-----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, Vdkm5ADPX8UB5wrPDOwzq8xnSEqyIs7dR48SnWyFPUc7IiaFdijpZ8AdN+DfgFrZ DifXgnXNOX7kO9d+YmooQw== 0000812006-00-000007.txt : 20000307 0000812006-00-000007.hdr.sgml : 20000307 ACCESSION NUMBER: 0000812006-00-000007 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000306 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-30D SEC ACT: SEC FILE NUMBER: 811-05086 FILM NUMBER: 561400 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-30D 1 MANAGER AND FOUNDER AQUILA MANAGEMENT CORPORATION 380 Madison Avenue, Suite 2300 New York, New York 10017 INVESTMENT SUB-ADVISER BANC ONE INVESTMENT ADVISORS CORPORATION 416 West Jefferson Street Louisville, Kentucky 40202 BOARD OF TRUSTEES Lacy B. Herrmann, Chairman Thomas A. Christopher Douglas Dean Diana P. Herrmann Carroll F. Knicely Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Diana P. Herrmann, President Jerry G. McGrew, Senior Vice President L. Michele Robbins, Senior Vice President Teresa M. Blair, 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. ANNUAL REPORT DECEMBER 31, 1999 CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [Logo of Churchill Tax-Free Fund of Kentucky: a circle with a standing Pegasus] [Logo of the Aquila Group of Funds: an eagle's head] ONE OF THE AQUILAsm GROUP OF FUNDS [Logo of Churchill Tax-Free Fund of Kentucky: a circle with a standing Pegasus] SERVING KENTUCKY INVESTORS FOR OVER A DECADE CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT "WE TAKE SPECIAL CARE TO ENSURE YOUR SAFETY" February 22, 2000 Dear Fellow Shareholders: Every now and then, we come across something that triggers a special point worth considering. This happened to us on a recent trip on United Airlines. When a pre-flight announcement was made that stated, "We take special care to ensure your safety," that remark brought home to us a point that we practice on a continuous basis with Churchill Tax-Free Fund of Kentucky. We know from our surveys that most of the shareholders of Churchill Tax-Free Fund of Kentucky are looking forward to retiring or have already retired. These are a very special group of people - and we work very hard to make sure that we are addressing their needs. Once one is no longer in the work force, it is essential that very careful attention be paid to whatever financial resources are available to ensure that these resources are available when needed. It is just as important that these financial resources produce the kind of return, on a consistent basis, that our shareholders can count on. SAFETY Safety with municipal securities is a very important factor to which management of your Fund pays considerable attention. Just like the United Airlines announcement, "we take special care to ensure your safety" with all the municipal securities in the Fund. As you probably know, municipal securities have various credit ratings. These ratings attempt to measure the kind of safety and trustworthiness that the securities represent. With Churchill Tax-Free Fund of Kentucky, we specifically limit the credit ratings to those within the top four grades - AAA, AA, A, and Baa. This world in which we live is changing extremely rapidly. Therefore, we feel it is important that we ensure that the majority of securities in the Fund's portfolio are within the top TWO credit grades - AAA and AA - for your safety. Through our portfolio management, we very carefully monitor the characteristics of each investment and every type of investment in the portfolio. Therefore, we do not expect "surprises" from any of the securities that are in the portfolio of the Fund. Recently, the marketplace for municipal securities has made it such that the difference in yield for a AAA or AA credit rating versus a Baa credit rating is relatively little. Therefore, our approach is to go with the best. Obviously, if one can buy securities which provide a top rating without paying any significant premium for them, we prefer to go in that direction. We want you to know, that at the report date of December 31, 1999, the combination of AAA and AA securities amounted to over 85% of the total assets in the portfolio of your Fund. In this way, we feel that "we take special care to ensure your safety." MATURITY OF TAX-FREE MUNICIPAL BONDS Another factor that we feel is important in building quality for your investment is the maturity structure of the municipal bonds in the portfolio. As we have explained to you in the past, longer-term maturity bonds will usually produce a higher return than short-term bonds. However, such longer maturity bonds also have a higher degree of volatility of price fluctuations. Therefore, we have structured the average maturity of Churchill Tax-Free Fund of Kentucky to be at a somewhat intermediate level - currently 14.5 years. This level is produced by using a "laddered" approach to the selection of bonds in terms of their maturity. We have a certain number of short-term bonds and a certain number of long-term bonds, but the overall average of these maturities run at an intermediate level. In this way, we can capture a substantial amount of possible income level available from