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 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.
SEMI-ANNUAL
REPORT
JUNE 30, 1998
AQUILA
[Logo of Aquila Group of Funds: an eagle's head]
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a
circle around it]
ONE OF THE
AQUILAsm GROUP OF FUNDS
<PAGE>
[Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a
circle around it]
SERVING KENTUCKY INVESTORS FOR OVER A DECADE
CHURCHILL TAX-FREE FUND OF KENTUCKY
SEMI-ANNUAL REPORT
"ATTRACTIVE TAX-FREE RETURNS PLUS HIGH STABILITY"
August 17, 1998
Dear Investor:
In our last report letter to you, we discussed the initial impact
of the serious economic and currency problems of various countries in the Far
East. We observed that these problems have resulted in a "FLIGHT TO QUALITY."
Specifically, we pointed out that, on a comparative basis, the
economy of the United States has continued to be very strong. As a result,
the U.S. dollar as a currency, as well as U.S. securities markets, have stood
out in the world as a "BEACON OF QUALITY." Churchill Tax-Free Fund of
Kentucky shares in this high quality ranking.
Therefore, in this letter to you, we wish to focus upon the level
of tax-free* return provided to you by Churchill Tax-Free Fund of Kentucky in
the current marketplace.
ATTRACTIVE TAX-FREE RETURNS
The rate of inflation in the United States has continued to be
relatively low throughout the recent expansion of the economy. This has
caused the level of interest rates to decline over recent years.
This decline in interest rates has provided the opportunity for
various municipalities to finance new projects and also to refinance existing
projects at lower interest costs to them. Municipalities act much like you
and I would when refinancing home mortgages to take advantage of attractive
rates. Basically, they are acting to save money.
While interest rates generated by TAX-FREE municipal bonds have
declined over the years, they have not declined as much as rates on a taxable
investment. As a result, TAX-FREE municipal securities have become
exceptionally attractive - on a comparative basis - with other types of
fixed-income securities.
Indeed, while the benchmark 30-year maturity U.S. Treasury bond
is currently yielding approximately 5.65%, its interest income is still
subject to taxes. On the other hand, similar maturity municipal securities,
of comparable quality, are yielding roughly 5.15% and are TAX-FREE. Thus,
comparable TAX-FREE municipal bonds are yielding more than 90% of what
high-quality TAXABLE bonds are paying. Consequently, with TAX-FREE municipal
securities, you are getting to keep more of the actual return paid. Most
significantly, this level of return represents for investors one of the best
for TAX-FREE securities in recent years.
The advantage to you of owning a TAX-FREE investment such as
Churchill Tax-Free Fund of Kentucky is vividly illustrated in the following
chart. This chart compares the 4.85%** average level of distribution return
for Class A Shares (as measured against the maximum public offering price)
for the past twelve months with what you would have had to earn with a
taxable investment.
<PAGE>
[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 28% 31% 36% 39.6%
<S> <C> <C> <C> <C>
Taxable Equivalent Rate 7.17 7.58 8.20 8.71
Triple Tax-Free Distribution Rate 4.85 4.85 4.85 4.85
</TABLE>
As you will note, you would have to find taxable fixed-income
securities that would yield you a level of return quite a bit higher than
that achieved by your investment in Churchill Tax-Free Fund of Kentucky.
Given the current economic environment, such higher levels of yield would
not be possible to obtain, unless significant additional risk was taken in
the form of lesser quality securities.
You should be aware of just how attractive the TAX-FREE return
from the Fund is in today's marketplace.
STABILITY OF YOUR INVESTMENT
Additionally, what we have always tried to achieve for your
investment in Churchill Tax-Free Fund of Kentucky is a high level of
stability of share value. This is one of the prime objectives that
shareholders in the Fund have indicated to us that they would like to have
in addition to a good level of tax-free return.
