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 811-8168
Aquila Rocky Mountain Equity Fund
(Exact name of Registrant as specified in charter)
380 Madison Avenue
New York, New York 10017
(Address of principal executive offices) (Zip code)
Joseph P. DiMaggio
380 Madison Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 697-6666
Date of fiscal year end: 12/31
Date of reporting period: 6/30/04
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
[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
4.65% without provision for sales charges, for the six months ended June 30,
2004. This compares to the S&P 500 with a total return of 3.44% and the Russell
2000 Index with a total return of 6.80%.
For the five years cumulatively ending June 30, 2004, Aquila Rocky
Mountain A Shares; before provision for sales charges, had a total return of
38.01% compared to -10.54% for the S&P 500 and 38.46% for the Russell 2000
Index.
We do not have a perfect benchmark or performance comparison for the Fund
since we invest in companies in a specific region rather than a specific size.
At mid-year 2004, 18.1% of the Fund was invested in companies with a market
capitalization of over $10 billion (large cap companies), 38.4% of the Fund was
invested in companies with a market capitalization between $2 billion and $10
billion (mid-cap) and 43.49% of the Fund was invested in small and micro-cap
companies (below $2 billion.)
We continued to use our growth at a reasonable price (GARP) or core
investment style in 2004. We look for good growth companies that are selling at
what we believe to be a reasonable price relative to their growth rates. For the
first six months of 2004, the Lipper median for U.S. equity mutual funds that
invest in different sized companies using a core style (multi-cap core) was
3.34% compared to the 4.65%, without provision for sales charges, for Aquila
Rocky Mountain Equity Fund.
At mid-year we had holdings of 57 companies in the portfolio across a
number of industries. We work to hold our individual position sizes to 5% or
less of the portfolio and try to diversify the Fund across industries. We
believe this helps control specific security risk as well as industry risk. Our
biggest individual position size on June 30th was Microchip Technology at 3.76%
of the portfolio.
The five best performers in the Fund during the first half of 2004 were
from four industries and four states. Coldwater Creek, based in Sandpoint, Idaho
had a total return of 140.6%. This retailer which serves women in the 45 - 60
age range is benefiting from new stores to complement its catalogue operation.
Station Casinos based in Las Vegas, Nevada was up 59.2%, benefiting from
population growth in Nevada and management fees from its new native American
gaming businesses. Shufflemaster, a Las Vegas-based provider of card shuffling
systems and other table gaming equipment, benefited from the growth of native
American gaming in many states, was up 57.8%. Mobile Mini, a Tempe, Arizona
based provider of mobile storage units, was up 44.07%, also benefiting from a
pickup in the economy. Atrix Laboratories, a Fort Collins, Colorado based
provider of drug delivery systems was up 42.6%. The company benefited from new
product approvals and the news that the company would be acquired.
Our three worst performers were also from different industries. McData is a
Broomfield, Colorado based provider of switches and software for storage
networks. This market segment has experienced a slow-down in demand over the
past six months, pulling the stock down 43.5%. NPS Pharmaceuticals is a Salt
Lake City based developmental stage drug company that is not yet producing
earnings but has several products nearing market. Despite the new products, the
stock declined 31.5%. During a period of rising interest rates, the market tends
to penalize developmental stage companies since they are not yet producing
earnings or dividends. That is why we tend to limit our exposure to
developmental stage companies. Merit Medical, a Jordan, Utah based med-tech
provider was down 28.4%. The company had a price pullback in part because
several new products were delayed.
We continue to work to invest the Fund strategically since we believe that
trading and transaction costs do matter. We prefer to do our own research,
focusing on the two to five year time frame. We are often surprised by how short
term oriented many investors are. We continue to look for the best management
teams in the Rocky Mountain region to invest in for our shareholders.
Currently we have four companies in the portfolio in the process of being
acquired. They are all small cap companies. This suggests to us that small cap
companies are still priced attractively. Larger companies may also be looking
for ways to enhance their growth rates in a slower growth environment. The four
companies in the process of being acquired are: Unisource (the old Tucson
Electric Power), Prima Energy, Evergreen Resources and Atrix Labs. We are
working hard to replace these companies in the portfolio. We would note that we
especially hate to lose Prima Energy as a holding. Dick Lewis, Prima's founder
and CEO, has achieved what we believe to be superior results over time due to
his personal integrity and discipline and focusing on what would be best for
investors for the long term, rather than allowing himself to be influenced by
short term market forces.
