UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5086
Churchill Tax-Free Trust
(Exact name of Registrant as specified in charter)
380 Madison Avenue
New York, New York 10017
(Address of principal executive offices) (Zip code)
Joseph P. DiMaggio
380 Madison Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 697-6666
Date of fiscal year end: 12/31
Date of reporting period: 6/30/05
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2005
[LOGO OF AQUILA ROCKY MOUNTAIN EQUITY FUND:
A RECTANGLE WITH A DRAWING OF TWO
MOUNTAINS AND THE WORDS "AQUILA ROCKY MOUNTAIN EQUITY FUND"]
AN INVESTMENT DESIGNED
FOR GROWTH AT A REASONABLE PRICE
[LOGO OF THE AQUILA
GROUP OF FUNDS: ONE OF THE
AN EAGLE'S HEAD] AQUILA(SM) GROUP OF FUNDS
[LOGO OF AQUILA ROCKY MOUNTAIN EQUITY FUND:
A RECTANGLE WITH A DRAWING OF TWO
MOUNTAINS AND THE WORDS "AQUILA ROCKY MOUNTAIN EQUITY FUND"]
AQUILA ROCKY MOUNTAIN EQUITY FUND
"OUR STRATEGY IS WORKING"
August, 2005
Dear Fellow Shareholder:
It was just over eleven years ago that we started Aquila Rocky Mountain
Equity Fund. Our strategic work in the early part of the 1990's suggested that
the Rocky Mountain region offered a variety of attractive advantages in terms of
quality of life and an outdoors lifestyle. In addition, we felt that the region
might attract independent-minded, entrepreneurial types who were business people
with lots of energy. We were willing to take a long term perspective in terms of
the dynamism of the area.
We believe our assessment of the region has proven valid. A recent study
conducted by the Department of Labor for the period of 1990-2003 ranked all 50
states by job growth over the period studied. Seven out of the eight Rocky
Mountain States (Arizona, Colorado, Utah, Idaho, New Mexico, Nevada, and
Montana) all ranked in the top 10 in terms of job growth.
Just as we wanted to take a long term perspective with your Fund, we have
sought to be strategic in our investment management of your Fund. The portfolio
turnover of the Fund is well below that of the average mutual fund. Although
Wall Street tends to be short term in its thinking, we prefer to shift out our
time frame. We look for young, emerging companies that appear to have good
growth opportunities over a two to five year time frame or more.
Since Aquila Rocky Mountain Equity Fund is classified as a regional fund
(investing in the Rocky Mountain states of Arizona, Colorado, Idaho, Montana,
Nevada, New Mexico, Utah and Wyoming), it is difficult to provide a similar
benchmark with which to compare relative performance. However, we are providing
you with the results of various well-know indices during the first six months of
2005 so that you can see how the market has fared in general in comparison to
Aquila Rocky Mountain Equity Fund.
NOT A PART OF THE SEMI-ANNUAL REPORT
PERSPECTIVE AS TO CUMULATIVE RETURNS - 1 AND 5 YEARS
AQUILA Dow Jones
ROCKY MOUNTAIN S&P Russell Industrial
EQUITY FUND* 500 2000 NASDAQ Average
6 months ended 6/30/05 -0.86% -0.81% -1.21% -5.12% -3.65%
For the first half of 2005, the stock market has been consolidating as the
Federal Reserve has continued to raise short term interest rates.
ABSOLUTE AVERAGE ANNUAL RETURNS
To give you a better indication of how Aquila Rocky Mountain Equity Fund*
has performed over its lifetime, the absolute average annual returns for 1 year,
3 years, 5 years and since inception follow:
1 year 6.17%
3 years 12.15%
5 years 5.72%
Since inception 9.61%
In dollars and cents, the "since inception" average annual return of 9.61%
equates to a holding of $27,317 if you had invested $10,000 into Aquila Rocky
Mountain Equity Fund at its launch in July, 1994.
THE ECONOMY OF THE COUNTRY REMAINS POSITIVE
In considering the various economic indicators for the country as a whole,
we conclude that the United States is doing reasonably well. The number of jobs
has been increasing to the highest level in a number of years, the country
continues to enjoy increased productivity, new home sales are up, and inflation
continues to be under control. All in all, the country is operating in a
positive manner.
THE ROCKY MOUNTAIN AREA CONTINUES TO SHOW ENTREPRENEURIAL ACTIVITY
According to a recent "Business Week" survey, the Rocky Mountain region
possesses 3 of the top 100 growth companies in the United States. "Fortune
Magazine" also recently released a list of the fastest growing companies with
revenues below $200 million and 4 of your Fund's holdings were on the list. We
have also seen over ten new companies headquartered in the Rocky Mountain Region
go public over the past twelve months.
NOT A PART OF THE SEMI-ANNUAL REPORT
STAY THE COURSE
Despite the lackluster market performance of the first six months of this
calendar year, we feel that you, our shareholders, may be well rewarded by
staying the course with your investment in Aquila Rocky Mountain Equity Fund.
YOUR CONFIDENCE IS APPRECIATED
We are gratified by the continued confidence you have placed in the Fund
through your investment.
Sincerely,
/s/ Barbara S. Walchli /s/ Lacy B. Herrmann
Barbara S. Walchli Lacy B. Herrmann
Senior Vice President and Founder
Portfolio Manager
*In keeping with industry standards, total return figures do not include sales
charges, but do reflect reinvestment of dividends and capital gains. Different
classes of shares are offered by the Fund and their performance will vary
because of differences in sales charges and fees paid by shareholders investing
in these different classes. The performance shown represents that of Class A
shares, adjusted to reflect the absence of sales charges, which is currently a
maximum amount of 4.25% for this Class. From time to time, management fees and
other expenses have been waived or absorbed by Aquila Investment Management LLC,
Manager of the Fund. Returns would be less if sales charges, waived management
fees, and absorbed expenses, were applied. Share price (net asset value) and
investment return fluctuate so that upon redemption an investor may receive more
or less than their original investment. The indices noted above are not
available for direct investment. Therefore, their performance does not reflect
the expenses associated with the active management of an actual portfolio. The
prospectus of the Fund, which contains more complete information, including
management fees and expenses and which discusses the special risk considerations
of the geographic concentration strategy of the Fund, should, of course, be
carefully reviewed before investing. Past performance does not guarantee future
results.
