Preliminary Proxy Material
IMPORTANT NOTICE
PLEASE READ IMMEDIATELY
NARRAGANSETT INSURED TAX-FREE INCOME FUND
380 Madison Avenue, Suite 2300, New York, N.Y. 10017
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
on NOVEMBER 14, 1997
TO OUR SHAREHOLDERS:
The purpose of this Notice is to advise you that an Annual
Meeting of the Shareholders of Narragansett Insured Tax-Free Income
Fund (the "Fund") will be held:
Place: (a) Rhode Island Convention Center
1 Sabin Street
Providence, Rhode Island
Time: (b) on November 14, 1997
at 2:30 p.m. local time;
Purposes: (c) for the following purposes:
(i) to elect seven Trustees; each Trustee
elected will hold office until the next annual
meeting of the Fund's shareholders or until
his or her successor is duly elected;
(ii) to ratify (that is, to approve) or reject
the selection of KPMG Peat Marwick LLP as the
Fund's independent auditors for the fiscal
year ending June 30, 1998 (Proposal No. 1);
PLEASE NOTE:
If you do not expect to attend the Meeting, you are requested to
indicate voting instructions on the enclosed proxy and to date,
sign and return it in the accompanying stamped envelope. To avoid
unnecessary expense to the Fund, your cooperation is requested in
mailing in your proxy no matter how large or small your holding may
be.
(iii) to consider a proposed new investment
advisory and administration agreement between the
Fund and Aquila Management Corporation, which
currently serves as the Fund's Administrator, under
which it would become the Fund's investment adviser
by contracting with others at its expense, as well
as continuing to provide administrative services as
heretofore, and under which all advisory fees and
administration fees would be paid to it (Proposal
No. 2);
(iv) to consider a proposed new sub-advisory
agreement between Aquila Management Corporation as
Manager and Citizens Bank of Rhode Island as Sub-
Adviser (Proposal No. 3);
(iii) to act upon any other matters which may
properly come before the Meeting at the scheduled
time and place or any adjourned meeting or
meetings.
Who Can
Vote What
Shares: (d) To vote at the Meeting, you must have been a
shareholder on the Fund's records at the close
of business on August 20, 1997 (the "record
date"). Also, the number of shares of each of
the Fund's three classes of shares that you
held at that time and the respective net asset
values of each class of shares at that time
determines the number of votes you may cast at
the Meeting (or any adjourned meeting or
meetings).
By Order of the Board of Trustees,
EDWARD M. W. HINES
Secretary
September 20, 1997
(ii)
NARRAGANSETT INSURED TAX-FREE INCOME FUND
380 Madison Avenue, Suite 2300, New York, New York 10017
PROXY STATEMENT
This annual meeting of the shareholders of Narragansett
Insured Tax-Free Income Fund will consider, in addition to the
election of Trustees and the ratification of the selection of the
Fund's auditors, two special proposals of vital importance to the
Fund:
* Action upon a proposed new investment advisory and
administration agreement between the Fund and Aquila
Management Corporation, which currently serves as the
Fund's Administrator, under which it will become the
Fund's investment adviser by contracting with others at
its expense, as well as continuing to provide
administrative services as heretofore, and under which
all advisory fees and administration fees would be paid
to it (Proposal No. 2);
* Action on a proposed new sub-advisory agreement between
Aquila Management Corporation and Citizens Bank of Rhode
Island as Sub-Adviser; (Proposal No. 3)
The Board of Trustees believes that all of these proposals are
in the best interest of the Fund and its shareholders. Please read
the proxy statement and then indicate your vote on the enclosed
proxy card as soon as possible.
INTRODUCTION
The purpose of the Notice (the first two pages of this
document) is to advise you of the time, place and purposes of an
Annual Meeting of the Shareholders of Narragansett Insured Tax-Free
Income Fund (the "Fund"). The purpose of this proxy statement (all
the rest of this document) is to give you information on which you
may base your decisions as to the choices, if any, you make on the
enclosed proxy card.
A copy of the Fund's most recent annual report will be sent to
you without charge upon written request to the Fund's Distributor,
Aquila Distributors, Inc., 380 Madison Avenue, Suite 2300, New
York, NY 10017 or by calling 800-453-6864 toll-free or 212-697-
6666.
The Fund's organizer and administrator (the "Administrator")
is Aquila Management Corporation, 380 Madison Avenue, Suite 2300,
New York, NY 10017. The Fund's investment adviser is Citizens Bank
of Rhode Island (the "Adviser"), One Citizens Plaza, Providence, RI
02903.
This Notice and Proxy Statement are first being mailed on or
about September 20, 1997.
The enclosed proxy card authorizes the persons named (or their
substitutes) to vote your shares; the Fund calls these persons the
"proxy holders." As to the election of Trustees you may authorize
the proxy holders to vote your shares for the entire slate
indicated below by marking the appropriate box on the proxy card or
by merely signing and returning your proxy card with no
instructions. Or, you may withhold the authority of the proxy
holders to vote on the election of Trustees by marking the
appropriate box. Also, you may withhold that authority as to any
particular nominee by striking a line through the nominee's name on
the proxy card.
As to the other matters listed on the proxy card, you may
direct the proxy holders to vote your shares on those proposals by
checking the appropriate box "For" or "Against" or instruct them
not to vote your shares on a proposal by checking the "Abstain"
box. If you return your signed proxy card and do not check any box
on a proposal, the proxy holders will vote your shares for that
proposal. Shares held by brokers in "street name" and not voted or
marked as abstentions will not be counted for purposes of
determining a quorum or the vote on any matter.
You may end the power of the proxy holders to vote your shares
after you have signed and returned your proxy card and before the
power is used by (i) so notifying the Fund in writing; (ii) signing
a new and different proxy card (if the Fund receives it before the
old one is used); or (iii) voting your shares in person or by your
duly appointed agent at the meeting.
The Fund is sending you this Notice and Proxy Statement in
connection with the solicitation by its Trustees of proxy cards
("proxies") to be used at the Annual Meeting to be held at the time
and place and for the purposes indicated in the Notice or any
adjourned meeting or meetings. The Fund pays the costs of the
solicitation. Proxies are being solicited by the use of the mails;
they may also be solicited by telephone, facsimile and personal
interviews. Brokerage firms, banks and others may be requested to
forward this Notice and Proxy Statement to beneficial owners of the
Fund's shares so that these owners may authorize the voting of
these shares. The Fund will pay these firms for their out-of-pocket
expenses for doing so.
