<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
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 LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
</PAGE>
<PAGE>
ANNUAL
REPORT
DECEMBER 31, 1998
[Logo Graphic: Rectangle with the words AQUILA ROCKY MOUNTAIN
EQUITY FUND and also a drawing of two mountains]
A CAPITAL APPRECIATION INVESTMENT
[Logo of Aquila Group of Funds: eagle's head]
ONE OF THE
AQUILAsm GROUP OF FUNDS
[Logo Graphic: Rectangle with the words AQUILA ROCKY MOUNTAIN
EQUITY FUND and also a drawing of two mountains]
AQUILA ROCKY MOUNTAIN EQUITY FUND
ANNUAL REPORT
February 17, 1999
Dear Fellow Shareholder:
We are not as pleased as we might be to send you this
Annual Report for the Aquila Rocky Mountain Equity Fund.
The reason for this is that the Fund's share value did
not do as well as we had hoped during this period. Over the first
part of the year, the value of the Fund's shares increased.
However, over the last part of the year, they suffered a decline in
value - despite the good inherent characteristics of most of the
companies represented in the portfolio.
It matters little that a substantial number of the
portfolios of value-oriented funds have suffered a similar fate. It
also matters little to us that many mutual funds of various
organizations did not have a good year in 1998.
However, our faith continues.
THE ROCKY MOUNTAIN REGION CONTINUES TO BE ATTRACTIVE
As you are aware, the investments of the Fund are
focused upon the Rocky Mountain region of our country. This
consists of the eight states in the area - Arizona, Colorado,
Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming. This region
continues to possess some of the most outstanding characteristics
for economic growth within our country. And, its growth is
inherent in a significant number of the companies in the region.
Our investment style, however, is basically to select
securities on a value basis. This means that we look for companies
which have good growth in earnings, cash flow, strength of balance
sheet, and positive competitor characteristics. But, we try to buy
these companies at a reasonable price/earnings ratio.
Unfortunately, the value-oriented investment approach
that we have employed, and which has been employed by others in the
country, has tended to be not in favor recently. Instead, we have
seen a popularity of a growth and momentum style come to the fore.
It is interesting to note that within the Standard &
Poor's 500 Index, only a very limited number of companies - about
20 - produced the stellar price movement that the Index experienced
in its performance. And, these limited number of companies are
currently selling at a price/earnings ratio of over 40 times. Also,
the spectacular nature of internet stocks - which have exploded in
their stock price, yet have shown no earnings and tremendous
volatility - has led some people to believe that they can become
instant millionaires overnight.
</PAGE>
<PAGE>
Comparatively, the average price/earnings ratio of
Aquila Rocky Mountain Equity Fund was only 18.8 times.
This leads one to ask the question, "Is value investing
dead?" We can emphatically say, "No." The ebbs and flow in
growth-oriented managementand that of a value approach are part of
the nature of the markets. It is hard for us to judge when the
stock market will swing back to a value-oriented approach. But, we
do know it will swing back. We will continue to stick to our
value-oriented style of investing because over time it has proven
itself as making good sound sense.
Rather than chase after highly valued growth stocks, or
buying companies which for the moment are in vogue, we will
continue to invest in companies which have value over the
long-term.
Stocks selling at 40 - 50 times their price/earnings
ratio are, for the most part, well outside our value universe. When
you factor in the unpredictability of earnings growth, such issues
can be especially vulnerable in price due to any disappointments by
the companies involved or to market downturns.
THE FUND'S INVESTMENTS
From the charts below you will see the various states
represented in the Rocky Mountain region as well as market sectors
in which the Fund is invested.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY REGION
Colorado 33.86%
Utah 15.90%
Arizona 9.37%
Nevada 10.87%
Montana 9.37%
New Mexico 4.23%
Idaho 5.24%
Other 11.16%
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY MARKET SECTOR
Energy 6.9%
Transportation 4.7%
Consumer: Non-Durable 12.6%
Consumer: Cyclical 16.2
Utilities 13.2%
Cable/Communications 15.2%
Financial/Insurance 15.2%
Healthcare 2.5%
Basic Industry 2.1%
Gaming 8.4%
Other 3.0%
</PAGE>
<PAGE>
Below are listed the top ten holdings of the Fund as of
December 31, 1998. While the individual holdings of the Fund and
those that make up the top ten will vary over time, there is a
common denominator in their selection. This common denominator is
a factor of what we believe to be value.
