CAPITAL CASH MANAGEMENT TRUST
Capital Cash Management Trust
Capital Cash U.S. Government Securities Trust
380 Madison Avenue, Suite 2300
New York, New York 10017
212-697-6666
Statement of Additional Information
November 1, 1999 Supplemented November 5, 1999
This Statement of Additional Information (the "SAI") is
not a Prospectus. It relates to Capital Cash Management Trust
(the "Trust") which has two separate funds, Capital Cash
Management Trust and Capital Cash U.S. Government Securities
Trust (each a "Fund" and collectively, the "Funds"). There are
two Prospectuses for the Funds dated November 1, 1999: one for
Original Class Shares ("Original Shares"), the other for Service
Class Shares ("Service Shares") of the Funds. References in the
SAI to "the Prospectus" refer to either of these Prospectuses.
The SAI should be read in conjunction with the Prospectus for the
class of shares in which you are considering investing. Either or
both Prospectuses may be obtained from the Fund's Shareholder
Servicing Agent, PFPC Inc., by writing to: 400 Bellevue Parkway,
Wilmington, DE 19809 or by calling:
800-952-6666 toll free
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New
York 10017; or by calling 800-697-6666 toll free
Financial Statements: The financial statements for
Capital Cash Management Trust for the year ended June 30, 1999,
which report is contained in the Annual Report for that fiscal
year, are hereby incorporated by reference into the SAI. Those
financial statements have been audited by KPMG LLP, independent
auditors, whose report thereon is incorporated herein by
reference. The Annual Report can be obtained without charge by
calling any of the toll-free numbers listed above. The Annual
Report will be delivered with the SAI.
TABLE OF CONTENTS
Trust History . . . . . . . . . . . . . . . . . . . . . . 2
Investment Strategies and Risks . . . . . . . . . . . 2
Policies of the Funds .. . . . . . . . . 6
Management of the Funds .. . . . . 9
Ownership of Securities . . . . . . . . . . . . . . . .16
Investment Advisory and Other Services. . . . . . . .17
Brokerage Allocation and Other Practices. . . . . . . . .20
Capital Stock . . . . . . . . . . . . . . . . . . . . . .21
Purchase, Redemption, and Pricing of Shares . . . . .23
Exchange Privilege. . . . . . . . . . . . . . . .25
Taxation of the Trust . . . . . . . . . . . . . . . . . . . . .36
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . .36
Performnce . . . . . . . . . . . . . . . . . . . . . . . .36
Appendix A . . .. . . . . . . . . . . . . . . . . . . . .37
<PAGE> CAPITAL CASH MANAGEMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
Trust History
Capital Cash Management Trust (the "Trust") is an open-
end investment company formed in 1976 as a Massachusetts business
trust. The Trust is one of the oldest money-market mutual funds
in the United States. The Trust consists of two separate funds:
Capital Cash Management Trust (the "Cash Fund") and Capital Cash
U.S. Government Securities Trust (the "Government Securities
Fund"). They are collectively referred to as the "Funds." Until
November 1, 1999, the Trust had only one portfolio, Capital Cash
Management Trust.
Investment Strategies and Risks
The investment objective and policies of each Fund are
described in the Prospectuses, which refers to the investments
and investment methods described below.
Additional Information About the Cash Fund's Investments
Under the current management policies, the Cash Fund
invests only in the following types of obligations:
(1) U.S. Government Securities: Obligations issued or
guaranteed by the U.S. government or its agencies or
instrumentalities.
(2) Bank Obligations and Instruments Secured by Them:
Bank obligations (i) of U.S. regulated banks having total assets
of at least $1.5 billion, which may be domestic banks, foreign
branches of such banks or U.S. subsidiaries of foreign banks;
(ii) of any foreign bank having total assets equivalent to at
least $1.5 billion; or (iii) that are fully insured as to
principal by the Federal Deposit Insurance Corporation. ("Banks"
include commercial banks, savings banks and savings and loan
associations.)
(3) Commercial Paper: Short-term corporate debt.
(4) Corporate Debt Obligations: Corporate debt
obligations (for example, bonds and debentures). Debentures are a
form of unsecured corporate debt.
(5) Variable Amount Master Demand Notes: Variable amount
master demand notes repayable on not more than 30 days' notice.
These notes permit the investment of fluctuating amounts by the
Cash Fund at varying rates of interest pursuant to direct
arrangements between the Cash Fund, as lender, and the borrower.
They permit daily changes in the amounts borrowed. The Cash Fund
has the right to increase the amount under the note at any time
up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may prepay up to the full
amount of the note without penalty. Variable amount master demand
notes may or may not be backed by bank letters of credit.
(6) Certain Other Obligations: Obligations other than
those listed in 1 through 5 above only if such other obligations
are guaranteed as to principal and interest by either a bank in
whose obligations the Cash Fund may invest (see 2 above) or a
corporation in whose commercial paper the Cash Fund may invest
(see 3 above). If the Cash Fund invests more than 5% of its net
assets in such other obligations, the Prospectus will be
supplemented to describe them.
(7) Repurchase Agreements: The Cash Fund may purchase
securities subject to repurchase agreements with commercial banks
and broker-dealers provided that such securities consist entirely
of U.S. Government securities or securities that, at the time the
repurchase agreement is entered into, are rated in the highest
rating category by two or more nationally recognized statistical
rating organizations ("NRSROs").
(8) When-Issued or Delayed Delivery Securities: The Cash
Fund may buy securities on a when-issued or delayed delivery
basis. The Cash Fund may not enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Cash
Fund's total assets, less liabilities other than the obligations
created by when-issued commitments. When-issued securities are
subject to market fluctuation and no interest accrues to the Cash
Fund until delivery and payment take place; their value at the
delivery date may be less than the purchase price.
Information on Variable Amount Master Demand Notes
The Cash Fund may buy variable amount master demand
notes. The nature and terms of these obligations are as follows.
They permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between
the Fund, as lender, and the borrower. They permit daily changes
in the amounts borrowed. The Cash Fund has the right to increase
the amount under the note at any time up to the full amount
provided by the note agreement, or to decrease the amount, and
the borrower may prepay up to the full amount of the note without
penalty. Because these notes are direct lending arrangements
between the lender and borrower, it is not generally contemplated
that they will be traded, and there is no secondary market for
them. They are redeemable (and thus repayable by the borrower) at
principal amount, plus accrued interest, at any time on not more
than thirty days' notice. Except for those notes which are
payable at principal amount plus accrued interest within seven
days after demand, such notes fall within the Fund's overall 10%
limitation on securities with possible limited liquidity. There
is no limitation on the type of issuer from which these notes
will be purchased; however, all such notes must be First Tier
Securities and in connection with such purchases and on an
ongoing basis, STCM Management Company, Inc. (the "Adviser") will
consider the earning power, cash flow and other liquidity ratios
of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes
make demand simultaneously. Master demand notes as such are not
typically rated by credit rating agencies and if not so rated
the Fund may, under its minimum rating standards, invest in them
only if at the time of an investment they are determined to be
comparable in quality to rated issues in which the Fund can
invest.
Information On Insured Bank Obligations
The Federal Deposit Insurance Corporation ("FDIC")
insures the deposits of Federally insured banks and savings
institutions (collectively herein, "banks") up to $100,000. The
Cash Fund may purchase bank obligations which are fully insured
as to principal by the FDIC. To remain fully insured as to
principal, these investments must currently be limited to
$100,000 per bank; if the principal amount and accrued interest
together exceed $100,000 then the excess accrued interest will
not be insured. Insured bank obligations may have limited
marketability; unless the Board of Trustees determines that a
readily available market exists for such obligations, the Cash
Fund will invest in them only within a 10% limit of each Fund
unless such obligations are payable at principal amount plus
accrued interest on demand or within seven days after demand.
Information about Certain Other Obligations
The Cash Fund may purchase obligations other than those
listed in categories 1 through 5 above, but only if such other
obligations are guaranteed as to principal and interest by either
a bank in whose obligations the Cash Fund may invest or a
corporation in whose commercial paper it may invest. If any such
guarantee is unconditional and is itself an Eligible Security,
the obligation may be purchased based on the guarantee; if any
such guarantee is not unconditional, purchase of the obligation
can only be made if the underlying obligation is an Eligible
Security and meets all other applicable requirements of Rule 2a-7
(the "Rule") of the Securities and Exchange Commission. As of the
date of the SAI the Cash Fund does not own any such obligations
and has no present intention of purchasing any. Such obligations
can be any obligation of any kind so guaranteed, including, for
example, obligations created by "securitizing" various kinds of
assets such as credit card receivables or mortgages. If the Cash
Fund invests in these assets, they will be identified in the
Prospectus and described in the SAI.
U.S. Government Securities
All of the Funds may invest in U.S Government Securities
(i.e., obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities), which include securities
issued by the U.S. Government, such as Treasury Bills (which
mature within one year of the date they are issued) and Treasury
Notes and Bonds (which are issued with longer maturities). All
Treasury securities are backed by the full faith and credit of
the United States.
