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: 06/30/06
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2006
[LOGO OF AQUILA ROCKY MOUNTAIN EQUITY FUND:
A RECTANGLE WITH A DRAWING OF TWO MOUNTAINS AND 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 WORDS
"AQUILA ROCKY MOUNTAIN EQUITY FUND"]
AQUILA ROCKY MOUNTAIN EQUITY FUND
"THE STOCK MARKET HAS BEEN ROCKY RECENTLY, BUT THE ROCKY MOUNTAIN REGION
OF OUR COUNTRY REMAINS SOUND AND ATTRACTIVE"
August, 2006
Dear Fellow Shareholder:
As you are aware, the course of the investment world is seldom
straight-lined in nature. This has certainly been the case with the stock market
over the first six months of this fiscal year ended June 30, 2006. One day it
has been up, and the next day it has been down. But, in general, the trend has
been relatively flat.
On the other hand, the investments in Aquila Rocky Mountain Equity Fund
continue, in our judgment, to be sound and attractive. A great number of the
companies in the Rocky Mountain region of our country are run by entrepreneurs
who seek to carve out attractive businesses for their companies. Our job is to
find those companies and hopefully have their securities become a part of our
portfolio.
With equity investing, you are taking an ownership interest in a company.
Over time, you participate in the growth of that company. Over the short term,
prices fluctuate based on many factors such as interest rates, psychology and
even geopolitical conflict. Despite short-term price fluctuations, we remain
committed to finding and investing in the best growth companies in the Rocky
Mountain region.
RESULTS TO DATE
As we have said in our prior reports to you, it has been our goal with
this fund to produce total returns that are of an absolute nature. Sure, it is
nice to have returns equal to or better than the relative benchmarks of the
market. But, in the final analysis, it is the total return of your investment
that gives you money to spend.
The Aquila Rocky Mountain Equity Fund Class A Share returns for the six
months and 5.5 years periods ended June 30, 2006 were as follows, compared to
the Standard & Poor's 500 (S&P 500), Russell 2000, NASDAQ Composite Index
(NASDAQ) and the Dow Jones Industrial Average (DJIA):
NOT A PART OF THE SEMI-ANNUAL REPORT
AQUILA
ROCKY
MOUNTAIN
EQUITY FUND* S&P500 RUSSELL 2000 NASDAQ DJIA
------------ ------ ------------ ------ ----
6 months ended 6/30/06+ 3.40% 2.71% 8.27% -1.08% 5.22%
5.5 years ended 6/30/06++ 8.48% 0.98% 9.07% -1.79% 2.77%
+ Not annualized.
++ Average annual returns.
As you will note, we were ahead of some of the averages and behind others.
However, in the final analysis, we have basically produced a return on your
capital which was on the positive side for the most recent six-month period as
well as the past five and one-half years.
Additionally, you will find in the table below, the one year, five year,
ten year and since inception returns for each of the Fund's share classes for
the periods ended June 30, 2006.
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED JUNE 30, 2006
-------------------------------
SINCE
CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ------------------------ ------ ------- -------- ---------
Class A (7/22/94)
With Sales Charge .... 5.29% 7.37% 8.18% 9.20%
Without Sales Charge . 9.97% 8.31% 8.65% 9.64%
Class C (5/01/96)
With CDSC ............ 8.12% 7.52% 7.90% 7.95%
Without CDSC ......... 9.12% 7.52% 7.90% 7.95%
Class Y (5/01/96)
No Sales Charge ...... 10.19% 8.58% 8.88% 8.92%
Class I (12/01/05)
No Sales Charge ...... N/A N/A N/A 0.69%
COMPARATIVE INDEX
- ------------------------
Russell 2000 Stock Index 14.68% 8.58% 9.14% 11.02% (Class A)
7.86% (Class C & Y)
10.18% (Class I)
OUR INVESTMENTS IN THE ROCKY MOUNTAIN REGION
From the inception of Aquila Rocky Mountain Equity Fund, our goal has been
to seek capital appreciation through investment in securities (primarily common
stock or other equity securities) of companies having a significant business
presence in the general Rocky Mountain region of our country.
NOT A PART OF THE SEMI-ANNUAL REPORT
Our primary approach in the management of the Fund has been to seek out
securities which possess growth at a reasonable price. This applies to those
companies which have large capitalization, down to those which have a micro
capitalization. We do not want the Fund to be identified as having companies of
only one particular size in its portfolio. Rather, we wish to have the
flexibility to invest in those securities which have the overall characteristics
of growth regardless of their capitalization.
The 8-state Rocky Mountain region is a very substantial geographic area of
our country. It also possesses, on a composite basis, a gross state product
which is larger than that of India, Korea or Mexico based on 2004 gross domestic
product/gross state product. Consequently, even though the first six months of
2006 did not produce outstanding results for equity investments, we remain very
positive concerning our stock selections in the Rocky Mountain region.
