AQUILA TAX-FREE TRUST OF OREGON
380 Madison Avenue, Suite 2300, New York, N.Y. 10017
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD
on October 31, 1997
TO SHAREHOLDERS OF THE TRUST:
The purpose of this Notice is to advise you that a Special
Meeting of the Shareholders of Aquila Tax-Free Trust of Oregon
(the "Trust"), the only series of The Cascades Trust, will be
held
Place: (a) at the offices of the Trust
380 Madison Avenue, Suite 2300
New York, NY 10017
Time: (b) on October 31, 1997, at 10:00 a.m. local time
Purposes: (c) for the following purposes:
(i) to consider a proposed interim investment
advisory agreement between the Trust and First Bank National
Association, effective August 1, 1997, and payment of advisory
fees thereunder, which will be superseded by the sub-advisory
agreement referred to in Proposal No. 3 if Proposals No. 2 and
No. 3 are approved by the shareholders (Proposal No. 1);
(ii) to consider a proposed new investment
advisory and administration agreement between the Trust and
Aquila Management Corporation, which currently serves as the
Trust's Administrator, under which it would become the Trust's
investment adviser by contracting with others at its expense, as
well as continuing to provide administrative services as
heretofore, and under which all advisory fees and administration
fees would be paid to it (Proposal No. 2);
If you do not expect to attend the Meeting, you are requested to
indicate voting instructions on the enclosed proxy and to date,
sign and return it in the accompanying stamped envelope. To avoid
unnecessary expense to the Trust, your cooperation is requested
in mailing in your proxy no matter how large or small your
holding may be.
(iii) to consider a proposed new sub-advisory
agreement between Aquila Management Corporation as Manager and
First Bank National Association as Sub-Adviser (Proposal No. 3);
(iv) to act upon any other matters which may
properly come before the Meeting at the scheduled time and place
or any adjourned meeting or meetings.
Who Can
Vote What
Shares: (d) To vote at the Meeting, you must have been a
shareholder on the Trust's records at the close of business on
August 5, 1997 (the "record date"). Also, the number of shares
of each of the Trust's three classes of shares that you held at
that time and the respective net asset values of each class of
shares at that time determines the number of votes you may cast
at the Meeting (or any adjourned meeting or meetings).
By Order of the Board of Trustees
EDWARD M. W. HINES
Secretary
August 26, 1997
(ii)
AQUILA
TAX-FREE TRUST OF OREGON
380 Madison Avenue, Suite 2300, New York, New York 10017
PROXY STATEMENT
This special meeting of the shareholders of Tax-Free Trust
of Oregon will consider three proposals of vital importance to
the Trust:
* Action upon a proposed interim investment advisory
agreement between the Trust and First Bank National Association,
effective August 1, 1997, and payment of advisory fees
thereunder, which will be superseded by the sub-advisory
agreement referred to in Proposal No. 3 if Proposals No. 2 and
No. 3 are approved by the shareholders (Proposal No. 1);
* Action upon a proposed new investment advisory and
administration agreement between the Trust and Aquila Management
Corporation, which currently serves as the Trust's Administrator,
under which it will become the Trust's investment adviser by
contracting with others at its expense, as well as continuing to
provide administrative services as heretofore, and under which
all advisory fees and administration fees would be paid to it
(Proposal No. 2);
* Action on a proposed new sub-advisory agreement between
Aquila Management Corporation and First Bank National Association
as Sub-Adviser; (Proposal No. 3)
The Board of Trustees believes that all of these proposals
are in the best interest of the Trust and its shareholders.
Please read the proxy statement and then indicate your vote on
the enclosed proxy card as soon as possible.
INTRODUCTION
The purpose of the Notice (the first two pages of this
document) is to advise you of the time, place and purposes of a
Special Meeting of the Shareholders of Aquila Tax-Free Trust of
Oregon (the "Trust"). The purpose of this Proxy Statement (all
the rest of this document) is to give you information on which
you may base your decisions as to the choices, if any, you make
on the enclosed proxy card.
This Notice and Proxy Statement are first being mailed on or
about August 27, 1997.
A copy of the Trust's most recent annual report and most
recent semi-annual report will be sent to you without charge upon
written request to the Trust's Distributor, Aquila Distributors,
Inc., 380 Madison Avenue, Suite 2300, New York, NY 10017 or by
calling 800-872-6734 toll-free or 212-697-6666.
The Trust's organizer and administrator is Aquila Management
Corporation 380 Madison Avenue, Suite 2300, New York, NY 10017.
The Trust's investment adviser is First Bank National Association
("First Bank"), 601 Second Avenue, Minneapolis, MN 55402.
The enclosed proxy card authorizes the persons named (or
their substitutes) to vote your shares; the Trust calls these
persons the "proxy holders." As to the matters listed on the
proxy card, you may direct the proxy holders to vote your shares
on those proposals by checking the appropriate box "For" or
"Against" or instruct them not to vote your shares on a proposal
by checking the "Abstain" box. If you return your signed proxy
card and do not check any box on a proposal, the proxy holders
will vote your shares for that proposal.
You may end the power of the proxy holders to vote your
shares after you have signed and returned your proxy card and
before the power is used by (i) so notifying the Trust in
writing; (ii) signing a new and different proxy card (if the
Trust receives it before the old one is used); or (iii) voting
your shares in person or by your duly appointed agent at the
meeting. Shares held by brokers in "street name" and not voted or
marked as abstentions will not be counted for purposes of
determining a quorum or the vote on any matter.
The Trust is sending you this Notice and Proxy Statement in
connection with the solicitation by its Trustees of proxy cards
("proxies") to be used at a Special Meeting to be held at the
time and place and for the purposes indicated in the Notice or
any adjourned meeting or meetings. First Bank will pay the costs
of the solicitation. Proxies are being solicited by the use of
the mails; they may also be solicited by telephone, facsimile and
personal interviews. Brokerage firms, banks and others may be
requested to forward this Notice and Proxy Statement to
beneficial owners of the Trust's shares so that these owners may
authorize the voting of their shares. First Bank will pay these
firms for their out-of-pocket expenses for doing so.
The Trust has three classes of shares outstanding.
