-----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, OGMVeLfrGbpjyf6BlIpZyQzvJiA5BmBGzEZSXv3A5iL4OtG26tFKGx8/iyYjxuAs xarz7kCPjN+FxtiFQhs5Ug== 0000812006-97-000004.txt : 19970310 0000812006-97-000004.hdr.sgml : 19970310 ACCESSION NUMBER: 0000812006-97-000004 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970307 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TAX FREE TRUST CENTRAL INDEX KEY: 0000812006 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-05086 FILM NUMBER: 97552894 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 2: 380 MADISON AVE SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHURCHILL TAX FREE FUND OF KENTUCKY DATE OF NAME CHANGE: 19880911 N-30B-2 1 ANNUAL REPORT DECEMBER 31, 1996 [Logo of Aquila Group of Funds: Eagles head] CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [Logo of Churchill Tax-Free Fund of Kentucky: A Standing Pegasus Within a Circle] ONE OF THE AQUILASM GROUP OF FUNDS [Logo of Churchill Tax-Free Fund of Kentucky: A Standing Pegasus Within a Circle] CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT "THE VALUE OF STEADFASTNESS" February 18, 1997 Dear Investor: Most of us have heard, at one time or another, the story of the tortoise and the hare. With respect to your investment in Churchill Tax-Free Fund of Kentucky, this old adage, detailing the virtue of steadfastness, speaks volumes. If the finish line you are seeking to cross is one of capital preservation and triple tax-free income, then an investment which performs much like the tortoise just might "win the race." THE CALL OF THE STOCK MARKET As I am sure you will agree, recent years have been banner ones for the stock market. The spectacular price increases experienced have made the appeal of investing in equity securities extremely powerful and, at times, almost irresistible. If it were possible to know in advance just what and when to buy or sell in order to maximize profit, then constantly switching your investment vehicle, trying to capture the latest trend, would be uncomplicated. Unfortunately, "timing" the market, with any degree of consistency, is near impossible. We have generally found that, for the average investor, switching continuously from one security to another in the management of his/her investment portfolio tends to be a fruitless, often imprudent, exercise. With the degree of volatility inherent in the equity markets, missing an upturn or downturn could result in a disastrous loss of invested principal. PROUD TO BE A TORTOISE Our various survey results indicate that a substantial portion of investors in Churchill Tax-Free Fund of Kentucky are retirees or pre-retirees who are concerned about capital preservation. Accordingly, staying on track with your investment in the Fund could well prove to be the most appropriate course to follow. Although equity investments can be rewarding for a portion of one's capital, it is still critical to keep firmly in mind your overall investment goal and not get disproportionately distracted by the dazzle of other investments. It is no great secret that municipal bonds, such as those in which the Fund invests, are generally not exciting investments. Unlike stocks, they do not experience abrupt, dramatic highs. However, it must be kept in mind that municipal bonds also do not experience the dumbfounding lows of stocks. Municipal bond funds just plod along from year to year, much like the tortoise, producing consistent triple tax-free results for shareholders. While being a tortoise may not be as glamorous as being a hare, this should not represent a cause for concern. The end result is really what counts - not how you got there, but that you got there at all. CAPITAL PRESERVATION STRATEGIES Although capital preservation is not guaranteed, the Fund does take some very deliberate steps to ensure that there will be minimal volatility in share price over a reasonable time frame. The Fund's basic philosophy is "don't put all your eggs in one basket." And, when you choose the eggs for that basket, choose only quality ones. DIVERSIFICATION is a key stability tool used in the construction of the Fund's investment portfolio. At year-end 1996, over 170 separate municipal issues were represented in the Fund's portfolio. Having such a breadth of participation helps to ensure against any significant loss of principal by the Fund in the remote event anything ever did go wrong with a particular issuer. Such diversification also enables the Fund to participate in financing many different vital public purpose projects in numerous communities throughout Kentucky, thereby benefitting residents of the entire Commonwealth. We have found from experience that sticking with QUALITY is best in the long run. Therefore, investments in the Fund are specifically limited to only the top four credit ratings, or equivalent, of the nine assignable to municipal securities by nationally-known credit rating services. At December 31, 1996, 96.8% of the portfolio was comprised of the top three credit ratings - AAA, AA, AND A. Emphasis is also placed on having A SPREAD OF MATURITIES in the Fund's investment portfolio. As you probably are aware, short term maturities tend to have very little price fluctuation, but produce a lesser rate of return than longer maturity securities. Conversely, long-term maturities produce a higher return level, but have a much higher price volatility factor than shorter-term issues since they reflect the risks associated with the