UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-06707
Narragansett Insured Tax-Free Income Fund
(Exact name of Registrant as specified in charter)
380 Madison Avenue
New York, New York 10017
(Address of principal executive offices) (Zip code)
Joseph P. DiMaggio
380 Madison Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 697-6666
Date of fiscal year end: 6/30
Date of reporting period: 06/30/08
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL
REPORT
JUNE 30, 2008
A TAX-FREE INCOME INVESTMENT
[LOGO OF NARRANGANSETT INSURED TAX-FREE INCOME FUND:
RECTANGLE WITH PROFILE VIEW OF A SAILBOAT ON TOP OF
WAVES AND THREE SEAGULLS FLYING ABOVE IT]
[LOGO OF THE AQUILA
GROUP OF FUNDS: ONE OF THE
AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS (R)
[LOGO OF NARRANGANSETT INSURED TAX-FREE INCOME FUND:
RECTANGLE WITH PROFILE VIEW OF A SAILBOAT ON TOP OF
WAVES AND THREE SEAGULLS FLYING ABOVE IT]
SERVING RHODE ISLAND INVESTORS FOR MORE THAN 15 YEARS
NARRAGANSETT INSURED TAX-FREE INCOME FUND
"A MORE PREDICTABLE RIDE"
August, 2008
Dear Fellow Shareholder:
If you've read any of our previous shareholder communications, you know
that we try to skip the financial jargon and speak in terms with which we
believe the average person can relate and understand.
The recent movements in the stock market got us to thinking about how risk
tolerance mirrors choosing rides at an amusement park.
In our younger days, we always enjoyed the thrill of roller coasters. If
you're like us, you can vividly remember holding your breath with anticipation
as you climbed and climbed to the top, never knowing just when you would finally
get there. Then, just as you began to relax, the roller coaster would begin its
decline. The ride to the bottom seemed like it would never end as you laughed,
screamed, and implored the heavens to let you make it through alive.
Much of what has transpired in the stock market over the last year or so
has reminded us of our younger roller coaster riding days. Of course, the ride
to the "top" of the market is always exhilarating. But, as we've matured, we've
come to realize that roller coasters have lost some of their allure.
We no longer find adrenaline-pumping adventures so attractive. While you
can be brought to dizzying heights, some dramatic lows are also inevitable. For
those of us who don't have the stomach for this type of volatility, especially
with our investment money, a more stable alternative may be the ticket.
We like to think of investing in a tax-free municipal bond fund, such as
Narragansett Insured Tax-Free Income Fund, as more like riding the swings at a
county fair. There is definitely some up and down movement, but you usually
don't go quite that far. In general, you know what to expect next and the ride
is fairly pleasant. Of course, we believe that there is a place in everyone's
life for roller coasters. But, as one matures, it might be prudent to have the
more stable predictable swings begin to play a larger role. After all, what good
are highs if they are often followed by lows?
NOT A PART OF THE ANNUAL REPORT
Of course, we believe that there is a place in everyone's life for roller
coasters. But, as one matures, it might be prudent to have the more stable
predictable swings begin to play a larger role. After all, what good are highs
if they are often followed by lows?
Sincerely,
[PHOTO OMITTED]
/s/ Lacy B. Herrmann /s/ Diana P. Herrmann
Lacy B. Herrmann Diana P. Herrmann
Founder and Chairman Emeritus President
NOT A PART OF THE ANNUAL REPORT
[LOGO OF NARRANGANSETT INSURED TAX-FREE INCOME FUND:
RECTANGLE WITH PROFILE VIEW OF A SAILBOAT ON TOP OF
WAVES AND THREE SEAGULLS FLYING ABOVE IT]
SERVING RHODE ISLAND INVESTORS FOR MORE THAN 15 YEARS
NARRAGANSETT INSURED TAX-FREE INCOME FUND
ANNUAL REPORT
MANAGEMENT DISCUSSION
Narragansett Insured Tax-Free Income Fund (the "Fund") seeks to provide
the highest level of double tax-free income possible while staying within the
self-imposed quality restraints. As an extra measure of credit protection to
shareholders, all securities owned by the Fund are insured to provide for the
timely payment of principal and interest when due. A maximum average maturity
profile of less than 12 years has been and, we expect, will continue to be
maintained for the Fund's portfolio in order to produce a reasonable level of
income return with relative stability for the Fund's share price. At the June
30, 2008 fiscal year end, the portfolio had an average maturity of 8.1 years.
Equity markets have performed poorly for the first half of 2008 as all
major U.S. equity markets are feeling the fallout from the housing market and
overburdened consumer. As of June 30, 2008 the S&P 500, Dow Jones Industrials,
and NASDAQ indices were down approximately 12%, 13%, and 13%, respectively.
International stock markets have not fared much better than U.S. markets as
Europe, China, and Japan have shown corrections equal to or worse than the U.S.
The latest economic data shows that the economy is on the brink of recession as
the housing market slump continues to filter through the economy. The latest
jobs data shows that unemployment has risen to 5.5% and job growth continues to
stagnate over the past year. Increasing inflation is a concern to all, but
consumers are feeling it most in higher gasoline and food prices. However,
should the U.S. economy fall into a recession, it is believed that the resultant
decrease in demand would keep inflation in check.
We don't think the second half of the year will be much better as the
financial markets are still in a state of flux. With the Presidential election
only a few short months away, one can only hope that the markets will stabilize
and we will see a post-election rally as has historically been the case.
Even though the Federal Reserve (the "Fed") has brought the Federal Funds
target rate down to 2.00%, the Fed has made it a point that inflation is a major
concern and that monetary policy is ready to move toward a less accommodating
stance. The markets have moved in sympathy with the yield curve, steepening in
anticipation of higher inflation. If you leave out food and energy, consumer
inflation numbers look reasonable. Producer prices look ominous but that has yet
to translate into sharply higher consumer prices. While the Fed appears to be
jawboning the policy tightening theme, U.S. Treasuries are beginning to digest
the latest market data that predicts a more protracted economic downturn.
Further competition from foreign markets has also had an impact on U.S.
Treasury yields. Recent rate hikes by the European Central Bank and others have
begun to bring world rates more in line with the U.S. This has started some
reallocation of bond purchases to other markets outside of
MANAGEMENT DISCUSSION (CONTINUED)
the U.S. This means that there is now more competition for capital, and Treasury
rates should adjust when fixed income investors make their allocations.
The U.S. Supreme Court's decision earlier this year in favor of the
Commonwealth of Kentucky (see footnote 10a of this annual report) has solidified
the importance and need of single-state municipal bond funds, particularly in
those states that have high income taxes. The preferential treatment given to
residents by exempting income earned on in-state municipal bonds keeps the
current tax advantage intact.
Performance for the Class A Shares of the Fund for the full year ending
June 30, 2008 was 4.00%. This was considerably below the over 10% return of U.S.
Treasury securities which were favored due to a flight to quality. For the same
time period, returns for the Dow, S&P 500, and NASDAQ were all negative at
13.3%, 13.1%, and 11.2% respectively. The Fund's returns fared better in the
first half of the fiscal year as the Federal Reserve changed its policy stance
to become more accommodative in the wake of the faltering housing market.
During the first quarter of 2008, the municipal bond market experienced
market volatility that had not been seen in decades. With the auction-rate
securities market becoming illiquid and investors unable to have immediate
access to funds, the U.S. Treasury and Federal Reserve provided much needed
liquidity to the banks and brokerage houses to provide an orderly liquidation of
this market. Additionally, concerns surrounding the municipal bond insurers and
subsequent credit downgrades added concern to an already fragile market. As
credit downgrades continue, newer and more well capitalized insurers have taken
advantage to provide additional credit assurance to municipal issuers. We fully
expect there to be consolidation and rationalization within this industry to
ensure proper allocation of resources. As has always been the case, we believe
it is most important to look at the underlying rating(s) when buying bonds for
the portfolio. Insurance is a secondary factor that can provide additional
liquidity and safety to ensure timely payment of interest and the ultimate
payment of principal. Your locally-based portfolio managers, have never relied
solely on insurance and they know the city, town, or project that they are
buying. This should be of additional comfort to you, our shareholder,
particularly during these uncertain times.
Given the current Federal and Rhode Island income tax rates, we believe
Narragansett Insured Tax-Free Income Fund presently produces an attractive yield
for Rhode Island residents when compared to taxable fixed-income securities.
Management believes that having available to the Fund a locally-based
investment manager, with extensive knowledge and experience in the Rhode Island
municipal market continues to add considerable value to the portfolio and
provides a distinct benefit to Fund shareholders.
The Fund's investment Sub-Adviser intends to continue to oversee the
portfolio with a strong emphasis on achieving a balance between share price
stability, acceptable double tax-free income return, and the highest standards
of credit quality.
PERFORMANCE REPORT
The following graph illustrates the value of $10,000 invested in the Class
A shares of Narragansett Insured Tax-Free Income Fund for the 10-year period
ended June 30, 2008 as compared with the Lehman Brothers Quality Intermediate
Municipal Bond Index and the Consumer Price Index (a cost of living index). The
performance of each of the other classes is not shown in the graph but is
included in the table below. It should be noted that the Lehman Index does not
include any operating expenses nor sales charges and being nationally oriented,
does not reflect state specific bond market performance.
[Graphic of a line chart with the following information:]
NITFIF NITFIF Lehman Brothers
Cost of Fund Class A Shares Fund Class A Shares Quality Intermediate
Living Index no sales charge with sales charge Municipal Bond Index
6/98 10,000 10,000 9,600 10,000
6/99 10,196 10,136 9,727 10,303
6/00 10,577 10,396 9,976 10,718
6/01 10,920 11,409 10,949 11,665
6/02 11,037 12,088 11,601 12,477
6/03 11,270 13,192 12,660 13,452
6/04 11,638 13,057 12,531 13,499
6/05 11,933 14,001 13,436 14,226
6/06 12,448 13,900 13,340 14,274
6/07 12,782 14,470 13,886 14,871
6/08 13,424 15,085 14,477 15,675
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED JUNE 30, 2008
---------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A (commenced operations on 9/10/92)
With Sales Charge ......................................... (0.14)% 1.97% 3.77% 4.90%
Without Sales Charge ...................................... 4.00 2.81 4.20 5.17
Class C (commenced operations on 5/01/96)
With CDSC ................................................. 2.09 1.94 3.30 3.86
Without CDSC .............................................. 3.12 1.94 3.30 3.86
Class Y (commenced operations on 5/01/96)
No Sales Charge ........................................... 4.16 2.96 4.34 5.01
Class I (commenced operations on 11/04/98)
No Sales Charge ........................................... 3.84 2.74 n/a 4.04
Lehman Index ................................................ 5.40 3.11 4.60 5.18* (Class A)
4.12** (Class C&Y)
4.41+ (Class I)
Total return figures shown for the Fund reflect any change in price and assume
all distributions within the period were invested in additional shares. Returns
for Class A shares are calculated with and without the effect of the initial 4%
maximum sales charge. Returns for Class C shares are calculated with and without
the effect of the 1% contingent deferred sales charge (CDSC), imposed on
redemptions made within the first 12 months after purchase. Class Y and Class I
shares are sold without any sales charge. The rates of return will vary and the
principal value of an investment will fluctuate with market conditions. Shares,
if redeemed, may be worth more or less than their original cost. A portion of
each class's income may be subject to Federal and state income taxes. Past
performance is not predictive of future investment results.
* From commencement of operations on 9/10/92.