Shareholders of the Trust of all three classes are entitled to
vote at the meeting. Each shareholder on the record date is
entitled to one (1) vote for each dollar (and a proportionate
fractional vote for each fraction of a dollar) of net asset value
(determined as of the record date) represented by full and
fractional shares of any class held on the record date. On the
record date the net asset value of the Trust's Class A Shares and
Class C Shares was $10.70 per share and the net asset value of
the Trust's Class Y Shares was $10.69 per share.
On the record date the total number of shares of the
Trust of all classes outstanding and entitled to vote was
29,673,310. Of the shares of the Trust outstanding on the record
date, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box 30561,
New Brunswick, NJ, held of record 2,207,946 Class A Shares (7.5%
of the class) and 49,544 Class C Shares (67% of the class) and
BHC Securities Inc., 2005 Market Street, Philadelphia, PA held of
record 2,620,708 Class A Shares (8.9% of the class). U.S.
National Bank of Oregon held 182,728 Class Y Shares (53.7% of the
class) and its nominee, Unit & Co. held of record 156,592 Class Y
Shares (46.0% of the class. On the basis of information received
from the holders, the Trust's management believes that all of the
shares indicated are held for the benefit of clients. Trust's
management is not aware of any other person beneficially owning
more than 5% of its outstanding shares as of such date. The
Trustees and officers as a group own less than 1% of the
outstanding shares of the Trust.
ACTION UPON INTERIM INVESTMENT ADVISORY AGREEMENT, INCLUDING
RATIFICATION OF PAYMENT OF ADVISORY FEES TO FIRST BANK NATIONAL
ASSOCIATION FROM AUGUST 1, 1997 (THE DATE OF THE MERGER BETWEEN
U.S. BANCORP AND FIRST BANK SYSTEM, INC.), WHICH WILL BE
SUPERSEDED BY THE SUB-ADVISORY AGREEMENT REFERRED TO IN PROPOSAL
NO. 3 IF PROPOSALS NO. 2 AND NO. 3 ARE APPROVED BY THE
SHAREHOLDERS
(PROPOSAL NO. 1)
BACKGROUND AND REASONS FOR PROPOSAL NO. 1
Information about the Merger
From the inception of the Trust in 1986 until the date of
the merger described below, Qualivest Capital Management, Inc.
("Qualivest") supervised the investment program of the Trust and
the composition of its portfolio. It was a subsidiary of United
States National Bank of Oregon, which was itself a subsidiary of
U.S. Bancorp.
On March 20, 1997, U.S. Bancorp, the parent company of
Qualivest, announced that it had agreed to be merged into First
Bank System, Inc., ("FBS"). In this proxy statement this
transaction is called the "Merger." The Merger took place on
August 1, 1997. That date is called the "Effective Date." Since
the Merger, the combined organization has used the name U.S.
Bancorp and has been headquartered in Minneapolis, Minnesota.
One effect of the Merger is that the operations of
Qualivest, including providing investment advisory services to
the Trust, have been combined with those of First Bank National
Association ("First Bank"), a subsidiary of FBS, through a
division called First Asset Management. Because the Merger
resulted in an assignment of the Trust's advisory agreement with
Qualivest, that agreement terminated by its own terms upon the
Effective Date. The Trustees have approved and the shareholders
are being asked to approve a new advisory agreement (the "Interim
Agreement") between the Trust and First Bank which has the same
terms and fee structure as the Trust's former agreement with
Qualivest, except that First Bank is the adviser and the
commencement and termination provisions of the two agreements
differ. The terms of the Interim Agreement are described below.
By exemptive order dated July 29, 1997, the Securities and
Exchange Commission has determined that the fees described above
may be paid to the First Bank for 120 days after the Effective
Date prior to approval of the Interim Agreement by the
shareholders of the Trust, provided that all such payments be
held in escrow during that period. The Trust and First Bank have
entered into an escrow agreement with Banc One Trust Company,
N.A. as escrow agent for this purpose. Banc One Trust Company,
N.A. is the Trust's custodian.
The Board of Trustees has determined that First Bank is a
highly suitable organization to provide continuing investment
advisory services to the Trust because it offers a combination of
local Oregon-based portfolio management, corporate commitment,
depth of resources and experience. The Board considered the
following matters in reaching its determination.
First Bank has been managing investment assets for many
years and is experienced in managing the assets of its clients.
The Board noted that First Bank has served as investment adviser
for the First American Investment Funds, Inc., since 1987, for
First American Funds, Inc. since 1982 and for First American
Strategy Funds, Inc. since 1996. As of December 31, 1996, these
funds had assets of over $12 billion. As of that date, First Bank
was managing accounts with an aggregate value of over $35
billion, including these mutual funds.
The Board also noted that the management of the Trust and
the Board of Trustees have secured from First Bank several
undertakings that are of key importance for the Trust. First,
First Bank recognizes the value to the Trust and its shareholders
of local Oregon portfolio management and has accordingly agreed
to maintain management of the Trust's portfolio in Oregon and
expects to use the Trust's current portfolio management for that
purpose. Second, First Bank has agreed to serve at the current
fee structure for three years, thus protecting the Trust from fee
increases during that period.
The Board also noted that First Bank has represented that it
will take all appropriate actions to ensure that the scope and
quality of advisory and other services provided to the Trust
under the Interim Agreement will be at least equivalent, in the
judgement of the Board of Trustees, including a majority of the
Independent Trustees (defined below), to the scope and quality of
the services provided under the former advisory agreement.
The Board also noted that in addition to its local portfolio
management in Oregon, First Bank has a staff of security analysts
who assist the portfolio manager in evaluating securities from a
credit and valuation standpoint.
First Bank is currently investment adviser for the following
mutual funds, which have similar investment objectives as the
Trust in that they invest in tax-free municipal bonds:
Assets as of
9/30/1996
Name of Fund (000,000 omitted) Advisory fee rate
Intermediate Tax
Free Fund $66.9 0.70 of 1% (1)
Minnesota Insured
Intermediate
Tax Free Fund $93.3 0.70 of 1% (1)
Colorado
Intermediate
Tax Free Fund $48.9 0.70 of 1% (1)
<FN>
(1) These fees (together with the fund's administrator's fees) are
currently being waived. Actual current advisory fees are net of waivers,
and are being charged at 0.48, 0.47 and 0.47 of 1%, respectively for each
of these funds.
