SEMI-ANNUAL
REPORT
JUNE 30, 1996
AQUILA
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo of Churchill Tax-Free Trust of Kentucky--Standing pegasus/horse with
wings within a circle]
One of the
AQUILAsm Group of Funds
<PAGE>
[Logo of Churchill Tax-Free Trust of Kentucky--Standing pegasus/horse with
wings within a circle]
CHURCHILL TAX-FREE FUND OF KENTUCKY
SEMI-ANNUAL REPORT
"FLUCTUATIONS, YET HIGH STABILITY"
August 20, 1996
<TABLE>
<CAPTION>
6/30/96 12/31/95 6/30/95
<S> <C> <C> <C>
SHARE NET ASSET VALUE $10.43 $10.71 $10.42
DISTRIBUTION YIELD 5.37%* 5.52%* 5.68%*
</TABLE>
Dear Investor:
We live in a world that is ever changing.
As the above table illustrates, the price of the Fund's shares can and
does move up and down over time. Also, the rate of triple tax-free income
return distributed to shareholders can and will change. Movements in these
two key areas reflect the changes in market conditions that occurred over
the time period of this past year.
Yet, while changes have occurred, looking at these numbers in a broader
perspective, there has tended to be a relatively high level of stability to
the performance results. Indeed, these results compare favorably to what
occurred in the municipal securities market itself during this period.
MARKET FORCES
As indicated, the changes in share price and income return are
influenced considerably by market forces. Market forces are governed by
several main factors in the area of fixed-income securities. This area
encompasses the tax-free municipal securities in which the Fund invests.
Key among these factors is action taken by the Federal Reserve Board.
This Federal government organization has the power to raise and lower
interest rates in key areas which, in turn, can have an effect on all types
of fixed-income securities. The Fed can also control the supply of money in
our financial system - increasing or decreasing the amount of dollars in
circulation. This, in turn, can affect the market.
The other key factor influencing market action is the psychology of
investors. By psychology of investors, we mean the level of confidence that
investors as a whole have toward what is happening in our country's overall
financial affairs. We now live in a world that is not only ever changing,
but also one that is very global in nature. Consequently, the psychology
factor within market activity is influenced not only by the confidence level,
or lack thereof, which investors in the United States have, but also by the
confidence level that investors all around the world have toward the
handling of major financial affairs in our country.
* Indicates trailing 12 month yield distributed to shareholders as measured
against share maximum public offering price.
<PAGE>
Altogether, then, what happens to the share price and distribution
return of the Fund is very much driven by market forces. This is an
important factor which shareholders in the Fund must appreciate and come to
understand. And, this is the case whether investors own municipal
securities individually, or whether they do so through the portfolio of such
municipal securities as the Fund provides to shareholders.
THE VALUE THE FUND PROVIDES
While accepting the fact that market forces can and do have an effect
upon the Fund's performance, it must also be recognized that Churchill
Tax-Free Fund of Kentucky brings to bear very specific factors to dampen the
extremes of such market forces.
Most significant of these factors is the professional investment
management team of the Fund's Investment Adviser, Banc One Investment
Advisors Corporation. Under the guidance of the Fund's management and the
Trustees, the Investment Adviser oversees, on a continuing basis the
investments of the Fund. And, in doing so, they moderate forces that can or
might cause anxieties with investors. A very special element that the
professional investment management team brings to bear is the implementation
of the Fund's investment approach.
QUALITY FACTOR
A key moderation factor in containing damage from market forces is
quality - quality of the municipal issues within the Fund's investment
portfolio. Quality of issues is a very protective factor when it comes to
capital preservation.
That is why the Fund has chosen to invest in only those municipal
securities within the TOP FOUR CREDIT RATINGS, or equivalent.
It is noteworthy that at the end of the June 30, 1996 report period,
92.1% of the Fund's holdings carried a credit rating of A OR BETTER - the
top three ratings.
Moreover, at this report date, 46.1% of the Fund's investments were
rated AA OR AAA.
DIVERSIFICATION FACTOR
Another very important factor in moderating market forces is
diversification among portfolio holdings.
At June 30, 1996, the Fund had 165 SEPARATE ISSUES within the investment
portfolio, representing many different municipal projects within numerous
communities throughout Kentucky.
MATURITY FACTOR
Through having a variety of different maturities among the securities
in the Fund's portfolio, it is possible to avoid extremes in volatility that
can come about with market fluctuations. As you are aware, short maturity
securities possess little fluctuation in price, but pay low yields. On the
other hand, long maturity securities give higher yields, but possess
considerable price volatility due to the uncertainties involved over the time
between the present and the specified maturity date. The Fund seeks an
average intermediate maturity within the investment portfolio. Currently, at
June 30, 1996, the average maturity was 14.74 YEARS, so as to provide an
adequate income return, yet only moderate volatility in share price.
INCOME RETURN
As the table above illustrates, the trailing 12-month yield distributed
to shareholders, as measured against average maximum public offering price,
was running at the rate of 5.37% at June 30, 1996.