unpredictability of future events and the potential interest rate changes over the extended life of the municipal bond. By creating a blend of maturities, ranging from under one year to over 20 years in length, the Fund attempts to provide you with a satisfactory level of return without subjecting the share price to excessive swings as interest rates move up and down. Thus, the current average maturity of the Fund's portfolio is the relatively intermediate term of 15.7 years. The Fund's Investment Adviser, Banc One Investment Advisors Corporation, examines the above elements very carefully when selecting each individual "egg" for your basket of investments in order to obtain the most appropriate fit. Such careful attention seeks to provide protection for shareholders' capital and promote stability. TAX-FREE RATE OF RETURN What many investors sometime forget is that while the level of income from the Fund may seem unimpressive on the surface, it is TRIPLE TAX-FREE* - free of both regular Federal and Commonwealth of Kentucky income taxes as well as ad valorem taxes. When the rate of return achieved by the Fund is converted into a taxable equivalent rate, the outcome is generally quite an eye-opener. The following chart shows the average annualized level of TRIPLE TAX-FREE income return distributed to shareholders from January 1, 1996 to December 31, 1996, as measured against the maximum public offering price.** It additionally illustrates the rate of taxable income return one would have had to earn in order to equate to the TRIPLE TAX-FREE income return generated by the Fund. [Graphic of Bar Chart with the following information:] CHURCHILL TAX-FREE FUND OF KENTUCKY'S TRIPLE TAX-FREE DISTRIBUTION RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
Tax Bracket Taxable Equivalent Rate Triple Tax-Free Distribution Rate 28% 7.98% 5.40% 31% 8.44% 5.40% 36% 9.13% 5.40% 39.6% 9.70% 5.40%
No matter which Federal income tax bracket applies, you can readily see that there is quite a difference between the TAXABLE and the TRIPLE TAX-FREE return levels. OUR PLEDGE TO YOU Management of Churchill Tax-Free Fund of Kentucky values the confidence you have placed in us. You can be assured that we will steadfastly strive to help you cross the finish line of your investment goal. Sincerely, /s/ Lacy B. Herrmann Lacy B. Herrmann President and Chairman of the Board of Trustees * Some income may be subject to the alternative minimum tax for certain investors. ** The performance shown represents that of Class A shares. Such performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund's average annual total return as of 12/31/96 for the past one-year period was 4.17%; for the past five-year period was 6.55% and since inception was 7.56%. These returns do not take into consideration the maximum sales charge of 4%. Returns would be less if the sales charge was applied. As of 12/31/96, the Fund's 30-day SEC yield was 4.58%. MANAGEMENT DISCUSSION OF FUND PERFORMANCE The graph below illustrates the value of $10,000 invested in Class A shares of Churchill Tax-Free Fund of Kentucky at inception of the Fund in May, 1987 and maintaining this investment through the Fund's latest fiscal year end, December 31, 1996, as compared with a hypothetical similar size investment in the Lehman Brothers Municipal Bond Index (the "Index") of municipal securities and the Consumer Price Index (a cost of living index) over that same period. The total return of the investment in the Fund is shown after deduction of the maximum sales charge of 4% at the time of initial investment. It also reflects deduction of the Fund's annual operating expenses and reinvestment of monthly dividends and capital gains distributions without sales charge. On the other hand, the Index does not reflect any sales charge nor operating expenses but does reflect reinvestment of interest. The performance of the Fund's other classes, first offered on April 30, 1996, may be greater or less than the Class A shares performance indicated on this graph, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in the other classes. It should also be specifically noted that the Index is nationally oriented and consisted, over the period covered by the graph, of an unmanaged mix of between 8,000 to 34,000 investment-grade long-term municipal securities of issuers throughout the United States. However, the Fund's investment portfolio consisted of a significantly lesser number of investment-grade tax-free municipal obligations, principally of Kentucky issuers, over the same period. The maturities, market prices, and behavior of the individual securities in the Fund's investment portfolio can be affected by local and regional factors which might well result in variances from the market action of the securities in the Index. Consequently, much of the difference in performance of the Index versus the Fund can be attributed to the lack of application of annual operating expenses and initial sales charge to the Index. Additionally, a portion of the difference in performance can be attributed to the different characteristics in the single-state market of the securities in the Fund's portfolio as compared with the national orientation of the securities in the Index. Since its inception, the Fund has been managed to provide as stable a share value as possible consistent with producing a competitive income return to shareholders. It has not been managed for maximum total return, since one of the aims of management in structuring the portfolio of the Fund is to reduce fluctuations in the price of the Fund's shares resulting from changes in interest rates. As can be observed, however, the pattern of the Fund's results and that of the Index over the period since inception of the Fund track quite similarly, even though they are not entirely comparable in character. [Graphic of Line Chart with the following information:] PERFORMANCE COMPARISON
