MANAGER AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
CITIZENS BANK OF RHODE ISLAND
One Citizens Plaza
Providence, Rhode Island 02903
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Vernon R. Alden
Paul Y. Clinton
David A. Duffy
William J. Nightingale
J. William Weeks
OFFICERS
Lacy B. Herrmann, President
Stephen J. Caridi, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
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.
ANNUAL
REPORT
JUNE 30, 1998
A TAX-FREE INCOME INVESTMENT
AQUILA
[Logo of Aquila Group of Funds: eagle's head)
[Logo of Narragansett Insured Tax-Free Income Fund: a rectangle with profile
view of a sailboat on top of waves and three flying seagulls above it]
ONE OF THE
AQUILAsm GROUP OF FUNDS
<PAGE>
[Logo of Narragansett Insured Tax-Free Income Fund: a rectangle with profile
view of a sailboat on top of waves and three flying seagulls above it]
NARRAGANSETT INSURED TAX-FREE INCOME FUND
ANNUAL REPORT
"ATTRACTIVE TAX-FREE RETURNS PLUS HIGH STABILITY"
August 17, 1998
Dear Investor:
In our last report letter to you, we discussed the initial impact
of the serious economic and currency problems of various countries in the Far
East. We observed that these problems have resulted in a "FLIGHT TO QUALITY."
Specifically, we pointed out that, on a comparative basis, the
economy of the United States has continued to be very strong. As a result,
the U.S. dollar as a currency, as well as U.S. securities markets, have stood
out in the world as a "BEACON OF QUALITY." Narragansett Insured Tax-Free
Income Fund shares in this high quality ranking.
Therefore, in this letter to you, we wish to focus upon the level
of tax-free* return provided to you by Narragansett Insured Tax-Free Income
Fund in the current marketplace.
ATTRACTIVE TAX-FREE RETURNS
The rate of inflation in the United States has continued to be
relatively low throughout the recent expansion of the economy. This has
caused the level of interest rates to decline over recent years.
This decline in interest rates has provided the opportunity for
various municipalities to finance new projects and also to refinance existing
projects at lower interest costs to them. Municipalities act much like you
and I would when refinancing home mortgages to take advantage of attractive
rates. Basically, they are acting to save money.
While interest rates generated by TAX-FREE municipal bonds have
declined over the years, they have not declined as much as rates on a taxable
investment. As a result, TAX-FREE municipal securities have become
exceptionally attractive - on a comparative basis - with other types of
fixed-income securities.
Indeed, while the benchmark 30-year maturity U.S. Treasury bond
is currently yielding approximately 5.65%, its interest income is still
subject to taxes. On the other hand, similar maturity municipal securities,
of comparable quality, are yielding roughly 5.15% and are TAX-FREE. Thus,
comparable TAX-FREE municipal bonds are yielding more than 90% of what
high-quality TAXABLE bonds are paying. Consequently, with TAX-FREE municipal
securities, you are getting to keep more of the actual return paid. Most
significantly, this level of return represents for investors one of the best
for TAX-FREE securities in recent years.
The advantage to you of owning a TAX-FREE investment such as
Narragansett Insured Tax-Free Income Fund is vividly illustrated in the
following chart. This chart compares the 4.72%** average level of
distribution return for Class A Shares (as measured against the maximum
public offering price) for the past twelve months with what you would have
had to earn with a taxable investment.
<PAGE>
[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
28% 31% 36% 39.6%
<S> <C> <C> <C> <C>
Taxable Equivalent Rate 7.10% 7.60% 8.35% 8.98%
Double Tax-Free Distribution Rate 4.72% 4.72% 4.72% 4.72%
</TABLE>
As you will note, you would have to find taxable fixed-income
securities that would yield you a level of return quite a bit higher than
that achieved by your investment in Narragansett Insured Tax-Free Income
Fund. Given the current economic environment, such higher levels of yield
would not be possible to obtain, unless significant additional risk was taken
in the form of lesser quality securities.
You should be aware of just how attractive the TAX-FREE return
from the Fund is in today's marketplace.
STABILITY OF YOUR INVESTMENT
Additionally, what we have always tried to achieve for your
investment in Narragansett Insured Tax-Free Income Fund is a high level of
stability of share value. This is one of the prime objectives that
shareholders in the Fund have indicated to us that they would like to have
in addition to a good level of tax-free return.
[Graphic of bar chart with the following information:]
NET ASSET VALUE
<TABLE>
<CAPTION>
In Dollars
<C> <C>
9/10/92 9.60
12/31/92 9.59
6/30/93 10.07
12/31/93 10.31
6/30/94 9.44
12/31/94 9.11
6/30/95 9.80
12/31/95 10.24
6/30/96 10.38
12/31/96 10.14
6/30/97 10.18
12/31/97 10.46
6/30/98 10.47
</TABLE>
As you will note from the above chart, the Class A share value of
the Fund has achieved a high level of stability since the Fund began.
<PAGE>
SLEEPING WELL AT NIGHT
We have always been conscious of the fact that since many of our
shareholders are retirees or pre-retirees, they want comfort with regard to
obtaining a high degree of safety for their invested capital in the Fund. We
are still very mindful of the credit problems and capital losses experienced
by many residents of Rhode Island just a few short years ago. Indeed, in our
management of Narragansett Insured Tax-Free Income Fund, we have always tried
to ensure that you are able to "SLEEP WELL AT NIGHT" knowing that your
investment dollars are being well looked after.