This is somewhat lower than it was six months and a year earlier.
However, it reflects the declining level of general market return of
municipal securities over this period.
Despite the modest decline in yield to shareholders, it must be
remembered that this income amount is the TRIPLE TAX-FREE return that
shareholders received from the Fund.
It is worth noting from the below graph that one would have had to earn
a substantially higher income return from a TAXABLE investment in order to
match the TRIPLE TAX-FREE amount distributed by the Fund.
And you will note, if one were in the 28% Federal income tax bracket, a
TAXABLE return of 7.93% would have to be achieved to match the 5.37% TRIPLE
TAX-FREE return of the Fund. In the highest Federal income tax bracket of
39.6%, the equivalent return would have had to have been 9.46%. In general,
it would not have been possible for an investor to obtain such levels of
taxable return unless additional risk was taken in the form of lesser quality
or longer maturity securities, or both such elements.
[Graphic of Bar chart with the following information:]
CHURCHILL TAX-FREE FUND OF KENTUCKY'S TRIPLE TAX-FREE
DISTRIBUTION RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE
AN INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
<TABLE>
<CAPTION>
Tax Bracket Taxable Equivalent Rate Double Tax-Free Equivalent Rate
<S> <C> <C>
28% 7.93% 5.37%
31% 8.28% 5.37%
36% 8.93% 5.37%
39.6% 9.46% 5.37%
</TABLE>
<PAGE>
COMMITMENT TO CONSISTENCY
Management is committed to providing shareholders with as consistent
results from Churchill Tax-Free Fund of Kentucky as are possible to achieve,
considering prevailing market forces.
You should be aware that we are not able to eliminate completely the
market forces that swirl around us on a continuing basis.
However, as indicated, a number of investment management techniques are
used by the Fund to moderate market forces.
YOUR CONFIDENCE APPRECIATED
We again wish to emphasize that your confidence in Churchill Tax-Free
Fund of Kentucky is greatly appreciated. You can be assured that management
will do everything in its power to merit your continued trust.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
RATINGS
FACE MOODY'S/
AMOUNT REVENUE BONDS (98.7%) S&P VALUE
<C> <S> <C> <C>
State Agencies (27.3%)
Kentucky Higher Education Student
Loan Corporaton
Insured Student Loan Revenue,
$ 4,125,000 6.400%, 12/01/99 A/NR $ 4,279,687
980,000 6.500%, 06/01/00 A/NR 1,021,650
1,490,000 6.500%, 06/01/02 A/NR 1,583,125
2,955,000 6.800%, 06/01/03 A/NR 3,161,850
615,000 6.550%, 06/01/99 Aa-/A1 638,831
1,915,000 7.100%, 12/01/11 Aa-/AA 2,046,656
Kentucky Infrastructure Authority
Revenue,
1,000,000 7.625%, 08/01/03 NR/A 1,098,750
3,195,000 7.100%, 08/01/97 A/A 3,296,601
200,000 7.500%, 02/01/09 NR/AAA 218,500
1,445,000 7.500%, 02/01/99 NR/AAA 1,578,662
555,000 7.200%, 06/01/11 A/A 604,950
1,110,000 6.375%, 06/01/14 A/A 1,164,112
Kentucky Local Correctional
Facilities Construction
Authority Revenue,
4,925,000 5.500%, 11/01/14 Aaa/AAA 4,746,469
Kentucky State Properties and
Buildings Commission Revenue,
1,375,000 7.900%, 11/01/97 A/A+ 1,436,875
500,000 8.400%, 11/01/97 Aaa/AAA 537,500
1,130,000 7.100%, 12/01/97 A/A 1,172,375
250,000 7.600%, 08/01/98 NR/AAA 271,562
1,460,000 7.300%, 12/01/99 A/A 1,574,975
250,000 7.600%, 08/01/98 NR/AAA 271,563
400,000 7.350%, 12/01/99 Aaa/AAA 442,500
365,000 7.000%, 02/01/06 Aaa/AAA 403,325
4,510,000 6.625%, 10/01/07 A/A+ 4,944,088
300,000 8.000%, 08/01/98 NR/AAA 328,125
750,000 7.375%, 12/01/99 Aaa/AAA 830,625