the bonds, without exposing the portfolio to an undue level of volatility. Our goal is to maintain a reasonably high level of stability for the share net asset value of the Fund, while producing the kind of tax-free return that people want to see from their investment. This is another strategy that we use in building quality, safety, and stability into your investment in Churchill Tax-Free Fund of Kentucky. RELIABILITY OF PAYMENTS We also recognize that most of our shareholders depend upon the monthly tax-free income produced by Churchill Tax-Free Fund of Kentucky. Shareholders want to know that the income from the Fund is there when the time comes to pay various bills. The quality character of the portfolio ensures that this is the case. We want to make sure that, to the best of our ability, the monthly payments add up to a satisfactory level of income that you can be SURE will be there when you need it. YOUR CONFIDENCE IS APPRECIATED As always, we again wish to express our appreciation for the confidence you have shown by your investment in Churchill Tax-Free Fund of Kentucky. We can assure you that we will continually do our best to merit your continued level of trust. Sincerely, Diana P. Herrmann President Lacy B. Herrmann Chairman, Board of Trustees PERFORMANCE REPORT The following graph illustrates the value of $10,000 invested in the Class A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended December 31, 1999 as compared with the Lehman Brothers Quality Intermediate Municipal Bond Index and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Lehman Index does not include any operating expenses nor sales charges and being nationally oriented, does not reflect state specific bond market performance. [Graphic of a line chart with the following information:] 12/89 $10,000 $9,600 $10,000 $10,000 12/90 10,751 10,229 10,656 10,625 12/91 11,948 11,330 11,804 10,941 12/92 12,822 12,332 12,847 11,266 12/93 14,091 13,626 14,196 11,582 12/94 13,706 13,188 13,740 11,883 12/95 15,597 14,972 15,598 12,191 12/96 16,262 15,653 16,307 12,587 12/97 17,453 16,884 17,590 12,801 12/98 18,500 17,740 18,482 13,006 12/99 18,554 17,493 18,224 13,354
Lehman Brothers Quality Intermediate Fund's Class A Shares Municipal Bond Index With Sales Charge Without Sales Charge Cost of Living Index
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1999 SINCE 1 YEAR 5 YEARS 10 YEARS INCEPTION Class A (5/21/87) With Sales Charge (5.45)% 4.93% 5.75% 6.32% Without Sales Charge (1.51)% 5.80% 6.19% 6.66% Class C (4/1/96) With CDSC (3.42)% n/a n/a 3.66% Without CDSC (2.45)% n/a n/a 3.66% Class Y (4/1/96) No Sales Charge (1.46)% n/a n/a 4.68% Lehman Index 0.29% 6.24% 6.38% 6.51% (Class A) 0.29% n/a n/a 4.97% (Class C&Y) Total return figures shown for the Fund reflect any change in price and assume all distributions within the period were invested in additional shares. Returns for Class A shares are calculated with and without the effect of the initial 4% maximum sales charge. Returns for Class C shares are calculated with and without the effect of the 1% contingent deferred sales charge (CDSC), imposed on redemptions made within the first 12 months after purchase. Class Y shares are sold without any sales charge. The rates of return will vary and the principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each classes' income may be subject to federal and state income taxes. Past performance is not predictive of future investment results. MANAGEMENT DISCUSSION OF FUND PERFORMANCE The financial markets in 1999 will certainly be remembered for a number of dramatic events. One of the most noteworthy events affecting all markets was the absolute dominance in the equity market of technology stocks - primarily Internet stocks. There was unparalleled excitement. It seems everyone knows about AOL, Yahoo, and Dell. Investors who had never participated in the stock market were jumping in to buy shares in the latest, hottest "dot.com" of the day. It looked like you couldn't lose. There were many big winners, but there were some losers as well. Without a doubt, the most anticipated event of the year was the coming of and preparation for Y2K - the turn of the century. It was feared that all of the systems controlled by older computers would come to a complete stop at the stroke of midnight on December 31. Well, the lights stayed on, water faucets flowed, telephones rang, and airplanes didn't fall from the sky. We survived Y2K! As we have seen in each of the last five years, the equity market took center stage in 1999. The Dow Jones Industrial Average rose nearly 26%, to close at another record level - approximately 11,500, up from 9,200 at the close of 1998. A broader measure of the stock market, the Standard & Poor's 500 Index rose 21%. The technology-heavy NASDAQ Composite Index, however, was up nearly 84% from 1998. The Federal Reserve Bank raised interest rates three times in 1999. There was continued fear by the Fed that economic growth, a low level of inflation, and the rise of underlying commodity prices - particularly the price of oil - would eventually translate into a higher overall national level of inflation. Oil prices