ANNUAL
REPORT
JUNE 30, 1996
A TAX-FREE INCOME INVESTMENT
AQUILA
(Logo of Narragansett Insured Tax-Free Income Fund: Sailboat atop waves with
seagulls above)
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
(Logo of Narragansett Insured Tax-Free Income Fund: Sailboat atop waves with
seagulls above)
NARRAGANSETT INSURED TAX-FREE INCOME FUND
ANNUAL REPORT
"PROTECTING YOUR INVESTMENT
WHILE EARNING TAX-FREE INCOME"
August 20, 1996
Dear Investor:
Rhode Island is a great State with many positive attributes.
However, we doubt if anyone will disagree with the fact that the State and
various of its communities are still experiencing financial difficulties.
Nevertheless, we do see the prospects for a resurgence in
various business areas. We, therefore, remain hopeful that over time the
current financial difficulties will pass. Meanwhile, though, we remain very
realistic in the investment management approach of Narragansett Insured
Tax-Free Income Fund. Such realism means seeing things in a manner which does
not involve wearing "rose-colored glasses."
CREDIT RISK PROTECTION
This means that management sees, as key goals of the Fund,
continuing protection of investors' assets to the maximum extent practicable
while at the same time generating attractive returns for shareholders. This
remains the reason why the Fund has taken the investment approach of focusing
upon municipal securities having the highest credit rating attainable - AAA.
Moreover, management has generally sought, as an extra measure
of protection, to have the Fund's holdings of municipal securities insured by
nationally-renown specialized insurance companies. Such insurance coverage is
designed to make sure that there is timely payment of interest and principal
when due, in the remote event an issuer experienced problems.
These two steps offer the maximum amount of credit risk
protection that we can provide to shareholders. We believe that this goal is
of utmost importance for investors in the Fund. It allows shareholders to
sleep at night better.
MARKET FORCES
These above mentioned steps offset potential credit risks with
the Fund's investment holdings. They do not, however, speak to market forces.
Market forces are present with all types of securities. And, they can result
in changes in share price and rate of return provided by the Fund to
shareholders.
Indeed, we live in an ever changing world.
<TABLE>
<CAPTION>
6/30/96 12/31/95 6/30/95
<S> <C> <C> <C>
SHARE NET ASSET VALUE $ 9.93 $10.24 $ 9.80
DISTRIBUTION YIELD 5.00%* 5.16%* 5.41%*
</TABLE>
As the above table illustrates, the price of the Fund's shares
can and does move up and down over time. Also, the rate of DOUBLE TAX-FREE
income return distributed to shareholders can and will change. Movements in
these two key areas reflect the changes in market conditions that occurred
over the time period of this past fiscal year.
* Indicates trailing 12-month yield distributed to shareholders as
measured against share maximum public offering price.
Yet, while changes have occurred, looking at these numbers in a
broader perspective, there has tended to be a relatively high level of
stability to the Fund's performance results. Indeed, these results compare
favorably to what occurred in the municipal securities market itself during
this period.
You should be aware that market forces are governed by several
main factors in the area of fixed-income securities, which includes the
tax-free municipal securities in which the Fund invests.
Key among these factors is action taken by the Federal Reserve
Board. This Federal government organization has the power to raise and lower
interest rates in key areas which, in turn, can have an effect on all types
of fixed-income securities. The Fed can also control the supply of money in
our financial system - increasing or decreasing the amount of dollars in
circulation. This, in turn, can affect the market.
The other key factor influencing market action is the
psychology of investors. By psychology of investors, we mean the level of
confidence that investors as a whole have toward what is happening in our
country's overall financial affairs. We now live in a world that is not only
ever changing, but also one that is very global in nature. Consequently, the
psychology factor within market activity is influenced not only by the
confidence level, or lack thereof, which investors in Rhode Island and the
United States have, but also by the confidence level that investors all
around the world have toward the handling of major financial affairs in our
country.
Altogether, then, what happens to the share price and
distribution return of the Fund is very much driven by market forces. This is
an important factor which shareholders in the Fund must appreciate and come
to understand. And, this is the case whether investors own Rhode Island
municipal securities individually, or whether they do so through the
portfolio of such municipal securities as the Fund provides to shareholders.
It is also the reason why we say that an investment in the Fund should be
viewed as long-term in nature.
THE VALUE THE FUND PROVIDES
While accepting the fact that market forces can and do have an
effect upon the Fund's performance, it must also be recognized that
Narragansett Insured Tax-Free Income Fund brings to bear very specific
factors to dampen the extremes of such market forces.
Most significant of these factors is the professional
investment management team of the Fund's Investment Adviser, Citizens Trust
Company. Under the guidance of the Fund's management and the Trustees, the
Investment Adviser oversees on a continuing basis the investments of the
Fund. And, in doing so, they moderate forces that can or might cause
anxieties with investors. A very special element that the professional
investment management team brings to bear is the implementation of the Fund's
investment approach.
QUALITY FACTOR
As we have mentioned, the Fund's focus is upon the highest
credit quality securities attainable - AAA - with its investments. Although
municipal securities having high credit ratings can still be and are affected
by market forces of an adverse nature, they tend to rebound in price
relatively quickly and significantly.
<PAGE>
DIVERSIFICATION FACTOR
Another very important factor in moderating market forces is
diversification among portfolio holdings.
At June 30, 1996, the Fund had 116 SEPARATE ISSUES within the
investment portfolio, representing many different municipal projects within
numerous communities throughout Rhode Island.
MATURITY FACTOR
Through having a variety of different maturities among the
securities in the Fund's portfolio, it is possible to avoid extremes in
volatility that can come about with market fluctuations. As you are aware,
short maturity securities possess little fluctuation in price, but pay low
yields. On the other hand, long maturity securities give higher yields, but
possess considerable price volatility due to the uncertainties involved over
the time between the present and the specified maturity date. The Fund seeks
an average intermediate maturity within the investment portfolio. Currently,
at June 30, 1996, the average maturity was 12 YEARS, so as to provide an
adequate income return, yet only moderate volatility in share price.
INCOME RETURN
As the table on page one illustrates, the trailing 12-month
yield distributed to shareholders, as measured against average maximum public
offering price, was running at the rate of 5.00% at June 30, 1996.
This is somewhat lower than it was six months and a year
earlier. However, it reflects the declining level of general market return of
municipal securities over this period.
Despite the modest decline in yield to shareholders, it must be
remembered that this income amount is the DOUBLE TAX-FREE return that
shareholders received from the Fund.