The Rocky Mountain region attracts people who are seeking new
opportunities for themselves in their careers and personal lives. This has
resulted in a growing number of entrepreneurial ventures within the eight state
region.
[GRAPHIC OMITTED]
NOT A PART OF THE SEMI-ANNUAL REPORT
We will discuss individual investment ventures about which we are excited
in the comments recorded in the management section of this report.
We appreciate the confidence you have shown in your investment in Aquila
Rocky Mountain Equity Fund. We remain excited about the potential of this region
and believe that you and other investors should share this excitement.
Sincerely,
/s/ Barbara S. Walchli /s/ Lacy B. Herrmann
Barbara S. Walchli Lacy B. Herrmann
Senior Vice President and Founder and Chairman Emeritus
Portfolio Manager
*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. Before investing in the Fund, carefully read
about and consider the investment objectives, risks, charges, expenses, and
other information found in the Fund prospectus. The prospectus is available from
your financial advisor, or call 800-437-1020, or visit www.aquilafunds.com. An
investment in the Fund involves certain risks, including possible loss of the
principal amount invested, market and financial risk, volatility and trading
volume of small companies, interest & credit risks of convertible fixed-income
investments, economic and diversification risks of geographic concentration.
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 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
3.40%, without provision for sales charges but reflecting contractually waived
Fund expenses, for the six months ended June 30, 2006. This compares to the S&P
500 with a total return of 2.71% and the Russell 2000 with a total return of
8.27%.
We do not have a perfect benchmark or performance comparison for the Fund
since we invest in companies in a specific region. On June 30, 21.9% of the
equity investments in the Fund were in companies with a market capitalization of
over $10 billion (large cap companies), 33.2% were in companies with a market
capitalization between $2 billion and $10 billion (mid cap) and 38.2% were in
companies with market capitalizations between $300 million and $2 billion (small
cap). In addition 6.7% of the equity investments in the Fund were in companies
with market capitalizations below $300 million (micro cap). For the five years
cumulatively ending June 30, 2006, Aquila Rocky Mountain Equity Fund's Class A
shares, before provision for sales charges, had a total return of 49.04%
compared to 13.09% for the S&P 500 and 50.97% for the Russell 2000 Index.
At year-end, we had common stock holdings of 62 companies in the portfolio
across a broad number of industries. We work to hold our individual position
sizes to around 5% or less of the portfolio and try to diversify the Fund across
industries. We believe this diversification helps to control specific security
risk as well as industry risk. Our largest individual position size on June 30
was Microchip Technologies at 4.0% of the portfolio. Microchip is an electronics
company based in Chandler, Arizona that designs and manufactures
microcontrollers for use in products in many industries and countries.
We continue 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 investment time frame. We continue to look for the best
businesses and management teams in the Rocky Mountain Region to invest in for
our shareholders. Portfolio turnover for the past three fiscal years has
averaged under 10%.
During the first half of 2006, the five best performing stocks in the Fund
came from different states and industries. The best performing stock was SBS
Technologies based in Albuquerque, NM. The stock was up 63.7% due to a takeover
by General Electric. OfficeMax, the former Boise Cascade from Boise, Idaho was
up 62.1%, reflecting a restructuring. The third best performer was MoneyGram, a
spin-off from Viad in Phoenix, and which was up 30.5% for the six month period.
Shuffle Master was the fourth best performing stock for the first half of
2006, up 30.4%. Shuffle Master, based in Las Vegas, Nevada, provides gaming
equipment to the casino industry. Allied Waste, a waste disposal company based
in Scottsdale, Arizona was up 30.0% for the six month period.
MANAGEMENT DISCUSSION (CONTINUED)
The three worst performing stocks were also from different industries and
states. Headwaters based in South Jordan, Utah was down 27.9%. Headwaters, which
provides alterative fuel technologies, lost some of the tax incentives for its
coal additive business because the price of oil rose so high. SpectraLink based
in Boulder, Colorado was down 25.7% due to concern about increasing competion.
SpectraLink is a provider of specialty wireless phone systems for businesses
such as retailers and hospitals. Medicis Pharmaceuticals was down 25.0% for the
six month period due to concern about competition for its dermalogical filler,
Restylane. While it is impossible to predict, you may be interested in the fact
that in the past, we have seen some of our worst performers go on to have very
positive performance the next year.
During the second half of 2006 our focus will continue to be to invest in
what we deem to be the best businesses in the region for the intermediate to
longer term. The Fed has been raising interest rates for over twenty-four months
to slow the economy so that the economic cycle can last longer. We have started
to see some short term earnings disappointments as the economy slows. However,
we are pleased with the quality of the businesses that we are finding in the
Rocky Mountain region. The smaller and mid-size companies we own may be able to
be more nimble in a slowing economy. Since we also work to own companies with
above average return on assets and strong cash flow, some of our companies also
have strong share buy back programs in place.
