-----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, CXHyoex18TxaCNhtbh8RUjpvz3/PxrxVN3lSPZnSgKW3pvufMh5D9/KaFvq+JtwT ZVUr96l9UeQJ56CkSVOY6w== 0000812006-98-000004.txt : 19980306 0000812006-98-000004.hdr.sgml : 19980306 ACCESSION NUMBER: 0000812006-98-000004 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980305 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: SEC FILE NUMBER: 811-05086 FILM NUMBER: 98558284 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 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 Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Lacy B. Herrmann, President Jerry G. McGrew, Senior Vice President Teresa M. Priest, Vice President L. Michele Robbins, 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 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. ANNUAL REPORT DECEMBER 31, 1997 AQUILA [Logo of Aquila Group of Funds: an eagle's head] CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a circle around it] ONE OF THE AQUILASM GROUP OF FUNDS [Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a circle around it] SERVING KENTUCKY INVESTORS FOR OVER A DECADE CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT "QUALITY FOSTERS PEACE OF MIND" February 20, 1998 Dear Investor: Recently, there has been a lot of news about the Far East and the problems that a number of countries in that area are experiencing. These problems have included some failures of major financial corporations in Japan, South Korea, Indonesia, Hong Kong, and various other countries. Also, there have been major deterioration changes in the currencies of these countries as they relate to U.S. dollars. It is hard to believe the magnitude of recent currency depreciation that has taken place in various countries vs. the U.S. dollar. The currency deteriorations against the U.S. dollar have ranged from 10% to well over 70% with various countries around the world. While we may have some problems in our own country, these are very substantially less than those of other countries. What has occurred as a result of the problems of these countries is a flight to quality. In comparison to various economies and currencies of the Far East, as well as other countries in the world, the U.S. economy securities markets and currency stand out as a beacon of quality. Quality has also been one of the trademarks of Churchill Tax-Free Fund of Kentucky from the inception of the fund. It has been our strong belief that you can sleep much better at night by having high quality issues in the fund in which you invest. Indeed, presently, the portfolio of Churchill Tax-Free Fund of Kentucky consists of 54.35% of tax-exempt securities having a AAA rating, and 15.79% of securities having a AA rating. Thus, 70.14% of the Fund's overall portfolio is rated as AA or AAA. These are the two highest quality securities you can possibly own. Just as important for you to know, in the portfolio management of the fund, separate credit analysis is done by the portfolio adviser to confirm that such top-quality assessment of the individual securities is justified. In other words, we do not merely rely upon the judgment of rating agencies, but rather independently verify the credit quality of each security. Why do we structure the portfolio this way? Primarily, so that you can feel comfortable with your investment in Churchill Tax-Free Fund of Kentucky in terms of knowing that that portion of your savings possesses a high level of capital preservation. PATTERN OF PRICING OF SHARE VALUE When you look at the pricing of share value of Churchill Tax-Free Fund of Kentucky, you will note that it presents a high level of share price consistency. This is in stark contrast to the currency deterioration and volatility of currency and securities markets that is taking place around the world. The chart below shows you that consistency for every year since the Fund began. [Graphic of bar chart with the following information:] SHARE NET ASSET VALUE In Dollars 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
OTHER STEPS TAKEN TO PROTECT YOUR MONEY As we have pointed out in previous reports to you, we have also consistently sought to diversify the holdings of municipal bonds in the portfolio so that no one segment could hurt the overall value of your money in the remote event a problem occurred. As a result, it is worth pointing out that the portfolio of securities presently consists of 168 issues spread over a variety of categories. This diversification is illustrated in the pie chart below. [Graphic of pie chart with the following information:] PORTFOLIO DISTRIBUTION BY PROJECT State Agencies 9.89% Local Public Property 17.77% Industrial Buildings 3.77% Utilities 5.79% Pollution Control 10.60% Transportation 4.96% Hospitals 12.54% Housing 16.25% Education 15.91% Airports 2.52%