It is worth noting from the below graph that one would have had
to earn a substantially higher income return from a taxable investment in
order to match the DOUBLE TAX-FREE amount distributed by the Fund.
[Graphic of Bar Chart with the following information:]
NARRAGANSETT INSURED TAX-FREE INCOME FUND'S DOUBLE TAX-FREE
DISTRIBUTION RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE
AN INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
<TABLE>
<CAPTION>
Tax Bracket Taxable Equivalent Rate Double Tax-Free Distribution Rate
<C> <C> <C>
28% 7.52% 5.00%
31% 7.92% 5.00%
36% 8.67% 5.00%
39.6% 9.29% 5.00%
</TABLE>
<PAGE>
As you will note, if one were in the 28% Federal income tax
bracket, a TAXABLE return of 7.52% would have to be achieved to match the
5.00% DOUBLE TAX-FREE return of the Fund. In the highest Federal income tax
bracket of 39.6%, the equivalent return would have had to have been 9.29%. In
general, it would not have been possible for an investor to obtain such
levels of taxable return unless additional risk was taken in the form of
lesser quality or longer maturity securities, or both such elements.
COMMITMENT TO CONSISTENCY
Management is committed to providing shareholders with as
consistent results from Narragansett Insured Tax-Free Income Fund as are
possible to achieve, considering prevailing market forces.
You should be aware that, while the Fund has taken very
specific steps to protect against credit risk, we are not able to eliminate
completely the market forces that swirl around us on a continuing basis.
However, as indicated, a number of proven investment management
techniques are used by the Fund to moderate market forces.
YOUR CONFIDENCE APPRECIATED
We again wish to emphasize that your confidence in Narragansett
Insured Tax-Free Income Fund is greatly appreciated. You can be assured that
management will do everything in its power to merit your continued trust.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The graph below illustrates the value of $10,000 invested in
Class A shares of Narragansett Insured Tax-Free Income Fund at inception of
the Fund in September, 1992 and maintaining this investment through the
Fund's latest fiscal year end, June 30, 1996, as compared with a hypothetical
similar size investment in the Lehman Brothers Municipal Bond Index (the
"Index") of municipal securities and the Consumer Price Index (a cost of
living index) over that same period. The total return of the investment in
the Fund is shown after deduction of the maximum sales charge of 4% at the
time of initial investment. It also reflects deduction of the Fund's annual
operating expenses and reinvestment of monthly dividends without sales
charge. On the other hand, the Index does not reflect any sales charge nor
operating expenses but does reflect reinvestment of interest. The performance
of the Fund's other classes, first offered on May 1, 1996, may be greater or
less than the Class A shares performance indicated on this graph, depending
on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
It should also be specifically noted that the Index is nationally
oriented and consisted, over the period covered by the graph, of an unmanaged
mix of between 12,000 to 32,000 investment-grade long-term municipal
securities of issuers throughout the United States. The Fund, being a
single-State fund, is primarily restricted to purchasing insured tax-free
municipal bonds issued by the State of Rhode Island, its thirty-nine cities
and towns and various political subdivisions. The maturities, market prices,
and behavior of the individual securities in the Fund's investment portfolio
can be affected by local and regional factors which might well result in
variances from the market action of the securities in the Index.
Consequently, much of the difference in performance of the Index
versus the Fund can be attributed to the lack of application of annual
operating expenses and initial sales charge to the Index. Additionally, a
portion of the difference in performance can be attributed to the different
characteristics in the single-state market of the insured securities in the
Fund's portfolio as compared with the national orientation of the securities
in the Index.
Since its inception, the Fund has been managed to provide as
stable a share value as possible consistent with producing a competitive
income return to shareholders. It has not been managed for maximum total
return, since one of the aims of management in structuring the portfolio of
the Fund is to reduce fluctuations in the price of the Fund's shares
resulting from changes in interest rates.
As can be observed, however, the pattern of the Fund's results
and that of the Index over the period since inception of the Fund track quite
similarly, even though they are not entirely comparable in character.
[Graphic of Line Chart with the following information:]
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
LEHMAN BROTHERS FUND AFTER SALES COST OF
MUNICIPAL BOND INDEX CHARGE AND EXPENSES LIVING INDEX
<C> <C> <C>
10,000 9,600 10,000
10,182 9,709 10,085
10,905 10,478 10,227
11,432 11,011 10,361
10,927 10,355 10,489
10,844 10,290 10,630
11,891 11,374 10,800
12,738 12,200 10,907
12,681 12,146 11,098
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
[Table with the following information:]
FUND'S AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the Period Ended 1 Year Life of Fund
June 30, 1996 Since 9/10/92
<S> <C> <C>
Including Sales 2.44% 5.24%
Charge and Expenses
</TABLE>
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
Narragansett Insured Tax-Free Income Fund (the "Fund") has
strived to provide as high a level of DOUBLE TAX-FREE income as possible
within self-imposed quality constraints. The Fund has purchased only
municipal securities rated AAA by nationally-renown credit rating services.
As an extra measure of credit protection to shareholders, nearly all
securities owned by the Fund are also insured by nationally-prominent
specialized insurance companies as to timely payment when due of principal
and interest. A maximum average maturity profile of under 15 years has been
and will continue to be maintained for the Fund's portfolio in order to
produce a reasonable level of income return, yet relatively high stability
for the Fund's share price. At the June 30, 1996 fiscal year-end, the
portfolio had an average maturity of 12 years, down from 13 years at fiscal
year-end 1995.
While 1994 was one of the worst years in over five decades for
the fixed income markets, 1995 turned out to be an exceptionally strong year
for fixed income investments, producing double digit total returns. As the
economic data viewed during calendar 1995 continued to portray a slowing
economy and a rate of inflation below 3%, interest rates moved lower and by
year end had declined by 200 basis points (2%). The economy slowed to a level
where the Federal Reserve, concerned about negative Gross Domestic Product
and a possible recession, chose to lower short term rates by 1/4 of 1% upon
three separate occasions in July, 1995, December, 1995, and January, 1996.
These reductions were good news for the bond market and as interest rates
moved lower the value of fixed income portfolios increased.