Achieving an attractive level of tax-free return PLUS high
stability for your investment in Narragansett Insured Tax-Free Income Fund
requires use of various investment strategies.
We again want to highlight these various investment strategies
which the Fund uses to ensure that YOUR MONEY IS WELL PROTECTED.
These strategies include emphasis on municipal securities having
the highest quality credit rating, broad diversification with respect to both
number and nature of securities, and an intermediate maturity level with the
various holdings in the Fund's portfolio.
The accompanying three pie charts illustrate these points.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY QUALITY
(By Credit Rating)
<TABLE>
<S> <C>
AAA 100%
</TABLE>
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY PROJECT
<TABLE>
<S> <C>
Development 14.95%
Higher Education 16.06%
Hospitals 9.50%
Housing 1.15%
Water 5.56%
General Obligations 46.79%
Other 5.99%
</TABLE>
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY MATURITY
(in Years)
<TABLE>
<S> <C>
0 - 5 6.72%
6 - 10 32.39%
11 - 15 28.87%
16 - 20 17.07%
Over 20 14.95%
</TABLE>
At June 30, 1998, 100% of the Fund's overall portfolio was
rated AAA - the HIGHEST quality credit rating available for securities.
Additionally, nearly the entire portfolio was insured by specialized
insurance companies as to principal and interest payments when due.
<PAGE>
There are presently 133 individual issues in the Fund's
portfolio, representing a broad diversification in number and variety of
project categories throughout the State.
The average overall maturity of the portfolio is in the
intermediate range of 12.7 years. And, the duration is 4.9 years.
Basically, all these factors are designed to give you "PEACE OF
MIND" with your investment in Narragansett Insured Tax-Free Income Fund -
providing attractive tax-free return PLUS high stability.
KEEPING YOU IN MIND
We want you to know, that since the inception of Narragansett
Insured Tax-Free Income Fund, we have always kept in mind the level of
tax-free return you receive from your investment in the Fund.
We also keep in mind the degree of stability that we want your
investment to possess.
We achieve this through paying attention to the various areas we
have highlighted above.
These are the prime focuses that we continue to have for you with
the Fund.
YOUR CONFIDENCE VALUED
We value the opportunity to be of service to you. It is our
intent to consistently work in your interest with your investment in
Narragansett Insured Tax-Free Income Fund.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
* In certain circumstances, a small portion of the dividends paid by
the Fund will be subject to income taxes, including the alternative
minimum tax.
** The distribution rate shown represents that of Class A shares. Such
data quoted represents past performance and is not indicative of future
results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Different classes of shares are offered
by the Fund and their distribution rate and performance will vary because
of differences in sales charges and fees paid by shareholders investing
in different classes.
<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, 1998, as compared with a hypothetical
similar size investment in the Lehman Brothers Insured 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 consists of an unmanaged mix of more than 18,000 insured
investment-grade 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. Furthermore, whatever difference in
performance of the Index versus the Fund might also be attributed to the lack
of application of annual operating expenses and initial sales charge to 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.
Previously, the Fund's performance was compared to the Lehman
Brothers Municipal Bond Index rather than the Lehman Brothers Insured
Municipal Bond Index. A change in the particular index was made by the Fund
because it provides a better basis of comparison inasmuch as the Fund only
purchased insured bonds since inception. Had the Lehman Brothers Municipal
Bond Index been used at June 30, 1998, the value of a $10,000 investment in
that Index at inception of the Fund would have been $14,917. However, the corr
elation between the Fund's behavior and the Lehman Brothers Insured Municipal
Fund Index is more closely related.
[Graphic of a 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> <C>
9/92 $10,000 $9,600 $10,000
6/93 11,027 10,467 10,227
6/94 10,988 10,421 10,489
6/95 11,997 11,527 10,800
6/96 12,810 12,043 11,098
6/97 13,879 13,143 11,353
6/98 15,144 14,152 11,544
</TABLE>
[Table setup with the following information:]
FUND'S AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED LIFE OF FUND
JUNE 30, 1998 1 YEAR 5 YEARS Since 9/10/92
<S> <C> <C> <C>
INCLUDING SALES
CHARGE AND EXPENSES 3.74% 5.34% 6.16%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
PORTFOLIO MANAGER'S ANALYSIS
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 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, 1998 fiscal year-end the portfolio had
an average maturity of 12.7 years.
The 1997 calendar year ended on a very strong economic note with
gross domestic product ("GDP") growth of 4.3%. The economy continued to
improve with first quarter GDP momentum accelerating to 5.8%, well above the
strong showing in 1997. The economic recovery has entered the beginning of
its eighth year, 87 consecutive months with the close of first quarter 1998.
With inflation subdued and interest rates near the fiscal low, the Federal
Reserve Board held Federal fund rates even. It has been over a year since
short-term fund rates have been changed. Presently long-term interest rates
hover close to 5.5%, down from 6.75% a year earlier. Economic growth has
been very robust with consumer activity making up for any softness in demand
for exports caused by the disruptions in Asia.
The economic recovery has entered its 8th year, yet inflation and
interest rates are not rising. There is evidence corporate earnings are
moderating but remain positive. The Federal Treasury continues to benefit
from increased tax revenues creating a rare surplus of funds. This surplus
is allowing for the retirement of some outstanding Federal debt. A
continuance of economic improvement is anticipated but at a moderating pace.