soared in 1999 - up 176%, as producers cut supply to boost prices from the 12-year low that we saw in 1998. The national unemployment rate dropped to 4.2% in 1999, versus 4.5% in 1998. However, the two measures of inflation, the Producer Price Index (PPI) and the Consumer Price Index (CPI), remained relatively stable, although slightly higher in 1999 at the levels of 3.0% and 2.7%, respectively. As you will recall, the price of bonds are affected inversely by changes in interest rates. When interest rates decrease, such as happened in 1998, bond prices rise. On the other hand, as interest rates increase, such as the case in 1999, bond prices decline. As a result of the Fed's actions in the year 1999, bond prices declined considerably. Consequently, the bond markets turned in their worst performance since 1994, and the second-worst performing year since 1973. In terms of total return, 30-year long maturity U. S. Treasury securities turned in the worst performance of all fixed-income investments. Total return of these U.S. Treasuries fell by 14.8% versus a positive return of 17.1% in 1998. On the other hand, long-term maturity municipal bonds had a negative return of -6.3%. As we have pointed out in our letters to you and as a direct result of the conservative intermediate maturity structure and the overall high quality of the portfolio, Churchill Tax-Free Fund of Kentucky was, however, among the best performers of all Kentucky municipal bond mutual funds. With falling interest rates in 1998, the total rate of return was 5.13% for its Class A shares. With rising interest rates, defensive actions taken by the Fund made it such that total return for 1999 was only -1.5%. This kind of performance compared very favorably with all other comparable fixed-income investments available in the market. From the standpoint of our shareholders, we have always attempted to provide a highly dependable amount of actual income from the Fund, regardless of what happens to bond prices in the marketplace. This we have done consistently over the years, as well as for 1998 and 1999, in terms of distribution return for the Fund's investors. The investment objective of Churchill Tax-Free Fund of Kentucky is to provide as high a level of triple tax-exempt current income as is consistent with the preservation of capital. This objective continues to be successfully addressed by adhering to a discipline of solid fundamental, conservative portfolio management ideals. The Fund continues to maintain an average credit quality of "AA". We are proud to have once again earned a [graphic: four stars] rating from Morningstar, an independent mutual fund rating service. Our "laddered" maturity structure helps us manage price volatility. The Fund has an average life of approximately 14.5 years and a duration of 6.3 years. We maintain a well-diversified portfolio of over 150 different Kentucky issues. We are forecasting another good year for the economy in 2000. Continued strong job growth, low inflation, and a high level of consumer confidence should help the economy to grow. While we are expecting a slightly higher inflation rate, as measured by the CPI, we are not looking for any dramatic spikes in inflation anytime in the near future, despite the vagaries of increased oil prices. INDEPENDENT AUDITORS' REPORT [Logo of KPMG: four rectangles with the letters KPMG in front of them] To the Board of Trustees and Shareholders of Churchill Tax-Free Fund of Kentucky: We have audited the accompanying statement of assets and liabilities of Churchill Tax-Free Fund of Kentucky, including the statement of investments, as of December 31, 1999, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. 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, 1999, 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 Churchill Tax-Free Fund of Kentucky as of December 31, 1999, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. /s/ KPMG LLP - ------------ New York, New York February 18, 2000 CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 STATE AGENCIES (15.7%) Kentucky Higher Education Student Loan Corporation Insured Student Loan Revenue, $ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,542,150 2,955,000 6.800%, 06/01/03 Aaa/AA- 3,099,056 1,915,000 7.100%, 12/01/11 Aaa/AA- 1,991,600 Kentucky Infrastructure Authority Revenue, 1,930,000 5.000%, 06/01/09, MBIA Insured Aaa/AAA 1,893,813 555,000 7.200%, 06/01/11 Aa3/A 581,363 635,000 5.250%, 06/01/12 Aa3/A 621,506 875,000 6.500%, 06/01/12 Aa3/A 914,375 125,000 5.250%, 06/01/14 Aa3/A 118,750 1,110,000 6.375%, 06/01/14, Pre-Refunded Aa3/A 1,201,575 135,000 5.250%, 06/01/15 Aa3/A 126,394 100,000 5.375%, 06/01/17 Aa3/A 93,750 1,500,000 5.375%, 02/01/18 Aa3/A 1,413,750 Kentucky Local Correctional Facilities Construction Authority Revenue, 5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 4,976,363 Kentucky Area Development 345,000 5.750%, 12/01/27, LOC Fifth Third Bank NR/AA 329,044 145,000 5.600%, 06/01/28, LOC Fifth Third Bank NR/AA 135,394 785,000 5.500%, 06/01/28, LOC Fifth Third Bank NR/AA 722,200 Kentucky Rural Economic Development Authority 3,110,000 7.250%, 06/01/17, LOC Bank One