However, with two quarters of 1996 behind us, a different
economic outlook has evolved. Current manufacturing activity, the improvement
in auto production, housing construction, and retail sales support the fact
that the economy is expanding and not slowing as so widely anticipated. This
growth has caused concern that it will be followed with an increase in
inflation as the economy is operating at close to capacity with a low level
of unemployment. Any further improvement in demand might cause prices and
wages to rise. These concerns have brought pressure on the fixed income
markets. As a result, long-term rates have risen by approximately 1% from
calendar year-end 1995 which has caused the value of bonds and bond funds to
decline. It is apparent that consumer confidence has improved, especially
with respect to job security. Bolstered by this, consumers continue to
accumulate debt. Since consumer spending represents approximately 2/3 of our
country's Gross Domestic Product, it is evident that it is consumer activity
that keeps the economy moving at its present pace.
It is anticipated that the high level of consumer debt which has
increased the level of credit delinquency, i.e., installment loans, mortgages
and credit cards, will result in an unprecedented rate of personal
bankruptcies. We expect this situation might cause consumers to show some
fiscal restraint in the second half of 1996. This might well result in
interest rates moving lower by year end and an improvement in the price of
fixed income portfolios and the per share value of the Fund. We will be
diligent to changes in the fixed income markets and to improvements that can
be made to the portfolio to enhance yield and per share value.
Given the current Federal income tax rates and the piggy-back
Rhode Island income tax rate, the Narragansett Insured Tax-Free Income Fund
produces a yield that is very attractive for Rhode Island residents when
compared to taxable fixed-income securities.
Management believes that having available to the Fund the locally
based Investment Adviser's knowledge of and experience in the Rhode Island
municipal market continues to add considerable value to the portfolio and
provides a distinct benefit to Fund shareholders.
The Fund's Investment Adviser will continue to manage the
portfolio with a strong emphasis on achieving a balance between providing
shareholders with share price stability, acceptable DOUBLE TAX-FREE income
return, and maintaining the highest standards of credit quality.
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Narragansett Insured Tax-Free Income Fund:
We have audited the accompanying statement of assets and liabilities of
Narragansett Insured Tax-Free Income Fund, including the statement of
investments, as of June 30, 1996, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each
of the years in the three-year period then ended and for the period September
10, 1992 (commencement of operations) to June 30, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 1996, by correspondence with the custodian.
An audit also includes assessing the accounting principles used, and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Narragansett Insured Tax-Free Income Fund as of June 30, 1996,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the three-year period then
ended and for the period September 10, 1992 (commencement of operations) to
June 30, 1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
August 16, 1996
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (55.9%) S&P VALUE
<C> <S> <C> <C>
$ 300,000 Town of Bristol, Rhode Island,
MBIA Insured
5.000%, 12/01/08 Aaa/AAA $ 286,500
100,000 Town of Bristol, Rhode Island,
MBIA Insured
6.000%, 12/15/11 Aaa/AAA 104,250
100,000 Town of Bristol, Rhode Island,
MBIA Insured
6.000%, 12/15/12 Aaa/AAA 103,875
1,000,000 Town of Bristol, Rhode Island,
MBIA Insured
5.100%, 08/15/07 Aaa/AAA 973,750
405,000 Town of Burrillville, Rhode
Island, AMBAC
Insured 5.300%, 07/15/08 Aaa/AAA 406,012
250,000 Town of Burrillville, Rhode
Island, MBIA
Insured 5.400%, 10/15/06 Aaa/AAA 256,875
250,000 Town of Burrillville, Rhode
Island, MBIA
Insured 5.500%, 10/15/07 Aaa/AAA 256,562
150,000 Town of Burrillville, Rhode
Island, MBIA
Insured 5.700%, 10/15/10 Aaa/AAA 152,250
500,000 Central Falls, Rhode Island,
MBIA Insured
4.900%, 11/15/05 Aaa/AAA 490,000
500,000 Central Falls, Rhode Island,
MBIA Insured
5.200%, 11/15/09 Aaa/AAA 485,625
300,000 Cranston, Rhode Island, MBIA
Insured 5.500%,
06/15/07 Aaa/AAA 303,375
1,120,000 Cranston, Rhode Island, MBIA
Insured 5.300%,
07/15/05 Aaa/AAA 1,129,800
345,000 Town of Cumberland, Rhode
Island, MBIA Insured
5.500%, 09/01/06 Aaa/AAA 354,056
500,000 Town of Cumberland, Rhode Island,
MBIA Insured
5.600%, 10/01/08 Aaa/AAA 508,750
400,000 Town of Lincoln, Rhode Island,
MBIA Insured
6.000%, 01/15/06 Aaa/AAA 409,436
400,000 Town of Lincoln, Rhode Island,
MBIA Insured
5.100%, 01/15/06 Aaa/AAA 397,000
400,000 Town of Lincoln, Rhode Island,
MBIA Insured
5.200%, 08/15/06 Aaa/AAA 400,000
850,000 Town of Lincoln, Rhode Island,
MBIA Insured
5.500%, 08/15/10 Aaa/AAA 850,000
100,000 Town of Lincoln, Rhode Island,
AMBAC Insured
5.625%, 04/15/11 Aaa/AAA 100,500
300,000 Narragansett, Rhode Island,
MBIA Insured 5.100%,
09/15/06 Aaa/AAA 297,375
1,000,000 Narragansett, Rhode Island,
MBIA Insured 5.300%,
09/15/08 Aaa/AAA 990,000
150,000 Newport, Rhode Island, MBIA
Insured 6.550%,
08/15/07 Aaa/AAA 163,687
250,000 Newport, Rhode Island, Series B,
FGIC Insured
4.900%, 05/15/06 Aaa/AAA 242,500