The Funds may invest in securities of U.S. government
agencies and instrumentalities that issue or guarantee
securities. These include, but are not limited to, the Farmers
Home Administration, Federal Farm Credit System, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal
Housing Administration, Federal National Mortgage Association,
Financing Corporation, Government National Mortgage Association,
Resolution Funding Corporation, Small Business Administration,
Student Loan Marketing Association and the Tennessee Valley
Authority.
Securities issued or guaranteed by U.S. government
agencies and instrumentalities are not always supported by the
full faith and credit of the United States. Some, such as
securities issued by the Federal Home Loan Banks, are backed by
the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal
National Mortgage Association, are supported only by the credit
of the instrumentality and not by the Treasury. If the securities
are not backed by the full faith and credit of the United States,
the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to
assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment. The Funds
will invest in government securities, including securities of
agencies and instrumentalities only the Adviser, acting under
procedures approved by the Board of Trustees, is satisfied that
these obligations present minimal credit risks.
Portfolio Turnover
In general, the Funds will purchase securities with the
expectation of holding them to maturity. However, the Funds may
to some degree engage in short-term trading to attempt to take
advantage of short-term market variations. The Funds may also
sell securities prior to maturity to meet redemptions or as a
result of a revised management evaluation of the issuer. The
Funds will have a high portfolio turnover due to the short
maturities of the securities held, but this should not affect net
asset value or income, as brokerage commissions are not usually
paid on the securities in which the Funds invest. (In the usual
calculation of portfolio turnover, securities of the type in
which the Funds invests are excluded; consequently, the high
turnover which the Funds will have is not comparable to the
turnover of non-money-market investment companies.)
When-Issued and Delayed Delivery Securities
The Cash Fund may purchase securities on a when-issued or
delayed delivery basis. For example, delivery and payment may
take place a month or more after the date of the transaction. The
purchase price and the interest rate payable on the securities
are fixed on the transaction date. At the time that either Fund
makes a commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and
thereafter reflect the value of such securities each day in
determining its net asset value. The Cash Fund will make
commitments for such when-issued transactions only when they have
the intention of actually acquiring the securities. The Cash Fund
maintain and mark to market every business day a separate account
with portfolio securities in an amount at least equal to such
commitments. On delivery dates for such transactions, the Cash
Fund will each meet their obligations from maturities or sales of
the securities held in the separate account and/or from cash
flow. If the Cash Fund chooses to dispose of any right to acquire
a when-issued security prior to its acquisition, it could, as
with the disposition of any other portfolio obligation, incur a
gain or loss due to market fluctuation. The Cash Fund may not
enter into when-issued commitments exceeding in the aggregate 15%
of the market value of its respective total assets, less
liabilities other than the obligations created by when-issued
commitments.
Diversification and Certain Industry Requirements
The Cash Fund has a rule under which it cannot buy the
securities of issuers in any one industry if more than 25% of its
total assets would then be invested in securities of issuers of
that industry. In applying this rule to commercial paper issued
by finance subsidiaries or affiliates of operating companies, if
the business of the issuer consists primarily of financing the
activities of the related operating company, the Fund considers
the industry of the issuer to be that of the related operating
company.
Policies of the Funds
Investment Restrictions
Each Fund has a number of policies concerning what it can
and cannot do. Those policies, which are called "fundamental
policies," may not be changed unless the holders of a majority,
as defined in the Investment Company Act of 1940 (the "1940
Act"), of the outstanding shares of that Fund vote to change
them. Under the 1940 Act, the vote of the holders of a majority
of the outstanding shares of a Fund 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 its outstanding shares. Those fundamental policies not set
forth in the Prospectus are set forth below.
Investment Restrictions of the Cash Fund
1. The Cash Fund has diversification and anti-concentration
requirements.
The Cash Fund cannot buy the securities of any issuer if
it would then own more than 10% of the total value of all of the
issuer's outstanding securities.
The Cash Fund cannot buy the securities (not including
U.S. Government Securities) of any issuer if more than 5% of its
total assets (valued at market value) would then be invested in
securities of that issuer. In addition, the Rule limits
investment in Second Tier Securities to 5% of the Cash Fund's
assets in the aggregate, and to no more than the greater of 1% of
the Cash Fund's assets or $1,000,000 in the securities of any one
issuer.
The Cash Fund cannot buy the securities of issuers in any
one industry if more than 25% of its total assets would then be
invested in securities of issuers in that industry (see the
Additional Statement); U.S. Government Securities and those
domestic bank obligations and instruments of domestic banks which
the Cash Fund may purchase (see "Investment of the Cash Fund's
Assets") are considered as not included in this limit; however,
obligations of foreign banks and of foreign branches of domestic
banks are considered as included in this limit.
2. The Cash Fund can make loans only by lending securities or
entering into repurchase agreements.
The Cash Fund can buy those debt securities which it is
permitted to buy (see "Investment of the Cash Fund's Assets");
this is investing, not making a loan. The Cash Fund can lend its
portfolio securities on a collateralized basis up to 10% of the
value of its total assets (see the Additional Statement) and
enter into repurchase agreements (see "Repurchase Agreements"
above). While the Cash Fund can lend up to 10% of its portfolio,
it does not currently foresee lending more than 5% of its
portfolio. The Cash Fund will not purchase any securities subject
to a repurchase agreement if thereafter more than 10% of its
total assets would be invested in such securities subject to
repurchase agreements calling for delivery in more than seven
days. The Cash Fund may be considered as the beneficial owner of
the loaned securities in that any gain or loss in their market
price during the loan inures to the Cash Fund and its
shareholders; thus, when the loan is terminated, the value of the
securities may be more or less than their value at the beginning
of the loan.
3. The Cash Fund can borrow only in limited amounts for special
purposes.
The Cash Fund can borrow from banks for temporary or
emergency purposes but only up to 10% of its total assets. It can
mortgage or pledge its assets only in connection with such
borrowing and in amounts not in excess of 15% of its assets at
the time of such borrowing. Interest on borrowings would reduce
the Cash Fund's income. Except in connection with borrowings, the
Cash Fund will not issue senior securities.
Investment Restrictions of the Government Securities Fund
The following restrictions on the Government Securities
Fund's investments are fundamental policies and cannot be changed
without approval of the shareholders of the Government Securities
Fund.
1. The Government Securities Fund can make loans only by
lending securities or entering into repurchase agreements.
The Government Securities Fund can buy those debt
securities which it is permitted to buy; this is investing, not
making a loan. The Government Securities Fund can lend its
portfolio securities on a collateralized basis up to 10% of the
value of its total assets to specified borrowers (broker-dealers,
banks and certain other financial institutions) to increase its
income and enter into repurchase agreements. The Government
Securities Fund may be considered as the beneficial owner of the
loaned securities in that any gain or loss in their market price
during the loan inures to the Government Securities Fund and its
shareholders; thus, when the loan is terminated, the value of the
securities may be more or less than their value at the beginning
of the loan.
2. The Government Securities Fund can borrow only in
limited amounts for special purposes.
The Government Securities Fund can borrow from banks for
temporary or emergency purposes but only up to 10% of its total
assets. It can mortgage or pledge its assets only in connection
with such borrowing and only up to the lesser of the amounts
borrowed or 5% of the value of its total assets. Interest on
borrowings would reduce the Government Securities Fund's income.
The Government Securities Fund will not purchase any securities
while it has any outstanding borrowings which exceed 5% of the
value of its assets. Except in connection with borrowings, the
Government Securities Fund will not issue senior securities.
Restrictions Applicable to all of the Funds
1. The Funds invest only in certain limited securities.
Since the Funds cannot buy any securities other than
those listed under "Investment of the Trust's Assets" in the
Prospectus or under "Investment Strategies and Risks" in the SAI,
the Funds cannot buy any voting securities, any commodities or
commodity contracts, any mineral related programs or leases, any
shares of other investment companies or any warrants, puts, calls
or combinations thereof.
The Cash Fund cannot purchase or hold the securities of
any issuer if, to their knowledge, any Trustee, Director or
officer of the Fund or its Adviser individually owns beneficially
more than 0.5% of the securities of that issuer and all such
Trustees, Directors and officers together own in the aggregate
more than 5% of such securities.
The Funds cannot buy or sell real estate; however it may
purchase marketable securities issued by companies, including
real estate investment trusts, which invest in real estate or
interests therein.
2. Almost all of the Funds's assets must be in established
companies.
Only 5% of the Funds's total assets may be in issuers
less than three years old, that is, which have not been in
continuous operation for at least three years. This includes the
operations of predecessor companies.
3. The Funds do not buy for control.
The Funds cannot invest for the purpose of exercising
control or management of other companies.
4. The Funds do not sell securities it doesn't own or borrow from
brokers to buy securities.
Thus, they cannot sell short or buy on margin.
