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: 06/30/07
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2007
[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 GROUP OF FUNDS(SM)
[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 ROAD NOT TAKEN"
August, 2007
Dear Fellow Shareholder:
A recent WALL STREET JOURNAL article noted that the current average
holding period for a U. S. stock was about seven months. While much of Wall
Street and the hedge fund world are rapidly trading stocks to try to capture
short term inefficiencies, we have chosen another path - the road not taken. Our
goal is to invest in companies with good growth opportunities for a two to five
year period or longer. We believe this approach allows us to reduce trading
costs over the near term and increase our exposure to good growth companies over
the longer term.
Consequently, our portfolio turnover (the percentage of the portfolio we
sell every year and re-invest the proceeds in different companies) is much lower
than the average mutual fund or hedge fund because we try to invest
strategically. In addition, we receive cash flow from new investors that we also
invest in new companies.
Since we are investing in the Rocky Mountain region, we are investing in
an area that is younger than much of the country. Many of the states became
states later than the rest of the country.
Arizona 1912
Colorado 1876
Idaho 1890
Montana 1889
Nevada 1864
New Mexico 1912
Utah 1896
Wyoming 1890
In addition, it was not until air conditioning in the 1940's that the more
southern states in the region developed.
Many companies in the region tend to be on the smaller side since they
have been under development for a shorter period of time. Approximately half of
the public companies in the region are small or microcap companies (under $2
billion in market capitalization.) We believe that this is one of the key
reasons why it is attractive to invest in the Rocky Mountain area. Many of the
companies located here tend to be in a growth phase of their development. Our
goal is to participate in this growth.
NOT A PART OF THE SEMI-ANNUAL REPORT
Examples of companies in which we have been able to participate in the
growth phase of the company over time include:
INITIAL
PURCHASE AVERAGE PRICE
DATE PURCHASE PRICE ON 6/29/07
Questar 05/15/00 $14.56 $52.85
Station Casinos 12/24/02 30.17 86.80
Coldwater Creek 03/14/03 1.94 23.23
Myriad Genetics 03/17/03 17.66 37.19
Ventana Medical 04/04/03 26.77 77.27
Watching these companies grow and develop and contribute to our region has
been very rewarding. Let us share with you our thoughts on each of them.
QUESTAR has done an outstanding job developing its exploration and
production business in the Rockies. It is a major natural gas producer in Utah
and Wyoming. STATION CASINOS has benefited from its extensive holdings of Las
Vegas real estate and its business of building and managing casinos for itself
and others.
COLDWATER CREEK has been an innovator in the retail industry, optimizing
its use of three channels of distribution - the Internet, its catalogues and its
stores. MYRIAD GENETICS has identified a number of genes which cause different
types of cancer and other diseases and tests to find the genes. In addition this
company has several promising drugs under development including an Alzheimer's
drug and a brain cancer drug which delivers a lot of medication through the
blood brain barrier. VENTANA MEDICAL, with its affiliation with the Arizona
Cancer Center in Tucson, has become a global leader in cancer cell diagnostics
technology.
Not every investment turns out well. As a result, two or three times a
year we eliminate companies from the portfolio for various reasons. Managements
do not perform well or the competitive environment for a company changes,
causing the outlook to deteriorate significantly. In those cases we sell our
position.
We also lose companies to takeovers. This year this is the case with some
good companies including Kinder Morgan and Station Casinos.
However, we are encouraged by the companies that we are finding in the
Rocky Mountain Region.
We appreciate your continued support of Aquila Rocky Mountain Equity Fund.
We will do our best to produce favorable results over the future as we
participate in the growth rate of the companies within the Rocky Mountain
region.
Sincerely,
/s/ Barbara S. Walchli /s/ Lacy B. Herrmann
Barbara S. Walchli Lacy B. Herrmann
Senior Vice President and Portfolio Manager Founder and Chairman Emeritus
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
5.70%, without provision for sales charges but reflecting contractually waived
management fees, for the six months ended June 30, 2007. This compares to the
S&P 500 with a total return of 6.96% and the Russell 2000 with a total return of
6.45%. The Russell Microcap Index, representing companies with market
capitalizations below $300 million had a total return of 4.28%
We do not have a perfect benchmark or performance comparison for the Fund
since we invest in companies in a specific region - the eight contiguous states
in the Rocky Mountain area of our country. On June 30, 19.5% of the equity
investments in the Fund were in companies with a market capitalization of over
$10 billion (large cap companies), 40.7% were in companies with a market
capitalization between $2 billion and $10 billion (mid cap) and 35.3% were in
companies with market capitalizations between $300 million and $2 billion (small
cap). In addition 4.5% of the equity investments in the Fund were in companies
with market capitalizations below $300 million (micro cap).
