ANNUAL
REPORT
DECEMBER 31, 1996
[Graphic: Logo of Aquila Rocky Mountain Equity Fund-Rectangle with a drawing
of a mountain top in it]
A CAPITAL APPRECIATION INVESTMENT
[Graphic: Logo of Aquila Group of Funds-Eagles's head]
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
ANNUAL REPORT
February 14, 1997
Dear Investor:
We are pleased to provide you with the Annual Report for Aquila
Rocky Mountain Equity Fund for the twelve-month period ended December 31,
1996. We believe you will be pleased with the investment results achieved by
the Fund as illustrated in the table and chart below.
INVESTMENT RESULTS
<TABLE>
<S> <C> <C>
Total Return From
Inception Through Year-End 7/22/94 - 12/31/94 (3.24%)*
1 Year Total Return 1/1/95 - 12/31/95 19.68%*
1 Year Total Return 1/1/96 - 12/31/96 18.68%*
Life Of Fund - Avg. Annual
Total Return Inception 7/22/94 - 12/31/96 13.93%*
</TABLE>
ILLUSTRATION OF A $10,000 INVESTMENT SINCE INCEPTION OF THE FUND*
[Graphic of area chart with the following information:]
<TABLE>
<S> <C>
7/22/94 $10,000.00
9/30/94 $ 9,851.27
12/31/94 $ 9,676.29
3/31/94 $10,376.20
6/30/95 $11,041.12
9/30/95 $11,636.05
12/31/95 $11,580.75
3/31/96 $12,330.45
6/30/96 $13,106.62
9/30/96 $13,027.24
12/31/96 $13,743.66
</TABLE>
The table and chart above illustrate the percentage return
generated by the Fund and also the capital appreciation of a hypothetical
investment of $10,000 since the Fund's inception on July 22, 1994. They do
not reflect any sales charges since these vary with the classes of shares
offered by the Fund.
THE FUND'S INVESTMENT GOAL
The Fund's goal is capital appreciation for your investment. We
seek to achieve this goal primarily through investments in growth-oriented
companies within the Rocky Mountain region of our country.
The Fund's investment portfolio manager, KPM Investment
Management, Inc., searches for securities of companies whose market price is
undervalued in relationship to intrinsic value and the projected growth rate
<PAGE>
of the company. To the extent practicable, the intent of this approach is to
capture upside potential while limiting downside risks in price movements.
WHY THE ROCKY MOUNTAIN REGION
Independent analysis shows that the Rocky Mountain region, which
collectively consists of eight states - Arizona, Colorado, Idaho, Montana,
Nevada, New Mexico, Utah, and Wyoming - has been experiencing the highest
economic growth rate of any area in our country. Projections indicate that
such growth rate should continue over the foreseeable future.
The U.S. Bureau of the Census projects the percentage change in
population growth of each of the states in the region to be greater than the
U.S. as a whole between 1995 - 2010. Additionally, other projections
forecast higher employment growth rates than the overall country's average
over the coming decade.
The Rocky Mountain region's industry base has broadened
significantly over the past decade. As a result, the region now offers
numerous attractive investment opportunities with growth-oriented companies
of various size.
Moreover, the Rocky Mountain Fund is not bothered by such
problems as languages, currencies, accounting standards, and cultural
differences, unlike those geographic regional funds that have attracted
strong investor interest in recent years by focusing upon countries in Asia,
Latin America and Eastern Europe.
REGIONALLY-LOCATED INVESTMENT MANAGEMENT
Aquila Management Corporation, as the Fund's founder, believes
there are distinct benefits to investors in having a regionally-located
investment manager focusing upon local Rocky Mountain companies. This
approach provides greater ability to search out and take advantage of
attractive investment opportunities.
It is always exciting and rewarding to "discover" vibrant
companies in the Rocky Mountain region whose securities can possess good
appreciation prospects - before they are uncovered by the marketplace
nationally.
The Fund's investment selections are focused upon securities of
companies right here in "our own backyard."
HIGHLIGHTS OF THE FUND'S INVESTMENTS
Our objective is to invest a minimum of 65% of the Fund's assets
in companies within the Rocky Mountain region. This criteria is defined as
those companies:
* having principal executive offices located in the region, or
* more than half of their assets located in the region; or
* deriving more than half of their revenue or profits from the region.