TOP TEN HOLDINGS
<TABLE>
<S> <C> <C> <C>
PERCENTAGE
COMPANY OF NET ASSETS STATE MARKET SECTOR
Montana Power 5.99% Montana Utilities
American Stores 5.22% Utah Consumer: Non-Durable
First Security 4.83% Utah Financial
First State Bancorp 4.31% New Mexico Financial
Viad Corp 4.29% Arizona Consumer: Cyclical
New Century Energies 3.96% Colorado Utilities
Jones Intercable 3.90% Colorado Cable/Communications
International Game Technology 3.86% Nevada Gaming
Tele-Communications Inc. 3.73% Colorado Cable/Communications
Westerfed Financial 3.56% Montana Financial
</TABLE>
DISCUSSION OF MANAGEMENT APPROACH
We distinctly urge you to read the section of the
report entitled "Management Discussion" to gain a better framework
of the Fund's investment style.
CONFIDENCE IN THE ROCKY MOUNTAIN REGION
We strongly want to emphasize to you that we have high
confidence in the growth characteristics of the Rocky Mountain
region - despite the recent market difficulties experienced - as
well as in the various companies that make up its nature.
Furthermore, we have confidence in our value-oriented investment
approach toward this area.
YOUR CONFIDENCE IS GRATIFYING
We want you to know that your confidence is especially
gratifying during a period such as we are going through where value
investing has been out of style. We strongly feel this aberration
is a temporary one and that good companies will be appreciated and
be rewarding for investors over time.
Sincerely,
Lacy B. Herrmann
Chairman, Board of Trustees
</PAGE>
<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. The
Fund's universe of companies are primarily within the eight state
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, 1998, 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 perio
d 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. The performance of the Fund's
other classes may be greater or lesser than the Class A shares
performance indicated on this graph, depending on whether greater
or lesser sales charges and fees were incurred by shareholders
investing in the other classes.
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 domiciled in 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 might well result in variances
from the market action of the securities in the Index. Furthermore,
whatever the difference in performance of the Index versus the Fund
might also be attributed to the lack of application of annual
operating expenses and initial sales charge to the Index.
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 a line chart with the following information:]
PERFORMANCE COMPARISON
RUSSELL 2000 FUND AFTER SALES
MUNICIPAL BOND INDEX CHARGE AND EXPENSES
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
6/98 19,824 16,211
12/98 18,413 15,325
[Table setup with the following information:]
FUND'S AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIOD ENDED LIFE OF FUND
DECEMBER 31, 1998 1 YEAR SINCE 7/22/94
INCLUDING SALES
CHARGE AND EXPENSES -9.31% 10.08%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
</PAGE>
Aquila Rocky Mountain Equity Fund's Class A Shares had
a total return of -5.31%, without provisions for sales charges, for
the year ended December 31, 1998, while the Russell 2000 Index
posted a total return of -2.55%. For the 3-year period ended
December 31, 1998, the Rocky Mountain Equity Fund had a compounded
average annual return of +11.40% compared to +11.19% for the
Russell 2000 for the same period.
These results are indicative of the difficult market
environment that medium- and small-capitalization stocks faced in
1998. Investor interest last year was focused on a very narrow
group of large-capitalization growth stocks, including technology
and telecommunication companies. The strength of these few
companies enabled the Standard & Poor's 500 Index (which is
weighted by the market capitalization or size of each company) to
report its fourth consecutive year of 20% plus gains. However, only
13 stocks contributed about one-half of the Standard & Poor's 500
gain in 1998. In contrast, the average stock declined last year as
measured by any of the broad unweighted stock market averages.
Unfortunately, your Fund was adversely affected by these trends,
since very few of the largest capitalization stocks are based in
the Rocky Mountain area. However, this should only be a temporary
setback. In the past, large- and small-capitalization stocks have
each taken their turns of being in favor with investors. Thus, we
would expect the broader market to "catch-up" with the largest
stocks at some point in the future. In fact, the last time the
stock market was similarly so narrowly focused on large stocks was
in 1972-73 and subsequently the small and medium stocks
outperformed the Standard & Poor's 500 Average for the following 10
consecutive years.
In 1999, we continue 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 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 backyard," we
can uncover under-followed stocks that will add value for you, our
shareholders.