We also ensure that the maturity of the portfolio is spread out over various time periods, with the average portfolio maturity being 17 years, as is indicated in the pie chart below. [Graphic of pie chart with the following information:] PORTFOLIO DISTRIBUTION BY MATURITY (in Years) 1 - 5 14.99% 6 - 10 8.57% 11 - 20 35.64% 21 - 25 25.42% Over 25 Years 15.38%
Altogether then, when you consider the quality, diversification, and maturity of the portfolio, what we have consistently tried to do for you is to provide you with the means by which you can have "PEACE OF MIND" with your investment in Churchill Tax-Free Fund of Kentucky. WORKING IN YOUR INTEREST You can be assured that all those associated with the management of your investment will consistently work in your investment interest. We very much value you as a shareholder and appreciate the confidence you have shown in Churchill Tax-Free Fund of Kentucky. Sincerely, /s/ Lacy B. Herrmann Lacy B. Herrmann President and Chairman of the Board of Trustees 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, 1997, as compared with a hypothetical similar size investment in the Lehman Brothers Quality Intermediate 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 consists of an unmanaged mix of 22,000 investment-grade intermediate-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. Whatever difference in performance of the Index versus the Fund might also be attributed to the lack of application of annual operating expenses and initial sales charge to the Index. 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. Previously, the Fund's performance was compared to the Lehman Brothers Municipal Bond Index (an index of long-term municipal securities) rather than the Lehman Brothers Quality Intermediate Municipal Bond Index. A change in the particular index was made by the Fund because it provides a better basis of comparison inasmuch as the Fund has maintained an intermediate-term average maturity since inception. Had the longer-term Lehman Brothers Municipal Bond Index been used at December 31, 1997, the value of a $10,000 investment at inception of the Fund would have been $23,905. However, the correlation between the Fund's behavior and the Lehman Brothers Quality Intermediate Municipal Bond Index is more closely related. (Graphic of line chart with the following information:) PERFORMANCE COMPARISON
Lehman Brothers Fund After Sales Cost of Quality Municipal Charge and Expenses Living Index Bond Index 5/87 $10,000 $9,600 $10,000 12/87 10,210 9,538 10,230 12/88 10,866 10,539 10,681 12/89 11,917 11,936 11,176 12/90 12,812 12,693 11,874 12/91 14,239 14,033 12,228 12/92 15,280 15,273 12,591 12/93 16,793 16,876 12,935 12/94 16,334 16,334 13,271 12/95 18,587 18,544 13,616 12/96 19,380 19,387 14,076 12/97 20,799 20,926 14,315
(Graphic of table with the following information:)
Fund's average annual total return 1 5 10 Life of Fund For the Period Ended December 31, 1997 Year Years Years Since 5/21/87 Including Sales Charge and Expenses 3.75% 5.60% 7.73% 7.20%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS 1997 proved to be another year of significant financial milestones: 1. The Dow Jones Industrial Average broke the 8,000 mark for the first time in history. The Standard & Poor's 500 Index rose 33.38%, making 1997 the third consecutive year of double-digit returns. 2. Domestic inflation, as measured by the Producer Price Index (PPI) actually declined by 1.3% for the year. Prices on the retail level, as measured by the Consumer Price Index (CPI) rose a modest 1.6%, the lowest rate since 1986. 3. With the decline in inflation, we saw long-term bond yields drop to levels approaching those not seen since the early 1970's. Yields on 30-year U.S. Treasury bonds dropped from 6.64% in January to 5.92% at year-end. 4. The municipal Bond Buyer 20 Bond Index ended the year at 5.50%, down from 5.76% in December 1996. A typical AAA-rated 15-year bond began the year yielding 5.19%. By the end of the year, that same bond was yielding 4.79%. 5. The Taxpayer Relief Act of 1997 was signed into law in August. A reduction was made in the maximum capital gains tax rate for long-term capital gain on those assets sold after holding for longer than 18 months. It was projected that investors would "flood the market" with highly appreciated assets, thus putting upside pressure on interest rates. It didn't happen. 6. Kentucky municipal bonds continued to be in short supply, as lower rates led to many bonds being called. Strong demand, coupled with meager supply, helped drive rates on Kentucky municipal bonds lower than we have seen in years. 