The following chart illustrates the year-end state-by-state
allocation of the Fund's investment assets within the Rocky Mountain region.
[Graphic of pie chart with the following information:]
<TABLE>
<S> <C>
Nevada 10.31%
Colorado 26.03%
Arizona 20.45%
Idaho 2.92%
Utah 17.98%
New Mexico 3.16%
Montana 3.78%
Cash Equivalents 9.22%
Other States 6.15%
</TABLE>
<PAGE>
At year-end December 31, 1996, the companies whose securities
made up the 10 largest common stock holdings in the portfolio were:
COMPANY STATE % OF NET ASSETS
Prima Energy Corp. Colorado 6.22%
American Stores Company Utah 4.41
First Security Corp. Utah 3.79
Viad Corporation Arizona 3.56
Finova Group Inc. Arizona 3.33
Mity Lite, Inc. Utah 3.24
Conseco Inc. Indiana 3.21
First State Bancorp New Mexico 3.16
International Game Technology Nevada 3.15
KN Energy Colorado 3.05
37.12%
IMPORTANCE OF CONSISTENCY AND LONGER-TERM VIEWPOINT
We encourage investors in the Fund to view their investment over
a reasonable time period - a minimum of 3 to 5 years - in order to realize
their desired capital appreciation goal.
Just as fashions change frequently with ladies' apparel,
investment sectors also change frequently within the equity securities
marketplace. When such changes occur, certain investments go out of favor,
while others come into favor.
Experience has shown, however, that it is difficult, and often
imprudent, to switch continuously from one investment style to another just
trying to capture the latest trend in the management of investments.
Therefore, we have settled upon a value-oriented approach in
selecting investments for capital appreciation opportunities. This may
result in the Fund doing well in certain periods, but, at other times, not
necessarily keeping up with the then "in-vogue" securities.
In our experience, "value will win out" over the longer run.
This tends to be the case whether one talks about clothes, automobiles,
collectibles, or investment securities.
ABSOLUTE RETURNS AND THE POWER OF COMPOUNDING
The major desire of Aquila Rocky Mountain Equity Fund is to
produce credible ABSOLUTE returns for our investors. ABSOLUTE results, as
measured on an average annual basis, are, after all, what you can take to
the bank and spend.
It is always desirable to strive for positive performance
relative to popular market indexes. However, we have found from extensive
experience over the years, that chasing indexes can lead, in many instances,
to short-sightedness as opposed to sticking with one's basic investment
strategy.
The chief advantage in taking a longer-term viewpoint in
investing is that it permits one to enjoy the power of compounding.
Let us illustrate the power of compounding. An average annual
ABSOLUTE return of 10% doubles one's money in 7 years. A 15% average annual
ABSOLUTE return doubles one's money in about 5 years. Over the past 10
years, equity investments have produced an average annual return of about
15%. Whether such higher rate of return as that experienced in more recent
years will continue is imponderable. It is noteworthy that this more recent
level of return is higher than the average annual return of about 10%
experienced over the past 70 years.
The relatively high level of absolute returns the Fund realized
in 1995 and 1996 are rewarding and gratifying. However, based upon
historical securities market results, such performance may not necessarily be
replicated on a continuing basis over the future.
<PAGE>
What we can say to you, though, is that the Fund will
consistently seek to provide you with highly acceptable average annual
ABSOLUTE return results through participation in the growth prospects of the
dynamic Rocky Mountain region. A return that can compound your capital
nicely is our goal.
One has to maintain the "big picture" gained through longer-term
perspective. In this regard, ABSOLUTE performance over a reasonable length
time period is what counts.
THE FUND'S INCOME AND EXPENSES
As indicated, Aquila Rocky Mountain Equity Fund is designed for
capital appreciation over a reasonable time period. Accordingly, securities
of the kind that make up the investment portfolio generally produce little,
if any, annual income in the form of dividends or interest. To date, the
Fund's portfolio has generated an average annual income level of
approximately 1.5% of total assets. We hope a comparable income level might
be continued.