The portfolio was exposed to several industries that
did well in 1998. The cable stocks continued to benefit from
improved growth in cash flows as well as interest in the group from
some smart investors such as Microsoft and AT&T. Our position in
Tele-Communications Inc. increased 98% during 1998 primarily due to
AT&T's proposal to buy the company. The portfolios other cable
holdings, TCI Ventures, Jones Intercable, Liberty Media, MediaOne
Group and United International also appreciated sharply.
Investor interest in telecommunications benefitted
another portfolio holding, Montana Power, which plans to sell most
of its electrical generating capacity and expand its fiber optic
tele-communication network. Another holding, American Stores,
appreciated significantly after another Rocky Mountain-based
company, Albertson's, proposed to buy them out.
The portfolio was also exposed to several industries
that had challenges in 1998. Oil and gas prices declined during the
year which negatively affected our energy holdings, including Union
Pacific Resources, Prima Energy and KN Energy. U.S. natural gas
prices were adversely impacted by a warmer than normal winter in
1997-98 and the first half of 1998-99. Worldwide, oil prices were
impacted by reduced demand from Asia and excess production from
OPEC. While this was disappointing, we are still bullish on
energy prices long-term. Oil and gas are depleting natural
resources and demand will eventually recover and weather patterns
will return to normal.
Our investments in casino stocks Circus Circus and
Mirage Resorts were hampered in 1998 by overbuilding in Las Vegas.
We temporarily reduced our investments in this industry, but plan
to increase them again as the new capacity is absorbed into the
market.
We also had invested in several companies who had
earnings disappointments in 1998 such as RuralMetro, American Coin
Merchandising, Avert and Mity Lite. In each case, we believe
management is taking the appropriate action to restore their
respective company's earnings growth.
We are very excited about one new stock that we added
to the portfolio in December, NAVIDEC, Inc. This Colorado-based
company is developing a nationwide auto Internet site. It currently
has auto buying/leasing/information sites in five metro areas and
plans to expand to 75 by the end of 2000. A recent acquisition
gives it access to several major Internet portals including
Netscape and Prodigy.
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>
<PAGE>
[Logo of KPMG: 'KPMG' in front of four rectangles]
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, 1998, and 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 highlhights for each of the years in
the four-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, 1998, by correspondence with
the custodian. 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, 1998, 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 four-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 LLP
New York, New York
February 1, 1999
</PAGE>
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
MARKET
SHARES COMMON STOCKS - 97.0% VALUE
BASIC INDUSTRY - 2.1%
3,000 Barrick Gold Corp. $ 58,500
CABLE/COMMUNICATIONS - 15.2%
2,800 Jones Intercable Inc. Class A + 99,750
300 Jones Intercable Inc. + 10,537
1,500 Liberty Media Group Class A + 69,094
1,909 Tele-Communications Inc. TCI Group - A + 105,592
2,182 Tele-Communications Inc. - TCI Ventures Group - A + 51,412
2,000 MediaOne Group + 94,000
430,385
CONSUMER CYCLICAL - 16.2%
5,000 Building Material Holding Corp. + 60,625
5,600 Koala Corp. + 97,300
7,000 Mity Lite, Inc. + 99,750
16,000 Navidec Inc. + 81,000
4,000 Viad Corporation 121,500
460,175
CONSUMER NON-DURABLE - 12.6%
4,000 American Stores Company 147,750
6,500 Avert Inc. + 30,875
3,000 Dial Corp. 86,625
3,000 Franklin Covey Company + 50,250
8,000 Rocky Mountain Chocolate Factory + 42,000
357,500
ENERGY - 6.9%
1,800 KN Energy 65,475
7,000 Prima Energy Corp.+ 88,812
4,400 Union Pacific Resources, Inc. 39,880
194,167
FINANCIAL - 15.2%
2,332 Conseco Inc. 71,272
5,850 First Security Corp. 136,744
5,875 First State Bancorp 121,906
5,561 Westerfed Financial Corp. 100,794
</PAGE>
<PAGE>
430,716
GAMING - 8.4%
5,000 American Coin Merchandising + 29,375
4,500 International Game Technology 109,406
9,000 Jackpot Enterprises 84,937
900 Mirage Resorts + 13,444
237,162
HEALTHCARE - 2.5%
1,000 Ballard Medical Products 24,312
2,250 Sierra Health Services Inc.+ 47,391
71,703
TRANSPORTATION - 4.7%
5,700 Rural/Metro Corp.+ 62,344
1,600 Union Pacific 72,100
134,444
UTILITIES -13.2%
2,500 Idacorp Inc. 90,469
3,000 Montana Power Co. 169,688
2,300 New Century Energies Inc. 112,125
372,282
Total Common Stocks (cost $2,038,350) 2,747,034
FACE
AMOUNT SHORT-TERM INVESTMENTS - 4.9%
$ 133,243 Churchill Cash Reserves Trust 133,243
4,500 The One Group Prime Money Market Fund 4,500
Total Short-Term Investments (cost $137,743) 137,743
Total Investments (cost $2,176,093*) 101.9% 2,884,777
Liabilities in excess of other assets (1.9) (53,960)
Net Assets 100.0% $2,830,817
</TABLE>
* Cost for Federal tax purposes is $2,187,371.