** From commencement of operations on 5/01/96.
+ From commencement of operations on 11/04/98.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Narragansett Insured Tax-Free Income Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Narragansett Insured Tax-Free Income
Fund as of June 30, 2008, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the three years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for each of the years in the two year
period ended June 30, 2005 have been audited by other auditors, whose report
dated August 12, 2005 expressed an unqualified opinion on such financial
highlights.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
the Fund's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of June 30, 2008, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Narragansett Insured Tax-Free Income Fund as of June 30, 2008, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the three years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
August 27, 2008
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NARRAGANSETT INSURED TAX-FREE INCOME FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2008
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT GENERAL OBLIGATION BONDS (45.4%) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
Coventry, Rhode Island
Coventry, Rhode Island
$ 550,000 5.000%, 11/01/16 AMBAC Insured ....................... Aa3/NR/NR $ 580,223
550,000 5.000%, 11/01/17 AMBAC Insured ....................... Aa3/NR/NR 579,513
Cranston, Rhode Island
500,000 5.450%, 11/15/11 FGIC Insured (pre-refunded) ......... Baa1/A/BBB+ 523,545
1,000,000 4.250%, 04/01/18 MBIA Insured ........................ A2/AA/BBB+ 990,500
1,000,000 4.250%, 04/01/19 MBIA Insured ........................ A2/AA/BBB+ 982,170
1,000,000 4.300%, 04/01/20 MBIA Insured ........................ A2/AA/BBB+ 976,500
1,000,000 4.500%, 04/01/23 MBIA Insured ........................ A2/AA/BBB+ 995,670
2,455,000 4.625%, 07/01/25 FSA Insured* ........................ Aaa/AAA/NR 2,471,620
1,500,000 4.500%, 04/01/26 MBIA Insured ........................ A2/AA/BBB+ 1,439,625
Cumberland, Rhode Island
250,000 4.000%, 02/01/14 FGIC Insured ........................ A3/A/BBB 253,443
250,000 4.000%, 02/01/15 FGIC Insured ........................ A3/A/BBB 252,810
500,000 5.000%, 08/01/15 MBIA Insured ........................ A2/AA/NR 511,235
250,000 4.000%, 02/01/16 FGIC Insured ........................ A3/A/BBB 252,183
250,000 4.100%, 02/01/17 FGIC Insured ........................ A3/A/BBB 253,012
1,000,000 4.250%, 08/01/17 FSA Insured ......................... Aaa/AAA/AAA 1,024,980
250,000 4.150%, 02/01/18 FGIC Insured ........................ A3/A/BBB 253,322
600,000 4.250%, 08/01/18 FSA Insured ......................... Aaa/AAA/AAA 611,328
1,255,000 5.000%, 10/01/18 MBIA Insured ........................ A2/AA/NR 1,286,224
1,040,000 5.200%, 10/01/21 MBIA Insured ........................ A2/AA/NR 1,068,631
Lincoln, Rhode Island
1,000,000 4.500%, 08/01/24 MBIA Insured ........................ Aa3/NR/AA- 1,010,770
1,275,000 4.500%, 08/01/25 MBIA Insured ........................ Aa3/NR/AA- 1,275,816
2,000,000 4.500%, 08/01/26 MBIA Insured ........................ Aa3/NR/AA- 1,990,140
New Shoreham, Rhode Island
245,000 4.000%, 11/15/15 AMBAC Insured ....................... Aa3/AA/NR 247,634
255,000 4.250%, 11/15/16 AMBAC Insured ....................... Aa3/AA/NR 259,669
270,000 4.250%, 11/15/17 AMBAC Insured ....................... Aa3/AA/NR 274,728
910,000 4.800%, 04/15/18 AMBAC Insured ....................... Aa3/AA/NR 940,767
285,000 4.500%, 11/15/18 AMBAC Insured ....................... Aa3/AA/NR 292,601
1,105,000 5.000%, 04/15/22 AMBAC Insured ....................... Aa3/AA/NR 1,141,808
Newport, Rhode Island
1,000,000 4.500%, 11/01/15 AMBAC Insured ....................... Aa3/NR/NR 1,030,780
1,000,000 4.750%, 11/01/18 AMBAC Insured ....................... Aa3/NR/NR 1,028,710
800,000 5.000%, 11/01/20 AMBAC Insured ....................... Aa3/NR/NR 826,352
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
North Kingstown, Rhode Island
$ 500,000 3.750%, 10/01/12 FGIC Insured ........................ Aa3/AA-/BBB $ 504,475
North Providence, Rhode Island
500,000 4.700%, 09/15/14 FSA Insured ......................... Aaa/AAA/AAA 516,765
500,000 3.650%, 10/15/14 FSA Insured ......................... Aaa/AAA/NR 504,050
500,000 3.750%, 10/15/15 FSA Insured ......................... Aaa/AAA/NR 503,080
Pawtucket, Rhode Island
600,000 4.300%, 09/15/09 AMBAC Insured ....................... Aa3/NR/BBB+ 611,952
250,000 4.400%, 09/15/10 AMBAC Insured ....................... Aa3/NR/BBB+ 257,928
910,000 4.000%, 04/15/14 AMBAC Insured ....................... Aa3/NR/BBB+ 916,952
Providence, Rhode Island
700,000 5.500%, 01/15/11 FSA Insured ......................... Aaa/AAA/AAA 704,683
1,000,000 5.000%, 01/15/16 FGIC Insured (pre-refunded) ......... A3/A/A 1,054,190
1,000,000 5.000%, 01/15/17 FGIC Insured (pre-refunded) ......... A3/A/A 1,054,190
1,000,000 5.000%, 01/15/18 FGIC Insured (pre-refunded) ......... A3/A/A 1,054,190
Rhode Island Consolidated Capital
Development Loan
1,000,000 5.125%, 07/15/11 1998 Series A FGIC Insured
(pre-refunded)* .................................. Aa3/AA/AA 1,011,040
1,500,000 5.000%, 09/01/15 1998 Series A FGIC Insured
(pre-refunded) ................................... Aa3/AA/AA 1,522,215
1,000,000 5.000%, 09/01/14 Series A FGIC Insured
(pre-refunded) ................................... Aa3/AA/AA 1,014,810
1,500,000 4.750%, 09/01/17 Series A FGIC Insured
(pre-refunded) ................................... Aa3/AA/AA 1,521,630
South Kingstown, Rhode Island
500,000 5.500%, 06/15/12 FGIC Insured (pre-refunded) ......... Aa2/NR/BBB 530,860
State of Rhode Island
4,000,000 5.000%, 08/01/14 Series A FGIC Insured ............... Aa3/AA/AA 4,169,960
2,000,000 5.000%, 08/01/12 Series B MBIA Insured ............... Aa3/AA/AA 2,120,840
1,000,000 5.000%, 06/01/14 Series B FGIC Insured ............... Aa3/AA/AA 1,040,300
2,000,000 5.000%, 08/01/15 Series B FGIC Insured ............... Aa3/AA/AA 2,076,100
1,000,000 5.250%, 11/01/11 Series C MBIA Insured ............... Aa3/AA/AA 1,062,880
2,500,000 5.000%, 09/01/18 Series C MBIA Insured ............... Aa3/AA/AA 2,603,800
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
State of Rhode Island (continued)
$ 2,000,000 5.000%, 09/01/19 Series C MBIA Insured ............... Aa3/AA/AA $ 2,078,620
1,500,000 5.000%, 09/01/20 Series C MBIA Insured ............... Aa3/AA/AA 1,553,520
2,000,000 4.500%, 02/01/17 MBIA Insured ........................ Aa3/AA/AA 2,039,460
2,000,000 5.250%, 11/01/17 FGIC Insured (pre-refunded) ......... Aa3/AA/AA 2,151,820
Warwick, Rhode Island
825,000 4.000%, 08/01/16 FSA Insured Series 2008 ............. Aaa/AAA/NR 836,360
1,015,000 4.000%, 08/01/17 FSA Insured Series 2008 ............. Aaa/AAA/NR 1,021,131
665,000 4.250%, 07/15/14 AMBAC Insured ....................... Aa3/AA/NR 676,584
700,000 4.375%, 07/15/15 AMBAC Insured ....................... Aa3/AA/NR 712,551
770,000 4.600%, 07/15/17 AMBAC Insured ....................... Aa3/AA/NR 783,883
905,000 4.250%, 01/15/18 XLCA Insured ........................ A1/AA-/NR 893,126
810,000 4.700%, 07/15/18 AMBAC Insured ....................... Aa3/AA/NR 824,872
1,000,000 5.000%, 01/15/19 FGIC Insured ........................ A1/AA-/BBB 1,028,990
855,000 4.750%, 07/15/19 AMBAC Insured ....................... Aa3/AA/NR 868,783
500,000 5.000%, 01/15/20 FGIC Insured ........................ A1/AA-/BBB 513,890
West Warwick, Rhode Island
500,000 4.875%, 03/01/16 AMBAC Insured ....................... Aa3/NR/BBB 514,910
670,000 5.000%, 03/01/17 AMBAC Insured ....................... Aa3/NR/BBB 692,345
700,000 5.050%, 03/01/18 AMBAC Insured ....................... Aa3/NR/BBB 724,038
735,000 5.100%, 03/01/19 AMBAC Insured ....................... Aa3/NR/BBB 759,461
Westerly, Rhode Island
900,000 4.000%, 07/01/17 MBIA Insured ........................ Aa3/AA/NR 900,000
900,000 4.000%, 07/01/18 MBIA Insured ........................ Aa3/AA/NR 891,225
Woonsocket, Rhode Island
655,000 4.450%, 12/15/12 FGIC Insured ........................ Baa1/NR/A 663,325
685,000 4.550%, 12/15/13 FGIC Insured ........................ Baa1/NR/A 693,857
--------------
Total General Obligation Bonds ................... 73,805,950
--------------
REVENUE BONDS (55.1%)
DEVELOPMENT REVENUE BONDS (9.8%)
Providence, Rhode Island Redevelopment Agency
Revenue Refunding Public Safety Building Project
1,925,000 5.200%, 04/01/11 Series A 1999 AMBAC Insured
(pre-refunded) ** ................................ Aa3/NR/NR 2,023,733
Rhode Island Convention Center Authority
Revenue Refunding
925,000 5.000%, 05/15/10 Series 1993 B MBIA Insured .......... A2/AA/NR 955,756
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT REVENUE BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
DEVELOPMENT REVENUE BONDS (CONTINUED)
Rhode Island Public Building Authority State
Public Projects
$ 1,000,000 5.250%, 02/01/09 Series 1998 A AMBAC Insured ** ...... Aa3/AA/AA $ 1,012,270
Rhode Island State Economic Development Corp.,
Airport Revenue
1,000,000 5.000%, 07/01/18 Series B FSA Insured ................ Aaa/AAA/AAA 1,010,970
540,000 4.625%, 07/01/26 Series B Assured
Guaranty Insured ................................. Aaa/AAA/AAA 514,917
1,000,000 5.000%, 07/01/18 Series C Assured
Guaranty Insured ................................. Aaa/AAA/AAA 1,041,520
1,500,000 5.000%, 07/01/22 Series C MBIA Insured ............... A2/AA/A 1,524,765
Rhode Island State Economic Development Corp.,
Airport Revenue Refunding
1,670,000 5.000%, 07/01/13 Series C MBIA Insured ............... A2/AA/A 1,748,006
Rhode Island State Economic Development Corp.,
Motor Fuel Tax Revenue (Rhode Island
Department of Transportation)
1,000,000 4.000%, 06/15/15 Series A AMBAC Insured .............. Aa3/AA/A 1,004,890
1,000,000 4.000%, 06/15/18 Series 2006A AMBAC Insured .......... Aa3/AA/A 978,280