500,000 Newport, Rhode Island, Series B,
FGIC Insured
5.000%, 05/15/07 Aaa/AAA 483,125
500,000 Newport, Rhode Island, Series B,
FGIC Insured
5.100%, 05/15/08 Aaa/AAA 484,375
100,000 Pawtucket, Rhode Island, MBIA
Insured 6.650%,
09/15/06 Aaa/AAA 109,000
310,000 Pawtucket, Rhode Island, FGIC
Insured 5.625%,
04/15/07 Aaa/AAA 317,750
25,000 Providence, Rhode Island, MBIA
Insured 6.600%,
01/15/01 Aaa/AAA 26,969
100,000 Providence, Rhode Island, MBIA
Insured 5.500%,
01/15/04 Aaa/AAA 102,750
100,000 Providence, Rhode Island, MBIA
Insured 5.900%,
01/15/09 Aaa/AAA 104,625
200,000 Providence, Rhode Island, MBIA
Insured 5.250%,
01/15/12 Aaa/AAA 188,000
100,000 Providence, Rhode Island, Series
A, MBIA
Insured 5.400%, 08/01/01 Aaa/AAA 103,250
90,000 Providence, Rhode Island, Series
A, MBIA
Insured 5.700%, 08/01/04 Aaa/AAA 93,825
500,000 East Providence, Rhode Island,
MBIA Insured
5.400%, 05/15/07 Aaa/AAA 507,500
100,000 Commonwealth of Puerto Rico,
Series A, MBIA
Insured 5.750%, 07/01/09 Aaa/AAA 102,750
50,000 Commonwealth of Puerto Rico,
Series A, CGIC
Insured 6.000%, 07/01/14 Aaa/AAA 51,250
100,000 Commonwealth of Puerto Rico,
MBIA Insured
6.000%, 07/01/14 Aaa/AAA 102,500
500,000 Commonwealth of Puerto Rico,
AMBAC Insured
5.850%, 07/01/15 Aaa/AAA 505,625
500,000 Commonwealth of Puerto Rico,
AMBAC Insured
5.875%, 07/01/18 Aaa/AAA 505,000
50,000 State of Rhode Island Refunding
Series A, FGIC
Insured 6.000%, 06/15/02 Aaa/AAA 52,875
300,000 Rhode Island Consolidated Capital
Development Loan 1991 Series
B, AMBAC Insured 6.250%,
05/15/07 Aaa/AAA 319,500
380,000 Rhode Island Consolidated Capital
Development Loan 1991 Series
B, MBIA Insured 6.250%,
05/15/09 Aaa/AAA 407,550
100,000 Rhode Island Consolidated Capital
Development Loan 1991 Series
B, MBIA Insured 6.250%,
05/15/10 Aaa/AAA 105,875
1,050,000 Rhode Island Consolidated Capital
Development Loan 1992 Series
A, FGIC Insured 5.500%,
08/01/07 Aaa/AAA 1,065,750
25,000 Rhode Island Consolidated Capital
Development Loan 1992 Series
A, FGIC Insured 5.500%,
08/01/08 Aaa/AAA 25,156
1,000,000 Rhode Island Consolidated Capital
Development Loan 1993, AMBAC
Insured 4.800%, 06/15/02 Aaa/AAA 996,250
1,000,000 Rhode Island Consolidated Capital
Development Loan 1993 Series
A, FGIC Insured 5.100%,
11/01/13 Aaa/AAA 916,250
375,000 Town of Scituate, Rhode Island,
MBIA Insured
5.500%, 04/01/09 Aaa/AAA 377,813
390,000 South Kingstown, Rhode Island,
MBIA Insured
5.000%, 03/15/08 Aaa/AAA 376,838
390,000 South Kingstown, Rhode Island,
MBIA Insured
5.050%, 03/15/09 Aaa/AAA 375,863
125,000 South Kingstown, Rhode Island,
MBIA Insured
5.125%, 06/01/08 Aaa/AAA 122,031
170,000 South Kingstown, Rhode Island,
MBIA Insured
5.200%, 06/01/09 Aaa/AAA 165,325
170,000 South Kingstown, Rhode Island,
MBIA Insured
5.250%, 06/01/10 Aaa/AAA 165,325
100,000 South Kingstown, Rhode Island,
MBIA Insured
6.300%, 12/15/11 Aaa/AAA 106,625
400,000 South Kingstown, Rhode Island,
AMBAC Insured
4.900%, 11/15/07 Aaa/AAA 385,500
150,000 Warwick, Rhode Island, MBIA
Insured 6.100%,
11/15/01 Aaa/AAA 159,000
50,000 Warwick, Rhode Island, FGIC
Insured 7.000%,
11/15/02 Aaa/AAA 54,438
195,000 Warwick, Rhode Island, FGIC
Insured 5.600%,
08/01/14 Aaa/AAA 191,344
500,000 West Warwick, Rhode Island,
MBIA Insured
5.800%, 01/01/04 Aaa/AAA 522,500
500,000 West Warwick, Rhode Island,
MBIA Insured
5.900%, 01/01/05 Aaa/AAA 521,875
385,000 Woonsocket, Rhode Island,
MBIA Insured 5.125%,
03/01/11 Aaa/AAA 367,194
Total General Obligation
Bonds 21,231,349
REVENUE BONDS (42.3%)
Higher Education Revenue Bonds
(11.2%)
25,000 Rhode Island Health & Education
Building Corp - Higher
Education, Various Purpose
Series 1990 B,
CGIC Insured 7.250%, 09/15/06 Aaa/AAA 27,500
100,000 Rhode Island Health & Education
Building Corp - Bryant College,
MBIA Insured 6.300%, 06/01/03 Aaa/AAA 107,000
50,000 Rhode Island Health & Education
Building Corp - Bryant College,
MBIA Insured 5.550%, 06/01/03 Aaa/AAA 51,500
100,000 Rhode Island Health & Education
Building Corp - Bryant College,
MBIA Insured 5.800%, 06/01/05 Aaa/AAA 103,625
100,000 Rhode Island Health & Education
Building Corp - Johnson &
Wales Series 1993, Connie Lee
Insured 5.200%, 04/01/04 NR/AAA 99,750
200,000 Rhode Island Health & Education
Building Corp - Johnson &
Wales Series 1992A, Connie Lee
Insured 5.875%, 04/01/05 NR/AAA 207,500
150,000 Rhode Island Health & Education
Building Corp - Johnson & Wales
Series 1993, Connie Lee Insured
5.750%, 04/01/12 NR/AAA 148,687
500,000 Rhode Island Health & Education
Building Corp - Johnson & Wales
Series 1993, Connie Lee Insured
5.250%, 04/01/16 NR/AAA 456,875
150,000 Rhode Island Health & Education
Building Corp - Johnson &
Wales, Connie Lee Insured
6.375%, 04/01/12 NR/AAA 156,750
300,000 Rhode Island Health & Education
Building Corp - Providence
Series 1993, MBIA Insured
5.600%, 11/01/09 Aaa/AAA 298,500
300,000 Rhode Island Health & Education
Building Corp - Providence
Series 1993, MBIA Insured
5.600%, 11/01/10 Aaa/AAA 297,000
200,000 Rhode Island Health & Education
Building Corp - School of
Design Series 1992, MBIA
Insured
5.800%, 06/01/05 Aaa/AAA 207,250
500,000 Rhode Island Health & Education
Building Corp - Brown
University Series 1993, MBIA
Insured
5.400%, 09/01/18 Aaa/AAA 470,000
500,000 Rhode Island Health & Education
Building Corp - Brown
University Series 1993, MBIA
Insured
5.375%, 09/01/23 Aaa/AAA 461,875
55,000 Rhode Island Health & Education
Building Corp - Board of
Governors Series 1993A, MBIA
Insured
5.500%, 09/15/13 Aaa/AAA 53,350
245,000 Rhode Island Health & Education
Building Corp - Board of
Governors Series 1993B, MBIA