</FN>
The names, principal occupations and addresses of the
principal executive officer and every director of First Bank are
as follows:
Name Positions and Offices with First Bank
John F. Grundhofer Chairman, President, and Chief
Executive Officer
Richard A. Zona Director and Vice Chairman - Finance
Philip G. Heasley Director and Vice Chairman
Philip C. Rohr Director and Executive Vice President
J. Robert Hoffmann Director, Executive Vice President,
and Chief Credit Officer
Lee R. Mitau Director, Executive Vice President,
General Counsel and Secretary
Susan R. Lester Director, Executive Vice President, and
Chief Financial Officer
The Addresses of each of the foregoing persons is First Bank
Place, 601 Second Avenue South, Minneapolis, Minnesota 55402.
Reasons for the Interim Agreement
For the reasons described below, it is proposed that the
current management structure of the Trust be replaced by a new
structure so that the affairs of the Trust, instead of being
managed by an adviser and separate administrator, will be managed
by an adviser and sub-adviser to whom the adviser will delegate
advisory responsibilities. (See "Background and Reasons for
Proposals No. 2 and No. 3.") Such a change requires the approval
of the shareholders of the Trust and it was not practical to
obtain such approval before the Effective Date. Accordingly The
Interim Agreement, if it is approved by the Trust's shareholders,
will remain in effect until the new arrangements are approved by
the Trust's shareholders, or, if they are not so approved, the
Interim Agreement will remain in effect indefinitely, subject to
the requirement that it be renewed at least annually, as
described below.
For these reasons, at an in-person meeting called and held
for the purpose on June 6, 1997, the Board of Trustees, including
a majority of the Trustees who are not parties to the Interim
Agreement or "interested persons," as defined in the Investment
Company Act of 1940 (the "1940 Act"), of any such party (the
"Independent Trustees"), voted to approve the Interim Agreement.
Information About Prior Advisory Agreements
Qualivest served under an investment advisory agreement with
the Trust (the "Former Advisory Agreement") which was most
recently approved by the shareholders of the Trust on May 1,
1995. From its inception in 1986, the Trust has had investment
advisory agreements with Qualivest. The original agreement was
approved by the Board of Trustees, including a majority of the
Independent Trustees, and by Aquila Management Corporation as the
initial sole shareholder of the Trust. It was approved by the
Trust's public shareholders on April 13, 1987, for the period
ending April 30, 1988. It was successively renewed in accordance
with the 1940 Act, until it was superseded by a new restated and
amended advisory agreement, which was approved by the
shareholders on April 23, 1990. That agreement had substantially
the same terms and was to be in effect for the period ended April
30, 1991. The agreement was successively renewed in accordance
with the 1940 Act, until it was superseded by a new restated and
amended advisory agreement, which was approved by the
shareholders on May 4, 1992. That agreement was superseded by
another advisory agreement, which was approved by the
shareholders of the Trust on May 2, 1994, and which had
substantially the same terms except for certain fee reductions.
The most recent such agreement had substantially the same
provisions except for certain fee reductions in connection with
payments under the Trust's distribution plan.
Description of the Interim Agreement
The Interim Agreement has the same provisions as the Trust's
former agreement with Qualivest, except for the name of the
adviser and except for its commencement and termination
provisions. In the following description, First Bank is referred
to as "the Adviser."
The Adviser supervises the investment program of the Trust
and the composition of its portfolio. The services of the Adviser
are rendered under the Interim Agreement which provides, subject
to the control of the Board of Trustees, for investment,
supervisory and certain administrative services.
Under the Interim Agreement, the Adviser pays all
compensation of those of the Trust's officers and employees and
of those Trustees, if any, who are affiliated with the Adviser.
Additionally, the Adviser agrees that it will furnish the Trust,
at the Adviser's expense, all office space and facilities,
equipment and clerical personnel necessary for carrying out its
duties under the Interim Agreement and the keeping of the
accounting records of the Trust, including the computation of the
net asset value per share and the dividends. Under the Interim
Agreement, the Trust bears the cost of the preparation and
setting in type of its prospectuses, statements of additional
information and reports to shareholders and the costs of printing
and distributing those copies of such prospectuses, statements of
additional information and reports as are sent to shareholders.
The Interim Agreement lists examples of other expenses to be
borne by the Trust; the major categories of such expenses relate
to legal and audit expenses, custodian and transfer agency
expenses, stock issuance and redemption costs, expenses incident
to the issuance of Trust shares (including issuance on the
payment of, or reinvestment of dividends), certain printing
costs, fees and expenses incident to the registration costs of
the Trust and its shares under Federal and State securities laws,
interest, taxes and non-recurring expenses, including litigation.
Under the Interim Agreement, the Trust agrees to pay the
Adviser, and the Adviser agrees to accept as full compensation
for all services rendered by the Adviser as such, an annual fee
payable monthly and computed on the net asset value of the Trust
as of the close of business each business day at the annual rate
of 0.25 of 1% of such net asset value provided, however, that for
any day that the Trust pays or accrues a fee under the
Distribution Plan of the Trust based upon the assets of the
Trust, the annual fee shall be payable at the annual rate of 0.20
of 1% of such assets. The Interim Agreement provides that the
fees earned by the Adviser and paid by the Trust hereunder shall
be maintained with an unaffiliated financial institution in an
interest-bearing escrow account, to be paid to the Adviser only
upon approval of the Interim Agreement by the shareholders of the
Trust or, in the absence of approval by such shareholders, to the
Trust.
Under the Interim Agreement, the Adviser agrees that the
above fee shall be reduced, but not below zero, by an amount
equal to one half of the amount, if any, by which the total
expenses of the Trust in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5%
of the first $30 million of average annual net assets of the
Trust plus 2% of the next $70 million of such assets and 1.5% of
its average annual net assets in excess of $100 million, or (ii)
25% of the Trust's total annual investment income. The payment of
the above fee at the end of any month will be reduced or
postponed so that at no time will there be any accrued but unpaid
liability under this expense limitation, subject to readjustment
during the year.