[Graphic of bar chart with the following information:]
SHARE NET ASSET VALUE
<TABLE>
<CAPTION>
In Dollars
<C> <C>
12/31/87 9.26
12/31/88 9.53
12/31/89 10.05
12/31/90 10.00
12/31/91 10.39
12/31/92 10.50
12/31/93 10.93
12/31/94 9.97
12/31/95 10.71
12/31/96 10.55
12/31/97 10.81
6/30/98 10.81
</TABLE>
As you will note from the above chart, the Class A share value
of the Fund has achieved a high level of stability since the Fund began.
<PAGE>
SLEEPING WELL AT NIGHT
We have always been conscious of the fact that since many of
our shareholders are retirees or pre-retirees, they want comfort with regard
to obtaining a high degree of safety for their invested capital in the Fund.
Indeed, in our management of Churchill Tax-Free Fund of Kentucky, we have
always tried to ensure that you are able to "SLEEP WELL AT NIGHT" knowing
that your investment dollars are being well looked after.
Achieving an attractive level of tax-free return PLUS high
stability for your investment in Churchill Tax-Free Fund of Kentucky requires
use of various investment strategies.
We again want to highlight these various investment strategies
which the Fund uses to ensure that YOUR MONEY IS WELL PROTECTED.
These strategies include emphasis on municipal securities having
high quality credit ratings, broad diversification with respect to both
number and nature of securities, and an intermediate maturity level with the
various holdings in the Fund's portfolio.
The accompanying three pie charts illustrate these points.
[Graphic of pie chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY QUALITY
(By Credit Rating)
<C> <C>
AAA 58.39%
AA 15.21%
A 23.41%
Below A and not rated 2.99%
</TABLE>
[Graphic of pie chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY PROJECT
<S> <C>
State Agencies 9.48%
Local Public Property 19.14%
Industrial Development 4.62%
Utilities 6.60%
Pollution Control 9.47%
Transportation 4.41%
Hospitals 13.19%
Housing 15.59%
Education 15.36%
Airports 2.14%
</TABLE>
[Graphic of pie chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY MATURITY
(in Years)
<S> <C>
0 - 5 17.58%
6 - 10 6.76%
11 - 20 39.57%
21 - 25 20.47%
Over 25 15.62%
</TABLE>
At June 30, 1998, 73.6% of the Fund's overall portfolio was rated
AAA or AA - the two HIGHEST quality credit ratings available for securities.
There are presently 177 individual issues in the Fund's
portfolio, representing a broad diversification in number and variety of
project categories throughout the State.
<PAGE>
The average overall maturity of the portfolio is in the
intermediate range of 16.49 years. And, the duration is 5.32 years.
Basically, all these factors are designed to give you "PEACE OF
MIND" with your investment in Churchill Tax-Free Fund of Kentucky - providing
attractive tax-free return PLUS high stability .
KEEPING YOU IN MIND
We want you to know, that since the inception of Churchill
Tax-Free Fund of Kentucky, we have always kept in mind the level of tax-free
return you receive from your investment in the Fund.
We also keep in mind the degree of stability that we want your
investment to possess.
We achieve this through paying attention to the various areas we
have highlighted above.
These are the prime focuses that we continue to have for you with
the Fund.
YOUR CONFIDENCE VALUED
We value the opportunity to be of service to you. It is our
intent to consistently work in your interest with your investment in
Churchill Tax-Free Fund of Kentucky.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
* In certain circumstances, a small portion of the dividends paid by the
Fund will be subject to income taxes, including the alternative minimum
tax.