1,000,000 6.500%, 08/01/01 Aaa/AAA 1,091,250
Kreda Economic Development
Revenue,
3,110,000 7.250%, 06/01/17 NR/AA 3,253,838
Mount Sterling Kentucky Lease
Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 1,944,000
7,000,000 6.200%, 03/01/18 Aa/NR 7,043,750
Pendleton County Kentucky
Multi-County Lease Revenue,
500,000 7.300%, 03/01/02 NR/A 528,750
570,000 7.550%, 03/01/10 NR/A 604,200
4,500,000 6.500%, 03/01/19 NR/A 4,623,750
3,000,000 6.400%, 03/01/19 NR/A 3,165,000
Puerto Rico Public Buildings
Authority,
1,000,000 6.875%, 07/01/12 Aaa/AAA 1,121,250
61,029,144
County Agencies (5.0%)
Clark County Kentucky Industrial
Buildings Revenue (Southern Wood
Project),
565,000 6.000%, 12/01/00 NR/NR* 560,762
250,000 7.000%, 12/01/08 NR/NR* 250,937
Clark County Kentucky Public
Properties Corp. Revenue,
1,120,000 6.700%, 06/01/16 A/NR 1,174,600
Franklin County Kentucky Public
Projects Corp. Revenue,
350,000 5.500%, 1/01/24 NR/A- 342,125
Jefferson County Kentucky Economic
Development Corp. Lease Revenue,
2,000,000 7.625%, 07/01/08 A1/NR 2,069,440
250,000 7.750%, 07/01/16 A1/NR 258,818
Kenton County Kentucky Public
Properties Corp. Revenue,
400,000 7.000%, 10/01/03 NR/NR* 436,000
Lincoln County Kentucky Public
Properties Corp.,
430,000 6.500%, 09/01/96 NR/NR* 435,912
Louisville and Jefferson County
Kentucky, Series B,
120,000 5.650%, 07/01/03 NR/NR* 120,062
200,000 6.625%, 07/01/15 NR/NR* 191,500
250,000 6.650%, 07/01/19 NR/NR* 241,250
Madison County Kentucky Capital
Project Corp. Revenue,
650,000 7.800%, 04/01/09 NR/NR* 715,813
Muhlenberg County Kentucky
Industrial Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A 1,625,625
Munfordville Kentucky Industrial
Development Bond,
2,500,000 7.000%, 06/01/19 NR/A 2,659,375
Woodford County Kentucky Public
Properties Corp. Revenue,
100,000 8.200%, 11/01/17 A/NR 108,125
11,190,344
City/Municipal Obligations (5.4%)
Covington Kentucky Municipal
Properties Corp. Revenue,
400,000 7.950%, 08/01/04 Baa1/NR 440,000
250,000 7.375%, 08/01/11 Baa1/NR 272,188
Hickman Kentucky Industrial
Building Revenue (HIS, Kentucky,
Inc. Project),
1,665,000 6.950%, 08/01/09 NR/NR* 1,708,706
Jeffersontown Kentucky Public
Project Corp. Revenue,
500,000 5.750%, 11/01/15 A/NR 488,125
Kentucky League Cities Funding
Trust COP,
1,715,000 6.200%, 08/01/17 NR/A- 1,757,875
Louisville Kentucky Public
Properties Corp,
4,090,000 6.700%, 12/01/20 A/A- 4,335,400
Nicholasville, Kentucky Industrial
Development Revenue (Johnson
Control),
3,000,000 8.000%, 09/01/04 A2/A 3,105,330
12,107,624
Utilities (5.5%)
Ashland Kentucky Sewer & Solid
Waste Revenue (Ashland, Inc.),
3,200,000 7.125%, 02/01/22 Baa1/NR 3,364,000
Boone County Kentucky Public
Properties Revenue,
500,000 5.150%, 12/01/14 A/A- 456,875
Campbell & Kenton Counties
Kentucky Sanitation District
No. 1 Sanitation Revenue,
220,000 7.300%, 08/15/00 Aa/A+ 228,525
200,000 7.700%, 08/15/04 Aa/A+ 210,250
Glasgow Kentucky Electric Plant
Board Revenue,
280,000 7.600%, 12/01/09 NR/BBB 301,350
Henderson Kentucky Electric Light
and Power Revenue,
1,100,000 5.700%, 03/01/03 NR/A 1,101,595
Lebanon Kentucky Waterworks
Revenue,
250,000 7.500%, 04/01/16 NR/NR* 267,500
Louisville and Jefferson County
Kentucky Metropolitian Sewer
District Revenue,
3,000,000 5.300%, 05/15/19 Aaa/AAA 2,835,000
1,230,000 5.500%, 05/15/23 Aaa/AAA 1,166,963
1,500,000 6.500%, 05/15/24 Aaa/AAA 1,597,500
Muhlenberg County Kentucky Water
District, Waterworks Revenue,
100,000 5.500%, 01/01/12 Aaa/AAA 98,125
110,000 5.500%, 01/01/13 Aaa/AAA 107,387
115,000 5.600%, 01/01/14 Aaa/AAA 112,700
