-----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, GI4Msy0deHZNo9nVqDmpkUYnixlpFzUtpvwGj4yFutVIw64mzCBWk8mt7dGaH6Qd oq/apCVqX4httbw3rVKGbA== 0000812006-99-000014.txt : 19990311 0000812006-99-000014.hdr.sgml : 19990311 ACCESSION NUMBER: 0000812006-99-000014 CONFORMED SUBMISSION TYPE: N-30D/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TAX FREE TRUST CENTRAL INDEX KEY: 0000812006 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D/A SEC ACT: SEC FILE NUMBER: 811-05086 FILM NUMBER: 99561300 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 2: 380 MADISON AVE SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHURCHILL TAX FREE FUND OF KENTUCKY DATE OF NAME CHANGE: 19880911 N-30D/A 1 MANAGER AND FOUNDER AQUILA MANAGEMENT CORPORATION 380 Madison Avenue, Suite 2300 New York, New York 10017 INVESTMENT SUB-ADVISER BANC ONE INVESTMENT ADVISORS CORPORATION 416 West Jefferson Street Louisville, Kentucky 40202 BOARD OF TRUSTEES Lacy B. Herrmann, Chairman Thomas A. Christopher Douglas Dean Diana P. Herrmann Carroll F. Knicely Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS 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 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, 1998 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) (Logo for the Aquila Group of Funds: an eagle's head) ONE OF THE AQUILAsm GROUP OF FUNDS SERVING KENTUCKY INVESTORS FOR OVER A DECADE (Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a circle around it) CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT "THE BEST THINGS IN LIFE CAN BE TAX-FREE" February 17, 1999 Dear Fellow Shareholder: When you compare TAX-FREE municipal bonds with similar maturity high quality taxable U.S. Treasuries, we think it is fair to say, "THE BEST THINGS IN LIFE CAN BE TAX-FREE." You may well come out way ahead owning a TAX-FREE bond, since recently the ratio of return on TAXABLE U.S. Treasuries versus TAX-FREE municipals has been running ahead of what has normally been the case. What this means to you in dollars and cents is that when you take into consideration the effect of taxes you pay with a TAXABLE bond, you actually get to keep more of your return with the TAX-FREE investment. Let us show you the mathematics of how this works out. Let's suppose you purchase a $1,000 15-year U.S. Treasury bond yielding 5% and a $1,000 tax-free municipal bond with a maturity of 15 years yielding 4.4%. Your investments would look as follows*: U.S. TREASURY TAX-FREE Interest Income $50.00 $44.00 Federal Tax Bracket 28% 28% Federal Tax Paid $14.00 $-0- Net Income Retained $36.00 $44.00 Even though on the surface the U.S. Treasury appears to be yielding higher than the TAX-FREE municipal, once the effect of Federal taxes is taken into consideration, the TAX-FREE investment allows you to keep more money in your pocket. State taxes are not applicable to either investment. Obviously, investors in higher income tax brackets will obtain an even greater advantage. Given the desirability of making sure you have the right asset allocation with your investment money, the fact that there is an increased supply of high quality municipal bonds and a rising ratio of taxable vs. tax-free bonds, we believe it is fair to say that, "THE BEST THINGS IN LIFE CAN BE TAX-FREE." This is particularly true considering the high quality of the bonds in Churchill Tax-Free Fund of Kentucky and the intermediate maturity of the overall portfolio of the Fund. Both these factors lend themselves to the kind of investment that allows you to "sleep well at night." You can be assured that all those associated with the management of your investment in Churchill Tax-Free Fund of Kentucky are consistently working in your best interest. We very much value you as a shareholder and appreciate the confidence you have shown in the Fund. Sincerely, Lacy B. Herrmann Chairman, Board of Trustees * The examples given, while realistic, are for illustrative purposes only, are strictly hypothetical in nature and do not represent the performance of any particular investment. For simplicity, a stable net asset value has been assumed over the life of each investment and the effect of dividend reinvestment was not taken into account. Of course, the actual rate of return and share price of a municipal bond fund, such as Churchill Tax-Free Fund of Kentucky, will fluctuate with general interest rate changes. Thus, redemption price may be more or less than original purchase price. 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, 1998, 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 approximately 28,000 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. Furthermore, whatever the 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. 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:) 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 12/98 22,047 21,999 14,545 (Graphic of table with the following information:) Fund's average annual total return For the Period Ended December 31, 1998 1 Year 5 Years 10 Years Life of Fund Since 5/21/87 Including Sales Charge and Expenses 0.93% 4.55% 7.20% 7.02%