Interest rates are near their trading range low and may remain low until
improvement in Asia is seen. Quality remains a primary foundation of this
Fund. While interest rates have declined we strive to enhance overall yield
without foregoing quality.
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 a
locally-based investment manager with its 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 manager will continue to oversee 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
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, 1998, and 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 five-year period then ended. 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, 1998, 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, 1998,
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 five-year period then
ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
August 7, 1998
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS
JUNE 30, 1998
<TABLE>
<C> <S> <C> <C>
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (44.1%) S&P VALUE
Town of Bristol, Rhode Island, MBIA Insured
$1,000,000 5.100%, 08/15/07 Aaa/AAA $1,035,000
100,000 6.000%, 12/15/11 Aaa/AAA 106,375
100,000 6.000%, 12/15/12 Aaa/AAA 106,250
Town of Burrillville, Rhode Island,
AMBAC Insured
405,000 5.300%, 07/15/08 Aaa/AAA 424,237
Town of Burrillville, Rhode Island,
MBIA Insured
250,000 5.400%, 10/15/06 Aaa/AAA 264,062
250,000 5.500%, 10/15/07 Aaa/AAA 264,688
150,000 5.700%, 10/15/10 Aaa/AAA 158,812
Central Falls, Rhode Island, MBIA Insured
500,000 4.900%, 11/15/05 Aaa/AAA 519,375
500,000 5.200%, 11/15/09 Aaa/AAA 520,625
Cranston, Rhode Island, MBIA Insured
1,120,000 5.300%, 07/15/05 Aaa/AAA 1,169,000
300,000 5.500%, 06/15/07 Aaa/AAA 324,000
Town of Cumberland, Rhode Island,
MBIA Insured
345,000 5.500%, 09/01/06 Aaa/AAA 371,306
500,000 5.600%, 10/01/08 Aaa/AAA 526,250
Town of Lincoln, Rhode Island, MBIA Insured
400,000 5.100%, 01/15/06 Aaa/AAA 418,000
400,000 5.200%, 08/15/06 Aaa/AAA 418,500
850,000 5.500%, 08/15/10 Aaa/AAA 892,500
100,000 5.625%, 04/15/11 Aaa/AAA 104,250
Town of Lincoln, Rhode Island, FGIC Insured
250,000 5.750%, 08/01/15 Aaa/AAA 266,875
Narragansett, Rhode Island, MBIA Insured
300,000 5.100%, 09/15/06 Aaa/AAA 313,500
1,000,000 5.300%, 09/15/08 Aaa/AAA 1,048,750
Newport, Rhode Island, MBIA Insured
150,000 6.550%, 08/15/07 Aaa/AAA 164,438
Newport, Rhode Island, Series B, FGIC
Insured
250,000 4.900%, 05/15/06 Aaa/AAA 257,500
500,000 5.000%, 05/15/07 Aaa/AAA 518,125
500,000 5.100%, 05/15/08 Aaa/AAA 521,250
<PAGE>
Pawtucket, Rhode Island, MBIA Insured
100,000 6.650%, 09/15/06 Aaa/AAA 109,375
Pawtucket, Rhode Island, FGIC Insured
310,000 5.625%, 04/15/07 Aaa/AAA 331,312
500,000 5.750%, 04/15/09 Aaa/AAA 531,875
Providence, Rhode Island, MBIA Insured
25,000 6.600%, 01/15/01 Aaa/AAA 26,469
100,000 5.500%, 01/15/04 Aaa/AAA 105,750
100,000 5.900%, 01/15/09 Aaa/AAA 106,375
200,000 5.250%, 01/15/12 Aaa/AAA 204,750
Providence, Rhode Island, FSA Insured
700,000 5.500%, 01/15/11 Aaa/AAA 738,500
Providence, Rhode Island, Series A,
MBIA Insured
100,000 5.400%, 08/01/01 Aaa/AAA 104,250
Providence, Rhode Island, 1992 Series A,
90,000 MBIA Insured 5.700%, 08/01/04 Aaa/AAA 95,288
East Providence, Rhode Island, MBIA
Insured
500,000 5.400%, 05/15/07 Aaa/AAA 540,000
Commonwealth of Puerto Rico, MBIA Insured
90,000 5.900%, 07/01/06 Aaa/AAA 96,188
100,000 5.750%, 07/01/09 Aaa/AAA 105,875
100,000 6.000%, 07/01/14 Aaa/AAA 106,000
500,000 5.875%, 07/01/18 Aaa/AAA 541,250
Commonwealth of Puerto Rico, FSA Insured
50,000 6.000%, 07/01/14 Aaa/AAA 53,000
Commonwealth of Puerto Rico, AMBAC Insured
500,000 5.850%, 07/01/15 Aaa/AAA 540,625
State of Rhode Island Refunding, Series A,
50,000 FGIC Insured 6.000%, 06/15/02 Aaa/AAA 53,437
Rhode Island Consolidated Capital Development
Loan, 1991 Series B, AMBAC Insured
300,000 6.250%, 05/15/07 Aaa/AAA 317,250
<PAGE>
Rhode Island Consolidated Capital Development
Loan, 1991 Series B, MBIA Insured
380,000 6.250%, 05/15/09 Aaa/AAA 403,275
100,000 6.250%, 05/15/10 Aaa/AAA 106,000
Rhode Island Consolidated Capital Development
Loan, 1992 Series A, FGIC Insured
1,050,000 5.500%, 08/01/07 Aaa/AAA 1,101,188
25,000 5.500%, 08/01/08 Aaa/AAA 26,219
Rhode Island Consolidated Capital Development
Loan, 1993 Series A, AMBAC Insured
1,000,000 4.800%, 06/15/02 Aaa/AAA 1,025,000