NOT A PART OF THE SEMI-ANNUAL REPORT
[LOGO OF AQUILA ROCKY MOUNTAIN EQUITY FUND:
A RECTANGLE WITH A DRAWING OF TWO
MOUNTAINS AND THE WORDS "AQUILA ROCKY MOUNTAIN EQUITY FUND"]
AQUILA ROCKY MOUNTAIN EQUITY FUND
SEMI-ANNUAL REPORT
MANAGEMENT DISCUSSION
Aquila Rocky Mountain Equity Fund's Class A shares had a total return of
- -0.86%, without provision for sales charges, for the six months ended June 30,
2005. This compares to a total return of -0.81% for the S&P 500 and -1.21% for
the Russell 2000.
Flat to down stock market performance is consistent historically with
periods when the Federal Reserve has been raising interest rates mid-cycle to
slow the economy. The Fed has been raising interest rates for the past twelve
months. Often when the Fed finishes raising interest rates, the stock market has
an upward bias.
For the five years cumulatively ended June 30, 2005, Aquila Rocky Mountain
Fund A shares, before provision for sales charges, had a total return of 31.97%
compared to -11.32% for the S&P 500 and 32.48% for the Russell 2000.
We do not have a perfect benchmark or performance comparison for the Fund
since we invest in a specific region rather than specific size companies. At
mid-year 2005, 18.8% of the Fund was invested in companies with a market
capitalization of over $10 billion (large cap companies), 33.8% was invested in
companies with a market capitalization between $2 billion and $10 billion
(mid-cap), 38.1% of the Fund was invested in companies with a market
capitalization between $300 million and $2 billion (small cap) and 9.3% of the
Fund was invested in companies with a market capitalization below $300 million
(micro cap). We participate in all sizes of companies, with roughly 50% of the
Fund in large and mid cap stocks and 50% of the Fund in small and micro cap
stocks.
At mid-year we had holdings of 56 companies across a number of industries.
We work to hold our maximum position size to around 5% of the Fund's total
portfolio. As a percentage of net assets Coldwater Creek ended the quarter with
a 5.7% weight in the portfolio since the stock spiked up at the end of the
quarter. Consequently, we subsequently sold some Coldwater Creek to reduce this
holding to 5% or less. Our next largest position was Microchip Technologies with
a weighting of 3.9%. Our median position size for the fund was 1.7%.
The five best performers in the Fund during the first half of 2005 were
headquartered in Arizona or Colorado and came from five different industries.
o Rocky Mountain Chocolate Factory, based in Durango, Colorado had a
total return of 112.0%. The company's earnings growth has recently
benefited from a new kiosk business.
o The second best performer was Unisource Energy, headquartered in
Tucson, Arizona with a total return of 29.2%. Unisource is an
electric utility in southern Arizona, which has benefited from
growth in its service territory and increased interest in its solar
cell business, Global Solar.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
o The third best performing stock was Ventana Medical with a total
return of 25.7%. Ventana Medical is also a Tucson based company that
manufactures instruments and reagents that help analyze tissue for
the diagnosis and treatment of cancer.
o The fourth best performing company was MDC Holdings with a total
return of 24.3%. MDC Holdings, based in Denver, Colorado, owns
Richmond American Homes which has been benefiting from rising home
prices.
o The fifth best performing company was Intrado with a total return of
23.2%. Intrado, based in Longmont, Colorado provides emergency
notification services and data management for telecom providers and
public safety agencies. Intrado stock moved up on the news that the
FCC would require telephone services provided over the internet to
have 911 services.
Our three worst performing stocks all came from the pharmaceutical/biotech
industries. Pharmion, a Boulder, Colorado based company declined 45.0% during
the first half. NPS Pharmaceuticals declined 37.9% and Myriad Genetics declined
30.5%. These are all developmental stage companies that are either in the
process of becoming profitable or that have not yet become profitable.
Developmental stage companies tend to be more volatile. For this reason, we seek
to limit the weightings of developmental stage companies in the Fund. At the end
of June, the weighting of Pharmion was 0.4% of the Fund, NPS Pharmaceutical was
0.3% and Myriad Genetics was 1.3% of the Fund. These companies are all working
on portfolios of new pharmaceutical products. Myriad Genetics is in Phase III
clinical trials with Flurizan, a drug for Alzheimer's.
During the first half of 2005, we had eight companies with stock splits.
While stock splits and stock dividends are really just an accounting adjustment
to lower the price of a stock, they often attract investor attention. On January
11, MDC Holdings split their shares 13 for 10, on January 18 Shufflemaster split
their shares 3 for 2, on March 10 First State Bancorp split their shares 2 for 1
and on March 15 Ventana Medical split their shares 2 for 1. Coldwater Creek
split their shares 3 for 2 on March 21, MGM Mirage split their shares 2 for 1 on
May 19, Glacier Bancorp split their shares 5 for 4 on May 27 and Rocky Mountain
Chocolate Factory split their shares 4 for 3 on June 14.
Over the past twelve months, the Federal Reserve has raised short term
interest rates nine times from 1.00% to 3.25% to slow the economy. During Fed
tightenings, stocks tend to correct, anticipating slowing earnings growth. Once
the Fed tightening is completed, market leadership often moves from economic
sensitive groups to consistent growers, such as health care stocks. Sometimes
investors also focus on emerging growth stocks, smaller companies that are
enjoying a high growth phase at an early stage of their growth. We have recently
begun to see a pick-up in performance of technology stocks. Factors which may be
contributing to this include 1) the shift from 32 bit to 64 bit computing, 2)
strong spending on computers for anti-terrorism intelligence, 3) computer
requirements under the Sarbanes Oxley Act for corporate internal control
purposes and 4) it has now been six or seven years since corporations upgraded
computer systems for Y2K.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
Over the past 12 months we have seen over ten new companies go public in
the Rocky Mountain Region, including one which we purchased. Bill Barrett Corp.
is a Denver based oil and gas company which went public in December. During the
first half of 2005 we had one of our energy companies acquired, Patina Oil and
Gas. We replaced it with Cimarex Energy, another Denver based company. Liberty
Media, run by John Malone in Englewood, Colorado has been busy spinning off
companies. Last year Liberty spun off its international cable businesses as
Liberty International. In July, Liberty will spin off its holdings of the
Discovery Channel. We anticipate retaining this spin-off in the Fund as its
headquarters will also be in Colorado.