PERFORMANCE COMPARISON Lehman Brothers Quality Fund After Sales Charge Cost of Intermediate Municipal Bond Index and Expenses Living Index
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. No matter how you look at it, 1998 was a very dramatic year for the world financial markets. It seemed that every time we turned around, another Asian or Latin American securities market or currency was on the "verge of collapse." The Russian government devalued the ruble and delayed payment on billions of dollars of its debt. Tensions in Iraq threatened to send oil prices higher. And as if all that weren't enough, the markets had the distraction of the Clinton scandal to contend with. In spite of all the challenges it faced, the U. S. financial markets continued to prosper. The U. S. Treasury market proved once again to be the "safe haven" for both domestic and foreign investors to "park" their funds, with rate of return taking a backseat to safety. The yield to maturity on the 30-year U. S. Treasury bond began the year at 5.92%. By the close of 1998, the yield had fallen to 5.09%. While this decline was due in large part to the "flight to quality" offered by the perceived safety provided by U. S. Treasury securities, the fact that we experienced only modest inflation during the year also contributed to this unprecedented strength. In 1998 we saw the Federal Reserve move to reduce short-term interest rates a number of times. The Dow Jones Industrial Average continued to break records, hitting a high of nearly 9400, before closing the year at just under 9200. The Standard & Poor's 500 Index rose 26.67%, marking the fourth consecutive year of double-digit returns. We had great news on the inflation front in 1998 - domestic inflation, as measured by the Producer Price Index (PPI) actually declined by 0.1% for the year. Prices at the retail level, as measured by the Consumer Price Index (CPI) rose a modest 1.6% for the year, matching the increase we saw in 1997. The municipal Bond Buyer Revenue Bond Index ended the year at 5.28%, virtually unchanged from the levels we saw at the end of 1997. Kentucky municipal bonds continued to be in strong demand. The General Fund of the Commonwealth of Kentucky continues to maintain a comfortable surplus. Consequently, in 1998, the State was essentially absent from borrowing in the tax-free bond market. Cities, counties, and other local municipalities accounted for nearly all of the increase in borrowing that we saw last year, as issuers took advantage of the prevailing lower interest rates to refinance their higher cost debt. The conservative intermediate maturity structure of the portfolio and the high current income of the Churchill Tax-Free Fund of Kentucky combined to produce a net asset value of $10.81 per share, exactly the same as where we ended 1997. The "A" class shares of the Fund had an annual total rate of return of 5.13% for 1998. The investment objective of the Churchill Tax-Free Fund of Kentucky is to provide as high a level of triple tax-exempt current income as is consistent with the preservation of capital. This objective continues to be successfully addressed by adhering to a discipline of solid fundamental, conservative portfolio management ideals. The Fund has maintained an average credit quality 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 7.5 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 are optimistic about the prospects for the domestic economy in 1999. We expect the economy to grow at a modest rate, approximately 1.5% - 2.0%, as measured by the Gross Domestic Product (GDP). We forecast inflation, as measured by the CPI, to average approximately 1.75% for the year. There remain serious concerns regarding financial turmoil still being experienced in several foreign economies. Slow growth, moderate inflation, and global economic concerns should again translate into another positive year for the bond market and interest rates in 1999. (Logo for KPMG LLP: The letters KPMG in front of four rectangles) 