We continue to harvest short term trading losses to use to offset capital
gains in the future. At mid-year, we are carrying over trading losses that we
will be able to use to offset gains from the acquisitions of the four companies
that will close in the second half of 2004.
During the first half of 2004, we had three companies with stock splits
and one company that paid a stock dividend. Medicis Pharmaceutical split their
shares two for one on January 26th. Shufflemaster split their shares three for
two on April 19th and Glacier Bancorp split their shares five for four on May
21st. MDC paid a 10% stock dividend on March 4th. While stock splits and stock
dividends are really just an accounting adjustment, they often attract investor
attention.
During the first half of 2004, small cap stocks as measured by the Russell
2000 outperformed large cap stocks as measured by the S&P 500. This
outperformance of small cap stocks has continued for the past five and a half
years. While market leadership for the entire year is still to be determined, we
believe small cap outperformance could continue. We find the current period
similar to the 1974-1983 period when small caps as measured by the Russell 2000
outperformed every year. Both periods were preceded by a period in which
valuations of large capitalization stocks reached an extreme level. In 1973, it
was the "Nifty 50" and in 1999, it was the "Technology Bubble."
At year-end we noted that we thought that 2004 could be quite a different
year from 2003 due to more market volatility coming from changes in interest
rates and possibly currencies. Changes in commodity prices are also causing some
pressures on earnings and on the economy. In the last six weeks, we have seen
evidence that the economy is slowing, caused in part by oil prices near $40.
Both consumers and businesses alike are being squeezed by oil prices at this
level. We attribute the pull back in the stock market from its highs of the
first half to some adjustment in earnings expectations along with multiple
contraction in part caused by rising interest rates. Once these adjustments are
fully discounted in the market, the market should be able to move in line with
earnings growth.
AQUILA ROCKY MOUNTAIN EQUITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2004
(UNAUDITED)
MARKET
SHARES COMMON STOCKS - 88.4% VALUE
- ---------- ---------------------------------------------------- -----------
BASIC INDUSTRY - 10.1%
18,000 Allied Waste Industries, Inc.+....................... $ 237,240
3,500 Ball Corp............................................ 252,175
7,000 Boise Cascade Corp................................... 263,480
9,000 Knight Transportation, Inc.+......................... 258,570
5,000 Newmont Mining Corp.................................. 193,800
3,500 Phelps Dodge Corp.+.................................. 271,285
8,000 SkyWest, Inc......................................... 139,280
-----------
1,615,830
-----------
BUSINESS SERVICES - 3.0%
10,000 Intrado, Inc.+....................................... 160,900
12,000 Viad Corp............................................ 324,120
-----------
485,020
-----------
CAPITAL SPENDING - 4.4%
6,000 Advanced Energy Industries, Inc.+.................... 94,320
22,000 Mity Enterprises, Inc.+.............................. 375,100
8,000 Mobile Mini, Inc.+................................... 227,280
-----------
696,700
-----------
CONSUMER CYCLICALS - 2.0%
4,950 M.D.C. Holdings, Inc................................. 314,869
-----------
CONSUMER SERVICES - 21.9%
4,000 Action Performance Companies, Inc.................... 60,280
4,000 Apollo Group, Inc. (Class A)+........................ 353,160
22,500 Coldwater Creek, Inc.+............................... 595,575
3,400 Comcast Corp. (Special Class A)+..................... 93,874
10,000 Echostar Communications Corp. (Class A)+............. 307,500
15,000 International Game Technology........................ 579,000
22,000 Liberty Media Corp. (Class A)+....................... 197,780
1,100 Liberty Media International, Inc. Class A+........... 40,810
6,000 MGM MIRAGE+.......................................... 281,640
5,000 PETsMART, Inc........................................ 162,250
5,000 P.F. Chang's China Bistro, Inc.+..................... 205,750
6,000 Shuffle Master, Inc.+................................ 217,860
8,000 Station Casinos, Inc................................. 387,200
-----------
3,482,679
-----------
CONSUMER STAPLES - 1.0%
6,000 Albertson's, Inc..................................... $ 159,240
-----------
ENERGY - 4.9%
5,000 Evergreen Resources, Inc.+........................... 202,000
7,000 Headwaters, Inc.+.................................... 181,510
10,000 Prima Energy Corp.+.................................. 395,700
-----------
779,210
-----------
FINANCIAL - 10.1%
12,000 First State Bancorporation........................... 370,320
12,500 Glacier Bancorp, Inc................................. 352,125
10,000 Janus Capital Group, Inc............................. 164,900
4,500 Wells Fargo & Company................................ 257,535
7,500 Zions Bancorporation................................. 460,875
-----------
1,605,755
-----------
HEALTH CARE - 11.3%
9,000 Atrix Laboratories, Inc.+............................ 308,520
12,000 Medicis Pharmaceutical Corp. (Class A)............... 479,400