AQUILA ROCKY MOUNTAIN EQUITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005 (UNAUDITED)
MARKET
SHARES COMMON STOCKS - 88.9% VALUE
- --------------- ------------------------------------------------------------------ --------------
BASIC INDUSTRY - 8.5%
16,000 Allied Waste Industries, Inc.+ ................................... $ 126,880
8,000 Ball Corp. ....................................................... 287,680
17,000 Knight Transportation, Inc. ...................................... 413,610
5,000 Newmont Mining Corp. ............................................. 195,150
3,500 Phelps Dodge Corp. ............................................... 323,750
8,000 SkyWest, Inc. .................................................... 145,440
--------------
1,492,510
--------------
BUSINESS SERVICES - 2.4%
12,000 Intrado, Inc. + .................................................. 178,920
5,000 OfficeMax, Inc. .................................................. 148,850
3,000 Viad Corp. ....................................................... 85,020
--------------
412,790
--------------
CAPITAL SPENDING - 3.5%
22,000 Mity Enterprises, Inc. + ......................................... 341,000
8,000 Mobile Mini, Inc.+ ............................................... 275,840
--------------
616,840
--------------
CONSUMER CYCLICALS - 2.3%
5,000 M.D.C. Holdings, Inc. ............................................ 411,250
--------------
CONSUMER SERVICES - 23.7%
5,000 Apollo Group, Inc. (Class A)+ .................................... 391,100
40,000 Coldwater Creek, Inc.+ ........................................... 996,400
3,400 Comcast Corp. (Special Class A)+ ................................. 101,830
11,000 Echostar Communications Corp. (Class A) .......................... 331,760
15,000 International Game Technology .................................... 422,250
1,100 Liberty Global, Inc. Series A .................................... 51,271
25,000 Liberty Media Corp. (Class A)+ ................................... 254,750
12,000 MGM Mirage+ ...................................................... 474,960
10,000 PETsMART, Inc. ................................................... 303,500
10,500 Shuffle Master, Inc. + ........................................... 294,315
8,000 Station Casinos, Inc. ............................................ 531,200
--------------
4,153,336
--------------
CONSUMER STAPLES - 3.7%
10,000 Albertson's, Inc. ................................................ 206,800
6,000 P.F. Chang's China Bistro, Inc.+ ................................. 353,880
4,200 Rocky Mountain Chocolate Factory, Inc. ........................... 92,400
--------------
653,080
--------------
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------- ------------------------------------------------------------------ --------------
ENERGY - 5.5%
7,000 Bill Barrett Corp.+ .............................................. $ 207,060
2,000 Cimarex Energy Co. + ............................................. 77,820
10,000 Headwaters, Inc.+ ................................................ 343,800
5,000 Questar Corp. .................................................... 329,500
--------------
958,180
--------------
FINANCIAL - 12.0%
24,000 First State Bancorporation ....................................... 462,960
15,625 Glacier Bancorp, Inc. ............................................ 408,281
11,000 Janus Capital Group, Inc. ........................................ 165,440
9,000 MoneyGram International, Inc. .................................... 172,080
5,000 Wells Fargo & Company ............................................ 307,900
8,000 Zions Bancorporation ............................................. 588,240
--------------
2,104,901
--------------
HEALTH CARE - 10.6%
14,000 Medicis Pharmaceutical Corp. (Class A) ........................... 444,220
36,000 Merit Medical Systems, Inc.+ ..................................... 554,760
14,000 Myriad Genetics, Inc. + .......................................... 219,100
4,000 NPS Pharmaceuticals, Inc. + ...................................... 45,400
3,000 Pharmion Corp.+ .................................................. 69,630
9,000 QLT, Inc.+ ....................................................... 93,780
22,000 Sonic Innovations, Inc.+ ......................................... 105,380
8,000 Ventana Medical Systems, Inc.+ ................................... 321,840
--------------
1,854,110
--------------
TECHNOLOGY - 13.3%
14,000 Avnet, Inc.+ ..................................................... 315,420
20,000 CIBER, Inc.+ ..................................................... 159,600
12,000 First Data Corp. ................................................. 481,680
5,000 Inter-Tel, Inc. .................................................. 93,050
10,000 JDA Software Group, Inc. + ....................................... 113,800
23,000 Microchip Technology, Inc. ....................................... 681,260
20,000 Micron Technology, Inc.+ ......................................... 204,200
16,000 SBS Technologies, Inc.+ .......................................... 148,480
12,000 SpectraLink Corp. ................................................ 126,240
--------------
2,323,730
--------------
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------- ------------------------------------------------------------------ --------------
UTILITIES - 3.4%
4,000 Kinder Morgan, Inc. .............................................. $ 332,800
3,000 Pinnacle West Capital Corp. ...................................... 133,350
4,000 UniSource Energy Corp. ........................................... 123,000
--------------
589,150
--------------
Total Common Stocks (cost $9,761,610) ......................... 15,569,877
--------------
FACE
AMOUNT SHORT-TERM INVESTMENTS - 8.9%
- --------------- ------------------------------------------------------------------
$ 800,000 AIM S-T Invest. Co. Prime Port. Inst. Cl. Money Market Fund ...... 800,000
750,000 JP Morgan Liquid Assets Money Market Fund ........................ 750,000
--------------
Total Short-Term Investments (cost $1,550,000) ................ 1,550,000
--------------
Total Investments (cost $11,311,610*) ............ 97.8% 17,119,877
Other assets less liabilities .................... 2.2 383,925
----- --------------
Net Assets ....................................... 100.0% $ 17,503,802
===== ==============
PORTFOLIO DISTRIBUTION (UNAUDITED)
----------------------------------
Arizona ......................................... 26.3%
California ...................................... 1.8
Canada .......................................... 0.5
Colorado ........................................ 18.1
Idaho ........................................... 8.2
Illinois ........................................ 0.9
Minnesota ....................................... 1.0
Montana ......................................... 2.4
Nevada .......................................... 10.1
New Mexico ...................................... 3.6
Pennsylvania .................................... 0.6
Texas ........................................... 1.9
Utah ............................................ 15.6
Short-Term Investments .......................... 9.0
-----
100.0%
=====
* Cost for Federal income tax and financial purposes is identical.
