-----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, JdiY21v/ssdzTEe9+UUis2bLNXG13OTFBtjahYoBho2eoiCo9ORw4mT/k1G/WGo9 FbUkTk2H9MXN/EGA9igCVA== /in/edgar/work/20000822/0000812006-00-000016/0000812006-00-000016.txt : 20000922 0000812006-00-000016.hdr.sgml : 20000922 ACCESSION NUMBER: 0000812006-00-000016 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000822 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: 707804 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 0001.txt MANAGER 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 Carroll F. Knicely Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Diana P. Herrmann, President Thomas S. Albright, Senior Vice President and Portfolio Manager Jerry G. McGrew, Senior Vice President L. Michele Robbins, Senior Vice President Teresa M. Blair, Vice President James M. McCullough, 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 757 Third Avenue New York, New York 10017 Further information is contained in the Prospectus, which must precede or accompany this report. SEMI-ANNUAL REPORT JUNE 30, 2000 CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a circle] [Logo of the Aquila Group of Funds: an eagle's head] ONE OF THE AQUILASM GROUP OF FUNDS SERVING KENTUCKY INVESTORS FOR OVER A DECADE CHURCHILL TAX-FREE FUND OF KENTUCKY SEMI-ANNUAL REPORT "CONSISTENCY" August 18, 2000 Dear Fellow Shareholder: If there is one word that captures the essence of Churchill Tax-Free Fund of Kentucky, that word is "CONSISTENCY." The Fund has constantly attempted to provide: * CONSISTENCY of share value, * CONSISTENCY in the TAX-FREE return produced by the Fund * CONSISTENCY of quality of investments and * CONSISTENCY in the type of investments for the Fund. CONSISTENCY OF SHARE VALUE As you are aware, management of the Fund cannot control interest rates or their effect upon the market. Interest rates are primarily controlled by the Federal Reserve Board. The Fed increases or decreases rates as they feel is necessary in order to maintain the stability and growth potential of the economy of the United States. When the Federal Reserve feels that growth in the economy is increasing at too rapid a pace, they tend to increase interest rates and reduce the supply of money in order to slow down the rate of growth. (This is what has happened during the past year or so.) On the other hand, when the Federal Reserve feels that the economy needs stimulation, there is a tendency to decrease interest rates and increase the supply of money in order to provide an additional impetus to the overall economy. Interest rate changes have the effect in the marketplace of creating changes in the share value of fixed-income securities such as the Fund. As we have previously indicated, when interest rates go up, the share value goes down. And, when interest rates go down, the share value goes up. What we have done is to use various investment management techniques to dampen the swings that can occur in the share value of the Fund. Despite the variations in share price that have taken place since the inception of the Fund, management of the Fund has strived to provide, to the maximum extent possible, CONSISTENCY in the value of the Fund's shares. This you will note from the chart below. [Graphic of a bar chart with the following information:] SHARE NET ASSET VALUE 5/21/87 $ 9.60 12/31/87 9.26 12/31/88 9.53 12/31/89 10.05 12/31/90 10.00 12/31/91 10.39 12/31/92 10.50 12/31/93 10.93 12/31/94 9.97 12/31/95 10.71 12/31/96 10.55 12/31/97 10.81 12/31/98 10.81 12/31/99 10.09 6/30/2000 10.15 Since the majority of investors using the Fund are pre-retirees or retirees, this action by the Fund of maintaining a stable share value is what we feel is in the best interest of all shareholders. We want you to know that when you need money from your investment in the Fund, it is THERE - at approximately