7. The Kentucky Intangibles Property Tax was declared unconstitutional in early 1997. Refund checks started going out to eligible taxpayers in the fourth quarter. Interest rates declined - and bond prices rose - across the board over the course of 1997. While the Federal Reserve moved early in 1997 to modestly increase short-term rates to stem inflationary pressures, these "preemptive moves" drove long-term rates lower. The conservative intermediate-term maturity structure of the Churchill Tax-Free Fund of Kentucky led to an increase in the net asset value of the Fund in 1997: beginning 1997 at $10.55 and closing out the year at $10.81. The class "A" shares of the Fund had an annual total rate of return of 8.08%. This compares favorably to a 4.17% return in 1996. Demand for quality Kentucky municipal bonds continues to be strong. Once again, the Commonwealth of Kentucky is expected to post a surplus in the General Fund. Governor Patton also anticipates a balance of more than $200 million in the Commonwealth's "rainy day" fund. The investment objective of the Churchill Tax-Free Fund of Kentucky is to provide as high a level of triple tax-free current income as is consistent with the preservation of capital. This objective continues to be successfully addressed by adhering to a discipline of fundamental, conservative portfolio management ideals. The Fund has an average quality rating of "AA". We are proud to have once again earned a four star - **** - rating from Morningstar, an independent mutual fund rating service. Our "laddered" portfolio maturity structure helps us manage price volatility. The Fund has an effective maturity of approximately 7.1 years. We maintain a well-diversified portfolio of over 160 different Kentucky issues, thus reducing issuer credit risk by not having all of our eggs in one basket. We continue to be optimistic about the domestic economy in 1998. The recent financial crisis being experienced in numerous Asian economies has made the American bond market a "safe haven" for international investors. We expect growth to slow with the Gross Domestic Product (GDP) to be below 2% for all of 1998. We forecast inflation, as measured by the CPI, to average approximately 2% for the year. Slow growth plus moderate inflationary expectations should translate into another banner year for the bond market and interest rates for 1998. 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, 1997, 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, 1997, by correspondence with the custodian. As to securities sold but not delivered, we performed other appropriate auditing procedures. 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, 1997, 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 6, 1998 CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS DECEMBER 31, 1997
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (98.3%) S&P VALUE State Agencies (13.9%) Kentucky Higher Education Student Loan Corporaton Insured Student Loan Revenue, $ 980,000 6.500%, 06/01/00 Aaa/AA- $ 1,025,325 1,490,000 6.500%, 06/01/02 Aaa/AA- 1,609,200 2,955,000 6.800%, 06/01/03 Aaa/AA- 3,268,969 1,915,000 7.100%, 12/01/11 Aaa/AA- 2,075,381 Kentucky Infrastructure Authority Revenue, 795,000 7.625%, 08/01/03, Pre-Refunded A/NR 852,637 205,000 7.625%, 08/01/03 NR/A 220,119 200,000 7.500%, 02/01/99, Pre-Refunded NR/AAA 211,298 1,500,000 5.375%, 02/01/18 NR/A 1,522,500 555,000 7.200%, 06/01/11 A/A 609,112 635,000 5.250%, 06/01/12 A2/A 649,288 875,000 6.500%, 06/01/12 A/A 951,562 125,000 5.250%, 06/01/14 A2/A 126,250 1,110,000 6.375%, 06/01/14 A/A 1,234,875 135,000 5.250%, 06/01/15 A2/A 135,844 100,000 5.375%, 06/01/17 A2/A 101,375 Kentucky Local Correctional Facilities Construction Authority Revenue, 4,925,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,103,531 Kentucky Rural Economic Development Authority, 3,110,000 7.250%, 06/01/17 NR/AA 3,374,350 Kentucky State Properties and Buildings Commission Revenue, 400,000 5.000%, 09/01/13, Pre-Refunded A2/A+ 403,500 500,000 5.500%, 11/01/09, Pre-Refunded Aaa/AAA 535,000 400,000 7.350%, 12/01/99, Pre-Refunded Aaa/AAA 431,500 365,000 7.000%, 02/01/01, Pre-Refunded Aaa/AAA 401,500 4,510,000 6.625%, 10/01/00, Pre-Refunded Aaa/AAA 4,972,275 750,000 7.375%, 12/01/99, Pre-Refunded Aaa/AAA 810,000 1,000,000 6.500%, 08/01/01, Pre-Refunded Aaa/AAA 1,095,000 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,125,000 32,845,391 County Agencies (11.3%) Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/01, Pre-Refunded A2/NR 1,215,200 Jefferson County Kentucky Capital Projects, 420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 425,775 1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,656,450 1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,672,800 5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 6,084,375 Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 