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
Diana P. Herrmann
R. Thayne Robson
Cornelius T. Ryan
OFFICERS
Lacy B. Herrmann, President
Sue McCarthy-Jones, Senior Vice President
Jerry G. McGrew, 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
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
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.
ANNUAL
REPORT
(AQUILA ROCKY MOUNTAIN LOGO)
DECEMBER 31, 1997
A CAPITAL APPRECIATION INVESTMENT
(LOGO OF AQUILA GROUP OF FUNDS EAGLES HEAD)
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
ANNUAL REPORT
(AQUILA ROCKY MOUNTAIN LOGO)
February 17, 1998
Dear Investor:
We are very pleased to present you with this Annual Report for
the third full year of operation of Aquila Rocky Mountain Equity Fund.
For the period of January 1, 1997 through December 31, 1997, the
Class A Shares of the Fund provided an average annual total return of 23.01%1,
without provision of sales charge.
YOUR "OWN BACKYARD"
The investment philosophy of the Fund is to invest in our "own
backyard." In this case, our "own backyard" consists of the eight states in
the Rocky Mountain region - Arizona, Colorado, Idaho, Montana, Nevada, New
Mexico, Utah, and Wyoming.
Through our research, we have recognized that the Rocky Mountain
region of the United States is one of the fastest growing parts of our
country. This fast growth encompasses population growth, job growth and
diversification growth in terms of companies - all of which equates to sound
economic growth. And, this in turn, equates to investment opportunities.
What we have determined is that there are sufficiently broad
enough capital appreciation possibilities right here within the Rocky
Mountain region. These capital appreciation opportunities can, in turn, lend
themselves to providing investors with a good level of absolute return for
their invested capital.
Moreover, by investing in our "own backyard" - the Rocky Mountain
region - we are not faced with the problems that can occur and have occurred
in other investment regions. Within the Rocky Mountain region, we do not have
problems with currency, accounting standards, language barriers, and all the
other complexities of investing in other regions of the world. Some of the
problems that are intrinsic to investing in other regions were amply brought
to mind through the difficulties that have recently become apparent in the
various countries of Asia.
What has become equally apparent to us is that we have a
substantial number of very good investment opportunities right here in our
"own backyard" of the Rocky Mountain states. Within the Rocky Mountain
region, we have a universe of well over 400 publicly-traded companies in
which we can invest. We can then screen down from this universe a selective
number of investment opportunities that will give us the kind of return we
would like to see.
<PAGE>
THE FUND'S INVESTMENTS
As you will note from the pie chart below, we have invested the
Fund's assets primarily in the various states of the Rocky Mountain region.
From the other pie chart below you will notice that there are many market
sectors within the Rocky Mountain region that are represented in the
portfolio.
December 31, 1997.
(GRAPHIC OF THE CHART WITH THE FOLLOWING INFORMATION)
PORTFOLIO DISTRIBUTION BY REGION PIE CHART
Cash 13.99%
Colorado 26.67%
Utah 13.90%
Arizona 14.86%
Nevada 12.94%
Montana 2.94%
New Mexico 3.20%
Idaho 3.59%
Other 7.91%
(GRAPHIC OF THE CHART WITH THE FOLLOWING INFORMATION:)
PORTFOLIO DISTRIBUTION BY MARKET SECTOR PIE CHART
Basic Industry 2.99%
Gaming 9.53%
Energy 12.47%
Transportation 4.89%
Consumer: Non-Durable 11.48%
Cash 13.99%
Consumer: Cyclical 8.50%
Technology 1.30%
Utilities 9.50%
Cable/Communication 7.81%
Financial/Insurance 14.46%
Healthcare 3.08%
There is listed below the top ten holdings of the Fund as of December 31,
1997.
