment of dividends
and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the dividends
and other distributions paid on Class A Shares and Class C Shares
will not result in "preferential dividends" under the Code; and (2)
the conversion of shares does not constitute a taxable event. If
the conversion feature ceased to be available, the Class C Shares
of the Fund would not be converted and would continue to be subject
to the higher ongoing expenses of the Class C Shares beyond six
years from the date of purchase. The Fund has no reason to believe
that these conditions for the availability of the conversion
feature will not continue to be met.
If the Fund implements any amendments to its Distribution Plan
that would increase materially the costs that may be borne under
such Distribution Plan by Class A Shares shareholders, Class C
Shares will stop converting into Class A Shares unless a majority
of Class C Shares shareholders, voting separately as a class,
approve the proposal.
GENERAL INFORMATION
Possible Additional Series
When an additional Series (as discussed in the Prospectus) is
created by the Board of Trustees and becomes operational, shares of
each such Series will be entitled to vote as a Series only to the
extent permitted by the 1940 Act (see below) or as permitted by the
Board of Trustees. Income and operating expenses will be allocated
among the Fund and the additional series in a manner acceptable to
the Board of Trustees.
Under Rule 18f-2 under the 1940 Act, any matter required to be
submitted to shareholder vote is not deemed to have been
effectively acted upon unless approved by the holders of a
"majority" (as defined in that Rule) of the voting securities of
each Series affected by the matter. Such separate voting
requirements do not apply to the election of trustees or the
ratification of the selection of accountants. Rule 18f-2 contains
special provisions for cases in which an advisory contract is
approved by one or more, but not all, Series. A change in
investment policy may go into effect as to one or more Series whose
holders so approve the change, even though the required vote is not
obtained as to the holders of other affected Series.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable as
partners for the obligations of the 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 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.
The Declaration of Trust further indemnifies the Trustees of
the Fund out of the Fund's property and provides that they will not
be liable for errors of judgment or mistakes of fact or law; but
nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her
office.
Ownership of Securities
Of the Class A Shares of the Fund outstanding on September 30,
1996, Merrill, Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 30561
New Brunswick, NJ held of record 391,284 shares (10.2%) On the
basis of information received from the holder, the Fund's
management believes that all of such shares are held for the
benefit of brokerage clients.
Of the Class C Shares of the Fund outstanding on September 30,
1996, Merrill, Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 30561
New Brunswick, NJ held of record 7,768 shares (68.1%). On the basis
of information received from the holder, the Fund's management
believes that all of such shares are held for the benefit of
brokerage clients. In addition, Thomas E. Powell and Rose Marie
Powell JTWROS held 1,496 shares (13.1%), W. Thomas Knight held
2,093 shares (18.3%).
Of the Class Y Shares of the Fund outstanding on September 30,
1996, Aquila Management Corporation held of record 11 shares
(100%).
The Fund's management is not aware of any other person owning
of record or beneficially 5% or more of the shares of any class of
Fund's outstanding shares as of that date.
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company, N.A., is
responsible for holding the Fund's assets.
The Fund's auditors, KPMG Peat Marwick LLP, will perform an
annual audit of the Fund's financial statements.
Underwriting Commissions
During the Fund's fiscal year ended June 30, 1996 the
aggregate dollar amount of sales charges on sales of shares of the
Fund was $225,063 and the amount retained by the Distributor was
$3,823.
Financial Statements
The financial statements for the Fund for the year ended June
30, 1996, which are contained in the Annual Report for that fiscal
year, are hereby incorporated by reference into the Additional
Statement. Those financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors, whose report thereon is
incorporated herein by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Municipal Bond Ratings
Standard & Poor's. A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment may
take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price
or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the highest
rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher
rated categories.
Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Standard & Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing the
designation SP-1 are deemed very strong or to have strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+)
designation. Notes bearing the designation SP-2 are deemed to have
a satisfactory capacity to pay principal and interest.
Moody's Investors Service. A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in
Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's Investment
Grade as MIG 1 through MIG 4. In the case of variable rate demand
obligations (VRDOs), two ratings are assigned; one representing an
evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an
evaluation of the degree of risk associated with the demand
feature. The short-term rating assigned to the demand feature of
VRDOs is designated as VMIG. When no rating is applied to the long
or short-term aspect of a VRDO, it will be designated NR. Issues or
the features associated with MIG or VMIG ratings are identified by
date of issue, date of maturity or maturities or rating expiration
date and description to distinguish each rating from other ratings.
Each rating designation is unique with no implication as to any
other similar issue of the same obligor. MIG ratings terminate at
the retirement of the obligation while VMIG rating expiration will
be a function of each issuer's specific structural or credit
features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality. Margins
of protection are ample although not so large
as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access for
refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of an
investment security is present and although
not distinctly or predominantly speculative,
there is specific risk.
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INVESTMENT ADVISER
Citizens Trust Company
One Citizens Plaza
Providence, Rhode Island 02903
ADMINISTRATOR and FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Vernon R. Alden
Paul Y. Clinton
David A. Duffy
Robert L. Krakoff
William J. Nightingale
J. William Weeks
OFFICERS
Lacy B. Herrmann, President
Stephen J. Caridi, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
Aquila
Narragansett
Insured Tax-Free Income Fund
STATEMENT OF
ADDITIONAL
INFORMATION
One of The
Aquilasm Group Of Funds