5. The Funds are not underwriters.
The Funds cannot invest in securities for which there are
legal or contractual restrictions on resale or underwrite
securities of other issuers except insofar as it may technically
be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
Management of the Funds
The Board of Trustees
The business and affairs of each Fund are managed under
the direction and control of its Board of Trustees. The Board of
Trustees has authority over every aspect of the Fund's
operations, including approval of the advisory agreements and
their annual renewal, the contracts with all other service
providers and payments under the Fund's Distribution Plan and
Shareholder Services Plan.
Trustees and Officers
The Trustees and officers of the Funds, their
affiliations, if any, with the Adviser or Distributor and their
principal occupations during at least the past five years are set
forth below. Each of the Trustees and officers of the Funds holds
the same position with all of the Funds. Messrs. Herrmann and
Mason and Ms. Herrmann are "interested persons" of the Trust as
that term is defined in the 1940 Act as officers of the Trust; in
addition Mr. Herrmann is an officer, director and shareholder of
the Adviser and of the Distributor. As of the date of this SAI,
the Trustees and officers of the Funds owned less than 1% of the
outstanding shares of any of them.
In the following material the Funds (together with the
other Aquila money-market funds) are called the "Aquila Money-
Market Funds"; Hawaiian Tax-Free Trust, Tax-Free Trust of
Arizona, Tax-Free Trust of Oregon, Tax-Free Fund of Colorado,
Churchill Tax-Free Fund of Kentucky, Narragansett Insured Tax-
Free Income Fund and Tax-Free Fund For Utah, each of which is a
tax-free municipal bond fund, are called the "Aquila Bond Funds";
and Aquila Cascadia Equity Fund and Aquila Rocky Mountain Equity
Fund are called the "Aquila Equity Funds."
Name, Address, Age Positions(s) Principal
Held with Occupation(s)
Trust During
Past 5 Years
Lacy B. Herrmann* Chairman Founder and Chairman of
380 Madison Avenue of the the Board of Aquila
New York, New York Board of Management Corporation,
10017 Trustees the sponsoring
Age: 70 organization and Manager or
Administrator and/or Adviser or
Sub-Adviser to the Aquila Money-
Market Funds, the Aquila Bond Funds
and the Aquila Equity Funds, and
Founder, Chairman of the Board of
Trustees and (currently or until
1998) President of each since its
establishment, beginning in 1984;
Director of Aquila Distributors,
Inc., distributor of the above
funds, since 1981 and formerly Vice
President or Secretary, 1981-1998;
President and a Director of STCM
Management Company, Inc., sponsor
and sub-adviser to CCMT; Founder
and Chairman of several other money
market funds; Director or Trustee
of OCC Cash Reserves, Inc. and
Quest For Value Accumulation Trust,
and Director or Trustee of
Oppenheimer Quest Value Fund, Inc.,
Oppenheimer Quest Global Value
Fund, Inc. and Oppenheimer
Rochester Group of Funds, each of
which is an open-end investment
company; Trustee of Brown
University, 1990-1996 and currently
Trustee Emeritus; actively
involved for many years in
leadership roles with university,
school and charitable
organizations.
Theodore T. Mason* Trustee, Executive Director,
26 Circle Drive Vice Louisiana Power Partners,
Hastings-on-Hudson, Chairman LLC, since 1999; Managing New York
10706 Director of EastWind
Age: 63 Power Partners, Ltd. since 1994;
Second Vice President, Alumni Association,
SUNY Maritime College 1998;
Director for the same organization,
1997; Director of Cogeneration
Development of Willamette
Industries, Inc., a forest products
company, 1991-1993; Vice President
of Corporate Development of
Penntech Papers, Inc., 1978-1991;
Vice President of Capital Projects
for the same company, 1977-1978;
Vice Chairman of the Board of
Trustees of CCMT since 1981;
Trustee and Vice President,
1976-1981, and formerly Director of
its predecessor; Director of STCM
Management Company, Inc.; Vice
Chairman of the Board of Trustees
and Trustee of Prime Cash Fund
(which is inactive) since 1982;
Trustee of Short Term Asset
Reserves, 1984-1986 and 1989-1996,
of Hawaiian Tax-Free Trust and
Pacific Capital Cash Assets Trust
since 1984, of Churchill Cash
Reserves Trust since 1985, of
Pacific Capital Tax-Free Cash
Assets Trust and Pacific Capital
U.S. Government Securities Cash
Assets Trust since 1988 and of
Churchill Tax-Free Fund of Kentucky
since 1992; Vice President and
Trustee of Oxford Cash Management
Fund, 1983-1989; Vice President of
Trinity Liquid Assets Trust,
1983-1985; President and Director
of Ted Mason Venture Associates,
Inc., a venture capital consulting
firm, 1972-1980; Advisor to the
Commander, U.S. Maritime Defense
Zone Atlantic, 1984-1988; National
Vice President, Surface/Subsurface,
Naval Reserve Association,
1985-1987; National Vice President,
Budget and Finance, for the same
Association, 1983-1985; Commanding
Officer of four Naval Reserve
Units, 1974-1985; Captain, USNR,
1978-1988.
Diana P. Herrmann* Trustee, President and Chief
380 Madison Avenue Vice Operating Officer of the
New York, New York President Administrator since 1997,
10017 a Director since 1984,
Age: 41 Secretary since 1986 and previously
its Executive Vice President, Senior
Vice President or Vice President,
1986-1997; President of various
Aquila Bond and Money-Market Funds
since 1998; Assistant Vice
President, Vice President, Senior
Vice President or Executive Vice
President of Aquila Money-Market,
Bond and Equity Funds since 1986;
Trustee of a number of Aquila
Money-Market, Bond and Equity Funds
since 1995; Trustee of Reserve
Money-Market Funds since 1999 and
Reserve Private Equity Series since
1998; Assistant Vice President and
formerly Loan Officer of European
American Bank, 1981-1986; daughter
of the Trust's Chairman; 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.
Paul Y. Clinton Trustee Principal of Clinton
39 Blossom Avenue Management Associates,
Osterville, MA a financial and venture
02655 capital consulting firm; Age:
68 formerly Director of External
Affairs of Kravco Corporation, a
national real estate owner and
developer, 1984-1995; formerly
President of Essex Management
Corporation, a management and
financial consulting company, 1979-
1983; Trustee of Capital Cash
Management Trust since 1979, of
Narragansett Insured Tax-Free
Income Fund since 1996 and of Prime
Cash Fund (which is inactive),
since 1993; Trustee of Short Term
Asset Reserves 1984-1996; general
partner of Capital Growth Fund, a
venture capital partnership, 1979-
1982; President of Geneve Corp., a
venture capital fund, 1970-1978;
formerly Chairman of Woodland
Capital Corp., a small business
investment company; formerly Vice
President, W.R. Grace & Co;
Director or Trustee of OCC Cash
Reserves, Inc., Oppenheimer Quest
Global Value Fund, Inc.,
Oppenheimer Quest Value Fund, Inc.,
a Series of Quest Funds and Trustee
of Quest For Value Accumulation
Trust, and of the Rochester Group
of Funds, each of which is an open-
end investment company; and of the
Oppenheimer Funds, Inc. Mid-Cap
Fund.
Anne J. Mills Trustee Vice President for
167 Glengarry Place Business Affairs of
Castle Rock, Ottawa University since
Colorado 80104 1992; Director of
Age: 60 Customer Fulfillment,
U.S. Marketing and Services
Group,IBM Corporation, 1990-1991;
Director of Business Requirements
of that Group, 1988-1990; Director
of Phase Management of that Group,
1985-1988; Budget Review Officer of
the American Baptist Churches/USA,
1994-1997; Director of the American
Baptist Foundation 1985-1996 and
since 1998; Trustee of Brown
University 1992-1997; Trustee of
Churchill Cash Reserves Trust since
1985, of Tax-Free Trust of Arizona
since 1986, of Churchill Tax-Free
Fund of Kentucky, Tax-Free Fund of
Colorado and Capital Cash
Management Trust since 1987 and of
Tax-Free Fund For Utah since 1994.
Cornelius T. Ryan Trustee General Partner of Oxford
c/o Oxford Partners Ventures Partners, a
315 Post Road West group of investment
Westport, Connecticut venture capital
06880 partnerships, since 1981; Age:
67 and Managing Partner of Oxford
Bioscience Partners, an affiliated
administrative company, since 1992;
Trustee of CCMT since 1976, of
Prime Cash Fund (which is
inactive), 1983-1996 and of Aquila
Rocky Mountain Equity Fund since
1996; President of AMR
International, Inc., a management
training and publishing company,
1978-1980; President of GTE New
Ventures Corporation, 1974-1978;
Vice President, Corporation
Development, of GTE Corporation,
1974-1978; President and a founder
of Randolph Computer Corporation,
1965-1974; Director of Neuberger &
Berman Equity Funds, since 1988.