Rhode Island Consolidated Capital Development
Loan, 1993 Series A, FGIC Insured
1,000,000 5.100%, 11/01/13 Aaa/AAA 1,012,500
Town of Scituate, Rhode Island, MBIA Insured
375,000 5.500%, 04/01/09 Aaa/AAA 397,031
South Kingstown, Rhode Island, MBIA Insured
390,000 5.000%, 03/15/08 Aaa/AAA 405,600
125,000 5.125%, 06/01/08 Aaa/AAA 130,156
390,000 5.050%, 03/15/09 Aaa/AAA 405,112
170,000 5.200%, 06/01/09 Aaa/AAA 176,800
170,000 5.250%, 06/01/10 Aaa/AAA 176,800
100,000 6.300%, 12/15/11 Aaa/AAA 108,875
South Kingstown, Rhode Island, AMBAC Insured
400,000 4.900%, 11/15/07 Aaa/AAA 413,500
Warwick, Rhode Island, MBIA Insured
150,000 6.100%, 11/15/01 Aaa/AAA 159,938
Warwick, Rhode Island, FGIC Insured
50,000 7.000%, 11/15/02 Aaa/AAA 53,062
Warwick, Rhode Island, FSA Insured
195,000 5.600%, 08/01/14 Aaa/AAA 207,431
1,000,000 5.000%, 03/01/18 Aaa/AAA 980,000
<PAGE>
West Warwick, Rhode Island, MBIA Insured
500,000 5.800%, 01/01/04 Aaa/AAA 533,125
500,000 5.900%, 01/01/05 Aaa/AAA 532,500
Woonsocket, Rhode Island, MBIA Insured
385,000 5.125%, 03/01/11 Aaa/AAA 396,550
Total General Obligation Bonds 24,171,899
REVENUE BONDS (55.2%)
Higher Education Revenue Bonds (13.9%)
Rhode Island Health & Education Building
Corp - Higher Education, Various Purpose
25,000 1990 Series B, FSA Insured 7.250%, 09/15/06 Aaa/AAA 26,500
Rhode Island Health & Education Building
Corp - Bryant College, MBIA Insured 6.300%,
100,000 06/01/03 Aaa/AAA 108,750
Rhode Island Health & Education Building
Corp - Bryant College, 1992 2nd Series,
50,000 MBIA Insured 5.550%, 06/01/03 Aaa/AAA 52,750
100,000 5.800%, 06/01/05 Aaa/AAA 106,375
Rhode Island Health & Education Building
Corp - Johnson & Wales University, 1993
Series A, AMBAC Insured
100,000 5.200%, 04/01/04 NR/AAA 103,750
500,000 5.250%, 04/01/16 NR/AAA 506,250
1,000,000 5.00%, 09/01/23 NR/AAA 993,750
Rhode Island Health & Education Building
Corp - Johnson & Wales University, 1992
Series A, AMBAC Insured
200,000 5.875%, 04/01/05 NR/AAA 215,000
150,000 5.750%, 04/01/12 NR/AAA 159,188
150,000 6.375%, 04/01/12 NR/AAA 165,375
Rhode Island Health & Education Building
Corp - Providence College, 1993 Series,
MBIA Insured
300,000 5.600%, 11/01/09 Aaa/AAA 317,625
300,000 5.600%, 11/01/10 Aaa/AAA 315,750
500,000 5.600%, 11/01/22 Aaa/AAA 513,125
<PAGE>
Rhode Island Health & Education Building
Corp - Rhode Island School of Design,
200,000 1992 Series, MBIA Insured 5.800%, 06/01/05 Aaa/AAA 215,500
Rhode Island Health & Education Building
Corp - Brown University, 1993 Series,
MBIA Insured
500,000 5.400%, 09/01/18 Aaa/AAA 505,000
500,000 5.375%, 09/01/23 Aaa/AAA 503,750
Rhode Island Health & Education Building
Corp - Roger Williams University, 1996
1,000,000 Series S, AMBAC Insured 5.500%, 11/15/11 NR/AAA 1,056,250
Rhode Island Health & Education Building
Corp - Board of Governors, 1993 Series A,
MBIA Insured
450,000 5.300%, 09/15/08 Aaa/AAA 469,125
55,000 5.500%, 09/15/13 Aaa/AAA 57,612
140,000 5.250%, 09/15/23 Aaa/AAA 139,825
500,000 5.250%, 09/15/23 Aaa/AAA 499,375
Rhode Island Health & Education Building
Corp - Board of Governors, 1993 Series B,
MBIA Insured
245,000 5.500%, 09/15/13 Aaa/AAA 256,638
Rhode Island Health & Education Building Corp -
Salve Regina, 1993 Series, AMBAC Insured
150,000 5.300%, 03/15/00 NR/AAA 152,812
150,000 6.100%, 03/15/06 NR/AAA 162,938
7,603,013
Hospital Revenue Bonds (7.6%)
Rhode Island Health & Education Building
Corporation, Women & Infants Hospital, 1992
Series, FSA Insured
100,000 6.150%, 09/01/05 Aaa/AAA 108,375
400,000 6.350%, 09/01/07 Aaa/AAA 436,500
300,000 6.550%, 09/01/13 Aaa/AAA 327,375
<PAGE>
Rhode Island Health & Education Building
Corporation, Kent County Memorial Hospital,
150,000 1992 Series, MBIA Insured 6.000%, 07/01/06 Aaa/AAA 159,188
Rhode Island Health & Education Building
Corporation - Hospital Fing - Lifespan
Obligation Group, MBIA Insured
2,000,000 5.750%, 05/15/23 Aaa/AAA 2,112,500
1,000,000 5.250%, 05/15/26 Aaa/AAA 998,750
4,142,688
Mortgage Revenue-Multi Family Bonds (1.1%)
Rhode Island Housing & Mortgage Finance Corp,
1995 Series A, AMBAC Insured
300,000 5.450%, 07/01/04 Aaa/AAA 316,500
300,000 5.550%, 07/01/05 Aaa/AAA 318,750
635,250
Water and Sewer Revenue Bonds (2.5%)
Kent County Water Authority Revenue Bonds, 1994
250,000 Series A, 5.700%, 07/15/04, MBIA Insured Aaa/AAA 268,125