Whatever level of income is produced from the Fund's investments
will first be applied against payment of the Fund's operating expenses. Over
time, as the asset level of the Fund increases, we trust the income level
produced by the various securities in the portfolio will also increase in
amount and be sufficient to cover all operating expenses. Then, any surplus
income, above the level devoted to payment of the Fund's operating expenses,
will be distributed as dividends to the Fund's shareholders.
Meanwhile, as shown in the "Statement of Operations" in this
Annual Report, the Fund's operating expenses are currently being subsidized
by reimbursement from the Fund's Administrator, Aquila Management
Corporation. Additionally, both the Administrator and Adviser are currently
waiving their management fees, and intend to continue doing so, to the extent
necessary, while the Fund's size grows to a larger asset base.
Over the longer-term, Aquila intends to cap actual operating
expenses charged to the Fund at a 1.5% level - thus matching the hoped for
approximate level of annual income return of the portfolio.
Any net realized capital gains that are produced by the Fund will
be distributed annually.
YOUR CONFIDENCE IS APPRECIATED
Your investment in Aquila Rocky Mountain Equity Fund is greatly
appreciated. We value your trust and will do our best to merit your
continued confidence.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
*In keeping with industry standards, total return
figures indicated above do not include sales charges, but do reflect
reinvestment of distributions of $0.1059 per share in 1995 and $0.5305
per share in 1996. Different Classes of shares are offered and their
performance will vary because of differences in Class inception dates,
sales charges and fees paid by shareholders investing in different
Classes. The performance shown represents that of Class A shares,
adjusted to reflect the absence of sales charges, which are currently a
maximum amount of 4.25% for this Class (for the period July 22, 1994
through April 30, 1996, it was 4.75%). Management fees and certain
expenses are being subsidized or waived. Returns would be less if sales
charges, management fees, and expenses were applied. Share net asset
value and investment return fluctuate so that an investor may receive
more or less than original investment cost upon redemption. The
prospectus of the Fund, which contains more complete information,
including management fees and expenses and which discusses the special
risk considerations of the geographic concentration strategy of the
Fund, should, of course, be carefully reviewed before investing.
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The Aquila Rocky Mountain Equity Fund has been managed, since its
inception, to provide capital appreciation through selection of
equity-oriented securities, on a value basis, of companies primarily within
the Rocky Mountain region.
The graph below illustrates the value of $10,000 invested in
Class A shares of the Fund since its inception on July 22, 1994 and
maintaining this investment through the Fund's latest fiscal year-end,
December 31, 1996, as compared with a hypothetical similar size investment in
the Russell 2000 Stock Index (the "Index") over that same period. The total
return of the investment in the Fund is shown after deduction of the current
maximum sales charge of 4.25% at the time of initial investment (for the
period July 22, 1994 through April 30, 1996, the maximum sales charge was
4.75%). It also reflects deduction of the Fund's annual operating expenses
and reinvestment of dividends and capital gains distributions without sales
charge. On the other hand, the Index does not reflect any sales charge nor
operating expenses, but does reflect reinvestment of dividends.
It should also be specifically noted that the Index is
nationally-oriented and consisted, over the period covered by the graph, of
an unmanaged group of 2,000 equity securities of issuers throughout the
United States, mostly of companies having relatively small capitalizations.
However, the Fund's investment portfolio consisted over the same period of
a significantly lesser number of equity securities, primarily of companies
within the eight state Rocky Mountain region of the country. The market
prices and behavior of the individual securities in the Fund's investment
portfolio can be affected by local and regional factors which may well result
in variances from the market action of the securities in the
nationally-oriented index.
Consequently, much of the difference in performance of the Index
versus the Fund can be attributed to the different characteristics of the
regional market of the securities in the Fund's portfolio as compared with
the national orientation of securities in the Index. Additionally, a portion
of the difference in performance can be attributed to the fact that there is
no initial sales charge applicable to the Index, nor are there annual
operating expenses with the Index as is the case with the Fund.
As can be observed, the pattern of the Fund's results and that of
the Index over the period since inception of the Fund do, however, track in a
reasonably similar pattern, even though they are not entirely comparable in
character.