The Fund has three classes of shares outstanding. Shareholders
of the Fund of all three classes are entitled to vote at the
meeting. Each shareholder on the record date is entitled to one (1)
vote for each dollar (and a proportionate fractional vote for each
fraction of a dollar) of net asset value (determined as of the
record date) represented by full and fractional shares of any class
held on the record date. On the record date the net asset values
per share of each of the of the Fund's classes of shares was Class
A Shares, $10.31, Class C Shares, $10.30 and Class Y Shares $10.32.
On the record date the total number of shares of the Fund of
each class outstanding and entitled to vote was 4,338,140 Class A
Shares, 54,828 Class C Shares and 10 Class Y Shares.
On the record date, National Financial Services Corp., 200
Liberty Street New York, NY 10281 held of record 257,731 Class A
Shares (5.9%) of the class); Merrill Lynch, Pierce, Fenner & Smith,
Inc., P.O. Box 30561, New Brunswick, NJ, held of record 384,353
Class A Shares (8.8% of the class) and 33,085 Class C Shares (60.3%
of the class); Corelink Financial Inc., P.O. Box 4054, Concord, CA
94524 held of record 335,093 Class A Shares (7.7% of the Class) and
7,838 Class C Shares (14.2% of the Class). On the basis of
information received from the holders, the Fund's management
believes that all of the shares indicated are held for the benefit
of clients. Cecelia A.Cannon, Warwick, RI 02888 held of record and
beneficially 3,857 Class C Shares (7.0% of the Class) and Thomas E.
Powell held of record and beneficially 4,123 Class C Shares (7.5%
of the class) Aquila Management Corporation held of record 10.6
Class Y Shares (100% of the Class). The Fund's management is not
aware of any other person beneficially owning more than 5% of its
outstanding shares as of such date.
ELECTION OF TRUSTEES
At the Meeting, seven Trustees are to be elected. Whenever it
is stated in this Proxy Statement that a matter is to be acted on
at the Meeting, this means the Meeting held at the scheduled time
or any adjourned meeting or meetings.
Each Trustee elected will serve until the next annual meeting
or until his or her successor is duly elected. The nominees
selected by the Trustees are named in the table below. See
"Introduction" above for information as to how you can instruct the
proxy holders as to the voting of your shares as to the election of
Trustees.
Each of the nominees is presently a Trustee and was elected by
the shareholders. Each current Trustee, except for Mr. Weeks, Mr.
Duffy and Mr. Clinton was either named as a Trustee in the original
Declaration of Trust, or was named as a Trustee by such original
Trustees, and was also elected as a Trustee by the Fund's original
sole shareholder, Aquila Management Corporation in 1992. The
Trustees and officers as a group own less than 1% of the
outstanding shares of the Fund. All of the shares indicated below
are Class A Shares. In the material below and elsewhere in this
Proxy Statement, Aquila Management Corporation, organizer and
Administrator of the Fund, is referred to as the "Administrator"
and the Fund's Distributor, Aquila Distributors, Inc., is referred
to as the "Distributor." Mr. Herrmann is an interested person of
the Fund as that term is defined in the Investment Company Act of
1940 (the "1940 Act") as an officer of the Fund and a Director,
officer and shareholder of the Distributor. He is so designated by
an asterisk.
Described in the following material are the name, positions
with the Fund, age as of the record date and business experience
during at least the past five years (other than with the Fund) of
each nominee and all officers of the Fund.
Lacy B. Herrmann*, President and Chairman of the Board of Trustees,
Age:68, Shares Owned: 529 (1)
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following open-
end investment companies, and Founder, Chairman of the Board of
Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Arizona since 1986; Tax-Free Trust of
Oregon since 1986; Tax-Free Fund of Colorado since 1987; 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; and of 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;
Vice President, Director, Secretary and formerly Treasurer of
Aquila Distributors, Inc. since 1981, distributor of the above
funds; President and Chairman of the Board of Trustees of CCMT, a
money market fund since 1981, and an Officer and Trustee/Director
of its predecessors since 1974; Chairman of the Board of Trustees
and President of Prime Cash Fund (which is inactive), since 1982
and of Short Term Asset Reserves 1984-1996; President and a
Director of STCM Management Company, Inc., sponsor and sub-adviser
to CCMT; Chairman, President, and a Director since 1984, of InCap
Management Corporation, formerly sub-adviser and administrator of
Prime Cash Fund and Short Term Asset Reserves, and Founder and
Chairman of several other money market funds; Director or Trustee
of OCC Cash Reserves, Inc., Oppenheimer Quest Global Value Fund,
Inc., Oppenheimer Quest Value Fund, Inc., and Trustee of Quest For
Value Accumulation Trust, The Saratoga Advantage Trust, and of the
Rochester Group of Funds, each of which is an open-end investment
company; Trustee of Brown University, 1990-1996 and currently
Trustee Emeritus; actively involved for many years in leadership
roles with university, school and charitable organizations.
(1) Owned of record by the Administrator
Vernon R. Alden, Trustee, Age: 74, Shares Owned: 214
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, Age: 66, Shares Owned: 210
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, Age: 58, Shares Owned: 213
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, Age: 62, Shares Owned: 130
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, Age: 67, Shares Owned: 630
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, Age: 70, Shares Owned: 559
Trustee of Tax-Free Fund of Colorado since 1995; Senior Vice
President of Tax-Free Fund of Colorado and Narragansett Insured
Tax-Free Income Fund, 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, Age: 36
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.
Diana P. Herrmann, Vice President, Age: 39
Trustee of Tax-Free Trust of Arizona and Tax-Free Trust of Oregon
since 1994, of Churchill Tax-Free Fund of Kentucky and Churchill
Cash Reserves Trust since 1995, of Aquila Cascadia Equity Fund
since 1996 and of Aquila Rocky Mountain Equity Fund and Tax-Free
Fund for Utah since 1997; President and Chief Operating Officer of
the Administrator since 1997; Senior Vice President and Secretary,
formerly Vice President of the Administrator since 1986 and
Director since 1984; Senior Vice President or Vice President and
formerly Assistant Vice President of the Aquila Money-Market Funds
since 1986; Vice President of the Aquila Bond and Equity Funds
since 1997; Vice President of InCap Management Corporation since
1986 and Director since 1983; Assistant Vice President of Oxford
Cash Management Fund, 1986-1988; Assistant Vice President and
formerly Loan Officer of European American Bank, 1981-1986;
daughter of the Fund's President; Trustee of the Leopold Schepp
Foundation (academic scholarships) since 1995; actively involved in
mutual fund and trade associations and in college and other
volunteer organizations.