Charles E. Childs, IIISenior Vice Senior Vice-President
380 Madison Avenue President Corporate development
New York, New York 10017 since 1998, formerly Vice
Age:42 President - Assistant Vice President and
Associate of the Administrator since
1987; Senior Vice President, Vice
President or Assistant Vice President of
the Money-Market Funds since 1988;
Northeastern University, 1986-1987
(M.B.A., 1987); Financial Analyst,
Unisys Corporation, 1986; Associate
Analyst at National Economic Research
Associates, Inc. (NERA), a micro-
economic consulting firm, 1979-1985.
John M. Herndon Vice Assistant Secretary of
380 Madison Avenue President, the Aquila Money-Market,
New York, New York Assistant Bond and Equity Funds
10017 Secretary since 1995 and Vice
Age: 59 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.
Rose F. Marotta Chief Chief Financial Officer
380 Madison Avenue Financial of the Aquila Money-
New York, New York Officer Market, Bond and Equity
10017 Funds since 1991 and
Age: 75 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 Treasurer of the Aquila
380 Madison Avenue, Money-Market, Bond
New York, New York 10017 and Equity Funds and
Age: 63 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 Partner of Hollyer Brady
551 Fifth Avenue Smith Troxell Barrett
New York, New York 10176 Rockett Hines & Mone
Age: 59 LLP, attorneys, since
1989 and counsel, 1987-1989;
Secretary of the Aquila
Money-Market, 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.
Compensation of Trustees
The Trust does not pay fees to Trustees affiliated with the
Adviser, Administrator or to any of the Trust's officers. During
the fiscal year ended June 30, 1999, the Trust paid $11,376 in
fees and reimbursement of expenses to the Trustees. The Trust is
one of the 14 funds in the Aquilasm Group of Funds, which consist
of tax-free municipal bond funds, money-market funds and equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Trust and the compensation
they received during the Trust's fiscal year from other funds in
the Aquilasm Group of Funds. None of such Trustees has any
pension or retirement benefits from the Trust or any of the other
funds in the Aquila group.
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Trust Group now serves
Paul Y.
Clinton $2,365 $7,050 2
Theodore T.
Mason $60 $48,138 7
Anne J. Mills $2,153 $34,572 6
Cornelius T.
Ryan $2,190 $3,600 2
Ownership of Securities
The ownership of more than 5% of the outstanding shares
of the Cash Fund Original Shares (the only outstanding series and
class on the at date) on August 2, 1999, was as follows:
Anthony L. Cucuzella, M.D., held of record and
beneficially 158,464 shares (9.0% of the class); William J. Boyle
held of record and beneficially 114,895 shares (6.6%) and Julie L
Freireich held of record and beneficially 107,811 shares (6.2%).
In addition, the Trustees and officers of the Trust owned 371,278
shares (21.2%), held as follows: by Aquila Distributors, Inc.,
153,112 shares (8.7%) by Lacy B. Herrmann,63,990 shares (3.65%),
by Elizabeth B. Herrmann, 100,998 shares (5.8%) and by Diana P.
Herrmann, 53,176 shares (3.0%).
The Funds' management is not aware of any person, other
than those named above, who beneficially owned 5% or more of
either class of a Fund's outstanding shares on such date.
Investment Advisory and Other Services
The services of STCM Management Company, Inc. (the
"Adviser") to each Fund are rendered under an Investment Advisory
Agreements between that Fund and the Adviser (together, the
"Advisory Agreements") which were most recently approved by the
shareholders (Cash Fund in 1992 and the Government Securities
Fund in 1999).
The Advisory Agreements of the Funds provide, subject to
the control of the Board of Trustees, for investment supervision
by the Adviser. Under the Advisory Agreements, the Adviser will
furnish information as to the Fund's portfolio securities to any
provider of fund accounting services to each Fund; will monitor
records of each Fund as to the Fund's portfolio, including
prices, maintained by such provider of such services; and will
supply at its expense, monthly or more frequently as may be
necessary, pricing of each Fund's portfolio based on available
market quotations using a pricing service or other source of
pricing information satisfactory to that Fund. Each Advisory
Agreement states that the Adviser shall, at its expense, provide
to the Fund all office space and facilities, equipment and
clerical personnel necessary for the carrying out of the
Adviser's duties under the Advisory Agreement.
Under each Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Fund and of
those Trustees, if any, who are affiliated with the Adviser,
provided, however that if any Trustee is an affiliate of the
Adviser solely by reason of being a member of its Board of
Directors, the Funds' may pay compensation to such Trustee, but
at a rate no greater than the rate it pays to its other Trustees.
Under the Advisory Agreements, each Fund bears the cost of
preparing and setting in type its prospectuses, statements of
additional information, and reports to its shareholders and the
costs of printing or otherwise producing and distributing those
copies of such prospectuses, statements of additional information
and reports as are sent to its shareholders. Under each Advisory
Agreement, all costs and expenses not expressly assumed by the
Adviser or by the Administrator under the Fund's Administration
Agreement or by the Fund's principal underwriter are paid by the
Fund. The Advisory Agreements list examples of such expenses
borne by the Funds, the major categories of such expenses being:
legal and audit expenses, custodian and transfer agent, or
shareholder servicing agent, fees and expenses, stock issuance
and redemption costs, certain printing costs, registration costs
of the Funds and their shares under Federal and State securities
laws, interest, taxes, and non-recurring expenses, including
litigation.
Under each Advisory Agreement, the each Fund pays a fee
payable monthly and computed on the net asset value of the Fund
as of the close of business each business day at the annual rate
of 0.20 of 1% of such Fund's average daily net assets.
The Adviser agrees (for the Cash Fund only) that the
above fee shall be reduced, but not below zero, by an amount
equal to its pro-rata portion (hereafter described) of the
amount, if any, by which the Cash Fund's total expenses in any
fiscal year, exclusive of taxes, interest, and brokerage fees,
shall exceed the lesser of (i) 1.5% of the first $30 million of
the Cash Fund's average annual net assets, plus 1% of the Trust's
average annual net assets in excess of $30 million, or (ii) 25%
of the Cash Fund's total annual investment income.
Each Advisory Agreement may be terminated by the 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 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).
Each Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Adviser is not
liable for any loss sustained by the adoption of any investment
policy or the purchase, sale or retention of any security and
permits the Adviser to act as investment adviser for any other
person, firm or corporation. Each Fund agrees to indemnify the
Adviser to the full extent permitted under the Trust's
Declaration of Trust.
Each Advisory Agreement states that it is agreed that the
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 Adviser for inclusion therein.
Each Advisory Agreement contains provisions as to the
Fund's portfolio transactions which are described under
"Brokerage Allocation and other practices," below.
The Administration Agreements
Under Administration Agreements with each Fund (the
"Administration Agreements"), Aquila Management Corporation as
Administrator, at its own expense, provides office space,
personnel, facilities and equipment for the performance of its
functions thereunder and as is necessary in connection with the
maintenance of the headquarters of the Fund and pays all
compensation of the Fund's Trustees, officers and employees who
are affiliated persons of the Administrator. The Administration
Agreements went into effect November 1, 1993.
Under the Administration Agreements, subject to the
control of the Funds' Board of Trustees, the Administrator
provides all administrative services to each Fund other than
those relating to its investment portfolio and the maintenance of
its accounting books and records. Such administrative services
include but are not limited to maintaining books and records
(other than accounting books and records) of the Funds, and
overseeing all relationships between the Funds and their transfer
agent, custodian, legal counsel, auditors and principal
underwriter, including the negotiation of agreements in relation
thereto, the supervision and coordination of the performance of
such agreements, and the overseeing of all administrative matters
which are necessary or desirable for effective operation of the
Funds and for the sale, servicing or redemption of the Funds'
shares.
Under the Administration Agreement, each Fund pays 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 0.15 of 1%
of such net asset value. The Administrator has agreed (Cash Fund
only) that the above fee shall be reduced, but not below zero, by
an amount equal to its pro-rata portion (hereafter described) of
the amount, if any, by which the Cash Fund's total expenses in
any fiscal year, exclusive of taxes, interest, and brokerage
fees, shall exceed the lesser of (i) 1.5% of the first $30
million of the Cash Fund's average annual net assets, plus 1% of
the Cash Fund's average annual net assets in excess of $30
million, or (ii) 25% of the Trust's total annual investment
income.
In addition to the foregoing expense limitation, the
Administration Agreement contains provision under which the
Administrator agrees to waive fees and reimburse expenses to the
Cash Fund as required so that the total expenses of the Cash Fund
in any fiscal year shall not exceed 0.60 of 1% of its average
annual net assets. The payment of any fee under the
Administration Agreement to the Administrator at the end of any
month will be reduced or postponed as may be required by reason
of the expense guarantee, subject to readjustment during the
year. Any reimbursement of expense to the Cash Fund with respect
to a fiscal year will be made during or at the end of that fiscal
year, and any reimbursements made during the fiscal year will be
subject to readjustment during the year. The expense guarantee
continues from year to year after June 30, 1998, provided,
however, that upon at least six months' written notice to the
Cash Fund, the Administrator may cancel its obligation under this
expense guarantee. Upon the expiration of the expense guarantee,
any amount then outstanding thereunder shall be paid, and
thereupon neither party shall have any further liability to the
other thereunder. The expense guarantee and any outstanding
obligation thereunder shall survive the termination of the
Administration Agreement.