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, 1998, and 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, 1998, 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, 1998, 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 LLP New York, New York February 1, 1999 STATE AGENCIES (13.9%) Kentucky Higher Education Student Loan Corporaton Insured Student Loan Revenue, $ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,588,712 2,955,000 6.800%, 06/01/03 Aaa/AA- 3,206,175 1,915,000 7.100%, 12/01/11 Aaa/AA- 2,039,475 1,930,000 Kentucky Infrastructure Authority Revenue, 5.000%, 06/01/09, MBIA Insured Aaa/AAA 2,033,737 555,000 7.200%, 06/01/11 A/A 602,869 635,000 5.250%, 06/01/12 A2/A 661,987 875,000 6.500%, 06/01/12 A/A 946,094 125,000 5.250%, 06/01/14 A2/A 128,594 1,110,000 6.375%, 06/01/14 A/A 1,239,037 135,000 5.250%, 06/01/15 A2/A 138,375 100,000 5.375%, 06/01/17 A2/A 103,250 100,000 5.000%, 08/01/17 NR/A 98,875 1,500,000 5.375%, 02/01/18 NR/A 1,530,000 Kentucky Local Correctional Facilities Construction Authority Revenue, 5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,343,575 Kentucky Area Development 345,000 5.750%, 12/01/27 NR/AA 357,506 145,000 5.600%, 6/01/28 NR/AA 148,625 785,000 5.500%, 6/01/28 NR/AA 797,756 Kentucky Rural Economic Development Authority 3,110,000 7.250%, 06/01/17 NR/AA 3,351,025 Kentucky State Properties and Buildings Commission Revenue, 4,510,000 6.625%, 10/01/00, Pre-Refunded NR/AAA 4,932,812 365,000 7.000%, 02/01/01, Pre-Refunded NR/AAA 396,025 1,000,000 6.500%, 08/01/01, Pre-Refunded NR/AAA 1,087,500 220,000 6.000%, 09/01/08 A2/A+ 249,700 500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 542,500 400,000 5.000%, 09/01/13 A/A+ 404,000 1,000,000 5.100%, 10/01/17 A2/A+ 1,011,250 Puerto Rico Public Buildings Authority, 1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,117,500 34,056,954 COUNTY AGENCIES (13.3%) Clark County Kentucky Public Properties Corp. Revenue, 1,120,000 6.700%, 06/01/01, Pre-Refunded A/NR 1,201,200 Floyd County Public Property, Courthouse Revenue, 510,000 5.500%, 09/01/14 NR/A 545,063 Jefferson County Kentucky Capital Projects, 1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,075,000 420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 437,850 1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,680,750 1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,697,400 5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 6,187,625 Kenton County Kentucky Public Property County Courthouse 455,000 5.000%, 03/01/14 A1/NR 455,569 250,000 5.000%, 03/01/15 A1/NR 248,750 345,000 5.000%, 03/01/20 A1/NR 335,081 1,000,000 5.000%, 03/01/23 A1/NR 962,500 Lincoln County Kentucky Public Properties Corp., 430,000 6.500%, 03/01/22 NR/NR* 481,600 Muhlenberg County Kentucky Industrial Development Revenue, 1,500,000 7.000%, 09/01/01 NR/A 1,606,875 Nelson Co. IDR - (Mabex Universal), 2,900,000 6.500%, 04/01/05 A1/NR 3,146,500 Pendleton County Kentucky Multi-County Lease Revenue, 500,000 7.300%, 03/01/02 NR/AA 535,000 570,000 7.550%, 03/01/10 NR/AA 607,050 4,500,000 6.500%, 03/01/19 NR/A 4,888,125 3,000,000 6.400%, 03/01/19 NR/A 3,476,250 Warren County Kentucky Justice, 2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,982,812 32,551,000 CITY/MUNICIPAL OBLIGATIONS (8.7%) Danville Kentucky Multi-City Lease. Revenue, 545,000 5.000%, 09/01/11 NR/NR* 557,262 Jeffersontown Kentucky Public Project Corp. Revenue, 500,000 5.750%, 11/01/15 A/NR 538,125 Kentucky League Cities Funding Trust COP, 700,000 5.900%, 08/01/16, (Owensboro) NR/A 753,375 1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,871,494 Louisville Kentucky Public Properties Corp., 4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,585,912 Mount Sterling Kentucky Lease Revenue, 1,920,000 6.150%, 03/01/13 Aa/NR 2,078,400 7,000,000 6.200%, 03/01/18 Aa/NR 7,533,750 Munfordville Kentucky Industrial Development Revenue 2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,753,125 Richmond Kentucky District Court Facility Revenue 740,000 5.300%, 02/01/25 A3/NR 750,175 21,421,618 UTILITIES (9.6%) Carrolton & Henderson Kentucky Gas Revenue, 750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 792,187 Glasgow Kentucky Electric Plant Board Revenue, 280,000 7.600%, 12/01/09, Pre-Refunded NR/BBB 306,600 Hardin County, Kentucky Water District 1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA 1,086,250 Henderson County Kentucky Water District, Waterworks Revenue, 190,000 5.600%, 09/01/21 NR/NR* 194,987 Lebanon Kentucky Waterworks Revenue, 250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 