+ Non-income producing security.
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2005 (UNAUDITED)
ASSETS
Investments at market value (cost $11,311,610) ................................... $17,119,877
Cash ............................................................................. 335,328
Receivable for Fund shares sold .................................................. 87,172
Receivable for investment securities sold ........................................ 50,682
Due from Manager for reimbursement of expenses (note 3) .......................... 8,100
Dividends and interest receivable ................................................ 6,733
Prepaid expenses ................................................................. 23,326
Other assets ..................................................................... 25,623
-----------
Total assets ................................................................. 17,656,841
-----------
LIABILITIES
Payable for investment securities purchased ........................................ 114,380
Payable for Fund shares redeemed ................................................... 15,611
Distribution and service fees payable .............................................. 9,136
Accrued expenses ................................................................... 13,912
-----------
Total liabilities ............................................................... 153,039
-----------
NET ASSETS ............................................................................ $17,503,802
===========
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 6,358
Additional paid-in capital ......................................................... 11,690,492
Net unrealized appreciation on investments (note 4) ................................ 5,808,267
Accumulated net realized gain on investments ....................................... 47,417
Net investment loss ................................................................ (48,732)
-----------
$17,503,802
===========
CLASS A
Net Assets ......................................................................... $13,681,330
===========
Capital shares outstanding ......................................................... 494,007
===========
Net asset value and redemption price per share ..................................... $ 27.69
===========
Offering price per share (100/95.75 of $27.69 adjusted to nearest cent) ............ $ 28.92
===========
CLASS C
Net Assets ......................................................................... $ 2,111,682
===========
Capital shares outstanding ......................................................... 81,228
===========
Net asset value and offering price per share ....................................... $ 26.00
===========
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if redeemed
during the first 12 months after purchase) ...................................... $ 26.00*
===========
CLASS Y
Net Assets ......................................................................... $ 1,710,790
===========
Capital shares outstanding ......................................................... 60,563
===========
Net asset value, offering and redemption price per share ........................... $ 28.25
===========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
INVESTMENT INCOME:
Dividends ........................................... $ 83,608
Expenses:
Management fee (note 3) ............................. $ 123,533
Distribution and service fees (note 3) .............. 27,148
Trustees' fees and expenses ......................... 30,948
Legal fees (note 3) ................................. 26,301
Registration fees and dues .......................... 18,515
Transfer and shareholder servicing agent fees ....... 12,402
Shareholders' reports ............................... 8,776
Auditing and tax fees ............................... 8,465
Chief compliance officer (note 3) ................... 2,253
Custodian fees ...................................... 1,521
Insurance ........................................... 586
Miscellaneous ....................................... 11,191
-----------
Total expenses ...................................... 271,639
Management fee waived (note 3) ...................... (123,533)
Reimbursement of expenses by Manager (note 3) ....... (10,858)
Expenses paid indirectly (note 5) ................... (4,908)
-----------
Net expenses ........................................ 132,340
-----------
Net investment loss ................................. (48,732)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions 49,833
Change in unrealized appreciation on investments .... (153,319)
-----------
Net realized and unrealized gain (loss) on investments (104,486)
-----------
Net change in net assets resulting from operations .. $ (153,218)
===========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2005
(UNAUDITED) DECEMBER 31, 2004
---------------- -----------------
OPERATIONS:
Net investment loss ................................... $ (48,732) $ (115,803)
Net realized gain (loss) from securities transactions . 49,833 245,325
Change in unrealized appreciation on investments ...... (154,319) 1,671,939
----------- -----------
Change in net assets from operations ............... (153,218) 1,801,461
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 8):
Class A Shares:
Net realized gain on investments ...................... -- --
Class C Shares:
Net realized gain on investments ...................... -- --
Class Y Shares:
Net realized gain on investments ...................... -- --
----------- -----------
Change in net assets from distributions ............ -- --
----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ............................. 2,942,180 4,941,240
Short-term trading redemption fee ..................... 1,986 1,476
Reinvested dividends and distributions ................ -- --
Cost of shares redeemed ............................... (2,901,497) (2,709,144)
----------- -----------
Change in net assets from capital share transactions 42,669 2,233,572
----------- -----------
Change in net assets ............................... (110,549) 4,035,033
NET ASSETS:
Beginning of period ................................... 17,614,351 13,579,318
----------- -----------
End of period ......................................... $17,503,802 $17,614,351
=========== ===========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 (UNAUDITED)
1. ORGANIZATION
Aquila Rocky Mountain Equity Fund (the "Fund"), a diversified, open-end
investment company, was organized on November 3, 1993 as a Massachusetts
business trust and commenced operations on July 22, 1994. The Fund is authorized
to issue an unlimited number of shares and, since its inception to May 1, 1996,
offered only one class of shares. On that date, the Fund began offering two
additional classes of shares, Class C and Class Y shares. All shares outstanding
prior to that date were designated as Class A shares and are sold with a
front-payment sales charge and bear an annual distribution fee. Class C shares
are sold with a level-payment sales charge with no payment at time of purchase
but level service and distribution fees from date of purchase through a period
of six years thereafter. A contingent deferred sales charge of 1% is assessed to
any Class C shareholder who redeems shares of this Class within one year from
the date of purchase. Class C Shares, together with a pro rata portion of all
Class C Shares acquired through reinvestment of dividends or other distributions
paid in additional Class C Shares, automatically convert to Class A Shares after
6 years. The Class Y shares are only offered to institutions acting for an
investor in a fiduciary, advisory, agency, custodian or similar capacity and are
not offered directly to retail investors. Class Y shares are sold at net asset
value without any sales charge, redemption fees, contingent deferred sales
charge or distribution or service fees. On April 30, 1998 the Fund established
Class I shares, which are offered and sold only through financial intermediaries
and are not offered directly to retail investors. As of the report date, there
were no Class I shares outstanding. All classes of shares represent interests in
the same portfolio of investments and are identical as to rights and privileges
but differ with respect to the effect of sales charges, the distribution and/or
service fees borne by each class, expenses specific to each class, voting rights
on matters affecting a single class and the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies.
a) PORTFOLIO VALUATION: Securities listed on a national securities exchange
or designated as national market system securities are valued at the last
sale price on such exchanges or market system or, if there has been no
sale that day, at the bid price. Securities for which market quotations
are not readily available are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees. Short-term
investments maturing in 60 days or less are valued at amortized cost.
