-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mz/QDQVxSDYCnLbiTGSJd2p1UVTvie8TnQXvk+SULAQe+cDv0EhtlK/1tbPC8EKZ n3av6ADdHV3O6cohm1fXhg== 0000791049-07-000002.txt : 20070130 0000791049-07-000002.hdr.sgml : 20070130 20070130100326 ACCESSION NUMBER: 0000791049-07-000002 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20070130 DATE AS OF CHANGE: 20070130 EFFECTIVENESS DATE: 20070131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASCADES TRUST CENTRAL INDEX KEY: 0000791049 IRS NUMBER: 136868231 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-04382 FILM NUMBER: 07563220 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: # 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TAX FREE TRUST OF OREGON DATE OF NAME CHANGE: 19890810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASCADES TRUST CENTRAL INDEX KEY: 0000791049 IRS NUMBER: 136868231 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04626 FILM NUMBER: 07563221 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: # 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TAX FREE TRUST OF OREGON DATE OF NAME CHANGE: 19890810 0000791049 S000006648 TAX-FREE TRUST OF OREGON C000018137 Tax-Free Trust of Oregon Class A ORTFX C000018138 Tax-Free Trust of Oregon Class C ORTCX C000018139 Tax-Free Trust of Oregon Class I ORTIX C000018140 Tax-Free Trust of Oregon Class Y ORTYX 485BPOS 1 orb07.txt N-1A PARTS A, B AND C Registration Nos. 33-4382 & 811-4626 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 31 [ X ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ] Amendment No. 32 [ X ] THE CASCADES TRUST (Exact Name of Registrant as Specified in Charter) 380 Madison Avenue, Suite 2300 New York, New York 10017 (Address of Principal Executive Offices) (212) 697-6666 (Registrant's Telephone Number) EDWARD M.W. HINES Hollyer Brady Barrett & Hines LLP 551 Fifth Avenue, 27th Floor New York, New York 10176 (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate box): [ ] immediately upon filing pursuant to paragraph (b) [ X ] on January 31, 2007, pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph(a)(i) [ ] on (date) pursuant to paragraph (a)(i) [ ] 75 days after filing pursuant to paragraph (a)(ii) [ ] on (date) pursuant to paragraph (a)(ii) of Rule 485. [ ] This post-effective amendment designates a new effective date for a previous post-effective amendment. Tax-Free Trust of Oregon 380 Madison Avenue, Suite 2300 * New York, New York 10017 800-437-1020 * 212-697-6666 PROSPECTUS Class A Shares January 31, 2007 Class C Shares Tax-Free Trust of Oregon is a mutual fund that seeks to provide you as high a level of current income exempt from Oregon state and regular Federal income taxes as is consistent with preservation of capital. The Trust invests in municipal obligations that pay interest exempt from Oregon state and regular Federal income taxes and are of investment grade quality. For purchase, redemption or account inquiries contact the Trust's Shareholder Servicing Agent: PFPC Inc.* 101 Sabin Street * Pawtucket, RI 02860-1427 800-437-1000 toll-free For general inquiries & yield information 800-437-1020 toll-free or 212-697-6666 The Securities and Exchange Commission has not approved or disapproved the Trust's securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. TABLE OF CONTENTS The Trust's Objective, Investment Strategies and Main Risks................ Risk/Return Bar Chart and Performance Table................................ Fees and Expenses of the Trust............................................. Investment of the Trust's Assets........................................... Trust Management........................................................... Net Asset Value per Share.................................................. Purchases.................................................................. Redeeming Your Investment.................................................. Alternative Purchase Plans................................................. Dividends and Distributions................................................ Tax Information............................................................ Financial Highlights....................................................... The Trust's Objective, Investment Strategies and Main Risks "What is the Trust's objective?" The Trust's objective, which is a fundamental policy, is to provide you as high a level of current income exempt from Oregon state and regular Federal income taxes as is consistent with preservation of capital. "What is the Trust's investment strategy?" The Trust invests in tax-free municipal obligations which pay interest exempt from Oregon state and regular Federal income taxes. We call these "Oregon Obligations." In general, all or almost all of these obligations are issued by the State of Oregon, its counties and various other local authorities. At least 80% of the Trust's assets will always consist of such obligations of these issuers. These obligations can be of any maturity, but the Trust's average portfolio maturity has traditionally been between 10 and 18 years. At the time of purchase, the Trust's Oregon Obligations must be of investment grade quality. This means that they must either * be rated within the four highest credit ratings assigned by nationally recognized statistical rating organizations or, * if unrated, be determined to be of comparable quality by the Trust's Sub-Adviser, FAF Advisors, Inc. The Sub-Adviser selects obligations for the Trust's portfolio to best achieve the Trust's objective. The Sub-Adviser evaluates specific obligations for purchase by considering various characteristics including quality, maturity and coupon rate. The interest paid on certain types of Oregon Obligations may be subject to the Federal alternative minimum tax ("AMT"). As a fundamental policy of the Trust at least 80% of the Trust's assets must be invested in Oregon Obligations whose interest is exempt from Oregon state and regular Federal income taxes and is also not subject to AMT. The Trust may use futures and options thereon to "hedge" or protect its portfolio from adverse movements in securities prices and interest rates. "What are the main risks of investing in the Trust?" Among the risks of investing in shares of the Trust and its portfolio of securities are the following: Loss of money is a risk of investing in the Trust. The Trust's assets, being primarily or entirely Oregon issues, are subject to economic and other conditions affecting Oregon. Adverse local events, such as a downturn in the Oregon economy, could affect the value of the Trust's portfolio. (See "What are the main risk factors and special considerations specifically relating to investment in Oregon Issuers?") There are two types of risk associated with any fixed-income debt securities such as Oregon Obligations: interest rate risk and credit risk. * Interest rate risk relates to fluctuations in market value arising from changes in interest rates. If interest rates rise, the value of debt securities, including Oregon Obligations, will normally decline. If the value of Oregon Obligations held by the Trust declines, the net asset value of your shares in the Trust will also decline. All fixed-rate debt securities, even the most highly rated Oregon Obligations, are subject to interest rate risk. Oregon Obligations with longer maturities generally have a more pronounced reaction to interest rate changes than shorter-term securities. * Credit risk relates to the ability of the particular issuers of the Oregon Obligations the Trust owns to make periodic interest payments as scheduled and ultimately repay principal at maturity. There are risks in using futures and options for hedging purposes. An investment in the Trust is not a deposit in FAF Advisors, Inc., any of its bank or non-bank affiliates or any other bank, and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Trust is classified as a "non-diversified" investment company under the Investment Company Act of 1940 (the "1940 Act"). Thus, compared with "diversified" funds, it may invest a greater percentage of its assets in obligations of a particular issuer and may therefore not have as much diversification among securities, and thus diversification of risk. In general, the more the Trust invests in the securities of specific issuers, the more the Trust is exposed to risks associated with investments in those issuers. A description of the Trust's policies and procedures with respect to the disclosure of the Trust's portfolio securities is available in the Trust's Statement of Additional Information (the "SAI"). TAX-FREE TRUST OF OREGON Risk/Return Bar Chart and Performance Table The bar chart shown below provides an indication of the risks of investing in Tax-Free Trust of Oregon by showing changes in performance of the Trust's Class A Shares from year to year over a ten-year period. The table on the following page shows the risk of investing in the Trust by showing how the Trust's average annual returns for the designated periods compare with a broad measure of market performance. The table also shows the effect of taxes on the Trust's returns by presenting after-tax returns for Class A Shares. These returns are calculated using the highest individual Federal income and capital gains tax rates in effect at the time of each distribution and redemption, but do not reflect state and local taxes. A "return after taxes on distributions and redemptions" may sometimes be higher than the other two return figures; this happens when there is a capital loss on redemption, giving rise to a tax benefit to the shareholder. Actual after-tax returns will depend on your specific situation and may differ from those shown. The after-tax returns shown will be irrelevant to investors owning shares through tax-deferred accounts, such as IRAs or 401(k) plans. The total returns reflect reinvestment of dividends and distributions. How the Trust has performed in the past (before and after taxes) is not necessarily an indication of how the Trust will perform in the future. [Bar Chart] Annual Total Returns Class A Shares 1997-2006 16% 14% 12% 10% 10.08 9.03 8% 7.44 XXXX XXXX 6% XXXX 5.40 XXXX 4.54 XXXX 4.89 4% XXXX XXXX XXXX XXXX XXXX XXXX 3.88 3.72 2% XXXX XXXX XXXX XXXX XXXX XXXX XXXX 2.52 XXXX 0% XXXX XXXX -1.97 XXXX XXXX XXXX XXXX XXXX XXXX XXXX - -2% XXXX - -4% XXXX 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Calendar Years During the 10-year period shown in the bar chart, the highest return for a quarter was 4.46% (quarter ended September 30, 2002) and the lowest return for a quarter was -2.18% (quarter ended June 30, 2004). Note: The Trust's Class A Shares are sold subject to a maximum 4% sales load which is not reflected in the bar chart. If the sales load were reflected, returns would be less than those shown above. Average Annual Total Return For the Period Ended December 31, 2006 1 Year 5 Years 10 Years Tax-Free Trust of Oregon Class A Shares(1) Return before taxes (0.41%) 3.93% 4.47% Return after taxes on distributions (0.44%) 3.61% 3.90% Return after taxes on distributions and redemptions 1.03% 3.64% 3.91% Lehman Brothers Quality Intermediate Municipal Bond Index(2) 3.78% 4.44% 4.97% For the Period Ended December 31, 2006 1 Year 5 Years 10 Years Tax-Free Trust of Oregon Class C Shares Return before taxes 1.82%(3) 3.90% 4.01% Lehman Brothers Quality Intermediate Municipal Bond Index(2) 3.78% 4.44% 4.97% (1) The average annual total returns shown for Class A shares reflect the maximum 4% sales load. (2) The Lehman Brothers Quality Intermediate Municipal Bond Index is nationally oriented and consists of an unmanaged mix of investment-grade intermediate-term municipal securities of issuers throughout the United States. Because of the relatively short duration of the Trust's portfolio, management believes the Intermediate Index to be appropriate, although the average maturity of the Trust's portfolio is somewhat longer than that of the index and the Trust's portfolio may accordingly experience somewhat greater volatility. (3) The average annual total return for Class C Shares for one year assumes redemption at the end of the year and payment of 1% CDSC. TAX-FREE TRUST OF OREGON FEES AND EXPENSES OF THE TRUST This table describes the fees and expenses that you may pay if you buy and hold shares of the Trust. Class A Class C Shares Shares Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases..... (as a percentage of offering price) 4.00% None Maximum Deferred Sales Charge (Load).....None(1) 1.00%(2) (as a percentage of the lesser of redemption value or purchase price) Maximum Sales Charge (Load) Imposed on Reinvested Dividends or Distributions (as a percentage of offering price).....None None Redemption Fees..........................None None Exchange Fee.............................None None Annual Trust Operating Expenses (expenses that are deducted from the Trust's assets) Management Fee ..........................0.40% 0.40% Distribution (12b-1) Fee.................0.15% 0.75% Other: Service Fee........................None 0.25% Other Expenses (3).................0.20% 0.20% Total (3) ...........0.20% 0.45% Total Annual Trust Operating Expenses (3)..................0.75% 1.60% (1) If you buy Class A Shares in transactions of $1 million or more there is no sales charge but you will be subject to a contingent deferred sales charge of up to 1% if you redeem your shares during the first two years after purchase and up to 0.50 of 1% if you redeem your shares during the third and fourth years after purchase. (2) A contingent deferred sales charge of 1% is imposed on the redemption proceeds if you redeem your shares during the first 12 months after purchase. (3) Does not reflect an offset in Trust expenses received in the year ended September 30, 2006 for uninvested cash balances. Reflecting this offset for that year, total annual Trust operating expenses were 0.74% for Class A Shares and 1.59% for Class C Shares. Example This Example is intended to help you compare the cost of investing in the Trust with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Trust for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year, that you reinvest all dividends and distributions, and that the Trust's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 10 years Class A Shares............$474 $630 $800 $1,293 Class C Shares............$263 $505 $871 $1,462(1) You would pay the following expenses if you did not redeem your Class C Shares: Class C Shares............$163 $505 $871 $1,462(1) (1) Six years after the date of purchase, Class C Shares automatically convert to Class A Shares. Over time, long-term Class C Shareholders could pay the economic equivalent of an amount that is more than the maximum front-end sales charge allowed under applicable regulations because of the 12b-1 fee and service fee. Investment of the Trust's Assets "Is the Trust right for me?" The shares of the Trust are designed to be a suitable investment for individuals, corporations, institutions and fiduciaries who seek income exempt from Oregon state and regular Federal income taxes. Oregon Obligations The Trust invests in Oregon Obligations, which are a type of municipal obligation. They pay interest which bond counsel or other appropriate counsel deems to be exempt from regular Federal and State of Oregon income taxes. They include obligations of Oregon issuers and certain non-Oregon issuers, of any maturity. The obligations of non-Oregon issuers that the Trust can purchase as Oregon Obligations are those issued by or under the authority of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin Islands. Interest paid on these obligations is currently exempt from regular Federal and Oregon income taxes. Municipal Obligations Municipal obligations are issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies and instrumentalities to obtain funds for public purposes. There are two principal classifications of municipal obligations: "notes" and "bonds." Notes generally have maturities of one year or less, while bonds are paid back over longer periods. The various public purposes for which municipal obligations are issued include: * obtaining funds for general operating expenses, * refunding outstanding obligations, * obtaining funds for loans to other public institutions and facilities, and * funding the construction of highways, bridges, schools, hospitals, housing, mass transportation, streets and water and sewer works. Municipal obligations include: * tax, revenue or bond anticipation notes, * construction loan notes, * project notes, which sometimes carry a U.S. government guarantee, * municipal lease/purchase agreements, which are similar to installment purchase contracts for property or equipment, and * floating and variable rate demand notes. [picture] Max Light Rail [picture] Clackamas County School Districts [picture] State of Oregon [picture] Portland International Airport [Logo] TAX-FREE TRUST OF OREGON [picture] City of Portland [picture] City of Salem Utilities [picture] Oregon Convention Center [picture] Eugene Water & Electric Board The Trust invests in tax-free municipal securities, primarily the kinds of obligations issued by various communities and political subdivisions within Oregon. Most of these securities are used in general to finance construction of long-term municipal projects; examples are pictured above. The municipal obligations that financed these particular projects were included in the Trust's portfolio as of December 31, 2006 and together represented approximately 19% of the Trust's portfolio. Since the portfolio is subject to change, the Trust may not necessarily own these specific securities at the time of the delivery of this Prospectus. "Explain further how interest rate risk and credit risk may affect the value of the Trust's investments and their yields." Change in prevailing interest rates is the most common factor that affects the value of the obligations in the Trust's portfolio. Any such change may have different effects on short-term and long-term Oregon Obligations. Long-term obligations (which usually have higher yields) may fluctuate in value more than short-term ones. Thus, the Trust may shorten the average maturity of its portfolio when it believes that prevailing interest rates may rise. While this strategy may promote one part of the Trust's objective, preservation of capital, it may also result in a lower level of income. An additional aspect of credit risk that is related to but distinct from the direct risk of nonpayment by an issuer is that market perceptions may develop, based on the determinations of a rating agency or otherwise, of deterioration in an issuer's credit, and these may tend to depress the market value of the issuer's outstanding debt obligations. Other market conditions may ameliorate this effect; for example, in a period of rising demand for, and/or diminishing supply of, Oregon Obligations, the market value of an Oregon Obligation may remain relatively firm even in the face of a lowered credit rating for an issuer. Nevertheless, deterioration in creditworthiness tends as a general matter to be reflected over time in lower market values. "What are the main risk factors and special considerations specifically relating to investment in Oregon Issuers?" The following is a discussion of the general factors that might influence the ability of Oregon issuers to repay principal and interest when due on Oregon Obligations that the Trust owns. The Trust has derived this information from sources that are generally available to investors and believes it to be accurate, but it has not been independently verified and it may not be complete. After 17 consecutive .25% increases the Federal Reserve stopped raising overnight lending rates in June of 2006. The hikes by the Fed had led to rises in short term interest rates, but longer-term rates had failed to follow. The result was an inverted yield curve for taxable fixed income instruments as short term yields exceeded long term ones. The municipal yield curve has historically been one of the more steeply sloped curves in the fixed-income markets. However, municipals are not immune to current global flattening trends. Most municipal curve measures approached their flattest readings of the past 20 years. Long term yields touched their lowest point in 20 years, while short and intermediate maturity yields remained significantly higher than their low point readings of 2003. While short term rates are somewhat tethered to the Fed's current rate stance, intermediate and longer-term rates can incorporate a longer-term view of market factors, including inflation expectations. Consistent with a growing economy, the financial picture for many Oregon municipalities strengthened as income tax revenues grew. The State of Oregon's General Fund derives most of its revenue from income taxes and is constitutionally required to return to Oregonians any revenue that exceeds 2% over original projections. As of the writing of this report over $1 billion is expected to be returned to Oregonians in November of 2007. The major risks now facing the Oregon economy are: A major slowdown in the U.S. economy and a global downturn triggered by the U.S. economy. The U.S. economy has been an important engine of growth for the global economy. If the U.S. economy were to falter, the whole world would feel the impact. Asia, in particular, would be severely affected due to its heavy exposure to the U.S. economy. A hard landing in China. The Chinese economy is growing rapidly, with building construction and other business investments largely responsible for the economic growth. Central government efforts to curb growth have produced minimal success, and limited experience in policy making could result in an undesirable set of policy measures. A major slowdown in China would hurt most Asian economies, along with those of commodity exporting countries including Canada. Canada and Asian countries are the major destinations of Oregon's exports. Accordingly, Oregon's manufacturing sector would be negatively affected. Geopolitical risks. Uncertainty still surrounds the transition in Iraq and tensions with North Korea and Iran, and heightened security risks all weigh heavily on businesses and consumers. Disruptions in travel, oil supplies, and consumer confidence could be severe. Inflation and Federal Reserve Bank reactions. A growing economy with surging energy costs is a recipe for inflation. Faster inflation than forecasted might force the Federal Reserve to raise rates more quickly and to higher levels. A sharp fall of the U.S. Dollar. As the dollar depreciates against other currencies, U.S. exports are promoted as U.S. products become more price-competitive. Oregon's manufacturing sector is strongly tied to international markets. If the U.S. dollar falls too quickly, this could harm Oregon's trading partners, weakening their economies and lowering their demand for Oregon products. A sharp and major stock market correction. This could slow consumer spending. Lower stock prices could also limit the ability of businesses to raise necessary capital in the equity markets. A possible collapse of the housing market. Extremely low interest rates have caused a boom in home refinancing. As refinancing activity matures and interest rates begin to rise, the earlier boost to consumer spending may lessen. Rising regional energy prices. If and as energy prices rise, more businesses may slow production and lay off workers. Natural gas prices have risen the past year, but have stabilized recently. A geopolitical incident could dramatically disrupt gasoline and natural gas prices. Avian Flu. A pandemic would be disruptive for the Oregon economy. Higher mortality rates and absenteeism of 20 to 30 percent would severely hamper the economy. Past pandemics have erupted quickly and worked through the population within 8 weeks. Oregon's Public Employees Retirement System (PERS) and possible state and local government budget shortfalls. Major reforms in PERS have been judicially upheld and the current biennium appears to require only small additional expenditures. However, State and local governments may have to increase taxes, reduce services, and/or increase bond financing to cover potential unfunded liabilities for PERS. Initiatives, referendums, and referrals. The ballot box brings a number of unknowns that could have significant impacts on the Oregon economy. For example, the Oregon Supreme Court has upheld land use Measure 37 (discussed below), the potential impact of which on the economy is still unknown as cases are just working through the system. A slowdown in semiconductors, software, and communications. Business equipment spending is still strong, but a major slowdown in capital spending would have a negative impact on Oregon's manufacturing. Continued outsourcing of manufacturing could slow growth in this region. If research functions are shipped out of the country, Oregon's high technology sector could be harmed. In addition to general obligation bonds, the State and its political subdivisions issue revenue obligations payable from specific projects or sources, including lease rentals. There can be no assurance that a material downturn in the State's economy, with resulting impact on the financial strength of State and local entities, will not adversely affect the ability of obligors of the obligations held in the Trust's portfolio to make the required payments on these obligations, and consequently, the market value of such obligations. The principal sources of State tax revenues are the personal income and corporate income taxes. Oregon does not have a sales tax; however, the issue of a sales tax is brought before the Oregon voters frequently. Oregon has a very friendly initiative process; any registered Oregon voter may submit a proposed initiative. In recent years, Oregon has seen active use of the initiative and referendum process, with initiative measures being proposed on a variety of constitutional and statutory topics. Three such initiatives voted on in the 1990s have dramatically changed the landscape for local government. A measure that passed in November 2004, Measure 37, was intended to protect landowners from the decline of the market value of their land due to adverse land use regulations. The impact of the measure is still unknown. As of mid-June 2006 1,900 Measure 37 claims had been filed with compensation from those claims at approximately $3.5 billion. The actual amount to be paid is uncertain as applicable laws may be waived without compensation, and the ultimate interpretation of the measure is not predictable. Additionally, certain municipal securities held by the Trust may rely in whole or in part for repayment on ad valorem property taxes. There are limits under Oregon State law on the issuance of bonds supported by such taxes. In recent years several voter initiatives have also amended the State Constitution to "freeze" or roll back such taxes. School districts had been reliant on ad valorem property taxes as their major source of revenue. These initiatives created the need for the school districts to go to the State for more funding. The State has been able to fund minimum needs, but the revenue sources for the State are much more volatile than are property taxes. In March of 2006, a group of school districts filed suit claiming that the legislature's funding of public K-12 education is inadequate under the state constitution and requested that the court require the legislature to appropriate funds for the current biennium to meet certain quality goals. The State prevailed in trial court in September 2006; the school districts are expected to appeal. There is a relatively inactive market for municipal bonds of Oregon issuers other than the general obligations of the State itself and certain other limited segments of the market. Consequently, the market price of such other bonds may have a higher degree of volatility and it may be difficult to execute sales of blocks of such bonds. If the Trust were forced to sell a large volume of these bonds for any reason, such as redemptions of a large number of its shares, there is a risk that the large size of the sale itself might adversely affect the value of the Trust's portfolio. Risks relating to Futures and Options A risk of using futures and options to attempt to protect against the price volatility of the Trust's Oregon Obligations is that the Sub-Adviser could be incorrect in its expectations as to the extent of various interest rate movements or the time span within which the movements take place. For example, if the Trust sold a future in anticipation of an increase in interest rates, and then interest rates went down instead, the Trust would lose money on the sale. Another risk of using futures or options on them arises because of the imperfect correlation between movement in the price of the future and movements in the prices of the Oregon Obligations which are the subject of the hedge. Trust Management "How is the Trust managed?" Aquila Investment Management LLC, 380 Madison Avenue, Suite 2300, New York, NY 10017, the Manager, is the Trust's investment adviser under an Advisory and Administration Agreement. Its investment advisory duties, including portfolio management, have been delegated to the Sub-Adviser, FAF Advisors, Inc., under a sub-advisory agreement described below. The Manager is also responsible for administrative services, including providing for the maintenance of the headquarters of the Trust, overseeing relationships between the Trust and the service providers to the Trust. The Manager is also responsible for administrative services, including providing for the maintenance of the headquarters of the Trust, overseeing relationships between the Trust and the service providers to the Trust and providing other administrative services. The Sub-Adviser provides the Trust with local advisory services. Under the Sub-Advisory Agreement, the Sub-Adviser provides for investment supervision, including supervising continuously the investment program of the Trust and the composition of its portfolio, determining what securities will be purchased or sold by the Trust, and arranging for the purchase and the sale of securities held in the portfolio of the Trust; and, at the Sub-Adviser's expense, providing for pricing of the Trust's portfolio daily. During the fiscal year ended September 30, 2006, the Trust accrued management fees to the Manager at the annual rate of 0.40 of 1% of its average annual net assets. A discussion regarding the Trustees' basis for approving the annual renewal of the Advisory and Administration Agreement and the Sub-Advisory Agreement is available in the Trust's annual report to shareholders for the year ended September 30, 2006. Information about the Manager and the Sub-Adviser The Trust's Manager is a wholly-owned subsidiary of Aquila Management Corporation ("AMC"), founder of each fund in the Aquila Group of Fundssm, which consists of three money-market funds, seven tax-free municipal bond funds, a high income corporate bond fund and an equity fund. As of December 31, 2006, these funds had aggregate assets of approximately $4.5 billion, of which approximately $2.4 billion consisted of assets of the tax-free municipal bond funds. AMC's address is the same as that of the Manager. AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly, through two trusts and through share ownership by his wife. The Sub-adviser, FAF Advisors, Inc., is a registered investment adviser and subsidiary of U.S. Bank National Association. U.S. Bank National Association is a wholly owned subsidiary of U.S. Bancorp ("USB"), 800 Nicollett Mall, Minneapolis, Minnesota 55402. USB is the 6th largest financial services holding company in the United States. The company operates 2,462 banking offices and 4,943 ATMs, providing a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment systems products and services to consumers, businesses and institutions. The company is headquartered in Minneapolis, Minnesota and primarily serves the Midwest and West. At September 30, 2006, on a pro forma combined basis, USB and its consolidated subsidiaries had consolidated assets of approximately $216.9 billion, consolidated deposits of $120.9 billion and shareholder equity of $20.9 billion. Mr. Michael Hamilton, with the position of Director and Senior Portfolio Manager, is the officer of the Sub-Adviser who manages the Trust's portfolio. He has been employed by the parent company of the Sub-Adviser and its predecessors since 1989. He has been associated with the Trust since 1994, assisting in administration and credit analysis. Mr. Hamilton has managed municipal bond common trust funds, individual municipal bond portfolios, taxable portfolios, and money market funds. He holds a B.A. from Albertsons College of Idaho and an M.B.A. from Western Washington University. The SAI provides additional information about the portfolio manager's compensation, other accounts managed by the portfolio manager and the portfolio manager's ownership of securities of the Trust. Net Asset Value per Share The net asset value of the shares of each of the Trust's classes of shares is determined as of 4:00 p.m., New York time, on each day that the New York Stock Exchange is open (a "business day"), by dividing the value of the Trust's net assets (which means the value of the assets less liabilities) allocable to each class by the total number of shares of such class outstanding at that time. In general, net asset value of the Trust's shares is based on portfolio market value, except that Oregon Obligations maturing in 60 days or less are generally valued at amortized cost. Any securities or assets for which such market quotations are not readily available are valued at their fair value as determined in good faith under procedures subject to the general supervision and responsibility of the Trust's Board of Trustees. The price at which a purchase or redemption of shares is effected is based on the net asset value next calculated after your purchase or redemption order is received in proper form. The New York Stock Exchange annually announces the days on which it will not be open. The most recent announcement indicates that it will not be open on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the Exchange may close on days not included in that announcement. Purchases "Are there alternative purchase plans?" The Trust provides individuals with alternative ways to purchase shares through two separate classes of shares (Class A and Class C). Although the classes have different sales charge structures and ongoing expenses, they both represent interests in the same portfolio of Oregon Obligations. You should choose the class that best suits your own circumstances and needs. "In which states can I buy shares of the Trust?" You can purchase shares of the Trust if you live in Oregon or in one of the other states listed below. You should not purchase shares of the Trust if you do not reside in one of the following states. Also, if you do not reside in Oregon, dividends from the Trust may be subject to state income taxes of the state in which you do reside. Therefore, you should consult your tax adviser before buying shares of the Trust. On the date of this Prospectus, Class A Shares and Class C Shares are available only in: * Oregon * Arizona * California * Colorado * Connecticut * Hawaii * Idaho * Illinois * Minnesota * Missouri * Nevada * New Mexico * New Jersey * New York * Pennsylvania * Texas * Washington The Trust and the Distributor may reject any order for the purchase of shares. "How much money do I need to invest?" Option I * Initially, $1,000. * Subsequently any amount (for investments in shares of the same class). Option II * $50 or more if an Automatic Investment Program is established. * Subsequently, any amount you specify of $50 or more. * You are not permitted to maintain both an Automatic Investment Program and an Automatic Withdrawal Plan simultaneously. "How do I purchase shares?" You may purchase the Trust's shares: * through an investment broker or dealer, or a bank or other financial intermediary, that has a sales agreement with the Distributor, Aquila Distributors, Inc., in which case that institution will take action on your behalf, and you will not personally perform the steps indicated below; or * directly through the Distributor, by mailing payment to the Trust's Agent, PFPC Inc. Your investment must be drawn in United States dollars on a United States commercial bank, savings bank or credit union or a United States branch of a foreign commercial bank (each of which is a "Financial Institution"). The price you will pay is net asset value plus a sales charge for Class A Shares and net asset value for Class C Shares. (See "What price will I pay for the Trust's shares?") Your broker/dealer may charge a service or processing fee in connection with purchases; such a fee will be in addition to the price of the shares. Opening an Account * Make out a check for the investment amount payable to Tax-Free Trust of Oregon * Complete a New Account Application, which is available with the Prospectus or upon request, indicating the features you wish to authorize. * Send your check and completed New Account Application to your dealer or to the Trust's Agent, PFPC Inc.
Adding to An Account By Wire By Check * Telephone the Agent (toll-free) at 800-437-1000 * Make out a check for the investment amount (individual shareholders) or 877-953-6932 payable to Tax-Free Trust of Oregon. (broker/dealers) to advise us that you would like to purchase shares of the Trust by wire transfer. * Fill out the pre-printed stub attached to the Trust's confirmations or supply the name(s) of * Instruct your bank to transfer funds by wire to the account owner(s), the account number, and the following account: name of the Trust. Bank Name:PNC Bank, Philadelphia, PA * Send your check and account information to your ABA Number: 031-0000-53 dealer or to the Trust's Agent, PFPC Inc. Account Name: Aquila Group of Fundssm Account No.: 85-0242-8425 Further Credit: Tax-Free Trust of Oregon, Name of Shareholder and Account Number.
Unless you indicate otherwise, your investment will be made in Class A Shares. "Can I transfer funds electronically?" You can have funds transferred electronically, in amounts of $50 or more, from your Financial Institution if it is a member of the Automated Clearing House. You may make investments through two electronic transfer features, "Automatic Investment" and "Telephone Investment." * Automatic Investment: You can authorize a pre-determined amount to be regularly transferred from your account. * Telephone Investment: You can make single investments of up to $50,000 by telephone instructions to the Agent. Before you can transfer funds electronically, the Trust's Agent must have your completed New Account Application authorizing these features. Or, if you initially decide not to choose these conveniences and then later wish to do so, you must complete a Ready Access Features Form which is available from the Distributor or Agent, or if your account is set up so that your broker or dealer makes these sorts of changes, request your broker or dealer to make them. The Trust may modify or terminate these investment methods or charge a service fee, upon 30 days' written notice to shareholders. Redeeming Your Investment You may redeem some or all of your shares by a request to the Agent. Shares will be redeemed at the next net asset value determined after your request has been received in proper form. There is no minimum period for investment in the Trust, except for shares recently purchased by check or by Automatic or Telephone Investment as discussed below. If you own both Class A Shares and Class C Shares and do not specify which class you wish to redeem, we will redeem your Class A Shares. Certain shares are subject to a contingent deferred sales charge, or CDSC. These are: * Class C Shares held for less than 12 months (from the date of purchase); and * CDSC Class A Shares. Upon redemption, enough additional shares will be redeemed to pay for any applicable CDSC. A redemption may result in a tax liability for you. "How can I redeem my investment?"
By mail, send instructions to: By telephone, call: By FAX, send instructions to: PFPC Inc. 800-437-1000 508-599-1838 Attn: Aquila Group of Fundssm toll-free 101 Sabin Street Pawtucket, RI 02860-1427
For liquidity and convenience, the Trust offers expedited redemption. Expedited Redemption Methods (Non-Certificate Shares Only) You may request expedited redemption for any shares not issued in certificate form in two ways: 1. By Telephone. The Agent will take instructions from anyone by telephone to redeem shares and make payments: a) to a Financial Institution account you have previously specified; or b) by check in the amount of $50,000 or less, mailed to the name and address on the account from which you are redeeming, provided that neither the name nor the address has changed during the prior 30 days. You may only redeem by check via telephone request once in any seven-day period. Telephoning the Agent Whenever you telephone the Agent, please be prepared to supply: * account name(s) and number * name of the caller * the social security number registered to the account * personal identification. Note: Check the accuracy of your confirmation statements immediately upon receipt. The Trust, the Agent, and the Distributor are not responsible for losses resulting from unauthorized telephone transactions if the Agent follows reasonable procedures designed to verify a caller's identity. The Agent may record calls. 2. By FAX or Mail. You may request redemption payments to a predesignated Financial Institution account by a letter of instruction sent to the Agent, PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860-1427 or by FAX at 508-599-1838. The letter, signed by the registered shareholder(s) (no signature guarantee is required), must indicate: * account name(s) * account number * amount to be redeemed * any payment directions. To have redemption proceeds sent directly to a Financial Institution account, you must complete the Expedited Redemption section of the New Account Application or a Ready Access Features Form. You will be required to provide (1) details about your Financial Institution account, (2) signature guarantees and (3) possible additional documentation. The name(s) of the shareholder(s) on the Financial Institution account must be identical to the name(s) on the Trust's records of your account. You may change your designated Financial Institution account at any time by completing and returning a revised Ready Access Features Form. Regular Redemption Method (Certificate and Non-Certificate Shares) Certificate Shares. Mail to the Trust's Agent: (1) blank (unsigned) certificates for Class A Shares to be redeemed, (2) redemption instructions and (3) a stock assignment form. To be in "proper form," items (2) and (3) above must be signed by the registered shareholder(s) exactly as the account is registered. For a joint account, both shareholder signatures are necessary. For your protection, mail certificates separately from signed redemption instructions. We recommend that certificates be sent by registered mail, return receipt requested. We may require additional documentation for certain types of shareholders, such as corporations, partnerships, trustees or executors, or if redemption is requested by someone other than the shareholder of record. Signature Guarantees. If sufficient documentation is on file, we do not require a signature guarantee for redemptions of certificate or non-certificate shares up to $50,000, payable to the record holder, and sent to the address of record. In all other cases, signatures must be guaranteed. Your signature may be guaranteed by any: * member of a national securities exchange * U.S. bank or trust company * state-chartered savings bank * federally chartered savings and loan association * foreign bank having a U.S. correspondent bank; or * participant in the Securities Transfer Association Medallion Program ("STAMP"), the Stock Exchanges Medallion Program ("SEMP") or the New York Stock Exchange, Inc. Medallion Signature Program ("MSP"). A notary public is not an acceptable signature guarantor. Non-Certificate Shares. You must use the Regular Redemption Method if you have not chosen Expedited Redemption. To redeem by this method, send a letter of instruction to the Trust's Agent, which includes: * account name(s) * account number * dollar amount or number of shares to be redeemed or a statement that all shares held in the account are to be redeemed * payment instructions (we normally mail redemption proceeds to your address as registered with the Trust) * signature(s) of the registered shareholder(s); and * signature guarantee(s), if required, as indicated above after "Certificate Shares." "When will I receive the proceeds of my redemption?" Redemption proceeds are normally sent on the next business day following receipt of your redemption request in proper form. Except as described below, payments will normally be sent to your address of record within seven days.
Redemption Method of Payment Charges Under $1,000. Check. None. $1,000 or more. Check, or wired or transferred None. through the Automated Clearing House to your Financial Institution account, if you so requested on your New Account Application or Ready Access Features Form. Through a broker Check or wire, to your None. However your broker/dealer /dealer. broker/dealer. may charge a fee.
Although the Trust does not currently intend to, it can charge up to $5.00 per wire redemption, after written notice to shareholders who have elected this redemption procedure. Upon 30 days' written notice to shareholders the Trust may modify or terminate the use of the Automated Clearing House to make redemption payments at any time or charge a service fee, although no such fee is presently contemplated. If any such changes are made, the Prospectus will be supplemented to reflect them. The Trust may delay payment for redemption of shares recently purchased by check (including certified, cashier's or official bank check), Automatic Investment or Telephone Investment for up to 15 days after purchase; however, payment for redemption will not be delayed after (i) the check or transfer of funds has been honored, or (ii) the Agent receives satisfactory assurance that your Financial Institution will honor the check or transfer of funds. You can eliminate possible delays by paying for purchased shares with wired funds or Federal Reserve drafts. The Trust has the right to postpone payment or suspend redemption rights during certain periods. These periods may occur (i) when the New York Stock Exchange is closed for other than weekends and holidays, (ii) when the Securities and Exchange Commission (the "SEC") restricts trading on the New York Stock Exchange, (iii) when the SEC determines that an emergency exists which causes disposal of, or determination of the value of, portfolio securities to be unreasonable or impracticable, and (iv) during such other periods as the SEC may permit. The Trust can redeem your shares if their value totals less than $500 as a result of redemptions or failure to meet and maintain the minimum investment level under an Automatic Investment program. Before such a redemption is made, we will send you a notice giving you 60 days to make additional investments to bring your account up to the minimum. Redemption proceeds may be paid in whole or in part by distribution of the Trust's portfolio securities ("redemption in kind") in conformity with SEC rules. This method will only be used if the Board of Trustees determines that payments partially or wholly in cash would be detrimental to the best interests of the remaining shareholders. "Are there any reinvestment privileges?" If you reinvest proceeds of redemption within 120 days of the redemption you will not have to pay any additional sales charge on the reinvestment and the Distributor will refund to you any CDSC deducted at the time of redemption by adding it to the amount of your reinvestment. You must reinvest in the same class as the shares redeemed. You may exercise this privilege only once a year, unless otherwise approved by the Distributor. Reinvestment will not alter the tax consequences of your original redemption. "Is there an Automatic Withdrawal Plan?" An Automatic Withdrawal Plan, which is only available for Class A Shares, allows you to receive a monthly or quarterly check in a stated amount, not less than $50. Alternative Purchase Plans "How do the different arrangements for Class A Shares and Class C Shares affect the cost of buying, holding and redeeming shares, and what else should I know about the two classes?" In this Prospectus the Trust provides you with two ways to invest in the Trust through two separate classes of shares. All classes represent interests in the same portfolio of Oregon Obligations. The classes of shares offered to individuals differ in their sales charge structures and ongoing expenses, as described below. You should choose the class that best suits your own circumstances and needs. Class A Shares Class C Shares "Front-Payment Class" "Level-Payment Class" Initial Sales Class A Shares are None. Class C Charge offered at net asset Shares are offered value plus a maximum at net asset value sales charge of 4%, with no sales charge paid at the time of payable at the time purchase. Thus, of purchase. your investment is reduced by the applicable sales charge. Contingent None (except for A maximum CDSC of Deferred Sales certain purchases 1% is imposed upon Charge ("CDSC") of $1 million or the redemption of more). Class C Shares held for less than 12 months. No CDSC applies to Class C Shares acquired through the reinvestment of dividends or distributions. Distribution and A distribution fee There is a level Service Fees of 0.15 of 1% is charge for imposed on the distribution and average annual net service fees for six assets represented years after the date by the Class A of purchase at the Shares. aggregate annual rate of 1% of the average net assets represented by the Class C Shares. Other Information The initial sales Class C Shares, charge is waived or together with a pro- reduced in some rata portion of all cases. Larger Class C Shares purchases qualify acquired through for lower sales reinvestment of charges. dividends and other distributions paid in additional Class C Shares, automatically convert to Class A Shares after six years. Systematic Payroll Investments You can make systematic investments in either Class A Shares or Class C Shares each pay period if your employer has established a Systematic Payroll Investment Plan with the Trust. To participate in the payroll plan, you must make your own arrangements with your employer's payroll department, which may include completing special forms. Additionally, the Trust requires that you complete the New Account Application. Once your New Account Application is received by the Trust and a new account is opened, under the payroll plan your employer will deduct a preauthorized amount from each payroll check. This amount will then be sent directly to the Trust for purchase of shares at the then current offering price, which includes any applicable sales charge. You will receive a confirmation from the Trust for each transaction. Should you wish to change the dollar amount or end future systematic payroll investments, you must notify your employer directly. Changes may take up to ten days. "What price will I pay for the Trust's shares?" Class A Shares Offering Class C Shares Offering Price Price Net asset value per share Net asset value per plus the applicable share sales charge You will receive that day's offering price on purchase orders, including Telephone Investments and investments by mail, received in proper form prior to 4:00 p.m. New York time. Otherwise, orders will be filled at the next determined offering price. Dealers are required to submit orders promptly, provided, however, that if your dealer imposes an earlier cutoff time than 4:00 p.m. for the receipt of orders, your dealer will submit orders received after its earlier cutoff time after 4:00 p.m. Those orders will receive the next determined offering price. Purchase orders received on a non-business day, including those for Automatic Investment, will be executed on the next succeeding business day. The sale of shares will be suspended (1) during any period when net asset value determination is suspended or (2) when the Distributor judges it is in the Trust's best interest to do so. "What are the sales charges for purchases of Class A Shares?" The following table shows the amount of sales charge incurred for each new purchase by a "single purchaser" of Class A Shares. A "single purchaser" is: * an individual, together with his or her spouse and/or any children under 21 years of age purchasing shares for their accounts; * a trustee or other fiduciary purchasing shares for a single trust estate or fiduciary account; or * a tax-exempt organization as detailed in Section 501(c)(3) or (13) of the Internal Revenue Code. You are entitled to substantial reductions in sales charges based on aggregate holdings of Class A Shares of the Trust and Class A Shares of any of the other funds in the Aquila Group of Fundssm that you or other members of your immediate family already own at the time of your purchase. Be sure you tell your broker or dealer about all of those holdings so that any applicable reduction in sales charges on your purchase can be correctly computed. You will need to produce proof of such ownership in the form of account statements relating to any account at any financial intermediary that you or any member of your immediate family own that holds any such Class A Shares. A "single purchaser" will pay a sales charge based on the value at the time of purchase of his or her aggregate holdings of Class A Shares of the Trust and Class A Shares of any of the other funds in the Aquila Group of Fundssm in accordance with the following table: I II III Amount of Purchase Sales Charge as Sales Charge as and Value of All Percentage of Approximate Class A Shares Held Public Percentage of By a Single Purchaser Offering Price Amount Invested Less than $25,000 4.00% 4.17% $25,000 but less than $50,000 3.75% 3.90% $50,000 but less than $100,000 3.50% 3.63% $100,000 but less than $250,000 3.25% 3.36% $250,000 but less than $500,000 3.00% 3.09% $500,000 but less than $1,000,000 2.50% 2.56% For purchases of $1 million or more see "Sales Charges for Purchases of $1 Million or More."
For example: If you pay $10,000 (Column I), your sales charge ($10,000 x .04 = $400) ould be 4.00% or $400 (Column II). The value of your account would be equivalent to the ($10,000 - $400 = $9,600) amount of your payment less the sales charge. (The initial value of your account would be $10,000 - $400 = $9,600.) The sales charge as a percentage of the increase in ($400 / $9,600 = .0416666 or 4.17%) the value of your account would be 4.17% (Column III).
