AQUILA CASCADIA EQUITY FUND
380 Madison Avenue
Suite 2300
New York, New York 10017
(888)-3-CASCADIA (888) 322-7223
212-697-6666
STATEMENT OF ADDITIONAL INFORMATION
July 23, 1996
As supplemented August 12, 1996
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. The Additional Statement should
be read in conjunction with the Prospectus (the "Prospectus")
dated July 23, 1996 of Aquila Cascadia Equity Fund (the "Fund"),
which may be obtained from the Fund's Shareholder Servicing
Agent, Administrative Data Management Corp. by writing to it at:
581 Main Street, Woodbridge, NJ 07095-1198 or by calling it at
the following numbers:
888-322-7224 toll free or 908-855-5731
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New
York 10017; or by calling:
(888)-3-CASCADIA (888) 322-7223
or 212-697-6666
TABLE OF CONTENTS
Investment of the Fund's Assets . . . . . . . . . . . . . . . .2
Performance . . . . . . . . . . . . . . . . . . . . . . . . . .7
Investment Restrictions . . . . . . . . . . . . . . . . . . . .8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . .9
Shareholder Services Plan. . . . . . . . . . . . . . . . . . . 15
Limitation of Redemptions in Kind . . . . . . . . . . . . . . 17
Trustees and Officers . . . . . . . . . . . . . . . . . . . . 17
Additional Information as to Management Arrangements . . . . . 22
Computation of Net Asset Value . . . . . . . . . . . . . . . . 26
Automatic Withdrawal Plan . . . . . . . . . . . . . . . . . . 28
Additional Tax Information . . . . . . . . . . . . . . . . . . 28
Conversion of Class C Shares . . . . . . . . . . . . . . . . . 28
General Information . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . . . . . . . . 31
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . 36
INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters
described below.
Additional Information regarding Options Transactions, Risks
Associated with such Transactions and Tax Consequences.
Writing Covered Call Options
The Fund may write (sell) "covered" call options and
purchase options to close out options previously written by the
Fund to generate additional income from option premiums. This
premium income will serve to enhance the Fund's total return and
will reduce the effect of any price decline of the security
involved in the option. Covered call options will generally be
written on securities which, in the opinion of the Adviser are
not expected to make any major price moves in the near future but
which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the "right to
purchase" a security at a specified price (the exercise price) at
any time prior to a certain date (the expiration date). So long
as the obligation of the writer of a call option continues, he
may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the
underlying security against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or
such earlier time at which the writer effects a closing purchase
transaction by repurchasing the option which he previously sold.
To secure his obligation to deliver the underlying security in
the case of a call option, a writer is required to deposit in
escrow the underlying security or other assets in accordance with
the rules of the Options Clearing Corporation (OCC) and of the
Exchanges. The Fund will write only covered call options. This
means that the Fund will only write a call option on a security
which the Fund already owns. The Fund will not write call options
on when-issued securities. In order to comply with the
requirements of the securities laws in several states, the Fund
will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities covering call
options exceeds 20% of the market value of the Fund's assets.
Portfolio securities on which call options may be written
will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objectives.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, the Fund, in return for the
premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but
conversely retains the risk of loss should the price of the
security decline. Unlike one who owns securities not subject to
an option, the Fund has no control over when it may be required
to sell the underlying securities, since it may be assigned an
exercise notice at any time prior to the expiration date of its
obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the
market value of the underlying security during the option period.
If the call option is exercised, the Fund will realize a gain or
a loss from the sale of the underlying security. The security
covering the call will be maintained in a segregated account of
the Fund's custodian. The Fund does not consider a security
covered by a call to be "pledged" as that term is used in the
Fund's policy which limits the pledging or mortgaging of its
assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to
such market price, the historical price volatility of the
underlying security, and the length of the option period. In
determining whether a particular call option should be written on
a particular security, the Adviser will consider the
reasonableness of the anticipated premium and the likelihood that
a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options
will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the net asset
value per share of the Fund is computed (close of the New York
Stock Exchange), or, in the absence of such sale, the latest
asked price. The option will be terminated upon expiration of the
option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security upon the
exercise of the option.
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security from being called, or, to permit the sale of the
underlying security. Furthermore, effecting a closing transaction
will permit the Fund to write another call option on the
underlying security with either a different exercise price or
expiration date or both. If the Fund desires to sell a particular
security from its portfolio on which it has written a call
option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of
the security. There is, no assurance that the Fund will be able
to effect such closing transactions at a favorable price. If the
Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case
it would continue to be at market risk on the security. This
could result in higher transaction costs, including brokerage
commissions. The Fund will pay brokerage commissions in
connection with the writing of options to close out previously
written options. Such brokerage commissions are normally higher
than those applicable to purchases and sales of portfolio
securities.
If the writer of an option wishes to terminate the
obligation, he or she may effect a "closing purchase
transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the
clearing corporation. However, a writer may not effect a closing
purchase transaction after he or she has been notified of the
exercise of an option. Similarly, an investor who is the holder
of an option may liquidate his or her position by effecting a
"closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing
sale transaction can be effected. To secure the obligation to
deliver the underlying security in the case of a call option, the
writer of the option (whether an exchange-traded option or a
NASDAQ option) is required to pledge for the benefit of the
broker the underlying security or other assets in accordance with
rules of the OCC, which is an institution created to interpose
itself between buyers and sellers of options. Technically, the
OCC assumes the other side of every purchase and sale transaction
on an exchange and, by doing so, guarantees the transaction.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
From time to time, the Fund may purchase an underlying security
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security from
its portfolio. In such cases additional brokerage commissions
will be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
Federal Income Tax Treatment of Covered Call Options
Expiration of an option or entry into a closing purchase
transaction will result in a capital gain. If the option is "in-
the-money" (i.e., the option strike price is less than the market
value of the security covering the option) at the time it was
written, any gain or loss realized as a result of the closing
purchase transaction will be long-term capital gain or loss, if
the security covering the option was held for more than 12 months
prior to the writing of the option. The holding period of the
securities covering an "in-the-money" option will not include the
period of time the option is outstanding. If the option is
exercised, the Fund will realize a gain or loss from the sale of
the security covering the call option, and in determining such
gain or loss the premium will be included in the proceeds of the
sale.
If the Fund writes options other than "qualified covered
call options," as defined in the Internal Revenue Code, any
losses on such options transactions, to the extent they do not
exceed the unrealized gains on the securities covering the
options, may be subject to deferral until the securities covering
the options have been sold. In addition, any options written
against securities other than stocks will be considered to have
been closed out at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time.
Such gains or losses would be characterized as 60% long-term
capital gain or loss and 40% short-term capital gain or loss.
Purchasing Put Options
The Fund may purchase put options on an underlying security
owned by the Fund. As the holder of a put option, the Fund has
the right to sell the underlying security at the exercise price
at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise
them or permit them to expire. The Fund may purchase put options
for defensive purposes in order to protect against an anticipated
decline in the value of its securities. The example of such use
of put options is provided below. The Fund will not purchase
options for leverage purposes.
The Fund may purchase a put option on an underlying security
(a "protective put") owned by the Fund as a defensive technique
in order to protect against an anticipated decline in the value
of its security. Such hedge protection is provided only during
the life of the put option when the Fund as the holder of the put
option is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying
security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a
security where the Adviser deems it desirable to continue to hold
the security because of tax considerations. The premium paid for
the put option and any transaction costs would reduce any capital
gain otherwise available for distribution when the security is
eventually sold.
The Fund will commit no more than 5% of its assets to
premiums when purchasing put options. The premium paid by the
Fund when purchasing a put option will be recorded as an asset of
the Fund. This asset will be adjusted daily to the option's
current market value, which will be the latest sale price at the
time at which the net asset value per share of the Fund is
computed (close of New York Stock Exchange), or, in the absence
of such sale, the latest bid price. The option will be terminated
upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the
underlying security upon the exercise of the option.