LEHMAN BROTHERS FUND AFTER SALES COST OF MUNICIPAL BOND INDEX CHARGE AND EXPENSES LIVING INDEX 5/87 10,000 9,600 10,000 12/87 10,500 9,500 10,230 12/88 11,500 10,600 10,681 12/89 12,750 11,900 11,176 12/90 13,750 12,700 11,874 12/91 15,300 14,000 12,228 12/92 16,750 15,250 12,591 12/93 18,850 16,850 12,935 12/94 17,844 16,342 13,271 12/95 20,960 18,589 13,616 12/96 21,890 19,362 14,067
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS [Table with the following information:]
FUND'S AVERAGE ANNUAL TOTAL RETURN For the Period Ended 1 Year 5 Years Life of Fund December 31, 1996 Since 5/21/87 Including Sales (0.01%) 5.69% 7.11% Charge and Expenses
1996 will certainly be remembered as a year of financially significant milestones: 1. The Dow Jones Industrial Average skyrocketed past the 6,000 mark and didn't look back; 2. Bill Clinton was reelected, with Republicans retaining control in the House and Senate; 3. The consumer price index once again demonstrated the economy's impressive resistance to inflation. The core inflation rate, which excludes the volatile food and energy sectors, rose a modest 2.60%; 4. Kentucky municipal bonds remained in short supply; 5. Interest rates, while volatile in-between, started and ended the year with little change; 6. The "flat tax" faded away - at least for the time being - as a political\economic issue, returning municipal bonds back to more representative levels. Interest rates on municipal bonds rose modestly over the course of 1996, as measured by The Bond Buyer's 20 Bond Index, moving from 5.37% in January to 5.66% in December. Along the way, long-term rates traded in the 6.00% range. This weakness had been in response to the possible enactment of a "flat tax." Due to the defensive, intermediate-term maturity structure of the Churchill Tax-Free Fund of Kentucky, the net asset value of the Fund showed only a modest decline, moving from $10.71 at December 31, 1995 to $10.55 at December 31, 1996. The Fund generated a total return of 4.17%, which was very competitive relative performance among Kentucky state-specific funds. As we saw in 1995, the ongoing demand for quality Kentucky tax-free bonds greatly outpaced the available supply of municipal bonds. Nationwide, the issuance of municipal bonds rose 14.4% from the levels of 1995. For the same period, Kentucky saw a decline of 29.0% from what was brought to market in 1995. The Commonwealth of Kentucky, as of year-end 1996, had a General Fund surplus of approximately $200 million. There is no need for state government to borrow funds in the bond market if there is plenty of cash in the bank! The key investment objectives of the Churchill Tax-Free Fund of Kentucky are to provide as high a level of triple tax-free current income as possible while seeking to minimize the volatility of the daily net asset value of the Fund. These objectives continue to be successfully addressed by following our fundamental, conservative portfolio management ideals. We purchase high quality investments. The Fund today has an average quality rating of "AA" and has a 4-star rating from the independent mutual funds rating service, Morningstar. We maintain a "laddered" portfolio maturity structure to manage price volatility. The Fund currently has an average maturity of just over 15 years. We maintain a well-diversified portfolio of over 170 different Kentucky issues. As we look to 1997, we continue to be optimistic about a restructuring of the Federal capital gains tax. From Frankfort, we should hear definitive information on the Kentucky intangibles tax in the near future. Banc One Investment Advisors, Inc. Chief Economist Anthony Chan's current economic forecast calls for a slowing of the growth rate of Real Domestic Product (GDP) into the 1.0 - 1.5% range, down from 1996 levels. An upturn in interest rates is also predicted, with the Consumer Price Index climbing to over 3.0% during the year, due to increased wage and price pressures. KPMG Peat Marwick LLP Certified Public Accountants INDEPENDENT AUDITORS' REPORT 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, 1996, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year 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, 1996, 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, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New York, New York February 14, 1997 CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS DECEMBER 31, 1996