The Interim Agreement went into effect on the Effective Date
and, unless terminated as discussed below or superseded by the
arrangements described in Proposals No. 2 and No. 3), will
continue until the June 30 next preceding the first anniversary
of its effective date and from year to year thereafter, but only
so long as such continuance is specifically approved in
accordance with the 1940 Act; under the 1940 Act such continuance
must be approved annually by the vote of the Board of Trustees,
including a majority of the Trust's Independent Trustees cast in
person at a meeting called for the purpose of such approval, or
by the vote of a majority of the Trust's Independent Trustees and
the vote of the holders of a majority (as defined in the 1940
Act) of the Trust's shares. The Interim Agreement may not be
amended except by such a vote of the Trustees and shareholders.
If it is not approved by the shareholders, the Interim Agreement
will terminate 120 days after the Effective Date.
The Interim Agreement may be terminated by the Adviser at
any time without penalty upon giving the Trust sixty days'
written notice, and may be terminated by the Trust at any time
without penalty upon giving the Adviser sixty days' written
notice, provided that such termination by the Trust shall be
directed or approved by the vote of a majority of all its
Trustees in office at the time or by the vote of the holders of a
majority (as defined in the 1940 Act) of its voting securities at
the time outstanding and entitled to vote; it automatically
terminates in the event of its assignment (as so defined). The
Adviser has agreed that it will not exercise its termination
rights for three years after the Interim Agreement becomes
effective, except for regulatory reasons.
The Interim Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Adviser is not
liable for any loss sustained by the adoption of any investment
policy or the purchase, sale or retention of any security and
permits the Adviser to act as investment adviser for any other
person, firm or corporation. The Trust agrees to indemnify the
Adviser to the full extent permitted under the Trust's
Declaration of Trust.
The Interim Agreement states that it is agreed that the
Adviser shall have no responsibility or liability for the
accuracy or completeness of the Trust's Registration Statement
under the Securities Act of 1933 and the 1940 Act, except for the
information supplied by the Adviser for inclusion therein.
The Interim Agreement also has a provision relating to
portfolio transactions. It provides that in connection with its
duties to arrange for the purchase and sale of portfolio
securities, the Adviser shall select such broker-dealers
("dealers") as shall, in the Adviser's judgment, implement the
policy to achieve "best execution," i.e., prompt, efficient, and
reliable execution of orders at the most favorable net price. The
Adviser shall cause the Trust to deal directly with the selling
or purchasing principal or market maker without incurring
brokerage commissions unless the Adviser determines that better
price or execution may be obtained by paying such commissions;
the Trust expects that most transactions will be principal
transactions at net prices and that the Trust will incur little
or no brokerage costs. The Trust 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 Adviser is
authorized to consider, in determining whether a particular
dealer will provide best execution, the dealer's reliability,
integrity, financial condition, and risk in positioning the
securities involved, as well as the difficulty of the transaction
in question, and thus need not pay the lowest spread or
commission available if the Adviser determines in good faith that
such amount of commission is reasonable in relation to the value
of the brokerage and research services provided by the dealer,
viewed either in terms of the particular transaction or the
Adviser's overall responsibilities as to the accounts as to which
it exercises investment discretion. If, on the foregoing basis,
the transaction in question could be allocated to two or more
dealers, the Adviser is authorized, in making such allocation, to
consider (i) whether a dealer has provided research services, as
further discussed below; and (ii) whether a dealer has sold
shares of the Trust or any other investment company or companies
having the Adviser as its investment adviser or having the same
administrator as the Trust. 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 Trust recognizes that no dollar
value can be placed on such research services or on execution
services, that such research services may or may not be useful to
the Trust and/or other accounts of the Adviser and that research
received by such other accounts may or may not be useful to the
Trust.
During the Trust's fiscal year ended September 30, 1996, all
of its transactions were principal transactions and no brokerage
commissions were paid.
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INTERIM
AGREEMENT DESCRIBED ABOVE BE APPROVED. See "BACKGROUND AND
REASONS FOR PROPOSAL NO. 1" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Trust, is
required for the approval of this Proposal No. 1. Under the 1940
Act, the vote of the holders of a majority of the outstanding
shares of the Trust means the vote of the holders of the lesser
of (a) 67% or more of the shares of the Trust present at the
Meeting or represented by proxy if the holders of more than 50%
of the such shares are so present or represented, or (b) more
than 50% of the outstanding shares of the Trust, with one (1)
vote for each dollar ( and a proportionate fractional vote for
each fraction of a dollar) of net asset value (determined as of
the record date) represented by full and fractional shares of all
of the Trust's three classes of shares.
BACKGROUND AND REASONS FOR
PROPOSALS NO. 2 AND NO. 3
Proposals No. 2 and No. 3 are designed to change the form of
the Trust's investment advisory and administration arrangements
to a new structure involving an adviser and a sub-adviser. The
proposed arrangements will not result in any change in overall
management fees paid by the Trust, nor any change in the parties
providing these services. Marketing efforts and positioning of
the Trust will remain the same with a strong local niche
orientation.
The Board of Trustees believes that the new structure would,
among other things, contribute to the stability, continuity and
quality of local portfolio management, and would improve the
ability of the Trust to obtain various services on beneficial
terms.
Under the proposals, Aquila Management Corporation
("Aquila"), which currently serves as the Trust's administrator,
would in addition become investment adviser under a new agreement
(the "Advisory and Administration Agreement") under which it
would also continue to provide the Trust with all administrative
services (Proposal No. 2). Also, under a proposed agreement (the
"Sub-Advisory Agreement") between Aquila and First Bank, the
Interim Agreement would be replaced by one under which Aquila
would appoint First Bank as Sub-Adviser to the Trust (Proposal
No. 3). Under the Sub-Advisory Agreement, First Bank would
continue to provide the Trust with advisory services of the kind
which it (and previously Qualivest) have provided to the Trust.
The duties of the administrator, now performed under an
administration agreement, would be performed by Aquila under the
Advisory and Administration Agreement where it would be referred
to as the "Manager." The current administration agreement will no
longer be needed and will terminate upon approval of the proposed
agreements.
The Board of Trustees believes that it is in the best
interest of the shareholders to provide Aquila with additional
authority to supervise the investment advisory function, with the
power to retain an investment sub-adviser (subject to the
approval of the Board of Trustees and the shareholders) and to
terminate a sub-adviser (subject to the approval of the Board of
Trustees) if it were to deem doing so to be in the best interests
of the Trust and its shareholders. The Board of Trustees
considers that this authority will improve Aquila's ability to
obtain for the Trust benefits of stability, continuity and
quality of portfolio management.