the same value that it has been all along. CONSISTENCY IN THE TAX-FREE RETURN PRODUCED BY THE FUND When you look at the Fund in terms of income produced on a year-by-year basis, you will observe that we have tried to provide the maximum level of yearly TAX-FREE return as can be produced by a quality-oriented portfolio of municipal securities. As you are aware, this level of return will vary from year to year as interest rate changes by the Federal Reserve affect the overall marketplace. Nevertheless, there is a CONSISTENCY to the level of return that the Fund would like to provide for you and other shareholders. Although the income level received by shareholders will vary from year to year, it does have a CONSISTENCY to it. And, this is why shareholders buy and own the Fund - for that CONSISTENCY of TAX-FREE income. During recent years, the level of SPENDABLE TAX-FREE return provided to shareholders has ranged between 4.65% to 5.37% based upon an average share value of the Fund. Shareholders of Churchill Tax-Free Fund of Kentucky should not buy or sell the Fund based upon capital appreciation, such as they would with an equity or stock fund. An analogy for a shareholder of Churchill Tax-Free Fund of Kentucky would be a person buying a dairy cow for the steady stream of milk it supplies, not for what it might be worth when he/she sells it. What the Fund is providing is a relatively steady stream of TAX-FREE income and a relatively stable share value. Shareholders buy and hold their position in Churchill Tax-Free Fund of Kentucky for the longer term, not for a quick in and out. Therefore, shareholders do NOT and should NOT look upon the Fund for its total return - but, rather for the income stream it provides in the form of TAX-FREE dividends. Also, when you look at the recent level of TAX-FREE income provided by the Fund and measure that against the taxable income required to provide the same amount of money in your pocket, here's what things look like. [Graphic of a 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 RATE OF RETURN TAXABLE EQUIVALENT RATE TRIPLE TAX-FREE DISTRIBUTION RATE TAX BRACKET 28% 4.90% 7.24% 31% 4.90% 7.66% 36% 4.90% 8.29% 40% 4.90% 8.80% CONSISTENCY OF QUALITY OF INVESTMENTS Since inception of the Fund, management has CONSISTENTLY sought high-quality investments for its shareholders. We don't like surprises. Nor, do shareholders like surprises. We believe the best way to avoid surprises is to stick with quality. The pie chart below gives you a breakdown of the quality of the individual securities of the Fund as at the Semi-Annual Report date of June 30, 2000. [Graphic of a pie chart with the following information:] PORTFOLIO DISTRIBUTION BY QUALITY AAA 63.62% AA 15.74% A 19.19% Below A and Not Rated 1.45% As you will recall, the Fund's prospectus restricts its investments to only the top four quality securities - AAA, AA, A, Baa - although there are nine different grades of quality associated with municipal bond investing ranging from the highest to the lowest. We have always tried to make sure that shareholders know that, to the maximum extent possible, their invested money will be there when they need it. The best way we know to accomplish this objective is by sticking with quality. This is why we CONSISTENTLY seek to maintain most of the Fund's money in the upper quality securities - AAA AND AA. As you will appreciate, the exact level of quality will vary from time to time based upon availability of securities in the marketplace to achieve the Fund's objective. CONSISTENCY IN THE TYPE OF INVESTMENTS FOR THE FUND Management of Churchill Tax-Free Fund of Kentucky has CONSISTENTLY embraced the idea that your investment should not only help shareholders financially, but also help your state and its communities. Thus, investments in the Fund are as diversified as