Insured
5.500%, 09/15/13 Aaa/AAA 237,650
140,000 Rhode Island Health & Education
Building Corp - Board of
Governors Series 1993A, MBIA
Insured
5.250%, 09/15/23 Aaa/AAA 127,575
450,000 Rhode Island Health & Education
Building Corp - Board of
Governors Series 1993A, MBIA
Insured
5.300%, 09/15/08 Aaa/AAA 440,438
150,000 Rhode Island Health & Education
Building Corp - Salve Regina
Series 1993, Connie Lee Insured
5.300%, 03/15/00 NR/AAA 152,250
150,000 Rhode Island Health & Education
Building Corp - Salve Regina
Series 1993, Connie Lee Insured
6.100%, 03/15/06 NR/AAA 158,250
4,263,325
Hospital Revenue Bonds (2.6%)
100,000 Rhode Island Health & Education
Building Corporation - Women &
Infants Hospital Series 1992,
CGIC Insured 6.150%, 09/01/05 Aaa/AAA 105,250
400,000 Rhode Island Health & Education
Building Corporation - Women &
Infants Hospital Series 1992,
CGIC Insured 6.350%, 09/01/07 Aaa/AAA 421,000
300,000 Rhode Island Health & Education
Building Corporation - Women &
Infants Hospital, CGIC Insured
6.550%, 09/01/13 Aaa/AAA 320,625
150,000 Rhode Island Health & Education
Building Corp - Kent County
Memorial Hospital Series 1992,
MBIA Insured 6.000%, 07/01/06 Aaa/AAA 155,625
1,002,500
Mortgage Revenue-Multi Family
(1.6%)
300,000 Rhode Island Housing & Mortgage
Finance Corp, 1995 Series A,
AMBAC Insured 5.550%, 07/01/05, Aaa/AAA 306,000
300,000 Rhode Island Housing & Mortgage
Finance Corp, 1995 Series A,
AMBAC Insured 5.450%, 07/01/04, Aaa/AAA 305,625
611,625
Water and Sewer Revenue Bonds
(1.0%)
250,000 Kent County Water Authority
Revenue Bonds, 1994 Series A,
5.700%, 07/15/04, MBIA Insured Aaa/AAA 259,063
100,000 Puerto Rico Commonwealth Aqueduct
& Sewer Authority, (Escrowed
and collateralized),
5.900%, 07/01/06 Aaa/AAA 102,875
361,938
Utility Revenue Bonds (1.7%)
100,000 Puerto Rico Electric Power
Authority, Series Q,
FSA Insured 5.750%, 07/01/07 Aaa/AAA 103,000
50,000 Puerto Rico Electric Power
Authority, Series O,
CGIC Insured 6.000%, 07/01/10 Aaa/AAA 51,375
500,000 Puerto Rico Telephone Authority,
Series M, MBIA
Insured 4.400%, 01/01/99 Aaa/AAA 498,750
653,125
Development Revenue Bonds (16.5%)
100,000 Rhode Island Convention Center
Authority, Series A, MBIA
Insured 6.100%, 05/15/02 Aaa/AAA 107,125
150,000 Rhode Island Convention Center
Authority, Series A, MBIA
Insured 6.300%, 05/15/04 Aaa/AAA 162,000
100,000 Rhode Island Convention Center
Authority, Series A, MBIA
Insured 6.375%, 05/15/23 Aaa/AAA 108,375
500,000 Rhode Island Convention Center
Authority, Series B, MBIA
Insured 5.000%, 05/15/07 Aaa/AAA 481,875
500,000 Rhode Island Convention Center
Authority, Series A, AMBAC
Insured 5.400%, 05/15/08 Aaa/AAA 493,750
300,000 Rhode Island Convention Center
Authority, Series A, AMBAC
Insured 5.500%, 05/15/13 Aaa/AAA 289,125
300,000 Rhode Island Public Building
Authority State Public
Projects, 1990A, AMBAC
Insured (Escrowed to
Maturity) 6.600%, 02/01/02 Aaa/AAA 326,625
500,000 Rhode Island Public Building
Authority State Public
Projects, Series 1993A,
AMBAC Insured
5.100%, 02/01/05 Aaa/AAA 495,000
1,000,000 Rhode Island Public Building
Authority State Public
Projects, Series 1993A, AMBAC
Insured
5.250%, 02/01/10 Aaa/AAA 957,500
785,000 Rhode Island Public Building
Authority State Public
Projects, Series 1990A, AMBAC
Insured
6.000%, 02/01/11 Aaa/AAA 794,812
710,000 Rhode Island Public Building
Authority State Public
Projects, Series 1990A, AMBAC
Insured (Escrowed to Maturity)
6.000%, 02/01/11 Aaa/AAA 744,612
370,000 Rhode Island Public Building
Authority State Public
Projects, Series 1989A, AMBAC
Insured (Escrowed to Maturity)
7.000%, 02/01/07 Aaa/AAA 403,763
35,000 Rhode Island Public Building
Authority State Public
Projects, Series 1989A, AMBAC
Insured (Escrowed to Maturity)
6.750%, 02/01/10 Aaa/AAA 37,931
250,000 Rhode Island Public Building
Authority State Public
Projects, Series A, MBIA
Insured
5.250%, 08/01/06 Aaa/AAA 248,125
600,000 Rhode Island Public Building
Authority State Public
Projects,Series A, MBIA
Insured 5.250%,
08/01/07 Aaa/AAA 590,250
6,240,868
Pollution Control Revenue Bonds
(1.3%)
200,000 Rhode Island Clean Water
Protection, Series A 1993,
MBIA Insured 5.300%, 10/01/07 Aaa/AAA 201,500
300,000 Rhode Island Clean Water
Protection, Series A 1993,
MBIA Insured 5.400%, 10/01/09 Aaa/AAA 294,375
495,875
Transportation Revenue Bonds (3.0%)
600,000 Rhode Island Port Authority &
Economic Development
Corporation Airport Revenue,
Series 1993A, FSA Insured
(subject to AMT) 5.100%,
07/01/07 Aaa/AAA 578,250
600,000 Rhode Island Port Authority &
Economic Development
Corporation Airport Revenue,
Series 1993A, FSA Insured
(subject to AMT) 5.125%,
07/01/08 Aaa/AAA 573,000
1,151,250
Other Revenue Bonds (3.4%)
210,000 State of Rhode Island Depositors
Economic Protection Corp -
Series A, FSA Insured 6.000%,
08/01/01 Aaa/AAA 220,237
135,000 State of Rhode Island Depositors
Economic Protection Corp -
Series B, MBIA Insured 5.500%,
08/01/06 Aaa/AAA 136,519
355,000 State of Rhode Island Depositors
Economic Protection Corp -
Series A, MBIA Insured 5.625%,
08/01/09 Aaa/AAA 357,219
100,000 State of Rhode Island Depositors
Economic Protection Corp -
Series B, MBIA Insured 6.000%,
08/01/17 Aaa/AAA 101,375
500,000 State of Rhode Island Depositors
Economic Protection Corp -
Series B, MBIA Insured 5.250%,
08/01/21 Aaa/AAA 478,125
1,293,475
Total Revenue Bonds 16,073,981
Total Investments - 98.2%
(Cost $37,481,641*) 37,305,330
Other assets in excess of
liabilities - 1.8% 682,919
Net Assets - 100% $ 37,988,249
<FN>
(*)Cost for Federal income tax purposes is $37,404,788.