Sales Charges for Purchases of $1 Million or More You will not pay a sales charge at the time of purchase when you purchase "CDSC Class A Shares." CDSC Class A Shares are: (i) Class A Shares issued in a single purchase of $1 million or more by a single purchaser; and (ii) Class A Shares issued when the value of the purchase, together with the value of shares of the Trust or any other Fund in the Aquila Group of Fundssm that are owned by the purchaser and are either CDSC Class A Shares or Class A Shares on which a sales charge was paid, is $1 million or more. Redemption of CDSC Class A Shares If you redeem all or part of your CDSC Class A Shares during the four years after you purchase them, you may have to pay a special CDSC upon redemption. The amount of the CDSC, calculated based on the lesser of net asset value at the time of purchase or at the time of redemption, depends on the value of your holdings of CDSC Class A Shares at the time of redemption, according to the following table:
During First Two Years After During Third and Fourth Years Purchase After Purchase Value of Holdings $1 million and up to $2.5 million 1% 0.50% Over $2.5 million and up to $5 0.50% in year 1 0 million 0.25% in year 2 0 Over $5 million 0 0
However, it is not the Trust's intention ever to charge the shareholder (impose a CDSC) more than the commission amount that was paid to the broker/dealer in connection with the purchase transaction. This special charge also applies to CDSC Class A Shares purchased without a sales charge pursuant to a Letter of Intent. The CDSC will be waived for: * Redemption following the death of the shareholder or beneficial owner. * Redemption by the Trust when an account falls below the minimum required account size. * Redemption by an investor who purchased $1 million or more without an initial sales charge if the securities dealer of record waived its commission in connection with the purchase, with notice to the investor and the Trust at the time of purchase. Reduced Sales Charges for Certain Purchases of Class A Shares Right of Accumulation "Single purchasers" may qualify for a reduced sales charge in accordance with the above schedule when making subsequent purchases of Class A Shares. Letters of Intent A "single purchaser" may also qualify for reduced sales charges, in accordance with the above schedule, after a written Letter of Intent (included in the New Account Application) is received by the Distributor. General Class A Shares may be purchased without a sales charge by current and former Trustees and officers of any funds in the Aquila Group of Fundssm, the directors, Trustees, officers and certain employees, former employees and representatives of the Manager, the Distributor, the sub-adviser of any fund in the Aquila Group of Fundssm and the parents and/or affiliates of such companies, selected broker dealers, their officers and employees and other investment professionals, certain persons connected with firms providing legal, advertising or public relations assistance, certain family members of, and plans for the benefit of, the foregoing and plans for the benefit of trust or similar clients of banking institutions over which these institutions have full investment authority, if the Distributor has an agreement relating to such purchases. In addition, acquisitions of shares by reinvestment of dividends or in exchanges (with certain exceptions) do not incur a sales charge. The foregoing information about breakpoints in, or elimination of, sales charges is also available free of charge in a clear and prominent format on our website at www.aquilafunds.com. Simply click on the Trust's name, then on "Profile," then on "Alternative Purchase Plans." Certain financial intermediaries may charge you additional fees in connection with transactions in Trust shares. The Manager or the Distributor may make payments or provide non-cash compensation out of their own resources to securities dealers and other financial intermediaries for providing services intended to result in the sale of Trust shares or for shareholder servicing activities. The compensation is discretionary and may be available only to selected selling and servicing agents. See the "Additional Information" below and the SAI for discussions of marketing support payments. "What are the sales, service and distribution charges for Class C Shares?" * No sales charge at time of purchase. * Fees for service and distribution at a combined annual rate of 1% of average annual net assets of the Trust represented by Class C Shares. * After six years, Class C Shares automatically convert to Class A Shares, which bear a lower distribution fee and no service fee. The Trust will not accept purchase orders for Class C Shares on behalf of an individual investor (not including dealer "street name" or omnibus accounts) in an amount of $500,000 or more or if the purchase order would bring the value of the account over $500,000. This is because it will generally be more advantageous for such a purchase by an individual to be invested in the Trust's Class A Shares instead. Redemption of Class C Shares * 1% charge if redeemed within the first 12 months after purchase. This contingent deferred sales charge, or CDSC, is calculated based on the lesser of the net asset value at the time of purchase or at the time of redemption. * No CDSC applies if Class C Shares are held for 12 months after purchase. * Shares acquired by reinvestment of dividends or distributions are not subject to any CDSC. * The CDSC will be waived for redemption following the death of the shareholder or beneficial owner and for redemption by the Trust when an account falls below the minimum required size. Broker/Dealer Compensation - Class C Shares The Distributor will pay 1% of the sales price to any broker/dealer executing a Class C Share purchase. Exchange Privilege Generally, you can exchange shares of this Trust into the tax-free municipal bond funds, the high-income corporate bond fund and the equity fund (together with the Trust, the "Bond or Equity Funds") and money-market funds (the "Money-Market Funds") in the Aquila Group of Fundssm (collectively, the "Aquila Funds") for shares of the same class of any other Bond or Equity Fund, or for Original Shares of any Money-Market Fund, without the payment of a sales charge or any other fee. Because excessive trading in Trust shares can be harmful to the Trust and its other shareholders, the right is reserved to revise or terminate the exchange privilege, to limit the number of exchanges or to reject any exchange if (i) the Trust or any of the other Aquila Funds believe that it or they would be harmed or be unable to invest effectively or (ii) it or they receive or anticipate receiving simultaneous orders that may significantly affect the Trust or any other Aquila Fund. Frequent Trading As stated above, the Trust and the Distributor may reject any order for the purchase of shares. For example, because frequent movement of assets into and out of the Trust by market timers or other investors may disrupt the management of the Trust and increase its expenses, the Board of Trustees of the Trust has determined that the Trust may reject purchase orders, on a temporary or permanent basis, from investors that the Trust is able to determine are exhibiting a pattern of frequent or short-term trading in Trust shares. The Trust may not be able to detect frequent trading by the underlying owners of shares held in omnibus accounts and therefore may not be able effectively to prevent frequent trading in those accounts. Accordingly, there is no guarantee that the Trust will be successful in identifying all investors who engage in excessive trading activity or in curtailing that activity. The Trust's policy on frequent trading extends to purchases through exchanges. (See "Exchange Privilege" above.) "What about confirmations?" A statement will be mailed to you confirming each purchase or redemption of shares in the Trust. Additionally, your account at the Agent will be credited or debited in full and fractional shares (rounded to the nearest 1/1000th of a share). "Is there a Distribution Plan or a Services Plan?" The Trust has adopted a Distribution Plan (the "Plan") under the Investment Company Act of 1940's Rule 12b-1 in order to: (i) permit the Trust to finance activities primarily intended to result in the sale of its shares; (ii) permit the Manager or Sub-Adviser to make payment for distribution expenses out of its own funds; and (iii) protect the Trust against any claim that some of the expenses which it pays or may pay might be considered to be sales-related and therefore come within the purview of the Rule. Pursuant to the Plan, the Trust makes payments with respect to both Class A Shares and Class C Shares under agreements to certain broker/dealers and other qualified recipients. For any fiscal year, these payments may not exceed 0.15 of 1% for Class A Shares, and 0.75 of 1% for Class C Shares, of the average annual net assets represented by each such class. Because these distribution fees are paid out of assets on an ongoing basis, over time these fees will increase the cost of your investment; they may cost you more than paying other types of sales charges. Whenever the Trust makes Class A payments, the annual rate of the management fee otherwise payable by the Trust is reduced from 0.50 of 1% to 0.40 of 1% of the Trust's average annual net assets. Shareholder Services Plan for Class C Shares The Trust's Shareholder Services Plan authorizes it to pay a service fee under agreements to certain qualified recipients who have agreed to provide personal services to Class C shareholders and/or maintain their accounts. For any fiscal year, such fees may not exceed 0.25 of 1% of the average annual net assets represented by Class C Shares. Payment is made only out of the Trust's assets represented by Class C Shares. Service fees with respect to Class C Shares will be paid to the Distributor during the first year after purchase and thereafter to other qualified recipients. Additional Information The Distributor and/or its related companies may pay compensation (out of their own assets and not as an additional charge to the Trust) to certain broker/dealers and other financial intermediaries ("financial advisors") in connection with the sale or retention of Trust shares or certain shareholder servicing and/or certain recordkeeping/sub-transfer agency services. For example, the Distributor and/or its related companies may pay compensation to financial advisors for administrative, sub-accounting or shareholder transaction processing services above and beyond such costs which would normally be paid by the Trust, assistance in training and education and/or other forms of marketing support, including costs related to providing the Trust with "shelf space." Payments made to financial advisors may be based on a fixed dollar amount and/or one or more of the following factors: gross sales, current assets, number of accounts attributable to or maintained by the financial advisor and/or reimbursement for marketing expenses of the financial advisor. Some of these amounts may be significant to the Distributor, although they may be small compared to amounts a financial advisor may receive from other distributors. Nonetheless, the prospect of receiving additional compensation may provide financial advisors with an incentive to favor sales of shares of the Trust over other investment options. To obtain more information on how additional compensation may have influenced your advisor's recommendation of the Trust ask your financial advisor. For more information, please see the Trust's SAI. "Transfer on Death" ("TOD") Registration (Both Classes) The Trust generally permits "transfer on death" ("TOD") registration of shares, so that on the death of the shareholder the shares are transferred to a designated beneficiary or beneficiaries. Ask the Agent or your broker/dealer for the Transfer on Death Registration Request Form. With it you will receive a copy of the TOD Rules of the Aquila Group of Fundssm, which specify how the registration becomes effective and operates. By opening a TOD Account, you agree to be bound by the TOD Rules. Dividends and Distributions "How are dividends and distributions determined?" The Trust pays dividends and other distributions with respect to each class of shares. The Trust calculates its dividends and other distributions with respect to each class at the same time and in the same manner. Net income for dividend purposes includes all interest income accrued by the Trust since the previous dividend declaration less expenses paid or accrued. Net income also includes any original issue discount, which occurs if the Trust purchases an obligation for less than its face amount. The discount from the face amount is treated as additional income earned over the life of the obligation. Because the Trust's income varies, so will the Trust's dividends. There is no fixed dividend rate. It is expected that most of the Trust's dividends will be comprised of interest income. The dividends and distributions of each class can vary due to certain class-specific charges. The Trust will declare all of its net income as dividends on every day, including weekends and holidays, on those shares outstanding for which payment was received by the close of business on the preceding business day. Redeemed shares continue to earn dividends through and including the earlier of: 1. the day prior to the day when redemption proceeds are mailed, wired or transferred by the Automated Clearing House or the Agent or paid by the Agent to a selected dealer; or 2. the third business day after the day the net asset value of the redeemed shares was determined. The Trust's present policy is to pay dividends so they will be received or credited by approximately the first day of each month. "How are dividends and distributions paid?" Dividends and distributions will automatically be reinvested in full and fractional shares of the Trust of the same class at net asset value as of the payment date for the dividend or distribution, unless you elect otherwise. You may choose to have all or any part of your dividends or distributions paid in cash. You can elect to have the cash portion of your dividends or distributions deposited, without charge, by electronic funds transfers into your account at a financial institution, if it is a member of the Automated Clearing House. You can make any of these elections on the New Account Application, by a Ready Access Features Form or by a letter to the Agent. Your election to receive some or all of your dividends and distributions in cash will be effective as of the next payment of dividends after it has been received in proper form by the Agent. It will continue in effect until the Agent receives written notification of a change. Whether your dividends and distributions are received in cash or reinvested, you will receive a monthly statement indicating the current status of your investment account with the Trust. If you do not comply with laws requiring you to furnish taxpayer identification numbers and report dividends, the Trust may be required to impose backup withholding at a rate of 28% upon payment of redemptions to you and on capital gains distributions (if any) and any other distributions that do not qualify as "exempt-interest dividends." The Trust reserves the right to change the dividend and distribution payment option on your account to "reinvest" if mail sent to the address on your account is returned by the post office as "undeliverable" and you have elected to have your account dividends and/or distributions paid in cash. In such event, the Trust would then purchase additional shares of the Trust with any dividend or distribution payments that are "undeliverable." In order to change the option back to "cash," you would need to send the Agent written instructions as described above. Tax Information Net investment income includes income from Oregon Obligations in the portfolio that the Trust allocates as "exempt-interest dividends." Such dividends are exempt from regular Federal income tax. The Trust will allocate exempt-interest dividends by applying one designated percentage to all income dividends it declares during its tax year. It will normally make this designation in the first month following its fiscal year end for dividends paid in the prior year. It is possible that, under certain circumstances, a portion of the distributions paid by the Trust will be subject to income taxes. During the last calendar year, the Trust's dividends consisted of the following: Calendar Year 12/31/06 Exempt- Capital Ordinary Interest Gains Dividends Dividend Income Dividends Class A Shares 99.32% 0.44% 0.24% Class C Shares 99.18% 0.51% 0.31% Net capital gains of the Trust, if any, realized through October 31st of each year and not previously paid out will be paid out after that date. The Trust may also pay supplemental distributions after the end of its fiscal year. Capital gains and any other taxable dividends declared in October, November or December and paid to you in January (whether received in cash or reinvested in shares) are taxable for Federal income tax purposes as if received in December. If net capital losses are realized in any year, they are charged against capital and not against net investment income, which is distributed regardless of gains or losses. The Trust intends to qualify during each fiscal year under the Internal Revenue Code to pay exempt-interest dividends to its shareholders. Exempt-interest dividends derived from net income earned by the Trust on Oregon Obligations will be excludable from gross income of the shareholders for regular Federal income tax purposes. Capital gains dividends are not included in "exempt-interest dividends." Although exempt-interest dividends are not subject to regular Federal income tax, each taxpayer must report the total amount of tax-exempt interest (including exempt-interest dividends from the Trust) received or acquired during the year. Exempt-interest dividends are taken into account in determining the taxable portion of any Social Security or Railroad Retirement benefit you or your spouse receives. The Trust will treat as ordinary income in the year received certain gains on Oregon Obligations it acquired after April 30, 1993 and sells for less than face or redemption value. Those gains will be taxable to you as ordinary income, if distributed. Capital gains dividends (net long-term gains over net short-term losses) which the Trust distributes and so designates are reportable by shareholders as taxable gains from the sale or exchange of a capital asset held for more than a year. This is the case whether the shareholder reinvests the distribution in shares of the Trust or receives it in cash, regardless of the length of time the investment is held. Short-term gains, when distributed, are taxed to shareholders as ordinary income. Capital losses of the Trust are not distributed but are carried forward by the Trust to offset gains in later years and reduce future capital gains dividends and amounts taxed to shareholders. The Trust's gains or losses on sales of Oregon Obligations will be deemed long- or short-term depending upon the length of time the Trust holds these obligations. You will receive information on the tax status of the Trust's dividends and distributions annually. Special Tax Matters Under the Internal Revenue Code, interest on loans incurred by shareholders to enable them to purchase or carry shares of the Trust may not be deducted for regular Federal tax purposes. In addition, under rules used by the Internal Revenue Service for determining when borrowed funds are deemed used for the purpose of purchasing or carrying particular assets, the purchase of shares of the Trust may be considered to have been made with borrowed funds even though the borrowed funds are not directly traceable to the purchase of shares. If you, or someone related to you, is a "substantial user" of facilities financed by industrial development or private activity bonds, you should consult your own tax adviser before purchasing shares of the Trust. Interest from all Oregon Obligations is tax-exempt for purposes of computing the shareholder's regular tax. However, interest from so-called private activity bonds issued after August 7, 1986, constitutes a tax preference for both individuals and corporations and thus will enter into a computation of the alternative minimum tax ("AMT"). Whether or not that computation will result in a tax will depend on the entire content of your return. The Trust will not invest more than 20% of its assets in the types of Oregon Obligations that pay interest subject to AMT. An adjustment required by the Internal Revenue Code will tend to make it more likely that corporate shareholders will be subject to AMT. They should consult their tax advisers. "What should I know about Oregon taxes?" Individual shareholders of the Trust, resident in Oregon, will not be subject to Oregon personal income tax on distributions received from the Trust to the extent such distributions are attributable to interest on tax-exempt obligations of the State of Oregon and its political subdivisions and authorities or on obligations issued by or under the authority of the governments of Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands, provided that the Trust complies with the requirement of the Code that at least 50% of its assets at the close of each quarter of its taxable year is invested in state, municipal, or other obligations the interest on which is exempt from federal income tax under Section 103(a) thereof. Other distributions from the Trust, including all long-term and short-term capital gains, will generally not be exempt from Oregon income tax. Trust distributions are expected to be fully includable in income in determining the Oregon excise tax on corporations. Shares of the Trust will not be subject to the Oregon property tax. Shareholders of the Trust should consult their tax advisers about other state and local tax consequences of their investment in the Trust. TAX-FREE TRUST OF OREGON FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD The financial highlights table is intended to help you understand the Trust's financial performance for the past five years of the Trust's operations. Certain information reflects financial results for a single Trust share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Trust (assuming reinvestment of all dividends and distributions). This information has been audited by Tait, Weller & Baker LLP (independent registered public accounting firm), whose report, along with the Trust's financial statements, is included in the annual report, is incorporated by reference into the SAI and is available upon request.
Class A ----------------------------------------------------------- Year Ended September 30, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period ...... $ 10.91 $ 11.01 $ 11.04 $ 11.12 $ 10.72 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income + ................. 0.41 0.42 0.44 0.45 0.48 Net gain (loss) on securities (both realized and unrealized) .............. (0.05) (0.10) (0.01) (0.06) 0.41 ------- ------- ------- ------- ------- Total from investment operations ........ 0.36 0.32 0.43 0.39 0.89 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .... (0.41) (0.41) (0.44) (0.45) (0.47) Distributions from capital gains ........ (0.02) (0.01) (0.02) (0.02) (0.02) ------- ------- ------- ------- ------- Total distributions ..................... (0.43) (0.42) (0.46) (0.47) (0.49) ------- ------- ------- ------- ------- Net asset value, end of period ............ $ 10.84 $ 10.91 $ 11.01 $ 11.04 $ 11.12 ======= ======= ======= ======= ======= Total return (not reflecting sales charge) 3.42% 2.98% 3.97% 3.65% 8.59% Ratios/supplemental data Net assets, end of period (in millions) . $ 359 $ 369 $ 367 $ 361 $ 345 Ratio of expenses to average net assets . 0.75% 0.77% 0.72% 0.71% 0.71% Ratio of net investment income to average net assets ............................ 3.82% 3.79% 4.02% 4.11% 4.45% Portfolio turnover rate ................. 16% 14% 11% 12% 11% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets . 0.74% 0.76% 0.71% 0.70% 0.69%
- ---------- + Per share amounts have been calculated using the monthly average shares method.
Class C ----------------------------------------------------------- Year Ended September 30, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period ..... $ 10.90 $ 11.00 $ 11.03 $ 11.11 $ 10.71 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income + ................ 0.32 0.32 0.35 0.36 0.38 Net gain (loss) on securities (both realized and unrealized) ............. (0.04) (0.09) (0.02) (0.06) 0.42 ------- ------- ------- ------- ------- Total from investment operations ....... 0.28 0.23 0.33 0.30 0.80 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income ... (0.32) (0.32) (0.34) (0.36) (0.38) Distributions from capital gains ....... (0.02) (0.01) (0.02) (0.02) (0.02) ------- ------- ------- ------- ------- Total distributions .................... (0.34) (0.33) (0.36) (0.38) (0.40) ------- ------- ------- ------- ------- Net asset value, end of period ........... $ 10.84 $ 10.90 $ 11.00 $ 11.03 $ 11.11 ======= ======= ======= ======= ======= Total return (not reflecting sales charge) 2.64% 2.10% 3.09% 2.77% 7.67% Ratios/supplemental data Net assets, end of period (in millions) $ 32.9 $ 41.9 $ 41.4 $ 43.9 $ 25.9 Ratio of expenses to average net assets 1.60% 1.62% 1.57% 1.55% 1.55% Ratio of net investment income to average net assets ................... 2.97% 2.94% 3.17% 3.22% 3.56% Portfolio turnover rate ................ 16% 14% 11% 12% 11% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets 1.59% 1.61% 1.56% 1.54% 1.54%
[Inside Back cover] 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 FAF Advisors, Inc. 555 S.W. Oak Street * Portland, Oregon 97204 Board of Trustees James A. Gardner, Chair Diana P. Herrmann, Vice Chair Gary C. Cornia Edmund P. Jensen Timothy J. Leach John W. Mitchell Ralph R. Shaw Nancy Wilgenbusch Officers Diana P. Herrmann, President James M. McCullough, Senior Vice President Sally J. Church, Vice President Christine L. Neimeth, 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 PFPC Inc. 101 Sabin Street Pawtucket, Rhode Island 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, Pennsylvania 19103 Counsel Hollyer Brady Barrett & Hines LLP 551 Fifth Avenue * New York, New York 10176 [Back cover-left column] This Prospectus concisely states information about the Trust that you should know before investing. A Statement of Additional Information about the Trust (the "SAI") has been filed with the Securities and Exchange Commission. The SAI contains information about the Trust and its management not included in this Prospectus. The SAI is incorporated by reference in its entirety in this Prospectus and is therefore legally a part of this Prospectus. Only when you have read both this Prospectus and the SAI are all material facts about the Trust available to you. You can get additional information about the Trust's investments in the Trust's annual and semi-annual reports to shareholders. In the Trust's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Trust's performance during its last fiscal year. You can get the SAI and the Trust's annual and semi-annual reports without charge, upon request by calling 800-437-1020 (toll-free) or by visiting the Trust's website at www.aquila.com. In addition, you can review and copy information about the Trust (including the SAI) at the Public Reference Room of the SEC in Washington, D.C. Information on the operation of the Public Reference Room is available by calling 202-942-8090. Reports and other information about the Trust are also available on the EDGAR Database at the SEC's Internet site at http://www.sec.gov. Copies of this information can be obtained, for a duplicating fee, by E-mail request to publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102. - ------- The file number under which the Trust is registered with the SEC under the Investment Company Act of 1940 is 811-4626. This Prospectus should be read and retained for future reference TAX-FREE TRUST OF OREGON One of The Aquila Group of Fundssm A tax-free income investment A Series of The Cascades Trust PROSPECTUS --------- To make shareholder account inquiries, call the Trust's Shareholder Servicing Agent at: 800-437-1000 toll free or you can write to PFPC Inc. 101 Sabin Street Pawtucket, RI 02860-1427 Ticker Symbol CUSIP # Class A Shares ORTFX 876932104 Class C Shares ORTCX 876932203 Aquila Group of Fundssm Tax-Free Trust of Oregon 380 Madison Avenue, Suite 2300 * New York, New York 10017 800-437-1020 * 212-697-6666 PROSPECTUS Class Y Shares January 31, 2007 Class I Shares Tax-Free Trust of Oregon is a mutual fund that seeks to provide you as high a level of current income exempt from Oregon state and regular Federal income taxes as is consistent with preservation of capital. The Trust invests in municipal obligations that pay interest exempt from Oregon state and regular Federal income taxes and are of investment grade quality. For purchase, redemption or account inquiries contact the Trust's Shareholder Servicing Agent: PFPC Inc.* 101 Sabin Street * Pawtucket, RI 02860-1427 800-437-1000 toll-free For general inquiries & yield information 800-437-1020 toll-free or 212-697-6666 The Securities and Exchange Commission has not approved or disapproved the Trust's securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. Table of Contents The Trust's Objective, Investment Strategies and Main Risks............... Risk/Return Bar Chart and Performance Table............................... Fees and Expenses of the Trust............................................ Investment of the Trust's Assets.......................................... Trust Management.......................................................... Net Asset Value per Share................................................. Purchases................................................................. Redeeming Your Investment................................................. Alternative Purchase Plans................................................ Dividends and Distributions............................................... Tax Information........................................................... Financial Highlights...................................................... The Trust's Objective, Investment Strategies and Main Risks "What is the Trust's objective?" The Trust's objective, which is a fundamental policy, is to provide you as high a level of current income exempt from Oregon state and regular Federal income taxes as is consistent with preservation of capital. "What is the Trust's investment strategy?" The Trust invests in tax-free municipal obligations which pay interest exempt from Oregon state and regular Federal income taxes. We call these "Oregon Obligations." In general, all or almost all of these obligations are issued by the State of Oregon, its counties and various other local authorities. At least 80% of the Trust's assets will always consist of such obligations of these issuers. These obligations can be of any maturity, but the Trust's average portfolio maturity has traditionally been between 10 and 18 years. At the time of purchase, the Trust's Oregon Obligations must be of investment grade quality. This means that they must either * be rated within the four highest credit ratings assigned by nationally recognized statistical rating organizations or, * if unrated, be determined to be of comparable quality by the Trust's Sub-Adviser, FAF Advisors, Inc. The Sub-Adviser selects obligations for the Trust's portfolio to best achieve the Trust's objective. The Sub-Adviser evaluates specific obligations for purchase by considering various characteristics including quality, maturity and coupon rate. The interest paid on certain types of Oregon Obligations may be subject to the Federal alternative minimum tax ("AMT"). As a fundamental policy of the Trust at least 80% of the Trust's assets must be invested in Oregon Obligations whose interest is exempt from Oregon state and regular Federal income taxes and is also not subject to AMT. The Trust may use futures and options thereon to "hedge" or protect its portfolio from adverse movements in securities prices and interest rates. "What are the main risks of investing in the Trust?" Among the risks of investing in shares of the Trust and its portfolio of securities are the following: Loss of money is a risk of investing in the Trust. The Trust's assets, being primarily or entirely Oregon issues, are subject to economic and other conditions affecting Oregon. Adverse local events, such as a downturn in the Oregon economy, could affect the value of the Trust's portfolio. (See "What are the main risk factors and special considerations specifically relating to investment in Oregon Issuers?") There are two types of risk associated with any fixed-income debt securities such as Oregon Obligations: interest rate risk and credit risk. * Interest rate risk relates to fluctuations in market value arising from changes in interest rates. If interest rates rise, the value of debt securities, including Oregon Obligations, will normally decline. If the value of Oregon Obligations held by the Trust declines, the net asset value of your shares in the Trust will also decline. All fixed-rate debt securities, even the most highly rated Oregon Obligations, are subject to interest rate risk. Oregon Obligations with longer maturities generally have a more pronounced reaction to interest rate changes than shorter-term securities. * Credit risk relates to the ability of the particular issuers of the Oregon Obligations the Trust owns to make periodic interest payments as scheduled and ultimately repay principal at maturity. There are risks in using futures and options for hedging purposes. An investment in the Trust is not a deposit in FAF Advisors, Inc., any of its bank or non-bank affiliates or any other bank, and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Trust is classified as a "non-diversified" investment company under the Investment Company Act of 1940 (the "1940 Act"). Thus, compared with "diversified" funds, it may invest a greater percentage of its assets in obligations of a particular issuer and may therefore not have as much diversification among securities, and thus diversification of risk. In general, the more the Trust invests in the securities of specific issuers, the more the Trust is exposed to risks associated with investments in those issuers. A description of the Trust's policies and procedures with respect to the disclosure of the Trust's portfolio securities is available in the Trust's Statement of Additional Information (the "SAI"). TAX-FREE TRUST OF OREGON RISK/RETURN BAR CHART AND PERFORMANCE TABLE The bar chart shown below provides an indication of the risks of investing in Tax-Free Trust of Oregon by showing changes in performance of the Trust's Class Y Shares from year to year over a ten-year period. The table on the following page shows the risk of investing in the Trust by showing how the Trust's average annual returns for the designated periods compare with a broad measure of market performance. The table also shows the effect of taxes on the Trust's returns by presenting after-tax returns for Class Y Shares. These returns are calculated using the highest individual Federal income and capital gains tax rates in effect at the time of each distribution and redemption, but do not reflect state and local taxes. A "return after taxes on distributions and redemptions" may sometimes be higher than the other two return figures; this happens when there is a capital loss on redemption, giving rise to a tax benefit to the shareholder. Actual after-tax returns will depend on your specific situation and may differ from those shown. The after-tax returns shown will be irrelevant to investors owning shares through tax-deferred accounts, such as IRAs or 401(k) plans. The total returns reflect reinvestment of dividends and distributions. How the Trust has performed in the past (before and after taxes) is not necessarily an indication of how the Trust will perform in the future. [Bar Chart] Annual Total Returns Class Y Shares 1997-2006 10% 10.25% 9.20% XXXX XXXX 8% 7.50% XXXX XXXX XXXX XXXX XXXX 6% XXXX XXXX XXXX XXXX 5.56% XXXX 4.59% XXXX 5.14% 4% XXXX XXXX XXXX XXXX XXXX XXXX 3.94% 3.78% XXXX XXXX XXXX XXXX XXXX XXXX XXXX 2.77 XXXX 2% XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX 0% XXXX XXXX -1.73 XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX - -2 XXXX 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Calendar Years During the 10-year period shown in the bar chart, the highest return for a quarter was 4.50% (quarter ended September 30, 2002) and the lowest return for a quarter was -2.23% (quarter ended June 30, 2004). Average Annual Total Return For the Period Ended December 31, 2006 1 Year 5 Years 10 Years Tax-Free Trust of Oregon Class Y Shares Return before taxes 3.78% 4.94% 5.05% Return after taxes on Distributions 3.65% 3.90% 3.49% Return after taxes on distributions and redemptions 3.74% 3.83% 3.46% Lehman Brothers Quality Intermediate Municipal Bond Index(1) 3.78% 4.44% 4.97% (No Class I Shares were outstanding during these periods.) (1) The Lehman Brothers Quality Intermediate Municipal Bond Index is nationally oriented and consists of an unmanaged mix of investment-grade intermediate-term municipal securities of issuers throughout the United States. Because of the relatively short duration of the Trust's portfolio, management believes the Intermediate Index to be appropriate, although the average maturity of the Trust's portfolio is somewhat longer than that of the index and the Trust's portfolio may accordingly experience somewhat greater volatility. TAX-FREE TRUST OF OREGON FEES AND EXPENSES OF THE TRUST This table describes the fees and expenses that you may pay if you buy and hold shares of the Trust. No Class I Shares are currently outstanding. Class I Class Y Shares Shares Shareholder Fees (fees paid directly from your investment) Maximum Sales Charge (Load) Imposed on Purchases.........................None None (as a percentage of offering price) Maximum Deferred Sales Charge (Load).........None None Maximum Sales Charge (Load) Imposed on Reinvested Dividends or Distributions (as a percentage of offering price)........None None Redemption Fees..............................None None Exchange Fee.................................None None Annual Trust Operating Expenses (expenses that are deducted from the Trust's assets) Management Fee ..............................0.40% 0.40% Distribution (12b-1)Fee......................0.15%(1) None Other (2)....................................0.38% 0.20% Total Annual Trust Operating Expenses (2)...0.93% 0.60% (1) Current rate; up to 0.25% can be authorized. (2) Does not reflect an offset in Trust expenses received in the year ended September 30, 2006 for uninvested cash balances. Reflecting this offset for that year, total annual Trust operating expenses were 0.59% for Class Y Shares and would have been 0.92% for Class I Shares. "Other" expenses for the two classes differ because Class I Shares pay service fees to financial intermediaries of 0.25%, which includes transfer agent services, and charges common to both classes of 0.13%, while Class Y Shares bear only the common charges of 0.13% and an allocation for transfer agent services of 0.07%. Example This Example is intended to help you compare the cost of investing in the Trust with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Trust for the time periods indicated, regardless of whether you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year, that you reinvest all dividends and distributions, and that the Trust's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 10 years Class I Shares.......... $95 $296 $515 $1,143 Class Y Shares...........$61 $192 $335 $ 750 Investment of the Trust's Assets "Is the Trust right for me?" The shares of the Trust are designed to be a suitable investment for individuals, corporations, institutions and fiduciaries who seek income exempt from Oregon state and regular Federal income taxes. Institutional Class Shares ("Class Y Shares") are offered only to institutions acting for investors in a fiduciary, advisory, agency, custodial or similar capacity. Financial Intermediary Class Shares ("Class I Shares") are offered and sold only through financial intermediaries with which Aquila Distributors, Inc. (the "Distributor") has entered into sales agreements. The Trust does not sell the shares of either class directly to retail customers. Oregon Obligations The Trust invests in Oregon Obligations, which are a type of municipal obligation. They pay interest which bond counsel or other appropriate counsel deems to be exempt from regular Federal and State of Oregon income taxes. They include obligations of Oregon issuers and certain non-Oregon issuers, of any maturity. The obligations of non-Oregon issuers that the Trust can purchase as Oregon Obligations are those issued by or under the authority of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin Islands. Interest paid on these obligations is currently exempt from regular Federal and Oregon income taxes. Municipal Obligations Municipal obligations are issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies and instrumentalities to obtain funds for public purposes. There are two principal classifications of municipal obligations: "notes" and "bonds." Notes generally have maturities of one year or less, while bonds are paid back over longer periods. The various public purposes for which municipal obligations are issued include: * obtaining funds for general operating expenses, * refunding outstanding obligations, * obtaining funds for loans to other public institutions and facilities, and * funding the construction of highways, bridges, schools, hospitals, housing, mass transportation, streets and water and sewer works. Municipal obligations include: * tax, revenue or bond anticipation notes, * construction loan notes, * project notes, which sometimes carry a U.S. government guarantee, * municipal lease/purchase agreements, which are similar to installment purchase contracts for property or equipment, and * floating and variable rate demand notes. "Explain further how interest rate risk and credit risk may affect the value of the Trust's investments and their yields." Change in prevailing interest rates is the most common factor that affects the value of the obligations in the Trust's portfolio. Any such change may have different effects on short-term and long-term Oregon Obligations. Long-term obligations (which usually have higher yields) may fluctuate in value more than short-term ones. Thus, the Trust may shorten the average maturity of its portfolio when it believes that prevailing interest rates may rise. While this strategy may promote one part of the Trust's objective, preservation of capital, it may also result in a lower level of income. An additional aspect of credit risk that is related to but distinct from the direct risk of nonpayment by an issuer is that market perceptions may develop, based on the determinations of a rating agency or otherwise, of deterioration in an issuer's credit, and these may tend to depress the market value of the issuer's outstanding debt obligations. Other market conditions may ameliorate this effect; for example, in a period of rising demand for, and/or diminishing supply of, Oregon Obligations, the market value of an Oregon Obligation may remain relatively firm even in the face of a lowered credit rating for an issuer. Nevertheless, deterioration in creditworthiness tends as a general matter to be reflected over time in lower market values. "What are the main risk factors and special considerations specifically relating to investment in Oregon Issuers?" The following is a discussion of the general factors that might influence the ability of Oregon issuers to repay principal and interest when due on Oregon Obligations that the Trust owns. The Trust has derived this information from sources that are generally available to investors and believes it to be accurate, but it has not been independently verified and it may not be complete. After 17 consecutive .25% increases the Federal Reserve stopped raising overnight lending rates in June of 2006. The hikes by the Fed had led to rises in short term interest rates, but longer-term rates had failed to follow. The result was an inverted yield curve for taxable fixed income instruments as short term yields exceeded long term ones. The municipal yield curve has historically been one of the more steeply sloped curves in the fixed-income markets. However, municipals are not immune to current global flattening trends. Most municipal curve measures approached their flattest readings of the past 20 years. Long term yields touched their lowest point in 20 years, while short and intermediate maturity yields remained significantly higher than their low point readings of 2003. While short term rates are somewhat tethered to the Fed's current rate stance, intermediate and longer-term rates can incorporate a longer-term view of market factors, including inflation expectations. Consistent with a growing economy, the financial picture for many Oregon municipalities strengthened as income tax revenues grew. The State of Oregon's General Fund derives most of its revenue from income taxes and is constitutionally required to return to Oregonians any revenue that exceeds 2% over original projections. As of the writing of this report over $1 billion is expected to be returned to Oregonians in November of 2007. The major risks now facing the Oregon economy are: A major slowdown in the U.S. economy and a global downturn triggered by the U.S. economy. The U.S. economy has been an important engine of growth for the global economy. If the U.S. economy were to falter, the whole world would feel the impact. Asia, in particular, would be severely affected due to its heavy exposure to the U.S. economy. A hard landing in China. The Chinese economy is growing rapidly, with building construction and other business investments largely responsible for the economic growth. Central government efforts to curb growth have produced minimal success, and limited experience in policy making could result in an undesirable set of policy measures. A major slowdown in China would hurt most Asian economies, along with those of commodity exporting countries including Canada. Canada and Asian countries are the major destinations of Oregon's exports. Accordingly, Oregon's manufacturing sector would be negatively affected. Geopolitical risks. Uncertainty still surrounds the transition in Iraq and tensions with North Korea and Iran, and heightened security risks all weigh heavily on businesses and consumers. Disruptions in travel, oil supplies, and consumer confidence could be severe. Inflation and Federal Reserve Bank reactions. A growing economy with surging energy costs is a recipe for inflation. Faster inflation than forecasted might force the Federal Reserve to raise rates more quickly and to higher levels. A sharp fall of the U.S. Dollar. As the dollar depreciates against other currencies, U.S. exports are promoted as U.S. products become more price-competitive. Oregon's manufacturing sector is strongly tied to international markets. If the U.S. dollar falls too quickly, this could harm Oregon's trading partners, weakening their economies and lowering their demand for Oregon products. A sharp and major stock market correction. This could slow consumer spending. Lower stock prices could also limit the ability of businesses to raise necessary capital in the equity markets. A possible collapse of the housing market. Extremely low interest rates have caused a boom in home refinancing. As refinancing activity matures and interest rates begin to rise, the earlier boost to consumer spending may lessen. Rising regional energy prices. If and as energy prices rise, more businesses may slow production and lay off workers. Natural gas prices have risen the past year, but have stabilized recently. A geopolitical incident could dramatically disrupt gasoline and natural gas prices. Avian Flu. A pandemic would be disruptive for the Oregon economy. Higher mortality rates and absenteeism of 20 to 30 percent would severely hamper the economy. Past pandemics have erupted quickly and worked through the population within 8 weeks. Oregon's Public Employees Retirement System (PERS) and possible state and local government budget shortfalls. Major reforms in PERS have been judicially upheld and the current biennium appears to require only small additional expenditures. However, State and local governments may have to increase taxes, reduce services, and/or increase bond financing to cover potential unfunded liabilities for PERS. Initiatives, referendums, and referrals. The ballot box brings a number of unknowns that could have significant impacts on the Oregon economy. For example, the Oregon Supreme Court has upheld land use Measure 37 (discussed below), the potential impact of which on the economy is still unknown as cases are just working through the system. A slowdown in semiconductors, software, and communications. Business equipment spending is still strong, but a major slowdown in capital spending would have a negative impact on Oregon's manufacturing. Continued outsourcing of manufacturing could slow growth in this region. If research functions are shipped out of the country, Oregon's high technology sector could be harmed. In addition to general obligation bonds, the State and its political subdivisions issue revenue obligations payable from specific projects or sources, including lease rentals. There can be no assurance that a material downturn in the State's economy, with resulting impact on the financial strength of State and local entities, will not adversely affect the ability of obligors of the obligations held in the Trust's portfolio to make the required payments on these obligations, and consequently, the market value of such obligations. The principal sources of State tax revenues are the personal income and corporate income taxes. Oregon does not have a sales tax; however, the issue of a sales tax is brought before the Oregon voters frequently. Oregon has a very friendly initiative process; any registered Oregon voter may submit a proposed initiative. In recent years, Oregon has seen active use of the initiative and referendum process, with initiative measures being proposed on a variety of constitutional and statutory topics. Three such initiatives voted on in the 1990s have dramatically changed the landscape for local government. A measure that passed in November 2004, Measure 37, was intended to protect landowners from the decline of the market value of their land due to adverse land use regulations. The impact of the measure is still unknown. As of mid-June 2006 1,900 Measure 37 claims had been filed with compensation from those claims at approximately $3.5 billion. The actual amount to be paid is uncertain as applicable laws may be waived without compensation, and the ultimate interpretation of the measure is not predictable. Additionally, certain municipal securities held by the Trust may rely in whole or in part for repayment on ad valorem property taxes. There are limits under Oregon State law on the issuance of bonds supported by such taxes. In recent years several voter initiatives have also amended the State Constitution to "freeze" or roll back such taxes. School districts had been reliant on ad valorem property taxes as their major source of revenue. These initiatives created the need for the school districts to go to the State for more funding. The State has been able to fund minimum needs, but the revenue sources for the State are much more volatile than are property taxes. In March of 2006, a group of school districts filed suit claiming that the legislature's funding of public K-12 education is inadequate under the state constitution and requested that the court require the legislature to appropriate funds for the current biennium to meet certain quality goals. The State prevailed in trial court in September 2006; the school districts are expected to appeal. There is a relatively inactive market for municipal bonds of Oregon issuers other than the general obligations of the State itself and certain other limited segments of the market. Consequently, the market price of such other bonds may have a higher degree of volatility and it may be difficult to execute sales of blocks of such bonds. If the Trust were forced to sell a large volume of these bonds for any reason, such as redemptions of a large number of its shares, there is a risk that the large size of the sale itself might adversely affect the value of the Trust's portfolio. Risks relating to Futures and Options A risk of using futures and options to attempt to protect against the price volatility of the Trust's Oregon Obligations is that the Sub-Adviser could be incorrect in its expectations as to the extent of various interest rate movements or the time span within which the movements take place. For example, if the Trust sold a Future in anticipation of an increase in interest rates, and then interest rates went down instead, the Trust would lose money on the sale. Another risk of using futures or options on them arises because of the imperfect correlation between movement in the price of the future and movements in the prices of the Oregon Obligations which are the subject of the hedge. Trust Management "How is the Trust managed?" Aquila Investment Management LLC, 380 Madison Avenue, Suite 2300, New York, NY 10017, the Manager, is the Trust's investment adviser under an Advisory and Administration Agreement. Its investment advisory duties, including portfolio management, have been delegated to the Sub-Adviser, FAF Advisors, Inc., under a sub-advisory agreement described below. The Manager is also responsible for administrative services, including providing for the maintenance of the headquarters of the Trust, overseeing relationships between the Trust and the service providers to the Trust. The Manager is also responsible for administrative services, including providing for the maintenance of the headquarters of the Trust, overseeing relationships between the Trust and the service providers to the Trust and providing other administrative services. The Sub-Adviser provides the Trust with local advisory services. Under the Sub-Advisory Agreement, the Sub-Adviser provides for investment supervision, including supervising continuously the investment program of the Trust and the composition of its portfolio, determining what securities will be purchased or sold by the Trust, and arranging for the purchase and the sale of securities held in the portfolio of the Trust; and, at the Sub-Adviser's expense, providing for pricing of the Trust's portfolio daily. During the fiscal year ended September 30, 2006, the Trust accrued management fees to the Manager at the annual rate of 0.40 of 1% of its average annual net assets. A discussion regarding the Trustees' basis for approving the annual renewal of the Advisory and Administration Agreement and the Sub-Advisory Agreement is available in the Trust's annual report to shareholders for the year ended September 30, 2006. Information about the Manager and the Sub-Adviser The Trust's Manager is a wholly-owned subsidiary of Aquila Management Corporation ("AMC"), founder of each fund in the Aquila Group of Fundssm, which consists of three money-market funds, seven tax-free municipal bond funds, a high income corporate bond fund and an equity fund. As of December 31, 2006, these funds had aggregate assets of approximately $4.5 billion, of which approximately $2.4 billion consisted of assets of the tax-free municipal bond funds. AMC's address is the same as that of the Manager. AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly, through two trusts and through share ownership by his wife. The Sub-adviser, FAF Advisors, Inc., is a registered investment adviser and subsidiary of U.S. Bank National Association. U.S. Bank National Association is a wholly owned subsidiary of U.S. Bancorp ("USB"), 800 Nicollett Mall, Minneapolis, Minnesota 55402. USB is the 6th largest financial services holding company in the United States. The company operates 2,462 banking offices and 4,943 ATMs, providing a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment systems products and services to consumers, businesses and institutions. The company is headquartered in Minneapolis, Minnesota and primarily serves the Midwest and West. At September 30, 2006, on a pro forma combined basis, USB and its consolidated subsidiaries had consolidated assets of approximately $216.9 billion, consolidated deposits of $120.9 billion and shareholder equity of $20.9 billion. Mr. Michael Hamilton, with the position of Director and Senior Portfolio Manager, is the officer of the Sub-Adviser who manages the Trust's portfolio. He has been employed by the parent company of the Sub-Adviser and its predecessors since 1989. He has been associated with the Trust since 1994, assisting in administration and credit analysis. Mr. Hamilton has managed municipal bond common trust funds, individual municipal bond portfolios, taxable portfolios, and money market funds. He holds a B.A. from Albertsons College of Idaho and an M.B.A. from Western Washington University. The SAI provides additional information about the portfolio manager's compensation, other accounts managed by the portfolio manager and the portfolio manager's ownership of securities of the Trust. Net Asset Value per Share The net asset value of the shares of each of the Trust's classes of shares is determined as of 4:00 p.m., New York time, on each day that the New York Stock Exchange is open (a "business day"), by dividing the value of the Trust's net assets (which means the value of the assets less liabilities) allocable to each class by the total number of shares of such class outstanding at that time. In general, net asset value of the Trust's shares is based on portfolio market value, except that Oregon Obligations maturing in 60 days or less are generally valued at amortized cost. Any securities or assets for which such market quotations are not readily available are valued at their fair value as determined in good faith under procedures subject to the general supervision and responsibility of the Trust's Board of Trustees. The price at which a purchase or redemption of shares is effected is based on the net asset value next calculated after your purchase or redemption order is received in proper form. The New York Stock Exchange annually announces the days on which it will not be open. The most recent announcement indicates that it will not be open on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, the Exchange may close on days not included in that announcement. Purchases "Are there alternative purchase plans?" This Prospectus offers two separate classes of shares. All classes represent interests in the same portfolio of Oregon Obligations. "In which states can I buy shares of the Trust?" You can purchase shares of the Trust if you live in Oregon or in one of the other states listed below. You should not purchase shares of the Trust if you do not reside in one of the following states. Also, if you do not reside in Oregon, dividends from the Trust may be subject to state income taxes of the state in which you do reside. Therefore, you should consult your tax adviser before buying shares of the Trust. On the date of this Prospectus, Class Y Shares and Class I Shares are available only in: * Oregon * Arizona * California * Colorado * Connecticut * Hawaii * Idaho * Illinois * Minnesota * Missouri * Nevada * New Mexico * New York * Pennsylvania * Washington The Trust and the Distributor may reject any order for the purchase of shares. "How much money do I need to invest?" For Class Y Shares: $1,000. Subsequent investments can be in any amount. For Class I Shares: Financial intermediaries can set their own requirements for initial and subsequent investments. "How do I purchase shares?" You may purchase Class Y Shares: * through an investment broker or dealer, or a bank or other financial intermediary, that has a sales agreement with the Distributor, Aquila Distributors, Inc., in which case that institution will take action on your behalf, and you will not personally perform the steps indicated below; or * directly through the Distributor, by mailing payment to the Trust's Agent, PFPC Inc. Your investment must be drawn in United States dollars on a United States commercial bank, savings bank or credit union or a United States branch of a foreign commercial bank (each of which is a "Financial Institution"). You may purchase Class I Shares only through a financial intermediary. The price you will pay is net asset value for both Class Y Shares and Class I Shares. (See "What price will I pay for the Trust's shares?") Opening a Class Y Shares Account Adding to a Class Y Shares Account * Make out a check for * Make out a check for the investment amount the investment amount payable to Tax-Free payable to Tax-Free Trust of Oregon. Trust of Oregon. * Complete a New Account * Fill out the pre-printed Application which is stub attached to the available with the Trust's confirmations Prospectus or upon or supply the name(s) request, indicating the of account owner(s), features you wish to the account number, and authorize. the name of the Trust. * Send your check and * Send your check and completed New Account account information Application to your dealer to your dealer or or to the Trust's to the Trust's Agent, PFPC, Inc. Agent, PFPC, Inc. "Can I transfer funds electronically?" You can have funds transferred electronically, in amounts of $50 or more, from your Financial Institution if it is a member of the Automated Clearing House. You may make investments through two electronic transfer features, "Automatic Investment" and "Telephone Investment." * Automatic Investment: You can authorize a pre-determined amount to be regularly transferred from your account. * Telephone Investment: You can make single investments of up to $50,000 by telephone instructions to the Agent. Before you can transfer funds electronically, the Trust's Agent must have your completed New Account Application authorizing these features. Or, if you initially decide not to choose these conveniences and then later wish to do so, you must complete a Ready Access Features Form which is available from the Distributor or Agent, or if your account is set up so that your broker or dealer makes these sorts of changes, request your broker or dealer to make them. The Trust may modify or terminate these investment methods or charge a service fee, upon 30 days' written notice to shareholders. Redeeming Your Investment Redeeming Class Y Shares You may redeem some or all of your shares by a request to the Agent. Shares will be redeemed at the next net asset value determined after your request has been received in proper form. There is no minimum period for investment in the Trust, except for shares recently purchased by check or by Automatic or Telephone Investment as discussed below. A redemption may result in a tax liability for you. "How can I redeem my investment?"