Advisory and Administration Fees
During the three fiscal years ended June 30, 1999, 1998
and 1997, the following fees were accrued, all of which were
waived. The expense limitation provisions in the Advisory and
Administration Agreements in effect, would in any event have
precluded any of such fees during these years.
To the Adviser:
Cash Fund Government
Securities Fund
1999 $3,370 N/A
1998 $3,238 N/A
1997 $3,423 N/A
To the Administrator:
1999 $2,527 N/A
1998 $2,429(2) N/A
1997 $2,568 (3) N/A
(2) The Administrator also reimbursed the Trust $54,773
to comply with the expense limitation, $12,988 pursuant to the
agreement regarding total expenses of the Trust and $3,237
voluntarily, totaling $70,998.
(3) The Administrator also reimbursed the Trust $82,435
to comply with the expense limitation, $12,390 pursuant to the
agreement regarding total expenses of the Trust and $3,296
voluntarily, totaling $98,121.
Transfer Agent, Custodian and Auditors
The Funds' Shareholder Servicing Agent (transfer agent)
is PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
Each Fund's Custodian is Bank One Trust Company N.A., 100
East Broad Street, Columbus, Ohio 43271; it receives, holds and
delivers the Funds' portfolio securities (including physical
securities, book-entry securities, and securities in
depositories) and money, performs related accounting functions
and issues reports to the Funds.
The Funds' auditors, KPMG LLP, 345 Park Avenue, New York,
New York 10154 perform an annual audit of the Funds' financial
statements.
Brokerage Allocation and Other Practices
During the fiscal years ended June 30, 1999, 1998 and
1997, all of the Funds' transactions were principal transactions
and no brokerage commissions were paid. Brokerage allocation and
other practices relating to brokerage are set forth in the
description of the Advisory Agreements. The Advisory Agreements
provide that in connection with its duties to arrange for the
purchase and sale of the Fund's portfolio securities, the Adviser
shall select such broker-dealers ("dealers") as shall, in the
Adviser's judgment, implement the policy of the Fund to achieve
"best execution," i.e., prompt, efficient and reliable execution
of orders at the most favorable net price. The Adviser shall
cause the Fund to deal directly with the selling or purchasing
principal or market maker without incurring brokerage commissions
unless the Adviser determines that better price or execution may
be obtained by paying such commissions; the Fund expects that
most transactions will be principal transactions at net prices
and that the Fund will incur little or no brokerage costs. The
Fund understands that purchases from underwriters include a
commission or concession paid by the issuer to the underwriter
and that principal transactions placed through dealers include a
spread between the bid and asked prices. In allocating
transactions to dealers, the Adviser is authorized to consider,
in determining whether a particular dealer will provide best
execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as
well as the difficulty of the transaction in question, and thus
need not pay the lowest spread or commission available if the
Adviser determines in good faith that 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 Adviser's overall responsibilities
as to the accounts as to which it exercises investment
discretion. If, on the foregoing basis, the transaction in
question could be allocated to two or more dealers, the Adviser
is authorized, in making such allocation, to consider (i) whether
a dealer has provided research services, as further discussed
below; and (ii) whether a dealer has sold shares of the Fund or
any other investment company or companies having the Adviser as
its investment adviser or having the same sub-adviser,
Administrator or principal underwriter as 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, that such research services may or may not
be useful to the Fund and/or other accounts of the Adviser and
that research received by such other accounts may or may not be
useful to the Fund.
Limitation of Redemptions in Kind
Each 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.
Capital Stock
Description of Shares
The Business Trust issues two series of shares, each
series constituting the shares of a Fund. Each series has
separate assets and liabilities and is comprised of two classes
of shares: Original Shares and Service Shares. The Declaration of
Trust permits the Trustees to issue an unlimited number of full
and fractional shares and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Trust. Each share
represents an equal proportionate interest in a Fund. Income,
direct liabilities and direct operating expenses of each series
will be allocated directly to each series, and general
liabilities and expenses, if any, of the Trust will be allocated
among the series in a manner acceptable to the Board of Trustees.
Certain expenses of a series specifically allocable to a
particular class will be borne by that class; the expense of the
series not so allocated will be allocated among the classes in a
manner acceptable to the Board of Trustees and in accordance with
any applicable exemptive order or rule of the SEC. Upon
liquidation of a series, shareholders of each class of the series
are entitled to share pro-rata (subject to liabilities, if any,
allocated specifically to that class) in the net assets of that
series available for distribution to shareholders and upon
liquidation of the Trust, the respective series are entitled to
share proportionately in the assets available to the Trust after
allocation to the various series. If they deem it advisable and
in the best interests of shareholders, the Board of Trustees of
the Trust may create additional classes of shares (subject to
rules and regulations of the Securities and Exchange Commission
or by exemptive order) or the Board of Trustees may, at its own
discretion, create additional series of shares, each of which may
have separate assets and liabilities (in which case any such
series will have a designation including the word "Series").
Shares are fully paid and non-assessable, except as set forth
below; the holders of shares have no pre-emptive or conversion
rights.
Voting Rights
At any meeting of shareholders, shareholders are entitled
to one vote for each dollar of net asset value (determined as of
the record date for the meeting) represented by the shares held
(and proportionate fractional votes for fractional dollar
amounts). Shareholders will vote on the election of Trustees and
on other matters submitted to the vote of shareholders. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Trust. The Trust may be terminated (i) upon the
sale of its assets to another issuer, or (ii) upon liquidation
and distribution of the assets of the Trust, in either case if
such action is approved by the vote of the holders of a majority
of the outstanding shares of each series. If not so terminated,
the Trust will continue indefinitely. Rule 18f-2 under the
Investment Company Act of 1940 provides that matters submitted to
shareholders be approved by a majority of the outstanding voting
securities of each series, unless it is clear that the interests
of each series in the matter are identical or the matter does not
affect a series. However, the rule exempts the selection of
accountants and the election of Trustees from the separate voting
requirement. Classes do not vote separately except that, as to
matters exclusively affecting one class (such as the adoption or
amendment of class-specific provisions of the Distribution Plan),
only shares of that class are entitled to vote.
Each Fund has two classes of shares:
Original Shares: Original Shares are offered solely to
(1) institutions for their own account or acting for investors in
a fiduciary, agency, investment advisory or custodial capacity;
(2) persons entitled to exchange into such shares under the
Fund's exchange privilege; (3) shareholders of record on November
1, 1999, the date on which the Funds first offered two classes of
shares; (4) members of entities, including membership
organizations and associations of common interest which render
assistance in servicing of shareholder accounts or in consulting
or otherwise cooperating as to their members or others in their
area of interest and which have entered into agreements with the
Distributor under a Fund's Distribution Plan. Original Shares are
sold with no sales charge and there is no redemption fee.
Service Shares: Service Shares are offered to anyone.
There are no sales charges or redemption fees. Service Shares of
each Fund are subject to a Distribution (12b-1) fee of 0.25 of 1%
of the average annual assets of the Fund represented by Service
Shares.
The Business Trust is an entity of the type commonly
known as a Massachusetts business trust. Under Massachusetts law,
shareholders of a trust such as the Business Trust may, under
certain circumstances, be held personally liable as partners for
the obligations of the trust. However, for the protection of
shareholders, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of
the Business Trust and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or
executed by any Fund or the Trustees. The Declaration of Trust
provides for indemnification out of the Business Trust's property
of any shareholder held personally liable for the obligations of
the Business Trust. The Declaration of Trust also provides that
the Business Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of
the Business Trust and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to the relatively remote
circumstances in which the Business Trust itself would be unable
to meet its obligations. If any series or class is unable to meet
the obligations attributable to it (which, in the case of the
Business Trust, is a remote possibility), other series or classes
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
out of the assets of each 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.
Purchase, Redemption, and Pricing of Shares
Amortized Cost Valuation
The Funds operate under Rule 2a-7 (the "Rule") of the
Securities and Exchange Commission which permits them to value
their portfolios on the basis of amortized cost. The amortized
cost method of valuation is accomplished by valuing a security at
its cost and thereafter assuming a constant amortization rate to
maturity of any discount or premium, and does not reflect the
impact of fluctuating interest rates on the market value of the
security. This method does not take into account unrealized gains
or losses.
While the amortized cost method provides certainty in
valuation, there may be periods during which value, as determined
by amortized cost, is higher or lower than the price a Fund would
receive if it sold the instrument. During periods of declining
interest rates, the daily yield on a Fund's shares may tend to be
higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market
prices and estimates of market prices for all of its portfolio
instruments and changing its dividends based on these changing
prices. The converse would apply in a period of rising interest
rates.