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE
COMPANY OF NET ASSETS STATE MARKET SECTOR
<S> <C> <C> <C>
Prima Energy 4.41% Colorado Energy
First Security Corp. 4.13% Utah Financial/Insurance
First State Bancorp 3.20% New Mexico Financial/Insurance
Dial 3.16% Arizona Consumer Non-Durable
Mity Lite 3.07% Utah Consumer Cyclical
Westerfed Financial 2.94% Montana Financial/Insurance
Giant Industries 2.90% Arizona Energy
Mirage Resorts 2.88% Nevada Gaming
International Game
Technology 2.87% Nevada Gaming
Franklin Covey 2.80% Utah Consumer/Non-Durable
</TABLE>
While the individual holdings in the Fund and those which make up
the top ten will vary over time, there is a common denominator in their
selection.
This common denominator is one of value investing. By this we
mean that our portfolio management focuses upon individual companies whose
securities can be bought at attractive levels considering their growth rate
in earnings and overall prospects for the future.
<PAGE>
VALUE-ORIENTED APPROACH
Consider the fact that many of the companies in the Dow Jones
Industrial Average are selling at a price which is a ratio of 30 to 40 times
their projected earning for 1998. In turn, these companies may well have
earnings growing at a rate of 20% per year. On the other hand, we try to buy
companies whose earnings are growing at a comparable rate of 20% per year,
but whose stocks are available at a ratio of 15-20 times earnings. At
December 31, 1997, the average price earnings ratio for Aquila Rocky Mountain
Equity Fund was 17.65. This compares with the inflated price earnings ratio
of over 21 times earnings of most of the major stock market indices at the
same time.
There are a sufficient number of companies within the Rocky
Mountain region whose earnings growth and prospects for the future are highly
attractive. However, because they are not as well known as some of those
large companies that make up the Dow Jones Industrial Average or the Standard
and Poor's 500, we can buy them at a price that is very reasonable, before
Wall Street discovers them.
As a result of our value-oriented approach, the volatility of the
portfolio will tend to be less than that which exists with a number of other
funds as well as with popular market averages.
Our value-oriented approach to finding investments does not lend
itself to having the spectacular nature of some funds which have a different
approach to seeking growth in capital. Some of those funds are more like a
home run hitter in baseball who may at some times hit the ball out of the
park, but at other times strike out.
The Aquila Rocky Mountain Equity Fund generally will not have the
volatility that goes along with that kind of player. Our approach is more
like the steadiness of baseball players whom you can count on for singles,
doubles and triples. With our value-oriented approach we tend to hold
investments over a longer term. As a result, it is difficult to put a
timetable on when these investments might achieve their objective. On the
other hand, we strive to provide the kind of return that might double or
triple your money over time with a lot less price fluctuation and more "peace
of mind."
PERFORMANCE RESULTS
As of December 31, 1997, the Aquila Rocky Mountain Equity Fund
had been in operation for a period of approximately 3 1/2 years. As you will
note from the chart below, had a hypothetical investment of $10,000 been made
at the inception of the Fund, it would have grown to $16,906. In other words,
the Fund has produced a very respectable return on investors' capital.
<PAGE>
(GRAPHIC OF THE CHART WITH THE FOLLOWING INFORMATION)
GROWTH OF $10,000 SINCE INCEPTION (WITHOUT SALES CHARGES)2
<TABLE>
<C> <C>
7/94 10,000
12/94 9,676
6/95 11,041
12/95 11,581
6/96 13,107
12/96 13,744
6/97 14,794
12/97 16,906
</TABLE>
Our intent is to continue finding securities which can provide
investors with a highly acceptable absolute return through value-oriented
investing in companies in our "own backyard" of the Rocky Mountain region.
YOUR CONFIDENCE 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
1 In keeping with industry standards, total return figure indicated
above does not include sales charges, but does reflect reinvestment of
dividends and capital gains. Different classes of shares are offered and
their performance will vary because of differences in 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 is 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 absorbed. 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 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.
2 Cumulative results of a hypothetical $10,000 investment in Class A
Shares are shown from the period of inception through 12/31/97. The
portfolio of the Fund is subject to change and as a consequense, past
performance does not guarantee future results.
