<PAGE>
Aquila
Narragansett Insured Tax-Free Income Fund
380 Madison Avenue
Suite 2300
New York, New York 10017
800-453-6864
212-697-6666
Prospectus
Class A Shares
Class C Shares October 30, 1998
The Fund is a mutual fund whose objective is to seek to provide a
high level of preservation for investors' capital and consistency
in the payment of current income which is exempt from both State
of Rhode Island personal income taxes and regular Federal income
taxes.
To achieve this objective, the Fund will invest primarily in
tax-free municipal obligations which are insured by nationally
recognized insurers of municipal obligations.
Municipal obligations which are so insured generally carry
the highest credit rating (Aaa or AAA) assigned by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"). The Fund's goal, which is not assured, is to
have 100% of the Fund's assets invested in insured obligations.
If any uninsured obligations are purchased by the Fund, they must
either be rated within the four highest credit ratings, which are
considered as "investment grade," or, if unrated, be determined
to be of comparable quality by the Fund's investment sub-adviser,
Citizens Bank of Rhode Island.
This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund dated October 30, 1998 (the
"Additional Statement") has been filed with the Securities and
Exchange Commission and is available without charge upon written
request to the Fund's Shareholder Servicing Agent, at the address
given below, or by calling the telephone number(s) given below.
The Additional Statement contains information about the Fund and
its management not included in this Prospectus. The Additional
Statement is incorporated by reference in its entirety in this
Prospectus. Only when you have read both this Prospectus and the
Additional Statement are all material facts about the Fund
available to you.
Insurance covers timely payment of principal and interest
when due on individually insured securities in the Fund's
investment portfolio. Insurance does not, however, insure
against fluctuations in the value of the Fund's shares and
dividend rates, which are not fixed and will vary with prevailing
interest rates and economic and market factors.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY CITIZENS BANK OF RHODE ISLAND (THE
"SUB-ADVISER"), CITIZENS FINANCIAL GROUP, INC., ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact the Fund's
Shareholder Servicing Agent:
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809
Call 800-637-4633 toll free
For General Inquiries & Yield Information,
Call 800-453-6864 toll free or 212-697-6666
In Rhode Island: 401-453-6864
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Department of Administration - Providence, RI
Rhode Island Convention Center - Providence, RI
Andrews Hall - Brown University
Providence County Courthouse
Daphne Farago Wing
Rhode Island School of Design
Veterans Memorial Auditorium
Providence, RI
The Fund invests in tax-free municipal securities, primarily the
kinds of obligations issued by various communities and political
subdivisions within Rhode Island. Most of these securities are
used to finance long-term municipal projects; examples are
pictured above. (See "Investment of the Fund's Assets.") The
municipal obligations which financed projects of which these are
typical were included in the Fund's portfolio as of June 30,
1998, and together represented 17.4% of the Fund's portfolio.
Since the portfolio is subject to change, the Fund may not
necessarily own these specific securities at the time of the
delivery of this Prospectus.
<PAGE>
HIGHLIGHTS
Narragansett Insured Tax-Free Income Fund, founded by Aquila
Management Corporation in 1992 and one of the Aquilasm Group of
Funds, is an open-end, non-diversified management investment
company (a "mutual fund") which invests in tax-free municipal
bonds and notes, the kind of obligations issued by the State of
Rhode Island and its various local authorities to finance such
long-term projects as schools, roads, hospitals, and water
facilities throughout Rhode Island or to finance short-term
needs. (See "Introduction.")
Insured Obligations - The Fund's investments will be
primarily municipal obligations which are insured as to the
timely payment of principal and interest when due by nationally
recognized insurers of such obligations. The goal of the Fund,
which is not assured, is to have 100% of the Fund's assets so
invested. While individual portfolio securities of the Fund will
be so insured, the Fund's share value and dividend rate are not
fixed or insured and will fluctuate with prevailing interest
rates and other economic and market factors. (See "Factors Which
May Affect the Value of the Fund's Investments and Their
Yields.")
Investment Grade - Other than insured municipal obligations
which are rated Aaa or AAA, the Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Sub-Adviser to be of comparable quality. In general, there
are nine separate credit ratings for municipal obligations,
ranging from the highest to the lowest credit ratings.
Obligations within the top four ratings are considered
"investment grade," but those in the fourth rating may have
speculative characteristics as well. (See "Investment of the
Fund's Assets.")
Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from both State of
Rhode Island personal income taxes and regular Federal income
taxes. Dividends paid by the Fund from this income are likewise
free of both such taxes. It is, however, possible that in certain
circumstances, a small portion of the dividends paid by the Fund
will be subject to income taxes. In addition, the Federal
alternative minimum tax may apply to some investors; however, not
more than 20% of the Fund's net assets can be invested in
obligations paying interest which is subject to this tax. The
receipt of exempt-interest dividends from the Fund may result in
some portion of social security payments or railroad retirement
benefits being included in taxable income. Capital gains
distributions, if any, are taxable. (See "Dividend and Tax
Information.")
Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. (See the
Application, which is in the back of the Prospectus and "How to
Invest in the Fund," which includes applicable sales charge
information.)
Additional Investments - You may make additional investments
at any time and in any amount, directly or, if in an amount of
$50 or more, through the convenience of having your investment
electronically transferred from your financial institution
account into the Fund by Automatic Investment or Telephone
Investment. (See "How to Invest in the Fund.")
Alternative Purchase Plans - The Fund provides two
alternative ways for individuals to invest. (See "Alternative
Purchase Plans.") One way permits individual investors to pay
distribution and certain service charges principally at the time
they purchase shares; the other way permits investors to pay such
costs over a period of time, but without paying anything at time
of purchase, much as goods can be purchased on an installment
plan. For this purpose the Fund offers the following classes of
shares, which differ in their expense levels and sales charges:
Front-Payment Class Shares ("Class A Shares") are offered
to anyone at net asset value plus a sales charge, paid at
the time of purchase, at the maximum rate of 4.0% of the
public offering price, with lower rates for larger
purchases. (See "How to Purchase Class A Shares.") Class A
Shares are subject to an asset retention service fee under
the Fund's Distribution Plan at the rate of 0.15 of 1% of
the average annual net assets represented by the Class A
Shares. (See "Distribution Plan.")
Level-Payment Class Shares ("Class C Shares") are offered
to anyone at net asset value with no sales charge payable at
the time of purchase but with a level charge for service and
distribution fees for six years after the date of purchase
at the aggregate annual rate of 1% of the average annual net
assets of the Class C Shares. (See "Distribution Plan" and
"Shareholder Services Plan for Class C Shares.") Six years
after the date of purchase, Class C Shares are automatically
converted to Class A Shares. If you redeem Class C Shares
before you have held them for 12 months from the date of
purchase you will pay a contingent deferred sales charge
("CDSC"); this charge is 1%, calculated on the net asset
value of the Class C Shares at the time of purchase or at
redemption, whichever is less. There is no CDSC after Class
C Shares have been held beyond the applicable period. (See
"Alternative Purchase Plans," "Computation of the Holding
Periods for Class C Shares" and "How to Purchase Class C
Shares.")
The Fund also issues Institutional Class Shares ("Class Y
Shares") that are sold only to certain institutional investors
and Financial Intermediary Class Shares ("Class I Shares") which
are offered and sold only through certain financial
intermediaries. Class Y Shares and Class I Shares are not offered
by this Prospectus.
Class A Shares and Class C Shares are only offered for sale
in certain states. (See "How to Invest in the Fund.") If shares
of the Fund are sold outside those states the Fund can redeem
them. If your state of residence is not Rhode Island, the
dividends from the Fund may be subject to income taxes of the
state in which you reside. Accordingly, you should consult your
tax adviser before acquiring shares of the Fund.
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to
you, directly deposited into your financial institution account
or automatically reinvested without sales charge in additional
shares of the Fund at the then-current net asset value. Specific
classes of shares will have different dividend amounts due to
their particular expense levels. (See "Dividend and Tax
Information.")
Redemptions - Liquidity - You may redeem any amount of your
account on any business day at the next determined net asset
value by telephone, FAX or mail request, with proceeds being sent
to a predesignated financial institution, if you have elected
Expedited Redemption. Proceeds will be wired or transferred
through the facilities of the Automated Clearing House, wherever
possible, upon request, if in an amount of $1,000 or more, or
will be mailed. For these and other redemption procedures see
"How to Redeem Your Investment." There are no penalties or
redemption fees for redemption of Class A Shares. However, there
is a contingent deferred sales charge with respect to certain
Class A Shares which have been purchased in amounts of $1 million
or more (see "Purchase of $1 Million or More"). If you redeem
Class C Shares before you have held them for 12 months from the
date of purchase you will pay a contingent deferred sales charge
("CDSC") at the rate of 1%. (See "Alternative Purchase Plans" -
"Class C Shares.")
Local Investment Management and Fee Arrangements - Citizens
Bank of Rhode Island serves as the Fund's investment Sub-Adviser,
providing experienced local professional management. The Fund
pays fees at a rate of up to 0.50 of 1% of average annual net
assets to its Manager which pays fees at the annual rate of 0.23
of 1% of such net assets to the Sub-Adviser, although some or all
of these fees may be waived temporarily. (See "Table of Expenses"
and "Management Arrangements.")
Many Different Issues - Even a small investment in the Fund
allows you to have the advantages of a portfolio which consists
of over 110 issues with different maturities. (See "Investment
of the Fund's Assets.")
Certain Stabilizing Measures - To attempt to protect against
declines in the value of its investments and other market risks,
the Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases of
other than insured issues, broadening diversification and
increasing its position in cash.
Exchanges - You may exchange Class A Shares or Class C
Shares of the Fund into corresponding classes of shares of other
Aquila-sponsored tax-free municipal bond funds or Aquila-
sponsored equity funds. You may also exchange them into shares of
the Aquila-sponsored money market funds. The exchange prices will
be the respective net asset values of the shares. (See "Exchange
Privilege.")
Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions, including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Rhode Island issues, are subject to
economic and other conditions affecting Rhode Island. (See "Risk
Factors and Special Considerations Regarding Investment in Rhode
Island Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.")
Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual
Report and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
TABLE OF EXPENSES
Class A Class C
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases.......... 4.00% None
(as a percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividends None None
Maximum Deferred Sales Charge ..................... None(1) 1.00%(2)
Redemption Fees ................................... None None
Exchange Fee ...................................... None None
Annual Fund Operating Expenses(3)(4)
(as a percentage of average net assets)
Management Fee After Waiver(5).......... .......... 0.05% 0.05%
12b-1 Fee After Expense Reimbursement.............. 0.00% 0.75%
All Other Expenses After Expense
Reimbursement..................................... 0.21% 0.46%
Service Fee ..................................... None 0.25%
Other Expenses .................................. 0.21% 0.21%
Total Fund Operating Expenses After Expense
Reimbursement and Fee Waiver..................... 0.26% 1.26%
Example (6)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares.............. $43 $48 $54 $72
Class C Shares..............
With complete redemption
at end of period........ $23 $40 $69 $99(7)
With no redemption........ $13 $40 $69 $99(7)
<FN>
(1) Certain shares purchased in transactions of $1 million or more without
a sales charge may be subject to a contingent deferred sales charge of up
to 1% upon redemption during the first four years after purchase. (See
"Purchase of $1 Million or More.")
</FN>
<FN>
(2) A contingent deferred sales charge of 1% is imposed on the redemption
proceeds of the shares (or on the original price, whichever is lower) if
redeemed during the first 12 months after purchase.
</FN>
<FN>
(3) Estimated based upon actual expenses incurred by the Fund during its
most recent fiscal year and known expense adjustments for the current year.
</FN>
<FN>
(4) At present, fees are being partially waived by the Manager
and the Sub-Adviser. It is anticipated that once the asset size
of the Fund reaches approximately $100 million, these waivers may
no longer be necessary. Also, operating expenses are being
subsidized through reimbursement by the Manager. This subsidy is
being phased out progressively so that the Fund will bear its
own expenses, other than management fees, once its asset size
reaches approximately $100 million. The undertakings of the Manager
and the Sub-Adviser as to fee waivers and the practices of the
Manager as to expense reimbursement may operate to reduce the fees
and expenses of the Fund in order for the Fund to maintain a
competitive yield. (See "Management Arrangements.") Other
Expenses do not reflect a 0.01% expense offset in Custodian
fees received for uninvested cash balances. Without fee
waivers and expense reimbursement and including the offset
in Custodian fees, expenses would have been incurred
at the following annual rates: for Class A Shares, management fee,
0.50%; 12b-1 fee, 0.15%; other expenses, 0.45%, for total operating
expenses of 1.10%; for Class C Shares, management fee, 0.50%;
12b-1 fee, 0.75%; service fee, 0.25%; other expenses, 0.45%,
for total operating expenses of 1.95%.
</FN>
<FN>
(5) The Fund pays the Manager an advisory fee at the annual rate of
0.50% of 1% of average annual net assets of which 0.45 of 1% is
currently being waived; the Manager pays the Sub-Adviser a
sub-advisory fee at the annual rate of 0.23 of 1% of average annual
net assets of which 0.18 of 1% is currently being waived.
(See "Management Arrangements.")
</FN>
<FN>
(6) The expense example is based upon the above shareholder transaction
expenses (in the case of Class A Shares, this includes a sales charge of
$40 for a $1,000 investment) and estimated annual Fund operating expenses.
It is also based upon amounts at the beginning of each year which
includes the prior year's assumed results. A year's results consist of
an assumed 5% annual return less total operating expenses; the expense
ratio was applied to an assumed average balance (the year's starting
investment plus one-half the year's results). Each figure represents the
cumulative expenses so determined for the period specified.
</FN>
<FN>
(7) Six years after the date of purchase, Class C Shares are automatically
converted to Class A Shares.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL
FUNDS USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE
EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE INTERPRETED AS A
PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE HIGHER OR LOWER. THE EXAMPLE
ALSO REFLECTS THE MAXIMUM SALES CHARGE. (SEE "HOW TO INVEST IN THE FUND.")
The purpose of the above table is to assist the investor in
understanding the various costs that an investor in the Fund will bear
directly or indirectly. The above table should not be considered as a
commitment or prediction that any fees, or that any particular portion
of fees, will be waived, or that any particular expenses will be
reimbursed. (See "Management Arrangements" for a more complete
description of the management and sub-advisory fees.)
<PAGE>
<TABLE>
<CAPTION>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights has been audited by KPMG
Peat Marwick LLP, independent auditors, whose report thereon is included
with the Fund's financial statements contained in its Annual Report,
which are incorporated by reference into the Additional Statement.
The information provided in the table should be read in conjunction with
the financial statements and related notes. The Fund's Annual Report
contains additional information about the Fund's performance and is
available upon request without charge, by calling or writing
the Fund's Shareholder Servicing Agent at the address and telephone
numbers on the cover of the Prospectus.
Class C(2)
Class A(1) Year Year Period
Year Ended June 30, Ended Ended Ended(3)
1998 1997 1996 6/30/98 6/30/97 6/30/96
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.. $10.18 $9.93 $9.80 $10.18 $9.93 $9.94
Income from Investment
Operations:
Net investment
income.............. 0.50 0.51 0.52 0.40 0.41 0.07
Net gain (loss) on
securities (both
realized and
unrealized)......... 0.30 0.26 0.13 0.30 0.26 (0.01)
Total from Investment
Operations.......... 0.80 0.77 0.65 0.70 0.67 0.06
Less Distributions:
Dividends from net
investment income.... (0.51) (0.52) (0.52) (0.41) (0.42) (0.07)
Distributions from
capital gains........ - - - - - -
Total Distributions.... (0.51) (0.52) (0.52) (0.41) (0.42) (0.07)
Net Asset Value, End
of Period..............$10.47 $10.18 $9.93 $10.47 $10.18 $9.93
Total Return (not
reflecting sales
charge) (%)............ 8.02 7.95 6.72 6.94 6.89 0.60+
Ratios/Supplemental Data
Net Assets, End of
Period ($ thousands).. 52,006 42,540 37,988 2,778 485 0.1
Ratio of Expenses to
Average Net
Assets (%)........... 0.27 0.21 0.14 1.28 1.06 0.20+
Ratio of Net Investment
Income to Average Net
Assets (%)........... 4.84 5.07 5.19 3.76 4.22 0.72+
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 Manager's and Sub-Adviser's voluntary
waiver of fees, 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 ($)........... 0.41 0.41 0.42 0.33 0.30 0.06
Ratio of Expenses to
Average Net
Assets (%)........... 1.13 1.25 1.17 1.94 2.10 0.32+
Ratio of Net Investment
Income to Average Net
Assets (%)........... 3.98 4.03 4.16 3.10 3.18 0.61+
<CAPTION>
Class A(1)
Year Ended June 30,
1995 1994
<C> <C>
$9.44 $10.07
0.54 0.53
0.36 (0.63)
0.90 (0.10)
(0.54) (0.53)
- -
(0.54) (0.53)
$9.80 $9.44)
9.82 (1.11)
34,373 31,660
0.06 0.02
5.63 5.30
0 0
0.43 0.40
1.19 1.32
4.50 4.00
<FN>
(1) Designated as Class A Shares on May 21, 1996.
</FN>
<FN>
(2) New Class of Shares established on May 21, 1996.
</FN>
<FN>
(3) From May 1, 1996 to June 30, 1996.
</FN>
<FN>
+ Not annualized.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment
for investors who seek a high level of preservation for the
principal of their investment and consistency in the payment of
income which is exempt from regular State of Rhode Island
personal income taxes and regular Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Rhode Island Obligations, as defined below,
which may include obligations of certain non-Rhode Island
issuers. The Fund offers you the opportunity to keep assets fully
invested in a vehicle that provides a professionally managed
portfolio of Rhode Island Obligations which may, but not
necessarily will, be more diversified, higher yielding or more
stable and more liquid than you might be able to obtain on an
individual basis by direct purchase of Rhode Island Obligations.
Through the convenience of a single security consisting of
shares of the Fund, you are also relieved of the inconvenience
associated with direct investments of fixed denominations,
including the selecting, purchasing, handling, monitoring call
provisions and safekeeping of Rhode Island Obligations.
Rhode Island Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations, such as bonds, are
issued include the construction of a wide range of public
facilities such as highways, bridges, schools, hospitals,
housing, mass transportation, streets and water and sewer works.
Other public purposes for which municipal obligations may be
issued include the refunding of outstanding obligations, the
obtaining of funds for general operating expenses and the
obtaining of funds to lend to other public institutions and
facilities.
INVESTMENT OF THE FUND'S ASSETS
The Fund's objective is to seek a high level of preservation
for investor's capital and consistency in the payment of current
income which is exempt from both State of Rhode Island personal
income taxes and regular Federal income taxes. There is no
assurance, however, that the Fund will achieve its objective,
which is a fundamental policy of the Fund. (See "Investment
Restrictions" for a description of the Fund's fundamental
policies.) In seeking its objective, the Fund will invest
primarily in Rhode Island Obligations (as defined below) which
are insured by nationally recognized insurers of municipal
obligations as to the timely payment of principal and interest
when due. The value of the Fund's shares will tend to fluctuate
with prevailing interest rates and economic and market factors.
As used in the Prospectus and the Additional Statement, the
term "Rhode Island Obligations" means obligations, including
those of certain non-Rhode Island issuers, of any maturity which
pay interest which, in the opinion of bond counsel or other
appropriate counsel, is exempt from Rhode Island personal income
taxes and regular Federal income taxes. Although exempt from
regular Federal income tax, interest paid on certain types of
Rhode Island Obligations, and dividends which the Fund might pay
from this interest, are preference items as to the Federal
alternative minimum tax ("AMT"); for further information, see
"Dividend and Tax Information." As a fundamental policy, at least
80% of the Fund's net assets will be invested in Rhode Island
Obligations the income paid upon which will not be subject to the
AMT; accordingly, the Fund can invest up to 20% of its net assets
in obligations which are subject to the AMT. The Fund may refrain
entirely from purchasing Rhode Island Obligations subject to AMT.
The non-Rhode Island bonds or other obligations, the
interest on which is exempt under present law from State of Rhode
Island personal income taxes and regular Federal income taxes,
are those issued by or under the authority of Guam, the Northern
Mariana Islands, Puerto Rico and the Virgin Islands. The Fund
will not purchase Rhode Island Obligations of non-Rhode Island
issuers unless Rhode Island Obligations of Rhode Island issuers
of the desired quality, maturity and interest rate are not
available. As a Rhode Island-oriented fund, it is a fundamental
policy that at least 65% of the Fund's total assets will be
invested in Rhode Island Obligations of Rhode Island issuers.
Insurance Feature
The purpose of having insurance on investments in Rhode
Island Obligations in the Fund's portfolio is to reduce financial
risk for investors in the Fund.
Insurance as to the timely payment of principal and interest
when due for Rhode Island Obligations is acquired as follows:
(i) obtained by the issuer of the Rhode Island Obligations
at the time of original issue of the obligations, known as
"New Issue Insurance," or
(ii) purchased by the Fund or a previous owner with respect
to specific Rhode Island Obligations, termed "Secondary
Market Insurance."
The insurance of principal under these types of insurance
policies refers to the payment of the face or par value of the
Rhode Island Obligation when due. Insurance is not affected by
nor does it insure the market price paid by the Fund for the
obligation. The market value of obligations in the Fund will,
from time to time, be affected by various factors including the
general movement of interest rates. The value of the Fund's
shares is not insured.
In order to reduce financial risk to the Fund's investors as
much as practical, it is a goal of the Fund, which is not
assured, that 100% of the Fund's assets will be invested in
insured Rhode Island Obligations. However, if the Board of
Trustees determines that there is an inadequate supply in the
marketplace of Rhode Island Obligations covered by New Issue
Insurance and that appropriate Secondary Market Insurance cannot
be obtained for other Rhode Island Obligations on terms that are
financially advantageous to the Fund as a result of market
conditions or other factors, then the Fund may invest in Rhode
Island Obligations that are not insured. As a fundamental policy,
65% of the Fund's total net assets will be invested in Rhode
Island Obligations which are insured.
New Issue Insurance is obtained by the issuer of the Rhode
Island Obligations and all premiums respecting such securities
are paid in advance by such issuer. Such policies are
noncancelable and continue in force so long as the Rhode Island
Obligations are outstanding and the insurer remains in business.
The Fund may also purchase Secondary Market Insurance on any
Rhode Island Obligation purchased by the Fund. By purchasing
Secondary Market Insurance, the Fund will obtain, upon payment of
a single premium, insurance against nonpayment of scheduled
principal and interest for the remaining term of the Rhode Island
Obligation, regardless of whether the Fund then owns such
security. Such insurance coverage is noncancelable and continues
in force so long as the security so insured is outstanding and
the insurer remains in business. The purposes of acquiring
Secondary Market Insurance are to insure timely payment of
principal and interest when due and to enable the Fund to sell a
Rhode Island Obligation to a third party as a high-rated insured
Rhode Island Obligation at a market price greater than what
otherwise might be obtainable if the security were sold without
the insurance coverage. There is no assurance that such insurance
can be obtained at rates that would make its purchase
advantageous to the Fund.
New Issue Insurance and Secondary Market Insurance will be
obtained from some or all of the following: Municipal Bond
Investors Assurance Corporation ("MBIA"), Financial Guaranty
Insurance Company ("Financial Guaranty") and AMBAC Indemnity
Corporation ("AMBAC Indemnity"). (See the Additional Statement
for information about these companies.) The Fund may also
purchase insurance from, or Rhode Island Obligations insured by,
other insurers. However, the Fund will seek to ensure that any
insurer used will itself have a Aaa or AAA rating.
Further information concerning the insurance feature appears
in the Additional Statement.
Risk Factors and Special Investment Considerations Regarding the
Insurance Feature
While the insurance feature is intended to reduce financial
risk, in some instances there is a cost to be borne by the Fund
for such a feature. In general, the insurance premium cost of New
Issue Insurance is borne by the issuer.
Secondary Market Insurance, if purchased by the Fund,
involves payment of a single premium, the cost of which is added
to the cost basis of the price of the security. It is not
considered an item of expense of the Fund, but rather an addition
to the price of the security. Upon sale of a security so insured,
the excess, if any, of the security's market value as an "Aaa" or
"AAA" rated security over its market value without such rating,
including the cost of the single premium for Secondary Market
Insurance, would inure to the Fund in determining the net capital
gain or loss realized by the Fund.
In practice, those nationally recognized insurers which
provide insurance generally do so only for municipal obligations
which on their own would be rated within the top four credit
ratings, and preferably with at least an "A" rating by such
credit rating agencies as Moody's or S&P.
New Issue Insurance and Secondary Market Insurance do not
terminate with respect to a Rhode Island Obligation once the
obligation is sold by the Fund.
Information about the Fund's Investments
Municipal obligations which are insured are generally rated
Aaa or AAA by the major credit rating agencies, the highest
attainable credit rating assigned by these rating agencies. If
the Fund purchases uninsured Rhode Island Obligations, which it
may do, in order to maintain a quality-oriented portfolio, the
Fund will purchase only investment grade securities. Any such
Rhode Island Obligations which the Fund purchases must, at the
time of purchase, either (i) be rated within the four highest
credit ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"); or (ii) if
unrated, be determined to be of comparable quality to municipal
obligations so rated by Citizens Bank of Rhode Island (the "Sub-
Adviser"), the Fund's investment sub-adviser (subject to the
direction and control of the Board of Trustees).
In general, there are nine separate credit ratings, ranging
from the highest to the lowest credit standards for municipal
obligations. Municipal obligations rated in the fourth highest
credit rating are considered by such rating agencies to be of
medium quality and thus may present investment risks not present
in more highly rated obligations. Such bonds lack outstanding
investment characteristics and may in fact have some speculative
characteristics as well; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to
make principal and interest payments than is the case for higher
grade bonds.
Except as set forth under "Risk Factors and Special
Investment Considerations Regarding the Insurance Feature,"
above, if after purchase the rating of any rated Rhode Island
Obligation is downgraded such that it could not then be purchased
by the Fund, or, in the case of an unrated Rhode Island
Obligation, if the Sub-Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Fund may purchase, it is the current policy
of the Fund to cause any such obligation to be sold as promptly
thereafter as the Sub-Adviser in its discretion determines to be
consistent with the Fund's objectives; such obligation remains in
the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Fund can purchase
industrial development bonds only if they meet the definition of
Rhode Island Obligations, i.e., the interest on them is exempt
from Rhode Island State and regular Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have had to meet a similar test as to 75% of
its assets. The Fund may therefore not have as much
diversification among securities, and thus diversification of
risk, as if it had made this election under the 1940 Act. In
general, the more the Fund invests in the securities of specific
issuers, the more the Fund is exposed to risks associated with
investments in those issuers. The Fund's assets, being primarily
or entirely Rhode Island issues, are accordingly subject to
economic and other conditions affecting Rhode Island. (See "Risk
Factors and Special Considerations Regarding Investment in Rhode
Island Obligations.")
Possible Stabilizing Measures
The Fund will employ such traditional measures as upgrading
credit standards for portfolio purchases of other than insured
obligations, varying maturities, broadening diversification and
increasing its position in cash and cash equivalents in
attempting to protect against declines in the value of its
investments as a result of general interest rate fluctuations,
economic factors and other market risks. There can, however, be
no assurance that these will be successful.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30 days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Rhode Island Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Rhode Island Obligations in the
proportion that the Fund's participation interest bears to the
total amount of the underlying Rhode Island Obligations. All such
participation interests must meet the Fund's credit requirements.
(See "Limitation to 10% as to Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Rhode Island Obligations on a when-issued
or delayed delivery basis when it has the intention of acquiring
them. The Rhode Island Obligations so purchased are subject to
market fluctuation and no interest accrues to the Fund until
delivery and payment take place; their value at the delivery date
may be less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account, which is marked to market every business day.
(See the Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Fund cannot purchase Rhode Island Obligations that are
not readily marketable if thereafter more than 10% of its net
assets would consist of such investments. However, this 10% limit
does not include any Rhode Island Obligations as to which the
Fund can exercise the right to demand payment in full within
three days and as to which there is a secondary market. Floating
and variable rate demand notes and participation interests
(including municipal lease/purchase obligations) are considered
illiquid unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets
in (i) Rhode Island Obligations the interest on which is paid
from revenues of similar type projects or (ii) industrial
development bonds, unless the Prospectus and/or the Additional
Statement are supplemented to reflect the change and to give
additional information.
Factors Which May Affect the Value
of the Fund's Investments and Their Yields
The value of the Rhode Island Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Rhode Island Obligations, the
value of these obligations will normally go down; if these rates
go down, the value of these obligations will normally go up.
Changes in value and yield based on changes in prevailing
interest rates may have different effects on short-term Rhode
Island Obligations than on long-term obligations. Long-term
obligations (which often have higher yields) may fluctuate in
value more than short-term ones. For this reason, the Fund may,
to achieve a defensive position, shorten the average maturity of
its portfolio. The Fund's portfolio will represent a blend of
short-term and long-term obligations designed to reduce
fluctuations in the net asset value of the Fund's shares.
Risk Factors and Special Considerations Regarding Investment in
Rhode Island Obligations
The following is a discussion of the general factors that
might influence the ability of Rhode Island issuers to repay
principal and interest when due on the Rhode Island Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.
Rhode Island experienced significant economic growth during
most of the 1980's. Its economy became more diversified as
reliance on manufacturing employment decreased and
non-manufacturing employment grew. From 1980 to 1989 per capita
income growth exceeded national growth levels, and employment
growth and total personal income growth both paralleled national
growth levels.
Between the late 1980's and the mid-1990's, there was a
regional economic slowdown resulting in rising unemployment rates
and the slowing of personal income growth. Rhode Island, like
other New England states, began to experience a slowdown in its
economy at that time. Since 1997, the State has experienced per
capita income higher than the national average and employment has
increased in all sectors except for manufacturing.
The economic slowdown resulted in significant budget
constraints. Declining revenues, combined with increased demand
for certain governmental services, such as public assistance,
have occurred as a result of the difficult general economic
conditions. The State constitution requires that Rhode Island end
each year with a balanced budget and does not permit a deficit to
continue into the next fiscal year. The constitutional mandate
and overall budgeting pressure forced state officials to review
the State's overall fiscal outlook and structural issues
pertaining to its financial structure. Revenue estimating
procedures were improved, and five-year projections were
published with the annual budget submission. Major program
reductions and eliminations were adopted. A constitutional
amendment was adopted by voter referendum to mandate a "rainy day
fund." A capital budgeting process was initiated along with
increased emphasis on debt management. (See the Additional
Statement for further information.)
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and in the Additional Statement as "fundamental
policies," cannot be changed unless the holders of a "majority,"
as defined in the 1940 Act, of the Fund's outstanding shares vote
to change them. (See the Additional Statement for a definition of
such a majority.) All other policies can be changed from time to
time by the Board of Trustees without shareholder approval. Some
of the more important of the Fund's fundamental policies, not
otherwise identified in the Prospectus, are set forth below;
others are listed in the Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than Rhode Island
Obligations meeting the standards stated under "Investment of the
Fund's Assets."
2. The Fund has industry investment requirements.
The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry. The Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Rhode Island Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. Interest on borrowings would reduce the
Fund's income. Except in connection with borrowings, the Fund
will not issue senior securities. The Fund will not purchase any
Rhode Island Obligations while it has any outstanding borrowings
which exceed 5% of the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time,
on each day that the New York Stock Exchange is open (a "business
day"), by dividing the value of the Fund's net assets (i.e., the
value of the assets less liabilities) allocable to each class by
the total number of shares of such class then outstanding.
Determination of the value of the Fund's assets is subject to the
direction and control of the Fund's Board of Trustees. In
general, it is based on market value, except that Rhode Island
Obligations maturing in 60 days or less are generally valued at
amortized cost; see the Additional Statement for further
information.