In the first six months of 2006 we have lost three of our companies to
takeovers and added six new companies to the portfolio. We have continued to
look for companies with unique products that have the potential to grow even
though the overall economy is slowing. We have added two health care companies,
a software company, a telecom equipment company, a specialty materials company
and a utility in New Mexico.
As the economy slows, we believe that investors may become more interested
in growth companies that show consistent results. These stocks may be from such
sectors as health care and media. Later this year, technology may also benefit
as investors anticipate 1) the release of Microsoft's new operating system which
will integrate home computing and entertainment, 2) the shift from 32 to 64 bit
computing, 3) a shift to high definition broadcasting and 4) more government
spending on communications and technology systems for security purposes.
AQUILA ROCKY MOUNTAIN EQUITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2006 (UNAUDITED)
MARKET
SHARES COMMON STOCKS (85.9%) VALUE
- ------------- ------------------------------------------------------------ -----------
BASIC INDUSTRY (10.4%)
25,000 Allied Waste Industries, Inc.+ ............................. $ 284,000
15,000 Ball Corp. ................................................. 555,600
32,000 Knight Transportation, Inc. ................................ 646,400
7,000 Newmont Mining Corp. ....................................... 370,510
5,000 Phelps Dodge Corp. ......................................... 410,800
14,000 SkyWest, Inc. .............................................. 347,200
-----------
2,614,510
-----------
BUSINESS SERVICES (2.0%)
14,000 Insight Enterprises, Inc.+ ................................. 266,700
3,000 OfficeMax, Inc. ............................................ 122,250
4,000 Viad Corp. ................................................. 125,200
-----------
514,150
-----------
CAPITAL SPENDING (6.0%)
4,000 Dynamic Materials Corp.+ ................................... 134,920
30,000 Mity Enterprises, Inc.+ .................................... 541,500
16,000 Mobile Mini, Inc.+ ......................................... 468,160
10,000 Radyne Corp.+ .............................................. 113,800
28,000 Semitool, Inc.+ ............................................ 252,560
-----------
1,510,940
-----------
CONSUMER CYCLICALS (1.0%)
5,000 M.D.C. Holdings, Inc. ...................................... 259,650
-----------
CONSUMER SERVICES (18.4%)
10,000 Apollo Group, Inc. (Class A)+ .............................. 516,700
37,000 Coldwater Creek, Inc.+ ..................................... 941,650*
3,400 Comcast Corp. (Special Class A)+ ........................... 111,452
18,000 Echostar Communications Corp. (Class A)+ ................... 554,580
14,000 International Game Technology .............................. 531,160
1,100 Liberty Global, Inc. Series A+ ............................. 23,650
1,100 Liberty Global, Inc. Series C+ ............................. 22,627
1,250 Liberty Media Capital Series A+ ............................ 104,713
6,250 Liberty Media Interactive Series A+ ........................ 107,875
12,000 MGM Mirage+ ................................................ 489,600
12,000 PETsMART, Inc. ............................................. 307,200
12,000 Shuffle Master, Inc.+ ...................................... 393,360
8,000 Station Casinos, Inc. ...................................... 544,640
-----------
4,649,207
-----------
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- ------------- ------------------------------------------------------------ -----------
CONSUMER STAPLES (2.3%)
16,000 Discovery Holding Co. Class A+ ............................. $ 234,080
7,000 P.F. Chang's China Bistro, Inc.+ ........................... 266,140
6,000 Rocky Mountain Chocolate Factory, Inc. ..................... 77,940
-----------
578,160
-----------
ENERGY (4.9%)
8,000 Bill Barrett Corp.+ ........................................ 236,880
5,000 Cimarex Energy Co. ......................................... 206,950*
12,000 Headwaters, Inc.+ .......................................... 306,720
6,000 Questar Corp. .............................................. 482,940
-----------
1,233,490
-----------
FINANCIAL (10.5%)
25,000 First State Bancorporation ................................. 594,500
17,000 Glacier Bancorp, Inc. ...................................... 497,590
18,000 Janus Capital Group, Inc. .................................. 322,200
9,000 MoneyGram International, Inc. .............................. 289,440*
5,000 Wells Fargo & Company ...................................... 335,400
8,000 Zions Bancorporation ....................................... 623,520
-----------
2,662,650
-----------
HEALTH CARE (13.8%)
12,000 Array BioPharma, Inc.+ ..................................... 103,200
22,000 Medicis Pharmaceutical Corp. (Class A) ..................... 528,000
55,000 Merit Medical Systems, Inc.+ ............................... 756,800
19,000 Myriad Genetics, Inc.+ ..................................... 479,750
17,000 NightHawk Radiology Holdings, Inc.+ ........................ 304,980
22,000 Sonic Innovations, Inc.+ ................................... 99,000
21,000 Spectranetics Corp.+ ....................................... 232,260*
12,000 USANA Health Services, Inc.+ ............................... 454,800
11,000 Ventana Medical Systems, Inc.+ ............................. 518,980
-----------
3,477,770
-----------
TECHNOLOGY (14.2%)
24,000 Avnet, Inc.+ ............................................... 480,480
34,000 CIBER, Inc.+ ............................................... 224,060
19,000 First Data Corp. ........................................... 855,760
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- ------------- ------------------------------------------------------------ -----------