<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, 1997, 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 in 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 AN AREA CHART WITH THE FOLLOWING INFORMATION:)
PERFORMANCE COMPARISON BAR CHART
<TABLE>
<CAPTION>
Fund's average annual total return
For the Period Ended 1 Life of Fund
December 31, 1997 Year Since 7/22/94
<S> <C> <C>
Including Sales
Charge and Expenses 17.77% 14.99%
</TABLE>
<TABLE>
<CAPTION>
RUSSELL 2000 STOCK FUND AFTER SALES
INDEX EXPENSES CHARGE AND
<C> <C> <C>
7/94 10,000 9,575
12/94 10,325 9,263
6/95 11,813 10,570
12/95 13,262 11,086
6/96 14,650 12,549
12/96 15,440 13,157
6/97 17,016 14,162
12/97 18,893 16,184
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
Aquila Rocky Mountain Equity Fund achieved a total return of
23.01%, without provisions for sales charges, for the year ended December 31,
1997, while the Russell 2000 Index posted a total return of 22.36%.
In 1997, we continued to apply our value-oriented investment
style to the universe of Rocky Mountain stocks. We are a value-oriented
investment manager concentrating on security selection. We search for
securities that are under valued in relation to their intrinsic value and
projected growth rate of the company. In general, we look for companies that
offer continuing earnings growth, generate an above-average return on equity
and have a low price/earnings ratio. The idea is not only to build a
portfolio of quality companies that has a higher anticipated growth rate and
return on equity than the market average, but one that has a lower
price/earnings ratio as well. Our emphasis on value coupled with the
positive economic and demographic trends of the Rocky Mountain states lead
us to be optimistic about the future.
We travel frequently around the Rocky Mountain states to learn
about companies that meet our investment criteria. It is our hope that by
focusing on companies in our "own back yard", we can uncover under-followed
stocks that will add value for you, our shareholders.
Above average population growth and job creation continued in the
Rocky Mountains in 1997. This growth, coupled with decreasing interest rates
led to appreciation in stocks of various industries to which the portfolio
was exposed.
Notably, financial service companies and regional banks were
among the Fund's best performers. Strong financial performance and industry
consolidation led to significant appreciation in our holdings. First State
Bancorporation shares appreciated 42% while shares of WesterFed rose more
than 39%. First Security shares increased by more than 80%. Meanwhile, shares
of Conseco and Finova increased more than 40%.
In the Fund's Annual Report for 1995, we noted: "In the cable
industry, continued legislative uncertainty regarding deregulation and
competing technologies dampened the price returns of Tele-Communications,
Inc. (TCI), Jones Intercable and United International Holdings, despite
strong growth prospects for these companies."
In 1997, new interest in cable, notably from Microsoft, helped
our cable and communications stocks to appreciate significantly. Shares of
TCI rose more than 100% while shares of Jones Intercable and U.S. West Media
Group appreciated 69% and 56%, respectively. Our shares of Inter-tel
appreciated more than 80% when we sold them in 1997. It took time, but our
cable investments are finally paying off.
The portfolio's energy stocks performed well due to increased
prices and demand for oil and gas. Shares of Giant Industries and KN Energy
both increased by more than 35%, while Prima Energy increased by nearly 30%.
Concerns regarding Union Pacific Resources aborted takeover attempt of
Pennzoil meant that the Fund's holdings decreased by 17%.
You may recall that in our 1995 Annual Report we wrote: "As
value managers, we are happy to continue holding the shares of these energy
companies since we believe they are under-valued in relation to their
intrinsic value and the projected long-term worldwide demand for oil and
gas." Our emphasis on stock selection and long-term investment in early 1995
led to positive returns for our energy stocks in 1996 and 1997. A by-product
of this long-term value style is a relatively low portfolio turnover rate. In
1997, the turnover rate was 10.39% while it was 20.32% and 15.14% in 1996 and
1995, respectively.
The increasing population and lower interest rates affected the
Fund's holding of utility companies in a positive manner. Public Service of
Colorado, now New Century Energies, increased more than 20% as did our shares
in Idaho Power. Pinnacle West shares rose more than 30% during the year.