ALTERNATIVE PURCHASE PLANS
In this Prospectus the Fund provides you with two
alternative ways to invest in the Fund through two separate
classes of shares. All classes represent interests in the same
portfolio of Rhode Island Obligations. The classes of shares
offered to individuals differ in their sales charge structures
and ongoing expenses, as described below. You should choose the
class that best suits your own circumstances and needs.
If you choose to purchase Class A Shares you will pay the
applicable sales charge at the time of your purchase. By
purchasing Class C Shares, you will pay a sales charge over a
period of six years after purchase but without paying anything at
the time of purchase, much as goods can be purchased on an
installment plan. You are subject to a contingent deferred sales
charge, described below, but only if you redeem your Class C
Shares before they have been held 12 months from your purchase.
(See "Computation of Holding Periods for Class C Shares.")
Class A Shares, "Front-Payment Class Shares," are offered to
anyone at net asset value plus a sales charge, paid at the
time of purchase, at the maximum rate of 4.0% of the public
offering price, with lower rates for larger purchases. When
you purchase Class A Shares, the amount of your investment
is reduced by the applicable sales charge. Class A Shares
are subject to an asset retention service fee under the
Fund's Distribution Plan at the rate of 0.15 of 1% of the
average annual net assets represented by the Class A Shares.
Certain Class A Shares purchased in transactions of $1
million or more are subject to a contingent deferred sales
charge. (See "Purchase of $1 Million or More.")
Class C Shares, "Level-Payment Class Shares," are offered to
anyone at net asset value with no sales charge payable at
purchase but with a level charge for distribution fees and
service fees for six years after the date of purchase at the
aggregate annual rate of 1% of the average annual net assets
represented by the Class C Shares. (See "Distribution Plan"
and "Shareholder Services Plan for Class C Shares.") Six
years after the date of purchase, Class C Shares, including
Class C Shares acquired in exchange for other Class C Shares
under the Exchange Privilege (see "Exchange Privilege"), are
automatically converted to Class A Shares. If you redeem
Class C Shares before you have held them for 12 months from
the date of purchase, you will pay a contingent deferred
sales charge ("CDSC") at the rate of 1%, calculated on the
net asset value of the redeemed Class C Shares at the time
of purchase or of redemption, whichever is less. The amount
of any CDSC will be paid to the Distributor. The CDSC does
not apply to shares acquired through the reinvestment of
dividends on Class C Shares or to any Class C Shares held
for more than 12 months after purchase. For purposes of
applying the CDSC and determining the time of conversion,
the 12-month and six-year holding periods are considered
modified by up to one month depending upon when during a
month your purchase of such shares is made. (See
"Computation of Holding Periods for Class C Shares" and "How
to Purchase Class C Shares.")
In determining whether a CDSC is payable on a redemption of
Class C Shares, it will be assumed that the redemption is made
first of any shares acquired as dividends or distributions,
second of any Class C Shares you have held for more than 12
months from the date of purchase and finally of those Class C
Shares as to which the CDSC is payable which you have held the
longest. This will result in your paying the lowest possible
CDSC.
Computation of Holding Periods for Class C Shares
For purposes of determining the holding period for Class C
Shares, all of your purchases made during a calendar month will
be deemed to have been made on the first business day of that
month at the average cost of all purchases made during that
month. The 12-month CDSC holding period will end on the first
business day of the 12th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your Class C Shares may be up to one
month less than the full 12 months depending upon when your
actual purchase was made during a month. Running of the 12-month
CDSC holding period will be suspended for one month for each
period of thirty days during which you have held shares of a
money market fund you have received in exchange for Class C
Shares under the Exchange Privilege. (See "Exchange Privilege.")
Your Class C Shares will automatically convert to Class A
Shares six years after the date of purchase, together with a
pro-rata portion of all Class C Shares representing dividends and
other distributions paid in additional Class C Shares. The Class
C Shares so converted will no longer be subject to the higher
expenses borne by the Class C Shares. The conversion will be
effected at relative net asset values on the first business day
of the month following that in which the sixth anniversary of
your purchase of the Class C Shares occurred, except as noted
below. Accordingly, the holding period applicable to your Class C
Shares may be up to one month more than six years depending upon
when your actual purchase was made during a month. Because the
per share value of Class A Shares may be higher than that of
Class C Shares at the time of conversion, you may receive fewer
Class A Shares than the number of Class C Shares converted. If
you have made one or more exchanges of Class C Shares among the
Aquila-sponsored tax-free municipal bond funds or equity funds
under the Exchange Privilege, the six-year holding period is
deemed to have begun on the date you purchased your original
Class C Shares of the Fund or of another of the Aquila bond or
equity funds. The six-year holding period will be suspended by
one month for each period of thirty days during which you hold
shares of a money market fund you have received in exchange for
Class C Shares under the Exchange Privilege. (See "Exchange
Privilege.")
The following chart summarizes the principal differences
between Class A Shares and Class C Shares.
<TABLE>
<CAPTION>
Class A Class C
<S> <C> <C>
Initial Sales Maximum of 4% of the None
Charge Public Offering Price
Contingent Deferred None (except for Maximum CDSC of 1%
Sales Charge certain purchases if shares redeemed
over $1 Million) before 12 months;
0% after 12 months
Distribution and 0.15 of 1% Distribution fee of
Service Fees 0.75 of 1% and a
service fee of 0.25 of
1% for a total of 1%,
payable for six years
Other Information Initial Sales Charge Shares convert to Class
waived or reduced in A Shares after six years
in some cases
</TABLE>
Factors to Consider in Choosing Classes of Shares
This discussion relates to the major differences between
Class A Shares and Class C Shares. It is recommended that any
investment in the Fund be considered long-term in nature.
Over time, the cumulative total cost of the 1% annual
service and distribution fees on the Class C Shares will equal or
exceed the total cost of the initial 4% maximum initial sales
charge and 0.15 of 1% annual fee payable for Class A Shares. For
example, if equal amounts were paid at the same time for Class A
Shares (where the amount invested is reduced by the amount of the
sales charge) and for Class C Shares (which carry no sales charge
at the time of purchase) and the net asset value per share
remained constant over time, the total of such costs for Class C
Shares would equal the total of such costs for Class A Shares
after approximately four and two-thirds years. This example
assumes no redemptions and disregards the time value of money.
Purchasers of Class C Shares have all of their investment dollars
invested from the time of purchase, without having their
investment reduced at the outset by the initial sales charge
payable for Class A Shares. If you invest in Class A Shares you
will pay the entire sales charge at the time of purchase.
Accordingly, if you expect to redeem your shares within a
reasonably short time after purchase, you should consider the
total cost of such an investment in Class A Shares compared with
a similar investment in Class C Shares. The example under "Table
of Expenses" shows the effect of Fund expenses for both classes
if a hypothetical investment in each of the classes is held for
1, 3, 5 and 10 years. (See the Table of Expenses.)
Dividends and other distributions paid by the Fund with
respect to shares of each class are calculated in the same manner
and at the same time. The dividends actually paid with respect to
Class C Shares will be lower than those paid on Class A Shares
because Class C Shares bear higher distribution and service fees
and will have a higher expense ratio. In addition, the dividends
of each class can vary because each class will bear certain
class-specific charges. For example, each class will bear the
costs of printing and mailing annual reports to its own
shareholders.
HOW TO INVEST IN THE FUND
The Fund's shares may be purchased through any investment
broker or dealer (a "selected dealer") which has a sales
agreement with Aquila Distributors, Inc. (the "Distributor") or
through the Distributor. There are two ways to make an initial
investment: (i) order the shares through your investment broker
or dealer, if it is a selected dealer; or (ii) mail the
Application with payment to the Fund's Shareholder Servicing
Agent (the "Agent") at the address on the Application. If you
purchase Class A Shares, the applicable sales charge will apply
in either instance. Subsequent investments are also subject to
the applicable sales charges. You are urged to complete an
Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment. Unless your initial investment is specified to be
made in Class C Shares, it will be made in Class A Shares.
The minimum initial investment for Class A Shares and Class
C Shares is $1,000, except as otherwise stated in the Prospectus
or Additional Statement. You may also make an initial investment
of at least $50 by establishing an Automatic Investment Program.
To do this you must open an account for automatic investments of
at least $50 each month and make an initial investment of at
least $50. (See below and "Automatic Investment Program" in the
Application.) Such investment must be drawn in United States
dollars on a United States commercial or savings bank, a credit
union or a United States branch of a foreign commercial bank
(each of which is a "Financial Institution"). You may make
subsequent investments in the same class of shares in any amount
(unless you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number, the name of the Fund and the class of shares to
be purchased. With subsequent investments, please send the
pre-printed stub attached to the Fund's confirmations.
Subsequent investments of $50 or more in shares of the same
class as your initial investment can be made by electronic funds
transfer from your demand account at a Financial Institution. To
use electronic funds transfer for your purchases, your Financial
Institution must be a member of the Automated Clearing House and
the Agent must have received your completed Application
designating this feature, or, after your account has been opened,
a Ready Access Features Form available from the Distributor or
the Agent. A pre-determined amount can be regularly transferred
for investment ("Automatic Investment"), or single investments
can be made upon receipt by the Agent of telephone instructions
from anyone ("Telephone Investment"). The maximum amount of each
Telephone Investment is $50,000. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate these investment
methods at any time or charge a service fee, although no such fee
is currently contemplated.
The offering price is the net asset value per share for
Class C Shares and the net asset value per share plus the
applicable sales charge for Class A Shares. The offering price
determined on any day applies to all purchase orders received by
the Agent from selected dealers that day, except that orders
received by it after 4:00 p.m. New York time will receive that
day's offering price only if such orders were received by
selected dealers from customers prior to such time and
transmitted to the Distributor prior to its close of business
that day (normally 5:00 p.m. New York time); if not so
transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day, except that if that day is not a business
day your order will be executed at the price determined on the
next business day. In the case of Telephone Investment your order
will be filled at the next determined offering price. If your
order is placed after the time for determining the net asset
value of the Fund shares for any day it will be executed at the
price determined on the following business day. The sale of
shares will be suspended during any period when the determination
of net asset value is suspended. The Fund and the Distributor
reserve the right to reject any order for the purchase of shares.
In addition, the offering of shares may be suspended at any time
and resumed at any time thereafter.
At the date of this Prospectus, Class A Shares and Class C
Shares of the Fund are available only in the following states:
Rhode Island, Connecticut, District of Columbia, Florida, Hawaii,
Massachusetts, New Jersey and New York.
If you do not reside in one of these states you should not
purchase shares of the Fund. If Class A Shares or Class C Shares
of the Fund are sold outside of these states the Fund can redeem
them. Such a redemption may result in a loss to you and may have
tax consequences. In addition, if your state of residence is not
Rhode Island, the dividends from the Fund may not be exempt from
income tax of the state in which you reside. Accordingly, you
should consult your tax adviser before acquiring shares of the
Fund.
How to Purchase Class A Shares (Front-Payment Class Shares)
The following table shows the amount of the sales charge to
a "single purchaser" (defined below) together with the dealer
discounts paid to dealers and the agency commissions paid to
brokers (collectively called the "commissions") for purchases of
Class A Shares:
<TABLE>
<CAPTION>
Sales Charge
Sales Charge as as Commissions
Percentage of Approximate as
Public Percentage of Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
$50,000 but less
than $100,000 3.50% 3.63% 3.25%
$100,000 but less
than $250,000 3.25% 3.36% 3.00%
$250,000 but less
than $500,000 3.00% 3.09% 2.75%
$500,000 but less
than $1,000,000 2.50% 2.56% 2.25%
</TABLE>
For purchases of $1 million or more see "Purchase of $1 Million or More,"
below.
The table of sales charges is applicable to purchases of
Class A Shares by a "single purchaser," i.e.: (a) an individual;
(b) an individual together with his or her spouse and their
children under the age of 21 purchasing Class A Shares for his,
her or their own accounts; (c) a trustee or other fiduciary
purchasing Class A Shares for a single trust estate or a single
fiduciary account; and (d) a tax-exempt organization enumerated
in Section 501(c)(3) or (13) of the Code.
Upon notice to all selected dealers, the Distributor may
reallow up to the full amount of the applicable sales charge as
shown in the above schedule during periods specified in such
notice. During periods when all or substantially all of the
entire sales charge is reallowed, such selected dealers may be
deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Purchase of $1 Million or More
Class A Shares issued under the following circumstances are
called "CDSC Class A Shares": (i) Class A Shares issued in a
single purchase of $1 million or more by a single purchaser; and
(ii) all Class A Shares issued in a single purchase to a single
purchaser the value of which, when added to the value of the CDSC
Class A Shares and Class A Shares on which a sales charge has
been paid, already owned at the time of such purchase, equals or
exceeds $1 million. CDSC Class A Shares also include certain
Class A Shares issued under the program captioned "Special Dealer
Arrangements," below. CDSC Class A Shares do not include (i)
Class A Shares purchased without sales charge pursuant to the
terms described under "General," below and (ii) Class A Shares
purchased in transactions of less than $1 million and when
certain special dealer arrangements are not in effect under
"Certain Investment Companies" set forth under "Reduced Sales
Charges," below.
When you purchase CDSC Class A Shares you will not pay a
sales charge at the time of purchase, and the Distributor will
pay to any dealer effecting such a purchase an amount equal to 1%
of the sales price of the shares purchased for purchases of $1
million but less than $2.5 million, 0.50 of 1% for purchases of
$2.5 million but less than $5 million, and 0.25 of 1% for
purchases of $5 million or more.
If you redeem all or part of your CDSC Class A Shares during
the four years after your purchase of such shares, at the time of
redemption you will be required to pay to the Distributor a
special contingent deferred sales charge based on the lesser of
(i) the net asset value of your redeemed CDSC Class A Shares at
the time of purchase or (ii) the net asset value of your redeemed
CDSC Class A Shares at the time of redemption (the "Redemption
Value"). The special charge will be an amount equal to 1% of the
Redemption Value if the redemption occurs within the first two
years after purchase, and 0.50 of 1% of the Redemption Value if
the redemption occurs within the third or fourth year after
purchase. The special charge will apply to redemptions of CDSC
Class A Shares purchased without a sales charge pursuant to a
Letter of Intent, as described below under "Reduced Sales Charges
for Certain Purchases of Class A Shares." The special charge does
not apply to Class A Shares acquired through the reinvestment of
dividends on CDSC Class A Shares or to any CDSC Class A Shares
held for more than four years after purchase. In determining
whether the special charge is applicable, it will be assumed that
the CDSC Class A Shares you have held the longest are the first
CDSC Class A Shares to be redeemed, unless you instruct the Agent
otherwise. It will also be assumed that if you have both CDSC
Class A Shares and non-CDSC Class A Shares the non-CDSC Class A
Shares will be redeemed first.
For purposes of determining the holding period for CDSC
Class A Shares, all of your purchases made during a calendar
month will be deemed to have been made on the first business day
of that month at the average cost of all purchases made during
that month. The four-year holding period will end on the first
business day of the 48th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your CDSC Class A Shares may be up
to one month less than the full 48 months depending upon when
your actual purchase was made during a month. Running of the
48-month CDSC holding period will be suspended for one month for
each period of thirty days during which you have held shares of a
money market fund you have received in exchange for CDSC Class A
Shares under the Exchange Privilege. (See "Exchange Privilege.")
Reduced Sales Charges for Certain Purchases of Class A Shares
Right of Accumulation: If you are a "single purchaser" you
may benefit from a reduction of the sales charge in accordance
with the above schedule for subsequent purchases of Class A
Shares if the cumulative value (at cost or current net asset
value, whichever is higher) of Class A Shares you have previously
purchased with a sales charge and still own, together with Class
A Shares of your subsequent purchase with such a charge, amounts
to $25,000 or more.
Letters of Intent: The foregoing schedule of reduced sales
charges will also be available to "single purchasers" who enter
into a written Letter of Intent (included in the Application)
providing for the purchase, within a thirteen-month period, of
Class A Shares of the Fund through a single selected dealer or
through the Distributor. Class A Shares of the Fund which you
previously purchased during a 90-day period prior to the date of
receipt by the Distributor of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For further details, including escrow provisions, see
the Letter of Intent provisions of the Application.
General: Class A Shares may be purchased at the next
determined net asset value by the Fund's Trustees and officers,
by the directors, officers and certain employees, retired
employees and representatives of the Sub-Adviser and its parent
and affiliates, the Manager and the Distributor, by selected
dealers and brokers and their officers and employees, by certain
persons connected with firms providing legal, advertising or
public relations assistance, by certain family members of, and
plans for the benefit of, the foregoing, and for the benefit of
trust or similar clients of banking institutions over which these
institutions have full investment authority if the Fund or the
Distributor has entered into an agreement relating to such
purchases. Except for the last category, purchasers must give
written assurance that the purchase is for investment and that
the Class A Shares will not be resold except through redemption.
There may be tax consequences of these purchases. Such purchasers
should consult their own tax counsel. Class A Shares may also be
issued at net asset value in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund
is a party.
The Fund permits the sale of its Class A Shares at prices
that reflect the reduction or elimination of the sales charge to
investors who are members of certain qualified groups meeting the
following requirements. A qualified group (i) is a group or
association, or a category of purchasers who are represented by a
fiduciary, professional or other representative (other than a
registered broker-dealer), which (ii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its
costs of distributing Class A Shares; (iii) gives its endorsement
or authorization (if it is a group or association) to an
investment program to facilitate solicitation of its membership
by a broker or dealer; and (iv) complies with the conditions of
purchase that are set forth in any agreement entered into between
the Fund and the group, representative or broker or dealer. At
the time of purchase you must furnish the Distributor with
information sufficient to permit verification that the purchase
qualifies for a reduced sales charge, either directly or through
a broker or dealer.
Certain Investment Companies: Class A Shares of the Fund may
be purchased at net asset value without sales charge (except as
set forth below under "Special Dealer Arrangements") to the
extent that the aggregate net asset value of such Class A Shares
does not exceed the proceeds from a redemption (a "Qualified
Redemption"), made within 120 days prior to such purchase, of
shares of another investment company on which a sales charge,
including a contingent deferred sales charge, has been paid.
Additional information is available from the Distributor.
To qualify, the following special procedures must be
followed:
1. A completed Application (included in the Prospectus) and
payment for the Class A Shares to be purchased must be sent
to the Distributor, Aquila Distributors, Inc., 380 Madison
Avenue, Suite 2300, New York, NY 10017 and should not be
sent to the Fund's Shareholder Servicing Agent. (This
instruction replaces the mailing address contained on the
Application.)
2. The Application must be accompanied by evidence
satisfactory to the Distributor that the prospective
shareholder has made a Qualified Redemption in an amount at
least equal to the net asset value of the Class A Shares to
be purchased. Satisfactory evidence includes a confirmation
of the date and the amount of the redemption from the
investment company, its transfer agent or the investor's
broker or dealer, or a copy of the investor's account
statement with the investment company reflecting the
redemption transaction.
3. You must complete and return to the Distributor a
Transfer Request Form, which is available from the
Distributor.
The Fund reserves the right to alter or terminate this
privilege at any time without notice. The Prospectus will be
supplemented to reflect such alteration or termination.
Special Dealer Arrangements: During certain periods
determined by the Distributor, the Distributor (not the Fund)
will pay to any dealer effecting a purchase of Class A Shares of
the Fund using the proceeds of a Qualified Redemption the lesser
of (i) 0.50 of 1% of such proceeds or (ii) the same amounts
described under "Purchase of $1 Million or More," on the same
terms and conditions. Class A Shares of the Fund issued in such a
transaction will be CDSC Class A Shares and if you thereafter
redeem all or part of such shares during the two-year period from
the date of purchase you will be subject to the special
contingent deferred sales charge of 0.50 of 1% described under
"Purchase of $1 Million or More," on the same terms and
conditions. Whenever the Special Dealer Arrangements are in
effect the Prospectus will be supplemented.
The foregoing special dealer arrangements will be in effect
from October 31, 1998 until October 31, 1999 unless extended or
earlier terminated by a supplement to the Prospectus.
How to Purchase Class C Shares (Level-Payment Class Shares)
Level-Payment Class Shares ("Class C Shares") are offered at
net asset value with no sales charge payable at purchase. A level
charge is imposed for service and distribution fees for the first
six years after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Fund represented by
the Class C Shares. If you redeem Class C Shares before you have
held them for 12 months from the date of purchase you will pay a
contingent deferred sales charge ("CDSC"). The CDSC is charged at
the rate of 1%, calculated on the net asset value of the redeemed
Class C Shares at the time of purchase or at redemption,
whichever is less. There is no CDSC after Class C Shares have
been held beyond the applicable period. The CDSC does not apply
to Class C Shares acquired through the reinvestment of dividends
on Class C Shares.
The Distributor will pay to any dealer effecting a purchase
of Class C Shares an amount equal to 1% of the sales price of the
Class C Shares purchased.
Additional Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Manager out of its own funds, directly or through
the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Systematic Payroll Investments
If your employer has established with the Fund a Systematic
Payroll Investment Plan ("Payroll Plan") you may arrange for
systematic investments into the Fund through the Payroll Plan.
Investments can be made in either Class A Shares or Class C
Shares. In order to participate in a Payroll Plan, you should
make arrangements with your own employer's payroll department,
and you must complete and sign any special application forms
which may be required by your employer. You must also complete
the Application included in the Prospectus. Once your application
is received and put into effect, under a Payroll Plan the
employer will make a deduction from payroll checks in an amount
you determine, and will remit the proceeds to the Fund. An
investment in the Fund will be made for you at the offering
price, which includes applicable sales charges determined as
described above, when the Fund receives the funds from your
employer. The Fund will send a confirmation of each transaction
to you. To change the amount of or to terminate your
participation in the Payroll Plan (which could take up to ten
days), you must notify your employer.
Confirmations and Share Certificates
All purchases of shares will be confirmed and credited to
you in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share).
No share certificates will be issued for Class C Shares.
Share certificates for Class A Shares will be issued only if you
so request in writing to the Agent. All share certificates
previously issued by the Fund represent Class A Shares. No
certificates will be issued for fractional Class A Shares or if
you have elected Automatic Investment or Telephone Investment for
Class A Shares (see "How to Invest in the Fund" above) or
Expedited Redemption (see "How to Redeem Your Investment" below).
If certificates for Class A Shares are issued at your request,
Expedited Redemption Methods described below will not be
available. In addition, you may incur delay and expense if you
lose the certificates.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended
to result in the sale of its shares except pursuant to a written
plan adopted under the Rule. The Plan has four parts.
Under one part of the Plan, the Fund is authorized to make
payments with respect to Class A Shares ("Class A Permitted
Payments") to Qualified Recipients, which payments shall be made
through the Distributor or shareholder servicing agent as
disbursing agent and may not exceed, for any fiscal year of the
Fund (as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any fiscal
year which is not a full fiscal year), 0.15 of 1% of the average
annual net assets represented by the Class A Shares of the Fund.
Such payments shall be made only out of the Fund's assets
allocable to the Class A Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Class A Shares or servicing of accounts of
shareholders owning Class A Shares.
Under another part of the Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Class C Permitted
Payments") to Qualified Recipients. Class C Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or
for any fiscal year which is not a full fiscal year), 0.75 of 1%
of the average annual net assets represented by the Class C
Shares of the Fund. Such payments shall be made only out of the
Fund's assets allocable to the Class C Shares. "Qualified
Recipients" means broker-dealers or others selected by the
Distributor, including but not limited to any principal
underwriter of the Fund, with which the Fund or the Distributor
has entered into written agreements and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Class C Shares or
servicing of accounts of shareholders owning Class C Shares.
Payments with respect to Class C Shares during the first year
after purchase are paid to the Distributor and thereafter to
other Qualified Recipients.
Payments Under the Plan
During the fiscal year ended June 30, 1998, Permitted
Payments of $72,087 were made to Qualified Recipients with
respect to Class A Shares of the Fund, of which the Distributor
retained $1,455. All of such payments were for compensation. (See
the Additional Statement for a description of the Distribution
Plan.) During the fiscal year ended June 30, 1998, Permitted
Payments of $10,093 were made to Qualified Recipients with
respect to Class C Shares of the Fund, of which the Distributor
retained $7,946. All of such payments were for compensation. (See
the Additional Statement for a description of the Distribution
Plan.)
Another part of the Plan is designed to protect against any
claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for Permitted Payments it is not financing any such
activity and does not consider any payment enumerated in this
part of the Plan as so financing any such activity. However, it
might be claimed that some of the expenses the Fund pays come
within the purview of the Rule. If and to the extent that any
payment as specifically listed in the Plan (see the Additional
Statement) is considered to be primarily intended to result in or
as indirect financing of any activity which is primarily intended
to result in the sale of Fund shares, these payments are
authorized under the Plan. In addition, if the Manager, out of
its own funds, makes payment for distribution expenses such
payments are authorized. (See the Additional Statement.)
Shareholder Services Plan for Class C Shares
Under a Shareholder Services Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Service Fees") to
Qualified Recipients. Service Fees shall be paid through the
Distributor or shareholder servicing agent as disbursing agent,
and may not exceed, for any fiscal year of the Fund (as adjusted
for any part or parts of a fiscal year during which payments
under the Plan are not accruable or for any fiscal year which is
not a full fiscal year), 0.25 of 1% of the average annual net
assets represented by the Class C Shares of the Fund. Such
payments shall be made only out of the Fund's assets represented
by the Class C Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have agreed to provide personal services to
holders of Class C Shares and/or maintenance of Class C Shares
shareholder accounts. (See the Additional Statement.) At present,
Service Fees with respect to Class C Shares are retained by the
Distributor. During the fiscal year ended June 30, 1998, $3,364
of Service Fees was paid to Qualified Recipients with respect to
the Fund's Class C Shares all of which was retained by the
Distributor.
HOW TO REDEEM YOUR INVESTMENT
You may redeem all or any part of your shares at the net
asset value next determined after acceptance of your redemption
request at the Agent (subject to any applicable contingent
deferred sales charge for redemptions of Class C Shares and CDSC
Class A Shares). For redemptions of Class C Shares and CDSC Class
A Shares, at the time of redemption a sufficient number of
additional shares will be redeemed to pay for any applicable
contingent deferred sales charge. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. Except for CDSC Class A Shares (see "Purchase of
$1 Million or More") there are no redemption fees or withdrawal
penalties for Class A Shares. Class C Shares are subject to a
contingent deferred sales charge if redeemed before they have
been held 12 months from the date of purchase. (See "Alternative
Purchase Plans.") A redemption may result in a transaction
taxable to you. If you own both Class A Shares and Class C Shares
and do not specify which you wish to redeem, it will be assumed
that you wish to redeem Class A Shares.
For your convenience the Fund offers expedited redemption
for all classes of shares to provide you with a high level of
liquidity for your investment.
Expedited Redemption Methods (Non-Certificate Shares)
You have the flexibility of two expedited methods of
initiating redemptions. They are available as to shares of any
class not represented by certificates.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Fund and
the check is sent to your address of record, provided that
there has not been a change of your address of record during
the 30 days preceding your redemption request. You can make
only one request for telephone redemption by check in any
7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-637-4633 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
2. By FAX or Mail. You may also request redemption payments
to a predesignated Financial Institution account by a letter
of instructions sent to the Fund's Shareholder Servicing
Agent: PFPC Inc., by FAX at 302-791-3055 or by mail to 400
Bellevue Parkway, Wilmington, DE 19809. The letter must
provide account name(s), account number, amount to be
redeemed, and any payment directions, signed by the
registered holder(s). Signature guarantees are not
required.(See "Redemption Payments" below for payment
methods.)
If you wish to have redemption proceeds sent directly to a
Financial Institution Account, you should so elect on the
Expedited Redemption section of the Application or the Ready
Access Features Form and provide the required information
concerning your Financial Institution account number. The
Financial Institution account must be in the exclusive name(s) of
the shareholder(s) as registered with the Fund. You may change
the designated Financial Institution account at any time by
completing and returning a Ready Access Features Form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.
Regular Redemption Method
(Certificate and Non-Certificate Shares)
1. Certificate Shares. Certificates representing Class A
Shares to be redeemed should be sent in blank (unsigned) to
the Fund's Shareholder Servicing Agent: PFPC Inc., 400
Bellevue Parkway, Wilmington, DE 19809 with payment
instructions. A stock assignment form signed by the
registered shareholder(s) exactly as the account is
registered must also be sent to the Shareholder Servicing
Agent.
For your own protection, it is essential that certificates
be mailed separately from signed redemption documentation.
Because of possible mail problems, it is also recommended that
certificates be sent by registered mail, return receipt
requested.
For a redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.
2. Non-Certificate Shares. If you own non-certificate shares
registered on the books of the Fund, and you have not
elected Expedited Redemption to a predesignated Financial
Institution account, you must use the Regular Redemption
Method. Under this redemption method you should send a
letter of instructions to the Fund's Shareholder Servicing
Agent, PFPC Inc., 400 Bellevue Parkway, Wilmington, DE
19809, containing:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated
above.
Redemption Payments
Redemption payments will ordinarily be mailed to you at your
address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will,
wherever possible, be wired or transferred through the facilities
of the Automated Clearing House to the Financial Institution
account specified in the Expedited Redemption section of your
Application or Ready Access Features Form. The Fund may impose a
charge, not exceeding $5.00 per wire redemption, after written
notice to shareholders who have elected this redemption
procedure. The Fund has no present intention of making this
charge. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service fee.
If any such changes are made, the Prospectus will be supplemented
to reflect them. If you use a broker or dealer to arrange for a
redemption, it may charge you a fee for this service.
The Fund will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven
days after acceptance of such a redemption request. However, the
right of redemption may be suspended or the date of payment
postponed (i) during periods when the New York Stock Exchange is
closed for other than weekends and holidays or when trading on
such Exchange is restricted as determined by the Securities and
Exchange Commission by rule or regulation; (ii) during periods in
which an emergency, as determined by the Securities and Exchange
Commission, exists which causes disposal of, or determination of
the net asset value of, the portfolio securities to be
unreasonable or impracticable; or (iii) for such other periods as
the Securities and Exchange Commission may permit. Payment for
redemption of shares recently purchased by check (irrespective of
whether the check is a regular check or a certified, cashier's or
official bank check) or by Automatic Investment or Telephone
Investment may be delayed up to 15 days or until (i) the purchase
check or Automatic Investment or Telephone Investment has been
honored or (ii) the Agent has received assurances by telephone or
in writing from the Financial Institution on which the purchase
check was drawn, or from which the funds for Automatic Investment
or Telephone Investment were transferred, satisfactory to the
Agent and the Fund, that the purchase check or Automatic
Investment or Telephone Investment will be honored. Possible
delays in payment of redemption proceeds can be eliminated by
using wire payments or Federal Reserve drafts to pay for
purchases.
If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. (See the Additional Statement for details.)
The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.
Reinvestment Privilege
You may reinvest without payment of any additional sales
charge all or part of any redemption proceeds within 120 days of
a redemption of shares in shares of the Fund of the same class as
the shares redeemed at the net asset value next determined after
the Agent receives your reinvestment order. In the case of Class
C Shares or CDSC Class A Shares on which a contingent deferred
sales charge was deducted at the time of redemption, the
Distributor will refund to you the amount of such sales charge,
which will be added to the amount of the reinvestment. The Class
C Shares or CDSC Class A Shares issued on reinvestment will be
deemed to have been outstanding from the date of your original
purchase of the redeemed shares, less the period from redemption
to reinvestment. The reinvestment privilege for any class may be
exercised only once a year, unless otherwise approved by the
Distributor. If you have realized a gain on the redemption of
your shares, the redemption transaction is taxable, and
reinvestment will not alter any capital gains tax payable. If
there has been a loss on the redemption, some or all of the loss
may be tax deductible, depending on the amount reinvested and the
length of time between the redemption and the reinvestment. You
should consult your own tax advisor on this matter.
AUTOMATIC WITHDRAWAL PLAN
You may establish an Automatic Withdrawal Plan if you own or
purchase Class A Shares of the Fund having a net asset value of
at least $5,000. The Automatic Withdrawal Plan is not available
for Class C Shares.