+ Non-income producing security.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at market value (cost $2,176,093) $ 2,884,777
Deferred organization expenses (note 2) 5,961
Due from Administrator for reimbursement of expenses (note 3) 4,761
Dividends and interest receivable 2,808
Receivable for Fund shares sold 157
Other assets 114
Total assets 2,898,578
LIABILITIES
Cash overdraft 30,431
Accrued expenses 17,592
Payable for Fund shares redeemed 18,187
Distribution fees payable 1,551
Total liabilities 67,761
NET ASSETS $ 2,830,817
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par
value $.01 per share $ 1,689
Additional paid-in capital 2,131,722
Undistributed net realized loss on investments (11,278)
Net unrealized appreciation on investments 708,684
$ 2,830,817
CLASS A
Net Assets $ 1,879,513
Capital shares outstanding 112,146
Net asset value and redemption price per share $ 16.76
Offering price per share (100/95.75 of $16.76 adjusted to
nearest cent) $ 17.50
CLASS C
Net Assets $ 161,895
Capital shares outstanding 9,793
Net asset value and offering price per share $ 16.53
Redemption price per share (*generally, a charge of 1% is
imposed on the proceeds of shares redeemed during the
first 12 months after purchase) $ 16.53*
CLASS Y
Net Assets $ 789,409
Capital shares outstanding 46,929
Net asset value, offering and redemption price per share $ 16.82
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 41,108
Interest 11,047
$ 52,155
Expenses:
Investment Adviser fees (note 3) $ 24,024
Administrator fees (note 3) 27,455
Registration fees and dues 22,516
Legal fees 21,537
Shareholders' reports 16,889
Audit and accounting fees 12,250
Amortization of organization expenses (note 2) 10,771
Trustees' fees and expenses 9,853
Transfer and shareholder servicing agent fees 8,841
Distribution and service fees (note 3) 7,757
Custodian fees 1,941
Miscellaneous 5,821
169,655
Investment Adviser fees waived (note 3) (24,024)
Administrator fees waived (note 3) (27,455)
Reimbursement of expenses by Administrator (note 3) (58,939)
Expenses paid indirectly (note 6) (6,691)
Net expenses 52,546
Net investment loss (391)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 7,746
Change in unrealized appreciation on investments (155,516)
Net realized and unrealized loss on investments (147,770)
Net decrease in net assets resulting from operations $ (148,161)
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
</CAPTION>
<S> <C> <C> <C>
1998 1997
OPERATIONS:
Net investment income (loss) $ (391) $ 1,786
Net realized gain from securities transactions 7,746 125,748
Change in unrealized appreciation on investments (155,516) 473,126
Change in net assets from operations (148,161) 600,660
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 5):
Class A Shares:
Net investment income (1,387) -
Net realized gain on investments (18,386) (103,249)
Class C Shares:
Net investment income (120) -
Net realized gain on investments (1,588) (231)
Class Y Shares:
Net investment income (574) -
Net realized gain on investments (7,609) (26,133)
Change in net assets from distributions (29,664) (129,613)
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold 475,496 1,544,525
Reinvested dividends and distributions 31,719 112,775
Cost of shares redeemed (1,444,705) (497,888)
Change in net assets from capital share transactions (937,490) 1,159,412
Change in net assets (1,115,315) 1,630,459
NET ASSETS:
Beginning of period 3,946,132 2,315,673
End of period $ 2,830,817 $3,946,132
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<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. 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. At December 31, 1998 there were no
Class I shares outstanding. 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.