By mail, send instructions to: By telephone, call: By FAX, send instructions to: ---- --------- ---- PFPC Inc. 800-437-1000 508-599-1838 Attn: Aquila Group of Fundssm toll-free 101 Sabin Street Pawtucket, RI 02860-1427
For liquidity and convenience, the Trust offers expedited redemption for Class Y Shares. Expedited Redemption Methods You may request expedited redemption in two ways: 1. By Telephone. The Agent will take instructions from anyone by telephone to redeem shares and make payments: a) to a Financial Institution account you have previously specified; or b) by check in the amount of $50,000 or less, mailed to the name and address on the account from which you are redeeming, provided that neither the name nor the address has changed during the prior 30 days. You may only redeem by check via telephone request once in any seven-day period. Telephoning the Agent Whenever you telephone the Agent, please be prepared to supply: * account name(s) and number * name of the caller * the social security number registered to the account * personal identification. Note: Check the accuracy of your confirmation statements immediately upon receipt. The Trust, the Agent, and the Distributor are not responsible for losses resulting from unauthorized telephone transactions if the Agent follows reasonable procedures designed to verify a caller's identity. The Agent may record calls. 2. By FAX or Mail. You may request redemption payments to a predesignated Financial Institution account by a letter of instruction sent to the Agent, PFPC Inc., 101 Sabin Street, Pawtucket, RI 02860-1427 or by FAX at 508-599-1838. The letter, signed by the registered shareholder(s) (no signature guarantee is required), must indicate: * account name(s) * account number * amount to be redeemed * any payment directions. To have redemption proceeds sent directly to a Financial Institution account, you must complete the Expedited Redemption section of the New Account Application or a Ready Access Features Form. You will be required to provide (1) details about your Financial Institution account, (2) signature guarantees and (3) possible additional documentation. The name(s) of the shareholder(s) on the Financial Institution account must be identical to the name(s) on the Trust's records of your account. You may change your designated Financial Institution account at any time by completing and returning a revised Ready Access Features Form. Regular Redemption Method To redeem by the regular redemption method, send a letter of instruction to the Trust's Agent, which includes: * account name(s) * account number * dollar amount or number of shares to be redeemed or a statement that all shares held in the account are to be redeemed * payment instructions (we normally mail redemption proceeds to your address as registered with the Trust) * signature(s) of the registered shareholder(s); and * signature guarantee(s), if required, as indicated below. To be in "proper form," your letter must be signed by the registered shareholder(s) exactly as the account is registered. For a joint account, both shareholder signatures are necessary. We may require additional documentation for certain types of shareholders, such as corporations, partnerships, trustees or executors, or if redemption is requested by someone other than the shareholder of record. Signature Guarantees. If sufficient documentation is on file, we do not require a signature guarantee for redemptions of shares up to $50,000, payable to the record holder, and sent to the address of record. In all other cases, signatures must be guaranteed. Your signature may be guaranteed by any: * member of a national securities exchange * U.S. bank or trust company * state-chartered savings bank * federally chartered savings and loan association * foreign bank having a U.S. correspondent bank; or * participant in the Securities Transfer Association Medallion Program ("STAMP"), the Stock Exchanges Medallion Program ("SEMP") or the New York Stock Exchange, Inc. Medallion Signature Program ("MSP"). A notary public is not an acceptable signature guarantor. Redemption of Class I Shares You may redeem all or any part of your Class I Shares at the net asset value next determined after receipt in proper form of your redemption request by your financial intermediary. Redemption requests for Class I Shares must be made through a financial intermediary and cannot be made directly. Financial intermediaries may charge a fee for effecting redemptions. There is no minimum period for any investment in the Trust. The Trust does not impose redemption fees or penalties on redemption of Class I Shares. A redemption may result in a transaction taxable to you. "When will I receive the proceeds of my redemption?" Redemption proceeds for Class Y Shares are normally sent on the next business day following receipt of your redemption request in proper form. Except as described below, payments will normally be sent to your address of record within seven days. Redemption Method of Payment Charges Under $1,000. Check. None. $1,000 or more. Check, or wired or None. transferred through the Automated Clearing House to your Financial Institution account, if you so requested on your New Account Application or Ready Access Features Form. Through a Check or wire, to your None. broker/dealer. broker/dealer. However your broker/dealer may charge a fee. Although the Trust does not currently intend to, it can charge up to $5.00 per wire redemption, after written notice to shareholders who have elected this redemption procedure. Upon 30 days' written notice to shareholders the Trust may modify or terminate the use of the Automated Clearing House to make redemption payments at any time or charge a service fee, although no such fee is presently contemplated. If any such changes are made, the Prospectus will be supplemented to reflect them. Redemption payments for Class I Shares are made to financial intermediaries. The Trust may delay payment for redemption of shares recently purchased by check (including certified, cashier's or official bank check), Automatic Investment or Telephone Investment for up to 15 days after purchase; however, payment for redemption will not be delayed after (i) the check or transfer of funds has been honored, or (ii) the Agent receives satisfactory assurance that your Financial Institution will honor the check or transfer of funds. You can eliminate possible delays by paying for purchased shares with wired funds or Federal Reserve drafts. The Trust has the right to postpone payment or suspend redemption rights during certain periods. These periods may occur (i) when the New York Stock Exchange is closed for other than weekends and holidays, (ii) when the Securities and Exchange Commission (the "SEC") restricts trading on the New York Stock Exchange, (iii) when the SEC determines that an emergency exists which causes disposal of, or determination of the value of, the portfolio securities to be unreasonable or impracticable, and (iv) during such other periods as the SEC may permit. The Trust can redeem your shares if their value totals less than $500 as a result of redemptions or failure to meet and maintain the minimum investment level under an Automatic Investment program. Before such a redemption is made, we will send you a notice giving you 60 days to make additional investments to bring your account up to the minimum. Redemption proceeds may be paid in whole or in part by distribution of the Trust's portfolio securities ("redemption in kind") in conformity with SEC rules. This method will only be used if the Board of Trustees determines that payments partially or wholly in cash would be detrimental to the best interests of the remaining shareholders. "Is there an Automatic Withdrawal Plan?" An Automatic Withdrawal Plan, which is only available for Class Y Shares, allows you to receive a monthly or quarterly check in a stated amount, not less than $50. Alternative Purchase Plans In this Prospectus the Trust provides you with two ways to invest in the Trust through two separate classes of shares. All classes represent interests in the same portfolio of Oregon Obligations. Class Y Shares Class I Shares "Institutional "Financial Intermediary Class" Class" Initial Sales None. None. Financial Charge intermediaries may charge a fee for purchase of shares. Contingent None. None. Deferred Sales Charge Distributions and None. Distribution fee of Service Fees up to 0.25 of 1% of average annual net assets allocable to Class I Shares, currently up to 0.15 of 1% of such net assets, and a service fee of up to 0.25 of 1% of such assets. "What price will I pay for the Trust's shares?" The offering price for Class Y Shares is the net asset value per share. You will receive that day's offering price on purchase orders, including Telephone Investments and investments by mail, received in proper form prior to 4:00 p.m. New York time. Otherwise, orders will be filled at the next determined offering price. Dealers are required to submit orders promptly, provided, however, that if your dealer imposes an earlier cutoff time than 4:00 p.m. for the receipt of orders, your dealer will submit orders received after its earlier cutoff time after 4:00 p.m. Those orders will receive the next determined offering price. Purchase orders received on a non-business day, including those for Automatic Investment, will be executed on the next succeeding business day. The offering price for Class I Shares is the net asset value per share. The offering price determined on any day applies to all purchases received by each financial intermediary prior to 4:00 p.m. New York time on any business day. Purchase orders received by financial intermediaries after that time will be filled at the next determined net asset value. The sale of shares will be suspended (1) during any period when net asset value determination is suspended, or (2) when the Distributor judges it is in the Trust's best interest to do so. Exchange Privilege Generally, you can exchange Class Y shares of this Trust into the tax-free municipal bond funds, the high-income corporate bond fund and the equity fund (together with the Trust, the "Bond or Equity Funds") and money-market funds (the "Money-Market Funds") in the Aquila Group of Fundssm (collectively, the "Aquila Funds") for shares of the same class of any other Bond or Equity Fund, or for Original Shares of any Money-Market Fund, without the payment of a sales charge or any other fee. The exchange privilege is also available to Class I Shares to the extent that other Aquila Funds are made available to its customers by your financial intermediary. All exchanges of Class I Shares must be made through your financial intermediary. Because excessive trading in Trust shares can be harmful to the Trust and its other shareholders, the right is reserved to revise or terminate the exchange privilege, to limit the number of exchanges or to reject any exchange if (i) the Trust or any of the other Aquila Funds believe that it or they would be harmed or be unable to invest effectively or (ii) it or they receive or anticipate receiving simultaneous orders that may significantly affect the Trust or any other Aquila Fund. Frequent Trading As stated above, the Trust and the Distributor may reject any order for the purchase of shares. For example, because frequent movement of assets into and out of the Trust by market timers or other investors may disrupt the management of the Trust and increase its expenses, the Board of Trustees of the Trust has determined that the Trust may reject purchase orders, on a temporary or permanent basis, from investors that the Trust is able to determine are exhibiting a pattern of frequent or short-term trading in Trust shares. The Trust may not be able to detect frequent trading by the underlying owners of shares held in omnibus accounts and therefore may not be able effectively to prevent frequent trading in those accounts. Accordingly, there is no guarantee that the Trust will be successful in identifying all investors who engage in excessive trading activity or in curtailing that activity. The Trust's policy on frequent trading extends to purchases through exchanges. (See "Exchange Privilege" above.) "What about confirmations and share certificates?" A statement will be mailed to you confirming each purchase or redemption of Class Y Shares in the Trust. Additionally, your account at the Agent will be credited or debited in full and fractional shares (rounded to the nearest 1/1000th of a share). Financial intermediaries will confirm purchases of Class I Shares. The Trust will not issue certificates for Class Y Shares or Class I Shares. "Is there a Distribution Plan or a Services Plan?" The Trust has adopted a Distribution Plan (the "Plan") under the Investment Company Act of 1940's Rule 12b-1 in order to: (i) permit the Trust to finance activities primarily intended to result in the sale of its shares; (ii) permit the Manager or Sub-Adviser to make payment for distribution expenses out of its own funds; and (iii) protect the Trust against any claim that some of the expenses which it pays or may pay might be considered to be sales-related and therefore come within the purview of the Rule. Pursuant to the Plan, the Trust makes payments with respect to Class I Shares under agreements to certain broker/dealers and other qualified recipients. For any fiscal year, these payments (currently up to 0.15 of 1%) may not exceed 0.25 of 1% of the average annual net assets represented by the Class I Shares of the Trust. Such payments can be made only out of the Trust's assets allocable to the Class I Shares. Because these distribution fees are paid out of assets on an ongoing basis, over time these fees will increase the cost of your investment; they may cost you more than paying other types of sales charges. The Plan also permits payments out of the assets of the Trust's Class A Shares. Whenever the Trust makes Class A payments under the Plan, the annual rate of the management fee otherwise payable by the Trust is reduced from 0.50 of 1% to 0.40 of 1% of the Trust's average annual net assets. No payments are made under the Plan out of assets represented by Class Y Shares. Shareholder Services Plan for Class I Shares The Trust's Shareholder Services Plan authorizes it to pay a service fee under agreements to certain qualified recipients who have agreed to provide personal services to Class I shareholders and/or maintain their accounts. For any fiscal year, such fees may not exceed 0.25 of 1% of the average annual net assets represented by Class I Shares. Payment is made only out of the Trust's assets represented by Class I Shares. No payments are made with respect to assets represented by Class Y Shares. Additional Information The Distributor and/or its related companies may pay compensation (out of their own assets and not as an additional charge to the Trust) to certain broker/dealers and other financial intermediaries ("financial advisors") in connection with the sale or retention of Trust shares or certain shareholder servicing and/or certain recordkeeping/sub-transfer agency services. For example, the Distributor and/or its related companies may pay compensation to financial advisors for administrative, sub-accounting or shareholder transaction processing services above and beyond such costs which would normally be paid by the Trust, assistance in training and education and/or other forms of marketing support, including costs related to providing the Trust with "shelf space." Payments made to financial advisors may be based on a fixed dollar amount and/or one or more of the following factors: gross sales, current assets, number of accounts attributable to or maintained by the financial advisor and/or reimbursement for marketing expenses of the financial advisor. Some of these amounts may be significant to the Distributor, although they may be small compared to amounts a financial advisor may receive from other distributors. Nonetheless, the prospect of receiving additional compensation may provide financial advisors with an incentive to favor sales of shares of the Trust over other investment options. To obtain more information on how additional compensation may have influenced your advisor's recommendation of the Trust ask your financial advisor. For more information, please see the Trust's SAI. "Transfer on Death" ("TOD") Registration (Not available for Class I Shares) If you own Class Y Shares, the Trust generally permits "transfer on death" ("TOD") registration of shares, so that on the death of the shareholder the shares are transferred to a designated beneficiary or beneficiaries. Ask the Agent or your broker/dealer for the Transfer on Death Registration Request Form. With it you will receive a copy of the TOD Rules of the Aquila Group of Fundssm, which specify how the registration becomes effective and operates. By opening a TOD Account, you agree to be bound by the TOD Rules. This service is not available for Class I Shares. Dividends and Distributions "How are dividends and distributions determined?" The Trust pays dividends and other distributions with respect to each class of shares. The Trust calculates its dividends and other distributions with respect to each class at the same time and in the same manner. Net income for dividend purposes includes all interest income accrued by the Trust since the previous dividend declaration less expenses paid or accrued. Net income also includes any original issue discount, which occurs if the Trust purchases an obligation for less than its face amount. The discount from the face amount is treated as additional income earned over the life of the obligation. Because the Trust's income varies, so will the Trust's dividends. There is no fixed dividend rate. It is expected that most of the Trust's dividends will be comprised of interest income. The dividends and distributions of each class can vary due to certain class-specific charges. The Trust will declare all of its net income as dividends on every day, including weekends and holidays, on those shares outstanding for which payment was received by the close of business on the preceding business day. Redeemed shares continue to earn dividends through and including the earlier of: 1. the day prior to the day when redemption proceeds are mailed, wired or transferred by the Automated Clearing House or the Agent or paid by the Agent to a selected dealer; or 2. the third business day after the day the net asset value of the redeemed shares was determined. The Trust's present policy is to pay dividends so they will be received or credited by approximately the first day of each month. "How are dividends and distributions paid?" Dividends and distributions on Class Y Shares will automatically be reinvested in full and fractional shares of the Trust of the same class at net asset value as of the payment date for the dividend or distribution unless you elect otherwise. If you own or purchase Class Y Shares, you may choose to have all or any part of your dividends or distributions paid in cash. You can elect to have the cash portion of your dividends or distributions deposited, without charge, by electronic funds transfers into your account at a financial institution, if it is a member of the Automated Clearing House. You can make any of these elections on the New Account Application, by a Ready Access Features Form or by a letter to the Agent. Your election to receive some or all of your dividends and distributions in cash will be effective as of the next payment of dividends after it has been received in proper form by the Agent. It will continue in effect until the Agent receives written notification of a change. All arrangements for the payment of dividends and distributions with respect to Class I Shares, including reinvestment of dividends, must be made through financial intermediaries. Whether your dividends and distributions are received in cash or reinvested, you will receive a monthly statement indicating the current status of your Class Y investment account with the Trust. Financial intermediaries provide their own statements of Class I Shares accounts. If you do not comply with laws requiring you to furnish taxpayer identification numbers and report dividends, the Trust may be required to impose backup withholding at a rate of 28% upon payment of redemptions to you and on capital gains distributions (if any) and any other distributions that do not qualify as "exempt-interest dividends." The Trust reserves the right to change the dividend and distribution payment option on your account to "reinvest" if mail sent to the address on your account is returned by the post office as "undeliverable" and you have elected to have your account dividends and/or distributions paid in cash. In such event, the Trust would then purchase additional shares of the Trust with any dividend or distribution payments that are "undeliverable." In order to change the option back to "cash," you would need to send the Agent written instructions as described above. Tax Information Net investment income includes income from Oregon Obligations in the portfolio that the Trust allocates as "exempt-interest dividends." Such dividends are exempt from regular Federal income tax. The Trust will allocate exempt- interest dividends by applying one designated percentage to all income dividends it declares during its tax year. It will normally make this designation in the first month following its fiscal year end for dividends paid in the prior year. It is possible that, under certain circumstances, a portion of the distributions paid by the Trust will be subject to income taxes. During the last calendar year, the Trust's dividends consisted of the following (no Class I Shares were outstanding): Calendar Year 12/31/06 Exempt- Capital Ordinary Interest Gains Dividends Dividend Dividends Income Class Y Shares 99.30% 0.48% 0.22% Net capital gains of the Trust, if any, realized through October 31st of each year and not previously paid out will be paid out after that date. The Trust may also pay supplemental distributions after the end of its fiscal year. Capital gains and any other taxable dividends declared in October, November or December and paid to you in January (whether received in cash or reinvested in shares) are taxable for Federal income tax purposes as if received in December. If net capital losses are realized in any year, they are charged against capital and not against net investment income, which is distributed regardless of gains or losses. The Trust intends to qualify during each fiscal year under the Internal Revenue Code to pay exempt-interest dividends to its shareholders. Exempt-interest dividends derived from net income earned by the Trust on Oregon Obligations will be excludable from gross income of the shareholders for regular Federal income tax purposes. Capital gains dividends are not included in "exempt-interest dividends." Although exempt-interest dividends are not subject to regular Federal income tax, each taxpayer must report the total amount of tax-exempt interest (including exempt-interest dividends from the Trust) received or acquired during the year. Exempt-interest dividends are taken into account in determining the taxable portion of any Social Security or Railroad Retirement benefit you or your spouse receives. The Trust will treat as ordinary income in the year received certain gains on Oregon Obligations it acquired after April 30, 1993 and sells for less than face or redemption value. Those gains will be taxable to you as ordinary income, if distributed. Capital gains dividends (net long-term gains over net short-term losses) which the Trust distributes and so designates are reportable by shareholders as taxable gains from the sale or exchange of a capital asset held for more than a year. This is the case whether the shareholder reinvests the distribution in shares of the Trust or receives it in cash, regardless of the length of time the investment is held. Short-term gains, when distributed, are taxed to shareholders as ordinary income. Capital losses of the Trust are not distributed but are carried forward by the Trust to offset gains in later years and reduce future capital gains dividends and amounts taxed to shareholders. The Trust's gains or losses on sales of Oregon Obligations will be deemed long- or short-term depending upon the length of time the Trust holds these obligations. You will receive information on the tax status of the Trust's dividends and distributions annually. Special Tax Matters Under the Internal Revenue Code, interest on loans incurred by shareholders to enable them to purchase or carry shares of the Trust may not be deducted for regular Federal tax purposes. In addition, under rules used by the Internal Revenue Service for determining when borrowed funds are deemed used for the purpose of purchasing or carrying particular assets, the purchase of shares of the Trust may be considered to have been made with borrowed funds even though the borrowed funds are not directly traceable to the purchase of shares. If you, or someone related to you, is a "substantial user" of facilities financed by industrial development or private activity bonds, you should consult your own tax adviser before purchasing shares of the Trust. Interest from all Oregon Obligations is tax-exempt for purposes of computing the shareholder's regular tax. However, interest from so-called private activity bonds issued after August 7, 1986, constitutes a tax preference for both individuals and corporations and thus will enter into a computation of the alternative minimum tax ("AMT"). Whether or not that computation will result in a tax will depend on the entire content of your return. The Trust will not invest more than 20% of its assets in the types of Oregon Obligations that pay interest subject to AMT. An adjustment required by the Internal Revenue Code will tend to make it more likely that corporate shareholders will be subject to AMT. They should consult their tax advisers. "What should I know about Oregon taxes?" Individual shareholders of the Trust, resident in Oregon, will not be subject to Oregon personal income tax on distributions received from the Trust to the extent such distributions are attributable to interest on tax-exempt obligations of the State of Oregon and its political subdivisions and authorities or on obligations issued by or under the authority of the governments of Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands, provided that the Trust complies with the requirement of the Code that at least 50 % of its assets at the close of each quarter of its taxable year is invested in state, municipal, or other obligations the interest on which is exempt from federal income tax under Section 103(a) thereof. Other distributions from the Trust, including all long-term and short-term capital gains, will generally not be exempt from Oregon income tax. Trust distributions are expected to be fully includable in income in determining the Oregon excise tax on corporations. Shares of the Trust will not be subject to the Oregon property tax. Shareholders of the Trust should consult their tax advisers about other state and local tax consequences of their investment in the Trust. TAX-FREE TRUST OF OREGON FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD The financial highlights table is intended to help you understand the Trust's financial performance for the past five years of the Trust's operations. Certain information reflects financial results for a single Trust share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Trust (assuming reinvestment of all dividends and distributions). This information has been audited by Tait, Weller & Baker LLP (independent registered public accounting firm), whose report, along with the Trust's financial statements, is included in the annual report, is incorporated by reference into the SAI and is available upon request. No Class I Shares were outstanding during the periods shown.
Class Y ----------------------------------------------------------- Year Ended September 30, ----------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period ..... $ 10.90 $ 11.00 $ 11.03 $ 11.11 $ 10.72 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income + ................ 0.43 0.43 0.46 0.47 0.49 Net gain (loss) on securities (both realized and unrealized) ............. (0.04) (0.09) (0.02) (0.06) 0.41 ------- ------- ------- ------- ------- Total from investment operations ....... 0.39 0.34 0.44 0.41 0.90 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income ... (0.43) (0.43) (0.45) (0.47) (0.49) Distributions from capital gains ....... (0.02) (0.01) (0.02) (0.02) (0.02) ------- ------- ------- ------- ------- Total distributions .................... (0.45) (0.44) (0.47) (0.49) (0.51) ------- ------- ------- ------- ------- Net asset value, end of period ........... $ 10.84 $ 10.90 $ 11.00 $ 11.03 $ 11.11 ======= ======= ======= ======= ======= Total return (not reflecting sales charge) 3.67% 3.11% 4.13% 3.80% 8.65% Ratios/supplemental data Net assets, end of period (in millions) $ 43.9 $ 36.0 $ 37.0 $ 37.1 $ 31.2 Ratio of expenses to average net assets 0.60% 0.62% 0.57% 0.56% 0.56% Ratio of net investment income to average net assets ................... 3.97% 3.95% 4.17% 4.26% 4.59% Portfolio turnover rate ................ 16% 14% 11% 12% 11% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets 0.59% 0.61% 0.56% 0.55% 0.54%
- ---------- + Per share amounts have been calculated using the monthly average shares method. [Inside Back cover] 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 FAF Advisors, Inc. 555 S.W. Oak Street * Portland, Oregon 97204 Board of Trustees James A. Gardner, Chair Diana P. Herrmann, Vice Chair Gary C. Cornia Edmund P. Jensen Timothy J. Leach John W. Mitchell Ralph R. Shaw Nancy Wilgenbusch Officers Diana P. Herrmann, President James M. McCullough, Senior Vice President Sally J. Church, Vice President Christine L. Neimeth, 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 PFPC Inc. 101 Sabin Street Pawtucket, Rhode Island 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, Pennsylvania 19103 Counsel Hollyer Brady Barrett & Hines LLP 551 Fifth Avenue * New York, New York 10176 [Back cover-left column] This Prospectus concisely states information about the Trust that you should know before investing. A Statement of Additional Information about the Trust (the "SAI") has been filed with the Securities and Exchange Commission. The SAI contains information about the Trust and its management not included in this Prospectus. The SAI is incorporated by reference in its entirety in this Prospectus and is therefore legally a part of this Prospectus. Only when you have read both this Prospectus and the SAI are all material facts about the Trust available to you. You can get additional information about the Trust's investments in the Trust's annual and semi-annual reports to shareholders. In the Trust's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Trust's performance during its last fiscal year. You can get the SAI and the Trust's annual and semi-annual reports without charge, upon request by calling 800-437-1020 (toll free) or by visiting the Trust's website at www.aquilafunds.com. In addition, you can review and copy information about the Trust (including the SAI) at the Public Reference Room of the SEC in Washington, D.C. Information on the operation of the Public Reference Room is available by calling 202-942-8090. Reports and other information about the Trust are also available on the EDGAR Database at the SEC's Internet site at http://www.sec.gov. Copies of this information can be obtained, for a duplicating fee, by E-mail request to publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102. ---- The file number under which the Trust is registered with the SEC under the Investment Company Act of 1940 is 811-4626. This Prospectus should be read and retained for future reference TAX-FREE TRUST OF OREGON One Of The Aquila Group of Fundssm A tax-free income investment A Series of The Cascades Trust PROSPECTUS ----- To make shareholder account inquiries, call the Trust's Shareholder Servicing Agent at: 800-437-1000 toll free or you can write to PFPC Inc. 101 Sabin Street Pawtucket, RI 02860-1427 Ticker Symbol CUSIP # Class I Shares ORTIX 876932401 Class Y Shares ORTYX 876932302 Tax-Free Trust of Oregon 380 Madison Avenue Suite 2300 New York, NY 10017 800-437-1020 212-697-6666 Statement of Additional Information January 31, 2007 This Statement of Additional Information (the "SAI") is not a Prospectus. There are two Prospectuses for the Trust dated January 31, 2007: one Prospectus describes Front-Payment Class Shares ("Class A Shares") and Level-Payment Class Shares ("Class C Shares") of the Trust and the other describes Institutional Class Shares ("Class Y Shares") and Financial Intermediary Class Shares ("Class I Shares") of the Trust. References in this SAI to "the Prospectus" refer to either of these Prospectuses. The SAI should be read in conjunction with the Prospectus for the class of shares in which you are considering investing. Prospectuses may be obtained from the Trust's Distributor, Aquila Distributors, Inc. 380 Madison Avenue, Suite 2300, New York, NY 10017 800-437-1020 toll-free or 212-697-6666 Financial Statements The financial statements for the Trust for the year ended September 30, 2006, which are contained in the Annual Report for that fiscal year, are hereby incorporated by reference into this SAI. Those financial statements have been audited by Tait, Weller & Baker LLP, independent registered public accounting firm, whose report thereon is incorporated herein by reference. The Annual Report of the Trust can be obtained without charge by calling the toll-free number listed above. The Annual Report will be delivered with the SAI. TABLE OF CONTENTS Trust History................................................................ Investment Strategies and Risks.............................................. Trust Policies............................................................... Management of the Trust...................................................... Ownership of Securities...................................................... Investment Advisory and Other Services....................................... Brokerage Allocation and Other Practices..................................... Capital Stock................................................................ Purchase, Redemption, and Pricing of Shares.................................. Additional Tax Information................................................... Underwriters................................................................. Appendix A................................... ............................... Tax-Free Trust of Oregon Statement of Additional Information Trust History The Trust is a series of The Cascades Trust, a Massachusetts business trust (the "Business Trust"), formed in 1985 under the name Tax-Free Trust of Oregon. On August 10, 1989, the name of the Business Trust was changed to The Cascades Trust. The Business Trust presently has only one active series, the original series, which continues to be called Tax-Free Trust of Oregon. The Trust is an open-end, non-diversified management investment company. Investment Strategies and Risks Ratings The ratings assigned by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P"), Dominion Bond Rating Service ("DBRS") and Fitch Ratings ("Fitch"), nationally recognized statistical rating organizations, represent their respective opinions of the quality of the municipal bonds and notes which they undertake to rate. It should be emphasized, however, that ratings are general and not absolute standards of quality. Consequently, obligations with the same maturity, stated interest rate and rating may have different yields, while obligations of the same maturity and stated interest rate with different ratings may have the same yield. Rating agencies consider municipal obligations that have only the fourth highest credit rating to be of medium quality. Thus, they may present investment risks which do not exist with more highly rated obligations. Such obligations possess less attractive investment characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case for higher-grade bonds. See Appendix A to this SAI for further information about the ratings of these organizations that apply to the various rated Oregon Obligations which the Trust may purchase. The table below gives information as to the percentage of Trust net assets invested as of September 30, 2006, in Oregon Obligations in the various rating categories: Highest rating (1).........................................................71.8% Second highest rating (2)..................................................25.1% Third highest rating (3)....................................................1.7% Fourth highest rating (4)...................................................0.8% Not rated:..................................................................0.6% ---- 100.0% (1) Aaa of Moody's or AAA of S&P, DBRS or Fitch. (2) Aa of Moody's or AA of S&P, DBRS or Fitch. (3) A of Moody's, S&P, DBRS or Fitch. (4) Baa of Moody's or BBB of S&P, DBRS or Fitch. Municipal Bonds The two principal classifications of municipal bonds are "general obligation" bonds and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and unlimited taxing power for the payment of principal and interest. Revenue or special tax bonds are payable only from the revenues derived from a particular facility or class of facilities or projects or, in a few cases, from the proceeds of a special excise or other tax, but are not supported by the issuer's power to levy unlimited general taxes. There are, of course, variations in the security of municipal bonds, both within a particular classification and between classifications, depending on numerous factors. The yields of municipal bonds depend on, among other things, general financial conditions, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. Since the Trust may invest in industrial development bonds or private activity bonds, the Trust may not be an appropriate investment for entities that are "substantial users" of facilities financed by those bonds or for investors who are "related persons" of such users. Generally, an individual will not be a "related person" under the Internal Revenue Code unless such investor or his or her immediate family (spouse, brothers, sisters and lineal descendants) owns directly or indirectly in the aggregate more than 50 percent of the equity of a corporation or is a partner of a partnership which is a "substantial user" of a facility financed from the proceeds of those bonds. A "substantial user" of such facilities is defined generally as a "non-exempt person who regularly uses a part of a facility" financed from the proceeds of industrial development or private activity bonds. As indicated in the Prospectus, there are certain Oregon Obligations the interest on which is subject to the Federal alternative minimum tax on individuals. While the Trust may purchase these obligations, it may, on the other hand, refrain from purchasing particular Oregon Obligations due to this tax consequence. Also, as indicated in the Prospectus, the Trust will not purchase obligations of Oregon issuers the interest on which is subject to regular Federal income tax. The foregoing may reduce the number of issuers of obligations that are available to the Trust. Additional Information about the State of Oregon and Oregon Obligations In addition to the material in the Prospectus the following is a brief summary of the complex factors affecting the financial situation in Oregon. This information is derived from sources that are generally available to investors and is based in part on information obtained from various state and local agencies in Oregon. It should be noted that the creditworthiness of obligations issued by local Oregon issuers may be unrelated to the creditworthiness of obligations issued by the State of Oregon, and that there is no obligation on the part of Oregon to make payment on such local obligations in the event of default. Budgetary Process. The finances of the State are managed on a biennial basis. A biennium begins July 1 and ends June 30 of odd-numbered years. After reviewing and revising the Governor's proposed budget, the Legislative Assembly then passes separate appropriation bills to provide expenditure authority. The Governor may veto an entire bill or may veto individual items in a bill without affecting any other provisions in such bill. An appropriation bill may not contain provisions on any subject other than appropriations. The Governor's veto may be overridden by a two-thirds vote of the Legislative Assembly, although additional legislation may be adopted in subsequent special sessions. Because the Oregon Legislative Assembly meets in regular session for approximately six months of each biennium, provision is made for interim funding through the Legislative Emergency Board. The Emergency Board is authorized to make allocations of General Fund monies to State agencies from the State Emergency Fund. The State Emergency Fund is funded with moneys appropriated to it by the Legislative Assembly as a part of the State's regular budgeting process. The Emergency Board may also authorize increases in expenditure limitations from Other or Federal Funds (dedicated or continuously appropriated funds), and may take other actions to meet emergency needs when the Legislative Assembly is not in session. The Legislative Assembly may also meet in special session during the biennium to adjust the budget in accordance with any significant revenue shortfall. A central feature of the budgeting process in the State is the constitutional requirement that the budget be in balance at the end of each biennium. The State may not budget a deficit and is required to alleviate any revenue shortfalls within each biennium. Article IX, section 6 of the Oregon Constitution states that "whenever the expenses, of any fiscal year, shall exceed the income, the Legislative Assembly shall provide for levying a tax, for the ensuing fiscal year, sufficient, with other sources of income, to pay the deficiency, as well as the estimated expense of the ensuing fiscal year." Article IX, section 2 of the Oregon Constitution states that "The Legislative Assembly shall provide for raising revenue sufficiently to defray the expenses of the State for each fiscal year, and also a sufficient sum to pay the interest of each State debt, if there be any. The State has several basic tools available to balance the budget including, but not limited to, tax increases, fee increases, and expenditure reductions. Since other provisions of the Oregon Constitution limit the ability of the Legislative Assembly to raise taxes (bills to increase taxes must be approved by a three-fifths vote of each house of the Legislative Assembly and may be referred to the voters), the Legislative Assembly does not always increase taxes to balance the budget. Instead, the Legislative Assembly may balance the budget by increasing fees (bills to increase fees do not require three-fifths approval) or by reducing expenditures. Revenue and Expenditures. The Oregon Biennial budget is a two-year fiscal plan balancing proposed spending against expected revenues. The total budget consists of four segments distinguished by source of revenue: programs supported by General Fund revenues; by Other Funds (dedicated fund) revenues; by lottery funds; and by Federal Funds. In its 2005 Regular Session, the Oregon Legislative Assembly approved General Fund and Lottery appropriations totaling approximately $12.3 billion for the 2005-2007 biennium. In November 2004 Oregonians passed citizen initiative "Measure 37", an initiative designed to entitle certain landowners either to receive compensation for the decline in value of their property as the result of certain land use regulations or to have the property released from the restrictions. In 2000, the State's voters approved a constitutional amendment that would have required the State and local governments to compensate property owners for land use restrictions. The Oregon Supreme Court held that the amendment violated the Oregon Constitution, and the amendment never took effect. In February 2006 the Oregon Supreme Court determined that Measure 37 seeks to change Oregon Statutes and not the Constitution, thus can be modified by the Legislative Assembly. As of mid-June 2006 about 1900 Measure 37 claims had been filed with compensation from those claims at approximately $3.5 billion. The actual amounts to be paid under Measure 37 are uncertain in that the applicable laws may be waived rather than paying compensation, and the ultimate interpretation of the measure is not predictable. In March of 2006, a group of school districts filed suit claiming that the legislature's funding of public K-12 education is inadequate under the state constitution and requested that the court require the legislature to appropriate funds for the current biennium to meet certain quality goals. The State prevailed in trial court in September 2006; the school districts are expected to appeal. Debt Administration and Limitation. Oregon statutes give the State Treasurer authority to review and approve the terms and conditions of sale for State agency bonds. The Governor, by statute, seeks the advice of the State Treasurer when recommending the total biennial bonding level for State programs. Agencies may not request that the Treasurer issue bonds or certificates of participation unless so authorized in the "biennial bonding bill." Statutes contain management and reporting requirements for state agencies on proposed and outstanding debt. A variety of general obligation and revenue bond programs have been approved in Oregon to finance public purpose programs and projects. General obligation bond authority requires voter approval or a constitutional amendment, while revenue bonds may be issued under statutory authority. However, under the Oregon Constitution the state may issue up to $50,000 of general obligation debt without specific voter approval. The State Legislative Assembly has the right to place limits on general obligation bond programs which are more restrictive than those approved by the voters. General obligation authorizations are normally expressed as a percentage of statewide value of taxable property. Revenue bonds usually are limited by the Legislative Assembly to a specific dollar amount. The authorized general obligation debt is broken down into two categories, general-fund supported and fully self-supporting. Examples of general-fund supported programs are the Higher Education Facility, Pollution Control, School Bond Guaranty program, and Pension Obligation bonds. Fully self-supporting programs include Veterans Welfare, Higher Education, Pollution Control, Water resources, Elderly & Disabled Housing, and Alternate Energy project bonds. Facilities acquired under the Pollution Control program are required to conservatively appear to be at least 70 percent self-supporting and self-liquidating from revenue, gifts, federal government grants, user charges, assessments, and other fees; therefore they can be found under both categories. As of September 2006, the total balance of general obligation bonds was $4.17 billion. As of September 2006 the debt service requirements for general obligation bonds, including interest of approximately $3.21 billion, was $7.38 billion. In November 1998, voters approved the Oregon School Bond Guaranty Act. This law authorizes the state to use its full faith, credit and unlimited taxing power pledge to guarantee the timely payment for qualifying school district general obligation bonds. As of September 2006 the state has guaranteed $1.81 billion through this program. Throughout the biennium, the General Fund experiences regular mismatches in the timing of revenue receipts and required expenditures. In the past the state had used interfund borrowings to correct these mismatches. The Legislature authorized the use of Tax anticipation notes as a short term borrowing tool to help manage the State's cash. The Tax anticipation notes are full faith and credit obligations of the State, to which the State pledges all available funds. Revenue bonds are accounted for through direct revenue and conduit revenue bonds. Examples of direct revenue bonds include lottery, transportation, highway user tax, single and multi-family housing and economic development. Conduit revenue bonds include industrial development revenue bonds ("IDBs"), Oregon Facilities Authority ("OFA") revenue bonds and some multi-family housing revenue bonds. The IDBs are issued to finance the expansion, enhancement, or relocation of private industry in the State. Before such bonds are issued, the project application must be reviewed and approved by both the Oregon State Treasury and the Oregon Economic Development Commission. Strict guidelines for eligibility have been developed to ensure that the program meets a clearly defined development objective. IDBs issued by the State are secured solely by payments from the private company and there is no obligation, either actual or implied, to provide state funds to secure the bonds. OFA is a public corporation created in 1989 to assist with the assembling and financing of lands for health care, housing, educational and cultural uses, and for the construction and financing of facilities for such uses. The authority reviews proposed projects and makes recommendations to the State Treasurer as to the issuance of bonds to finance proposed projects. The State has no financial obligation for these bonds, which are secured solely by payments from the entities for which projects were financed. The State is statutorily authorized to enter into financing agreements though the issuance of certificates of participation. Certificates of participation have been used for the acquisition of computer systems by the Department of Transportation, the Department of Administrative Services, and the Oregon University System. Also, certificates of participation have been used for the acquisition, construction, or remodeling of buildings by the Departments of Administrative Services, Fish and Wildlife, Agriculture, Oregon University System, Forestry, Military, Corrections, the State Fair, Public Employees Retirement System, and Oregon Youth Authority. Further, certificates of participation were used in the acquisition of telecommunication systems by the Department of Administrative Services and the Adult & Family Services Division. As of September 2006, the certificates of participation debt totaled $1.1 billion. In order to balance the budget for the 2001-2003 biennium the Legislature authorized the issuance of approximately $431.5 million in bonds subject to appropriation. As of September 2006, $360.2 million were outstanding. The State does not have authority to issue more of these bonds. The Treasurer on behalf of the State may also issue Federally taxable bonds in those situations where securing a Federal tax exemption is unlikely or undesirable; regulate "current" as well as "advance" refunding bonds; enter into financing agreements, including lease purchase agreements, installment sales agreements and loan agreements to finance real or personal property; and approve certificates of participation with respect to the financing agreements. Amounts payable by the State under a financing agreement are limited to funds appropriated or otherwise made available by the Legislative Assembly for such payment. The principal amount of such financing agreements is treated as bonds subject to maximum annual bonding levels established by the Legislative Assembly under Oregon statutes. When-Issued and Delayed Delivery Obligations The Trust may buy Oregon Obligations on a when-issued or delayed delivery basis. The purchase price and the interest rate payable on the Oregon Obligations are fixed on the transaction date. At the time the Trust makes the commitment to purchase Oregon Obligations on a when-issued or delayed delivery basis, it will record the transaction and thereafter reflect the value each day of such Oregon Obligations in determining its net asset value. The Trust will make commitments for such when-issued transactions only when it has the intention of actually acquiring the Oregon Obligations. Determination of the Marketability of Certain Securities In determining marketability of floating and variable rate demand notes and participation interests (including municipal lease/purchase obligations) the Board of Trustees will consider the Sub-Adviser's opinion as to marketability of the issue and other factors that may be applicable to any particular issue. Futures Contracts and Options The Trust is permitted to buy and sell futures contracts relating to municipal security indices ("Municipal Security Index Futures") and to U.S. Government securities ("U.S. Government Securities Futures," together referred to as "Futures"), and exchange-traded options based on Futures as a possible means of protecting the asset value of the Trust during periods of changing interest rates. The following discussion is intended to explain briefly the workings of Futures and options on them. Unlike when the Trust purchases or sells an Oregon Obligation, no price is paid or received by the Trust upon the purchase or sale of a Future. Initially, however, when such transactions are entered into, the Trust will be required to deposit with the futures commission merchant ("broker") an amount of cash or Oregon Obligations equal to a varying specified percentage of the contract amount. This amount is known as initial margin. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying index or security fluctuates making the Future more or less valuable, a process known as marking to market. Insolvency of the broker may make it more difficult to recover initial or variation margin. Changes in variation margin are recorded by the Trust as unrealized gains or losses. Margin deposits do not involve borrowing by the Trust and may not be used to support any other transactions. At any time prior to expiration of the Future, the Trust may elect to close the position by taking an opposite position which will operate to terminate the Trust's position in the Future. A final determination of variation margin is then made. Additional cash is required to be paid by or released to the Trust and it realizes a gain or a loss. Although Futures by their terms call for the actual delivery or acceptance of cash, in most cases the contractual obligation is fulfilled without having to make or take delivery. All transactions in the futures markets are subject to commissions payable by the Trust and are made, offset or fulfilled through a clearing house associated with the exchange on which the contracts are traded. Although the Trust intends to buy and sell Futures only on an exchange where there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular Future at any particular time. In such event, or in the event of an equipment failure at a clearing house, it may not be possible to close a futures position. Municipal Security Index Futures currently are based on a municipal security index developed by the Chicago Board of Trade ("CBT") (the "Municipal Security Index"). Financial Futures contracts based on the current Municipal Security Index began trading on October 25, 2002. The Municipal Security Index is comprised of 100 to 250 tax-exempt municipal securities. Each bond included in the Municipal Security Index must be rated Aaa by Moody's and AAA by S&P and must have a remaining maturity of 10 to 40 years. New issues satisfying the eligibility requirements are added to, and an equal number of old issues are deleted from, the Municipal Security Index quarterly. The value of the Municipal Security Index is computed daily by a recognized independent pricing service according to a formula based on the price of each bond in the Municipal Security Index, as evaluated by the pricing service. The Municipal Security Index Futures contract is traded on the CBT. Like other contract markets, the CBT assures performance under futures contracts through a clearing corporation, a nonprofit organization managed by the exchange membership which is also responsible for handling daily accounting of deposits or withdrawals of margin. There are as of the date of this Statement of Additional Information U.S. Government Securities Futures contracts based on long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month Treasury bills. U.S. Government Securities Futures have traded longer than Municipal Security Index Futures, and the depth and liquidity available in the trading markets for them are in general greater. Call Options on Futures Contracts. The Trust may also purchase and sell exchange-traded call and put options on Futures. The purchase of a call option on a Future is analogous to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the Future upon which it is based, or upon the price of the underlying debt securities, it may or may not be less risky than ownership of the futures contract or underlying debt securities. Like the purchase of a futures contract, the Trust may purchase a call option on a Future to hedge against a market advance when the Trust is not fully invested. The writing of a call option on a Future constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the Future. If the price at expiration of the Future is below the exercise price, the Trust will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Trust's portfolio holdings. Put Options on Futures Contracts. The purchase of put options on a Future is analogous to the purchase of protective put options on portfolio securities. The Trust may purchase a put option on a Future to hedge the Trust's portfolio against the risk of rising interest rates. The writing of a put option on a Future constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the Future. If the Future price at expiration is higher than the exercise price, the Trust will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Trust intends to purchase. The writer of an option on a Future is required to deposit initial and variation margin pursuant to requirements similar to those applicable to Futures. Premiums received from the writing of an option will be included in initial margin. The writing of an option on a Future involves risks similar to those relating to Futures. Risk Factors in Futures Transactions and Options One risk in employing Futures or options on Futures to attempt to protect against the price volatility of the Trust's Oregon Obligations is that the Sub-Adviser could be incorrect in its expectations as to the extent of various interest rate movements or the time span within which the movements take place. For example, if the Trust sold a Future in anticipation of an increase in interest rates, and then interest rates went down instead, the Trust would lose money on the sale. Another risk as to Futures or options on them arises because of the imperfect correlation between movement in the price of the Future and movements in the prices of the Oregon Obligations which are the subject of the hedge. The risk of imperfect correlation increases as the composition of the Trust's portfolio diverges from the municipal securities included in the applicable index or from the securities underlying the U.S. Government Securities Futures. The price of the Future or option may move more than or less than the price of the Oregon Obligations being hedged. If the price of the Future or option moves less than the price of the Oregon Obligations which are the subject of the hedge, the hedge will not be fully effective but, if the price of the Oregon Obligations being hedged has moved in an unfavorable direction, the Trust would be in a better position than if it had not hedged at all. If the price of the Oregon Obligations being hedged has moved in a favorable direction, this advantage will be partially offset by the Future or option. If the price of the Future or option has moved more than the price of the Oregon Obligations, the Trust will experience either a loss or gain on the Future or option which will not be completely offset by movements in the price of the Oregon Obligations which are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the Oregon Obligations being hedged and movements in the price of the Futures or options, the Trust may buy or sell Futures or options in a greater dollar amount than the dollar amount of the Oregon Obligations being hedged if the historical volatility of the prices of the Oregon Obligations being hedged is less than the historical volatility of the debt securities underlying the hedge. It is also possible that, where the Trust has sold Futures or options to hedge its portfolio against decline in the market, the market may advance and the value of the Oregon Obligations held in the Trust's portfolio may decline. If this occurred the Trust would lose money on the Future or option and also experience a decline in value of its portfolio securities. Where Futures or options are purchased to hedge against a possible increase in the price of Oregon Obligations before the Trust is able to invest in them in an orderly fashion, it is possible that the market may decline instead; if the Trust then decides not to invest in the Oregon Obligations at that time because of concern as to possible further market decline or for other reasons, the Trust will realize a loss on the Futures or options that is not offset by a reduction in the price of the Oregon Obligations which it had anticipated purchasing. The particular municipal securities comprising the index underlying Municipal Security Index Futures will vary from the bonds held by the Trust. The correlation of the hedge with such bonds may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Trust's investments as compared to those comprising the Index, and general economic or political factors. In addition, the correlation between movements in the value of the Municipal Security Index may be subject to change over time, as additions to and deletions from the Municipal Security Index alter its structure. The correlation between U.S. Government Securities Futures and the municipal bonds held by the Trust may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such Futures and the prices of municipal obligations held by the Trust may be greater. Trading in Municipal Security Index Futures may be less liquid than trading in other Futures. The trading of Futures and options is also subject to certain market risks, such as inadequate trading activity or limits on upward or downward price movements which could at times make it difficult or impossible to liquidate existing positions. Regulatory Aspects of Futures and Options The Trust will, due to requirements under the Investment Company Act of 1940 (the "1940 Act"), deposit in a segregated account Oregon Obligations maturing in one year or less or cash, in an amount equal to the fluctuating market value of long Futures or options it has purchased, less any margin deposited on long positions. The Trust must operate as to its long and short positions in Futures in conformity with restrictions it has committed to pursuant to a rule (the "CFTC Rule") adopted by the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (the "CEA") to be eligible for the exclusion provided by the CFTC Rule from qualification as a "commodity pool operator" (as defined under the CEA). Under these restrictions the Trust will not, as to any positions, whether long, short or a combination thereof, enter into Futures or options for which the aggregate initial margins and premiums paid for options exceed 5% of the fair market value of its assets. Under the restrictions, the Trust also must, as to its short positions, use Futures and options solely for bona-fide hedging purposes within the meaning and intent of the applicable provisions under the CEA. As to the Trust's long positions which are used as part of its portfolio strategy and are incidental to its activities in the underlying cash market, the "underlying commodity value" (see below) of its Futures must not exceed the sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt obligations or other U.S. dollar-denominated high quality short-term money market instruments so set aside, plus any funds deposited as margin; (ii) cash proceeds from existing investments due in 30 days and (iii) accrued profits held at the futures commission merchant. (There is described above the segregated account which the Trust must maintain as to its Futures and options activities due to requirements other than those described in this paragraph; the Trust will, as to long positions, be required to abide by the more restrictive of the two requirements.) The "underlying commodity value" of a Future or option is computed by multiplying the size of the Future by the daily settlement price of the Future or option. The "sale" of a Future means the acquisition by the Trust of an obligation to deliver an amount of cash equal to a specified dollar amount times the difference between the value of the index or government security at the close of the last trading day of the Future and the price at which the Future is originally struck (which the Trust anticipates will be lower because of a subsequent rise in interest rates and a corresponding decline in the index value). This is referred to as having a "short" Futures position. The "purchase" of a Future means the acquisition by the Trust of a right to take delivery of such an amount of cash. In this case, the Trust anticipates that the closing value will be higher than the price at which the Future is originally struck. This is referred to as having a "long" futures position. No physical delivery of the bonds making up the index or the U.S. government securities, as the case may be, is made as to either a long or a short futures position. Trust Policies Investment Restrictions The Trust has a number of policies concerning what it can and cannot do. Those that are called fundamental policies cannot be changed unless the holders of a "majority" (as defined in the 1940 Act) of the Trust's outstanding shares vote to change them. Under the 1940 Act, the vote of the holders of a "majority" of the Trust's outstanding shares means the vote of the holders of the lesser of (a) 67% or more of the dollar value of the Trust's shares present at a meeting or represented by proxy if the holders of more than 50% of the dollar value of its shares are so present or represented; or (b) more than 50% of the dollar value of the Trust's outstanding shares. Those fundamental policies not set forth in the Prospectus are set forth below: 1. The Trust invests only in certain limited securities. The Trust cannot buy any securities other than Oregon Obligations (discussed under "Investment of the Trust's Assets" in the Prospectus and in "Investment Strategies and Risks" in the SAI), Municipal Security Index Futures, U.S. Government Securities Futures and options on such Futures; therefore the Trust cannot buy any voting securities, any commodities or commodity contracts other than Municipal Security Index Futures and U.S. Government Securities Futures, any mineral related programs or leases, any shares of other investment companies or any warrants, puts, calls or combinations thereof other than on Futures. The Trust cannot purchase or hold the securities of any issuer if, to its knowledge, Trustees, Directors or officers of the Fund, its Adviser or Sub-Adviser who individually own beneficially more than 0.5% of the securities of that issuer, together own in the aggregate more than 5% of such securities. The Trust cannot buy real estate or any non-liquid interests in real estate investment trusts; however, it can buy any securities which it can otherwise buy even though the issuer invests in real estate or has interests in real estate. 2. The Trust does not buy for control. The Trust cannot invest for the purpose of exercising control or management of other companies. 3. The Trust does not sell securities it does not own or borrow from brokers to buy securities. Thus, it cannot sell short or buy on margin; however, the Trust can make margin deposits in connection with the purchase or sale of Municipal Security Index Futures, U.S. Government Securities Futures and options on them, and can pay premiums on these options. 4. The Trust is not an underwriter. The Trust cannot engage in the underwriting of securities, that is, the selling of securities for others. Also, it cannot invest in restricted securities. Restricted securities are securities which cannot freely be sold for legal reasons. 5. The Trust has industry investment requirements. The Trust cannot buy the obligations of issuers in any one industry if more than 25% of its total assets would then be invested in securities of issuers of that industry; the Trust will consider that a non-governmental user of facilities financed by industrial development bonds is an issuer in an industry. 6. The Trust cannot make loans. The Trust can buy those Oregon Obligations which it is permitted to buy; this is investing, not making a loan. The Trust cannot lend its portfolio securities. 7. The Trust can borrow only in limited amounts for special purposes. The Trust can borrow from banks for temporary or emergency purposes but only up to 10% of its total assets. It can mortgage or pledge its assets only in connection with such borrowing and only up to the lesser of the amounts borrowed or 5% of the value of its total assets. However, this shall not prohibit margin arrangements in connection with the purchase or sale of Municipal Security Index Futures, U.S. Government Securities Futures or options on them, or the payment of premiums on those options. Interest on borrowings would reduce the Trust's income. Except in connection with borrowings, the Trust will not issue senior securities. The Trust will not purchase any Oregon Obligations, Futures or options on Futures while it has any outstanding borrowings which exceed 5% of the value of its total assets. 8. The Trust's investment in obligations subject to the Federal alternative minimum tax is limited. As a fundamental policy, at least 80% of the Trust's net assets will be invested in Oregon Obligations the income paid upon which will not be subject to the alternative minimum tax; accordingly, the Trust can invest up to 20% of its net assets in obligations that are subject to the Federal alternative minimum tax. Portfolio Turnover A portfolio turnover rate is, in general, the percentage computed by taking the lesser of purchases or sales of portfolio securities for a year and dividing it by the monthly average value of such securities during the year, excluding certain short-term securities. Since the turnover rate of the Trust will be affected by a number of factors, the Trust is unable to predict what rate the Trust will have in any particular period or periods, although such rate is not expected to exceed 100%. However, the rate could be substantially higher or lower in any particular period. Management of the Trust The Board of Trustees The business and affairs of the Trust are managed under the direction and control of its Board of Trustees. The Board of Trustees has authority over every aspect of the Trust's operations, including approval of the advisory and any sub-advisory agreements and their annual renewal, the contracts with all other service providers and payments under the Trust's Distribution Plan and Shareholder Services Plan. The Trust has an Audit Committee, consisting of all of the Trustees who are "independent" and are not "interested persons" of the Trust. The Committee determines what independent registered public accounting firm will be selected by the Board of Trustees, reviews the methods, scope and result of audits and the fees charged, and reviews the adequacy of the Trust's internal accounting procedures and controls. The Audit Committee held four meetings during the last fiscal year. The Trust has a Nominating Committee, consisting of all of the non-interested Trustees. The Nominating Committee held one meeting during the last fiscal year. The committee will consider nominees recommended by the shareholders who may send recommendations to the committee in care of the Manager at 380 Madison Avenue, New York, NY 10017. Trustees and Officers The following material includes information about each Trustee, officer and Trustee Emeritus of the Trust. All shares of the Trust listed as owned by the Trustees are Class A Shares unless indicated otherwise.
Number of Positions Held Portfolios Other Directorships with in Fund Held by Trustee Trust and Complex (The position held is Name, Address(1) Length of Principal Occupation(s) Overseen a directorship unless and Date of Birth Service(2) During Past 5 Years by Trustee indicated otherwise.) - ------------------ ---------- ------------------- ---------- --------------------- Interested Trustee(3) Diana P. Herrmann Trustee since Vice Chair and Chief Executive 12 ICI Mutual Insurance Company New York, NY 1994, Officer of Aquila Management (02/25/58) President Corporation, Founder of the since 1998, Aquila Group of Fundssm(4) and and Vice Chair parent of Aquila Investment of the Board Management LLC, Manager, since since 2003 2004, President and Chief Operating Officer since 1997, 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 and President, Chief Operating Officer and Manager of the Manager since 2003; Chair, Vice Chair, President, Executive Vice President or Senior Vice President of funds in the Aquila Group of Fundssm 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 and head of its Small Funds Committee since 2004; active in charitable and volunteer organizations. John W. Mitchell Trustee since Principal of M & H Economic 1 None Portland, OR 1999 Consultants; Economist, Western (07/13/44) Region, for U. S. Bancorp since 1998; Chief Economist, U.S. Bancorp, Portland, Oregon, 1983-1998; member, Oregon Governor's Council of Economic Advisors, 1984-1998; Chairman, Oregon Governor's Technical Advisory Committee for Tax Review in 1998. Non-interested Trustees James A. Gardner Chair of the President, Gardner Associates, 1 None Terrebonne, OR Board of an investment and real estate (07/22/43) Trustees since firm, since 1989; Partner, 2005 and Ranch of the Canyons, a real Trustee since estate firm, since 1991; 1986 President Emeritus, Lewis and Clark College and Law School; director, Oregon High Desert Museum since 1989, Vice Chairman since 2002; active in civic, business, educational and church organizations in Oregon. Gary C. Cornia Trustee since Director, Romney Institute of 4 None Orem, UT 2002 Public Management, Marriott (06/24/48) School of Management, Brigham Young University, 2004 - present; Professor, Marriott School of Management, 1980 - present; Past President, the National Tax Association; Fellow, Lincoln Institute of Land Policy, 2002 - present; Associate Dean, Marriott School of Management, Brigham Young University, 1991-2000; Utah Governor's Tax Review Committee since 1993. Edmund P. Jensen Trustee President and CEO, VISA 1 BMG-Seltec, a software Portland, OR since 2003 International, 1994-1999; company; Portland Family of (04/13/37) director: Phoenix Technologies, Funds, a community a Tech/BIOS company, 2000-2005; investment bank. Corillian Corp., a banking software company, 2000-2002; Trintech, a payment software company, 1999-2002. Timothy J. Leach Trustee since UC Berkeley Haas School of 2 None Orinda, CA 2005 Business Executive Education, (08/28/55) Lecturer since 2006; Regional Chief Executive Officer, US Trust Company, N.A., 2005-2006; Executive Vice President & Chief Investment Officer, U.S. Trust Company, New York, NY, 2004-2005; Executive Vice President & Chief Investment Officer, Private Asset Management Group, Wells Fargo Bank, San Francisco, CA, 1999-2003; CEO, President and Chief Investment Officer, ABN Amro Asset Management (USA), 1998-1999; President & Chief Investment Officer, Qualivest Capital Management Inc. and Senior Vice President & Chief Investment Officer, Trust & Investment Group, US Bancorp, Portland, OR, 1994-1998. Ralph R. Shaw Trustee since President, Shaw Management 1 Schnitzer Steel Industries, Portland, OR 2000 Company, an investment Inc., Telestream, Inc., BMG (08/23/38) counseling firm, 1980 - Seltec Corporation, Rentrak present; General Partner, Shaw Corporation, United Fund Venture Partners, 1983 - 2005; Advisors, One-to-One Shaw Venture Partners II, 1987 Interactive. - 2005; and Shaw Venture Partners III, 1994 - 2005 (US Bancorp, parent of the Sub-Adviser, was a limited partner in these three ventures). Nancy Wilgenbusch Trustee since President, Marylhurst 1 Chair, Oregon Regional Marylhurst, OR 2002 University since 1984; member, Advisory Board for (09/17/47) former Chair, Portland Branch PacifiCorp; West Coast Bank's of the Federal Reserve Bank of Board; director, Cascade San Francisco; active board Corporation, a leading member of a number of civic international manufacturer of organizations. lift truck attachments; director, Scottish Power. Other Individuals Trustees Emeritus(5) Lacy B. Herrmann Founder and Founder and Chairman of the N/A N/A New York, NY Chairman Board, Aquila Management (05/12/29) Emeritus since Corporation, the sponsoring 2005; Chairman organization and parent of the of the Board of Manager or Administrator and/or Trustees Adviser or Sub-Adviser to each 1985-2004 and fund of the Aquila Group of Trustee, Fundssm; Chairman of the 1985-2005 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 Fundssm; previously Chairman and a Trustee of each fund in the Aquila Group of Fundssm 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 Retired; former director or N/A N/A Boston, MA Emeritus since trustee of various Fortune 500 (04/07/23) 2006 companies, including Colgate-Palmolive and McGraw Hill; formerly President of Ohio University and Associate Dean of the Harvard University Graduate School of Business Administration; member of several Japan-related advisory councils, including Chairman of the Japan Society of Boston; trustee of various cultural, educational and civic organizations. David B. Frohnmayer Trustee President, University of Oregon N/A N/A Eugene, OR Emeritus since since 1994; former Dean of the (07/09/40) 2003 University of Oregon Law School and former Attorney General of the State of Oregon; Trustee, Tax-Free Trust of Oregon, 1997-2003. Raymond H. Lung Trustee Retired; trustee, Qualivest N/A N/A Portland, OR Emeritus since Group of Funds, 1994-1997; (12/24/26) 2005 former Executive Vice President and Executive Trust Officer, U.S. National Bank of Oregon; previously active in bank trade organizations and director of certain Pacific Northwest companies; Trustee, Tax-Free Trust of Oregon, 1992-2005. Patricia L. Moss Trustee President and Chief Executive N/A N/A Bend, OR Emeritus since Officer, Cascade Bancorp and (07/23/53) 2005 Bank of the Cascades since 1998; Trustee, Tax-Free Trust of Oregon, 2002-2005; active in community and educational organizations. Richard C. Ross Trustee Retired; President of Richard N/A N/A Lake Oswego, OR Emeritus since Ross Communications, a (07/04/21) 2006 consulting firm, since 1986; Senior communications consultant to Pihas, Schmidt, Westerdahl, advertising and public relations, 1986-1988; Executive News Director of KATU Television, 1975-1986; News Director of KGW-TV, 1956-1975; President of the Oregon chapter of the National Multiple Sclerosis Society, 1984-1986; Chairman of the Broadcasters Group of the Bar-Press-Broadcasters professional relations committee, 1964-1984; Former President of the Rotary Club of East Portland. Officers Charles E. Executive Vice Executive Vice President of all N/A N/A Childs, III President funds in the Aquila Group of New York, NY since 2003 Fundssm and the Manager and the (04/01/57) Manager's parent since 2003; 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. James M. McCullough Senior Vice Senior Vice President or Vice N/A N/A Portland, OR (06/11/45) President President of Aquila Rocky since 1999 Mountain Equity Fund and two Aquila Bond Funds; Senior Vice President of the Distributor since 2000; Director of Fixed Income Institutional Sales, CIBC Oppenheimer & Co. Inc., Seattle, WA, 1995-1999. Jerry G. McGrew Senior Vice President of the Distributor N/A N/A New York, NY (06/18/44) President since 1998, Registered Principal since 2002 since 1993, Senior Vice President, 1997-1998 and Vice President, 1993-1997; Senior Vice President, Aquila Rocky Mountain Equity Fund and five Aquila Municipal Bond Funds since 1995; Vice President, Churchill Cash Reserves Trust, 1995-2001. Sally J. Church Vice President Vice President, Tax-Free Trust N/A N/A Portland, OR since 2002 of Oregon since 2002 and (10/17/48) 1989-1997; retired, 1997-2002; Vice President of Aquila Cascadia Equity Fund, 1996-1997. Christine L. Neimeth Vice President Vice President of Aquila Rocky N/A N/A Portland, OR since 1998 Mountain Equity Fund and (02/10/64) Tax-Free Trust of Oregon; Management Information Systems consultant, Hillcrest Ski and Sport, 1997; Institutional Municipal Bond Salesperson, Pacific Crest Securities, 1996; active in college alumni and volunteer organizations. Robert W. Anderson Chief Chief Compliance Officer of the N/A N/A New York, NY (08/23/40) Compliance Trust and each of the other Officer since funds in the Aquila Group of 2004 and Fundssm, the Manager and the Assistant Distributor since 2004, Secretary Compliance Officer of the since 2000 Manager or its predecessor and current parent 1998-2004; Assistant Secretary of the Aquila Group of Fundssm since 2000. Joseph P. DiMaggio Chief Chief Financial Officer of the N/A N/A New York, NY Financial Aquila Group of Fundssm since (11/06/56) Officer since 2003 and Treasurer since 2000. 2003 and Treasurer since 2000 Edward M. W. Hines Secretary Partner, Hollyer Brady Barrett & N/A N/A New York, NY since 1985 Hines LLP, legal counsel to the (12/16/39) Trust, since 1989; Secretary of the Aquila Group of Fundssm. John M. Herndon Assistant Assistant Secretary of the N/A N/A New York, NY (12/17/39) Secretary Aquila Group of Fundssm since since 1995 1995 and Vice President 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 Assistant Treasurer of the N/A N/A New York, NY Treasurer since Aquila Group of Fundssm since (11/02/66) 2000 2000; Assistant Vice President of the Manager or its predecessor and current parent since 1998; Fund Accountant for the Aquila Group of Fundssm, 1995-1998.
(1) The mailing address of each Trustee and officer is c/o Tax-Free Trust of Oregon, 380 Madison Avenue, New York, NY 10017. (2) 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. (3) Ms. Herrmann is an interested person of the Trust as an officer of the Trust, 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. Mr. Mitchell is an interested person as a security holder and an employee of the Sub-Adviser's parent. (4) 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 Municipal 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 Fundssm." (5) A Trustee Emeritus may attend Board meetings but has no voting power.
Securities Holdings of the Trustees ----------------------------------- (as of 12/31/06) Dollar Range of Aggregate Dollar Range of Ownership in Name of Ownership in Tax-Free the Aquila Group of Fundssm Trustee Trust of Oregon(1) Overseen by Trustee(1) - ------- --------------- ------------------- Interested Trustees Diana P. Herrmann C E John W. Mitchell D D Non-interested Trustees James A. Gardner C C Gary C. Cornia D E Edmund P. Jensen C C Timothy J. Leach B B Ralph R. Shaw C C Nancy Wilgenbusch C C
(1) A. None B. $1-$10,000 C. $10,001-$50,000 D. $50,001-$100,000 E. over $100,000 None of the non-interested Trustees or their immediate family members holds of record or beneficially any securities of the Manager, the Sub-Adviser or the Distributor. The Trust does not currently pay fees to any of the Trust's officers or to Trustees affiliated with the Manager or the Sub-Adviser. For its fiscal year ended September 30, 2006, the Trust paid a total of $233,394 in compensation and reimbursement of expenses to the Trustees. No other compensation or remuneration of any type, direct or contingent, was paid by the Trust to its Trustees. The Trust is one of the twelve funds in the Aquila Group of Fundssm, which consists of three money-market funds, seven tax-free municipal bond funds, a high-income corporate bond fund and an equity fund. The following table lists the compensation of all non-interested Trustees who received compensation from the Trust and the compensation they received during the Trust's fiscal year from other funds in the Aquila Group of Fundssm. None of such Trustees has any pension or retirement benefits from the Trust or any of the other funds in the Aquila Group of Fundssm.
Compensation from all Number of funds in the boards on Compensation Aquila which the From the Group of Trustee now Name Trust Fundssm serves James A. Gardner $39,000 $39,000 1 Gary C. Cornia $23,000 $75,375 4 Edmund P. Jensen $21,500 $21,500 1 Timothy J. Leach $22,500 $41,875 2 John W. Mitchell $23,000 $23,000 1 Ralph R. Shaw $31,000 $31,000 1 Nancy Wilgenbusch $23,000 $23,000 1
Class A Shares may be purchased without a sales charge by the Trust's Trustees and officers. (See "Reduced Sales Charges for Certain Purchases of Class A Shares," below). Ownership of Securities On January 10, 2007, the following persons held 5% or more of any class of the Trust's outstanding shares. On the basis of information received from these institutional holders, the Trust's management believes that all of the shares indicated are held by them for the benefit of clients.
Name and Address of the Holder of Record Number of Shares Percent of Class Merrill Lynch Pierce Fenner & Smith 4800 Deer Lake Drive East 347,296 Class C Shares 12.16% Jacksonville, FL 281,241 Class Y Shares 6.78% South Valley Bank and Trust P.O. Box 1784 Medford, OR 429,696 Class Y Shares 10.36% Charles Schwab and Company 101 Montgomery Street San Francisco, CA 406,050 Class Y Shares 9.79%
Additional 5% shareholders The Trust's management is not aware of any other person beneficially owning more than 5% of any class of its outstanding shares as of such date. Management Ownership As of the date of this SAI, all of the Trustees and officers of the Trust as a group owned less than 1% of its outstanding shares. Investment Advisory and Other Services Information about the Manager, the Sub-Adviser, and the Distributor Management Fees During the fiscal years ended September 30, 2006, 2005 and 2004 the Trust incurred management fees (investment advisory fees) as follows: 2006 $1,742,346 2005 $1,788,408 2004 $1,764,876 The management fee is treated as a Trust expense and, as such, is allocated to each class of shares based on the relative net assets of that class. Aquila Distributors, Inc. 380 Madison Avenue, Suite 2300, New York, NY 10017 is the Trust's Distributor. The Distributor currently handles the distribution of the shares of twelve funds (three money-market funds, seven tax-free municipal bond funds, a high-income corporate bond fund and an equity fund), including the Trust. Under the Distribution Agreement, the Distributor is responsible for the payment of certain printing and distribution costs relating to prospectuses and reports as well as the costs of supplemental sales literature, advertising and other promotional activities. The shares of the Distributor are owned 24% by Diana P. Herrmann, 72% by Mr. Herrmann and other members of his immediate family, and the balance by employees of Aquila Investment Management LLC. The Advisory and Administration Agreement The Advisory and Administration Agreement provides that, subject to the direction and control of the Board of Trustees of the Trust, the Manager shall: (i) supervise continuously the investment program of the Trust and the composition of its portfolio; (ii) determine what securities shall be purchased or sold by the Trust; (iii) arrange for the purchase and the sale of securities held in the portfolio of the Trust; and (iv) at its expense provide for pricing of the Trust's portfolio daily using a pricing service or other source of pricing information satisfactory to the Trust and, unless otherwise directed by the Board of Trustees, provide for pricing of the Trust's portfolio at least quarterly using another such source satisfactory to the Trust. The Advisory and Administration Agreement provides that, subject to the termination provisions described below, the Manager may at its own expense delegate to a qualified organization ("Sub-Adviser"), affiliated or not affiliated with the Manager, any or all of the above duties. Any such delegation of the duties set forth in (i), (ii) or (iii) above shall be by a written agreement (the "Sub-Advisory Agreement") approved as provided in Section 15 of the 1940 Act. The Manager has delegated all of such functions to the Sub-Adviser in the Sub-Advisory Agreement. The Advisory and Administration Agreement also provides that, subject to the direction and control of the Board of Trustees of the Trust, the Manager shall provide all administrative services to the Trust other than those relating to its investment portfolio which have been delegated to a Sub-Adviser of the Trust under the Sub-Advisory Agreement; as part of such administrative duties, the Manager shall: (i) provide office space, personnel, facilities and equipment for the performance of the following functions and for the maintenance of the headquarters of the Trust; (ii) oversee all relationships between the Trust and any sub-adviser, transfer agent, custodian, legal counsel, auditors and principal underwriter, including the negotiation of agreements in relation thereto, the supervision and coordination of the performance of such agreements, and the overseeing of all administrative matters which are necessary or desirable for the effective operation of the Trust and for the sale, servicing or redemption of the Trust's shares; (iii) either keep the accounting records of the Trust, including the computation of net asset value per share and the dividends (provided that if there is a Sub-Adviser, daily pricing of the Trust's portfolio shall be the responsibility of the Sub-Adviser under the Sub-Advisory Agreement) or, at its expense and responsibility, delegate such duties in whole or in part to a company satisfactory to the Trust; (iv) maintain the Trust's books and records, and prepare (or assist counsel and auditors in the preparation of) all required proxy statements, reports to the Trust's shareholders and Trustees, reports to and other filings with the Securities and Exchange Commission and any other governmental agencies, and tax returns, and oversee the insurance relationships of the Trust; (v) prepare, on behalf of the Trust and at the Trust's expense, such applications and reports as may be necessary to register or maintain the registration of the Trust and/or its shares under the securities or "Blue-Sky" laws of all such jurisdictions as may be required from time to time; and (vi) respond to any inquiries or other communications of shareholders of the Trust and broker/dealers, or if any such inquiry or communication is more properly to be responded to by the Trust's shareholder servicing and transfer agent or distributor, oversee such shareholder servicing and transfer agent's or distributor's response thereto. The Advisory and Administration Agreement contains provisions relating to compliance of the investment program, responsibility of the Manager for any investment program managed by it, allocation of brokerage, and responsibility for errors that are substantially the same as the corresponding provisions in the Sub-Advisory Agreement. The Advisory and Administration Agreement provides that the Manager shall, at its own expense, pay all compensation of Trustees, officers, and employees of the Trust who are affiliated persons of the Manager. The Trust bears the costs of preparing and setting in type its prospectuses, statements of additional information and reports to its shareholders, and the costs of printing or otherwise producing and distributing those copies of such prospectuses, statements of additional information and reports as are sent to its shareholders. All costs and expenses not expressly assumed by the Manager under the agreement or otherwise by the Manager, administrator or principal underwriter or by any sub-adviser shall be paid by the Trust, including, but not limited to (i) interest and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses of its Trustees other than those affiliated with the Manager or such sub-adviser, administrator or principal underwriter except for certain expenses of those who are officers of the Trust; (v) legal and audit expenses; (vi) custodian and transfer agent, or shareholder servicing agent, fees and expenses; (vii) expenses incident to the issuance of its shares (including issuance on the payment of, or reinvestment of, dividends); (viii) fees and expenses incident to the registration under Federal or State securities laws of the Trust or its shares; (ix) expenses of preparing, printing and mailing reports and notices and proxy material to shareholders of the Trust; (x) all other expenses incidental to holding meetings of the Trust's shareholders; and (xi) such non-recurring expenses as may arise, including litigation affecting the Trust and the legal obligations for which the Trust may have to indemnify its officers and Trustees. The Advisory and Administration Agreement provides that it may be terminated by the Manager at any time without penalty upon giving the Trust sixty days' written notice (which notice may be waived by the Trust) and may be terminated by the Trust at any time without penalty upon giving the Manager sixty days' written notice (which notice may be waived by the Manager), provided that such termination by the Manager or the Trust shall be directed or approved by a vote of a majority of its Trustees in office at the time or by a vote of the holders of a majority (as defined in the 1940 Act) of the voting securities of the Trust outstanding and entitled to vote. The specific portions of the Advisory and Administration Agreement which relate to providing investment advisory services will automatically terminate in the event of the assignment (as defined in the 1940 Act) of the Advisory and Administration Agreement, but all other provisions relating to providing services other than investment advisory services will not terminate, provided however, that upon such an assignment the annual fee payable monthly and computed on the net asset value of the Trust as of the close of business each business day shall be reduced to the annual rate of 0.26 of 1% from current fees of 0.40 of 1% of such net asset value. The Sub-Advisory Agreement The services of the Sub-Adviser are rendered under the Sub-Advisory Agreement between the Manager and the Sub-Adviser, which provides, subject to the control of the Board of Trustees, for investment supervision and at the Sub-Adviser's expense for pricing of the Trust's portfolio daily using a pricing service or other source of pricing information satisfactory to the Trust and, unless otherwise directed by the Board of Trustees, for pricing of the Trust's portfolio at least quarterly using another such source satisfactory to the Trust. The Sub-Advisory Agreement provides that any investment program furnished by the Sub-Adviser shall at all times conform to, and be in accordance with, any requirements imposed by: (1) the 1940 Act and any rules or regulations in force thereunder; (2) any other applicable laws, rules and regulations; (3) the Declaration of Trust and By-Laws of the Trust as amended from time to time; (4) any policies and determinations of the Board of Trustees of the Trust; and (5) the fundamental policies of the Trust, as reflected in its registration statement under the 1940 Act or as amended by the shareholders of the Trust. The Sub-Advisory Agreement provides that the Sub-Adviser shall give to the Manager, as defined therein, and to the Trust the benefit of its best judgment and effort in rendering services hereunder, but the Sub-Adviser shall not be liable for any loss sustained by reason of the adoption of any investment policy or the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon (i) its own investigation and research or (ii) investigation and research made by any other individual, firm or corporation, if such purchase, sale or retention shall have been made and such other individual, firm or corporation shall have been selected in good faith by the Sub-Adviser. Nothing therein contained shall, however, be construed to protect the Sub-Adviser against any liability to the Trust or its security holders by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of its reckless disregard of its obligations and duties under the Agreement. The Sub-Advisory Agreement provides that nothing in it shall prevent the Sub-Adviser or any affiliated person (as defined in the 1940 Act) of the Sub-Adviser from acting as investment adviser or manager for any other person, firm or corporation and shall not in any way limit or restrict the Sub-Adviser or any such affiliated person from buying, selling or trading any securities for its own or their own accounts or for the accounts of others for whom it or they may be acting, provided, however, that the Sub-Adviser expressly represents that, while acting as Sub-Adviser, it will undertake no activities which, in its judgment, will adversely affect the performance of its obligations to the Trust under the Agreement. It is agreed that the Sub-Adviser shall have no responsibility or liability for the accuracy or completeness of the Trust's Registration Statement under the 1940 Act and the Securities Act of 1933, except for information supplied by the Sub-Adviser for inclusion therein. The Sub-Adviser shall promptly inform the Trust as to any information concerning the Sub-Adviser appropriate for inclusion in such Registration Statement, or as to any transaction or proposed transaction, which might result in an assignment (as defined in the 1940 Act) of the Agreement. To the extent that the Manager is indemnified under the Trust's Declaration of Trust with respect to the services provided by the Sub-Adviser, the Manager agrees to provide the Sub-Adviser the benefits of such indemnification. The Sub-Advisory Agreement contains provisions regarding brokerage described below under "Brokerage Allocation and Other Practices." The Sub-Advisory Agreement provides that the Sub-Adviser agrees to maintain, and to preserve for the periods prescribed, such books and records with respect to the portfolio transactions of the Trust as are required by applicable law and regulation, and agrees that all records which it maintains for the Trust on behalf of the Manager shall be the property of the Trust and shall be surrendered promptly to the Trust or the Manager upon request. The Sub-Adviser agrees to furnish to the Manager and to the Board of Trustees of the Trust such periodic and special reports as each may reasonably request. The Sub-Advisory Agreement provides that the Sub-Adviser shall bear all of the expenses it incurs in fulfilling its obligations under the Agreement. In particular, but without limiting the generality of the foregoing: the Sub-Adviser shall furnish the Trust, at the Sub-Adviser's expense, all office space, facilities, equipment and clerical personnel necessary for carrying out its duties under the Agreement. The Sub-Adviser shall supply, or cause to be supplied, to any investment adviser, administrator or principal underwriter of the Trust all necessary financial information in connection with such adviser's, administrator's or principal underwriter's duties under any agreement between such adviser, administrator or principal underwriter and the Trust. The Sub-Adviser will also pay all compensation of the Trust's officers, employees, and Trustees, if any, who are affiliated persons of the Sub-Adviser. The Sub-Advisory Agreement provides that it shall, unless terminated as therein provided, continue in effect from year to year so long as such continuance is specifically approved at least annually (1) by a vote of the Trust's Board of Trustees, including a vote of a majority of the Trustees who are not parties to the Agreement or "interested persons" (as defined in the 1940 Act) of any such party, with votes cast in person at a meeting called for the purpose of voting on such approval, or (2) by a vote of the holders of a "majority" (as so defined) of the dollar value of the outstanding voting securities of the Trust and by such a vote of the Trustees. The Sub-Advisory Agreement provides that it may be terminated by the Sub-Adviser at any time without penalty upon giving the Manager and the Trust sixty days' written notice (which notice may be waived). It may be terminated by the Manager or the Trust at any time without penalty upon giving the Sub-Adviser sixty days' written notice (which notice may be waived by the Sub-Adviser), provided that such termination by the Trust shall be directed or approved by a vote of a majority of its Trustees in office at the time or by a vote of the holders of a majority (as defined in the 1940 Act) of the dollar value of the voting securities of the Trust outstanding and entitled to vote. The Sub-Advisory Agreement will automatically terminate in the event of its assignment (as defined in the 1940 Act) or the termination of the Investment Advisory Agreement. Additional Information about the Portfolio Manager Michael Hamilton is the portfolio manager responsible for the day-to-day management of the Trust. Mr. Hamilton manages four other investment company portfolios with assets of $264,300,000 as of December 31, 2006. He manages no other pooled investment vehicles. He manages ten other accounts with an aggregate value of $192,800,000 as of December 31, 2006. The compensation paid by the client varies. Generally, compensation by the accounts and the funds is computed as a percentage of assets under management. No account or fund has performance-based fees. While fees are payable by the investment companies other than the Trust at a greater rate than with respect to the Trust, the Sub-Adviser considers that those funds are in general more complex to manage and receive more extensive administrative and other services under their agreements than the Trust, and accordingly the fee differences by themselves do not present a conflict of interest. In general, it is unlikely that the Trust's opportunities or the execution of its investment program may be compromised or limited by the investments of the other accounts, except that there may be occurrences where a scarcity of bonds of Oregon issuers hinders the execution of the Trust's investment program. The minimum block sizes and maturity requirements of purchases for the Trust typically differ from the investment requirements of other accounts managed by the portfolio manager. There are three elements to portfolio manager compensation. Base Pay. Base pay is determined based upon an analysis of the portfolio manager's general performance, experience, and market levels of base pay for such position. Annual Cash Incentive. Mr. Hamilton is paid an annual incentive based upon investment performance, generally over the past one- and three-year periods. The maximum potential annual cash incentive is equal to a multiple of base pay, determined based upon Mr. Hamilton's performance and experience, and market levels of base pay for such position. The portion of the maximum potential annual cash incentive that is paid out is based upon performance of four of the five funds, including the Trust, which Mr. Hamilton manages relative to the portfolio's appropriate Lipper industry peer group, a subjective component equal to 25% of the maximum potential annual cash incentive, and 10% for contributions to two other Funds. Generally, the threshold for payment of an annual cash incentive is median performance versus the peer group, and the maximum annual cash incentive is attained at top quartile performance versus the Lipper industry peer group, subject to the 25% subjective component. Investment performance is measured on a gross basis for the portfolio result and for the Lipper industry peer group. Long Term Incentive Payments. Long-term incentive payments are paid to portfolio managers on an annual basis based upon general performance and expected contributions to the success of FAF Advisors, Inc. Long-term incentive payments are compromised of two components: (i) FAF Advisors, Inc. phantom options and restricted stock units and (ii) U.S Bancorp options and restricted stock. As of December 31, 2006 the range of the value of securities in the Trust beneficially owned by Mr. Hamilton was $1-$10,000. Underwriting Commissions During the fiscal years listed, the aggregate dollar amount of sales charges on sales of Class A shares of the Trust and the amount retained by the Distributor, respectively, were as follows: Sales Charges Retained by Distributor 2006 $ 635,150 $ 122,650 2005 $ 809,222 $ 157,559 2004 $ 808,995 $ 149,424 In connection with sales of Class A Shares, the Distributor pays a portion of the sales charge on such shares to dealers in the form of discounts and to brokers in the form of agency commissions (together, "Commissions"), in amounts that vary with the size of the sales charge as follows:
Amount of Purchase and Value of All Class A Shares Held by a Single Sales Charge as Percentage of Public Commissions as Percentage of Purchaser Offering Price Offering Price Less than $25,000 4.00% 3.00% $25,000 but less than $50,000 3.75% 3.00% $50,000 but less than $100,000 3.50% 2.75% $100,000 but less than $250,000 3.25% 2.75% $250,000 but less than $500,000 3.00% 2.50% $500,000 but less than $1,000,000 2.50% 2.25%