</FN>
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
CGIC - Capital Guaranty Insurance Co.
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance
MBIA - Municipal Bond Investors Assurance Corp.
See accompanying notes to financial statements.
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost - $37,481,641) $ 37,305,330
Cash 45,812
Interest receivable 640,099
Due from Administrator for reimbursement of expenses 52,945
Other assets 134
Total assets 38,044,320
LIABILITIES
Dividends payable 21,357
Accrued expenses 17,259
Distribution fees payable 14,061
Adviser and Administrator fees payable 3,394
Total liabilities 56,071
NET ASSETS $ 37,988,249
Net Assets consist of:
Capital Stock - Authorized 80,000,000 shares, par
value $.01 per share $ 38,259
Additional paid-in capital 38,101,433
Undistributed net investment income 24,868
Net unrealized depreciation on investments (176,311)
$ 37,988,249
CLASS A
Net Assets $ 37,988,049
Capital shares outstanding 3,825,838
Net asset value and redemption price per share $ 9.93
Offering price per share (100/96 of $9.93 adjusted to
nearest cent) $ 10.34
CLASS C
Net Assets $ 100
Capital shares outstanding 10
Net asset value and offering price per share $ 9.93
Redemption price per share (* varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 100
Capital shares outstanding 10
Net asset value, offering and redemption price per share $ 9.93
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 1,964,884
Expenses:
Investment Adviser fees (note B) $ 84,631
Administrator fees (note B) 99,350
Distribution fees (note B) 55,194
Legal fees 30,443
Shareholders' reports and proxy statements 30,372
Transfer and shareholder servicing agent fees 26,578
Trustees' fees and expenses (note G) 21,798
Audit and accounting fees 21,231
Registration fees and dues 6,970
Custodian fees (note F) 5,054
Insurance 771
Miscellaneous 48,975
431,367
Investment Adviser fees waived (note B) (74,614)
Administrator fees waived (note B) (94,003)
Reimbursement of expenses by Administrator
(note B) (205,443)
Expenses paid indirectly (note F) (5,054)
Net expenses 52,253
Net investment income 1,912,631
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities
transactions -
Change in unrealized depreciation on
investments 375,457
Net realized and unrealized gain on
investments 375,457
Net increase in net assets resulting
from operations $ 2,288,088
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,912,631 $ 1,806,639
Net realized gain from securities
transactions - -
Change in unrealized appreciation
on investments 375,457 1,230,713
Change in net assets from operations 2,288,088 3,037,352
DISTRIBUTIONS TO SHAREHOLDERS (NOTE E):
Class A Shares:
Net investment income (1,912,631) (1,806,639)
Net realized gain on investments - -
Class C Shares:
Net investment income - -
Net realized gain on investments - -
Class Y Shares:
Net investment income - -
Net realized gain on investments - -
Change in net assets from distributions (1,912,631) (1,806,639)
CAPITAL SHARE TRANSACTIONS (NOTE H):
Proceeds from shares sold 6,562,446 5,670,799
Reinvested dividends and distributions 917,354 723,910
Cost of shares redeemed (4,239,774) (4,912,876)
Change in net assets from capital share
transactions 3,240,026 1,481,833
Change in net assets 3,615,483 2,712,546
NET ASSETS:
Beginning of period 34,372,766 31,660,220
End of period $ 37,988,249 $ 34,372,766
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Narragansett Insured Tax-Free Income Fund (the "Fund"), a
non-diversified, open-end investment company, was organized on January 22,
1992 as a Massachusetts business trust and commenced operations on September
10, 1992. The Fund is authorized to issue 80,000,000 shares and, since its
inception to May 1, 1996, offered only one class of shares. On that date, the
Fund began offering two additional classes of shares, Class C and Class Y
shares. All shares outstanding prior to that date were designated as Class A
shares and, as was the case since inception, are sold with a front-payment
sales charge and bear a service fee. Class C shares are sold with no
front-payment sales charge but are assessed a contingent deferred sales
charge if redeemed within one year from the date of purchase and a
level-payment charge for service and distribution fees from date of purchase
through six years thereafter. Class Y shares are offered only to institutions
acting for investors in a fiduciary, advisory, agency, custodial or similar
capacity, are not offered directly to retail customers, and are sold at net
asset value with no sales charge, no redemption fee, no contingent deferred
sales charge and no service or distribution fees. All classes of shares
represent interests in the same portfolio of investments and are identical as
to rights and privileges but differ with respect to the effect of sales
charges, the distribution and/or service fees borne by each class, expenses
specific to each class, voting rights on matters affecting a single class and
the exchange privileges of each class.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
(1) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued each business day based
upon information provided by a nationally prominent independent
pricing service and periodically verified through other pricing
services; in the case of securities for which market quotations are
readily available, securities are valued at the mean of bid and
asked quotations and in the case of other securities, at fair value
determined under procedures established by and under the general
supervision of the Board of Trustees. Securities which mature in 60
days or less are valued at amortized cost if their term to maturity
at purchase was 60 days or less, or by amortizing their unrealized
appreciation or depreciation on the 61st day prior to maturity, if
their term to maturity at purchase exceeded 60 days.