Writing Put Options
The Fund will not write put options except to close out
transactions as described above.
Purchasing Call Options
The Fund may purchase call options. As the holder of a call
option, the Fund has the right to purchase the underlying
security at the exercise price at any time during the option
period. The Fund may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire.
The Fund may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could
reduce its current return. The Fund may also purchase call
options in order to acquire the underlying securities. Examples
of such uses of call options are provided below. The Fund will
not purchase options for leverage purposes.
Call options may be purchased by the Fund for the purpose of
acquiring the underlying securities for its portfolio. Utilized
in this fashion, the purchase of call options enables the Fund to
fix its cost of acquiring the securities directly. This technique
may also be useful to the Fund in purchasing a large block of
stock that would be more difficult to acquire by direct market
purchases. So long as it holds such a call option rather than the
underlying security itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security and in such event could allow the call option to expire,
incurring a loss only to the extent of the premium paid for the
option.
The Fund will commit no more than 5% of its assets to
premiums when purchasing call options. The Fund may also purchase
call options on underlying securities it owns in order to protect
unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax
considerations make it inadvisable to realize such gains through
a closing purchase transaction. Call options may also be
purchased at times to avoid realizing losses that would result in
a reduction of the Fund's current return. For example, where the
Fund has written a call option on an underlying security having a
current market value below the price at which such security was
purchased by the Fund, an increase in the market price could
result in the exercise of the call option written by the Fund and
the realization of a loss on the underlying security with the
same exercise price and expiration date as the option previously
written.
Risks Associated with Options Transactions
Option transactions involve risks and transaction costs
which the Fund would not incur if it did not engage in option
transactions. If the Adviser's predictions of movements in the
direction of the securities markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position
than if such strategies were not used. Risks inherent in the use
of options include (i) dependence upon the Adviser's ability to
predict correctly movements in the direction of securities
prices; (ii) imperfect correlation between the price of options
and the movements in the prices of securities being hedged; (iii)
the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; (iv)
the possible absence of a liquid secondary market for any
particular instrument at any time; (v) the possible need to defer
closing out certain hedged position to avoid adverse consequences
and (vi) the possible inability of the Fund to purchase or sell
portfolio securities at a time when it would otherwise be
favorable to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, because of the
requirement for the Fund to maintain "cover" or to segregate
securities in connection with a hedging transaction.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage
computed by taking the lesser of purchases or sales of portfolio
securities for a year and dividing it by the monthly average
value of such securities during the year, excluding certain short
term securities. Since the turnover rate of the Fund will be
affected by a number of factors, the Fund is unable to predict
what rate the Fund will have in any particular period or periods,
although such rate is not expected to exceed 60%. The factors
which may affect the rate with respect to the balance of the
Fund's assets include (ii) the possible necessary sales of
portfolio securities to meet redemptions; and (iii) the
possibility of purchasing or selling portfolio securities without
regard to the length of time they have been held to attempt to
take advantage of market opportunities and to avoid market
declines. Short-term trading increases portfolio turnover and
transaction costs.
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate its past
performance.
Performance quotations by investment companies are subject
to rules of the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the SEC. Average
annual compounded total return quotations used by the Fund are
based on these standardized methods. Each of these and other
methods that may be used by the Fund are described in the
following material.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over a 1- year period
and a period since the inception of the operations of the Fund
that would equate an initial hypothetical $1,000 investment to
the value such an investment would have if it were completely
redeemed at the end of each such period. The calculation assumes
the maximum sales charge is deducted from the hypothetical
initial $1,000 purchase, that on each reinvestment date during
each such period any capital gains are reinvested at net asset
value, and all income dividends are reinvested at net asset
value, without sales charge (because the Fund does not impose any
sales charge on reinvestment of dividends). The computation
further assumes that the entire hypothetical account was
completely redeemed at the end of each such period.
Investors should note that the maximum sales charge (4.25%)
reflected in the following quotations is a one time charge, paid
at the time of initial investment. The greatest impact of this
charge is during the early stages of an investment in the Fund.
Actual performance will be affected less by this one time charge
the longer an investment remains in the Fund.
These figures will be calculated according to the following
SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1- and 5-year
periods or the period since inception, at the end of
each such period.
As discussed in the Prospectus, the Fund may quote total
rates of return in addition to its average annual total return.
Such quotations are computed in the same manner as the Fund's
average annual compounded rate, except that such quotations will
be based on the Fund's actual return for a specified period as
opposed to its average return over the periods described above.
In general, actual total rate of return will be lower than
average annual rate of return because the average annual rate of
return reflects the effect of compounding. See discussion of the
impact of the sales charge on quotations of rates of return,
above.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
INVESTMENT RESTRICTIONS
The Fund has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the
1940 Act) of the Fund's outstanding shares vote to change them.
Under that Act, the vote of the holders of a "majority" of the
Fund's outstanding shares means the vote of the holders of the
lesser of (a) 67% or more of the Fund's shares present at a
meeting or represented by proxy if the holders of more than 50%
of its shares are so present or represented; or (b) more than 50%
of the Fund's outstanding shares. Those fundamental policies not
set forth in the Prospectus are set forth below.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than those
discussed under "Investment of the Fund's Assets" in the
Prospectus; therefore the Fund cannot buy any commodities or
commodity contracts, any mineral related programs or leases, or
combinations thereof.
The Fund cannot purchase or hold the securities of any
issuer if, to its knowledge, Trustees, Directors or officers of
the Fund or its Adviser individually owning beneficially more
than 0.5% of the securities of that issuer together own in the
aggregate more than 5% of such securities.
The Fund cannot buy real estate or any non-liquid interests
in real estate investment trusts; however, it can buy any
securities which it can otherwise buy even though the issuer
invests in real estate or has interests in real estate.
2. The Fund does not buy for control.
The Fund cannot invest for the purpose of exercising control
or management of other companies.
3. The Fund does not sell securities it does not own or borrow
from brokers to buy securities.
Thus, it cannot sell short or buy on margin; however, the
Fund can make margin deposits in connection with the purchase or
sale of options and can pay premiums on these options.
4. The Fund is not an underwriter.
The Fund cannot engage in the underwriting of securities,
that is, the selling of securities for others. Also, it cannot
invest in restricted securities. Restricted securities are
securities which cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Fund's Distribution Plan has three parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II) and to certain defensive provisions (Part III).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser
or the Distributor. The Distributor will consider shares which
are not Qualified Holdings of such unrelated broker-dealers to be
Qualified Holdings of the Distributor and will authorize
Permitted Payments to the Distributor with respect to such shares
whenever Permitted Payments are being made under the Plan.
Part I of the Plan applies only to the Front Payment Shares
Class ("Class A Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part I of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part I ("Class A Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Front Payment 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 Board of
Trustees of the Fund, the Fund may make payments ("Class A
Permitted Payments") to Qualified Recipients, which Class A
Permitted Payments may be made directly, or through the
Distributor or shareholder servicing agent as disbursing agent,
which may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year), 0.15 of 1% of the average
annual net assets of the Fund represented by the Front Payment
Class Shares. Such payments shall be made only out of the Fund's
assets allocable to the Front Payment Shares. The Distributor
shall have sole authority (i) as to the selection of any
Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class A Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class A Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Front Payment Class Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and
history, and the manner in which purchases and redemptions of
shares of the Fund may be effected; assisting shareholders in
designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part I is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class A Permitted
Payments made under Section 9 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part I originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part I of the Plan; and (ii) by a vote of holders of at
least a "majority" (as so defined) of the outstanding voting
securities of the Front Payment Class Shares (or of any
predecessor class or category of shares, whether or not
designated as a class) and a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities
of the Level Payment Class and/or of any other class whose shares
are convertible into Front Payment Shares. Part I has continued,
and will, unless terminated as hereinafter provided, continue in
effect, until the June 30 next succeeding such effectiveness, and
from year to year thereafter only so long as such continuance is
specifically approved at least annually by the Fund's Trustees
and its Independent Trustees with votes cast in person at a
meeting called for the purpose of voting on such continuance.