Under an Automatic Withdrawal Plan you will receive a
monthly or quarterly check in a stated amount, not less than $50.
If such a plan is established, all dividends and distributions
must be reinvested in your shareholder account. Redemption of
Class A Shares to make payments under the Automatic Withdrawal
Plan will give rise to a gain or loss for tax purposes. (See the
Automatic Withdrawal Plan provisions of the Application included
with the Prospectus, the Additional Statement under "Automatic
Withdrawal Plan," and "Dividend and Tax Information" below.)
Purchases of additional Class A Shares concurrently with
withdrawals are undesirable because of sales charges when
purchases are made. Accordingly, you may not maintain an
Automatic Withdrawal Plan while simultaneously making regular
purchases. While an occasional lump sum investment may be made,
such investment should normally be an amount at least equal to
three times the annual withdrawal or $5,000, whichever is less.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
Change in Management Arrangements
On November 14, 1997, the arrangements described below were
approved by the shareholders of the Fund and went into effect.
The new arrangements were 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 new
arrangements did not result in any change in overall management
fees paid by the Fund, or any change in the parties providing
these services. Marketing efforts and positioning of the Fund
remained the same with a strong local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition became investment adviser under
a new agreement (the "Advisory and Administration Agreement")
under which it also continues to provide the Fund with all
administrative services. Also, by adoption of a Sub-Advisory
Agreement between Aquila and Citizens Bank of Rhode Island (the
"Sub-Adviser"), the former investment advisory agreement was
replaced by one under which Aquila appointed the Sub-Adviser as
Sub-Adviser to the Fund. Under the Sub-Advisory Agreement, the
Sub-Adviser continues to provide the Fund with advisory services
of the kind which it formerly provided as adviser. The duties of
the administrator, previously performed under an administration
agreement, are now performed by Aquila under the Advisory and
Administration Agreement where Aquila is referred to as the
"Manager." The former administration agreement terminated upon
effectiveness of the new agreements.
The Advisory and Administration Agreement
The Advisory and Administration Agreement between the Fund
and Aquila Management Corporation (the "Manager") has several
parts, most of which are substantially identical to corresponding
provisions in the Fund's former advisory agreements and
administration agreement. The Advisory and Administration
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 Manager
has the power to delegate its advisory functions to a
sub-adviser, which it will employ at its own expense. It has
delegated these duties to the Sub-Adviser. The Advisory and
Administration Agreement contains provisions relating to
administrative services that are substantially identical to those
contained in the Fund's former administration agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the
Manager may at its own expense delegate to a qualified
organization ("Sub-Adviser"), affiliated or not affiliated with
the Manager, any or all of the above duties. Any such delegation
of the duties set forth in (i), (ii) or (iii) above shall be by a
written agreement (the "Sub-Advisory Agreement") approved as
provided in Section 15 of the Investment Company Act of 1940. The
Manager delegates all of such functions to the Sub-Adviser in the
Sub-Advisory Agreement, which became effective at the same time
as the Advisory and Administration Agreement.
The Advisory and Administration Agreement also provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall provide all administrative services
to the Fund other than those relating to its investment portfolio
which have been delegated to a Sub-Adviser of the Fund under the
Sub-Advisory Agreement; as part of such administrative duties,
the Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement), or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory and Administration Agreement contains
provisions relating to compliance of the investment program,
responsibility of the Manager for any investment program managed
by it, allocation of brokerage, and responsibility for errors
that are substantially the same as the corresponding provisions
in the Sub-Advisory Agreement. (See the Additional Statement.)
The Advisory and Administration Agreement provides that the
Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Fund who are affiliated
persons of the Manager.
The Fund bears the costs of preparing and setting in type
its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to the Manager a fee payable monthly and computed on the
net asset value of the Fund as of the close of business each
business day at the annual rate of 0.50 of 1% of such net asset
value.
The Advisory and Administration Agreement provides that it
may be terminated by the Manager at any time without penalty upon
giving the Fund sixty days' written notice (which notice may be
waived by the Fund) and may be terminated by the Fund at any time
without penalty upon giving the Manager sixty days' written
notice (which notice may be waived by the Manager), provided that
such termination by the Fund shall be directed or approved by a
vote of a majority of its Trustees in office at the time or by a
vote of the holders of a majority (as defined in the 1940 Act) of
the voting securities of the Fund outstanding and entitled to
vote. The specific portions of the Advisory and Administration
Agreement which relate to providing investment advisory services
will automatically terminate in the event of the assignment (as
defined in the 1940 Act) of the Advisory and Administration
Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Fund as of the close of business each business day shall be
reduced to the annual rate of 0.27 of 1% of such net asset value.
The Sub-Advisory Agreement
The Manager has delegated investment advisory responsibility
to Citizens Bank of Rhode Island (the "Sub-Adviser"), which
supervises the investment program of the Fund and the composition
of its portfolio.
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser,
which provides, subject to the control of the Board of Trustees,
for investment supervision and at the Sub-Adviser's expense for
pricing of the Fund's portfolio daily using a pricing service or
other source of pricing information satisfactory to the Fund and,
unless otherwise directed by the Board of Trustees, for pricing
of the Fund's portfolio at least quarterly using another such
source satisfactory to the Fund. The Sub-Advisory Agreement
states that the Sub-Adviser shall, at its expense, provide to the
Fund all office space and facilities, equipment and clerical
personnel necessary for the carrying out of the Sub-Adviser's
duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rate of 0.23 of 1% of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund (see the
Additional Statement). Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund. It has termination and renewal provisions similar to
those contained in the Advisory and Administration Agreement.
(See the Additional Statement.)
Information About the Fund's Management
Citizens Bank of Rhode Island, the Sub-Adviser, is wholly-
owned by Citizens Financial Group, Inc. ("CFG"). CFG is a wholly-
owned subsidiary of The Royal Bank of Scotland plc. The
Sub-Adviser operates through 62 branch offices in Rhode Island .
Among other CFG subsidiaries, Citizens Bank of Connecticut has 40
branches in southeastern Connecticut; Citizens Bank of
Massachusetts, has more than 100 branches in southeastern
Massachusetts; and Citizens Bank New Hampshire has 75 branches in
New Hampshire. CFG is a $17 billion bank holding company and is
one of the 50 largest bank holding companies in the United
States. Through the Sub-Adviser and other subsidiaries, CFG
provides a full range of financial services to individuals,
businesses and governmental units. As of June 30, 1998, the Trust
and Investment Services Group of the Sub-Adviser had
approximately $5.7 billion of assets under administration,
including approximately $386 million in municipal obligations.
Salvatore C. DiSanto is the officer of the Sub-Adviser 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 Sub-Adviser's Trust and Investment
Services Group, is a member of its Trust Investment Committee. He
has been employed by the Sub-Adviser for 40 years and has been
involved in portfolio management for the last 33 years.
The Fund's Manager is founder and Manager and/or
administrator to the Aquilasm Group of Funds, which consists of
tax-free municipal bond funds, money market funds and equity
funds. As of June 30, 1998, these funds had aggregate assets of
approximately $3.0 billion, of which approximately $1.9 billion
consisted of assets of tax-free municipal bond funds. The
Manager, which was founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). (See the Additional Statement for information on
Mr. Herrmann.)
During the period July 1, 1997 through November 14, 1997
fees of $46,426 and $39,548 were accrued to the Manager and the
Sub-Adviser, respectively, under the administration agreement and
advisory agreement then in effect, of which $46,426 and $30,951,
respectively, were waived. From November 15, 1997 through June
30, 1998 fees of $160,215 were accrued to the Manager, of which
$16,024 was paid to the Sub-Adviser and the balance was waived.
In addition, during the fiscal year the Manager reimbursed the
Fund for other expenses 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 July, 1998.
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.
At the date of this Prospectus, 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 Manager and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued. Dividends and other distributions paid by the
Fund with respect to each class of its shares are calculated at
the same time and in the same manner. Because such net income
will vary, the Fund's dividends will also vary. The per-share
dividends of Class C Shares will be lower than the per share
dividends on the Class A Shares as a result of the higher service
and distribution fees applicable to those shares. In addition,
the dividends of each class can vary because each class will bear
certain class-specific charges. Dividends and other distributions
paid by the Fund with respect to each class of its shares are
calculated at the same time and in the same manner.
It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. On the Application or by completing a Ready Access
Features Form, you may elect to have dividends deposited without
charge by electronic funds transfers into your account at a
Financial Institution, if it is a member of the Automated
Clearing House.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined. (See
"How To Redeem Your Investment.")
Net investment income includes amounts of income from the
Rhode Island Obligations in the Fund's portfolio which are
allocated as "exempt-interest dividends." "Exempt-interest
dividends" are exempt from regular Federal income tax. The
allocation of "exempt-interest dividends" will be made by the use
of one designated percentage applied uniformly to all income
dividends declared during the Fund's tax year. Such designation
will normally be made in the first month after the end of each of
the Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the fiscal year ended June 30, 1998, 99.59%
of the Fund's dividends were "exempt-interest dividends." For the
calendar year 1997, 2.01% of the total dividends paid were
taxable. The percentage of income designated as tax-exempt for
any particular dividend may be different from the percentage of
the Fund's income that was tax-exempt during the period covered
by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions
to shareholders, and from short- and long-term gains
distributions (if any) and any other distributions that do not
qualify as "exempt-interest dividends," if shareholders do not
comply with provisions of the law relating to the furnishing of
taxpayer identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be
automatically reinvested in full and fractional shares of the
Fund at net asset value on the record date for the dividend or
distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All
shareholders, whether their dividends are received in cash or are
being reinvested, will receive a monthly account summary
indicating the current status of their investment. There is no
fixed dividend rate. Corporate shareholders of the Fund are not
entitled to any deduction for dividends received from the Fund.
Federal Tax Information
The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
"Exempt-interest dividends" which are derived from net income
earned by the Fund on Rhode Island Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in "
exempt-interest dividends." Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including "exempt-interest dividends" from
the Fund) received or acquired during the year.
The Code requires that either gains realized by the Fund on
the sale of municipal obligations acquired after April 30, 1993
at a price which is less than face or redemption value be
included as ordinary income to the extent such gains do not
exceed such discount or that the discount be amortized and
included ratably in taxable income. There is an exception to the
foregoing treatment if the amount of the discount is less than
0.25% of face or redemption value multiplied by the number of
years from acquisition to maturity. The Fund will report such
ordinary income in the years of sale or redemption rather than
amortize the discount and report it ratably. To the extent the
resultant ordinary taxable income is distributed to shareholders,
it will be taxable to them as ordinary income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as gain from the sale or exchange
of a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects
to have the distribution reinvested in Fund shares and regardless
of the length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Rhode Island
Obligations will be long-term or short-term depending upon the
length of time the Fund has held such obligations. Capital gains
and losses of the Fund will also include gains and losses on
Futures and options, if any, including gains and losses actually
realized on sales and exchanges and gains and losses deemed to be
realized.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends from
the Fund by an individual shareholder may result in some portion
of any social security payments or railroad retirement benefits
received by the shareholder or the shareholder's spouse being
included in taxable income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.
While interest from all Rhode Island Obligations is
tax-exempt for purposes of computing the shareholder's regular
tax, interest from so-called private activity bonds issued after
August 7, 1986, constitutes a tax preference for both individuals
and corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of Rhode
Island Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. If you are required to pay a contingent deferred
sales charge at the time of redemption, the amount of that charge
will reduce the amount of your gain or increase the amount of
your loss as the case may be. For redemptions made after January
1, 1998, your gain or loss will be long-term if you held the
redeemed shares for over one year and short-term, if for a year
or less. Long term capital gains are currently taxed at a maximum
rate of 20% and short-term gains are currently taxed at ordinary
income tax rates. However, if shares held for six months or less
are redeemed and you have a loss, two special rules apply: the
loss is reduced by the amount of exempt-interest dividends, if
any, which you received on the redeemed shares, and any loss
over and above the amount of such exempt-interest dividends is
treated as a long-term loss to the extent you have received
capital gains dividends on the redeemed shares.
Tax Effect of Conversion
Class C Shares will automatically convert to Class A Shares
approximately six years after purchase. No gain or loss will be
recognized by the Fund or its shareholders upon such conversions;
each shareholder's adjusted tax basis in the Class A Shares
received upon conversion will equal the shareholder's adjusted
tax basis in the Class C Shares held immediately before the
conversion; and each shareholder's holding period for the Class A
Shares received upon conversion will include the period for which
the shareholder held as capital assets the converted Class C
Shares immediately before conversion.
Rhode Island Tax Information
The following is a summary of certain aspects relating to
the Rhode Island tax consequences of an investment in the Fund.
This summary is based upon the advice of Edward & Angell, LLP,
Rhode Island counsel to the Fund.
This summary assumes that the Fund qualifies as a regulated
investment company for Federal income tax purposes under
Subchapter M of the Code. Such summary is based upon the
provisions of the Rhode Island tax law and the regulations
promulgated thereunder as currently in effect, all of which are
subject to change, possibly with retroactive effect. Prospective
investors in the Fund should contact their tax advisors regarding
the effect of Rhode Island or other state or local tax laws on
their investment.
Taxation of the Fund. The Fund will be subject to the Rhode
Island business corporation tax in an amount equal to the greater
of $250 or $0.10 on each $100 of the gross income of the Fund
that is apportioned to Rhode Island. Gross income is generally
defined in the same manner as for Federal income tax purposes
except that (i) interest which is exempt from Federal income tax
and which is not derived from obligations of the United States or
its possessions or Rhode Island Obligations issued by Rhode
Island issuers and exempt from taxation by Rhode Island, and (ii)
50% of the excess of capital gains over capital losses is
includable in gross income. While the issue is not entirely free
from doubt, it is unlikely that the Fund, as a Massachusetts
business trust, will be subject to the Rhode Island franchise
tax.
Individual Holders. Individual holders of shares of the Fund
who are subject to Rhode Island personal income taxation will not
be required to include in income for Rhode Island personal income
tax purposes that portion of the exempt-interest dividends which
the Fund clearly identifies as directly attributable to interest
earned on Rhode Island Obligations. Individual holders will,
however, be required to include in income any other distributions
of interest, dividends or income, except for interest or dividend
income obligations or securities issued by any authority,
commission or instrumentality of the United States.
Moreover, individual holders who are subject to Rhode Island
personal income taxation will be required to include in income
for Rhode Island personal income tax purposes the distribution of
capital gain dividends and any net short-term capital gains
realized by the Fund, unless such capital gains dividends and
short-term capital gains are derived from the sale of underlying
Rhode Island Obligations which are issued by Rhode Island issuers
and are specifically exempted from Rhode Island capital gains tax
by the Rhode Island law authorizing the issuance of the Rhode
Island Obligations.
Gain or loss recognized by an individual subject to Rhode
Island personal income taxation will be included in their Rhode
Island source income. However, Rhode Island may specifically
exempt from Rhode Island capital gains tax gain recognized on the
sale or exchange of certain Rhode Island Obligations.
Corporate Holders. Generally, corporate holders of shares of
the Fund are subject to the Rhode Island business corporation tax
or the Rhode Island franchise tax will be taxed on their net
income, authorized stock or at a flat rate minimum tax. Net
income is generally defined in the same manner as the
corporation's taxable income for Federal income tax purposes
except that distributions of exempt-interest dividends which are
derived from interest earned on municipal obligations by
governmental authorities in states other than Rhode Island will
be included in net income. Net income will also include
distributions of capital gain dividends and any net short-term
capital gains realized by the Fund, unless such distributions of
capital gain dividends and short-term capital gains are derived
from the sale of underlying Rhode Island Obligations which are
issued by Rhode Island issuers and are specifically exempted from
the Rhode Island capital gains tax.
Gain or loss recognized on the dispositions of fund shares
by corporate holders subject to the Rhode Island business
corporation tax will be included in their Rhode Island income.
Property and Estate Taxes. Shares of the Fund will be exempt
from local property taxes in Rhode Island but will be includable
in the gross estate of a deceased individual shareholder who is a
resident of Rhode Island for purposes of the Rhode Island estate
tax.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Fund, certain tax-free municipal bond funds and equity funds
(together with the Fund, the "Bond or Equity Funds") and certain
money market funds (the "Money-Market Funds"), all of which are
sponsored by Aquila Management Corporation and Aquila
Distributors, Inc., and have the same Manager or Administrator
and Distributor as the Fund. All exchanges are subject to certain
conditions described below. As of the date of the Prospectus, the
Aquila-sponsored Bond or Equity Funds are this Fund, Aquila Rocky
Mountain Equity Fund, Aquila Cascadia Equity Fund, Hawaiian
Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of
Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of
Kentucky and Tax-Free Fund For Utah; the Aquila Money-Market
Funds are Capital Cash Management Trust, Pacific Capital Cash
Assets Trust (Original Shares), Pacific Capital Tax-Free Cash
Assets Trust (Original Shares), Pacific Capital U.S. Government
Securities Cash Assets Trust (Original Shares) and Churchill Cash
Reserves Trust.
Generally, you can exchange shares of a given class of a
Bond or Equity Fund including the Fund for shares of the same
class of any other Bond or Equity Fund, or for shares of any
Money Market Fund, without the payment of a sales charge or any
other fee, and there is no limit on the number of exchanges you
can make from fund to fund. However, the following important
information should be noted:
(1) CDSCs Upon Redemptions of Shares Acquired Through
Exchanges. If you exchange shares subject to a CDSC, no CDSC will
be imposed at the time of exchange, but the shares you receive in
exchange for them will be subject to the applicable CDSC if you
redeem them before the requisite holding period (extended, if
required) has expired.
If the shares you redeem would have incurred a CDSC if you
had not made any exchanges, then the same CDSC will be imposed
upon the redemption regardless of the exchanges that have taken
place since the original purchase.
(2) Extension of Holding Periods by Owning Money-Market
Funds. Any period of 30 days or more during which Money-Market
Fund shares received on an exchange of CDSC Class A Shares or
Class C Shares are held is not counted in computing the
applicable holding period for CDSC Class A Shares or Class C
Shares.
(3) Originally Purchased Money-Market Fund Shares. Shares
of a Money-Market Fund (and any shares acquired as a result of
reinvestment of dividends and/or distributions on these shares)
acquired directly in a purchase (or in exchange for Money-Market
Fund shares that were themselves directly purchased), rather than
in exchange for shares of a Bond or Equity Fund, may be exchanged
for shares of any class of any Bond or Equity Fund that the
investor is otherwise qualified to purchase, but the shares
received in such an exchange will be subject to the same sales
charge, if any, that they would have been subject to had they
been purchased rather than acquired in exchange for Money-Market
Fund shares. If the shares received in exchange are shares that
would be subject to a CDSC if purchased directly, the holding
period governing the CDSC will run from the date of the exchange,
not from the date of the purchase of Money-Market Fund shares.
This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal
to the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-637-4633 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
Exchanges will be effected at the relative exchange prices
of the shares being exchanged next determined after receipt by
the Agent of your exchange request. The exchange prices will be
the respective net asset values of the shares, unless a sales
charge is to be deducted in connection with an exchange of
shares, in which case the exchange price of shares of a Bond or
Equity Fund will be their public offering price. Prices for
exchanges are determined in the same manner as for purchases of
the Fund's shares. (See "How to Invest in the Fund.")
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free money
market fund) are exempt from regular Federal income tax, and to
the extent that a portion or all of the dividends paid by Pacific
Capital U.S. Government Securities Cash Assets Trust (which
invests in U.S. Government obligations) are exempt from state
income taxes. Dividends paid by Aquila Rocky Mountain Equity Fund
and Aquila Cascadia Equity Fund are taxable. If your state of
residence is not the same as that of the issuers of obligations
in which a tax-free municipal bond fund or a tax-free money
market fund invests, the dividends from that fund may be subject
to income tax of the state in which you reside. Accordingly, you
should consult your tax adviser before acquiring shares of such a
bond fund or a tax-free money market fund under the exchange
privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase,
invested at the maximum public offering price (offering price
includes any applicable sales charge) for 1-, 5- and 10- year
periods and for a period since the inception of the Fund, to the
extent applicable, through the end of such periods, assuming
reinvestment (without sales charge) of all distributions. The
Fund may also furnish total return quotations for other periods
or based on investments at various applicable sales charge levels
or at net asset value. For such purposes total return equals the
total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price. (See the Additional Statement.)
Current yield reflects the income per share earned by each of the
Fund's portfolio investments; it is calculated by (i) dividing
the Fund's net investment income per share during a recent 30-day
period by (ii) the maximum public offering price on the last day
of that period and by (iii) annualizing the result. Taxable
equivalent yield shows the yield from a taxable investment that
would be required to produce an after-tax yield equivalent to
that of the Fund, which invests in tax-exempt obligations. It is
computed by dividing the tax-exempt portion of the Fund's yield
(calculated as indicated) by one minus a stated income tax rate
and by adding the product to the taxable portion (if any) of the
Fund's yield. (See the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.
Description of the Fund and Its Shares
The Fund is an open-end, non-diversified management
investment company organized in 1992 as a Massachusetts business
trust. (See "Investment of the Fund's Assets" for further
information about the Fund's status as "non-diversified.") The
Declaration of Trust permits the Trustees to issue 80,000,000
shares of $.01 par value, and to divide or combine the shares
into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Fund. Each
share represents an equal proportionate interest in the Fund with
each other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into four classes; however, if they deem it advisable and
in the best interests of shareholders, the Board of Trustees of
the Fund may create additional classes of shares which may differ
from each other as provided in rules and regulations of the
Securities and Exchange Commission or by exemptive order. The
Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a
designation including the word "Series"). (See the Additional
Statement for further information about possible additional
series.) Shares are fully paid and non-assessable, except as set
forth under the caption "General Information" in the Additional
Statement; the holders of shares have no pre-emptive or
conversion rights except that Class C Shares automatically
convert to Class A Shares after being held for six years.
In addition to Class A Shares and Class C Shares, which are
offered by this Prospectus, the Fund also has (i) Institutional
Class Shares ("Class Y Shares"), which are offered only to
institutions acting for investors in a fiduciary, advisory,
agency, custodial or similar capacity and are not offered
directly to retail customers and (ii) Financial Intermediary
Class Shares ("Class I Shares"), which are offered and sold only
through certain financial intermediaries. Class Y Shares and
Class I Shares are offered by a separate prospectus, which can be
obtained by calling the Fund at 800-453-6864 toll free or
212-697-6666 or in Rhode Island: 401-453-6864.
The Fund's four classes of shares differ in their sales
charge structures and ongoing expenses, which are likely to be
reflected in differing yields and other measures of investment
performance. All four classes represent interests in the same
portfolio of Rhode Island Obligations and have the same rights,
except that each class bears the separate expenses, if any, of
its participation in the Distribution Plan and Shareholder
Services Plan and has exclusive voting rights with respect to
such participation.
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies
on do not properly process date-related information and data
involving the year 2000 and after. The Manager is taking steps
that it believes are reasonable to address this problem in its
own computer systems and to obtain assurances that steps are
being taken by the other major service providers to the Fund to
achieve comparable results. The three mission critical vendors --
the shareholder servicing agent, the custodian and the fund
accounting agent -- as well as other support organizations, have
advised the Manager that they are actively working on necessary
changes. Certain vendors have advised the Manager that they are
currently compliant. The target date for compliance by the
mission critical vendors is late 1998. The Manager has also
requested the Fund's portfolio manager to attempt to evaluate the
potential impact of this problem on the issuers of securities in
which the Fund invests. At this time there can be no assurance
that the target dates will be met or that these steps will be
sufficient to avoid any adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.
<PAGE>
APPLICATION FOR NARRAGANSETT INSURED TAX-FREE INCOME FUND
FOR CLASS A OR CLASS C SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
Tel.# 1-800-637-4633
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.______________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for __________________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** ___________________________________________
Name of State Minor's Social Security Number
4. _____________________________________________________________________
_____________________________________________________________________
(Name of Corporation or Organization. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of the
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust
may be registered in the name of the Plan or Trust itself.)
________________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
________________________________________________________________________
Street or PO Box City
_________________________________ (______)_______________________
State Zip Daytime Phone Number
Occupation:________________________Employer:____________________________
Employer's Address:_____________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding
(See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
______________________________ ____________________________________
Dealer Name Branch Number
______________________________ ____________________________________
Street Address Rep. Number/Name
______________________________ (_________)_________________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Indicate Class of Shares)
__ Class A Shares (Front-Payment Class)
__ Class C Shares (Level-Payment Class)
Indicate Method of Payment (For either method, make check payment to
NARRAGANSETT INSURED TAX-FREE INCOME FUND)
__ Initial Investment $______________ (Minimum $1,000)
__ Automatic Investment $______________ (Minimum $50)
For Automatic Investments of at least $50 per month, you must complete
Step 3, Section A, Step 4, Sections A & B and attached a PRE-PRINTED
DEPOSIT SLIP OR VOIDED CHECK.
IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE MADE IN
CLASS A SHARES.
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be: ___ Reinvested ___ Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would
like you to deposit the dividend. (A Financial Institution is a
commercial bank, savings bank or credit union.)
___ Mail check to my/our address listed in Step 1B.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and
invested in your Narragansett Insured Tax-Free Income Fund account. To
establish this program, please complete Step 4, Sections A & B of this
Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
the Fund toll-free at 1-800-637-4633. To establish this program, please
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. LETTER OF INTENT
APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this application.
___ Yes ___ No
I/We intend to invest in Class A Shares of the Fund during the
13-month period from the date of my/our first purchase pursuant to
this Letter (which purchase cannot be more than 90 days prior to the
date of this Letter), an aggregate amount (excluding any reinvestment
of dividends or distributions) of at least $25,000 which, together with
my/our present holdings of Fund shares (at public offering price on date
of this Letter), will equal or exceed the minimum amount checked below:
___ $25,000 ___ $50,000 ___ $100,000 ___ $250,000
___ $500,000
D. AUTOMATIC WITHDRAWAL PLAN
APPLICABLE TO CLASS A SHARES ONLY.
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks prior to
1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, PFPC Inc.
(the "Agent") is authorized to redeem sufficient shares from
this account at the then current Net Asset Value, in accordance
with the terms below:
Dollar Amount of each withdrawal $ ______________beginning______________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
________________________________________ ___________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ____________________________________
Street Financial Institution Street Address
_______________________________ ____________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
E. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
person's telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorney's fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution
account listed.
Cash proceeds in any amount from the redemption of shares will be
mailed or wired, whenever possible, upon request, if in an amount of
$1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Fund
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ _____________________________________
Account Registration Financial Institution Account Number
_______________________________ _____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ _____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITOR'S AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the
Agent, PFPC Inc., and to pay such sums in accordance therewith, provided
my/our account has sufficient funds to cover such drafts or debits. I/We
further agree that your treatment of such orders will be the same as
if I/we personally signed or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number __________________________________
Name and Address where my/our account is maintained
Name of Financial Institution__________________________________________
Street Address_________________________________________________________
City_______________________________State _________________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account
is registered
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors,
Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit
in the normal course of business initiated by the Agent (except any
loss due to your payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in writing
of any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle or pay
any such claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any
such electronic debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Fund and has received and
read a current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Fund and its agents may cancel the
purchase transaction and are authorized to liquidate other shares or
fractions thereof held in my/our Fund account to make up any
deficiency resulting from any decline in the net asset value of shares
so purchased and any dividends paid on those shares. I/We
authorize the Fund and its agents to correct any transfer error
by a debit or credit to my/our Financial Institution account and/or
Fund account and to charge the account for any related charges. I/We
acknowledge that shares purchased either through Automatic Investment
or Telephone Investment are subject to applicable sales charges.
- - The Fund, the Agent and the Distributor and their Trustees,
directors, employees and agents will not be liable for acting upon
instructions believed to be genuine, and will not be responsible for
any losses resulting from unauthorized telephone transactions if the
Agent follows reasonable procedures designed to verify the identity of
the caller. The Agent will request some or all of the following
information: account name and number; name(s) and social security
number registered to the account and personal identification; the
Agent may also record calls. Shareholders should verify the accuracy
of confirmation statements immediately upon receipt. Under penalties
of perjury, the undersigned whose Social Security (Tax I.D.) Number is
shown above certifies (i) that Number is my correct taxpayer
identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned
further certifies, under penalties of perjury, that either (a) no such
Number has been issued, and a Number has been or will soon be applied
for; if a Number is not provided to you within sixty days, the
undersigned understands that all payments (including liquidations) are
subject to 31% withholding under federal tax law, until a Number is
provided and the undersigned may be subject to a $50 I.R.S. penalty;
or (b) that the undersigned is not a citizen or resident of the U.S.;
and either does not expect to be in the U.S. for 183 days during each
calendar year and does not conduct a business in the U.S. which would
receive any gain from the Fund, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ __________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ __________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trusts, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment, Expedited
Redemption and Direct Deposit of Dividends) are effective 15 days after
this form is received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access Features Form which may be obtained from Aquila
Distributors at 1-800-453-6864 and send it to the Agent together
with a "voided" check or pre-printed deposit slip from the new
account. The new Financial Institution change is effective in 15
days after this form is received in good order by the Fund's Agent.
TERMS OF LETTER OF INTENT AND ESCROW
By checking Box 3c and signing the Application, the investor is
entitled to make each purchase at the public offering price applicable
to a single transaction of the dollar amount checked above, and agrees
to be bound by the terms and conditions applicable to Letters of Intent
appearing below.
The investor is making no commitment to purchase shares, but if the
investor's purchases within thirteen months from the date of the
investor's first purchase do not aggregate $25,000, or, if such purchases
added to the investor's present holdings do not aggregate the minimum
amount specified above, the investor will pay the increased amount of
sales charge prescribed in the terms of escrow below.
The commission to the dealer or broker, if any, named herein shall be
at the rate applicable to the minimum amount of the investor's specified
intended purchases checked above. If the investor's actual purchases do
not reach this minimum amount, the commissions previously paid to the
dealer will be adjusted to the rate applicable to the investor's total
purchases. If the investor's purchases exceed the dollar amount of the
investor's intended purchases and pass the next commission break-point,
the investor shall receive the lower sales charge, provided that the
dealer returns to the Distributor the excess of commissions previously
allowed or paid to him over that which would be applicable to the amount
of the investor's total purchases.
The investor's dealer or broker shall refer to this Letter of Intent
in placing any future purchase orders for the investor while this Letter
is in effect.
The escrow shall operate as follows:
1. Out of the initial purchase (or subsequent purchases if necessary), 3%
of the dollar amount specified in the Letter of Intent (computed to the
nearest full share) shall be held in escrow in shares of the Fund by
the Agent. All dividends and any capital distributions on the escrowed
shares will be credited to the investor's account.
2. If the total minimum investment specified under the Letter is completed
within a thirteen-month period, the escrowed shares will be promptly
released to the investor. However, shares disposed of prior to
completion of the purchase requirement under the Letter will be
deducted from the amount required to complete the investment commitment.
3. If the total purchases pursuant to the Letter are less than the amount
specified in the Letter as the intended aggregate purchases, the
investor must remit to the Distributor an amount equal to the difference
between the dollar amount of sales charges actually paid and the amount
of sales charges which would have been paid if the total amount
purchased had been made at a single time. If such difference in sales
charges is not paid within twenty days after receipt of a request from
the Distributor or the dealer, the Distributor will, within sixty days
after the expiration of the Letter, redeem the number of escrowed
shares necessary to realize such difference in sales charges. Full
shares and any cash proceeds for a fractional share remaining after
such redemption will be released to the investor. The escrow of shares
will not be released until any additional sales charge due has been
paid as stated in this section.