274,687 Louisville and Jefferson County Kentucky Metropolitan Sewer District Revenue, 1,525,000 6.500%, 11/15/04, MBIA Insured, Pre-Refunded Aaa/AAA 1,749,937 250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 255,312 230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 233,162 2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 2,037,500 2,500,000 5.000%, 05/15/19, MBIA Insured Aaa/AAA 2,481,250 1,745,000 5.000%, 05/15/22, MBIA Insured Aaa/AAA 1,736,275 4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,217,537 1,000,000 5.250%, 05/15/27, MBIA Insured Aaa/AAA 1,025,000 7,000,000 4.750%, 05/15/28, MBIA Insured Aaa/AAA 6,693,750 Muhlenberg County Kentucky Water District, Waterworks Revenue, 100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 107,500 110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 117,837 115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 122,619 North Nelson County Kentucky, Water Revenue 205,000 5.200%, 01/01/20 NR/NR* 203,462 23,635,852 POLLUTION CONTROL REVENUE (9.1%) Ashland Kentucky Pollution Control Revenue, (Ashland Oil) 3,000,000 6.650%, 08/01/09 Baa2/NR 3,240,000 Boone County Kentucky Pollution Control, (Dayton Power & Light) 4,000,000 6.500%, 11/15/22 Aa3/AA- 4,355,000 Boone County Kentucky Pollution Control, (Cinergy) 750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 779,062 Carroll County Kentucky Pollution Control Revenue, (LG&E Energy) 3,500,000 7.450%, 09/15/16 Aa2/AA- 3,950,625 2,910,000 6.250%, 02/01/18 Aa2/AA- 3,084,600 Jefferson County Kentucky Pollution Control Revenue, (LG&E Energy) 3,800,000 5.900%, 04/15/23 Aa2/AA 4,037,500 Wickliffe Kentucky Pollution Control, (Westvaco) 2,755,000 6.200%, 04/01/07 A1/A 2,760,235 100,000 6.375%, 04/01/26 A1/A 109,000 22,316,022 TRANSPORTATION (6.8%) 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 156,938 145,000 5.400%, 06/01/17 NR/A 148,625 200,000 6.000%, 12/01/20 NR/A 208,250 300,000 5.800%, 12/01/20 NR/A 309,750 400,000 6.000%, 12/01/20 NR/A 416,500 400,000 5.650%, 12/01/20 NR/A 410,000 350,000 5.600%, 12/01/20 NR/A 357,875 Kentucky State Turnpike Authority Economic Development Road Revenue, 120,000 8.500%, 07/01/06 A/A+ 152,850 1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,176,250 3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,763,494 Puerto Rico Commonwealth Highway & Transportation Authority Highway Revenue, 4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,430,000 16,578,632 HOSPITALS (11.2%) Floyd County Kentucky Hospital Revenue, 250,000 7.500%, 08/01/10 NR/AAA 269,375 Hopkins County Kentucky Hospital Revenue, 1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,083,750 Jefferson County Kentucky Health Facilities Revenue (Jewish Hospital), 1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,601,250 100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 107,625 1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,249,188 230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 247,825 1,000,000 5.125%, 10/01/18, MBIA Insured Aaa/AAA 1,002,500 3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,508,750 Kentucky Development Finance Authority Hospital Revenue, 750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 825,938 3,000,000 6.500%, 11/01/01, Pre-Refunded A1/A+ 3,258,750 2,150,000 6.750%, 11/01/01, Pre-Refunded A1/A+ 2,351,563 420,000 5.250%, 02/01/09, FSA Insured Aaa/AAA 450,450 1,000,000 5.700%, 10/01/10, ACA Insured NR/A 1,068,750 1,375,000 6.125%, 02/01/12, CGIC Insured, (Kingsdaughters) Aaa/AAA 1,495,313 2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,590,000 3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,213,750 1,000,000 5.850%, 10/01/17, ACA Insured NR/A 1,041,250 1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,972,588 27,338,615 HOUSING (15.4%) Greater Kentucky Housing Assistance Corp. Multi- Family Housing Revenue, 320,000 6.300%, 07/01/15 Aaa/NR 339,600 2,025,000 6.050%, 07/01/22 Aaa/AAA 2,075,625 275,000 6.400%, 07/01/23 Aaa/NR 293,219 Jefferson County Kentucky Multi-Family Revenue, 1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,604,588 Jefferson County Kentucky Multi-Family Revenue, 1,200,000 5.650%, 08/20/34 (Kentucky Towers Project) Aaa/AAA 1,249,500 Kenton County Kentucky Project Note 1,000,000 6.125%, 12/01/17, FHA Insured Aa2/NR 1,080,000 Kenton County Kentucky Industrial Development, 300,000 6.950%, 12/01/26 Aa2/NR 339,000 Kentucky Housing Corporation Housing Revenue, 255,000 7.750%, 01/01/07 Aaa/AAA 266,156 835,000 7.600%, 01/01/07 Aaa/AAA 870,488 1,000,000 6.500%, 01/01/07 Aaa/AAA 1,066,250 