28,001 Merit Medical Systems, Inc.+......................... 446,056
10,000 Myriad Genetics, Inc.+............................... 149,200
6,000 NPS Pharmaceuticals, Inc.+........................... 126,000
19,000 Sonic Innovations, Inc.+............................. 107,730
4,000 Ventana Medical Systems, Inc.+....................... 190,120
-----------
1,807,026
-----------
TECHNOLOGY - 15.8%
3,000 Altiris, Inc.+....................................... 82,830
11,000 Avnet, Inc.+......................................... 249,700
18,000 CIBER, Inc.+......................................... 147,960
11,000 First Data Corp...................................... 489,720
5,000 Inter-Tel, Inc....................................... 124,850
10,000 JDA Software Group, Inc.+............................ 131,700
7,000 McData Corp. (Class A)+.............................. 37,660
19,000 Microchip Technology, Inc............................ 599,260
16,000 Micron Technology, Inc.+............................. 244,960
14,000 SBS Technologies, Inc.+.............................. $ 224,980
12,000 SpectraLink Corp..................................... 178,800
------------
2,512,420
------------
UTILITIES - 3.9%
4,000 Kinder Morgan, Inc................................... 237,160
3,000 Pinnacle West Capital Corp........................... 121,170
5,000 Questar Corp......................................... 193,200
3,000 UniSource Energy Corp................................ 74,550
------------
626,080
------------
Total Common Stocks (cost $9,031,248)........... 14,084,829
------------
FACE
AMOUNT SHORT-TERM INVESTMENTS - 9.1%
- ---------- -------------------------------------------------
$ 725,000 AIM S-T Invest. Co. Prime Port. Inst. Cl. Money
Market Fund.................................... 725,000
725,000 One Group Prime Money Market Fund................ 725,000
------------
Total Short-Term Investments
(cost $1,450,000)......................... 1,450,000
------------
Total Investments (cost $10,481,248*)..... 97.5% 15,534,829
Other assets less liabilities............. 2.5 391,190
----- ------------
Net Assets ............................... 100.0% $ 15,926,019
===== ============
* Cost for Federal tax 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, 2004 (UNAUDITED)
ASSETS
Investments at market value (cost $10,481,248) ..................................... $ 15,534,829
Cash ............................................................................... 514,853
Receivable for Fund shares sold .................................................... 16,861
Dividends and interest receivable .................................................. 5,905
Other assets ....................................................................... 947
------------
Total assets .................................................................... 16,073,395
------------
LIABILITIES
Payable for investment securities purchased ........................................ 119,353
Distribution fees payable .......................................................... 9,854
Management fee payable ............................................................. 3,820
Accrued expenses ................................................................... 14,349
------------
Total liabilities ............................................................... 147,376
------------
NET ASSETS ............................................................................ $ 15,926,019
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $.01 per share . $ 6,144
Additional paid-in capital ......................................................... 11,208,278
Net unrealized appreciation on investments (note 4) ................................ 5,053,581
Accumulated net realized loss on investments ....................................... (276,462)
Accumulated net investment loss .................................................... (65,522)
------------
$ 15,926,019
============
CLASS A
Net Assets ......................................................................... $ 12,291,277
============
Capital shares outstanding ......................................................... 471,333
============
Net asset value and redemption price per share ..................................... $ 26.08
============
Offering price per share (100/95.75 of $26.08 adjusted to nearest cent) ............ $ 27.24
============
CLASS C
Net Assets ......................................................................... $ 2,129,954
============
Capital shares outstanding ......................................................... 86,380
============
Net asset value and offering price per share ....................................... $ 24.66
============
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) ...................................... $ 24.66*
============
CLASS Y
Net Assets ......................................................................... $ 1,504,788
============
Capital shares outstanding ......................................................... 56,724
============
Net asset value, offering and redemption price per share ........................... $ 26.53
============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
INVESTMENT INCOME:
Dividends ............................................ $ 46,782
Interest ............................................. 5,293
--------
$ 52,075
Expenses:
Management fee (note 3) .............................. 111,668