[Graphic of Area Graph with the following information:]
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON
Fund After Sales Russell 2000
Charge and Expenses Stock Index
<S> <C> <C>
7/94 10,000 9,575
9/94 10,521 9,430
12/94 10,325 9,263
3/95 10,801 9,933
6/95 11,813 10,570
9/95 12,981 11,139
12/95 13,262 11,086
3/96 13,937 11,804
6/96 14,650 12,547
9/96 14,698 12,471
12/96 15,440 13,157
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
[Table with the following information:]
<TABLE>
<CAPTION>
Fund's average annual total return
<S> <C> <C>
For the Period Life of Fund
Ended December 31, 1996 1 Year Since 7/22/94
Including Sales
Charge and Expenses 13.66% 11.91%
</TABLE>
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
December 31, 1996 marked the close of the second full fiscal year
of Aquila Rocky Mountain Equity Fund. It also reaffirmed the merits of our
belief that there are a variety of attractive investment opportunities for
capital appreciation within the Rocky Mountain region of our country.
Over the past decade, we have witnessed substantial changes in the
industry composition within the Rocky Mountain region. There is now much
greater diversification and a significantly larger breadth in number of
companies - of all sizes - in which to invest.
Nevertheless, while there are numerous companies of smaller to
medium size capitalization in the region, there are still relatively few
larger capitalization companies available for investment than exists
elsewhere.
These factors do not, however, deter us in seeking our investment
goal of capital appreciation. What it does mean, though, is that it is
presently difficult to find a popular index against which to correlate the
Fund's investment results. The Russell 2000 Index represents, at present,
the closest type composition of securities to that which exists in the Rocky
Mountain region. However, this Index still does not provide an accurate
comparison for investments within the region. During 1996, the Fund's share
net asset value achieved a total return of 18.68%. Over the comparable
year's period, the Russell 2000 Index posted total return results of 16.49%.
In general, the "bull" market of 1996 was led by large
capitalization "Blue Chip" companies such as those which make up the Dow
Jones Industrial Average. This was similar to the situation which existed
in 1995 when the securities of large capitalization companies out-performed
smaller capitalization investments. This capitalization size effect has been
reflected in the Fund's portfolio performance since the Fund's inception in
that the average capitalization for companies located in the Rocky Mountain
region remains relatively small to mid-size.
Regardless, using our value-oriented approach to securities
selection, it remains our belief that sufficient attractive investments exist
within the region to produce commendable absolute results for the Fund's
shareholders.
Examples of the nature of the Fund's investment style can be found
in our investments in the natural gas industry. Securities of various energy
companies were acquired for the Fund's portfolio when natural gas prices were
at the historically low levels that were existent through much of the year.
Then, when natural gas prices more than doubled in the fourth quarter of
1996, significant increases in the price of shares took place in these energy
companies - Prima Energy Corp., Barrett Resources Corp., and KN Energy.
The Fund's performance also benefitted from positive action in the
financial services sector. Here, the securities of various companies, which
were acquired as being undervalued relative to the market, experienced
substantial gains as acquisitions occurred. Conseco Inc. acquired Life
Partners Group Inc. in the first half of 1996. Then, more recently,
Westerfed Financial Corp. announced its intention to purchase Security
Bancorp in a deal expected to close in 1997. This resulted in a dramatic
appreciation in the shares of Security Bancorp to the advantage of the Fund's
share price.
As might be expected, it is not possible to predict the timing of
recognition by the market of undervalued situations. In example, the stock
action of various technology holdings was mixed. The securities of various
software companies held by the Fund did not do well in 1996, although the
price of Analytical Surveys Inc. more than doubled and we sold the Fund's
position. Also, stocks in the cable sector posted flat to negative results
in 1996.
Altogether, we remain optimistic about the overall prospects for
investment opportunities in the Rocky Mountain region.
We will continue to apply our long-term value criteria in our
search for undervalued securities within the universe of Rocky Mountain
companies.
We feel confident that 1997 will bring continuing economic growth
to the Rocky Mountain region and that this will create additional capital
appreciation possibilities for the Fund.