45,000 7.875%, 01/01/08 Aaa/AAA 45,956 340,000 7.250%, 01/01/09 Aaa/AAA 353,141 980,000 7.125%, 01/01/10 Aaa/AAA 1,036,350 4,975,000 6.600%, 07/01/11 Aaa/AAA 5,273,500 725,000 5.300%, 07/01/10 Aaa/AAA 750,375 230,000 5.400%, 07/01/14 Aaa/AAA 237,763 750,000 6.250%, 07/01/15 Aaa/AAA 798,750 315,000 6.100%, 07/01/16 Aaa/AAA 333,900 1,475,000 6.400%, 01/01/17 Aaa/AAA 1,576,406 445,000 5.300%, 07/01/18 Aaa/AAA 451,675 1,065,000 5.550%, 07/01/18 Aaa/AAA 1,103,606 1,450,000 5.800%, 01/01/19 Aaa/AAA 1,504,375 300,000 7.900%, 01/01/21 Aaa/AAA 311,625 30,000 7.800%, 01/01/21 Aaa/AAA 31,238 110,000 8.100%, 01/01/22 Aaa/AAA 114,813 1,910,000 7.450%, 01/01/23 Aaa/AAA 2,005,500 225,000 6.800%, 01/01/24 Aaa/AAA 238,500 310,000 5.850%, 07/01/27 Aaa/AAA 320,850 3,500,000 6.375%, 07/01/28 Aaa/AAA 3,696,875 6,900,000 6.300%, 01/01/28 Aaa/AAA 7,296,750 1,000,000 6.250%, 07/01/28 Aaa/AAA 1,057,500 37,723,874 SCHOOLS (10.3%) Boone County Kentucky School District Finance Corp. School Building Revenue, 1,750,000 6.750%, 09/01/01, Pre-Refunded A1/A 1,931,563 2,250,000 6.125%, 12/01/17, Pre-Refunded A1/NR 2,477,813 2,295,000 5.700%, 05/01/18 A1/NR 2,398,275 Boyd County Kentucky School District Finance Corp., 575,000 5.375%, 10/01/17 A1/NR 595,844 Christian County Kentucky School District Finance Corp., 500,000 5.000%, 06/01/09 A1/NR 523,750 Fayette County School Building Revenue, 160,000 5.350%, 01/01/14 A1/A+ 166,200 1,780,000 5.700%, 12/01/16 A1/A+ 1,902,375 Floyd County Kentucky School Building Revenue 250,000 5.000%, 12/01/09 A1/NR 262,500 Garrard County Kentucky School Building Revenue, 100,000 5.900%, 06/01/15 A1/NR 107,750 160,000 5.900%, 06/01/16 A1/NR 171,800 Grayson County Kentucky School Building Revenue, 1,940,000 6.000%, 01/01/15 A1/NR 2,129,150 Hazard Kentucky Independent School District Finance Corp., 555,000 5.300%, 09/01/22 A1/NR 566,100 Jefferson County Kentucky School District Finance Corp. School Building Revenue, 370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 401,913 100,000 5.250%, 07/01/09 Aaa/AAA 106,750 500,000 5.875%, 01/01/11 A1/A+ 541,250 695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 713,244 Kenton County Kentucky School District Finance Corp. School Building Revenue, 100,000 5.250%, 03/01/06 NR/A+ 106,125 Lexington-Fayette Urban County Government Project U.K. Library 725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 728,625 1,000,000 5.000%, 11/01/20, MBIA Insured Aaa/AAA 995,000 Meade County Kentucky School District Finance Corp., 400,000 5.700%, 07/01/15 A1/NR 435,000 500,000 6.000%, 07/01/16 A1/NR 551,250 Middlesboro Kentucky Independent School District Finance Corp. 100,000 6.100%, 08/01/16 A1/NR 111,500 Nelson County Kentucky School Building Revenue, 1,820,000 5.750%, 04/01/15 A1/NR 1,940,575 Pike County Kentucky School District Finance Corp. School Building Revenue, 720,000 7.000%, 12/01/00, Pre-Refunded A/A 786,600 Rowan County Kentucky School District Finance Corp. 215,000 5.600%, 06/01/16 A1/NR 229,781 Scott County Kentucky School Building Revenue, 2,750,000 5.900%, 06/01/18 A1/A 2,932,188 Taylor County Kentucky School Building Revenue, 280,000 6.000%, 08/01/16 A1/NR 304,850 Todd County Kentucky School Building Revenue, 980,000 6.300%, 10/01/14 NR/A 1,079,225 25,196,996 Total Investments (cost $226,378,152**) 98.3% 240,819,563 Other assets in excess of liabilities 1.7 4,131,527 Net Assets 100.0% $ 244,951,090 * Any security not rated has been determined by the Investment Sub-Adviser to have sufficient quality to be ranked in the top four credit ratings if a credit rating were to be assigned by a rating service. ** Cost for Federal tax purposes is identical. See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS DECEMBER 31, 1998 RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (98.3%) S&P VALUE
CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998 ASSETS Investments at value (cost $226,378,152) $ 240,819,563 Cash 389,974 Interest receivable 3,837,674 Receivable for securities called for redemption 450,000 Receivable for Fund shares sold 102,448 Other assets 1,242 Total assets 245,600,901 LIABILITIES Dividends payable 338,227 Distribution fees payable 89,075 Management fee payable 83,129 Accrued expenses 71,931 Payable for Fund shares redeemed 67,449 Total liabilities 649,811 NET ASSETS $ 244,951,090 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 226,486 Additional paid-in capital 229,517,778 Accumulated net realized gain on investments 765,415 Net unrealized appreciation on investments 14,441,411 $ 244,951,090 CLASS A Net Assets $ 229,667,000 