-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFiVbXCFmLEZu+8CilPPmR2car4pWa9vI3+qhM63y24GI8MF3zjEBH4PumqtGNWH OJznCv7zDdOa14lOgXoseg== 0000812006-96-000010.txt : 19960923 0000812006-96-000010.hdr.sgml : 19960923 ACCESSION NUMBER: 0000812006-96-000010 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960905 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TAX FREE TRUST CENTRAL INDEX KEY: 0000812006 STANDARD INDUSTRIAL CLASSIFICATION: FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-05086 FILM NUMBER: 96625829 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 2: 380 MADISON AVE SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHURCHILL TAX FREE FUND OF KENTUCKY DATE OF NAME CHANGE: 19880911 N-30B-2 1 SEMI-ANNUAL REPORT JUNE 30, 1996 AQUILA CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [Logo of Churchill Tax-Free Trust of Kentucky--Standing pegasus/horse with wings within a circle] One of the AQUILAsm Group of Funds [Logo of Churchill Tax-Free Trust of Kentucky--Standing pegasus/horse with wings within a circle] CHURCHILL TAX-FREE FUND OF KENTUCKY SEMI-ANNUAL REPORT "FLUCTUATIONS, YET HIGH STABILITY" August 20, 1996
6/30/96 12/31/95 6/30/95 SHARE NET ASSET VALUE $10.43 $10.71 $10.42 DISTRIBUTION YIELD 5.37%* 5.52%* 5.68%*
Dear Investor: We live in a world that is ever changing. As the above table illustrates, the price of the Fund's shares can and does move up and down over time. Also, the rate of triple tax-free income return distributed to shareholders can and will change. Movements in these two key areas reflect the changes in market conditions that occurred over the time period of this past year. Yet, while changes have occurred, looking at these numbers in a broader perspective, there has tended to be a relatively high level of stability to the performance results. Indeed, these results compare favorably to what occurred in the municipal securities market itself during this period. MARKET FORCES As indicated, the changes in share price and income return are influenced considerably by market forces. Market forces are governed by several main factors in the area of fixed-income securities. This area encompasses the tax-free municipal securities in which the Fund invests. Key among these factors is action taken by the Federal Reserve Board. This Federal government organization has the power to raise and lower interest rates in key areas which, in turn, can have an effect on all types of fixed-income securities. The Fed can also control the supply of money in our financial system - increasing or decreasing the amount of dollars in circulation. This, in turn, can affect the market. The other key factor influencing market action is the psychology of investors. By psychology of investors, we mean the level of confidence that investors as a whole have toward what is happening in our country's overall financial affairs. We now live in a world that is not only ever changing, but also one that is very global in nature. Consequently, the psychology factor within market activity is influenced not only by the confidence level, or lack thereof, which investors in the United States have, but also by the confidence level that investors all around the world have toward the handling of major financial affairs in our country. * Indicates trailing 12 month yield distributed to shareholders as measured against share maximum public offering price. Altogether, then, what happens to the share price and distribution return of the Fund is very much driven by market forces. This is an important factor which shareholders in the Fund must appreciate and come to understand. And, this is the case whether investors own municipal securities individually, or whether they do so through the portfolio of such municipal securities as the Fund provides to shareholders. THE VALUE THE FUND PROVIDES While accepting the fact that market forces can and do have an effect upon the Fund's performance, it must also be recognized that Churchill Tax-Free Fund of Kentucky brings to bear very specific factors to dampen the extremes of