Rhode Island State Economic Development Corp.,
(Rhode Island Airport Corp. Intermodal
Facility Project)
1,000,000 4.250%, 07/01/17 CIFG Assurance N.A., Inc. Insured ... Baa1/A-/NR 971,980
Rhode Island State Economic Development Corp.,
University of Rhode Island
750,000 4.800%, 11/01/11 Series 1999 FSA Insured ............. Aaa/NR/NR 772,140
750,000 4.900%, 11/01/12 Series 1999 FSA Insured ............. Aaa/NR/NR 771,720
750,000 4.900%, 11/01/13 Series 1999 FSA Insured ............. Aaa/NR/NR 771,225
750,000 5.000%, 11/01/14 Series 1999 FSA Insured ............. Aaa/NR/NR 772,290
--------------
Total Development Revenue Bonds 15,874,462
--------------
HIGHER EDUCATION REVENUE BONDS (30.5%)
Providence, Rhode Island Public Building
Authority, School Projects
500,000 5.500%, 12/15/14 Series 1996 B MBIA Insured .......... A2/AA/NR 505,660
500,000 5.500%, 12/15/15 Series 1996 B MBIA Insured .......... A2/AA/NR 505,660
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT REVENUE BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
HIGHER EDUCATION REVENUE BONDS (CONTINUED)
Providence, Rhode Island Public Building
Authority, School Projects (continued)
$ 1,000,000 5.250%, 12/15/14 Series 1998 A FSA Insured ........... Aaa/AAA/AAA $ 1,029,230
500,000 5.000%, 12/15/09 Series 1999 A AMBAC Insured ......... Aa3/AA/NR 512,075
1,395,000 4.000%, 12/15/12 Series 2003 A MBIA Insured .......... A2/AA/NR 1,426,959
1,450,000 4.000%, 12/15/13 Series 2003 A MBIA Insured .......... A2/AA/NR 1,468,270
1,505,000 4.000%, 12/15/14 Series 2003 A MBIA Insured .......... A2/AA/NR 1,515,354
1,570,000 4.000%, 12/15/15 Series 2003 A MBIA Insured .......... A2/AA/NR 1,573,784
1,630,000 4.000%, 12/15/16 Series 2003 A MBIA Insured .......... A2/AA/NR 1,624,181
Providence, Rhode Island Public Building School &
Public Facilities Project
1,500,000 5.250%, 12/15/17 Series A AMBAC Insured .............. Aa3/AA/NR 1,562,460
1,000,000 5.250%, 12/15/19 Series 1999 A AMBAC Insured ......... Aa3/AA/NR 1,038,460
Rhode Island Health & Education Building Corp.,
Brown University
2,000,000 5.250%, 09/01/17 Series 1993 MBIA Insured ............ Aaa/AA/NR 2,093,400
Rhode Island Health & Education Building Corp.,
Bryant College
1,000,000 5.125%, 06/01/19 AMBAC Insured ....................... Aa3/AA/NR 1,030,820
230,000 5.000%, 12/01/21 AMBAC Insured ....................... Aa3/AA/NR 234,830
Rhode Island Health & Education Building Corp.,
Higher Educational Facilities
1,010,000 3.625%, 09/15/14 Series 2003 B MBIA Insured .......... A2/AA/NR 1,004,142
1,050,000 4.000%, 09/15/15 Series 2003 B MBIA Insured .......... A2/AA/NR 1,052,888
1,040,000 4.000%, 09/15/16 Series 2003 B MBIA Insured .......... A2/AA/NR 1,036,350
600,000 3.625%, 09/15/14 Series 2003 C MBIA Insured .......... A2/AA/NR 596,520
500,000 4.000%, 09/15/15 Series 2003 C MBIA Insured .......... A2/AA/NR 501,375
500,000 4.000%, 09/15/16 Series 2003 C MBIA Insured .......... A2/AA/NR 498,245
1,500,000 4.250%, 05/15/21 Series A FSA Insured ................ Aaa/NR/AAA 1,453,620
1,500,000 4.375%, 05/15/22 Series A FSA Insured ................ Aaa/NR/NR 1,456,620
Rhode Island Health & Education Building Corp.,
Johnson & Wales University
465,000 5.500%, 04/01/15 Series 1999 A MBIA Insured .......... A2/AA/NR 509,584
900,000 5.500%, 04/01/16 Series 1999 A MBIA Insured .......... A2/AA/NR 990,342
785,000 5.500%, 04/01/17 Series 1999 A MBIA Insured .......... A2/AA/NR 865,023
1,360,000 4.000%, 04/01/12 Series 2003 XLCA Insured ............ NR/BBB-/NR 1,370,295
3,210,000 4.000%, 04/01/13 Series 2003 XLCA Insured ............ NR/BBB-/NR 3,218,089
2,000,000 4.000%, 04/01/14 Series 2003 XLCA Insured ............ NR/BBB-/NR 1,992,800
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT REVENUE BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
HIGHER EDUCATION REVENUE BONDS (CONTINUED)
Rhode Island Health & Education Building Corp.,
Public School Financing
$ 1,000,000 4.250%, 05/15/21 Series 2007 B FSA Insured ........... Aaa/AAA/AAA $ 982,440
Rhode Island Health & Education Building Corp.,
Rhode Island School of Design
505,000 4.700%, 06/01/18 Series 2001 MBIA Insured ............ A1/AA/NR 514,959
280,000 4.750%, 06/01/19 Series 2001 MBIA Insured ............ A1/AA/NR 284,771
Rhode Island Health & Education Building Corp.,
Roger Williams University
500,000 5.125%, 11/15/11 AMBAC Insured ....................... Aa3/AA/NR 513,935
1,000,000 5.125%, 11/15/14 Series 1996 S AMBAC Insured ......... Aa3/AA/NR 1,026,100
1,000,000 5.000%, 11/15/18 Series 1996 S AMBAC Insured ......... Aa3/AA/NR 1,023,940
Rhode Island Health & Educational Building Corp.,
University of Rhode Island
800,000 5.000%, 09/15/23 Series 2003 C Refunding
MBIA Insured ..................................... A2/AA/NR 817,936
1,200,000 4.000%, 09/15/11 Series 2005 G AMBAC Insured ......... Aa3/AA/NR 1,226,364
1,200,000 4.125%, 09/15/12 Series 2005 G
AMBAC Insured .................................... Aa3/AA/NR 1,230,900
1,200,000 4.125%, 09/15/13 Series 2005 G
AMBAC Insured .................................... Aa3/AA/NR 1,228,440
1,000,000 4.500%, 09/15/26 Series 2005 G Refunding
AMBAC Insured .................................... Aa3/AA/NR 964,970
Rhode Island Health & Education Facilities
Authority, Providence College
1,000,000 4.250%, 11/01/14 XLCA Insured ........................ A3/A-/NR 1,003,740
2,500,000 4.375%, 11/01/15 XLCA Insured ........................ A3/A-/NR 2,505,175
2,500,000 4.500%, 11/01/16 XLCA Insured ........................ A3/A-/NR 2,506,900
1,000,000 4.500%, 11/01/17 XLCA Insured ........................ A3/A-/NR 999,190
--------------
Total Higher Education Revenue Bonds ................. 49,496,796
--------------
HOUSING REVENUE BONDS (0.6%)
Rhode Island Housing & Mortgage Finance Corp.
Homeowner Opportunity
1,000,000 3.750%, 10/01/13 Series 50-A MBIA Insured ............ A2/AA/NR 997,600
--------------
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT REVENUE BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
LEASE REVENUE BONDS (0.6%)
Rhode Island State & Providence Plantations Lease
Participation Certificates (Central Power Plant)
$ 1,000,000 4.000%, 10/01/20 Series D FSA Insured ................ Aaa/AAA/AAA $ 969,760
--------------
POLLUTION CONTROL REVENUE BONDS (4.0%)
Rhode Island Clean Water Finance Agency, Water
Pollution Control Bonds
1,800,000 5.000%, 10/01/18 Series 2002 B MBIA Insured .......... Aaa/AA/NR 1,855,332
4,765,000 4.375%, 10/01/21 Series 2002 B MBIA Insured .......... Aaa/AA/NR 4,715,158
--------------
Total Pollution Control Revenue Bonds ................ 6,570,490
--------------
WATER AND SEWER REVENUE BONDS (8.4%)
Bristol County, Rhode Island Water Authority
750,000 5.250%, 07/01/17 Series 1997 A MBIA Insured .......... A2/AA/NR 755,130
1,000,000 3.500%, 12/01/13 Series 2004 Refunding A
MBIA Insured ..................................... A2/AA/NR 995,100
1,000,000 3.500%, 12/01/14 Series 2004 Refunding A
MBIA Insured ..................................... A2/AA/NR 975,860
Kent County, Rhode Island Water Authority
500,000 4.000%, 07/15/12 Series 2002 A MBIA Insured .......... A2/AA/NR 511,215
1,055,000 4.150%, 07/15/14 Series 2002 A MBIA Insured .......... A2/AA/NR 1,071,437
Rhode Island Clean Water Protection Finance Agency
300,000 5.400%, 10/01/09 1993 Series 1993 A
MBIA Insured ..................................... Aaa/AA/NR 310,770
1,250,000 5.400%, 10/01/15 1993 Series A MBIA Insured .......... Aaa/AA/NR 1,342,012
500,000 4.500%, 10/01/11 1993 Series B AMBAC Insured ......... Aaa/AA/NR 506,930
500,000 4.750%, 10/01/20 1999 Series A AMBAC Insured ......... Aaa/AA/NR 503,210
1,000,000 5.125%, 10/01/11 Series 1999 C MBIA Insured .......... Aaa/AA/NR 1,026,830
500,000 4.600%, 10/01/13 Series A AMBAC Insured .............. Aaa/AA/NR 506,370
500,000 4.750%, 10/01/14 Series A AMBAC Insured .............. Aaa/AA/NR 507,030
2,000,000 4.750%, 10/01/18 Series A AMBAC Insured .............. Aaa/AA/NR 2,019,620
Rhode Island Water Resources Board Public
Drinking Water Protection
1,500,000 4.000%, 03/01/14 Series 2002 MBIA Insured ............ A2/AA/NR 1,513,680
1,000,000 4.250%, 03/01/15 Series 2002 MBIA Insured ............ A2/AA/NR 1,015,890
--------------
Total Water and Sewer Revenue Bonds .................. 13,561,084
--------------
RATING
PRINCIPAL MOODY'S, S&P
AMOUNT REVENUE BONDS (CONTINUED) OR FITCH VALUE
- --------------- ------------------------------------------------------ ------------ --------------
OTHER REVENUE BONDS (1.2%)
State of Rhode Island Depositors Economic
Protection Corp.
$ 500,000 6.000%, 08/01/17 Ser. 1992 B MBIA Insured ETM ........ A2/AA/NR $ 544,680
300,000 5.800%, 08/01/09 Ser. 1993 B MBIA Insured ETM ........ A2/AA/NR 312,846
1,045,000 5.250%, 08/01/21 Ser. 1993 B MBIA Insured
ETM (pre-refunded) ............................... A2/AA/NR 1,100,489
--------------
Total Other Revenue Bonds ............................ 1,958,015
--------------
Total Revenue Bonds .............................. 89,428,207
--------------
Total Investments (cost $161,631,924-note 4) ......... 100.5% 163,234,157
Other assets less liabilities ........................ (0.5) (865,126)
-------- --------------
Net Assets ........................................... 100.0% $ 162,369,031
======== ==============
ABBREVIATION:
-------------
NR - Not rated
* Security traded on a "when-issued" basis.
** Security pledged as collateral for the Fund's
when-issued commitments.
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO+
---------------------------------------------------- ---------
Aaa of Moody's or AAA of S&P or Fitch .............. 21.5%
Aa of Moody's or AA of S&P or Fitch ................ 65.7
A of Moody's or S&P or Fitch ....................... 8.8
Baa of Moody's or BBB of S&P ....................... 4.0
-----
100.0%
=====
+ Calculated using the highest rating of the three rating services.
PORTFOLIO ABBREVIATIONS:
------------------------
AMBAC - American Municipal Bond Assurance Corp.