William C. Wallace, Vice President, Age: 61
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, Age: 73
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer of
Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of the
Distributor since 1985.
Richard F. West, Treasurer, Age: 61
Treasurer of the Aquila Money-Market Funds and the Aquila Bond and
Equity Funds and of Aquila Distributors, Inc. since 1992; Associate
Director of Furman Selz Incorporated, 1991-1992; Vice President of
Scudder, Stevens & Clark, Inc. and Treasurer of Scudder
Institutional Funds, 1989-1991; Vice President of Lazard Freres
Institutional Funds Group, Treasurer of Lazard Freres Group of
Investment Companies and HT Insight Funds, Inc., 1986-1988; Vice
President of Lehman Management Co., Inc. and Assistant Treasurer of
Lehman Money Market Funds, 1981-1985; Controller of Seligman Group
of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, Age: 57
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines & Mone
LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary of the
Aquila Money-Market Funds and the Aquila Bond and Equity Funds
since 1982; Secretary of Trinity Liquid Assets Trust, 1982-1985 and
Trustee of that Trust, 1985-1986; Secretary of Oxford Cash
Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, Age: 57
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995 and Vice President of the Aquila
Money-Market Funds since 1990; Vice President of the Administrator
since 1990; Investment Services Consultant and Bank Services
Executive of Wright Investors' Service, a registered investment
adviser, 1983-1989; Member of the American Finance Association, the
Western Finance Association and the Society of Quantitative
Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer,
Age: 31
Assistant Secretary of the Aquila Money-Market Funds and the Aquila
Bond and Equity Funds since 1995; Counsel to the Administrator and
the Distributor since 1995; formerly a Legal Associate for
Oppenheimer Management Corporation, 1993-1995.
Compensation of Trustees
The Fund does not pay fees to Trustees affiliated with the
Administrator or to any of the Fund's officers. During the fiscal
year ended June 30, 1997, the Fund paid $39,153 in fees and
reimbursement of expenses to its other Trustees. The Fund is one of
the 14 funds in the Aquilasm Group of Funds, which consist of
tax-free municipal bond funds, money market funds and two equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Fund and the compensation they
received during the Fund's fiscal year from other funds in the
Aquilasm Group of Funds. None of such Trustees has any pension or
retirement benefits from the Fund or any of the other funds in the
Aquila group.
<TABLE>
<CAPTION>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Fund Group now serves
<S> <C> <C> <C>
Vernon R.
Alden $2,726 $57,609 7
Paul Y.
Clinton $3,927 $7,585 2
David A.
Duffy $3,042 $3,042 1
Robert L.
Krakoff $1,600 $3,150 2
William J.
Nightingale $2,400 $15,928 3
J. William
Weeks $4,100 $13,418 2
</TABLE>
The Administrator is administrator to the Aquilasm Group of
Funds which consists of tax-free municipal bond funds, money market
funds and two equity funds. As of July 31, 1997, these funds had
aggregate assets of approximately $2.8 billion, of which
approximately $1.9 billion consisted of assets of the tax-free
municipal bond funds. The Administrator is controlled by Mr. Lacy
B. Herrmann, through share ownership directly, through a trust and
by his wife. During the Fund's fiscal year ended June 30, 1997,
fees of $92,236 and $108,154 were accrued to the Adviser and
Administrator, respectively, of which, $72,100 and $84,117,
respectively, were waived. In addition, the Administrator
reimbursed the Fund for other expenses in the amount of $251,853.
Of this amount, $74,241 was paid prior to June 30, 1997 and the
balance of $177,612 was paid in July, 1997. During the fiscal year
ended June 30, 1997, Permitted Payments of $59,620 were made to
Qualified Recipients with respect to Class A Shares of the Fund, of
which the Distributor received $1,175 and $1,815 of payments were
made to Qualified Recipients with respect to Class A Shares of the
Fund, of which the Distributor received $1,815. The Distributor
received $60 under the Fund's Shareholder Services Plan.
The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond funds and two equity funds), including the Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs relating
to prospectuses and reports as well as the costs of supplemental
sales literature, advertising and other promotional activities. At
the date of this proxy statement, there is a proposed transaction
whereby all of the shares of the Distributor, which are currently
owned 75% by Mr. Herrmann and 25% by Diana P. Herrmann, will be
owned by certain directors and/or officers of the Administrator
and/or the Distributor including Mr. Herrmann and Ms. Herrmann.
Other Information on Trustees
The Trustees have appointed an Audit Committee consisting of
all of the Trustees (the "Independent Trustees") who are not
"interested persons," as that term is defined in the 1940 Act. The
Committee (i) recommends to the Board of Trustees what firm of
independent auditors will be selected by the Board of Trustees
(subject to shareholder ratification); (ii) reviews the methods,
scope and result of audits and the fees charged; and (iii) reviews
the adequacy of the Fund's internal accounting procedures and
controls. The Committee held two meetings during the Fund's last
fiscal year. The Board of Trustees does not have a nominating
committee. During the Fund's last fiscal year, the Board of
Trustees held four meetings. All current Trustees were present for
at least 75% of the total number of Board meetings and Audit
Committee Meetings (if such Trustee was a member of that
Committee).
RATIFICATION OR REJECTION
OF SELECTION OF
INDEPENDENT AUDITORS
(Proposal No. 1)
KPMG Peat Marwick LLP, which is currently serving as the
Fund's auditors, has been selected by the Fund's Board of Trustees,
including a majority of the Independent Trustees, as the Fund's
independent auditors for the fiscal year ending June 30, 1998 and
such selection is submitted to the shareholders for ratification or
rejection.
The firm has no direct or indirect financial interest in the
Fund, the Fund's Adviser or the Fund's Administrator. It is
expected that representatives of the firm will not be present at
the meeting but will be available should any matter arise requiring
their presence.