Distribution Plan The Trust's Distribution Plan has four parts, relating respectively to distribution payments with respect to Class A Shares (Part I), to distribution payments relating to Class C Shares (Part II), to distribution payments relating to Class I Shares (Part III) and to certain defensive provisions (Part IV). For purposes of Parts I, II and III, the Distributor will consider shares which are not Qualified Holdings of broker/dealers unaffiliated with the Manager, Sub-Adviser or Distributor to be Qualified Holdings of the Distributor and will authorize Permitted Payments to the Distributor with respect to such shares whenever Permitted Payments are being made under the Plan. Provisions Relating to Class A Shares (Part I) Part I of the Plan applies only to the Front-Payment Class Shares ("Class A Shares") of the Trust (regardless of whether such class is so designated or is redesignated by some other name). As used in Part I of the Plan, "Qualified Recipients" shall mean broker/dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to any principal underwriter of the Trust, with which the Trust or the Distributor has entered into written agreements in connection with Part I ("Class A Plan Agreements") and which have rendered assistance (whether direct, administrative, or both) in the distribution and/or retention of the Trust's Front-Payment Class Shares or servicing of shareholder accounts with respect to such shares. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Front-Payment Class Shares beneficially owned by such Qualified Recipient, or beneficially owned by its brokerage customers, other customers, other contacts, investment advisory clients, or other clients, if the Qualified Recipient was, in the sole judgment of the Distributor, instrumental in the purchase and/or retention of such shares and/or in providing administrative assistance or other services in relation thereto. Subject to the direction and control of the Trust's Board of Trustees, the Trust may make payments ("Class A Permitted Payments") to Qualified Recipients, which Class A Permitted Payments may be made directly, or through the Distributor or shareholder servicing agent as disbursing agent, which may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year), 0.15 of 1% of the average annual net assets of the Trust represented by the Front-Payment Class Shares. Such payments shall be made only out of the Trust's assets allocable to the Front-Payment Class Shares. The Distributor shall have sole authority (i) as to the selection of any Qualified Recipient or Recipients; (ii) not to select any Qualified Recipient; and (iii) as to the amount of Class A Permitted Payments, if any, to each Qualified Recipient provided that the total Class A Permitted Payments to all Qualified Recipients do not exceed the amount set forth above. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Front-Payment Class Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; furnishing (either alone or together with other reports sent to a shareholder by such person) monthly and year-end statements and confirmations of purchases and redemptions; transmitting, on behalf of the Trust, proxy statements, annual reports, updating prospectuses and other communications from the Trust to its shareholders; receiving, tabulating and transmitting to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Trust; and providing such other related services as the Distributor or a shareholder may request from time to time; and (c) the possibility that the Qualified Holdings of the Qualified Recipient would be redeemed in the absence of its selection or continuance as a Qualified Recipient. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years. While Part I is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Class A Permitted Payments made under the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Manager, Sub-Adviser or Distributor paid or accrued during such quarter. In addition, if any such Qualified Recipient is an affiliated person, as that term is defined in the 1940 Act, of the Trust, Manager, Sub-Adviser or Distributor, such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually. Part I originally went into effect when it was approved (i) by a vote of the Trustees, including the Independent Trustees, with votes cast in person at a meeting called for the purpose of voting on Part I of the Plan; and (ii) by a vote of holders of at least a "majority" (as so defined) of the dollar value of the outstanding voting securities of the Front-Payment Class Shares class (or of any predecessor class or category of shares, whether or not designated as a class) and a vote of holders of at least a "majority" (as so defined) of the dollar value of the outstanding voting securities of the Level-Payment Class Shares and/or of any other class whose shares are convertible into Front-Payment Class Shares. Part I has continued, and will, unless terminated as hereinafter provided, continue in effect from year to year so long as such continuance is specifically approved at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. Part I may be terminated at any time by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the dollar value of the outstanding voting securities of the Trust to which Part I applies. Part I may not be amended to increase materially the amount of payments to be made without shareholder approval of the class or classes of shares affected by Part I as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above. In the case of a Qualified Recipient which is a principal underwriter of the Trust, the Class A Plan Agreement shall be the agreement contemplated by Section 15(b) of the 1940 Act since each such agreement must be approved in accordance with, and contain the provisions required by, the Rule. In the case of Qualified Recipients which are not principal underwriters of the Trust, the Class A Plan Agreements with them shall be (i) their agreements with the Distributor with respect to payments under the Trust's Distribution Plan in effect prior to April 1, 1996 or (ii) Class A Plan Agreements entered into thereafter. Provisions Relating to Class C Shares (Part II) Part II of the Plan applies only to the Level-Payment Shares Class ("Class C Shares") of the Trust (regardless of whether such class is so designated or is redesignated by some other name). As used in Part II of the Plan, "Qualified Recipients" shall mean broker/dealers or others selected by the Distributor, including but not limited to any principal underwriter of the Trust, with which the Trust or the Distributor has entered into written agreements in connection with Part II ("Class C Plan Agreements") and which have rendered assistance (whether direct, administrative, or both) in the distribution and/or retention of the Trust's Level-Payment Class Shares or servicing of shareholder accounts with respect to such shares. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Level-Payment Class Shares beneficially owned by such Qualified Recipient, or beneficially owned by its brokerage customers, other customers, other contacts, investment advisory clients, or other clients, if the Qualified Recipient was, in the sole judgment of the Distributor, instrumental in the purchase and/or retention of such shares and/or in providing administrative assistance or other services in relation thereto. Subject to the direction and control of the Trust's Board of Trustees, the Trust may make payments ("Class C Permitted Payments") to Qualified Recipients, which Class C Permitted Payments may be made directly, or through the Distributor or shareholder servicing agent as disbursing agent, which may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year), 0.75 of 1% of the average annual net assets of the Trust represented by the Level-Payment Class Shares. Such payments shall be made only out of the Trust's assets allocable to the Level-Payment Class Shares. The Distributor shall have sole authority (i) as to the selection of any Qualified Recipient or Recipients; (ii) not to select any Qualified Recipient; and (iii) as to the amount of Class C Permitted Payments, if any, to each Qualified Recipient provided that the total Class C Permitted Payments to all Qualified Recipients do not exceed the amount set forth above. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Level- Payment Class Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; furnishing (either alone or together with other reports sent to a shareholder by such person) monthly and year-end statements and confirmations of purchases and redemptions; transmitting, on behalf of the Trust, proxy statements, annual reports, updating prospectuses and other communications from the Trust to its shareholders; receiving, tabulating and transmitting to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Trust; and providing such other related services as the Distributor or a shareholder may request from time to time; and (c) the possibility that the Qualified Holdings of the Qualified Recipient would be redeemed in the absence of its selection or continuance as a Qualified Recipient. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years. While Part II is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Class C Permitted Payments made under the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Manager, Sub-Adviser or Distributor paid or accrued during such quarter. In addition, if any such Qualified Recipient is an affiliated person, as that term is defined in the 1940 Act, of the Trust, Manager, Sub-Adviser or Distributor such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually. Part II originally went into effect when it was approved (i) by a vote of the Trustees, including the Independent Trustees, with votes cast in person at a meeting called for the purpose of voting on Part II of the Plan; and (ii) by a vote of holders of at least a "majority" (as so defined) of the dollar value of the outstanding voting securities of the Level-Payment Class Shares. Part II has continued, and will, unless terminated as therein provided, continue in effect from year to year so long as such continuance is specifically approved at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. Part II may be terminated at any time by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the dollar value of the outstanding voting securities of the Trust to which Part II applies. Part II may not be amended to increase materially the amount of payments to be made without shareholder approval of the class or classes of shares affected by Part II as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above. In the case of a Qualified Recipient which is a principal underwriter of the Trust, the Class C Plan Agreement shall be the agreement contemplated by Section 15(b) of the 1940 Act since each such agreement must be approved in accordance with, and contain the provisions required by, the Rule. In the case of Qualified Recipients which are not principal underwriters of the Trust, the Class C Plan Agreements with them shall be (i) their agreements with the Distributor with respect to payments under the Trust's Distribution Plan in effect prior to April 1, 1996 or (ii) Class C Plan Agreements entered into thereafter. Provisions Relating to Class I Shares (Part III) Part III of the Plan applies only to the Financial Intermediary Class Shares ("Class I Shares") of the Trust (regardless of whether such class is so designated or is redesignated by some other name). As used in Part III of the Plan, "Qualified Recipients" shall mean broker/dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to any principal underwriter of the Trust, with which the Trust or the Distributor has entered into written agreements in connection with Part III ("Class I Plan Agreements") and which have rendered assistance (whether direct, administrative, or both) in the distribution and/or retention of the Trust's Class I Shares or servicing of shareholder accounts with respect to such shares. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Class I Shares beneficially owned by such Qualified Recipient, or beneficially owned by its brokerage customers, other customers, other contacts, investment advisory clients, or other clients, if the Qualified Recipient was, in the sole judgment of the Distributor, instrumental in the purchase and/or retention of such shares and/or in providing administrative assistance or other services in relation thereto. Subject to the direction and control of the Trust's Board of Trustees, the Trust may make payments ("Class I Permitted Payments") to Qualified Recipients, which Class I Permitted Payments may be made directly, or through the Distributor or shareholder servicing agent as disbursing agent, which may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year), a rate fixed from time to time by the Board of Trustees, initially up to 0.15 of 1% of the average annual net assets of the Trust represented by the Class I Shares, but not more than 0.25 of 1% of such assets. Such payments shall be made only out of the Trust's assets allocable to Class I Shares. The Distributor shall have sole authority (i) as to the selection of any Qualified Recipient or Recipients; (ii) not to select any Qualified Recipient; and (iii) as to the amount of Class I Permitted Payments, if any, to each Qualified Recipient provided that the total Class I Permitted Payments to all Qualified Recipients do not exceed the amount set forth above. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Class I Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; furnishing (either alone or together with other reports sent to a shareholder by such person) monthly and year-end statements and confirmations of purchases and redemptions; transmitting, on behalf of the Trust, proxy statements, annual reports, updating prospectuses and other communications from the Trust to its shareholders; receiving, tabulating and transmitting to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Trust; and providing such other related services as the Distributor or a shareholder may request from time to time; and (c) the possibility that the Qualified Holdings of the Qualified Recipient would be redeemed in the absence of its selection or continuance as a Qualified Recipient. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years. While Part III is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Class I Permitted Payments made under the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Manager, Sub-Adviser or Distributor paid or accrued during such quarter. In addition, if any such Qualified Recipient is an affiliated person, as that term is defined in the 1940 Act, of the Trust, Manager, Sub-Adviser or Distributor such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually. Part III originally went into effect when it was approved (i) by a vote of the Trustees, including the Independent Trustees, with votes cast in person at a meeting called for the purpose of voting on Part III of the Plan; and (ii) by a vote of holders of at least a "majority" (as so defined) of the dollar value of the outstanding voting securities of the Class I Shares Class. Part III has continued, and will, unless terminated as thereinafter provided, continue in effect from year to year so long as such continuance is specifically approved at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. Part III may be terminated at any time by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the dollar value of the outstanding voting securities of the Trust to which Part III applies. Part III may not be amended to increase materially the amount of payments to be made without shareholder approval of the class or classes of shares affected by Part III as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above. In the case of a Qualified Recipient which is a principal underwriter of the Trust, the Class I Plan Agreement shall be the agreement contemplated by Section 15(b) of the 1940 Act since each such agreement must be approved in accordance with, and contain the provisions required by, the Rule. In the case of Qualified Recipients which are not principal underwriters of the Trust, the Class I Plan Agreements with them shall be (i) their agreements with the Distributor with respect to payments under the Trust's Distribution Plan in effect prior to April 1, 1996 or (ii) Class I Plan Agreements entered into thereafter. Defensive Provisions (Part IV) Another part of the Plan (Part IV) states that if and to the extent that any of the payments listed below are considered to be "primarily intended to result in the sale of" shares issued by the Trust within the meaning of Rule 12b-1, such payments are authorized under the Plan: (i) the costs of the preparation of all reports and notices to shareholders and the costs of printing and mailing such reports and notices to existing shareholders, irrespective of whether such reports or notices contain or are accompanied by material intended to result in the sale of shares of the Trust or other funds or other investments; (ii) the costs of the preparation and setting in type of all prospectuses and statements of additional information and the costs of printing and mailing all prospectuses and statements of additional information to existing shareholders; (iii) the costs of preparation, printing and mailing of any proxy statements and proxies, irrespective of whether any such proxy statement includes any item relating to, or directed toward, the sale of the Trust's shares; (iv) all legal and accounting fees relating to the preparation of any such reports, prospectuses, statements of additional information, proxies and proxy statements; (v) all fees and expenses relating to the registration or qualification of the Trust and/or its shares under the securities or "Blue-Sky" laws of any jurisdiction; (vi) all fees under the Securities Act of 1933 and the 1940 Act, including fees in connection with any application for exemption relating to or directed toward the sale of the Trust's shares; (vii) all fees and assessments of the Investment Company Institute or any successor organization, irrespective of whether some of its activities are designed to provide sales assistance; (viii) all costs of the preparation and mailing of confirmations of shares sold or redeemed or share certificates, and reports of share balances; and (ix) all costs of responding to telephone or mail inquiries of investors or prospective investors. The Plan states that while it is in effect, the selection and nomination of those Trustees of the Trust who are not "interested persons" of the Trust shall be committed to the discretion of such disinterested Trustees but that nothing in the Plan shall prevent the involvement of others in such selection and nomination if the final decision on any such selection and nomination is approved by a majority of such disinterested Trustees. The Plan defines as the Trust's Independent Trustees those Trustees who are not "interested persons" of the Trust as defined in the 1940 Act and who have no direct or indirect financial interest in the operation of the Plan or in any agreements related to the Plan. The Plan, unless terminated as therein provided, continues in effect from year to year only so long as such continuance is specifically approved at least annually by the Trust's Board of Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. In voting on the implementation or continuance of the Plan, those Trustees who vote to approve such implementation or continuance must conclude that there is a reasonable likelihood that the Plan will benefit the Trust and its shareholders. The Plan may be terminated at any time by vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the dollar value of the outstanding voting securities of the Trust. The Plan may not be amended to increase materially the amount of payments to be made without shareholder approval and all amendments must be approved in the manner set forth above as to continuance of the Plan. The Plan and each Part of it shall also be subject to all applicable terms and conditions of Rule 18f-3 under the 1940 Act as now in force or hereafter amended. Specifically, but without limitation, the provisions of Part IV shall be deemed to be severable, within the meaning of and to the extent required by Rule 18f-3, with respect to each outstanding class of shares of the Trust. Payments Under the Plan During the fiscal year ended September 30, 2006 payments were made only under Part I and Part II of the Plan. All payments were to Qualified Recipients and were for compensation. No payments were made under Part III or Part IV of the Plan. Payments to Qualified Recipients During the fiscal year ended September 30, 2006, payments to Qualified Recipients under each part of the Plan and the amounts of such payments to the Distributor and others were as follows:
To All Qualified Recipients To Distributor To Other Qualified Recipients Part I $540,787 $26,203 $514,584 Part II $280,484 $82,253 $198,231
All payments to Other Qualified Recipients, most of whom are broker/dealers, and to the Distributor, were for compensation. Payments with respect to Class C Shares during the first year after purchase are paid to the Distributor and thereafter to Other Qualified Recipients. Amounts paid under the Plan as compensation to Qualified Recipients, including the Distributor, are not based on the recipient's expenses in providing distribution, retention and/or shareholder servicing assistance to the Trust and, accordingly, are not regarded as reimbursement of such expenses. Shareholder Services Plan The Trust has adopted a Shareholder Services Plan (the "Services Plan") to provide for the payment with respect to Class C Shares and Class I Shares of the Trust of "Service Fees" within the meaning of the Conduct Rules of the National Association of Securities Dealers, Inc. The Services Plan applies only to the Class C Shares and Class I Shares of the Trust (regardless of whether such class is so designated or is redesignated by some other name). Provisions for Level-Payment Class Shares (Class C Shares) (Part I) As used in Part I of the Services Plan, "Qualified Recipients" shall mean broker/dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to the Distributor and any other principal underwriter of the Trust, who have, pursuant to written agreements with the Trust or the Distributor, agreed to provide personal services to shareholders of Level-Payment Class Shares and/or maintenance of Level-Payment Class Shares shareholder accounts. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Level-Payment Class Shares beneficially owned by such Qualified Recipient's customers, clients or other contacts. "Manager" shall mean Aquila Investment Management LLC or any successor serving as sub-adviser or administrator of the Trust. Subject to the direction and control of the Trust's Board of Trustees, the Trust may make payments ("Service Fees") to Qualified Recipients, which Service Fees (i) may be paid directly or through the Distributor or shareholder servicing agent as disbursing agent and (ii) may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Services Plan are not accruable or for any fiscal year which is not a full fiscal year), 0.25 of 1% of the average annual net assets of the Trust represented by the Level-Payment Class Shares. Such payments shall be made only out of the Trust's assets allocable to the Level-Payment Class Shares. The Distributor shall have sole authority with respect to the selection of any Qualified Recipient or Recipients and the amount of Service Fees, if any, paid to each Qualified Recipient, provided that the total Service Fees paid to all Qualified Recipients may not exceed the amount set forth above and provided, further, that no Qualified Recipient may receive more than 0.25 of 1% of the average annual net asset value of shares sold by such Recipient. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient and (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Level-Payment Class Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; and providing such other related services as the Distributor or a shareholder may request from time to time. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years. Service Fees with respect to Class C Shares will be paid to the Distributor. During the fiscal year ended September 30, 2006, $93,495 was paid to the Distributor under Part I of the Plan. Provisions for Financial Intermediary Class Shares (Class I Shares) (Part II) As used in Part II of the Services Plan, "Qualified Recipients" shall mean broker/dealers or others selected by the Distributor, including but not limited to the Distributor and any other principal underwriter of the Trust, who have, pursuant to written agreements with the Trust or the Distributor, agreed to provide personal services to shareholders of Financial Intermediary Class Shares, maintenance of Financial Intermediary Class Shares shareholder accounts and/or pursuant to specific agreements entering confirmed purchase orders on behalf of customers or clients. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Financial Intermediary Class Shares beneficially owned by such Qualified Recipient's customers, clients or other contacts. "Manager" shall mean Aquila Investment Management LLC or any successor serving as sub-adviser or administrator of the Trust. Subject to the direction and control of the Trust's Board of Trustees, the Trust may make payments ("Service Fees") to Qualified Recipients, which Service Fees (i) may be paid directly or through the Distributor or shareholder servicing agent as disbursing agent and (ii) may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Services Plan are not accruable or for any fiscal year which is not a full fiscal year), 0.25 of 1% of the average annual net assets of the Trust represented by the Financial Intermediary Class Shares. Such payments shall be made only out of the Trust's assets allocable to the Financial Intermediary Class Shares. The Distributor shall have sole authority with respect to the selection of any Qualified Recipient or Recipients and the amount of Service Fees, if any, paid to each Qualified Recipient, provided that the total Service Fees paid to all Qualified Recipients may not exceed the amount set forth above and provided, further, that no Qualified Recipient may receive more than 0.25 of 1% of the average annual net asset value of shares sold by such Recipient. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient and (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Financial Intermediary Class Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; and providing such other related services as the Distributor or a shareholder may request from time to time. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years. No Class I Shares were outstanding during the fiscal year ended September 30, 2006. General Provisions While the Services Plan is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Service Fees paid under the Services Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Distributor paid or accrued during such quarter. In addition, if any Qualified Recipient is an "affiliated person," as that term is defined in the 1940 Act, of the Trust, Manager, Sub-Adviser or Distributor, such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually. The Services Plan has been approved by a vote of the Trustees, including those Trustees who, at the time of such vote, were not "interested persons" (as defined in the 1940 Act) of the Trust and had no direct or indirect financial interest in the operation of the Services Plan or in any agreements related to the Services Plan (the "Independent Trustees"), with votes cast in person at a meeting called for the purpose of voting on the Services Plan. It will continue in effect for a period of more than one year from its original effective date only so long as such continuance is specifically approved at least annually as set forth in the preceding sentence. It may be amended in like manner and may be terminated at any time by vote of the Independent Trustees. The Services Plan shall also be subject to all applicable terms and conditions of Rule 18f-3 under the 1940 Act as now in force or hereafter amended. While the Services Plan is in effect, the selection and nomination of those Trustees of the Trust who are not "interested persons" of the Trust, as that term is defined in the 1940 Act, shall be committed to the discretion of such disinterested Trustees. Nothing therein shall prevent the involvement of others in such selection and nomination if the final decision on any such selection and nomination is approved by a majority of such disinterested Trustees. Codes of Ethics The Trust, the Manager, the Sub-Adviser and the Distributor have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. The codes permit personnel of these organizations who are subject to the codes to purchase securities, including the types of securities in which the Trust invests, but only in compliance with the provisions of the codes. Transfer Agent, Custodian and Independent Registered Public Accounting Firm The Trust's Shareholder Servicing Agent (transfer agent) is PFPC Inc., 101 Sabin Street, Pawtucket, Rhode Island 02860-1427. The Trust's Custodian, JPMorgan Chase Bank, N.A., 1111 Polaris Parkway, Columbus, Ohio 43240, is responsible for holding the Trust's assets. The Trust's independent registered public accounting firm, Tait, Weller & Baker LLP, 1818 Market Street, Suite 2400, Philadelphia, Pennsylvania 19103, performs an annual audit of the Trust's financial statements. Brokerage Allocation and Other Practices During the fiscal years ended September 30, 2006, 2005 and 2004, all of the Trust's portfolio transactions were principal transactions and no brokerage commissions were paid. The following provisions regarding brokerage allocation and other practices relating to purchases and sales of the Trust's securities are contained in the Sub-Advisory Agreement. It provides that the Sub-Adviser shall select such broker/dealers ("dealers") as shall, in the Sub-Adviser's judgment, implement the policy of the Trust to achieve "best execution," i.e., prompt, efficient, and reliable execution of orders at the most favorable net price. The Sub-Adviser shall cause the Trust to deal directly with the selling or purchasing principal or market maker without incurring brokerage commissions unless the Sub-Adviser determines that better price or execution may be obtained by paying such commissions; the Trust expects that most transactions will be principal transactions at net prices and that the Trust will incur little or no brokerage costs. The Trust understands that purchases from underwriters include a commission or concession paid by the issuer to the underwriter and that principal transactions placed through dealers include a spread between the bid and asked prices. In allocating transactions to dealers, the Sub-Adviser is authorized to consider, in determining whether a particular dealer will provide best execution, the dealer's reliability, integrity, financial condition and risk in positioning the securities involved, as well as the difficulty of the transaction in question, and thus need not pay the lowest spread or commission available if the Sub-Adviser determines in good faith that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the dealer, viewed either in terms of the particular transaction or the Sub-Adviser's overall responsibilities. If, on the foregoing basis, the transaction in question could be allocated to two or more dealers, the Sub-Adviser is authorized, in making such allocation, to consider whether a dealer has provided research services, as further discussed below. Such research may be in written form or through direct contact with individuals and may include quotations on portfolio securities and information on particular issuers and industries, as well as on market, economic, or institutional activities. The Trust recognizes that no dollar value can be placed on such research services or on execution services and that such research services may or may not be useful to the Trust and may be used for the benefit of the Sub-Adviser or its other clients. Capital Stock The Trust has four classes of shares. * Front-Payment Class Shares ("Class A Shares") are offered to anyone at net asset value plus a sales charge, paid at the time of purchase, at the maximum rate of 4.0% of the public offering price, with lower rates for larger purchases including previous purchases of Class A Shares of the Trust or of Class A Shares of any of the other funds in the Aquila Group of Fundssm. There is no sales charge on purchases of $1 million or more, but redemptions of shares so purchased are generally subject to a contingent deferred sales charge ("CDSC"). Class A Shares are subject to a fee under the Trust's Distribution Plan at the rate of 0.15 of 1% of the average annual net assets represented by the Class A Shares. * Level-Payment Class Shares ("Class C Shares") are offered to anyone at net asset value with no sales charge payable at the time of purchase but with a level charge for service and distribution fees for six years after the date of purchase at the aggregate annual rate of 1% of the average annual net assets of the Class C Shares. Six years after the date of purchase, Class C Shares are automatically converted to Class A Shares. If you redeem Class C Shares before you have held them for 12 months from the date of purchase you will pay a CDSC; this charge is 1%, calculated on the net asset value of the Class C Shares at the time of purchase or at redemption, whichever is less. There is no CDSC after Class C Shares have been held beyond the applicable period. For purposes of applying the CDSC and determining the time of conversion, the 12-month and six-year holding periods are considered modified by up to one month depending upon when during a month your purchase of such shares is made. Class C Shares are subject to a fee under the Trust's Distribution Plan at the rate of 0.75 of 1% of the average annual net assets represented by the Class C Shares and a service fee of 0.25 of 1% of such assets. * Institutional Class Shares ("Class Y Shares") are offered only to institutions acting for investors in a fiduciary, advisory, agency, custodial or similar capacity, and are not offered directly to retail customers. Class Y Shares are offered at net asset value with no sales charge, no redemption fee, no contingent deferred sales charge and no distribution fee. * Financial Intermediary Class Shares ("Class I Shares") are offered and sold only through financial intermediaries with which Aquila Distributors, Inc. has entered into sales agreements, and are not offered directly to retail customers. Class I Shares are offered at net asset value with no sales charge and no redemption fee or contingent deferred sales charge, although a financial intermediary may charge a fee for effecting a purchase or other transaction on behalf of its customers. Class I Shares may carry a distribution fee of up to 0.25 of 1% of average annual net assets allocable to Class I Shares, currently up to 0.15 of 1% of such net assets, and a service fee of up to 0.25 of 1% of such assets. The Trust's four classes of shares differ in their sales charge structures and ongoing expenses, which are likely to be reflected in differing yields and other measures of investment performance. All four classes represent interests in the same portfolio of Oregon Obligations and have the same rights, except that each class bears the separate expenses, if any, of its participation in the Distribution Plan and Shareholder Services Plan and has exclusive voting rights with respect to such participation. At any meeting of shareholders, shareholders are entitled to one vote for each dollar of net asset value (determined as of the record date for the meeting) per share held (and proportionate fractional votes for fractional dollar amounts). Shareholders will vote on the election of Trustees and on other matters submitted to the vote of shareholders. Shares vote by classes on any matter specifically affecting one or more classes, such as an amendment of an applicable part of the Distribution Plan. No amendment, whether or not affecting the rights of the shareholders, may be made to the Declaration of Trust without the affirmative vote of the holders of a majority of the dollar value of the outstanding shares of the Trust, except that the Trust's Board of Trustees may change the name of the Trust. The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in the Trust. Each share represents an equal proportionate interest in the Trust with each other share of its class; shares of the respective classes represent proportionate interests in the Trust in accordance with their respective net asset values. Upon liquidation of the Trust, shareholders are entitled to share pro-rata in the net assets of the Trust available for distribution to shareholders, in accordance with the respective net asset values of the shares of each of the Trust's classes at that time. All shares are presently divided into four classes; however, if they deem it advisable and in the best interests of shareholders, the Board of Trustees of the Trust may create additional classes of shares, which may differ from each other as provided in rules and regulations of the Securities and Exchange Commission or by exemptive order. The Board of Trustees may, at its own discretion, create additional series of shares, each of which may have separate assets and liabilities (in which case any such series will have a designation including the word "Series"). Shares are fully paid and non-assessable, except as set forth in the next paragraph; the holders of shares have no pre-emptive or conversion rights, except that Class C Shares automatically convert to Class A Shares after being held for six years. The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of a trust such as the Trust, may, under certain circumstances, be held personally liable as partners for the obligations of the trust. For shareholder protection, however, an express disclaimer of shareholder liability for acts or obligations of the Trust is contained in the Declaration of Trust, which requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Declaration of Trust provides for indemnification out of the Business Trust's property of any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to the relatively remote circumstances in which the Trust itself would be unable to meet its obligations. In the event the Trust had two or more Series, and if any such Series were to be unable to meet the obligations attributable to it (which, as with the Trust, is relatively remote), the other Series would be subject to such obligations, with a corresponding increase in the risk of the shareholder liability mentioned in the prior sentence. Purchase, Redemption, and Pricing of Shares The following supplements the information about purchase, redemption and pricing of shares set forth in the Prospectus. Sales Charges for Purchases of $1 Million or More of Class A Shares You will not pay a sales charge at the time of purchase when you purchase "CDSC Class A Shares." CDSC Class A Shares include: (i) Class A Shares issued in a single purchase of $1 million or more by a single purchaser; and (ii) Class A Shares issued when the value of the purchase, together with the value (based on purchase cost or current net asset value, whichever is higher) of shares of the Trust or any other fund in the Aquila Group of Fundssm that are owned by the purchaser and are either CDSC Class A Shares or Class A Shares on which a sales charge was paid, is $1 million or more. CDSC Class A Shares do not include Class A Shares purchased without a sales charge as described under "General" below. Broker/Dealer Compensation - Class A Shares Upon notice to all selected dealers, the Distributor may distribute up to the full amount of the applicable sales charge to broker/dealers. Under the Securities Act of 1933, broker/dealers may be deemed to be underwriters during periods when they receive all, or substantially all, of the sales charge. Redemption of CDSC Class A Shares If you redeem all or part of your CDSC Class A Shares during the four years after you purchase them, you must pay a special CDSC upon redemption. As stated in the Prospectus it is the Trust's intention not to charge you a CDSC that is greater than the amount of the commission that was paid to the broker/dealer in connection with your purchase transaction. If the broker/dealer was paid less than the maximum commission, your actual CDSC will be reduced as described by the following table:
Value of Holdings At the CDSC You will Pay on Commission Paid to Time of Purchase Redemption Broker/Dealer $1 million and up to $2.5 million 1% in years 1 & 2 1% 0.50 of 1% in years 3 &4 None 0.25% in 4 payments over 4 years Over $2.5 million and up to $5 0.50 of 1% in year 1 0.50% million 0.25 of 1% in year 2 0.0 in years 3 & 4 None 0.25% in 2payments over 2 years Over $5 million None 0.25%
This special charge also applies to CDSC Class A Shares purchased without a sales charge pursuant to a Letter of Intent (see "Reduced Sales Charges for Certain Purchases of Class A Shares" below). This special charge will not apply to shares acquired through the reinvestment of dividends or distributions on CDSC Class A Shares or to CDSC Class A Shares held for longer than four years. When redeeming shares, the Agent will redeem the CDSC Class A Shares held the longest, unless otherwise instructed. If you own both CDSC and non-CDSC Class A Shares, the latter will be redeemed first. The Trust will treat all CDSC Class A Share purchases made during a calendar month as if they were made on the first business day of that month at the average cost of all purchases made during that month. Therefore, the four-year holding period will end on the first business day of the 48th calendar month after the date of those purchases. Accordingly, the holding period may, in fact, be almost one month less than the full 48 depending on when your actual purchase was made. If you exchange your CDSC Class A Shares for shares of an Aquila money-market fund (see "Exchange Privilege" below), running of the 48-month holding period for those exchanged shares will be suspended. Broker/Dealer Compensation - CDSC Class A Shares The Distributor currently intends to pay any dealer executing a purchase of CDSC Class A Shares as follows: Amount Distributed to Broker/Dealer as a Percentage Amount of Purchase of Purchase Price $1 million but less than $2.5 million 1% $2.5 million but less than $5 million 0.50 of 1% $5 million or more 0.25 of 1% Reduced Sales Charges for Certain Purchases of Class A Shares Right of Accumulation "Single purchasers" may qualify for a reduced sales charge in accordance with the schedule set forth in the Prospectus for Class A Shares and Class C Shares when making subsequent purchases of Class A Shares. A reduced sales charge applies if the cumulative value (based on purchase cost or current net asset value, whichever is higher) of Class A Shares previously purchased with a sales charge, together with Class A Shares of your subsequent purchase, also with a sales charge, amounts to $25,000 or more. Letters of Intent "Single purchasers" may also qualify for reduced sales charges, in accordance with the same schedule, after a written Letter of Intent (included in the New Account Application) is received by the Distributor. The Letter of Intent confirms that you intend to purchase, with a sales charge, within a thirteen-month period, Class A Shares of the Trust through a single selected dealer or the Distributor. Class A Shares of the Trust which you previously purchased, with a sales charge, within 90 days prior to the Distributor's receipt of your Letter of Intent and which you still own may also be included in determining the applicable reduction. For more information, including escrow provisions, see the Letter of Intent provisions of the New Account Application. General Class A Shares may be purchased without a sales charge by: * current and former Trustees and officers of any funds in the Aquila Group of Fundssm, * the directors, Trustees, officers and certain employees, former employees and representatives of the Manager, the Distributor, the sub-adviser of any fund in the Aquila Group of Fundssm and the parents and/or affiliates of such companies, * selected broker dealers, their officers and employees and other investment professionals, * certain persons connected with firms providing legal, advertising or public relations assistance, * certain family members of, and plans for the benefit of, the foregoing; and * plans for the benefit of trust or similar clients of banking institutions over which these institutions have full investment authority, if the Distributor has an agreement relating to such purchases. Except for the last category, purchasers must give written assurance that the purchase is for investment and that the Class A Shares will not be resold except through redemption. Since there may be tax consequences of these purchases, your tax advisor should be consulted. Class A Shares may also be issued without a sales charge in a merger, acquisition or exchange offer made pursuant to a plan of reorganization to which the Trust is a party. The Trust permits the sale of its Class A Shares at prices that reflect the reduction or elimination of the sales charge to investors who are members of certain qualified groups. A qualified group is a group or association, or a category of purchasers who are represented by a fiduciary, professional or other representative, including a registered broker/dealer that is acting as a registered investment adviser or certified financial planner for investors participating in comprehensive fee programs (but not any other broker/dealer), which (i) satisfies uniform criteria which enable the Distributor to realize economies of scale in its costs of distributing shares; (ii) gives its endorsement or authorization (if it is a group or association) to an investment program to facilitate solicitation of its membership by a broker or dealer; and (iii) complies with the conditions of purchase that make up an agreement between the Trust and the group, representative or broker or dealer. At the time of purchase, the Distributor must receive information sufficient to permit verification that the purchase qualifies for a reduced sales charge, either directly or through a broker or dealer. Additional Compensation for Financial Intermediaries The Distributor and/or its related companies may pay compensation out of their own assets to certain broker/dealers and other financial intermediaries ("financial advisors") above and beyond sales commissions, 12b-1 or certain service fees and certain recordkeeping/sub-transfer agency fees paid by the Trust, in connection with the sale, servicing or retention of Trust shares. This compensation, which may be significant in dollar amounts to the Distributor, could create an incentive for a financial advisor to sell Trust shares. You should ask your financial advisor to obtain more information on how this additional compensation may have influenced your advisor's recommendation of the Trust. Such additional compensation is paid out of the Distributor's (or related company's) own resources, without additional charge to the Trust or its shareholders. Additional cash payments may be based on a percentage of gross sales, a percentage of assets or number of accounts maintained or serviced by the financial advisor, and/or a fixed dollar amount. At its discretion, the Distributor determines whether to pay additional compensation and the amount of any such payments based on factors the Distributor deems relevant. Factors considered by the Distributor generally include the financial advisor's reputation, training of the financial advisor's sales force, quality of service, ability to attract and retain assets for the Trust, expertise in distributing a particular class of shares of the Trust, and/or access to target markets. The Distributor may pay additional compensation for services with respect to the Trust and other funds in the Aquila Group of Fundssm without allocation for services provided to particular funds. Typically, additional compensation in the form of education and/or marketing support payments is made towards one or more of the following: o assistance in training and educating the financial advisor's personnel; o participation in the financial advisor's conferences and meetings; o advertising of the Trust's shares; o payment of travel expenses, including lodging, for attendance at sales seminars by qualifying registered representatives; o other incentives or financial assistance to financial advisors in connection with promotional, training or educational seminars or conferences; o shareholder appreciation events; o exhibit space or sponsorships at regional or national events of financial intermediates; o participation in special financial advisor programs; o continued availability of the Trust's shares through the financial advisor's automated trading platform; o access to the financial advisor's sales representatives and national sales management personnel by the Distributor or Trust representatives; o inclusion of the Trust and/or the Aquila Group of Fundssm on preferred or recommended sales lists; and o other comparable expenses at the discretion of the Distributor. The financial advisors to whom the Distributor may pay, or has paid additional compensation in the form of education and/or marketing support payments since January 1, 2004, include A.G. Edwards & Sons Inc., Bank One Securities Corp., Charles Schwab & Co., Inc., DA Davidson & Co., Edward D. Jones & Co., First Federal Savings Bank, Invest Financial Corporation, J.J.B. Hilliard, W.L. Lyons Inc., Legg Mason Wood Walker, Incorporated, Merrill, Lynch, Pierce Fenner & Smith Inc., Morgan Keegan & Company, Inc., Morgan Stanley DW Inc. (including anticipated fixed dollar payments ranging from $21,000 to $25,000 annually), Pershing LLC, Piper Jaffray Inc., RBC Dain Rauscher Inc., Raymond James Securities, Stifel, Nicolaus & Company, Inc., Stock Yards Bank & Trust Co., The Glenview Trust Co., The Investment Center Inc., UBS Financial Services, US Bancorp Investments, Inc., US Bank Securities, UVEST Investment Services, Inc., Wachovia Securities, Inc., and Zions Investment Securities Inc. The Distributor and/or related companies may compensate financial advisors not listed above. The Distributor and/or related companies may enter into additional compensation arrangements or change arrangements at any time without notice. The Distributor and/or its related companies currently compensate financial advisors on a case by case basis. Any of the foregoing payments to be made by the Distributor may be made instead by the Manager out of its own funds, directly or through the Distributor. Automatic Withdrawal Plan You may establish an Automatic Withdrawal Plan if you own or purchase Class A Shares or Class Y Shares of the Trust having a net asset value of at least $5,000. The Automatic Withdrawal Plan is not available for Class C Shares or Class I Shares. Under an Automatic Withdrawal Plan you will receive a monthly or quarterly check in a stated amount, not less than $50. If such a plan is established, all dividends and distributions must be reinvested in your shareholder account. Redemption of shares to make payments under the Automatic Withdrawal Plan will give rise to a gain or loss for tax purposes. (See the Automatic Withdrawal Plan provisions of the New Account Application.) Purchases of additional Class A Shares concurrently with withdrawals are undesirable because of sales charges when purchases are made. Accordingly, you may not maintain an Automatic Withdrawal Plan while simultaneously making regular purchases. While an occasional lump sum investment may be made, such investment should normally be an amount at least equal to three times the annual withdrawal or $5,000, whichever is less. Share Certificates You may obtain Share certificates for full Class A Shares only if you make a written request to the Agent. All share certificates previously issued by the Trust represent Class A Shares. If you lose the certificates, you may incur delay and expense when redeeming shares or having the certificates reissued. Share certificates will not be issued: * for fractional Class A Shares; * if you have selected Automatic Investment or Telephone Investment for Class A Shares; * if you have selected Expedited Redemption. However, if you specifically request, Class A Share certificates will be issued with a concurrent automatic suspension of Expedited Redemption on your account; or * for Class C Shares, Class Y Shares or Class I Shares. Reinvestment Privilege If you reinvest proceeds of a redemption within 120 days of the redemption you will not have to pay any additional sales charge on the reinvestment. You must reinvest in the same class as the shares redeemed. You may exercise this privilege only once a year, unless otherwise approved by the Distributor. The Distributor will refund to you any CDSC deducted at the time of redemption by adding it to the amount of your reinvestment. The Class C or CDSC Class A Shares purchased upon reinvestment will be deemed to have been outstanding from the date of your original purchase of the redeemed shares, less the period from redemption to reinvestment. Reinvestment will not alter the tax consequences of your original redemption. Exchange Privilege Shareholders of the Trust have an exchange privilege as set forth below. Exchanges can be made among this Trust, the other tax-free municipal bond funds, the high-income corporate bond fund and the equity fund (together with the Trust, the "Bond or Equity Funds") and certain money-market funds (the "Money-Market Funds") in the Aquila Group of Fundssm. All of the funds have the same Manager or Administrator and Distributor as the Trust. All exchanges are subject to certain conditions described below. As of the date of this SAI, the Bond or Equity Funds are Aquila Rocky Mountain Equity Fund, Aquila Three Peaks High Income Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Oregon, Tax-Free Trust of Arizona, Churchill Tax-Free Fund of Kentucky, Tax-Free Fund of Colorado, Tax-Free Fund For Utah and Narragansett Insured Tax-Free Income Fund; the Money-Market Funds are Pacific Capital Cash Assets Trust (Original Shares), Pacific Capital Tax-Free Cash Assets Trust (Original Shares) and Pacific Capital U.S. Government Securities Cash Assets Trust (Original Shares). Generally, you can exchange shares of a given class of a Bond or Equity Fund including the Trust for shares of the same class of any other Bond or Equity Fund, or for Original Shares of any Money-Market Fund, without the payment of a sales charge or any other fee. The exchange privilege is available to Class I Shares to the extent that other Aquila-sponsored funds are made available to its customers by your financial intermediary. All exchanges of Class I Shares must be made through your financial intermediary. Because excessive trading in Trust shares can be harmful to the Trust and its other shareholders, the right is reserved to revise or terminate the exchange privilege, to limit the number of exchanges or to reject any exchange if (i) the Trust or any of the other Aquila Funds believe that it or they would be harmed or be unable to invest effectively or (ii) it or they receive or anticipate receiving simultaneous orders that may significantly affect the Trust or any other Aquila Fund. The following important information should be noted: (1) CDSCs Upon Redemptions of Shares Acquired Through Exchanges. If you exchange shares subject to a CDSC, no CDSC will be imposed at the time of exchange, but the shares you receive in exchange for them will be subject to the applicable CDSC if you redeem them before the requisite holding period (extended, if required) has expired. If the shares you redeem would have incurred a CDSC if you had not made any exchanges, then the same CDSC will be imposed upon the redemption regardless of the exchanges that have taken place since the original purchase. (2) Extension of Holding Periods by Owning Money-Market Funds. Any period of 30 days or more during which Money-Market Fund shares received on an exchange of CDSC Class A Shares or Class C Shares are held is not counted in computing the applicable holding period for CDSC Class A Shares or Class C Shares. (3) Originally Purchased Money-Market Fund Shares. Shares of a Money-Market Fund (and any shares acquired as a result of reinvestment of dividends and/or distributions on these shares) acquired directly in a purchase (or in exchange for Money-Market Fund shares that were themselves directly purchased), rather than in exchange for shares of a Bond or Equity Fund, may be exchanged for shares of any class of any Bond or Equity Fund that the investor is otherwise qualified to purchase, but the shares received in such an exchange will be subject to the same sales charge, if any, that they would have been subject to had they been purchased rather than acquired in exchange for Money-Market Fund shares. If the shares received in exchange are shares that would be subject to a CDSC if purchased directly, the holding period governing the CDSC will run from the date of the exchange, not from the date of the purchase of Money-Market Fund shares. This Trust, as well as the Money-Market Funds and other Bond or Equity Funds, reserves the right to reject any exchange into its shares, if shares of the fund into which exchange is desired are not available for sale in your state of residence. The Trust may also modify or terminate this exchange privilege at any time. In the case of termination, the Prospectus will be appropriately supplemented. No such modification or termination shall take effect on less than 60 days' written notice to shareholders. All exercises of the exchange privilege are subject to the conditions that (i) the shares being acquired are available for sale in your state of residence; (ii) the aggregate net asset value of the shares surrendered for exchange is at least equal to the minimum investment requirements of the investment company whose shares are being acquired and (iii) the ownership of the accounts from which and to which the exchange is made are identical. The Agent will accept telephone exchange instructions from anyone. To make a telephone exchange telephone: 800-437-1000 toll-free Note: The Trust, the Agent, and the Distributor will not be responsible for any losses resulting from unauthorized telephone transactions if the Agent follows reasonable procedures designed to verify the identity of the caller. The Agent will request some or all of the following information: account name(s) and number, name of the caller, the social security number registered to the account and personal identification. The Agent may also record calls. You should verify the accuracy of confirmation statements immediately upon receipt. Exchanges will be effected at the relative exchange prices of the shares being exchanged next determined after receipt by the Agent of your exchange request. The exchange prices will be the respective net asset values of the shares, unless a sales charge is to be deducted in connection with an exchange of shares, in which case the exchange price of shares of a Bond or Equity Fund will be their public offering price. Prices for exchanges are determined in the same manner as for purchases of the Trust's shares. An exchange is treated for Federal tax purposes as a redemption and purchase of shares and may result in the realization of a capital gain or loss, depending on the cost or other tax basis of the shares exchanged and the holding period; no representation is made as to the deductibility of any such loss should such occur. Dividends paid by the Money-Market Funds are taxable, except to the extent that a portion or all of the dividends paid by Pacific Capital Tax-Free Cash Assets Trust (a tax-free money-market fund) are exempt from regular Federal income tax, and to the extent that a portion or all of the dividends paid by Pacific Capital U.S. Government Securities Cash Assets Trust (which invests in U.S. Government obligations) are exempt from state income taxes. Dividends paid by Aquila Rocky Mountain Equity Fund and Aquila Three Peaks High Income Fund are taxable. If your state of residence is not the same as that of the issuers of obligations in which a tax-free municipal bond fund or a tax-free money-market fund invests, the dividends from that fund may be subject to income tax of the state in which you reside. Accordingly, you should consult your tax adviser before acquiring shares of such a bond fund or a tax-free money-market fund under the exchange privilege arrangement. If you are considering an exchange into one of the funds listed above, you should send for and carefully read its Prospectus. Conversion of Class C Shares Conversion of Class C Shares into Class A Shares will be effected at relative net asset values on the 15th day (or the next business day thereafter) of the month preceding that in which the sixth anniversary of your purchase of the Class C Shares occurred, except as noted below. Accordingly, the holding period applicable to your Class C Shares may be up to seven weeks less than the six years depending upon when your actual purchase was made during a month. Because the per share value of Class A Shares may be higher than that of Class C Shares at the time of conversion, you may receive fewer Class A Shares than the number of Class C Shares converted. If you have made one or more exchanges of Class C Shares among the Aquila-sponsored Bond or Equity Funds under the Exchange Privilege, the six-year holding period is deemed to have begun on the date you purchased your original Class C Shares of the Trust or of another of the Aquila Bond or Equity Funds. The six-year holding period will be suspended by one month for each period of thirty days during which you hold shares of a Money-Market Fund you have received in exchange for Class C Shares under the Exchange Privilege. "Transfer on Death" ("TOD") Registration (Not Available for Class I Shares) Each of the funds in the Aquila Group of Fundssm now permits registration of its shares in beneficiary form, subject to the funds' rules governing Transfer on Death ("TOD") registration, if the investor resides in a state that has adopted the Uniform Transfer on Death Security Registration Act (a "TOD State"; for these purposes, Missouri is deemed to be a TOD State). This form of registration allows you to provide that, on your death, your shares are to be transferred to the one or more persons that you specify as beneficiaries. To register shares of the Trust in TOD form, complete the special TOD Registration Request Form and review the Rules Governing TOD Registration; both are available from the Agent. The Rules, which are subject to amendment upon 60 days' notice to TOD account owners, contain important information regarding TOD accounts with the Trust; by opening such an account you agree to be bound by them, and failure to comply with them may result in your shares' not being transferred to your designated beneficiaries. If you open a TOD account with the Trust that is otherwise acceptable but, for whatever reason, neither the Trust nor the Agent receives a properly completed TOD Registration Request Form from you prior to your death, the Trust reserves the right not to honor your TOD designation, in which case your account will become part of your estate. You are eligible for TOD registration only if, and as long as, you reside in a TOD State. If you open a TOD account and your account address indicates that you do not reside in a TOD State, your TOD registration will be ineffective and the Trust may, in its discretion, either open the account as a regular (non-TOD) account or redeem your shares. Such a redemption may result in a loss to you and may have tax consequences. Similarly, if you open a TOD account while residing in a TOD State and later move to a non-TOD State, your TOD registration will no longer be effective. In both cases, should you die while residing in a non-TOD State the Trust reserves the right not to honor your TOD designation. At the date of this SAI, most states are TOD States. Computation of Net Asset Value The net asset value of the shares of each of the Trust's classes is determined as of 4:00 p.m., New York time, on each day that the New York Stock Exchange is open, by dividing the value of the Trust's net assets allocable to each class by the total number of its shares of such class then outstanding. With the approval of the Trust's Board of Trustees the Trust's normal practice is that most or all of the Oregon Obligations in the Trust's portfolio are priced using a reputable pricing service which may employ differential comparisons to the market in other municipal bonds under methods which include consideration of the current market value of tax-free debt instruments having varying characteristics of quality, yield and maturity. Portfolio securities other than those with a remaining maturity of sixty days or less are valued at the mean between bid and asked quotations, if available, which, for Oregon Obligations, may be obtained from a reputable pricing service which may, in turn, obtain quotations from broker/dealers or banks dealing in Oregon Obligations. Any securities or assets for which such market quotations are not readily available are valued at their fair value as determined in good faith under procedures subject to the general supervision and responsibility of the Trust's Board of Trustees. Securities having a remaining maturity of sixty days or less when purchased and securities originally purchased with maturities in excess of sixty days but which currently have maturities of sixty days or less are valued at cost adjusted for amortization of premiums and accretion of discounts. With the approval of the Trust's Board of Trustees, the Sub-Adviser may at its own expense and without reimbursement from the Trust employ a pricing service, bank or broker/dealer experienced in such matters to perform any of the above described functions. Reasons for Differences in Public Offering Price As described herein and in the Prospectus, there are a number of instances in which the Trust's Class A Shares are sold or issued on a basis other than the maximum public offering price, that is, the net asset value plus the highest sales charge. Some of these relate to lower or eliminated sales charges for larger purchases, whether made at one time or over a period of time as under a Letter of Intent or right of accumulation. (See the table of sales charges in the Prospectus.) The reasons for these quantity discounts are, in general, that (i) they are traditional and have long been permitted in the industry and are therefore necessary to meet competition as to sales of shares of other funds having such discounts; and (ii) they are designed to avoid an unduly large dollar amount of sales charge on substantial purchases in view of reduced selling expenses. Quantity discounts are made available to certain related persons ("single purchasers") for reasons of family unity and to provide a benefit to tax-exempt plans and organizations. The reasons for the other instances in which there are reduced or eliminated sales charges for Class A Shares are as follows. Exchanges at net asset value are permitted because a sales charge has already been paid on the shares exchanged. Sales without sales charge are permitted to Trustees, officers and certain others due to reduced or eliminated selling expenses and/or since such sales may encourage incentive, responsibility and interest and an identification with the aims and policies of the Trust. Limited reinvestments of redemptions of Class A Shares and Class C Shares at no sales charge are permitted to attempt to protect against mistaken or incompletely informed redemption decisions. Shares may be issued at no sales charge in plans of reorganization due to reduced or eliminated sales expenses and since, in some cases, such issuance is exempted in the 1940 Act from the otherwise applicable restrictions as to what sales charge must be imposed. In no case in which there is a reduced or eliminated sales charge are the interests of existing shareholders adversely affected since, in each case, the Trust receives the net asset value per share of all shares sold or issued. Purchases and Redemptions Through Broker/Dealers A broker/dealer may charge its customers a processing or service fee in connection with the purchase or redemption of Trust shares. The amount and applicability of such a fee is determined and should be disclosed to its customers by each individual broker/dealer. These processing or service fees are typically fixed, nominal dollar amounts and are in addition to the sales and other charges described in the Prospectus and this SAI. Your broker/dealer should provide you with specific information about any processing or service fees you will be charged. Purchases and Redemptions of Class I Shares The Trust has authorized one or more financial intermediaries to receive on its behalf purchase and redemption orders for Class I Shares; one or more of those financial intermediaries are also authorized to designate other intermediaries to receive purchase and redemption orders for Class I Shares on the Trust's behalf. The Trust will be deemed to have received a purchase or redemption order for Class I Shares when an authorized financial intermediary or, if applicable, the financial intermediary's authorized designee receives the order. Such orders will be priced at the Trust's net asset value for Class I Shares next determined after they are received by the authorized financial intermediary or, if applicable, its authorized designee and accepted by the Trust. Limitation of Redemptions in Kind The Trust has elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Trust is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1 percent of the net asset value of the Trust during any 90-day period for any one shareholder. Should redemptions by any shareholder exceed such limitation, the Trust will have the option of redeeming the excess in cash or in kind. If shares are redeemed in kind, the redeeming shareholder might incur brokerage costs in converting the assets into cash. The method of valuing securities used to make redemptions in kind will be the same as the method of valuing portfolio securities described under "Net Asset Value Per Share" in the Prospectus, and such valuation will be made as of the same time the redemption price is determined. Disclosure of Portfolio Holdings Under Trust policies, the Manager publicly discloses the complete schedule of the Trust's portfolio holdings, as reported at the end of each calendar quarter, generally by the 15th day after the end of each calendar quarter. Such information will remain accessible until the next schedule is made publicly available. You may obtain a copy of the Trust's schedule of portfolio holdings for the most recently completed period by accessing the information on the Trust's website at www.aquilafunds.com. In addition, the Manager may share the Trust's non-public portfolio holdings information with pricing services and other service providers to the Trust who require access to such information in order to fulfill their contractual duties to the Trust. The Manager may also disclose non-public information regarding the Trust's portfolio holdings information to certain mutual fund analysts and rating and tracking entities, such as Morningstar and Lipper Analytical Services, or to other entities that have a legitimate business purpose in receiving such information on a more frequent basis. Exceptions to the frequency and recipients of the disclosure may be made only with the advance authorization of the Trust's Chief Compliance Officer upon a determination that such disclosure serves a legitimate business purpose and is in the best interests of the Trust and will be reported to the Board of Trustees at the next regularly scheduled board meeting. All non-public portfolio holdings information is provided pursuant to arrangements as to confidentiality. Whenever portfolio holdings disclosure made pursuant to these procedures involves a possible conflict of interest between the Trust's shareholders and the Trust's Manager, Sub-Adviser, Distributor or any affiliated person of the Trust, the disclosure may not be made unless a majority of the independent Trustees or a majority of a board committee consisting solely of independent Trustees approves such disclosure. The Trust, the Manager and the Sub-Adviser shall not enter into any arrangement providing for the disclosure of non-public portfolio holdings information for the receipt of compensation or benefit of any kind. Any material changes to the policies and procedures for the disclosure of portfolio holdings will be reported to the Board on at least an annual basis. Additional Tax Information Certain Exchanges If you incur a sales commission on a purchase of shares of one mutual fund (the original fund) and then sell such shares or exchange them for shares of a different mutual fund without having held them at least 91 days, you must reduce the tax basis for the shares sold or exchanged to the extent that the standard sales commission charged for acquiring shares in the exchange or later acquiring shares of the original fund or another fund is reduced because of the shareholder's having owned the original fund shares. The effect of the rule is to increase your gain or reduce your loss on the original fund shares. The amount of the basis reduction on the original fund shares, however, is added on the investor's basis for the fund shares acquired in the exchange or later acquired. Tax Status of the Trust During its last fiscal year, the Trust qualified as a "regulated investment company" under the Internal Revenue Code and intends to continue such qualification. A regulated investment company is not liable for Federal income taxes on amounts paid by it as dividends and distributions. The Code, however, contains a number of complex qualifying tests. Therefore, it is possible, although not likely, that the Trust might not meet one or more of these tests in any particular year. If the Trust fails to qualify, it would be treated for tax purposes as an ordinary corporation. As a consequence, it would receive no tax deduction for payments made to shareholders and would be unable to pay dividends and distributions which would qualify as "exempt-interest dividends" or "capital gains dividends." Additionally the Trust must meet certain distribution requirements or it will be subject to an excise tax on amounts not properly distributed. The Trust intends to meet such requirements. Tax Effects of Redemptions Normally, when you redeem shares of the Trust you will recognize capital gain or loss measured by the difference between the proceeds received in the redemption and the amount you paid for the shares. If you are required to pay a contingent deferred sales charge at the time of redemption, the amount of that charge will reduce the amount of your gain or increase the amount of your loss as the case may be. Your gain or loss will be long-term if you held the redeemed shares for over one year and short-term if for a year or less. Long-term capital gains are currently taxed at a maximum rate of 15% and short-term gains are currently taxed at ordinary income tax rates. However, if shares held for six months or less are redeemed and you have a loss, two special rules apply: the loss is reduced by the amount of exempt-interest dividends, if any, which you received on the redeemed shares, and any loss over and above the amount of such exempt-interest dividends is treated as a long-term loss to the extent you have received capital gains dividends on the redeemed shares. Tax Effect of Conversion When Class C Shares automatically convert to Class A Shares, approximately six years after purchase, you will recognize no gain or loss. Your adjusted tax basis in the Class A Shares you receive upon conversion will equal your adjusted tax basis in the Class C Shares you held immediately before conversion. Your holding period for the Class A Shares you receive will include the period you held the converted Class C Shares. Underwriters Aquila Distributors, Inc. acts as the Trust's principal underwriter in the continuous public offering of all of the Trust's classes of shares. The Distributor is not obligated to sell a specific number of shares. Under the Distribution Agreement, the Distributor is responsible for the payment of certain printing and distribution costs relating to prospectuses and reports as well as the costs of supplemental sales literature, advertising and other promotional activities. Payments of the amounts listed below for the fiscal year ended September 30, 2006 were as follows:
Net Underwriting Compensation on Name of Principal Discounts and Redemptions and Brokerage Commissions Other Compensation Underwriter Commissions Repurchases Aquila Distributors, $122,650 None None None(*) Inc.
(*) Amounts paid to the Distributor under the Trust's Distribution Plan are for compensation. APPENDIX A DESCRIPTION OF MUNICIPAL BOND RATINGS Municipal Bond Ratings Standard & Poor's. A Standard & Poor's municipal obligation rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other circumstances. The ratings are based, in varying degrees, on the following considerations: I. Likelihood of default - capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; II. Nature of and provisions of the obligation; III. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors rights. AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Provisional Ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. Moody's Investors Service. A brief description of the applicable Moody's Investors Service rating symbols and their meanings follows: Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1. Moody's Short Term Loan Ratings - There are three rating categories for short-term obligations, all of which define an investment grade situation. These are designated as Moody's Investment Grade MIG 1 through MIG 3. In the case of variable rate demand obligations (VRDOs), two ratings are assigned; one representing an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other representing an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When no rating is applied to the long or short-term aspect of a VRDO, it will be designated NR. Issues or the features associated with MIG or VMIG ratings are identified by date of issue, date of maturity or maturities or rating expiration date and description to distinguish each rating from other ratings. Each rating designation is unique with no implication as to any other similar issue of the same obligor. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issuer's specific structural or credit features. MIG1/VMIG1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support or demonstrated broad-based access to the market for refinancing. MIG2/VMIG2 This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. MIG3/VMIG3 This designation denotes acceptable credit quality. Liquidity and cash flow protection may be narrow, and market access for refinancing is likely to be less well established. Dominion Bond Rating Service Limited ("DBRS") Bond and Long Term Debt Rating Scale. Long term debt ratings are meant to give an indication of the risk that the borrower will not fulfill its full obligations in a timely manner with respect to both interest and principal commitments. AAA Bonds rated AAA are of the highest credit quality, with exceptionally strong protection for the timely repayment of principal and interest. AA Bonds rated AA are of superior credit quality, and protection of interest and principal is considered high. A Bonds rated A are of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than with AA rated entities. BBB Bonds rated BBB are of adequate credit quality. BB Bonds rated BB are defined to be speculative, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. B Bonds rated B are highly speculative and there is a reasonably high level of uncertainty which exists as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity. DBRS Commercial Paper and Short Term Debt Rating Scale. Commercial paper ratings are meant to give an indication of the risk that the borrower will not fulfill its obligations in a timely manner. All three DBRS rating categories for short term debt use "high," "middle" or "low" as subset grades to designate the relative standing of the credit within a particular rating category. R-1 (high) Short term debt rated R-1 (high) is of the highest credit quality, and indicates an entity which possesses unquestioned ability to repay current liabilities as they fall due. R-1 (middle) Short term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings in this category differ from R-1 (high) credits to only a small degree. R-1 (low) Short term debt rated R-1 (low) is of satisfactory credit quality. the overall strength and outlook for key liquidity, debt and profitability ratios is not normally as favorable as with higher rating categories, but these considerations are still respectable. R-2 (high), Short term debt rated R-2 is of adequate credit quality and within the three subset grades, R-2 (middle), debt protection ranges from having reasonable ability for timely repayment to a level R-2 (low) which is considered only just adequate. R-3 (high), Short term debt rated R-3 is speculative, and within the three subset grades, the capacity R-3 (middle), for timely payment ranges from mildly speculative to doubtful. R-3 (low) Fitch Ratings. A brief description of the applicable rating symbols and their meanings follows: AAA Highest credit quality. `AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA Very high credit quality. `AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A High credit quality. `A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB Good credit quality. `BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. Notes to Long-term and Short-term ratings: "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the `AAA' Long-term rating category, to categories below `CCC', or to Short-term ratings other than `F1'. `NR' indicates that Fitch Ratings does not rate the issuer or issue in question. `Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced. Rating Watch: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. A Rating Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose outlooks are `stable` could be upgraded or downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving. Short-Term Obligations. The following ratings scale applies to foreign currency and local currency ratings. A Short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for US public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature. F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. PART C: OTHER INFORMATION Financial Statements Tax-Free Trust of Oregon Portfolio: Included in Part A: Per Share Income and Capital Changes Incorporated by reference into Part B: Report of Independent Registered Public Accounting Firm Statement of Assets and Liabilities as of September 30, 2006 Statement of Operations for the year ended September 30, 2006 Statement of Changes in Net Assets for the years ended September 30, 2006 and 2005 Statement of Investments as of September 30, 2006 Notes to Financial Statements Included in Part C: Consent of Independent Registered Public Accounting Firm ITEM 23 Exhibits: (a) Supplemental Declaration of Trust Amending and Restating the Declaration of Trust (ii) (b) By-laws (xiii) (c) Instruments defining rights of shareholders The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in the Trust. Each share represents an equal proportionate interest in the Trust with each other share of its class; shares of the respective classes represent proportionate interests in the Trust in accordance with their respective net asset values. Upon liquidation of the Trust, shareholders are entitled to share pro-rata in the net assets of the Trust available for distribution to shareholders, in accordance with the respective net asset values of the shares of each of the Trust's classes at that time. All shares are presently divided into four classes; however, if they deem it advisable and in the best interests of shareholders, the Board of Trustees of the Trust may create additional classes of shares, which may differ from each other as provided in rules and regulations of the Securities and Exchange Commission or by exemptive order. The Board of Trustees may, at its own discretion, create additional series of shares, each of which may have separate assets and liabilities (in which case any such series will have a designation including the word "Series"). Shares are fully paid and non-assessable, except as set forth under the caption "General Information" in the Additional Statement; the holders of shares have no pre-emptive or conversion rights, except that Class C Shares automatically convert to Class A Shares after being held for six years. At any meeting of shareholders, shareholders are entitled to one vote for each dollar of net asset value (determined as of the record date for the meeting) per share held (and proportionate fractional votes for fractional dollar amounts). Shareholders will vote on the election of Trustees and on other matters submitted to the vote of shareholders. Shares vote by classes on any matter specifically affecting one or more classes, such as an amendment of an applicable part of the Distribution Plan. No amendment may be made to the Declaration of Trust without the affirmative vote of the holders of a majority of the outstanding shares of the Trust except that the Trust's Board of Trustees may change the name of the Trust. The Trust may be terminated (i) upon the sale of its assets to another issuer, or (ii) upon liquidation and distribution of the assets of the Trust, in either case if such action is approved by the vote of the holders of a majority of the outstanding shares of the Trust. (d) (i) Investment Advisory and Administration Agreement (iv) (a) Assignment and Assumption Agreement (x) (b) Amendment of Advisory and Administration Agreement (xiii) (ii)(a) Sub-Advisory Agreement (iv) (b) Assignment and Assumption of Sub-Advisory Agreement (x) (c) Amendment to Sub-Advisory Agreement (xiii) (e) (i) Distribution Agreement (vi) (ii) Sales Agreement for Brokerage Firms for Tax-Free Trust of Oregon Portfolio (iii) (iii) Sales Agreement for Financial Institutions for Tax-Free Trust of Oregon Portfolio (iii) (iv) Sales Agreement for Investment Advisers for Tax-Free Trust of Oregon Portfolio (iii) (v) Shareholder Services Agreement (viii) (vi) Anti-Money Laundering Amendment to Distribution Agreement(ix) (f) Not applicable (g) (i) Custody Agreement for Tax-Free Trust of Oregon Portfolio (i) (h) (i) Transfer Agency Agreement for Tax-Free Trust of Oregon Portfolio (iv) (ii) Anti-Money Laundering Amendment to Transfer Agency Agreement (x) (iii) Customer Identification Services Amendment to Transfer Agency Agreement (x) (i) (i) Opinion of Trust's Counsel (iv) (i) (ii) Consent of Trust Counsel (xiii) (j) Consent of Independent Registered Public Accounting Firm (xiii) (k) Not Applicable (l) Not Applicable (m) (i) Distribution Plan (iv) (ii) Shareholder Services Plan (iv) (n) Plan Pursuant to Rule 18f-3 (xiii) (o) Reserved (p) Codes of Ethics (i) The Trust (xiii) (ii) The Manager and The Distributor (xiii) (iii) The Sub-Adviser (xii) (i) Filed as an exhibit to Registrant's Post-Effective Amendment No. 17 dated January 31, 1996 and incorporated herein by reference. (ii) Filed as an exhibit to Registrant's Post-Effective Amendment No. 18 dated April 3, 1996 and incorporated herein by reference. (iii) Filed as an exhibit to Registrant's Post-Effective Amendment No. 19 dated January 24, 1997, and incorporated herein by reference. (iv) Filed as an exhibit to Registrant's Post-Effective Amendment No. 20 dated December 1, 1997, and incorporated herein by reference. (v) Filed as an exhibit to Registrant's Post-Effective Amendment No 23 filed January 28, 1999 and incorporated herein by reference. (vi) Filed as an exhibit to Registrant's Post-Effective Amendment No. 24 dated January 28, 2000 and incorporated herein by reference. (vii) Filed as an exhibit to Registrant's Post-Effective Amendment No. 25 dated January 31, 2001 and incorporated herein by reference. (viii) Filed as an exhibit to Registrant's Post-Effective Amendment No. 26 dated January 23, 2002 and incorporated herein by reference (ix) Filed as an exhibit to Registrant's Post-Effective Amendment No. 27 dated January 29, 2003 and incorporated herein by reference (x) Filed as an exhibit to Registrant's Post-Effective Amendment No. 28 dated January 29, 2004 and incorporated herein by reference (xi) Filed as an exhibit to Registrant's Post-Effective Amendment No. 29 dated January 29, 2005 and incorporated herein by reference (xii) Filed as an exhibit to Registrant's Post-Effective Amendment No. 30 dated January 30, 2006 and incorporated herein by reference (xiii) Filed herewith. ITEM 24. Persons Controlled By Or Under Common Control With Registrant None ITEM 25. Indemnification Subdivision (c) of Section 12 of Article SEVENTH of Registrant's Amended and Restated Declaration of Trust, filed as Exhibit 1 to Registrant's Post Effective Amendment No. 18 dated April 3, 1996 is incorporated herein by reference. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Trustees, officers, and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a Trustee, officer, or controlling person of Registrant in the successful defense of any action, suit, or proceeding) is asserted by such Trustee, officer, or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 26. Business and Other Connections of Investment Adviser and Sub-Adviser The business and other connections of Aquila Investment Management LLC, the Trust's Investment Adviser and Administrator is set forth in the prospectus (Part A); the business and other connections of Mr. Lacy B. Herrmann, the controlling shareholder of the corporate parent, Aquila Management Corporation, are set forth in the Statement of Additional Information (Part B). For information as to the business, profession, vocation, or employment of a substantial nature of its Directors and officers, reference is made to the Form ADV filed by it under the Investment Advisers Act of 1940. The Sub-adviser, FAF Advisors, Inc., is a registered investment adviser and subsidiary of U.S. Bank National Association. U.S. Bank National Association is a wholly owned subsidiary of U.S. Bancorp ("USB"), 800 Nicollett Mall, Minneapolis, Minnesota 55402. USB is the 6th largest financial services holding company in the United States. The company operates 2,462 banking offices and 4,943 ATMs, providing a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment systems products and services to consumers, businesses and institutions. The company is headquartered in Minneapolis, Minnesota and primarily serves the Midwest and West. At September 30, 2006, on a pro forma combined basis, USB and its consolidated subsidiaries had consolidated assets of approximately $216.9 billion, consolidated deposits of $120.9 billion and shareholder equity of $20.9 billion. For information as to the business, profession, vocation, or employment of a substantial nature of its Directors and officers, reference is made to the Form ADV filed by it under the Investment Advisers Act of 1940. ITEM 27. Principal Underwriters (a) Aquila Distributors, Inc. serves as principal underwriter to the following Funds, including the Registrant, Tax-Free Trust of Oregon: Churchill Tax-Free Fund of Kentucky, Hawaiian Tax-Free Trust, Narragansett Insured Tax-Free Income Fund, Pacific Capital Cash Assets Trust, Pacific Capital Tax-Free Cash Assets Trust, Pacific Capital U.S. Government Securities Cash Assets Trust, Tax-Free Fund For Utah, Tax-Free Fund of Colorado, Tax-Free Trust of Arizona, Aquila Rocky Mountain Equity Fund and Aquila Three Peaks High Income Fund. (b) For information about the directors and officers of Aquila Distributors, Inc., reference is made to the Form BD filed by it under the Securities Exchange Act of 1934. (c) Not applicable. ITEM 28. Location of Accounts and Records All such accounts, books, and other documents are maintained by the Manager, the Sub-Adviser the custodian, and the transfer agent, whose addresses appear in or on the back cover pages of the Prospectus and the Statement of Additional Information. ITEM 29. Management Services Not applicable. ITEM 30. Undertakings Not applicable. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on the 30th day of January, 2007. THE CASCADES TRUST (Registrant) /s/Diana P. Herrmann By Diana P. Herrmann, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement or Amendment has been signed below by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE /s/Diana P. Herrmann President, Vice Chair 1/30/07 - ----------------------- and Trustee --------- Diana P. Herrmann /s/Gary C. Cornia Trustee 1/30/07 ---------------------- --------- Gary C. Cornia /s/James A. Gardner Trustee 1/30/07 - ----------------------- --------- James A. Gardner /s/Edmund P. Jensen Trustee 1/30/07 ---------------------- --------- Edmund P. Jensen /s/Timothy J. Leach Trustee 1/30/07 ---------------------- --------- Timothy J. Leach /s/ John W. Mitchell Trustee 1/30/07 ---------------------- --------- John W. Mitchell /s/Ralph R. Shaw Trustee 1/30/07 ----------------------- --------- Ralph R. Shaw /s/Nancy Wilgenbusch Trustee 1/30/07 ----------------------- --------- Nancy Wilgenbusch /s/Joseph P. DiMaggio 1/30/07 - ------------------------ Chief Financial Officer ---------- Joseph P. DiMaggio and Treasurer THE CASCADES TRUST EXHIBIT INDEX Exhibit Number Name (b) By-laws (d) (i)(b) Amendment of Advisory and Administration Agreement (d) (ii)(c) Amendment to Sub-Advisory Agreement (i) (ii) Consent of Trust Counsel (j) Consent of Independent Registered Public Accounting Firm (n) Plan Pursuant to Rule 18f-3 (p) Code of Ethics (i) The Trust (ii) The Manager and the Distributor EX-99.B 3 orb07byl.txt BY-LAWS Dated: December 1, 2006 THE CASCADES TRUST BY-LAWS ARTICLE I SHAREHOLDERS Section 1. Place of Meeting. All meetings of the Shareholders (which term as used herein shall, together with all other terms defined in the Declaration of Trust, have the same meaning as in the Declaration of Trust) shall be held at the principal office of the Trust or at such other place as may from time to time be designated by the Board of Trustees and stated in the notice of meeting. Section 1A. Shareholder Voting. At any meeting of Shareholders, Shareholders are entitled to one (1) vote for each dollar of net asset value (determined as of the record date for the meeting) per Share held (and fractional votes for fractional dollar amounts.) Section 2. Annual Meeting. In any year in which the Trustees determine that a meeting of the Shareholders of the Trust shall be held for the purpose of electing Trustees, that meeting shall be held on such date and at such time as may be determined by the Board of Trustees and as shall be designated in the notice of meeting for the purpose of electing Trustees until the next meeting for such purpose and for the transaction of such other business as may properly be brought before the meeting. Section 3. Special or Extraordinary Meetings. Special or extraordinary meetings of Shareholders for any purpose or purposes may be called by the Chair of the Board of Trustees, if any, or by the President or by the Board of Trustees and shall be called by the Secretary upon receipt of the request in writing signed by holders of Shares representing not less than one third of the votes eligible to be cast thereat. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice of Meetings of Shareholders. Not less than ten days' and not more than ninety days' written or printed notice of every meeting of Shareholders, stating the time and place thereof (and the general nature of the business proposed to be transacted at any special or extraordinary meeting), shall be given to each Shareholder entitled to vote thereat by leaving the same with him or at his residence or usual place of business or by mailing it, postage prepaid and addressed to him at his address as it appears upon the books of the Trust. No notice of the time, place or purpose of any meeting of Shareholders need be given to any Shareholder who attends in person or by proxy or to any Shareholder who, in writing executed and filed with the records of the meeting, either before or after the holding thereof, waives such notice. Section 5. Record Dates. The Board of Trustees may fix, in advance, a date, not exceeding ninety days and not less than ten days preceding the date of any meeting of Shareholders, and not exceeding ninety days preceding any dividend payment date or any date for the allotment of rights, as a record date for the determination of the Shareholders entitled to receive such dividends or rights, as the case may be; and only Shareholders of record on such date shall be entitled to notice of and to vote at such meeting or to receive such dividends or rights, as the case may be. Section 6. Quorum, Adjournment of Meetings. The presence in person or by proxy of the holders of record of outstanding Shares of the Trust representing at least one-third of the votes eligible to be cast thereat shall constitute a quorum at all meetings of Shareholders. If at any meeting of the Shareholders there shall be less than a quorum present, the Shareholders present at such meeting may, without further notice, adjourn the same from time to time until a quorum shall attend, but no business shall be transacted at any such adjourned meeting except such as might have been lawfully transacted had the meeting not been adjourned. Section 7. Voting and Inspectors. At all meetings of Shareholders every Shareholder of record entitled to vote thereat shall be entitled to vote at such meeting either in person or by proxy appointed by such Shareholder or his duly authorized attorney-in-fact. All elections of Trustees shall be had by a plurality of the votes cast and all questions shall be decided by a majority of the votes cast, in each case at a duly constituted meeting, except as otherwise provided in the Declaration of Trust or in these By-Laws or by specific statutory provision superseding the restrictions and limitations contained in the Declaration of Trust or in these By-Laws. At any election of Trustees, the Board of Trustees prior thereto may, or, if they have not so acted, the Chair of the meeting may, and upon the request of the holders of the outstanding Shares of the Trust representing 10% of its net asset value entitled to vote at such election shall, appoint two inspectors of election who shall first subscribe an oath or affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after the election make a certificate of the result of the vote taken. No candidate for the office of Trustee shall be appointed such Inspector. The Chair of the meeting may cause a vote by ballot to be taken upon any election or matter, and such vote shall be taken upon the request of the holders of the outstanding Shares of the Trust representing 10% of its net asset value entitled to vote on such election or matter. Section 8. Conduct of Shareholders' Meetings. The meetings of the Shareholders shall be presided over by the Chair of the Board of Trustees, if any, or if he shall not be present, by the President, or if he shall not be present, by a Vice-President, or if neither the Chair of the Board of Trustees, the President nor any Vice-President is present, by a Chair to be elected at the meeting. A person who relinguishes the Chair shall not be considered present for purposes of this Section until such time as he or she resumes the Chair. The Secretary of the Trust, if present, shall act as Secretary of such meetings, or if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor an Assistant Secretary is present, then the meeting shall elect its secretary. Section 9. Concerning Validity of Proxies, Ballots, Etc. At every meeting of the Shareholders, all proxies shall be received and taken in charge of and all ballots shall be received and canvassed by the secretary of the meeting, who shall decide all questions touching the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless inspectors of election shall have been appointed as provided in Section 7, in which event such inspectors of election shall decide all such questions. ARTICLE II BOARD OF TRUSTEES Section 1. Number and Tenure of Office. The business and property of the Trust shall be conducted and managed by a Board of Trustees consisting of the number of initial Trustees, which number may be increased or decreased as provided in Section 2 of this Article. Each Trustee shall, except as otherwise provided herein, hold office until the annual meeting of Shareholders of the Trust next succeeding his election or until his successor is duly elected and qualifies. Trustees need not be Shareholders. Section 2. Increase or Decrease in Number of Trustees; Removal. The Board of Trustees, by the vote of a majority of the entire Board, may increase the number of Trustees to a number not exceeding fifteen, and may elect Trustees to fill the vacancies created by any such increase in the number of Trustees until the next annual meeting or until their successors are duly elected and qualify; the Board of Trustees, by the vote of a majority of the entire Board, may likewise decrease the number of Trustees to a number not less than two but the tenure of office of any Trustee shall not be affected by any such decrease. Vacancies occurring other than by reason of any such increase shall be filled as provided for a Massachusetts business corporation. In the event that after proxy material has been printed for a meeting of Shareholders at which Trustees are to be elected any one or more management nominees dies or becomes incapacitated, the authorized number of Trustees shall be automatically reduced by the number of such nominees, unless the Board of Trustees prior to the meeting shall otherwise determine. Any Trustee at any time may be removed either with or without cause by resolution duly adopted by the affirmative votes of the holders of the majority of the Shares of the Trust present in person or by proxy at any meeting of Shareholders at which such vote may be taken, provided that a quorum is present, or by such larger vote as may be required by Massachusetts law. Any Trustee at any time may be removed for cause by resolution duly adopted at any meeting of the Board of Trustees provided that notice thereof is contained in the notice of such meeting and that such resolution is adopted by the vote of at least two thirds of the Trustees whose removal is not proposed. As used herein, "for cause" shall mean any cause which under Massachusetts law would permit the removal of a Trustee of a business trust. Section 3. Place of Meeting. The Trustees may hold their meetings, have one or more offices, and keep the books of the Trust outside Massachusetts, at any office or offices of the Trust or at any other place as they may from time to time by resolution determine, or, in the case of meetings, as they may from time to time by resolution determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. Section 4. Regular Meetings. Regular meetings of the Board of Trustees shall be held at such time and on such notice, if any, as the Trustees may from time to time determine. The annual meeting of the Board of Trustees shall be held as soon as practicable after the annual meeting of the Shareholders for the election of Trustees. Section 5. Special Meetings. Special meetings of the Board of Trustees may be held from time to time upon call of the Chair of the Board of Trustees, if any, the President or two or more of the Trustees, by oral or telegraphic or written notice duly served on or sent or mailed to each Trustee not less than one day before such meeting. No notice need be given to any Trustee who attends in person or to any Trustee who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Such notice or waiver of notice need not state the purpose or purposes of such meeting. Section 6. Quorum. One-third of the Trustees then in office shall constitute a quorum for the transaction of business, provided that a quorum shall in no case be less than two Trustees. If at any meeting of the Board there shall be less than a quorum present (in person or by open telephone line, to the extent permitted by the 1940 Act), a majority of those present may adjourn the meeting from time to time until a quorum shall have been obtained. The act of the majority of the Trustees present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by statute, by the Declaration of Trust or by these By-Laws. Section 7. Executive Committee. The Board of Trustees may, by the affirmative vote of a majority of the entire Board, elect from the Trustees an Executive Committee to consist of such number of Trustees as the Board may from time to time determine. The Board of Trustees by such affirmative vote shall have power at any time to change the members of such Committee and may fill vacancies in the Committee by election from the Trustees. When the Board of Trustees is not in session, the Executive Committee shall have and may exercise any or all of the powers of the Board of Trustees in the management of the business and affairs of the Trust (including the power to authorize the seal of the Trust to be affixed to all papers which may require it) except as provided by law and except the power to increase or decrease the size of, or fill vacancies on the Board. The Executive Committee may fix its own rules of procedure, and may meet, when and as provided by such rules or by resolution of the Board of Trustees, but in every case the presence of a majority shall be necessary to constitute a quorum. In the absence of any member of the Executive Committee the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Trustees to act in the place of such absent member. Section 8. Other Committees. The Board of Trustees, by the affirmative vote of a majority of the entire Board, may appoint other committees which shall in each case consist of such number of members (not less than two) and shall have and may exercise such powers as the Board may determine in the resolution appointing them. A majority of all members of any such committee may determine its action, and fix the time and place of its meetings, unless the Board of Trustees shall otherwise provide. The Board of Trustees shall have power at any time to change the members and powers of any such committee, to fill vacancies, and to discharge any such committee. Section 9. Informal Action by and Telephone Meetings of Trustees and Committees. Any action required or permitted to be taken at any meeting of the Board of Trustees or any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board, or of such committee, as the case may be. Trustees or members of a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment; such participation shall, except as otherwise required by the 1940 Act, have the same effect as presence in person. Section 10. Compensation of Trustees. Trustees shall be entitled to receive such compensation from the Trust for their services as may from time to time be voted by the Board of Trustees. Section 11. Dividends. Dividends or distributions payable on the Shares may, but need not be, declared by specific resolution of the Board as to each dividend or distribution; in lieu of such specific resolutions, the Board may, by general resolution, determine the method of computation thereof, the method of determining the Shareholders to which they are payable and the methods of determining whether and to which Shareholders they are to be paid in cash or in additional Shares. ARTICLE III OFFICERS Section 1. Executive Officers. The executive officers of the Trust shall be chosen by the Board of Trustees as soon as may be practicable after the annual meeting of the Shareholders. These may include a Chair of the Board of Trustees, and shall include a President, one or more Vice-Presidents (the number thereof to be determined by the Board of Trustees), a Secretary and a Treasurer. The Chair of the Board of Trustees, if any, and the President may, but need not be, selected from among the Trustees. The Board of Trustees may also in its discretion appoint Assistant Secretaries, Assistant Treasurers, and other officers, agents and employees, who shall have such authority and perform such duties as the Board or the Executive Committee may determine. The Board of Trustees may fill any vacancy which may occur in any office. Any two offices, except those of President and Vice-President, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law or these By-Laws to be executed, acknowledged or verified by two or more officers. At any time when a person other than an interested person of the Trust under the Investment Company Act of 1940 holds the position of Chair or Vice Chair of the Board of Trustees, that person shall not be considered an executive officer and the position shall be a Board position only. Section 2. Term of Office. The term of office of all officers shall be one year and until their respective successors are chosen and qualify; however, any officer may be removed from office at any time with or without cause by the vote of a majority of the entire Board of Trustees. Section 3. Powers and Duties. The officers of the Trust shall have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as may from time to time be conferred by the Board of Trustees or the Executive Committee. ARTICLE IV SHARES Section 1. Certificates of Shares. Each Shareholder of the Trust may be issued a certificate or certificates for his Shares in such form as the Board of Trustees may from time to time prescribe, but only if and to the extent and on the conditions prescribed by the Board. Section 2. Transfer of Shares. Shares shall be transferable on the books of the Trust by the holder thereof in person or by his duly authorized attorney or legal representative, upon surrender and cancellation of certificates, if any, for the same number of Shares, duly endorsed or accompanied by proper instruments of assignment and transfer, with such proof of the authenticity of the signature as the Trust or its agent may reasonably require; in the case of Shares not represented by certificates, the same or similar requirements may be imposed by the Board of Trustees. Section 3. Stock Ledgers. The stock ledgers of the Trust, containing the name and address of the Shareholders and the number of Shares held by them respectively, shall be kept at the principal offices of the Trust or, if the Trust employs a transfer agent, at the offices of the transfer agent of the Trust. Section 4. Lost, Stolen or Destroyed Certificates. The Board of Trustees may determine the conditions upon which a new certificate may be issued in place of a certificate which is alleged to have been lost, stolen or destroyed; and may, in their discretion, require the owner of such certificate or his legal representative to give bond, with sufficient surety to the Trust and the transfer agent, if any, to indemnify it and such transfer agent against any and all loss or claims which may arise by reason of the issue of a new certificate in the place of the one so lost, stolen or destroyed. ARTICLE V SEAL The Board of Trustees shall provide a suitable seal of the Trust, in such form and bearing such inscriptions as it may determine. ARTICLE VI FISCAL YEAR The fiscal year of the Trust shall be fixed by the Board of Trustees. ARTICLE VII AMENDMENT OF BY-LAWS The By-Laws of the Trust may be altered, amended, added to or repealed by the Shareholders or by majority vote of the entire Board of Trustees, but any such alteration, amendment, addition or repeal of the By-Laws by action of the Board of Trustees may be altered or repealed by the Shareholders. EX-99.D 4 orb07aaa.txt AMEND. OF ADVIS. AND ADMIN. AGMT TAX-FREE TRUST OF OREGON AMENDMENT OF ADVISORY AND ADMINISTRATION AGREEMENT THIS AGREEMENT, made as of April 8, 2006 by and between TAX-FREE TRUST OF OREGON (the "Trust"), a Massachusetts business trust which is registered under the Investment Company Act of 1940 (the "Act") as an open-end, non-diversified management investment company, and AQUILA INVESTMENT MANAGEMENT LLC (the "Manager"), a Delaware limited liability company, 380 Madison Avenue, Suite 2300, New York, New York 10017, W I T N E S S E T H : WHEREAS, the Trust and the Manager are parties to an Advisory and Administration Agreement (the "Agreement") made as of October 11, 1997 with respect to services to the Trust, the Manager having succeeded by an assignment and assumption to the rights, duties and obligations of its predecessor in interest effective January 1, 2004; and WHEREAS, the Trust and the Manager wish to amend the Agreement in a manner authorized by the Board of Trustees of the Trust at a meeting called and held for the purpose on April 8, 2006; NOW THEREFORE, in consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendment Subsection (iv) of Section 3 of the Agreement is amended by deleting the words "and expenses" therefrom and adding at the end thereof the phrase "and expenses of all its Trustees" so that it shall read in its entirety as follows: (iv) compensation of its Trustees other than those affiliated with the Manager or such adviser, administrator or principal underwriter and expenses of all its Trustees; 2. Continuance of Agreement In all other respects, the Agreement is hereby confirmed. IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers as of the day and year first above written. ATTEST: TAX-FREE TRUST OF OREGON - -------------------------- By----------------------- ATTEST: AQUILA INVESTMENT MANAGEMENT LLC - -------------------------- By----------------------- EX-99.D 5 orb07asaa.txt AMEND. TO SUB-ADVISORY AGMT AMENDMENT TO TAX-FREE TRUST OF OREGON SUB-ADVISORY AGREEMENT Dated as of April 8, 2006 WHEREAS, the Federal Reserve Board has deemed Piper Jaffray & Co. ("Piper") to be an affiliate of U.S. Bank N.A. (the "Bank") for purposes of Sections 23A and 23B of the Federal Reserve Act; WHEREAS, Section 23B(b)(1)(A) of the Federal Reserve Act imposes certain restrictions on the Bank and its subsidiaries, acting as a fiduciary, from purchasing or acquiring any security or other asset from an affiliate of the Bank unless such purchase is permitted (i) under the instrument creating the fiduciary relationship, (ii) by court order, or (iii) by law of the jurisdiction governing the fiduciary relationship; WHEREAS, Aquila Investment Management Corporation LLC ("Aquila"), a registered investment adviser under the Investment Advisers Act of 1940, serves as the investment adviser to The Cascades Trust (the "Trust"), including Tax-Free Trust of Oregon (the "Fund"), a separately managed series of the Trust; WHEREAS, FAF Advisors, Inc. (formerly known as U.S. Bancorp Piper Jaffray Asset Management, Inc. and subsequently known as U.S. Bancorp Asset Management, Inc., hereinafter "FAF"), a subsidiary of the Bank, acts as the investment sub-adviser to the Fund under the Tax-Free Trust of Oregon Sub-Advisory Agreement, dated October 31, 1997, as amended (the "Sub-Advisory Agreement"); WHEREAS, FAF believes it is in the best interests of the Fund to permit FAF, when acting as fiduciary for the Fund, to cause the Fund to purchase securities from Piper; WHEREAS, to avoid any doubt as to whether FAF is permitted to cause the Fund to purchase securities from Piper, FAF, Aquila and the Trust wish to amend the Sub-Advisory Agreement to expressly permit the Fund to purchase securities from Piper, with Piper acting as principal, as long as such purchases would not be prohibited by Section 17(a) of the Investment Company Act of 1940; WHEREAS, the Trust, Aquila and FAF also wish to amend the Sub-Advisory Agreement to take advantage of the exemption provided by Rule 17a-10 of the Investment Company Act of 1940. NOW, THEREFORE, the Trust, Aquila and FAF agree as follows: The Sub-Advisory Agreement is hereby amended to expressly permit the Fund to purchase securities from Piper, with Piper acting as principal, as long as such purchases would not be prohibited by Section 17(a) of the Investment Company Act of 1940. In addition, the Sub-Advisory Agreement is hereby amended to expressly prohibit FAF from consulting with any other sub-adviser of the Fund or any other sub-adviser to a fund under common control with the Fund concerning securities transactions of the Fund in securities or other assets. IN WITNESS WHEREOF, the Trust, Aquila and FAF have caused this instrument to be executed as of the date first above written by their duly authorized officers. FAF ADVISORS, INC. THE CASCADES TRUST By: ------------------------- By: ------------------------ Its: ------------------------ Its: ------------------------ AQUILA INVESTMENT MANAGEMENT LLC By: ------------------------- Its: ------------------------ EX-23 6 orb07councon.txt CONSENT OF TRUST COUNSEL HOLLYER BRADY BARRETT & HINES LLP 551 Fifth Avenue New York, NY 10176 Tel: (212) 818-1110 FAX: (212) 818-0494 January 30, 2007 To the Trustees of Tax-Free Trust of Oregon We consent to the incorporation by reference into post-effective amendment No. 31 under the 1933 Act and No. 32 under the 1940 Act of our opinion dated December 1, 1997. Hollyer Brady Barrett & Hines LLP /s/ William L.D. Barrett By:------------------------- Partner EX-23 7 orb07audcon.txt CONSENT OF IND. REG. PUB. ACCTG. FIRM CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the references to our firm in the Post-Effective Amendment to the Registration Statement on Form N-1A of Tax-Free Trust of Oregon and to the use of our reports dated November 20, 2006 on the financial statements and financial highlights of Tax-Free Trust of Oregon. Such financial statements and financial highlights appear in the 2006 Annual Report to Shareholders, which is incorporated by reference into the Statement of Additional Information. /s/ TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania January 30, 2007 EX-99.N 8 orb0718f3.txt PLAN PURSUANT TO RULE 18F-3 TAX-FREE TRUST OF OREGON Rule 18f-3 Multiple Class Plan As Amended June June 9, 2006 TAX-FREE TRUST OF OREGON (the "Trust") has elected to rely on Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"), in offering multiple classes of shares with differing distribution arrangements, voting rights and expense allocations. Pursuant to Rule 18f-3, the Board of Trustees of the Trust has approved and adopted this written plan (the "Plan") specifying all of the differences among the classes of shares to be offered by the Trust. Prior to such offering, the Plan will be filed as an exhibit to the Trust's registration statement. The Plan sets forth the differences among the classes, including shareholder services, distribution arrangements, expense allocations, and conversion or exchange options. I. Attributes of Share Classes This section discusses the attributes of the various classes of shares. Each share of the Trust represents an equal pro rata interest in the Trust and has identical voting rights, powers, qualifications, terms and conditions and, in proportion to each share's net asset value, liquidation rights and preferences. Each class differs in that: (a) each class has a different class designation; (b) only the Front-Payment Shares are subject to a front-end sales charge ("FESC"); (c) only the Level-Payment and certain Front-Payment Shares are subject to a contingent deferred sales charge ("CDSC"); (d) only the Front-Payment Shares, Level-Payment Shares and Financial Intermediary Shares (as described below) are subject to distribution fees under a plan adopted pursuant to Rule 12b-1 under the 1940 Act (a "Rule 12b-1 Plan"), the distribution fees for the Level-Payment Class and Financial Intermediary Class being higher than that for the Front-Payment Class; (e) only the Level-Payment Shares and Financial Intermediary Shares are subject to a shareholder servicing fee under a non-Rule 12b-1 shareholder services plan (a "Shareholder Services Plan"); (f) to the extent that one class alone is affected by a matter submitted to a vote of the shareholders, then only that class has voting power on the matter, provided, however, that any class whose shares convert automatically to shares of another class also votes separately with respect to class-specific Rule 12b-1 matters applying to the latter class; (g) the expenses attributable to a specific class ("Class Expenses")(1)/ are borne only by shares of that class on a pro-rata basis; and (h) exchange privileges and conversion features may vary among the classes. A. Front-Payment Shares Front-Payment Shares are sold to (1) retail customers and (2) persons entitled to exchange into Front-Payment Shares under the exchange privileges of the Trust. Shares of the Trust outstanding on the date that different classes of shares were first made available were redesignated Front-Payment Shares. Front-Payment Shares are also issued upon automatic conversion of Level-Payment Shares, as described below. 