possible. Diversification geographically and by type of project is another way of ensuring that your money is doing the best job possible for not only you, but also for your community and state. [Graphic of a pie chart with the following information:] PORTFOLIO DISTRIBUTION BY MARKET SECTOR Airports 2.52% Hospitals 9.79% Housing 15.58% Local Public Property 19.10% Pollution Control 10.29% School Building Revenues and Universities 11.22% Kentucky State Agencies 11.23% Turnpikes/Highways 4.25% Utilities 5.96% Other 10.06% SUMMARY As we have tried to illustrate in this report to you, the essence of Churchill Tax-Free Fund of Kentucky is CONSISTENCY. This is what we feel that shareholders are primarily interested in. And, this is exactly what we are trying to provide to you and other shareholders. CONSISTENCY OF APPRECIATION 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 CONSISTENTLY do our best to merit your continued level of trust. Sincerely, Diana P. Herrmann President Lacy B. Herrmann Chairman, Board of Trustees CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS JUNE 30, 2000 (UNAUDITED) STATE AGENCIES (15.6%) Kentucky Higher Education Student Loan Corporation Insured Student Loan Revenue, $ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,527,250 2,955,000 6.800%, 06/01/03 Aaa/AA- 3,073,200 1,915,000 7.100%, 12/01/11 Aaa/AA- 1,984,419 Kentucky Infrastructure Authority Revenue, 930,000 5.000%, 06/01/09, MBIA Insured Aaa/AAA 926,513 555,000 7.200%, 06/01/11 Aa3/A 577,433 635,000 5.250%, 06/01/12 Aa3/A 635,794 875,000 6.500%, 06/01/12 Aa3/A 911,094 1,110,000 6.375%, 06/01/14, Pre-Refunded Aa3/A 1,202,963 1,500,000 5.375%, 02/01/18 Aa3/A 1,436,250 Kentucky Local Correctional Facilities Construction Authority Revenue, 5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,096,656 Kentucky Area Development 345,000 5.750%, 12/01/27, LOC Fifth Third Bank NR/AA 331,631 145,000 5.600%, 06/01/28, LOC Fifth Third Bank NR/AA 136,481 785,000 5.500%, 06/01/28, LOC Fifth Third Bank NR/AA 725,144 Kentucky Rural Economic Development Authority 3,110,000 7.250%, 06/01/17, LOC Bank One NR/A+ 3,226,625 Kentucky State Properties and Buildings Commission Revenue, 3,000,000 6.250%, 09/01/07 Aaa/AAA 3,228,750 4,510,000 6.625%, 10/01/07, Pre-Refunded NR/AAA 4,707,312 365,000 7.000%, 02/01/06, Pre-Refunded NR/AAA 377,425 220,000 6.000%, 09/01/08 Aa3/A+ 234,850 500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 513,750 1,000,000 6.500%, 08/01/11, Pre-Refunded Aaa/AAA 1,040,970 400,000 5.000%, 09/01/13 Aa3/A+ 386,500 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/12, Pre-Refunded Aaa/AAA 1,061,250 33,342,260 COUNTY AGENCIES (11.7%) Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/16, Pre-Refunded A/NR 1,158,058 Floyd County Public Property, Courthouse Revenue, $ 510,000 5.500%, 09/01/14 NR/A $ 510,638 Jefferson County Kentucky Capital Projects, 1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,012,500 420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 412,650 1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,569,375 1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,555,950 5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 5,634,500 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A 1,530,000 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/AA 510,625 570,000 7.550%, 03/01/10 NR/AA 588,377 4,500,000 6.500%, 03/01/19 NR/A 4,640,625 3,000,000 6.400%, 03/01/19 NR/A 3,217,500 Warren County Kentucky Justice, 2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,670,156 25,010,954 CITY/MUNICIPAL OBLIGATIONS (8.9%) Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 506,250 Kentucky League Cities Funding Trust COP, 700,000 5.900%, 08/01/16, (Owensboro) NR/A 714,000 1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,779,313 Louisville Kentucky Public Properties Corp., 