CIFG - CDC IXIS Financial Guaranty
ETM - Escrowed to Maturity
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance
MBIA - Municipal Bond Investors Assurance
XLCA - XL Capital Assurance
See accompanying notes to financial statements.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2008
ASSETS
Investments at value (cost $161,631,924) ................................................. $ 163,234,157
Interest receivable ...................................................................... 1,927,947
Receivable for Fund shares sold .......................................................... 286,458
Other assets ............................................................................. 26,003
-------------
Total assets ............................................................................. 165,474,565
-------------
LIABILITIES
Cash overdraft ............................................................................. 224,011
Payable for investment securities purchased ................................................ 2,473,511
Dividends payable .......................................................................... 193,529
Payable for Fund shares redeemed ........................................................... 102,920
Distribution and service fees payable ...................................................... 22,539
Management fee payable ..................................................................... 22,164
Accrued expenses ........................................................................... 66,860
-------------
Total liabilities .......................................................................... 3,105,534
-------------
NET ASSETS ..................................................................................... $ 162,369,031
=============
Net Assets consist of:
Capital Stock - Authorized 80,000,000 shares, par value $0.01 per share .................... $ 156,277
Additional paid-in capital ................................................................. 161,420,126
Net unrealized appreciation on investments (note 4) ........................................ 1,602,233
Accumulated net realized loss on investments ............................................... (817,705)
Undistributed net investment income ........................................................ 8,100
-------------
$ 162,369,031
=============
CLASS A
Net Assets ................................................................................. $ 105,330,334
=============
Capital shares outstanding ................................................................. 10,138,014
=============
Net asset value and redemption price per share ............................................. $ 10.39
=============
Offering price per share (100/96 of $10.39 adjusted to nearest cent) ....................... $ 10.82
=============
CLASS C
Net Assets ................................................................................. $ 11,169,375
=============
Capital shares outstanding ................................................................. 1,075,174
=============
Net asset value and offering price per share ............................................... $ 10.39
=============
Redemption price per share (*a 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) ............................................. $ 10.39*
=============
CLASS I
Net Assets ................................................................................. $ 536,876
=============
Capital shares outstanding ................................................................. 51,685
=============
Net asset value, offering and redemption price per share ................................... $ 10.39
=============
CLASS Y
Net Assets ................................................................................. $ 45,332,446
=============
Capital shares outstanding ................................................................. 4,362,868
=============
Net asset value, offering and redemption price per share ................................... $ 10.39
=============
See accompanying notes to financial statements.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2008
INVESTMENT INCOME:
Interest income ..................................................... $ 6,618,843
Expenses:
Management fee (note 3) ............................................. $ 777,183
Distribution and service fees (note 3) .............................. 286,945
Trustees' fees and expenses (note 8) ................................ 153,764
Legal fees (note 3) ................................................. 134,009
Transfer and shareholder servicing agent fees (note 3) .............. 76,397
Shareholders' reports and proxy statements .......................... 30,107
Fund accounting fees ................................................ 19,788
Auditing and tax fees ............................................... 17,016
Custodian fees (note 6) ............................................. 10,439
Registration fees and dues .......................................... 8,484
Insurance ........................................................... 6,856
Chief compliance officer (note 3) ................................... 4,426
Miscellaneous ....................................................... 66,922
-----------
Total expenses ...................................................... 1,592,336
Management fee waived (note 3) ...................................... (536,482)
Expenses paid indirectly (note 6) ................................... (30,566)
-----------
Net expenses ........................................................ 1,025,288
-------------
Net investment income ............................................... 5,593,555
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ............... 89,660
Change in unrealized appreciation on investments .................... 146,976
-----------
Net realized and unrealized gain (loss) on investments .............. 236,636
-------------
Net change in net assets resulting from operations .................. $ 5,830,191
=============
See accompanying notes to financial statements.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
JUNE 30, 2008 JUNE 30, 2007
------------- -------------
OPERATIONS:
Net investment income ............................................... $ 5,593,555 $ 5,456,299
Net realized gain (loss) from securities transactions ............... 89,660 (97,580)
Change in unrealized appreciation on investments .................... 146,976 695,973
------------- -------------
Change in net assets from operations ............................ 5,830,191 6,054,692
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 9):
Class A Shares:
Net investment income ............................................... (3,893,537) (3,835,965)
Class C Shares:
Net investment income ............................................... (369,761) (443,679)
Class I Shares:
Net investment income ............................................... (25,275) (27,009)
Class Y Shares:
Net investment income ............................................... (1,438,715) (1,306,184)
------------- -------------
Change in net assets from distributions ......................... (5,727,288) (5,612,837)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ........................................... 34,062,506 15,170,793
Reinvested dividends and distributions .............................. 2,606,015 2,561,412
Cost of shares redeemed ............................................. (22,421,102) (22,978,923)
------------- -------------
Change in net assets from capital share transactions ................ 14,247,419 (5,246,718)
------------- -------------
Change in net assets ............................................ 14,350,322 (4,804,863)
NET ASSETS:
Beginning of period ................................................. 148,018,709 152,823,572
------------- -------------
End of period* ...................................................... $ 162,369,031 $ 148,018,709
============= =============
* Includes undistributed net investment income of: ................ $ 8,100 $ 12,951
============= =============
See accompanying notes to financial statements.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2008
1. ORGANIZATION
Narragansett Insured Tax-Free Income Fund (the "Fund"), a non-diversified,
open-end investment company, was organized on January 22, 1992 as a
Massachusetts business trust and commenced operations on September 10, 1992. The
Fund is authorized to issue 80,000,000 shares and, since its inception to May 1,
1996, offered only one class of shares. On that date, the Fund began offering
two additional classes of shares, Class C and Class Y Shares. All shares
outstanding prior to that date were designated as Class A Shares and are sold
with a front-payment sales charge and bear an annual distribution fee. Class C
Shares are sold with a level-payment sales charge with no payment at time of
purchase but level service and distribution fees from date of purchase through a
period of six years thereafter. A contingent deferred sales charge of 1% is
assessed to any Class C shareholder who redeems shares of this Class within one
year from the date of purchase. Class C Shares, together with a pro-rata portion
of all Class C Shares acquired through reinvestment of dividends and other
distributions paid in additional Class C Shares, automatically convert to Class
A Shares after 6 years. The Class Y Shares are only offered to institutions
acting for an investor in a fiduciary, advisory, agency, custodian or similar
capacity and are not offered directly to retail investors. Class Y Shares are
sold at net asset value without any sales charge, redemption fees, contingent
deferred sales charge or distribution or service fees. On October 31, 1997, the
Fund established Class I Shares, which are offered and sold only through
financial intermediaries and are not offered directly to retail investors. Class
I Shares are sold at net asset value without any sales charge, redemption fees,
or contingent deferred sales charge. Class I Shares carry a distribution fee and
a service fee. All classes of shares represent interests in the same portfolio
of investments and are identical as to rights and privileges and differ with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities
of more than 60 days are valued each business day based upon information
provided by a nationally prominent independent pricing service and
periodically verified through other pricing services. In the case of
securities for which market quotations are readily available, securities
are valued by the pricing service at the mean of bid and asked quotations.
If market quotations or a valuation from the pricing service is not
readily available, the security is valued at fair value determined in good
faith under procedures established by and under the general supervision of
the Board of Trustees. Securities which mature in 60 days or less are
valued at amortized cost if their term to maturity at purchase is 60 days
or less, or by amortizing their unrealized appreciation or depreciation on
the 61st day prior to maturity, if their term to maturity at purchase
exceeds 60 days.
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Interest income is recorded on the accrual basis and is adjusted for
amortization of premium and accretion of original issue and market
discount.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The Fund
intends to make distributions of income and securities profits sufficient
to relieve it from all, or substantially all, Federal income and excise
taxes.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
("FIN 48") was adopted on December 31, 2007. Management has reviewed the
tax positions for each of the open tax years (2004-2008) and has
determined that the implementation of FIN 48 did not have a material
impact on the Fund's financial statements.
d) MULTIPLE CLASS ALLOCATIONS: All income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses are
allocated daily to each class of shares based on the relative net assets
of each class. Class-specific expenses, which include distribution and
service fees and any other items that are specifically attributed to a
particular class, are charged directly to such class.
e) USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
f) ACCOUNTING PRONOUNCEMENT: In September 2006, FASB issued FASB Statement
No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Fund believes adoption of SFAS 157 will have no material impact
on the Fund's financial statements.
3. FEES AND RELATED PARTY TRANSACTIONS
a) Management Arrangements:
Aquila Investment Management LLC (the "Manager"), a wholly-owned
subsidiary of Aquila Management Corporation, the Fund's founder and sponsor,
serves as the Manager for the Fund under an Advisory and Administration
Agreement with the Fund. The portfolio management of the Fund has been delegated
to a Sub-Adviser as described below. Under the Advisory and Administration
Agreement, the Manager provides all administrative services to the Fund, other
than those relating to the day-to-day portfolio management. The Manager's
services include providing the office of the Fund and all related services as
well as overseeing the activities of the Sub-Adviser and managing relationships
with all the various support organizations to the Fund such as the shareholder
servicing agent, custodian, legal counsel, fund accounting agent, auditor and
distributor. For its services, the Manager is entitled to receive a fee which is
payable monthly and computed as of the close of business each day at the annual
rate of 0.50% on the Fund's average net assets.
Citizens Investment Advisors, a department of RBS Citizens, N.A. (the
"Sub-Adviser") serves as the Investment Sub-Adviser for the Fund under a
Sub-Advisory Agreement between the Manager and the Sub-Adviser. Under this
agreement, the Sub-Adviser continuously provides, subject to oversight of the
Manager and the Board of Trustees of the Fund, the investment program of the
Fund and the composition of its portfolio, arranges for the purchases and sales
of portfolio securities, and provides for daily pricing of the Fund's portfolio.
For its services, the Sub-Adviser is entitled to receive a fee from the Manager
which is payable monthly and computed as of the close of business each day at
the annual rate of 0.23% on the Fund's average net assets.
For the year ended June 30, 2008, the Fund incurred management fees of
$777,183 of which $536,482 was waived. The Manager contractually undertook to
waive fees and/or reimburse Fund expenses during the period July 1, 2007 through
June 30, 2008 so that total Fund expenses would not exceed 0.85% for Class A
Shares, 1.70% for Class C Shares, 1.02% for Class I Shares or 0.70% for Class Y
Shares. Comparable expense limitations are in place for fiscal 2009.
Under a Compliance Agreement with the Manager, the Manager is compensated
for Chief Compliance Officer related services provided to enable the Fund to
comply with Rule 38a-1 of the Investment Company Act of 1940.
Specific details as to the nature and extent of the services provided by
the Manager and the Sub-Adviser are more fully defined in the Fund's Prospectus
and Statement of Additional Information.
b) Distribution and Service Fees:
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of
the Plan, with respect to Class A Shares,
the Fund is authorized to make distribution fee payments to broker-dealers or
others ("Qualified Recipients") selected by Aquila Distributors, Inc. ("the
Distributor"), including, but not limited to, any principal underwriter of the
Fund with which the Distributor has entered into written agreements contemplated
by the Rule and which have rendered assistance in the distribution and/or
retention of the Fund's shares or servicing of shareholder accounts. The Fund
makes payment of this service fee at the annual rate of 0.15% of the Fund's
average net assets represented by Class A Shares. For the year ended June 30,
2008, distribution fees on Class A Shares amounted to $156,968, of which the
Distributor retained $3,755.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C Shares or
servicing of shareholder accounts. These payments are made at the annual rate of
0.75% of the Fund's average net assets represented by Class C Shares and for the
year ended June 30, 2008 amounted to $96,426. In addition, under a Shareholder
Services Plan, the Fund is authorized to make service fee payments with respect
to Class C Shares to Qualified Recipients for providing personal services and/or
maintenance of shareholder accounts. These payments are made at the annual rate
of 0.25% of the Fund's average net assets represented by Class C Shares and for
the year ended June 30, 2008, amounted to $32,142. The total of these payments
with respect to Class C Shares amounted to $128,568, of which the Distributor
retained $31,975.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class I Shares to Qualified Recipients. Class I payments, under
the Plan, may not exceed, for any fiscal year of the Fund a rate (currently
0.20%) set from time to time by the Board of Trustees of not more than 0.25% of
the average annual net assets represented by the Class I Shares. In addition,
the Fund has a Shareholder Services Plan under which it may pay service fees
(currently 0.15%) of not more than 0.25% of the average annual net assets of the
Fund represented by Class I Shares. That is, the total payments under both plans
will not exceed 0.50% of such net assets. For the year ended June 30, 2008,
these payments were made at the average annual rate of 0.35% of such net assets
amounting to $2,465 of which $1,409 related to the Plan and $1,056 related to
the Shareholder Services Plan.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as the exclusive
distributor of the Fund's shares. Through agreements between the Distributor and
various brokerage and advisory firms ("intermediaries"), the Fund's shares are
sold primarily through the facilities of these intermediaries having offices
within Rhode Island, with the bulk of sales commissions inuring to such
intermediaries. For the year ended June 30, 2008, total commissions on sales of
Class A Shares amounted to $207,418, of which the Distributor received $18,953.
c) Other Related Party Transactions:
For the year ended June 30, 2008, the Fund incurred $133,804 of legal fees
allocable to Butzel Long PC, counsel to the Fund, for legal services in
conjunction with the Fund's ongoing operations. The Secretary of the Fund is a
shareholder of that firm.
4. PURCHASES AND SALES OF SECURITIES
During the year ended June 30, 2008, purchases of securities and proceeds
from the sales of securities aggregated $19,366,310 and $4,389,250,
respectively.
At June 30, 2008, the aggregate tax cost for all securities was
$161,623,824. At June 30, 2008, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost amounted to
$2,447,484 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $837,151 for a net
unrealized appreciation of $1,610,333.