Under the Rule, each Fund's Board of Trustees must
establish, and has established, procedures (the "Procedures")
designed to stabilize at $1.00, to the extent reasonably
possible, the Fund's price per share as computed for the purpose
of sales and redemptions. Such procedures must include review of
the Fund's portfolio holdings by the Board of Trustees at such
intervals as it may deem appropriate and at such intervals as are
reasonable in light of current market conditions to determine
whether the Fund's net asset value calculated by using available
market quotations deviates from the per share value based on
amortized cost. "Available market quotations" may include actual
market quotations (valued at the mean between bid and asked
prices), estimates of market value reflecting current market
conditions based on quotations or estimates of market value for
individual portfolio instruments or values obtained from yield
data relating to a directly comparable class of securities
published by reputable sources.
Under the Rule, if the extent of any deviation between
the net asset value per share based upon "available market
quotations" (see above) and the net asset value per share based
on amortized cost exceeds $0.005, the Board of Trustees must
promptly consider what action, if any, will be initiated. When
the Board of Trustees believes that the extent of any deviation
may result in material dilution or other unfair results to
investors or existing shareholders, it is required to take such
action as it deems appropriate to eliminate or reduce to the
extent reasonably practicable such dilution or unfair results.
Such actions could include the sale of portfolio securities prior
to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or payment of
distributions from capital or capital gains, redemptions of
shares in kind, or establishing a net asset value per share using
available market quotations. The Procedures include changes in
the dividends payable by each Fund under specified conditions, as
described below under "Computation of Daily Dividends." This
portion of the Procedures provides that actions that the Trustees
would consider under certain circumstances can be taken
automatically.
Computation of Daily Dividends
Under the Procedures which each Fund's Board of Trustees
has adopted relating to amortized cost valuation, the calculation
of each Fund's daily dividends will change under certain
circumstances from that indicated in the Prospectus. If on any
day the deviation between net asset value determined on an
amortized cost basis and that determined using market quotations
is $0.003 or more, the amount of such deviation will be added to
or subtracted from the daily dividend to the extent necessary to
reduce such deviation to within $0.003.
If on any day there is insufficient net income to absorb
any such reduction, the Board of Trustees would be required under
the Rule to consider taking other action if the deviation, after
eliminating the dividend for that day, exceeds $0.005. One of the
actions which the Board of Trustees might take could be the
elimination or reduction of dividends for more than one day.
Automatic Withdrawal Plan
If you own or purchase shares of a 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 must be reinvested.
Shares will be redeemed on the last business day of the
month as may be necessary to meet withdrawal payments. Shares
acquired with reinvested dividends will be redeemed first to
provide such withdrawal payments and thereafter other shares will
be redeemed to the extent necessary, and, depending upon the
amount withdrawn, your principal may be depleted.
Redemption of shares for withdrawal purposes may reduce
or even liquidate the account. Monthly or quarterly payments paid
to shareholders may not be considered as a yield or income on
investment.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among
the Funds and certain tax-free municipal bond funds and equity
funds (the "Bond or Equity Funds") and certain money market funds
(together with the Trust, the "Money-Market Funds"), all of which
are sponsored by Aquila Management Corporation and Aquila
Distributors, Inc., and have the same Manager or Administrator
and Distributor as the Funds. All exchanges are subject to
certain conditions described below. As of the date of the
Prospectus, the Aquila Bond or Equity Funds are Aquila Rocky
Mountain Equity Fund, Aquila Cascadia Equity Fund, Hawaiian Tax-
Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of Oregon,
Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky,
Tax-Free Fund For Utah and Narragansett Insured Tax-Free Income
Fund; the Aquila Money-Market Funds are the Funds, Pacific
Capital Cash Assets Trust (Original Shares), Pacific Capital Tax-
Free Cash Assets Trust (Original Shares), Pacific Capital U.S.
Government Securities Cash Assets Trust (Original Shares) and
Churchill Cash Reserves Trust.
The Aquila Bond and Equity Funds offer Classes of Shares:
Class A Shares ("Front-Payment Shares") and Class C Shares
("Level-Payment Shares") which can be purchased by anyone and
Class Y Shares ("Institutional Class Shares"), which are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity, and are not
offered directly to retail customers. Some Funds also offer Class
I Shares ("Financial Intermediary Class Shares"). The Exchange
Privilege has different provisions for exchanges for each class.
Generally, you can exchange shares of a given class of a
Bond or Equity Fund for shares of the same class of any other
Bond or Equity Fund, or for shares of any Money-Market Fund,
without the payment of a sales charge or any other fee, and there
is no limit on the number of exchanges you can make from fund to
fund. However, the following important information should be
noted:
(1) Originally Purchased Money-Market Fund Shares. Shares
of a Money-Market Fund (and any shares acquired as a result of
reinvestment of dividends and/or distributions on these shares)
acquired directly in a purchase (or in exchange for Money-Market
Fund shares that were themselves directly purchased), rather than
in exchange for shares of a Bond or Equity Fund, may be exchanged
for shares of any class of any Bond or Equity Fund that the
investor is otherwise qualified to purchase, but the shares
received in such an exchange will be subject to the same sales
charge, if any, that they would have been subject to had they
been purchased rather than acquired in exchange for Money-Market
Fund shares. If the shares received in exchange are shares that
would be subject to a contingent deferred sales charge ("CDSC")
if purchased directly, the holding period governing the CDSC will
run from the date of the exchange, not from the date of the
purchase of Money-Market Fund shares.
(2) CDSCs Upon Redemptions of Shares Acquired Through
Exchanges. If you exchange shares subject to a CDSC, no CDSC will
be imposed at the time of exchange, but the shares you receive in
exchange for them will be subject to the applicable CDSC if you
redeem them before the requisite holding period (extended, if
required) has expired.
If the shares you redeem would have incurred a CDSC if
you had not made any exchanges, then the same CDSC will be
imposed upon the redemption regardless of the exchanges that have
taken place since the original purchase.
(3) Extension of Holding Periods by Owning Money-Market
Funds. Any period of 30 days or more during which Money-Market
Fund shares received on an exchange of CDSC Class A Shares or
Class C Shares are held is not counted in computing the
applicable holding period for CDSC Class A Shares or Class C
Shares.
The Funds, as well as the other Money-Market Funds and
Bond or Equity Funds, reserves the right to reject any exchange
into its shares, if shares of the fund into which exchange is
desired are not available for sale in your state of residence.
The Trust may also modify or terminate this exchange privilege at
any time. In the case of termination, the Prospectus will be
appropriately supplemented. No such modification or termination
shall take effect on less than 60 days' written notice to
shareholders.
All exercises of the exchange privilege are subject to
the conditions that (i) the shares being acquired are available
for sale in your state of residence; and (ii) the aggregate net
asset value of the shares surrendered for exchange are at least
equal to the minimum investment requirements of the investment
company whose shares are being acquired.
To effect an exchange, you must complete a form which is
available from the Distributor, unless you have elected the
Telephone Exchange feature on the Application. The exchange will
be effected at the relative exchange prices of the shares being
exchanged next determined after receipt by the Distributor of a
properly completed form or Telephone Exchange request. The
exchange prices will be the respective net asset values of the
shares (unless a sales charge is to be deducted in connection
with an exchange of shares as described above, in which case the
exchange price of shares of the Bond or Equity Fund will be its
public offering price).
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period;
no representation is made as to the deductibility of any such
loss should such occur.
Dividends paid by the Money-Market Funds are taxable,
except to the extent that dividends paid by Pacific Capital Tax-
Free Cash Assets Trust (a tax-free money market fund) are exempt
from regular Federal income tax, and to the extent that dividends
paid by Pacific Capital U.S. Government Securities Cash Assets
Trust (which invests in U.S. Government obligations) are exempt
from state income taxes. Dividends paid by Aquila Rocky Mountain
Equity Fund and Aquila Cascadia Equity Fund are taxable. If your
state of residence is not the same as that of the issuers of
obligations in which a bond fund or a tax-free money market fund
invests, the dividends from that fund may be subject to income
tax of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of such a bond
or equity fund or a tax-free money market fund under the exchange
privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
Transfer on Death Registration
Each of the funds in the Aquilasm Group of Funds now
permits registration of its shares in beneficiary form, subject
to the funds' rules governing Transfer on Death ("TOD")
registration, if the investor resides in a state that has adopted
the Uniform Transfer on Death Security Registration Act (a "TOD
State"; for these purposes, Missouri is deemed to be a TOD
State). This form of registration allows you to provide that, on
your death, your shares are to be transferred to the one or more
persons (to a maximum of three) that you specify as
beneficiaries. To register shares of the Trust in TOD form,
complete the special TOD Registration Request Form and review the
Rules Governing TOD Registration; both are available from the
Agent. The Rules, which are subject to amendment upon 60 days'
notice to TOD account owners, contain important information
regarding TOD accounts with the Trust; by opening such an account
you agree to be bound by them, and failure to comply with them
may result in your shares' not being transferred to your
designated beneficiaries. If you open a TOD account with the
Trust that is otherwise acceptable but, for whatever reason,
neither the Trust nor the Transfer Agent receives a properly
completed TOD Registration Request Form from you prior to your
death, the Trust reserves the right not to honor your TOD
designation, in which case your account will become part of your
estate.