531,250 Kenton County Kentucky Public Properties Corp. Revenue, 400,000 7.000%, 10/01/99, Pre-Refunded NR/NR* 427,000 Kenton County Kentucky Industrial Developement, 300,000 6.950%, 12/01/26 Aa2/NR 339,375 Kenton County Kentucky Industrial Developement, 345,000 5.750%, 12/01/27 NR/AA 348,881 Lincoln County Kentucky Public Properties Corp., 430,000 6.500%, 03/01/22 NR/NR* 483,750 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A- 1,635,000 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/AA 543,750 570,000 7.550%, 03/01/10 NR/AA 616,312 4,500,000 6.500%, 03/01/19 NR/A 4,944,375 3,000,000 6.400%, 03/01/19 NR/A 3,513,750 Warren County Kentucky Justice, 2,350,000 5.350%, 09/01/29, MBIA Insured Aaa/AAA 2,397,000 26,835,043 City/Municipal Obligations (8.5%) Kentucky League Cities Funding Trust COP, 700,000 5.900%, 08/01/16 NR/A 750,750 1,715,000 6.200%, 08/01/17 NR/A+ 1,867,206 Louisville Kentucky Public Properties Corp, 4,090,000 6.700%, 12/01/20 A/A- 4,539,900 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 2,037,600 7,000,000 6.200%, 03/01/18 Aa/NR 7,446,250 Munfordville Kentucky Industrial Development Bond, 2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,765,625 Richmond Kentucky District Court 740,000 5.300%, 02/01/25 A3/NR 747,400 20,154,731 Utilities (5.7%) Glasgow Kentucky Electric Plant Board Revenue, 280,000 7.600%, 12/01/09, Pre-Refunded NR/BBB 311,500 Hardin County, Kentucky Water District, 1,000,000 5.900%, 01/01/25 Aaa/AAA 1,068,750 Henderson County Kentucky Water District, Waterworks Revenue, 190,000 5.600%, 09/01/21 NR/NR* 194,750 Kenton County Kentucky Water District 1,600,000 6.375%, 02/01/12, FGIC Insured Aaa/AAA 1,756,000 1,000,000 6.375%, 02/01/17, FGIC Insured Aaa/AAA 1,095,000 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 279,375 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue, 2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 2,020,000 4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,161,575 1,500,000 6.500%, 11/15/04, AMBAC Insured, Pre-Refunded Aaa/AAA 1,711,875 500,000 5.300%, 05/15/09, MBIA Insured Aaa/AAA 521,250 Muhlenberg County Kentucky Water District, Waterworks Revenue, 100,000 5.500%, 01/01/12, AMBAC Insured Aaa/AAA 104,875 110,000 5.500%, 01/01/13, AMBAC Insured Aaa/AAA 114,950 115,000 5.600%, 01/01/14, AMBAC Insured Aaa/AAA 120,750 13,460,650 Pollution Control Revenue (10.4%) Ashland Kentucky Pollution Control Revenue, 1,000,000 7.375%, 07/01/09 Baa2/NR 1,076,250 3,000,000 6.650%, 08/01/09 Baa2/NR 3,255,000 Boone County Kentucky Pollution Control, 4,000,000 6.500%, 11/15/22 Aa3/AA- 4,390,000 Boone County Kentucky Pollution Control, 735,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 751,538 Carroll County Kentucky Pollution Control Revenue, 3,500,000 7.450%, 09/15/16 Aa2/AA- 4,016,250 2,910,000 6.250%, 02/01/18 Aa2/AA- 3,102,788 Jefferson County Kentucky Pollution Control Revenue, 3,800,000 5.900%, 04/15/23 Aa2/AA- 4,013,750 Wickliffe Kentucky Pollution Control, 3,900,000 6.200%, 10/01/07 A1/A 3,914,469 100,000 6.375%, 04/01/26 A1/A 108,875 24,628,920 Transportation (8.1%) Kenton County Kentucky Airport Board Airport Revenue, 4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 5,048,100 Kentucky Interlocal School Transportation Authority 150,000 5.100%, 03/01/05 NR/A 154,688 200,000 6.000%, 12/01/20 NR/A 208,750 300,000 5.800%, 12/01/20 NR/A 308,250 400,000 5.650%, 12/01/20 NR/A 408,500 400,000 6.000%, 12/01/20 NR/A 416,500 350,000 5.600%, 12/01/20 NR/A 357,875 Kentucky State Turnpike Authority Economic Development Road Revenue, 3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,689,012 1,035,000 7.250%, 05/15/00, Pre-Refunded Aaa/AAA 1,122,975 1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,172,500 Louisville Kentucky Airport Lease Revenue, 750,000 7.850%, 02/01/09 A/A- 798,668 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,450,000 Puerto Rico Commonwealth Highway Authority Highway Revenue, 1,000,000 6.750%, 07/01/00, Pre-Refunded Aaa/A 1,085,000 19,220,818 Hospitals (12.6%) Floyd County Kentucky Hospital Revenue, 270,000 7.500%, 08/01/10 NR/AAA 296,325 510,000 5.500%, 09/01/14 NR/A 539,325 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,098,750 Jefferson County Kentucky Health Facilities Revenue (Jewish Hospital), 1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,580,625 100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 105,375 1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,253,500 230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 242,362 3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,434,375 Kentucky Development Finance Authority Hospital Revenue, 235,000 7.200%, 10/01/99 A3/A 247,338 2,570,000 7.300%, 10/01/99, Pre-Refunded A3/A 2,756,325 