5. PORTFOLIO ORIENTATION
Since the Fund invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Rhode Island, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Rhode Island and whatever
effects these may have upon Rhode Island issuers' ability to meet their
obligations. However, to mitigate against such risks, the Fund has chosen to
have at least 80% and possibly the entire number of issues in the portfolio
insured as to timely payment of principal and interest when due by nationally
prominent municipal bond insurance companies. At June 30, 2008, all of the
securities in the Fund were insured. While such insurance protects against
credit risks with portfolio securities, it does not insure against market risk
of fluctuations in the Fund's share price and income return.
The Fund is also permitted to invest in U.S. territorial municipal
obligations meeting comparable quality standards and providing income which is
exempt from both regular Federal and Rhode Island income taxes. The general
policy of the Fund is to invest in such securities only when comparable
securities of Rhode Island issuers are not available in the market. At June 30,
2008, the Fund had all of its net assets invested in Rhode Island municipal
issues.
6. EXPENSES
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees and other Fund
expenses whenever there are uninvested cash balances. The Statement of
Operations reflects the total expenses before any offset, the amount of offset
and the net expenses.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
YEAR ENDED YEAR ENDED
JUNE 30, 2008 JUNE 30, 2007
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold ................... 1,685,023 $ 17,703,105 643,809 $ 6,762,397
Reinvested distributions .................... 206,778 2,169,365 203,145 2,134,004
Cost of shares redeemed ..................... (1,279,281) (13,392,601) (1,304,721) (13,685,665)
------------ ------------ ------------ ------------
Net change ................................ 612,520 6,479,869 (457,767) (4,789,264)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold ................... 242,233 2,541,616 151,378 1,590,583
Reinvested distributions .................... 12,955 135,823 16,970 178,232
Cost of shares redeemed ..................... (534,010) (5,606,965) (420,314) (4,406,868)
------------ ------------ ------------ ------------
Net change ................................ (278,822) (2,929,526) (251,966) (2,638,053)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold ................... 55 591 46,414 490,000
Reinvested distributions .................... 2,411 25,257 2,570 27,008
Cost of shares redeemed ..................... (30,490) (319,333) (42,870) (451,484)
------------ ------------ ------------ ------------
Net change ................................ (28,024) (293,485) 6,114 65,524
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold ................... 1,312,969 13,817,194 601,991 6,327,813
Reinvested distributions .................... 26,297 275,570 21,137 222,168
Cost of shares redeemed ..................... (295,344) (3,102,203) (422,081) (4,434,906)
------------ ------------ ------------ ------------
Net change ................................ 1,043,922 10,990,561 201,047 2,115,075
------------ ------------ ------------ ------------
Total transactions in Fund
shares ....................................... 1,349,596 $ 14,247,419 (502,572) $ (5,246,718)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At June 30, 2008 there were 6 Trustees, one of which is affiliated with
the Manager and is not paid any fees. The total amount of Trustees' service and
attendance fees paid during the year ended June 30, 2008 was $109,500, to cover
carrying out their responsibilities and attendance at regularly scheduled
quarterly Board Meetings and meetings of the Independent Trustees held prior to
each quarterly Board Meeting. When additional meetings (Audit, Nominating,
Shareholder and special meetings) are held, the meeting fees are paid to those
Trustees in attendance. Trustees are reimbursed for their expenses such as
travel, accommodations, and meals incurred in connection
with attendance at Board Meetings and at the Annual Meeting of Shareholders. For
the year ended June 30, 2008, such meeting-related expenses amounted to $44,264.
9. INCOME TAX INFORMATION AND DISTRIBUTIONS
The Fund declares dividends daily from net investment income and makes
payments monthly. Net realized capital gains, if any, are distributed annually
and are taxable. These distributions are paid in additional shares at the net
asset value per share, in cash, or in a combination of both, at the
shareholder's option.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net investment
income to be exempt from regular Federal and State of Rhode Island income taxes.
However, due to differences between financial statement reporting and Federal
income tax reporting requirements, distributions made by the Fund may not be the
same as the Fund's net investment income, and/or net realized securities gains.
In this regard, the Fund increased undistributed net investment income in the
amount of $128,882 and decreased additional paid-in capital in the amount of
$128,882 at June 30, 2008. This adjustment had no impact on the Fund's aggregate
net assests at June 30, 2008. Further, a small portion of the dividends may,
under some circumstances, be subject to taxes at ordinary income rates.
At June 30, 2008, the Fund had a capital loss carryover of $817,705 of
which $530,992 expires on June 30, 2009, $111,495 expires on June 30, 2013, and
$175,218 expires on June 30, 2015. This carryover is available to offset future
net realized gains on securities transactions to the extent provided for in the
Internal Revenue Code. To the extent that this loss is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed.
Tax character of distributions:
YEAR ENDED JUNE 30,
-----------------------------
2008 2007
------------ ------------
Net tax-exempt income $ 5,598,407 $ 5,334,313
Ordinary income 128,881 278,524
------------ ------------
$ 5,727,288 $ 5,612,837
============ ============
As of June 30, 2008, the components of distributable earnings on a tax
basis were as follows:
Undistributed tax-exempt income $ 193,529
Accumulated net realized loss (817,705)
Unrealized appreciation 1,610,333
Other temporary differences (193,529)
------------
$ 792,628
============
At June 30, 2008, the difference between book basis and tax basis
unrealized appreciation was attributable primarily to the treatment of accretion
of discounts and amortization of premiums. The difference between book basis and
tax basis undistributed income is due to the timing of distribution.
10. RECENT DEVELOPMENTS
a) THE DAVIS CASE: In May, 2007, the U. S. Supreme Court agreed to hear an
appeal in DEPARTMENT OF REVENUE OF KENTUCKY V. DAVIS, a case concerning
the constitutionality of differential tax treatment for interest from
in-state vs. out-of-state municipal securities, a practice which is common
among the majority of the states. On May 19, 2008, the U. S. Supreme Court
upheld the right of states to tax interest on out-of-state municipal bonds
while exempting their own state's bond interest from taxation. The U. S.
Supreme Court said differential tax treatment for interest from in-state
vs. out-of-state municipal securities does not discriminate against
interstate commerce, but rather promotes the financing of essential
governmental services.
b) INSURERS: Over the past few months, municipal bond insurance companies
have been under review by the three major rating agencies: Standard &
Poor's, Moody's and Fitch. The ratings of some of the insurance companies
have now either been downgraded and/or have a negative outlook. The
financial markets continue to assess the severity of the losses caused by
the subprime credit crisis and its impact on municipal bond insurance
companies and the prices of insured municipal bonds.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Net asset value, beginning of period ......................... $ 10.37 $ 10.34 $ 10.79 $ 10.49 $ 10.92
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income .................................... 0.38++ 0.38+ 0.38+ 0.40+ 0.41+
Net gain (loss) on securities
(both realized and unrealized) ....................... 0.03 0.04 (0.44) 0.31 (0.42)
--------- --------- --------- --------- ---------
Total from investment operations ......................... 0.41 0.42 (0.06) 0.71 (0.01)
--------- --------- --------- --------- ---------
Less distributions (note 9):
Dividends from net investment income ..................... (0.39) (0.39) (0.39) (0.41) (0.42)
--------- --------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.39 $ 10.37 $ 10.34 $ 10.79 $ 10.49
========= ========= ========= ========= =========
Total return (not reflecting sales charge) ................... 4.00% 4.10% (0.56)% 6.81% (0.10)%
Ratios/supplemental data
Net assets, end of period (in thousands) ................. $ 105,330 $ 98,749 $ 103,222 $ 105,910 $ 101,413
Ratio of expenses to average net assets .................. 0.64% 0.68% 0.67% 0.58% 0.53%
Ratio of net investment income to
average net assets ................................... 3.63% 3.63% 3.61% 3.68% 3.82%
Portfolio turnover rate .................................. 2.87% 2.37% 7.25% 2.20% 8.61%
The expense and net investment income ratios without the effect of the waiver of a portion of the management fee and the expense
reimbursement were (note 3):
Ratio of expenses to average net assets .................. 0.97% 1.03% 1.03% 0.96% 0.91%
Ratio of net investment income to
average net assets ................................... 3.29% 3.28% 3.25% 3.31% 3.44%
The expense ratios after giving effect to the waiver, reimbursement and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets .................. 0.63% 0.68% 0.67% 0.57% 0.52%
CLASS C
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Net asset value, beginning of period ......................... $ 10.37 $ 10.34 $ 10.79 $ 10.48 $ 10.92
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income .................................... 0.29++ 0.30+ 0.29+ 0.31+ 0.32+
Net gain (loss) on securities
(both realized and unrealized) ....................... 0.03 0.03 (0.44) 0.31 (0.43)
--------- --------- --------- --------- ---------
Total from investment operations ......................... 0.32 0.33 (0.15) 0.62 (0.11)
--------- --------- --------- --------- ---------
Less distributions (note 9):
Dividends from net investment income ..................... (0.30) (0.30) (0.30) (0.31) (0.33)
--------- --------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.39 $ 10.37 $ 10.34 $ 10.79 $ 10.48
========= ========= ========= ========= =========
Total return (not reflecting sales charge) ................... 3.12% 3.22% (1.40)% 6.01% (1.04)%
Ratios/supplemental data
Net assets, end of period (in thousands) ................. $ 11,169 $ 14,034 $ 16,602 $ 19,031 $ 17,901
Ratio of expenses to average net assets .................. 1.51% 1.53% 1.52% 1.43% 1.38%
Ratio of net investment income to
average net assets ................................... 2.76% 2.78% 2.76% 2.83% 2.98%
Portfolio turnover rate .................................. 2.87% 2.37% 7.25% 8.61%
The expense and net investment income ratios without the effect of the waiver of a portion of the management fee and the expense
reimbursement were (note 3):
Ratio of expenses to average net assets .................. 1.82% 1.88% 1.88% 1.81% 1.76%
Ratio of net investment income to
average net assets ................................... 2.45% 2.43% 2.40% 2.45% 2.60%
The expense ratios after giving effect to the waiver, reimbursement and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets .................. 1.48% 1.53% 1.52% 1.42% 1.37%
- ----------------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily average shares
method.
See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS I
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Net asset value, beginning of period ......................... $ 10.37 $ 10.34 $ 10.79 $ 10.48 $ 10.91
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income .................................... 0.37++ 0.38+ 0.37+ 0.39+ 0.41+
Net gain (loss) on securities (both
realized and unrealized) ............................. 0.03 0.03 (0.44) 0.32 (0.42)
--------- --------- --------- --------- ---------
Total from investment operations ......................... 0.40 0.41 (0.07) 0.71 (0.01)
--------- --------- --------- --------- ---------
Less distributions (note 9):
Dividends from net investment income ..................... (0.38) (0.38) (0.38) (0.40) (0.42)
--------- --------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.39 $ 10.37 $ 10.34 $ 10.79 $ 10.48
========= ========= ========= ========= =========
Total return (not reflecting sales charge) ................... 3.84% 3.96% (0.67)% 6.89% (0.12)%
Ratios/supplemental data
Net assets, end of period (in thousands) ................. $ 537 $ 826 $ 761 $ 1,098 $ 790
Ratio of expenses to average net assets .................. 0.81% 0.81% 0.79% 0.58% 0.53%
Ratio of net investment income to
average net assets ................................... 3.47% 3.50% 3.48% 3.68% 3.82%
Portfolio turnover rate .................................. 2.87% 2.37% 7.25% 2.20% 8.61%
The expense and net investment income ratios without the effect of the waiver of a portion of the management fee and the expense
reimbursement were (note 3):
Ratio of expenses to average net assets .................. 1.12% 1.15% 1.15% 0.96% 0.91%
Ratio of net investment income to
average net assets ................................... 3.16% 3.15% 3.12% 3.30% 3.44%
The expense ratios after giving effect to the waiver, reimbursement and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets .................. 0.77% 0.80% 0.79% 0.57% 0.52%
CLASS Y
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Net asset value, beginning of period ......................... $ 10.37 $ 10.34 $ 10.79 $ 10.49 $ 10.92
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income .................................... 0.40++ 0.40+ 0.40+ 0.41+ 0.43+
Net gain (loss) on securities (both
realized and unrealized) ............................. 0.03 0.04 (0.44) 0.31 (0.43)
--------- --------- --------- --------- ---------
Total from investment operations ......................... 0.43 0.44 (0.04) 0.72 --
--------- --------- --------- --------- ---------
Less distributions (note 9):
Dividends from net investment income ..................... (0.41) (0.41) (0.41) (0.42) (0.43)
--------- --------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.39 $ 10.37 $ 10.34 $ 10.79 $ 10.49
========= ========= ========= ========= =========
Total return (not reflecting sales charge) ................... 4.16% 4.25% (0.40)% 6.98% 0.03%
Ratios/supplemental data
Net assets, end of period (in thousands) ................. $ 45,332 $ 34,409 $ 32,239 $ 27,998 $ 22,113
Ratio of expenses to average net assets .................. 0.51% 0.53% 0.52% 0.43% 0.38%
Ratio of net investment income to
average net assets ................................... 3.75% 3.77% 3.76% 3.83% 3.97%
Portfolio turnover rate .................................. 2.87% 2.37% 7.25% 2.20% 8.61%
The expense and net investment income ratios without the effect of the waiver of a portion of the management fee and the expense
reimbursement were (note 3):
Ratio of expenses to average net assets .................. 0.82% 0.87% 0.88% 0.81% 0.76%
Ratio of net investment income to
average net assets ................................... 3.44% 3.43% 3.39% 3.45% 3.59%
The expense ratios after giving effect to the waiver, reimbursement and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets .................. 0.47% 0.52% 0.52% 0.42% 0.37%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily average shares
method.