In addition, Aquila has advised the Board of Trustees that
it plans to propose a similar reorganization to other funds in
the Aquilasm Group of Funds. If, as planned those proposals are
adopted, the following additional reasons support the proposed
reorganization, although there can be no assurance that they will
be realized:
There would be heightened public recognition of the
Aquilasm Group and its funds, and better public
relations possibilities.
The new arrangements would benefit the entire group
because they would tend to increase the negotiating
power of Aquila in dealing with service providers to
the funds in various ways.
The arrangements potentially increase the
standardization of procedures, e.g. compliance, among the
advisers.
The Board of Trustees noted that Aquila is the founder and
organizer of the Trust and has continuously served as its
administrator since 1986. Since 1985, Aquila has formed and
sponsored seven state-specific tax-free municipal bond funds,
which have grown to a total of $1.9 billion in combined assets.
These funds and their years of inception are Hawaiian Tax-Free
Trust (1985), the Trust (1986), Tax-Free Trust of Arizona (1986),
Tax-Free Fund of Colorado (1987), Churchill Tax-Free Fund of
Kentucky (1987), Tax-Free Fund For Utah (1992) and Narragansett
Insured Tax-Free Income Fund (1992). Aquila has also sponsored
five money market funds and two regional capital appreciation
equity funds. As of June 30, 1997, the Aquilasm Group of Funds
had combined assets of approximately $2.8 billion.
By founding the Trust and other state-specific tax-free
municipal bond funds, Aquila has been able to offer to individual
investors in various states a locally-managed, quality-oriented
portfolio of municipal obligations, providing income that is
exempt from state as well as federal income taxes.
Aquila advised the Board of Trustees that a critical
component of high-quality service to investors in its funds is a
close familiarity with the local economy and market conditions
that can only be provided by experienced local portfolio
management. Aquila found that investment advisers that were a
part of, or associated with, major local financial institutions
had the experience and resources to provide this management. The
Aquila bond funds are unusual compared with other such funds in
emphasizing local portfolio management, which has been a major
factor in their acceptance by investors.
Recent years have seen a consolidation in the financial
services industry that has resulted in many prominent local banks
becoming parts of larger national institutions. The Merger
described in Proposal No. 1 is an example. Similar transactions
have affected the local advisers of other Aquila bond funds. In
every instance, Aquila has been able to secure commitments to
continuous local management, but in some instances it became
necessary for Aquila to seek out other organizations to provide
the continuity and quality of service that investors expect. The
Board of Trustees believes that by providing Aquila with explicit
authority to supervise the investment advisory function, the
Board would better enable Aquila to ensure continuity and quality
of local portfolio management.
Another anticipated advantage of the proposed arrangements
is that, to the extent extended, as planned, to other Aquila bond
funds, Aquila expects to improve its ability to negotiate
beneficial terms with service providers, such as transfer agents
and pricing services, substantially uniform agreements that would
provide services to all of the bond funds. Because of the
combined size of the bond funds, Aquila expects that its
collective bargaining position would be enhanced and that costs
for these services may be lower than would be obtained if these
arrangements were negotiated on a piecemeal basis. There can be
no assurance that this will occur.
The Board of Trustees believes that making Aquila manager
has definite organizational benefits, including a better
structure for handling any possible future changes. The costs of
the change in structure will be borne by Aquila and not the
Trust.
In approving of the proposed new arrangements, the Board of
Trustees stipulated that the Sub-Advisory Agreement could provide
for its termination by the Adviser upon reasonable notice,
provided, however, that the Adviser should not terminate the Sub-
Advisory Agreement (and any attempt by the Adviser to terminate
such agreement would be null and void) unless, prior to giving
notice to the Sub-Adviser of such termination, either (i) the
Advisory Agreement had been reapproved by the Board of Trustees
of the Trust, in the manner described in Section 15 of the Act,
in contemplation of the Adviser's managing the investment
portfolio of the Trust without the assistance of a Sub-Adviser;
(ii) a new Sub-Advisory Agreement, to take effect upon the
termination of the existing Sub-Advisory Agreement, had been
approved by the Board of Trustees and the shareholders of the
Trust as contemplated by Section 15 of the Act; (iii) the Board
had authorized such termination; or (iii) the Adviser had
complied with such other or additional directives and
authorizations of the Board with respect to such termination as
may from time to time be in effect.
Other Changes
Under the Interim Agreement and the advisory agreements that
preceded it, the adviser was responsible for either keeping the
accounting records of the Trust, including the computation of net
asset value per share and dividends or, at its expense and
responsibility, delegating such duties in whole or in part to a
company satisfactory to the Trust. Under the new arrangements
these functions will be provided by Aquila. The Board of Trustees
has determined that the annual rate of compensation for the Sub-
Adviser should accordingly be reduced by 0.02 of 1% from the
previous advisory fee and the annual rate of compensation of
Aquila should be increased by the same amount.
The Interim Agreement and the advisory agreements that
preceded it and the Administration Agreement provide that fees
payable thereunder shall not exceed certain amounts or
percentages of the Trust's net assets or income. These
provisions, which were required by certain State securities laws,
have no effect on the Trust, due to its size. The state
securities laws were preempted by Federal legislation in 1996 and
the provisions in the Management Agreement and the Sub-Advisory
Agreement are accordingly no longer required and are being
eliminated.
Other Information About Aquila
Aquila, founded in 1984, is controlled by Mr. Lacy B.
Herrmann (directly, through a trust and through share ownership
by his wife). Aquila's shares are owned as follows:
Elizabeth B. Herrmann 35%
Lacy B. Herrmann 25%
Elizabeth B. Herrmann
1993 Annuity Trust 40%
The names, addresses and principal occupations of the
principal executive officer and each director of Aquila are as
follows:
Name Position with Aquila
Lacy B. Herrmann Chairman, Chief Executive Officer
and Director
Diana P. Herrmann President, Chief Operating Officer
and Director
Elizabeth B. Herrmann Director.
The address of all of these individuals is 380 Madison
Avenue, Suite 2300, New York, NY 10017.