Bristol County Rhode Island Water Authority
750,000 1997 Series A, 5.250%, 07/01/17, MBIA Insured Aaa/AAA 769,688
Bristol County Rhode Island, MBIA Insured
300,000 5.000%, 12/01/08 Aaa/AAA 310,125
1,347,938
Utility Revenue Bonds (.3%)
Puerto Rico Electric Power Authority, Series Q,
FSA Insured
100,000 5.750%, 07/01/07 Aaa/AAA 106,750
50,000 6.000%, 07/01/10 Aaa/AAA 50,932
157,682
<PAGE>
Development Revenue Bonds (18.4%)
Rhode Island Convention Center Authority,
1991 Series A, MBIA Insured (Escrowed to
Maturity)
100,000 6.375%, 05/15/01 Aaa/AAA 108,000
100,000 6.100%, 05/15/02 Aaa/AAA 107,250
150,000 6.300%, 05/15/04 Aaa/AAA 161,625
Rhode Island Convention Center Authority, 1993
500,000 Series B, MBIA Insured 5.000%, 05/15/07 Aaa/AAA 519,375
Rhode Island Convention Center Authority, 1993
Series A, AMBAC Insured
500,000 5.400%, 05/15/08 Aaa/AAA 526,250
300,000 5.500%, 05/15/13 Aaa/AAA 315,375
650,000 5.000%, 05/15/20 Aaa/AAA 637,812
940,000 5.000%, 05/15/23 Aaa/AAA 915,325
Rhode Island Public Building Authority State
Public Projects, 1990 Series A, AMBAC Insured
(Escrowed to Maturity)
710,000 6.000%, 02/01/01 Aaa/AAA 743,725
300,000 6.600%, 02/01/02 Aaa/AAA 324,000
Rhode Island Public Building Authority State
Public Projects, 1993 Series A, AMBAC Insured
500,000 5.100%, 02/01/05 Aaa/AAA 519,375
1,000,000 5.250%, 02/01/10 Aaa/AAA 1,031,250
Rhode Island Public Building Authority State
Public Projects, 1990 Series A, AMBAC Insured
785,000 6.000%, 02/01/11 Aaa/AAA 821,306
Rhode Island Public Building Authority State
Public Projects, 1989 Series A, AMBAC Insured
(Escrowed to Maturity)
370,000 7.000%, 02/01/00 Aaa/AAA 394,050
35,000 6.750%, 02/01/00 Aaa/AAA 37,144
Rhode Island Public Building Authority State
Public Projects, Series A, MBIA Insured
250,000 5.250%, 08/01/06 Aaa/AAA 252,812
<PAGE>
Rhode Island Public Building Authority State
Public Projects, 1986 Series A, MBIA Insured
600,000 5.250%, 08/01/07 Aaa/AAA 606,750
Rhode Island Public Building Authority State
Public Projects, 1996 School Series B,
MBIA Insured
500,000 5.500%, 12/15/14 Aaa/AAA 526,250
1,000,000 5.250%, 12/15/14 Aaa/AAA 1,026,250
500,000 5.500%, 12/15/15 Aaa/AAA 523,750
10,097,674
Pollution Control Revenue Bonds (3.4%)
Rhode Island Clean Water Protection, 1993
Series A, MBIA Insured
200,000 5.300%, 10/01/07 Aaa/AAA 212,500
300,000 5.400%, 10/01/09 Aaa/AAA 322,125
1,250,000 5.400%, 10/01/15 Aaa/AAA 1,342,188
1,876,813
Other Revenue Bonds (8.0%)
State of Rhode Island Depositors Economic
Protection Corp., 1992 Series A,
210,000 FSA Insured 6.000%, 08/01/01 Aaa/AAA 221,550
State of Rhode Island Depositors Economic
Protection Corp., 1992 Series B,
MBIA Insured
135,000 5.500%, 08/01/06 Aaa/AAA 144,450
500,000 6.000%, 08/01/17 Aaa/AAA 541,250
State of Rhode Island Depositors Economic
Protection Corp., 1993 Series A,
MBIA Insured
355,000 5.625%, 08/01/09 Aaa/AAA 387,394
State of Rhode Island Depositors Economic
Protection Corp., 1993 Series B,
MBIA Insured
300,000 5.800%, 08/01/09 Aaa/AAA 334,125
500,000 5.250%, 08/01/21 Aaa/AAA 521,250
<PAGE>
Rhode Island State and Local Facilities
1,500,000 MBIA Insured 5.400%, 08/01/08 Aaa/AAA 1,605,000
State of Rhode Island Certificates of
Participation, Howard Center Improvements,
MBIA Insured
400,000 5.250%, 10/01/10 Aaa/AAA 417,000
200,000 5.375%, 10/01/16 Aaa/AAA 206,500
4,378,519
Total Revenue Bonds 30,239,577
Total Investments (cost $52,140,019*) 99.3% 54,411,476
Other assets in excess of liabilities 0.7 389,415
Net Assets 100.0% $ 54,800,891
<FN> * Cost for Federal tax purposes is identical. </FN>
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
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, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $52,140,019) $ 54,411,476
Interest receivable 810,045
Receivable for Fund shares sold 123,809
Due from Administrator for reimbursement of expenses
(note 3) 12,569
Receivable for investment securities sold 5,000
Other assets 86
Total assets 55,362,985
LIABILITIES
Cash overdraft 395,310
Accrued expenses 62,844
Dividends payable 43,910
Payable for Fund shares redeemed 32,069
Distribution fees payable 25,715
Management fee payable 2,246
Total liabilities 562,094
NET ASSETS $ 54,800,891
Net Assets consist of:
Capital Stock - Authorized 80,000,000 shares, par value
$.01 per share $ 52,330