4. By checking Box 3c and signing the Application, the investor
irrevocably constitutes and appoints the Agent or the Distributor as
his attorney to surrender for redemption any or all escrowed shares
on the books of the Fund.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees
to the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Fund. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may
be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal incapacity
of the Planholder. Upon termination of the Plan by the Agent or the
Fund, shares remaining unredeemed will be held in an uncertificated
account in the name of the Planholder, and the account will continue
as a dividend-reinvestment, uncertificated account unless and until
proper instructions are received from the Planholder, his executor or
guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any
successor transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while
simultaneously making regular purchases. While an occasional lump sum
investment may be made, such investment should normally be an
amount equivalent to three times the annual withdrawal or $5,000,
whichever is less.
<PAGE>
MANAGER AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
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
Diana P. Herrmann, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights.......................................2
Table of Expenses................................5
Financial Highlights.............................7
Introduction.....................................8
Investment Of The Fund's Assets..................8
Investment Restrictions.........................14
Net Asset Value Per Share.......................14
Alternative Purchase Plans......................15
How To Invest In The Fund.......................17
How To Redeem Your Investment...................25
Automatic Withdrawal Plan.......................29
Management Arrangements.........................29
Dividend And Tax Information....................34
Exchange Privilege..............................38
General Information.............................40
Application and Letter of Intent
AQUILA
[LOGO]
Narragansett
[LOGO]
Insured Tax-Free Income Fund
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Aquila
Narragansett Insured Tax-Free Income Fund
380 Madison Avenue
Suite 2300
New York, New York 10017
800-453-6864
212-697-6666
Prospectus
Class Y Shares
Class I Shares October 30, 1998
The Fund is a mutual fund whose objective is to seek to provide a
high level of preservation for investors' capital and consistency
in the payment of current income which is exempt from both State
of Rhode Island personal income taxes and regular Federal income
taxes.
To achieve this objective, the Fund will invest primarily in
tax-free municipal obligations which are insured by nationally
recognized insurers of municipal obligations.
Municipal obligations which are so insured generally carry
the highest credit rating (Aaa or AAA) assigned by Moody's
Investors Service, Inc. or Standard & Poor's Corporation. The
Fund's goal, which is not assured, is to have 100% of the Fund's
assets invested in insured obligations. If any uninsured
obligations are purchased by the Fund, they must either be rated
within the four highest credit ratings, which are considered as
"investment grade," or, if unrated, be determined to be of
comparable quality by the Fund's investment sub-adviser, Citizens
Bank of Rhode Island.
This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund dated October 30, 1998 (the
"Additional Statement") has been filed with the Securities and
Exchange Commission and is available without charge upon written
request to the Fund's Shareholder Servicing Agent, at the address
given below, or by calling the telephone number(s) given below.
The Additional Statement contains information about the Fund and
its management not included in this Prospectus. The Additional
Statement is incorporated by reference in its entirety in this
Prospectus. Only when you have read both this Prospectus and the
Additional Statement are all material facts about the Fund
available to you.
Insurance covers timely payment of principal and interest
when due on individually insured securities in the Fund's
investment portfolio. Insurance does not, however, insure
against fluctuations in the value of the Fund's shares and
dividend rates, which are not fixed and will vary with prevailing
interest rates and economic and market factors.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY CITIZENS BANK OF RHODE ISLAND (THE
"SUB-ADVISER"), CITIZENS FINANCIAL GROUP, INC., ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact the Fund's
Shareholder Servicing Agent:
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809
Call 800-637-4633 toll free
For General Inquiries & Yield Information,
Call 800-453-6864 toll free or 212-697-6666
In Rhode Island: 401-453-6864
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
HIGHLIGHTS
Narragansett Insured Tax-Free Income Fund, founded by Aquila
Management Corporation in 1992 and one of the Aquila Group of
Funds, is an open-end, non-diversified management investment
company (a "mutual fund") which invests in tax-free municipal
bonds and notes, the kind of obligations issued by the State of
Rhode Island and its various local authorities to finance such
long-term projects as schools, roads, hospitals, and water
facilities throughout Rhode Island or to finance short-term
needs. (See "Introduction.")
Insured Obligations - The Fund's investments will be
primarily municipal obligations which are insured as to the
timely payment of principal and interest when due by nationally
recognized insurers of such obligations. The goal of the Fund,
which is not assured, is to have 100% of the Fund's assets so
invested. While individual portfolio securities of the Fund will
be so insured, the Fund's share value and dividend rate are not
fixed or insured and will fluctuate with prevailing interest
rates and other economic and market factors. (See "Factors Which
May Affect the Value of the Fund's Investments and Their
Yields.")
Investment Grade - Other than insured municipal obligations
which are rated Aaa or AAA, the Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Sub-Adviser to be of comparable quality. In general there
are nine separate credit ratings, ranging from the highest to the
lowest credit ratings for municipal obligations. Obligations
within the top four ratings are considered "investment grade,"
but those in the fourth rating may have speculative
characteristics as well. (See "Investment of the Fund's Assets.")
Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from both State of
Rhode Island personal income taxes and regular Federal income
taxes. Dividends paid by the Fund from this income are likewise
free of both such taxes. It is, however, possible that in certain
circumstances, a small portion of the dividends paid by the Fund
will be subject to income taxes. In addition, the Federal
alternative minimum tax may apply to some investors; however, not
more than 20% of the Fund's net assets can be invested in
obligations paying interest which is subject to this tax. The
receipt of exempt-interest dividends from the Fund may result in
some portion of social security payments or railroad retirement
benefits being included in taxable income. Capital gains
distributions, if any, are taxable. (See "Dividend and Tax
Information.")
Alternative Purchase Plans - The Fund provides alternative
ways to invest. (See "How to Invest in the Fund.") For this
purpose the Fund offers classes of shares, which differ in their
expense levels and sales charges. This prospectus offers:
Institutional Class Shares ("Class Y Shares") are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity, and are not
offered directly to retail customers. Class Y Shares are
offered at net asset value with no sales charge, no
redemption fee, no contingent deferred sales charge and no
distribution fee. (See "How to Purchase Class Y Shares.")
Financial Intermediary Class Shares ("Class I Shares") are
offered and sold only through financial intermediaries with
which Aquila Distributors, Inc. (the "Distributor") has
entered into sales agreements, and are not offered directly
to retail customers. Class I Shares are offered at net asset
value with no sales charge and no redemption fee or
contingent deferred sales charge, although a financial
intermediary may charge a fee for effecting a purchase or
other transaction on behalf of its customers. Class I Shares
may carry a distribution fee of up to 0.25 of 1% of average
annual net assets allocable to Class I Shares, currently
0.10 of 1% of such net assets, and a services fee of 0.25 of
1% of such assets. (See "How to Purchase Class I Shares.")
The Fund's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of the Prospectus, Class Y Shares and Class I
Shares are only offered for sale in certain states. (See "How to
Invest in the Fund.") If Class Y Shares or Class I Shares of the
Fund are sold outside those states, except to certain
institutional investors, the Fund can redeem them. If your state
of residence is not Rhode Island, dividends from the Fund may be
subject to income taxes of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund.
Initial Investment - You may open your account for Class Y
Shares with any purchase of $1,000 or more. (See the Application,
which is in the back of the Prospectus.) Class I Shares are sold
only through financial intermediaries, which may have their own
minimum investment requirement. (See "How to Invest in the
Fund.")
Additional Investments - You may make additional investments
in Class Y Shares at any time and in any amount, directly or, if
in an amount of $50 or more, through the convenience of having
your investment electronically transferred from your financial
institution account into the Fund by Automatic Investment or
Telephone Investment. Additional investments in Class I Shares
can be made only through financial intermediaries, which may have
their own requirements for subsequent investments. (See "How to
Invest in the Fund.")
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends on Class Y Shares are paid by
check mailed to you, directly deposited into your financial
institution account or automatically reinvested without sales
charge in additional Class Y Shares at the then-current net asset
value. All arrangements for the payment of dividends with respect
to Class I Shares, including reinvestment of dividends, must be
made through financial intermediaries. (See "Dividend and Tax
Information.")
Redemptions - Liquidity - You may redeem any amount of your
Class Y Shares account on any business day at the next determined
net asset value by telephone, FAX or mail request, with proceeds
being sent to a predesignated financial institution, if you have
elected Expedited Redemption. Proceeds will be wired or
transferred through the facilities of the Automated Clearing
House, wherever possible, upon request, if in an amount of $1,000
or more, or will be mailed. For these and other redemption
procedures see "How to Redeem Your Investment." All arrangements
for redemptions of Class I Shares must be made through financial
intermediaries. The Fund does not impose redemption fees for
redemption of Class Y Shares or Class I Shares. However,
financial intermediaries may charge a fee for effecting
redemptions.
Local Investment Management and Fee Arrangements - Citizens
Bank of Rhode Island serves as the Fund's investment Sub-Adviser,
providing experienced local professional management. The Fund
pays fees at a rate of up to 0.50 of 1% of average annual net
assets to its Manager which pays fees at the annual rate of 0.23
of 1% of such net assets to the Sub-Adviser, although some or all
of these fees may be waived temporarily. (See "Table of Expenses"
and "Management Arrangements.")
Many Different Issues - Even a small investment in the Fund
allows you to have the advantages of a portfolio which consists
of over 110 issues with different maturities. (See "Investment of
the Fund's Assets.")
Certain Stabilizing Measures - To attempt to protect against
declines in the value of its investments and other market risks,
the Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases of
other than insured issues, broadening diversification and
increasing its position in cash.
Exchanges - You may exchange Class Y Shares of the Fund into
Class Y Shares of other Aquila-sponsored tax-free municipal bond
funds or Aquila-sponsored equity funds. You may also exchange
them into shares of the Aquila-sponsored money market funds.
Similar exchangability is available to Class I Shares to the
extent that other Aquila-sponsored funds are made available to
its customers by a financial intermediary. The exchange prices
will be the respective net asset values of the shares. (See
"Exchange Privilege.")
Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions, including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Rhode Island issues, are subject to
economic and other conditions affecting Rhode Island. (See "Risk
Factors and Special Considerations Regarding Investment in Rhode
Island Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.")
Statements and Reports - You will receive statements of your
Class Y Shares account monthly as well as each time you add to
your account or take money out. Financial intermediaries provide
their own statements of Class I Shares accounts. Additionally,
you will receive a Semi-Annual Report and an audited Annual
Report.
<PAGE>
<TABLE>
<CAPTION>
NARRAGANSETT INSURED TAX-FREE INCOME FUND
TABLE OF EXPENSES
Class I Class Y
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases.............. None None
(as a percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividends .. None None
Maximum Deferred Sales Charge ......................... None None
Redemption Fees ....................................... None None
Exchange Fee .......................................... None None
Annual Fund Operating Expenses (1)(2)
(as a percentage of average net assets)
Management Fee After Waiver (3)........................ 0.05% 0.05%
12b-1 Fee ............................................. 0.10% None
All Other Expenses After Expense Reimbursement ........ 0.40% 0.21%
Total Fund Operating Expenses After Expense
Reimbursement and Fee Waivers ....................... 0.55% 0.26%
Example (4)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
Class I Shares..... $6 $18 $31 $69
Class Y Shares..... $3 $8 $15 $33
<FN>
(1) Estimated based upon actual expenses incurred by the Fund's Class Y
Shares during its most recent fiscal year and known expense adjustments
for the current year.
</FN>
<FN>
(2) At present fees are being partially waived by the Manager and
Sub-Adviser. It is anticipated that once the asset size of the Fund
reaches approximately $100 million, these waivers may no
longer be necessary. Also, operating expenses are being
subsidized through reimbursement by the Manager. This subsidy
is being phased out progressively so that the Fund will bear its own
expenses, other than management fees, once its asset size reaches
approximately $100 million. The undertakings of the Manager and
the Sub-Adviser as to fee waivers and the practices of the Manager
as to expense reimbursement may operate to reduce the fees
and expenses of the Fund in order for the Fund to maintain a
competitive yield. (See "Management Arrangements.") Other Expenses
do not reflect a 0.01% expense offset in Custodian fees received for
uninvested cash balances. Without fee waivers and expense
reimbursement, and including the offset in Custodian fees,
expenses would have been incurred at the following annual
rates: for Class I Shares, management fee, 0.50%; 12b-1 fee,
0.10% (up to 0.25% can be authorized; see "Distribution Plan");
other expenses, 0.64%, for total operating expenses of 1.24%;
for Class Y Shares, management fee, 0.50%; other expenses,
0.45%, for total operating expenses of 0.95%.
</FN>
<FN>
(3) The Fund pays the Manager an advisory fee at the annual rate of
0.50 of 1% of average annual net assets of which 0.45 of 1% is
currently being waived; the Manager pays the Sub-Advisor a
sub-advisory fee at the annual rate of 0.23 of 1% of average annual
net assets of which 0.18 of 1% is currently being waived.
(See "Management Arrangements.")
</FN>
<FN>
(4) The expense example is based upon the annual Fund operating expenses.
It is also based upon amounts at the beginning of each year which includes
the prior year's assumed results. A year's results consist of an assumed
5% annual return less total annual operating expenses; the expense ratio
was applied to an assumed average balance (the year's starting investment
plus one-half the year's results). Each figure represents the cumulative
expenses so determined for the period specified.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT
ALL MUTUAL FUNDS USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF
PREPARING THE ABOVE EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD
NOT BE INTERPRETED AS A PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE
HIGHER OR LOWER.
The purpose of the above table is to assist the investor in
understanding the various costs that an investor in the Fund will bear
directly or indirectly. The above table should not be considered as a
commitment or prediction that any fees, or that any particular portion
of fees, will be waived, or that any particular expenses will be
reimbursed. (See "Management Arrangements" for a more complete
description of the management and sub-advisory fees.)
<PAGE>
<TABLE>
<CAPTION>
The table shown below for Class A Shares is for information purposes
only. Class A Shares are not offered by this Prospectus. No historical
information exists for Class I Shares which were established on
October 31, 1997 as there have been no I Shares sales.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights has been audited by KPMG
Peat Marwick LLP, independent auditors, whose report thereon is included
with the Fund's financial statements contained in its Annual Report, which
are incorporated by reference into the Additional Statement.
The information provided in the table should be read in conjunction
with the financial statements and related notes. The Fund's Annual Report
contains additional information about the Fund's performance and is
available upon request without charge, by calling or writing
the Fund's Shareholder Servicing Agent at the address and telephone
numbers on the cover of the Prospectus.
Class Y(2)
Class A(1) Year Year Period(3)
Year Ended June 30, Ended Ended Ended
1998 1997 1996 6/30/98 6/30/97 6/30/96
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period....$10.18 $9.93 $9.80 $10.19 $9.93 $9.94
Income from Investment
Operations:
Net investment
income ............... 0.50 0.51 0.52 0.59 0.09 0.59
Net gain (loss) on
securities (both
realized and
unrealized) ......... 0.30 0.26 0.13 0.29 0.26 (0.01)
Total from Investment
Operations .......... 0.80 0.77 0.65 0.88 0.82 0.08
Less Distributions:
Dividends from net
investment income ... (0.51) (0.52) (0.52) (0.60) (0.59) (0.09)
Distributions from
capital gains ....... - - - - - -
Total Distributions ... (0.51) (0.52) (0.52) (0.60) (0.59) (0.09)
Net Asset Value, End of
Period................. $10.47 $10.18 $9.93 $10.47 $10.19 $9.93
Total Return (not
reflecting sales
charge) (%)............ 8.02 7.97 6.72 8.80 8.48 0.80+
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) ....... 52,006 42,540 37,988 17 0.1 0.1
Ratio of Expenses to
Average Net
Assets (%)........... 0.27 0.21 0.14 0.27 0.06 0.14+
Ratio of Net Investment
Income to Average Net
Assets (%)........... 4.84 5.07 5.19 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 Manager's and Sub-Adviser's voluntary
waiver of fees, 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 ($)............. 0.41 0.41 0.42 0.46 0.55 0.08
Ratio of Expenses to
Average Net
Assets (%)............. 1.31 1.25 1.17 0.84 1.10 0.15+
Ratio of Net Investment
Income to Average Net
Assets (%)............. 3.98 4.03 4.16 4.10 4.18 0.77+
<CAPTION>
Class A(1)
Year Ended June 30,
1995 1994
<C> <C>
$9.44 $10.07
0.54 0.53
0.36 (0.63)
0.90 (0.10)
(0.54) (0.53)
- -
(0.54) (0.53)
$9.80 $9.44
9.82 (1.11)
34,373 31,660
0.06 0.02
5.63 5.30
0 0
0.43 0.40
1.19 1.32
4.50 4.00
<FN>
(1) Designated as Class A Shares on May 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on May 1, 1996.
</FN>
<FN>
(3) From May 1, 1996 to June 30, 1996.
</FN>
<FN>
+ Not annualized.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment
for investors who seek a high level of preservation for the
principal of their investment and consistency in the payment of
income which is exempt from regular State of Rhode Island
personal income taxes and regular Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Rhode Island Obligations, as defined below,
which may include obligations of certain non-Rhode Island
issuers. The Fund offers you the opportunity to keep assets fully
invested in a vehicle that provides a professionally managed
portfolio of Rhode Island Obligations which may, but not
necessarily will, be more diversified, higher yielding or more
stable and more liquid than you might be able to obtain on an
individual basis by direct purchase of Rhode Island Obligations.
Through the convenience of a single security consisting of
shares of the Fund, you are also relieved of the inconvenience
associated with direct investments of fixed denominations,
including the selecting, purchasing, handling, monitoring call
provisions and safekeeping of Rhode Island Obligations.
Rhode Island Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations, such as bonds, are
issued include the construction of a wide range of public
facilities such as highways, bridges, schools, hospitals,
housing, mass transportation, streets and water and sewer works.
Other public purposes for which municipal obligations may be
issued include the refunding of outstanding obligations, the
obtaining of funds for general operating expenses and the
obtaining of funds to lend to other public institutions and
facilities.
INVESTMENT OF THE FUND'S ASSETS
The Fund's objective is to seek a high level of preservation
for investor's capital and consistency in the payment of current
income which is exempt from both State of Rhode Island personal
income taxes and regular Federal income taxes. There is no
assurance, however, that the Fund will achieve its objective,
which is a fundamental policy of the Fund. (See "Investment
Restrictions" for a description of the Fund's fundamental
policies.) In seeking its objective, the Fund will invest
primarily in Rhode Island Obligations (as defined below) which
are insured by nationally recognized insurers of municipal
obligations as to the timely payment of principal and interest
when due. The value of the Fund's shares will tend to fluctuate
with prevailing interest rates and economic and market factors.
As used in the Prospectus and the Additional Statement, the
term "Rhode Island Obligations" means obligations, including
those of certain non-Rhode Island issuers, of any maturity which
pay interest which, in the opinion of bond counsel or other
appropriate counsel, is exempt from Rhode Island personal income
taxes and regular Federal income taxes. Although exempt from
regular Federal income tax, interest paid on certain types of
Rhode Island Obligations, and dividends which the Fund might pay
from this interest, are preference items as to the Federal
alternative minimum tax ("AMT"); for further information, see
"Dividend and Tax Information." As a fundamental policy, at least
80% of the Fund's net assets will be invested in Rhode Island
Obligations the income paid upon which will not be subject to the
AMT; accordingly, the Fund can invest up to 20% of its net assets
in obligations which are subject to the AMT. The Fund may refrain
entirely from purchasing Rhode Island Obligations subject to AMT.
The non-Rhode Island bonds or other obligations, the
interest on which is exempt under present law from State of
Rhode Island personal income taxes and regular Federal income
taxes, are those issued by or under the authority of Guam, the
Northern Mariana Islands, Puerto Rico and the Virgin Islands. The
Fund will not purchase Rhode Island Obligations of non-Rhode
Island issuers unless Rhode Island Obligations of Rhode Island
issuers of the desired quality, maturity and interest rate are
not available. As a Rhode Island-oriented fund, it is a
fundamental policy that at least 65% of the Fund's total assets
will be invested in Rhode Island Obligations of Rhode Island
issuers.
Insurance Feature
The purpose of having insurance on investments in Rhode
Island Obligations in the Fund's portfolio is to reduce financial
risk for investors in the Fund.
Insurance as to the timely payment of principal and interest
when due for Rhode Island Obligations is acquired as follows:
(i) obtained by the issuer of the Rhode Island Obligations
at the time of original issue of the obligations, known as "New
Issue Insurance," or
(ii) purchased by the Fund or a previous owner with respect
to specific Rhode Island Obligations, termed "Secondary Market
Insurance."
The insurance of principal under these types of insurance
policies refers to the payment of the face or par value of the
Rhode Island Obligation when due. Insurance is not affected by
nor does it insure the market price paid by the Fund for the
obligation. The market value of obligations in the Fund will,
from time to time, be affected by various factors, including the
general movement of interest rates. The value of the Fund's
shares is not insured.
In order to reduce financial risk to the Fund's investors as
much as practical, it is a goal of the Fund, which is not
assured, that 100% of the Fund's assets will be invested in
insured Rhode Island Obligations. However, if the Board of
Trustees determines that there is an inadequate supply in the
marketplace of Rhode Island Obligations covered by New Issue
Insurance and that appropriate Secondary Market Insurance cannot
be obtained for other Rhode Island Obligations on terms that are
financially advantageous to the Fund as a result of market
conditions or other factors, then the Fund may invest in Rhode
Island Obligations that are not insured. As a fundamental policy,
65% of the Fund's total net assets will be invested in Rhode
Island Obligations which are insured.
New Issue Insurance is obtained by the issuer of the Rhode
Island Obligations and all premiums respecting such securities
are paid in advance by such issuer. Such policies are
noncancelable and continue in force so long as the Rhode Island
Obligations are outstanding and the insurer remains in business.
The Fund may also purchase Secondary Market Insurance on any
Rhode Island Obligation purchased by the Fund. By purchasing
Secondary Market Insurance, the Fund will obtain, upon payment of
a single premium, insurance against nonpayment of scheduled
principal and interest for the remaining term of the Rhode Island
Obligation, regardless of whether the Fund then owns such
security. Such insurance coverage is noncancelable and continues
in force so long as the security so insured is outstanding and
the insurer remains in business. The purposes of acquiring
Secondary Market Insurance are to insure timely payment of
principal and interest when due and to enable the Fund to sell a
Rhode Island Obligation to a third party as a high-rated insured
Rhode Island Obligation at a market price greater than what
otherwise might be obtainable if the security were sold without
the insurance coverage. There is no assurance that such insurance
can be obtained at rates that would make its purchase
advantageous to the Fund.
New Issue Insurance and Secondary Market Insurance will be
obtained from some or all of the following: Municipal Bond
Investors Assurance Corporation ("MBIA"), Financial Guaranty
Insurance Company ("Financial Guaranty") and AMBAC Indemnity
Corporation ("AMBAC Indemnity"). (See the Additional Statement
for information about these companies.) The Fund may also
purchase insurance from, or Rhode Island Obligations insured by,
other insurers. However, the Fund will seek to ensure that any
insurer used will itself have a Aaa or AAA rating.
Further information concerning the insurance feature appears
in the Additional Statement.
Risk Factors and Special Investment Considerations Regarding the
Insurance Feature
While the insurance feature is intended to reduce financial
risk, in some instances there is a cost to be borne by the Fund
for such a feature. In general, the insurance premium cost of New
Issue Insurance is borne by the issuer.
Secondary Market Insurance, if purchased by the Fund,
involves payment of a single premium, the cost of which is added
to the cost basis of the price of the security. It is not
considered an item of expense of the Fund, but rather an addition
to the price of the security. Upon sale of a security so insured,
the excess, if any, of the security's market value as an "Aaa" or
"AAA" rated security over its market value without such rating,
including the cost of the single premium for Secondary Market
Insurance, would inure to the Fund in determining the net capital
gain or loss realized by the Fund.
In practice, those nationally recognized insurers which
provide insurance generally do so only for municipal obligations
which on their own would be rated within the top four credit
ratings, and preferably with at least an "A" rating by such
credit rating agencies as Moody's or S&P.
New Issue Insurance and Secondary Market Insurance do not
terminate with respect to a Rhode Island Obligation once the
obligation is sold by the Fund.
Information about the Fund's Investments
Municipal obligations which are insured are generally rated
Aaa or AAA by the major credit rating agencies, the highest
attainable credit rating assigned by these rating agencies. If
the Fund purchases uninsured Rhode Island Obligations, which it
may do, in order to maintain a quality-oriented portfolio, the
Fund will purchase only investment grade securities. Any such
Rhode Island Obligations which the Fund purchases must, at the
time of purchase, either (i) be rated within the four highest
credit ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"); or (ii) if
unrated, be determined to be of comparable quality to municipal
obligations so rated by Citizens Bank of Rhode Island (the "Sub-
Adviser"), the Fund's investment sub-adviser (subject to the
direction and control of the Board of Trustees).
In general, there are nine separate credit ratings, ranging
from the highest to the lowest credit standards for municipal
obligations. Municipal obligations rated in the fourth highest
credit rating are considered by such rating agencies to be of
medium quality and thus may present investment risks not present
in more highly rated obligations. Such bonds lack outstanding
investment characteristics and may in fact have some speculative
characteristics as well; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to
make principal and interest payments than is the case for higher
grade bonds.
Except as set forth under "Risk Factors and Special
Investment Considerations Regarding the Insurance Feature,"
above, if after purchase the rating of any rated Rhode Island
Obligation is downgraded such that it could not then be purchased
by the Fund, or, in the case of an unrated Rhode Island
Obligation, if the Sub-Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Fund may purchase, it is the current policy
of the Fund to cause any such obligation to be sold as promptly
thereafter as the Sub-Adviser in its discretion determines to be
consistent with the Fund's objectives; such obligation remains in
the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. (See Appendix A to the Additional Statement for further
information as to these ratings.) The Fund can purchase
industrial development bonds only if they meet the definition of
Rhode Island Obligations, i.e., the interest on them is exempt
from Rhode Island State and regular Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have had to meet a similar test as to 75% of
its assets. The Fund may therefore not have as much
diversification among securities, and thus diversification of
risk, as if it had made this election under the 1940 Act. In
general, the more the Fund invests in the securities of specific
issuers, the more the Fund is exposed to risks associated with
investments in those issuers. The Fund's assets, being primarily
or entirely Rhode Island issues, are accordingly subject to
economic and other conditions affecting Rhode Island. (See "Risk
Factors and Special Considerations Regarding Investment In Rhode
Island Obligations.")
Possible Stabilizing Measures
The Fund will employ such traditional measures as upgrading
credit standards for portfolio purchases of other than insured
obligations, varying maturities, broadening diversification and
increasing its position in cash and cash equivalents in
attempting to protect against declines in the value of its
investments as a result of general interest rate fluctuations,
economic factors and other market risks. There can, however, be
no assurance that these will be successful.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30 days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Rhode Island Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Rhode Island Obligations in the
proportion that the Fund's participation interest bears to the
total amount of the underlying Rhode Island Obligations. All such
participation interests must meet the Fund's credit requirements.
(See "Limitation to 10% as to Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Rhode Island Obligations on a when-issued
or delayed delivery basis when it has the intention of acquiring
them. The Rhode Island Obligations so purchased are subject to
market fluctuation and no interest accrues to the Fund until
delivery and payment take place; their value at the delivery date
may be less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account, which is marked to market every business day.
(See the Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Fund cannot purchase Rhode Island Obligations that are
not readily marketable if thereafter more than 10% of its net
assets would consist of such investments. However, this 10% limit
does not include any Rhode Island Obligations as to which the
Fund can exercise the right to demand payment in full within
three days and as to which there is a secondary market. Floating
and variable rate demand notes and participation interests
(including municipal lease/purchase obligations) are considered
illiquid unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets
in (i) Rhode Island Obligations the interest on which is paid
from revenues of similar type projects or (ii) industrial
development bonds, unless the Prospectus and/or the Additional
Statement are supplemented to reflect the change and to give
additional information.
Factors Which May Affect the Value of the Fund's Investments and
Their Yields
The value of the Rhode Island Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Rhode Island Obligations, the
value of these obligations will normally go down; if these rates
go down, the value of these obligations will normally go up.
Changes in value and yield based on changes in prevailing
interest rates may have different effects on short-term Rhode
Island Obligations than on long-term obligations. Long-term
obligations (which often have higher yields) may fluctuate in
value more than short-term ones. For this reason, the Fund may,
to achieve a defensive position, shorten the average maturity of
its portfolio. The Fund's portfolio will represent a blend of
short-term and long-term obligations designed to reduce
fluctuations in the net asset value of the Fund's shares.
Risk Factors and Special Considerations Regarding Investment in
Rhode Island Obligations
The following is a discussion of the general factors that
might influence the ability of Rhode Island issuers to repay
principal and interest when due on the Rhode Island Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.
Rhode Island experienced significant economic growth during
most of the 1980's. Its economy became more diversified as
reliance on manufacturing employment decreased and
non-manufacturing employment grew. From 1980 to 1989 per capita
income growth exceeded national growth levels, and employment
growth and total personal income growth both paralleled national
growth levels.
Between the late 1980's and the mid-1990's, there was a
regional economic slowdown resulting in rising unemployment rates
and the slowing of personal income growth. Rhode Island, like
other New England states, began to experience a slowdown in its
economy at that time. Since 1997, the State has experienced per
capita income higher than the national average and employment has
increased in all sectors except for manufacturing.
The economic slowdown resulted in significant budget
constraints. Declining revenues, combined with increased demand
for certain governmental services, such as public assistance,
have occurred as a result of the difficult general economic
conditions. The State constitution requires that Rhode Island end
each year with a balanced budget and does not permit a deficit to
continue into the next fiscal year. The constitutional mandate
and overall budgeting pressure forced state officials to review
the State's overall fiscal outlook and structural issues
pertaining to its financial structure. Revenue estimating
procedures were improved, and five-year projections were
published with the annual budget submission. Major program
reductions and eliminations were adopted. A constitutional
amendment was adopted by voter referendum to mandate a "rainy day
fund." A capital budgeting process was initiated along with
increased emphasis on debt management. (See the Additional
Statement for further information.)
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and in the Additional Statement as "fundamental
policies," cannot be changed unless the holders of a "majority,"
as defined in the 1940 Act, of the Fund's outstanding shares vote
to change them. (See the Additional Statement for a definition of
such a majority.) All other policies can be changed from time to
time by the Board of Trustees without shareholder approval. Some
of the more important of the Fund's fundamental policies, not
otherwise identified in the Prospectus, are set forth below;
others are listed in the Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than Rhode Island
Obligations meeting the standards stated under "Investment of the
Fund's Assets."
2. The Fund has industry investment requirements.
The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry. The Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Rhode Island Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. Interest on borrowings would reduce the
Fund's income. Except in connection with borrowings, the Fund
will not issue senior securities. The Fund will not purchase any
Rhode Island Obligations while it has any outstanding borrowings
which exceed 5% of the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time,
on each day that the New York Stock Exchange is open (a "business
day"), by dividing the value of the Fund's net assets (i.e., the
value of the assets less liabilities) allocable to each class by
the total number of shares of such class then outstanding.
Determination of the value of the Fund's assets is subject to the
direction and control of the Fund's Board of Trustees. In
general, it is based on market value, except that Rhode Island
Obligations maturing in 60 days or less are generally valued at
amortized cost; see the Additional Statement for further
information.
HOW TO INVEST IN THE FUND
This Prospectus offers two separate classes of shares. All
classes represent interests in the same portfolio of Rhode Island
Obligations.
Institutional Class Shares ("Class Y Shares") are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity and are not
offered directly to retail customers. Class Y Shares are
offered at net asset value with no sales charge, no
redemption fee, no contingent deferred sales charge and no
distribution fee.
Financial Intermediary Class Shares ("Class I Shares") are
offered and sold only through financial intermediaries with
which Aquila Distributors, Inc. (the "Distributor") has
entered into sales agreements, and are not offered directly
to retail customers. Class I Shares are offered at net asset
value with no sales charge and no redemption fee or
contingent deferred sales charge, although a financial
intermediary may charge a fee for effecting a purchase or
other transaction on behalf of its customers. Class I Shares
may carry a distribution fee of up to 0.25 of 1% of average
annual net assets allocable to Class I Shares, currently
0.10 of 1% of such net assets, and a service fee of 0.25 of
1% of such assets. (See "Distribution Plan" and "Shareholder
Services Plan for Class I Shares.")