Part I may be terminated at any time by the vote of a majority of
the Independent Trustees or by the vote of the holders of a
"majority" (as defined in the 1940 Act) of the outstanding voting
securities of the Fund to which Part I applies. Part I may not
be amended to increase materially the amount of payments to be
made without shareholder approval of the class or classes of
shares affected by Part I as set forth in (ii) above, and all
amendments must be approved in the manner set forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class A Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class A Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to 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 Class
Shares ("Class C Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part II ("Class C Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Level Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.
Subject to the direction and control of the Board of
Trustees of the Fund, the Fund may make payments ("Class C
Permitted Payments") to Qualified Recipients, which Class C
Permitted Payments may be made directly, or through the
Distributor or shareholder servicing agent as disbursing agent,
which may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year), 0.75 of 1% of the average
annual net assets of the Fund represented by the Level Payment
Class Shares. Such payments shall be made only out of the Fund's
assets allocable to the Level Payment Shares. The Distributor
shall have sole authority (i) as to the selection of any
Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class C Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class C Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Level Payment Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Fund
may be effected; assisting shareholders in designating and
changing dividend options, account designations and addresses;
providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in
processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares;
verifying and guaranteeing shareholder signatures in connection
with redemption orders and transfers and changes in shareholder
designated accounts; furnishing (either alone or together with
other reports sent to a shareholder by such person) monthly and
year-end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part II is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part II originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part II of the Plan; and (ii) by a vote of holders of
at least a "majority" (as so defined) of the outstanding voting
securities of the Level Payment Class Shares. Part II has
continued, and will, unless terminated as hereinafter provided,
continue in effect, until the April 30 next succeeding such
effectiveness, and from year to year thereafter only so long as
such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part II may be terminated at any time by the vote
of a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part II
applies. Part II may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part II as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class C Plan Agreements with them shall be their
agreements with the Distributor with respect to payments under
Part II.
Defensive Provisions (Part III)
Another part of the Plan (Part III) states that if and to
the extent that any of the payments listed below are considered
to be "primarily intended to result in the sale of" shares issued
by the Fund within the meaning of Rule 12b-1, such payments are
authorized under the Plan: (i) the costs of the preparation of
all reports and notices to shareholders and the costs of printing
and mailing such reports and notices to existing shareholders,
irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares
of the Fund or other funds or other investments; (ii) the costs
of the preparation and setting in type of all prospectuses and
statements of additional information and the costs of printing
and mailing all prospectuses and statements of additional
information to existing shareholders; (iii) the costs of
preparation, printing and mailing of any proxy statements and
proxies, irrespective of whether any such proxy statement
includes any item relating to, or directed toward, the sale of
the Fund's shares; (iv) all legal and accounting fees relating to
the preparation of any such reports, prospectuses, statements of
additional information, proxies and proxy statements; (v) all
fees and expenses relating to the registration or qualification
of the Fund and/or its shares under the securities or "Blue-Sky"
laws of any jurisdiction; (vi) all fees under the Securities Act
of 1933 and the 1940 Act, including fees in connection with any
application for exemption relating to or directed toward the sale
of the Fund's shares; (vii) all fees and assessments of the
Investment Company Institute or any successor organization,
irrespective of whether some of its activities are designed to
provide sales assistance; (viii) all costs of the preparation and
mailing of confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all costs
of responding to telephone or mail inquiries of investors or
prospective investors.
The Plan states that while it is in effect, the selection
and nomination of those Trustees of the Fund who are not
"interested persons" of the Fund shall be committed to the
discretion of such disinterested Trustees but that nothing in the
Plan shall prevent the involvement of others in such selection
and nomination if the final decision on any such selection and
nomination is approved by a majority of such disinterested
Trustees.
The Plan states that while it is in effect, the Fund's
Administrator and Distributor shall report at least quarterly to
the Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this
Plan, the identity of the Qualified Recipient of each Payment,
and the purposes for which the amounts were expended; (ii) all
costs of each item of cost specified in the Plan (making
estimates of such costs where necessary or desirable) during the
preceding calendar or fiscal quarter; and (iii) all fees of the
Fund to the distributor, sub-adviser or administrator paid or
accrued during such quarter. In addition if any such Qualified
Recipient is an affiliate, as that term is defined in the Act, of
the Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund as defined
in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements
related to the Plan. The Plan, unless terminated as hereinafter
provided, continues in effect from year to year only so long as
such continuance is specifically approved at least annually by
the Fund's Board of Trustees and its Independent Trustees with
votes cast in person at a meeting called for the purpose of
voting on such continuance. In voting on the implementation or
continuance of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Plan may be terminated at any time by vote of a
majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund. The Plan may not be
amended to increase materially the amount of payments to be made
without shareholder approval and all amendments must be approved
in the manner set forth above as to continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act
as now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by
Rule 18f-3, with respect to each outstanding class of shares of
the Fund.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares of the Fund of "Service Fees" within the meaning of
Article III, Section 26(b)(9) of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. The
Services Plan applies only to the Class C Shares of shares of the
Fund (regardless of whether such class is so designated or is
redesignated by some other name).
As used in the Services Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to the
Distributor and any other principal underwriter of the Fund, who
have, pursuant to written agreements with the Fund or the
Distributor, agreed to provide personal services to shareholders
of Level-Payment Class Shares and/or maintenance of Level-Payment
Class Shares shareholder accounts. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Level-Payment Class
Shares beneficially owned by such Qualified Recipient's
customers, clients or other contacts. "Administrator" shall mean
Aquila Management Corporation or any successor serving as sub-
adviser or administrator of the Fund.
Subject to the direction and control of the Board of
Trustees of the Fund, the Fund may make payments ("Service Fees")
to Qualified Recipients, which Service Fees (i) may be paid
directly or through the Distributor or shareholder servicing
agent as disbursing agent and (ii) may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Services Plan are not
accruable or for any fiscal year which is not a full fiscal year)
0.25, of 1% of the average annual net assets of the Fund
represented by the Level-Payment Class of shares. Such payments
shall be made only out of the Fund's assets allocable to the
Level-Payment Shares. The Distributor shall have sole authority
with respect to the selection of any Qualified Recipient or
Recipients and the amount of Service Fees, if any, paid to each
Qualified Recipient, provided that the total Service Fees paid to
all Qualified Recipients may not exceed the amount set forth
above and provided, further, that no Qualified Recipient may
receive more than 0.25 of 1% of the average annual net asset
value of shares sold by such Recipient. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient
and (b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Level Payment Class Shares, including
without limitation, any or all of the following activities:
answering customer inquiries regarding account status and
history, and the manner in which purchases and redemptions of
shares of the Fund may be effected; assisting shareholders in
designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from
time to time. Notwithstanding the foregoing two sentences, a
majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the
above limits accrued to a Qualified Recipient but not paid during
a fiscal year may be paid thereafter; if less than the full
amount is accrued to all Qualified Recipients, the difference
will not be carried over to subsequent years.
While the Services Plan is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in writing
for their review on the following matters: (i) all Service Fees
paid under the Services Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor
paid or accrued during such quarter. In addition, if any
Qualified Recipient is an "affiliated person," as that term is
defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), of the Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
The Services Plan has been approved by a vote of the
Trustees, including those Trustees who, at the time of such vote,
were not "interested persons" (as defined in the 1940 Act) of the
Fund and had no direct or indirect financial interest in the
operation of the Service Plan or in any agreements related to the
Service Plan (the "Independent Trustees"), with votes cast in
person at a meeting called for the purpose of voting on the
Service Plan. It is effective as of the date first above written
and will continue in effect for a period of more than one year
from such 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 Act as now in force
or hereafter amended.