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Aquila Rocky Mountain Equity Fund:
We have audited the accompanying statement of assets and liabilities of
Aquila Rocky Mountain Equity Fund, including the statement of investments, as
of December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years
in the two-year period then ended and for the period July 22, 1994
(commencement of operations) to December 31, 1994. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Aquila Rocky Mountain Equity Fund as of December 31, 1996, the
results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the two-year period then ended
and for the period July 22, 1994 (commencement of operations) to December 31,
1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
January 31, 1997
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF INVESTMENTS
DECEMBER 31, 1996
<C> <S> <C>
MARKET
SHARES COMMON STOCKS - 90.8% VALUE
Basic Industry - 2.4%
400 Barrick Gold Corp. $ 11,500
1,500 Cyprus Amax Minerals Co. 35,062
200 Newmont Mining 8,950
55,512
Cable/Communications - 7.8%
1,500 Inter-Tel Inc.# 28,500
2,800 Jones Intercable Inc. Class A# 29,050
300 Jones Intercable Inc.# 3,188
1,000 Liberty Media Group Class A# 28,562
3,000 Tele-Communications Inc. Class A# 39,187
2,000 U.S. West Media Group# 37,000
1,300 United International Holdings, Inc. Class A# 15,925
181,412
Consumer Cyclical - 9.2%
4,500 BMC West Corp.# 55,125
6,000 Mity Lite, Inc.# 75,000
5,000 Viad Corporation 82,500
212,625
Consumer Non-Durable - 10.6%
2,500 American Stores Company 102,188
4,000 Dial Corp. 59,000
2,800 Franklin Quest Company# 58,800
4,500 Rocky Mountain Chocolate Factory# 25,875
245,863
Energy - 14.3%
800 Barrett Resources Corp.# 34,100
4,500 Giant Industries, Inc. 63,000
1,800 KN Energy 70,650
6,400 Prima Energy Corp.# 144,000
677 Union Pacific Resources, Inc. 19,818
331,568
Financial - 17.3%
1,166 Conseco Inc. 74,332
1,200 Finova Group Inc. 77,100
2,600 First Security Corp. 87,750
4,875 First State Bancorp 73,125
800 Security Bancorp 23,600
3,500 Westerfed Financial Corp. 63,875
399,782
<PAGE>
Gaming - 7.8%
1,200 Circus Circus Enterprises Inc.# $ 41,250
4,000 International Game Technology 73,000
4,800 Jackpot Enterprises 46,800
900 Mirage Resorts# 19,463
180,513
Healthcare - 4.0%
1,000 Ballard Medical Products 18,625
1,900 Sierra Health Services Inc.# 46,788
2,000 Utah Medical Products Inc.# 26,750
92,163
Technology - 2.0%
5,000 Novell Inc.# 47,344
47,344
Transportation - 6.4%
1,800 Rural/Metro Corp.# 64,800
1,500 Swift Transportation# 35,250
800 Union Pacific 48,100
148,150
Utilities - 9.0%
400 Idaho Power Co. 12,450
2,000 Pinnacle West Capital 63,500
1,800 Public Service Co. Colorado 69,975
1,900 U.S. West Inc. 61,275
207,200
Total Common Stocks (cost $1,711,058) 2,102,132
Short-Term Investments - 4.7%
75,000 The One Group Prime Money Market Fund 75,000
35,000 Churchill Cash Reserves Trust 35,000
Total Short-Term Investments (cost $110,000) 110,000
Total Investments - 95.5% (cost $1,821,058*) 2,212,132
Other assets in excess of liabilities - 4.5% 103,541
Net Assets - 100% $ 2,315,673
<FN>
* Cost for Federal income tax purposes is identical.