1. Sales Loads. Front-Payment Shares are sold subject to the current maximum FESC (with scheduled variations or eliminations of the sales charge, as permitted by the 1940 Act). Certain Front-Payment Shares sold without a FESC are subject to a CDSC. 2. Distribution and Service Fees. Front-Payment Shares are subject to a distribution fee pursuant to Part I of the Trust's Rule 12b-1 Plan. They are not subject to charges applicable to a Shareholder Services Plan. 3. Class Expenses. Class Expenses that are attributable to the Front-Payment Class are allocated to that particular class. 4. Exchange Privileges and Conversion Features. Front-Payment Shares are exchangeable for Front-Payment Shares issued by other funds sponsored by Aquila Investment Management LLC and as may additionally be set forth in the then current prospectus of the Trust. Front-Payment Shares have no conversion features. B. Level-Payment Shares Level-Payment Shares are sold to (1) retail customers and (2) persons entitled to exchange into Level-Payment Shares under the exchange privileges of the Trust. 1. Sales Loads. Level-Payment Shares are sold without the imposition of any FESC, but are subject to a CDSC (with scheduled variations or eliminations of the sales charge, as permitted by the 1940 Act). 2. Distribution and Service Fees. Level-Payment Shares are subject to a distribution fee pursuant to Part II of the Trust's Rule 12b-1 Plan and to a shareholder servicing fee under a Shareholder Services Plan not to exceed .25% of the average daily net assets of the Level-Payment Class. 3. Class Expenses. Class Expenses that are attributable to the Level-Payment Class are allocated to that particular class. 4. Exchange Privileges and Conversion Features. Level-Payment Shares are exchangeable for Level-Payment Shares issued by other funds sponsored by Aquila Investment Management LLC and as may additionally be set forth in the then current prospectus of the Trust. After a period of no greater than six years, Level-Payment Shares automatically convert to Front-Payment Shares on the basis of the relative net asset values of the two classes without the imposition of any sales charge, fee, or other charge, provided, however, that the expenses, including distribution fees, for Front-Payment Shares are not higher than the expenses, including distribution fees, for Level-Payment Shares. If the amount of expenses, including distribution fees, for the Front-Payment Class is increased materially without approval of the shareholders of the Level-Payment Class, a new class will be established -- on the same terms as apply to the Front-Payment Class prior to such increase -- as the class into which Level-Payment Shares automatically convert. C. Institutional Shares Institutional Shares are not offered to retail customers but are sold only to (1) institutional investors investing funds held in a fiduciary, advisory, agency, custodial or other similar capacity and (2) persons entitled to exchange into Institutional Shares under the exchange privileges of the Trust. 1. Sales Loads. Institutional Shares are sold without the imposition of any FESC, CDSC or any other sales charge. 2. Distribution and Service Fees. Institutional Shares are not subject to any distribution fee or shareholder servicing fee. 3. Class Expenses. Class Expenses that are attributable to the Institutional Class are allocated to that particular class. 4. Exchange Privileges and Conversion Features. Institutional Shares are exchangeable for Institutional Shares issued by other funds sponsored by Aquila Investment Management LLC and as may additionally be set forth in the then current prospectus of the Trust. Institutional Shares have no conversion features. D. Financial Intermediary Shares Financial Intermediary Shares are sold (1) only through financial intermediaries with which Aquila Distributors, Inc. has entered into sales agreements, and are not offered directly to retail customers and (2) persons entitled to exchange into Financial Intermediary Shares under the exchange privileges of the Trust. 1. Sales Loads. Financial Intermediary Shares are sold without the imposition of any FESC, CDSC or any other sales charge. 2. Distribution and Service Fees. Financial Intermediary Shares are subject to a distribution fee pursuant to Part III of the Trust's Rule 12b-1 Plan and to a shareholder servicing fee under a Shareholder Services Plan not to exceed 0.25% of the average daily net assets of the Financial Intermediary Class. 3. Class Expenses. Class Expenses that are attributable to the Financial Intermediary Class are allocated to that particular class. 4. Exchange Privileges . Financial Intermediary Shares are exchangeable for Financial Intermediary Shares issued by other funds sponsored by Aquila Investment Management LLC to the extent that shares of such funds are sold by the respective financial intermediaries, and as may additionally be set forth in the then current prospectus of the Trust. E. Additional Classes In the future, the Trust may offer additional classes of shares which differ from the classes discussed above. However, any additional classes of shares must be approved by the Board, and the Plan must be amended to describe those classes. II. Approval of Multiple Class Plan The Board of the Trust, including a majority of the independent Trustees, must approve the Plan initially. In addition, the Board must approve any material changes to the classes and the Plan prior to their implementation. The Board must find that the Plan is in the best interests of each class individually and the Trust as a whole. In making its findings, the Board should focus on, among other things, the relationships among the classes and examine potential conflicts of interest among classes regarding the allocation of fees, services, waivers and reimbursements of expenses, and voting rights. Most significantly, the Board should evaluate the level of services provided to each class and the cost of those services to ensure that the services are appropriate and that the allocation of expenses is reasonable. In accordance with the foregoing provisions of this Section II, the Board of the Trust has approved and adopted this Plan as of the date written above. III. Dividends and Distributions Because of the differences in fees paid under a Rule 12b-1 Plan and Shareholder Services Plan and the special allocation of Class Expenses among the classes of shares of the Trust, the dividends payable to shareholders of a class will differ from the dividends payable to shareholders of one or more of the other classes. Dividends paid to each class of shares in the Trust will, however, be declared at the same time and, except for the differences in expenses listed above, will be determined in the same manner and paid in the same amounts per outstanding shares. IV. Expense Allocations The methodology and procedures for calculating the net asset value and dividends and distributions of the various classes of shares and the proper allocation of income and expenses among the various classes of shares are set forth in a memorandum (together with exhibits) on file with the Fund's Chief Financial Officer and Treasurer at Aquila Investment Management LLC. - -------- (1) / Class Expenses are limited to (i) transfer agency fees; (ii) preparation and mailing expenses for shareholder communications required by law, sent to current shareholders of a class; (iii) state Blue Sky registration fees; (iv) Securities and Exchange Commission ("SEC") registration fees; (v) trustees' fees; (vi) expenses incurred for periodic meetings of trustees or shareholders; and (vii) legal and accounting fees, other than fees for income tax return preparation or income tax advice. EX-14 9 orb07coe.txt CODE OF ETHICS OF THE TRUST CODE OF ETHICS for TAX-FREE TRUST OF OREGON Effective: January 7, 2005 (revised January 25, 2005) (amended September 10, 2006) TABLE OF CONTENTS
I. INTRODUCTION..............................................................1 - -- ------------ II. DEFINITIONS...............................................................2 - --- ----------- III. REBUTTAL OF THE PRESUMPTION OF ACCESS PERSON STATUS.......................5 - ---- --------------------------------------------------- IV. RECEIPT AND ACKNOWLEDGEMENT OF THE CODE AND AMENDMENTS TO THE CODE........6 - --- ------------------------------------------------------------------ V. COMPLIANCE WITH LAWS AND REGULATIONS......................................6 - -- ------------------------------------ A. General Prohibitions Applicable to All Personnel.................6 -- ------------------------------------------------ B. Front-Running....................................................7 -- ------------- C. Market Timing....................................................7 -- ------------- VI. RESTRICTIONS ON PERSONAL SECURITIES TRADING...............................7 - --- ------------------------------------------- A. Pre-Clearance of Personal Securities Transactions................7 -- ------------------------------------------------- B. Prohibited Trading Practices.....................................8 -- ---------------------------- 1. Short-Term Trading......................................8 -- ------------------ 2. Short Sales.............................................8 -- ----------- C. Blackout Periods.................................................8 -- ---------------- D. Exempt Transactions..............................................9 -- ------------------- E. Approvals of Transactions or Requests for Waivers of Restrictions by the CCO or the President.............10 -- -------------------------------------------------- VII. REPORTING AND REVIEW OF PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS.............................................................10 - ---- --------------------------------------------------- A. Initial and Annual Reports of Holdings and Accounts ("Holdings and Accounts Reports").....................11 -- ------------------------------------------------- B. Quarterly Reports of Securities Transactions ("Quarterly Transaction and Accounts Reports")..................12 -- ---------------------------------------------- VIII. APPLICATION OF PERSONAL TRADING RESTRICTIONS AND REPORTING TO INDEPENDENT TRUSTEES OF THE FUND......................................13 - ----- ------------------------------------- IX. GIFTS AND GRATUITIES.....................................................14 - --- -------------------- X. ADVISING NON-AQUILA ENTITIES.............................................14 - -- ---------------------------- XI. ADVISORY PERSONS SERVING AS DIRECTORS OF PUBLICLY-TRADED COMPANIES................................................15 - --- ----------------------------- XII. RECORD KEEPING...........................................................15 - ---- -------------- XIII. EXTERNAL ADVISERS, SUBADVISERS AND EXTERNAL PRINCIPAL UNDERWRITERS' CODES OF ETHICS..................................16 - ----- ------------------------------------- XIV. REPORTING VIOLATIONS OF THIS CODE AND PENALTIES..........................17 - ---- ----------------------------------------------- XV. BOARD APPROVAL...........................................................17 - --- -------------- A. Initial Approval of Codes of Ethics.............................17 -- ----------------------------------- B. Material Changes to Codes of Ethics.............................17 -- ----------------------------------- C. Annual Reports to the Fund Board................................17 -- --------------------------------
APPENDICES Note: The forms set forth in the Appendices are not part of this Code of Ethics but are appended for convenience. Appendix A........CERTIFICATION OF RECEIPT OF CODE OF ETHICS Appendix B........PERSONAL TRADING REQUEST FORM Appendix C........INITIAL & ANNUAL HOLDINGS AND ACCOUNTS REPORT Appendix D........QUARTERLY TRANSACTION AND ACCOUNTS REPORT I. INTRODUCTION It is the policy of TAX-FREE TRUST OF OREGON (the "Fund") that conflicts, or even the appearance of conflicts, between the interests of the Fund and its shareholders, and the interests of the Fund's officers and trustees and of its service providers and their respective personnel, must be avoided at all times. This code of ethics (the "Code of Ethics" or the "Code") has been adopted to implement this policy. As an officer, trustee, director, LLC Manager, Control Person or employee of the Fund or an Aquila Entity, you are subject to all applicable provisions of this Code. Codes of ethics have been adopted by each of the Aquila Entities and each of the Aquila Funds, and cover every officer, trustee, director, LLC Manager, Control Person and employee of those entities. The Chief Compliance Officer ("CCO") of the Fund is responsible for enforcing and interpreting this Code, and is available to answer any questions you may have. Independent Trustees may contact the CCO or, in the alternative, Fund Counsel. II. DEFINITIONS "Access Person" shall mean any person who is an Advisory Person. In addition, the following persons are presumed to be Access Persons of the Fund: (1) all officers and trustees of the Fund; and (2) all officers and LLC Managers of Aquila Investment Management LLC. Note: The presumption of Access Person status may be rebutted under certain circumstances as described in Section III of this Code. Note: Persons associated with Aquila Distributors, Inc. whose job functions or duties involve them in Fund investment decisions or give them access to information regarding Fund investment transactions are Advisory Persons and also Access Persons of the Fund. "Advisory Person" shall mean any person who is: (1) An officer, director, trustee, LLC Manager or employee of the Fund or of any Aquila Entity who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding, the Purchase or Sale of Covered Securities (defined below) by the Fund or whose functions relate to the making of any recommendations with respect to such Purchases or Sales; or (2) a Control Person (defined below) who obtains information concerning recommendations made to the Fund with regard to the Purchase or Sale of Covered Securities by the Fund. "Aquila Entity" or "Aquila Entities" shall mean Aquila Management Corporation, Aquila Investment Management LLC (a registered investment adviser) and Aquila Distributors, Inc. (a registered broker-dealer). "Aquila Funds" (each an "Aquila Fund") shall mean all funds in The Aquila Group of Funds and any fund to which an Aquila Entity provides administrative, distribution or investment advisory services, including: Aquila Rocky Mountain Equity Fund Aquila Three Peaks High Income Fund Capital Cash Management Trust (Dormant) Churchill Cash Reserves Trust (Dormant) Churchill Tax-Free Fund of Kentucky Hawaiian Tax-Free Trust Narragansett Insured Tax-Free Income Fund Tax-Free Fund For Utah Tax-Free Fund of Colorado Tax-Free Trust of Arizona Tax-Free Trust of Oregon Pacific Capital Cash Assets Trust Pacific Capital Tax-Free Cash Assets Trust Pacific Capital U.S. Government Securities Cash Assets Trust "Beneficial Owner" shall mean any person who has or shares, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, a direct or indirect pecuniary interest in a Security, within the meaning of Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 ("Exchange Act"). "Pecuniary interest" means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the Security. Securities in which you have an "indirect pecuniary interest" include, but are not limited to, securities held by members of your immediate family who share your household, including your spouse, children and stepchildren, parents, grandparents, brothers and sisters, and any of your in-laws. The presumption of beneficial ownership of Securities held by a family member sharing your household may be rebutted by successfully demonstrating to the CCO to the Fund, or to Fund Counsel if you are an Independent Trustee, that you do not have a beneficial ownership interest in the Securities. "Board" shall mean the Board of Trustees of the Fund. "CCO" shall mean the Chief Compliance Officer of the Fund. "Code of Ethics" or Code shall mean this Code of Ethics. "Control" shall mean the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. A person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company. A person who does not own more than 25% of the voting securities of a company shall be presumed not to control such company. A person who has "control" under this definition shall be presumed to have "control" unless and until the Securities and Exchange Commission ("SEC") grants an order to the contrary. "Control Person" shall mean any individual who has a Control relationship with the Fund or an investment adviser of the Fund. NOTE: Under no circumstances shall the Fund's own portfolio transactions, accounts or holdings be subject to the account, transaction or holdings reporting, pre-clearance or other requirements of this Code.(1) "Covered Security" shall mean any Security, including shares issued by offshore funds, unregistered funds (such as hedge funds), unit investment trusts, exchange-traded funds (whether structured as unit investment trusts or open-end management companies) and closed-end funds. It also includes options or a Security convertible or exchangeable into a Covered Security. It does not include direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments (including repurchase agreements)(2) and, unless otherwise specifically included above (e.g., exchange-traded funds), shares of U.S.-registered open-end investment companies (including shares of the Aquila Funds and all money market funds).(3) "Independent Trustee" shall mean a Trustee who is not an "interested person" of the Fund, as defined in Section 2(a)(19) of the Investment Company Act of 1940 ("1940 Act"). "Initial Public Offering" shall mean an offering of Securities registered under the Securities Act of 1933 ("Securities Act"), the issuer of which , immediately before registration, was not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act. "Limited Offering" shall mean an offering of Securities that is exempt from registration under the Securities Act pursuant to Section 4(2) or Section 4(6) under the Securities Act, or Rule 504, Rule 505 or Rule 506 thereunder (e.g., private placements). "LLC Manager" shall mean a person who is named as a Manager of an Aquila Entity that is organized as a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed. "Personal Trading" shall mean the Purchase or Sale of Securities by an individual for his or her own account, any other account in which he or she is a Beneficial Owner, or any account (other than an account of an Aquila Fund) for which the Aquila employee decides what securities transactions will be effected for the account, either by making recommendations to the account owner or by entering orders directly with the broker handling the account. "President" shall mean the current President of the Fund. "Purchase or Sale of a Security" includes, among other things, the writing of an option to purchase or sell a Security. "Security" shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security or on any group or index of securities (including any interest therein based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or generally any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase any of the foregoing. "Security Held or to be Acquired" means: (A) any Security that within the most recent fifteen (15) days is being or has been (i) held by the Fund or (ii) "considered for purchase or sale" by or on behalf of the Fund; and (B) any option to purchase or sell, and any Security convertible into or exchangeable for, a Security described in (A) above. A Security is "being considered" for Purchase or Sale if: (a) there is an outstanding order (this includes orders that are in the process of being executed) to Purchase or Sell that Security for an account or portfolio of the Fund; (b) there is an outstanding oral or written recommendation with respect to that Security that has not been acted upon or rejected; or (c) the person responsible for a portfolio intends to Purchase or Sell (i.e., has decided to but has not yet purchased or sold) that Security for the Fund's accounts or portfolios. III. REBUTTAL OF THE PRESUMPTION OF ACCESS PERSON STATUS For the purposes of this Code, all officers and trustees of the Fund and all officers and LLC Managers of Aquila Investment Management LLC are presumed to be Access Persons and thus are subject to the personal trading restrictions and reporting requirements described in Sections VI and VII below unless and until the presumption is rebutted. This presumption may be rebutted as to these persons, but only if the CCO makes a finding that such person, in connection with his or her regular functions or duties, does not make, participate in or obtain information regarding the Purchase or Sale of Covered Securities by the Fund and that his or her functions do not relate to the making of any recommendations with respect to such Purchases or Sales. Prior to making a determination rebutting the presumption that a person is an Access Person of the Fund, the CCO shall investigate all relevant facts and prepare a memorandum for the file which sets forth the facts demonstrating the rebuttal of the presumption, as well as the CCO's determination that such person is not, in fact, an Access Person for the purpose of this Code. The CCO shall retain a copy of this memorandum in the business records of the Aquila Entities and the Fund. The CCO also shall maintain a list of all persons deemed Access Persons for the purpose of this Code. The CCO shall review the list and reaffirm that it is accurate and complete no less frequently than on an annual basis. Although included in the definition of Access Person, Independent Trustees of the Fund are generally exempt from the personal trading restrictions and prohibitions, as well as the initial, annual, and quarterly reporting requirements described below. IV. RECEIPT AND ACKNOWLEDGEMENT OF THE CODE AND AMENDMENTS TO THE CODE As an officer, director, trustee, LLC Manager, Control Person, or employee of the Fund or one or more of the Aquila Entities, you must read this Code carefully and then sign and date the attached Certification (Appendix A) acknowledging receipt of this Code and return it to the CCO promptly. The CCO will provide you with a copy of any updates or amendments to this Code. You must read any such updates or amendments, and then again sign and date the attached Certification acknowledging receipt of the updates or amendments. The CCO shall retain a copy of these Certifications in accordance with Section XII of this Code. V. COMPLIANCE WITH LAWS AND REGULATIONS A. General Prohibitions Applicable to All Personnel When buying or selling any Security (including shares of the Fund and any other Aquila Fund), no officer, director, trustee, LLC Manager, Control Person, or employee of the Fund or one or more of the Aquila Entities shall: o Employ any device, scheme, or artifice to defraud the Fund; o Make to the Fund any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading; o Engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or o Engage in any manipulative practice with respect to the Fund. B. Front-Running The practice of trading on the basis of the anticipated market effect of trades for Aquila Fund accounts, which is known as "front-running" or "scalping," constitutes a violation of the Federal securities laws. Therefore, it is absolutely prohibited for any officer, director, trustee, LLC Manager, Control Person, or employee of the Fund or one or more of the Aquila Entities to engage in such trading. C. Market Timing No officer, director, trustee, LLC Manager, Control Person or employee of the Fund or of any Aquila Entity shall purchase or redeem shares of the Fund in violation of the policies and restrictions set forth in the Fund's prospectus, including, but not limited to, the restrictions limiting the frequency of transfers into and out of the Fund that are designed to prevent so-called "market timing" and protect the interests of long-term investors in the Fund. VI. RESTRICTIONS ON PERSONAL SECURITIES TRADING Note: These restrictions generally will not apply to Independent Trustees of the Fund. Further, these restrictions do not apply to the Fund's own portfolio transactions, holdings or accounts.(4) The prohibitions and restrictions on personal securities transactions discussed below apply to the securities accounts held by or under the Control of an Advisory Person and/or Access Person, depending on the restriction, as well as those accounts held by or under the Control of members of the Advisory or Access Person's immediate family living in the same household with the Advisory or Access Person. A. Pre-Clearance of Personal Securities Transactions Advisory Persons must apply for and receive prior written approval from the CCO or his or her designee before purchasing or selling more than 100 shares of any Covered Security (see definition in Section II). Advisory Persons must also receive prior written approval from the CCO, or his or her designee in the CCO's absence, before acquiring any number of shares through an Initial Public Offering or Limited Offering. Advisory Persons shall request approvals by submitting a request, electronically, on paper or by facsimile using the Personal Trading Request Form attached hereto as Appendix B. The CCO shall submit his or her Personal Trading Request Form to the President (or the President's designee, in his or her absence) for approval. Copies of all Personal Trading Request Forms submitted by Advisory Persons shall be retained by the CCO in accordance with Section XII of this Code. A record of all written approvals of, and rationale supporting, any direct or indirect acquisition by Advisory Persons of an investment in an Initial Public Offering or Limited Offering will be made and retained by the CCO. Advisory Persons who have acquired Limited Offering Securities pursuant to prior written approval from the CCO or his or her designee must immediately disclose that investment to the CCO or his or her designee before they participate at any level in any Aquila Fund's subsequent consideration of an investment in the same issuer. In such circumstance, the Aquila Fund's decision to purchase Securities of the issuer will be subject to independent review by other investment personnel with no personal interest in the issuer. In the case of requests for pre-clearance in a Security Held or to be Acquired for any Aquila Fund which is advised by an investment adviser that is not subject to this Code ("external investment adviser"), the President or CCO generally shall grant authorization to trade if the person seeking pre-clearance does not have access to or knowledge of current investment decisions or recommendations of such external investment adviser. B. Prohibited Trading Practices 1. Short-Term Trading An Advisory Person is generally prohibited from realizing a profit from the purchase and sale or sale and purchase of the same Covered Security, within a period of sixty (60) days. It is recognized that short-term trading is not necessarily indicative of whether an individual is trading on inside information. Accordingly, an Advisory Person may apply to the CCO, or the President in the CCO's absence, for an exception from this provision, which shall be granted if the CCO or President reasonably believes that the Advisory Person will suffer undue hardship as a result of not being permitted to do the trade and that the trade does not violate the principles of this Code. The CCO shall make and retain a record of all waivers granted (including any waivers granted by the President in the CCO's absence) under this provision, including a summary of the reasons for granting the waiver. 2. Short Sales An Advisory Person is prohibited from effecting short sales or acquiring short positions in any Covered Security held by the Fund. C. Blackout Periods An Advisory Person shall not Purchase or Sell, directly or indirectly, any Covered Security: (a) within five (5) days after the time that the same Covered Security is purchased or sold by the Fund; or (b) at any time when he or she has have actual knowledge that a Covered Security is being purchased or sold, or recommended or considered for Purchase or Sale, by the Fund until five (5) days after the Fund's Purchase or Sale transaction in such Covered Security has been completed or the Covered Security is no longer being recommended or considered for Purchase or Sale by the Fund. An Advisory Person may apply to the CCO, or the President in the CCO's absence, for an exception from this provision, which shall be granted if the CCO or President reasonably believes that the Advisory Person will suffer undue hardship as a result of not being permitted to do the trade and that the trade does not violate the principles of this Code. The CCO shall make and keep a record of all waivers granted under this provision, including a summary of the reasons for granting the waiver. D. Exempt Transactions The Purchase or Sale of a Security in one of the following types of transactions, shall be considered an "Exempt Transaction" for the purposes of the restrictions on short-term trading, short sales and Purchases or Sales during blackout periods set forth in this Section VI: o trading in Securities in an account over which the Access Person does not have direct or indirect control or influence (e.g., a blind trust); o purchases of Covered Securities pursuant to an automatic investment plan (i.e., a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation, including dividend reinvestment plans);(5) o purchases or sales made by payroll deduction through an employer-sponsored employee benefit plan; o purchases or sales which are non-volitional; or o purchases of Securities effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer. Note: The above-listed Exempt Transactions and Covered Securities acquired in such transactions remain subject to initial, annual and quarterly holdings and transaction reporting requirements as set forth in Section VII. E. Approvals of Transactions or Requests for Waivers of Restrictions by the CCO or the President In the event that the CCO or the President seeks to engage in a transaction for which pre-clearance is required or seeks a waiver from the blackout period or short-term trading restrictions of this Section of the Code, the approval shall, in the case of the CCO, be granted or denied by the President and, in the case of proposed transactions by the President, the approval or waiver shall be granted or denied by the CCO. In the absence of the President or the CCO, such requests for approval shall be submitted to Fund Counsel. A written record of the determination made and the reasons for it shall be made by the person making the determination and the original record retained in accordance with this Code. VII. REPORTING AND REVIEW OF PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS Note: These requirements generally will not apply to Independent Trustees of the Fund. Further, these requirements do not apply to the Fund's own portfolio transactions, holdings or accounts.(6) Access Persons, other than Independent Trustees, are required to submit initial and annual Covered Securities holdings and accounts reports as well as quarterly transaction reports as outlined below. The CCO shall identify all Access Persons who are required to submit reports pursuant to this Section of the Code and shall inform those Access Persons of these reporting requirements. The CCO shall maintain a record of all Access Persons who are required to submit reports pursuant to this section. These reports are mandated by SEC regulations and, therefore, exceptions and waivers of these reporting requirements cannot be granted under any circumstances. However, Access Persons need not make separate reports under this Section VII, to the extent the information in such reports would duplicate information required to be reported to any Aquila Entity pursuant to the Code of Ethics of the Aquila Entity. All reports submitted pursuant to this Code will be reviewed by the CCO or his or her designee to seek to ensure that Access Persons have abided by this Code. Through these reviews, the CCO or his or her designee will seek to identify improper trades or patterns of abuse (including market timing) by Access Persons. When reviewing these reports, the CCO also will seek to ensure that Access Persons have received all necessary pre-clearances required by this Code. The CCO shall periodically provide summary reports of any violations of this Code to the President. No report required by this Section shall be construed as an admission by the Access Person that he or she is a Beneficial Owner of any Security on the report. A. Initial and Annual Reports of Holdings and Accounts ("Holdings and Accounts Reports") All Access Persons (other than Independent Trustees) must, upon commencement of employment, disclose all holdings in Covered Securities (as defined in Section II) and personal brokerage, mutual fund or bank accounts through which Securities are held or traded and over which the Access Person has direct or indirect control or influence (including those of immediate family members living in the same household as the Access Person). All Initial Holdings and Accounts Reports (Exhibit C) shall be made in writing to the CCO within ten (10) days of becoming an Access Person and such information shall be current as of a date no more than forty-five (45) days prior to such person becoming an Access Person. Thereafter, Access Persons must submit Annual Holdings and Accounts Reports (Exhibit C) to the CCO no later than February 14th of each year and must be current as of December 31st of the previous calendar year. Annual Holdings and Accounts Reports must be filed even if there have been no changes in the information reported previously and even if the Access Person has arranged for brokers, banks and mutual funds to send duplicate account statements for his/her personal accounts to the CCO. Access Persons must disclose all Covered Securities holdings in the Initial and Annual Holdings and Accounts Reports including those resulting from transactions which are exempt from the transactional reports. The only holdings which are not required to be reported are Covered Securities held in accounts over which the Access Person does not have any direct or indirect influence or control (e.g., blind trusts). The Initial and Annual Holdings and Accounts Reports must include: (a) title, type of Covered Security and as applicable the exchange ticker symbol or CUSIP number, number of shares and principal amount of each Covered Security of which the Access Person is a direct or indirect Beneficial Owner; (b) the name of any broker, dealer, mutual fund company or bank with which the Access Person maintains an account used to hold or trade Securities, the account number, the title of the account and the names of all individuals who are Beneficial Owners of the account in which any Security is held for the Access Person's direct or indirect benefit; and (c) the date that the report is submitted by the Access Person. The CCO shall retain copies of the Initial and Annual Holdings and Accounts Reports in accordance with Section XII of this Code. B. Quarterly Reports of Securities Transactions ("Quarterly Transaction and Accounts Reports") Each Access Person (other than Independent Trustees) must submit a Quarterly Transaction and Accounts Report (Exhibit D) to the CCO containing the information described below with respect to transactions in any Covered Securities (as defined in Section II) in which such Access Person was a direct or indirect Beneficial Owner of a Covered Security. Access Persons are not required to report Exempt Transactions, as defined below. Access Persons are not required to report trades in accounts over which they do not have influence or control over investment decisions (e.g., a blind trust). Quarterly Transaction and Accounts Reports must be submitted in writing to the CCO no later than thirty (30) days after the end of the calendar quarter in which the transaction(s) were effected. The CCO shall retain the reports in accordance with Section XII of this Code. Quarterly Transaction and Accounts Reports must include the following information for each transaction in a Covered Security: (a) the date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date (if applicable), and number of shares, and the principal amount of each Covered Security involved; (b) the nature of the transaction (e.g., purchase, sale, or any other type of acquisition or disposition); (c) the price at which the transaction was effected; (d) the name of the broker, dealer, mutual fund company or bank with or through which the transaction was effected; and (e) the date that the report is submitted by the Access Person. If during the calendar quarter, the Access Person established a new brokerage, mutual fund or bank account where Securities are held, the Quarterly Transaction and Accounts Report must include the following information: (a) the name of the broker, dealer, mutual fund company or bank with whom the Access Person established the account; (b) the date the account was established; and (c) the date that the report is submitted by the Access Person. The following transactions are "Exempt Transactions" for the purpose of the Quarterly Transaction and Accounts Report requirements (but still must be reported on Initial and Annual Holdings and Accounts Reports): o transactions reported in duplicate broker monthly account statements or trade confirmations received by the Aquila Entities or the Fund, if all of the above required information is included and confirmations or account statements are received by the CCO within thirty (30) days of the close of the calendar quarter; and o purchases of Covered Securities pursuant to an automatic investment plan (i.e., a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation, including dividend reinvestment plans).(7) Trading in Covered Securities in an account over which a person does not have direct or indirect control or influence (e.g., a blind trust) are also Exempt Transactions and need not be reported on Quarterly Transaction and Accounts Reports, nor on Initial and Annual Holdings and Accounts Reports. VIII. APPLICATION OF PERSONAL TRADING RESTRICTIONS AND REPORTING TO INDEPENDENT TRUSTEES OF THE FUND Independent Trustees of the Fund are not required to submit Initial and Annual Holdings and Accounts Reports. Independent Trustees are required to submit Quarterly Transaction and Accounts Reports only if the Independent Trustee knew or, in the ordinary course of fulfilling his or her duties as an Independent Trustee, should have known, that during the fifteen (15) day period before or after his or her transaction in a Covered Security, the Covered Security was purchased or sold, or was considered for Purchase or Sale, by or on behalf of the Fund. Required reports must be submitted no later than thirty (30) days after the end of the calendar quarter in which the transaction(s) were effected and must include the information described in Section VII. Independent Trustees also are not required to report Covered Securities trades in accounts for which they do not have influence or control over investment decisions (e.g., a blind trust). No such report shall be construed as an admission by an Independent Trustee that he or she is a Beneficial Owner of any Covered Security on the report, nor shall the making of a report be construed as an admission of a violation of this Code by the Independent Trustee. The CCO for the Fund will inform the Independent Trustees of the applicable reporting requirements under this Code. Copies of any reports received by the CCO from an Independent Trustee of the Fund will be provided to Fund Counsel and the originals maintained by the CCO as part of the Fund's records. IX. GIFTS AND GRATUITIES Advisory Persons may not seek or accept from, or offer to give or give to, any person that does business with any Aquila Entity or the Fund any item of material value or preferential treatment that is or appears to be connected with an Aquila Entity or Aquila Fund directing business to that person or receiving business from that person. For purposes of this prohibition, "items of material value" include but are not limited to: (a) gifts amounting in value to more than $100 per person per year; and (b) payment or reimbursement of travel expenses, including overnight lodging, in excess of $100 per person per year. "Items of material value" do not include: (a) an occasional meal, a ticket to a sporting event or the theater or comparable entertainment, which is not conditioned on directing business to the firm that provided such meal or entertainment and is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achieving a sales target; or (b) an unconditional gift of a typical item of reminder advertising such as a ball-point pen with the name of the advertiser inscribed, a calendar pad, or other gifts amounting in value to not more than $100 per person per year. Any invitations involving travel for more than one day where travel expenses will be paid or reimbursed by a person that does business with an Aquila Entity, the Fund or any other Aquila Fund must have advance approval from the CCO, or the President in the CCO's absence. The President must approve the CCO's invitations involving travel for more than one day. The CCO shall maintain a record of all such requests for travel and the reason for granting or denying all such requests in accordance with this Code. X. ADVISING NON-AQUILA ENTITIES Advisory Persons may not render investment advice to persons other than Aquila Entities or Aquila Funds, unless the advisory relationship, including the identity of those involved and any fee arrangements, has been disclosed to and approved by the President. Once cleared with the President, all transactions for such outside advisory clients are subject to the reporting requirements outlined above. This prohibition precludes Advisory Persons from providing investment advice to members of such person's immediate family without the prior approval of the President. XI. ADVISORY PERSONS SERVING AS DIRECTORS OF PUBLICLY-TRADED COMPANIES An Advisory Person who serves as a director or trustee of a publicly-traded company in which the Fund invests or may invest may have an inherent conflict between the fiduciary duty he or she owes to the Fund and that owed to the shareholders of the publicly-traded company. In addition, service on the board of directors or board of trustees of any company other than an Aquila Fund or Aquila Entity ("External Company") may present conflicts between the duties owed by the Advisory Person to that company and to the Fund and the Aquila Entities. To avoid the potential adverse consequences of such conflicts of interest or to ensure they are appropriately dealt with, effective January 7, 2005, all Advisory Persons must receive the prior written approval of the CCO and the President before serving as director or trustee of any External Company, which approval may be withheld in the President's sole discretion. If you are an Advisory Person and currently serve as a director or trustee of an External Company, you should notify the CCO immediately. Prior to commencement of employment with any Aquila Entity and annually thereafter, each Advisory Person shall provide the CCO with a written list of all positions held by the Advisory Person with any External Company. Advisory Persons who receive permission to serve as directors of publicly-traded External Companies will be isolated through "Fire Walls" or other procedures from making decisions regarding the Securities of those companies for which they serve as directors or trustees. An especially sensitive situation involves representation on a creditors' committee. Particular care will be taken to create a "Fire Wall" between portfolio management and creditors' committee representation. XII. RECORD KEEPING The CCO shall maintain the following records in the manner and for the time periods described under the 1940 Act and the Investment Advisers Act of 1940: (a) a copy of this Code of Ethics and any other Code of Ethics which is, or at any time within the past six (6) years has been in effect and all amendments to such Code(s); (b) a copy of each signed and dated Certification acknowledging receipt of the Code and any amendments or updates to the Code for a period of at least six (6) years after the individual acknowledging receipt is no longer affiliated with the Aquila Entities or the Fund; (c) records of any violations of this Code and any actions taken as a result of such violations for a period of six (6) years after the resolution of such violation; (d) each report, record or finding made under this Code, including any information provided in lieu of these reports (e.g., duplicate account statements) for a period of six (6) years after the date of the report, record or finding; (e) each Personal Trading Request Form (Exhibit B) submitted by an Advisory Person and a record of the decision regarding such request for a period of six (6) years after the date of the request (and for shares of an Initial Public Offering or Limited Offering, the reasoning for the decision); (f) each request for a waiver from any of the restrictions on Personal Trading by Advisory Persons (including requests that an Advisory Person not be deemed the Beneficial Owner of Securities held by another household member), including a description of the reason for the request and a brief summary of the reasons for granting or denying the waiver for a period of six (6) years after the last date on which the waiver was applied; (g) a list of all individuals who currently are, or within the past six (6) years have been deemed, Access Persons of the Aquila Entities or the Fund, as well as records of any decision by the CCO to exempt a person from the definition of "Access Person" and supporting documentation for and facts surrounding such a decision; (h) a list of all individuals who currently are, or within the past six (6) years have been, required to make Quarterly Transaction and Accounts Reports or Holdings and Accounts Reports pursuant to this Code; (i) a list of all persons who currently are or within the past six (6) years have been responsible for reviewing reports submitted pursuant to the Code; (j) a copy of all Quarterly Transaction and Accounts Reports and Initial and Annual Holdings and Accounts Reports submitted to the CCO for a period of six (6) years from the date of the report; (k) a record of all requests for travel pursuant to Section IX of this Code and the reason for granting or