810,000 7.500%, 10/01/12, Pre-Refunded A3/A 871,762 400,000 7.250%, 11/01/06 A1/A+ 425,000 400,000 7.200%, 09/01/99, Pre-Refunded Aaa/AAA 427,500 750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 833,438 Kentucky Development Finance Authority, Sisters of Charity Hospitals, 3,000,000 6.500%, 11/01/07 A1/A+ 3,232,500 100,000 6.250%, 11/01/13, MBIA Insured Aaa/AAA 106,125 2,150,000 6.750%, 11/01/12 A1/A+ 2,346,188 Kentucky Development Finance Authority Kings Daughters Medical Center, 1,375,000 6.125%, 02/01/12, CGIC Insured Aaa/AAA 1,485,000 Kentucky Development Finance Authority Hospital Revenue, 1,000,000 5.700%, 10/01/10 NR/BBB 1,028,750 3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,176,250 2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,557,625 1,705,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,653,850 29,698,288 Housing (15.9%) Greater Kentucky Housing Assistance Corp. Multi- Family Housing Revenue, 320,000 6.300%, 07/01/15 Aaa/AAA 340,400 275,000 6.400%, 07/01/23 Aaa/AAA 293,562 Greater Kentucky Housing Assistance Corp. Multi- Family Housing Revenue, 2,025,000 6.050%, 07/01/22, Aaa/AAA 2,080,688 Jefferson County Kentucky Multi-Family Revenue, 1,530,000 5.750%, 06/01/23 NR/AA 1,595,025 Kenton County Kentucky Project Note, 1,000,000 6.125%, 12/01/17, FHA Insured Aa2/NR 1,073,750 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 270,300 835,000 7.600%, 01/01/07 Aaa/AAA 883,012 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,077,500 65,000 7.875%, 01/01/08 Aaa/AAA 67,681 440,000 7.250%, 01/01/09 Aaa/AAA 464,200 980,000 7.125%, 01/01/10 Aaa/AAA 1,047,375 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,310,812 225,000 5.400%, 07/01/14 Aaa/AAA 231,188 750,000 6.250%, 07/01/15 Aaa/AAA 803,438 215,000 6.150%, 07/01/16 Aaa/AAA 228,707 1,615,000 6.400%, 01/01/17 Aaa/AAA 1,742,181 965,000 5.500%, 07/01/18 Aaa/AAA 977,062 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,500,750 435,000 7.900%, 01/01/21 Aaa/AAA 458,925 175,000 7.800%, 01/01/21 Aaa/AAA 184,844 135,000 8.100%, 01/01/22 Aaa/AAA 143,269 2,370,000 7.450%, 01/01/23 Aaa/AAA 2,521,088 900,000 6.800%, 01/01/24 Aaa/AAA 963,000 3,500,000 6.375%, 07/01/28 Aaa/AAA 3,740,625 6,900,000 6.300%, 01/01/28 Aaa/AAA 7,331,250 1,000,000 6.250%, 07/01/28 Aaa/AAA 1,063,750 Martin County Kentucky Housing Revenue 1,000,000 6.250%, 07/01/23 Aa/NR 1,030,000 37,424,382 Universities (0.1%) Western Kentucky University Revenue, 275,000 7.100%, 12/01/00, Pre-Refunded Aaa/AAA 302,500 Schools (11.8%) Boone County Kentucky School District Finance Corp. School Building Revenue, 1,750,000 6.750%, 09/01/09 A1/A 1,944,687 2,250,000 6.125%, 12/01/17 A1/NR 2,390,625 2,295,000 5.700%, 05/01/18 A1/NR 2,395,406 Boyd County Kentucky School District, 575,000 5.375%, 10/01/17 A1/NR 586,500 Butler County Kentucky School Building Revenue, 270,000 7.200%, 05/01/07 NR/A 295,650 290,000 7.200%, 05/01/08 NR/A 317,550 Christian County Kentucky School District, 500,000 5.000%, 06/01/09 A1/NR 515,000 Fayette County School Building Revenue, 1,780,000 5.700%, 12/01/16 A1/A+ 1,877,900 Garrard County Kentucky School Building Revenue, 100,000 5.900%, 06/01/15 A1/NR 106,500 160,000 5.900%, 06/01/16 A1/NR 169,800 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 A1/NR 2,100,050 Harlan County Kentucky School District Corp. School Building Revenue, 205,000 7.400%, 12/01/06 A1/NR 224,731 200,000 7.250%, 09/01/00, Pre-Refunded A1/A 221,000 Hazard Kentucky Independent School District, 555,000 5.300%, 09/01/22 A1/NR 563,325 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 403,762 210,000 6.750%, 08/01/09, MBIA Insured Aaa/AAA 224,700 500,000 5.875%, 01/01/11 A1/A+ 530,000 695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 702,819 Kenton County Kentucky School District Finance Corp. School Building Revenue, 500,000 6.900%, 12/01/99, Pre-Refunded NR/NR* 540,000 600,000 7.000%, 12/01/99, Pre-Refunded NR/NR* 648,750 Lexington-Fayette Urban County Government School Building Revenue, 250,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 270,625 400,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 433,000 370,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 400,525 Meade County Kentucky School District, 500,000 6.000%, 07/01/16 A1/NR 540,000 400,000 5.700%, 07/01/15 A1/NR 422,500 Middlesboro Kentucky Independent School District Finance Corp., 100,000 6.100%, 08/01/16 A1/NR 108,500 Nelson County Kentucky School Building Revenue, 900,000 6.500%, 04/01/05 A3/NR 993,375 1,820,000 5.750%, 04/01/15 A1/NR 1,926,925 Pike County Kentucky School District Finance Corp. School Building Revenue, 505,000 6.900%, 12/01/05 A1/A 545,400 720,000 7.000%, 12/01/09 A1/A 795,600 Rowan County Kentucky School District Finance Corp., 215,000 5.600%, 06/01/16 A1/NR 