** The distribution rate shown represents that of Class A shares. Such data
quoted represents past performance and is not indicative of future
results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Different classes of shares are
offered by the Fund and their distribution rate and performance will
vary because of differences in sales charges and fees paid by
shareholders investing in different classes.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<C> <S> <C> <C>
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (98.6%) S&P VALUE
State Agencies (13.0%)
Kentucky Higher Education Student Loan
Corporaton Insured Student Loan Revenue,
$1,490,000 6.500%, 06/01/02 AA/AA- $1,598,025
2,955,000 6.800%, 06/01/03 AA/AA- 3,243,112
1,915,000 7.100%, 12/01/11 AA/AA- 2,061,019
Kentucky Infrastructure Authority Revenue,
200,000 7.500%, 02/01/99, Pre-Refunded NR/AAA 208,210
555,000 7.200%, 06/01/11 A/A 604,950
635,000 5.250%, 06/01/12 A2/NA 654,844
875,000 6.500%, 06/01/12 A/A 949,375
125,000 5.250%, 06/01/14 A2/A 127,344
1,110,000 6.375%, 06/01/14 A/A 1,237,650
135,000 5.250%, 06/01/15 A2/A 137,025
100,000 5.375%, 06/01/17 A2/A 102,125
1,500,000 5.375%, 02/01/18 NR/A 1,530,000
Kentucky Local Correctional Facilities
Construction Authority Revenue,
4,925,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,140,469
Kentucky Area Development Mount Vernon Project
145,000 5.600%, 6/01/28 NR/AA 145,906
Kentucky Rural Economic Development Authority
3,110,000 7.250%, 06/01/17 NR/AA 3,362,688
Kentucky State Properties and Buildings
Commission Revenue,
400,000 7.350%, 12/01/99, Pre-Refunded NR/AAA 427,000
4,510,000 6.625%, 10/01/00, Pre-Refunded NR/AAA 4,932,813
365,000 7.000%, 02/01/01, Pre-Refunded NR/AAA 397,394
1,000,000 6.500%, 08/01/01, Pre-Refunded NR/AAA 1,087,500
220,000 6.000%, 09/01/08 A2/A+ 247,225
500,000 5.500%, 11/01/09 Aaa/AAA 535,625
400,000 5.000%, 09/01/13 A/A+ 406,000
1,000,000 5.100%, 10/01/17 A2/A+ 1,000,000
Puerto Rico Public Buildings Authority,
1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,118,750
31,255,049
<PAGE>
County Agencies (13.7%)
Clark County Kentucky Public Properties Corp.
Revenue,
1,120,000 6.700%, 06/01/01, Pre-Refunded A/NR 1,209,600
Danville Kentucky Multi-City Lease. Revenue,
545,000 5.000%, 09/01/11 NR/NR* 551,131
Jefferson County Kentucky Capital Projects,
1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,051,250
420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 431,550
1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,658,475
1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,670,750
5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 6,091,750
Kenton County Kentucky Public Properties Corp.
Revenue,
400,000 7.000%, 10/01/99, Pre-Refunded NR/NR* 423,000
Kenton County Kentucky Public Property County
Courthouse
455,000 5.000%, 03/01/14 A1/NR 450,100
250,000 5.000%, 03/01/15 A1/NR 245,822
1,000,000 5.000%, 03/01/23 A1/NR 968,750
Kenton County Kentucky Industrial Development,
300,000 6.950%, 12/01/26 Aa2/NR 338,625
Kenton County Kentucky Industrial Development,
345,000 5.750%, 12/01/27 NR/AA 350,606
Lincoln County Kentucky Public Properties Corp.,
430,000 6.500%, 03/01/22 NR/NR* 485,362
Muhlenberg County Kentucky Industrial
Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A 1,620,000
Nelson Co. IDR - (Mabex Universal),
2,900,000 6.500%, 04/01/05 A3/NR 3,150,125
Pendleton County Kentucky Multi-County Lease
Revenue,
500,000 7.300%, 03/01/02 NR/AA 539,375
570,000 7.550%, 03/01/10 NR/AA 612,037
4,500,000 6.500%, 03/01/19 NR/A 4,933,125
3,000,000 6.400%, 03/01/19 NR/A 3,506,250
<PAGE>
Warren County Kentucky Justice,
2,350,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,414,625
32,702,308
City/Municipal Obligations (8.7%)
Jeffersontown Kentucky Public Project Corp.