denying all such requests for a period of six (6) years from the date of the request; and (l) a copy of each report submitted to the Boards of Trustees of the Fund in connection with the Board's approval of a code of ethics or material changes to such a code for a period of six (6) years following the date of such report. XIII. EXTERNAL ADVISERS, SUBADVISERS AND EXTERNAL PRINCIPAL UNDERWRITERS' CODES OF ETHICS As required by Rule 17j-1 under the 1940 Act ("Rule 17j-1"), each external adviser, subadviser and external principal underwriter to the Fund shall adopt a written code of ethics governing personal investment activity that meets the requirements of Rule 17j-1. Any person that is an "access person" (as defined in Rule 17j-1) of an external adviser, subadviser or external principal underwriter shall be subject to and comply with the code of ethics of such external adviser, subadviser or external principal underwriter. XIV. REPORTING VIOLATIONS OF THIS CODE AND PENALTIES All officers, directors, trustees, LLC Managers, Control Persons or employees of the Fund or of any Aquila Entity shall promptly report any actual or suspected violations of this Code to the CCO. In the absence of the CCO, violations may be reported to the President but also must be separately reported to the CCO promptly following his or her return to the office. The identity of the person making such a report will be kept in confidence whenever possible. Persons who report actual or suspected violations will be protected from retaliation for making such reports. Violations of this Code may result in the imposition of criminal penalties or sanctions by the SEC, other law enforcement or regulatory authorities, or the Fund or Aquila Entities, including forfeiture of any profit from or loss avoided by a transaction, forfeiture of future discretionary salary increases or bonuses, and suspension or termination of employment. Determinations as to whether a violation has occurred, and the appropriate sanctions, if any, shall be made by the CCO and may be subject to review by the President or trustees of the Fund, as appropriate; provided however, that no person believed to have violated this Code shall participate in such determinations made with respect to his or her own conduct. XV. BOARD APPROVAL A. Initial Approval of Codes of Ethics The Board of the Fund, including a majority of Independent Trustees, shall approve any code of ethics of any new adviser, subadviser or principal underwriter to the Fund before initially retaining its services. Before the Board meeting at which a code is scheduled for approval, the affected adviser, subadviser or principal underwriter shall provide the Board with a copy of its code of ethics, a written certification that it has adopted procedures reasonably necessary to prevent its "access persons" from violating its code and any other information requested by the Board. B. Material Changes to Codes of Ethics The Board of the Fund, including a majority of Independent Trustees, shall approve any material changes to this Code, as well as to the codes of ethics of the Aquila Entities and each external adviser, subadviser and external principal underwriter to the Fund within six (6) months following the adoption of the change. The appropriate officers or LLC Managers of the Fund or other Aquila Entities or of the external adviser, subadviser or external principal underwriter will, on a timely basis, provide notice to the Board of the changes and provide the Board with the following information regarding the changes for which Board approval is sought: (1) a written description of the change and the reasons therefore; (2) a copy of the revised code of ethics, marked to show the changes; (3) a written certification that the entity has adopted procedures reasonably necessary to prevent its access persons from violating the code of ethics; and (4) any other information requested by the Board. C. Annual Reports to the Fund Board To assist the Board of the Fund in meeting its responsibilities under Rule 17j-1, the appropriate officers or LLC Managers of the Aquila Entities and any external adviser, subadviser or external principal underwriter to the Fund, at least annually, shall provide the Fund's Board with: (1) a written certification that the Aquila Entities or external adviser, subadviser or external principal underwriter have adopted procedures reasonably necessary to prevent their respective access persons from violating their codes of ethics; (2) a written report that describes any issues arising under such codes of ethics or related procedures since the last report to the Board; and (3) any other information requested by the Board. The report referred to in (2) above shall include, but not be limited to, information about: (a) material violations of the code or related procedures; (b) immaterial, individual violations (such as late filings of quarterly transactions reports) if such violations are material in the aggregate; and (c) sanctions imposed in response to such violations; significant conflicts of interest that arose involving personal trading, even if the conflicts did not result in a code violation (e.g., where an Access Person is a director of a company whose Securities are held by an Aquila Fund). Further, the Fund's Board will be provided with more frequent reports when there have been significant violations of a code of ethics or related procedures, or significant conflicts of interest arising under the code or related procedures. - ------------------ (1) An individual who owns a significant portion (i.e., more than 25%) of the Fund's outstanding shares would be a Control Person of the Fund. In addition, an owner of Fund shares would be a "beneficial owner" of Fund portfolio securities who is a controlling shareholder of the Fund or has or shares investment control over the Fund's portfolio. Without the above exclusion, in such cases the Fund's own portfolio transactions, accounts and holdings technically could be subject to the account, transaction or holdings reporting, pre-clearance and other requirements in this Code. This result would serve no protective purpose for the Fund and its shareholders, but could prevent the Fund from engaging in beneficial transactions on a timely basis and would otherwise have inappropriate and burdensome effects. (2) "High quality short-term debt instrument" means any instrument having a maturity at issuance of less than 366 days and which is rated in one of the highest two rating categories by a Nationally Recognized Statistical Rating Organization, or which is unrated but is of comparable quality. (3) Shares of the Fund, although excepted from the definition of "Covered Security" in this Code, will be subject to reporting, preclearance and other personal trading restrictions under the codes of ethics of the Aquila Entities and of any other investment advisers of the Fund. (4) An individual who owns a significant portion (i.e., more than 25%) of the Fund's outstanding shares would be a Control Person of the Fund. In addition, an owner of Fund shares would be a "beneficial owner" of Fund portfolio securities who is a controlling shareholder of the Fund or has or shares investment control over the Fund's portfolio. Without the above exclusion, in such cases the Fund's own portfolio transactions, accounts and holdings technically could be subject to the account, transaction or holdings reporting, pre-clearance and other requirements in this Code. This result would serve no protective purpose for the Fund and its shareholders, but could prevent the Fund from engaging in beneficial transactions on a timely basis and would otherwise have inappropriate and burdensome effects. (5) Any transaction that overrides the pre-set schedule or allocations of the automatic investment plan is not exempt. (6) See footnote 4 above. (7) Any transaction, however, that overrides the pre-set schedule or allocations of the automatic investment plan must be included in a Quarterly Transaction Report. EX-14 10 orb07coeman.txt CODE OF ETHICS OF MANAGER AND DISTRIBUTOR CODE OF ETHICS for AQUILA MANAGEMENT CORPORATION AQUILA INVESTMENT MANAGEMENT LLC AQUILA DISTRIBUTORS, INC. February 1, 2005 Amended: September 7, 2006 (approved at Fall 2006 meetings of Fund Boards starting September 7, 2006) TABLE OF CONTENTS [to be updated]
I. STATEMENT OF BUSINESS ETHICS.....................................................1 - -- ---------------------------- II. DEFINITIONS......................................................................2 - --- ----------- III. APPLICATION OF THE CODE..........................................................7 - ---- ----------------------- IV. DELIVERY AND ACKNOWLEDGEMENT OF THE CODE AND AMENDMENTS TO THE CODE..............7 - --- ------------------------------------------------------------------- V. COMPLIANCE WITH LAWS AND REGULATIONS.............................................7 - -- ------------------------------------ A. Compliance with the Federal Securities Laws.............................7 -- ------------------------------------------- B. General Prohibitions Applicable to All Personnel........................8 -- ------------------------------------------------ C. Front-Running...........................................................8 -- ------------- D. Market Timing...........................................................8 -- ------------- VI. INSIDER TRADING..................................................................9 - --- --------------- VII. CONFIDENTIALITY OF SECURITIES RECOMMENDATIONS, INVESTMENT DECISIONS AND SECURITIES HOLDINGS.........................................................................9 -------- VIII. RESTRICTIONS ON PERSONAL SECURITIES TRADING.....................................10 - ----- ------------------------------------------- A. Pre-Clearance of Personal Securities Transactions......................10 -- ------------------------------------------------- B. Prohibited Trading Practices...........................................11 -- ---------------------------- 1. Short-Term Trading............................................11 -- ------------------ 2. Short Sales...................................................11 -- ----------- C. Blackout Periods.......................................................11 -- ---------------- D. Exempt Transactions....................................................12 -- ------------------- E. Approvals of Transactions or Requests for Waivers of Restrictions by the CCO or the President.......................................................12 ---------------- IX. REPORTING AND REVIEW OF PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS...........13 - --- --------------------------------------------------------------------- A. Initial and Annual Reports of Securities Holdings ("Securities Holdings and Accounts Reports").............................................13 B. Quarterly Reports of Securities Transactions ("Quarterly Transaction and Accounts Reports").....................................................14 X. GIFTS AND GRATUITIES............................................................16 - -- -------------------- XI. ADVISING NON-AQUILA ENTITIES....................................................17 - --- ---------------------------- XII. SUPERVISED PERSONS SERVING AS DIRECTORS OF PUBLICLY-TRADED COMPANIES............17 - ---- -------------------------------------------------------------------- XIII. RECORD KEEPING..................................................................17 - ----- -------------- XIV. REPORTING VIOLATIONS OF THIS CODE AND PENALTIES.................................19 - ---- -----------------------------------------------
APPENDICES Note: The forms set forth in the Appendices are not part of this Code of Ethics but are appended for convenience. Appendix A........CERTIFICATION OF RECEIPT OF CODE OF ETHICS Appendix B........PERSONAL TRADING REQUEST FORM Appendix C........INITIAL & ANNUAL HOLDINGS AND ACCOUNTS REPORT Appendix D........QUARTERLY TRANSACTION AND ACCOUNTS REPORT 11 I. STATEMENT OF BUSINESS ETHICS Aquila Management Corporation, Aquila Investment Management LLC and Aquila Distributors, Inc. are committed to maintaining the highest legal and ethical standards in the conduct of our business. We have a reputation based on investor trust and confidence in our professional abilities and integrity. We place the interests of our advisory clients above our own. Conflicts, or even the appearance of conflicts, between the interests of our advisory clients and our own must be avoided at all times. Meeting this commitment is a top priority and the responsibility of each and every one of us. This Code of Ethics (the "Code"), has been adopted by each of the Aquila Entities to implement our statement of business ethics. As a Supervised Person (as defined in Section II) you are subject to this Code. A code of ethics similar to this Code has been adopted by each of the funds of The Aquila Group of Funds. The CCO (as defined in Section II) is responsible for enforcing and interpreting this Code, and is available to answer any questions you may have. II. DEFINITIONS Listed below are definitions of some of the terms used in this Code, many of which are defined by law. "Access Person" shall mean any Supervised Person who: (a) has access to non-public information regarding an Aquila Fund's or other advisory client's Purchase or Sale of Securities or nonpublic information regarding the portfolio holdings of any of the Aquila Funds or other advisory client, or (b) is involved in making securities recommendations to any of the Aquila Funds or other advisory client or who has access to such recommendations that are nonpublic. Note: All officers and LLC Managers of Aquila Investment Management LLC are presumed to be Access Persons for the purposes of this Code. This presumption may be rebutted as described in Section III of this Code. "Advisory Person" shall mean any person who is: (1) A Supervised Person who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding, the Purchase or Sale of Reportable Securities by an Aquila Fund or other advisory client of Aquila Investment Management LLC or whose functions relate to the making of any recommendations with respect to such Purchases or Sales; or (2) a Control Person who obtains information concerning recommendations made to an Aquila Fund or other advisory client of Aquila Investment Management LLC with regard to the Purchase or Sale of Reportable Securities by an Aquila Fund or other advisory client of Aquila Investment Management LLC. "Aquila Entity" or "Aquila Entities" shall mean Aquila Management Corporation, Aquila Investment Management LLC (a registered investment adviser) and Aquila Distributors, Inc. (a registered broker-dealer). "Aquila Funds" or "Funds" (each an "Aquila Fund" or "Fund") shall mean all funds in The Aquila Group of Funds and any other fund to which an Aquila Entity provides administrative, distribution or investment advisory services, including: Aquila Rocky Mountain Equity Fund Aquila Three Peaks High Income Fund Capital Cash Management Trust (Dormant) Churchill Cash Reserves Trust (Dormant) Churchill Tax-Free Fund of Kentucky Hawaiian Tax-Free Trust Narragansett Insured Tax-Free Income Fund Tax-Free Fund For Utah Tax-Free Fund of Colorado Tax-Free Trust of Arizona Tax-Free Trust of Oregon Pacific Capital Cash Assets Trust Pacific Capital Tax-Free Cash Assets Trust Pacific Capital U.S. Government Securities Cash Assets Trust "Beneficial Owner" shall mean any person who has or shares, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, a direct or indirect pecuniary interest in a Security, within the meaning of Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 ("Exchange Act"). "Pecuniary interest" means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the Security. Securities in which you have an "indirect pecuniary interest" include, but are not limited to, securities held by members of your immediate family who share your household, including your spouse, children and stepchildren, parents, grandparents, brothers and sisters, and any of your in-laws. The presumption of beneficial ownership of Securities held by a family member sharing your household may be rebutted by successfully demonstrating to the CCO that you do not have a beneficial ownership interest in the Securities. "CCO" shall mean the Chief Compliance Officer of Aquila Investment Management LLC. "Code of Ethics" or Code shall mean this Code of Ethics. "Control" shall mean the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. A person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company. A person who does not own more than 25% of the voting securities of a company shall be presumed not to control such company. A person who has "control" under this definition shall be presumed to have "control" unless and until the Securities and Exchange Commission grants an order to the contrary. "Control Person" shall mean any individual who has a Control relationship with an Aquila Fund or an investment adviser of an Aquila Fund. NOTE: Under no circumstances shall an Aquila Fund's own portfolio transactions, accounts or holdings be subject to the account, transaction or holdings reporting, pre-clearance or other requirements of this Code.(1) "Initial Public Offering" shall mean an offering of Securities registered under the Securities Act of 1933 ("Securities Act"), the issuer of which , immediately before registration, was not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act. "Limited Offering" shall mean an offering of Securities that is exempt from registration under the Securities Act pursuant to Section 4(2), Section 4(6) or Rule 504, Rule 505 or Rule 506 (e.g., private placements). "LLC Manager" shall mean a person who is named as a Manager of an Aquila Entity that is organized as a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed. "Personal Trading" shall mean the Purchase or Sale of Securities by an individual for his or her own account, any other account in which he or she is a Beneficial Owner, or any account (other than an account of an Aquila Fund or other advisory client of Aquila Investment Management LLC) for which the Aquila employee decides what securities transactions will be effected for the account, either by making recommendations to the account owner or by entering orders directly with the broker handling the account. "President" shall mean the current President of Aquila Investment Management LLC. "Purchase or Sale of a Security" includes, among other things, the writing of an option to purchase or sell a Security. "Reportable Security" shall mean any Security, including shares of an Aquila Fund (other than an Aquila money market fund) or any fund for which Aquila Investment Management LLC serves as an investment adviser, or any fund whose investment adviser or principal underwriter controls, is controlled by, or is under common control with Aquila Investment Management LLC. ("Control" has the same meaning as in Section 2(a)(9) of the Investment Company Act of 1940 ("1940 Act").) Reportable Security also includes shares issued by offshore funds, unregistered funds (such as hedge funds), unit investment trusts, exchange-traded funds (whether structured as unit investment trusts or open-end management companies) and closed-end funds. It also includes options or a Security convertible or exchangeable into a Reportable Security. It does not include a direct obligations of the U.S. Government, bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt instruments (including repurchase agreements),(2) and, unless otherwise specifically included above (e.g., exchange-traded funds), shares of third-party U.S.-registered open-end investment companies (including money market funds). "Security" shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security or on any group or index of securities (including any interest therein based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or generally any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase any of the foregoing. "Security Held or to be Acquired" means: (A) any Security that within the most recent fifteen (15) days is being or has been (i) held by an Aquila Fund or other advisory client or (ii) "considered for purchase or sale" by or on behalf of any of the Aquila Funds or other advisory client; and (B) any option to purchase or sell, and any Security convertible into or exchangeable for, a Security described in (A) above. A Security is "being considered" for Purchase or Sale if: (a) there is an outstanding order (this includes orders that are in the process of being executed) to Purchase or Sell that Security for an account or portfolio of any of the Aquila Funds or other advisory client; (b) there is an outstanding oral or written recommendation with respect to that Security that has not been acted upon or rejected; or (c) the person responsible for a portfolio intends to Purchase or Sell (i.e., has decided to but has not yet purchased or sold) that Security for any of the accounts or portfolios of the Aquila Funds or other advisory clients. "Supervised Person" means any partner, officer, director, LLC Manager (or other person occupying a similar status or performing similar functions), or employee of the Aquila Entities, or any other person who provides investment advice on behalf of Aquila Investment Management LLC and is subject to the supervision and control of Aquila Investment Management LLC. III. APPLICATION OF THE CODE Although this Code generally applies to all Supervised Persons, some of the provisions that restrict personal securities transactions apply only to Access Persons and/or Advisory Persons, as defined in Section II of this Code. The CCO will maintain a list of all persons deemed Access Persons for the purpose of this Code. The CCO shall review the list and reaffirm that it is accurate and complete no less frequently than on an annual basis. For the purposes of this Code, all officers and LLC Managers of Aquila Investment Management LLC are presumed to be Access Persons and thus are subject to the personal trading restrictions and reporting requirements that apply to Access Persons under Sections VIII and IX of this Code unless and until the presumption is rebutted. This presumption may be rebutted as to these persons, but only if the CCO makes a finding that such person does not have access to non-public information regarding the Purchase or Sale of Securities by an Aquila Fund or other advisory client or nonpublic information regarding the portfolio holdings of any of the Aquila Funds or other advisory clients, and is not involved in making securities recommendations to any of the Aquila Funds and does not have access to such nonpublic recommendations. Prior to making a determination rebutting the presumption that a person is an Access Person, the CCO shall investigate all relevant facts and prepare a memorandum for the file which sets forth the facts demonstrating the rebuttal of the presumption, as well as the CCO's determination that such person is not, in fact, an Access Person for the purpose of this Code. The CCO shall retain a copy of this memorandum in the business records of the Aquila Entities. IV. DELIVERY AND ACKNOWLEDGEMENT OF THE CODE AND AMENDMENTS TO THE CODE The CCO will provide each Supervised Person with a copy of this Code and any updates or amendments. All Supervised Persons shall read this Code and any updates and amendments carefully and then sign and date the attached Certification acknowledging receipt and return it to the CCO promptly. The CCO shall retain a copy of these Certifications in accordance with Section XIII of this Code. V. COMPLIANCE WITH LAWS AND REGULATIONS A. Compliance with the Federal Securities Laws Supervised Persons are required at all times to comply with the federal securities laws, as defined in Rule 204A-1 of the Investment Advisers Act of 1940 ("Advisers Act"), both in conducting the business of the Aquila Entities and when acting in their personal capacities or outside the scope of their employment or association with the Aquila Entities. Accordingly, any violation of the federal securities laws will be a violation of this Code and may subject the Supervised Person to sanctions or other appropriate remedial action under the Code. B. General Prohibitions Applicable to All Personnel As a registered investment adviser, Aquila Investment Management LLC, has a fiduciary obligation to the Aquila Funds and any other advisory clients. This Code is based on the principle that Supervised Persons owe a fiduciary duty to clients and at all times must conduct the Aquila Entities' business and their own affairs, including personal securities transactions, in accordance with the high ethical and legal standards that apply to those acting in a fiduciary capacity. This means, among other things, that Supervised Persons must avoid: (i) placing the interests of the Aquila Entities or their own personal interests ahead of the Aquila Funds or other advisory clients, (ii) taking in appropriate advantage of their position with the Aquila Entities; or (iii) any actual or potential conflicts with the interests of the Funds or other advisory clients or even the appearance of such conflicts. When buying or selling any Security (including shares of the Aquila Funds), no Supervised Person shall: o Employ any device, scheme, or artifice to defraud; o Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they are made, not misleading; o Engage in any act, practice or course of business that operates or would operate as a fraud or deceit; or o Engage in any manipulative practice. C. Front-Running The practice of trading on the basis of the anticipated market effect of trades for the accounts of investment advisory clients, which is known as "front-running" or "scalping," constitutes a violation of the Federal securities laws. Therefore, it is absolutely prohibited for any Supervised Person to engage in such trading. D. Market Timing No Supervised Person shall purchase or redeem shares of the Aquila Funds in violation of the policies and restrictions set forth in each Fund's prospectuses, including, but not limited to, the restrictions limiting the frequency of transfers into and out of a Fund that are designed to prevent so-called "market timing" and protect the interests of long-term investors in the Fund. VI. INSIDER TRADING No Supervised Person may Purchase or Sell any Security, or be involved in any way in the Purchase or Sale of a Security, while in possession of material non-public information about the Security or its issuer, regardless of the manner in which such information was obtained. This prohibition covers transactions for the Aquila Funds or other advisory clients made in the course of your employment with an Aquila Entity, as well as transactions in your Personal Trading accounts. As used in this Code, material non-public information includes corporate information, such as undisclosed financial information about a corporation, and market information, such as a soon-to-be-published article about a corporation. Material non-public information also includes securities recommendations and securities holdings and transactions of any of the Aquila Funds or other advisory clients. Material information is defined as information which an investor would consider important in making an investment decision, or which would substantially affect the market price of a Security if generally disclosed. Non-public information is defined as information which has not been effectively made available to the marketplace. Any questions as to whether certain information is material non-public information should be directed to the CCO. VII. CONFIDENTIALITY OF SECURITIES RECOMMENDATIONS, INVESTMENT DECISIONS AND SECURITIES HOLDINGS Supervised Persons must maintain the utmost confidentiality with respect to proprietary information of the Aquila Entities or other advisory clients, including recommendations, investments decisions and securities holdings of the Aquila Funds or other advisory clients. Such information may be deemed "material nonpublic information" by the SEC and other regulatory authorities. Proprietary information may include, but is not limited to: (1) an anticipated recommendation to purchase or sell a Security for an Aquila Fund or other advisory client; (2) the timing of a Purchase or Sale of a Security for an Aquila Fund or other advisory client; and (3) nonpublic information regarding securities holdings of the Aquila Funds or other advisory clients. The subject and content of a recommendation or investment decision remains proprietary information through the time that all trades based on that recommendation or decision have been consummated, and may only be used for the benefit of the Aquila Funds or other advisory clients. Accordingly, Supervised Persons must not discuss a contemplated recommendation, investment decision, or securities holdings with persons outside of the Aquila Entities, except for persons who provide services to the Aquila Entities and the Aquila Funds who themselves have an obligation to keep the information they receive confidential (e.g., transfer agents, outside counsel, auditors, custodians, etc.). Supervised Persons shall take steps to ensure that proprietary information is safeguarded. All computers containing access to proprietary information should be password protected and Supervised Persons and other employees should keep all such passwords strictly confidential. Paper files containing proprietary information should be kept in locked filing cabinets or locked rooms which are not accessible by visitors to the offices of the Aquila Entities. Any questions regarding the safeguarding of proprietary information should be directed to the CCO. VIII. RESTRICTIONS ON PERSONAL SECURITIES TRADING Note: These restrictions do not apply to an Aquila Fund's own portfolio transactions, holdings or accounts.(3) The prohibitions and restrictions on personal securities transactions discussed below apply to the securities accounts held by or under the Control of Access Persons or Advisory Persons, as well as those accounts held by or under the Control of members of the Access Person's or Advisory Person's immediate family members living in the same household with the Access Person or Advisory Person, respectively. A. Pre-Clearance of Personal Securities Transactions Advisory Persons must apply for and receive prior written approval from the CCO or his or her designee before purchasing or selling more than 100 shares of any Reportable Security (see definition in Section II), other than purchases or sales of shares of the Aquila Funds. Access Persons and Advisory Persons must receive prior written approval from the CCO, or his or her designee in the CCO's absence, before acquiring any shares through an Initial Public Offering or Limited Offering. Approvals shall be requested by submitting a request, electronically, on paper or by facsimile using the Personal Trading Request Form attached hereto as Appendix B. The CCO shall submit his or her Personal Trading Request Form to the President (or the President's designee, in his or her absence) for approval. Copies of all Personal Trading Request Forms submitted by Access Persons and Advisory Persons shall be retained by the CCO in accordance with Section XIII of this Code. A record of all written approvals of, and rationale supporting, any direct or indirect acquisition by Access Persons and Advisory Persons of an investment in an Initial Public Offering or Limited Offering will be made and retained by the CCO. Access Persons or Advisory Persons who have acquired Limited Offering Securities pursuant to prior written approval from the CCO or his or her designee must immediately disclose that investment to the CCO or his or her designee before they participate at any level in any Aquila Fund's or other advisory client's subsequent consideration of an investment in the same issuer. In such circumstance, the Aquila Fund's or other advisory client's decision to purchase Securities of the issuer will be subject to independent review by other investment personnel with no personal interest in the issuer. In the case of requests for pre-clearance in a Security Held or to be Acquired for any Aquila Fund or other advisory client which is advised by an investment adviser that is not subject to this Code ("external investment adviser"), the President or CCO generally shall grant authorization to trade if the person seeking pre-clearance does not have access to or knowledge of current investment decisions or recommendations of such external investment adviser. B. Prohibited Trading Practices 1. Short-Term Trading A Advisory Persons is generally prohibited from realizing a profit from the purchase and sale or sale and purchase of the same Reportable Security, within a period of sixty (60) days. It is recognized that short-term trading is not necessarily indicative of whether an individual is trading on inside information. Accordingly, a Advisory Person may apply to the CCO, or the President in the CCO's absence, for an exception from this provision, which shall be granted if the CCO or President reasonably believes that the Advisory Person will suffer undue hardship as a result of not being permitted to do the trade and that the trade does not violate the principles of this Code. The CCO shall make and retain a record of all waivers granted (including any waivers granted by the President in the CCO's absence) under this provision, including a summary of the reasons for granting the waiver. 2. Short Sales Advisory Persons are prohibited from effecting short sales or acquiring short positions in any Security Held by an Aquila Fund or other advisory client. C. Blackout Periods Advisory Persons shall not Purchase or Sell, directly or indirectly, any Reportable Security: (a) within five (5) days after the time that the same Reportable Security is purchased or sold by an Aquila Fund or other advisory client; or (b) at any time when he or she has actual knowledge that a Reportable Security is being purchased or sold, or recommended or considered for Purchase or Sale, by an Aquila Fund or other advisory client until five (5) days after the Fund's Purchase or Sale transaction in such Reportable Security has been completed or the Reportable Security is no longer being recommended or considered for Purchase or Sale by the Fund or other advisory client. An Advisory Person may apply to the CCO, or the President in the CCO's absence, for an exception from this provision, which shall be granted if the CCO or President reasonably believes that the Advisory Person will suffer undue hardship as a result of not being permitted to do the trade and that the trade does not violate the principles of this Code. The CCO shall make and keep a record of all waivers granted under this provision, including a summary of the reasons for granting the waiver. D. Exempt Transactions The Purchase or Sale of a Security in one of the following types of transactions, shall be considered an "Exempt Transaction" for the purposes of the restrictions on short-term trading, short sales and Purchases or Sales during blackout periods set forth in this Section VIII: o trading in Securities in an account over which the Supervised Person does not have direct or indirect control or influence (e.g., a blind trust); o purchases of Reportable Securities pursuant to an automatic investment plan (i.e., a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation, including dividend reinvestment plans);(4) o purchases or sales made by payroll deduction through an employer-sponsored employee benefit plan; o purchases or sales which are non-volitional; or o purchases of Securities effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer. Note: The above-listed Exempt Transactions and Reportable Securities acquired in such transactions remain subject to the initial, annual and quarterly holdings and transaction reporting requirements as set forth in Section IX. E. Approvals of Transactions or Requests for Waivers of Restrictions by the CCO or the President In the event that the CCO or the President seeks to engage in a transaction for which pre-clearance is required or seeks a waiver from the blackout period or short-term trading restrictions of this Section of the Code, the approval shall, in the case of the CCO, be granted or denied by the President and, in the case of proposed transactions by the President, the approval or waiver shall be granted or denied by the CCO. In the absence of the President or the CCO, such requests for approval shall be submitted to Counsel to the Aquila Funds. A written record of the determination made and the reasons for it shall be made by the person making the determination, a copy provided to the CCO and the original record retained in accordance with this Code. IX. REPORTING AND REVIEW OF PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS Note: These requirements do not apply to an Aquila Fund's own portfolio transactions, holdings or accounts.(5) Access Persons are required to submit initial and annual Reportable Securities holdings reports as well as quarterly transaction reports as outlined below. The CCO shall identify all Access Persons who are required to submit reports pursuant to this Section of the Code and shall inform those Access Persons of these reporting requirements. The CCO shall maintain a record of all Access Persons who are required to submit reports pursuant to this section. These reports are mandated by SEC regulations and, therefore, exceptions and waivers of these reporting requirements cannot be granted under any circumstances. However, Access Persons who make reports pursuant the code of ethics of any Aquila Fund, need not make separate reports under this Code to the extent the information in such reports would duplicate information required to be reported pursuant to this Code. All reports submitted pursuant to this Code will be reviewed by the CCO or his or her designee as soon as practical after receipt to seek to ensure that Access Persons have abided by this Code. Through these reviews, the CCO or his or her designee will seek to identify any improper trades or patterns of abuse (including market timing) by Access Persons. When reviewing these reports, the CCO also will seek to ensure that Access Persons and Advisory have received all necessary pre-clearances required by this Code. The CCO shall periodically provide summary reports of any violations of this Code to the President. No report required by this section shall be construed as an admission by the Access Person that he or she is a Beneficial Owner of any Security on the report. A. Initial and Annual Reports of Securities Holdings ("Securities Holdings and Accounts Reports") All Access Persons must, upon commencement of employment, disclose all holdings in Reportable Securities (as defined in Section II) and personal brokerage, mutual fund or bank accounts through which Securities are held or traded and over which the Access Person has direct or indirect control or influence (including those of immediate family members living in the same household as the Access Person). All Initial Holdings and Accounts Reports (Exhibit C) shall be made in writing to the CCO within ten (10) days of becoming an Access Person and such information shall be current as of a date no more than forty-five (45) days prior to such person becoming an Access Person. Thereafter, Access Persons must submit Annual Holdings and Accounts Reports (Exhibit C) to the CCO no later than February 14th of each year and the information in these reports must be current as of December 31st of the previous calendar year. Annual Holdings and Accounts Reports must be filed even if there have been no changes in the information reported previously and even if the Access Person has arranged for brokers, banks and mutual funds to send duplicate account statements for his/her personal accounts to the CCO. Access Persons must disclose all Reportable Securities holdings in the Initial and Annual Holdings and Accounts Reports including those resulting from transactions which are exempt from the transaction reporting requirements. The only holdings which are not required to be reported are Reportable Securities held in accounts over which the Access Person does not have any direct or indirect influence or control (e.g., blind trusts). The Initial and Annual Holdings and Accounts Reports must include: (a) title, type of Reportable Security and as applicable the exchange ticker symbol or CUSIP number, number of shares and principal amount of each Reportable Security of which the Access Person is a direct or indirect Beneficial Owner; (b) the name of any broker, dealer, mutual fund company or bank with which the Access Person maintains an account used to hold or trade Securities, the account number, the title of the account and the names of all individuals who are Beneficial Owners of the account in which any Security is held for the Access Person's direct or indirect benefit; and (c) the date that the report is submitted by the Access Person. The CCO shall retain copies of Initial and Annual Holdings and Accounts Reports in accordance with Section XIII of this Code. B. Quarterly Reports of Securities Transactions ("Quarterly Transaction and Accounts Reports") Each Access Person must submit a Quarterly Transaction and Accounts Report (Exhibit D) to the CCO containing the information described below with respect to transactions in any Reportable Securities (as defined in Section II) and any Securities account in which such Access Person was a direct or indirect Beneficial Owner of a Reportable Security. Access Persons are not required to report Exempt Transactions, as defined below. Access Persons are not required to report trades in accounts over which they do not have influence or control over investment decisions (e.g., a blind trust). Quarterly Transaction and Accounts Reports must be submitted in writing to the CCO no later than thirty (30) days after the end of the calendar quarter in which the transaction(s) were effected. The CCO shall retain the reports in accordance with Section XIII of this Code. Quarterly Transaction and Accounts Reports must include the following information for each transaction in a Reportable Security: (a) the date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date (if applicable), and number of shares, and the principal amount of each Reportable Security involved; (b) the nature of the transaction (e.g., purchase, sale, or any other type of acquisition or disposition); (c) the price at which the transaction was effected; (d) the name of the broker, dealer, mutual fund company or bank with or through which the transaction was effected; and (e) the date that the report is submitted by the Access Person. If during the calendar quarter, the Access Person established a new brokerage, mutual fund or bank account where Securities are held, the Quarterly Transaction and Accounts Report must include the following information: (a) the name of the broker, dealer, mutual fund company or bank with whom the Access Person established the account; (b) the date the account was established; and (c) the date that the report is submitted by the Access Person. The following transactions are "Exempt Transactions" for the purpose of the Quarterly Transaction and Accounts Report requirements (but still must be reported on Initial and Annual Holdings and Accounts Reports): o transactions reported in duplicate broker monthly account statements or trade confirmations received by the Aquila Entities, if all of the above required information is included and confirmations or account statements are received by the CCO within thirty (30) days of the close of the calendar quarter; and o purchases of Reportable Securities pursuant to an automatic investment plan (i.e., a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation, including dividend reinvestment plans).(6) Trading in Reportable Securities in an account over which a person does not have direct or indirect control or influence (e.g., a blind trust) are also Exempt Transactions and need not be reported on Quarterly Transaction and Accounts Reports, nor on Initial and Annual Holdings and Accounts Reports. X. GIFTS AND GRATUITIES No Supervised Person may seek or accept from, or offer to give or give to, any person that does business with any Aquila Entity or Aquila Fund any item of material value or preferential treatment that is or appears to be connected with an Aquila Entity or Aquila Fund or other advisory client directing business to that person or receiving business from that person. For purposes of this prohibition, "items of material value" include but are not limited to: (a) gifts amounting in value to more than $100 per person per year; and (b) payment or reimbursement of travel expenses, including overnight lodging, in excess of $100 per person per year. "Items of material value" do not include: (a) an occasional meal, a ticket to a sporting event or the theater or comparable entertainment, which is not conditioned on directing business to the firm that provided such meal or entertainment and is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achieving a sales target; or (b) an unconditional gift of a typical item of reminder advertising such as a ball-point pen with the name of the advertiser inscribed, a calendar pad, or other gifts amounting in value to not more than $100 per person per year. Any invitations involving travel for more than one day where travel expenses will be paid or reimbursed by a person that does business with an Aquila Entity or any Aquila Fund or other advisory client must have advance approval from the CCO, or the President in the CCO's absence. The President must approve the CCO's invitations involving travel for more than one day. The CCO shall maintain a record of all such requests for travel and the reason for granting or denying all such requests in accordance with this Code. XI. ADVISING NON-AQUILA ENTITIES Supervised Persons may not render investment advice to persons other than the Aquila Entities, Aquila Funds or other advisory clients of the Aquila Entities unless the advisory relationship, including the identity of those involved and any fee arrangements, has been disclosed to and approved by the President. Once cleared with the President, all transactions for such outside advisory clients are subject to the reporting requirements outlined above. This prohibition precludes Supervised Persons from providing investment advice to members of such person's immediate family without the prior approval of the President. XII. SUPERVISED PERSONS SERVING AS DIRECTORS OF PUBLICLY-TRADED COMPANIES A Supervised Person who serves as a director or trustee of a publicly-traded company in which any of the Aquila Funds or other advisory client invests or may invest may have an inherent conflict between the fiduciary duty he or she owes to the Funds or other advisory clients and that owed to the shareholders of the publicly-traded company. In addition, service on the board of directors or board of trustees of any company other than an Aquila Fund or Aquila Entity ("External Company") may present conflicts between the duties owed by the Supervised Person to that company and to the Aquila Funds or other advisory clients. To avoid the potential adverse consequences of such conflicts of interest or to ensure they are appropriately dealt with, effective February 1, 2005, all Supervised Persons must receive the prior written approval of the CCO and the President before serving as director or trustee of any External Company, which approval may be withheld in the President's sole discretion. If you are a Supervised Person and currently serve as a director or trustee of an External Company, you should notify the CCO immediately. Prior to commencement of employment with any Aquila Entity and annually thereafter, each Supervised Person shall provide the CCO with a written list of all positions held by the Supervised Person with any External Company. Supervised Persons who receive permission to serve as directors of publicly-traded External Companies will be isolated through "Fire Walls" or other procedures from making decisions regarding the Securities of those companies for which they serve as directors or trustees. An especially sensitive situation involves representation on a creditors' committee. Particular care will be taken to create a "Fire Wall" between portfolio management and creditors' committee representation. XIII. RECORD KEEPING The CCO shall maintain the following records in the manner and for the time periods described under the Investment Company Act of 1940 and the Investment Advisers Act of 1940: (a) a copy of this Code of Ethics and any other Code of Ethics which is, or at any time within the past six (6) years has been in effect and all amendments to such Code(s); (b) a copy of each signed and dated Certification acknowledging receipt of the Code and any amendments or updates to the Code for a period of at least six (6) years after the individual acknowledging receipt is no longer affiliated with the Aquila Entities; (c) records of any violations of this Code and any actions taken as a result of such violations for a period of six (6) years after the resolution of such violation; (d) each report, record or finding made under this Code, including any information provided in lieu of these reports (e.g., duplicate account statements) for a period of six (6) years after the date of the report, record or finding; (e) each Personal Trading Request Form (Exhibit B) submitted by a Supervised Person and a record of the decision regarding such request for a period of six (6) years after the date of the request (and for shares of an Initial Public Offering or Limited Offering, the reasoning for the decision); (f) each request for a waiver from any of the restrictions on Personal Trading by Advisory Persons (including requests that a Advisory Person not be deemed the Beneficial Owner of Securities held by another household member), including a description of the reason for the request and a brief summary of the reasons for granting or denying the waiver for a period of six (6) years after the last date on which the waiver was applied; (g) a list of all individuals who currently are or within the past six (6) years have been deemed Advisory Persons and Access Persons, as well as records of any decision by the CCO to exempt a person from the definition of "Access Person" and supporting documentation for and facts surrounding such a decision; (h) a list of all individuals who currently are, or within the past six (6) years have been, required to make Quarterly Transaction and Accounts Reports or Initial and Annual Securities Holdings and Accounts Reports pursuant to this Code; (i) a list of all persons who currently are or within the past six (6) years have been responsible for reviewing reports submitted pursuant to the Code; (j) a copy of all Quarterly Transaction and Accounts Reports or Securities Holdings and Accounts Reports submitted to the CCO for a period of six (6) years from the date of the report; and (k) a record of all requests for travel pursuant to Section X of this Code and the reason for granting or denying all such requests for a period of six (6) years from the date of the request. XIV. REPORTING VIOLATIONS OF THIS CODE AND PENALTIES All Supervised Persons shall promptly report any actual or suspected violations of this Code to the CCO. In the absence of the CCO, violations may be reported to the President but also must be separately reported to the CCO promptly following his or her return to the office. The identity of the person making such a report will be kept in confidence whenever possible. Supervised Persons who report actual or suspected violations will be protected from retaliation for making such reports. Violations of this Code may result in the imposition of criminal penalties or sanctions by the SEC, or other law enforcement or regulatory authorities, or remedial action by the Aquila Entities, including forfeiture of any profit from or loss avoided by a transaction, forfeiture of future discretionary salary increases or bonuses, and suspension or termination of employment. Determinations as to whether a violation has occurred, and the appropriate sanctions, if any, shall be made by the CCO and may be subject to review by the President, as appropriate; provided however, that no person believed to have violated this Code shall participate in such determinations made with respect to his or her own conduct. - -------------------- (1) An individual who owns a significant portion (i.e., more than 25%) of a Fund's outstanding shares would be a Control Person of the Fund. In addition, an owner of a Fund's shares would be a "beneficial owner" of a Fund's portfolio securities who is a controlling shareholder of a Fund or has or shares investment control over a Fund's portfolio. Without the above exclusion, in such cases the Fund's own portfolio transactions, accounts and holdings technically could be subject to the account, transaction or holdings reporting, pre-clearance and other requirements in this Code. This result would serve no protective purpose for the Fund and its shareholders, but could prevent the Fund from engaging in beneficial transactions on a timely basis and would otherwise have inappropriate and burdensome effects. (2) "High quality short-term debt instrument" means any instrument having a maturity at issuance of less than 366 days and which is rated in one of the highest two rating categories by a Nationally Recognized Statistical Rating Organization, or which is unrated but is of comparable quality. (3) An individual who owns a significant portion (i.e., more than 25%) of an Aquila Fund's outstanding shares would be a Control Person of the Fund. In addition, an owner of a Fund's shares would be a "beneficial owner" of a Fund's portfolio securities who is a controlling shareholder of a Fund or has or shares investment control over the Fund's portfolio. Without the above exclusion, in such cases the Fund's own portfolio transactions, accounts and holdings technically could be subject to the account, transaction or holdings reporting, pre-clearance and other requirements in this Code. This result would serve no protective purpose for the Fund and its shareholders, but could prevent the Fund from engaging in beneficial transactions on a timely basis and would otherwise have inappropriate and burdensome effects. (4) Any transaction that overrides the pre-set schedule or allocations of the automatic investment plan is not exempt. (5) See footnote 4 above. (6) Any transaction, however, that overrides the pre-set schedule or allocations of the automatic investment plan must be included in a Quarterly Transaction Report. -----END PRIVACY-ENHANCED MESSAGE-----