Additional paid-in capital 52,522,828
Overdistribution of net investment income (43,776)
Accumulated net loss on investments (1,948)
Net unrealized appreciation on investments 2,271,457
$ 54,800,891
CLASS A
Net Assets $ 52,005,908
Capital shares outstanding 4,966,056
Net asset value and redemption price per share $ 10.47
Offering price per share (100/96 of $10.47 adjusted to
nearest cent) $ 10.91
CLASS C
Net Assets $ 2,778,215
Capital shares outstanding 265,321
Net asset value and offering price per share $ 10.47
Redemption price per share (*generally, a charge of
1% is imposed on the proceeds of shares redeemed
during the first 12 months after purchase) $ 10.47*
CLASS Y
Net Assets $ 16,768
Capital shares outstanding 1,601
Net asset value, offering and redemption price per share $ 10.47
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 2,514,878
Expenses:
Management fee (note 3) $ 246,189
Distribution and service fees (note 3) 85,544
Trustees' fees and expenses (note 8) 46,522
Transfer and shareholder servicing agent fees 40,131
Legal fees 38,158
Shareholders' reports and proxy statements 31,876
Audit and accounting fees 20,821
Registration fees and dues 6,984
Custodian fees (note 7) 6,800
Insurance 834
Miscellaneous 44,541
568,400
Management fee waived (note 3) (221,568)
Reimbursement of expenses by Manager (note 3) (195,380)
Expenses paid indirectly (note 7) (6,800)
Net expenses 144,652
Net investment income 2,370,226
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities
transactions -
Change in unrealized appreciation on
investments 1,342,773
Net realized and unrealized gain on
investments 1,342,773
Net increase in net assets resulting from
operations $ 3,712,999
</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,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,370,226 $ 2,028,546
Net realized gain (loss) from securities
transactions - (1,948)
Change in unrealized appreciation on
investments 1,342,773 1,032,756
Change in net assets from operations 3,712,999 3,059,354
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (2,351,223) (2,047,604)
Net realized gain on investments - -
Class C Shares:
Net investment income (52,701) (9,970)
Net realized gain on investments - -
Class Y Shares:
Net investment income (113) (6)
Net realized gain on investments - -
Change in net assets from distributions (2,404,037) (2,057,580)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 14,588,209 8,147,455
Reinvested dividends and distributions 1,376,354 1,067,542
Cost of shares redeemed (5,497,648) (5,180,006)
Change in net assets from capital share
transactions 10,466,915 4,034,991
Change in net assets 11,775,877 5,036,765
NET ASSETS:
Beginning of period 43,025,014 37,988,249
End of period $ 54,800,891 $ 43,025,014
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
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 an annual service fee. Class C shares are sold with a
level-payment sales charge with no payment at time of purchase but level
service and distribution fees from date of purchase through a period of six
years thereafter. A contingent deferred sales charge of 1% is assessed to any
Class C shareholder who redeems shares of this Class within one year from the
date of purchase. The Class Y shares are only offered to institutions acting
for an investor in a fiduciary, advisory, agency, custodian or similar
capacity. They are not available to individual retail investors. Class Y
shares are sold at net asset value without any sales charge, redemption fees,
contingent deferred sales charge or distribution or service fees. On October
31, 1997, the Fund established Class I shares, which are offered and sold
only through financial intermediaries and are not offered directly to retail
investors. At June 30, 1998 there were no Class I shares outstanding. All
classes of shares represent interests in the same portfolio of investments in
the Fund and are identical as to rights and privileges. They differ only with
respect to the effect of sales charges, the distribution and/or service fees
borne by the respective class, expenses specific to each class, voting rights
on matters affecting a single class and the exchange privileges of each
class.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value 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.