The Fund's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of this Prospectus, Class Y Shares of the Fund
are only offered for sale in Rhode Island, Connecticut, District
of Columbia, Florida, Hawaii, New Jersey and New York. At the
date of this Prospectus, Class I Shares of the Fund are only
offered for sale in Rhode Island and New York.
If you do not reside in one of these states you should not
purchase shares of the Fund. If shares are sold outside of these
states except to certain institutional investors, the Fund can
redeem them. Such a redemption may result in a loss to you and
may have tax consequences. In addition, if your state of
residence is not Rhode Island, the dividends from the Fund may
not be exempt from income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund. The Fund and the Distributor reserve the
right to reject any order for the purchase of shares. In
addition, the offering of shares may be suspended at any time and
resumed at any time thereafter.
How to Purchase Class Y Shares
Institutional Class Shares ("Class Y Shares") are offered
only to institutional investors for investments held in a
fiduciary, advisory, agency, custodial or similar capacity, or
through them to their clients, and are not offered directly to
retail customers. Class Y Shares are offered at net asset value
with no sales charge, no redemption fee, no contingent deferred
sales charge and no distribution fee.
Class Y Shares of the Fund may be purchased through any
investment broker or dealer (a "selected dealer") which has a
sales agreement with Aquila Distributors, Inc. (the
"Distributor") or through the Distributor. There are two ways to
make an initial investment: (i) order the shares through your
investment broker or dealer, if it is a selected dealer; or (ii)
mail the Application with payment to the Fund's Shareholder
Servicing Agent (the "Agent") at the address on the Application.
There is no sales charge on initial or subsequent investments.
You are urged to complete an Application and send it to the Agent
so that expedited shareholder services can be established at the
time of your investment.
The minimum initial investment for Class Y Shares is
$1,000, or as otherwise stated in the Prospectus or Additional
Statement. Such investment must be drawn in United States dollars
on a United States commercial or savings bank or credit union or
a United States branch of a foreign commercial bank (each of
which is a "Financial Institution"). You may make subsequent
investments in Class Y Shares in any amount (unless you have an
Automatic Withdrawal Plan). Your subsequent investment may be
made through a selected dealer or by forwarding payment to the
Agent, with the name(s) of account owner(s), the account number
and the name of the Fund. With subsequent investments, please
send the pre-printed stub attached to the Fund's confirmations.
Subsequent investments of $50 or more in Class Y Shares can
be made by electronic funds transfer from your demand account at
a Financial Institution. To use electronic funds transfer for
your purchases, your Financial Institution must be a member of
the Automated Clearing House and the Agent must have received
your completed Application designating this feature, or, after
your account has been opened, a Ready Access Features Form
available from the Distributor or the Agent. A pre-determined
amount can be regularly transferred for investment ("Automatic
Investment"), or single investments can be made upon receipt by
the Agent of telephone instructions from anyone ("Telephone
Investment"). The maximum amount of each Telephone Investment is
$50,000. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate these investment methods at any time or
charge a service fee, although no such fee is currently
contemplated.
How to Purchase Class I Shares
Initial and subsequent investments in Class I Shares must be
made through financial intermediaries and cannot be made
directly. Financial intermediaries may charge a fee for effecting
a purchase or other transaction on behalf of customers. Financial
intermediaries that make Class I Shares of the Fund and other
mutual funds available to their customers may offer distinct
services, may have their own charges for services and may impose
their own minimum requirements for initial and subsequent
investments. Customers of financial intermediaries should read
the Prospectus in light of the terms of their accounts with
financial intermediaries. Financial intermediaries that have
entered into specific agreements with the Fund may enter
confirmed purchase orders on behalf of clients and customers,
with payment to follow not later than the Fund's pricing of Class
I Shares on the following business day. If payment is not
received by that time the financial intermediary could be held
liable for resulting fees or losses.
Offering Price
The offering price for Class Y Shares is the net asset value
per share. The offering price determined on any day applies to
all purchase orders received by the Agent from selected dealers
that day, except that orders received by it after 4:00 p.m. New
York time will receive that day's offering price only if such
orders were received by selected dealers from customers prior to
such time and transmitted to the Distributor prior to its close
of business that day (normally 5:00 p.m. New York time); if not
so transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day, except that if that day is not a business
day your order will be executed at the price determined on the
next business day. In the case of Telephone Investment your order
will be filled at the next determined offering price. If your
order is placed after the time for determining the net asset
value of the Fund shares for any day, it will be executed at the
price determined on the following business day. The sale of
shares will be suspended during any period when the determination
of net asset value is suspended.
The offering price for Class I Shares is the net asset value
per share. The offering price determined on any day applies to
all purchases received by each financial intermediary prior to
4:00 p.m. New York time on any business day. Purchase orders
received by financial intermediaries after that time will be
filled at the next determined offering price.
Possible Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Manager out of its own funds, directly or through
the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Confirmations and Share Certificates
All purchases of Class Y Shares will be confirmed and
credited to you in an account maintained for you at the Agent in
full and fractional shares of the Fund (rounded to the nearest
1/1000th of a share). Purchases of Class I Shares will be
confirmed by financial intermediaries. No share certificates will
be issued for Class Y Shares or Class I Shares.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended
to result in the sale of its shares except pursuant to a written
plan adopted under the Rule. No payments under the Plan from
assets represented by Class Y Shares are authorized.
Under a part of the Plan, the Fund is authorized to make
payments with respect to Class I Shares ("Class I Permitted
Payments") to Qualified Recipients. Class I Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or
for any fiscal year which is not a full fiscal year), a rate set
from time to time by the Board of Trustees (currently 0.10 of 1%)
but not more than 0.25 of 1% of the average annual net assets
represented by the Class I Shares of the Fund. Such payments
shall be made only out of the Fund's assets allocable to the
Class I Shares. "Qualified Recipients" means financial
intermediaries selected by the Distributor with which the Fund or
the Distributor has entered into written agreements to act in
such capacity.
The Plan contains provisions designed to protect against any
claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for payments made with respect to Class A Shares,
Class C Shares and Class I Shares, it is not financing any such
activity and does not consider any payment enumerated in such
provisions as so financing any such activity. If and to the
extent that any payment as specifically listed in such provisions
(see the Additional Statement) is considered to be primarily
intended to result in or as indirect financing of any activity
which is primarily intended to result in the sale of Fund shares,
these payments are authorized under the Plan. In addition, if the
Manager, out of its own funds, makes payment for distribution
expenses such payments are authorized. (See the Additional
Statement.)
Shareholder Services Plan for Class I Shares
Under a Shareholder Services Plan, (the "Plan") the Fund is
authorized to make payments with respect to Class I Shares
("Service Payments") to Qualified Recipients. Fees paid under the
Plan are subject to such limits as may be necessary for Class I
Shares to qualify as a "no-load" class for purposes of the
Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"). The current limitation is as follows: fees paid
under the Plan that satisfy the definition of "service fees" in
Rule 2830(d) of the Conduct Rules of the National Association of
Securities Dealers, Inc. may not exceed an amount equal to the
difference between (i) 0.25 of 1% of the average annual net
assets of the Fund represented by Class I Shares and (ii) the
amount paid under the Fund's Distribution Plan with respect to
the assets represented by the Class I Shares. That is, the total
payments under both plans will not exceed 0.25 of 1% of such net
assets. Where necessary or appropriate, the Independent Trustees,
or such appropriate officer or officers of the Fund as they may
designate, shall, with the advice of counsel, determine what fees
paid under this Plan are to be deemed "service fees." The Fund's
management believes that, in general, fees allocable to
activities such as sub-accounting and record-keeping are not
"service fees," while fees allocable to activities such as
account service are "service fees." In like manner, allocation of
payments among activities is also determined by the Independent
Trustees or their delegates. Subject to the foregoing, Service
Payments may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year), 0.25 of 1% of the average
annual net assets represented by the Class I Shares of the Fund.
Such payments shall be made only out of the Fund's assets
represented by the Class I Shares.
"Qualified Recipients" means broker-dealers or others
selected by the Distributor, including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements to provide
personal services to Class I Shares shareholders, maintenance of
Class I Shares shareholder accounts and/or pursuant to specific
agreements entering of confirmed purchase orders on behalf of
customers or clients and which have provided services to holders
of Class I Shares and/or maintenance of Class I Shares
shareholder accounts.
The Distributor is authorized, but not directed, to take
into account, in addition to any other factors deemed relevant by
it, the following: (a) the amount of the Qualified Holdings of
the Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares,
including without limitation, (i) activities relating to
sub-accounting and record-keeping, including the providing of
necessary personnel and facilities to establish and maintain
shareholder accounts and records, and (ii) activities relating to
account service, such as assisting shareholders in designating
and changing dividend options, account designations and
addresses; answering customer inquiries regarding account status
and history and the manner in which purchases and redemptions of
shares of the Fund may be effected; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares, including, where appropriate, arranging for the wiring of
funds; assisting in processing purchase and redemption
transactions; and verifying and guaranteeing shareholder
signatures in connection with redemption orders and transfers and
changes in shareholder designated accounts. A majority of the
Independent Trustees (as defined in the Plan) may remove any
person as a Qualified Recipient and no fees shall be paid
pursuant to the Plan for activities primarily intended to result
in the sale of shares of the Fund or to finance sales or sales
promotion expenses. No fees shall be paid, or be deemed to have
been paid, for any of the listed activities to the extent that
such payments are deemed by the Independent Trustees to be
intended for distribution. Service Payments shall be paid through
the Distributor or shareholder servicing agent as disbursing
agent. (See the Additional Statement.)
HOW TO REDEEM YOUR INVESTMENT
Redemption of Class Y Shares
You may redeem all or any part of your Class Y Shares at the
net asset value next determined after acceptance of your
redemption request at the Agent. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. There are no redemption fees or penalties on
redemption of Class Y Shares. A redemption may result in a
transaction taxable to you.
For your convenience the Fund offers expedited redemption
for Class Y Shares to provide you with a high level of liquidity
for your investment.
Expedited Redemption Methods
You have the flexibility of two expedited methods of
initiating redemptions of Class Y Shares.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have
predesignated or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Fund and
the check is sent to your address of record, provided that
there has not been a change of your address of record during
the 30 days preceding your redemption request. You can make
only one request for telephone redemption by check in any
7-day period.
(See "Redemption Payments" below for payment methods.) Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-637-4633 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
2. By FAX or Mail. You may also request redemption payments
to a predesignated Financial Institution account by a letter
of instructions sent to the Fund's Shareholder Servicing
Agent: PFPC Inc., by FAX at 302-791-3055 or by mail to 400
Bellevue Parkway, Wilmington, DE 19809. The letter must
provide account name(s), account number, amount to be
redeemed, and any payment directions and be signed by the
registered holder(s). Signature guarantees are not required.
(See "Redemption Payments" below for payment methods.)
If you wish to have redemption proceeds sent directly to a
Financial Institution Account you should so elect on the
Expedited Redemption section of the Application or the Ready
Access Features Form and provide the required information
concerning your Financial Institution account number. The
Financial Institution account must be in the exclusive name(s) of
the shareholder(s) as registered with the Fund. You may change
the designated Financial Institution account at any time by
completing and returning a Ready Access Features Form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.
Regular Redemption Method
If you own Class Y Shares and have not elected Expedited
Redemption to a predesignated Financial Institution account, you
must use the Regular Redemption Method. Under this redemption
method you should send a letter of instruction to the Fund's
Shareholder Servicing Agent: PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809. The letter must contain:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated
below.
For a redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.
Redemption of Class I Shares
You may redeem all or any part of your Class I Shares at the
net asset value next determined after acceptance of your
redemption request by your financial intermediary. Redemption
requests for Class I Shares must be made through a financial
intermediary and cannot be made directly. Financial
intermediaries may charge a fee for effecting redemptions. There
is no minimum period for any investment in the Fund. The Fund
does not impose redemption fees or penalties on redemption of
Class I Shares. A redemption may result in a transaction taxable
to you.
Redemption Payments
Redemption payments with respect to Class Y Shares will
ordinarily be mailed to you at your address of record. If you so
request and the amount of your redemption proceeds is $1,000 or
more, the proceeds will, wherever possible, be wired or
transferred through the facilities of the Automated Clearing
House to the Financial Institution account specified in the
Expedited Redemption section of your Application or Ready Access
Features Form. The Fund may impose a charge, not exceeding $5.00
per wire redemption, after written notice to shareholders who
have elected this redemption procedure. The Fund has no present
intention of making this charge. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate the use of the
Automated Clearing House to make redemption payments at any time
or charge a service fee. If any such changes are made, the
Prospectus will be supplemented to reflect them. If you use a
broker or dealer to arrange for a redemption, it may charge you
a fee for this service. Redemption payments for Class I Shares
are made to financial intermediaries.
The Fund will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven
days after acceptance of such a redemption request. However, the
right of redemption may be suspended or the date of payment
postponed (i) during periods when the New York Stock Exchange is
closed for other than weekends and holidays or when trading on
such Exchange is restricted as determined by the Securities and
Exchange Commission by rule or regulation; (ii) during periods in
which an emergency, as determined by the Securities and Exchange
Commission, exists which causes disposal of, or determination of
the net asset value of, the portfolio securities to be
unreasonable or impracticable; or (iii) for such other periods as
the Securities and Exchange Commission may permit. Payment for
redemption of shares recently purchased by check (irrespective of
whether the check is a regular check or a certified, cashier's or
official bank check) or by Automatic Investment or Telephone
Investment may be delayed up to 15 days or until (i) the purchase
check or Automatic Investment or Telephone Investment has been
honored or (ii) the Agent has received assurances by telephone or
in writing from the Financial Institution on which the purchase
check was drawn, or from which the funds for Automatic
Investment or Telephone Investment were transferred, satisfactory
to the Agent and the Fund, that the purchase check or Automatic
Investment or Telephone Investment will be honored. Possible
delays in payment of redemption proceeds of Class Y Shares can be
eliminated by using wire payments or Federal Reserve drafts to
pay for purchases.
If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. (See the Additional Statement for details.)
The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
If you had a Class Y Shares account with the Fund before
October 31, 1997, you may establish an Automatic Withdrawal Plan
if you own or purchase Class Y Shares of the Fund having a net
asset value of at least $5,000. Under an Automatic Withdrawal
Plan you will receive a monthly or quarterly check in a stated
amount, not less than $50. If such a plan is established, all
dividends and distributions must be reinvested in your
shareholder account. Redemption of shares to make payments under
the Automatic Withdrawal Plan will give rise to a gain or loss
for tax purposes. (See the Automatic Withdrawal Plan provisions
of the Application included with the Prospectus, the Additional
Statement under "Automatic Withdrawal Plan," and "Dividend and
Tax Information" below.) The Automatic Withdrawal Plan is not
available under this Prospectus to other Class Y investors or to
Class I investors.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
Change in Management Arrangements
On November 14, 1997, the arrangements described below were
approved by the shareholders of the Fund and went into effect.
The new arrangements were 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 new
arrangements did not result in any change in overall management
fees paid by the Fund, or any change in the parties providing
these services. Marketing efforts and positioning of the Fund
remained the same with a strong local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition became investment adviser under
a new agreement (the "Advisory and Administration Agreement")
under which it also continues to provide the Fund with all
administrative services. Also, by adoption of a Sub-Advisory
Agreement between Aquila and Citizens Bank of Rhode Island (the
"Sub-Adviser"), the former investment advisory agreement was
replaced by one under which Aquila appointed the Sub-Adviser as
Sub-Adviser to the Fund. Under the Sub-Advisory Agreement, the
Sub-Adviser continues to provide the Fund with advisory services
of the kind which it formerly provided as adviser. The duties of
the administrator, previously performed under an administration
agreement, are now performed by Aquila under the Advisory and
Administration Agreement where Aquila is referred to as the
"Manager." The former administration agreement terminated upon
effectiveness of the new agreements.
The Advisory and Administration Agreement
The Advisory and Administration Agreement between the Fund
and Aquila Management Corporation (the "Manager") has several
parts, most of which are substantially identical to corresponding
provisions in the Fund's former advisory agreements and
administration agreement. The Advisory and Administration
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 Manager
has the power to delegate its advisory functions to a
sub-adviser, which it will employ at its own expense. It has
delegated these duties to the Sub-Adviser. The Advisory and
Administration Agreement contains provisions relating to
administrative services that are substantially identical to those
contained in the Fund's former administration agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the
Manager may at its own expense delegate to a qualified
organization, 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 delegates all
of such functions to the Sub-Adviser in the Sub-Advisory
Agreement, which became effective at the same time as the
Advisory and Administration Agreement.
The Advisory and Administration Agreement also provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall provide all administrative services
to the Fund other than those relating to its investment portfolio
which have been delegated to a Sub-Adviser of the Fund under the
Sub-Advisory Agreement; as part of such administrative duties,
the Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement), or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare (or
assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any such
inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory and Administration Agreement contains
provisions relating to compliance of the investment program,
responsibility of the Manager for any investment program managed
by it, allocation of brokerage, and responsibility for errors
that are substantially the same as the corresponding provisions
in the Sub-Advisory Agreement. (See the Additional Statement.)
The Advisory and Administration Agreement provides that the
Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Fund who are affiliated
persons of the Manager.
The Fund bears the costs of preparing and setting in type
its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to the Manager a fee payable monthly and computed on the
net asset value of the Fund as of the close of business each
business day at the annual rate of 0.50 of 1% of such net asset
value.
The Advisory and Administration Agreement provides that it
may be terminated by the Manager at any time without penalty upon
giving the Fund sixty days' written notice (which notice may be
waived by the Fund) and may be terminated by the Fund at any time
without penalty upon giving the Manager sixty days' written
notice (which notice may be waived by the Manager), provided that
such termination by the Fund shall be directed or approved by a
vote of a majority of its Trustees in office at the time or by a
vote of the holders of a majority (as defined in the 1940 Act) of
the voting securities of the Fund outstanding and entitled to
vote. The specific portions of the Advisory and Administration
Agreement which relate to providing investment advisory services
will automatically terminate in the event of the assignment (as
defined in the 1940 Act) of the Advisory and Administration
Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Fund as of the close of business each business day shall be
reduced to the annual rate of 0.27 of 1% of such net asset value.
The Sub-Advisory Agreement
The Manager has delegated investment advisory responsibility
to Citizens Bank of Rhode Island (the "Sub- Adviser"), which
supervises the investment program of the Fund and the composition
of its portfolio.
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser,
which provides, subject to the control of the Board of Trustees,
for investment supervision and at the Sub-Adviser's expense for
pricing of the Fund's portfolio daily using a pricing service or
other source of pricing information satisfactory to the Fund and,
unless otherwise directed by the Board of Trustees, for pricing
of the Fund's portfolio at least quarterly using another such
source satisfactory to the Fund. The Sub-Advisory Agreement
states that the Sub-Adviser shall, at its expense, provide to
the Fund all office space and facilities, equipment and clerical
personnel necessary for the carrying out of the Sub-Adviser's
duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Fund as of the close of business each business
day at the annual rate of 0.23 of 1% of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund (see the
Additional Statement). Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund. It has termination and renewal provisions similar to
those contained in the Advisory and Administration Agreement.
(See the Additional Statement.)
Information About the Fund's Management
Citizens Bank of Rhode Island, the Sub-Adviser, is wholly-
owned by Citizens Financial Group, Inc. ("CFG"). CFG is a wholly-
owned subsidiary of The Royal Bank of Scotland plc. The
Sub-Adviser operates through 62 branch offices in Rhode Island.
Among other CFG subsidiaries, Citizens Bank of Connecticut has 40
branches in southeastern Connecticut; Citizens Bank of
Massachusetts has more than 100 branches in southeastern
Massachusetts; and Citizens Bank New Hampshire has 75 branches in
New Hampshire. CFG is a $17 billion bank holding company and is
one of the 50 largest bank holding company in the United States.
Through the Sub-Adviser and other subsidiaries CFG provides a
full range of financial services to individuals, businesses and
governmental units. As of June 30, 1998, the Trust and Investment
Services Group of the Sub-Adviser had approximately $5.7 billion
of assets under administration, including approximately $386
million in municipal obligations.
Salvatore C. DiSanto is the officer of the Sub-Adviser 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 Sub-Adviser's Trust and Investment
Services Group, is a member of its Trust Investment Committee. He
has been employed by the Sub-Adviser for 40 years and has been
involved in portfolio management for the last 33 years.
The Fund's Manager is founder and Manager and/or
administrator to the Aquilasm Group of Funds, which consists of
tax-free municipal bond funds, money market funds and equity
funds. As of June 30, 1998, these funds had aggregate assets of
approximately $3.0 billion, of which approximately $1.9 billion
consisted of assets of tax-free municipal bond funds. The
Manager, which was founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). (See the Additional Statement for information on
Mr. Herrmann.)
During the period July 1, 1997 through November 14, 1997
fees of $46,426 and $39,548 were accrued to the Manager and the
Sub-Adviser, respectively, under the administration agreement and
advisory agreement then in effect, of which $46,426 and $30,951,
respectively, were waived. From November 15, 1997 through June
30, 1998 fees of $160,215 were accrued to the Manager, of which
$16,240 was paid to the Sub-Adviser and the balance was waived.
In addition, during the fiscal year the Manager reimbursed the
Fund for other expenses 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 July, 1998.
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.
At the date of this Prospectus, 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 Manager and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued.Dividends and other distributions paid by the
Fund with respect to each class of its shares are calculated at
the same time and in the same manner. Because such net income
will vary, the Fund's dividends will also vary. In addition, the
dividends of each class can vary because each class will bear
certain class-specific charges.
It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. On the Application or by completing a Ready Access
Features Form, holders of Class Y Shares may elect to have
dividends deposited without charge by electronic funds transfers
into an account at a Financial Institution if it is a member of
the Automated Clearing House. All arrangements for the payment of
dividends with respect to Class I Shares, including reinvestment
of dividends, must be made through financial intermediaries.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined. (See
"How To Redeem Your Investment.")
Net investment income includes amounts of income from the
Rhode Island Obligations in the Fund's portfolio which are
allocated as "exempt-interest dividends." "Exempt-interest
dividends" are exempt from regular Federal income tax. The
allocation of "exempt-interest dividends" will be made by the use
of one designated percentage applied uniformly to all income
dividends declared during the Fund's tax year. Such designation
will normally be made in the first month after the end of each of
the Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the fiscal year ended June 30, 1998, 99.59%
of the Fund's dividends were "exempt-interest dividends." For the
calendar year 1996, 2.01% of the total dividends paid were
taxable. The percentage of income designated as tax-exempt for
any particular dividend may be different from the percentage of
the Fund's income that was tax-exempt during the period covered
by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of your
redemptions of Class Y Shares, and from short- and long-term
gains distributions (if any) and any other distributions with
respect to your Class Y Shares that do not qualify as
"exempt-interest dividends," if you do not comply with provisions
of the law relating to the furnishing of taxpayer identification
numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions with respect to
Class Y Shares will be automatically reinvested in full and
fractional Class Y Shares of the Fund at net asset value on the
record date for the dividend or distribution or other date fixed
by the Board of Trustees. An election to receive cash will
continue in effect until written notification of a change is
received by the Agent. All Class Y Shares shareholders, whether
their dividends are received in cash or are being reinvested,
will receive a monthly account summary indicating the current
status of their investment. There is no fixed dividend rate.
Corporate shareholders of the Fund are not entitled to any
deduction for dividends received from the Fund.
Federal Tax Information
The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income
earned by the Fund on Rhode Island Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in
"exempt-interest dividends." Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the
Fund) received or acquired during the year.
The Code requires that either gains realized by the Fund on
the sale of municipal obligations acquired after April 30, 1993
at a price which is less than face or redemption value be
included as ordinary income to the extent such gains do not
exceed such discount or that the discount be amortized and
included ratably in taxable income. There is an exception to the
foregoing treatment if the amount of the discount is less than
0.25% of face or redemption value multiplied by the number of
years from acquisition to maturity. The Fund will report such
ordinary income in the years of sale or redemption rather than
amortize the discount and report it ratably. To the extent the
resultant ordinary taxable income is distributed to shareholders,
it will be taxable to them as ordinary income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as gain from the sale or exchange
of a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects
to have the distribution reinvested in Fund shares and regardless
of the length of time the shareholder has held his or her shares.
Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Rhode Island
Obligations will be long-term or short-term depending upon the
length of time the Fund has held such obligations. Capital gains
and losses of the Fund will also include gains and losses on
Futures and options, if any, including gains and losses actually
realized on sales and exchanges and gains and losses deemed to be
realized.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends from
the Fund by an individual shareholder may result in some portion
of any social security payments or railroad retirement benefits
received by the shareholder or the shareholder's spouse being
included in taxable income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.
While interest from all Rhode Island Obligations is
tax-exempt for purposes of computing the shareholder's regular
tax, interest from so-called private activity bonds issued after
August 7, 1986, constitutes a tax preference for both individuals
and corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of Rhode
Island Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. If you are required to pay a contingent deferred
sales charge at the time of redemption, the amount of that charge
will reduce the amount of your gain or increase the amount of
your loss as the case may be. For redemptions made after January
1, 1998, your gain or loss will be long-term if you held the
redeemed shares for over one year and short-term, if for a year
or less. Long term capital gains are currently taxed at a maximum
rate of 20% and short-term gains are currently taxed at ordinary
income tax rates. However, if shares held for six months or less
are redeemed and you have a loss, two special rules apply: the
loss is reduced by the amount of exempt-interest dividends, if
any, which you received on the redeemed shares, and any loss over
and above the amount of such exempt-interest dividends is treated
as a long-term loss to the extent you have received capital gains
dividends on the redeemed shares.
Rhode Island Tax Information
The following is a summary of certain aspects relating to
the Rhode Island tax consequences of an investment in the Fund.
This summary is based upon the advice of Edward & Angell, LLP,
Rhode Island counsel to the Fund.
This summary assumes that the Fund qualifies as a regulated
investment company for Federal income tax purposes under
Subchapter M of the Code. Such summary is based upon the
provisions of the Rhode Island tax law and the regulations
promulgated thereunder as currently in effect, all of which are
subject to change, possibly with retroactive effect. Prospective
investors in the Fund should contact their tax advisors regarding
the effect of Rhode Island or other state or local tax laws on
their investment.
Taxation of the Fund. The Fund will be subject to the Rhode
Island business corporation tax in an amount equal to the greater
of $250 or $0.10 on each $100 of the gross income of the Fund
that is apportioned to Rhode Island. Gross income is generally
defined in the same manner as for Federal income tax purposes
except that (i) interest which is exempt from Federal income tax
and which is not derived from obligations of the United States or
its possessions or Rhode Island Obligations issued by Rhode
Island issuers and exempt from taxation by Rhode Island, and (ii)
50% of the excess of capital gains over capital losses is
includable in gross income. While the issue is not entirely free
from doubt, it is unlikely that the Fund, as a Massachusetts
business trust, will be subject to the Rhode Island franchise
tax.
Individual Holders. Individual holders of shares of the Fund
who are subject to Rhode Island personal income taxation will not
be required to include in income for Rhode Island personal income
tax purposes that portion of the exempt-interest dividends which
the Fund clearly identifies as directly attributable to interest
earned on Rhode Island Obligations. Individual holders will,
however, be required to include in income any other distributions
of interest, dividends or income, except for interest or dividend
income obligations or securities issued by any authority,
commission or instrumentality of the United States.
Moreover, individual holders who are subject to Rhode Island
personal income taxation will be required to include in income
for Rhode Island personal income tax purposes the distribution of
capital gain dividends and any net short-term capital gains
realized by the Fund, unless such capital gains dividends and
short-term capital gains are derived from the sale of underlying
Rhode Island Obligations which are issued by Rhode Island issuers
and are specifically exempted from Rhode Island capital gains tax
by the Rhode Island law authorizing the issuance of the Rhode
Island Obligations.
Gain or loss recognized by an individual subject to Rhode
Island personal income taxation will be included in their Rhode
Island source income. However, Rhode Island may specifically
exempt from Rhode Island capital gains tax gain recognized on the
sale or exchange of certain Rhode Island Obligations.
Corporate Holders. Generally, corporate holders of shares of
the Fund are subject to the Rhode Island business corporation tax
or the Rhode Island franchise tax will be taxed on their net
income, authorized stock or at a flat rate minimum tax. Net
income is generally defined in the same manner as the
corporation's taxable income for Federal income tax purposes
except that distributions of exempt-interest dividends which are
derived from interest earned on municipal obligations by
governmental authorities in states other than Rhode Island will
be included in net income. Net income will also include
distributions of capital gain dividends and any net short-term
capital gains realized by the Fund, unless such distributions of
capital gain dividends and short-term capital gains are derived
from the sale of underlying Rhode Island Obligations which are
issued by Rhode Island issuers and are specifically exempted from
the Rhode Island capital gains tax.
Gain or loss recognized on the dispositions of fund shares
by corporate holders subject to the Rhode Island business
corporation tax will be included in their Rhode Island income.
Property and Estate Taxes. Shares of the Fund will be exempt
from local property taxes in Rhode Island but will be includable
in the gross estate of a deceased individual shareholder who is a
resident of Rhode Island for purposes of the Rhode Island estate
tax.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among this
Fund, certain tax-free municipal bond funds and equity funds
(together with the Fund, the "Bond or Equity Funds") and certain
money market funds (the "Money-Market Funds"), all of which are
sponsored by Aquila Management Corporation and Aquila
Distributors, Inc., and have the same Manager or Administrator
and Distributor as the Fund. All exchanges are subject to certain
conditions described below. As of the date of the Prospectus, the
Aquila-sponsored Bond or Equity Funds are this Fund, Aquila Rocky
Mountain Equity Fund, Aquila Cascadia Equity Fund, Hawaiian
Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of
Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of
Kentucky and Tax-Free Fund For Utah; the Aquila Money-Market
Funds are Capital Cash Management Trust, Pacific Capital Cash
Assets Trust (Original Shares), Pacific Capital Tax-Free Cash
Assets Trust (Original Shares), Pacific Capital U.S. Government
Securities Cash Assets Trust (Original Shares) and Churchill Cash
Reserves Trust.
Class Y Shares of the Fund may be exchanged only for Class Y
Shares of the Bond or Equity Funds or for shares of a
Money-Market Fund. Similar exchangability is available to Class I
Shares to the extent that other Aquila-sponsored funds are made
available to its customers by a financial intermediary. All
exchanges of Class I Shares must be made through your financial
intermediary.
Under the Class Y exchange privilege, once Class Y Shares
of any Bond or Equity Fund have been purchased, those shares (and
any Class Y Shares acquired as a result of reinvestment of
dividends and/or distributions) may be exchanged any number of
times between Money-Market Funds and Class Y Shares of the Bond
or Equity Funds without the payment of any sales charge, provided
that the applicable minimum investment requirements for purchase
of Class Y Shares are met. (See "How to Purchase Class Y
Shares.")
The "Class Y Eligible Shares" of any Bond or Equity Fund are
those shares which were (a) acquired by direct purchase,
including by exchange by an institutional investor from a
Money-Market Fund, or which were received in exchange for Class Y
Shares of another Bond or Equity Fund; or (b) acquired as a
result of reinvestment of dividends and/or distributions on
otherwise Class Y Eligible Shares. Shares of a Money-Market Fund
not acquired in exchange for Class Y Eligible Shares of a Bond or
Equity Fund can be exchanged for Class Y Shares of a Bond or
Equity Fund only by persons eligible to make an initial purchase
of Class Y Shares.
This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange is at least equal to
the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-637-4633 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
Exchanges of Class Y Shares will be effected at the relative
net asset values of the Class Y Shares being exchanged next
determined after receipt by the Agent of your exchange request.