</FN>
<FN>
# Non-income producing security.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<S> <C>
ASSETS
Investments at market value (identified cost - $1,821,058) $ 2,212,132
Cash 45,067
Deferred organization expenses (note A) 38,283
Receivable for investment securities sold 14,107
Due from Administrator for reimbursement of expenses 18,086
Dividends and interest receivable 2,291
Other assets 6,376
Total assets 2,336,342
LIABILITIES
Accrued expenses 13,443
Payable for investment securities purchased 5,798
Distribution fees payable 1,428
Total liabilities 20,669
NET ASSETS $ 2,315,673
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 1,539
Additional paid-in capital 1,910,396
Undistributed net realized gain on investments 12,664
Net unrealized appreciation on investments 391,074
$ 2,315,673
CLASS A
Net Assets $ 2,178,108
Capital shares outstanding 144,758
Net asset value and redemption price per share $ 15.05
Offering price per share (100/95.75 of $15.05
adjusted to nearest cent) $ 15.72
CLASS C
Net Assets $ 4,131
Capital shares outstanding 274
Net asset value and offering price per share $ 15.07
Redemption price per share (* varies by length of
time shares are held) $ *
CLASS Y
Net Assets $ 133,434
Capital shares outstanding 8,853
Net asset value, offering and redemption price per share $ 15.07
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 25,946
Interest 1,277
$ 27,223
Expenses:
Investment Adviser fees (note B) $ 14,047
Administrator fees (note B) 16,054
Shareholders' reports and proxy statements 28,330
Legal fees 24,106
Trustees' fees and expenses 17,454
Transfer and shareholder servicing agent fees 15,896
Amortization of organization expenses (note A) 15,032
Registration fees and dues 10,823
Audit and accounting fees 10,750
Distribution fees (note B) 4,975
Custodian fees (note E) 906
Miscellaneous 18,619
176,992
Investment Adviser fees waived (note B) (14,047)
Administrator fees waived (note B) (16,054)
Reimbursement of expenses by Administrator
(note B) (116,013)
Expenses paid indirectly (note E) (906)
Net expenses 29,972
Net investment loss (2,749)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 82,961
Change in unrealized appreciation on investments 258,491
Net realized and unrealized gain on investments 341,452
Net increase in net assets resulting from
operations $ 338,703
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended
December 31,
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment loss $ (2,749) $ (7,500)
Net realized gain from securities
transactions 82,961 32,529
Change in unrealized appreciation on
investments 258,491 149,483
Change in net assets from operations 338,703 174,512
DISTRIBUTIONS TO SHAREHOLDERS (note D):
Class A Shares:
Net investment income _ (721)
Net realized gain on investments (74,547) (13,420)
Class C Shares:
Net investment income _ _
Net realized gain on investments (143) _
Class Y Shares:
Net investment income _ _
Net realized gain on investments (4,537) _
Change in net assets from distributions (79,227) (14,141)
CAPITAL SHARE TRANSACTIONS (note F):
Proceeds from shares sold 705,847 1,330,661
Reinvested dividends and distributions 68,103 12,828
Cost of shares redeemed (454,481) (297,410)
Change in net assets from capital
share transactions 319,469 1,046,079
Change in net assets 578,945 1,206,450
NET ASSETS:
Beginning of period 1,736,728 530,278
End of period $ 2,315,673 $ 1,736,728
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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,
as was the case since inception, are sold with a front-payment sales charge
and bear an annual service 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. The Class Y shares are only offered to institutions acting for
an investor in a fiduciary, advisory, agency, custodian or similar capacity.
They are not available to individual 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. All classes of shares
represent interests in the same portfolio of investments in the Fund and are
identical as to rights and privileges. They differ only with respect to the
effect of sales charges, the distribution and/or service fees borne by the
respective class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privileges of each class.
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 generally accepted accounting principles for investment
companies.
(1) PORTFOLIO VALUATION: Securities listed on a national securities
exchange or designated as national market system securities are
valued at the last sale price on such exchanges or market system or,
if there has been no sale that day, at the bid price. Securities for
which market quotations are not readily available are valued at fair
value as determined in good faith by or at the direction of the Board
of Trustees. Short-term investments maturing in 60 days or less are
valued at amortized cost.
(2) 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.
(3) 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.
(4) ORGANIZATION EXPENSES: The Fund's organizational expenses have
been deferred and are being amortized on a straight-line basis over
five years.
<PAGE>
(5) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, 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.
(6) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of 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.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Fund are conducted through two separate
management arrangements.
KPM Investment Management, Inc. (the "Adviser"), a wholly-owned
subsidiary of Kirkpatrick, Pettis, Smith, Polian Inc., serves as Investment
Adviser to the Fund. Kirkpatrick, Pettis is, in turn, a subsidiary of the
nationally oriented Mutual of Omaha Insurance Company. In this role, under an
Investment Advisory Agreement, the Adviser supervises the Fund's investments
and provides various services to the Fund for which it 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; 0.70 of 1%
on the first $15 million; 0.55 of 1% on the next $35 million and 0.40 of 1%
on the excess over $50 million.