Aquila Distributors, Inc. (the "Distributor") currently
handles the distribution of the shares of fourteen funds (seven
tax-free municipal bond funds, five money market funds and two
equity funds), including the Trust. Under the Distribution
Agreement, the Distributor is responsible for the payment of
certain printing and distribution costs relating to prospectuses
and reports as well as the costs of supplemental sales
literature, advertising and other promotional activities.
At the date of this proxy statement, there is a proposed
transaction whereby all of the shares of the Distributor, which
are currently owned 75% by Mr. Herrmann and 25% by Diana P.
Herrmann, will be owned by certain directors and/or officers of
the Administrator and/or the Distributor, including Mr. Herrmann
and Ms. Herrmann.
Fee Arrangements
There will be no increase in overall management fees paid by
the Trust as a result of the new arrangements. Under the Advisory
and Administration Agreement, the Trust will pay to Aquila a fee
payable monthly and computed on the net asset value of the Trust
as of the close of business each business day at the annual rate
of 0.50 of 1% of such net asset value, provided, however, that
for any day that the Trust pays or accrues a fee under the
Distribution Plan of the Trust based upon the assets of the Trust
(other than a fee allocable by class to certain shares of the
Trust), the annual management fee shall be payable at the annual
rate of 0.40 of 1% of such net asset value. Under the Sub-
Advisory Agreement, Aquila will pay a fee to the Sub-Adviser
payable monthly and computed on the net asset value of the Trust
as of the close of business each business day at the annual rate
of 0.23 of 1% of such net asset value, provided, however, that
for any day that the Trust pays or accrues a fee under the
Distribution Plan of the Trust based upon the assets of the Trust
(other than a fee allocable by class to certain shares of the
Trust), the annual sub-advisory fee shall be payable at the
annual rate of 0.18 of 1% of such net asset value.
Payments under the Trust's Distribution Plan began in 1994.
In the opinion of the Trust's management, there is no foreseeable
possibility that the current payments under the Distribution Plan
will be eliminated.
Annual Fee Rates
(Fee rates are annual rates as a percentage of the Fund's average
daily net assets.)
Under arrangements
Type of payment Under arrangements if Proposals 2 and
made by the Trust currently in effect 3 are adopted
Advisory fee 0.20 of 1% 0.40 of 1%
(Sub-Advisory fee
paid by the Adviser) 0 (0.18 of 1%)
Administration fee 0.20 of 1% 0
Total Payments
by the Trust 0.40 of 1% 0.40 of 1%
The following table shows the advisory and administration
fees the Fund paid during its last fiscal year, the fees it would
have paid if the proposed arrangements had been in effect during
that fiscal year and the percentage change.
Type of payment Amount Amount that would Difference between
by the Trust actually paid have been paid the old and new
if the new arrangements as a
arrangements percentage of the
had been in effect old arrangements
Advisory fee $615,409 $1,230,818 200%
(Sub-Advisory
fee Paid by
the Adviser) 0 $553,869 N/A
Administration
fee $615,409 0 0%
Total payments $1,230,818 $1,230,818 0%
Proposals No. 2 and No. 3 are designed to operate together.
Neither separately will have the intended results. Neither
proposal will be implemented unless both are approved by
shareholders. Accordingly, the proposed new Investment Advisory
and Administration Agreement and the proposed Sub-Advisory
Agreement will go into effect upon approval by shareholders of
both Proposals No. 2 and 3. If these proposals are not both
approved, the current arrangements will remain in effect. The
Board of Trustees will consider what further action is
appropriate, which could include calling another shareholders
meeting.
The Trustees also noted that in addition to the foregoing
matters, Aquila has more than twelve years of experience in
forming and administering tax-exempt municipal bond funds,
including identifying and securing the services of competent
local investment advisers. The Trustees also noted that First
Bank has the experience and qualifications described in the
material relating to Proposal No. 1 and that Aquila had secured
the agreement of First Bank to serve as the Trust's Sub-Adviser
on the terms described in Proposal No. 3.
For the reasons set forth above, at an in-person meeting
called and held for the purpose on June 6, 1997, the Board of
Trustees, including a majority of the Trustees who are not
parties to the Advisory and Administration Agreement or the Sub-
Advisory Agreement or "interested persons" (as defined in the
1940 Act) of any such party (the "Independent Trustees"), voted
to approve the Advisory Agreement and Sub-Advisory Agreement.
ACTION ON A NEW INVESTMENT ADVISORY AGREEMENT WHICH
WILL PROVIDE THAT ALL ADVISORY FEES AND ADMINISTRATION FEES WILL
BE PAID TO AQUILA MANAGEMENT CORPORATION ALTHOUGH COMBINED
ADVISORY AND ADMINISTRATION FEES WILL REMAIN AT THE CURRENT
LEVEL
(PROPOSAL NO. 2)
The new Investment Advisory and Administration Agreement
(the "Advisory Agreement") has several parts, most of which are
substantially identical to corresponding provisions in the
Trust's former advisory agreements and administration agreement.
The Advisory Agreement contains provisions relating to investment
advice for the Trust and management of its portfolio that are
substantially identical to prior advisory agreements, except that
the Adviser has the power to delegate its advisory functions to a
Sub-Adviser, which it will employ at its own expense. The
Advisory Agreement contains provisions relating to administrative
services that are substantially identical to those contained in
the Trust's current and prior administration agreements. In the
following description, Aquila is referred to as the "Manager."
Description of the Investment advisory and Administration
Agreement
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Trust, the
Manager shall:
(i) supervise continuously the investment program of the
Trust and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Trust;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Trust; and
(iv) at its expense provide for pricing of the Trust's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Trust and, unless
otherwise directed by the Board of Trustees, provide for pricing
of the Trust's portfolio at least quarterly using another such
source satisfactory to the Trust.
The Advisory Agreement provides that, subject to the
termination provisions described below, the Manager may at its
own expense delegate to a qualified organization ("Sub-Adviser"),
affiliated or not affiliated with the Manager, any or all of the
above duties. Any such delegation of the duties set forth in (i),
(ii) or (iii) above shall be by a written agreement (the "Sub-
Advisory Agreement") approved as provided in Section 15 of the
Investment Company Act of 1940. The Manager will delegate all of
such functions to First Bank under the proposed Sub-Advisory
Agreement. See "Background and Reasons for Proposals No. 2 and
No. 3."