Exchanges of Class I Shares will be effected at the relative net
asset values of the Class I Shares being exchanged next
determined after receipt by the financial intermediary of your
exchange request.
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.
Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free money
market Fund) are exempt from regular Federal income tax, and to
the extent that a portion or all of the dividends paid by Pacific
Capital U.S. Government Securities Cash Assets Trust (which
invests in U.S. Government obligations) are exempt from state
income taxes. Dividends paid by Aquila Rocky Mountain Equity Fund
and Aquila Cascadia Equity Fund are taxable. If your state of
residence is not the same as that of the issuers of obligations
in which a tax-free municipal bond fund or a tax-free money
market fund invests, the dividends from that fund may be subject
to income tax of the state in which you reside. Accordingly, you
should consult your tax adviser before acquiring shares of such a
bond fund or a tax-free money market fund under the exchange
privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase,
invested at the maximum public offering price (offering price
includes any applicable sales charge) for 1-, 5- and 10-year
periods and for a period since the inception of the Fund, to the
extent applicable, through the end of such periods, assuming
reinvestment (without sales charge) of all distributions. The
Fund may also furnish total return quotations for other periods
or based on investments at various applicable sales charge levels
or at net asset value. For such purposes total return equals the
total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price. (See the Additional Statement.)
Current yield reflects the income per share earned by each
of the Fund's portfolio investments; it is calculated by (i)
dividing the Fund's net investment income per share during a
recent 30-day period by (ii) the maximum public offering price on
the last day of that period and by (iii) annualizing the result.
Taxable equivalent yield shows the yield from a taxable
investment that would be required to produce an after-tax yield
equivalent to that of the Fund, which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of
the Fund's yield (calculated as indicated) by one minus a stated
income tax rate and by adding the product to the taxable portion
(if any) of the Fund's yield. (See the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.
Description of the Fund and Its Shares
The Fund is an open-end, non-diversified management
investment company organized in 1992 as a Massachusetts business
trust. (See "Investment of the Fund's Assets" for further
information about the Fund's status as "non-diversified.") The
Declaration of Trust permits the Trustees to issue 80,000,000
shares of $.01 par value, and to divide or combine the shares
into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Fund. Each
share represents an equal proportionate interest in the Fund with
each other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into four classes; however, if they deem it advisable and
in the best interests of shareholders, the Board of Trustees of
the Fund may create additional classes of shares which may differ
from each other as provided in rules and regulations of the
Securities and Exchange Commission or by exemptive order. The
Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a
designation including the word "Series"). (See the Additional
Statement for further information about possible additional
series.) Shares are fully paid and non-assessable, except as set
forth under the caption "General Information" in the Additional
Statement; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically
convert to Class A Shares after being held for six years.
The other two classes of shares of the Fund are
Front-Payment Class Shares ("Class A Shares") and Level-Payment
Class Shares ("Class C Shares"), which are fully described in a
separate prospectus that can be obtained by calling the Fund at
800-453-6864 toll free or 212-697-6666 or in Rhode Island:
401-453-6864.
The Fund's four classes of shares differ in their different
sales charge structures and ongoing expenses, which are likely to
be reflected in differing yields and other measures of investment
performance. All four classes represent interests in the same
portfolio of Rhode Island Obligations and have the same rights,
except that each class bears the separate expenses, if any, of
its participation in the Distribution Plan and Shareholder
Services Plan and has exclusive voting rights with respect to
such participation. There are no Distribution fees with respect
to Class Y Shares.
The Fund's Distribution Plan has four parts. In addition to
the defensive provisions described above, Parts I and II of the
Plan authorize payments, to certain "Qualified Recipients," out
of the Fund's assets allocable to the Class A Shares and Class C
Shares, respectively. (See the Additional Statement.) The Fund
has also adopted a Shareholder Services Plan under which the Fund
is authorized to make certain payments out of the Fund's assets
allocable to the Class C Shares. (See the Additional Statement.)
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies
on do not properly process date-related information and data
involving the year 2000 and after. The Manager is taking steps
that it believes are reasonable to address this problem in its
own computer systems and to obtain assurances that steps are
being taken by the other major service providers to the Fund to
achieve comparable results. The three mission critical vendors --
the shareholder servicing agent, the custodian and the fund
accounting agent -- as well as other support organizations, have
advised the Manager that they are actively working on necessary
changes. Certain vendors have advised the Manager that they are
currently compliant. The target date for compliance by the
mission critical vendors is late 1998. The Manager has also
requested the Fund's portfolio manager to attempt to evaluate the
potential impact of this problem on the issuers of securities in
which the Fund invests. At this time there can be no assurance
that the target dates will be met or that these steps will be
sufficient to avoid any adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.
<PAGE>
APPLICATION FOR NARRAGANSETT INSURED TAX-FREE INCOME FUND
FOR CLASS I and Y SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
Tel.# 1-800-446-8824
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.______________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.______________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for __________________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** ___________________________________________
Name of State Minor's Social Security Number
4. _____________________________________________________________________
_____________________________________________________________________
(Name of Corporation or Organization. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of the
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust
may be registered in the name of the Plan or Trust itself.)
________________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
________________________________________________________________________
Street or PO Box City
_________________________________ (______)_______________________
State Zip Daytime Phone Number
Occupation:________________________Employer:____________________________
Employer's Address:_____________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding
(See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
______________________________ ____________________________________
Dealer Name Branch Number
______________________________ ____________________________________
Street Address Rep. Number/Name
______________________________ (_________)_________________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Indicate Class of Shares)
Make check payment to NARRAGANSETT INSURED TAX-FREE INCOME FUND
__ Initial Investment $______________ (Minimum $1,000)
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be: ___ Reinvested ___ Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would like you to
deposit the dividend. (A Financial Institution is a commercial bank,
savings bank or credit union.)
___ Mail check to my/our address listed in Step 1B.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested in
your Narragansett Insured Tax-Free Income Fund account. To establish this
program, please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
the Fund toll-free at 1-800-637-4633. To establish this program,
please complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. AUTOMATIC WITHDRAWAL PLAN
(Available only to shareholders who had Class Y Shares accounts before
October 30, 1998)
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks prior to
1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, PFPC Inc
(the "Agent") is authorized to redeem sufficient shares
from this account at the then current Net Asset Value, in accordance
with the terms below:
Dollar Amount of each withdrawal $ ______________beginning______________
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable
to a Financial Institution for your account, indicate Financial
Institution name, address and your account number.
________________________________________ ___________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ____________________________________
Street Financial Institution Street Address
_______________________________ ____________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquilasm Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
person's telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorney's fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution
account listed.
Cash proceeds in any amount from the redemption of shares will be
mailed or wired, whenever possible, upon request, if in an amount of
$1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this Fund
account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ _____________________________________
Account Registration Financial Institution Account Number
_______________________________ _____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ _____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITOR'S AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the
Agent, PFPC Inc., and to pay such sums in accordance therewith, provided
my/our account has sufficient funds to cover such drafts or debits. I/We
further agree that your treatment of such orders will be the same as if
I/we personally signed or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any reason,
you shall have no liabilities.
Financial Institution Account Number __________________________________
Name and Address where my/our account is maintained
Name of Financial Institution__________________________________________
Street Address_________________________________________________________
City_______________________________State _________________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account
is registered
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
_________________________________________________
(Please Print)
X________________________________________________ ____________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors,
Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit
in the normal course of business initiated by the Agent (except any
loss due to your payment of any amount drawn against insufficient or
uncollected funds), provided that you promptly notify us in writing
of any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle or pay
any such claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause, any
such electronic debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Fund and has received and
read a current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Fund and its agents may cancel the
purchase transaction and are authorized to liquidate other shares or
fractions thereof held in my/our Fund account to make up any
deficiency resulting from any decline in the net asset value of shares
so purchased and any dividends paid on those shares. I/We authorize the
Fund and its agents to correct any transfer error by a debit or credit
to my/our Financial Institution account and/or Fund account and to
charge the account for any related charges. I/We acknowledge that
shares purchased either through Automatic Investment or Telephone
Investment are subject to applicable sales charges.
- - The Fund, the Agent and the Distributor and their Trustees,
directors, employees and agents will not be liable for acting upon
instructions believed to be genuine, and will not be responsible for
any losses resulting from unauthorized telephone transactions if the
Agent follows reasonable procedures designed to verify the identity of
the caller. The Agent will request some or all of the following
information: account name and number; name(s) and social security
number registered to the account and personal identification; the
Agent may also record calls. Shareholders should verify the accuracy
of confirmation statements immediately upon receipt. Under penalties
of perjury, the undersigned whose Social Security (Tax I.D.) Number
is shown above certifies (i) that Number is my correct taxpayer
identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned
further certifies, under penalties of perjury, that either (a) no such
Number has been issued, and a Number has been or will soon be applied
for; if a Number is not provided to you within sixty days, the
undersigned understands that all payments (including liquidations) are
subject to 31% withholding under federal tax law, until a Number is
provided and the undersigned may be subject to a $50 I.R.S. penalty; or
(b) that the undersigned is not a citizen or resident of the U.S.; and
either does not expect to be in the U.S. for 183 days during each
calendar year and does not conduct a business in the U.S. which would
receive any gain from the Fund, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST,
ALL TRUSTEES MUST SIGN.*
__________________________ __________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ __________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trusts, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment,
Expedited Redemption and Direct Deposit of Dividends) are
effective 15 days after this form is received in good order by the
Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access Features Form which may be obtained from Aquila
Distributors at 1-800-453-6864 and send it to the Agent together
with a "voided" check or pre-printed deposit slip from the new
account. The new Financial Institution change is effective in 15
days after this form is received in good order by the Fund's Agent.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees
to the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Agent will credit all such shares to
the Planholder on the records of the Fund. Any share certificates now
held by the Planholder may be surrendered unendorsed to the Agent with
the application so that the shares represented by the certificate may
be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund
at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of
business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal incapacity
of the Planholder. Upon termination of the Plan by the Agent or the
Fund, shares remaining unredeemed will be held in an uncertificated
account in the name of the Planholder, and the account will continue
as a dividend-reinvestment, uncertificated account unless and until
proper instructions are received from the Planholder, his executor or
guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any
successor transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while
simultaneously making regular purchases. While an occasional lump
sum investment may be made, such investment should normally be an
amount equivalent to three times the annual withdrawal or $5,000,
whichever is less.
<PAGE>
MANAGER AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
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
Diana P. Herrmann, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights.......................................2
Table of Expenses................................4
Financial Highlights.............................5
Introduction.....................................6
Investment Of The Fund's Assets..................6
Investment Restrictions.........................11
Net Asset Value Per Share.......................11
How To Invest In The Fund.......................12
How To Redeem Your Investment...................14
Automatic Withdrawal Plan.......................16
Management Arrangements.........................16
Dividend And Tax Information....................28
Exchange Privilege..............................32
General Information.............................34
Application
AQUILA
[LOGO]
Narragansett
[LOGO]
Insured Tax-Free Income Fund
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Aquila
Narragansett
Insured Tax-Free Income Fund
380 Madison Avenue
Suite 2300
New York, New York 10017
800-453-6864
212-697-6666
Statement of Additional Information
October 30, 1998
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for
the Fund dated October 30, 1998: one Prospectus describes
Front-Payment Class Shares ("Class A Shares") and Level-Payment
Class Shares ("Class C Shares") of the Fund and the other
describes Institutional Class Shares ("Class Y Shares") and
Financial Intermediary Class Shares ("Class I Shares") of the
Fund. References in the Additional Statement to "the Prospectus"
refer to either of these Prospectuses. The Additional Statement
should be read in conjunction with the Prospectus for the class
of shares in which you are considering investing. Either or both
Prospectuses may be obtained from the Fund's Shareholder
Servicing Agent, PFPC Inc., 400 Bellevue Parkway, Wilmington, DE
19809 or by calling the following number:
800-637-4633 toll free
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New
York 10017; or by calling:
800-453-6864 toll free or 212-697-6666.
In Rhode Island: 401-453-6864
The Annual Report of the Fund for the fiscal year ended June 30,
1998 (audited) will be delivered with the Additional Statement.
TABLE OF CONTENTS
Investment of the Fund's Assets
Additional Information about the Rhode Island Economy
Municipal Bonds
Performance
Investment Restrictions
Distribution Plan
Shareholder Services Plan
Limitation of Redemptions in Kind
Trustees and Officers
Additional Information as to Management Arrangements
Computation of Net Asset Value
Automatic Withdrawal Plan
Additional Tax Information
Conversion of Class C Shares
General Information
Appendix A
<PAGE>
INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters
described below. (See the Prospectus for the definition of "Rhode
Island Obligations.")
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds
and notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. (See Appendix A to
this Additional Statement for further information about the
ratings of Moody's and S&P as to the various rated Rhode Island
Obligations which the Fund may purchase.)
The table below gives information as to the percentage of
Fund net assets invested, as of June 30, 1998, in Rhode Island
Obligations in the various rating categories:
Highest rating (1) . . . . . . . . . . . . . . . . . . . . . 100%
Second highest rating (2). . . . . . . . . . . . . . . . . . . 0%
Third highest rating (3) . . . . . . . . . . . . . . . . . . . 0%
Fourth highest rating (4). . . . . . . . . . . . . . . . . . . 0%
Unrated Obligations. . . . . . . . . . . . . . . . . . . . 0%
100.0%
(1) Aaa of Moody's or AAA of S&P.
(2) Aa of Moody's or AA of S&P.
(3) A of Moody's or A of S&P.
(4) Baa of Moody's or BBB of S&P.
When-Issued and Delayed Delivery Obligations
The Fund may buy Rhode Island Obligations on a when-issued
or delayed delivery basis. The purchase price and the interest
rate payable on the Rhode Island Obligations are fixed on the
transaction date. At the time the Fund makes the commitment to
purchase Rhode Island Obligations on a when-issued or delayed
delivery basis, it will record the transaction and thereafter
reflect the value each day of such Rhode Island Obligations in
determining its net asset value. The Fund will make commitments
for such when-issued transactions only when it has the intention
of actually acquiring the Rhode Island Obligations. The Fund
places an amount of assets equal in value to the amount due on
the settlement date for the when-issued or delayed delivery
securities being purchased in a segregated account, which is
marked to market every business day. On delivery dates for such
transactions, the Fund will meet its commitments by selling the
Rhode Island Obligations held in the separate account and/or from
cash flow.
Determination of the Marketability of Certain Securities
In determining marketability of floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) the Board of Trustees will consider
the following factors, not all of which may be applicable to any
particular issue: the quality, maturity and coupon rate of the
issue, ratings received from the nationally recognized
statistical rating organizations and any changes or prospective
changes in such ratings, the likelihood that the issuer will
continue to appropriate the required payments for the issue,
recent purchases and sales of the same or similar issues, the
general market for municipal securities of the same or similar
quality, the Sub-Adviser's opinion as to marketability of the
issue and other factors that may be applicable to any particular
issue.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage
computed by taking the lesser of purchases or sales of portfolio
securities for a year and dividing it by the monthly average
value of such securities during the year, excluding certain
short-term securities. Since the turnover rate of the Fund will
be affected by a number of factors (see below), the Fund is
unable to predict what rate the Fund will have in any particular
period or periods, although the rate is not expected to exceed
100%. The factors which may affect the rate include (i) assuming
or moving away from a defensive position; a defensive position
could be assumed by shortening the average maturity of the
portfolio; (ii) the possible necessary sales of Rhode Island
Obligations to meet redemptions; and (iii) the possibility of
purchasing or selling Rhode Island Obligations without regard to
the length of time these obligations have been held to attempt to
take advantage of short-term differentials in yields on these
obligations with the objective of seeking exempt-interest income
while conserving capital. Short-term trading increases portfolio
turnover and transaction costs. However, the turnover rate could
be substantially higher or lower in any particular period versus
that of a prior period.
Insurance Feature
As a matter of practice, insurers of municipal obligations
provide insurance only on issues which on their own credit rating
are of investment grade, i.e., those within the top four credit
ratings of the Nationally Recognized Statistical Rating
Organizations. In some instances, insurers restrict issuance of
insurance to those issues which would be credit rated "A" or
better by those organizations. These practices by the insurers
tend to reduce the risk that they might not be able to respond to
the default in payment of principal or interest on any particular
issue.
In general, New Issue Insurance provides that if an issuer
fails to make payment of principal or interest on an insured
Rhode Island Obligation, the payment will be made promptly by the
insurer. There are no deductible clauses, the insurance is
non-cancelable and the tax-exempt character of any payment in
respect of interest received is not affected. Premiums for such
insurance are not paid by the Fund but are paid once and for all
for the life of the issue at the time the securities are issued,
generally by the issuer and sometimes by the underwriter. The
right to receive the insurance proceeds is a part of the security
and is transferable on any resale.
The following information regarding Municipal Bond Investors
Assurance Corporation ("MBIA"), Financial Guaranty Insurance
Company ("Financial Guaranty") and AMBAC Indemnity Corporation
("AMBAC Indemnity"), has been derived from information furnished
by the insurers. The Fund has not independently verified any of
the information, but the Fund is not aware of facts which would
render such information inaccurate.
AMBAC Indemnity is a Wisconsin-domiciled stock insurance
corporation, regulated by the Insurance Department of the State
of Wisconsin, and licensed to do business in 50 states and the
District of Columbia. AMBAC Indemnity is a wholly-owned
subsidiary of AMBAC, Inc., a publicly held company.The
claims-paying ability of AMBAC Indemnity is rated "AAA" by S&P
and "Aaa" by Moody's.
MBIA is a limited liability corporation domiciled in New
York and licensed to do business in 50 states and the District of
Columbia. It is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. Neither MBIA Inc. nor
its shareholders are obligated to pay the debts of or claims
against MBIA. The claims-paying ability of MBIA is rated "AAA" by
S&P and "Aaa" by Moody's.
Financial Guaranty is a New York stock insurance company
regulated by the New York State Department of Insurance and
authorized to provide insurance in 49 states and the District of
Columbia. Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company, which is 99% owned by
General Electric Capital Corporation and 1% owned by Sumitomo
Marine and Fire Insurance Company Limited. Neither FGIC
Corporation nor GE Capital Corporation is obligated to pay the
debts of or the claims against Financial Guaranty.The
claims-paying ability of Financial Guaranty is rated "AAA" by S&P
and "Aaa" by Moody's.
Other insurance companies which the Fund has purchased
insurance from, or Rhode Island Obligations insured by include
the following:
Financial Security Assurance Co., which is owned by U.S.
West Capital Corp. (42.1%), Public & Employees (39.2%), Fund
America Enterprises (12.0%) and Tokyo Marine & Fire Insurance Co,
Ltd. (6.7%); it is rated Aaa by Moody's and AAA by S&P;
The Fund may also use other insurers. However, the Fund will
seek to ensure that any insurer used will itself have a AAA or
Aaa rating.
ADDITIONAL INFORMATION ABOUT THE RHODE ISLAND ECONOMY
The Fund believes the information summarized below describes
some of the more significant developments relating to Rhode
Island Obligations. The sources of such information include
information provided by and relating to the State of Rhode Island
appearing in the Official Statement dated July 8, 1998 relating
to the Rhode Island General Obligations Bonds, $65,720,000
Consolidated Capital Development Loan of 1998, Series A, as well
as other publicly available documents. The Fund has not
independently verified any of the information contained in such
official statement and other publicly available documents, but is
not aware of any facts which would render such information
inaccurate. Rhode Island operates on a June 30 fiscal year.
State Government Organization and Finances
General
The State is governed by its Constitution, the present form
of which was adopted by the electorate in 1986.
Under the State Constitution, the powers of government are
divided into three branches: legislative, executive and judicial.
The legislative power of the government is vested in the General
Assembly, which consists of a 50 member Senate and a 100 member
House of Representatives. A referendum approved by the voters in
the November 8, 1994 election changes the composition, pay scale
and pension of the General Assembly. Commencing in 2003, there
will be 75 members of the House of Representatives and 38
members of the Senate. They shall be constituted on the basis of
population and the representative districts shall be as nearly
equal in population and as compact in territory as possible. All
members of the General Assembly are elected biennially from
senatorial and representative districts established by general
law on the basis of population. The General Assembly meets
annually beginning on the first Tuesday in January.
The chief executive power of the State is vested in the
Governor and, by succession, the Lieutenant Governor. Each are
elected for 4 year terms. The Governor is primarily responsible
for the faithful execution of laws enacted by the General
Assembly and for the administration of the State government
through the Executive Department. The State Constitution also
provides for the election of three additional general State
Officers: the Attorney General, Secretary of State and General
Treasurer. Under the State Constitution, the Governor is granted
the power to veto any act adopted by the General Assembly,
provided, however, that any such veto can be overridden by a 3/5
vote of both houses of the General Assembly. The Governor does
not have any power of line-item veto.
The judicial power of the State is vested in the Supreme
Court and such inferior courts as are established by the General
Assembly. The Supreme Court, appointed by the Governor and
confirmed by the Senate and the House of Representatives, has
final revisory and appellate jurisdiction upon all questions of
law and equity. The General Assembly has also established a
Superior Court, a Family Court, a District Court and certain
municipal courts in various cities and towns in the State.
Municipalities
Below the level of State government, Rhode Island is divided
into 39 cities and towns which exercise the functions of local
general government. There is no county governmental structure.
Local executive power is generally placed in a mayor,
administrator/manager or town council form of government, and
legislative power is vested in either a city or town council. As
provided in the State Constitution, municipalities have the right
of self government in all local matters by adopting a "home rule"
charter. Every city or town, however, has the power to levy,
assess and collect taxes, or borrow money, only as specifically
authorized by the General Assembly. Except for matters that are
reserved exclusively to the General Assembly, such as taxation
and elections, the State Constitution restricts the power of the
General Assembly on actions relating to the property, affairs and
government of any city or town which has adopted a "home rule"
charter, to general laws which apply to all cities and towns, but
which shall not affect the form of government of any city or
town. The General Assembly has the power to act in relation to a
particular home rule charter community, provided that such
legislative action shall become effective only upon approval of a
majority of the voters of the affected city or town. Rhode Island
General Law (44-35-10) requires every city and town to adopt a
balanced budget for each fiscal year. Local governments rely
principally upon general real and tangible personal property
taxes and automobile excise taxes for provision of revenue.
During the 1985 Session of the General Assembly, a law was
passed entitled "An Act Providing Property Tax Relief and
Replacement and Establishing a Cap on City and Town Property Tax
Levy Growth". Enacted as section 44-5-2 of the General Laws and
entitled "Maximum Levy", the legislation limits tax levy or rate
increases by municipalities to an increase no greater than 5.5%
over the previous year. Legislation was also enacted which
authorized tax levy or rate increases of greater than 5.5% in the
event that debt service costs on present and future general
obligation debt increase at a rate greater than 5.5%. The
legislation also provides for the certification by a state agency
of the appropriate property tax base to be used in computations
in any year when revaluation is being implemented. Provisions of
section 44-5-2 also include authorization to exceed this
limitation in the event of loss of non-property tax revenue, or
when an emergency situation arises and is certified by the State
Auditor General. In such an emergency situation, such levy in
excess of a 5.5% increase must be approved by a majority of the
city or town governing body or electors voting at the financial
town meeting. The statute was amended to clarify that nothing in
the tax levy cap provisions was intended to constrain the payment
of obligations of cities and towns. The power of the cities and
towns to pay their general obligation bonds and notes is
unlimited and each city or town is required to levy ad valorem
taxes upon all the taxable property for the payment of such bonds
and notes and the interest thereon, without limitation as to rate
or amount.
State aid to cities and towns has risen from approximately
$389.7 million in FY 1991 to $668.3 million in the enacted FY
1999 Budget. The largest category of State aid to cities and
towns involves assistance programs for school operations and
school buildings. The general school aid program reimburses
communities on the basis of the relationship between the number
of students and the property wealth and personal income of the
community.
In addition to reimbursement of operations costs, state
school construction aid is provided at levels ranging from 30% to
88% of the construction cost of new facilities. The level is also
based upon the relationship between student counts and community
wealth, and takes into consideration the relative weight of
school debt in the particular city or town to its total debt.
Beginning in fiscal year 1991, bond interest payments were
included as reimbursable expenditures along with other project
costs for bonds issued on or after July 1, 1988. A related
program will provide approximately $1.6 million to cities and
towns in FY 1999 to provide aid in the construction of libraries.
The distribution formula for school aid was modified in
fiscal year 1995 to weight the distribution more heavily towards
districts with proportionally more children from poorer families.
The Legislature, recognizing that the current methods of
education aid distribution required evaluation, created a "Joint
Commission on School Funding" to study modifications to the
current system of state aid distribution. The Commission
recommended that an increase of $25.0 million over FY 1997 be
included in FY 1998 to provide support for targeted student
investments. The revised FY 1998 amount also increased aid for
Construction Aid by $1.6 million and Teachers Retirement and
Medical Fund by $0.3 million.
The FY 1999 Enacted Budget includes $536.1 million in
Education Aid to Local Governments. This is a $43.1 million
increase above the revised FY 1998 amount of $493.0 million.
Other local aid programs include the general revenue sharing and
payment-in-lieu of taxes programs. The 1987 session of the
General Assembly enacted legislation that consolidated all prior
revenue sharing components into one general revenue sharing
program and incorporated a distribution formula based upon
relative population, tax effort and personal income of each city
and town. In addition, the State distributes the proceeds of a
statewide tax imposed on the tangible personal property of
telephone, telegraph, cable, express and telecommunications
companies. The 1991 General Assembly passed legislation to
dedicate, beginning in fiscal year 1994, an amount equal to one
percent of second prior year total state tax revenues to general
state aid. That program has varied since FY 1991, between no
funding in FY 1993 to $13.6 million in FY 1995. The enacted FY
1998 budget included $13.75 million for local general revenue
sharing. The FY 1999 Enacted Budget includes $19.7 million for
this program and increases the share dedicated to 1.3% of state
tax revenues in FY 1999. This percentage will increase annually
until it reaches 4.7% in FY 2009.
The payment-in-lieu of taxes program authorizes the General
Assembly to appropriate and distribute to communities amounts not
to exceed 27% of the property taxes that would have been
collected on tax exempt properties. Funding was provided in
fiscal years 1988 ($2.5 million), 1989 ($3.1 million), 1991 ($3.5
million), 1992-1994 ($2.8 million), and 1995-1997 ($12.2
million). The enacted 1998 budget provides $14.2 million for this
program. The FY 1999 Enacted Budget includes funding of $15.8
million.
Budget Procedures
The State budget of revenues and appropriations for
administrative and other expenses of the State is adopted
annually by the General Assembly and is prepared for submission
to the General Assembly, under the supervision of the Governor,
by the State Budget Officer within the Department of
Administration. Preparation and submission of the budget is
governed by both the State Constitution and the general laws of
the State, which provide various limitations on the powers of the
General Assembly and certain guidelines designed to maintain
fiscal responsibility.
According to Article IX Section 16 of the Rhode Island
Constitution and the Rhode Island General Laws section 35-3-7,
the Governor must present spending recommendations to the
Legislature on or before the third Wednesday in February, unless
extended by statute. The budget contains a complete plan of
estimated revenues and proposed expenditures with a personnel
supplement detailing number and titles of positions of each
agency and estimates of personnel costs for the next fiscal year.
The budget as proposed by the Governor is considered by the
General Assembly which, under state law, may increase, decrease,
alter or strike out any items in the budget, provided the General
Assembly may not take action which would cause an excess of
appropriations for revenue expenditures over expected revenue
receipts. No appropriation in excess of budget recommendations
may be made by the General Assembly unless it shall provide the
necessary additional revenue to cover such appropriations. The
Governor may veto legislative appropriations bills. However, the
Rhode Island Governor does not have line-item veto authority. The
Legislature may override any veto by a three-fifths majority
vote. Supplemental appropriations measures may be submitted by
the Governor to the General Assembly on or before the second
Tuesday in January. Supplemental appropriations by the General
Assembly must be supported by additional revenues and are subject
to the Constitutional limitation on state expenditures discussed
below.
The General Laws of the State provide that, if the General
Assembly fails to pass the annual appropriation bill, the same
amounts as were appropriated in the prior fiscal year shall be
automatically available for expenditure, subject to monthly or
quarterly allotments as determined by the State Budget Officer.
Expenditures for general obligation bond indebtedness of the
State shall be made as required regardless of the passage of the
annual budget or the amount provided for in the prior fiscal
year.
The budget as submitted by the Governor is required to
contain a statement of receipts and expenditures for the current
fiscal year, the budget year (next fiscal year), and two prior
fiscal years. Receipt estimates for the current year and budget
year are those adopted by the State Revenue Estimating
Conference, as adjusted by any change to rates recommended by the
Governor.
The State Revenue Estimating Conference was created by the
1990 General Assembly to provide the Governor and the Assembly
with estimates of general revenues. It is composed of the State
Budget Officer, the House Fiscal Advisor, and the Senate Fiscal
Advisor, with the chair rotating among the three. It must meet
twice a year (specifically in May and November) and can be called
at any other time by any member, and must reach consensus on
revenues. The 1991 Assembly created a Medical Assistance and
Public Assistance Caseload Estimating Conference, similar to the
Revenue Estimating Conference, to adopt welfare and medical
assistance caseload estimates.
In addition to the preparation of the annual budget, the
State Budget Officer is also authorized and directed by the
general laws: (a) to exercise budgetary control over all State
departments; (b) to operate an appropriation allotment system;
(c) to develop long-term activity and financial programs,
particularly capital improvement programs; (d) to approve or
disapprove all requests for new personnel; and (e) to prepare
annually a five-year financial projection of anticipated general
revenue receipts and expenditures, including detail of principal
revenue sources and expenditures by major program areas which
will be included in the budget submitted to the General Assembly.
The 1990 Assembly instituted a limit on state expenditures
commencing in FY 1992 such that appropriations do not result in
general fund expenditures exceeding 99.5% of general fund
revenues in FY 1993, 98.5% in FY 1994 and 98.0% thereafter. The
remaining balance is to be deposited into a budget reserve
account, capped at 3% of general fund revenues. Once capped, the
excess is deposited in a Capital Account, to be used for capital
projects, debt reduction, and/or debt service. The 1991 Assembly
suspended those provisions for FY 1992, but provided that any
revenues received in excess of the amount estimated shall be
deposited in the account, up to one half percent of general
revenues. Excess revenues were received in FY 1993, largely as a
result of medicaid disproportionate share and provider tax
receipts, and an $8.4 million deposit was made into the fund.
The 1992 General Assembly approved placing the spending
limits on the ballot as a constitutional requirement, which the
voters approved on November 3, 1992. The FY 1997 reserve fund
balance was $55.3 million.
Financial Controls
Internal financial controls utilized by the State consist
principally of statutory restrictions on the expenditure of funds
in excess of appropriations, the supervisory powers and functions
exercised by the Department of Administration and the accounting
and audit controls maintained by the State Controller and the
Bureau of Audits. Statutory restrictions include the requirement
that all bills or resolutions introduced in the General Assembly
which, if passed, would have an effect on State or local revenues
or expenditures (unless the bill includes the appropriation of a
specific dollar amount) must be accompanied by a "fiscal note,"
which sets forth such effect. Bills impacting upon State finances
are forwarded to the State Budget Officer who determines the
agency or agencies affected by the bill and is responsible, in
cooperation with such agencies, for the preparation of the fiscal
note. The State Department of Administration is responsible for
the preparation of fiscal notes for bills affecting cities and
towns.
The Department of Administration is required by law to
produce a quarterly report to be made public which incorporates
actual expenditures, encumbrances, and revenues with the
projected revenues and appropriations. The report also contains a
projection of a year-end balance.
The State Controller is required by general law to
administer a comprehensive accounting system which will classify
the transactions of State departments in accordance with the
budget plan, to prescribe a uniform financial, accounting and
cost accounting system for State departments and to approve all
orders for disbursement of funds from the State treasury. In
addition, the Controller is required to prepare monthly
statements of receipts and disbursements in comparison with
estimates of revenue and allotments of appropriations.