The Fund also has a Sub-Advisory and Administration Agreement with Aquila
Management Corporation (the "Administrator"), the Fund's founder and sponsor.
Under this agreement, the Administrator provides such advisory services to
the Fund, in addition to those services provided by the Adviser, as the
Administrator deems appropriate. Besides its sub-advisory services, it also
provides all administrative services, other than those relating to the
management of the Fund's investments. This includes providing the office of
the Fund and all related services as well as overseeing the activities of 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 Administrator 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; 0.80 of 1% on the first $15
million; 0.65 of 1% on the next $35 million and 0.50 of 1% on the excess over
$50 million.
Specific details as to the nature and extent of the services provided by
the Adviser and the Administrator are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees shall
be reduced, but not below zero, by an amount equal to its pro-rata portion
(determined on the basis of the respective fees computed as described above)
of the amount, if any, by which the total expenses of the Fund in any fiscal
year, exclusive of taxes, interest and brokerage fees, shall exceed the most
restrictive expense limitation imposed upon the Fund in the States in which
shares are then eligible for sale. At the present time none of the States in
which the Fund's shares are sold have any such limitation.
<PAGE>
For the year ended December 31, 1996, the Fund incurred fees under the
Advisory Agreement and Sub-Advisory and Administration Agreement of $14,047
and $16,054, respectively. However, all of these fees were voluntarily
waived. Additionally, the Administrator voluntarily agreed to reimburse the
Fund for other expenses during this period in the amount of $116,013.
Under a Distribution Agreement, Aquila Distributors, Inc. (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 year ended
December 31, 1996 the Distributor received sales commissions in the amount of
$187.
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 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 year ended December 31, 1996, service fees on Class A Shares
amounted to $4,975, of which the Distributor received $574.
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 net assets represented by Class C Shares. There
were no payments made during the period May 1, 1996 through December 31,
1996.
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
net assets represented by Class C Shares. There were no payments made during
the period May 1, 1996 through December 31, 1996.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
NOTE C - PURCHASES AND SALES OF SECURITIES:
For the year ended December 31, 1996, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $451,120 and $365,783, respectively.
At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $499,676 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $108,602,
for a net unrealized appreciation of $391,074.
<PAGE>
NOTE D - 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 or in cash, at the
shareholder's option. Due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized
securities gains.
NOTE E - CUSTODIAN FEES:
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the year ended December 31, 1996,
the Fund's custodian fees amounted to $906, all of which were offset by such
credits. It is the general intention of the Fund to invest, to the extent
practicable, some or all of cash balances in income-producing assets rather
than leave cash on deposit with the custodian.
NOTE F - CAPITAL SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
Transactions in Capital Shares of the Fund were as follows:
Year Ended Year Ended
December 31, 1996 December 31, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 39,760 $ 589,861 106,291 $ 1,330,661
Reinvested dividends and
distributions 4,233 63,492 985 12,828
Cost of shares redeemed (31,555) (454,480) (22,898) (297,410)
Net change 12,438 $ 198,873 84,378 $ 1,046,079
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 269 $ 4,090
Reinvested dividends and
distributions 5 74
Cost of shares redeemed _ _
Net change 274 $ 4,164
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 8,551 $ 111,896
Reinvested dividends and
distributions 302 4,536
Cost of shares redeemed _ _
Net change 8,853 $ 116,432
<S> <C> <C> <C> <C>
Total transactions in Fund
shares 21,565 $ 319,469 84,378 $ 1,046,079
<FN>
* From May 1, 1996 (date of inception) through December 31, 1996.