Distribution and service fees (note 3) ............... 24,374
Legal fees ........................................... 16,934
Trustees' fees and expenses .......................... 13,213
Transfer and shareholder servicing agent fees ........ 10,045
Shareholders' reports ................................ 9,498
Auditing and tax fees ................................ 7,394
Registration fees and dues ........................... 7,341
Custodian fees ....................................... 2,571
Miscellaneous ........................................ 13,327
--------
Total expenses ....................................... 216,365
Management fee waived (note 3) ....................... (96,596)
Expenses paid indirectly (note 5) .................... (2,171)
--------
Net expenses ......................................... 117,598
--------
Net investment loss .................................. (65,523)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions (28,721)
Change in unrealized appreciation on investments ..... 762,934
--------
Net realized and unrealized gain (loss) on investments 734,213
--------
Net change in net assets resulting from operations ... $668,690
========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
---------------- -----------------
OPERATIONS:
Net investment loss ................................... $ (65,523) $ (74,618)
Net realized gain (loss) from securities transactions . (28,721) (114,744)
Change in unrealized appreciation on investments ...... 762,934 3,577,919
------------ ------------
Change in net assets from operations ............... 668,690 3,388,557
------------ ------------
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 ............................. 3,131,398 5,175,850
Short-term trading redemption fee ..................... 1,025 --
Reinvested dividends and distributions ................ -- --
Cost of shares redeemed ............................... (1,454,412) (1,002,631)
------------ ------------
Change in net assets from capital share transactions 1,678,011 4,173,219
------------ ------------
Change in net assets ............................... 2,346,701 7,561,776
NET ASSETS:
Beginning of period ................................... 13,579,318 6,017,542
------------ ------------
End of period ......................................... $ 15,926,019 $ 13,579,318
============ ============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
(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, 2004, the Fund incurred Management fees
of $111,668, of which $96,596 were waived. 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 total Fund expenses will not
exceed 1.50% for Class A Shares, 2.25% for Class C Shares or 1.25% for Class Y
Shares.
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, 2004, distribution fees on Class A
Shares amounted to $14,320 of which the Distributor retained $1,372.
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, 2004, amounted to $7,541. 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, 2004, amounted to $2,513. The total
of these payments with respect to Class C Shares amounted to $10,054 of which
the Distributor retained $1,003.
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, 2004, total commissions on sales of Class A Shares
amounted to $40,862 of which $4,365 was received by the Distributor.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2004, the Fund incurred $16,771 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, 2004, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $916,186 and $9,480, respectively.
At June 30, 2004, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted to
$5,289,839 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $236,258 for
a net unrealized appreciation of $5,053,581.
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 MONTH ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
CLASS A SHARES:
Proceeds from shares sold .. 97,011 $ 2,470,974 212,420 $ 4,259,877
Reinvested dividends and
distributions ........... -- -- -- --
Cost of shares redeemed .... (40,756) (1,045,752) (36,483) (759,051)
-------- ----------- -------- -----------
Net change .............. 56,255 1,425,222 175,937 3,500,826
-------- ----------- -------- -----------
CLASS C SHARES:
Proceeds from shares sold .. 22,548 548,104 37,062 786,448
Reinvested dividends and
distributions ........... -- -- -- --
Cost of shares redeemed .... (13,726) (334,036) (10,082) (207,947)
-------- ----------- -------- -----------
Net change .............. 8,822 214,068 26,980 578,501
-------- ----------- -------- -----------
CLASS Y SHARES:
Proceeds from shares sold .. 4,291 112,320 6,061 129,525
Reinvested dividends and
distributions ........... -- -- -- --
Cost of shares redeemed .... (2,856) (74,624) (1,841) (35,633)
-------- ----------- -------- -----------
Net change .............. 1,435 37,696 4,220 93,892
-------- ----------- -------- -----------
Total transactions in Fund
shares ..................... 66,512 $ 1,676,986 207,137 $ 4,173,219
======== =========== ======== ===========
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, 2004, 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, 2003 due to a net investment loss, Aquila
Rocky Mountain Equity Fund reclassified $74,618 from accumulated undistributed
net investment loss to paid-in capital. Net assets were not affected by these
changes.