Richmond Kentucky Water Gas and
Sewer Revenue,
200,000 7.300%, 07/01/05 Aaa/AAA 213,750
200,000 7.300%, 07/01/06 Aaa/AAA 213,750
12,275,270
Pollution Control Revenue (12.0%)
Ashland Kentucky Pollution Control
Revenue,
1,770,000 7.375%, 07/01/09 A3/NR 1,889,475
3,000,000 6.650%, 08/01/09 Baa1/NR 3,153,750
Ashland Kentucky Solid Waste
Revenue (Ashland Oil),
500,000 7.200%, 10/01/20 Baa1/BBB 523,125
Boone County Kentucky Pollution
Control Revenue,
735,000 5.500%, 01/01/24 Aaa/AAA 694,575
Carroll County Kentucky Pollution
Control Revenue,
3,500,000 7.450%, 09/15/16 Aa2/NR 3,941,875
Carroll County Kentucky Pollution
Control Revenue,
1,910,000 6.250%, 02/01/18 Aa2/AA- 1,948,200
Jefferson County Kentucky
Pollution Control Revenue,
2,200,000 5.450%, 10/15/20 Aa2/AA 2,057,000
2,600,000 5.900%, 04/15/23 Aa2/AA 2,567,500
1,000,000 7.750%, 02/01/19 Aa2/AA 1,065,000
5,000,000 5.625%, 08/15/19 Aa2/AA 4,793,750
Wickliffe Kentucky Pollution
Control,
4,100,000 6.200%, 04/01/07 A1/A 4,106,191
26,740,441
Transportation (11.7%)
Kenton County Kentucky Airport
Board Airport Revenue,
1,500,000 6.300%, 03/01/15 Aaa/AAA 1,535,625
3,955,000 8.750%, 03/01/15 A/A 4,131,947
Kentucky Interlocal School
Transportation Authority,
150,000 5.100%, 03/01/05 A/A 147,375
Kentucky State Turnpike Authority
Economic Development Road Revenue,
1,000,000 5.625%, 07/01/15 A/A 987,500
500,000 8.250%, 07/01/07 Aaa/AAA 530,635
100,000 6.000%, 07/01/09 Aaa/AAA 100,085
500,000 7.000%, 05/15/99 Aaa/AAA 533,750
1,035,000 7.250%, 05/15/10 Aaa/AAA 1,139,794
Kentucky State Turnpike Authority
Resource Recovery Road Revenue,
500,000 7.400%, 07/01/97 A/A+ 514,630
2,105,000 7.600%, 07/01/98 A/A+ 2,209,513
3,875,000 7.750%, 07/01/99 A/A+ 4,071,036
320,000 8.000%, 07/01/03 A/A+ 337,603
Kentucky State Turnpike Authority
Toll Road Revenue,
3,570,000 8.500%, 07/01/04 A/A 3,716,049
Louisville Kentucky Airport Lease
Revenue,
750,000 7.850%, 02/01/09 A/A- 819,375
Puerto Rico Commonwealth Highway
& Transportation Authority Highway
Revenue,
4,000,000 6.625%, 07/01/12 Baa1/A 4,410,000
Puerto Rico Commonwealth Highway
Authority Highway Revenue,
1,000,000 6.750%, 07/01/05 Baa1/A 1,092,500
26,277,417
Hospitals (10.8%)
Floyd County Kentucky Hospital
Revenue,
280,000 7.500%, 08/01/10 NR/AAA 306,250
510,000 5.500%, 09/01/14 NR/AAA 487,687
Hopkins County Kentucky Hospital
Revenue,
1,000,000 6.625%, 11/15/11 Aaa/AAA 1,067,500
Jefferson County Kentucky Health
Facilities Revenue (Jewish
Hospital),
1,000,000 6.550%, 05/01/22 Aaa/AAA 1,050,000
Jefferson County Kentucky Hospital
Revenue,
510,000 7.750%, 10/01/97 Aaa/AAA 543,150
Kentucky Development Finance
Authority Hospital Revenue,
895,000 7.625%, 09/01/11 Aaa/AAA 958,769
235,000 7.200%, 10/01/99 A/A 250,569
2,570,000 7.300%, 10/01/03 A/A 2,756,325
810,000 7.500%, 10/01/12 A/A 859,612
400,000 7.250%, 11/01/06 A1/A+ 427,500
400,000 7.200%, 09/01/15 Aaa/AAA 439,000
750,000 7.000%, 09/01/06 NR/NR* 834,375
Kentucky Development Finance
Authority Revenue,
3,000,000 6.500%, 11/01/07 A1/A+ 3,161,250
1,250,000 6.250%, 11/01/13 A1/A+ 1,264,063
2,150,000 6.750%, 11/01/12 A1/A+ 2,289,750
500,000 6.000%, 11/01/01 Aaa/AAA 526,875
Kentucky Development Finance
Authority Kings Daughters Medical
Center,
1,000,000 6.125%, 02/01/12 Aaa/AAA 1,026,250
Kentucky Development Finance
Authority Hospital Revenue,
3,000,000 5.900%, 12/01/15 Aaa/AAA 3,007,500
2,590,000 5.000%, 08/15/15 Aaa/AAA 2,334,238
Louisville Kentucky Hospital
Revenue,
450,000 7.300%, 01/01/14 NR/AAA 466,587
24,057,250
Housing (10.9%)
Greater Kentucky Housing