While the Service Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others
in such selection and nomination if the final decision on any
such selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the
1940 Act, pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1 percent
of the net asset value of the Fund during any 90-day period for
any one shareholder. Should redemptions by any shareholder exceed
such limitation, the Fund will have the option of redeeming the
excess in cash or in kind. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting
the assets into cash. The method of valuing securities used to
make redemptions in kind will be the same as the method of
valuing portfolio securities described under "Net Asset Value Per
Share" in the Prospectus, and such valuation will be made as of
the same time the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their affiliations,
if any, with the Administrator or the Distributor, and their
principal occupations during at least the past five years are set
forth below. None of the Trustees or officers of the Trust is
affiliated with the Adviser, except as indicated.
Mr. Herrmann is an "interested person" of the Trust as that
term is defined in the Investment Company Act of 1940 (the "1940
Act") as an officer of the Trust and a Director, officer and
shareholder of the Distributor. Ms. Herrmann is an interested
person as a member of his immediate family.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, 380 Madison Avenue, New York, New York 10017
Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Prime Cash Fund, 1982-1996;
Pacific Capital Cash Assets Trust since 1984; Short Term Asset
Reserves since 1984-1996; Churchill Cash Reserves Trust since
1985; Pacific Capital U.S. Treasuries Cash Assets Trust since
1988; Pacific Capital Tax-Free Cash Assets Trust since 1988; each
of which is a money market fund, and together with Capital Cash
Management Trust ("CCMT") are called the Aquila Money-Market
Funds; Hawaiian Tax-Free Trust since 1984; Tax-Free Trust of
Arizona since 1986; Tax-Free Trust of Oregon since 1986; Tax-Free
Fund of Colorado since 1987; Churchill Tax-Free Fund of Kentucky
since 1987; Tax-Free Fund For Utah since 1992; and Narragansett
Insured Tax-Free Income Fund since 1992; each of which is a tax-
free municipal bond fund, and two equity funds, the Fund and
Aquila Rocky Mountain Equity Fund since 1993, which, together
with this Fund are called the Aquila Bond and Equity Funds; Vice
President, Director, Secretary and formerly Treasurer of Aquila
Distributors, Inc. since 1981, distributor of the above funds;
President and Chairman of the Board of Trustees of CCMT, a money
market fund since 1981, and an Officer and Trustee/Director of
its predecessors since 1974; President and a Director of STCM
Management Company, Inc., sponsor and sub-adviser to CCMT;
Chairman, President, and a Director since 1984, of InCap
Management Corporation, formerly sub-adviser and administrator of
Prime Cash Fund and Short Term Asset Reserves, and Founder and
Chairman of several other money market funds; Director or Trustee
of OCC Cash Reserves, Inc., Oppenheimer Quest Global Value Fund,
Inc., Oppenheimer Quest Value Fund, Inc., and Trustee of Quest
For Value Accumulation Trust, The Saratoga Advantage Trust, and
of the Rochester Group of Funds, each of which is an open-end
investment company; Trustee of Brown University, 1990-1996 and
currently Trustee Emeritus; actively involved for many years in
leadership roles with university, school and charitable
organizations.
Vernon R. Alden, Trustee, 420 Boylston Street, Suite 403, Boston,
Massachusetts 02116
Director of Colgate Palmolive Company since 1974, Digital
Equipment Corporation, a computer manufacturing corporation,
since 1959, Intermet Corporation, an independent foundry, since
1986, and Sonesta International Hotels Corporation since 1978;
Chairman of the Board and Executive Committee of The Boston
Company, Inc., a financial services company, 1969-1978; Trustee
of Tax-Free Trust of Oregon since 1988, of Pacific Capital Cash
Assets Trust, Pacific Capital Tax-Free Cash Assets Trust and
Pacific Capital U.S. Treasuries Cash Assets Trust since 1989, of
Cascades Cash Fund, 1989-1994 and of Narragansett Insured Tax-
Free Income Fund since 1992; Associate Dean and member of the
faculty of Harvard University Graduate School of Business
Administration, 1951-1962; member of the faculty and Program
Director of Harvard Business School - University of Hawaii
Advanced Management Program, summer of 1959 and 1960; President
of Ohio University, 1962-1969; Chairman of The Japan Society of
Boston, Inc., and member of several Japan-related advisory
councils; Chairman of the Massachusetts Business Development
Council and the Massachusetts Foreign Business Council, 1978-
1983; Trustee of the Boston Symphony Orchestra since 1975;
Chairman of the Massachusetts Council on the Arts and Humanities,
1972-1984; Member of the Board of Fellows of Brown University,
1969-1986; Trustee and member of the Executive Committee, Plimoth
Plantation; trustee of various other cultural and educational
organizations; Honorary Consul General of the Royal Kingdom of
Thailand.
Warren C. Coloney, Trustee, 7304 Millwood Road, Bethesda,
Maryland 20817
Consultant to top management and governing boards on issues of
corporate governance, strategy, organization and human resource
management; Director of the Washington, D.C. office of Management
Practice, Inc., since 1992; President of Coloney & Company, Inc.,
since 1984; Managing Director-Europe of Towers, Perrin, Forster &
Crosby, Inc., 1974-1984; President of Coloney, Cannon, Main &
Pursell, Inc., 1968-1974; Registered Professional Engineer;
Founding Member of the Institute of Management Consultants;
Trustee of Tax-Free Trust of Oregon since 1986 and of Cascades
Cash Fund, 1989-1994; active in a number of professional, social,
church, and community service organizations in England and the
United States.
James A. Gardner, Trustee, Vandervert Ranch, Vandervert Road,
Bend, Oregon 97707
President of Gardner Associates, an investment and real estate
firm, since 1970; President Emeritus of Lewis and Clark College
and Law School since 1989 and President, 1981-1989; affiliated
with the Ford Foundation, 1969-1981; Lecturer and Assistant
Director of Admissions of Harvard College, 1968-1969; Member of
the Oregon Young Presidents Organization since 1983; Director of
Stanley Investment & Management Inc., an international business
brokerage, since 1987; Member of the Council on Foreign Relations
since 1988; Trustee of Tax-Free Trust of Oregon since 1986 and of
Cascades Cash Fund, 1989-1994; Director of the Oregon High Desert
Museum since 1989; active in civic, business, educational and
church organizations in Oregon.
Diana P. Herrmann*, Trustee, 380 Madison Avenue, New York, New
York 10017
Senior Vice President and Secretary and formerly Vice President
of the Administrator since 1986 and Director since 1984; Trustee
of Tax-Free Trust of Arizona and Tax-Free Trust of Oregon since
1994 and of Churchill Tax-Free Fund of Kentucky and Churchill
Cash Reserves Trust since 1995; Vice President of InCap
Management Corporation since 1986 and Director since 1983; Senior
Vice President or Vice President and formerly Assistant Vice
President of the Money Funds since 1986; Vice-President of
Cascades Cash Fund 1989-1994, of Prime Cash Fund 1986-1996 and of
Short-Term Asset Reserves 1986-1996; Assistant Vice President of
Oxford Cash Management Fund, 1986-1988; Assistant Vice President
and formerly Loan Officer of European American Bank, 1981-1986;
daughter of the Fund's President; Trustee of the Leopold Schepp
Foundation (academic scholarships) since 1995; actively involved
in mutual fund and trade associations and in college and other
volunteer organizations.