RATING FACE MOODY'S/ MARKET AMOUNT REVENUE BONDS (98.2%) S&P VALUE State Agencies (15.7%) Kentucky Higher Education Student Loan Corporation Insured Student Loan Revenue, $ 980,000 6.500%, 06/01/00 A/NR $ 1,022,875 1,490,000 6.500%, 06/01/02 A/NR 1,588,714 2,955,000 6.800%, 06/01/03 A/NR 3,176,625 1,915,000 7.100%, 12/01/11 Aa-/AA 2,053,837 Kentucky Infrastructure Authority Revenue, 795,000 7.625%, 08/01/03 NR/A 873,506 205,000 7.625%, 08/01/03 NR/A 216,019 200,000 7.500%, 02/01/09 NR/AAA 216,750 1,445,000 7.500%, 02/01/99 NR/AAA 1,566,019 555,000 7.200%, 06/01/11 A/A 607,725 875,000 6.500%, 06/01/12 A/A 1,186,312 1,110,000 6.375%, 06/01/14 A/A 937,344 Kentucky Local Correctional Facilities Construction Authority Revenue, 4,925,000 5.500%, 11/01/14 Aaa/AAA 4,894,218 Kentucky Rural Economic Development Authority, 3,110,000 7.250%, 06/01/17 NR/AAA 3,312,150 Kentucky State Properties and Buildings Commission Revenue, 1,375,000 7.900%, 11/01/97 A/A+ 1,416,554 500,000 8.400%, 11/01/97 Aaa/AAA 528,875 1,130,000 7.100%, 12/01/97 A/A 1,159,673 250,000 7.600%, 08/01/98 NR/AAA 268,438 1,460,000 7.300%, 12/01/99 A/A 1,565,850 250,000 7.600%, 08/01/98 NR/AAA 268,125 400,000 7.350%, 12/01/99 Aaa/AAA 440,500 365,000 7.000%, 02/01/06 Aaa/AAA 404,693 4,510,000 6.625%, 10/01/07 A/A+ 4,989,188 300,000 8.000%, 08/01/98 NR/AAA 323,625 750,000 7.375%, 12/01/99 Aaa/AAA 826,875 1,000,000 6.500%, 08/01/01 Aaa/AAA 1,097,500 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/12 Aaa/AAA 1,128,750 36,070,740 County Agencies (9.0%) Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/16 A/NR 1,201,200 Franklin County Kentucky Public Projects Corp. Revenue, 350,000 5.500%, 12/01/08 NR/A- 348,688 Jefferson County Kentucky Economic Development Corp. Lease Revenue, 2,000,000 7.625%, 07/01/08 A1/NR 2,071,580 250,000 7.750%, 07/01/16 A1/NR 259,085 Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 500,625 Kenton County Kentucky Public Properties Corp. Revenue, 400,000 7.000%, 10/01/03 NR/NR* 434,500 Lincoln County Kentucky Public Properties Corp., 430,000 6.500%, 03/01/22 NR/NR* 459,563 Louisville and Jefferson County Kentucky, Series B, 120,000 5.650%, 07/01/03 NR/NR* 120,185 200,000 6.625%, 07/01/15 NR/NR* 196,000 250,000 6.650%, 07/01/19 NR/NR* 248,750 470,000 5.625%, 07/01/25 NR/NR* 457,662 Madison County Kentucky Capital Project Corp. Revenue, 650,000 7.800%, 04/01/09 NR/NR* 707,688 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A 1,636,875 Munfordville Kentucky Industrial Development Bond, 2,500,000 7.000%, 06/01/19 NR/A 2,700,000 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/A 533,750 570,000 7.550%, 03/01/10 NR/A 609,187 4,500,000 6.500%, 03/01/19 NR/A 4,708,125 3,000,000 6.400%, 03/01/19 NR/A 3,251,250 Woodford County Kentucky Public Properties Corp. Revenue, 100,000 8.200%, 11/01/17 A/NR 106,544 20,551,257 City/Municipal Obligations (8.4%) Covington Kentucky Municipal Properties Corp. Revenue, 400,000 7.950%, 08/01/04 Baa1/NR 434,500 250,000 7.375%, 08/01/11 Baa1/NR 269,687 Kentucky League Cities Funding Trust COP, 1,715,000 6.200%, 08/01/17 NR/A- 1,794,319 Louisville Kentucky Public Properties Corp, 4,090,000 6.700%, 12/01/20 A/A- 4,437,650 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 1,963,200 7,000,000 6.200%, 03/01/18 Aa/NR 7,140,000 Nicholasville, Kentucky Industrial Development Revenue (Johnson Control), 3,000,000 8.000%, 09/01/04 A2/A 3,106,140 19,145,496 Utilities (3.3%) Campbell & Kenton Counties Kentucky Sanitation District No. 1 Sanitation Revenue, 220,000 7.300%, 08/15/00 Aa/A+ 225,810 200,000 7.700%, 08/15/04 Aa/A+ 207,486 Glasgow Kentucky Electric Plant Board Revenue, 280,000 7.600%, 12/01/09 NR/BBB 302,050 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/16 NR/NR* 269,375 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue, 3,000,000 5.300%, 05/15/19 Aaa/AAA 2,940,000 1,230,000 5.500%, 05/15/23 Aaa/AAA 1,211,550 1,500,000 6.500%, 05/15/24 Aaa/AAA 1,648,125 Muhlenberg County Kentucky Water District, Waterworks Revenue, 100,000 5.500%, 01/01/12 Aaa/AAA 100,250 110,000 5.500%, 01/01/13 Aaa/AAA 109,725 115,000 5.600%, 01/01/14 Aaa/AAA 115,718 Richmond Kentucky Water Gas and Sewer Revenue, 200,000 7.300%, 07/01/05 Aaa/AAA 212,500 200,000 7.300%, 07/01/06 Aaa/AAA 212,500 7,555,089 Pollution Control Revenue (13.4%) Ashland Kentucky Pollution Control Revenue, 1,770,000 7.375%, 07/01/09 A3/NR 1,913,812 3,000,000 6.650%, 08/01/09 Baa1/NR 3,198,750 Boone County Kentucky Public Properties Revenue, 500,000 5.150%, 12/01/14 A/A- 473,750 Boone County Kentucky Pollution Control Revenue, 735,000 5.500%, 01/01/24 Aaa/AAA 719,381 Carroll County Kentucky Pollution Control Revenue, 3,500,000 7.450%, 09/15/16 Aa2/NR 3,976,875 2,910,000 6.250%, 02/01/18 Aa2/AA- 3,030,038 450,000 5.750%, 12/01/23 Aa2/AA- 448,875 Jefferson County Kentucky Pollution Control Revenue, 1,500,000 5.650%, 01/01/17 Aa2/AA 1,498,125 1,000,000 7.750%, 02/01/19 Aa2/AA 1,052,150 5,530,000 5.625%, 08/15/19 Aa2/AA 5,516,175 2,200,000 5.450%, 10/15/20 Aa2/AA 2,145,000 2,600,000 5.900%, 04/15/23 Aa2/AA 2,645,500 Wickliffe Kentucky Pollution Control, 4,100,000 6.200%, 04/01/07 A1/A 4,109,144 100,000 6.375%, 04/01/26 A1/A 104,250 30,831,825 Transportation (12.2%) Kenton County Kentucky Airport Board Airport Revenue, 4,740,000 6.300%, 03/01/15 Aaa/AAA 4,917,750 3,955,000 8.750%, 03/01/15 A/A 4,063,920 Kentucky Interlocal School Transportation Authority, 150,000 5.100%, 03/01/05 A/A 149,625 Kentucky State Turnpike Authority Economic Development Road Revenue, 2,150,000 5.625%, 07/01/15 A/A 2,176,875 500,000 8.250%, 07/01/07 Aaa/AAA 521,295 100,000 6.000%, 07/01/09 Aaa/AAA 100,196 500,000 7.000%, 05/15/99 Aaa/AAA 531,250 1,035,000 7.250%, 05/15/10 Aaa/AAA 1,141,087 Kentucky State Turnpike Authority Resource Recovery Road Revenue, 2,105,000 7.600%, 07/01/98 A/A+ 2,180,401 3,875,000 7.750%, 07/01/99 A/A+ 4,015,624 320,000 8.000%, 07/01/03 A/A+ 332,310 Kentucky State Turnpike Authority Toll Road Revenue, 1,380,000 8.500%, 07/01/04 A/A 1,424,063 Louisville Kentucky Airport Lease Revenue, 750,000 7.850%, 02/01/09 A/A- 813,750 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/12 