such market forces. Most significant of these factors is the professional investment management team of the Fund's Investment Adviser, Banc One Investment Advisors Corporation. Under the guidance of the Fund's management and the Trustees, the Investment Adviser oversees, on a continuing basis the investments of the Fund. And, in doing so, they moderate forces that can or might cause anxieties with investors. A very special element that the professional investment management team brings to bear is the implementation of the Fund's investment approach. QUALITY FACTOR A key moderation factor in containing damage from market forces is quality - quality of the municipal issues within the Fund's investment portfolio. Quality of issues is a very protective factor when it comes to capital preservation. That is why the Fund has chosen to invest in only those municipal securities within the TOP FOUR CREDIT RATINGS, or equivalent. It is noteworthy that at the end of the June 30, 1996 report period, 92.1% of the Fund's holdings carried a credit rating of A OR BETTER - the top three ratings. Moreover, at this report date, 46.1% of the Fund's investments were rated AA OR AAA. DIVERSIFICATION FACTOR Another very important factor in moderating market forces is diversification among portfolio holdings. At June 30, 1996, the Fund had 165 SEPARATE ISSUES within the investment portfolio, representing many different municipal projects within numerous communities throughout Kentucky. MATURITY FACTOR Through having a variety of different maturities among the securities in the Fund's portfolio, it is possible to avoid extremes in volatility that can come about with market fluctuations. As you are aware, short maturity securities possess little fluctuation in price, but pay low yields. On the other hand, long maturity securities give higher yields, but possess considerable price volatility due to the uncertainties involved over the time between the present and the specified maturity date. The Fund seeks an average intermediate maturity within the investment portfolio. Currently, at June 30, 1996, the average maturity was 14.74 YEARS, so as to provide an adequate income return, yet only moderate volatility in share price. INCOME RETURN As the table above illustrates, the trailing 12-month yield distributed to shareholders, as measured against average maximum public offering price, was running at the rate of 5.37% at June 30, 1996. This is somewhat lower than it was six months and a year earlier. However, it reflects the declining level of general market return of municipal securities over this period. Despite the modest decline in yield to shareholders, it must be remembered that this income amount is the TRIPLE TAX-FREE return that shareholders received from the Fund. It is worth noting from the below graph that one would have had to earn a substantially higher income return from a TAXABLE investment in order to match the TRIPLE TAX-FREE amount distributed by the Fund. And you will note, if one were in the 28% Federal income tax bracket, a TAXABLE return of 7.93% would have to be achieved to match the 5.37% TRIPLE TAX-FREE return of the Fund. In the highest Federal income tax bracket of 39.6%, the equivalent return would have had to have been 9.46%. In general, it would not have been possible for an investor to obtain such levels of taxable return unless additional risk was taken in the form of lesser quality or longer maturity securities, or both such elements. [Graphic of Bar chart with the following information:] CHURCHILL TAX-FREE FUND OF KENTUCKY'S TRIPLE TAX-FREE DISTRIBUTION RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
Tax Bracket Taxable Equivalent Rate Double Tax-Free Equivalent Rate 28% 7.93% 5.37% 31% 8.28% 5.37% 36% 8.93% 5.37% 39.6% 9.46% 5.37%