</PAGE>
<PAGE>
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) 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 and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual
results could differ from those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
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.
</PAGE>
<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, 1998, the Fund incurred
fees under the Advisory Agreement and Sub-Advisory and
Administration Agreement of $24,024 and $27,455, respectively,
which were voluntarily waived. Additionally, the Administrator
voluntarily agreed to reimburse the Fund for other expenses during
this period in the amount of $58,939. Of this amount, $54,178 was
paid prior to December 31, 1998 and the balance of $4,761 was
paid in early January 1999.
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.
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, 1998, service fees on
Class A Shares amounted to $6,223, of which the Distributor
received $640.
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, 1998, amounted to $1,150. 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, 1998, amounted to
$384. The total of these payments with respect to Class C Shares
amounted to $1,534, of which the Distributor received $1,503.
</PAGE>
<PAGE>
Specific details about the Plans are more fully defined
in the Fund's Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as
the exclusive distributor of the Fund's shares. Through agreements
between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the
facilities of these dealers having offices within the general Rocky
Mountain region, with the bulk of sales commissions inuring to such
dealers. For the year ended December 31, 1998, the Distributor
received commissions of $1,407 on sales of Class A Shares.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1998, purchases of
securities and proceeds from the sales of securities (excluding
short-term investments) aggregated $629,227 and $1,173,396,
respectively.
At December 31, 1998, aggregate gross unrealized
appreciation for all securities in which there is an excess of
market value over tax cost amounted to $905,028 and aggregate gross
unrealized depreciation for all securities in which there is an
excess of tax cost over market value amounted to $207,622, for a
net unrealized appreciation of $697,406.
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 statement 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. EXPENSES
The Fund has negotiated an expense offset arrangement
with its custodian wherein it receives credit toward the reduction
of custodian fees and other Fund expenses whenever there are
uninvested cash balances. The Statement of Operations reflects the
total expenses before any offset, the amount of offset and the net
expenses. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in
income-producing assets rather than leave cash on deposit.
</PAGE>
<PAGE>
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
</CAPTION>
<S> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES:
Proceeds from shares sold 14,054 $ 260,372 56,515 $ 942,745
Reinvested dividends and
distributions 1,318 21,904 4,937 86,342
Cost of shares redeemed (78,986) (1,431,876) (30,449) (497,888)
Net change (63,614) (1,149,600) 31,003 531,199
CLASS C SHARES:
Proceeds from shares sold 10,043 178,108 100 1,780
Reinvested dividends and
distributions 101 1,632 18 300
Cost of shares redeemed (743) (12,829) - -
Net change 9,401 166,911 118 2,080
CLASS Y SHARES:
Proceeds from shares sold 2,035 37,016 34,051 600,000
Reinvested dividends and
distributions 498 8,183 1,492 26,133
Cost of shares redeemed - - - -
Net change 2,533 45,199 35,543 626,133
Total transactions in Fund
shares (51,680) $ (937,490) 66,664 $ 1,159,412
</TABLE>
8. PORTFOLIO ORIENTATION
The Fund's investments are primarily invested in the securities of
companies within the eight state Rocky Mountain region 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.
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
AQUILA ROCKY MOUNTAIN EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A(1)
PERIOD
YEAR ENDED DECEMBER 31, ENDED
</CAPTION>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 12/31/94(2)
Net Asset Value, Beginning of Period $17.89 $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) (0.96) 3.44 2.47 2.25 (0.37)
Total from Investment Operations (0.96) 3.45 2.45 2.18 (0.37)
Less Distributions (note 5):
Dividends from net investment income (0.01) - - (0.01) -
Distributions from capital gains (0.16) (0.61) (0.53) (0.10) -
Total Distributions (0.17) (0.61) (0.53) (0.11) -
Net Asset Value, End of Period $16.76 $17.89 $15.05 $13.13 $11.06
Total Return (not reflecting sales
charge) (%) (5.31) 23.01 18.68 19.68 (3.24)+
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 1,880 3,144 2,178 1,737 530
Ratio of Expenses to Average Net
Assets (%) 1.74 1.58 1.55 2.03 1.70*
Ratio of Net Investment Income (Loss)
to Average Net Assets (%) (0.22) (0.03) (0.19) (0.72) (0.51)*
Portfolio Turnover Rate (%) 19.52 10.39 20.32 15.14 2.95+
The expense and net investment income ratios without the effect of the
Adviser's and Administrator's voluntary waiver of fees and the
Administrator's voluntary expense reimbursement were:
Ratio of Expenses to Average Net
Assets (%)(3) 4.74 6.48 8.79 10.36 17.69*
Ratio of Net Investment Income (Loss)
to Average Net Assets (%) (3.22) (4.93) (7.43) (9.05) (16.50)*
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 (%) 1.55 1.50 1.50 1.91 1.19*
</TABLE>
(1) Designated as Class A Shares on May 1, 1996.