NR/AA 3,249,950 Kentucky State Properties and Buildings Commission Revenue, 3,000,000 6.250%, 09/01/07 Aaa/AAA 3,217,500 4,510,000 6.625%, 10/01/07, Pre-Refunded NR/AAA 4,752,413 365,000 7.000%, 02/01/06, Pre-Refunded NR/AAA 381,706 220,000 6.000%, 09/01/08 Aa3/A+ 231,550 500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 508,125 1,000,000 6.500%, 08/01/11, Pre-Refunded Aaa/AAA 1,048,750 400,000 5.000%, 09/01/13 Aa3/A+ 373,500 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/12, Pre-Refunded Aaa/AAA 1,071,250 34,595,827 COUNTY AGENCIES (11.6%) Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/16, Pre-Refunded A/NR 1,162,000 Floyd County Public Property, Courthouse Revenue, 510,000 5.500%, 09/01/14 NR/A 508,725 Jefferson County Kentucky Capital Projects, 1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,003,750 420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 403,200 1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,518,750 1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,521,100 5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 5,435,375 Kenton County Kentucky Public Property County Courthouse 455,000 5.000%, 03/01/14 A1/NR 415,187 250,000 5.000%, 03/01/15 A1/NR 225,937 Lincoln County Kentucky Public Properties Corp., 430,000 6.500%, 03/01/22 NR/NR* 449,350 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A 1,545,000 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/AA 514,375 570,000 7.550%, 03/01/10 NR/AA 592,920 4,500,000 6.500%, 03/01/19 NR/A 4,612,500 3,000,000 6.400%, 03/01/19 NR/A 3,108,750 Warren County Kentucky Justice, 2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,605,469 25,622,388 CITY/MUNICIPAL OBLIGATIONS (9.2%) Danville Kentucky Multi-City Lease Revenue, 545,000 5.000%, 09/01/11 NR/NR* 517,069 Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 498,125 Kentucky League Cities Funding Trust COP, 700,000 5.900%, 08/01/16, (Owensboro) NR/A 712,250 1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,777,169 Louisville Kentucky Public Properties Corp., 4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,386,525 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 1,984,800 7,000,000 6.200%, 03/01/18 Aa/NR 7,157,500 Munfordville Kentucky Industrial Development Revenue 2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,640,625 Richmond Kentucky District Court Facility Revenue 740,000 5.300%, 02/01/25 A3/NR 671,550 20,345,613 UTILITIES (6.0%) Carrolton & Henderson Kentucky Gas Revenue, 1,000,000 5.000%, 01/01/07, FSA Insured Aaa/AAA 971,250 Carrolton & Henderson Kentucky Gas Revenue, 1,750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 1,673,437 Hardin County, Kentucky Water District 1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA 986,250 Henderson County Kentucky Water District, Waterworks Revenue, 190,000 5.600%, 09/01/21 NR/NR* 174,325 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/16, Pre-Refunded NR/NR* 263,438 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue, 1,000,000 5.000%, 05/15/12, MBIA Insured Aaa/AAA 952,500 250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 233,125 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue (continued) 230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 211,025 2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 1,840,000 4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 3,835,975 1,525,000 6.500%, 05/15/24, MBIA Insured, Pre-Refunded Aaa/AAA 1,660,344 Muhlenberg County Kentucky Water District, Waterworks Revenue, 100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 100,250 110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 109,038 115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 113,706 North Nelson County Kentucky, Water Revenue 205,000 5.200%, 01/01/20 NR/NR* 182,194 13,306,857 POLLUTION CONTROL REVENUE (9.5%) Ashland Kentucky Pollution Control Revenue, (Ashland Oil) 3,000,000 6.650%, 08/01/09 Baa2/NR 3,112,500 Boone County Kentucky Pollution Control, (Dayton Power & Light) 4,000,000 6.500%, 11/15/22 Aa3/AA- 4,130,000 Boone County Kentucky Pollution Control, (Cinergy) 750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 705,000 Carroll County Kentucky Pollution Control Revenue, (LG&E Energy) 3,500,000 7.450%, 09/15/16 Aa2/AA- 3,766,875 2,910,000 6.250%, 02/01/18 Aa2/AA- 2,939,100 Jefferson County Kentucky Pollution Control Revenue, (LG&E Energy) 3,800,000 5.900%, 04/15/23 Aa2/AA 3,681,250 Wickliffe Kentucky Pollution Control, (Westvaco) 2,605,000 6.200%, 04/01/07 A1/A 2,607,970 100,000 6.375%, 04/01/26 A1/A 98,625 21,041,320 TRANSPORTATION (7.1%) Kenton County Kentucky Airport Board Airport Revenue, 4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 4,846,650 Kentucky Interlocal School Transportation Authority 150,000 5.100%, 03/01/05 NR/A 149,813 145,000 5.400%, 06/01/17 NR/A 138,294 200,000 6.000%, 12/01/20 NR/A 200,500 300,000 5.800%, 12/01/20 NR/A 292,125 400,000 6.000%, 12/01/20 NR/A 401,000 400,000 5.650%, 12/01/20 NR/A 381,500 350,000 5.600%, 12/01/20 NR/A 331,625 Kentucky State Turnpike Authority Economic Development Road Revenue, 120,000 8.500%, 07/01/06 A1/A+ 142,350 