<PAGE>
In Fiscal 1997, the Fund began amortizing bond premium using the
constant yield method. Accordingly, net unrealized appreciation and
additional paid-in capital have been adjusted by equal amounts at the
beginning of the year. This change had no effect on the Fund's net asset
value or distribution policy and conforms to the amortization policy
followed by the Fund for Federal tax purposes.
b) 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 premium and accretion of
original issue discount. Market discount is recognized upon disposition
of the security.
c) 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.
d) 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.
e) 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 and disclosure of contingent
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.
3. FEES AND RELATED PARTY TRANSACTIONS
A) MANAGEMENT ARRANGEMENTS:
Aquila Management Corporation (the "Manager"), the Fund's founder and
sponsor, serves as the Manager for the Fund under an Advisory and
Administration Agreement with the Fund. The portfolio management of the Fund
has been delegated to a Sub-Adviser as described below. Under the Advisory
and Administration Agreement, the Manager provides all administrative
services to the Fund, other than those relating to the day-to-day portfolio
management. The Manager's services include providing the office of the Fund
and all related services as well as overseeing the activities of the
Sub-Adviser and 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 Manager 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 0.50 of 1% on the Fund's net assets.
<PAGE>
Citizens Bank of Rhode Island (the "Sub-Adviser"),formerly known as
Citizens Trust Company, serves as the Investment Sub-Adviser for the Fund
under a Sub-Advisory Agreement between the Manager and the Sub-Adviser.
Under this agreement, the Sub-Adviser continuously provides, subject to
oversight of the Manager and the Board of Trustees of the Fund, the
investment program of the Fund and the composition of its portfolio, arranges
for the purchases and sales of portfolio securities, and provides for daily
pricing of the Fund's portfolio. For its services, the Sub-Adviser is
entitled to receive a fee from the Manager which is payable monthly and
computed as of the close of business each day at the annual rate of 0.23 of
1% on the Fund's net assets.
On November 14, 1997, the Management arrangements described above were
approved by the Fund's shareholders and went into effect. From inception of
the Fund to that date, Aquila Management Corporation and Citizens Bank of
Rhode Island had served as the Fund's Administrator and Investment Manager,
respectively, pursuant to agreements with the Fund, for total fees at an
annual rate of 0.50 of 1% of the Fund's net assets, the same fee as under the
new arrangements.
For the year ended June 30, 1998, the Fund incurred fees for advisory
and administrative services of $246,189 of which $221,568 was voluntarily
waived. Additionally, the Manager voluntarily agreed to reimburse the Fund
for other expenses during this period in the amount of $195,380. Of this
amount, $182,811 was paid prior to June 30, 1998 and the balance of $12,569
was paid in early July 1998.
Specific details as to the nature and extent of the services provided
by the Manager and the Sub-Adviser are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
B) DISTRIBUTION AND SERVICE FEES:
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 ("Qualified Recipients")
selected by Aquila Distributors, Inc., ("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. 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, 1998, service fees
on Class A Shares amounted to $72,087, of which the Distributor received
$1,455.
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 and for
the year ended June 30, 1998, amounted to $10,093. In addition, under a
Shareholder Services Plan, the Fund is
<PAGE>
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 and for the year ended
June 30, 1998, amounted to $3,364. The total of these payments with respect
to Class C Shares amounted to $13,457, of which the Distributor received
$11,301.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, 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, 1998, the Distributor received sales commissions of
$22,582.
4. PURCHASES AND SALES OF SECURITIES
During the year ended June 30, 1998, purchases of securities and
proceeds from the sales of securities aggregated $10,909,398 and $10,000,
respectively.
At June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $2,297,339 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to
$25,882, for a net unrealized appreciation of $2,271,457.
At June 30, 1998, the Fund had a capital loss carryover of $1,948,
which is available to offset future net realized gains on securities
transactions to the extent provided for in the Internal Revenue Code. If not
offset with gains, the loss will expire at June 30, 2006.
5. 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. At June 30, 1998,
all of the securities in the Fund were insured. While such insurance 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.
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
<PAGE>
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, 1998, the Fund had 2.9% of its net
assets invested in eight Puerto Rico municipal issues, all of which are rated
AAA and insured or collateralized by U.S. Treasury securities.
6. 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 and are taxable.
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 statement
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, under some circumstances, be subject
to the alternative minimum tax.
7. CUSTODIAN FEES
The Fund has negotiated an expense offset arrangement 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,
1998, the Fund's custodian fees amounted to $6,800, all of which was offset
by such credits. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in income-producing assets
rather than leave cash on deposit with the custodian.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were seven Trustees. Trustees' fees paid
during the year were at the annual rate of $3,000 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, 1998, such reimbursements
averaged approximately $3,500 per Trustee. One of the Trustees, who is
affiliated with the Manager, is not paid any Trustee fees.