</FN>
</TABLE>
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For a share outstanding throughout each period
Class A(1)
Year Year Year
Class C(2) Class Y(2) Ended Ended Ended
Period ended December December December
December 31, 1996 31, 1996 31, 1995 31, 1994(3)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $14.59 $14.59 $13.13 $11.06 $11.43
Income from Investment
Operations:
Net investment income
(loss) 0.01 0.01 (0.02) (0.07) -
Net gain (loss) on
securities (both
realized and unrealized) 1.00 1.00 2.47 2.25 (0.37)
Total from Investment
Operations 1.01 1.01 2.45 2.18 (0.37)
Less Distributions (note D):
Dividends from net
investment income - - - (0.01) -
Distributions from capital
gains (0.53) (0.53) (0.53) (0.10) -
Total Distributions (0.53) (0.53) (0.53) (0.11) -
Net Asset Value, End of
Period $15.07 $15.07 $15.05 $13.13 $11.06
Total Return (not
reflecting sales charge (%) 6.94# 6.94# 18.68 19.68 (3.24)#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 4 133 2,178 1,737 530
Ratio of Expenses to Average
Net Assets (%) 1.25* 1.25* 1.50 1.91 1.19*
Ratio of Net Investment
Loss to Average Net
Assets (%) 0.11* 0.11* (0.14) (0.60) -
Portfolio Turnover Rate (%) 20.32 20.32 20.32 15.14 2.95#
Average commision rate
paid (5)($) .0745 .0745 .0745 - -
<CAPTION>
Net investment income (loss) per share and the ratios of income and expenses
to average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and the
expense offset in custodian fees for uninvested cash balances would have
been:
<S> <C> <C> <C> <C> <C>
Net Investment Income
(loss) ($) (0.72) (0.72) (1.05) (1.12) -
Ratio of Expenses to
Average Net Assets(4)(%) 8.59* 8.59* 8.84 10.48 18.20*
Ratio of Net Investment Loss
to Average Net Assets (%) (7.23)* (7.23)* (7.48) (9.17) -
<FN>
(1) Designated as Class A Shares on May 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on May 1, 1996.
</FN>
<FN>
(3) From July 22, 1994 (commencement of operations) to December 31, 1994.
</FN>
<FN>
(4) Ratios for Class A Shares are based on average net assets of
$1,965,012, $1,239,752 and $453,768, respectively. In general, as the
Fund's net assets increase, the expense ratio will decrease.
</FN>
<FN>
(5) Represents the average per share broker commission rate paid by the
Fund in connection with the execution of the Fund's portfolio
transactions in equity securities on which commissions were charged.
Calculations are for fiscal years beginning January 1, 1996.
</FN>
<FN>
# Not annualized.
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
<PAGE>
REPORT ON THE SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED)
Special Meetings of Shareholders of Aquila Rocky Mountain Equity Fund
(the "Fund") were held on April 19, 1996 for the Fund's Class C and Class Y
Shareholders.* At the Special Meeting of Class C Shareholders of the Fund,
the Class C Shareholders voted on and unanimously approved amendments to the
Fund's Distribution Plan affecting the interests of the Class C Shareholders
of the Fund. At the Special Meeting of the Class Y Shareholders of the Fund,
Class Y Shareholders voted on and unanimously approved amendments to the
Fund's Distribution Plan affecting the interests of the Class Y Shareholders
of the Fund.
___________
* On the record dates for the Special Meetings, the total net asset values of
the Class C and Class Y Shares of the Fund outstanding and entitled to vote
were $100 and $100, respectively. The holders of all Class C and Class Y
Shares entitled to vote were present in person at the meetings.
FEDERAL TAX STATUS OF 1996 DISTRIBUTIONS (UNAUDITED)
The distribution from net realized short-term gain of $0.3130 per share,
paid on December 27, 1996, is taxable to shareholders in 1996 as ordinary
income.
The distribution from net realized long-term gain of $0.2175 per share,
paid on December 27, 1996, is designated as a "capital gain dividend" and is
taxable to shareholders as long-term capital gain.
Prior to January 31, 1997, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1996
CALENDAR YEAR.
<PAGE>
ADMINISTRATOR AND SUB-ADVISER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT ADVISER
KPM INVESTMENT MANAGEMENT, INC.
A Mutual of Omaha Company
One Norwest Center
1700 Lincoln Street
Denver, Colorado 80203
and
10250 Regency Circle, Suite 200
Omaha, Nebraska 68114
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
R. Thayne Robson
Cornelius T. Ryan
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
W. Dennis Cheroutes, Senior Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, 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.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus, which must precede or
accompany this report.