1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,092,500 3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,478,713 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/12, Pre-Refunded Baa1/A 4,250,000 15,705,070 HOSPITALS (9.6%) Floyd County Kentucky Hospital Revenue, 235,000 7.500%, 08/01/10, FHA Insured NR/AAA 244,374 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,043,750 Jefferson County Kentucky Health Facilities Revenue, 1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,449,375 100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 96,375 1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,206,062 230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 218,787 Kentucky Development Finance Authority Hospital Revenue, 750,000 7.000%, 09/01/06, Pre-Refunded NR/NR* 793,125 Kentucky Development Finance Authority Hospital Revenue (continued) 3,000,000 6.500%, 11/01/07, Pre-Refunded A1/A+ 3,157,500 420,000 5.250%, 02/01/09, FSA Insured Aaa/AAA 416,850 1,000,000 5.700%, 10/01/10, ACA Insured NR/A 987,500 2,150,000 6.750%, 11/01/12, Pre-Refunded A1/A+ 2,273,625 1,375,000 6.125%, 02/01/12, FSA Insured, (Kingsdaughters) Aaa/AAA 1,430,000 2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,331,000 3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,007,500 1,000,000 5.850%, 10/01/17, ACA Insured NR/A 928,750 1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,684,037 21,268,610 HOUSING (16.4%) Greater Kentucky Housing Assistance Corp. Multi-Family Housing Revenue, 320,000 6.300%, 07/01/15 Aaa/NR 326,800 2,025,000 6.050%, 07/01/22 Aaa/AAA 2,030,062 275,000 6.400%, 07/01/23 Aaa/NR 281,187 Jefferson County Kentucky Multi-Family Revenue, 1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,560,600 Jefferson County Kentucky Multi-Family Revenue, 1,200,000 5.650%, 08/20/34 (Kentucky Towers Project) Aaa/AAA 1,131,000 Kenton County Kentucky Industrial Development 1,000,000 6.125%, 12/01/17, FHA Insured Aa/NR 978,750 Kenton County Kentucky Industrial Development, 300,000 6.950%, 12/01/26 Aa/NR 313,125 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 261,780 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,031,250 200,000 7.250%, 01/01/09 Aaa/AAA 204,500 980,000 7.125%, 01/01/10 Aaa/AAA 1,013,075 725,000 5.300%, 07/01/10 Aaa/AAA 716,844 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,111,812 230,000 5.400%, 07/01/14 Aaa/AAA 222,812 750,000 6.250%, 07/01/15 Aaa/AAA 760,312 315,000 6.100%, 07/01/16 Aaa/AAA 316,181 1,270,000 6.400%, 01/01/17 Aaa/AAA 1,298,575 3,445,000 5.300%, 07/01/18 Aaa/AAA 3,160,787 1,065,000 5.550%, 07/01/18 Aaa/AAA 1,006,425 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,428,250 240,000 7.900%, 01/01/21 Aaa/AAA 235,764 80,000 8.100%, 01/01/22 Aaa/AAA 82,121 1,400,000 7.450%, 01/01/23 Aaa/AAA 1,443,750 275,000 5.850%, 07/01/27 Aaa/AAA 261,594 6,900,000 6.300%, 01/01/28 Aaa/AAA 6,917,250 3,120,000 6.375%, 07/01/28 Aaa/AAA 3,139,500 1,000,000 6.250%, 07/01/28 Aaa/AAA 997,500 36,231,606 SCHOOLS (10.3%) Boone County Kentucky School District Finance Corp. School Building Revenue, 1,750,000 6.750%, 09/01/09, Pre-Refunded Aa3/A 1,859,375 2,250,000 6.125%, 12/01/17, Pre-Refunded Aa3/NR 2,373,750 2,295,000 5.700%, 05/01/18 Aa3/NR 2,251,969 Boyd County Kentucky School District Finance Corp., 575,000 5.375%, 10/01/17 Aa3/NR 545,531 Christian County Kentucky School District Finance Corp., 500,000 5.000%, 06/01/09 Aa3/NR 485,625 Fayette County School Building Revenue, 160,000 5.350%, 01/01/14 Aa3/A+ 154,000 1,780,000 5.700%, 12/01/16 Aa3/A+ 1,766,650 Floyd County Kentucky School Building Revenue 250,000 5.000%, 12/01/09 Aa3/NR 242,500 Garrard County Kentucky School Building Revenue, 100,000 5.900%, 06/01/15 Aa3/NR 100,750 160,000 5.900%, 06/01/16 Aa3/NR 159,600 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 Aa3/NR 1,971,525 Hazard Kentucky Independent School District Finance Corp., 555,000 5.300%, 09/01/22 Aa3/NR 511,294 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 388,812 100,000 5.250%, 07/01/09 Aaa/AAA 100,000 500,000 5.875%, 01/01/11 Aa3/A+ 519,375 695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 652,431 Kenton County Kentucky School District Finance Corp. School Building Revenue, 100,000 5.250%, 03/01/06 Aa3/A+ 100,750 Lexington-Fayette Urban County Government Project U.K. Library 725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 651,594 Meade County Kentucky School District Finance Corp., 400,000 5.700%, 07/01/15 Aa3/NR 404,000 500,000 6.000%, 07/01/16 Aa3/NR 514,375 Middlesboro Kentucky Independent School District Finance Corp. 100,000 6.100%, 08/01/16 Aa3/NR 102,250 Nelson County Kentucky School Building Revenue, 1,820,000 5.750%, 04/01/15 Aa3/NR 1,815,450 Pike County Kentucky School District Finance Corp. School Building Revenue, 720,000 7.000%, 12/01/09, Pre-Refunded Aa3/A 759,161 Rowan County Kentucky School District Finance Corp. 215,000 5.600%, 06/01/16 Aa3/NR 211,238 Scott County Kentucky School Building Revenue, 2,750,000 5.900%, 06/01/18 Aa3/NR 2,743,125 Taylor County Kentucky School Building Revenue, 280,000 6.000%, 08/01/16 Aa3/NR 284,900 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14, Pre-Refunded Aa3/A 1,055,950 22,725,980 TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES (3.4%) Georgetown Kentucky Edl Instn Imp, 1,200,000 5.550%, 06/01/04 +, LOC Fifth/Third Bank A1/NR 1,200,000 Jefferson County Kentucky Retirement, 1,000,000 5.500%, 10/01/19 + NR/NR* 1,000,000 Kentucky Economic Development, 4,600,000 5.400%, 01/01/22 + Aaa/NR 4,600,000 Louisville & Jefferson County, 500,000 5.600%, 06/30/02 + M1G1/NR 500,000 Louisville Kentucky Indl, 250,000 5.550%, 09/01/01 +, LOC National City Bank NR/NR* 250,000 7,550,000 Total Investments (cost $217,319,572**) 98.8% 218,393,271 Other assets in excess of liabilities 1.2 2,726,392 Net Assets 100.0% 221,119,663