Assistance Corp. Multi-Family
Housing Revenue,
500,000 7.000%, 07/01/11 NR/AA+ 524,375
320,000 6.300%, 07/01/15 Aaa/AAA 325,600
275,000 6.400%, 07/01/23 NR/AA+ 280,156
Jefferson County Kentucky
Multi-Family Revenue,
1,500,000 5.750%, 06/01/23 NR/AA 1,520,625
Kentucky Housing Corporation
Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 269,025
835,000 7.600%, 01/01/07 Aaa/AAA 877,794
340,000 5.350%, 07/01/07 Aaa/AAA 330,225
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,041,250
95,000 7.875%, 01/01/08 Aaa/AAA 99,156
630,000 7.250%, 01/01/09 Aaa/AAA 661,500
980,000 7.125%, 01/01/10 Aaa/AAA 1,027,775
30,000 6.625%, 01/01/11 Aaa/AAA 30,187
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,136,688
200,000 5.400%, 07/01/14 Aaa/AAA 185,750
1,700,000 6.400%, 01/01/17 Aaa/AAA 1,727,625
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,408,312
630,000 7.900%, 01/01/21 Aaa/AAA 663,863
400,000 7.800%, 01/01/21 Aaa/AAA 419,000
185,000 8.100%, 01/01/22 Aaa/AAA 195,638
3,185,000 7.450%, 01/01/23 Aaa/AAA 3,268,606
1,345,000 6.800%, 01/01/24 Aaa/AAA 1,376,944
500,000 6.375%, 07/01/28 Aaa/AAA 505,000
Martin County Kentucky Housing
Revenue,
2,400,000 6.250%, 07/01/23 Aa/AA 2,391,000
24,266,094
Universities (1.6%)
Berea Kentucky College General
Obligation Subject to AMT,
2,400,000 5.900%, 05/01/13 Aa1/NR 2,412,000
Eastern Kentucky University
585,000 5.375%, 05/01/04 A/A 588,054
Western Kentucky University
Revenue,
325,000 7.100%, 12/01/99 Baa/BBB+ 348,562
275,000 7.100%, 12/01/01 Aaa/AAA 305,594
3,654,210
Schools (8.5%)
Boone County Kentucky School
District Finance Corp. School
Building Revenue,
2,250,000 6.125%, 12/01/17 A/A 2,289,375
1,750,000 6.750%, 09/01/09 A/A 1,872,500
Butler County Kentucky School
Building Revenue,
270,000 7.200%, 05/01/07 A/A 299,025
290,000 7.200%, 05/01/08 A/A 321,175
Campbell County Kentucky School
Building Revenue,
1,000,000 5.100%, 02/01/14 A/NR 932,500
Grayson County Kentucky School
Building Revenue,
1,940,000 6.000%, 01/01/15 A/NR 1,966,675
Harlan County Kentucky School
District Corp. School Building
Revenue,
205,000 7.400%, 12/01/06 A/A 226,269
200,000 7.250%, 09/01/09 NR/A 216,500
Jefferson County Kentucky School
District Finance Corp. School
Building Revenue,
370,000 6.200%, 01/01/06 Aaa/AAA 395,438
210,000 6.750%, 08/01/09 Aaa/AAA 225,488
500,000 5.875%, 01/01/11 A-1/A+ 508,125
Kenton County Kentucky School
District Finance Corp. School
Building Revenue,
500,000 6.900%, 12/01/05 NR/NR* 549,375
600,000 7.000%, 12/01/07 NR/NR* 661,500
Lexington-Fayette Urban County
Government School Building
Revenue,
255,000 7.700%, 11/01/04 A-1/A+ 274,444
180,000 7.700%, 11/01/05 A-1/A+ 193,725
250,000 7.000%, 06/01/06 A-1/A+ 275,000
400,000 7.000%, 06/01/08 A-1/A+ 440,000
370,000 7.000%, 06/01/09 A-1/A+ 407,000
Nelson County Kentucky School
Building Revenue,
1,820,000 5.750%, 04/01/15 A/NR 1,804,075
Pike County Kentucky School
District Finance Corp. School
Building Revenue,
505,000 6.900%, 12/01/05 NR/A 546,662
720,000 7.000%, 12/01/09 NR/A 778,500
Todd County Kentucky School
Building Revenue,
980,000 6.300%, 10/01/14 NR/A 1,019,200
Scott County Kentucky School
Building Revenue,
2,750,000 5.900%, 06/01/18 NR/A 2,746,562
18,949,113
Total Investments - 98.7% (Cost
$215,585,707**) 220,546,907
Other assets in excess of
liabilitites - 1.3% 2,937,295
Net Assets - 100% $ 223,484,202
<FN>
* Any security not rated must be determined by the Investment Adviser to
have sufficient quality to be ranked in the top four credit ratings if a
credit rating were to be assigned by a rating service.