Manufacturing companies in various industries also contributed to
the Fund's 1997 return. Mity Lite shares increased over 60% while Dial shares
and International Game Technology shares were up 41% and 38% respectively. We
sold our shares of Utah Medical Products and realized an 18% loss due to
deteriorating fundamentals.
Gold prices plummeted in 1997 and our holdings in gold and copper
mining stocks reacted accordingly. Cyprus Amax Minerals, Newmont Mining and
Barrick Gold were down for the year.
We continue to monitor metal prices and will hold these stocks,
knowing that they will do better in a better pricing environment.
We remain optimistic about the Rocky Mountain economy. Interest
rates are low, as is the rate of inflation. The Rocky Mountain economy
continues to grow and new companies are moving here. We will continue to
apply our long-term value criteria to the universe of Rocky Mountain stocks
in our efforts to add value for our shareholders.
<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, 1997, 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 three-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, 1997, by correspondence with the
custodian.
As to securities purchased but not received, we performed other appropriate
auditing procedures. 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, 1997, 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 three-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
February 6, 1998
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<C> <S> <C>
MARKET
SHARES COMMON STOCKS - 87.1% VALUE
Basic Industry - 3.0%
2,000 Barrick Gold Corp. $ 37,250
3,000 Cyprus Amax Minerals Co. 46,125
1,200 Newmont Mining 35,250
118,625
Cable/Communications - 7.8%
2,800 Jones Intercable Inc. Class A+ 49,175
300 Jones Intercable Inc.+ 5,100
1,500 Tele-Communications Inc. - Liberty Media Group - A 54,375
1,909 Tele-Communications Inc. - TCI Group - A 53,333
1,091 Tele-Communications Inc. - TCI Ventures Group - A 30,889
3,500 U.S. West Media Group+ 101,063
1,300 United International Holdings, Inc.Class A+ 14,950
308,885
Consumer Cyclical - 8.2%
4,500 Building Material Holding Corp.+ 47,250
3,400 Koala Corp.+ 58,650
6,000 Mity Lite, Inc.+ 121,500
5,000 Viad Corporation 96,563
323,963
Consumer Non-Durable - 10.2%
4,500 American Stores Company 92,531
6,500 Avert Inc.+ 49,563
6,000 Dial Corp. 124,875
5,000 Franklin Covey Company+ 110,000
4,500 Rocky Mountain Chocolate Factory+ 24,750
401,719
Energy - 12.5%
6,000 Giant Industries, Inc. 114,000
1,800 KN Energy 97,200
9,000 Prima Energy Corp.+ 174,375
4,377 Union Pacific Resources, Inc. 106,156
491,731
Financial - 14.5%
2,332 Conseco Inc. 105,960
1,200 Finova Group Inc. 59,625
3,900 First Security Corp. 163,313
5,875 First State Bancorp 125,578
4,561 Westerfed Financial Corp. 116,306
570,782
Gaming - 11.6%
4,000 American Coin Merchandising+ 70,500
4,500 Circus Circus Enterprises Inc.+ 92,250
4,500 International Game Technology 113,625
6,000 Jackpot Enterprises 67,875
5,000 Mirage Resorts+ 113,750
458,000
Healthcare - 3.3%
1,000 Ballard Medical Products 24,250
3,200 Sierra Health Services Inc.+ 107,600
131,850
Technology - 1.6%
6,000 Microtest Inc.+ 27,750
5,000 Novell Inc.+ 37,500
65,250
Transportation - 4.9%
2,800 Rural/Metro Corp.+ 93,450
1,600 Union Pacific 99,900
193,350
Utilities - 9.5%
2,500 Idaho Power Co. 94,062
2,300 New Century Energies Inc. 110,256
2,000 Pinnacle West Capital 84,750
1,900 U.S. West Inc. 85,737
374,805
Total Common Stocks (cost $2,574,760) 3,438,960
FACE
AMOUNT SHORT-TERM INVESTMENTS - 9.7%
$91,000 The One Group Prime Money Market Fund 191,000
191,000 Churchill Cash Reserves Trust 191,000
Total Short-Term Investments (cost $382,000) 382,000
Total Investments (cost $2,956,760*) 96.8% 3,820,960
Other assets in excess of liabilities 3.2 125,172
Net Assets 100.0%
$3,946,132
<FN> * Cost for Federal tax purposes is identical.</FN>
<FN> + Non-income producing security. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
Investments at market value (identified cost $2,956,760) $3,820,960
Cash 214,391