At the end of June, we had holdings of 61 companies in the portfolio
across a broad number of industries throughout the Rocky Mountain region. 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 4.06% 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 strive 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 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 years has averaged under
10%.
During the first half of 2007, the five best performing stocks in the Fund
came from four different states and five industries. The best performing stock
was Ventana Medical headquartered in Tucson, Arizona, up 79.6% due to a takeover
offer by Roche. Ventana Medical is the global leader in cancer diagnostics and
has a close technology relationship with the Arizona Cancer Center in Tucson.
Sonic Innovations, headquartered in Salt Lake City, was up 68.0% after improved
performance following a management change. Studies have shown that Sonic's
hearing aids have superior voice quality.
The third best performing stock was Avnet up 55.3%. Avnet is a global
electronics distributor which has been benefiting from an acquisition and
improved capital spending disciplines. Several years ago Avnet moved its
corporate headquarters from Pennsylvania to Tempe, Arizona and is located about
two miles from the Arizona State University campus. ASU's business school is
rated #3 nationwide in supply chain management.
MANAGEMENT DISCUSSION (CONTINUED)
The fourth best performing stock, up 43.8%, was MGM Mirage based in Las
Vegas, Nevada. The hotel industry has been receiving a lot of attention due to
its strong cash flow. The fifth best performing stock was Discovery Holding
Company based in Englewood, Colorado, up 42.9%. Discovery has a new CEO who is
focusing and streamlining the company. Discovery owns the Discovery Channel and
the Learning Channel among others and has recently started a new channel, Planet
Green which is drawing strong support from advertisers.
The four worst performing stocks were also from different industries and
states. The worst performing, Shuffle Master Inc., headquartered in Las Vegas
was down 36.6% after disappointing results from a joint venture. The company,
which has been trying to develop a number of new products and businesses, has
strengthened its management team. The second worst performing stock was
Nighthawk Radiology, based in Coeur D'Alene, Idaho. The stock was down 29.2%
after also reporting disappointing earnings. The company has been investing in
new products and is opening a new office for radiologists in San Francisco which
has put short term pressure on margins.
The third worst performing stock was Semitool, a semiconductor equipment
company headquartered in Kalispell, Montana. The stock declined 27.8% as
semiconductor companies deferred orders due to short term weakness in the memory
market. Merit Medical based in South Jordan, Utah declined 24.5% as it has
brought on new capacity and products which has also put short term pressure on
margins. Although the short term performance of these four companies has hurt
our performance in the first half, we believe their new products and improving
earnings should help our performance in the second half of 2007 and 2008.
During the second half of 2007 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. As the U.S. economy has slowed we have seen more investor interest
in growth stocks, companies that can grow even in a slow economy. 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.
We are seeing more interest in media stocks, in selected health care
stocks and technology as well. Now that the iPhone has been introduced, Intel
has introduced its new chip set for laptops and Microsoft has had six months to
work the bugs out of Vista, we are seeing signs of strength in technology.
Memory semiconductor prices have been moving up.
In the first six months of 2007 we have lost three of our companies to
takeovers and added three new companies to the portfolio. We have looked for
companies with unique products that we believe have the potential to grow even
though the overall economy is slowing. We have added a publishing company with
data bases in global energy, security and engineering industries, IHS Inc.,
headquartered in Englewood, Colorado. We have also added two Colorado
telecommunications companies, Qwest and Level 3 Communications that have
broadband resources. Due to new applications such as video, some analysts are
projecting that the Internet may grow at a 300-500% rate over the next few
years.