Baa1/A 4,445,000 Puerto Rico Commonwealth Highway Authority Highway Revenue, 1,000,000 6.750%, 07/01/05 Baa1/A 1,096,250 27,909,396 Hospitals (10.6%) Floyd County Kentucky Hospital Revenue, 275,000 7.500%, 08/01/10 NR/AAA 302,156 510,000 5.500%, 09/01/14 NR/AAA 504,262 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11 Aaa/AAA 1,087,500 Jefferson County Kentucky Health Facilities Revenue (Jewish Hospital), 1,090,000 6.550%, 05/01/22 Aaa/AAA 1,178,563 Jefferson County Kentucky Hospital Revenue, 510,000 7.750%, 10/01/97 Aaa/AAA 535,322 Kentucky Development Finance Authority Hospital Revenue, 895,000 7.625%, 09/01/11 Aaa/AAA 954,294 235,000 7.200%, 10/01/99 A/A 250,275 2,570,000 7.300%, 10/01/03 A/A 2,772,388 810,000 7.500%, 10/01/12 A/A 861,637 400,000 7.250%, 11/01/06 A1/A+ 428,000 400,000 7.200%, 09/01/15 Aaa/AAA 437,000 750,000 7.000%, 09/01/06 NR/NR* 838,125 Kentucky Development Finance Authority Revenue, 3,000,000 6.500%, 11/01/07 A1/A+ 3,198,750 1,250,000 6.250%, 11/01/13 A1/A+ 1,279,688 2,150,000 6.750%, 11/01/12 A1/A+ 2,311,250 500,000 6.000%, 11/01/01 Aaa/AAA 530,625 Kentucky Development Finance Authority Kings Daughters Medical Center, 1,375,000 6.125%, 02/01/12 Aaa/AAA 1,436,875 Kentucky Development Finance Authority Hospital Revenue, 3,000,000 5.900%, 12/01/15 Aaa/AAA 3,063,750 2,590,000 5.000%, 08/15/15 Aaa/AAA 2,408,700 24,379,160 Housing (14.9%) Greater Kentucky Housing Assistance Corp. Multi-Family Housing Revenue, 500,000 7.000%, 07/01/11 NR/AA+ 526,875 320,000 6.300%, 07/01/15 Aaa/AAA 329,200 275,000 6.400%, 07/01/23 NR/AA+ 283,250 Jefferson County Kentucky Multi-Family Revenue, 1,500,000 5.750%, 06/01/23 NR/AA 1,531,875 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 269,344 835,000 7.600%, 01/01/07 Aaa/AAA 879,881 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,051,250 95,000 7.875%, 01/01/08 Aaa/AAA 99,037 545,000 7.250%, 01/01/09 Aaa/AAA 572,931 980,000 7.125%, 01/01/10 Aaa/AAA 1,033,900 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,180,219 745,000 5.800%, 07/01/13 Aaa/AAA 753,381 200,000 5.400%, 07/01/14 Aaa/AAA 194,250 750,000 6.250%, 07/01/15 Aaa/AAA 766,875 1,685,000 6.400%, 01/01/17 Aaa/AAA 1,750,293 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,440,938 545,000 7.900%, 01/01/21 Aaa/AAA 574,975 345,000 7.800%, 01/01/21 Aaa/AAA 362,681 160,000 8.100%, 01/01/22 Aaa/AAA 169,400 2,820,000 7.450%, 01/01/23 Aaa/AAA 2,915,175 1,560,000 6.800%, 01/01/24 Aaa/AAA 1,612,650 150,000 5.850%, 07/01/27 Aaa/AAA 148,688 3,500,000 6.375%, 07/01/28 Aaa/AAA 3,583,125 5,525,000 6.300%, 01/01/28 Aaa/AAA 5,594,063 Martin County Kentucky Housing Revenue, 2,400,000 6.250%, 07/01/23 Aa/AA 2,418,000 34,042,256 Universities (0.5%) Eastern Kentucky University, 585,000 5.375%, 05/01/04 A/A 588,890 Western Kentucky University Revenue, 325,000 7.100%, 12/01/99 Baa/BBB+ 348,156 275,000 7.100%, 12/01/01 Aaa/AAA 306,625 1,243,671 Schools (10.2%) Boone County Kentucky School District Finance Corp. School Building Revenue, 2,250,000 6.125%, 12/01/17 A/A 2,334,375 1,750,000 6.750%, 09/01/09 A/A 1,887,812 Butler County Kentucky School Building Revenue, 270,000 7.200%, 05/01/07 A/A 299,700 290,000 7.200%, 05/01/08 A/A 321,900 Campbell County Kentucky School Building Revenue, 1,000,000 5.100%, 02/01/14 A/NR 965,000 Fayette County School Building Revenue, 1,780,000 5.700%, 12/01/16 A/A 1,784,450 Garrard County Kentucky School Building Revenue, 100,000 5.900%, 06/01/15 A/NR 101,125 160,000 5.900%, 06/01/16 A/NR 161,800 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 A/NR 2,024,875 Harlan County Kentucky School District Corp. School Building Revenue, 205,000 7.400%, 12/01/06 A/A 226,268 200,000 7.250%, 09/01/09 NR/A 217,250 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 370,000 6.200%, 01/01/06 Aaa/AAA 400,062 210,000 6.750%, 08/01/09 Aaa/AAA 226,275 500,000 5.875%, 01/01/11 A-1/A+ 516,875 Kenton County Kentucky School District Finance Corp. School Building Revenue, 500,000 6.900%, 12/01/05 NR/NR* 548,125 600,000 7.000%, 12/01/07 NR/NR* 660,000 Lexington-Fayette Urban County Government School Building Revenue, 255,000 7.700%, 11/01/04 A-1/A+ 270,777 180,000 7.700%, 11/01/05 A-1/A+ 191,137 250,000 7.000%, 06/01/06 A-1/A+ 274,375 400,000 7.000%, 06/01/08 A-1/A+ 439,000 370,000 7.000%, 06/01/09 A-1/A+ 406,075 Mead County School District, 500,000 6.000%, 07/01/16 A/NR 513,750 Middlesboro Kentucky Independent School District Finance Corp., 100,000 6.000%, 07/01/16 A/NR 104,250 Nelson County Kentucky School Building Revenue, 900,000 6.500%, 04/01/05 A/NR 965,250 1,820,000 5.750%, 04/01/15 A/NR 1,845,025 Pike County Kentucky School District Finance Corp. School Building Revenue, 505,000 6.900%, 12/01/05 NR/A 547,294 720,000 7.000%, 12/01/09 NR/A 782,100 Rowan County Kentucky School District Finance Corp., 215,000 5.600%, 06/01/16 NR/A 216,613 Scott County Kentucky School Building Revenue, 2,750,000 5.900%, 06/01/18 NR/A 2,794,688 Taylor County Kentucky School Building Revenue, 280,000 6.000%, 08/01/16 NR/A 288,050 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14 NR/A 1,038,800 23,353,076 Total Investments- 98.2% (Cost $215,512,122**) 225,081,966 Other assets in excess of liabilitites - 1.8% 4,063,031 Net Assets - 100% $ 229,144,997 * Any security not rated must be determined by the Investment Adviser to have sufficient quality to be ranked in the top four credit ratings if a credit rating were to be assigned by a rating service. ** Cost for Federal tax purposes is identical.