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recorded daily on the accrual basis.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The Fund
intends to make distributions of income and securities profits sufficient
to relieve it from all, or substantially all, Federal income and excise
taxes.
d) MULTIPLE CLASS ALLOCATIONS: All income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses are
allocated daily to each class of shares based on the relative net assets
of each class. Class-specific expenses, which include distribution and
service fees and any other items that are specifically attributed to a
particular class, are charged directly to such class.
e) USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
The Fund has a Sub-Advisory and Administration Agreement with Aquila
Investment Management LLC (the "Manager"), a wholly-owned subsidiary of Aquila
Management Corporation, the Fund's founder and sponsor. Under this agreement,
the Manager supervises the investments of the Fund and the composition of its
portfolio, arranges for the purchases and sales of portfolio securities, and
provides for daily pricing of the Fund's portfolio. Besides its sub-advisory
services, it also provides all administrative services. This includes providing
the office of the Fund and all related services as well as managing
relationships with all the various support organizations to the Fund such as the
shareholder servicing agent, custodian, legal counsel, auditors and distributor
and additionally maintaining the Fund's accounting books and records. For its
services, the Manager is entitled to receive a fee which is payable monthly and
computed as of the close of business each day on the net assets of the Fund at
the following annual rates; 1.50% on the first $15 million; 1.20% on the next
$35 million and 0.90% on the excess over $50 million.
For the six months ended June 30, 2005, the Fund incurred Management fees
of $123,533, of which all were waived. Additionally, during this period the
Manager reimbursed the Fund for other expenses in the amount of $10,858. Of this
amount, $2,758 was paid prior to June 30, 2005 and the balance of $8,100 was
paid in early July 2005. The Manager has contractually undertaken to waive fees
and/or reimburse Fund expenses during the period January 1, 2005 through
December 31, 2005 so that total Fund expenses would not exceed 1.50% for Class A
Shares, 2.25% for Class C Shares or 1.25% for Class Y Shares.
Under a Compliance Agreement with the Manager, the Manager is compensated
for Chief Compliance Officer related services provided to enable the Fund to
comply with Rule 38a-1 of the Investment Company Act of 1940.
Specific details as to the nature and extent of the services provided by
the Manager are more fully defined in the Fund's Prospectus and Statement of
Additional Information.
b) DISTRIBUTION AND SERVICE FEES:
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of
the Plan, with respect to Class A Shares, the Fund is authorized to make service
fee payments to broker-dealers or others ("Qualified
Recipients") selected by Aquila Distributors, Inc. (the "Distributor"),
including, but not limited to, any principal underwriter of the Fund, with which
the Distributor has entered into written agreements contemplated by the Rule and
which have rendered assistance in the distribution and/or retention of the
Fund's shares or servicing of shareholder accounts. The Fund makes payment of
this service fee at the annual rate of 0.25% of the Fund's average net assets
represented by Class A Shares. For the six months ended June 30, 2005,
distribution fees on Class A Shares amounted to $16,412 of which the Distributor
retained $1,445.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C shares or
servicing of shareholder accounts. These payments are made at the annual rate of
0.75% of the Fund's average net assets represented by Class C Shares and for the
six months ended June 30, 2005, amounted to $8,052. In addition, under a
Shareholder Services Plan, the Fund is authorized to make service fee payments
with respect to Class C Shares to Qualified Recipients for providing personal
services and/or maintenance of shareholder accounts. These payments are made at
the annual rate of 0.25% of the Fund's average net assets represented by Class C
Shares and for the six months ended June 30, 2005, amounted to $2,684. The total
of these payments with respect to Class C Shares amounted to $10,736 of which
the Distributor retained $2,359.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as the exclusive
distributor of the Fund's shares. Through agreements between the Distributor and
various broker-dealer firms ("dealers"), the Fund's shares are sold primarily
through the facilities of these dealers having offices within the general Rocky
Mountain region, with the bulk of sales commissions inuring to such dealers. For
the six months ended June 30, 2005, total commissions on sales of Class A Shares
amounted to $32,672 of which $3,090 was received by the Distributor.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2005, the Fund incurred $22,919 of legal
fees allocable to Hollyer Brady Barrett & Hines LLP, counsel to the Fund, for
legal services in conjunction with the Fund's ongoing operations. The Secretary
of the Fund is a Partner of Hollyer Brady Barrett & Hines LLP.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2005, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $965,856 and $794,579, respectively.
At June 30, 2005, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted to
$6,173,307 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $365,040 for
a net unrealized appreciation of $5,808,267.
5. EXPENSES
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees and other Fund
expenses whenever there are uninvested cash balances. The Statement of
Operations reflects the total expenses before any offset, the amount of offset
and the net expenses. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in equity securities rather
than leave cash on deposit.
6. PORTFOLIO ORIENTATION
The Fund's investments are primarily invested in the securities of
companies within the eight state Rocky Mountain region consisting of Colorado,
Arizona, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming and therefore are
subject to economic and other conditions affecting the various states which
comprise the region. Accordingly, the investment performance of the Fund might
not be comparable with that of a broader universe of companies.