Capital shares outstanding 21,236,109 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 $ 949,491 Capital shares outstanding 87,810 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 $ 14,334,599 Capital shares outstanding 1,324,689 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, 1998 INVESTMENT INCOME: Interest income $ 13,488,508 Expenses: Management fee (note 3) $ 958,774 Distribution and service fees (note 3) 348,905 Transfer and shareholder servicing agent fees 143,559 Trustees' fees and expenses (note 8) 74,368 Legal fees 61,335 Shareholders' reports and proxy statements 51,584 Registration fees and dues 31,113 Audit and accounting fees 28,750 Custodian fees 22,490 Insurance 3,766 Miscellaneous 23,715 1,748,359 Expenses paid indirectly (note 7) (33,201) Net expenses 1,715,158 Net investment income 11,773,350 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from securities transactions 865,993 Change in unrealized appreciation on investments (513,405) Net realized and unrealized gain on investments 352,588 Net increase in net assets resulting from operations $ 12,125,938 See accompanying notes to financial statements.
OPERATIONS: Net investment income $ 11,773,350 $ 11,982,164 Net realized gain from securities transactions 865,993 690,738 Change in unrealized appreciation on investments (513,405) 5,384,972 Change in net assets from operations 12,125,938 18,057,874 DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6): Class A Shares: Net investment income (11,135,477) (11,553,536) Net realized gain on investments (207,578) (332,819) Class C Shares: Net investment income (35,988) (29,337) Net realized gain on investments (671) (845) Class Y Shares: Net investment income (610,932) (391,517) Net realized gain on investments (11,388) (11,278) Change in net assets from distributions (12,002,034) (12,319,332) CAPITAL SHARE TRANSACTIONS (note 9): Proceeds from shares sold 28,425,496 25,210,705 Reinvested dividends and distributions 6,370,081 6,701,119 Cost of shares redeemed (26,247,691) (30,516,063) Change in net assets from capital share transactions 8,547,886 1,395,761 Change in net assets 8,671,790 7,134,303 NET ASSETS: Beginning of period 236,279,300 229,144,997 End of period $ 244,951,090 $ 236,279,300 See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1998 1997
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. On April 30, 1998 the Fund established Class I shares, which are offered and sold only through financial intermediaries and are not offered directly to retail investors. At December 31, 1998 there were no Class I shares outstanding. 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. b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on the identified cost basis. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue discount. Market discount is recognized upon disposition of the security. c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code applicable to certain investment companies. The Fund intends to make distributions of income and securities profits sufficient to relieve it from all, or substantially all, Federal income and excise taxes. d) ALLOCATION OF EXPENSES: Expenses, other than class-specific expenses, are allocated daily to each class of shares based on the relative net assets of each class. Class-specific expenses, which include distribution and service fees and any other items that are specifically attributed to a particular class, are charged directly to such class. e) USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Aquila Management Corporation (the "Manager"), the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. The portfolio management of the Fund has been delegated to a Sub-Adviser as described below. Under the Advisory and Administration Agreement, the Manager provides all administrative services to the Fund, other than those relating to the day-to-day portfolio management. The Manager's services include providing the office of the Fund and all related services as well as overseeing the activities of the Sub-Adviser and all the various support organizations to the Fund such as the shareholder servicing agent, custodian, legal counsel, auditors and distributor and additionally maintaining the Fund's accounting books and records. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's net assets. Banc One Investment Advisors Corporation (the "Sub-Adviser") serves as the Investment Sub-Adviser for the Fund under a Sub-Advisory Agreement between the Manager and the Sub-Adviser. Under this agreement, the Sub-Adviser continuously provides, subject to oversight of the Manager and the Board of Trustees of the Fund, the investment program of the Fund and the composition of its portfolio, arranges for the purchases and sales of portfolio securities, and provides for daily pricing of the Fund's portfolio. For its services, the Sub-Adviser is entitled to receive a fee from the Manager which is payable monthly and computed as of the close of business each day at the annual rate of 0.14 of 1% on the Fund's net assets. For the year ended December 31, 1998, the Fund incurred fees for advisory and administrative services of $958,774. Specific details as to the nature and extent of the services provided by the Manager and the Sub-Adviser are more fully defined in the Fund's Prospectus and Statement of Additional Information. b) DISTRIBUTION AND SERVICE FEES: The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make service fee payments to broker-dealers ("Qualified Recipients") or others selected by Aquila Distributors, Inc. (the "Distributor") including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund's shares or servicing of shareholder accounts. The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the year ended December 31, 1998, service fees on Class A Shares amounted to $340,056, of which the Distributor received $8,641. 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, 1998, amounted to $6,637. 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, 1998, amounted to $2,212. The total of these payments with respect to Class C Shares amounted to $8,849, of which the Distributor received $5,934. Specific details about the Plans are more fully defined in the Fund's Prospectus and Statement of Additional Information. Under a Distribution Agreement, the Distributor serves as the exclusive distributor of the Fund's shares. Through agreements between the Distributor and various broker-dealer firms ("dealers"), the Fund's shares are sold primarily through the facilities of these dealers having offices within Kentucky, with the bulk of sales commissions inuring to such dealers. For the year ended December 31, 1998, the Distributor received commissions of $27,253 on sales of Class A Shares. 4. PURCHASES AND SALES OF SECURITIES During the year ended December 31, 1998, purchases of securities and proceeds from the sales of securities aggregated $38,565,149 and $30,199,628, respectively. At December 31, 1998, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $14,646,285 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $204,874 for a net unrealized appreciation of $14,441,411. 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 and are taxable. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, due to differences between financial statement reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund's net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividends may, under some circumstances, be subject to the alternative minimum tax. 7. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. It is the general intention of the Fund to invest, to the extent practicable, some or all of cash balances in income-producing assets rather than leave cash on deposit. 8. TRUSTEES' FEES AND EXPENSES During the fiscal year there were nine Trustees. 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, 1998 such reimbursements averaged approximately $3,700 per Trustee. Two of the Trustees, who are affiliated with the Manager, are not paid any Trustee fees. 9. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows: CLASS A SHARES: Proceeds from shares sold 2,030,723 $ 21,961,981 1,946,573 $ 20,614,221 Reinvested distributions 584,567 6,317,336 629,661 6,662,872 Cost of shares redeemed (2,330,285) (25,200,489) (2,759,392) (29,203,137) Net change 285,005 3,078,828 (183,158) (1,926,044) CLASS C SHARES: Proceeds from shares sold 29,609 319,908 47,349 501,768 Reinvested distributions 2,314 25,002 2,091 22,131 Cost of shares redeemed (22,308) (240,974) (12,332) (131,306) Net change 9,615 103,936 37,108 392,593 CLASS Y SHARES: Proceeds from shares sold 568,483 6,143,607 387,049 4,094,716 Reinvested distributions 2,555 27,743 1,517 16,116 Cost of shares redeemed (74,568) (806,228) (112,210) (1,181,620) Net change 496,470 5,365,122 276,356 2,929,212 Total transactions in Fund shares 791,090 $ 8,547,886 130,306 $ 1,395,761
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 SHARES AMOUNT SHARES AMOUNT