AQUILA ROCKY MOUNTAIN EQUITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2007 (UNAUDITED)
MARKET
SHARES COMMON STOCKS (92.2%) VALUE
- -------------- -------------------------------------------------------------------- ------------
BASIC INDUSTRY (10.5%)
30,000 Allied Waste Industries, Inc.+ ..................................... $ 403,800
16,000 Ball Corp. ......................................................... 850,720
3,000 Freeport-McMoRan Copper & Gold, Inc. ............................... 248,460
38,000 Knight Transportation, Inc. ........................................ 736,440
11,000 Newmont Mining Corp. ............................................... 429,660
17,000 SkyWest, Inc. ...................................................... 405,110
------------
3,074,190
------------
BUSINESS SERVICES (2.8%)
5,000 IHS, Inc. (Class A)+ ............................................... 230,000
14,000 Insight Enterprises, Inc.+ ......................................... 315,980
3,000 OfficeMax, Inc. .................................................... 117,900
4,000 Viad Corp. ......................................................... 168,680
------------
832,560
------------
CAPITAL SPENDING (6.5%)
5,000 Dynamic Materials Corp.+ ........................................... 187,500
30,000 Mity Enterprises, Inc.+ ............................................ 643,800
18,000 Mobile Mini, Inc.+ ................................................. 525,600
24,000 Radyne Corp.+ ...................................................... 256,080
32,000 Semitool, Inc.+ .................................................... 307,520
------------
1,920,500
------------
CONSUMER CYCLICALS (0.8%)
5,000 M.D.C. Holdings, Inc. .............................................. 241,800
------------
CONSUMER SERVICES (19.6%)
36,000 Coldwater Creek, Inc.+ ............................................. 836,280
6,000 Comcast Corp. (Special Class A)+ ................................... 167,760
18,000 EchoStar Communications Corp. (Class A)+ ........................... 780,660
16,000 International Game Technology ...................................... 635,200
7,000 Las Vegas Sands Corp.+ ............................................. 534,730
3,000 Liberty Global, Inc. Series A+ ..................................... 123,120
2,000 Liberty Media Capital Series A+ .................................... 235,360
9,000 Liberty Media Interactive Series A+ ................................ 200,970
11,000 MGM Mirage+ ........................................................ 907,280
15,000 PetSmart, Inc. ..................................................... 486,750
20,000 Shuffle Master, Inc.+ .............................................. 332,000
6,000 Station Casinos, Inc. .............................................. 520,800
------------
5,760,910
------------
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- -------------- -------------------------------------------------------------------- ------------
CONSUMER STAPLES (2.5%)
18,000 Discovery Holding Co. Class A+ ..................................... $ 413,820
5,000 P.F. Chang's China Bistro, Inc.+ ................................... 176,000
8,000 Rocky Mountain Chocolate Factory, Inc. ............................. 127,040
------------
716,860
------------
ENERGY (5.5%)
12,000 Bill Barrett Corp.+ ................................................ 441,960
14,000 Cimarex Energy Co. ................................................. 551,740
12,000 Questar Corp. ...................................................... 634,200
------------
1,627,900
------------
FINANCIAL (11.8%)
25,000 First State Bancorporation ......................................... 532,250
25,500 Glacier Bancorp, Inc. .............................................. 518,925
28,000 Janus Capital Group, Inc. .......................................... 779,520
9,000 MoneyGram International, Inc. ...................................... 251,550
10,000 Wells Fargo & Company .............................................. 351,700
20,000 Western Union Co. .................................................. 416,600
8,000 Zions Bancorporation ............................................... 615,280
------------
3,465,825
------------
HEALTH CARE (18.0%)
22,000 Array BioPharma, Inc.+ ............................................. 256,740
22,000 Medicis Pharmaceutical Corp. (Class A) ............................. 671,880
60,000 Merit Medical Systems, Inc.+ ....................................... 717,600
20,000 Myriad Genetics, Inc.+ ............................................. 743,800
30,000 NightHawk Radiology Holdings, Inc.+ ................................ 541,500
14,000 Providence Service Corp.+ .......................................... 374,080
20,000 Sonic Innovations, Inc.+ ........................................... 175,000
30,000 Spectranetics Corp.+ ............................................... 345,600
7,000 USANA Health Services, Inc.+ ....................................... 313,180
15,000 Ventana Medical Systems, Inc.+ ..................................... 1,159,050
------------
5,298,430
------------
TECHNOLOGY (12.3%)
24,000 Avnet, Inc.+ ....................................................... 951,360
46,000 CIBER, Inc.+ ....................................................... 376,280
MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- -------------- -------------------------------------------------------------------- ------------
TECHNOLOGY (CONTINUED)
14,000 JDA Software Group, Inc.+ .......................................... $ 274,820