</FN>
<FN>
** Cost for Federal tax purposes is $213,513,486.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost $215,585,707) $ 220,546,907
Interest receivable 4,303,663
Receivable for Fund shares sold 210,712
Total assets 225,061,282
LIABILITIES
Cash overdraft 1,117,044
Dividends payable 137,978
Accrued expenses 97,013
Adviser and Administrator fees payable 86,118
Distribution fees payable 83,440
Payable for Fund shares redeemed 55,487
Total liabilities 1,577,080
NET ASSETS $ 223,484,202
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 214,178
Additional paid-in capital 219,279,416
Accumulated net realized loss on investments (970,592)
Net unrealized appreciation on investments 4,961,200
$ 223,484,202
CLASS A
Net Assets $ 218,717,530
Capital shares outstanding 20,961,194
Net asset value and redemption price per share $ 10.43
Offering price per share (100/96 of $10.43 adjusted to
nearest cent) $ 10.86
CLASS C
Net Assets $ 1,117
Capital shares outstanding 107
Net asset value and offering price per share $ 10.43
Redemption price per share (*varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 4,765,555
Capital shares outstanding 456,511
Net asset value, offering and redemption price per share $ 10.44
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 7,157,135
EXPENSES:
Investment Adviser fees (note B) $ 157,525
Administrator fees (note B) 292,547
Distribution fees (note B) 169,390
Transfer and shareholder servicing agent fees 86,500
Trustees' fees and expenses 40,000
Legal fees 37,000
Shareholders' reports and proxy statements 25,000
Custodian fees (note F) 18,505
Audit and accounting fees 16,000
Registration fees and dues 8,500
Insurance 2,300
Miscellaneous 22,794
876,061
Expenses paid indirectly (note F) (11,700)
Net expenses 864,361
Net investment income 6,292,774
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss from securities
transactions (231,702)
Change in unrealized appreciation on
investments (5,753,798)
Net realized and unrealized gain (loss) on
investments (5,985,500)
Net increase in net assets resulting from
operations $ 307,274
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,292,774 $ 13,733,799
Net realized loss from securities
transactions (231,702) (423,661)
Change in unrealized appreciation
(depreciation) on investments (5,753,798) 17,432,689
Change in net assets from operations 307,274 30,742,827
DISTRIBUTIONS TO SHAREHOLDERS (NOTE E):
Class A Shares:
Net investment income (6,262,787) (13,727,664)
Net realized gain on investments _ _
Class C Shares:
Net investment income _ _
Net realized gain on investments _ _
Class Y Shares:
Net investment income (29,987) _
Net realized gain on investments _ _
Change in net assets from
distributions (6,292,774) (13,727,664)
CAPITAL SHARE TRANSACTIONS (NOTE G):
Proceeds from shares sold 15,111,611 17,964,446
Reinvested dividends and
distributions 3,554,043 7,773,545
Cost of shares redeemed (19,466,295) (45,139,255)
Change in net assets from capital
share transactions (800,641) (19,401,264)
Change in net assets (6,786,141) (2,386,101)
NET ASSETS:
Beginning of period 230,270,343 232,656,444
End of period $ 223,484,202 $ 230,270,343
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified,
open-end investment company, was organized in March, 1987 as a Massachusetts
business trust and commenced operations on May 21, 1987. The Fund is
authorized to issue an unlimited number of shares and, since its inception to
April 1, 1996, offered only one class of shares. On that date, the Fund began
offering two additional classes of shares, Class C and Class Y shares. All
shares outstanding prior to that date were designated as Class A shares and,
as was the case since inception, are sold with a front-payment sales charge
and bear a service fee. Class C shares are sold with no front-payment sales
charge but are assessed a contingent deferred sales charge if redeemed within
one year from the date of purchase and a level-payment charge for service and
distribution fees from date of purchase through six years thereafter. Class Y
shares are offered only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity, are not offered directly to
retail customers, and are sold at net asset value with no sales charge, no
redemption fee, no contingent deferred sales charge and no service or
distribution fees. All classes of shares represent interests in the same
portfolio of investments and are identical as to rights and privileges but
differ with respect to the effect of sales charges, the distribution and/or
service fees borne by each class, expenses specific to each class, voting
rights on matters affecting a single class and the exchange privileges of
each class.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
(1) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued each business day based
upon information provided by a nationally prominent independent
pricing service and periodically verified through other pricing
services. In the case of securities for which market quotations are
readily available, securities are valued at the mean of bid and
asked quotations and, in the case of other securities, at fair
value determined under procedures established by and under the
general supervision of the Board of Trustees. Securities which
mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing
their unrealized appreciation or depreciation on the 61st day prior
to maturity, if their term to maturity at purchase exceeded 60
days.
(2) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on the identified
cost basis. Interest income is recorded daily on the accrual basis
and is adjusted for amortization of premiums and accretion of
discounts.
(3) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of
the Internal Revenue Code applicable to certain investment
companies. The Fund intends to make distributions of income and
securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
(4) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on the
relative net assets of each class. Class-specific expenses, which
include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly
to such class.
(5) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Fund are conducted through two separate
management arrangements.