7. CAPITAL SHARE TRANSACTIONS
a) Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
----------- ----------- ----------- -----------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
CLASS A SHARES:
Proceeds from shares sold 47,947 $ 1,296,984 154,717 $ 3,972,093
Reinvested dividends and
distributions ........ -- -- -- --
Cost of shares redeemed . (45,191) (1,218,306) (78,544) (1,999,023)
----------- ----------- ----------- -----------
Net change ........... 2,756 78,678 76,173 1,973,070
----------- ----------- ----------- -----------
CLASS C SHARES:
Proceeds from shares sold 10,081 254,759 32,243 783,083
Reinvested dividends and
distributions ........ -- -- -- --
Cost of shares redeemed . (13,792) (352,244) (24,862) (605,856)
----------- ----------- ----------- -----------
Net change ........... (3,711) (97,485) 7,381 177,227
----------- ----------- ----------- -----------
CLASS Y SHARES:
Proceeds from shares sold 49,700 1,390,437 7,124 186,064
Reinvested dividends and
distributions ........ -- -- -- --
Cost of shares redeemed . (47,546) (1,330,947) (4,003) (104,265)
----------- ----------- ----------- -----------
Net change ........... 2,154 59,490 3,121 81,799
----------- ----------- ----------- -----------
Total transactions in Fund
shares .................. 1,199 $ 40,683 86,675 $ 2,232,096
=========== =========== =========== ===========
b) SHORT-TERM TRADING REDEMPTION FEE: The Fund and the Distributor may reject
any order for the purchase of shares, on a temporary or permanent basis,
from investors exhibiting a pattern of frequent or short-term trading in
Fund shares. In addition, the Fund imposes a redemption fee of 2.00% of
the shares' redemption value on any redemption of Class A Shares on which
a sales charge is not imposed or of Class Y Shares, if the redemption
occurs within 120 days of purchase. The fee will be paid to the Fund and
is designed to offset the costs to the Fund caused by short-term trading
in Fund shares. The fee will not apply to shares sold under an Automatic
Withdrawal Plan, or sold due to the shareholder's death or disability. For
the six months ended June 30, 2005, fees collected did not have a material
effect on the financial highlights.
8. INCOME TAX INFORMATION AND DISTRIBUTIONS
The Fund declares annual distributions to shareholders from net investment
income, if any, and from net realized capital gains, if any. Distributions are
recorded by the Fund on the ex-dividend date and paid in additional shares at
the net asset value per share, in cash, or in a combination of both, at the
shareholder's option. Dividends from net investment income and distributions
from realized gains from investment transactions are determined in accordance
with Federal income tax regulations, which may differ from investment income and
realized gains determined under generally accepted accounting principles. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes, but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital. As of December 31, 2004 due to a net investment loss, Aquila
Rocky Mountain Equity Fund reclassified $115,803 from accumulated undistributed
net investment loss to paid-in capital. Net assets were not affected by these
changes.
At December 31, 2004, the Fund had a capital loss carryover of
approximately $2,072, which expires on December 31, 2011. This carryover is
available to offset future net gains on securities transactions to the extent
provided for in the Internal Revenue Code and it is probable the gain so offset
will not be distributed. In addition, the Fund generated a net post-October
capital loss of $344.
As of December 31, 2004, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized loss ...... $ (2,416)
Unrealized appreciation ............ 5,962,586
-----------
$ 5,960,170
===========
9. CHANGE IN PRINCIPAL ACCOUNTANTS
KPMG LLP was previously the principal accountants for the Aquila Rocky
Mountain Equity Fund (the "Fund"). On July 27, 2005 KPMG LLP resigned as the
principal accountants of the Fund and Tait, Weller and Baker was engaged as the
principal accountants to audit the Fund's financial statements for the fiscal
year of 2005. The decision was made by the Audit Committee of the Board of
Trustees.
The audit reports of KPMG LLP on the Fund's financial statements as of and
for the years ended December 31, 2004 and 2003 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the two fiscal years ended December 31,
2004 and 2003 and the subsequent interim period through July 27, 2005, there
were no reportable events or disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to the satisfaction of
KPMG LLP would have caused them to make reference in connection with their
opinion to the subject matter of the disagreements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/05 -----------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ....... $ 27.93 $ 24.92 $ 17.74 $ 20.96 $ 19.64 $ 19.96
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.07) (0.17) (0.16) (0.15) (0.07) (0.03)
Net gain (loss) on securities (both
realized and unrealized) ............ (0.17) 3.18 7.34 (3.07) 1.58 (0.09)
------- ------- ------- ------- ------- -------
Total from investment operations ....... (0.24) 3.01 7.18 (3.22) 1.51 (0.12)
------- ------- ------- ------- ------- -------
Less distributions (note 8):
Dividends from net investment income ... -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- -- (0.19) (0.20)
------- ------- ------- ------- ------- -------
Total distributions .................... -- -- -- -- (0.19) (0.20)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............. $ 27.69 $ 27.93 $ 24.92 $ 17.74 $ 20.96 $ 19.64
Total return (not reflecting sales charge) . (0.86)%* 12.08% 40.47% (15.36)% 7.73% (0.55)%
Ratios/supplemental data
Net assets, end of period (in thousands) $13,681 $13,718 $10,345 $ 4,242 $ 2,403 $ 2,109
======= ======= ======= ======= ======= =======
Ratio of expenses to average net assets 1.56%** 1.54% 1.50% 1.52% 1.60% 1.57%
Ratio of net investment loss to average
net assets .......................... (0.56)%** (0.72)% (0.77)% (0.82)% (0.44)% (0.20)%
Portfolio turnover rate ................ 5.26%* 8.38% 3.01% 1.81% 28.54% 29.27%
The expense and net investment income ratios without the effect of the waiver of fees and the expense reimbursement were:
Ratio of expenses to average net assets 3.09%** 2.82% 3.25% 4.15% 4.81% 5.57%
Ratio of net investment loss to average
net assets .......................... (2.10)%** (1.99)% (2.51)% (3.45)% (3.66)% (4.20)%
The expense ratios after giving effect to the waivers, reimbursements and expense offset for uninvested cash balances were (note 3):
Ratio of expenses to average net assets 1.50%** 1.50% 1.48% 1.50% 1.50% 1.51%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not Annualized
** Annualized
See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JUNE 30,
6/30/05 ------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- ------ ------ ------ ------ ------
Net asset value, beginning of period ....... $26.31 $23.66 $16.96 $20.19 $19.07 $19.53
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.16) (0.35) (0.30) (0.28) (0.21) (0.17)
Net gain (loss) on securities
(both realized and unrealized) ...... (0.15) 3.00 7.00 (2.95) 1.52 (0.09)
------ ------ ------ ------ ------ ------
Total from investment operations ....... (0.31) 2.65 6.70 (3.23) 1.31 (0.26)
------ ------ ------ ------ ------ ------
Less distributions (note 8):