30,000 Level 3 Comm Inc.+ ................................................. 175,500
32,000 Microchip Technology, Inc. ......................................... 1,185,280
38,000 Micron Technology, Inc.+ ........................................... 476,140
11,000 RightNow Technologies, Inc.+ ....................................... 180,510
------------
3,619,890
------------
UTILITIES (1.9%)
5,000 PNM Resources, Inc. ................................................ 138,950
30,000 Qwest Communications International+ ................................ 291,000
4,000 UniSource Energy Corp. ............................................. 131,560
------------
561,510
------------
Total Common Stocks (cost $17,383,386) ............................. 27,120,375
------------
INVESTMENT COMPANIES (7.1%)
1,050,000 AIM S-T Invest. Co. Prime Port. Inst. Cl. Money Market Fund ........ 1,050,000
1,050,000 JP Morgan Liquid Assets Money Market Fund .......................... 1,050,000
------------
Total Investment Companies (cost $2,100,000) ....................... 2,100,000
------------
Total Investments (cost $19,483,386*) .................. 99.3% 29,220,375
Other assets less liabilities .......................... 0.7 192,794
------ ------------
Net Assets ............................................. 100.0% $ 29,413,169
====== ============
PERCENT OF
PORTFOLIO DISTRIBUTION (UNAUDITED) PORTFOLIO
---------------------------------- ---------
ROCKY MOUNTAIN REGION
---------------------
Arizona 27.6%
Colorado 25.5
Idaho 6.4
Montana 3.5
Nevada 10.0
New Mexico 2.3
Utah 14.5
------
89.8
Investments in other states 3.0
Investment Companies 7.2
------
100.0%
======
* Cost for Federal income tax and financial reporting 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, 2007 (UNAUDITED)
ASSETS
Investments at market value (cost $19,483,386) ................................... $ 29,220,375
Cash ............................................................................. 249,156
Receivable for Fund shares sold .................................................. 19,700
Prepaid expenses ................................................................. 11,912
Dividends receivable ............................................................. 11,764
Receivable from Manager .......................................................... 1,564
Other assets ..................................................................... 3,644
------------
Total assets ................................................................. 29,518,115
------------
LIABILITIES
Payable for Fund shares redeemed ................................................... 77,654
Payable for investment securities purchased ........................................ 16,050
Distribution and service fees payable .............................................. 7,934
Accrued expenses ................................................................... 3,308
------------
Total liabilities ............................................................... 104,946
------------
NET ASSETS ............................................................................ $ 29,413,169
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 8,642
Additional paid-in capital ......................................................... 18,286,700
Net unrealized appreciation on investments (note 4) ................................ 9,736,989
Net Investment loss ................................................................ (85,515)
Accumulated net realized gain on investments ....................................... 1,466,353
------------
$ 29,413,169
============
CLASS A
Net Assets ......................................................................... $ 24,129,459
============
Capital shares outstanding ......................................................... 703,171
============
Net asset value and redemption price per share ..................................... $ 34.32
============
Offering price per share (100/95.75 of $34.32 adjusted to nearest cent) ............ $ 35.84
============
CLASS C
Net Assets ......................................................................... $ 3,484,649
============
Capital shares outstanding ......................................................... 109,910
============
Net asset value and offering price per share ....................................... $ 31.70
============
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) ...................................... $ 31.70*
============
CLASS I
Net Assets ......................................................................... $ 30,242
============
Capital shares outstanding ......................................................... 880
============
Net asset value, offering and redemption price per share ........................... $ 34.37
============
CLASS Y
Net Assets ......................................................................... $ 1,768,819
============
Capital shares outstanding ......................................................... 50,275
============
Net asset value, offering and redemption price per share ........................... $ 35.18
============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007 (unaudited)
INVESTMENT INCOME:
Dividends ............................................ $ 142,601
Expenses:
Management fee (note 3) .............................. $ 195,708
Distribution and service fees (note 3) ............... 47,388
Trustees' fees and expenses .......................... 40,703
Registration fees and dues ........................... 39,879
Transfer and shareholder servicing agent fees (note 3) 29,443
Legal fees (note 3) .................................. 23,338