TECHNOLOGY (CONTINUED)
5,000 Inter-Tel, Inc. ............................................ $ 105,300
14,000 JDA Software Group, Inc.+ .................................. 196,420
29,000 Microchip Technology, Inc. ................................. 972,950
32,000 Micron Technology, Inc.+ ................................... 481,920
7,000 RightNow Technologies, Inc.+ ............................... 116,760
16,000 SpectraLink Corp. .......................................... 141,120
-----------
3,574,770
-----------
UTILITIES (2.4%)
4,000 Kinder Morgan, Inc. ........................................ 399,560
3,000 PNM Resources, Inc. ........................................ 77,640*
4,000 UniSource Energy Corp. ..................................... 124,600
-----------
601,800
-----------
Total Common Stocks (cost $14,552,921) ..................... 21,677,097
-----------
SHARES INVESTMENT COMPANIES (9.4%)
- ------------- ------------------------------------------------------------
1,190,000 AIM S-T Invest. Co. Prime Port. Inst. Cl. Money Market Fund 1,190,000
1,190,000 JP Morgan Liquid Assets Money Market Fund .................. 1,190,000
-----------
Total Investment Companies (cost $2,380,000) ............... 2,380,000
-----------
Total Investments (cost $16,932,921@) ............... 95.3% 24,057,097
Other assets less liabilities ....................... 4.7 1,187,580
------ -----------
Net Assets .......................................... 100.0% $25,244,677
====== ===========
PERCENT OF
PORTFOLIO DISTRIBUTION (UNAUDITED) PORTFOLIO
- ---------------------------------- ---------
ROCKY MOUNTAIN REGION
---------------------
Arizona 26.3%
Colorado 19.8
Idaho 7.2
Montana 3.6
Nevada 8.1
PERCENT OF
PORTFOLIO DISTRIBUTION (UNAUDITED) PORTFOLIO
- ---------------------------------- ---------
New Mexico 2.8%
Utah 17.0
-----
84.8
Investment Companies 9.9
Other Investments 5.3
-----
100.0%
=====
+ Non-income producing security.
@ Cost for Federal income tax and financial reporting purposes is identical.
* Security valued at fair value on 6/30/06 in accordance with valuation
procedures approved by the Board of Trustees.
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2006 (UNAUDITED)
ASSETS
Investments at market value (cost $16,932,921) .................................... $ 24,057,097
Cash .............................................................................. 1,239,010
Receivable for Fund shares sold ................................................... 319,855
Dividends receivable .............................................................. 16,074
Prepaid expenses .................................................................. 45,084
Other assets ...................................................................... 25,867
------------
Total assets .................................................................... 25,702,987
------------
LIABILITIES
Payable for investment securities purchased ....................................... 397,539
Distribution and service fees payable ............................................. 14,134
Management fee payable ............................................................ 7,864
Payable for Fund shares redeemed .................................................. 5,078
Accrued expenses .................................................................. 33,695
------------
Total liabilities ............................................................... 458,310
------------
NET ASSETS .......................................................................... $ 25,244,677
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 8,355
Additional paid-in capital ........................................................ 17,502,934
Net unrealized appreciation on investments (note 4) ............................... 7,124,175
Accumulated net realized gain on investments ...................................... 649,844
Accumulated net investment loss ................................................... (40,631)
------------
$ 25,244,677
============
CLASS A
Net Assets ........................................................................ $ 20,684,643
============
Capital shares outstanding ........................................................ 679,311
============
Net asset value and redemption price per share .................................... $ 30.45
============
Offering price per share (100/95.75 of $30.45 adjusted to nearest cent) ........... $ 31.80
============
CLASS C
Net Assets ........................................................................ $ 3,102,247
============
Capital shares outstanding ........................................................ 109,353
============
Net asset value and offering price per share ...................................... $ 28.37
============
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) ...................................... $ 28.37*
============
CLASS I
Net Assets ........................................................................ $ 25,938
============
Capital shares outstanding ........................................................ 851
============
Net asset value, offering and redemption price per share .......................... $ 30.47
============
CLASS Y
Net Assets ........................................................................ $ 1,431,849
============
Capital shares outstanding ........................................................ 45,997
============
Net asset value, offering and redemption price per share .......................... $ 31.13
============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME:
Dividends ............................................ $ 148,814
Expenses:
Management fee (note 3) .............................. $ 166,732
Distribution and service fees (note 3) ............... 39,125
Trustees' fees and expenses .......................... 41,839
Registration fees and dues ........................... 27,291
Legal fees (note 3) .................................. 20,722