Distributions from net investment income -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- -- (0.19) (0.20)
------ ------ ------ ------ ------ ------
Total distributions .................... -- -- -- -- (0.19) (0.20)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $26.00 $26.31 $23.66 $16.96 $20.19 $19.07
====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge) . (1.18)%* 11.20% 39.50% (16.00)% 6.91% (1.28)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ...................... $2,112 $2,235 $1,835 $ 858 $ 372 $ 242
Ratio of expenses to average net assets 2.31%** 2.29% 2.26% 2.26% 2.34% 2.29%
Ratio of net investment income (loss)
to average net assets ............... (1.31)%** (1.47)% (1.53)% (1.56)% (1.23)% (0.94)%
Portfolio turnover rate ................ 5.26%* 8.38% 3.01% 1.81% 28.54% 29.27%
The expense and net investment income ratios without the effect of the waiver of fees and the expense reimbursement were (note 3):
Ratio of expenses to average net assets 3.84%** 3.56% 4.02% 4.95% 5.52% 6.32%
Ratio of net investment loss to
average net assets .................. (2.85)%** (2.74)% (3.29)% (4.25)% (4.40)% (4.97)%
The expense ratios after giving effect to the waivers, reimbursements and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets 2.25%** 2.25% 2.24% 2.25% 2.25% 2.23%
CLASS Y
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JUNE 30,
6/30/05 ------------------------------------------------------
(UNAUDITED) 2004 2003 2002 2001 2000
----------- ------ ------ ------ ------ ------
Net asset value, beginning of period ....... $28.45 $25.32 $17.97 $21.19 $19.81 $20.07
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.04) (0.11) (0.10) (0.10) (0.02) 0.03
Net gain (loss) on securities
(both realized and unrealized) ...... (0.16) 3.24 7.45 (3.12) 1.59 (0.09)
------ ------ ------ ------ ------ ------
Total from investment operations ....... (0.20) 3.13 7.35 (3.22) 1.57 (0.06)
------ ------ ------ ------ ------ ------
Less distributions (note 8):
Distributions from net investment income -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- -- (0.19) (0.20))
------ ------ ------ ------ ------ ------
Total distributions .................... -- -- -- -- (0.19) (0.20)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $28.25 $28.45 $25.32 $17.97 $21.19 $19.81
====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge) . (0.70)%* 12.36% 40.90% (15.20)% 7.97% (0.25)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ...................... $1,711 $1,661 $1,400 $ 918 $1,040 $ 962
Ratio of expenses to average net assets 1.31%** 1.29% 1.25% 1.26% 1.35% 1.29%
Ratio of net investment income (loss)
to average net assets ............... (0.32)%** (0.47)% (0.51)% (0.56%) (0.18)% 0.06%
Portfolio turnover rate ................ 5.26%* 8.38% 3.01% 1.81% 28.54% 29.27%
The expense and net investment income ratios without the effect of the waiver of fees and the expense reimbursement were (note 3):
Ratio of expenses to average net assets 2.84%** 2.56% 3.05% 3.87% 4.59% 5.32%
Ratio of net investment loss to
average net assets .................. (1.86)%** (1.75)% (2.32)% (3.16)% (3.42)% (3.96)%
The expense ratios after giving effect to the waivers, reimbursements and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets 1.25%** 1.25% 1.23% 1.25% 1.25% 1.23%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not annualized
** Annualized
See accompanying notes to financial statements.
ANALYSIS OF EXPENSES (UNAUDITED)
As a shareholder of the Fund, you may incur two types of costs: (1)
transaction costs, including front-end sales charges with respect to Class A
shares or contingent deferred sales charges ("CDSC") with respect to Class C
shares; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other Fund expenses. The tables below are intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The tables below are based on an investment of $1,000 invested on January
1, 2005 and held for the six months ended June 30, 2005.
ACTUAL EXPENSES
This table provides information about actual account values and actual
expenses. You may use the information provided in this table, together with the
amount you invested, to estimate the expenses that you paid over the period. To
estimate the expenses you paid on your account, divide your ending account value
by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During the Period".
FOR THE SIX MONTHS ENDED JUNE 30, 2005
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A (0.86)% $1,000.00 $991.40 $7.39
- --------------------------------------------------------------------------------
Class C (1.18)% $1,000.00 $988.20 $11.08
- --------------------------------------------------------------------------------
Class Y (0.70)% $1,000.00 $993.00 $6.10
- --------------------------------------------------------------------------------
(1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE
APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES.
TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
(2) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 1.50%, 2.25% AND
1.25% FOR THE FUND'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO
REFLECT THE ONE-HALF YEAR PERIOD).
ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs,
with respect to Class A shares. The example does not reflect the deduction of
contingent deferred sales charges ("CDSC") with respect to Class C shares.
Therefore, the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different mutual funds. In
addition, if these transaction costs were included, your costs would have been
higher.
FOR THE SIX MONTHS ENDED JUNE 30, 2005
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,017.37 $7.49
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,013.65 $11.22
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,018.61 $6.24
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 1.50%, 2.25% AND
1.25% FOR THE FUND'S CLASS A, C AND Y SHARES, RESPECTIVELY, MULTIPLIED BY
THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO
REFLECT THE ONE-HALF YEAR PERIOD).
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE SUB-ADVISORY AND ADMINISTRATION AGREEMENT
Renewal until June 30, 2006 of the Sub-Advisory and Administration
Agreement (the "Sub-Advisory Agreement") between the Aquila Rocky Mountain
Equity Fund (the "Fund") and the Manager was approved by the Board of Trustees
and the lndependent Trustees in June, 2005. At a meeting called and held for
that purpose at which a majority of the lndependent Trustees were present in
person, the following materials were considered:
o Copies of the agreements to be renewed;
o A term sheet describing the material terms of the agreements;
o The Annual Report of the Fund for the year ended December 31, 2004;
o A report by the Manager containing data about the performance of the
Fund compared to various benchmarks, data about its fees, expenses
and purchases and redemptions together with comparisons of such data
with similar data about other comparable funds, as well as data as
to the profitability of the Manager; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees reviewed materials relevant to, and considered the factors
set forth below.
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER.
The Manager's portfolio management operation with respect to the Fund's
investment securities is based within the investment region. The Trustees noted
that the Manager employed as portfolio manager for the Fund, Ms. Barbara S.