Revenue,
500,000 5.750%, 11/01/15 A/NR 535,625
Kentucky League Cities Funding Trust COP,
700,000 5.900%, 08/01/16 NR/A 752,500
1,715,000 6.200%, 08/01/17 NR/A+ 1,871,494
Louisville Kentucky Public Properties Corp.,
4,090,000 6.700%, 12/01/20 A/A- 4,570,575
Mount Sterling Kentucky Lease Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 2,080,800
7,000,000 6.200%, 03/01/18 Aa/NR 7,568,750
Munfordville Kentucky Industrial Development Bond,
2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,759,375
Richmond Kentucky District Court
740,000 5.300%, 02/01/25 A3/NR 753,875
20,892,994
Utilities (6.6%)
Glasgow Kentucky Electric Plant Board Revenue,
280,000 7.600%, 12/01/09, Pre-Refunded NR/BBB 307,650
Hardin County, Kentucky Water District
1,000,000 5.900%, 01/01/25 Aaa/AAA 1,070,000
Henderson County Kentucky Water District,
Waterworks Revenue,
190,000 5.600%, 09/01/21 NR/NR* 195,700
Lebanon Kentucky Waterworks Revenue,
250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 276,250
<PAGE>
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue,
1,525,000 6.500%, 11/15/04, MBIA Insured, Pre-Refunded Aaa/AAA 1,738,500
250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 251,875
230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 231,725
2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 2,017,500
2,500,000 5.000%, 05/15/19, MBIA Insured Aaa/AAA 2,456,250
1,550,000 5.000%, 05/15/22, MBIA Insured Aaa/AAA 1,520,937
4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,181,925
1,000,000 5.250%, 05/15/27, MBIA Insured Aaa/AAA 1,008,750
Muhlenberg County Kentucky Water District,
Waterworks Revenue,
100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 105,750
110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 115,912
115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 121,325
North Nelson County Kentucky, Water Revenue
205,000 5.200%, 01/01/20 NR/NR* 203,719
15,803,768
Pollution Control Revenue (9.3%)
Ashland Kentucky Pollution Control Revenue,
3,000,000 6.650%, 08/01/09 Baa2/NR 3,243,750
Boone County Kentucky Pollution Control,
4,000,000 6.500%, 11/15/22 Aa3/AA- 4,365,000
Boone County Kentucky Pollution Control,
735,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 756,131
Carroll County Kentucky Pollution Control
Revenue,
3,500,000 7.450%, 09/15/16 Aa2/AA- 3,981,250
2,910,000 6.250%, 02/01/18 Aa2/AA- 3,088,237
Jefferson County Kentucky Pollution Control
Revenue,
3,800,000 5.900%, 04/15/23 Aa2/AA 4,013,750
Wickliffe Kentucky Pollution Control,
2,755,000 6.200%, 04/01/07 A1/A 2,768,747
100,000 6.375%, 04/01/26 A1/A 108,750
22,325,615
<PAGE>
Transportation (7.3%)
Kenton County Kentucky Airport Board Airport
Revenue,
4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 5,036,250
Kentucky Interlocal School Transportation
Authority
150,000 5.100%, 03/01/05 A/A 155,250
145,000 5.400%, 06/01/17 NR/A 148,444
200,000 6.000%, 12/01/20 A1/NR 208,750
300,000 5.800%, 12/01/20 NR/A 309,000
400,000 6.000%, 12/01/20 NR/NR* 416,500
400,000 5.650%, 12/01/20 NR/A 409,500
350,000 5.600%, 12/01/20 NR/A 358,750
Kentucky State Turnpike Authority Economic
Development Road Revenue,