Ann R. Leven, Trustee, 785 Park Avenue, Apartment 20A, New York,
NY 10021
Treasurer of the National Gallery of Art, Washington, D.C., since
1994, Deputy Treasurer, 1990-1994; Treasurer of the Smithsonian
Institution, Washington, D.C., 1984-1990; President of ARL
Associates, strategic consultants, since 1983; Vice
President/Senior Corporate Planning Officer of The Chase
Manhattan Bank, N.A., 1979-1983; Treasurer of The Metropolitan
Museum of Art, 1972-1979; Trustee of Short Term Asset Reserves,
1984-1993, of Tax-Free Trust of Oregon since 1986, of Churchill
Tax-Free Fund of Kentucky since 1987, of Cascades Cash Fund,
1989-1994, and of Churchill Cash Reserves Trust since 1995;
Trustee of Oxford Cash Management Fund, 1987-1988; Director of
the Delaware Group of mutual funds since 1989; Adjunct Professor
at Columbia University Graduate School of Business Administration
since 1975; Trustee of the American Red Cross Endowment Fund,
1985-1990; Member of the Visiting Committee of Harvard Business
School, 1979-1985; Member of the Board of Overseers of The Amos
Tuck School, Dartmouth College, 1978-1984; Staff Director of the
Presidential Task Force on the Arts and Humanities, 1981;
Director of Alliance Capital Reserves Fund, a money market fund,
1978-1979.
Raymond H. Lung, Trustee, 2828 Southwest Hamilton Street,
Portland, Oregon 97201
Retired; Trustee of Qualivest Group of Funds since 1994;
Executive Vice President and Executive Trust Officer of U.S.
National Bank of Oregon, 1989-1991; Senior Vice President and
Executive Trust Officer, 1980-1989; various other management
positions, 1954-1980; Member of Executive Committee, Trust
Division, American Bankers Association, 1986-1988; Director of
Pacific Securities Depository Trust Company and Pacific Clearing
Corporation (subsidiaries of the Pacific Stock Exchange), 1980-
1987; Director of Collins Pine Company and Ostrander Companies
(lumber and oil), 1980-1990; Trustee of Tax-Free Trust of Oregon
since 1992 and of Cascades Cash Fund, 1992-1994.
Richard C. Ross, Trustee, 510 SW Country Club Road, Lake Oswego,
Oregon 97034
President of Richard Ross Communications, a 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; Trustee of Tax-Free Trust of
Oregon since 1988 and of Cascades Cash Fund, 1989-1994; Director
of the Portland Rose Festival since 1972; Director of the Greater
Portland Convention & Visitors Association, 1982-1985; Director
of the Portland Chamber of Commerce, 1971-1980; President of the
Oregon chapter of the National Multiple Sclerosis Society, 1984-
1986; Director of the Meridian Park Hospital Foundation, 1984-
1987; Chairman of the Broadcasters Group of the Bar-Press-
Broadcasters professional relations committee, 1964-1984; Former
President of the Rotary Club of East Portland and currently a
Director of Goodwill Industries, Metropolitan Youth Symphony and
the Lake Oswego Community Theatre.
W. Dennis Cheroutes, Senior Vice President, 410 17th Street,
Suite 1715, Denver, Colorado 80202
Investment Executive, Dain Bosworth, Inc., 1986-1995; and branch
office mutual fund co-ordinator, 1990-1995; owner of special
order clothing business, 1976-1986.
Sally Wilson Church, Vice President, 4800 MaCadam Avenue, Suite
300, Portland, Oregon 97201
Vice President of Tax-Free Trust of Oregon since 1988 and of
Cascades Cash Fund, 1989-1994; Corporate Vice President of
Shearson Lehman Hutton and Senior Marketing Coordinator of its
Northwest Region, 1985-1989 and an employee in various capacities
at that firm, 1978-1985.
Nancy L. Kayani, Vice President, 4800 Macadam Avenue, Suite 300,
Portland, Oregon 97201
Vice President of Tax-Free Trust of Oregon since 1992 and
Assistant Vice President of Cascades Cash Fund, 1992-1994;
Customer Service Representative of U.S. National Bank of Oregon,
1990-1991; Securities Trader of Bidwell & Co., 1988-1989;
Securities Trader and Mutual Fund Regional Representative of
Fidelity Investments Southwest, 1985-1987; Stockbroker of Dean
Witter Reynolds, 1983-1984; Mutual Regional Representative of
Columbia Management Company, 1980-1983.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of
the Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New
York 10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc., 1986-
1988; Vice President of Lehman Management Co., Inc. and Assistant
Treasurer of Lehman Money Market Funds, 1981-1985; Controller of
Seligman Group of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust, 1982-
1985 and Trustee of that Trust, 1985-1986; Secretary of Oxford
Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Administrator since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the
Administrator and the Distributor since 1995; formerly a Legal
Associate for Oppenheimer Management Corporation, 1993-1995.
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
Additional Information as to the Sub-Advisory Agreement
The Investment Sub-Advisory Agreement (the "Sub-Advisory
Agreement") between the Fund and Ferguson, Wellman, Rudd, Purdy &
Van Winkle, Inc. (the "Sub-Adviser") contains the provisions
described below, in addition to those described in the
Prospectus.
The Sub-Advisory Agreement may be terminated by the Sub-
Adviser at any time without penalty upon giving the Fund sixty
days' written notice, and may be terminated by the Fund at any
time without penalty upon giving the Sub-Adviser sixty days'
written notice, provided that such termination by the Fund shall
be directed or approved by the vote of a majority of all its
Trustees in office at the time or by the vote of the holders of a
majority (as defined in the 1940 Act) of its voting securities at
the time outstanding and entitled to vote; it automatically
terminates in the event of its assignment (as so defined).
However, in the Sub-Advisory Agreement, the Sub-Adviser agrees
that it will not exercise its termination rights for at least two
years from the effective date of the Sub-Advisory Agreement,
except for regulatory reasons.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Sub-Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Sub-Adviser is not
liable for any loss sustained by the adoption of any investment
policy or the purchase, sale or retention of any security and
permits the Sub-Adviser to act as investment adviser for any
other person, firm or corporation. The Fund agrees to indemnify
the Sub-Adviser to the full extent permitted under the Fund's
Declaration of Trust.
The Sub-Advisory Agreement contains the following provisions
as to the Fund's portfolio transactions. In connection with its
duties to arrange for the purchase and sale of the Fund's
portfolio securities, the Sub-Adviser shall select such
broker-dealers ("dealers") as shall, in the Sub-Adviser's
judgment, implement the policy of the Fund to achieve "best
execution," i.e., the most favorable price and efficient
execution, and accordingly shall seek to execute each transaction
at a price and commission, if any, which provide the most
favorable total cost or proceeds reasonably attainable in the
circumstances. The Fund understands that purchases from
underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked
prices. In allocating transactions to dealers, the Sub-Adviser is
authorized to consider, in determining whether a particular
dealer will provide best execution, the dealer's reliability,
integrity, financial condition and risk in positioning the
securities involved, as well as the difficulty of the transaction
in question, and thus need not pay the lowest spread or
commission available if the Sub-Adviser determines in good faith
that the amount of commission is reasonable in relation to the
value of the brokerage and research services provided by the
dealer, viewed either in terms of the particular transaction or
the Sub-Adviser's overall responsibilities. If, on the foregoing
basis, the transaction in question could be allocated to two or
more dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund. Such research may be in
written form or through direct contact with individuals and may
include quotations on portfolio securities and information on
particular issuers and industries, as well as on market, economic
or institutional activities. The Fund recognizes that no dollar
value can be placed on such research services or on execution
services and that such research services may or may not be useful
to the Fund and may be used for the benefit of the Sub-Adviser or
its other clients.
The Sub-Advisory Agreement states that it is agreed that the
Sub-Adviser shall have no responsibility or liability for the
accuracy or completeness of the Fund's Registration Statement
under the Securities Act of 1933 and the 1940 Act, except for the
information supplied by the Sub-Adviser for inclusion therein.
Additional Information as to the Advisory and Administration
Agreement
The Advisory and Administration Agreement (the "Advisory
Agreement") between Aquila Management Corporation, as Adviser and
Administrator, and the Fund contains the provisions described
below in addition to those described in the Prospectus.