The General Treasurer is responsible for the deposit of cash
receipts; the payment of sums, as may be required from time to
time and upon due authorization from the State Controller; and as
Chair of the State Investment Commission, the investment of all
monies in the State fund structure, as directed by the State
Investment Commission. Major emphasis is placed by the General
Treasurer on cash management in order to insure that there is
adequate cash on hand to meet the obligations of the State as
they arise.
The General Treasurer is responsible for the investment of
certain funds and accounts of the State on a day-to-day basis.
The State treasury balance is determined daily. In addition, the
General Treasurer is the custodian of certain other funds and
accounts and, in conjunction with the State Investment
Commission, invests the amounts on deposit in such funds and
accounts, including but not limited to the State Employees' and
Teachers' Retirement Trust Fund and the Municipal Employees'
Retirement Trust Fund. The General Treasurer submits a report to
the General Assembly at the close of each fiscal year on the
performance of the State's investments.
The Finance Committee of the House of Representatives is
required by law to provide for a complete post-audit of the
financial transactions and accounts of the State on an annual
basis, which must be performed by the Auditor General, who is
appointed by the Joint Committee on Legislative Affairs of the
General Assembly. This post-audit is performed traditionally on
the basis of financial statements prepared by the State
Controller with specific attention to the violation of laws
within the scope of the audit, illegal or improper expenditures
or accounting procedures and recommendations for accounting and
fiscal controls. The Auditor General is additionally directed to
review annually all capital development programs of the State to
determine: (a) the status of such programs; (b) whether funds are
being properly expended; (c) completion dates; and (d) expended
and unexpended fund balances. The Auditor General also has the
power, when directed by the Joint Committee, to make post-audits
and performance audits of all State and local public bodies or
any private entity receiving State funds.
Revenues
The state draws nearly all of its revenue from a series of
non-property related taxes and excises, principally the personal
income tax and general retail sales and use tax, from federal
assistance payments and grant-in-aid, and from earnings and
receipts from certain State-operated programs and facilities. The
State additionally derives revenue from a variety of special
purpose fees and charges that must be used for specific purposes
as required by State law.
Rhode Island Economy
Population Characteristics
Rhode Island's population in 1990 was 1,005,000. While the
Rhode Island population did not change significantly between 1989
and 1993, it decreased by 0.6% between 1994 and 1996. Bureau of
the Census estimates for 1996 show the Rhode Island population to
be 990,225. In contrast, the total U.S. population increased by
approximately 9.7% between 1980 and 1990, 3.4% between 1990 and
1993, and 2.9% between 1993 and 1996.
Personal Income, Consumer Prices, and Poverty. Per capita
personal income levels in Rhode Island have been consistent with
those in the United States since 1970. In addition, Rhode Island
has maintained a poverty rate well below the national average. In
1996, 11.0% of the Rhode Island population was below the poverty
line, while 13.7% of the population of the United States fell
below the poverty line.
Employment. Total employment levels in Rhode Island grew at
a rate of 1.4% in 1995, 0.3% in 1996 and 1.7% in 1997. The only
employment sector that declined in 1997 was manufacturing, which
has experienced declining employment levels since 1985. The
sector employing the greatest number of people in Rhode Island
continues to be the service sector, which contributed
approximately one-third of total non-agricultural employment in
1997.
Economic Base and Performance. Rhode Island has a
diversified economic base which includes traditional
manufacturing, high technology, and service industries. A
substantial portion of products produced by these and other
sectors is exported. Like most other historically industrial
states, Rhode Island has seen a shift in employment from
labor-intensive manufacturing industries to technology and
service-based industries.
Human Resources. Skilled human capital is the foundation of
economic strength in Rhode Island. It provides the basis for a
technologically dynamic and industrially diverse regional
economy. The Rhode Island population is well educated with 27.2%
of its residents over the age of 25 having received at least an
Associate's degree. In addition, per pupil spending on public
elementary and secondary education in Rhode Island has been
significantly higher than the national average since 1983. For
the 1995-96 academic year Rhode Island spent twenty-five percent
more per pupil than the national average.
Economy
Composition of Employment. Between 1989 and 1991, total
non-agricultural employment in Rhode Island declined 8.7%. The
construction, manufacturing and trade sectors experienced the
greatest decreases during this time. In 1993, 1994, and 1995,
however, total non-agricultural employment increased by 1.3%,
1.0% and 1.4%, respectively. Employment levels increased in all
sectors except manufacturing. The manufacturing sector has
experienced employment declines in every year since 1984. The
most rapid growth in 1997 came in the finance, insurance, and
real-estate sector, which grew at a rate of 4.7%. Total
non-agricultural employment increased by 3.5% between 1994 and
1997.
The Rhode Island services sector, with 33.6% of the
non-agricultural work force in 1997, is the largest employment
sector in the Rhode Island economy, followed by wholesale and
retail trade (21.9%), manufacturing (17.8%) and government
employment (14.2%).
Economic Forecast
This section describes the economic forecast used as input
for the Revenue Estimating Conference's consensus estimate. The
Revenue Estimating Conference incorporates a range of economic
forecasts and economic information in making revenue estimates.
During its May, 1998 meeting, forecasts were presented by Data
Resources Inc. (DRI), Regional Financial Associates (RFA), and
The New England Economic Project (NEEP). Current employment and
labor force trends were also presented by the Department of Labor
and Training.
RFA, DRI, and NEEP all forecast the economic growth will
continue throughout FY 1999, albeit at a more moderate pace.
Employment. There was some disparity among the economists
with respect to employment forecast. In FY 1998, growth was
anticipated in the range of 1.6% to 1.9% and in FY 1999, growth
is expected to fall in the range of 1.0% to 1.4%. The disparity
may be partially explained by problems in data sampling.
Benchmark revisions for FY 1997 resulted in annual
employment growth of 1.7% versus the preliminary figure of 1.0%.
RFA revised its 1998 nonfarm employment growth from 0.6% in
November to 1.9% in May.
Personal Income. Personal income growth varies from 4.8% to
5.1% in FY 1998 and from 4.1% to 5.5% in FY 1999. Personal income
tax receipts have increased dramatically due to continue
strength in financial markets.
Wages and Salary Income. A fairly wide range of forecasts
was present in wage and salary growth estimates, from 5.2 % to
6.1 % in FY 1998 and 4.7 % to 6.4 % in FY 1999. This disparity
also contributes to the differential in estimated personal income
growth. The more optimistic outlook may reflect the theory that
high wage earners are realizing greater salary gains, as well as
larger and more frequent bonuses. The dramatic rise in wage and
salary income since 1996 further indicates that Rhode Island is
increasingly creating higher paying jobs. This is further
evidenced by the shift in Rhode Island away from low paying
manufacturing employment toward higher paying services
employment.
REVENUE ESTIMATES
Revenue estimates are predicated upon the May Revenue
Estimating Conference, as well as changes to general revenues
reflected in the FY 1998 budget plan adopted by the Legislature
on April 2, 1998 and the FY 1999 Appropriations Act. The
Consensus Revenue Estimating Conference is required by
legislation to convene at least twice annually to forecast
general revenues for the current year and the budget year, based
upon current law and collection trends, as well as economic
forecast.
FY 1998 Revenue Estimate
The FY 1998 estimate was revised upward by $64.3 million
over the estimate adopted by the November Revenue Estimating
Conference. This is a revision of 3.4% to the November estimate.
The estimate includes adjustments adopted by the Revenue
Estimating Conference and changes included in the FY 1998 budget
plan adopted by the Legislature for 1998.
Revenue Estimating Conference
The largest revision was $43.9 million in personal income
taxes over the enacted estimate. The revisions to the enacted
estimate were: $22.2 million increase in estimated payments,
$16.9 million increase in final payments, $6.8 million increase
in refunds, and a $11.4 million increase in withholding payments.
The Conference adopted estimated payments of $163.7 million,
growth of 24.9% over FY 1997, reflecting market activity. The
28.5% increase in final payments appears to also reflect that
activity. Refunds are estimated to be 5.8% greater than FY 1997.
Withholding growth is estimated at 6.9%.
Total general business tax estimates were $5.4 million less
than the November estimate. Gains in corporate income tax ($1.1
million), Franchise Taxes, ($0.4 million), taxes on insurance
companies ($8.6 million), and bank deposit taxes ($0.2 million)
partially offset reductions in Public Utility Gross Earnings
Taxes ($2.6 million), Taxes on Financial Institutions ($12.6
million), and the Health Care Provider Tax ($0.5 million).
Estimated sales tax revenues of $527.0 million reflects 7.7%
growth over FY 1997 receipts. The estimate is $11.0 million over
the November estimate. Other major changes in the Sales and Use
Tax category include increases in Motor Vehicle Taxes ($1.8
million) and Cigarettes ($0.8 million).
Other adjustments include: an increase of $0.8 million in
inheritance taxes; an upward revision of $6.8 million for
departmental earnings; and a $4.0 million decrease to lottery
revenues. The lottery estimate change includes a $2.8 million
decrease to the video lottery terminal estimate, a decrease of
$1.8 million to the enacted estimate for games, and a $0.6
million increase to the KENO estimate.
The legislature's revised budget plan resulted in an
adjustment of negative $0.9 million to FY 1998 departmental
revenues.
FY 1999 Revenue Estimate
The largest source of FY 1999 general revenue is the
personal income tax, with estimated receipts of $731.1 million
composing 37.1% of the total. While collections in this component
have been reduced significantly by the 1997 tax law changes,
growth of 1.5% is still anticipated. Adjusted for these changes,
FY 1999 growth equals 4.3%.
Sales Tax collections are expected to total $548.0 million
in FY 1999. The FY 1999 estimate anticipates a 4.0% annual
growth, and composes 27.8% of total general revenues.
Other sources of "Sales and Use" taxes are expected to vary
slightly in the budget year. Since the Appropriations Act
dedicates the full gas tax to ISTF, the motor fuel tax will
realize the loss of $4.5 million, but the gas tax transfer in
"Other Sources" will increase by the same amount subject to other
changes in ISTF allocation. Cigarette Tax collections are
expected to realize a loss of $1.1 million, or negative 1.7%, for
an annual total of $65.0 million. Motor Vehicle and Alcohol Tax
collections are expected to remain at FY 1998 levels.
The General Business Taxes, which represent 10.5 % of total
collections, are expected to increase slightly in FY 1999. The
Business Corporations Tax is expected to decline by approximately
2.0% as a result of tax cuts and other adjustments, for a total
of $65.6 million in revenues. The Franchise and Bank Deposits
Taxes are expected to remain flat in FY 1999, while the Public
Utilities Gross Earnings Tax revenues are expected to decrease by
1.6% with total collections of $60.6 million. The Financial
Institutions account should rebound in FY 1999, with total
revenues reaching $7.0 million. The Health Care Provider
Assessment is expected to increase by 3.4% to $24.0 million,
keeping in line with forecast inflation.
Inheritance and Gift Taxes are expected to decline by $3.0
million (negative 16.7%) in FY 1999. This anticipated loss is
partially attributable to the Taxpayer Relief Act provisions
which will alter the taxable estate criteria beginning January 1,
1998, and which will likely have the greatest incremental effect
in FY 1999, due to tax return filing requirements.
The Hospital Licensing Fee enacted by the 1997 General
Assembly expired on June 30, 1998. The FY 1999 Appropriations Act
extends the fee, and includes $37.4 million in FY 1999 General
Revenues.
A reduction in "Other Sources" is explained by a smaller
portion of the Gas Tax being transferred to General Revenues, as
well as significant reductions in "Other Miscellaneous Revenues."
The FY 1999 Appropriations Act allocated the full gas tax to the
ISTF, with 5 cents dedicated to RIPTA, 1 cent to Elderly Affairs,
17.5 cents to transportation, and the remaining 4.5 cents to the
General Fund.
The FY 1999 Appropriations Act also transfers $4.0 million
from the Resource Recovery Fund to General Revenue.
MUNICIPAL BONDS
The two principal classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full
faith, credit and unlimited taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or projects or, in a few cases, from the
proceeds of a special excise or other tax, but are not supported
by the issuer's power to levy unlimited general taxes. There are,
of course, variations in the security of municipal bonds, both
within a particular classification and between classifications,
depending on numerous factors.
The yields of municipal bonds depend on, among other things,
general financial conditions, general conditions of the municipal
bond market, the size of a particular offering, the maturity of
the obligation and rating of the issue.
Since the Fund may invest in industrial development bonds or
private activity bonds, the Fund may not be an appropriate
investment for entities which are "substantial users" of
facilities financed by those bonds or for investors who are
"related persons" of such users. Generally, an individual will
not be a "related person" under the Internal Revenue Code unless
such investor or his or her immediate family (spouse, brothers,
sisters and lineal descendants) own directly or indirectly in the
aggregate more than 50% of the equity of a corporation or is a
partner of a partnership which is a "substantial user" of a
facility financed from the proceeds of those bonds. A
"substantial user" of such facilities is defined generally as a
"non-exempt person who regularly uses a part of [a] facility"
financed from the proceeds of industrial development or private
activity bonds.
As indicated in the Prospectus, there are certain Rhode
Island Obligations the interest on which is subject to the
Federal alternative minimum tax on individuals. While the Fund
may purchase these obligations, it may, on the other hand,
refrain from purchasing particular Rhode Island Obligations due
to this tax consequence. Also, as indicated in the Prospectus,
the Fund will not purchase obligations of Rhode Island issuers
the interest on which is subject to regular Federal income tax.
The foregoing may reduce the number of issuers the obligations of
which are available to the Fund.
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate its past
performance.
Performance quotations by investment companies are subject
to rules of the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used
by the Fund are based on these standardized methods and are
computed separately for each of the Fund's classes of shares.
Each of these and other methods that may be used by the Fund are
described in the following material. Prior to May 1, 1996, the
Fund had outstanding only one class of shares which are currently
designated "Class A Shares." On that date the Fund began to offer
shares of two other classes, Class C Shares and Class Y Shares.
During most of the historical periods listed below, there were no
Class C Shares or Class Y Shares outstanding and the information
below relates solely to Class A Shares unless otherwise
indicated. Class I Shares were first offered on October 31, 1997,
and none were outstanding during the periods indicated.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5- and 10-
year periods and a period since the inception of the operations
of the Fund (on September 10, 1992) that would equate an initial
hypothetical $1,000 investment in shares of each of the Fund's
outstanding classes to the value such an investment would have if
it were completely redeemed at the end of each such period.
In the case of Class A Shares, the calculation assumes the
maximum sales charge is deducted from the hypothetical initial
$1,000 purchase. In the case of Class C Shares, the calculation
assumes the applicable contingent deferred sales charge ("CDSC")
imposed on a redemption of Class C Shares held for the period is
deducted. In the case of Class Y Shares, the calculation assumes
that no sales charge is deducted and no CDSC is imposed. For all
classes, it is assumed that on each reinvestment date during each
such period any capital gains are reinvested at net asset value,
and all income dividends are reinvested at net asset value,
without sales charge (because the Fund does not impose any sales
charge on reinvestment of dividends for any class). The
computation further assumes that the entire hypothetical account
was completely redeemed at the end of each such period.
Investors should note that the maximum sales charge (4%)
reflected in the following quotations for Class A Shares is a one
time charge, paid at the time of initial investment. The greatest
impact of this charge is during the early stages of an investment
in the Fund. Actual performance will be affected less by this one
time charge the longer an investment remains in the Fund. Sales
charges at the time of purchase are payable only on purchases of
Class A Shares of the Fund.
Average Annual Compounded Rates of Return:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.74% 5.90% 8.80%
Five Years 5.34% N/A N/A
Since
inception on
September 10,
1992 6.18% 6.63%(1) 8.22%(1)
<FN>
(1) Period from May 1, 1996 (inception of class) through June 30, 1998.
</FN>
</TABLE>
These figures were calculated according to the following SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- and 10-year periods or
the period since inception, at the end of each such period.
As discussed in the Prospectus, the Fund may quote total
rates of return in addition to its average annual total return
for each of its three classes of shares. Such quotations are
computed in the same manner as the Fund's average annual
compounded rate, except that such quotations will be based on the
Fund's actual return for a specified period as opposed to its
average return over the periods described above.
Total Return
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.74% 5.90% 8.80%
Five Years 29.71 N/A N/A
Since
inception on
September 10,
1992 41.61% 14.91%(1) 18.64%(1)
<FN>
(1) Period from May 1, 1996 (inception of class) through June 30, 1998.
</FN>
</TABLE>
Yield
Current yield reflects the income per share earned by the
Fund's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of
the Fund's classes of shares during a 30-day base period by the
maximum offering price per share on the last day of the period
and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of each class during
the base period net of fee waivers and reimbursements of
expenses, if any.
The Fund may also quote a taxable equivalent yield for each
of its classes of shares which shows the taxable yield that would
be required to produce an after-tax yield equivalent to that of a
fund which invests in tax-exempt obligations. Such yield is
computed by dividing that portion of the yield of the class
(computed as indicated above) which is tax-exempt by one minus
the highest applicable combined federal and Rhode Island income
tax rate (and adding the result to that portion of the yield of
the class that is not tax-exempt, if any).
The Rhode Island and the combined Rhode Island and federal
income tax rates upon which the Fund's tax equivalent yield
quotations are based are 10.89% and 47.43%, respectively assuming
the maximum effective state rate. The State of Rhode Island
imposes the state income taxes as a percentage of the taxpayer's
Federal Income Tax, thus the actual state rate is effectively
reduced by its deductibility for Federal tax purposes if
deductions are itemized. The latter rate reflects
currently-enacted Federal income tax law. From time to time, as
any changes to such rates become effective, tax equivalent yield
quotations advertised by the Fund will be updated to reflect such
changes. Any tax rate increases will tend to make a tax-free
investment, such as the Fund, relatively more attractive than
taxable investments. Therefore, the details of specific tax
increases may be used in Fund sales material.
Yield for the 30-day period ended June 30, 1998 (the date of
the Fund's most recent audited financial statements):
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
Yield 4.22% 3.40% 4.42%
Taxable
Equivalent
Yield 7.83% 6.31% 8.20%
</TABLE>
These figures were obtained using the Securities and Exchange
Commission formula:
6
Yield = 2 [(a-b + 1) -1]
----
cd
Where:
a = interest earned during the period
b = expenses accrued for the period (net of waivers
and reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by
(i) dividing the total amount of dividends per share paid by the
Fund during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's current distribution rate (calculated as
indicated above). The current distribution rate can differ from
the current yield computation because it could include
distributions to shareholders from additional sources (i.e.,
sources other than dividends and interest), such as short-term
capital gains.
Other Performance Quotations
With respect to those categories of investors who are
permitted to purchase Class A Shares of the Fund at net asset
value, the Fund may quote a "Current Distribution for Net Asset
Value Investments." This rate is computed by (i) dividing the
total amount of dividends per share paid by the class during a
recent 30-day period by (ii) the current net asset value of the
class and by (iii) annualizing the result. Figures for yield,
total return and other measures of performance for Net Asset
Value Investments may also be quoted. These will be derived as
described above with the substitution of net asset value for
public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are quoted in advertising, they will
be accompanied by calculations of current yield in accordance
with the formula of the Securities and Exchange Commission.
The Fund may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect
of taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and
capital gains distributions in additional shares. The examples
used will be for illustrative purposes only and are not
representations by the Fund of past or future yield or return.
From time to time, in reports and promotional literature,
the Fund may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices
of broad groups of unmanaged securities considered to be
representative of, or similar to, the Fund's portfolio holdings,
such as:
Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales
charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend
dates accumulated for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar") is a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of
performance history are assigned ratings from one star (lowest)
to five stars (highest). Morningstar ratings are calculated from
the funds' three-, five-, and ten-year average annual returns
(when available) and a risk factor that reflects fund performance
relative to three-month Treasury bill monthly returns. A Fund's
returns are adjusted for fees and sales loads. Ten percent of the
funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and
the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance" is a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.
Merrill Lynch, Pierce, Fenner & Smith, Inc. is a "Taxable
Bond Indices," a monthly corporate government index publication
which lists principal, coupon and total return on over 100
different taxable bond indices which Merrill Lynch tracks. They
also list the par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report" is a monthly
publication which tracks principal, coupon and total return on
the Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as
well as all the components of these Indices.
The Consumer Price Index, prepared by the U.S. Bureau of
Labor Statistics, is a commonly used measure of inflation. The
Index shows changes in the cost of selected consumer goods and
does not represent a return on an investment vehicle.
From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE
WALL STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS
may be cited.
INVESTMENT RESTRICTIONS
The Fund has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the
1940 Act) of the Fund's outstanding shares vote to change them.
Under the 1940 Act, the vote of the holders of a "majority" of
the Fund's outstanding shares means the vote of the holders of
the lesser of (a) 67% or more of the Fund's shares present at a
meeting or represented by proxy if the holders of more than 50%
of its shares are so present or represented; or (b) more than 50%
of the Fund's outstanding shares. Those fundamental policies not
set forth in the Prospectus are set forth below.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Rhode
Island Obligations (discussed under "Investment of the Fund's
Assets" in the Prospectus). Therefore the Fund cannot buy any
voting securities, any commodities or commodity contracts, any
mineral related programs or leases, any shares of other
investment companies or any warrants, puts, calls or combinations
thereof.
The Fund cannot purchase or hold the securities of any
issuer if, to its knowledge, Trustees, Directors or officers of
the Fund or its Sub-Adviser individually owning beneficially more
than 0.5 of 1% of the securities of that issuer together own in
the aggregate more than 5% of such securities.
The Fund cannot buy real estate or any non-liquid interests
in real estate investment trusts; however, it can buy any
securities which it can otherwise buy even though the issuer
invests in real estate or has interests in real estate.
2. The Fund does not buy for control.
The Fund cannot invest for the purpose of exercising control
or management of other companies.
3. The Fund does not sell securities it does not own or borrow
from brokers to buy securities.
Thus, it cannot sell short or buy on margin.
4. The Fund is not an underwriter.
The Fund cannot engage in the underwriting of securities,
that is, the selling of securities for others. Also, it cannot
invest in restricted securities. Restricted securities are
securities which cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Fund's Distribution Plan has four parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II), to distribution payments relating to Class I
Shares (Part III) and to certain defensive provisions (Part IV).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Manager,
the Sub-Adviser or the Distributor. The Distributor will consider
shares which are not Qualified Holdings of such unrelated
broker-dealers to be Qualified Holdings of the Distributor and
will authorize Permitted Payments to the Distributor with respect
to such shares whenever Permitted Payments are being made under
the Plan.
Part I of the Plan applies only to the Front-Payment Class
Shares ("Class A Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part I of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part I ("Class A Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Front-Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Front-Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class A Permitted
Payments") to Qualified Recipients, which Class A Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.15 of 1% of the average annual net assets of the
Fund represented by the Front-Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Front-Payment Class Shares.
The Distributor shall have sole authority (i) as to the
selection of any Qualified Recipient or Recipients; (ii) not to
select any Qualified Recipient; and (iii) as to the amount of
Class A Permitted Payments, if any, to each Qualified Recipient
provided that the total Class A Permitted Payments to all
Qualified Recipients do not exceed the amount set forth above.
The Distributor is authorized, but not directed, to take into
account, in addition to any other factors deemed relevant by it,
the following: (a) the amount of the Qualified Holdings of the
Qualified Recipient; (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Front-Payment Class
Shares, including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Fund may be effected; assisting shareholders in
designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part I is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class A Permitted
Payments made under the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Manager, Sub-
Adviser or Distributor paid or accrued during such quarter. In
addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Fund,
Manager, Sub-Adviser or Distributor, such person shall agree to
furnish to the Distributor for transmission to the Board of
Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part I originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part I of the Plan; and (ii) by a vote of holders of at
least a "majority" (as so defined) of the outstanding voting
securities of the Front-Payment Class Shares class (or of any
predecessor class or category of shares, whether or not
designated as a class) and a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities
of the Level-Payment Class Shares and/or of any other class whose
shares are convertible into Front-Payment Class Shares. Part I
has continued, and will, unless terminated as therein provided,
continue in effect, until the December 31 next succeeding such
effectiveness, and from year to year thereafter only so long as
such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part I may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part I
applies. Part I may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part I as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class A Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class A Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to May 1, 1996 or
(ii) Class A Plan Agreements entered into thereafter.
Provisions relating to Class C Shares (Part II)
Part II of the Plan applies only to the Level-Payment Shares
Class ("Class C Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part II ("Class C Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Level-Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level-Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class C Permitted
Payments") to Qualified Recipients, which Class C Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.75 of 1% of the average annual net assets of the
Fund represented by the Level-Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Level-Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class C Permitted Payments, if any, to each
Qualified Recipient provided that the total Class C Permitted
Payments to all Qualified Recipients do not exceed the amount set
forth above. The Distributor is authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: (a) the amount of the Qualified
Holdings of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of
Level-Payment Class Shares, including without limitation, any or
all of the following activities: answering customer inquiries
regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be effected;
assisting shareholders in designating and changing dividend
options, account designations and addresses; providing necessary
personnel and facilities to establish and maintain shareholder
accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts;
furnishing (either alone or together with other reports sent to a
shareholder by such person) monthly and year-end statements and
confirmations of purchases and redemptions; transmitting, on
behalf of the Fund, proxy statements, annual reports, updating
prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the Fund
proxies executed by shareholders with respect to meetings of
shareholders of the Fund; and providing such other related
services as the Distributor or a shareholder may request from
time to time; and (c) the possibility that the Qualified Holdings
of the Qualified Recipient would be redeemed in the absence of
its selection or continuance as a Qualified Recipient.
Notwithstanding the foregoing two sentences, a majority of the
Independent Trustees (as defined below) may remove any person as
a Qualified Recipient. Amounts within the above limits accrued to
a Qualified Recipient but not paid during a fiscal year may be
paid thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part II is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Manager, Sub-
Adviser or Distributor paid or accrued during such quarter. In
addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Fund,
Manager, Sub-Adviser or Distributor, such person shall agree to
furnish to the Distributor for transmission to the Board of
Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part II originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part II of the Plan; and (ii) by a vote of holders of
at least a "majority" (as so defined) of the outstanding voting
securities of the Level-Payment Class Shares. Part II has
continued, and will, unless terminated as therein provided,
continue in effect, until the December 31 next succeeding such
effectiveness, and from year to year thereafter only so long as
such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part II may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part II
applies. Part II may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part II as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class C Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to May 1, 1996 or
(ii) Class C Plan Agreements entered into thereafter.
Payments Under the Plan
During the fiscal year ended June 30, 1998, Permitted
Payments of $72,087 were made to Qualified Recipients with
respect to Class A Shares of the Fund, of which the Distributor
received $1,455. All of such payments were for compensation. (See
the Additional Statement for a description of the Distribution
Plan.) During the fiscal year ended June 30, 1998, Permitted
Payments of $10,093 were made to Qualified Recipients with
respect to Class C Shares of the Fund, of which the Distributor
received $7,946. During the fiscal years ended June 30, 1997 and
1996, respectively, $59,620 and $55,194 was paid to Qualified
Recipients under the Plan, of which $1,175 and $1,008,
respectively, was retained by the Distributor. All of such
payments related to shares now designated as Class A Shares. All
of such payments were for compensation.
Provisions relating to Class I Shares (Part III)
Part III of the Plan applies only to the Financial
Intermediary Class Shares ("Class I Shares") of the Fund
(regardless of whether such class is so designated or is
redesignated by some other name).
As used in Part III of the Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to any principal underwriter of the Fund, with which the Fund or
the Distributor has entered into written agreements in connection
with Part III ("Class I Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Class I Shares or
servicing of shareholder accounts with respect to such shares.
"Qualified Holdings" shall mean, as to any Qualified Recipient,
all Class I Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers,
other customers, other contacts, investment advisory clients, or
other clients, if the Qualified Recipient was, in the sole
judgment of the Distributor, instrumental in the purchase and/or
retention of such shares and/or in providing administrative
assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class I Permitted
Payments") to Qualified Recipients, which Class I Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), a rate fixed from time to time by the Board of
Trustees, initially 0.10 of 1% of the average annual net assets
of the Fund represented by the Class I Shares, but not more than
0.25 of 1% of such assets. Such payments shall be made only out
of the Fund's assets allocable to Class I Shares. The Distributor
shall have sole authority (i) as to the selection of any
Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class C Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class I Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Class I Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Fund
may be effected; assisting shareholders in designating and
changing dividend options, account designations and addresses;
providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in
processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares;
verifying and guaranteeing shareholder signatures in connection
with redemption orders and transfers and changes in shareholder
designated accounts; furnishing (either alone or together with
other reports sent to a shareholder by such person) monthly and
year-end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part III is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class I Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Manager, Sub-Adviser or Distributor paid or accrued during such
quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, Manager, Sub-Adviser or Distributor such person shall agree
to furnish to the Distributor for transmission to the Board of
Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part III originally went into effect when it was approved
(i) by a vote of the Trustees, including the Independent
Trustees, with votes cast in person at a meeting called for the
purpose of voting on Part III of the Plan; and (ii) by a vote of
holders of at least a "majority" (as so defined) of the
outstanding voting securities of the Class I Shares Class. Part
III has continued, and will, unless terminated as thereinafter
provided, continue in effect, until the December 31 next
succeeding such effectiveness, and from year to year thereafter
only so long as such continuance is specifically approved at
least annually by the Fund's Trustees and its Independent
Trustees with votes cast in person at a meeting called for the
purpose of voting on such continuance. Part III may be terminated
at any time by the vote of a majority of the Independent Trustees
or by the vote of the holders of a "majority" (as defined in the
1940 Act) of the outstanding voting securities of the Fund to
which Part III applies. Part III may not be amended to increase
materially the amount of payments to be made without shareholder
approval of the class or classes of shares affected by Part III
as set forth in (ii) above, and all amendments must be approved
in the manner set forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class I Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class I Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to May 1, 1996 or
(ii) Class I Plan Agreements entered into thereafter.
Defensive Provisions (Part IV)
Another part of the Plan (Part IV) states that if and to the
extent that any of the payments listed below are considered to be
"primarily intended to result in the sale of" shares issued by
the Fund within the meaning of Rule 12b-1, such payments are
authorized under the Plan: (i) the costs of the preparation of
all reports and notices to shareholders and the costs of printing
and mailing such reports and notices to existing shareholders,
irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares
of the Fund or other funds or other investments; (ii) the costs
of the preparation and setting in type of all prospectuses and
statements of additional information and the costs of printing
and mailing all prospectuses and statements of additional
information to existing shareholders; (iii) the costs of
preparation, printing and mailing of any proxy statements and
proxies, irrespective of whether any such proxy statement
includes any item relating to, or directed toward, the sale of
the Fund's shares; (iv) all legal and accounting fees relating to
the preparation of any such reports, prospectuses, statements of
additional information, proxies and proxy statements; (v) all
fees and expenses relating to the registration or qualification
of the Fund and/or its shares under the securities or "Blue-Sky"
laws of any jurisdiction; (vi) all fees under the Securities Act
of 1933 and the 1940 Act, including fees in connection with any
application for exemption relating to or directed toward the sale
of the Fund's shares; (vii) all fees and assessments of the
Investment Company Institute or any successor organization,
irrespective of whether some of its activities are designed to
provide sales assistance; (viii) all costs of the preparation and
mailing of confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all costs
of responding to telephone or mail inquiries of investors or
prospective investors.
The Plan states that while it is in effect, the selection
and nomination of those Trustees of the Fund who are not
"interested persons" of the Fund shall be committed to the
discretion of such disinterested Trustees but that nothing in the
Plan shall prevent the involvement of others in such selection
and nomination if the final decision on any such selection and
nomination is approved by a majority of such disinterested
Trustees.