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 ASSETS Investments at value (identified cost $215,512,122) $ 225,081,966 Cash 81,259 Interest receivable 4,390,978 Receivable for Fund shares sold 149,166 Total assets 229,703,369 LIABILITIES Dividends payable 166,731 Payable for Fund shares redeemed 119,935 Accrued expenses 103,400 Distribution fees payable 88,350 Adviser and Administrator fees payable 79,956 Total liabilities 558,372 NET ASSETS $ 229,144,997 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 217,272 Additional paid-in capital 219,583,345 Accumulated net realized loss on investments (225,464) Net unrealized appreciation on investments 9,569,844 $ 229,144,997 CLASS A Net Assets $ 222,888,819 Capital shares outstanding 21,134,263 Net asset value and redemption price per share $ 10.55 Offering price per share (100/96 of $10.55 adjusted to nearest cent) $ 10.99 CLASS C Net Assets $ 433,309 Capital shares outstanding 41,087 Net asset value and offering price per share $ 10.55 Redemption price per share (*varies by length of time shares are held) $ * CLASS Y Net Assets $ 5,822,869 Capital shares outstanding 551,863 Net asset value, offering and redemption price per share $ 10.55
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Interest income $ 13,500,888 Expenses: Investment Adviser fees (note B) $ 316,432 Administrator fees (note B) 587,239 Distribution fees (note B) 339,776 Transfer and shareholder servicing agent fees 135,302 Legal fees 82,082 Trustees' fees and expenses (note G) 59,858 Shareholders' reports and proxy statements 47,554 Audit and accounting fees 35,228 Custodian fees (note F) 32,974 Registration fees and dues 23,848 Insurance 4,551 Miscellaneous 30,140 1,694,984 Expenses paid indirectly (note F) (24,720) Net expenses 1,670,264 Net investment income 11,830,624 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from securities transactions 513,426 Change in unrealized appreciation on investments (3,273,903) Net realized and unrealized gain (loss) on investments (2,760,477) Net increase in net assets resulting from operations $ 9,070,147
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1996 1995 OPERATIONS: Net investment income $ 11,830,624 $ 13,733,799 Net realized gain (loss) from securities transactions 513,426 (423,661) Change in unrealized appreciation (depreciation) on investments (3,273,903) 17,432,689 Change in net assets from operations 9,070,147 30,742,827 DISTRIBUTIONS TO SHAREHOLDERS (note E): Class A Shares: Net investment income (11,653,180) (13,727,664) Distributions in excess of net investment income (796,825) - Net realized gain on investments - - Class C Shares: Net investment income (5,800) - Distributions in excess of net investment income (410) - Net realized gain on investments - - Class Y Shares: Net investment income (171,644) - Distributions in excess of net investment income (10,323) - Net realized gain on investments - - Change in net assets from distributions (12,638,182) (13,727,664) CAPITAL SHARE TRANSACTIONS (note H): Proceeds from shares sold 25,334,669 17,964,446 Reinvested dividends and distributions 7,120,982 7,773,545 Cost of shares redeemed (30,012,962) (45,139,255) Change in net assets from capital share transactions 2,442,689 (19,401,264) Change in net assets (1,125,346) (2,386,101) NET ASSETS: Beginning of period 230,270,343 232,656,444 End of period $ 229,144,997 $ 230,270,343
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 1, 1996, offered only one class of shares. On that date, the Fund began offering two additional classes of shares, Class C and Class Y shares. All shares outstanding prior to that date were designated as Class A shares and, as was the case since inception, are sold with a front-payment sales charge and bear 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 is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity. They are not available to individual retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. All classes of shares represent interests in the same portfolio of investments in the Fund and are identical as to rights and privileges. They differ only with respect to the effect of sales charges, the distribution and/or service fees borne by the respective class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. (1) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued at the mean of bid and asked quotations and, in the case of other securities, at fair value determined under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeded 60 days. In Fiscal 1996, the Fund began amortizing bond premium using the constant yield method. Accordingly, net unrealized appreciation and additional paid-in capital have been adjusted by equal amounts at the beginning of the year. This change had no effect on the Fund's net asset value or distribution policy and conforms to the amortization policy followed by the Fund for Federal tax purposes. (2) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on the identified cost basis. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue discount. Market discount is recognized upon disposition of the security. (3) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code applicable to certain investment companies. The Fund intends to make distributions of income and securities profits sufficient to relieve it from all, or substantially all, Federal income and excise taxes. (4) ALLOCATION OF EXPENSES: Expenses, other than class-specific expenses, are allocated daily to each class of shares based on the relative net assets of each class. Class-specific expenses, which include distribution and service fees and any other items that are specifically attributed to a particular class, are charged directly to such class. (5) USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH AFFILIATES: Management affairs of the Fund are conducted through two separate management arrangements. Banc One Investment Advisors Corporation (the "Adviser") became Adviser to the Fund, effective September 11, 1995. In this role, under an Investment Advisory Agreement, the Adviser supervises the Fund's investments and provides various services to the Fund for which it is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.14 of 1% of the net assets of the Fund. The Fund also has an Administration Agreement with Aquila Management Corporation (the "Administrator"), the Fund's founder and sponsor. Under this Agreement, the Administrator provides all administrative services, other than those relating to the management