See accompanying notes to financial statements.
ADDITIONAL INFORMATION (UNAUDITED)
TRUSTEES AND OFFICERS(1)
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
INTERESTED TRUSTEES(4)
Diana P. Herrmann Trustee since 2005 Vice Chair and Chief Executive Officer 12 ICI Mutual Insurance Company
New York, NY and President of Aquila Management Corporation,
(02/25/58) since 1998 Founder of the Aquila Group of Funds(5)
and parent of Aquila Investment
Management LLC, Manager since 2004,
President since 1997, Chief Operating
Officer 1997-2008, a Director since
1984, Secretary since 1986 and
previously its Executive Vice President,
Senior Vice President or Vice President,
1986-1997; Chief Executive Officer and
Vice Chair since 2004, President and
Manager of the Manager since 2003, and
Chief Operating Officer of the Manager,
2003-2008; Chair, Vice Chair, President,
Executive Vice President or Senior Vice
President of funds in the Aquila Group
of Funds since 1986; Director of the
Distributor since 1997; trustee, Reserve
Money-Market Funds, 1999-2000 and
Reserve Private Equity Series,
1998-2000; Governor, Investment Company
Institute (a trade organization for the
U.S. fund industry dedicated to
protecting shareholder interests and
educating the public about investing)
and head of its Small Funds Committee
since 2004; active in charitable and
volunteer organizations.
NON-INTERESTED TRUSTEES
William J. Nightingale Chair of Retired; formerly Chairman, founder 2 Ring's End, Inc.
Rowayton, CT the Board (1975) and Senior Advisor until 2000 of
(09/16/29) of Trustees since Nightingale & Associates, L.L.C., a
2005 and Trustee general management consulting firm
since 1992 focusing on interim management,
divestitures, turnaround of troubled
companies, corporate restructuring and
financial advisory services; Trustee of
Churchill Tax-Free Fund of Kentucky,
1993-2007.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
David A. Duffy Trustee since 1995 Chairman, Rhode Island Convention Center 1 Delta Dental of Rhode Island
North Kingstown, RI Authority since 2003; director of
(08/07/39) Citizens Bank of Rhode Island and
Connecticut since 1999; retired Founder,
formerly President, Duffy & Shanley,
Inc., a marketing communications firm,
1973-2003; Transition Chairman for Gov.
Donald Carcieri (R.I.); past National
Chairman, National Conference for
Community and Justice (NCCJ); Past
Chair, Providence College President's
Council; Past Vice Chair, Providence
College Board of Trustees; officer or
director of numerous civic and
non-profit organizations including Rhode
Island Hospital.
James R. Ramsey Trustee since 2004 President, University of Louisville 2 Community Bank and Trust,
Louisville, KY since November 2002; Professor of Pikeville, KY and Texas
(11/14/48) Economics, University of Louisville, Roadhouse Inc.
1999-present; Kentucky Governor's Senior
Policy Advisor and State Budget
Director, 1999-2002; Vice Chancellor for
Finance and Administration, the
University of North Carolina at Chapel
Hill, 1998 to 1999; previously Vice
President for Finance and Administration
at Western Kentucky University, State
Budget Director for the Commonwealth of
Kentucky, Chief State Economist and
Executive Director for the Office of
Financial Management and Economic
Analysis for the Commonwealth of
Kentucky, Adjunct Professor at the
University of Kentucky, Associate
Professor at Loyola University-New
Orleans and Assistant Professor at
Middle Tennessee State University.
J. William Weeks Trustee since 1995 Retired; limited partner in real estate 1 None
Palm Beach, FL partnerships Alex, Brown & Sons No. 1
(06/22/27) and 2; formerly Senior Vice President or
Vice President of the Aquila Municipal
Bond Funds; and Vice President of the
Distributor.
Laureen L. White Trustee since 2005 President, Greater Providence Chamber of 1 None
North Kingstown, RI Commerce, since 2005, Executive Vice
(11/18/59) President 2004-2005 and Senior Vice
President, 1989-2002; Executive
Counselor to the Governor of Rhode
Island for Policy and Communications,
2003-2004.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
OTHER INDIVIDUALS
TRUSTEES EMERITUS(6)
Lacy B. Herrmann Founder and Founder and Chairman of the Board, N/A N/A
New York, NY Chairman Emeritus Aquila Management Corporation, the
(05/12/29) since 2005; sponsoring organization and parent of
Chairman of the the Manager or Administrator and/or
Board of Trustees, Adviser or Sub-Adviser to each fund of
1992-2005 the Aquila Group of Funds; Chairman of
the Manager or Administrator and/or
Adviser or Sub-Adviser to each since
2004; Founder and Chairman Emeritus of
each fund in the Aquila Group of Funds;
previously Chairman and a Trustee of
each fund in the Aquila Group of Funds
since its establishment until 2004 or
2005; Director of the Distributor since
1981 and formerly Vice President or
Secretary, 1981-1998; Trustee Emeritus,
Brown University and the Hopkins School;
active in university, school and
charitable organizations.
Vernon R. Alden Trustee Emeritus Retired; former director or trustee of N/A N/A
Boston, MA since 2006 various Fortune 500 companies, including
(04/07/23) Colgate-Palmolive and McGraw Hill;
formerly President of Ohio University
and Associate Dean of the Harvard
University Graduate School of Business
Administration; Trustee, Narragansett
Insured Tax-Free Income Fund, 1992-2006
and Tax-Free Trust of Oregon, 1988-2001;
Trustee Emeritus, Tax-Free Trust of
Oregon since 2006; Member of several
Japan-related advisory councils,
including Chairman of the Japan Society
of Boston; trustee of various cultural,
educational and civic organizations.
OFFICERS
Charles E. Childs, III Executive Vice Executive Vice President of all funds in N/A N/A
New York, NY President the Aquila Group of Funds and the
(04/01/57) since 2003 Manager and the Manager's parent since
2003; Executive Vice President and Chief
Operating Officer of the Manager's
parent since 2008; formerly Senior Vice
President, corporate development, Vice
President, Assistant Vice President and
Associate of the Manager's parent since
1987; Senior Vice President, Vice
President or Assistant Vice President of
the Aquila Money-Market Funds,
1988-2003.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
Stephen J. Caridi Senior Vice Vice President since 1998President of N/A N/A
New York, NY President the Distributor since 1995; Vice
(05/06/61) since 1998 President, Hawaiian Tax-Free Trust since
1998; Senior Vice President,
Narragansett Insured Tax-Free Income
Fund since 1998, Vice President
1996-1997; Senior Vice President,
Tax-Free Fund of Colorado since 2004;
Vice President, Aquila Rocky Mountain
Equity Fund since 2006.
Robert W. Anderson Chief Compliance Chief Compliance Officer of the Fund and N/A N/A
New York, NY Officer since 2004 each of the other funds in the Aquila
(08/23/40) and Assistant Group of Funds, the Manager and the
Secretary Distributor since 2004, Compliance
since 2000 Officer of the Manager or its
predecessor and current parent
1998-2004; Assistant Secretary of the
Aquila Group of Funds since 2000.
Joseph P. DiMaggio Chief Financial Chief Financial Officer of the Aquila N/A N/A
New York, NY Officer since 2003 Group of Funds since 2003 and Treasurer
(11/06/56) and Treasurer since 2000.
since 2000
Edward M. W. Hines Secretary Shareholder of Butzel Long, a N/A N/A
New York, NY since 1992 professional corporation, counsel to the
(12/16/39) Fund, since 2007; Partner of Hollyer
Brady Barrett & Hines LLP, its
predecessor as counsel, 1989-2007;
Secretary of the Aquila Group of Funds.
John J. Partridge Assistant Secretary Founding Partner, Partridge Snow & Hahn 3 None
Providence, RI - Advisor to the LLP, a law firm, Providence, Rhode
(05/05/40) Board since 2005 Island, since 1988, Senior Counsel,
since January 1, 2007; Assistant
Secretary - Advisor to the Board,
Narragansett Insured Tax-Free Income
Fund, since 2005, Trustee 2002-2005;
director or trustee of various
educational, civic and charitable
organizations, including Ocean State
Charities Trust, Memorial Hospital of
Rhode Island, and The Pawtucket
Foundation.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
John M. Herndon Assistant Secretary Assistant Secretary of the Aquila Group N/A N/A
New York, NY since 1995 of Funds since 1995 and Vice President
(12/17/39) of the three Aquila Money-Market Funds
since 1990; Vice President of the
Manager or its predecessor and current
parent since 1990.
Lori A. Vindigni Assistant Treasurer Assistant Treasurer of the Aquila Group N/A N/A
New York, NY since 2000 of Funds since 2000; Assistant Vice
(11/02/66) President of the Manager or its
predecessor and current parent since
1998; Fund Accountant for the Aquila
Group of Funds, 1995-1998.
- ----------
(1) The Fund's Statement of Additional Information includes additional
information about the Trustees and is available, without charge, upon request by
calling 800-437-1020 (toll-free) or by visiting WWW.AQUILAFUNDS.COM or the EDGAR
Database at the SEC's internet site at WWW.SEC.GOV.
(2) The mailing address of each Trustee and officer is c/o Narragansett Insured
Tax-Free Income Fund, 380 Madison Avenue, New York, NY 10017.
(3) Each Trustee holds office until the next annual meeting of shareholders or
until his or her successor is elected and qualifies. The term of office of each
officer is one year.
(4) Ms. Herrmann is an interested person of the Fund as an officer of the Fund,
as a director, officer and shareholder of the Manager's corporate parent, as an
officer and Manager of the Manager, and as a shareholder and director of the
Distributor. Ms. Herrmann is the daughter of Lacy B. Herrmann, the Founder and
Chairman Emeritus of the Fund.
(5) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S.
Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets
Trust, each of which is a money-market fund, are called the "Aquila Money-Market
Funds"; 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,
Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of
which is a tax-free municipal bond fund, are called the "Aquila Bond Funds";
Aquila Rocky Mountain Equity Fund is an equity fund; Aquila Three Peaks High
Income Fund is a high income corporate bond fund; considered together, these 12
funds are called the "Aquila Group of Funds."
(6) A Trustee Emeritus may attend Board meetings but has no voting power.
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ANALYSIS OF EXPENSES (UNAUDITED)
As a shareholder of the Fund, you may incur two types of costs: (1)
transaction costs, including front-end sales charges with respect to Class A
shares or contingent deferred sales charges ("CDSC") with respect to Class C
shares; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other Fund expenses. The table below is intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The table below is based on an investment of $1,000 invested on January 1,
2008 and held for the six months ended June 30, 2008.
ACTUAL EXPENSES
This table provides information about actual account values and actual
expenses. You may use the information provided in this table, together with the
amount you invested, to estimate the expenses that you paid over the period. To
estimate the expenses you paid on your account, divide your ending account value
by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During the Period".