Subject to the control of the Fund's Board of Trustees, the
Adviser provides all administrative services to the Fund other
than those relating to its investment portfolio handled by the
Sub-Adviser under the Sub-Advisory Agreement; as part of such
duties, the Adviser (i) provides office space, personnel,
facilities and equipment for the performance of the following
functions and for the maintenance of the Fund's headquarters;
(ii) oversees all relationships between the Fund and its transfer
agent, custodian, legal counsel, auditors and principal
underwriter, including the negotiation, subject to the approval
of the Fund's Board of Trustees, 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 effective operation and for
the sale, servicing, or redemption of the Fund's shares; (iii)
either keeps the accounting records of the Fund, including the
computation of net asset value per share and the dividends
(provided that daily pricing of the Fund's portfolio is the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement) or, at its expense and responsibility, delegates such
duties in whole or in part to a company satisfactory to the Fund;
(iv) maintains the Fund's books and records and prepares (or
assists counsel and auditors in the preparation of) all required
proxy statements, reports to shareholders and Trustees, reports
to and other filings with the Securities and Exchange Commission
and any other governmental agencies, and tax returns, and
oversees the Fund's insurance relationships; (v) prepares, on the
Fund's behalf and at its expense, such applications and reports
as may be necessary to register or maintain the Fund's
registration or that of its shares under the securities or
"Blue-Sky" laws of all such jurisdictions as may be required from
time to time; and (vi) responds to any inquiries or other
communications from shareholders and broker-dealers, or if any
such inquiry or communication is more properly to be responded to
by the Fund's shareholder servicing and transfer agent or
distributor, oversees such shareholder servicing and transfer
agent's or distributor's response thereto. Since the Fund pays
its own legal and audit expenses, to the extent that the Fund's
counsel and accountants prepare or assist in the preparation of
prospectuses, proxy statements and reports to shareholders, the
costs of such preparation or assistance are paid by the Fund.
The Advisory and Administration Agreement further provides
with respect to advisory services that subject to the direction
and control of the Board of Trustees of the Fund, the Adviser
shall review with the Sub-Adviser the investment activities of
the Fund and in conjunction with the Sub-Adviser shall make such
periodic reports to the Board of Trustees of the Fund as may be
appropriate, and in addition, the Adviser shall provide such
advisory services to the Fund, in addition to those services
provided by the Sub-Adviser, as the Adviser deems appropriate; as
part of any such services, the Adviser shall at its discretion:
(i) provide the Sub-Adviser and the Fund with overall market
analysis; (ii) provide the Sub-Adviser and the Fund with material
relevant to the investment of the assets of the Fund in
securities of issuers in various states; (iii) provide the Sub-
Adviser and the Fund such other investment advice as it considers
necessary or appropriate; (iv) consult with the Sub-Adviser in
connection with the Sub-Adviser's duties under the Sub-Advisory
Agreement; and (v) otherwise assist the Sub-Adviser, and itself
directly act (in coordination with the Sub-Adviser and as may be
agreed among them with respect to a portion of, or all of, the
Fund's portfolio), to (A) supervise continuously the investment
program of the Fund and the composition of its portfolio; (B)
determine what securities shall be purchased or sold by the Fund;
and (C) arrange for the purchase and the sale of securities held
in the portfolio of the Fund.
The Advisory and Administration Agreement further provides
with respect to possible advisory services that subject to the
direction and control of the Board of Trustees of the Fund, in
the event of the termination of the Sub-Advisory Agreement, the
Adviser shall act as managerial investment adviser to the Fund
with respect to the investment of the Fund's assets, and
supervise and arrange the purchase of securities for and the sale
of securities held in the portfolio of the Fund, and the fee
payable to the Adviser shall be increased to the amount provided
in sub-section 4(b) thereof, provided, however, that (i) within
two weeks of notice of termination of the Sub-Advisory Agreement
being delivered by the Fund or by the Sub-Adviser, or termination
of the Sub-Advisory Agreement for any other reason, or within
such longer period as shall have been specified by the Board of
Trustees, the Adviser shall have provided the Board of Trustees
information of the kind required in connection with annual
renewal of agreements under Section 15(c) of the Act, and (ii)
within thirty days of the termination of the Sub-Advisory
Agreement, the assumption of such duties by the Adviser shall
have been approved by a vote of the Trust's Board of Trustees,
including a vote of a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined in
the Act) of any such party, with votes cast in person at a
meeting called for the purpose of voting on such approval.
In the event that the Adviser assumes such duties, it shall
(i) supervise continuously the investment program of the Fund and
the composition of its portfolio; (ii) determine what securities
shall be purchased or sold by the Fund; (iii) arrange for the
purchase and the sale of securities held in the portfolio of the
Fund; and (iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for pricing
of the Fund's portfolio at least quarterly using another such
source satisfactory to the Fund.
In the event that the Adviser has assumes the duties of
managerial investment adviser to the Fund with respect to
investment of the Fund's assets hereof following approval by the
Fund's Board of Trustees, the Fund shall pay the Adviser, and the
Adviser shall accept as full compensation for all services
rendered thereunder, a fee payable monthly and computed on the
net asset value of the Fund at the end of each business day at
the annual rate of 1.50% of such net asset value on net assets of
the Fund up to $15,000,000, 1.20% on net assets of the Fund above
$15,000,000 to $50,000,000 and 0.90 of 1% of the Fund's net
assets above $50,000,000.
In the event of termination of the Sub-Advisory Agreement,
if the Adviser does not elect to assume the duties of managerial
investment adviser or if its election as managerial investment
adviser is not approved by the Board of Trustees, the Adviser
shall act as acting investment adviser until a new investment
adviser has been appointed. In such event, the Fund shall pay the
Adviser an amount in addition to the amounts it is being paid for
advisory and administrative services as described in the
Prospectus, which does not exceed its costs for its services as
acting managerial investment adviser, but in no event more that
the amounts set forth in the preceding paragraph.
The Advisory and Administration Agreement contains
provisions as to the Adviser's allocation of the portfolio
transactions of the Fund similar to those in the Sub-Advisory
Agreement.
The Advisory and Administration Agreement may be terminated
at any time without penalty by the Adviser upon sixty days'
written notice to the Fund and the Sub-Adviser; it may be
terminated by the Fund at any time without penalty upon giving
the Adviser sixty days' written notice, provided that such
termination by the Fund shall be directed or approved by a vote
of a majority of the Trustees in office at the time, including a
majority of the Trustees who are not interested persons of the
Fund. The Advisory and Administration Agreement will otherwise
continue indefinitely. In either case the notice provision may be
waived. The Advisory and Administration Agreement contains a
provision under which the Adviser agrees that it will not
exercise its termination rights for at least two years from the
effective date of the Agreement except for regulatory reasons.
The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.
The Advisory and Administration Agreement provides that the
Adviser shall not be liable for any error in judgement or for any
loss suffered by the Fund in connection with the matters to which
the Advisory and Administration Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence
of the Adviser in the performance of its duties, or from reckless
disregard by it of its obligations and duties under the Advisory
and Administration Agreement. The Fund agrees to indemnify the
Adviser to the full extent permitted by the Declaration of Trust.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined as of
4:00 p.m. New York time on each day that the New York Stock
Exchange is open by dividing the value of the Fund's net assets
by the total number of its shares then outstanding. The close of
the principal exchanges or other markets on which some of the
Fund's portfolio securities are traded may be later than 4:00
p.m. New York time. Options are valued at the last prior sales
price on the principal commodities exchange on which the option
is traded or, if there are no sales, at the bid price. Debt
securities having a remaining maturity of less than sixty days
when purchased and securities originally purchased with
maturities in excess of sixty days but which currently have
maturities of sixty days or less are valued at cost adjusted for
amortization of premiums and accretion of discounts.