Transfer and shareholder servicing agent fees ........ 19,583
Shareholders' reports ................................ 10,597
Auditing and tax fees ................................ 6,447
Chief compliance officer (note 3) .................... 2,278
Custodian fees ....................................... 1,419
Insurance ............................................ 550
Miscellaneous ........................................ 31,786
---------
Total expenses ....................................... 368,369
Management fee waived (note 3) ....................... (155,066)
Expenses paid indirectly (note 5) .................... (23,858)
---------
Net expenses ......................................... 189,445
---------
Net investment loss .................................. (40,631)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions 647,056
Change in unrealized appreciation on investments ..... 66,522
---------
Net realized and unrealized gain (loss) on investments 713,578
---------
Net change in net assets resulting from operations ... $ 672,947
=========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2006 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2005
---------------- -----------------
OPERATIONS:
Net investment loss .................................. $ (40,631) $ (84,718)
Net realized gain (loss) from securities transactions 647,056 5,203
Change in unrealized appreciation on investments ..... 66,522 1,095,067
------------ ------------
Change in net assets from operations ............... 672,947 1,015,552
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (note 8):
Class A Shares:
Net realized gain on investments ..................... -- --
Class C Shares:
Net realized gain on investments ..................... -- --
Class I 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 ............................ 4,940,217 8,593,036
Short-term trading redemption fee .................... 770 3,662
Reinvested dividends and distributions ............... -- --
Cost of shares redeemed .............................. (2,114,667) (5,481,191)
------------ ------------
Change in net assets from capital share transactions 2,826,320 3,115,507
------------ ------------
Change in net assets ............................... 3,499,267 4,131,059
NET ASSETS:
Beginning of period .................................. 21,745,410 17,614,351
------------ ------------
End of period ........................................ $ 25,244,677 $ 21,745,410
============ ============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2006 (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. Class I Shares are sold at net
asset value without any sales charge, redemption fees, or contingent deferred
sales charge. Class I Shares carry a distribution fee and service fee. 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. Class I shares commenced
operations on December 1, 2005.
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. 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.
f) RECLASSIFICATION OF CAPITAL ACCOUNTS: Accounting principles generally
accepted in the United States of America require that certain components
of net assets relating to permanent differences be reclassified between
financial and tax reporting. These reclassifications have no effect on net
assets or net asset value per share. On December 31, 2005 the Fund
decreased undistributed net investment loss by $84,718, and decreased
additional paid-in capital by $84,718.
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, 2006, the Fund incurred Management fees
of $166,732, of which $155,066 was waived. The Manager has contractually
undertaken to waive fees and/or reimburse Fund expenses during the period
January 1, 2006 through December 31, 2006 so that total Fund expenses would not
exceed 1.50% for Class A Shares, 2.25% for Class C Shares, 1.47% for Class I
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, 2006, distribution fees on Class A
Shares amounted to $24,415 of which the Distributor retained $2,449.
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, 2006, amounted to $11,018. 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, 2006, amounted to $3,673. The total
of these payments with respect to Class C Shares amounted to $14,691 of which
the Distributor retained $2,780.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class I Shares to Qualified Recipients. Class I payments, under
the Plan, may not exceed, for any fiscal year of the Fund a rate (currently
0.15%) set from time to time by the Board of Trustees of not more than 0.25% of
the average annual net assets represented by the Class I Shares. In addition,
the Fund has a Shareholder Services Plan under which it may pay service fees
(currently 0.20%) of not
more than 0.25% of the average annual net assets of the Fund represented by
Class I Shares. That is, the total payments under both plans will not exceed
0.50% of such net assets. For the six months ended June 30, 2006, these payments
were made at the average annual rate of 0.35% of such net assets amounting to
$46 of which $20 related to the Plan and $26 related to the Shareholder Services
Plan.
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, 2006, total commissions on sales of Class A Shares
amounted to $76,066 of which $7,394 was received by the Distributor.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2006, the Fund incurred $19,387 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 at that firm.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2006, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $3,522,373 and $1,707,019, respectively.
At June 30, 2006, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted to
$7,382,014 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $257,839 for
a net unrealized appreciation of $7,124,175.
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, its cash balances in equity securities rather than leave
cash uninvested.