BACKGROUND AND REASONS FOR
PROPOSALS NO. 2 AND NO. 3
Proposals No. 2 and No. 3 are designed to change the form of
the Fund's investment advisory and administration arrangements to
a new structure involving an adviser and a sub-adviser. The
proposed arrangements will not result in any change in overall
management fees paid by the Fund, nor any change in the parties
providing these services. Marketing efforts and positioning of the
Fund will remain the same with a strong local niche orientation.
The Board of Trustees believes that the new structure would,
among other things, contribute to the stability, continuity and
quality of local portfolio management, and would improve the
ability of the Fund to obtain various services on beneficial terms.
Under the proposals, Aquila Management Corporation ("Aquila"),
which currently serves as the Fund's administrator, would in
addition become investment adviser under a new agreement (the
"Advisory and Administration Agreement") under which it would also
continue to provide the Fund with all administrative services
(Proposal No. 2). Also, under a proposed agreement (the "Sub-
Advisory Agreement") between Aquila and Citizens Bank of Rhode
Island ("Citizens Bank"), the current investment advisory agreement
would be replaced by one under which Aquila would appoint Citizens
Bank as Sub-Adviser to the Fund (Proposal No. 3). Under the Sub-
Advisory Agreement, Citizens Bank would continue to provide the
Fund with advisory services of the kind which it has provided to
the Fund. The duties of the administrator, now performed under an
administration agreement, would be performed by Aquila under the
Advisory and Administration Agreement where it would be referred to
as the "Manager." The current administration agreement will no
longer be needed and will terminate upon approval of the proposed
agreements.
The Board of Trustees believes that it is in the best interest
of the shareholders to provide Aquila with additional authority to
supervise the investment advisory function, with the power to
retain an investment sub-adviser (subject to the approval of the
Board of Trustees and the shareholders) and to terminate a sub-
adviser (subject to the approval of the Board of Trustees) if it
were to deem doing so to be in the best interests of the Fund and
its shareholders. The Board of Trustees considers that this
authority will improve Aquila's ability to obtain for the Fund
benefits of stability, continuity and quality of portfolio
management.
In addition, Aquila has advised the Board of Trustees that it
plans to propose a similar reorganization to other funds in the
Aquilasm Group of Funds. If, as expected, those proposals are
adopted, the following additional reasons support the proposed
reorganization, although there can be no assurance that they will
be realized:
* There would be heightened public recognition of the
Aquilasm Group and its funds, and better public relations
possibilities.
* The new arrangements would benefit the entire group
because it would tend to increase the negotiating power
of Aquila in dealing with service providers to the funds
in various ways.
* The arrangements potentially increase the standardization
of procedures, e.g. compliance, among the advisers.
The Board of Trustees noted that Aquila is the founder and
organizer of the Fund and has continuously served as its
administrator since 1992. Since 1985, Aquila has formed and
sponsored seven state-specific tax-free municipal bond funds, which
have grown to a total of $1.9 billion in combined assets. These
funds and their years of inception are Hawaiian Tax-Free Trust
(1985), Tax-Free Trust of Oregon (1986), Tax-Free Trust of Arizona
(1986), Tax-Free Fund of Colorado (1987), Churchill Tax-Free Fund
of Kentucky (1987), the Fund (1992) and Tax-Free Fund For Utah
(1992). Aquila has also sponsored five money market funds and two
regional capital appreciation equity funds. As of July 31, 1997,
the Aquilasm Group of Funds had combined assets of approximately
$2.8 billion.
By founding the Fund and other state-specific tax-free
municipal bond funds, Aquila has been able to offer to individual
investors in various states a locally-managed, quality-oriented
portfolio of municipal obligations, providing income that is exempt
from state as well as federal income taxes.
Aquila advised the Board of Trustees that a critical component
of high-quality service to investors in its funds is a close
familiarity with the local economy and market conditions that can
only be provided by experienced local portfolio management. Aquila
found that investment advisers that were a part of, or associated
with, major local financial institutions had the experience and
resources to provide this management. The Aquila bond funds are
unusual compared with other such funds in emphasizing local
portfolio management, which has been a major factor in their
acceptance by investors.
Recent years have seen a consolidation in the financial
services industry that has resulted in many prominent local banks
becoming parts of larger national institutions. A number of these
transaction have affected the local advisers of other Aquila bond
funds. In every instance, Aquila has been able to secure
commitments to continuous local management, but in some instances
it became necessary for Aquila to seek out other organizations to
provide the continuity and quality of service that investors
expect. The Board of Trustees believes that by providing Aquila
with explicit authority to supervise the investment advisory
function, the Board would better enable Aquila to ensure continuity
and quality of local portfolio management.
Another anticipated advantage of the proposed arrangements is
that, to the extent extended, as planned, to other Aquila bond
funds, Aquila expects to improve its ability to negotiate
beneficial terms with service providers, such as transfer agents
and pricing services, under substantially uniform agreements that
would provide services to all of the bond funds. Because of the
combined size of the bond funds, Aquila expects that its collective
bargaining position would be enhanced and that costs for these
services may be lower than would be obtained if these arrangements
were negotiated on a piecemeal basis. There can be no assurance
that this will occur.
The Board of Trustees believes that making Aquila Manager has
definite organizational benefits, including a better structure for
handling any possible future changes. The costs of the change in
structure will be borne by Aquila and not the Fund.
In approving of the proposed new arrangements, the Board of
Trustees stipulated that the Sub-Advisory Agreement could provide
for its termination by the Adviser upon reasonable notice,
provided, however, that the Adviser should not terminate the Sub-
Advisory Agreement (and any attempt by the Adviser to terminate
such agreement would be null and void) unless, prior to giving
notice to the Sub-Adviser of such termination, either (i) the
Advisory Agreement had been reapproved by the Board of Trustees of
the Fund, in the manner described in Section 15 of the 1940 Act, in
contemplation of the Adviser's managing the investment portfolio of
the Fund without the assistance of a Sub-Adviser; (ii) a new Sub-
Advisory Agreement, to take effect upon the termination of the
existing Sub-Advisory Agreement, had been approved by the Board of
Trustees and the shareholders of the Fund as contemplated by
Section 15 of the 1940 Act; (iii) the Board had authorized such
termination; or (iv) the Adviser had complied with such other or
additional directives and authorizations of the Board with respect
to such termination as may from time to time be in effect.