As indicated above, the net asset value per share of the
Fund's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, that Exchange may close on days not included in that
announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a
number of instances in which the Fund's 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 are as follows. Exchanges at
net asset value are permitted because a sales charge has already
been paid on the shares exchanged. Sales without sales charge are
permitted to Trustees, officers and certain others due to reduced
or eliminated selling expenses and/or since such sales may
encourage incentive, responsibility and interest and an
identification with the aims and policies of the Fund.
Reinvestments of redemptions at no sales charge are permitted
during a limited time to permit flexibility to shareholders in
their financial planning and to allow them an opportunity to
correct mistaken or incompletely informed redemption decisions.
Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and
since, in some cases, such issuance is exempted in the 1940 Act
from the otherwise applicable restrictions as to what sales
charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or
issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A Shares or Class Y Shares of
the Fund having a net asset value of at least $5,000 you may
establish an Automatic Withdrawal Plan under which you will
receive a monthly or quarterly check in a stated amount, not less
than $50. Stock certificates will not be issued for shares held
under an Automatic Withdrawal Plan. All dividends and
distributions must be reinvested. Shares will be redeemed on the
last business day of the month or quarter as may be necessary to
meet withdrawal payments.
Redemption of shares for withdrawal purposes may reduce or
even liquidate the account. Monthly or quarterly payments paid to
shareholders should not be considered as a yield or income on
investment.
ADDITIONAL TAX INFORMATION
If you incur a sales commission when you buy 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 your 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 your 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 your
basis for the fund shares acquired in the exchange or later
acquired. The provision applies to commissions charged after
October 3, 1989.
CONVERSION OF CLASS C SHARES
Level Payment Class Shares ("Class C Shares) of the Fund,
which you hold will automatically convert to Front Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the
sixth anniversary of the your initial purchase of such Class C
Shares occurs. For these purposes, the date of your initial
purchase shall mean (1) the first business day of the month in
which such Class C Shares were issued to you, or (2) for Class C
Shares of the Fund you have obtained through an exchange or
series of exchanges under the Exchange Privilege (see "Exchange
Privilege" in the Prospectus), the first business day of the
month in which you made the original purchase of Class C Shares
so exchanged. For conversion purposes, Class C Shares purchased
through reinvestment of dividends or other distributions paid in
respect of Class C Shares will be held in a separate sub-
account. Each time any Class C Shares in your regular account
(other than those in the sub-account) convert to Class A Shares,
a pro-rata portion of the Class C Shares in the sub-account will
also convert to Class A Shares. The portion will be determined by
the ratio that your Class C Shares then converting to Class A
Shares bears to the total of your Class C Shares not acquired
through reinvestment of dividends and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the
dividends and other distributions paid on Class A Shares and
Class C Shares will not result in "preferential dividends" under
the Code; and (2) the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available,
the Class C Shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the
Class C Shares beyond six years from the date of purchase. The
Fund has no reason to believe that these conditions for the
availability of the conversion feature will not continue to be
met.
If the Fund implements any amendments to its Distribution
Plan that would increase materially the costs that may be borne
under such Distribution Plan by Class A Shares shareholders,
Class C Shares will stop converting into Class A Shares unless a
majority of Class C Shares shareholders, voting separately as a
class, approve the proposal.
GENERAL INFORMATION
Voting at Meetings of Shareholders
At any meeting of shareholders, each shareholder of each
share of the Fund and of each share of each series of the Fund,
if more than one series is established, is entitled to one (1)
vote for each dollar of net asset value (determined as of the
record date for such meeting) per share of each such series, and
will so vote on the election of Trustees and on other matters
submitted to the vote of all shareholders of the Business Trust,
except where a vote of the holders of the shares of any series
voting by series, is required by the 1940 Act and/or
Massachusetts law as to any proposal.
Possible Additional Series
If additional Series were created by the Board of Trustees,
shares of each such Series would be entitled to vote as a Series
only to the extent permitted by the 1940 Act (see below) or as
permitted by the Board of Trustees. Income and operating expenses
would be allocated among two or more series in a manner
acceptable to the Board of Trustees.
Under Rule 18f-2 under the 1940 Act, any matter required to
be submitted to shareholder vote is not deemed to have been
effectively acted upon unless approved by the holders of a
"majority" (as defined in that Rule) of the voting securities of
each Series affected by the matter. Such separate voting
requirements do not apply to the election of trustees or the
ratification of the selection of accountants. Rule 18f-2 contains
special provisions for cases in which an advisory contract is
approved by one or more, but not all, Series. A change in
investment policy may go into effect as to one or more Series
whose holders so approve the change, even though the required
vote is not obtained as to the holders of other affected Series.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. For shareholder
protection, however, an express disclaimer of shareholder
liability for acts or obligations of the Fund is contained in the
Declaration of Trust which requires that notice of such
disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Fund or the Trustees. The
Declaration of Trust provides for indemnification out of the
Fund's property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to the relatively remote circumstances in
which the Fund itself would be unable to meet its obligations. In
the event the Fund had two or more Series, and if any such Series
were to be unable to meet the obligations attributable to it
(which, as is the case with the Fund, is relatively remote), the
other Series would be subject to such obligations, with a
corresponding increase in the risk of the shareholder liability
mentioned in the prior sentence.
The Declaration of Trust further indemnifies the Trustees of
the Fund out of the property of the Fund and provides that they
will not be liable for errors of judgment or mistakes of fact or
law; but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company is responsible
for holding the Fund's assets.
The Fund's auditors, KPMG Peat Marwick LLP, perform an
annual audit of the Fund's financial statements.
<PAGE>
AQUILA CASCADIA EQUITY FUND
(formerly named Short Term Asset Reserves)
Financial Statements
March 31, 1996
380 Madison Avenue,
New York, NY 10017
STATEMENT OF NET ASSETS
March 31, 1996
Cash and Net Assets - 100.0%
Applicable to 1,001 shares outstanding (unlimited number $1,001
of $.01 par value shares authorized)
Net Asset Value Per Share $1.00
- ----------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1996
The Trust had no operations during the year.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
Year ended Year ended
March 31, March 31,
1996 1995
FROM INVESTMENT ACTIVITIES:
Net investment income $ - $ -
Dividends to shareholders - none - -
Change in net assets derived from
investment activities - -
FROM TRUST SHARE TRANSACTIONS:
Shares
Year ended Year ended
March 31, March 31,
1996 1995
Shares sold - - - -
Shares redeemed - - - -
Change in shares and
net assets derived
from Trust share
transactions - - - -
Net change in net
assets - -
NET ASSETS:
Beginning of year 1,001 1,001
End of year $1,001 $1,001
See accompanying notes to financial statements.
<PAGE>
SHORT TERM ASSET RESERVES
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year
Year ended March 31,
1996(1) 1995(1) 1994(1) 1993(2) 1992
Net Asset Value, Beginning
of Year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
Income from Investment
Operations:
Net investment income - - - 0.0251 0.0488
Less Distributions:
Dividends from net
investment income - - - (0.0251) (0.0488)
Net Asset Value, End of Year $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
Total Return - - - 3.06% 4.99%
Ratios/Supplemental Data
Net Assets, End of Year
(in thousands) 1 1 1 1 19,536
Ratio of Expenses to
Average Net Assets - - - 0.59% 0.58%
Ratio of Net Investment
Income to Average Net
Assets - - - 3.04% 4.88%
For the years ended March 31, 1993 and 1992, respectively, net investment
income per share and the ratios of income and expenses to average net assets
without the Adviser's and Administrator's voluntary waiver of fees would
have been:
Net Investment Income $0.0238 $0.0438
Ratio of Expenses to Average Net Assets 0.75% 1.09%
Ratio of Net Investment Income to Average
Net Assets 2.88% 4.38%
(1) The Trust had no operations during the year.