Walchli, who focuses on approximately 300-400 Rocky Mountain-based companies
from which she selects investments for the Fund's portfolio. Ms. Walchli, based
in Phoenix, Arizona, provides regional information regarding specific holdings
in the Fund's portfolio as well as economic and business developments within the
region. The portfolio manager has also been available to and has met with the
brokerage and financial planner community and with investors and prospective
investors to provide them with information generally about the Fund's portfolio,
with which to assess the Fund as an investment opportunity.
The Board considered that the Manager provided all services the Board
deemed necessary or appropriate, including the specific services that the Board
has determined are required for the Fund, given that its purpose is to provide
shareholders with capital appreciation primarily through investing in equity
securities of companies having a significant business presence in the Rocky
Mountain region.
The Board concluded that a commendable quality of services was provided
and that the Fund would be well served if they continued. Evaluation of this
factor weighed in favor of renewal of the Sub-Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER.
The Board determined it appropriate to consider the Fund's performance.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of various benchmark indices. It was noted that the
materials provided by the Manager indicated that compared to the benchmark
indices, the Fund has had investment performance that is comparable
to that of the benchmarks for one-, three-, five- and ten-year periods ended
March 31, 2005. The Board considered these results to be consistent with the
purposes of the Fund.
The Board concluded that the performance of the Fund, in light of market
conditions, was satisfactory. Evaluation of this factor indicated to the
Trustees that renewal of the Sub-Advisory Agreement would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATES AND THE RELATIONSHIP WITH THE FUND.
The information provided in connection with renewal contained expense data
for the Fund and a peer group selected by a detailed screening process which was
provided to the Trustees for their review and discussion. The materials also
showed the profitability to the Manager of its services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
reasonable as compared to those being paid by the peer group.
The Board noted that the entire sub-advisory fee had been waived, except
for $26,572. Additionally, it was noted that the Manager had contractually
undertaken to waive fees and/or reimburse Fund expenses during the period
January 1, 2004 through December 31, 2004 so that the total Fund expenses did
not exceed 1.50% for Class A Shares, 2.25% for Class C Shares and 1.25% for
Class Y Shares.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the profitability to the Manager and the
Distributor did not argue against approval of the fees to be paid under the
Sub-Advisory Agreement. (In this connection, the Board noted that the
Distributor did not derive profits from its relationship with the Fund.)
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS.
The Fund has in place breakpoints in the management fee which would be
realized as the Fund grows. For its services, the Manager is entitled to receive
a fee which is payable monthly and computed as of the close of business each day
on the net assets of the Fund at the following annual rates; 1.50% on the first
$5 million; 1.20% on the next $35 million and 0.90% on the excess over $50
million.
Evaluation of this factor indicated to the Board that the Sub-Advisory
Agreement should be renewed at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATES FROM THEIR
RELATIONSHIPS WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliates, by providing services to a number of funds or other
investment clients including the Fund, were able to spread costs as they would
otherwise be unable to do. The Board noted that while that produces efficiencies
and increased profitability for the Manager and its affiliates, it also makes
their services available to the Fund at favorable levels of quality and cost
which are more advantageous to the Fund than would otherwise have been possible.
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INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquilasm Group of Funds
produce is automatically sent to you and all other shareholders. Specifically,
you are routinely sent the entire list of portfolio securities of your Fund
twice a year in the semi-annual and annual reports you receive. Additionally, we
prepare, and have available, portfolio listings at the end of each quarter.
Whenever you may be interested in seeing a listing of your Fund's portfolio
other than in your shareholder reports, please check our website
(www.aquilafunds.com) or call us at 1-800-437-1020.
The Fund additionally files a complete list of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms
N-Q are available free of charge on the SEC website at www.sec.gov. You may also
review or, for a fee, copy the forms at the SEC's Public Reference Room in
Washington, DC or by calling 800-SEC-0330.
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Proxy Voting and Procedures of the Fund are available without charge, upon
request, by calling our toll free number (1-800-437-1020). This information is
also available at http://www.aquilafunds.com/EquityFunds/armef/armefmain.htm or
on the SEC's Web site - www.sec.gov
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FOUNDER
AQUILA MANAGEMENT CORPORATION
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Tucker Hart Adams, Chair
Lacy B. Herrmann
Arthur K. Carlson
Gary C. Cornia
Grady Gammage, Jr.
Diana P. Herrmann
OFFICERS
Diana P. Herrmann, President
Barbara S. Walchli, Senior Vice President and Portfolio Manager
Marie E. Aro, Senior Vice President
James M. McCullough, Senior Vice President
Kimball L. Young, Senior Vice President
Christine L. Neimeth, Vice President
Emily T. Rae, Vice President
Alan R. Stockman, Vice President
M. Kayleen Willis, Vice President
Robert W. Anderson, Chief Compliance Officer
Joseph P. DiMaggio, Chief Financial Officer
and Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
760 Moore Road
King of Prussia, Pennsylvania 19406
Further information is contained in the Prospectus, which must precede or
accompany this report.
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
905: Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940) as of a date within 90 days of the filing of this report, the registrant's
chief financial and executive officers have concluded that the disclosure
controls and procedures of the registrant are appropriately designed to ensure
that information required to be disclosed in the registrant's reports that are
filed under the Securities Exchange Act of 1934 are accumulated and communicated
to registrant's management, including its principal executive officer(s) and
principal financial officer(s), to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms adopted by the Securities and Exchange
Commission.
(b) There have been no significant changes in registrant's internal controls or
in other factors that could significantly affect registrant's internal controls
subsequent to the date of the most recent evaluation, including no significant
deficiencies or material weaknesses that required corrective action.
ITEM 10. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act
of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
CHURCHILL TAX-FREE TRUST
By: /s/ Diana P. Herrmann
- - ---------------------------------
President and Trustee
September 9,2005
By: /s/ Joseph P. DiMaggio
- - -----------------------------------
Chief Financial Officer and Treasurer
September 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Diana P. Herrmann
- - ---------------------------------
Diana P. Herrmann
President and Trustee
September 9, 2005
By: /s/ Joseph P. DiMaggio
- - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 9, 2005
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
(a) (2) Certifications of principal executive officer
and principal financial officer as required by Rule 30a-2(a)
under the Investment Company Act of 1940.
(b) Certification of chief executive officer and chief financial
officer as required by Rule 30a-2(b) of the Investment Company Act
of 1940.