The Plan states that while it is in effect, the Fund's
Manager and Distributor shall report at least quarterly to the
Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this
Plan, the identity of the Qualified Recipient of each Payment,
and the purposes for which the amounts were expended; (ii) all
costs of each item of cost specified in the Plan (making
estimates of such costs where necessary or desirable) during the
preceding calendar or fiscal quarter; and (iii) all fees of the
Fund to the distributor, sub-adviser or administrator paid or
accrued during such quarter. In addition if any such Qualified
Recipient is an affiliate, as that term is defined in the 1940
Act, of the Fund, the Manager, the Sub-Adviser or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund as defined
in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements
related to the Plan. The Plan, unless terminated as therein
provided, continues in effect from year to year only so long as
such continuance is specifically approved at least annually by
the Fund's Board of Trustees and its Independent Trustees with
votes cast in person at a meeting called for the purpose of
voting on such continuance. In voting on the implementation or
continuance of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Plan may be terminated at any time by vote of a
majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund. The Plan may not be
amended to increase materially the amount of payments to be made
without shareholder approval and all amendments must be approved
in the manner set forth above as to continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act
as now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part IV shall be deemed to be
severable, within the meaning of and to the extent required by
Rule 18f-3, with respect to each outstanding class of shares of
the Fund.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares and Class I Shares of the Fund of "Service Fees" within
the meaning of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. The Services Plan applies
only to the Class C Shares and Class I Shares of the Fund
(regardless of whether such class is so designated or is
redesignated by some other name).
Provisions for Level-Payment Class Shares (Part I)
As used in Part I of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by
Aquila Distributors, Inc. (the "Distributor"), including but not
limited to the Distributor and any other principal underwriter of
the Fund, who have, pursuant to written agreements with the Fund
or the Distributor, agreed to provide personal services to
shareholders of Level-Payment Class Shares and/or maintenance of
Level-Payment Class Shares shareholder accounts. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Level-Payment Class Shares beneficially owned by such Qualified
Recipient's customers, clients or other contacts. "Manager" shall
mean Aquila Management Corporation or any successor serving as
sub-adviser or administrator of the Fund.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Service Fees") to
Qualified Recipients, which Service Fees (i) may be paid directly
or through the Distributor or shareholder servicing agent as
disbursing agent and (ii) may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Services Plan are not accruable
or for any fiscal year which is not a full fiscal year), 0.25 of
1% of the average annual net assets of the Fund represented by
the Level-Payment Class Shares. Such payments shall be made only
out of the Fund's assets allocable to the Level-Payment Class
Shares. The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and the
amount of Service Fees, if any, paid to each Qualified Recipient,
provided that the total Service Fees paid to all Qualified
Recipients may not exceed the amount set forth above and
provided, further, that no Qualified Recipient may receive more
than 0.25 of 1% of the average annual net asset value of shares
sold by such Recipient. The Distributor is authorized, but not
directed, to take into account, in addition to any other factors
deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient and (b) the extent
to which the Qualified Recipient has, at its expense, taken steps
in the shareholder servicing area with respect to holders of
Level-Payment Class Shares, including without limitation, any or
all of the following activities: answering customer inquiries
regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be effected;
assisting shareholders in designating and changing dividend
options, account designations and addresses; providing necessary
personnel and facilities to establish and maintain shareholder
accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; and
providing such other related services as the Distributor or a
shareholder may request from time to time. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years. Service fees with respect to Class C Shares
will be paid to the Distributor. During the fiscal year ended
June 30, 1998, $3,364 of Service Fees was paid to Qualified
Recipients with respect to the Fund's Class C Shares all of which
was retained by the Distributor. During the fiscal year ended
June 30, 1997, $605 of Service Fees was paid with respect to
Class C Shares, of which the Distributor received all.
Provisions for Financial Intermediary Class Shares (Part II)
As used in Part II of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by
Aquila Distributors, Inc. (the "Distributor"), including but not
limited to the Distributor and any other principal underwriter of
the Fund, who have, pursuant to written agreements with the Fund
or the Distributor, agreed to provide personal services to
shareholders of Financial Intermediary Class Shares, maintenance
of Financial Intermediary Class Shares shareholder accounts
and/or pursuant to specific agreements entering confirmed
purchase orders on behalf of customers or clients. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Financial Intermediary Class Shares beneficially owned by such
Qualified Recipient's customers, clients or other contacts.
"Manager" shall mean Aquila Management Corporation or any
successor serving as sub-adviser or administrator of the Fund.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Service Fees") to
Qualified Recipients, which Service Fees (i) may be paid directly
or through the Distributor or shareholder servicing agent as
disbursing agent and (ii) may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Services Plan are not accruable
or for any fiscal year which is not a full fiscal year) , 0.25 of
1% of the average annual net assets of the Fund represented by
the Financial Intermediary Class Shares. Such payments shall be
made only out of the Fund's assets allocable to the Financial
Intermediary Class Shares.
The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and the
amount of Service Payments, if any, paid to each Qualified
Recipient, provided that the total such Service Payments paid to
all Qualified Recipients may not exceed the amount set forth
above and provided, further, that no Qualified Recipient may
receive more than 0.25 of 1% of the average annual net asset
value of such Recipient's Qualified Holdings.
The Distributor is authorized, but not directed, to take
into account, in addition to any other factors deemed relevant by
it, the following: (a) the amount of the Qualified Holdings of
the Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Financial Intermediary
Class Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from
time to time. Notwithstanding the foregoing two sentences, a
majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the
above limits accrued to a Qualified Recipient but not paid during
a fiscal year may be paid thereafter; if less than the full
amount is accrued to all Qualified Recipients, the difference
will not be carried over to subsequent years. No Class I Shares
were outstanding during the fiscal year ended June 30, 1998.
In addition, fees paid under the Plan shall be subject to
such further limits as may be necessary for the Financial
Intermediary Class of shares to qualify as a "no-load" class for
purposes of the Conduct Rules of the National Association of
Securities Dealers, Inc. On the effective date of the Plan, such
limitation is as follows: fees paid under the Plan that satisfy
the definition of "service fees" in Rule 2830(d) of the Conduct
Rules of the National Association of Securities Dealers, Inc. may
not exceed an amount equal to the difference between (i) 0.25 of
1% of the average annual net assets of the Fund represented by
the Financial Intermediary Class of shares and (ii) the amount
paid from the assets of the Financial Intermediary Class under
the Distribution Plan of the Fund. Where necessary or
appropriate, the Independent Trustees, or such appropriate
officer or officers of the Fund as they may designate, shall,
with the advice of counsel, determine what fees paid under the
Plan are to be deemed "service fees." Nevertheless, it is
understood that, as a general matter, fees allocable to
activities in category (i) above -- sub-accounting and
record-keeping -- are not "service fees," while fees allocable to
activities in category (ii) -- account service -- are "service
fees." In like manner, allocation of payments among activities
shall also be determined by the Independent Trustees or their
delegates.
General Provisions
While the Services Plan is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in writing
for their review on the following matters: (i) all Service Fees
paid under the Services Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor
paid or accrued during such quarter. In addition, if any
Qualified Recipient is an "affiliated person," as that term is
defined in the 1940 Act, of the Fund, Manager, Sub-Adviser or
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
The Services Plan has been approved by a vote of the
Trustees, including those Trustees who, at the time of such vote,
were not "interested persons" (as defined in the 1940 Act) of the
Fund and had no direct or indirect financial interest in the
operation of the Services Plan or in any agreements related to
the Services Plan (the "Independent Trustees"), with votes cast
in person at a meeting called for the purpose of voting on the
Services Plan. It will continue in effect for a period of more
than one year from its original effective date only so long as
such continuance is specifically approved at least annually as
set forth in the preceding sentence. It may be amended in like
manner and may be terminated at any time by vote of the
Independent Trustees.
The Services Plan shall also be subject to all applicable
terms and conditions of Rule 18f-3 under the 1940 Act as now in
force or hereafter amended.
While the Services Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing therein shall prevent the involvement of others
in such selection and nomination if the final decision on any
such selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1 percent of the
net asset value of the Fund during any 90-day period for any one
shareholder. Should redemptions by any shareholder exceed such
limitation, the Fund will have the option of redeeming the excess
in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets
into cash. The method of valuing securities used to make
redemptions in kind will be the same as the method of valuing
portfolio securities described under "Net Asset Value Per Share"
in the Prospectus, and such valuation will be made as of the same
time the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their affiliations,
if any, with the Manger or the Distributor, and their principal
occupations during at least the past five years are set forth
below. As of the date of this Additional Statement, the Trustees
and officers of the Fund as a group owned less than 1% of its
outstanding shares. None of the Trustees or officers of the Fund
is affiliated with the Sub-Adviser. Mr. Herrmann is an interested
person, as that term is defined in the 1940 Act, of the Fund as
an officer of the Fund and as a Director, officer and shareholder
of the Manager and the Distributor. He is so designated by an
asterisk.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, 380 Madison Avenue, New York, New York 10017
Founder and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and Manager
or 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; Pacific Capital Cash Assets Trust since 1984; Churchill
Cash Reserves Trust since 1985; Pacific Capital U.S. Government
Securities Cash Asset 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 and
Director, and formerly Secretary, 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. and Quest For Value Accumulation
Trust, and Director or Trustee of Oppenheimer Quest Value Fund,
Inc., Oppenheimer Quest Global Value Fund, Inc. and Oppenheimer
Rochester Group of Funds, each of which is an open-end investment
company; Trustee of Brown University, 1990-1996 and currently
Trustee Emeritus; actively involved for many years in leadership
roles with university, school and charitable organizations.
Vernon R. Alden, Trustee, 420 Boylston Street, Suite 403, Boston,
Massachusetts 02116
Director of Sonesta International Hotels Corporation and
Independent General Partner of the Merrill Lynch-Lee Funds;
Former Director of Colgate-Palmolive Company, Digital Equipment
Corporation, Intermet Corporation, The McGraw Hill and The Mead
Corporation; 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.
Government Securities 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 Emeritus, Boston
Symphony Orchestra; Chairman of the Massachusetts Council on the
Arts and Humanities, 1972-1984; Member of the Board of Fellows of
Brown University, 1969-1986; Trustee of various other cultural
and educational organizations; Honorary Consul General of the
Royal Kingdom of Thailand; Received Decorations from the Emperor
of Japan (1986) and the King of Thailand (1996 and 1997).
Paul Y. Clinton, Trustee, 39 Blossom Avenue, Osterville, MA 02655
Principal of Clinton Management Associates, a financial and
venture capital consulting firm; formerly Director of External
Affairs of Kravco Corporation, a national real estate owner and
developer, 1984-1995; formerly President of Essex Management
Corporation, a management and financial consulting company,
1979-1983; Trustee of Capital Cash Management Trust since 1979
and of Prime Cash Fund (which is inactive), since 1993; Trustee
of Short Term Asset Reserves 1984-1996; general partner of
Capital Growth Fund, a venture capital partnership, 1979-1982;
President of Geneve Corp., a venture capital fund, 1970-1978;
formerly Chairman of Woodland Capital Corp., a small business
investment company; formerly Vice President, W.R. Grace & Co;
Director or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest
Global Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and
Trustee of Quest For Value Accumulation Trust, and of the
Rochester Group of Funds, each of which is an open-end investment
company.
David A. Duffy, Trustee, 36 Reliance Drive, Poppasquash Point,
Bristol, Rhode Island 02809
President, Duffy & Shanley, Inc., an advertising, marketing and
public relations firm since 1973; National Chairman of the
National Conference for Community and Justice (formerly the
National Conference of Christians and Jews); Vice Chairman of the
Providence College Board of Trustees and Chairman of the
College's President's Council; Past Chair and current member of
the Executive Committee of the Greater Providence Chamber of
Commerce; past Chair of the Rhode Island Sports Council; past
Chair of the Rhode Island Public Telecommunications Authority;
and many other civic and non-profit organizations. He has been
the recipient of numerous awards for public service. He served
with the U.S. Army.
William J. Nightingale, Trustee, 1266 East Main Street, Stamford
Connecticut 06902
Chairman and founder (1975) and Senior Advisor since 1995 of
Nightingale & Associates, L.L.C., 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
Kasper A.S.L. Ltd.; Ring's End, Inc; Furr's/Bishop's Inc.
J. William Weeks, Trustee, 380 Madison Avenue, New York, New York
10017
Trustee of Tax-Free Fund of Colorado since 1995; Senior Vice
President of Tax-Free Fund of Colorado 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, 1978-1988; limited partner and
investor in various real estate partnerships since 1988; Partner
of Alex. Brown & Sons, investment bankers, 1966-1976; Vice
President of Finance and Assistant to the President of Howard
Johnson Company, a restaurant and motor lodge chain, 1961-1966;
formerly with Blyth & Co., Inc., investment bankers.
Stephen J. Caridi, Vice President, 380 Madison Avenue, New York
10017
Vice President of the Distributor since 1995, Assistant Vice
President, 1988-1995, Marketing Associate, 1986-1988; Assistant
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, 380 Madison Avenue, New York,
New York 10017
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; and Capital Cash Management Trust since
1997; President and Chief Operating Officer of the Manager since
1997; Senior Vice President and Secretary, and formerly Vice
President, of the Manager 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;
Executive Vice President, Senior Vice President or Vice President
of the Aquila Bond Funds and Vice President of the Aquila 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 and Prime Cash Fund
1986-1996; 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, 380 Madison Avenue, New York,
New York 10017
Vice President of Capital Cash Management Trust and Pacific
Capital Cash Assets Trust since 1984; Senior Vice President of
Hawaiian Tax-Free Trust since 1985 and Vice President, 1984-1985;
Senior Vice President of Tax-Free Trust of Arizona since 1989 and
Vice President, 1986-1988; Vice President of Tax-Free Trust of
Oregon since 1986, of Churchill Tax-Free Fund of Kentucky and
Tax-Free Fund of Colorado since 1987, of Pacific Capital Tax-Free
Cash Assets Trust and Pacific Capital U.S. Government Securities
Cash Assets Trust since 1988; Secretary and Director of STCM
Management Company, Inc. since 1974; President of the Distributor
1995-1998 formerly Vice President of the Distributor, 1986-1992;
Member of the Panel of Arbitrators, American Arbitration
Association, since 1978; Assistant Vice President, American
Stock Exchange, Market Development Division, and Director of
Marketing, American Gold Coin Exchange, a subsidiary of the
American Stock Exchange, 1976-1984.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Manager since 1984 and of the
Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New
York 10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc.,
1986-1988; Vice President of Lehman Management Co., Inc. and
Assistant Treasurer of Lehman Money Market Funds, 1981-1985;
Controller of Seligman Group of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust,
1982-1985 and Trustee of that Trust, 1985-1986; Secretary of
Oxford Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Manager since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the Manager
and the Distributor since 1995; Secretary of the Distributor
since 1997; 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, 1998, the Fund paid $46,522 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 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 $4,710 $52,514 7
Paul Y. Clinton $6,916 $9,422 2
David A. Duffy $5,520 $5,520 1
William J.
Nightingale $3,954 $17,431 3
J. William Weeks $6,276 $15,175 2
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
Additional Information as to the Advisory Agreement
On November 14, 1997, the arrangements described below
were approved by the shareholders of the Fund and went into
effect. The new arrangements 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 new
arrangements do 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.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition, became investment adviser
under a new agreement (the "Advisory and Administration
Agreement") under which it also continues to provide the Fund
with all administrative services. Also, by adoption of a
Sub-Advisory Agreement between Aquila and Citizens Bank of Rhode
Island (the "Sub-Adviser"), the former investment advisory
agreement is replaced by one under which Aquila has appointed the
Sub-Adviser as Sub-Adviser to the Fund. Under the Sub-Advisory
Agreement, the Sub-Adviser continues to provide the Fund with
advisory services of the kind which it formerly provided as
adviser. The duties of the administrator, previously performed
under an administration agreement, are now performed by Aquila
under the Advisory and Administration Agreement where Aquila is
referred to as the "Manager." The former administration agreement
terminated upon effectiveness of the new agreements.
Additional Information as to the Investment Advisory and
Administration Agreement
The Advisory and Administration Agreement provides that it
will, unless terminated as thereinafter provided, continue in
effect until the December 31 next preceding the first anniversary
of the effective date of the Advisory and Administration
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 and
Administration 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.
Additional Information as to the Sub-Advisory Agreement
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform
to, and be in accordance with, any requirements imposed by: (1)
the 1940 Act and any rules or regulations in force thereunder;
(2) any other applicable laws, rules and regulations; (3) the
Declaration of Trust and By-Laws of the Fund as amended from time
to time; (4) any policies and determinations of the Board of
Trustees of the Fund; and (5) the fundamental policies of the
Fund, as reflected in its registration statement under the Act or
as amended by the shareholders of the Fund.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall give to the Manager, as defined therein, and to the Fund
the benefit of its best judgment and effort in rendering services
hereunder, but the Sub-Adviser shall not be liable for any loss
sustained by reason of the adoption of any investment policy or
the purchase, sale or retention of any security, whether or not
such purchase, sale or retention shall have been based upon (i)
its own investigation and research or (ii) investigation and
research made by any other individual, firm or corporation, if
such purchase, sale or retention shall have been made and such
other individual, firm or corporation shall have been selected in
good faith by the Sub-Adviser. Nothing therein contained shall,
however, be construed to protect the Sub-Adviser against any
liability to the Fund or its security holders by reason of
willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard
of its obligations and duties under the Agreement.
The Sub-Advisory Agreement provides that nothing in it shall
prevent the Sub-Adviser or any affiliated person (as defined in
the Act) of the Sub-Adviser from acting as investment adviser or
manager for any other person, firm or corporation and shall not
in any way limit or restrict the Sub-Adviser or any such
affiliated person from buying, selling or trading any securities
for its own or their own accounts or for the accounts of others
for whom it or they may be acting, provided, however, that the
Sub-Adviser expressly represents that, while acting as
Sub-Adviser, it will undertake no activities which, in its
judgment, will adversely affect the performance of its
obligations to the Fund under the Agreement. It is agreed that
the Sub-Adviser shall have no responsibility or liability for the
accuracy or completeness of the Fund's Registration Statement
under the Act and the Securities Act of 1933, except for
information supplied by the Sub-Adviser for inclusion therein.
The Sub-Adviser shall promptly inform the Fund as to any
information concerning the Sub-Adviser appropriate for inclusion
in such Registration Statement, or as to any transaction or
proposed transaction which might result in an assignment (as
defined in the Act) of the Agreement. To the extent that the
Manager is indemnified under the Fund's Declaration of Trust with
respect to the services provided hereunder 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.
During the fiscal years ended June 30, 1998, 1997 and 1996,
all of the Fund's transactions were principal transactions and no
brokerage commissions were paid.
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 it will, unless
terminated as thereinafter provided, continue in effect until the
June 30 next preceding the first anniversary of the effective
date of the Agreement, and from year to year thereafter, but only
so long as such continuance is specifically approved at least
annually (1) by a vote of the Fund's Board of Trustees, including
a vote of a majority of the Trustees who are not parties to the
Agreement or "interested persons" (as defined in the Act) of any
such party, with votes cast in person at a meeting called for the
purpose of voting on such approval, or (2) by a vote of the
holders of a "majority" (as so defined) of the outstanding voting
securities of the Fund and by such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be
terminated by the Sub-Adviser at any time without penalty upon
giving the Manager and the Fund sixty days' written notice (which
notice may be waived). It may be terminated by the Manager or the
Fund at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Fund shall be
directed or approved by a vote of a majority of its Trustees in
office at the time or by a vote of the holders of a majority (as
defined in the Act) of the voting securities of the Fund
outstanding and entitled to vote. The Sub-Advisory Agreement will
automatically terminate in the event of its assignment (as
defined in the Act) or the termination of the Investment Advisory
and Administration Agreement. The Sub-Adviser agrees that it will
not exercise its termination rights for at least three years from
the effective date of the Agreement, except for regulatory
reasons.
During the period July 1, 1997 through November 14, 1997
fees of $46,426 and $39,548 were accrued to the Manager and the
Sub-Adviser, respectively, under the administration agreement and
advisory agreement then in effect, of which $46,426 and $30,951,
respectively, were waived. From November 15, 1997 through June
30, 1998 fees of $160,215 were accrued to the Manager, of which
$16,024 was paid to the Sub-Adviser and the balance was waived.
In addition, during the fiscal year the Manager reimbursed the
Fund for other expenses 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 July, 1998.
During the Fund's fiscal year ended June 30, 1997, fees of
$92,236 and $108,154 were accrued to the Sub-Adviser and Manager
under the former advisory and administration agreements,
respectively, of which, $72,100 and $84,117, respectively, were
waived. In addition, the Manager 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. For the year ended June 30, 1996, fees of $84,631
and $99,350, respectively, were accrued to the Sub-Adviser under
the Fund's then advisory agreement and to the Manager under the
Fund's then administration agreement, of which $74,614 and
$94,003, respectively, were waived. In addition, the Manager
reimbursed the Fund $205,443 in expenses.
Glass-Steagall Act and Certain Other Banking Laws
Citizens Bank of Rhode Island ("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 Sub-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
Sub-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 the 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.
COMPUTATION OF NET ASSET VALUE
The net asset value of the shares of each of the Fund's
classes is determined as of 4:00 p.m., New York time, on each day
that the New York Stock Exchange is open, by dividing the value
of the Fund's net assets allocable to each class by the total
number of its shares of such class then outstanding. Securities
having a remaining maturity of less than sixty days when
purchased and securities originally purchased with maturities in
excess of sixty days but which currently have maturities of sixty
days or less are valued at cost adjusted for amortization of
premiums and accretion of discounts. All other portfolio
securities are valued at the mean between bid and asked
quotations which, for Rhode Island Obligations, may be obtained
from a reputable pricing service or from one or more
broker-dealers dealing in Rhode Island Obligations, either of
which may, in turn, obtain quotations from broker-dealers or
banks which deal in specific issues. However, since Rhode Island
Obligations are ordinarily purchased and sold on a "yield" basis
by banks or dealers which act for their own account and do not
ordinarily make continuous offerings, quotations obtained from
such sources may be subject to greater fluctuations than is
warranted by prevailing market conditions. Accordingly, some or
all of the Rhode Island Obligations in the Fund's portfolio may
be priced, with the approval of the Fund's Board of Trustees, by
differential comparisons to the market in other municipal bonds
under methods which include consideration of the current market
value of tax-free debt instruments having varying characteristics
of quality, yield and maturity. Any securities or assets for
which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures
established by and under the general supervision and
responsibility of the Fund's Board of Trustees. In the case of
Rhode Island Obligations, such procedures may include "matrix"
comparisons to the prices for other tax-free debt instruments on
the basis of the comparability of their quality, yield, maturity
and other special factors, if any, involved. With the approval of
the Fund's Board of Trustees, the Sub-Adviser may at its own
expense and without reimbursement from the Fund employ a pricing
service, bank or broker-dealer experienced in such matters to
perform any of the above described functions.
As indicated above, the net asset value per share of the
Fund's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the Exchange may close on days not
included in that announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a
number of instances in which the Fund's Class A Shares are sold
or issued on a basis other than the maximum public offering
price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges
for larger purchases, whether made at one time or over a period
of time as under a Letter of Intent or right of accumulation.
(See the table of sales charges in the Prospectus.) The reasons
for these quantity discounts are, in general, that (i) they are
traditional and have long been permitted in the industry and are
therefore necessary to meet competition as to sales of shares of
other funds having such discounts; and (ii) they are designed to
avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses.
Quantity discounts are made available to certain related persons
("single purchasers") for reasons of family unity and to provide
a benefit to tax-exempt plans and organizations.
The reasons for the other instances in which there are
reduced or eliminated sales charges for Class A Shares are as
follows. Exchanges at net asset value are permitted because a
sales charge has already been paid on the shares exchanged. Sales
without sales charge are permitted to Trustees, officers and
certain others due to reduced or eliminated selling expenses
and/or since such sales may encourage incentive, responsibility
and interest and an identification with the aims and policies of
the Fund. Limited reinvestments of redemptions of Class A Shares
and Class C Shares at no sales charge are permitted to attempt to
protect against mistaken or incompletely informed redemption
decisions. Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and
since, in some cases, such issuance is exempted in the 1940 Act
from the otherwise applicable restrictions as to what sales
charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or
issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A Shares or Class Y Shares
(Plan only available to shareholders with Class Y accounts on
October 31, 1997) of the Fund having a net asset value of at
least $5,000 you may establish an Automatic Withdrawal Plan under
which you will receive a monthly or quarterly check in a stated
amount, not less than $50. Stock certificates will not be issued
for shares held under an Automatic Withdrawal Plan. All dividends
and distributions must be reinvested. Shares will be redeemed on
the last business day of the month or quarter as may be necessary
to meet withdrawal payments.
Redemption of shares for withdrawal purposes may reduce or
even liquidate your account. The monthly or quarterly payments
paid to you may not be considered as a yield or income on
investment.
ADDITIONAL TAX INFORMATION
If you incur a sales commission on a purchase of shares of
one mutual fund (the original fund) and then sell such shares or
exchange them for shares of a different mutual fund without
having held them at least 91 days, you must reduce the tax basis
for the shares sold or exchanged to the extent that the standard
sales commission charged for acquiring shares in the exchange or
later acquiring shares of the original fund or another fund is
reduced because of the shareholder's having owned the original
fund shares. The effect of the rule is to increase your gain or
reduce your loss on the original fund shares. The amount of the
basis reduction on the original fund shares, however, is added on
the investor's basis for the fund shares acquired in the exchange
or later acquired. The provision applies to commissions charged
after October 3, 1989.
CONVERSION OF CLASS C SHARES
Level-Payment Class Shares ("Class C Shares") of the Fund,
which you hold will automatically convert to Front-Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the
sixth anniversary of your initial purchase of such Class C Shares
occurs. For these purposes, the date of your initial purchase
shall mean (1) the first business day of the month in which such
Class C Shares were issued to you, or (2) for Class C Shares of
the Fund you have obtained through an exchange or series of
exchanges under the Exchange Privilege (see "Exchange Privilege"
in the Prospectus), the first business day of the month in which
you made the original purchase of Class C Shares so exchanged.
For conversion purposes, Class C Shares purchased through
reinvestment of dividends or other distributions paid in respect
of Class C Shares will be held in a separate sub-account. Each
time any Class C Shares in your regular account (other than those
in the sub-account) convert to Class A Shares, a pro-rata
portion of the Class C Shares in the sub-account will also
convert to Class A Shares. The portion will be determined by the
ratio that your Class C Shares then converting to Class A Shares
bears to the total of your Class C Shares not acquired through
reinvestment of dividends and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the
dividends and other distributions paid on Class A Shares and
Class C Shares will not result in "preferential dividends" under
the Code; and (2) the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available,
the Class C Shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the
Class C Shares beyond six years from the date of purchase. The
Fund has no reason to believe that these conditions for the
availability of the conversion feature will not continue to be
met.
If the Fund implements any amendments to its Distribution
Plan that would increase materially the costs that may be borne
under such Distribution Plan by holders of Class A Shares
shareholders, Class C Shares will stop converting into Class A
Shares unless a majority of the holders of Class C Shares, voting
separately as a class, approve the proposal.
GENERAL INFORMATION
Possible Additional Series
If an additional Series were created by the Board of
Trustees, shares of each such Series would be entitled to vote as
a Series only to the extent permitted by the 1940 Act (see below)
or as permitted by the Board of Trustees. Income and operating
expenses would be allocated among the Fund and the additional
series in a manner acceptable to the Board of Trustees.
Under Rule 18f-2 under the 1940 Act, as to any investment
company which has two or more Series outstanding, on any matter
required to be submitted to shareholder vote, such matter is not
deemed to have been effectively acted upon unless approved by the
holders of a "majority" (as defined in that Rule) of the voting
securities of each series affected by the matter. Such separate
voting requirements do not apply to the election of trustees or
the ratification of the selection of accountants. Rule 18f-2
contains special provisions for cases in which an advisory
contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more
series whose holders so approve the change, even though the
required vote is not obtained as to the holders of other affected
series.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable
as partners for the obligations of the Fund. For shareholder
protection, however, an express disclaimer of shareholder
liability for acts or obligations of the Fund is contained in the
Declaration of Trust which requires that notice of such
disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Fund or the Trustees. The
Declaration of Trust provides for indemnification out of the
Fund's property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to the relatively remote circumstances in
which the Fund itself would be unable to meet its obligations. In
the event the Fund had two or more Series, and if any such Series
were to be unable to meet the obligations attributable to it
(which, as is the case with the Fund, is relatively remote), the
other Series would be subject to such obligations, with a
corresponding increase in the risk of the shareholder liability
mentioned in the prior sentence.
The Declaration of Trust further indemnifies the Trustees of
the Fund out of the Fund's property and provides that they will
not be liable for errors of judgment or mistakes of fact or law;
but nothing in the Declaration of Trust protects a Trustee
against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
Ownership of Securities
Of the shares of the Fund outstanding on October 5, 1998,
Merrill, Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 30561, New
Brunswick, NJ held of record 414,042 Class A Shares (8.0% of the
class) and 34,874 Class C Shares (12.0% of the class), Corelink
Financial, Inc., P.O. Box 4054, Concord, CA held of record
588,595 Class A Shares (11.3% of the class) and 113,590 Class C
Shares (42.8% of the class); National Financial Services, 220
Liberty Street, New York, NY held of record 588,595 Class A
Shares (11.4% of the class); Donaldson Lufkin Jenrette Securities
Corporation, P.O. Box 2052, Jersey City, NJ held of record
44,345 Class C Shares (16.7% of the class) and US Clearing
Corporation, 26 Broadway, New York, NY held of record 1589 Class
Y Shares (99.2% of the class). On the basis of information
received from the holder, the Fund's management believes that all
of such shares are held for the benefit of clients. Mark S.
Mandel, 1 Park Row, Providence, RI held of record 24,369 Class C
Shares (9.1% of the class).
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company, N.A., is
responsible for holding the Fund's assets.
The Fund's auditors, KPMG Peat Marwick LLP, will perform an
annual audit of the Fund's financial statements.
Underwriting Commissions
During the Fund's fiscal year ended June 30, 1998 the
aggregate dollar amount of sales charges on sales of shares of
the Fund was $333,676 and the amount retained by the Distributor
was $22,582.
Financial Statements
The financial statements for the Fund for the year ended
June 30, 1998, which are contained in the Annual Report for that
fiscal year, are hereby incorporated by reference into the
Additional Statement. Those financial statements have been
audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon is incorporated herein by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Municipal Bond Ratings
Standard & Poor's. A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment
may take into consideration obligors such as guarantors, insurers
or lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization
or other arrangement under the laws of bankruptcy and
other laws affecting creditors rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category
than in higher rated categories.
Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt
being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Standard & Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing
the designation SP-1 are deemed very strong or to have strong
capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a
plus (+) designation. Notes bearing the designation SP-2 are
deemed to have a satisfactory capacity to pay principal and
interest.
Moody's Investors Service. A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's
Investment Grade as MIG 1 through MIG 4. In the case of variable
rate demand obligations (VRDOs), two ratings are assigned; one
representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the other
representing an evaluation of the degree of risk associated with
the demand feature. The short-term rating assigned to the demand
feature of VRDOs is designated as VMIG. When no rating is applied
to the long or short-term aspect of a VRDO, it will be designated
NR. Issues or the features associated with MIG or VMIG ratings
are identified by date of issue, date of maturity or maturities
or rating expiration date and description to distinguish each
rating from other ratings. Each rating designation is unique with
no implication as to any other similar issue of the same obligor.
MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issuer's
specific structural or credit features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality.
Margins of protection are ample although not
so large as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access
for refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of
an investment security is present and
although not distinctly or predominantly
speculative, there is specific risk.
<PAGE>
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
Diana P. Herrmann, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
Aquila
Narragansett
[LOGO]
Insured Tax-Free Income Fund
STATEMENT OF
ADDITIONAL
INFORMATION
One of The
Aquilasm Group Of Funds