Other Changes
The current advisory agreement and the Administration
Agreement provide that fees payable thereunder shall not exceed
certain amounts or percentages of the Fund's net assets or income.
These provisions, which were required by certain State securities
laws, have no effect on the Fund, due to its size. The state
securities laws were preempted by Federal legislation in 1996 and
accordingly, these provisions, which are no longer required by law
would not be included in the new agreements.
Other Information About Aquila
Aquila, founded in 1984, is controlled by Mr. Lacy B. Herrmann
(directly, through a trust and through share ownership by his
wife). Aquila's shares are owned as follows:
Elizabeth B. Herrmann 35%
Lacy B. Herrmann 25%
Elizabeth B. Herrmann
1993 Annuity Fund 40%
The names, addresses and principal occupations of the
principal executive officer and each director of Aquila are as
follows:
Name Position with Aquila
Lacy B. Herrmann Chairman, Chief Executive Officer
and Director
Diana P. Herrmann President, Chief Operating Officer
and Director
Elizabeth B. Herrmann Director.
The address of all of these individuals is 380 Madison Avenue,
Suite 2300, New York, NY 10017.
Aquila Distributors, Inc. (the "Distributor") currently
handles the distribution of the shares of fourteen funds (seven
tax-free municipal bond funds, five money market funds and two
equity funds), including the Fund. Under the Distribution
Agreement, the Distributor is responsible for the payment of
certain printing and distribution costs relating to prospectuses
and reports as well as the costs of supplemental sales literature,
advertising and other promotional activities.
Other Information About Citizens Bank
In considering the proposed Sub-Advisory Agreement, the
Trustees noted that Citizens Bank is wholly owned by Citizens
Financial Group, Inc. ("CFG"). CFG owned by The Royal Bank of
Scotland plc. (76.5%) and the Bank of Ireland (23.5%) Citizens Bank
operates through 75 branch offices in Rhode Island and Connecticut;
Citizens Bank of Massachusetts, which has more than 60 branches in
southeastern Massachusetts; Citizens Bank New Hampshire, which has
81 branches in New Hampshire; and Citizens Mortgage Corporation, a
Georgia corporation based in Atlanta with 20 offices in the
southeastern United States. In 1994, CFG acquired the former Old
Stone Federal Savings Bank in Providence, Rhode Island and the
former Coastal Federal Savings Bank in New London, Connecticut. CFG
also completed the acquisition of Neworld Bankcorp, Inc., the
holding company for Neworld Bank which was merged into Citizens
Bank of Massachusetts. In January, 1995, CFG acquired Quincy
Savings Bank of Massachusetts. In 1996, CFG acquired the former
First New Hampshire Bank. In June, 1996, CFG announced a definitive
agreement to acquire Farmers and Mechanics Bank in Middletown,
Connecticut. CFG is the 45th largest bank holding company in the
United States.
The Trustees also noted that Salvatore C. DiSanto is the
officer of Citizens Bank who manages the Fund's portfolio. He has
served as such since the inception of the Fund in September, 1992.
Mr.DiSanto, a Senior Vice President within the Trust Group of
Citizens Bank, is a member of its Officer Investment Committee. He
has been employed by Citizens Bank for 38 years and has been
involved in portfolio management for the last 31 years.
Citizens Bank 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.
Citizens Bank believes that it may perform 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. Citizens Bank 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.
Citizens Bank 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.
Citizens Bank 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 Citizens Bank 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 Citizens Bank is permitted to perform
for the Fund.
In the event that Citizens Bank is prohibited from acting as
the Fund's investment adviser, it is probable that the Board of
Trustees of the Fund or the Manager would either recommend to the
shareholders the selection of another qualified adviser or sub-
adviser or, if that course of action appeared impractical, that the
Fund be liquidated.
Citizens Bank does not act as investment adviser to any other
fund.
The names, principal occupations and addresses of the
principal executive officer and every director of Citizens Bank are
as follows:
Name Positions and Address
Lawrence K. Fish Chairman and Chief Executive Officer
Citizens Financial Group, Inc.
One Citizen Plaza
Providence, RI 02903
Robert M. Andreoli Chairman
Victoria Acquisition Group, Inc.
30 Jefferson Park Road
Warwick, RI 02888
Dr. Robert L. Carothers President
University of Rhode Island
Carlotti Administration Bldg.
Kingston, RI 02881
Herbert W. Cummings One Citizens Plaza - 12th Floor
Providence, RI 02903
David M. Hirsch President
Pawtucket Fasteners
327 Pine Street
Pawtucket, RI 02860
Marie J. Langlois Partner
Phoenix Investment Management
Co. One Citizens Plaza
Providence, RI 02903
Robert L. McCabe President
Narragansett Electric Company
280 Melrose Street
Providence, RI 02907
Dr. Pablo Rodriguez President
Women's Care, Inc.
845 North Main Street
Providence, RI 02904
Fee Arrangements
There will be no increase in overall management fees paid by
the Fund as a result of the new arrangements.
Annual Fee Rates
(Fee rates are annual rates as a percentage of the Fund's
average daily net assets.)
<TABLE>
<CAPTION>
Under
arrangements
Type of payment Under arrangements if Proposals 2
made by the Fund currently in effect and 3 are
adopted
<S> <C> <C>
Advisory fee 0.23 of 1% 0.50 of 1%
(Sub-Advisory fee
paid by the Adviser) 0 (0.23 of 1%)
Administration fee 0.27 of 1% 0
Total Payments
by the Fund 0.50 of 1% 0.50 of 1%
</TABLE>
The following table shows the advisory and administration fees
the Fund paid during its last fiscal year, the fees it would have
paid if the proposed arrangements had been in effect during that
fiscal year and the percentage change.
<TABLE>
<CAPTION>
Type of payment Amount Amount that would Difference between
by the Fund actually paid have been paid the old and new
if the new arrangements as a
arrangements percentage of the
had been in effect old arrangements
<S> <C> <C> <C>
Advisory fee $20,136(1) $44,173(1) 219%
(Sub-Advisory
fee Paid by
the Adviser) 0 $20,136(1) N/A
Administration
fee $24,037(1) 0 0%
Total payments $44,173(1) $44,173(1) 0%
<FN>
(1) Amounts paid after fee waivers. For the year ended June 30, 1997, fees of
$92,236 and $84,117, respectively, were accrued to the Adviser under the
Fund's advisory agreement and the Administrator under the Fund's
administration agreement, of which $58,760 and $49,962, respectively, were
waived.