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, 2006 Year Ended
(unaudited) December 31, 2005
--------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
CLASS A SHARES:
Proceeds from shares sold 112,876 $ 3,495,479 208,097 $ 5,903,039
Reinvested dividends and
distributions ......... -- -- -- --
Cost of shares redeemed . (34,051) (1,038,864) (98,862) (2,766,914)
----------- ----------- ----------- -----------
Net change ............ 78,825 2,456,615 109,235 3,136,125
----------- ----------- ----------- -----------
CLASS C SHARES:
Proceeds from shares sold 30,107 877,689 31,026 829,837
Reinvested dividends and
distributions ......... -- -- -- --
Cost of shares redeemed . (15,424) (448,008) (21,295) (557,251)
----------- ----------- ----------- -----------
Net change ............ 14,683 429,681 9,731 272,586
----------- ----------- ----------- -----------
CLASS I SHARES:
Proceeds from shares sold 22 700 829 25,000
Reinvested dividends and
distributions ......... -- -- -- --
Cost of shares redeemed . -- -- -- --
----------- ----------- ----------- -----------
Net change ............ 22 700 829* 25,000*
----------- ----------- ----------- -----------
CLASS Y SHARES:
Proceeds from shares sold 17,846 566,349 64,758 1,835,160
Reinvested dividends and
distributions ......... -- -- -- --
Cost of shares redeemed . (19,382) (627,795) (75,635) (2,157,026)
----------- ----------- ----------- -----------
Net change ............ (1,536) (61,446) (10,877) (321,866)
----------- ----------- ----------- -----------
Total transactions in Fund
shares .................. 91,994 $ 2,825,550 108,918 $ 3,111,845
=========== =========== =========== ===========
* Commenced operations on December 1, 2005.
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 I and Class Y Shares, if the redemption
occurs within 90 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, 2006, 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 from
paid-in capital.
As of December 31, 2005, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized gain ........... $ 2,787
Unrealized appreciation ................. 7,057,653
----------
$7,060,440
==========
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A
---------------------------------------------------------------------------------
Six Months
Ended Year Ended December (31,)
6/30/06 ---------------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ....... $ 29.45 $ 27.93 $ 24.92 $ 17.74 $ 20.96 $ 19.64
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.04) (0.11) (0.17) (0.16) (0.15) (0.07)
Net gain (loss) on securities (both
realized and unrealized) ............ 1.04 1.63 3.18 7.34 (3.07) 1.58
-------- -------- -------- -------- -------- --------
Total from investment operations ....... 1.00 1.52 3.01 7.18 (3.22) 1.51
-------- -------- -------- -------- -------- --------
Less distributions (note 8):
Dividends from net investment income ... -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- -- -- (0.19)
-------- -------- -------- -------- -------- --------
Total distributions .................... -- -- -- -- -- (0.19)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ............. $ 30.45 $ 29.45 $ 27.93 $ 24.92 $ 17.74 $ 20.96
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) . 3.40%* 5.44% 12.08% 40.47% (15.36)% 7.73%
Ratios/supplemental data
Net assets, end of period (in thousands) $ 20,685 $ 17,684 $ 13,718 $ 10,345 $ 4,242 $ 2,403
Ratio of expenses to average net assets 1.70%** 1.59% 1.54% 1.50% 1.52% 1.60%
Ratio of net investment loss to average
net assets .......................... (0.46)%** (0.48)% (0.72)% (0.77)% (0.82)% (0.44)%
Portfolio turnover rate ................ 8.28%* 9.78% 8.38% 3.01% 1.81% 28.54%
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 2.79%** 3.23% 2.82% 3.25% 4.15% 4.81%
Ratio of net investment loss to average
net assets .......................... (1.55)%** (2.11)% (1.99)% (2.51)% (3.45)% (3.66)%
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% 1.50% 1.48% 1.50% 1.50%
Class I
-----------------------
Six Months
Ended Period
6/30/06 Ended
(unaudited) 12/31/05(1)
----------- -----------
Net asset value, beginning of period ....... $ 29.46 $ 30.26
-------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.03) (0.02)
Net gain (loss) on securities (both
realized and unrealized) ............ 1.04 (0.78)
-------- --------
Total from investment operations ....... 1.01 (0.80)
-------- --------
Less distributions (note 8):
Dividends from net investment income ... -- --
Distributions from capital gains ....... -- --
-------- --------
Total distributions .................... -- --
-------- --------
Net asset value, end of period ............. $ 30.47 $ 29.46
======== ========
Total return (not reflecting sales charge) . 3.84%* (2.64)%*
Ratios/supplemental data
Net assets, end of period (in thousands) $ 26 $ 24
Ratio of expenses to average net assets 1.61%** 1.43%**
Ratio of net investment loss to average
net assets .......................... (0.37)%** (0.64)%**
Portfolio turnover rate ................ 8.28%* 9.78%*
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 2.72%** 2.67%**
Ratio of net investment loss to average
net assets .......................... (1.48)%** (1.89)%**
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 1.41%** 1.42%**
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not Annualized
** Annualized
(1) Commenced operations on December 1, 2005.