Shareholders' reports ................................ 17,272
Auditing and tax fees ................................ 6,447
Chief compliance officer (note 3) .................... 2,253
Custodian fees ....................................... 1,773
Insurance ............................................ 859
Miscellaneous ........................................ 25,839
-----------
Total expenses ....................................... 430,902
Management fee waived (note 3) ....................... (169,585)
Expenses paid indirectly (note 5) .................... (33,201)
-----------
Net expenses ......................................... 228,116
-----------
Net investment loss .................................. (85,515)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions 1,285,445
Change in unrealized appreciation on investments ..... 377,314
-----------
Net realized and unrealized gain (loss) on investments 1,662,759
-----------
Net change in net assets resulting from operations ... $ 1,577,244
===========
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2007 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2006
---------------- -----------------
OPERATIONS:
Net investment loss ................................... $ (85,515) $ (107,116)
Net realized gain (loss) from securities transactions . 1,285,445 507,092
Change in unrealized appreciation on investments ...... 377,314 2,302,022
------------ ------------
Change in net assets from operations ............... 1,577,244 2,701,998
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (note 8):
Class A Shares:
Net realized gain on investments ...................... -- (267,498)
Class C Shares:
Net realized gain on investments ...................... -- (42,980)
Class I Shares:
Net realized gain on investments ...................... -- (326)
Class Y Shares:
Net realized gain on investments ...................... -- (18,167)
------------ ------------
Change in net assets from distributions ............ -- (328,971)
------------ ------------
CAPITAL SHARE TRANSACTIONS (note 7):
Proceeds from shares sold ............................. 2,304,406 7,902,368
Short-term trading redemption fee ..................... -- 849
Reinvested distributions .............................. -- 217,492
Cost of shares redeemed ............................... (2,683,255) (4,024,372)
------------ ------------
Change in net assets from capital share transactions (378,849) 4,096,337
------------ ------------
Change in net assets ............................... 1,198,395 6,469,364
NET ASSETS:
Beginning of period ................................... 28,214,774 21,745,410
------------ ------------
End of period ......................................... $ 29,413,169 $ 28,214,774
============ ============
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007 (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 commenced
operations on December 1, 2005. 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.
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 listed only on
NASDAQ are valued in accordance with the NASDAQ Official Closing 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.
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, 2006 the Fund
decreased undistributed net investment loss by $107,116, and decreased
additional paid-in capital by $107,116.
g) ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting
Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for
how uncertain tax positions should be recognized, measured, presented and
disclosed in the financial statements. FIN 48 required the evaluation of
tax positions taken or expected to be taken in the course of preparing the
Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority.
Tax positions not deemed to meet the more-likely-than-not threshold would
have been recorded as a tax benefit or expense in the current year. FIN 48
was effective for the Fund on June 29, 2007 and there were no uncertain
tax positions to be reflected in the Fund's financial statements at June
30, 2007.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Fund
believes adoption of SFAS 157 will have no material impact on the Fund's
financial statements.
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, 2007, the Fund incurred management fees
of $195,708, of which $169,585 was waived. The Manager has contractually
undertaken to waive fees and/or reimburse Fund expenses during the period
January 1, 2007 through December 31, 2007 so that total Fund expenses would not
exceed 1.50% for Class A Shares, 2.25% for Class C Shares, 1.52% 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, 2007, distribution fees on Class A
Shares amounted to $29,551 of which the Distributor retained $3,352.
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, 2007, amounted to $13,356. 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,
2007, amounted to $4,452. The total of these payments with respect to Class C
Shares amounted to $17,808 of which the Distributor retained $4,002.
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
0.20%) 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 0.15%) 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,
2007, these payments were made at the average annual rate of 0.35% of such net
assets and amounted to $51 of which $29 related to the Plan and $22 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. The Fund's shares are sold primarily through
agreements between the Distributor and various brokerage and advisory firms,
with the bulk of sales commissions inuring to such brokerage and advisory firms.