The Advisory Agreement provides that subject to the
direction and control of the Board of Trustees of the Trust, the
Manager shall provide all administrative services to the Trust
other than those relating to its investment portfolio which have
been delegated to a Sub-Adviser of the Trust under a Sub-Advisory
Agreement; as part of such administrative duties, the Manager
shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Trust;
(ii) oversee all relationships between the Trust 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 Trust and for the sale, servicing or
redemption of the Trust's shares;
(iii) either keep the accounting records of the Trust,
including the computation of net asset value per share and the
dividends (provided that if there is a Sub-Adviser, daily pricing
of the Trust'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 Trust;
(iv) maintain the Trust's books and records, and prepare (or
assist counsel and auditors in the preparation of) all required
proxy statements, reports to the Trust'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 Trust;
(v) prepare, on behalf of the Trust and at the Trust's
expense, such applications and reports as may be necessary to
register or maintain the registration of the Trust 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 Trust and broker-dealers, or if any such
inquiry or communication is more properly to be responded to by
the Trust's shareholder servicing and transfer agent or
distributor, oversee such shareholder servicing and transfer
agent's or distributor's response thereto.
The Advisory Agreement contains provisions relating to
compliance of the investment program, responsibility of the
Manager for any investment program managed by it, allocation of
brokerage, and responsibility for errors that are substantially
the same as the corresponding provisions in the Sub-Advisory
Agreement. See Proposal No. 3.
The Advisory Agreement provides that the Manager shall, at
its own expense, provide office space, facilities, equipment, and
personnel for the performance of its functions hereunder and
shall pay all compensation of Trustees, officers, and employees
of the Trust who are affiliated persons of the Manager.
The Trust shall bear the costs of preparing and setting in
type its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under this sub-section or
otherwise by the Manager, administrator or principal underwriter
or by any Sub-Adviser shall be paid by the Trust, including, but
not limited to (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and
expenses of its Trustees other than those affiliated with the
Manager or such adviser, administrator or principal underwriter;
(v) legal and audit expenses; (vi) custodian and transfer agent,
or shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Trust or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Trust; (x) all other expenses
incidental to holding meetings of the Trust's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations for
which the Trust may have to indemnify its officers and Trustees.
The Advisory Agreement provides that the Trust agrees to pay
the Manager, and the Manager agrees to accept as full
compensation for all services rendered by the Manager as such, an
annual fee payable monthly and computed on the net asset value of
the Trust as of the close of business each business day at the
annual rate of 0.50 of 1% of such net asset value provided,
however, that for any day that the Trust pays or accrues a fee
under the Distribution Plan of the Trust based upon the assets of
the Trust, the annual fee shall be payable at the annual rate of
0.40 of 1% of such net asset value. As noted above, payments
under the Trust's Distribution Plan began in 1994 and in the
opinion of the Trust's management, there is no foreseeable
possibility that they will be eliminated.
The Advisory Agreement provides that the Sub-Advisory
Agreement may provide for its termination by the Manager upon
reasonable notice, provided, however, that the Manager agrees not
to terminate the Sub-Advisory Agreement except in accordance with
such authorization and direction of the Board of Trustees, if
any, as may be in effect from time to time.
The Advisory Agreement provides that it will become
effective on the date of its approval by the shareholders of the
Trust and will, unless terminated as hereinafter provided,
continue in effect until the June 30 next preceding the first
anniversary of the effective date of the Advisory Agreement, and
from year to year thereafter, but only so long as such
continuance is specifically approved at least annually (1) by a
vote of the Trust's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Advisory
Agreement or "interested persons" (as defined in the 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 Trust and by such a vote of the Trustees.
The Advisory Agreement provides that it may be terminated by
the Manager at any time without penalty upon giving the Trust
sixty days' written notice (which notice may be waived by the
Trust) and may be terminated by the Trust 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 Trust 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 Trust outstanding and entitled to vote.
The specific portions of the Advisory Agreement which relate to
providing investment advisory services will automatically
terminate in the event of the assignment (as defined in the Act)
of the Advisory Agreement, but all other provisions relating to
providing services other than investment advisory services will
not terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Trust 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
provided, however, that for any day that the Trust pays or
accrues a fee under the Distribution Plan of the Trust based upon
the assets of the Trust, the annual fee shall be payable at the
annual rate of 0.22 of 1% of such net asset value. The Manager
agrees that it will not exercise its termination rights for at
least three years from the effective date of the Advisory
Agreement, except for regulatory reasons.
Action Requested
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED INVESTMENT
ADVISORY AND ADMINISTRATION AGREEMENT DESCRIBED ABOVE BE
APPROVED. See "Background and Reasons for Proposals No. 2 and No.
3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Trust is
required for the approval of this Proposal No. 2. See Proposal
No. 1 for a description of such a majority.
ACTION UPON A PROPOSED NEW SUB-ADVISORY AGREEMENT
BETWEEN AQUILA MANAGEMENT CORPORATION AS MANAGER AND FIRST BANK
NATIONAL ASSOCIATION AS SUB-ADVISER
(PROPOSAL NO. 3)
The proposed Sub-Advisory Agreement (the "Sub-Advisory
Agreement") has substantially the same terms as the Interim
Agreement, except that the Sub-Advisory Agreement is with the
Manager and not with the Trust and the compensation of the Sub-
Advisor is paid by the Manager and not by the Trust.
The Sub-Advisory Agreement provides that the Manager
appoints the Sub-Adviser to render, to the Manager and to the
Trust, investment research and advisory services as set forth
below under the supervision of the Manager and subject to the
approval and direction of the Board of Trustees of the Trust.
The Sub-Advisory Agreement provides that the Sub-Adviser will act
as managerial investment adviser to the Trust with respect to the
investment of the Trust's assets, and will supervise and arrange
the purchase of securities for and the sale of securities held in
the portfolio of the Trust.
The Sub-Advisory Agreement provides in general that subject
to the direction and control of the Manager and the Board of
Trustees of the Trust, the Sub-Adviser shall:
(i) supervise continuously the investment program of the
Trust and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Trust;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Trust;
(iv) at its expense provide for pricing of the Trust's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Trust and, unless
otherwise directed by the Board of Trustees, provide for pricing
of the Trust's portfolio at least quarterly using another such
source satisfactory to the Trust; and
(v) consult with the Manager in connection with its duties
hereunder.