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class C
--------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/06 ---------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
----------- ------- ------- ------- ------- -------
Net asset value, beginning of period ....... $ 27.54 $ 26.31 $ 23.66 $ 16.96 $ 20.19 $ 19.07
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.15) (0.30) (0.35) (0.30) (0.28) (0.21)
Net gain (loss) on securities
(both realized and unrealized) ...... 0.98 1.53 3.00 7.00 (2.95) 1.52
------- ------- ------- ------- ------- -------
Total from investment operations ....... 0.83 1.23 2.65 6.70 (3.23) 1.31
------- ------- ------- ------- ------- -------
Less distributions (note 8):
Distributions from net investment income -- -- -- --
Distributions from capital gains ....... -- -- -- -- -- (0.19)
------- ------- ------- ------- ------- -------
Total distributions .................... -- -- -- -- -- (0.19)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............. $ 28.37 $ 27.54 $ 26.31 $ 23.66 $ 16.96 $ 20.19
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) . 3.01%* 4.68% 11.20% 39.50% (16.00)% 6.91%
Ratios/supplemental data
Net assets, end of period
(in thousands) ...................... $ 3,102 $ 2,607 $ 2,235 $ 1,835 $ 858 $ 372
Ratio of expenses to average net assets 2.45%** 2.34% 2.29% 2.26% 2.26% 2.34%
Ratio of net investment income (loss)
to average net assets ............... (1.21)%** (1.24)% (1.47)% (1.53)% (1.56)% (1.23)%
Portfolio turnover rate ................ 8.28%* 9.78% 8.38% 3.01% 1.81% 28.54%
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 3.54%** 3.96% 3.56% 4.02% 4.95% 5.52%
Ratio of net investment loss to
average net assets .................. (2.30)%** (2.87)% (2.74)% (3.29)% (4.25)% (4.40)%
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 2.25%** 2.25% 2.25% 2.24% 2.25% 2.25%
Class Y
--------------------------------------------------------------------------
Six Months
Ended Year Ended December (31,)
6/30/06 ---------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
------- ------- ------- ------- ------- -------
Net asset value, beginning of period ....... $ 30.08 $ 28.45 $ 25.32 $ 17.97 $ 21.19 $ 19.81
------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) + ......... -- (0.05) (0.11) (0.10) (0.10) (0.02)
Net gain (loss) on securities
(both realized and unrealized) ...... 1.05 1.68 3.24 7.45 (3.12) 1.59
------- ------- ------- ------- ------- -------
Total from investment operations ....... 1.05 1.63 3.13 7.35 (3.22) 1.57
------- ------- ------- ------- ------- -------
Less distributions (note 8):
Distributions from net investment income -- -- -- -- -- --
Distributions from capital gains ....... -- -- -- -- -- (0.19)
------- ------- ------- ------- ------- -------
Total distributions .................... -- -- -- -- -- (0.19)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............. $ 31.13 $ 30.08 $ 28.45 $ 25.32 $ 17.97 $ 21.19
======= ======= ======= ======= ======= =======
Total return (not reflecting sales charge) . 3.49%* 5.73% 12.36% 40.90% (15.20)% 7.97%
Ratios/supplemental data
Net assets, end of period
(in thousands) ...................... $ 1,432 $ 1,430 $ 1,661 $ 1,400 $ 918 $ 1,040
Ratio of expenses to average net assets 1.45%** 1.34% 1.29% 1.25% 1.26% 1.35%
Ratio of net investment income (loss)
to average net assets ............... (0.21)%** (0.26)% (0.47)% (0.51)% (0.56%) (0.18)%
Portfolio turnover rate ................ 8.28%* 9.78% 8.38% 3.01% 1.81% 28.54%
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 2.54%** 2.99% 2.56% 3.05% 3.87% 4.59%
Ratio of net investment loss to
average net assets .................. (1.30)%** (1.91)% (1.75)% (2.32)% (3.16)% (3.42)%
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 1.25%** 1.25% 1.25% 1.23% 1.25% 1.25%
- ----------
+ 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 table below is 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 table below is based on an investment of $1,000 invested on January 1,
2006 and held for the six months ended June 30, 2006.