(2) From July 22, 1994 (commencement of operations) to December 31, 1994.
(3) Ratios are based on average net assets of $2,489,469, $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.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C(1) CLASS Y(1)
PERIOD PERIOD
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED
1998 1997 12/31/96 1998 1997 12/31/96
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.79 $15.07 $14.59 $17.91 $15.07 $14.59
Income from Investment Operations:
Net investment income (0.16) (0.11) 0.01 0.03 0.04 0.01
Net gain on securities (both realized
and unrealized) (0.93) 3.44 1.00 (0.95) 3.41 1.00
Total from Investment Operations (1.09) 3.33 1.01 (0.92) 3.45 1.01
Less Distributions (note 5):
Dividends from net investment income (0.01) - - (0.01) - -
Distributions from capital gains (0.16) (0.61) (0.53) (0.16) (0.61) (0.53)
Total Distributions (0.17) (0.61) (0.53) (0.17) (0.61) (0.53)
Net Asset Value, End of Period $16.53 $17.79 $15.07 $16.82 $17.91 $15.07
Total Return (not reflecting sales charge) (%) (6.07) 22.18 6.94+ (5.08) 22.98 6.94+
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 162 7 4 789 795 133
Ratio of Expenses to Average Net
Assets (%) 2.53 2.34 1.30* 1.52 1.34 1.30*
Ratio of Net Investment Income (Loss)
to Average Net Assets (%) (1.07) (0.78) 0.06* (0.01) 0.16 0.06*
Portfolio Turnover Rate (%) 19.52 10.39 20.32+ 19.52 10.39 20.32+
The expense and net investment income ratios without the effect of the
Adviser's and Administrator's voluntary waiver of fees and the
Administrator's voluntary expense reimbursement were:
Ratio of Expenses to Average Net Assets (%)(2) 5.70 7.19 8.54* 4.58 5.34 8.54*
Ratio of Net Investment Income (Loss) to
Average Net Assets (%) (4.23) (5.63) (7.18)* (3.07) (3.84) (7.18)*
The expense ratios after giving effect to the waivers, reimbursements and
expense offset for uninvested cash balances were:
Ratio of Expenses to Average Net Assets (%) 2.33 2.26 1.25* 1.32 1.27 1.25*
</TABLE>
(1) New Class of Shares established on May 1, 1996.
(2) Ratios are based on average net assets of $153,364, $4,895 and $542,
respectively, for Class C Shares and $789,453, $287,294 and $52,490,
respectively, for Class Y Shares. In general, as the Fund's net assets
increase, the expense ratio will decrease.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
FEDERAL TAX STATUS OF 1998 DISTRIBUTIONS
During its fiscal year, the Fund distributed $27,583
from net realized long-term gains, which is hereby designated from
20% net long-term capital gains.
Prior to January 31, 1999, shareholders were mailed IRS
Form 1099-DIV which contained information on the status of
distributions paid for the 1998 CALENDAR YEAR.
PREPARING FOR YEAR 2000 (UNAUDITED)
The Trustees and officers of the Fund have been
monitoring issues involving preparedness for the turn of the
century for some time in an effort to minimize or eliminate any
potential impact upon the Fund and its shareholders. Our officers
have focussed significant time and effort in order that the various
computerized functions that could affect the Fund are ready by the
beginning of the year 2000.
The Fund is highly reliant on certain mission-critical
suppliers' services. Each supplier of these services has provided
the Fund's officers with assurances that it is actively addressing
potential problems relating to the year 2000. The officers, in
turn, are monitoring and will continue to monitor the progress of
its suppliers.
As you can well understand, we cannot directly control
our supplier operations. We assure you, however, that we recognize
a responsibility to inform our shareholders if in the future we
become aware of any developments which would lead us to believe
that the Fund will be significantly affected by year 2000 problems.
We will continue to keep you up-to-date through future
communications.
<PAGE>