(2) Per share amounts are for the period April 1, 1992 through
January 28, 1993, the date of the Trust's last dividend payment.
Total return and ratios have been annualized.
NOTES TO FINANCIAL STATEMENTS
Note A - Short Term Asset Reserves (the "Trust") was organized on July
31, 1984, as a Massachusetts business trust and commenced operations on
January 8, 1985 as a diversified, open-end investment company. At the
close of business on January 28, 1993, inasmuch as all shares outstanding,
except for 1,001 shares owned by Aquila Management Corporation, had been
redeemed by shareholders, the Trust ceased operations and has had no
operations since that date. Although the Trust is not conducting a public
offering of it shares, it will continue its existence as a Massachusetts
business trust and maintain its registration as an investment company.
Note B - Since inception, the Trust has qualified as a regulated investment
company by complying with the provisions of the Internal Revenue Code
applicable to certain investment companies. The Trust made distributions of
income and securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
Note C - Subsequent Event - The Trust, which was originally a money market
fund, has taken measures to restructure itself as an equity fund and as
restructured, to resume operations. At a meeting of the Board of Trustees
held on April 1, 1996, various actions were authorized, including the
filing of a post-effective amendment to the registration statement of the
Trust, entering into an Advisory and Administration Agreement between the
Trust and Aquila Management Corporation and a Sub-Advisory Agreement between
the Trust and Ferguson, Wellman, Rudd, Purdy & Van Winkle, Inc., and
submitting various measures to shareholder vote. On April 11, 1996, the
sole shareholder of the Trust authorized changing the name of the Trust,
providing for classes of shares, and various other measures. On that date,
a Supplemental Declaration of Trust was executed, which among other things
changed the name of the Trust to "Aquila Cascadia Equity Fund."
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholder of
Short Term Asset Reserves:
We have audited the accompanying statement of net assets of Short Term
Asset Reserves as of March 31, 1996, the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used, and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Short Term Asset Reserves as of March 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
April 16, 1996
<PAGE>
APPENDIX A
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS
Bond Ratings
At the date of this Additional Statement there are six
organizations considered as Nationally Recognized Statistical
Rating Organizations ("NRSROs") for purposes of Rule 15c3-1 under
the Securities Exchange Act of 1934. Their names, a brief summary
of their respective rating systems, some of the factors
considered by each of them in issuing ratings and their
individual procedures are described below.
STANDARD & POOR'S CORPORATION
Commercial paper consists of unsecured promissory notes
issued to raise short-term funds. An S&P commercial paper rating
is a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. S&P's
commercial paper ratings are graded into several categories from
"A-1" for the highest-quality obligations (which can also have a
plus (+) sign designation) to "D" for the lowest. The two highest
categories are:
A-1: This highest category indicates the degree of
safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign.
A-2: Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of safety is not as high for issues designated
A-1.
An S&P corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific
obligation. The ratings are based, in varying degrees, on the
following considerations:
1) 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 obligations;
2) Nature of and provisions of the obligation; and
3) 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.
The two highest categories are:
AAA: 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 a degree.
MOODY'S INVESTORS SERVICE
Moody's short-term debt ratings are opinions of the ability
of issuers to repay punctually senior debt obligations which have
an original maturity not exceeding one year. Obligations relying
upon support mechanisms such as letters of credit and bonds of
indemnity are excluded unless explicitly rated. The two highest
categories are:
Prime-1: Issuers rated P-1 have a superior ability for
repayment of senior short-term debt obligations,
evidenced by the following characteristics:
* Leading market positions in well-
established industries.
* High rates of return on funds employed.
* Conservative capital structure with
moderate reliance on debt and ample asset
protection.
* Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
* Well-established access to a range of
markets and assured sources of alternative
liquidity.
Prime-2: Issuers rated P-2 have a strong ability for
repayment of senior short-term debt obligations,
evidenced by the above-mentioned characteristics, but
to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Corporate bonds 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 edged." Interest payments are
protected by large or exceptionally stable margin and principal
is secure. Corporate bonds 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. Aa bonds
are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risk appear
somewhat greater than the Aaa securities.
DUFF & PHELPS, INC.
The ratings apply to all obligations with maturities of under one
year, including commercial paper, the unsecured portion of
certificates of deposit, unsecured bank loans, master notes,
bankers' acceptances, irrevocable letters of credit and current
maturities of long-term debt. The two highest categories are:
D-1+: Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
access to alternative sources of funds is outstanding
and safety is just below risk-free U.S. Treasury short-
term obligations.
D-1: Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity
factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk
factors are very small.
Long-term debt rated AAA represents the highest credit quality.
The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt. Debt rated AA represents high
credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic
conditions.
IBCA
In determining the creditworthiness of financial
institutions, IBCA assigns ratings within the following
categories: Legal, Individual, Short and Long Term. A legal
rating deals solely with the question of whether an institution
would receive support if it ran into difficulties and not whether
it is "good" or "bad". An individual rating looks purely at the
strength of a financial institution without receiving any
support. Short and long-term ratings assess the borrowing
capabilities and the capacity for timely repayment of debt
obligations. A short-term rating relates to debt which has a
maturity of less than one year, while a long-term rating applies
to a instrument of longer duration. The legal ratings are:
1: A bank for which there is a clear legal guarantee on
the part of its home state to provide any necessary
support or a bank of such importance both
internationally and domestically that support from the
state would be forthcoming, if necessary.
2: A bank for which there is no legal obligation on the
part of its sovereign entity to provide support but for
which state support would be forthcoming, for example,
because of its importance to the total economy or its
historic relationship with the government.
The individual ratings are:
A: A bank with a strong balance sheet, favorable
credit profile and a consistent record of above average
profitability.
B: A bank with a sound credit profile and without
significant problems. The bank's performance has
generally been in line with or better than that of its
peers.
The short-term ratings are:
A-1+: Obligations supported by the highest capacity for
timely repayment.
A-1: Obligations supported by a very strong capacity
for timely repayment.
A-2: Obligations supported by a very strong capacity
for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic or
financial conditions.
The long-term ratings are:
AAA: Obligations for which there is the lowest
expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial,
such that adverse changes in business, economic or
financial conditions are unlikely to increase
investment risk.
AA: Obligations for which there is a very low
expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial.
Adverse changes in business, economic or financial
conditions may increase investment risk albeit not
significantly.
Thomson BankWatch, Inc. (TBW)
The TBW short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the
entities to which the rating has been assigned. TBW's two highest
short-term ratings are:
TBW-1: Indicates a very high degree of likelihood that
principal and interest will paid on a timely basis.
TBW-2: While the degree of safety regarding timely
repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues
rated "TBW-1".
The TBW long-term rating specifically assess the likelihood
of an untimely repayment of principal or interest over the term
to maturity of the rated instrument. TBW's two highest long-term
ratings are:
AAA: Indicates ability to repay principal and interest
on a timely basis is very strong.
AA: Indicates a superior ability to repay principal
and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
Fitch Investors Service, Inc.
The Fitch short-term ratings apply to debt obligations that
are payable on demand which include commercial paper,
certificates of deposit, medium-term notes and municipal and
investment notes. Short-term ratings places greater emphasis than
long-term ratings on the existence of liquidity necessary to meet
the issuer's obligations in a timely manner. Fitch short-term
ratings are:
F-1+: Issues assigned this rating are regarded as
having the strongest degree of assurance for timely
payment.
F-1: Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than
issues rated "F-1+".
The Fitch long-term rating represents their assessment of
the issuer's ability to meet the obligations of a specific debt
issue or class of debt in a timely manner. The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial and operating performance of the issuer and any
guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength and credit
quality. The Fitch long-term rating are:
AAA: Bonds considered to be investment grade and of the
highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by
reasonably foreseeable events.
AA: Bonds considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong.