For the six months ended June 30, 2007, total commissions on sales of Class A
Shares amounted to $40,070 of which the Distributor received $3,930.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2007, the Fund incurred $23,338 of legal
fees allocable to Hollyer Brady Barrett & Hines LLP ("Hollyer Brady") and its
successor, Butzel Long PC, counsel to the Fund, for legal services in
conjunction with the Fund's ongoing operations. The Secretary of the Fund was a
partner at Hollyer Brady and is a shareholder of its successor.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2007, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $3,301,330 and $2,634,092, respectively.
At June 30, 2007, the aggregate tax cost for all securities was
$19,483,386. At June 30, 2007, the aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $10,134,425 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted to
$397,436 for a net unrealized appreciation of $9,736,989.
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.
6. PORTFOLIO ORIENTATION
The Fund's investments are primarily invested in the securities of
companies within the eight state Rocky Mountain region consisting of Arizona,
Colorado, 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, 2007 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2006
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
CLASS A SHARES:
Proceeds from shares sold 50,850 $ 1,691,653 184,088 $ 5,717,458
Reinvested distributions -- -- 5,662 183,463
Cost of shares redeemed . (59,785) (1,982,828) (78,130) (2,412,241)
----------- ----------- ----------- -----------
Net change ........... (8,935) (291,175) 111,620 3,488,680
----------- ----------- ----------- -----------
CLASS C SHARES:
Proceeds from shares sold 11,406 352,704 44,766 1,305,452
Reinvested distributions -- -- 705 21,199
Cost of shares redeemed . (16,034) (498,843) (25,603) (739,232)
----------- ----------- ----------- -----------
Net change ........... (4,628) (146,139) 19,868 587,419
----------- ----------- ----------- -----------
CLASS I SHARES:
Proceeds from shares sold 9 300 32 1,000
Reinvested distributions -- -- 10 326
Cost of shares redeemed . -- -- -- --
----------- ----------- ----------- -----------
Net change ........... 9 300 42 1,326
----------- ----------- ----------- -----------
CLASS Y SHARES:
Proceeds from shares sold 7,595 259,749 27,839 878,458
Reinvested distributions -- -- 377 12,504
Cost of shares redeemed . (5,935) (201,584) (27,134) (872,899)
----------- ----------- ----------- -----------
Net change ........... 1,660 58,165 1,082 18,063
----------- ----------- ----------- -----------
Total transactions in Fund
shares .................. (11,894) $ (378,849) 132,612 $ 4,095,488
=========== =========== =========== ===========
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, 2007, 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.
The tax character of distributions:
Year Ended December 31,
2006 2005
------------ ------------
Long-term capital gain ............... $ 328,971 --
As of December 31, 2006, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized gain ........ $ 180,908
Unrealized appreciation .............. 9,359,675
------------
$ 9,540,583
============
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A
---------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/07 ----------------------------------------------------------------
(unaudited) 2006 2005 2004 2003 2002
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 32.47 $ 29.45 $ 27.93 $ 24.92 $ 17.74 $ 20.96
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.09) (0.11) (0.11) (0.17) (0.16) (0.15)
Net gain (loss) on securities (both
realized and unrealized) ............. 1.94 3.51 1.63 3.18 7.34 (3.07)
-------- -------- -------- -------- -------- --------
Total from investment operations ....... 1.85 3.40 1.52 3.01 7.18 (3.22)
-------- -------- -------- -------- -------- --------
Less distributions (note 8):
Distributions from capital gains ....... -- (0.38) -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 34.32 $ 32.47 $ 29.45 $ 27.93 $ 24.92 $ 17.74
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 5.70%* 11.54% 5.44% 12.08% 40.47% (15.36)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 24,129 $ 23,121 $ 17,684 $ 13,718 $ 10,345 $ 4,242
Ratio of expenses to average net assets 1.73%** 1.72% 1.59% 1.54% 1.50% 1.52%
Ratio of net investment loss to average
net assets ........................... (0.74)%** (0.57)% (0.48)% (0.72)% (0.77)% (0.82)%
Portfolio turnover rate ................ 10.04%* 13.31% 9.78% 8.38% 3.01% 1.81%
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 2.68%** 2.70% 3.23% 2.82% 3.25% 4.15%
Ratio of net investment loss to average
net assets ........................... (1.69)%** (1.55)% (2.11)% (1.99)% (2.51)% (3.45)%
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% 1.50% 1.48% 1.50%
Class C