You are eligible for TOD registration only if, and as
long as, you reside in a TOD State. If you open a TOD account and
your account address indicates that you do not reside in a TOD
State, your TOD registration will be ineffective and the Trust
may, in its discretion, either open the account as a regular
(non-TOD) account or redeem your shares. Such a redemption may
result in a loss to you and may have tax consequences. Similarly,
if you open a TOD account while residing in a TOD State and later
move to a non-TOD State, your TOD registration will no longer be
effective. In both cases, should you die while residing in a non-
TOD State the Trust reserves the right not to honor your TOD
designation. At the date of this SAI, most states are TOD States.
Distribution Plan
Each Fund has adopted a Distribution Plan under Rule
12b-1 ("Rule 12b-1") under the 1940 Act; all have substantially
the same terms. In the following material the "Plan" means the
Plan of any of the Funds. Rule 12b-1 provides in substance that
an investment company may not engage directly or indirectly in
financing any activity which is primarily intended to result in
the sale of its shares except pursuant to a plan adopted under
Rule 12b-1. The Plan is in two parts.
The Plan states that while it is in effect, the selection
and nomination of those Trustees of any 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.
Part I of the Plan
Part I of the Plan is designed to protect against any
claim involving the Fund that the administration fee and some of
the expenses which the Fund pays or may pay come within the
purview of Rule 12b-1. No Fund considers such fee or any payment
enumerated in Part I of the Plan as so financing any such
activity. However, it might be claimed that such fee and some of
the expenses a Fund pays come within the purview of Rule 12b-1.
If and to the extent that any payments (including fees)
specifically listed in Part I of the Plan are considered to be
primarily intended to result in or are indirect financing of any
activity which is primarily intended to result in the sale of a
Fund's shares, these payments are authorized under the Plan.
As used in Part I of the Plan, "Qualified Recipients"
means (i) any principal underwriter or underwriters of the Fund
(other than a principal underwriter which is an affiliated
person, or an affiliated person of an affiliated person, of the
Administrator) and (ii) broker-dealers or others selected by
Aquila Management Corporation (the "Administrator") with which it
or a Fund has entered into written agreements ("Plan Agreements")
and which have rendered assistance (whether direct,
administrative or both) in the distribution and/or retention of a
Fund's shares or servicing shareholder accounts. "Qualified
Holdings" means, as to any Qualified Recipient, all Fund shares
beneficially owned by such Qualified Recipient or by one or more
customers (brokerage or other) or other contacts and/or its
investment advisory or other clients, if the Qualified Recipient
was, in the sole judgment of the Administrator, instrumental in
the purchase and/or retention of such Fund shares and/or in
providing administrative assistance in relation thereto.
The Plan permits the Administrator to make payments
("Administrator's Permitted Payments") to Qualified Recipients.
These Administrator's Permitted Payments are made by the
Administrator and are not reimbursed by the Fund to the
Administrator. Permitted Payments may not exceed, for any fiscal
year of a Fund (pro-rated for any fiscal year which is not a full
fiscal year) 0.10 of 1% of the respective average annual net
assets of that Fund. The Administrator shall have sole authority
(i) as to the selection of any Qualified Recipient or Recipients;
(ii) not to select any Qualified Recipient; and (iii) to
determine the amount of Administrator's Permitted Payments, if
any, to each Qualified Recipient, provided that the total
Administrator's Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Administrator 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; 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. The Plan states that whenever the Administrator bears
the costs, not borne by a Fund's Distributor, of printing and
distributing all copies of the Fund's prospectuses, statements of
additional information and reports to shareholders which are not
sent to the Fund's shareholders, or the costs of supplemental
sales literature and advertising, such payments are authorized.
Part I of the Plan recognizes that, in view of the
Administrator's Permitted Payments and bearing by the
Administrator of certain distribution expenses, the profits, if
any, of the Administrator are dependent primarily on the
administration fees paid by the Fund to the Administrator and
that its profits, if any, would be less, or losses, if any, would
be increased due to such Administrator's Permitted Payments and
the bearing by it of such expenses. If and to the extent that any
such administration fees paid by the Fund might, in view of the
foregoing, be considered as indirectly financing any activity
which is primarily intended to result in the sale of shares
issued by the Fund, the payment of such fees is authorized by
Part I of the Plan.
Part I of the Plan also states that if and to the extent
that any of the payments by the fund 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.
Part I of the Plan states that while Part I is in effect,
the Fund's Administrator shall report at least quarterly to the
Fund's Trustees in writing for its review on the following
matters: (i) all Administrator's Permitted Payments made to
Qualified Recipients, the identity of the Qualified Recipient of
each Payment and the purpose for which the amounts were expended;
(ii) all costs of each item specified in the second preceding
paragraph (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 Administrator paid or accrued
during such quarter.
Part I of 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. Part I of 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 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 Part I of the Plan, those
Trustees who vote to approve such implementation or continuance
must conclude that there is a reasonable likelihood that Part I
of the Plan will benefit the Fund and its shareholders. Part I of
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. Part I of 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 Part I of the Plan.
Part I of the Plan states that in the case of a Qualified
Recipient which is a principal underwriter of the Fund the 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, Rule
12b-1. The Plan also states that in the case of Qualified
Recipients which are not principal underwriters of the Fund, the
Plan Agreements with them shall be the agreements with the
Administrator with respect to payments under Part I of the Plan.
Under Rule 12b-1, all agreements related to
implementation of a plan must be in writing and must contain
specified adoption and continuance requirements, including a
requirement that they terminate automatically on their
"assignment," as that term is defined in the 1940 Act. The other
adoption and continuance requirements as to such agreements are
the same as those described above as to Part I of the Plan itself
except that: (i) no shareholder action is required for the
approval of such agreements, and (ii) termination by Trustee or
shareholder action as there described may be on not more than 60
days' written notice. The Plan Agreement between the Fund and the
Administrator is governed by the foregoing requirements.
The formula under which the payments described above may
be made under Part I of the Plan by the Administrator was arrived
at by considering a number of factors. One of such factors is
that such payments are designed to provide incentives for
Qualified Recipients (i) in the case of Qualified Recipients
which are principal underwriters, to act as such and (ii) in the
case of all Qualified Recipients, to devote substantial time,
persons and effort to the sale of the shares of the Fund. Another
factor is that such payments by the Administrator to Qualified
Recipients may provide the only incentive for Qualified
Recipients to do so; there is no sales charge on the sale of the
Fund's shares and, although Part II of the Plan, as discussed
below, permits certain payments by the Fund to persons providing
distribution and/or shareholder service assistance, those
payments are permitted only in connection with one of the Fund's
two classes of shares. Another factor is that the Fund is one of
a group of funds having certain common characteristics. Each such
fund (i) is a money-market fund; and (ii) has as its investment
adviser a banking institution or an affiliate which invests
assets over which it has investment authority in money-market
funds advised by other banking institutions or affiliates. The
marketing of the Fund's shares may be facilitated since each such
institution can, due to these common characteristics, be fully
and currently informed as to the quality of the investments of
and other aspects of the operations of each of the other funds
and if such an investment is otherwise appropriate, can, although
not required to do so, invest assets over which it has investment
authority in one or more of the other funds.
Part II of the Plan
Part II of the Plan authorizes payment of certain
distribution or service fees by the Fund in connection with
Service Shares of the Fund.
As used in Part II of the Plan, "Designated Payees" means
(i) any principal underwriter or underwriters of the Fund and
(ii) broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor") with which it or the Fund has entered
into written agreements ("Distributor's Plan Agreements") and
which have rendered assistance (whether direct, administrative or
both) in the distribution and/or retention of shares of the
specified class or servicing shareholder accounts with respect to
those shares. "Qualified Holdings" means, as to any Designated
Payee, all Service Shares beneficially owned by such Designated
Payee or by one or more customers (brokerage or other) or other
contacts and/or its investment advisory or other clients, if the
Designated Payee was, in the sole judgment of the Distributor,
instrumental in the purchase and/or retention of such shares
and/or in providing administrative assistance in relation
thereto.