4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,350,738 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 1,992,000 7,000,000 6.200%, 03/01/18 Aa/NR 7,183,738 Munfordville Kentucky Industrial Development Revenue, 2,500,000 7.000%, 06/01/19, LOC Bank One NR/A+ 2,634,375 19,160,414 UTILITIES (6.0%) Carrolton & Henderson Kentucky Gas Revenue, 1,000,000 5.000%, 01/01/07, FSA Insured Aaa/AAA 977,500 Carrolton & Henderson Kentucky Gas Revenue, 1,750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 1,686,563 Hardin County, Kentucky Water District $ 1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA $ 1,005,000 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/16, Pre-Refunded NR/NR* 260,223 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue, 1,000,000 5.000%, 05/15/12, MBIA Insured Aaa/AAA 975,000 250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 239,688 2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 1,902,500 4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 3,927,550 1,525,000 6.500%, 05/15/24, MBIA Insured, Pre-Refunded Aaa/AAA 1,652,719 12,626,743 POLLUTION CONTROL REVENUE (10.1%) Ashland Kentucky Pollution Control Revenue, (Ashland Oil) 3,000,000 6.650%, 08/01/09 Baa2/NR 3,086,250 Boone County Kentucky Pollution Control, (Dayton Power & Light) 4,000,000 6.500%, 11/15/22 A2/BBB+ 4,080,000 Boone County Kentucky Pollution Control, (Cinergy) 750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 721,875 Carroll County Kentucky Pollution Control Revenue, (LG&E Energy) 4,500,000 7.450%, 09/15/16 A1/A 4,753,125 2,910,000 6.250%, 02/01/18 Aa1/A 2,942,738 Jefferson County Kentucky Pollution Control Revenue, (LG&E Energy) 3,800,000 5.900%, 04/15/23 Aa1/A 3,747,750 Wickliffe Kentucky Pollution Control, (Westvaco) 2,455,000 6.200%, 04/01/07 A3/BBB+ 2,458,683 21,790,421 TRANSPORTATION (7.6%) Kenton County Kentucky Airport Board Airport Revenue, 5,240,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 5,344,800 Kentucky Interlocal School Transportation Authority $ 150,000 5.100%, 03/01/05 NR/A $ 151,875 145,000 5.400%, 06/01/17 NR/A 140,288 200,000 6.000%, 12/01/20 NR/A 202,750 300,000 5.800%, 12/01/20 NR/A 298,875 400,000 6.000%, 12/01/20 NR/A 405,500 400,000 5.650%, 12/01/20 NR/A 391,500 350,000 5.600%, 12/01/20 NR/A 340,375 Kentucky State Turnpike Authority Economic Development Road Revenue, 120,000 8.500%, 07/01/06 A1/A+ 141,450 1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,097,500 3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,531,288 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/12, Pre-Refunded Baa1/A 4,220,000 16,266,201 HOSPITALS (9.7%) Floyd County Kentucky Hospital Revenue, 225,000 7.500%, 08/01/10, FHA Insured NR/AAA 231,851 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,040,000 Jefferson County Kentucky Health Facilities Revenue, 1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,490,625 1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,193,125 Kentucky Development Finance Authority Hospital Revenue, 750,000 7.000%, 09/01/06, Pre-Refunded NR/NR* 784,688 3,000,000 6.500%, 11/01/07, Pre-Refunded A1/A+ 3,127,500 1,000,000 5.700%, 10/01/10, ACA Insured NR/A 1,001,250 2,150,000 6.750%, 11/01/12, Pre-Refunded A1/A+ 2,249,438 1,375,000 6.125%, 02/01/12, FSA Insured, (Kingsdaughters) Aaa/AAA 1,433,438 2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,428,125 3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,048,750 1,000,000 5.850%, 10/01/17, ACA Insured NR/A 956,250 1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,741,250 20,726,290 HOUSING (15.2%) Greater Kentucky Housing Assistance Corp. Multi-Family Housing Revenue, $ 320,000 6.300%, 07/01/15 Aaa/NR $ 328,000 2,025,000 6.050%, 07/01/22 Aaa/AAA 2,030,063 275,000 6.400%, 07/01/23 Aaa/NR 281,875 Jefferson County Kentucky Multi-Family Revenue, 