SIX MONTHS ENDED JUNE 30, 2008
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 0.49% $1,000.00 $1,004.90 $3.14
- --------------------------------------------------------------------------------
Class C 0.16% $1,000.00 $1,001.60 $7.37
- --------------------------------------------------------------------------------
Class I 0.51% $1,000.00 $1,005.10 $3.99
- --------------------------------------------------------------------------------
Class Y 0.57% $1,000.00 $1,005.70 $2.39
- --------------------------------------------------------------------------------
(1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE
APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES.
TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
(2) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.63%, 1.48%, 0.80%
AND 0.48% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
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ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs
with respect to Class A shares. The example does not reflect the deduction of
contingent deferred sales charges ("CDSC") with respect to Class C shares.
Therefore, the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different mutual funds. In
addition, if these transaction costs were included, your costs would have been
higher.
SIX MONTHS ENDED JUNE 30, 2008
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
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Class A 5.00% $1,000.00 $1,021.73 $3.17
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,017.50 $7.42
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,020.89 $4.02
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,022.48 $2.41
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.63%, 1.48%, 0.80%
AND 0.48% FOR THE TRUST'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
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INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila Group of Funds
produce is automatically sent to you and all other shareholders. Specifically,
you are routinely sent the entire list of portfolio securities of your Fund
twice a year in the semi-annual and annual reports you receive. Additionally, we
prepare, and have available, portfolio listings at the end of each quarter.
Whenever you may be interested in seeing a listing of your Fund's portfolio
other than in your shareholder reports, please check our website
http://www.aquilafunds.com or call us at 1-800-437-1020.
The Fund additionally files a complete list of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms
N-Q are available free of charge on the SEC website at http://www.sec.gov. You
may also review or, for a fee, copy the forms at the SEC's Public Reference Room
in Washington, DC or by calling 1-800-SEC-0330.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROXY VOTING RECORD (UNAUDITED)
The Fund does not invest in equity securities. Accordingly, there were no
matters relating to a portfolio security considered at any shareholder meeting
held during the 12 months ended June 30, 2008 with respect to which the Fund was
entitled to vote. Applicable regulations require us to inform you that the
foregoing proxy voting information is available on the SEC website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a requirement of the
Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED.
For the fiscal year ended June 30, 2008, $5,598,407 of dividends paid by
Narragansett Insured Tax-Free Income Fund, constituting 97.75% of total
dividends paid during the fiscal year ended June 30, 2008, were exempt-interest
dividends and the balance was ordinary dividend income.
Prior to January 31, 2008, shareholders were mailed the appropriate tax
form(s) which contained information on the status of distributions paid for the
2007 CALENDAR YEAR.
Prior to January 31, 2009, shareholders will be mailed the appropriate tax
form(s) which will contain information on the status of distributions paid for
the 2008 CALENDAR YEAR.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
CONSIDERATION OF NEW ADVISORY AND ADMINISTRATION AGREEMENT AND NEW SUB-ADVISORY
AGREEMENT IN CONNECTION WITH PROPOSED CHANGES IN OWNERSHIP OF THE PARENT COMPANY
OF THE MANAGER
BASIS FOR THE TRUSTEES' APPROVAL OF THE NEW ADVISORY AGREEMENT
The Board of Trustees and the independent Trustees approved the renewal
until December 31, 2008 of the Current Advisory Agreement in November 2007 at a
meeting called and held for that purpose at which a majority of the independent
Trustees were present in person. They additionally approved the New Advisory
Agreement at a meeting held June 2, 2008.
In connection with the renewal of the Current Advisory Agreement, the
following materials were considered:
o Copies of the agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended June 30, 2007;
o A report, prepared by the Manager and provided to the Trustees for
the Trustees' review, containing data about the performance of the
Fund, data about its fees, expenses and purchases and redemptions of
capital stock together with comparisons of such data with similar
data about other comparable funds, as well as data as to the
profitability of the Manager; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees considered the Current Advisory Agreement separately as well
as in conjunction with the Current Sub-Advisory Agreement to determine their
combined effects on the Fund.
In approving the Fund's New Advisory Agreement, the Trustees considered
the information provided and the conclusions reached in connection with the
Annual Review. In addition, they considered such new information as they
believed appropriate, including more up-to-date performance and expense
information. In approving the New Advisory Agreement, the Trustees considered
the information provided and the factors considered in connection with the
Annual Review as well as such new information (for example, information about
the Transaction) as they considered appropriate. In considering the New Advisory
Agreement, the Trustees did not identify any single factor as determinative.
Matters considered by the Trustees, including the Independent Trustees, in
connection with their review of the New Advisory Agreement included the
following:
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER
The Manager has provided all administrative services to the Fund. The
Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian. The Board considered that the Manager had established and
maintained a strong culture of ethical conduct and regulatory compliance.
The Manager has arranged for the Sub-Adviser to provide local management
of the Fund's portfolio.
The Board considered that the Manager had provided all services the Board
deemed necessary or appropriate, including the specific services that the Board
has determined are required for the Fund, given that its purpose is to provide
shareholders with as high a level of current income exempt
from Rhode Island state and regular Federal income taxes as is consistent with
preservation of capital. It noted that compared to other Rhode Island
state-specific municipal bond funds, the portfolio of the Fund was of higher
quality, was the only fund in the state with 100% of its portfolio instruments
insured or pre-refunded, and contained no securities subject to the alternative
minimum tax.
The Board concluded that a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the New Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and with
benchmark indices. It was noted that the materials provided by the Manager
indicated that compared to the three competitive Rhode Island funds, the Fund's
average annual total return outperformed that of all of its peers for one, five
and ten-year periods. The Board considered these results to be consistent with
the purposes of the Fund. The Fund considers its local competitors to be Rhode
Island oriented funds that invest chiefly in high-quality Rhode Island municipal
obligations.
The Board concluded that the performance of the Fund was excellent in
light of market conditions, the length of its average maturities, its investment
objectives and its long-standing emphasis on minimizing risk. Evaluation of this
factor indicated to the Trustees that renewal of the New Advisory Agreement
would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATES FROM THEIR RELATIONSHIPS WITH THE FUND
The information provided in connection with renewal contained expense data
for the Fund and its local competitors as well as data for all single-state
tax-free municipal bond funds nationwide, including data for all such front-end
sales charge funds of a comparable asset size. The materials also showed the
profitability to the Manager of its services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide, being less than the national average, and by the Fund's
local competitors.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Manager did not
argue against approval of the fees to be paid under the New Advisory Agreement.
The Board noted that the Manager was currently waiving a portion of its fees and
had been since the Fund's inception. Additionally, it was noted that the Manager
had contractually undertaken to waive fees and/or reimburse Fund expenses during
the period July 1, 2007 through June 30, 2008 so that total Fund expenses would
not exceed 0.85% for Class A Shares, 1.70% for Class C Shares, 1.02% for Class I
Shares and 0.70% for Class Y Shares. The Manager had indicated that it intended
to continue waiving fees as necessary in order that the Fund would remain
competitive.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS
Data provided to the Trustees showed that the Fund's average net asset
size had been generally increasing in recent years. The Trustees also noted that
the materials indicated that the Fund's fees were already lower than what those
of its peers would be at comparable asset levels, including those with
breakpoints. Evaluation of this factor indicated to the Board that the New
Advisory Agreement should be renewed without addition of breakpoints at this
time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATES FROM THEIR
RELATIONSHIPS WITH THE FUND
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliates, by providing services to a number of funds or other
investment funds including the Fund, were able to spread costs as they would
otherwise be unable to do. The Board noted that while that produces efficiencies
and increased profitability for the Manager and its affiliates, it also makes
their services available to the Fund at favorable levels of quality and cost
which are more advantageous to the Fund than would otherwise have been possible.
In connection with approval of the New Advisory Agreement and
recommendation that the shareholders of the Fund approve that agreement, the
Trustees noted that that agreement is substantially the same as the Current
Advisory Agreement except for its starting date and accordingly the materials
considered in connection with the Annual Review, and the reasons for renewing
the Current Advisory Agreement, apply to the New Advisory Agreement as well. In
addition, as noted above, in addressing the desirability of replacing the
Current Advisory Agreement with the New Advisory Agreement, the Trustees
considered a wide range of information relevant to the ongoing and future
continuity of management of the Fund, including:
o Representations by representatives of AMC and the Manager that the
o Proposed change of control was not expected to result in a
change in the personnel or operations of the Manager or
Sub-Adviser; and
o Investment approach or style of the Manager and the
Sub-Adviser with respect to the Fund, or the services provided
by them to the Fund, would not change.
o The fact that the
o Transaction will not result in
Any change to the advisory fees paid by the Fund or the
Fund's total expense ratio; and
A change in the costs of the services to be provided by
the Manager.
o Fund has operated in compliance with its investment objective
and restrictions.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the Independent Trustees, concluded
that the New Advisory Agreement should be approved and recommended that the
shareholders of the Fund vote to approve the New Advisory Agreement for an
initial one-year term.
CONSIDERATION OF NEW SUB-ADVISORY AGREEMENT IN CONNECTION WITH TERMINATION OF
CURRENT ADVISORY AND ADMINISTRATION AGREEMENT IN CONNECTION WITH PROPOSED
CHANGES IN OWNERSHIP OF THE PARENT COMPANY OF THE MANAGER
BASIS FOR THE TRUSTEES' APPROVAL OF THE NEW SUB-ADVISORY AGREEMENT
The Board of Trustees and the independent Trustees approved the renewal
until December 31, 2008 of the Current Sub-Advisory Agreement in November, 2007
at a meeting called and held for that purpose at which a majority of the
independent Trustees were present in person. They additionally approved the New
Sub-Advisory Agreement at a meeting held June 2, 2008.
In connection with the renewal of the Current Sub-Advisory Agreement, the
following materials were considered:
o Copies of the agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended June 30, 2007;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees' review, containing data
about the performance of the Fund, data about its fees, expenses and
purchases and redemptions of capital stock together with comparisons
of such data with similar data about other comparable funds, as well
as data as to the profitability of the Sub-Adviser; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees considered the Current Sub-Advisory Agreement separately as
well as in conjunction with Current Advisory Agreement to determine their
combined effects on the Fund. In approving the Fund's New Sub-Advisory
Agreement, the Trustees considered the information provided and the conclusions
reached in connection with the Annual Review. In addition, they considered such
new information as they believed appropriate, including more up-to-date
performance and expense information. In approving the New Sub-Advisory
Agreement, the Trustees considered the information provided and the factors
considered in connection with the Annual Review as well as such new information
(for example, information about the Transaction) as they considered appropriate.
In considering the New Sub-Advisory Agreement, the Trustees did not identify any
single factor as determinative. Matters considered by the Trustees, including
the Independent Trustees, in connection with their review of the New
Sub-Advisory Agreement included the following:
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE SUB-ADVISER
The Manager has arranged for the Sub-Adviser to provide local management
of the Fund's portfolio. The Trustees noted that the Sub-Adviser employs Mr.
Salvatore C. DiSanto and Mr. Jeffrey K. Hanna as co-portfolio managers for the
Fund and had provided facilities for credit analysis of the Fund's portfolio
securities. Messrs. DiSanto and Hanna, based in Providence, Rhode Island have
provided local information regarding specific holdings in the Fund's portfolio.
The portfolio managers have also been available to and have met with the
brokerage and financial planner community and with investors and prospective
investors to provide them with information generally
about the Fund's portfolio, with which to assess the Fund as an investment
vehicle for residents of Rhode Island in light of prevailing interest rates and
local economic conditions. In addition, one or both of them have been present at
all regular meetings of the Board and Shareholders.
The Board considered that the Sub-Adviser had provided all services the
Board deemed necessary or appropriate, including the specific services that the
Board has determined are required for the Fund, given that its purpose is to
provide shareholders with as high a level of current income exempt from Rhode
Island state and regular Federal income taxes as is consistent with preservation
of capital. It noted that compared to other Rhode Island state-specific
municipal bond funds, the portfolio of the Fund was of higher quality, was the
only fund in the state with 100% of its portfolio instruments insured or
pre-refunded, and contained no securities subject to the alternative minimum
tax.
The Board concluded that a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the New Sub-Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE SUB-ADVISER
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and with
benchmark indices. It was noted that the materials provided by the Manager
indicated that compared to the three competitive Rhode Island funds, the Fund's
average annual total return outperformed that of all of its peers for one, five
and ten-year periods. The Fund considers its local competitors to be Rhode
Island oriented funds that invest chiefly in high-quality Rhode Island municipal
obligations.