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, 2006
Actual
Total Return Beginning Ending Expenses
Without Account Account Paid During
Sales Charges(1) Value Value the Period(2)
- --------------------------------------------------------------------------------
Class A 3.40% $1,034.00 $1,063.60 $ 7.65
- --------------------------------------------------------------------------------
Class C 3.01% $1,030.10 $1,059.20 $ 11.45
- --------------------------------------------------------------------------------
Class I 3.84% $1,038.40 $ 973.60 $ 7.21
- --------------------------------------------------------------------------------
Class Y 3.49% $1,034.90 $1,064.80 $ 6.38
- --------------------------------------------------------------------------------
(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%, 1.41%
AND 1.25% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
183/365 (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, 2006
Hypothetical
Annualized Beginning Ending Expenses
Total Account Account Paid During
Return Value Value the Period(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,017.55 $ 7.59
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,013.79 $ 11.36
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,050.00 $ 7.25
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,018.80 $ 6.33
- --------------------------------------------------------------------------------
(1) Expenses are equal to the annualized expense ratio of 1.50%, 2.25%, 1.41%
and 1.25% for the Fund's Class A, C , I and Y shares, respectively,
multiplied by the average account value over the period, multiplied by
183/365 (to reflect the one-half year period).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila Group of Fundssm
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
http://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 http://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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 - http://www.sec.gov
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE SUB-ADVISORY AND ADMINISTRATION AGREEMENT
Renewal until June 30, 2007 of the Sub-Advisory and Administration
Agreement (the "Sub-Advisory Agreement") between the Fund and the Manager was
approved by the Board of Trustees and the independent Trustees in June, 2006. At
a meeting called and held for that purpose at which the independent 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, 2005;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees' review, containing data
about the performance of the Fund compared to various benchmarks,
data about its fees, expenses and purchases and redemptions of
capital stock 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 following
factors:
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. 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. She
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 had 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 Manager has additionally provided all administrative services to the
Fund. The Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian. The Board considered that the Manager had established and
maintained a strong culture of ethical conduct and regulatory compliance.
The Board concluded that the services provided were appropriate and
satisfactory 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 generally comparable to
that of the benchmarks for the one-, three-, five- and ten-year periods ended
March 31, 2006. 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 FROM 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 lack of 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, and that
the Manager had reimbursed the Fund for other expenses in the amount of $52,235.
Additionally, it was noted that the Manager had contractually undertaken to
waive fees and/or reimburse Fund expenses during the period January 1, 2005
through December 31, 2005 so that the total Fund expenses did not exceed 1.50%
for Class A Shares, 2.25% for Class C Shares, 1.47% for Class I 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 lack of profitability to the Manager
was consistent with approval of the fees to be paid under the Sub-Advisory
Agreement. (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 $15 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 THE
RELATIONSHIPS WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliate, 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 or in this case decreased losses 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.
(THIS PAGE INTENTIONALLY LEFT BLANK)
FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
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
Gary C. Cornia
Grady Gammage, Jr.
Diana P. Herrmann
OFFICERS
Diana P. Herrmann, President
Arthur K. Carlson, Executive Vice 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.
101 Sabin Street
Pawtuckett, RI 02860
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite 2400
Philadelphia, PA 19103
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.
(a)(1)(ii) The Board of Trustees of the Fund has determined that
it does not have at least one audit committee financial expert
serving on its audit committee. The Fund does not have such a
person serving on the audit committee because none of the persons
currently serving as Trustees happens to have the technical
accounting and auditing expertise included in the definition of
"audit committee financial expert" recently adopted by the Securities
and Exchange Commission in connection with this Form N-CSR, and the
Board has not heretofore deemed it necessary to seek such a person
for election to the Board.
The primary mission of the Board, which is that of oversight over
the operations and affairs of the Fund, confronts the Trustees with
a wide and expanding range of issues and responsibilities. The
Trustees believe that, accordingly, it is essential that the Board's
membership consist of persons with as extensive experience as possible
in fulfilling the duties and responsibilities of mutual fund directors
and audit committee members and, ideally, with extensive experience
and background relating to the economic and financial sectors and
securities in which the Fund invests, including exposure to the
financial and accounting matters commonly encountered with respect
to those sectors and securities. The Board believes that its current
membership satisfies those criteria. It recognizes that it would
also be helpful to have a member with the relatively focused accounting
and auditing expertise reflected in the applicable definition of
"audit committee financial expert," just as additional members with
similarly focused technical expertise in other areas relevant to
the Fund's operations and affairs would also contribute added value.
However, the Board believes that the Fund is better served, and its
assets better employed, by a policy of hiring experts in various
the specialized area of technical accounting and
auditing matters, if and as the Board identifies the need, rather
than by seeking to expand its numbers by adding technical experts
in the areas constituting its domain of responsibility. The Fund's
Audit Committee Charter explicitly authorizes the Committee to
retain such experts as it deems necessary in fulfilling its duties
under the Charter.
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)(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/ Diana P. Herrmann
- - - ---------------------------------
President and Trustee
September 7, 2006
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Chief Financial Officer and Treasurer
September 7, 2006
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 7, 2006
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 7 , 2006
AQUILA ROCKY MOUNTAIN EQUITY FUND
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.