1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,549,125 Kenton County Kentucky Industrial Development 1,000,000 6.125%, 12/01/17, FHA Insured Aa/NR 987,500 Kenton County Kentucky Industrial Development, 300,000 6.950%, 12/01/26, FHA Insured Aa/NR 315,375 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 261,755 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,032,500 175,000 7.250%, 01/01/09 Aaa/AAA 177,560 980,000 7.125%, 01/01/10 Aaa/AAA 1,009,733 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,124,250 230,000 5.400%, 07/01/14 Aaa/AAA 226,550 750,000 6.250%, 07/01/15 Aaa/AAA 766,875 315,000 6.100%, 07/01/16 Aaa/AAA 318,544 1,245,000 6.400%, 01/01/17 Aaa/AAA 1,280,794 3,000,000 5.300%, 07/01/18 Aaa/AAA 2,767,500 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,453,625 220,000 7.900%, 01/01/21 Aaa/AAA 224,950 80,000 8.100%, 01/01/22 Aaa/AAA 82,120 1,240,000 7.450%, 01/01/23 Aaa/AAA 1,274,100 6,900,000 6.300%, 01/01/28 Aaa/AAA 6,943,125 2,890,000 6.375%, 07/01/28 Aaa/AAA 2,922,513 1,130,000 6.250%, 07/01/28 Aaa/AAA 1,134,238 32,492,670 SCHOOLS (10.5%) Boone County Kentucky School District Finance Corp. School Building Revenue, 1,750,000 6.750%, 09/01/09, Pre-Refunded Aa3/A 1,841,875 2,250,000 6.125%, 12/01/17, Pre-Refunded Aa3/NR 2,359,688 2,295,000 5.700%, 05/01/18 Aa3/NR 2,300,738 Boyd County Kentucky School District Finance Corp., 575,000 5.375%, 10/01/17 Aa3/NR 560,625 Christian County Kentucky School District Finance Corp., $ 500,000 5.000%, 06/01/09 Aa3/NR $ 498,125 Fayette County School Building Revenue, 160,000 5.350%, 01/01/14 Aa3/A+ 159,400 1,780,000 5.700%, 12/01/16 Aa3/A+ 1,797,800 Floyd County Kentucky School Building Revenue 250,000 5.000%, 12/01/09 Aa3/NR 249,063 Garrard County Kentucky School Building Revenue, 100,000 5.900%, 06/01/15 Aa3/NR 103,125 160,000 5.900%, 06/01/16 Aa3/NR 163,600 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 Aa3/NR 2,000,625 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 165,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 172,838 205,000 6.200%, 01/01/06, MBIA Insured Pre-Refunded Aaa/AAA 213,969 100,000 5.250%, 07/01/09 Aaa/AAA 101,125 500,000 5.875%, 01/01/11 Aa3/A+ 518,125 695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 675,019 Kenton County Kentucky School District Finance Corp. School Building Revenue, 100,000 5.250%, 03/01/06 Aa3/A+ 102,000 Lexington-Fayette Urban County Government Project U.K. Library 725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 678,781 Meade County Kentucky School District Finance Corp., 400,000 5.700%, 07/01/15 Aa3/NR 407,500 500,000 6.000%, 07/01/16 Aa3/NR 519,375 Middlesboro Kentucky Independent School District Finance Corp. 100,000 6.100%, 08/01/16 Aa3/NR 103,875 Nelson County Kentucky School Building Revenue, 1,820,000 5.750%, 04/01/15 Aa3/NR 1,870,050 Pike County Kentucky School District Finance Corp. School Building Revenue, 720,000 7.000%, 12/01/09, Pre-Refunded Aa3/A 748,548 Rowan County Kentucky School District Finance Corp., 215,000 5.600%, 06/01/16 Aa3/NR 216,075 Scott County Kentucky School Building Revenue, $ 2,750,000 5.900%, 06/01/18 Aa3/NR $ 2,798,125 Taylor County Kentucky School Building Revenue, 280,000 6.000%, 08/01/16 Aa3/NR 291,200 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14, Pre-Refunded Aa3/A 1,051,050 22,502,319 TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES (3.4%) Kentucky Economic Development, 7,300,000 5.400%, 01/01/22 + Aaa/NR 7,300,000 7,300,000 Total Investments (cost $208,133,332**) 98.7% 211,218,272 Other assets in excess of liabilities 1.3 2,772,904 Net Assets 100.0% $ 213,991,176
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (95.3%) S&P VALUE