COMMITMENT TO CONSISTENCY Management is committed to providing shareholders with as consistent results from Churchill Tax-Free Fund of Kentucky as are possible to achieve, considering prevailing market forces. You should be aware that we are not able to eliminate completely the market forces that swirl around us on a continuing basis. However, as indicated, a number of investment management techniques are used by the Fund to moderate market forces. YOUR CONFIDENCE APPRECIATED We again wish to emphasize that your confidence in Churchill Tax-Free Fund of Kentucky is greatly appreciated. You can be assured that management will do everything in its power to merit your continued trust. Sincerely, /s/ Lacy B. Herrmann Lacy B. Herrmann President and Chairman of the Board of Trustees CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS JUNE 30, 1996 (UNAUDITED)
RATINGS FACE MOODY'S/ AMOUNT REVENUE BONDS (98.7%) S&P VALUE State Agencies (27.3%) Kentucky Higher Education Student Loan Corporaton Insured Student Loan Revenue, $ 4,125,000 6.400%, 12/01/99 A/NR $ 4,279,687 980,000 6.500%, 06/01/00 A/NR 1,021,650 1,490,000 6.500%, 06/01/02 A/NR 1,583,125 2,955,000 6.800%, 06/01/03 A/NR 3,161,850 615,000 6.550%, 06/01/99 Aa-/A1 638,831 1,915,000 7.100%, 12/01/11 Aa-/AA 2,046,656 Kentucky Infrastructure Authority Revenue, 1,000,000 7.625%, 08/01/03 NR/A 1,098,750 3,195,000 7.100%, 08/01/97 A/A 3,296,601 200,000 7.500%, 02/01/09 NR/AAA 218,500 1,445,000 7.500%, 02/01/99 NR/AAA 1,578,662 555,000 7.200%, 06/01/11 A/A 604,950 1,110,000 6.375%, 06/01/14 A/A 1,164,112 Kentucky Local Correctional Facilities Construction Authority Revenue, 4,925,000 5.500%, 11/01/14 Aaa/AAA 4,746,469 Kentucky State Properties and Buildings Commission Revenue, 1,375,000 7.900%, 11/01/97 A/A+ 1,436,875 500,000 8.400%, 11/01/97 Aaa/AAA 537,500 1,130,000 7.100%, 12/01/97 A/A 1,172,375 250,000 7.600%, 08/01/98 NR/AAA 271,562 1,460,000 7.300%, 12/01/99 A/A 1,574,975 250,000 7.600%, 08/01/98 NR/AAA 271,563 400,000 7.350%, 12/01/99 Aaa/AAA 442,500 365,000 7.000%, 02/01/06 Aaa/AAA 403,325 4,510,000 6.625%, 10/01/07 A/A+ 4,944,088 300,000 8.000%, 08/01/98 NR/AAA 328,125 750,000 7.375%, 12/01/99 Aaa/AAA 830,625 1,000,000 6.500%, 08/01/01 Aaa/AAA 1,091,250 Kreda Economic Development Revenue, 3,110,000 7.250%, 06/01/17 NR/AA 3,253,838 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 1,944,000 7,000,000 6.200%, 03/01/18 Aa/NR 7,043,750 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/A 528,750 570,000 7.550%, 03/01/10 NR/A 604,200 4,500,000 6.500%, 03/01/19 NR/A 4,623,750 3,000,000 6.400%, 03/01/19 NR/A 3,165,000 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/12 Aaa/AAA 1,121,250 61,029,144 County Agencies (5.0%) Clark County Kentucky Industrial Buildings Revenue (Southern Wood Project), 565,000 6.000%, 12/01/00 NR/NR* 560,762 250,000 7.000%, 12/01/08 NR/NR* 250,937 Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/16 A/NR 1,174,600 Franklin County Kentucky Public Projects Corp. Revenue, 350,000 5.500%, 1/01/24 NR/A- 342,125 Jefferson County Kentucky Economic Development Corp. Lease Revenue, 2,000,000 7.625%, 07/01/08 A1/NR 2,069,440 250,000 7.750%, 07/01/16 A1/NR 258,818 Kenton County Kentucky Public Properties Corp. Revenue, 400,000 7.000%, 10/01/03 NR/NR* 436,000 Lincoln County Kentucky Public Properties Corp., 430,000 6.500%, 09/01/96 NR/NR* 435,912 Louisville and Jefferson County Kentucky, Series B, 120,000 5.650%, 07/01/03 NR/NR* 120,062 200,000 6.625%, 07/01/15 NR/NR* 191,500 250,000 6.650%, 07/01/19 NR/NR* 241,250 Madison County Kentucky Capital Project Corp. Revenue, 650,000 7.800%, 04/01/09 NR/NR* 715,813 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A 1,625,625 Munfordville Kentucky Industrial Development Bond, 2,500,000 7.000%, 06/01/19 NR/A 2,659,375 Woodford County Kentucky Public Properties Corp. Revenue, 100,000 8.200%, 11/01/17 A/NR 108,125 11,190,344 City/Municipal Obligations (5.4%) Covington Kentucky Municipal Properties Corp. Revenue, 400,000 7.950%, 08/01/04 Baa1/NR 440,000 250,000 7.375%, 08/01/11 Baa1/NR 272,188 Hickman Kentucky Industrial Building Revenue (HIS, Kentucky, Inc. Project), 1,665,000 6.950%, 08/01/09 NR/NR* 1,708,706 Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 488,125 Kentucky League Cities Funding Trust COP, 1,715,000 6.200%, 08/01/17 NR/A- 1,757,875 Louisville Kentucky Public