<PAGE>
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,171,521 $12,169,353 760,202 $ 7,656,627
Reinvested distributions 128,741 1,340,037 105,705 1,064,301
Cost of shares redeemed (512,096) (5,326,530) (513,856) (5,167,501)
Net change 788,166 8,182,860 352,051 3,553,427
CLASS C SHARES:
Proceeds from shares sold 230,636 2,402,356 48,532 490,828
Reinvested distributions 3,479 36,310 320 3,235
Cost of shares redeemed (16,414) (171,117) (1,242) (12,505)
Net change 217,701 2,267,549 47,610 481,558
CLASS Y SHARES:
Proceeds from shares sold 1,590 16,500 - -
Reinvested distributions - 6 1 6
Cost of shares redeemed - - - -
Net change 1,590 16,506 1 6
Total transactions in Fund shares 1,007,457 $ 10,466,915 399,662 $ 4,034,991
</TABLE>
<PAGE>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class A(1)
Year ended June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.18 $9.93 $9.80 $9.44 $10.07
Income from Investment Operations:
Net investment income 0.50 0.51 0.52 0.54 0.53
Net gain (loss) on securities
(both realized and unrealized) 0.30 0.26 0.13 0.36 (0.63)
Total from Investment Operations 0.80 0.77 0.65 0.90 (0.10)
Less Distributions (note 6):
Dividends from net investment
income (0.51) (0.52) (0.52) (0.54) (0.53)
Distributions from capital gains - - - - -
Total Distributions (0.51) (0.52) (0.52) (0.54) (0.53)
Net Asset Value, End of Period $10.47 $10.18 $9.93 $9.80 $9.44
Total Return (not reflecting sales
charge)(%) 8.02 7.95 6.72 9.82 (1.11)
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 52,006 42,540 37,988 34,373 31,660
Ratio of Expenses to Average
Net Assets (%) 0.27 0.21 0.14 0.06 0.02
Ratio of Net Investment Income to
Average Net Assets (%) 4.84 5.07 5.19 5.63 5.30
Portfolio Turnover Rate (%) 0.02 5.29 0 0 0
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the voluntary waiver of a portion of the
management fee, the Manager's voluntary expense reimbursement and the expense
offset in custodian fees for uninvested cash balances would have been:
<S> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.41 0.41 0.42 0.43 0.40
Ratio of Expenses to Average
Net Assets (%) 1.13 1.25 1.17 1.19 1.32
Ratio of Net Investment Income to
Average Net Assets (%) 3.98 4.03 4.16 4.50 4.00
<FN> (1) Designated as Class A Shares on May 1, 1996. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Period(2) Period(2)
Year Ended June 30, Ended June Year Ended June 30, Ended June
1998 1997 30, 1996 1998 1997 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.18 $9.93 $9.94 $10.19 $9.93 $9.94
Income from Investment Operations:
Net investment income 0.40 0.41 0.07 0.59 0.56 0.09
Net gain (loss) on securities
(both realized and unrealized) 0.30 0.26 (0.01) 0.29 0.26 (0.01)
Total from Investment Operations 0.70 0.67 0.06 0.88 0.82 0.08
Less Distributions (note 6):
Dividends from net investment income (0.41) (0.42) (0.07) (0.60) (0.56) (0.09)
Distributions from capital gains - - - - - -
Total Distributions (0.41) (0.42) (0.07) (0.60) (0.56) (0.09)
Net Asset Value, End of Period $10.47 $10.18 $9.93 $10.47 $10.19 $9.93
Total Return (not reflecting sales
charge) (%) 6.94 6.89 0.60# 8.80 8.48 0.80#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 2,778 485 0.1 17 0.1 0.1
Ratio of Expenses to Average Net
Assets (%) 1.28 1.06 0.20# 0.27 0.06 0.14#
Ratio of Net Investment Income to
Average Net Assets (%) 3.76 4.22 0.70# 4.67 5.22 0.89#
Portfolio Turnover Rate (%) 0.02 5.29 0 0.02 5.29 0
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the voluntary waiver of a portion of the
management fee, the Manager'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 ($) 0.33 0.30 0.06 0.46 0.55 0.08
Ratio of Expenses to Average Net
Assets (%) 1.94 2.10 0.32# 0.84 1.10 0.15#
Ratio of Net Investment Income to
Average Net Assets (%) 3.10 3.18 0.61# 4.10 4.18 0.77#
<FN> (1) New Class of Shares established on May 1, 1996. </FN>
<FN> (2) From May 1, 1996 to June 30, 1996. </FN>
<FN> # Not annualized. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Narragansett Insured
Tax-Free Income Fund (the "Fund") was held on November 14, 1997. The holders
of shares representing 70% of the total net asset value of the shares
entitled to vote were present in person or by proxy. At the meeting, the
following matters were voted upon and approved by the shareholders (the
resulting votes for each matter are presented below).
(1) The election of Lacy B. Herrmann, Vernon R. Alden, Paul Y. Clinton,
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 31,665,320.51 affirmative
votes; no more than 421,457.31 votes were withheld for any Trustee).
(2) The ratification of the selection of KPMG Peat Marwick LLP as the
Fund's independent auditors for the fiscal year ending June 30, 1998
(votes for: 31,419,289.84; votes against: 84,778.45; abstentions:
582,709.53; broker non-votes: 0.00).
(3) The approval of a proposed Investment Advisory and Administration
Agreement with Aquila Management Corp. (votes for: 29,310,061.31;
votes against: 435,991.83; abstentions: 712,590.10; broker non-notes:
1,628,134.58).
(4) The approval of a proposed Sub-Advisory Agreement between Aquila
Management Corporation as Manager and Citizens Bank of Rhode Island as
Sub- Adviser (votes for: 27,770,787.93; votes against: 343,106.89;
abstentions: 685,106.48; broker non-votes: 3,287,776.52)
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, 1998, of the total amount of
dividends paid by Narragansett Insured Tax-Free Income Fund, 99.59% was
"exempt-interest dividends" and the balance was ordinary dividend income.
Prior to January 31, 1998, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions paid for
the 1997 CALENDAR YEAR.