</FN>
</TABLE>
Proposals No. 2 and No. 3 are designed to operate together.
Neither separately will have the intended results. Neither proposal
will be implemented unless both are approved by shareholders.
Accordingly, the proposed new Investment Advisory and
Administration Agreement and the proposed Sub-Advisory Agreement
will go into effect upon approval by shareholders of both Proposals
No. 2 and 3. If these proposals are not both approved, the current
arrangements will remain in effect. The Board of Trustees will
consider what further action is appropriate, which could include
calling another shareholder meeting.
The Trustees also noted that in addition to the foregoing
matters, Aquila has more than twelve years of experience in forming
and administering tax-exempt municipal bond funds, including
identifying and securing the services of competent local investment
advisers. The Trustees also noted that Aquila had secured the
agreement of Citizens Bank to serve as the Fund's Sub-Adviser on
the terms described in Proposal No. 3.
For the reasons set forth above, at an in-person meeting
called and held for the purpose in June, 1997, the Board of
Trustees, including a majority of the Trustees who are not parties
to the Advisory and Administration Agreement or the Sub-Advisory
Agreement or "interested persons" (as defined in the 1940 Act) of
any such party (the "Independent Trustees"), voted to approve the
Advisory Agreement and Sub-Advisory Agreement.
ACTION ON A NEW INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT WHICH WILL PROVIDE
THAT ALL ADVISORY FEES AND ADMINISTRATION FEES
WILL BE PAID TO AQUILA MANAGEMENT CORPORATION
ALTHOUGH COMBINED ADVISORY AND ADMINISTRATION
FEES WILL REMAIN AT THE CURRENT LEVEL
(PROPOSAL NO. 2)
The new Investment Advisory and Administration Agreement (the
"Advisory Agreement") has several parts, most of which are
substantially identical to corresponding provisions in the Fund's
former advisory agreements and administration agreement. The
Advisory Agreement contains provisions relating to investment
advice for the Fund and management of its portfolio that are
substantially identical to prior advisory agreements, except that
the Adviser has the power to delegate its advisory functions to a
Sub-Adviser, which it will employ at its own expense. The Advisory
Agreement contains provisions relating to administrative services
that are substantially identical to those contained in the Fund's
current and prior administration agreements. In the following
description, Aquila is referred to as the "Manager."
Description of the Investment advisory and Administration Agreement
The Advisory Agreement provides that subject to the direction
and control of the Board of Trustees of the Fund, the Manager
shall:
(i) supervise continuously the investment program of the Fund
and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities held
in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory Agreement provides that, subject to the
termination provisions described below, the Manager may at its own
expense delegate to a qualified organization ("Sub-Adviser"),
affiliated or not affiliated with the Manager, any or all of the
above duties. Any such delegation of the duties set forth in (i),
(ii) or (iii) above shall be by a written agreement (the "Sub-
Advisory Agreement") approved as provided in Section 15 of the
Investment Company Act of 1940. The Manager will delegate all of
such functions to Citizens Bank under the proposed Sub-Advisory
Agreement. See "Background and Reasons for Proposals No. 2 and No.
3."
The Advisory Agreement provides that subject to the direction
and control of the Board of Trustees of the Fund, the Manager shall
provide all administrative services to the Fund other than those
relating to its investment portfolio which have been delegated to
a Sub-Adviser of the Fund under a Sub-Advisory Agreement; as part
of such administrative duties, the Manager shall:
(i) provide office space, personnel, facilities and equipment
for the performance of the following functions and for the
maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any sub-
adviser, transfer agent, custodian, legal counsel, auditors
and principal underwriter, including the negotiation of
agreements in relation thereto, the supervision and
coordination of the performance of such agreements, and the
overseeing of all administrative matters which are necessary
or desirable for the effective operation of the Fund and for
the sale, servicing or redemption of the Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and the
dividends (provided that if there is a Sub-Adviser, daily
pricing of the Fund's portfolio shall be the responsibility of
the Sub-Adviser under the Sub-Advisory Agreement) or, at its
expense and responsibility, delegate such duties in whole or
in part to a company satisfactory to the Fund;
(iv) maintain the Fund's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's shareholders
and Trustees, reports to and other filings with the Securities
and Exchange Commission and any other governmental agencies,
and tax returns, and oversee the insurance relationships of
the Fund;
(v) prepare, on behalf of the Fund and at the Fund's expense,
such applications and reports as may be necessary to register
or maintain the registration of the Fund and/or its shares
under the securities or "Blue-Sky" laws of all such
jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory Agreement contains provisions relating to
compliance of the investment program, responsibility of the Manager
for any investment program managed by it, allocation of brokerage,
and responsibility for errors that are substantially the same as
the corresponding provisions in the Sub-Advisory Agreement. See
Proposal No. 3.
The Advisory Agreement provides that the Manager shall, at its
own expense, provide office space, facilities, equipment, and
personnel for the performance of its functions thereunder and shall
pay all compensation of Trustees, officers, and employees of the
Fund who are affiliated persons of the Manager.
The Fund shall bear the costs of preparing and setting in type
its prospectuses, statements of additional information and reports
to its shareholders, and the costs of printing or otherwise
producing and distributing those copies of such prospectuses,
statements of additional information and reports as are sent to its
shareholders. All costs and expenses not expressly assumed by the
Manager under the agreement or otherwise by the Manager,
administrator or principal underwriter or by any Sub-Adviser shall
be paid by the Fund, including, but not limited to (i) interest and
taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses of its Trustees other than those
affiliated with the Manager or such adviser, administrator or
principal underwriter; (v) legal and audit expenses; (vi) custodian
and transfer agent, or shareholder servicing agent, fees and
expenses; (vii) expenses incident to the issuance of its shares
(including issuance on the payment of, or reinvestment of,
dividends); (viii) fees and expenses incident to the registration
under Federal or State securities laws of the Fund or its shares;
(ix) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Fund; (x) all
other expenses incidental to holding meetings of the Fund's
shareholders; and (xi) such non-recurring expenses as may arise,
including litigation affecting the Fund and the legal obligations
for which the Fund may have to indemnify its officers and Trustees.