1,035,000 7.250%, 05/15/00, Pre-Refunded NR/AAA 1,110,037
1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,160,000
3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,702,156
Puerto Rico Commonwealth Highway &
Transportation Authority Highway Revenue,
4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,430,000
17,444,637
Hospitals (13.2%)
Floyd County Kentucky Hospital Revenue,
260,000 7.500%, 08/01/10 NR/AAA 282,100
510,000 5.500%, 09/01/14 NR/A 542,512
Hopkins County Kentucky Hospital Revenue,
1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,090,000
Jefferson County Kentucky Health Facilities
Revenue (Jewish Hospital),
1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,571,250
100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 105,500
1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,246,312
230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 242,650
3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,443,125
<PAGE>
Kentucky Development Finance Authority
Hospital Revenue,
400,000 7.200%, 09/01/99, Pre-Refunded Aaa/AAA 423,000
235,000 7.200%, 10/01/99, Escrowed to Maturity A3/A 244,400
2,570,000 7.300%, 10/01/99, Pre-Refunded A3/A 2,727,412
400,000 7.250%, 11/01/99, Pre-Refunded A1/A+ 425,000
750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 826,875
810,000 7.500%, 10/01/12, Pre-Refunded A3/A 861,637
Kentucky Development Finance Authority Revenue,
3,000,000 6.500%, 11/01/01, Pre-Refunded A1/A+ 3,273,750
2,150,000 6.750%, 11/01/01, Pre-Refunded A1/A+ 2,362,313
Kentucky Development Finance Authority Kings
Daughters Medical Center,
1,375,000 6.125%, 02/01/12, CGIC Insured Aaa/AAA 1,483,281
Kentucky Development Finance Authority
Hospital Revenue,
1,000,000 5.700%, 10/01/10 NR/BBB 1,035,000
3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,183,750
2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,599,712
1,000,000 5.850%, 10/01/17 Aaa/AAA 1,030,000
1,705,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,666,637
Russell Kentucky Health System Revenue
300,000 5.500%, 07/01/15 Baa1/BBB 304,125
Warren County Kentucky Bowling Green Hospital,
670,000 5.000%, 04/01/10 Aaa/AAA 685,075
31,655,416
Housing (15.4%)
Greater Kentucky Housing Assistance Corp.
Multi-Family Housing Revenue,
320,000 6.300%, 07/01/15 Aaa/NR 340,400
275,000 6.400%, 07/01/23 Aaa/NR 293,219
Greater Kentucky Housing Assistance Corp.
Multi-Family Housing Revenue,
2,025,000 6.050%, 07/01/22 Aaa/AAA 2,078,156
<PAGE>
Jefferson County Kentucky Multi-Family Revenue,
1,530,000 5.750%, 06/01/23 NR/AA 1,591,200
Kenton County Kentucky Project Note
1,000,000 6.125%, 12/01/17, FHA Insured Aa2/NR 1,073,750
Kentucky Housing Corporation Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 268,069
835,000 7.600%, 01/01/07 Aaa/AAA 876,750
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,075,000
60,000 7.875%, 01/01/08 Aaa/AAA 61,832
425,000 7.250%, 01/01/09 Aaa/AAA 445,188
980,000 7.125%, 01/01/10 Aaa/AAA 1,042,475
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,304,594
230,000 5.400%, 07/01/14 Aaa/AAA 237,187
750,000 6.250%, 07/01/15 Aaa/AAA 806,250
315,000 6.100%, 07/01/16 Aaa/AAA 336,263
1,570,000 6.400%, 01/01/17 Aaa/AAA 1,693,638