Properties Corp, 4,090,000 6.700%, 12/01/20 A/A- 4,335,400 Nicholasville, Kentucky Industrial Development Revenue (Johnson Control), 3,000,000 8.000%, 09/01/04 A2/A 3,105,330 12,107,624 Utilities (5.5%) Ashland Kentucky Sewer & Solid Waste Revenue (Ashland, Inc.), 3,200,000 7.125%, 02/01/22 Baa1/NR 3,364,000 Boone County Kentucky Public Properties Revenue, 500,000 5.150%, 12/01/14 A/A- 456,875 Campbell & Kenton Counties Kentucky Sanitation District No. 1 Sanitation Revenue, 220,000 7.300%, 08/15/00 Aa/A+ 228,525 200,000 7.700%, 08/15/04 Aa/A+ 210,250 Glasgow Kentucky Electric Plant Board Revenue, 280,000 7.600%, 12/01/09 NR/BBB 301,350 Henderson Kentucky Electric Light and Power Revenue, 1,100,000 5.700%, 03/01/03 NR/A 1,101,595 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/16 NR/NR* 267,500 Louisville and Jefferson County Kentucky Metropolitian Sewer District Revenue, 3,000,000 5.300%, 05/15/19 Aaa/AAA 2,835,000 1,230,000 5.500%, 05/15/23 Aaa/AAA 1,166,963 1,500,000 6.500%, 05/15/24 Aaa/AAA 1,597,500 Muhlenberg County Kentucky Water District, Waterworks Revenue, 100,000 5.500%, 01/01/12 Aaa/AAA 98,125 110,000 5.500%, 01/01/13 Aaa/AAA 107,387 115,000 5.600%, 01/01/14 Aaa/AAA 112,700 Richmond Kentucky Water Gas and Sewer Revenue, 200,000 7.300%, 07/01/05 Aaa/AAA 213,750 200,000 7.300%, 07/01/06 Aaa/AAA 213,750 12,275,270 Pollution Control Revenue (12.0%) Ashland Kentucky Pollution Control Revenue, 1,770,000 7.375%, 07/01/09 A3/NR 1,889,475 3,000,000 6.650%, 08/01/09 Baa1/NR 3,153,750 Ashland Kentucky Solid Waste Revenue (Ashland Oil), 500,000 7.200%, 10/01/20 Baa1/BBB 523,125 Boone County Kentucky Pollution Control Revenue, 735,000 5.500%, 01/01/24 Aaa/AAA 694,575 Carroll County Kentucky Pollution Control Revenue, 3,500,000 7.450%, 09/15/16 Aa2/NR 3,941,875 Carroll County Kentucky Pollution Control Revenue, 1,910,000 6.250%, 02/01/18 Aa2/AA- 1,948,200 Jefferson County Kentucky Pollution Control Revenue, 2,200,000 5.450%, 10/15/20 Aa2/AA 2,057,000 2,600,000 5.900%, 04/15/23 Aa2/AA 2,567,500 1,000,000 7.750%, 02/01/19 Aa2/AA 1,065,000 5,000,000 5.625%, 08/15/19 Aa2/AA 4,793,750 Wickliffe Kentucky Pollution Control, 4,100,000 6.200%, 04/01/07 A1/A 4,106,191 26,740,441 Transportation (11.7%) Kenton County Kentucky Airport Board Airport Revenue, 1,500,000 6.300%, 03/01/15 Aaa/AAA 1,535,625 3,955,000 8.750%, 03/01/15 A/A 4,131,947 Kentucky Interlocal School Transportation Authority, 150,000 5.100%, 03/01/05 A/A 147,375 Kentucky State Turnpike Authority Economic Development Road Revenue, 1,000,000 5.625%, 07/01/15 A/A 987,500 500,000 8.250%, 07/01/07 Aaa/AAA 530,635 100,000 6.000%, 07/01/09 Aaa/AAA 100,085 500,000 7.000%, 05/15/99 Aaa/AAA 533,750 1,035,000 7.250%, 05/15/10 Aaa/AAA 1,139,794 Kentucky State Turnpike Authority Resource Recovery Road Revenue, 500,000 7.400%, 07/01/97 A/A+ 514,630 2,105,000 7.600%, 07/01/98 A/A+ 2,209,513 3,875,000 7.750%, 07/01/99 A/A+ 4,071,036 320,000 8.000%, 07/01/03 A/A+ 337,603 Kentucky State Turnpike Authority Toll Road Revenue, 3,570,000 8.500%, 07/01/04 A/A 3,716,049 Louisville Kentucky Airport Lease Revenue, 750,000 7.850%, 02/01/09 A/A- 819,375 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/12 Baa1/A 4,410,000 Puerto Rico Commonwealth Highway Authority Highway Revenue, 1,000,000 6.750%, 07/01/05 Baa1/A 1,092,500 26,277,417 Hospitals (10.8%) Floyd County Kentucky Hospital Revenue, 280,000 7.500%, 08/01/10 NR/AAA 306,250 510,000 5.500%, 09/01/14 NR/AAA 487,687 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11 Aaa/AAA 1,067,500 Jefferson County Kentucky Health Facilities Revenue (Jewish Hospital), 1,000,000 6.550%, 05/01/22 Aaa/AAA 1,050,000 Jefferson County Kentucky Hospital Revenue, 510,000 7.750%, 10/01/97 Aaa/AAA 543,150 Kentucky Development Finance Authority Hospital Revenue, 895,000 7.625%, 09/01/11 Aaa/AAA 958,769 235,000 7.200%, 10/01/99 A/A 250,569 2,570,000 7.300%, 10/01/03 A/A 2,756,325 810,000 7.500%, 10/01/12 A/A 859,612 400,000 7.250%, 11/01/06 A1/A+ 427,500 400,000 7.200%, 09/01/15 Aaa/AAA 439,000 750,000 7.000%, 09/01/06 NR/NR* 834,375 Kentucky Development Finance