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (98.8%) S&P VALUE
* Any security not rated has been determined by the Investment Sub-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 identical. + The security has a maturity of more than one year, but has variable rate and demand features which qualify it as a short-term security. The rate disclosed is that currently in effect. This rate changes periodically based on market conditions or a specified market index. PORTFOLIO ABBREVIATIONS: ACA - American Capital Access AMBAC - American Municipal Bond Assurance Corp. FGIC - Financial Guaranty Insurance Co. FHA - Federal Housing Administration FSA - Financial Security Assurance MBIA - Municipal Bond Investors Assurance Corp. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1999 ASSETS Investments at value (cost $217,319,572) $ 218,393,271 Interest receivable 3,737,436 Receivable for investment securities sold 570,000 Receivable for Fund shares sold 15,727 Other assets 900 Total assets 222,717,334 LIABILITIES Payable for Fund shares redeemed 689,100 Cash overdraft 442,982 Dividends payable 290,032 Distribution fees payable 84,075 Management fee payable 12,150 Accrued expenses 79,332 Total liabilities 1,597,671 NET ASSETS $ 221,119,663 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 219,163 Additional paid-in capital 221,904,674 Accumulated net realized loss on investments (2,077,873) Net unrealized appreciation on investments 1,073,699 $ 221,119,663 CLASS A Net Assets $ 205,842,354 Capital shares outstanding 20,402,687 Net asset value and redemption price per share $ 10.09 Offering price per share (100/96 of $10.09 adjusted to nearest cent) $ 10.51 CLASS C Net Assets $ 1,931,723 Capital shares outstanding $ 191,549 Net asset value and offering price per share $ 10.08 Redemption price per share (*a charge of 1% is imposed on the redemption proceeds of the shares, or on the original price, whichever is lower, if redeemed during the first 12 months after purchase) $ 10.08* CLASS Y Net Assets $ 13,345,586 Capital shares outstanding $ 1,322,022 Net asset value, offering and redemption price per share $ 10.09
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 INVESTMENT INCOME: Interest income $ 13,460,227 Expenses: Management fee (note 3) $ 949,606 Distribution and service fees (note 3) 346,812 Transfer and shareholder servicing agent fees 134,210 Trustees' fees and expenses (note 8) 76,080 Legal fees 53,029 Shareholders' reports and proxy statements 45,616 Audit and accounting fees 26,750 Custodian fees 22,519 Registration fees and dues 17,408 Insurance 10,455 Miscellaneous 23,228 1,705,713 Expenses paid indirectly (note 7) (22,519) Net expenses 1,683,194 Net investment income 11,777,033 REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss from securities transactions (2,077,873) Change in unrealized depreciation on investments (13,367,712) Net realized and unrealized loss on investments (15,445,585) Net decrease in net assets resulting from operations $ (3,668,552)
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS OPERATIONS: Net investment income $ 11,777,033 $ 11,773,350 Net realized gain (loss) from securities transactions (2,077,873) 865,993 Change in unrealized depreciation on investments (13,367,712) (513,405) Change in net assets from operations (3,668,552) 12,125,938 DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6): Class A Shares: Net investment income (11,098,723) (11,135,477) Net realized gain on investments (712,904) (207,578) Class C Shares: Net investment income (61,991) (35,988) Net realized gain on investments (6,285) (671) Class Y Shares: Net investment income (754,212) (610,932) Net realized gain on investments (46,239) (11,388) Change in net assets from distributions (12,680,354) (12,002,034) CAPITAL SHARE TRANSACTIONS (NOTE 9): Proceeds from shares sold 22,053,760 28,425,496 Reinvested dividends and distributions 6,456,809 6,370,081 Cost of shares redeemed (35,993,090) (26,247,691) Change in net assets from capital share transactions (7,482,521) 8,547,886 Change in net assets (23,831,427) 8,671,790 NET ASSETS: Beginning of period 244,951,090 236,279,300 End of period $ 221,119,663 $ 244,951,090
YEAR ENDED DECEMBER 31, 1999 1998