Receivable for Fund shares sold 11,587
Deferred organization expenses (note 2) 16,732
Dividends and interest receivable 4,340
Due from Administrator for reimbursement
of expenses (note 3) 3,168
Total assets 4,071,178
LIABILITIES
Payable for investment securities purchased 93,495
Accrued expenses 26,687
Payable for Fund shares redeemed 2,964
Distribution fees payable 1,900
Total liabilities 125,046
NET ASSETS $3,946,132
Net Assets consist of:
Capital Stock - Authorized an unlimited
number of shares, par value $.01 per share $ 2,205
Additional paid-in capital 3,068,341
Undistributed net realized gain on investments 8,402
Undistributed net investment income 2,984
Net unrealized appreciation on investments 864,200
$3,946,132
CLASS A
Net Assets $3,144,138
Capital shares outstanding 175,760
Net asset value and redemption price per share $ 17.89
Offering price per share (100/95.75 of
$17.89 adjusted to nearest cent) $ 18.68
CLASS C
Net Assets $ 6,972
Capital shares outstanding 392
Net asset value and offering price per share $ 17.79
Redemption price per share (*generally, a
charge of 1% is imposed on the proceeds
of shares redeemed during the first 12 months after purchase) $ 17.79*
CLASS Y
Net Assets $ 795,022
Capital shares outstanding 44,396
Net asset value, offering and redemption price per share $ 17.91
See accompanying notes to financial statements.
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 30,891
Interest 12,325
$ 43,216
Expenses:
Investment Adviser fees (note 3) $ 19,571
Administrator fees (note 3) 22,367
Transfer and shareholder servicing agent fees 27,236
Shareholders' reports and proxy statements 21,993
Legal fees 20,899
Audit and accounting fees 13,321
Trustees' fees and expenses 13,094
Amortization of organization expenses (note 2) 12,817
Registration fees and dues 12,097
Distribution and service fees (note 3) 6,308
Custodian fees (note 6) 2,097
Miscellaneous 8,489
180,289
Investment Adviser fees waived (note 3) (19,571)
Administrator fees waived (note 3) (22,367)
Reimbursement of expenses by Administrator (note 3) (94,824)
Expenses paid indirectly (note 6) (2,097)
Net expenses 41,430
Net investment income 1,786
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 125,748
Change in unrealized appreciation on investments 473,126
Net realized and unrealized gain on investments 598,874
Net increase in net assets resulting from operations $ 600,660
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income (loss) $ 1,786 $ (2,749)
Net realized gain from securities transactions 125,748 82,961
Change in unrealized appreciation on investments 473,126 258,491
Change in net assets from operations 600,660 338,703
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 5):
Class A Shares:
Net investment income - -
Net realized gain on investments (103,249) (74,547)
Class C Shares:
Net investment income - -
Net realized gain on investments (231) (143)
Class Y Shares:
Net investment income - -
Net realized gain on investments (26,133) (4,537)
Change in net assets from distributions (129,613) (79,227)
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold 1,544,525 705,847
Reinvested dividends and distributions 112,775 68,103
Cost of shares redeemed (497,888) (454,481)
Change in net assets from capital
share transactions 1,159,412 319,469
Change in net assets 1,630,459 578,945
NET ASSETS:
Beginning of period 2,315,673 1,736,728
End of period $3,946,132 $ 2,315,673
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
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, 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.
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 generally accepted accounting principles for
investment companies.
a) PORTFOLIO VALUATION: Securities listed on a national securities
exchange or designated as national market system securities are valued
at the last sale price on such exchanges or market system or, if there
has been no sale that day, at the bid price. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of
Trustees. Short-term investments maturing in 60 days or less are valued
at amortized cost.