The Advisory Agreement provides that the Fund agrees to pay
the Manager, and the Manager agrees to accept as full compensation
for all services rendered by the Manager as such, an annual fee
payable monthly and computed on the net asset value of the Fund as
of the close of business each business day at the annual rate of
0.50 of 1% of such net asset value.
The Advisory Agreement provides that the Sub-Advisory
Agreement may provide for its termination by the Manager upon
reasonable notice, provided, however, that the Manager agrees not
to terminate the Sub-Advisory Agreement except in accordance with
such authorization and direction of the Board of Trustees, if any,
as may be in effect from time to time.
The Advisory Agreement provides that it will become effective
on the date of its approval by the shareholders of the Fund and
will, unless terminated as hereinafter provided, continue in effect
until the December 31 next preceding the second anniversary of the
effective date of the Advisory Agreement, and from year to year
thereafter, but only so long as such continuance is specifically
approved at least annually (1) by a vote of the Fund's Board of
Trustees, including a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, with votes cast in
person at a meeting called for the purpose of voting on such
approval, or (2) by a vote of the holders of a "majority" (as so
defined) of the outstanding voting securities of the Fund and by
such a vote of the Trustees.
The Advisory Agreement provides that it may be terminated by
the Manager at any time without penalty upon giving the Fund sixty
days' written notice (which notice may be waived by the Fund) and
may be terminated by the Fund at any time without penalty upon
giving the Manager sixty days' written notice (which notice may be
waived by the Manager), provided that such termination by the Fund
shall be directed or approved by a vote of a majority of its
Trustees in office at the time or by a vote of the holders of a
majority (as defined in the 1940 Act) of the voting securities of
the Fund outstanding and entitled to vote. The specific portions of
the Advisory Agreement which relate to providing investment
advisory services will automatically terminate in the event of the
assignment (as defined in the 1940 Act) of the Advisory Agreement,
but all other provisions relating to providing services other than
investment advisory services will not terminate, provided however,
that upon such an assignment the annual fee payable monthly and
computed on the net asset value of the Fund as of the close of
business each business day shall be reduced to the annual rate of
0.27 of 1% of such net asset value. The Manager agrees that it will
not exercise its termination rights for at least three years from
the effective date of the Advisory Agreement, except for regulatory
reasons.
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENT DESCRIBED ABOVE BE APPROVED.
See "Background and Reasons for Proposals No. 2 and No. 3" for the
reasons.
Vote Required
The favorable vote of the holders of a majority (as defined in
the 1940 Act) of the outstanding shares of the Fund, is required
for the approval of this Proposal No. 2. Under the 1940 Act, the
vote of the holders of a majority of the outstanding shares of the
Fund means the vote of the holders of the lesser of (a) 67% or more
of the shares of the Fund present at the Meeting or represented by
proxy if the holders of more than 50% of such shares are so present
or represented, or (b) more than 50% of the outstanding shares of
the Fund, with one (1) vote for each dollar ( and a proportionate
fractional vote for each fraction of a dollar) of net asset value
(determined as of the record date) represented by full and
fractional shares of all of the Fund's three classes of shares.
ACTION UPON A PROPOSED NEW SUB-ADVISORY
AGREEMENT BETWEEN AQUILA MANAGEMENT
CORPORATION AS MANAGER AND CITIZENS BANK OF
RHODE ISLAND AS SUB-ADVISER
(PROPOSAL NO. 3)
The proposed Sub-Advisory Agreement (the "Sub-Advisory
Agreement") has substantially the same terms as the current
advisory Agreement, except that the Sub-Advisory Agreement is with
the Manager and not with the Fund and the compensation of the Sub-
Advisor is paid by the Manager and not by the Fund.
The Sub-Advisory Agreement provides that the Manager appoints
Citizens Bank as Sub-Adviser to render, to the Manager and to the
Fund, investment research and advisory services as set forth below
under the supervision of the Manager and subject to the approval
and direction of the Board of Trustees of the Fund. The Sub-
Advisory Agreement provides that the Sub-Adviser will act as
managerial investment adviser to the Fund with respect to the
investment of the Fund's assets, and will supervise and arrange the
purchase of securities for and the sale of securities held in the
portfolio of the Fund.
The Sub-Advisory Agreement provides in general that subject to
the direction and control of the Manager and the Board of Trustees
of the Fund, the Sub-Adviser shall:
(i) supervise continuously the investment program of the Fund
and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities held
in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund; and
(v) consult with the Manager in connection with its duties
thereunder.
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform to,
and be in accordance with, any requirements imposed by: (1) the
Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Fund and By-Laws of
the Fund as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its registration
statement under the Act or as amended by the shareholders of the
Fund.
The Sub-Advisory Agreement provides that the Sub-Adviser shall
give to the Manager and to the Fund the benefit of its best
judgment and effort in rendering services thereunder, but the Sub-
Adviser shall not be liable for any loss sustained by reason of the
adoption of any investment policy or the purchase, sale or
retention of any security, whether or not such purchase, sale or
retention shall have been based upon (i) its own investigation and
research or (ii) investigation and research made by any other
individual, firm or corporation, if such purchase, sale or
retention shall have been made and such other individual, firm or
corporation shall have been selected in good faith by the Sub-
Adviser. Nothing therein contained shall, however, be construed to
protect the Sub-Adviser against any liability to the Fund or its
security holders by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations and duties under the
Agreement.
The Sub-Advisory Agreement provides that nothing in it shall
prevent the Sub-Adviser or any affiliated person (as defined in the
Act) of the Sub-Adviser from acting as investment adviser or
manager for any other person, firm or corporation and shall not in
any way limit or restrict the Sub-Adviser or any such affiliated
person from buying, selling or trading any securities for its own
or their own accounts or for the accounts of others for whom it or
they may be acting, provided, however, that the Sub-Adviser
expressly represents that, while acting as Sub-Adviser, it will
undertake no activities which, in its judgment, will adversely
affect the performance of its obligations to the Fund under the
Agreement. It is agreed that the Sub-Adviser shall have no
responsibility or liability for the accuracy or completeness of the
Fund's Registration Statement under the Act and the Securities Act
of 1933, except for information supplied by the Sub-Adviser for
inclusion therein. The Sub-Adviser shall promptly inform the Fund
as to any information concerning the Sub-Adviser appropriate for
inclusion in such Registration Statement, or as to any transaction
or proposed transaction which might result in an assignment (as
defined in the Act) of the Agreement. To the extent that the
Manager is indemnified under the Fund's Declaration of Fund with
respect to the services provided under the Agreement by the Sub-
Adviser, the Manager agrees to provide the Sub-Adviser the benefits
of such indemnification.