---------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/07 ----------------------------------------------------------------
(unaudited) 2006 2005 2004 2003 2002
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 30.11 $ 27.54 $ 26.31 $ 23.66 $ 16.96 $ 20.19
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.19) (0.32) (0.30) (0.35) (0.30) (0.28)
Net gain (loss) on securities (both
realized and unrealized) ............. 1.78 3.27 1.53 3.00 7.00 (2.95)
-------- -------- -------- -------- -------- --------
Total from investment operations ....... 1.59 2.95 1.23 2.65 6.70 (3.23)
-------- -------- -------- -------- -------- --------
Less distributions (note 8):
Distributions from capital gains ....... -- (0.38) -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 31.70 $ 30.11 $ 27.54 $ 26.31 $ 23.66 $ 16.96
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 5.28%* 10.71% 4.68% 11.20% 39.50% (16.00)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 3,485 $ 3,449 $ 2,607 $ 2,235 $ 1,835 $ 858
Ratio of expenses to average net assets 2.48%** 2.47% 2.34% 2.29% 2.26% 2.26%
Ratio of net investment loss to average
net assets ........................... (1.49)%** (1.32)% (1.24)% (1.47)% (1.53)% (1.56)%
Portfolio turnover rate ................ 10.04%* 13.31% 9.78% 8.38% 3.01% 1.81%
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 3.42%** 3.45% 3.98% 3.56% 4.02% 4.95%
Ratio of net investment loss to average
net assets ........................... (2.43)%** (2.30)% (2.87)% (2.74)% (3.29)% (4.25)%
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 2.25%** 2.25% 2.25% 2.25% 2.24% 2.25%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not annualized
** Annualized
See accompanying notes to financial statements.
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS (continued)
For a share outstanding throughout each period
Class I
------------------------------------------
Six Months
Ended Year Period
6/30/07 Ended Ended
(unaudited) 12/31/06 12/31/05(1)
----------- -------- -----------
Net asset value, beginning of period ..... $ 32.51 $ 29.46 $ 30.26
-------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.07) (0.08) (0.02)
Net gain (loss) on securities
(both realized and unrealized) ....... 1.93 3.51 (0.78)
-------- -------- --------
Total from investment operations ....... 1.86 3.43 (0.80)
-------- -------- --------
Less distributions (note 8):
Distributions from capital gains ....... -- (0.38) --
-------- -------- --------
Net asset value, end of period ........... $ 34.37 $ 32.51 $ 29.46
======== ======== ========
Total return (not reflecting sales charge) 5.72%* 11.64% (2.64)%*
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 30 $ 28 $ 24
Ratio of expenses to average net assets 1.65%** 1.64% 1.43%**
Ratio of net investment income (loss)
to average net assets ................ (0.67)%** (0.48)% (0.64)%**
Portfolio turnover rate ................ 10.04%* 13.31% 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 2.54%** 2.69% 2.67%**
Ratio of net investment loss to
average net assets ................... (1.55)%** (1.53)% (1.89)%**
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 1.43%** 1.42% 1.42%**
Class Y
----------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/07
(unaudited) 2006 2005 2004 2003 2002
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 33.25 $ 30.08 $ 28.45 $ 25.32 $ 17.97 $ 21.19
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) + ......... (0.04) (0.03) (0.05) (0.11) (0.10) (0.10)
Net gain (loss) on securities
(both realized and unrealized) ....... 1.97 3.58 1.68 3.24 7.45 (3.12)
-------- -------- -------- -------- -------- --------
Total from investment operations ....... 1.93 3.55 1.63 3.13 7.35 (3.22)
-------- -------- -------- -------- -------- --------
Less distributions (note 8):
Distributions from capital gains ....... -- (0.38) -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 35.18 $ 33.25 $ 30.08 $ 28.45 $ 25.32 $ 17.97
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 5.80%* 11.80% 5.73% 12.36% 40.90% (15.20)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 1,769 $ 1,616 $ 1,430 $ 1,661 $ 1,400 $ 918
Ratio of expenses to average net assets 1.48%** 1.47% 1.34% 1.29% 1.25% 1.26%
Ratio of net investment income (loss)
to average net assets ................ (0.49)%** (0.31)% (0.26)% (0.47)% (0.51)% (0.56)%
Portfolio turnover rate ................ 10.04%* 13.31% 9.78% 8.38% 3.01% 1.81%
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 2.43%** 2.45% 2.99% 2.56% 3.05% 3.87%
Ratio of net investment loss to
average net assets ................... (1.44)%** (1.30)% (1.91)% (1.75)% (2.32)% (3.16)%
The expense ratios after giving effect to the waivers, reimbursements and expense offset for uninvested cash balances were:
Ratio of expenses to average net assets 1.25%%** 1.25% 1.25% 1.25% 1.23% 1.25%
- ----------
+ 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.