Net Asset Value, Beginning of Period $10.81 $10.55 $10.71 $9.97 $10.93 Income from Investment Operations: Net investment income 0.53 0.55 0.55 0.60 0.60 Net gain (loss) on securities (both realized and unrealized) 0.01 0.27 (0.12) 0.74 (0.96) Total from Investment Operations 0.54 0.82 0.43 1.34 (0.36) Less Distributions (note 6): Dividends from net investment income (0.53) (0.55) (0.59) (0.60) (0.60) Distributions from capital gains (0.01) (0.01) - - - Total Distributions (0.54) (0.56) (0.59) (0.60) (0.60) Net Asset Value, End of Period $10.81 $10.81 $10.55 $10.71 $ 9.97 Total Return (not reflecting sales charge)(%) 5.13 8.08 4.17 13.75 (3.31) Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 229,667 226,477 222,889 230,270 232,656 Ratio of Expenses to Average Net Assets (%) 0.73 0.73 0.75 0.80 0.73 Ratio of Net Investment Income to Average Net Assets (%) 4.89 5.19 5.22 5.74 5.80 Portfolio Turnover Rate (%) 12.79 22.39 8.94 17.09 35.25 The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 0.72 0.72 0.74 0.79 0.72 (1) Designated as Class A Shares on April 1, 1996. Note: Effective September 11, 1995, Banc One Investment Advisors Corporation became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc. and effective on May 1, 1998, pursuant to new management arrangements, was appointed as the Fund's Investment Sub-Adviser. See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD CLASS A(1) YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period $10.81 $10.55 $10.47 $10.82 $10.55 $10.47 Income from Investment Operations: Net investment income 0.44 0.46 0.37 0.54 0.56 0.43 Net gain on securities (both realized and unrealized) 0.01 0.27 0.11 0.02 0.29 0.11 Total from Investment Operations 0.45 0.73 0.48 0.56 0.85 0.54 Less Distributions (note 6): Dividends from net investment income (0.44) (0.46) (0.40) (0.55) (0.57) (0.46) Distributions from capital gains (0.01) (0.01) - (0.01) (0.01) - Total Distributions (0.45) (0.47) (0.40) (0.56) (0.58) (0.46) Net Asset Value, End of Period $10.81 $10.81 $10.55 $10.82 $10.82 $10.55 Total Return (not reflecting sales charge)(%) 4.24 7.16 4.72+ 5.26 8.34 5.24+ Ratios/Supplemental Data Net Assets, End of Period ($ thousands) 949 845 433 14,335 8,957 5,823 Ratio of Expenses to Average Net Assets (%) 1.59 1.57 1.56* 0.58 0.57 0.58* Ratio of Net Investment Income to Average Net Assets (%) 4.04 4.30 4.34* 5.03 5.31 5.41* Portfolio Turnover Rate (%) 12.79 22.39 8.94 12.79 22.39 8.94 The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 1.57 1.56 1.55* 0.57 0.56 0.56* (1) New Class of Shares established on April 1, 1996. (2) From April 1, 1996 to December 31, 1996. + Not annualized. * Annualized. See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD CLASS C(1) CLASS Y(1) PERIOD(2) PERIOD(2) YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED 1998 1997 DEC. 31, 1996 1998 1997 DEC. 31, 1996
FEDERAL TAX STATUS OF 1998 DISTRIBUTIONS (UNAUDITED) For the fiscal year ended December 31, 1998, of the total amount of dividends paid by Churchill Tax-Free Fund of Kentucky, 98.10% was "exempt-interest dividends" and the balance was ordinary dividend income. $205,041 of the amount distributed by the Fund during fiscal 1998 is designated as a dividend from 20% net long-term capital gains. For those shareholders subject to the Federal alternative minimum tax, 19.41% of your Fund's dividends was derived from interest on "private activity bonds." Prior to January 31, 1999, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 1998 CALENDAR YEAR. PREPARING FOR YEAR 2000 (UNAUDITED) The Trustees and officers of the Fund have been monitoring issues involving preparedness for the turn of the century for some time in an effort to minimize or eliminate any potential impact upon the Fund and its shareholders. Our officers have focussed significant time and effort in order that the various computerized functions that could affect the Fund are ready by the beginning of the year 2000. The Fund is highly reliant on certain mission-critical suppliers' services. Each supplier of these services has provided the Fund's officers with assurances that it is actively addressing potential problems relating to the year 2000. The officers, in turn, are monitoring and will continue to monitor the progress of its suppliers. As you can well understand, we cannot directly control our supplier operations. We assure you, however, that we recognize a responsibility to inform our shareholders if in the future we become aware of any developments which would lead us to believe that the Fund will be significantly affected by year 2000 problems. We will continue to keep you up-to-date through future communications. -----END PRIVACY-ENHANCED MESSAGE-----