(2) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on the identified
cost basis. Interest income is recorded on the accrual basis and is
adjusted for amortization of premiums and accretion of discounts of
securities purchased at other than par with less than 60 days to
maturity.
(3) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of
the Internal Revenue Code applicable to certain investment
companies. The Fund intends to make distributions of income and
securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
<PAGE>
(4) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on the
relative net assets of each class. Class-specific expenses, which
include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly
to such class.
(5) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Fund are conducted through two separate
management arrangements.
Citizens Trust Company (the "Adviser"), part of Citizens Bank, serves as
Investment Adviser to the Fund. In this role, under an Investment Advisory
Agreement, the Adviser supervises the Fund's investments and provides various
services to the Fund for which it is entitled to receive a fee which is
payable monthly and computed as of the close of business each day at the
annual rate of 0.23 of 1% of the net assets of the Fund.
The Fund also has an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Fund's founder and sponsor. Under this
Agreement, the Administrator provides all administrative services, other than
those relating to the management of the Fund's investments. These include
providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the
Fund such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor and additionally maintaining the Fund's accounting
books and records. For its services, the Administrator is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.27 of 1% of the net assets of the Fund.
Specific details as to the nature and extent of the services provided by
the Adviser and the Administrator are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees shall
be reduced, but not below zero, by an amount equal to its pro-rata portion
(determined on the basis of the respective fees computed as described above)
of the amount, if any, by which the total expenses of the Fund in any fiscal
year, exclusive of taxes, interest and brokerage fees, shall exceed the
lesser of (i) 2.5% of the first $30 million of average annual net assets of
the Fund plus 2% of the next $70 million of such assets and 1.5% of its
average annual net assets in excess of $100 million, or (ii) 25% of the
Fund's total annual investment income. No such reduction in fees was required
during the year ended June 30, 1996.
For the year ended June 30, 1996, the Fund incurred fees under the
Advisory Agreement and Administration Agreement of $84,631 and $99,350,
respectively, of which amounts the Adviser and Administrator waived $74,614
and $94,003, respectively. Additionally, the Administrator voluntarily agreed
to reimburse the Fund for other expenses during this period in the amount of
$205,443.
<PAGE>
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Fund's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the facilities of
these dealers having offices within Rhode Island, with the bulk of sales
commissions inuring to such dealers. For the year ended June 30, 1996, the
Distributor received sales commissions in the amount of $3,823.
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part
of the Plan, with respect to Class A Shares, the Fund is authorized to make
service fee payments to broker-dealers or others selected by the Distributor,
including, but not limited to, any principal underwriter of the Fund, with
which the Distributor has entered into written agreements contemplated by the
Rule and which have rendered assistance in the distribution and/or retention
of the Fund's shares or servicing of shareholder accounts ("Qualified
Recipients"). The Fund makes payment of this service fee at the annual rate
of 0.15% of the Fund's average net assets represented by Class A Shares. For
the year ended June 30, 1996, service fees on Class A Shares amounted to
$55,194, of which the Distributor received $1,008.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C shares
or servicing of shareholder accounts. These payments are made at the annual
rate of 0.75% of the Fund's net assets represented by Class C Shares. There
were no payments made during the period May 1, 1996 through June 30, 1996.
In addition, under a Shareholder Services Plan, the Fund is authorized to
make service fee payments with respect to Class C Shares to Qualified
Recipients for providing personal services and/or maintenance of shareholder
accounts. These payments are made at the annual rate of 0.25% of the Fund's
net assets represented by Class C Shares. There were no payments made during
the period May 1, 1996 through June 30, 1996.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
NOTE C - PURCHASES AND SALES OF SECURITIES:
During the year ended June 30, 1996, purchases of securities aggregated
$3,423,184. There were no sales during this period.
At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $452,807 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $552,265,
for a net unrealized depreciation of $99,458.
NOTE D - PORTFOLIO ORIENTATION:
Since the Fund invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Rhode Island, it is subject
to possible risks associated with economic, political, or legal developments
or industrial or regional matters specifically affecting Rhode Island and
whatever effects these may have upon Rhode Island issuers' ability to meet
their obligations. However, to mitigate against such risks, the Fund has
chosen to have at least 65% and possibly the entire number of issues in the
portfolio insured as to timely payment of principal and interest when due by
nationally prominent municipal bond insurance companies.
The Fund is also permitted to invest in U.S. territorial municipal
obligations meeting comparable quality standards and providing income which
is exempt from both regular Federal and Rhode Island income taxes. The
general policy of the Fund is to invest in such securities only when
comparable securities of Rhode Island issuers are not available in the
market. At June 30, 1996, the Fund had 5.3% of its total net assets invested
in nine Puerto Rico municipal issues, all of which are rated AAA and insured
or collateralized by U.S. Treasury securities.
At June 30, 1996, 99.7% of the securities in the Fund were insured. The
balance were collateralized by U.S. Treasury securities. While such insurance
or collateralization protects against credit risks with portfolio securities,
it does not insure against market risk of fluctuations in the Fund's share
price and income return.
NOTE E - DISTRIBUTIONS:
The Fund declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Rhode Island
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized
securities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. For certain shareholders,
some dividend income may be subject to the alternative minimum tax. Also,
annual capital gains distributions, if any, are taxable.
NOTE F - CUSTODIAN FEES:
The Fund has negotiated an expense offset agreement with its custodian
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the year ended June 30, 1996, the
Fund's custodian fees amounted to $5,054, all of which were offset by such
credits. The Fund could have invested its cash balances in an
income-producing asset if it had not agreed to a reduction in fees under the
expense offset arrangement with the custodian.
NOTE G - TRUSTEES' FEES AND EXPENSES:
During the fiscal year from July 1, 1995 through June 30, 1996, there
were five Trustees for the first nine months and seven Trustees thereafter.
Trustees' fees paid during the year were at the annual rate of $1,000 for
carrying out their responsibilities and attendance at regularly scheduled
Board Meetings. If additional or special meetings are scheduled for the Fund,
separate meeting fees are paid for each such meeting to those Trustees in
attendance. The Fund also reimburses Trustees for expenses such as travel,
accommodations, and meals incurred in connection with attendance at regularly
scheduled or special Board Meetings and at the Annual Meeting and outreach
meetings of Shareholders. For the fiscal year ended June 30, 1996 such
reimbursements averaged approximately $2,700 per Trustee for those Trustees
serving throughout the entire fiscal year. One of the Trustees, who is
affiliated with the Administrator, is not paid any Trustee fees.