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION 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 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 and are not offered directly to retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. On April 30, 1998 the Fund established Class I shares, which are offered and sold only through financial intermediaries and are not offered directly to retail investors. At December 31, 1999 there were no Class I shares outstanding. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued at fair value 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. 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. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue discount. Market discount is recognized upon disposition of the security. 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) 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. e) 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: Aquila Management Corporation (the "Manager"), the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. The portfolio management of the Fund has been delegated to a Sub-Adviser as described below. Under the Advisory and Administration Agreement, the Manager provides all administrative services to the Fund, other than those relating to the day-to-day portfolio management. The Manager's services include providing the office of the Fund and all related services as well as overseeing the activities of the Sub-Adviser and all the various support organizations to the Fund such as the shareholder servicing agent, custodian, legal counsel, auditors and distributor and additionally maintaining the Fund's accounting books and records. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's net assets. Banc One Investment Advisors Corporation (the "Sub-Adviser") serves as the Investment Sub-Adviser for the Fund under a Sub-Advisory Agreement between the Manager and the Sub-Adviser. Under this agreement, the Sub-Adviser continuously provides, subject to oversight of the Manager and the Board of Trustees of the Fund, the investment program of the Fund and the composition of its portfolio, arranges for the purchases and sales of portfolio securities, and provides for daily pricing of the Fund's portfolio. For its services, the Sub-Adviser is entitled to receive a fee from the Manager which is payable monthly and computed as of the close of business each day at the annual rate of 0.14 of 1% on the Fund's net assets. For the year ended December 31, 1999, the Fund incurred fees for advisory and administrative services of $949,606. Specific details as to the nature and extent of the services provided by the Manager and the Sub-Adviser 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 ("Qualified Recipients") or others 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 0.15% of the Fund's average net assets represented by Class A Shares. For the year ended December 31, 1999, service fees on Class A Shares amounted to $331,919, of which the Distributor received $7,455. 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, 1999, amounted to $11,170. 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, 1999, amounted to $3,723. The total of these payments with respect to Class C Shares amounted to $14,893, of which the Distributor received $7,616. 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 Kentucky, with the bulk of sales commissions inuring to such dealers. For the year ended December 31, 1999, the Distributor received commissions of $21,878 on sales of Class A Shares. 4. PURCHASES AND SALES OF SECURITIES During the year ended December 31, 1999, purchases of securities and proceeds from the sales of securities aggregated $14,772,849 and $29,119,782, respectively. At December 31, 1999, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $4,904,931 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $3,831,232 for a net unrealized appreciation of $1,073,699. At December 31, 1999, the Fund has a capital loss carryover of $1,820,125 which expires on December 31, 2007. This carryover is available to offset future net realized gains on securities transactions to the extent provided for in the Internal Revenue Code. 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. 5. 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. 6. DISTRIBUTIONS The Fund declares dividends daily from net investment income and makes payments monthly in additional shares at the net asset value per share, in cash, or in a combination of both, at the shareholder's option. Net realized capital gains, if any, are distributed annually and are taxable. An additional distribution of gain may be made to the extent necessary to avoid payment of Federal taxes by the Fund. 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 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. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividends may, under some circumstances, be subject to the alternative minimum tax. 7. 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. 