of the Fund's investments. These include providing the office of the Fund and all related services as well as overseeing the activities of all the various support organizations to the Fund such as the shareholder servicing agent, custodian, legal counsel, auditors and distributor and additionally maintaining the Fund's accounting books and records. For its services, the Administrator is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.26 of 1% of the net assets of the Fund. Specific details as to the nature and extent of the services provided by the Adviser and the Administrator are more fully defined in the Fund's Prospectus and Statement of Additional Information. The Adviser and the Administrator each agrees that the above fees shall be reduced, but not below zero, by an amount equal to its pro-rata portion (determined on the basis of the respective fees computed as described above) of the amount, if any, by which the total expenses of the Fund in any fiscal year, exclusive of taxes, interest and brokerage fees, shall exceed the lesser of (i) 2.5% of the first $30 million of average annual net assets of the Fund plus 2% of the next $70 million of such assets and 1.5% of its average annual net assets in excess of $100 million, or (ii) 25% of the Fund's total annual investment income. The payment of the above fees at the end of any month will be reduced or postponed so that at no time will there be any accrued but unpaid liability under this expense limitation. No such reduction in fees was required during the year ended December 31, 1996. For the year ended December 31, 1996, the Fund incurred fees under the Advisory Agreement and Administration Agreement of $316,432 and $587,239, respectively. Under a Distribution Agreement, Aquila Distributors, Inc. (the "Distributor") serves as the exclusive distributor of the Fund's shares. Through agreements between the Distributor and various broker-dealer firms ("dealers"), the Fund's shares are sold primarily through the facilities of these dealers having offices within Kentucky, with the bulk of sales commissions inuring to such dealers. For the year ended December 31, 1996, the Distributor received sales commissions in the amount of $21,310. 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 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, 1996, service fees on Class A Shares amounted to $338,443, of which the Distributor received $4,724. 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 period April 1, 1996 through December 31, 1996, amounted to $1,000, of which the Distributor received $1,000. 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 period April 1, 1996 through December 31, 1996, amounted to $333, of which the Distributor received $333. Specific details about the Plans are more fully defined in the Fund's Prospectus and Statement of Additional Information. NOTE C - PURCHASES AND SALES OF SECURITIES: During the year ended December 31, 1996, purchases of securities and proceeds from the sales of securities aggregated $37,128,138 and $37,237,286, respectively. At December 31, 1996, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to approximately $9,780,000 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to approximately $213,000, for an approximate net unrealized appreciation of $9,570,000. At December 31, 1996, the Fund has a capital loss carryover of approximately $225,000 of which $185,000 expire on December 31, 2002 and $40,000 expire on December 31, 2003. 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 that gains so offset will not be distributed. NOTE D - PORTFOLIO ORIENTATION: Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. NOTE E - DISTRIBUTIONS: The Fund declares dividends daily from net investment income and makes payments monthly in additional shares at the net asset value per share or in cash, at the shareholder's option. Net realized capital gains, if any, are distributed annually. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, due to differences between financial reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund's net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to ordinary income taxes. For certain shareholders, some dividends may, under some circumstances, be subject to the alternative minimum tax. Also, annual capital gains distributions, if any, are taxable. NOTE F - CUSTODIAN FEES: The Fund has negotiated an expense offset arrangement with its custodian, Bank One Trust Company, N.A., an affiliate of the Adviser, wherein it receives credit toward the reduction of custodian fees whenever there are uninvested cash balances. During the year ended December 31, 1996, the Fund's custodian fees amounted to $32,974, of which $24,720 was offset by such credits. It is the general intention of the Fund to invest, to the extent practicable, some or all of cash balances in income-producing assets rather than leave cash on deposit with the custodian. NOTE G - TRUSTEES' FEES AND EXPENSES: During the fiscal year from January 1, 1996 through December 31, 1996, there were nine Trustees. Trustees' fees paid during the year were at the annual rate of $5,000 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, 1996, such reimbursements averaged approximately $2,300 per Trustee. Two of the Trustees, who are affiliated with the Administrator, are not paid any Trustee fees. NOTE H - CAPITAL SHARE TRANSACTIONS: Transactions in Capital Shares of the Fund were as follows:
Year Ended Year Ended December 31, 1996 December 31, 1995 Shares Amount Shares Amount CLASS A SHARES: Proceeds from shares sold 1,793,117 $ 18,843,152 1,723,240 $ 17,964,446 Reinvested dividends and distributions 676,874 7,110,206 743,680 7,773,545 Cost of shares redeemed (2,464,106) (25,843,142) (4,315,370) (45,139,255) Exchanged into Class Y Shares (369,589) (3,858,514) - - Net change (363,704) $ (3,748,298) (1,848,450) $ (19,401,264) Period Ended December 31, 1996* Shares Amount CLASS C SHARES: Proceeds from shares sold 40,643 $ 424,784 Reinvested dividends and distributions 444 4,663 Cost of shares redeemed - - Net change 41,087 $ 429,447 Period Ended December 31, 1996* Shares Amount CLASS Y SHARES: Proceeds from shares sold 211,416 $ 2,208,219 Reinvested dividends and distributions 583 6,113 Exchanged from Class A Shares 369,589 3,858,514 Cost of shares redeemed (29,725) (311,306) Net change 551,863 $ 5,761,540 Total transactions in Fund shares 229,246 $ 2,442,689 (1,848,450) $ (19,401,264) * From April 1, 1996 (date of inception) through December 31, 1996.
CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period Class C(2) Class Y(2) Class A(1) Period ended Year ended December 31 December 31, 1996 1996 1995 1994 1993 1992 Net Asset Value, Beginning of Period $10.47 $10.47 $10.71 $9.97 $10.93 $10.49 $10.39 Income from Investment Operations: Net investment income 0.37 0.43 0.55 0.60 0.60 0.62 0.66 Net gain (loss) on securities (both realized and unrealized) 0.11 0.11 (0.12) 0.74 (0.96) 0.47 0.19 Total from Investment Operations 0.48 0.54 0.43 1.34 (0.36) 1.09 0.85 Less Distributions: Dividends from net investment income (0.40) (0.46) (0.59) (0.60) (0.60) (0.62) (0.66) Distributions from capital gains - - - - - (0.03) (0.09) Total Distributions (0.40) (0.46) (0.59) (0.60) (0.60) (0.65) (0.75) Net Asset Value, End of Period $10.55 $10.55 $10.55 $10.71 $9.97 $10.93 $10.49 Total Return (not reflecting sales charge) (%) 4.72# 5.24# 4.17 13.75 (3.31) 10.50 8.48 Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 433 5,823 222,889 230,270 232,656 258,632 192,600 Ratio of Expenses to Average Net Assets (%) 1.55* 0.56* 0.74 0.79 0.72 0.59 0.42 Ratio of Net Investment Income to Average Net Assets (%) 4.35* 5.42* 5.23 5.75 5.81 5.67 6.21 Portfolio Turnover Rate (%) 8.94 8.94 8.94 17.09 35.25 31.29 50.33 Net investment income per share and the ratios of income and expenses to average net assets without the Adviser's and Administrator's voluntary waiver of fees, the Administrator's voluntary expense reimbursement and the expense offset in custodian fees for uninvested cash balances would have been: Net Investment Income ($) 0.37 0.43 0.55 0.60 0.60 0.60 0.63 Ratio of Expenses to Average Net Assets (%) 1.56* 0.58* 0.75 0.80 0.73 0.73 0.68 Ratio of Net Investment Income to Average Net Assets (%) 4.34* 5.41* 5.22 5.74 5.80 5.52 5.95 (1) Designated as Class A Shares on April 1, 1996. (2) New Class of Shares established on April 1, 1996. # Not annualized * Annualized. Note: Effective September 11, 1995, Banc One Investment Advisors Corporation became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc.
See accompanying notes to financial statements. REPORT ON THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 26, 1996.* At the meeting, the following matters were submitted to a shareholder vote and approved: (i) the election of Lacy B. Herrmann, Thomas A. Christopher, Douglas Dean, Diana P. Herrmann, Ann R. Leven, Theodore T. Mason, Anne J. Mills, William J. Nightingale, and James R. Ramsey as Trustees to hold office until the next annual meeting of the Fund's shareholders or until his or her successor is duly elected (each Trustee received at least 14,374,826 affirmative votes (98.57%); no more than 208,789 votes were withheld for any Trustee (1.43%)), and (ii) the ratification of the selection of KPMG Peat Marwick LLP as the Fund's independent auditors for the fiscal year ending December 31, 1996 (votes for: 13,979,337 (95.86%); votes against: 38,526 (0.26%); abstentions: 561,770 (3.85%); broker non-votes: 3,982 (0.03%)). Special Meetings of the Fund's Class C and Class Y Shareholders were held on March 29, 1996 and April 4, 1996, respectively. **At the Special Meeting of Class C Shareholders of the Fund, the Class C Shareholders voted on and unanimously approved amendments to the Fund's Distribution Plan affecting the interests of the Class C Shareholders of the Fund. At the Special Meeting of Class Y Shareholders of the Fund, the Class Y Shareholders voted on and unanimously approved amendments to the Fund's Distribution Plan affecting the interests of the Class Y Shareholders of the Fund. ___________ * On the record date for this meeting, 21,620,751 shares of the Fund were outstanding and entitled to vote. The holders of 14,583,615 shares (67.45%) entitled to vote were present in person or by proxy at the meeting. ** On the record dates for the Special Meetings, the total net asset values of the Class C and Class Y Shares of the Fund outstanding and entitled to vote were $100 and $100, respectively. The holders of all Class C and Class Y Shares entitled to vote were present in person at the meetings. FEDERAL TAX STATUS OF 1996 DISTRIBUTIONS (UNAUDITED) For the fiscal year ended December 31, 1996, of the total amount of dividends paid by Churchill Tax-Free Fund of Kentucky, 93.61% was "exempt-interest dividends" and the balance was ordinary dividend income. For those shareholders subject to the Federal alternative minimum tax, 19.63% of your Fund's dividends was derived from interest on "private activity bonds." Prior to January 31, 1997, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 1996 CALENDAR YEAR. INVESTMENT ADVISER BANC ONE INVESTMENT ADVISORS CORPORATION 416 West Jefferson Street Louisville, Kentucky 40202 ADMINISTRATOR AND FOUNDER AQUILA MANAGEMENT CORPORATION 380 Madison Avenue, Suite 2300 New York, New York 10017 BOARD OF TRUSTEES Lacy B. Herrmann, Chairman Thomas A. Christopher Douglas Dean Diana P. Herrmann Ann R. Leven Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Lacy B. Herrmann, President Jerry G. McGrew, Senior Vice President L. Michele Crutcher, Vice President Teresa M. Wright, Assistant Vice President Rose F. Marotta, Chief Financial Officer Richard F. West, Treasurer Edward M.W. Hines, Secretary DISTRIBUTOR AQUILA DISTRIBUTORS, INC. 380 Madison Avenue, Suite 2300 New York, New York 10017 CUSTODIAN BANK ONE TRUST COMPANY, N.A. 100 East Broad Street Columbus, Ohio 43271 TRANSFER AND SHAREHOLDER SERVICING AGENT ADMINISTRATIVE DATA MANAGEMENT CORP. 581 Main Street Woodbridge, New Jersey 07095-1198 INDEPENDENT AUDITORS KPMG PEAT MARWICK LLP 345 Park Avenue New York, New York 10154 Further information is contained in the Prospectus, which must precede or accompany this report. -----END PRIVACY-ENHANCED MESSAGE-----