The Board concluded that the performance of the Fund was excellent in
light of market conditions, the length of its average maturities, its investment
objectives and its long-standing emphasis on minimizing risk. Evaluation of this
factor indicated to the Trustees that renewal of the New Sub-Advisory Agreement
would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
SUB-ADVISER AND ITS AFFILIATES FROM THEIR RELATIONSHIPS WITH THE FUND
The information provided in connection with renewal contained expense data
for the Fund and its local competitors as well as data for all single-state
tax-free municipal bond funds nationwide, including data for all such front-end
sales charge funds of a comparable asset size. The materials also showed the
profitability to the Sub-Adviser of its services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide, being less than the national average, and by the Fund's
local competitors.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Sub-Adviser did
not argue against approval of the fees to be paid under the New Sub-Advisory
Agreement. The Board noted that the Sub-Adviser was currently waiving a portion
of its fees and had been since the Fund's inception.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS
Data provided to the Trustees showed that the Fund's average net asset
size had been generally increasing in recent years. The Trustees also noted that
the materials indicated that the Fund's fees were already lower than what those
of its peers would be at comparable asset levels, including those with
breakpoints. Evaluation of this factor indicated to the Board that the New
Sub-Advisory Agreement should be renewed without addition of breakpoints at this
time.
BENEFITS DERIVED OR TO BE DERIVED BY THE SUB-ADVISER AND ITS AFFILIATES FROM
THEIR RELATIONSHIPS WITH THE FUND
The Board observed that, as is generally true of most fund complexes, the
Sub-Adviser and its affiliates, by providing services to a number of funds or
other investment clients including the Fund, were able to spread costs as they
would otherwise be unable to do. The Board noted that while that produces
efficiencies and increased profitability for Sub-Adviser and its affiliates, it
also makes their services available to the Fund at favorable levels of quality
and cost which are more advantageous to the Fund than would otherwise have been
possible.
In connection with approval of the New Sub-Advisory Agreement and
recommendation that the shareholders of the Fund approve it, the Trustees noted
that that agreement is substantially the same as the Current Sub-Advisory
Agreement except for its starting date and accordingly the materials considered
in connection with the Annual Review, and the reasons for renewing the Current
Sub-Advisory Agreement, apply to the New Sub-Advisory Agreement as well. In
addition, as noted above, in addressing the desirability of replacing the
Current Sub-Advisory Agreement with the New Sub-Advisory Agreement, the Trustees
considered a wide range of information relevant to the ongoing and future
continuity of management of the Fund, including:
o Representations by representatives of the Sub-Adviser that the
o Proposed change of control of the Manager was not expected to
result in a change in the personnel or operations of the
Sub-Adviser; and
o Investment approach or style of the Sub-Adviser with respect
to the Fund, or the services provided by it to the Fund, would
not change.
o The fact that the
o Transaction will not result in
Any change to the advisory fees paid by the Fund or the
Fund's total expense ratio; and
A change in the costs of the services to be provided by
the Sub-Adviser.
o The fact that the Fund has operated in compliance with its
investment objective and restrictions.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the Independent Trustees, concluded
that the New Sub-Advisory Agreement should be approved and recommended that the
shareholders of the Fund vote to approve the New Sub-Advisory Agreement for an
initial one-year term.
- --------------------------------------------------------------------------------
PRIVACY NOTICE (UNAUDITED)
NARRAGANSETT INSURED TAX-FREE INCOME FUND
OUR PRIVACY POLICY. In providing services to you as an individual who owns or is
considering investing in shares of the Fund, we collect certain non-public
personal information about you. Our policy is to keep this information strictly
safeguarded and confidential, and to use or disclose it only as necessary to
provide services to you or as otherwise permitted by law. Our privacy policy
applies equally to former shareholders and persons who inquire about the Fund.
INFORMATION WE COLLECT. "Non-public personal information" is personally
identifiable financial information about you as an individual or your family.
The kinds of non-public personal information we have about you may include the
information you provide us on your share purchase application or in telephone
calls or correspondence with us, and information about your fund transactions
and holdings, how you voted your shares and the account where your shares are
held.
INFORMATION WE DISCLOSE. We disclose non-public personal information about you
to companies that provide necessary services to us, such as the Fund's transfer
agent, distributor, investment adviser or sub-adviser, as permitted or required
by law, or as authorized by you. Any other use is strictly prohibited. We do not
sell information about you or any of our fund shareholders to anyone.
NON-CALIFORNIA RESIDENTS: We also may disclose some of this information to
another fund in the Aquila Group of Funds (or its service providers) under joint
marketing agreements that permit the funds to use the information only to
provide you with information about other funds in the Aquila Group of Funds or
new services we are offering that may be of interest to you.
CALIFORNIA RESIDENTS ONLY: In addition, unless you "opt-out" of the following
disclosures using the form that was mailed to you under separate cover, we may
disclose some of this information to another fund in the Aquila Group of Funds
(or its sevice providers) under joint marketing agreements that permit the funds
to use the information only to provide you with information about other funds in
the Aquila Group of Funds or new services we are offering that may be of
interest to you.
HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to non-public personal
information about you to only those persons who need it to provide services to
you or who are permitted by law to receive it. We maintain physical, electronic
and procedural safeguards to protect the confidentiality of all non-public
personal information we have about you.
If you have any questions regarding our Privacy Policy, please contact us at
1-800-437-1020.
AQUILA DISTRIBUTORS, INC.
AQUILA INVESTMENT MANAGEMENT LLC
This Privacy Policy also has been adopted by Aquila Distributors, Inc. and
Aquila Investment Management LLC and applies to all non-public information about
you that each of these companies may obtain in connection with services provided
to the Fund or to you as a shareholder of the Fund.
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FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
Aquila Management Corporation
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
CITIZENS INVESTMENT ADVISORS,
A DEPARTMENT OF RBS CITIZENS, N. A.
One Citizens Plaza
Providence, Rhode Island 02903
BOARD OF TRUSTEES
William J. Nightingale, Chair
David A. Duffy
Diana P. Herrmann
James R. Ramsey
J. William Weeks
Laureen L. White
OFFICERS
Diana P. Herrmann, President
Stephen J. Caridi, Senior Vice President
Robert W. Anderson, Chief Compliance Officer
Joseph P. DiMaggio, Chief Financial Officer
and 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
PNC Global Investment Servicing
101 Sabin Street
Pawtucket, RI 02860
CUSTODIAN
JPMORGAN CHASE BANK, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite 2400
Philadelphia, PA 19103
Further information is contained in the Prospectus, which must precede or
accompany this report.
ITEM 2. CODE OF ETHICS.
(a) As of June 30, 2008 (the end of the reporting period) the
Fund has adopted a code of ethics that applies to the Fund's
principal executive officer(s)and principal financial officer(s)
and persons performing similar functions ("Covered Officers") as
defined in the Aquila Group of Funds Code of Ethics for Principal
Executive and Senior Financial Officers under Section 406 of the
Sarbanes-Oxley Act of 2002;
(f)(1) Pursuant to Item 10(a)(1), a copy of the Fund's Code of
Ethics that applies to the Fund's principal executive officer(s)
and principal financial officer(s) and persons performing similar
functions is included as an exhibit to its annual report on this
Form N-CSR;
(f)(2) The text of the Fund's Code of Ethics that applies to the
Trust's principal executive officer(s) and principal financial
officer(s) and persons performing similar functions has been
posted on its Internet website which can be found at the Fund's
Internet address at aquilafunds.com.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1)(ii) The Board of Trustees of the Fund has determined that
it does not have at least one audit committee financial expert
serving on its audit committee. The Fund does not have such a
person serving on the audit committee because none of the persons
currently serving as Trustees happens to have the technical
accounting and auditing expertise included in the definition of
"audit committee financial expert" recently adopted by the Securities
and Exchange Commission in connection with this Form N-CSR, and the
Board has not heretofore deemed it necessary to seek such a person
for election to the Board.
The primary mission of the Board, which is that of oversight over
the operations and affairs of the Fund, confronts the Trustees with
a wide and expanding range of issues and responsibilities. The
Trustees believe that, accordingly, it is essential that the Board's
membership consist of persons with as extensive experience as possible
in fulfilling the duties and responsibilities of mutual fund directors
and audit committee members and, ideally, with extensive experience
and background relating to the economic and financial sectors and
securities in which the Fund invests, including exposure to the
financial and accounting matters commonly encountered with respect
to those sectors and securities. The Board believes that its current
membership satisfies those criteria. It recognizes that it would
also be helpful to have a member with the relatively focused accounting
and auditing expertise reflected in the applicable definition of
"audit committee financial expert," just as additional members with
similarly focused technical expertise in other areas relevant to
the Fund's operations and affairs would also contribute added value.
However, the Board believes that the Fund is better served, and its
assets better employed, by a policy of hiring experts in various
areas, including the specialized area of technical accounting and
auditing matters, if and as the Board identifies the need, rather
than by seeking to expand its numbers by adding technical experts
in the areas constituting its domain of responsibility. The Fund's
Audit Committee Charter explicitly authorizes the Committee to
retain such experts as it deems necessary in fulfilling its duties
under the Charter.
ITEM 4. PRINCIPAL ACCOUNTING FEES AND SERVICES.
a) Audit Fees - The aggregate fees billed for professional services
rendered by the principal accountant for the audit of the Registrant's
annual financial statements were $16,000 in 2007 and $14,000 in 2008.
b) Audit Related Fees - There were no amounts billed for audit-related
fees over the past two years.
c) Tax Fees - The Registrant was billed by the principal accountant
$3,000 and $3,000 in 2007 and 2008, respectively, for return preparation
and tax compliance.
d) All Other Fees - There were no additional fees paid for audit and
non-audit services other than those disclosed in a) thorough c) above.
e)(1) Currently, the audit committee of the Registrant pre-approves audit
services and fees on an engagement-by-engagement basis
e)(2) None of the services described in b) through d) above were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X, all were pre-approved on an engagement-by-engagement basis.
f) No applicable.
g) There were no non-audit services fees billed by the Registrant's accountant
to the Registrant's investment adviser or distributor over the past two years
h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included in Item 1 above
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Directors of the Registrant has adopted a Nominating
Committee Charter which provides that the Nominating Committee (the 'Committee')
may consider and evaluate nominee candidates properly submitted by shareholders
if a vacancy among the Independent Trustees of the Registrant occurs and if,
based on the Board's then current size, composition and structure, the Committee
determines that the vacancy should be filled. The Committee will consider
candidates submitted by shareholders on the same basis as it considers and
evaluates candidates recommended by other sources. A copy of the qualifications
and procedures that must be met or followed by shareholders to properly submit
a nominee candidate to the Committee may be obtained by submitting a request
in writing to the Secretary of the Registrant.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940) as of a date within 90 days of the filing of this report, the registrant's
chief financial and executive officers have concluded that the disclosure
controls and procedures of the registrant are appropriately designed to ensure
that information required to be disclosed in the registrant's reports that are
filed under the Securities Exchange Act of 1934 are accumulated and communicated
to registrant's management, including its principal executive officer(s) and
principal financial officer(s), to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms adopted by the Securities and Exchange
Commission.
(b) There have been no significant changes in registrant's internal controls or
in other factors that could significantly affect registrant's internal controls
subsequent to the date of the most recent evaluation, including no significant
deficiencies or material weaknesses that required corrective action.
ITEM 12. EXHIBITS.
(a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and
Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act
of 2002.
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act
of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
NARRAGANSETT INSURED TAX-FREE INCOME FUND
By: /s/ Diana P. Herrmann
- -----------------------------------
President and Trustee
September 8, 2008
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Chief Financial Officer and Treasurer
september 8, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Diana P. Herrmann
- -----------------------------------
Diana P. Herrmann
President and Trustee
September 8, 2008
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 8, 2008
NARRAGANSETT INSURED TAX-FREE INCOME FUND
EXHIBIT INDEX
(a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and
Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act
of 2002.
(a) (2) Certifications of principal executive officer
and principal financial officer as required by Rule 30a-2(a)
under the Investment Company Act of 1940.
(b) Certification of chief executive officer and chief financial
officer as required by Rule 30a-2(b) of the Investment Company Act
of 1940.