At December 31, 2003, the Fund had a capital loss carryover of
approximately $247,741, $1,652 of which expires on December 31, 2009 and $21,063
which expires on December 31, 2010 and $225,026 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.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized loss $ (247,741)
Unrealized appreciation 4,290,647
------------
$ 4,042,906
============
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
-----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/04 -------------------------------------------------------
(UNAUDITED) 2001 2000 1999 1998 1997
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ................. $ 24.92 $ 17.74 $ 20.96 $ 19.64 $ 19.96 $ 16.76
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss)+ .................... (0.10) (0.16) (0.15) (0.07) (0.03) (0.04)
Net gain (loss) on securities (both
realized and unrealized) ..................... 1.26 7.34 (3.07) 1.58 (0.09) 3.48
------- ------- ------- ------- ------- -------
Total from investment operations ................. 1.16 7.18 (3.22) 1.51 (0.12) 3.44
------- ------- ------- ------- ------- -------
Less distributions (note 8):
Dividends from net investment income ............. -- -- -- -- -- --
Distributions from capital gains ................. -- -- -- (0.19) (0.20) (0.24)
------- ------- ------- ------- ------- -------
Total distributions .............................. -- -- -- (0.19) (0.20) (0.24)
------- ------- ------- ------- ------- -------
Net asset value, end of period ....................... $ 26.08 $ 24.92 $ 17.74 $ 20.96 $ 19.64 $ 19.96
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) ........... 4.65%++ 40.47% (15.36)% 7.73% (0.55)% 20.56%
Ratios/supplemental data
Net assets, end of period (in thousands) ......... $12,291 $10,345 $ 4,242 $ 2,403 $ 2,109 $ 1,363
Ratio of expenses to average net assets .......... 1.53%* 1.50% 1.52% 1.60% 1.57% 1.55%
Ratio of net investment loss to average
net assets ................................... (0.83)%* (0.77)% (0.82)% (0.44)% (0.20)% (0.27)%
Portfolio turnover rate .......................... 0.07%++ 3.01% 1.81% 28.54% 29.27% 6.45%
The expense and net investment income ratios without the effect of the voluntary waiver of fees and the voluntary expense
reimbursement were:
Ratio of expenses to average net assets .......... 2.79%* 3.25% 4.15% 4.81% 5.57% 5.86%
Ratio of net investment loss to average
net assets ................................... (2.09)%* (2.51)% (3.45)% (3.66)% (4.20)% (4.59)%
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 .......... 1.50%* 1.48% 1.50% 1.50% 1.51% 1.51%
- ----------------
Note: Effective July 28, 1999, Aquila Management Corporation assumed the role of
Investment Adviser, replacing KPM Investment Management, Inc. Effective
January 1, 2004, Aquila Management Corporation, founder of the Fund,
assigned its Advisory and Administration Agreement to its wholly-owned
subsidiary, Aquila Investment Management LLC.