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recorded daily on the accrual basis.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as
a regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The
Fund intends to make distributions of income and securities profits
sufficient to relieve it from all, or substantially all, Federal income
and excise taxes.
<PAGE>
d) ORGANIZATION EXPENSES: The Fund's organizational expenses have been
deferred and are being amortized on a straight-line basis over five
years.
e) 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.
f) 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.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Management affairs of the Fund are conducted through two separate
management arrangements.
KPM Investment Management, Inc. (the "Adviser") serves as
Investment Adviser to the Fund. The Adviser is a wholly-owned subsidiary of
KFS Corporation, a member of the nationally oriented Mutual of Omaha
Companies. 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.
<PAGE>
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.
For the year ended December 31, 1997, the Fund incurred fees under
the Advisory Agreement and Sub-Advisory and Administration Agreement of
$19,571 and $22,367, respectively, which were voluntarily waived. Also,
during this period the Administrator reimbursed the Fund for unamortized
deferred organization expenses of $8,734 and voluntarily agreed to reimburse
the Fund for other expenses in the amount of $94,824. Of this amount, $91,656
was paid prior to December 31, 1997 and the balance of $3,168 was paid in
early January, 1998.
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 year ended December 31,
1997, service fees on Class A Shares amounted to $6,262, of which the
Distributor received $685.
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
and for the year ended December 31, 1997, amounted to $35. 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 and for the year ended December 31, 1997, amounted to $11. The
total of these payments with respect to Class C Shares amounted to $46, of
which the Distributor received $46.
Specific details about the Plans are more fully defined in the
Fund's Prospectus and Statement of Additional Information.
<PAGE>
Under a Distribution Agreement, Aquila Distributors, Inc. 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, 1997,
the Distributor received sales commissions of $1,004.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1997, purchases of securities and
proceeds from the sales of securities (excluding short-term investments)
aggregated $992,585 and $253,511, respectively.
At December 31, 1997, aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $1,044,558 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted
to $180,358, for a net unrealized appreciation of $864,200.
5. 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.
6. 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, 1997, the Fund's custodian fees amounted to $2,097, 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.
<PAGE>
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 56,515 $942,745 39,760 $ 589,861
Reinvested dividends and
distributions 4,937 86,342 4,233 63,492
Cost of shares redeemed (30,449) (497,888) (31,555) (454,480)
Net change 31,003 531,199 12,438 198,873
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 100 1,780 269 4,090
Reinvested dividends and
distributions 18 300 5 74
Cost of shares redeemed - - - -
Net change 118 2,080 274 4,164
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 34,051 600,000 8,551 111,896
Reinvested dividends and
distributions 1,492 26,133 302 4,536
Cost of shares redeemed - - - -
Net change 35,543 626,133 8,853 116,432
Total transactions in
Fund shares 66,664 1,159,412 21,565 $319,469
<FN> *From May 1, 1996 (date of inception) through December 31, 1996. </FN>
</TABLE>
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class A(1)
Period Ended
Year Ended December 31, December 31,
1997 1996 1995 1994(2)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.05 $13.13 $11.06 $11.43
Income from Investment
Operations:
Net investment income (loss) 0.01 (0.02) (0.07) -
Net gain (loss) on securities
(both realized and unrealized) 3.44 2.47 2.25 (0.37)
Total from Investment Operations 3.45 2.45 2.18 (0.37)
Less Distributions (note 5):
Dividends from net investment
income - - (0.01) -
Distributions from capital gains (0.61) (0.53) (0.10) -
Total Distributions (0.61) (0.53) (0.11) -
Net Asset Value, End of Period $17.89 $15.05 $13.13 $11.06
Total Return (not reflecting
sales charge) (%) 23.01 18.68 19.68 (3.24)#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 3,144 2,178 1,737 530
Ratio of Expenses to Average
Net Assets (%) 1.50 1.50 1.91 1.19*
Ratio of Net Investment Income
(Loss) to Average Net Assets
(%) 0.05 (0.14) (0.60) -
Portfolio Turnover Rate (%) 10.39 20.32 15.14 2.95
Average Commission Rate
Paid(3) ($) .0836 .0745 - -
<CAPTION>
Net investment income (loss) per share and the ratios of income and expenses
to average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and the
expense offset in custodian fees for uninvested cash balances would have
been:
<S> <C> <C> <C> <C>
Net Investment (Loss) ($) (0.83) (1.05) (1.12) -
Ratio of Expenses to Average
Net Assets(4) (%) 6.56 8.84 10.48 18.20*
Ratio of Net Investment Loss
to Average Net Assets (%) (5.01) (7.48) (9.17) -
<FN> (1) Designated as Class A Shares on May 1, 1996. </FN>
<FN> (2) From July 22, 1994 (commencement of operations) to December 31,
1994. </FN>
<FN> (3) Represents the average per share broker commission rate paid by the
Fund in connection with the execution of its portfolio transactions
in equity securities on which commissions were charged.