227,631 Scott County Kentucky School Building Revenue, 2,750,000 5.900%, 06/01/18 A1/NR 2,925,312 Taylor County Kentucky School Building Revenue, 280,000 6.000%, 08/01/16 A/NR 302,400 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14 NR/A 1,076,775 27,727,323 Total Investments (cost $217,343,230**) 98.3% 232,298,046 Other assets in excess of liabilitites 1.7 3,981,254 Net Assets 100.0% $236,279,300 * Any security not rated has been 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, 1997 ASSETS Investments at value (identified cost $217,343,230) $232,298,046 Cash 84,873 Interest receivable 3,944,647 Receivable for Fund shares sold 471,984 Receivable for investment securities sold 410,000 Other assets 8,190 Total assets 237,217,740 LIABILITIES Payable for Fund shares redeemed 511,651 Dividends payable 195,792 Distribution fees payable 87,016 Adviser and Administrator fees payable 79,981 Accrued expenses 64,000 Total liabilities 938,440 NET ASSETS $236,279,300 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 218,575 Additional paid-in capital 220,977,803 Undistributed net investment income 7,774 Accumulated net realized gain on investments 120,332 Net unrealized appreciation on investments 14,954,816 $236,279,300 CLASS A Net Assets $226,476,719 Capital shares outstanding 220,951,105 Net asset value and redemption price per share $ 10.81 Offering price per share (100/96 of $10.81 adjusted to nearest cent) $ 11.26 CLASS C Net Assets $ 845,124 Capital shares outstanding 78,195 Net asset value and offering price per share $ 10.81 Redemption price per share (*generally, a charge of 1% is imposed on the proceeds of shares redeemed during the first 12 months after purchase) $ 10.81* CLASS Y Net Assets $ 8,957,457 Capital shares outstanding 828,219 Net asset value, offering and redemption price per share $ 10.82 See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 INVESTMENT INCOME: Interest income $13,628,874 Expenses: Investment Adviser fees (note 3) $ 322,582 Administrator fees (note 3) 599,081 Distribution and service fees (note 3) 340,309 Transfer and shareholder servicing agent fees 144,554 Trustees' fees and expenses (note 8) 72,402 Shareholders' reports and proxy statements 45,177 Legal fees 35,479 Audit and accounting fees 31,700 Custodian fees (note 7) 23,895 Registration fees and dues 8,063 Insurance 4,107 Miscellaneous 40,069 1,667,418 Expenses paid indirectly (note 7) (20,708) Net expenses 1,646,710 Net investment income 11,982,164 REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain from securities transactions 690,738 Change in unrealized appreciation on investments 5,384,972 Net realized and unrealized gain on investments 6,075,710 Net increase in net assets resulting from operations $18,057,874
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1997 1996 OPERATIONS: Net investment income $ 11,982,164 $ 11,830,624 Net realized gain from securities transactions 690,738 513,426 Change in unrealized appreciation (depreciation) on investments 5,384,972 (3,273,903) Change in net assets from operations 18,057,874 9,070,147 DISTRIBUTIONS TO SHAREHOLDERS (note 6): Class A Shares: Net investment income (11,553,536) (11,653,180) Distributions in excess of net investment income - (796,825) Net realized gain on investments (332,819) - Class C Shares: Net investment income (29,337) (5,800) Distributions in excess of net investment income - (410) Net realized gain on investments (845) - Class Y Shares: Net investment income (391,517) (171,644) Distributions in excess of net investment income - (10,323) Net realized gain on investments (11,278) - Change in net assets from distributions (12,319,332) (12,638,182) CAPITAL SHARE TRANSACTIONS (note 9): Proceeds from shares sold 25,210,705 25,334,669 Reinvested dividends and distributions 6,701,119 7,120,982 Cost of shares redeemed (30,516,063) (30,012,962) Change in net assets from capital share transactions 1,395,761 2,442,689 Change in net assets 7,134,303 (1,125,346) NET ASSETS: Beginning of period 229,144,997 230,270,343 End of period $236,279,300 $229,144,997