+ 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,
6/30/04 -----------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
----------- ------ ------ ------ ------ ------
Net asset value, beginning of period ....... $23.66 $16.96 $20.19 $19.07 $19.53 $16.53
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)+ .......... (0.19) (0.30) (0.28) (0.21) (0.17) (0.19)
Net gain (loss) on securities
(both realized and unrealized) ..... 1.19 7.00 (2.95) 1.52 (0.09) 3.43
------ ------ ------ ------ ------ ------
Total from investment operations ... 1.00 6.70 (3.23) 1.31 (0.26) 3.24
------ ------ ------ ------ ------ ------
Less distributions (note 8):
Distributions from net investment income -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- (0.19) (0.20) (0.24)
------ ------ ------ ------ ------ ------
Total distributions .................... -- -- -- (0.19) (0.20) (0.24)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $24.66 $23.66 $16.96 $20.19 $19.07 $19.53
====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge) . 4.23%++ 39.50% (16.00)% 6.91% (1.28)% 19.63%
Ratios/supplemental data
Net assets, end of period (in thousands) $2,130 $1,835 $ 858 $ 372 $ 242 $ 185
Ratio of expenses to average net assets 2.27%* 2.26% 2.26% 2.34% 2.29% 2.34%
Ratio of net investment income (loss)
to average net assets .............. (1.57)%* (1.53)% (1.56)% (1.23)% (0.94)% (1.10)%
Portfolio turnover rate .................... 0.07%++ 3.01% 1.81% 28.54% 29.27% 6.45%
The expense and net investment income ratios without the effect of the voluntary waiver of fees and the voluntary expense
reimbursement were:
Ratio of expenses to average net assets 3.54%* 4.02% 4.95% 5.52% 6.32% 6.59%
Ratio of net investment loss to
average net assets ................. (2.84)%* (3.29)% (4.25)% (4.40)% (4.97)% (5.35)%
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 2.24%* 2.24% 2.25% 2.25% 2.23% 2.30%
CLASS Y
----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JUNE 30,
6/30/04 ------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
----------- ------ ------ ------ ------ ------
Net asset value, beginning of period ....... $25.32 $17.97 $21.19 $19.81 $20.07 $16.82
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)+ .......... (0.07) (0.10) (0.10) (0.02) 0.03 (0.01)
Net gain (loss) on securities
(both realized and unrealized) ..... 1.28 7.45 (3.12) 1.59 (0.09) 3.50
------ ------ ------ ------ ------ ------
Total from investment operations ... 1.21 7.35 (3.22) 1.57 (0.06) 3.49
------ ------ ------ ------ ------ ------
Less distributions (note 8):
Distributions from net investment income -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- (0.19) (0.20) (0.24)
------ ------ ------ ------ ------ ------
Total distributions .................... -- -- -- (0.19) (0.20) (0.24)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $26.53 $25.32 $17.97 $21.19 $19.81 $20.07
====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge) . 4.78%++ 40.90% (15.20)% 7.97% (0.25)% 20.78%
Ratios/supplemental data
Net assets, end of period (in thousands) $1,505 $1,400 $ 918 $1,040 $ 962 $ 922
Ratio of expenses to average net assets 1.27%* 1.25% 1.26% 1.35% 1.29% 1.33%
Ratio of net investment income (loss)
to average net assets .............. (0.58)%* (0.51)% 0.56% (0.18)% 0.06% (0.09)%
Portfolio turnover rate .................... 0.07%*++ 3.01% 1.81% 28.54% 29.27% 6.45%
The expense and net investment income ratios without the effect of the voluntary waiver of fees and the voluntary expense
reimbursement were:
Ratio of expenses to average net assets 2.54%* 3.05% 3.87% 4.59% 5.32% 5.60%
Ratio of net investment loss to
average net assets ................. (1.84)%* (2.32)% (3.16)% (3.42)% (3.96)% (4.36)%
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%* 1.23% 1.25% 1.25% 1.23% 1.30%
- -----------
Note: Effective July 28, 1999, Aquila Management Corporation assumed the role of
investment adviser, replacing KPM Investment Management, Inc. Effective
January 1, 2004, Aquila Management Corporation, founder of the Fund,
assigned its Advisory and Administration Agreement to its wholly-owned
subsidiary, Aquila Investment Management LLC.
+ Per share amounts have been calculated using the monthly average shares
method.
++ Not annualized
* Annualized
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila(SM) 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. You should know,
however, that 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
FOUNDER
AQUILA MANAGEMENT CORPORATION
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
Gary C. Cornia
Diana P. Herrmann
Cornelius T. Ryan
OFFICERS
Diana P. Herrmann, Vice Chair and 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
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
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
757 Third Avenue
New York, New York 10017
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 fling 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.
AQUILA ROCKY MOUNTAIN EQUITY FUND
By: /s/ Lacy B. Herrmann
- ---------------------------------
Chairman of the Board
September 6, 2004
By: /s/ Diana P. Herrmann
- ---------------------------------
Vice Chair, Trustee and President
September 6 2004
By: /s/ Joseph P. DiMaggio
- -----------------------------------
Chief Financial Officer and Treasurer
September 6, 2004
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/ Lacy B. Herrmann
- ---------------------------------
Lacy B. Herrmann
Chairman of the Board
September 6, 2004
By: /s/ Diana P. Herrmann
- ---------------------------------
Diana P. Herrmann
Vice Chair, Trustee and President
September 6, 2004
By: /s/ Joseph P. DiMaggio
- -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 6, 2004