Calculations are for fiscal years beginning January 1, 1996. </FN>
<FN> (4) Ratios are based on average net assets of $2,505,548,
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> # Not annualized. </FN>
<FN> * Annualized. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Period Year Period
Ended Dec. Ended Dec. Ended Dec. Ended Dec.
31, 1997 31, 1996 31, 1997 31, 1996
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.07 $14.59 $15.07 $14.59
Income from Investment
Operations:
Net investment income (0.11) 0.01 0.04 0.01
Net gain on securities
(both realized
and unrealized) 3.44 1.00 3.41 1.00
Total from Investment
Operations 3.33 1.01 3.45 1.01
Less Distributions (note 5):
Dividends from net
investment income - - - -
Distributions from
capital gains (0.61) (0.53) (0.61) (0.53)
Total Distributions (0.61) (0.53) (0.61) (0.53)
Net Asset Value,
End of Period $17.79 $15.07 $17.91 $15.07
Total Return (not reflecting
sales charge) (%) 22.18 6.94# 22.98 6.94#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 7 4 795 133
Ratio of Expenses to
Average Net Assets (%) 2.26 1.25* 1.27 1.25*
Ratio of Net Investment
Income (Loss) to Average
Net Assets (%) (0.70) 0.11* 0.23 0.11*
Portfolio Turnover
Rate (%) 10.39 20.32# 10.39 20.32#
Average Commission
Rate Paid(2) ($) .0836 .0745 .0836 .0745
<CAPTION>
Net investment income (loss) per share and the ratios of income and
expenses to average net assets without the Adviser's and
Administrator's voluntary waiver of fees, the Administrator's voluntary
expense reimbursement and the expense offset in custodian fees for uninvested
cash balances would have been:
<S> <C> <C> <C> <C>
Net Investment (Loss) ($) (0.92) (0.72) (0.65) (0.72)
Ratio of Expenses to Average
Net Assets (3) (%) 7.27 8.59* 5.41 8.59*
Ratio of Net Investment Loss
to Average Net Assets (%) (5.71) (7.23)* (3.91) (7.23)*
<FN> (1) New Class of Shares established on May 1, 1996.
<FN> (2) Represents the average per share broker commission rate paid by the
Fund in connection with the execution of its portfolio transactions in
equity securities on which commissions were charged. </FN>
<FN> (3) Ratios are based on average net assets of $4,895 and $542,
respectively, for Class C Shares and $287,294 and $52,490,
respectively, for Class Y Shares. In general, as the Fund's net
assets increase, the expense ratio will decrease. </FN>
<FN> # Not annualized. </FN>
<FN> * Annualized. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
During its fiscal year, the Fund distributed $104,362 from net
realized long-term gain, of this amount, $57,911 is designated as a capital
gain dividend from 28% net long-term capital gain and $46,451 is designated
from 20% net long-term capital gain.
Prior to January 31, 1998, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions paid for
the 1997 CALENDAR YEAR.