- --------------------------------------------------------------------------------
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,
2007 and held for the six months ended June 30, 2007.
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".
SIX MONTHS ENDED JUNE 30, 2007
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 5.70% $1,000.00 $1,057.00 $ 7.65
- --------------------------------------------------------------------------------
Class C 5.28% $1,000.00 $1,052.80 $ 11.45
- --------------------------------------------------------------------------------
Class I 5.72% $1,000.00 $1,057.20 $ 7.29
- --------------------------------------------------------------------------------
Class Y 5.80% $1,000.00 $1,058.00 $ 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%, 1.43%
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
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs
with respect to Class A shares. The example does not reflect the deduction of
contingent deferred sales charges ("CDSC") with respect to Class C shares.
Therefore, the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different mutual funds. In
addition, if these transaction costs were included, your costs would have been
higher.
SIX MONTHS ENDED JUNE 30, 2007
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,017.36 $ 7.50
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,013.64 $ 11.23
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,017.70 $ 7.15
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,018.60 $ 6.26
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 1.50%, 2.25%, 1.43%
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
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE SUB-ADVISORY AND ADMINISTRATION AGREEMENT
Renewal until June 30, 2008 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, 2007. 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 agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended December 31, 2006;
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 Ms. Barbara Walchli, whom the Manager employs as portfolio manager for the
Fund, 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 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 indices, the
Fund has had investment performance that is generally comparable to that of the
benchmarks for the period 1996-2006.
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 a significant portion of the sub-advisory fee had
been waived. Additionally, it was noted that the Manager had contractually
undertaken to waive fees and/or reimburse Fund expenses during the period
January 1, 2007 through December 31, 2007 so that the total Fund expenses did
not exceed 1.50% for Class A Shares, 2.25% for Class C Shares, 1.52% for Class I
Shares and 1.25% for Class Y Shares.
The Board considered that the foregoing indicated the appropriateness of
the costs of the services to the Fund, which was being well managed as indicated
by the factors considered previously.
The Board further concluded that the 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
RELATIONSHIP 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 it 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 affiliate, it also makes their services available to the Fund at favorable
levels of quality and cost which are more advantageous to the Fund than would
otherwise have been possible.
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INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the 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.
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PROXY VOTING RECORD (UNAUDITED)
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
- --------------------------------------------------------------------------------
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
Glenn P. O'Flaherty
OFFICERS
Diana P. Herrmann, President
Barbara S. Walchli, Senior Vice President and Portfolio Manager
Marie E. Aro, Senior Vice President
Kimball L. Young, Senior Vice President
R. Lynn Yturri, Senior 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
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
101 Sabin Street
Pawtucket, RI 02860
CUSTODIAN
JPMORGAN CHASE BANK, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
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.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included in Item 1 above
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Directors of the Registrant has adopted a Nominating
Committee Charter which provides that the Nominating Committee (the 'Committee')
may consider and evaluate nominee candidates properly submitted by shareholders
if a vacancy among the Independent Trustees of the Registrant occurs and if,
based on the Board's then current size, composition and structure, the Committee
determines that the vacancy should be filled. The Committee will consider
candidates submitted by shareholders on the same basis as it considers and
evaluates candidates recommended by other sources. A copy of the qualifications
and procedures that must be met or followed by shareholders to properly submit
a nominee candidate to the Committee may be obtained by submitting a request
in writing to the Secretary of the Registrant.
ITEM 11. 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 12. 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 6, 2007
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Chief Financial Officer and Treasurer
September 6, 2007
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 6, 2007
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 6, 2007
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.