The Sub-Advisory Agreement provides that in connection with
its duties to arrange for the purchase and sale of the Fund's
portfolio securities, the Sub-Adviser shall select such
broker-dealers ("dealers") as shall, in the Sub-Adviser's judgment,
implement the policy of the Fund to achieve "best execution," i.e.,
prompt, efficient, and reliable execution of orders at the most
favorable net price. The Sub-Adviser shall cause the Fund to deal
directly with the selling or purchasing principal or market maker
without incurring brokerage commissions unless the Sub-Adviser
determines that better price or execution may be obtained by paying
such commissions; the Fund expects that most transactions will be
principal transactions at net prices and that the Fund will incur
little or no brokerage costs. The Fund understands that purchases
from underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked prices.
In allocating transactions to dealers, the Sub-Adviser is
authorized to consider, in determining whether a particular dealer
will provide best execution, the dealer's reliability, integrity,
financial condition and risk in positioning the securities
involved, as well as the difficulty of the transaction in question,
and thus need not pay the lowest spread or commission available if
the Sub-Adviser determines in good faith that the amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by the dealer, viewed either in
terms of the particular transaction or the Sub-Adviser's overall
responsibilities. If, on the foregoing basis, the transaction in
question could be allocated to two or more dealers, the Sub-Adviser
is authorized, in making such allocation, to consider (i) whether
a dealer has provided research services, as further discussed
below; and (ii) whether a dealer has sold shares of the Fund. Such
research may be in written form or through direct contact with
individuals and may include quotations on portfolio securities and
information on particular issuers and industries, as well as on
market, economic, or institutional activities. The Fund recognizes
that no dollar value can be placed on such research services or on
execution services and that such research services may or may not
be useful to the Fund and may be used for the benefit of the Sub-
Adviser or its other clients.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Fund as are required by applicable law and regulation, and
agrees that all records which it maintains for the Fund on behalf
of the Manager shall be the property of the Fund and shall be
surrendered promptly to the Fund or the Manager upon request. The
Sub-Adviser agrees to furnish to the Manager and to the Board of
Trustees of the Fund such periodic and special reports as each may
reasonably request.
The Sub-Advisory Agreement provides that the Sub-Adviser shall
bear all of the expenses it incurs in fulfilling its obligations
under the Agreement. In particular, but without limiting the
generality of the foregoing: the Sub-Adviser shall furnish the
Fund, at the Sub-Adviser's expense, all office space, facilities,
equipment and clerical personnel necessary for carrying out its
duties under the Agreement. The Sub-Adviser shall supply, or cause
to be supplied, to any investment adviser, administrator or
principal underwriter of the Fund all necessary financial
information in connection with such adviser's, administrator's or
principal underwriter's duties under any agreement between such
adviser, administrator or principal underwriter and the Fund. The
Sub-Adviser will also pay all compensation of the Fund's officers,
employees, and Trustees, if any, who are affiliated persons of the
Sub-Adviser.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rates of 0.23 of 1% of such net asset value.
The Sub-Advisory Agreement provides that it will become
effective on the day it is approved by the shareholders of the Fund
(the "Effective Date") and shall, unless terminated as thereinafter
provided, continue in effect until the December 31 next preceding
the second anniversary of the effective date of the Agreement, and
from year to year thereafter, but only so long as such continuance
is specifically approved at least annually (1) by a vote of the
Fund's Board of Trustees, including a vote of a majority of the
Trustees who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party, with votes cast
in person at a meeting called for the purpose of voting on such
approval, or (2) by a vote of the holders of a "majority" (as so
defined) of the outstanding voting securities of the Fund and by
such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be terminated
by the Sub-Adviser at any time without penalty upon giving the
Manager and the Fund sixty days' written notice (which notice may
be waived). It may be terminated by the Manager or the Fund at any
time without penalty upon giving the Sub-Adviser sixty days'
written notice (which notice may be waived by the Sub-Adviser),
provided that such termination by the Fund shall be directed or
approved by a vote of a majority of its Trustees in office at the
time or by a vote of the holders of a majority (as defined in the
Act) of the voting securities of the Fund outstanding and entitled
to vote. The Sub-Advisory Agreement will automatically terminate in
the event of its assignment (as defined in the 1940 Act) or the
termination of the Advisory and Administration Agreement. The Sub-
Adviser agrees that it will not exercise its termination rights for
at least three years from the effective date of the Agreement,
except for regulatory reasons.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED SUB-ADVISORY
AGREEMENT DESCRIBED ABOVE BE APPROVED. See "Background and Reasons
for Proposals No. 2 and No. 3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined in
the 1940 Act) of the outstanding shares of the Fund, is required
for the approval of this Proposal No. 3. See Proposal No. 2 for a
description of such a majority.
RECEIPT OF
SHAREHOLDER PROPOSALS
Under the proxy rules of the Securities and Exchange
Commission, shareholder proposals meeting tests contained in those
rules may, under certain conditions, be included in the Fund's
proxy statement and proxy card for a particular annual meeting. One
of these conditions relates to the timely receipt by the Fund of
any such proposal. Under these rules, proposals submitted for
inclusion in the proxy material for the Fund's next annual meeting
after the meeting to which this Proxy Statement relates must be
received by the Fund not less than 120 days before the anniversary
of the date stated in this Proxy Statement for the first mailing of
this Proxy Statement. The date for such submission could change,
depending on the scheduled date for the next annual meeting; if so,
the Fund will so advise you.
The fact that the Fund receives a shareholder proposal in a
timely manner does not insure its inclusion in the Fund's proxy
material, since there are other requirements in the proxy rules
relating to such inclusion.
OTHER BUSINESS
The Fund does not know of any other matter which will come up
for action at the Meeting. If any other matter or matters properly
come up for action at the Meeting, including any adjournment of the
Meeting, the proxy holders will vote the shares which the proxy
cards entitle them to vote in accordance with their judgment on
such matter or matters. That is, by signing and returning your
proxy card, you give the proxy holders discretionary authority as
to any such matter or matters.