* Any security not rated has been determined by the Investment Manager 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 JUNE 30, 2000 (UNAUDITED) ASSETS Investments at value (cost $208,133,332) $211,218,272 Interest receivable 3,527,861 Receivable for investment securities sold 120,000 Receivable for Fund shares sold 78,604 Other assets 799 Total assets 214,945,536 LIABILITIES Cash overdraft 402,452 Dividends payable 253,574 Payable for Fund shares redeemed 111,807 Distribution fees payable 77,772 Management fee payable 69,770 Accrued expenses 38,985 Total liabilities 954,360 NET ASSETS $213,991,176 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 210,769 Additional paid-in capital 213,473,882 Accumulated net realized loss on investments (2,778,415) Net unrealized appreciation on investments 3,084,940 $213,991,176 CLASS A Net Assets $198,918,474 Capital shares outstanding 19,592,939 Net asset value and redemption price per share $ 10.15 Offering price per share (100/96 of $10.15 adjusted to nearest cent) $ 10.57 CLASS C Net Assets $ 1,371,153 Capital shares outstanding 135,114 Net asset value and offering price per share $ 10.15 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) $ 10.15* CLASS Y Net Assets $ 13,701,549 Capital shares outstanding 1,348,807 Net asset value, offering and redemption price per share $ 10.16
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) INVESTMENT INCOME: Interest income $ 6,291,928 Expenses: Management fee (note 3) $ 426,518 Distribution and service fees (note 3) 157,661 Transfer and shareholder servicing agent fees 64,000 Trustees' fees and expenses 41,000 Legal fees 27,000 Shareholders' reports and proxy statements 23,000 Custodian fees 14,500 Audit and accounting fees 13,000 Registration fees and dues 7,500 Insurance 5,000 Miscellaneous 8,808 787,987 Expenses paid indirectly (note 7) (13,235) Net expenses 774,752 Net investment income 5,517,176 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss from securities transactions (700,736) Change in unrealized appreciation on investments 2,011,241 Net realized and unrealized gain on investments 1,310,505 Net increase in net assets resulting from operations $ 6,827,681
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) OPERATIONS: Net investment income $ 5,517,176 $ 11,777,033 Net realized loss from securities transactions (700,736) (2,077,873) Change in unrealized depreciation on investments 2,011,241 (13,367,712) Change in net assets from operations 6,827,681 (3,668,552) DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6): Class A Shares: Net investment income (5,134,117) (11,098,723) Net realized gain on investments - (712,904) Class C Shares: Net investment income (37,858) (61,991) Net realized gain on investments - 6,285) Class Y Shares: Net investment income (345,008) (754,212) Net realized gain on investments - (46,239) Change in net assets from distributions (5,516,983) ( 12,680,354) CAPITAL SHARE TRANSACTIONS (NOTE 8): Proceeds from shares sold 7,233,274 22,053,760 Reinvested dividends and distributions 2,616,701 6,456,809 Cost of shares redeemed (18,289,160) (35,993,090) Change in net assets from capital share transactions (8,439,185) (7,482,521) Change in net assets (7,128,487) (23,831,427) NET ASSETS: Beginning of period 221,119,663 244,951,090 End of period $213,991,176 $ 221,119,663
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, 1999
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 June 30, 2000 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 had been delegated to a Sub-Adviser through June 30, 2000 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") served as the Investment Sub-Adviser for the Fund through June 30, 2000 under a Sub-Advisory Agreement between the Manager and the Sub-Adviser. Under this agreement, the Sub-Adviser continuously provided, 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, arranged for the purchases and sales of portfolio securities, and provided for daily pricing of the Fund's portfolio. For its services, the