445,000 5.300%, 07/01/18 Aaa/AAA 447,225
1,065,000 5.550%, 07/01/18 Aaa/AAA 1,088,963
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,502,563
410,000 7.900%, 01/01/21 Aaa/AAA 429,988
175,000 7.800%, 01/01/21 Aaa/AAA 183,531
125,000 8.100%, 01/01/22 Aaa/AAA 131,719
2,280,000 7.450%, 01/01/23 Aaa/AAA 2,413,950
740,000 6.800%, 01/01/24 Aaa/AAA 789,950
280,000 5.850%, 07/01/27 Aaa/AAA 289,450
3,500,000 6.375%, 07/01/28 Aaa/AAA 3,723,125
6,900,000 6.300%, 01/01/28 Aaa/AAA 7,348,500
1,000,000 6.250%, 07/01/28 Aaa/AAA 1,066,250
36,939,185
Universities (0.1%)
Western Kentucky University Revenue,
275,000 7.100%, 12/01/00, Pre-Refunded Aaa/AAA 299,406
299,406
<PAGE>
Schools (11.3%)
Boone County Kentucky School District Finance
Corp. School Building Revenue,
1,750,000 6.750%, 09/01/01, Pre-Refunded A/A 1,931,563
2,250,000 6.125%, 12/01/17 A/NR 2,390,625
2,295,000 5.700%, 05/01/18 A/NR 2,401,144
Boyd County Kentucky School District,
575,000 5.375%, 10/01/17 A1/NR 591,531
Butler County Kentucky School Building Revenue,
270,000 7.200%, 05/01/00, Pre-Refunded NR/A 292,613
290,000 7.200%, 05/01/00, Pre-Refunded NR/A 314,288
Christian County Kentucky School District,
500,000 5.000%, 06/01/09 A1/NR 516,875
Fayette County School Building Revenue,
160,000 5.350%, 01/01/14 A1/A+ 165,000
1,780,000 5.700%, 12/01/16 A1/A+ 1,891,250
Floyd County Kentucky School Building Revenue
250,000 5.000%, 12/01/09 A1/NR 254,375
Garrard County Kentucky School Building Revenue,
100,000 5.900%, 06/01/15 A/NR 107,250
160,000 5.900%, 06/01/16 A/NR 171,000
Grayson County Kentucky School Building Revenue,
1,940,000 6.000%, 01/01/15 A/NR 2,102,475
Harlan County Kentucky School District Corp.
School Building Revenue,
200,000 7.250%, 09/01/00, Pre-Refunded A/A 218,750
205,000 7.400%, 12/01/06 A/NR 222,425
Hazard Kentucky Independent School District,
555,000 5.300%, 09/01/22 A1/NR 568,875
Jefferson County Kentucky School District
Finance Corp. School Building Revenue,
370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 400,063
500,000 5.875%, 01/01/11 A1/A+ 530,000
695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 705,425
Kenton County Kentucky School District Finance
Corp. School Building Revenue,
500,000 6.900%, 12/01/99, Pre-Refunded NR/NR* 535,000
600,000 7.000%, 12/01/99, Pre-Refunded NR/NR* 642,750
100,000 5.250%, 03/01/06, Pre-Refunded NR/A+ 104,500
<PAGE>
Lexington-Fayette Urban County Government
School Building Revenue,
250,000 7.000%, 12/01/99, Pre-Refunded A1/AAA 267,813
400,000 7.000%, 12/01/99, Pre-Refunded A1/AAA 428,500
370,000 7.000%, 12/01/99, Pre-Refunded A1/AAA 396,363
Mead County Kentucky School District
400,000 5.700%, 07/01/15 A1/NR 425,500
500,000 6.000%, 07/01/16 A/NR 542,500
Middlesboro Kentucky Independent School
District Finance Corp.
100,000 6.000%, 08/01/16 A/NR 108,375
Nelson County Kentucky School Building Revenue,
1,820,000 5.750%, 04/01/15 A/NR 1,936,025
Pike County Kentucky School District Finance
Corp. School Building Revenue,
505,000 6.900%, 12/01/99, Pre-Refunded A/A 540,350
720,000 7.000%, 12/01/00, Pre-Refunded A/A 787,500
Rowan County Kentucky School District Finance
Corp.