Banc One Investment Advisors Corporation (the "Adviser") became Adviser
to the Fund, effective September 11, 1995. In this role, under an Investment
Advisory Agreement, the Adviser supervises the Fund's investments and
provides various services to the Fund for which it is entitled to receive a
fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.14 of 1% of the net assets of the Fund.
The Fund also has an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Fund's founder and sponsor. Under this
Agreement, the Administrator provides all administrative services, other than
those relating to the management of the Fund's investments. These include
providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the
Fund such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor and additionally maintaining The Fund's accounting
books and records. For its services, the Administrator is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.26 of 1% of the net assets of the Fund.
Specific details as to the nature and extent of the services provided by
the Adviser and the Administrator are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees shall
be reduced, but not below zero, by an amount equal to its pro-rata portion
(determined on the basis of the respective fees computed as described above)
of the amount, if any, by which the total expenses of the Fund in any fiscal
year, exclusive of taxes, interest and brokerage fees, shall exceed the
lesser of (i) 2.5% of the first $30 million of average annual net assets of
the Fund plus 2% of the next $70 million of such assets and 1.5% of its
average annual net assets in excess of $100 million, or (ii) 25% of the
Fund's total annual investment income. The payment of the above fees at the
end of any month will be reduced or postponed so that at no time will there
be any accrued but unpaid liability under this expense limitation. No such
reduction in fees was required during the six months ended June 30, 1996.
For the six months ended June 30, 1996, the Fund incurred fees under the
Advisory Agreement and Administration Agreement of $157,525 and $292,547,
respectively.
<PAGE>
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Fund's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the facilities of
these dealers having offices within Kentucky, with the bulk of sales
commissions inuring to such dealers. For the six months ended June 30, 1996,
the Distributor received sales commissions in the amount of $13,239.
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 or others selected by the Distributor,
including, but not limited to, any principal underwriter of the Fund, with
which the Distributor has entered into written agreements contemplated by the
Rule and which have rendered assistance in the distribution and/or retention
of the Fund's shares or servicing of shareholder accounts ("Qualified
Recipients"). The Fund makes payment of this service fee at the annual rate
of 0.15% of the Fund's average net assets represented by Class A Shares. For
the six months ended June 30, 1996, service fees on Class A Shares amounted
to $169,390, of which the Distributor received $1,898.
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. There
were no payments made during the period April 1, 1996 through June 30, 1996.
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. There were no payments made during
the period April 1, 1996 through June 30, 1996.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
NOTE C - PURCHASES AND SALES OF SECURITIES:
During the six months ended June 30, 1996, purchases of securities and
proceeds from the sales of securities aggregated $12,336,803 and $14,558,190,
respectively.
At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $8,100,915 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to
$1,067,494, for a net unrealized appreciation of $7,033,421. At June 30,
1996, the Fund has a capital loss carryover of approximately $578,976 which
is available to offset future net realized gains on securities transactions
to the extent provided for in the Internal Revenue Code. Of this amount,
$538,426 expires at December 31, 2002 and the balance of $40,550 expires at
December 31, 2003. To the extent that this loss is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed.
<PAGE>
NOTE D - PORTFOLIO ORIENTATION:
Since the Fund invests principally and may invest entirely in triple
tax-free municipal obligations of issuers within Kentucky, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Kentucky and whatever
effects these may have upon Kentucky issuers' ability to meet their
obligations.
NOTE E - DISTRIBUTIONS:
The Fund declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Kentucky
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized
securities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. For certain shareholders,
some dividends may, under some circumstances, be subject to the alternative
minimum tax. Also, annual capital gains distributions, if any, are taxable.
NOTE F - CUSTODIAN FEES:
The Fund has negotiated an expense offset arrangement with its custodian,
Bank One Trust Company, N.A., an affiliate of the Adviser, wherein it
receives credit toward the reduction of custodian fees whenever there are
uninvested cash balances. During the six months ended June 30, 1996, the
Fund's custodian fees amounted to $18,505, of which $11,700 was offset by
such credits. The Fund could have invested its cash balances in an
income-producing asset if it had not agreed to a reduction in fees under the
expense offset arrangement with the custodian.
<PAGE>
NOTE G - CAPITAL SHARE TRANSACTIONS:
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 981,647 $10,337,146 1,723,240 $17,964,446
Reinvested dividends and
distributions 338,110 3,552,934 743,680 7,773,545
Cost of shares redeemed (1,486,941) (15,592,966) (4,315,370) (45,139,255)
Exchanged into Class Y
Shares (369,589) (3,858,514) _ _
Net change (536,773) $(5,561,400) (1,848,450) $(19,401,264)
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 107 $ 1,103
Reinvested dividends and
distributions _ _
Cost of shares redeemed _ _
Net change 107 $ 1,103
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 88,246 $ 914,848
Reinvested dividends and
distributions 107 1,109
Exchanged from Class A
Shares 369,589 3,858,514
Cost of shares redeemed (1,431) (14,815)
Net Change 456,511 $4,759,656
<C> <C> <C> <C>
Total transactions in
Fund shares (80,155) $(800,641) (1,848,450) $(19,401,264)
<FN>
* From April 1, 1996 (date of inception) through June 30, 1996.