Authority Revenue, 3,000,000 6.500%, 11/01/07 A1/A+ 3,161,250 1,250,000 6.250%, 11/01/13 A1/A+ 1,264,063 2,150,000 6.750%, 11/01/12 A1/A+ 2,289,750 500,000 6.000%, 11/01/01 Aaa/AAA 526,875 Kentucky Development Finance Authority Kings Daughters Medical Center, 1,000,000 6.125%, 02/01/12 Aaa/AAA 1,026,250 Kentucky Development Finance Authority Hospital Revenue, 3,000,000 5.900%, 12/01/15 Aaa/AAA 3,007,500 2,590,000 5.000%, 08/15/15 Aaa/AAA 2,334,238 Louisville Kentucky Hospital Revenue, 450,000 7.300%, 01/01/14 NR/AAA 466,587 24,057,250 Housing (10.9%) Greater Kentucky Housing Assistance Corp. Multi-Family Housing Revenue, 500,000 7.000%, 07/01/11 NR/AA+ 524,375 320,000 6.300%, 07/01/15 Aaa/AAA 325,600 275,000 6.400%, 07/01/23 NR/AA+ 280,156 Jefferson County Kentucky Multi-Family Revenue, 1,500,000 5.750%, 06/01/23 NR/AA 1,520,625 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 269,025 835,000 7.600%, 01/01/07 Aaa/AAA 877,794 340,000 5.350%, 07/01/07 Aaa/AAA 330,225 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,041,250 95,000 7.875%, 01/01/08 Aaa/AAA 99,156 630,000 7.250%, 01/01/09 Aaa/AAA 661,500 980,000 7.125%, 01/01/10 Aaa/AAA 1,027,775 30,000 6.625%, 01/01/11 Aaa/AAA 30,187 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,136,688 200,000 5.400%, 07/01/14 Aaa/AAA 185,750 1,700,000 6.400%, 01/01/17 Aaa/AAA 1,727,625 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,408,312 630,000 7.900%, 01/01/21 Aaa/AAA 663,863 400,000 7.800%, 01/01/21 Aaa/AAA 419,000 185,000 8.100%, 01/01/22 Aaa/AAA 195,638 3,185,000 7.450%, 01/01/23 Aaa/AAA 3,268,606 1,345,000 6.800%, 01/01/24 Aaa/AAA 1,376,944 500,000 6.375%, 07/01/28 Aaa/AAA 505,000 Martin County Kentucky Housing Revenue, 2,400,000 6.250%, 07/01/23 Aa/AA 2,391,000 24,266,094 Universities (1.6%) Berea Kentucky College General Obligation Subject to AMT, 2,400,000 5.900%, 05/01/13 Aa1/NR 2,412,000 Eastern Kentucky University 585,000 5.375%, 05/01/04 A/A 588,054 Western Kentucky University Revenue, 325,000 7.100%, 12/01/99 Baa/BBB+ 348,562 275,000 7.100%, 12/01/01 Aaa/AAA 305,594 3,654,210 Schools (8.5%) Boone County Kentucky School District Finance Corp. School Building Revenue, 2,250,000 6.125%, 12/01/17 A/A 2,289,375 1,750,000 6.750%, 09/01/09 A/A 1,872,500 Butler County Kentucky School Building Revenue, 270,000 7.200%, 05/01/07 A/A 299,025 290,000 7.200%, 05/01/08 A/A 321,175 Campbell County Kentucky School Building Revenue, 1,000,000 5.100%, 02/01/14 A/NR 932,500 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 A/NR 1,966,675 Harlan County Kentucky School District Corp. School Building Revenue, 205,000 7.400%, 12/01/06 A/A 226,269 200,000 7.250%, 09/01/09 NR/A 216,500 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 370,000 6.200%, 01/01/06 Aaa/AAA 395,438 210,000 6.750%, 08/01/09 Aaa/AAA 225,488 500,000 5.875%, 01/01/11 A-1/A+ 508,125 Kenton County Kentucky School District Finance Corp. School Building Revenue, 500,000 6.900%, 12/01/05 NR/NR* 549,375 600,000 7.000%, 12/01/07 NR/NR* 661,500 Lexington-Fayette Urban County Government School Building Revenue, 255,000 7.700%, 11/01/04 A-1/A+ 274,444 180,000 7.700%, 11/01/05 A-1/A+ 193,725 250,000 7.000%, 06/01/06 A-1/A+ 275,000 400,000 7.000%, 06/01/08 A-1/A+ 440,000 370,000 7.000%, 06/01/09 A-1/A+ 407,000 Nelson County Kentucky School Building Revenue, 1,820,000 5.750%, 04/01/15 A/NR 1,804,075 Pike County Kentucky School District Finance Corp. School Building Revenue, 505,000 6.900%, 12/01/05 NR/A 546,662 720,000 7.000%, 12/01/09 NR/A 778,500 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14 NR/A 1,019,200 Scott County Kentucky School Building Revenue, 2,750,000 5.900%, 06/01/18 NR/A 2,746,562 18,949,113 Total Investments - 98.7% (Cost $215,585,707**) 220,546,907 Other assets in excess of liabilitites - 1.3% 2,937,295 Net Assets - 100% $ 223,484,202 * Any security not rated must be determined by the Investment Adviser to have sufficient quality to be ranked in the top four credit ratings if a credit rating were to be assigned by a rating service. ** Cost for Federal tax purposes is $213,513,486.