215,000 5.600%, 06/01/16 A/NR 228,975
Scott County Kentucky School Building Revenue,
2,750,000 5.900%, 06/01/18 A/A 2,935,625
Taylor County Kentucky School Building Revenue,
280,000 6.000%, 08/01/16 A/NR 304,150
Todd County Kentucky School Building Revenue,
980,000 6.300%, 10/01/14 NR/A 1,079,225
27,038,678
Total Investments (cost $221,670,749**) 98.6% 236,357,056
Other assets in excess of liabilities 1.4 3,474,538
Net Assets 100.0% $239,831,594
<FN> * Any security not rated has been determined by the
Investment Adviser to have sufficient quality to be
ranked in the top four credit ratings if a credit rating
were to be assigned by a rating service. </FN>
<FN> **Cost for Federal tax purposes is identical. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $221,670,749) $236,357,056
Cash 1,019,032
Interest receivable 3,832,437
Receivable for Fund shares sold 140,250
Receivable for investment securities sold 50,000
Other assets 1,242
Total assets 241,400,017
LIABILITIES
Payable for investment securities purchased 1,055,698
Dividends payable 239,992
Distribution fees payable 86,266
Management fee payable 78,674
Accrued expenses 56,138
Payable for Fund shares redeemed 51,655
Total liabilities 1,568,423
NET ASSETS $239,831,594
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 221,934
Additional paid-in capital 224,593,633
Distributions in excess of net investment income (117,234)
Accumulated net realized gain on investments 446,954
Net unrealized appreciation on investments 14,686,307
$239,831,594
CLASS A
Net Assets $226,377,512
Capital shares outstanding 20,949,016
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 $ 841,517
Capital shares outstanding 77,887
Net asset value and offering price per share $ 10.80
Redemption price per share (*generally, a charge of 1%
is imposed on the proceeds of shares redeemed during the
first 12 months after purchase) $ 10.80*
CLASS Y
Net Assets $ 12,612,565
Capital shares outstanding 1,166,510
Net asset value, offering and redemption price per share $ 10.81
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 6,678,154
Expenses:
Management fee (note 3) $ 469,338
Distribution and service fees (note 3) 171,755
Transfer and shareholder servicing agent fees 68,000
Trustees' fees and expenses 36,000
Legal fees 28,000
Shareholders' reports and proxy statements 27,000
Audit and accounting fees 14,000
Custodian fees (note 7) 11,900
Registration fees and dues 7,500
Insurance 1,900
Miscellaneous 17,069
852,462
Expenses paid indirectly (note 7) (11,900)
Net expenses 840,562
Net investment income 5,837,592
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 326,622
Change in unrealized appreciation on investments (268,509)
Net realized and unrealized gain on investments 58,113
Net increase in net assets resulting from operations $ 5,895,705
</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, 1998 DECEMBER 31, 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,837,592 $ 11,982,164
Net realized gain from securities
transactions 326,622 690,738
Change in unrealized appreciation
(depreciation) on investments (268,509) 5,384,972
Change in net assets from operations 5,895,705 18,057,874
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (5,553,294) (11,553,536)
Distributions in excess of net
investment income (111,624) -
Net realized gain on investments - (332,819)
Class C Shares:
Net investment income (17,393) (29,337)
Distributions in excess of net
investment income (421) -
Net realized gain on investments - (845)
Class Y Shares:
Net investment income (266,905) (391,517)
Distributions in excess of net
investment income (5,189) -
Net realized gain on investments - (11,278)
Change in net assets from distributions (5,954,826) (12,319,332)
CAPITAL SHARE TRANSACTIONS (note 8):
Proceeds from shares sold 15,277,236 25,210,705
Reinvested dividends and distributions 3,217,159 6,701,119
Cost of shares redeemed (14,882,980) (30,516,063)
Change in net assets from
capital share transactions 3,611,415 1,395,761
Change in net assets 3,552,294 7,134,303
NET ASSETS:
Beginning of period 236,279,300 229,144,997
End of period $239,831,594 $236,279,300
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Churchill Tax-Free Fund of Kentucky (the "Fund"), a
non-diversified, open-end investment company, was organized in March, 1987 as
a Massachusetts business trust and commenced operations on May 21, 1987. The
Fund is authorized to issue an unlimited number of shares and, since its
inception to April 1, 1996, offered only one class of shares. On that date,
the Fund began offering two additional classes of shares, Class C and Class Y
shares. All shares outstanding prior to that date were designated as Class A
shares and, 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 June 30, 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
<PAGE>
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 theFund 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.