</FN>
</TABLE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
(UNAUDITED)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Six
Class Class Months Class A(1)
C(2) Y(2) Ended
Period Ended June 30, Year Ended December 31
June 30, 1996 1996 1995 1994 1993 1992 1991
------------- ------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period $10.47 $10.47 $10.71 $9.97 $10.93 $10.49 $10.39 $10.00
Income from
Investment
Operations:
Net investment
income 0.16 0.15 0.30 0.60 0.60 0.62 0.66 0.66
Net gain (loss)
on securities
(both realized
and unrealized)(0.04) (0.03) (0.28) 0.74 (0.96) 0.47 0.19 0.41
Total from
Investment
Operations 0.12 0.12 0.02 1.34 (0.36) 1.09 0.85 1.07
Less
Distributions:
Dividends from
net investment
income (0.16) (0.15) (0.30) (0.60) (0.60) (0.62) (0.66) (0.66)
Distributions
from capital
gains - - - - - (0.03) (0.09) (0.02)
Total
Distributions (0.16) (0.15) (0.30) (0.60) (0.60) (0.65) (0.75) (0.68)
Net Asset Value,
End of Period $10.43 $10.44 $10.43 $10.71 $9.97 $10.93 $10.49 $10.39
Total Return
(not reflecting
sales charge)
(%) 1.15# 1.19# 0.16# 13.75 (3.31) 10.50 8.48 10.97
Ratios /
Supplemental
Data
Net Assets,
End of Period
($ thousands) 1 4,766 218,718 230,270 232,656 258,632 192,600 114,798
Ratio of Expenses
to Average Net
Assets (%) - 0.61* 0.77* 0.79 0.72 0.59 0.42 0.27
Ratio of Net
Investment
Income to
Average Net
Assets (%) 5.19* 5.95* 5.60* 5.75 5.81 5.67 6.21 6.53
Portfolio Turn-
over Rate (%) 5.52# 5.52# 5.52# 17.09 35.25 31.29 50.33 16.69
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Investment
Income ($) 0.16 0.15 0.30 0.60 0.60 0.60 0.63 0.60
Ratio of
Expenses to
Average Net
Assets (%) 1.63* 0.62* 0.78* 0.80 0.73 0.73 0.68 0.84
Ratio of Net
Investment
Income to
Average Net
Assets (%) 3.56* 5.94* 5.59* 5.74 5.80 5.52 5.95 5.96
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 1, 1996.
</FN>
<FN>
# Not annualized
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
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.
<PAGE>
REPORT ON THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of
Kentucky (the "Fund") was held on April 26, 1996.* At the meeting, the
following matters were submitted to a shareholder vote and approved:
(i) the election of Lacy B. Herrmann, Thomas A. Christopher, Douglas
Dean, Diana P. Herrmann, Ann R. Leven, Theodore T. Mason, Anne J.
Mills, William J. Nightingale, and James R. Ramsey as Trustees to
hold office until the next annual meeting of the Fund's
shareholders or until his or her successor is duly elected (each
Trustee received at least 14,374,826 affirmative votes (98.57%);
no more than 208,789 votes were withheld for any Trustee (1.43%)),
and
(ii) the ratification of the selection of KPMG Peat Marwick LLP as
the Fund's independent auditors for the fiscal year ending December
31, 1996 (votes for: 13,979,337 (95.86%); votes against: 38,526
(0.26%); abstentions: 561,770 (3.85%); broker non-votes: 3,982
(0.03%)).
Special Meetings of the Fund's Class C and Class Y Shareholders were
held on March 29, 1996 and April 4, 1996, respectively. **At the Special
Meeting of Class C Shareholders of the Fund, the Class C Shareholders voted
on and unanimously approved amendments to the Fund's Distribution Plan
affecting the interests of the Class C Shareholders of the Fund. At the
Special Meeting of Class Y Shareholders of the Fund, the Class Y Shareholders
voted on and unanimously approved amendments to the Fund's Distribution Plan
affecting the interests of the Class Y Shareholders of the Fund.
___________
* On the record date for this meeting, 21,620,751 shares of the Fund were
outstanding and entitled to vote. The holders of 14,583,615 shares (67.45%)
entitled to vote were present in person or by proxy at the meeting.
** On the record dates for the Special Meetings, the total net asset values
of the Class C and Class Y Shares of the Fund outstanding and entitled to
vote were $100 and $100, respectively. The holders of all Class C and Class
Y Shares entitled to vote were present in person at the meetings.
<PAGE>
INVESTMENT ADVISER
BANC ONE INVESTMENT ADVISORS CORPORATION
416 West Jefferson Street
Louisville, Kentucky 40202
ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Ann R. Leven
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Crutcher, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