Part II of the Plan permits the Fund to make payments
("Fund's Permitted Payments") to Designated Payees. These Fund's
Permitted Payments are made by the Fund directly or through the
Distributor and may not exceed, for any fiscal year of the Fund
0.25 of 1% of the average annual net assets of the Fund
represented by the Service Shares class of Fund shares. Such
payments are to be made out of the Fund assets allocable to
Service Shares. For any fiscal year, the amounts paid under the
Plan to any Designated Payee when added to any amounts paid to
the same Payee in respect of the same Qualified Holdings under
the Trust's Shareholder Services Plan, shall not exceed in the
aggregate 0.25 of 1% of the average annual net asset value of
such Qualified Holdings. Appropriate adjustments shall be made
for any part or parts of a fiscal year during which payments
under this Part II of the Plan are not accruable or for any
fiscal year which is not a full fiscal year.The Distributor shall
have sole authority (i) as to the selection of any Designated
Payee or Payees; (ii) not to select any Designated Payee; and
(iii) to determine the amount of Fund's Permitted Payments, if
any, to each Designated Payee, provided that the total Fund's
Permitted Payments to all Designated Payees 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 Designated Payee; (b) the extent to
which the Designated Payee has, at its expense, taken steps in
the shareholder servicing area; and (c) the possibility that the
Qualified Holdings of the Designated Payee would be redeemed in
the absence of its selection or continuance as a Designated
Payee. The Distributor is also authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: providing facilities to answer
questions from prospective investors about the Trust and its
Portfolios; receiving and answering correspondence, including
requests for prospectuses and statements of additional
information; preparing, printing and delivering prospectuses and
shareholder reports to prospective shareholders; complying with
federal and state securities laws pertaining to the sales of
Trust shares; and assisting investors in completing application
forms and selecting dividend and other account options.
Designated Payees may also provide their endorsement of the Trust
and its Portfolios to their clients, members or customers as an
inducement to invest in the Trust. Notwithstanding the foregoing
two sentences, a majority of the Independent Trustees (as defined
below) may remove any person as a Designated Payee.
Part II of the Plan states that while Part II is in
effect, the Distributor shall report at least quarterly to the
Fund's Trustees in writing for its review on the following
matters: (i) all Fund's Permitted Payments made to Designated
Payees, the identity of the Designated Payee of each Payment and
the purpose 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.
Part II of 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 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
Part II of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that Part II of the Plan will benefit the
Fund and its shareholders. Part II of 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 Service
Shares class. Part II of 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 Part II of the Plan.
Part II of the Plan states that in the case of a
Designated Payee which is a principal underwriter of the Fund,
the Distributor's 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, Rule 12b-1. The Plan also states that in
the case of Designated Payees which are not principal
underwriters of the Fund, the Distributor's Plan Agreements with
them shall be the agreements with the Distributor with respect to
payments under Part II of the Plan.
During the three fiscal years ended June 30, 1999, 1998
and 1997, the no or nominal payments were made under the former
distribution plan, then in effect, under what is currently
designated Part I.
Shareholder Services plan
Each Fund has adopted a Shareholder Services Plan to
provide for the payment by the Service Shares of the Trust of
"service fees" within the meaning of Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. The
Plan applies only to shares of the class denominated Service
Shares (regardless of whether such class is so designated or is
redesignated by some other name). Both Plans have the same terms
and are referred to as the "Plan."
Provisions for Service Shares (Part I)
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 the Distributor and any other principal underwriter of the
Trust, who have, pursuant to written agreements with the Trust or
the Distributor, agreed to provide personal services to holders
of Service Shares and/or maintenance of Service Shares
shareholder accounts. "Qualified Holdings" shall mean, as to any
Qualified Recipient, all Service Shares beneficially owned by
such Qualified Recipient's customers, clients or other contacts.
"Administrator" shall mean Aquila Management Corporation, or any
successor serving as administrator of the Trust.
Subject to the direction and control of the Board of
Trustees of the Business Trust, the Trust may make payments
("Service Fees") to Qualified Recipients, which Service Fees (i)
may be paid directly or through the Distributor or shareholder
servicing agent as disbursing agent and (ii) may not exceed, for
any fiscal year of the Trust (as adjusted for any part or parts
of a fiscal year during which payments under this Part I of the
Plan are not accruable or for any fiscal year which is not a full
fiscal year) 0.25 of 1% of the average annual net assets of the
Trust represented by the Service Shares. Such payments shall be
made only out of the Trust assets allocable to the Service
Shares. For any year, the amounts paid under the Plan to any
Qualified Recipient, when added to any amounts paid to the same
Qualified recipient in respect of the same Qualified Holdings
under the Trust's Distribution Plan shall not exceed in the
aggregate 0.25 of 1% of the average annual net asset value of
such Qualified Holdings. 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 such
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 Service 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 Service Shares,
including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Trust may be effected; assisting shareholders in
designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from
time to time. Notwithstanding the foregoing two sentences, a
majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the
above limits accrued to a Qualified Recipient but not paid during
a fiscal year may be paid thereafter; if less than the full
amount is accrued to all Qualified Recipients, the difference
will not be carried over to subsequent years.
The Plan was not in effect during the fiscal years ended
June 30, 1999, 1998 or 1997.
General Provisions (Part II)
While the Plan is in effect, the Trust's Distributor
shall report at least quarterly to the Business Trust's Trustees
in writing for their review on the following matters: (i) all
Service Fees paid under the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Trust to the 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 Trust, the Administrator, the Distributor, or
the investment adviser or sub-adviser of the Trust, such person
shall agree to furnish to the Distributor for transmission to the
Board of Trustees of the Business Trust an accounting, in form
and detail satisfactory to the Board of Trustees, to enable the
Board of Trustees to make the determinations of the fairness of
the compensation paid to such affiliated person, not less often
than annually.
The Plan has been approved by a vote of the Trustees,
including those Trustees who, at the time of such vote, were not
"interested persons" (as defined in the 1940 Act) of the Trust
and had no direct or indirect financial interest in the operation
of the Plan or in any agreements related to this Plan (the
"Independent Trustees"), with votes cast in person at a meeting
called for the purpose of voting on the 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 Plan shall also be subject to all applicable terms
and conditions of Rule 18f-3 under the 1940 Act as now in force
or hereafter amended.
While the Plan is in effect, the selection and nomination
of those Trustees of the Trust who are not "interested persons"
of the Trust, as that term is defined in the 1940 Act, shall be
committed to the discretion of such disinterested Trustees.
Nothing 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.
Taxation of the Trust
Each Fund, during its last fiscal year, qualified and
intends to continue to qualify under subchapter M of the Internal
Revenue Code; if so qualified it will not be liable for Federal
income taxes on amounts distributed by the Fund.
Underwriter
Aquila Distributors, Inc. acts as each Fund's principal
underwriter in the continuous public offering of each Fund's
shares. The Distributor is not obligated to sell a specific
number of shares. Under the Distribution Agreement, the
Distributor is responsible for the payment of certain printing
and distribution costs relating to prospectuses and reports as
well as the costs of supplemental sales literature, advertising
and other promotional activities.
(1) (2) (3) (4) (5)
Name of Net Under- Compensation Brokerage Other
Principal writing on Redemptions Commissions Compen-
Underwriter Discounts and sation
Commissions Repurchases
Aquila None None None None
Distributors
Inc.
The Distributor currently handles the distribution of the
shares of fourteen funds (five money-market funds, seven tax-free
municipal bond funds and two equity funds), including the Trust.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs
relating to prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other promotional
activities.
The shares of the Distributor are owned 72% by Mr.
Herrmann and other members of his immediate family, 24% by Diana
P. Herrmann and the balance by an officer of the Distributor.
Performance
From time to time, each Fund may advertise its "current
yield" and its "effective yield" (also referred to as "effective
compound yield"). Both yield figures are based on historical
earnings and are not intended to indicate future performance. The
current yield of a Fund refers to the net income generated by an
investment in that Fund over a stated seven-day period. This
income is then "annualized". That is, the amount of income
generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a
percentage of the investment. Each Fund may also advertise or
quote its effective yield, which is calculated similarly, but,
when annualized, the income earned by an investment in a Fund is
assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect
of this assumed reinvestment.
In addition, each Fund may also compare its performance
to other income-producing securities such as (i) money-market
funds; (ii) various bank products, including both those that are
insured (e.g., deposit obligations) and those that are not (e.g.,
investment instruments offered by affiliates of banks); and (iii)
U.S. Treasury Bills or Notes. There are differences between these
income-producing alternatives and each Fund other than their
yields, some of which are summarized below.
The yield of each Fund is not fixed and will fluctuate.
In addition, your investment is not insured and its yield is not
guaranteed. There can be no assurance that a Fund will be able to
maintain a stable net asset value of $1.00 per share. Although
the yields of bank money-market deposit accounts and NOW accounts
will fluctuate, principal will not fluctuate and is insured by
the Federal Deposit Insurance Corporation up to $100,000. Bank
passbook savings accounts normally offer a fixed rate of
interest, and their principal and interest are also guaranteed
and insured. Bank certificates of deposit offer fixed or variable
rates for a set term. Principal and fixed rates are guaranteed
and insured. There is no fluctuation in principal value.
Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. Investment instruments, such as repurchase
agreements and commercial paper, offered by affiliates of banks
are not insured by the Federal Deposit Insurance Corporation. In
comparing the yields of one money-market fund to another,
consideration should be given to each fund's investment policy,
portfolio quality, portfolio maturity, type of instruments held
and operating expenses.
<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 AND 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.