Sub-Adviser was entitled to receive a fee from the Manager which was 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 six months ended June 30, 2000, the Fund incurred fees for advisory and administrative services of $426,518. On June 11, 2000, the Board of Trustees approved a change in the above management arrangements to be effective on July 1, 2000. On that date, the Manager assumed full responsibility for the Fund's investment program together with the other duties previously performed by the Sub-Adviser as described above. The total fee schedule did not change as a result of these new arrangements. Specific details as to the nature and extent of the services provided by the Manager and by the Sub-Adviser (through June 30, 2000) 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 six months ended June 30, 2000, service fees on Class A Shares amounted to $148,904, of which the Distributor received $3,444. 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 six months ended June 30, 2000, amounted to $6,568. 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 six months ended June 30, 2000, amounted to $2,189. The total of these payments with respect to Class C Shares amounted to $8,757, of which the Distributor received $5,733. 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 six months ended June 30, 2000, total commissions on sales of Class A Shares amounted to $91,556, of which the Distributor received $11,603. 4. PURCHASES AND SALES OF SECURITIES During the six months ended June 30, 2000, purchases of securities and proceeds from the sales of securities aggregated $1,693,145 and $9,836,740, respectively. At June 30, 2000, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $5,091,534 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $2,006,594 for a net unrealized appreciation of $3,084,940. 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. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows: CLASS A SHARES: Proceeds from shares sold 596,047 $ 6,003,190 1,525,380 $ 16,084,824 Reinvested distributions 255,985 2,578,345 607,660 6,362,827 Cost of shares redeemed (1,661,780) (16,722,375) (2,966,462) (31,041,782) Net change (809,748) (8,140,840) (833,422) (8,594,131) CLASS C SHARES: Proceeds from shares sold 3,304 33,286 119,878 1,262,958 Reinvested distributions 2,563 25,797 4,864 50,548 Cost of shares redeemed (62,303) (626,690) (21,003) (217,677) Net change (56,436) (567,607) 103,739 1,095,829 CLASS Y SHARES: Proceeds from shares sold 119,132 1,196,798 439,346 4,705,978 Reinvested distributions 1,248 12,559 4,179 43,434 Cost of shares redeemed (93,595) (940,095) (446,192) (4,733,631) Net change 26,785 269,262 (2,667) 15,781 Total transactions in Fund shares (839,399) $ (8,439,185) (732,350) $ (7,482,521)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, 1999 SHARES AMOUNT SHARES AMOUNT
CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (UNAUDITED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Asset Value, Beginning of Period $10.09 $10.81 $10.81 $10.55 $10.71 $9.97 Income from Investment Operations: Net investment income 0.26 0.52 0.53 0.55 0.55 0.60 Net gain (loss) on securities (both realized and unrealized) 0.07 (0.68) 0.01 0.27 (0.12) 0.74 Total from Investment Operations 0.33 (0.16) 0.54 0.82 0.43 1.34 Less Distributions (note 6): Dividends from net investment income (0.26) (0.53) (0.53) (0.55) (0.59) (0.60) Distributions from capital gains - (0.03) (0.01) (0.01) - - Total Distributions (0.26) (0.56) (0.54) (0.56) (0.59) (0.60) Net Asset Value, End of Period $10.16 $10.09 $10.81 $10.81 $10.55 $10.71 Total Return (not reflecting sales charge)(%) 3.21+ (1.51) 5.13 8.08 4.17 13.75 Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 198,918 205,842 229,667 226,477 222,889 230,270 Ratio of Expenses to Average Net Assets (%) 0.74* 0.72 0.73 0.73 0.75 0.80 Ratio of Net Investment Income to Average Net Assets (%) 5.16* 4.95 4.89 5.19 5.22 5.74 Portfolio Turnover Rate (%) 0.82+ 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 (%) 0.73* 0.71 0.72 0.72 0.74 0.79