<PAGE>
NOTE H - CAPITAL SHARE TRANSACTIONS:
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 659,760 $ 6,562,246 600,443 $ 5,670,799
Reinvested dividends and
distributions 91,389 917,354 76,557 723,910
Cost of shares redeemed (431,888) (4,239,774) (525,525) (4,912,876)
Net change 319,261 $ 3,239,826 151,475 $ 1,481,833
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 10 $ 100
Reinvested dividends and
distributions - -
Cost of shares redeemed - -
Net change 10 $ 100
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 10 $ 100
Reinvested dividends and
distributions - -
Cost of shares redeemed - -
Net change 10 $ 100
<S> <C> <C> <C> <C>
Total transactions in Fund
shares 319,281 $ 3,240,026 151,475 $ 1,481,833
<FN>
* From May 1, 1996 (date of inception) through June 30, 1996.
</FN>
</TABLE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class A(1)
Period(3)
Class C(2) Class Y(2) ended
Period ended Year ended June 30 June 30,
June 30, 1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.94 $9.94 $9.80 $9.44 $10.07 $9.60
Income from Investment
Operations:
Net investment income 0.07 0.09 0.52 0.54 0.53 0.39
Net gain (loss) on
securities (both
realized and
unrealized) (0.01) (0.01) 0.13 0.36 (0.63) 0.47
Total from Investment
Operations 0.06 0.08 0.65 0.90 (0.10) 0.86
Less Distributions:
Dividends from net
investment income (0.07) (0.09) (0.52) (0.54) (0.53) (0.39)
Distributions from
capital gains - - - - - -
Total Distributions (0.07) (0.09) (0.52) (0.54) (0.53) (0.39)
Net Asset Value, End
of Period $9.93 $9.93 $9.93 $9.80 $9.44 $10.07
Total Return (not
reflecting sales
charge) (%) 0.60# 0.80# 6.72 9.82 (1.11) 9.18#
Ratios/Supplemental
Data
Net Assets, End of
Period ($ thousands) 0.1 0.1 37,988 34,373 31,660 15,249
Ratio of Expenses to
Average Net Assets (%) .20# 0.04# 0.14 0.06 0.02 0*
Ratio of Net Investment
Income to Average Net
Assets (%) 0.72# 0.89# 5.19 5.63 5.30 5.28*
Portfolio Turnover
Rate (%) 0 0 0 0 0 2.56#
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary waiver
of fees, the Administrator's voluntary expense reimbursement and the expense
offset in custodian fees for uninvested cash balances would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income
($) 0.06 0.08 0.42 0.43 0.40 0.20
Ratio of Expenses to
Average Net Assets (%) 0.32# 0.15# 1.17 1.19 1.32 2.56*
Ratio of Net
Investment Income to
Average Net Assets (%) 0.61# 0.77# 4.16 4.50 4.00 2.72*
<FN>
(1) Designated as Class A Shares on May 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on May 1, 1996.
</FN>
<FN>
(3) From September 10, 1992 (commencement of operations) to June 30, 1993.
</FN>
<FN>
# Not annualized
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT OF THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Narragansett Insured Tax-Free Income
Fund (the "Fund") was held on October 6, 1995 and an adjourned session of
the meeting was held on November 6, 1995. At the meeting, the following
matters were submitted to a shareholder vote* and approved:
(i) the election of Lacy B. Herrmann, Vernon R. Alden, David A. Duffy,
Robert L. Krakoff, William J. Nightingale, and J. William Weeks as
Trustees to hold office until the next annual meeting of the Fund's
shareholders or until his or her successor is duly elected (each
Trustee received at least 1,971,256 affirmative votes (99.2%); no
more than 15,910 votes were withheld for any Trustee (0.8%)),
(ii) the ratification of the selection of KPMG Peat Marwick LLP as
the Fund's independent auditors for the fiscal year ending June 30,
1996 (votes for: 1,927,350 (97.0%); votes against: 11,785 (0.6%);
abstentions: 48,030 (2.4%); broker non-votes: 0),
(iii) the approval of an amendment to the Declaration of Trust of
the Fund to authorize the creation of classes of shares (votes for:
1,942,229 (78.8%); votes against: 101,693 (4.1%); abstentions:
98,632(4.0%); broker non-votes: 322,616 (13.1%)), and
(iv) the approval of an amendment to the Declaration of Trust of
the Fund to authorize voting by net asset value of shares (votes
for: 1,924,917 (78.1%); votes against: 108,067 (4.4%); abstentions:
109,571 (4.4%); broker non-votes: 322,616 (13.1%)).
Special Meetings of the Fund's Class C and Class Y Shareholders were
held on April 19, 1996.** At the Special Meeting of Class C Shareholders of
the Fund, the Class C Shareholders voted on and unanimously approved
amendments to the Fund's Distribution Plan affecting the interests of the
Class C Shareholders of the Fund. At the Special Meeting of Class Y
Shareholders of the Fund, the Class Y Shareholders voted on and unanimously
approved amendments to the Fund's Distribution Plan affecting the interests
of the Class Y Shareholders of the Fund.
___________
* On the record date for this meeting, 3,507,479 shares of the Fund were
outstanding and entitled to vote. The holders of 1,987,166 shares (56.6%)
entitled to vote were present in person or by proxy at the initial session of
the meeting and the holders of 2,465,171 shares (70.3%) entitled to vote were
present in person or by proxy at the adjourned session of the meeting.
** On the record dates for the Special Meetings, the total net asset values
of the Class C and Class Y Shares of the Fund outstanding and entitled to
vote were $100 and $100, respectively. The holders of all Class C and Class
Y Shares entitled to vote were present in person at the meetings.
<PAGE>
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a requirement of
the Internal Revenue Code AND NO CURRENT ACTION ON THE PART OF SHAREHOLDERS
IS REQUIRED.
For the fiscal year ended June 30, 1996, of the total amount of dividends
paid by Narragansett Insured Tax-Free Income Fund, 98.73% was
"exempt-interest dividends" and the balance was ordinary dividend income.
Prior to January 31, 1996, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1995
CALENDAR YEAR.
<PAGE>
INVESTMENT ADVISER
CITIZENS TRUST COMPANY
(Part of Citizens Bank)
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
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
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