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 1, 1996, offered only one class of shares. On that date, the Fund began offering two additional classes of shares, Class C and Class Y shares. All shares outstanding prior to that date were designated as Class A shares and, as was the case since inception, are sold with a front-payment sales charge and bear an annual service fee. Class C shares are sold with a level-payment sales charge with no payment at time of purchase but level service and distribution fees from date of purchase through a period of six years thereafter. A contingent deferred sales charge of 1% is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity. They are not available to individual retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. All classes of shares represent interests in the same portfolio of investments in the Fund and are identical as to rights and privileges. They differ only with respect to the effect of sales charges, the distribution and/or service fees borne by the respective class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. a) PORTFOLIO VALUATION: 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. 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. 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 at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Management affairs of the Fund are conducted through two separate management arrangements. 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, 1997. For the year ended December 31, 1997, the Fund incurred fees under the Advisory Agreement and Administration Agreement of $322,582 and $599,081, respectively. b) DISTRIBUTION AND SERVICE FEES: The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make service fee payments to broker-dealers ("Qualified Recipients") or others selected by Aquila Distributors, Inc. (the "Distributor") including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund's shares or servicing of shareholder accounts. The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the year ended December 31, 1997, service fees on Class A Shares amounted to $333,695, of which the Distributor received $6,454. Under another part of the Plan, the Fund is authorized to make payments with respect to Class C Shares to Qualified Recipients which have rendered assistance in the distribution and/or retention of the Fund's Class C shares or servicing of shareholder accounts. These payments are made at the annual rate of 0.75% of the Fund's net assets represented by Class C Shares and for the year ended December 31, 1997, amounted to $4,961. In addition, under a Shareholder Services Plan, the Fund is authorized to make service fee payments with respect to Class C Shares to Qualified Recipients for providing personal services and/or maintenance of shareholder accounts. These payments are made at the annual rate of 0.25% of the Fund's net assets represented by Class C Shares and for the year ended December 31, 1997, amounted to $1,653. The total of these payments with respect to Class C Shares amounted to $6,614, of which the Distributor received $6,286. Specific details about the Plans are more fully defined in the Fund's Prospectus and Statement of Additional Information. Under a Distribution Agreement, Aquila Distributors, Inc. 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, 1997, the Distributor received sales commissions of $37,896. 4. PURCHASES AND SALES OF SECURITIES During the year ended December 31, 1997, purchases of securities and proceeds from the sales of securities aggregated $52,469,221and $51,018,231, respectively. At December 31, 1997, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $14,954,816, for net unrealized appreciation of $14,954,816. There are no securities in which there is an excess of tax cost over market value. 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 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 secur ities 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. 7. 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, 1997, the Fund's custodian fees amounted to $23,895, of which $20,708 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. 8. TRUSTEES' FEES AND EXPENSES During the fiscal year there were nine Trustees. Trustee' 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, 1997, such reimbursements averaged approximately $4,200 per Trustee. Two of the Trustees, who are affiliated with the Administrator, are not paid any Trustee fees. 9. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
Year Ended Year Ended December 31, 1997 December 31, 1996 Shares Amount Shares Amount CLASS A SHARES: Proceeds from shares sold 1,946,573 $20,614,221 1,793,117 $18,843,152 Reinvested distributions 629,661 6,662,872 676,874 7,110,206 Cost of shares redeemed (2,759,392) (29,203,137) (2,464,106) (25,843,142) Exchanged into Class Y Shares - - (369,589) (3,858,514) Net change (183,158) (1,926,044) (363,704) (3,748,298) Period Ended December 31, 1996* Shares Amount CLASS C SHARES: Proceeds from shares sold 47,349 501,768 40,643 424,784 Reinvested distributions 2,091 22,131 444 4,663 Cost of shares redeemed (12,332) (131,306) - - Net change 37,108 392,593 41,087 429,447 Period Ended December 31, 1996* Shares Amount CLASS Y SHARES: Proceeds from shares sold 387,049 4,094,716 211,416 2,208,219 Reinvested distributions 1,517 16,116 583 6,113 Exchanged from Class A Shares - - 369,589 3,858,514 Cost of shares redeemed (112,210) (1,181,620) (29,725) (311,306) Net change 276,356 2,929,212 551,863 5,761,540 Total transactions in Fund shares 130,306 $1,395,761 229,246 $ 2,442,689 * 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 A(1) Year ended December 31, 1997 1996 1995 1994 1993 Net Asset Value, Beginning of Period $10.55 $10.71 $9.97 $10.93 $10.49 Income from Investment Operations: Net investment income 0.55 0.55 0.60 0.60 0.62 Net gain (loss) on securities (both realized and unrealized) 0.27 (0.12) 0.74 (0.96) 0.47 Total from Investment Operations 0.82 0.43 1.34 (0.36) 1.09 Less Distributions (note 6): Dividends from net investment income (0.55) (0.59) (0.60) (0.60) (0.62) Distributions from capital gains (0.01) - - - (0.03) Total Distributions (0.56) (0.59) (0.60) (0.60) (0.65) Net Asset Value, End of Period $10.81 $10.55 $10.71 $9.97 $10.93 Total Return (not reflecting sales charge)(%) 8.08 4.17 13.75 (3.31) 10.50 Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 226,477 222,889 230,270 232,656 258,632 Ratio of Expenses to Average Net Assets (%) 0.72 0.74 0.79 0.72 0.59 Ratio of Net Investment Income to Average Net Assets (%) 5.20 5.23 5.75 5.81 5.67 Portfolio Turnover Rate (%) 22.39 8.94 17.09 35.25 31.29 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 ($) 0.55 0.55 0.60 0.60 0.60 Ratio of Expenses to Average Net Assets (%) 0.73 0.75 0.80 0.73 0.73 Ratio of Net Investment Income to Average Net Assets (%) 5.19 5.22 5.74 5.80 5.52 (1) Designated as Class A Shares on April 1, 1996.
Note: Effective September 11, 1995, Banc One Investment Advisors Corporation became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc. See accompanying notes to financial statements. FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class C(1) Class Y(1) Year Period(2) Year Period(2) Ended Dec. Ended Dec. Ended Dec. Ended Dec. 31, 1997 31, 1996 31, 1997 31, 1996 Net Asset Value, Beginning of Period $10.55 $10.47 $10.55 $10.47 Income from Investment Operations: Net investment income 0.46 0.37 0.56 0.43 Net gain on securities (both realized and unrealized) 0.27 0.11 0.29 0.11 Total from Investment Operations 0.73 0.48 0.85 0.54 Less Distributions (note 6): Dividends from net investment income (0.46) (0.40) (0.57) (0.46) Distributions from capital gains (0.01) - (0.01) - Total Distributions (0.47) (0.40) (0.58) (0.46) Net Asset Value, End of Period $10.81 $10.55 $10.82 $10.55 Total Return (not reflecting sales charge)(%) 7.16 4.72# 8.34 5.24# Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 845 433 8,957 5,823 Ratio of Expenses to Average Net Assets (%) 1.56 1.55* 0.56 0.56* Ratio of Net Investment Income to Average Net Assets (%) 4.31 4.35* 5.32 5.42* Portfolio Turnover Rate (%) 22.39 8.94 22.39 8.94 Net investment income per share and the ratios of income and expenses to average net assets without the expense offset in custodian fees for uninvested cash balances would have been: Net Investment Income ($) 0.46 0.37 0.56 0.43 Ratio of Expenses to Average Net Assets (%) 1.57 1.56* 0.57 0.58* Ratio of Net Investment Income to Average Net Assets (%) 4.30 4.34* 5.31 5.41* (1) New Class of Shares established on April 1, 1996. (2) From April 1, 1996 to December 31, 1996. # Not annualized. * Annualized.
See accompanying notes to financial statements. REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 25, 1997.* 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 139,068,426 affirmative votes (98.37%); no more than 2,299,314 votes were withheld for any Trustee (1.63%)), 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, 1997 (votes for: 134,699,428 (95.28%); votes against: 454,454 (0.32%); abstentions: 6,213,858 (4.40%); broker non-votes: 0 (0.00%)). * On the record date for this meeting, the holders of 21,127,291.6 Class A shares, 50,774.7 Class C shares, and 61,025.5 Class Y shares of the Fund were outstanding and entitled to vote representing a total net asset value of $229,227,356.99. The holders of shares entitled to vote representing a total net asset value of $141,367,740 (61.6%) were present in person or by proxy at the meeting. FEDERAL TAX STATUS OF 1997 DISTRIBUTIONS (UNAUDITED) For the fiscal year ended December 31, 1997, of the total amount of dividends paid by Churchill Tax-Free Fund of Kentucky, 97.19% was "exempt-interest dividends" and the balance was ordinary dividend income. $344,942 of the amount distributed by the Fund during fiscal 1997 is designated as a dividend from 20% net long-term capital gains. For those shareholders subject to the Federal alternative minimum tax, 19.70% of your Fund's dividends was derived from interest on "private activity bonds." Prior to January 31, 1998, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 1997 CALENDAR YEAR. -----END PRIVACY-ENHANCED MESSAGE-----