8. TRUSTEES' FEES AND EXPENSES During the fiscal year there were nine Trustees, two of whom are affiliated with the Manager and are not paid any trustee fees. Trustees' fees paid during the year were at the average annual rate of $6,150 for carrying out their responsibilities and attendance at regularly scheduled Board Meetings. If additional or special meetings are scheduled for the Fund, separate meeting fees are paid for each such meeting to those Trustees in attendance. The Fund also reimburses Trustees for expenses such as travel, accommodations, and meals incurred in connection with attendance at regularly scheduled or special Board Meetings and at the Annual Meeting and outreach meetings of Shareholders. For the fiscal year ended December 31, 1999 such reimbursements averaged approximately $3,800 per Trustee. 9. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows: SHARES AMOUNT SHARES AMOUNT CLASS A SHARES: Proceeds from shares sold 1,525,380 $ 16,084,824 2,030,723 $ 21,961,981 Reinvested distributions 607,660 6,362,827 584,567 6,317,336 Cost of shares redeemed (2,966,462) (31,041,782) (2,330,285) (25,200,489) Net change (833,422) (8,594,131) 285,005 3,078,828 CLASS C SHARES: Proceeds from shares sold 119,878 1,262,958 29,609 319,908 Reinvested distributions 4,864 50,548 2,314 25,002 Cost of shares redeemed (21,003) (217,677) (22,308) (240,974) Net change 103,739 1,095,829 9,615 103,936 CLASS Y SHARES: Proceeds from shares sold 439,346 4,705,978 568,483 6,143,607 Reinvested distributions 4,179 43,434 2,555 27,743 Cost of shares redeemed (446,192) (4,733,631) (74,568) (806,228) Net change (2,667) 15,781 496,470 5,365,122 Total transactions in Fund shares (732,350) $ (7,482,521) 791,090 $ 8,547,886 CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
1999 1998 1997 1996 1995 Net Asset Value, Beginning of Period $10.81 $10.81 $10.55 $10.71 $9.97 Income from Investment Operations: Net investment income 0.52 0.53 0.55 0.55 0.60 Net gain (loss) on securities (both realized and unrealized) (0.68) 0.01 0.27 (0.12) 0.74 Total from Investment Operations (0.16) 0.54 0.82 0.43 1.34 Less Distributions (note 6): Dividends from net investment income (0.53) (0.53) (0.55) (0.59) (0.60) Distributions from capital gains (0.03) (0.01) (0.01) - - Total Distributions (0.56) (0.54) (0.56) (0.59) (0.60) Net Asset Value, End of Period $10.09 $10.81 $10.81 $10.55 $10.71 Total Return (not reflecting sales charge)(%) (1.51) 5.13 8.08 4.17 13.75 Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 205,842 229,667 226,477 222,889 230,270 Ratio of Expenses to Average Net Assets (%) 0.72 0.73 0.73 0.75 0.80 Ratio of Net Investment Income to Average Net Assets (%) 4.95 4.89 5.19 5.22 5.74 Portfolio Turnover Rate (%) 6.35 12.79 22.39 8.94 17.09 The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 0.71 0.72 0.72 0.74 0.79
CLASS A(1) YEAR ENDED DECEMBER 31,
(1) Designated as Class A Shares on April 1, 1996. Note: Effective September 11, 1995, Banc One Investment Advisors Corporation became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc. and effective on May 1, 1998, pursuant to new management arrangements, was appointed as the Fund's Investment Sub-Adviser. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C(1) CLASS Y(1) PERIOD(2) PERIOD(2) YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED 1999 1998 1997 DEC. 31, 1996 1999 1998 1997 DEC. 31, 1996 Net Asset Value, Beginning of Period $10.81 $10.81 $10.55 $10.47 $10.82 $10.82 $10.55 $10.47 Income from Investment Operations: Net investment income 0.43 0.44 0.46 0.37 0.53 0.54 0.56 0.43 Net gain on securities (both realized and unrealized) (0.69) 0.01 0.27 0.11 (0.69) 0.02 0.29 0.11 Total from Investment Operations (0.26) 0.45 0.73 0.48 (0.16) 0.56 0.85 0.54 Less Distributions (note 6): Dividends from net investment income (0.44) (0.44) (0.46) (0.40) (0.54) (0.55) (0.57) (0.46) Distributions from capital gains (0.03) (0.01) (0.01) - (0.03) (0.01) (0.01) - Total Distributions (0.47) (0.45) (0.47) (0.40) (0.57) (0.56) (0.58) (0.46) Net Asset Value, End of Period $10.08 $10.81 $10.81 $10.55 $10.09 $10.82 $10.82 $10.55 Total Return (not reflecting sales charge)(%) (2.45) 4.24 7.16 4.72+ (1.46) 5.26 8.34 5.24+ Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 1,932 949 845 433 13,346 14,335 8,957 5,823 Ratio of Expenses to Average Net Assets (%) 1.56 1.59 1.57 1.56* 0.57 0.58 0.57 0.58* Ratio of Net Investment Income to Average Net Assets (%) 4.09 4.04 4.30 4.34* 5.09 5.03 5.31 5.41* Portfolio Turnover Rate (%) 6.35 12.79 22.39 8.94 6.35 12.79 22.39 8.94 The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 1.55 1.57 1.56 1.55* 0.56 0.57 0.56 0.56*
(1) New Class of Shares established on April 1, 1996. (2) From April 1, 1996 to December 31, 1996. + Not annualized. * Annualized. See accompanying notes to financial statements. FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED) This information is presented in order to comply with a requirement of the Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED. For the fiscal year ended December 31, 1999, $11,777,033 of dividends paid by Churchill Tax-Free Fund of Kentucky, constituting 92.88% of total dividends paid during fiscal 1999, were exempt-interest dividends; $765,416 of dividends paid, constituting 6.04% of total dividends paid during fiscal 1999, were capital gain dividends; and the balance was ordinary dividend income. Prior to January 31, 2000, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 1999 CALENDAR YEAR. -----END PRIVACY-ENHANCED MESSAGE-----