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform
to, and be in accordance with, any requirements imposed by: (1)
the Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Trust and By-Laws
of the Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Trust; and (5) the
fundamental policies of the Trust, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Trust.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall give to the Manager and to the Trust 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 Trust 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
Trust under the Agreement. It is agreed that the Sub-Adviser
shall have no responsibility or liability for the accuracy or
completeness of the Trust'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 Trust 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 Trust'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 Trust'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 Trust 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 Trust 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 Trust expects
that most transactions will be principal transactions at net
prices and that the Trust will incur little or no brokerage
costs. The Trust 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 Trust. 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 Trust 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 Trust and may be used for the benefit of the
Sub-Adviser or its other clients.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Trust as are required by applicable law and regulation,
and agrees that all records which it maintains for the Trust on
behalf of the Manager shall be the property of the Trust and
shall be surrendered promptly to the Trust or the Manager upon
request. The Sub-Adviser agrees to furnish to the Manager and to
the Board of Trustees of the Trust 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 Trust, 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 Trust 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 Trust. The Sub-Adviser will also pay all
compensation of the Trust's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
The Sub-Advisory Agreement provides that the Manager agrees
to pay the Sub-Adviser, and the Sub-Adviser agrees to accept as
full compensation for all services rendered by the Sub-Adviser as
such, a management fee payable monthly and computed on the net
asset value of the Trust as of the close of business each
business day at the annual rates of 0.23 of 1% of such net asset
value, provided, however, that for any day that the Trust pays or
accrues a fee under the Distribution Plan of the Trust based upon
the assets of the Trust, the annual fee shall be payable at the
annual rate of 0.18 of 1% of such net asset value. As noted
above, payments under the Trust's Distribution Plan began in 1994
and in the opinion of the Trust's management, there is no
foreseeable possibility that they will be eliminated.
The Sub-Advisory Agreement provides that it will become
effective on the day it is approved by the shareholders of the
Trust (the "Effective Date") and shall, 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 Trust'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 Trust 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 Trust sixty days' written notice
(which notice may be waived). It may be terminated by the Manager
or the Trust 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 Trust
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
Trust 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 Agreement. The Sub-Adviser agrees that it
will not exercise its termination rights for at least three years
from the effective date of the Agreement, except for regulatory
reasons.
The Sub-Advisory Agreement provides that for its duration
the Sub-Adviser will not cause or permit any Converted Fund, as
thereafter defined, to offer or sell its shares directly to
retail customers, but shall restrict such offers or sales to
institutions acting for investors in a fiduciary, advisory,
agency, custodial or similar capacity. A Converted Fund is an
investment company registered under the Investment Company Act of
1940 which (i) is provided with portfolio management by the Sub-
Adviser or any affiliate thereof; (ii) has acquired, otherwise
than by portfolio purchases in the normal course of business,
assets previously held in a common trust fund managed by the Sub-
Adviser or its predecessors in interest, including Qualivest
Capital Management, Inc. or any affiliate thereof; and (iii)
invests in municipal securities issued by the State of Oregon or
its political subdivisions.
The Sub-Advisory Agreement further provides that, under the
supervision of the Manager, the Sub-Adviser shall, at its
expense, provide portfolio management particularly qualified to
manage investments in which the Trust primarily invests, and such
portfolio managment shall be located in the state of issuers of
such investments.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE PROPOSED SUB-ADVISORY
AGREEMENT DESCRIBED ABOVE BE APPROVED. See "Background and
Reasons for Proposals No. 2 and No. 3" for the reasons.
Vote Required
The favorable vote of the holders of a majority (as defined
in the 1940 Act) of the outstanding shares of the Trust, is
required for the approval of this Proposal No. 3. See Proposal
No. 1 for a description of such a majority.
OTHER BUSINESS
The Trust does not know of any other matter which will come
up for action at the Meeting. If any other matter or matters
properly come up for action at the Meeting, including any
adjournment of the Meeting, the proxy holders will vote the
shares which the proxy cards entitle them to vote in accordance
with their judgment on such matter or matters. That is, by
signing and returning your proxy card, you give the proxy holders
discretionary authority as to any such matter or matters.
AQUILA
TAX-FREE TRUST OF OREGON
PROXY FOR SHAREHOLDERS MEETING OCTOBER 31, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned shareholder of TAX-FREE TRUST OF OREGON (the
"Trust") does hereby appoint LACY B. HERRMANN, DIANA P. HERRMANN
and EDWARD M. W. HINES, or either of them, as attorneys and
proxies of the undersigned, with full power of substitution, to
attend a Special Meeting of Shareholders of the Trust to be held
on October 31, 1997, at the offices of the Trust, 380 Madison
Avenue, Suite 2300, New York, NY 10017, at 10:00 a.m., local
time, and at all adjournments thereof, and thereat to vote the
shares held in the name of the undersigned on the record date for
said meeting on the matters listed below. Such shares are
entitled to one vote for every dollar of net asset value
represented by the share balance printed on the other side of
this card.
Please mark your proxy, date and sign it below and return it
promptly in the accompanying envelope which requires no postage
if mailed in the United States.
Management recommends a vote FOR the proposals listed below.
The shares represented hereby will be voted as indicated below or
FOR if no choice is indicated.
As to any other matter said attorneys shall vote in
accordance with their best judgment.
Please indicate your vote by an "X" in the appropriate box
below.
Action on proposed Interim Investment
Advisory Agreement with
First Bank National Association
__ __ __
(Proposal No. 1) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Investment
Advisory and Administration Agreement with
Aquila Management Corporation
__ __ __
(Proposal No. 2) FOR [__] AGAINST [__] ABSTAIN [__]
Action on proposed Sub-Advisory
Agreement with
First Bank National Association
__ __ __
(Proposal No. 3) FOR [__] AGAINST [__] ABSTAIN [__]
Dated: ____________ ______, 1997
Month Day
__________________________________
SIGNATURE(S)
__________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing
as a custodian, attorney, executor, administrator, trustee,
guardian, etc., please sign your full title as such. Joint
owners should each sign.