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1996 (UNAUDITED) ASSETS Investments at value (identified cost $215,585,707) $ 220,546,907 Interest receivable 4,303,663 Receivable for Fund shares sold 210,712 Total assets 225,061,282 LIABILITIES Cash overdraft 1,117,044 Dividends payable 137,978 Accrued expenses 97,013 Adviser and Administrator fees payable 86,118 Distribution fees payable 83,440 Payable for Fund shares redeemed 55,487 Total liabilities 1,577,080 NET ASSETS $ 223,484,202 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 214,178 Additional paid-in capital 219,279,416 Accumulated net realized loss on investments (970,592) Net unrealized appreciation on investments 4,961,200 $ 223,484,202 CLASS A Net Assets $ 218,717,530 Capital shares outstanding 20,961,194 Net asset value and redemption price per share $ 10.43 Offering price per share (100/96 of $10.43 adjusted to nearest cent) $ 10.86 CLASS C Net Assets $ 1,117 Capital shares outstanding 107 Net asset value and offering price per share $ 10.43 Redemption price per share (*varies by length of time shares are held) $ * CLASS Y Net Assets $ 4,765,555 Capital shares outstanding 456,511 Net asset value, offering and redemption price per share $ 10.44
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) INVESTMENT INCOME: Interest income $ 7,157,135 EXPENSES: Investment Adviser fees (note B) $ 157,525 Administrator fees (note B) 292,547 Distribution fees (note B) 169,390 Transfer and shareholder servicing agent fees 86,500 Trustees' fees and expenses 40,000 Legal fees 37,000 Shareholders' reports and proxy statements 25,000 Custodian fees (note F) 18,505 Audit and accounting fees 16,000 Registration fees and dues 8,500 Insurance 2,300 Miscellaneous 22,794 876,061 Expenses paid indirectly (note F) (11,700) Net expenses 864,361 Net investment income 6,292,774 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss from securities transactions (231,702) Change in unrealized appreciation on investments (5,753,798) Net realized and unrealized gain (loss) on investments (5,985,500) Net increase in net assets resulting from operations $ 307,274
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1996 DECEMBER 31, 1995 OPERATIONS: Net investment income $ 6,292,774 $ 13,733,799 Net realized loss from securities transactions (231,702) (423,661) Change in unrealized appreciation (depreciation) on investments (5,753,798) 17,432,689 Change in net assets from operations 307,274 30,742,827 DISTRIBUTIONS TO SHAREHOLDERS (NOTE E): Class A Shares: Net investment income (6,262,787) (13,727,664) Net realized gain on investments _ _ Class C Shares: Net investment income _ _ Net realized gain on investments _ _ Class Y Shares: Net investment income (29,987) _ Net realized gain on investments _ _ Change in net assets from distributions (6,292,774) (13,727,664) CAPITAL SHARE TRANSACTIONS (NOTE G): Proceeds from shares sold 15,111,611 17,964,446 Reinvested dividends and distributions 3,554,043 7,773,545 Cost of shares redeemed (19,466,295) (45,139,255) Change in net assets from capital share transactions (800,641) (19,401,264) Change in net assets (6,786,141) (2,386,101) NET ASSETS: Beginning of period 230,270,343 232,656,444 End of period $ 223,484,202 $ 230,270,343
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 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 a service fee. Class C shares are sold with no front-payment sales charge but are assessed a contingent deferred sales charge if redeemed within one year from the date of purchase and a level-payment charge for service and distribution fees from date of purchase through six years thereafter. Class Y shares are offered only to institutions acting for investors in a fiduciary, advisory, agency, custodial or similar capacity, are not offered directly to retail customers, and are sold at net asset value with no sales charge, no redemption fee, no contingent deferred sales charge and no service or distribution fees. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 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: Municipal securities which have remaining maturities of more than 60 days are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued at the mean of bid and asked quotations and, in the case of other securities, at fair value determined under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeded 60 days. (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. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premiums and accretion of discounts. (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) 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. (5) 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. Banc One Investment Advisors Corporation (the "Adviser") became Adviser to the Fund, effective September 11, 1995. 