CLASS A SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2000 1999 1998 1997 1996 1995
+ Not annualized. * Annualized. 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. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (CONTINUED) (UNAUDITED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Asset Value, Beginning of Period $10.08 $10.81 $10.81 $10.55 $10.47 $10.09 $10.82 $10.82 $10.55 $10.47 Income from Investment Operations: Net investment income 0.22 0.43 0.44 0.46 0.37 0.27 0.53 0.54 0.56 0.43 Net gain (loss) on securities (both realized and unrealized) 0.07 (0.69) 0.01 0.27 0.11 0.06 (0.69) 0.02 0.29 0.11 Total from Investment Operations 0.29 (0.26) 0.45 0.73 0.48 0.33 (0.16) 0.56 0.85 0.54 Less Distributions (note 6): Dividends from net investment income (0.22) (0.44) (0.44) (0.46) (0.40) (0.27) (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 (0.22) (0.47) (0.45) (0.47) (0.40) (0.27) (0.57) (0.56) (0.58) (0.46) Net Asset Value, End of Period $10.15 $10.08 $10.81 $10.81 $10.55 $10.15 $10.09 $10.82 $10.82 $10.55 Total Return (not reflecting sales charge)(%) 2.87+ (2.45) 4.24 7.16 4.72+ 3.39+ (1.46) 5.26 8.34 5.24+ Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 1,371 1,932 949 845 433 13,702 13,346 14,335 8,957 5,823 Ratio of Expenses to Average Net Assets (%) 1.59* 1.56 1.59 1.57 1.56* 0.59* 0.57 0.58 0.57 0.58* Ratio of Net Investment Income to Average Net Assets (%) 4.31* 4.09 4.04 4.30 4.34* 5.31* 5.09 5.03 5.31 5.41* Portfolio Turnover Rate (%) 0.82+ 6.35 12.79 22.39 8.94 0.82+ 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 (%) 1.58* 1.55 1.57 1.56 1.55* 0.58* 0.56 0.57 0.56 0.56*
CLASS C CLASS Y SIX MONTHS PERIOD SIX MONTHS PERIOD ENDED ENDED ENDED ENDED JUNE 30, YEAR ENDED DECEMBER 31, DEC. 31, JUNE 30, YEAR ENDED DECEMBER 31, DEC. 31, 2000 1999 1998 1997 1996(1) 2000 1999 1998 1997 1996(1)
(1) For the period April 1, 1996 (commencement of operations) through December 31, 1996. + Not annualized. * Annualized. See accompanying notes to financial statements. SHAREHOLDER MEETING RESULTS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 28, 2000. The holders of shares representing 98% of the total net asset value of the shares entitled to vote were present in person or by proxy. At the meeting, the following matters were voted upon and approved by the shareholders (the resulting votes for each matter are presented below). 1. To elect Trustees. NUMBER OF VOTES: TRUSTEE FOR WITHHELD Lacy B. Herrmann 145,342,214 2,107,155 Thomas A. Christopher 145,484,939 1,964,431 Douglas Dean 145,506,391 1,942,978 Diana P. Herrmann 145,198,647 2,250,722 Carroll F. Knicely 144,880,933 2,568,436 Theodore T. Mason 145,411,262 2,038,108 Anne J. Mills 145,299,779 2,149,590 William J. Nightingale 145,358,416 2,090,953 James R. Ramsey 145,039,349 2,410,020 2. To ratify the selection of KPMG LLP as the Fund's independent auditors. NUMBER OF VOTES: FOR AGAINST ABSTAIN 143,531,770 482,412 3,435,186 ADJOURNED SESSION OF SHAREHOLDER MEETING RESULTS (UNAUDITED) The adjourned session of the Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on May 31, 2000. The holders of shares representing 68% of the total net asset value of the shares entitled to vote were present in person or by proxy. At the meeting, the following matter was voted upon and approved by the shareholders (the resulting votes for the matter are presented below). 1. To act upon a proposal to change the fundamental policies of the Fund to allow the use of additional nationally recognized statistical rating organizations. NUMBER OF VOTES: FOR AGAINST ABSTAIN 100,234,138 2,108,008 4,782,566 -----END PRIVACY-ENHANCED MESSAGE-----