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 at the annual rate of 0.14 of 1% of the net assets of the Fund. The Fund also has an Administration Agreement with Aquila Management Corporation (the "Administrator"), the Fund's founder and sponsor. Under this Agreement, the Administrator provides all administrative services, other than those relating to the management of the Fund's investments. These include 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 at the annual rate of 0.26 of 1% of the net assets of the Fund. 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 lesser of (i) 2.5% of the first $30 million of average annual net assets of the Fund plus 2% of the next $70 million of such assets and 1.5% of its average annual net assets in excess of $100 million, or (ii) 25% of the Fund's total annual investment income. The payment of the above fees at the end of any month will be reduced or postponed so that at no time will there be any accrued but unpaid liability under this expense limitation. No such reduction in fees was required during the six months ended June 30, 1996. For the six months ended June 30, 1996, the Fund incurred fees under the Advisory Agreement and Administration Agreement of $157,525 and $292,547, respectively. 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 Kentucky, with the bulk of sales commissions inuring to such dealers. For the six months ended June 30, 1996, the Distributor received sales commissions in the amount of $13,239. 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 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 ("Qualified Recipients"). The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the six months ended June 30, 1996, service fees on Class A Shares amounted to $169,390, of which the Distributor received $1,898. 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 April 1, 1996 through June 30, 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 April 1, 1996 through June 30, 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: During the six months ended June 30, 1996, purchases of securities and proceeds from the sales of securities aggregated $12,336,803 and $14,558,190, respectively. At June 30, 1996, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $8,100,915 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $1,067,494, for a net unrealized appreciation of $7,033,421. At June 30, 1996, the Fund has a capital loss carryover of approximately $578,976 which is available to offset future net realized gains on securities transactions to the extent provided for in the Internal Revenue Code. Of this amount, $538,426 expires at December 31, 2002 and the balance of $40,550 expires at December 31, 2003. To the extent that this loss is used to offset future realized capital gains, it is probable the gains so offset will not be distributed. NOTE D - PORTFOLIO ORIENTATION: Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. NOTE E - DISTRIBUTIONS: The Fund declares dividends daily from net investment income and makes payments monthly in additional shares at the net asset value per share or in cash, at the shareholder's option. Net realized capital gains, if any, are distributed annually. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, 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. Further, a small portion of the dividends may, under some circumstances, be subject to ordinary income taxes. For certain shareholders, some dividends may, under some circumstances, be subject to the alternative minimum tax. Also, annual capital gains distributions, if any, are taxable. NOTE F - CUSTODIAN FEES: The Fund has negotiated an expense offset arrangement with its custodian, Bank One Trust Company, N.A., an affiliate of the Adviser, wherein it receives credit toward the reduction of custodian fees whenever there are uninvested cash balances. During the six months ended June 30, 1996, the Fund's custodian fees amounted to $18,505, of which $11,700 was offset by such credits. The Fund could have invested its cash balances in an income-producing asset if it had not agreed to a reduction in fees under the expense offset arrangement with the custodian. NOTE G - CAPITAL SHARE TRANSACTIONS: Transactions in Capital Shares of the Fund were as follows:
Six Months Ended Year Ended June 30, 1996 December 31, 1995 Shares Amount Shares Amount CLASS A SHARES: Proceeds from shares sold 981,647 $10,337,146 1,723,240 $17,964,446 Reinvested dividends and distributions 338,110 3,552,934 743,680 7,773,545 Cost of shares redeemed (1,486,941) (15,592,966) (4,315,370) (45,139,255) Exchanged into Class Y Shares (369,589) (3,858,514) _ _ Net change (536,773) $(5,561,400) (1,848,450) $(19,401,264) Period Ended June 30, 1996* Shares Amount CLASS C SHARES: Proceeds from shares sold 107 $ 1,103 Reinvested dividends and distributions _ _ Cost of shares redeemed _ _ Net change 107 $ 1,103 Period Ended June 30, 1996* Shares Amount CLASS Y SHARES: Proceeds from shares sold 88,246 $ 914,848 Reinvested dividends and distributions 107 1,109 Exchanged from Class A Shares 369,589 3,858,514 Cost of shares redeemed (1,431) (14,815) Net Change 456,511 $4,759,656 Total transactions in Fund shares (80,155) $(800,641) (1,848,450) $(19,401,264) * From April 1, 1996 (date of inception) through June 30, 1996.
CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (UNAUDITED) For a share outstanding throughout each period
Six Class Class Months Class A(1) C(2) Y(2) Ended Period Ended June 30, Year Ended December 31 June 30, 1996 1996 1995 1994 1993 1992 1991 ------------- ------ ------------------------------------ Net Asset Value, Beginning of Period $10.47 $10.47 $10.71 $9.97 $10.93 $10.49 $10.39 $10.00 Income from Investment Operations: Net investment income 0.16 0.15 0.30 0.60 0.60 0.62 0.66 0.66 Net gain (loss) on securities (both realized and unrealized)(0.04) (0.03) (0.28) 0.74 (0.96) 0.47 0.19 0.41 Total from Investment Operations 0.12 0.12 0.02 1.34 (0.36) 1.09 0.85 1.07 Less Distributions: Dividends from net investment income (0.16) (0.15) (0.30) (0.60) (0.60) (0.62) (0.66) (0.66) Distributions from capital gains - - - - - (0.03) (0.09) (0.02) Total Distributions (0.16) (0.15) (0.30) (0.60) (0.60) (0.65) (0.75) (0.68) Net Asset Value, End of Period $10.43 $10.44 $10.43 $10.71 $9.97 $10.93 $10.49 $10.39 Total Return (not reflecting sales charge) (%) 1.15# 1.19# 0.16# 13.75 (3.31) 10.50 8.48 10.97 Ratios / Supplemental Data Net Assets, End of Period ($ thousands) 1 4,766 218,718 230,270 232,656 258,632 192,600 114,798 Ratio of Expenses to Average Net Assets (%) - 0.61* 0.77* 0.79 0.72 0.59 0.42 0.27 Ratio of Net Investment Income to Average Net Assets (%) 5.19* 5.95* 5.60* 5.75 5.81 5.67 6.21 6.53 Portfolio Turn- over Rate (%) 5.52# 5.52# 5.52# 17.09 35.25 31.29 50.33 16.69 Net investment income 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: Net Investment Income ($) 0.16 0.15 0.30 0.60 0.60 0.60 0.63 0.60 Ratio of Expenses to Average Net Assets (%) 1.63* 0.62* 0.78* 0.80 0.73 0.73 0.68 0.84 Ratio of Net Investment Income to Average Net Assets (%) 3.56* 5.94* 5.59* 5.74 5.80 5.52 5.95 5.96 (1) Designated as Class A Shares on April 1, 1996. (2) New Class of Shares established on April 1, 1996. # Not annualized * Annualized.
Note: Effective September 11, 1995, Banc One Investment Advisors Corporation became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc. See accompanying notes to financial statements. REPORT ON THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 26, 1996.* At the meeting, the following matters were submitted to a shareholder vote and approved: (i) the election of Lacy B. Herrmann, Thomas A. Christopher, Douglas Dean, Diana P. Herrmann, Ann R. Leven, Theodore T. Mason, Anne J. Mills, William J. Nightingale, and James R. Ramsey as Trustees to hold office until the next annual meeting of the Fund's shareholders or until his or her successor is duly elected (each Trustee received at least 14,374,826 affirmative votes (98.57%); no more than 208,789 votes were withheld for any Trustee (1.43%)), and (ii) the ratification of the selection of KPMG Peat Marwick LLP as the Fund's independent auditors for the fiscal year ending December 31, 1996 (votes for: 13,979,337 (95.86%); votes against: 38,526 (0.26%); abstentions: 561,770 (3.85%); broker non-votes: 3,982 (0.03%)). Special Meetings of the Fund's Class C and Class Y Shareholders were held on March 29, 1996 and April 4, 1996, respectively. **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 Class Y Shareholders of the Fund, the 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 date for this meeting, 21,620,751 shares of the Fund were outstanding and entitled to vote. The holders of 14,583,615 shares (67.45%) entitled to vote were present in person or by proxy at the meeting. ** 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. INVESTMENT ADVISER BANC ONE INVESTMENT ADVISORS CORPORATION 416 West Jefferson Street Louisville, Kentucky 40202 ADMINISTRATOR AND FOUNDER AQUILA MANAGEMENT CORPORATION 380 Madison Avenue, Suite 2300 New York, New York 10017 BOARD OF TRUSTEES Lacy B. Herrmann, Chairman Thomas A. Christopher Douglas Dean Diana P. Herrmann Ann R. Leven Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Lacy B. Herrmann, President Jerry G. McGrew, Senior Vice President L. Michele Crutcher, 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. -----END PRIVACY-ENHANCED MESSAGE-----