<PAGE>
On April 24, 1998, the Mangement arrangements described above were
approved by the Fund's shareholders and went into effect on May 1, 1998.
From September 11, 1995 to that date, Aquila Management Corporation and Banc
One Investment Advisors Corporation had served as the Fund's Administrator
and Investment Manager, respectively, pursuant to agreements with the Fund,
for total fees at an annual rate of 0.40 of 1% of the Fund's net assets, the
same fee as under the new arrangements.
For the six months ended June 30, 1998, the Fund incurred fees for
advisory and administrative services of $469,338.
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 six months ended June 30, 1998,
service fees on Class A Shares amounted to $167,577, of which the Distributor
received $4,222.
Under another part of the Plan, the Fund is authorized to make
payments with respect to Class C Shares to Qualified Recipients which have
rendered assistance in the distribution and/or retention of the Fund's Class
C shares or servicing of shareholder accounts. These payments are made at the
annual rate of 0.75% of the Fund's net assets represented by Class C Shares
and for the six months ended June 30, 1998, amounted to $3,134. In addition,
under a Shareholder Services Plan, the Fund is authorized to make service fee
payments with respect to Class C Shares to Qualified Recipients for providing
personal services and/or maintenance of shareholder accounts. These payments
are made at the annual rate of 0.25% of the Fund's net assets represented by
Class C Shares and for the six months ended June 30, 1998, amounted to
$1,044. The total of these payments with respect to Class C Shares amounted
to $4,178, of which the Distributor received $3,235.
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
<PAGE>
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, 1998, the Distributor
received sales commissions of $19,339.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1998, purchases of securities
and proceeds from the sales of securities aggregated $19,341,411 and
$15,934,595, respectively.
At June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $14,700,183 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to $13,876
for a net unrealized appreciation of $14,686,307.
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 ordinary income taxes. For certain
shareholders, some dividends may, under some circumstances, be subject to the
alternative minimum tax.
7. CUSTODIAN FEES
The Fund has negotiated an expense offset arrangement with its
custodian, Bank One Trust Company, N.A., an affiliate of the Sub-Adviser,
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the six months ended June 30,
1998, the Fund's custodian fees amounted to $11,900, all of which was offset
by such credits. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in income-producing assets
rather than leave cash on deposit with the custodian.
<PAGE>
8. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,041,937 $ 11,242,921 1,946,573 $ 20,614,221
Reinvested distributions 296,073 3,194,378 629,661 6,662,872
Cost of shares redeemed (1,340,098) (14,473,685) (2,759,392) (29,203,137)
Net change (2,088) (36,386) (183,158) (1,926,044)
CLASS C SHARES:
Proceeds from shares sold 8,789 94,845 47,349 501,768
Reinvested distributions 1,071 11,559 2,091 22,131
Cost of shares redeemed (10,169) (110,034) (12,332) (131,306)
Net change (309) (3,630) 37,108 392,593
CLASS Y SHARES:
Proceeds from shares sold 365,005 3,939,470 387,049 4,094,716
Reinvested distributions 1,040 11,222 1,517 16,116
Cost of shares redeemed (27,754) (299,261) (112,210) (1,181,620)
Net change 338,291 3,651,431 276,356 2,929,212
Total transactions in Fund
shares 335,894 $ 3,611,415 130,306 $ 1,395,761
</TABLE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class A(1)
Six Months
Ended Year ended December 31,
June 30, 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.55 $10.71 $9.97 $10.93 $10.49
Income from Investment Operations:
Net investment income 0.27 0.55 0.55 0.60 0.60 0.62
Net gain (loss) on securities (both
realized and unrealized) - 0.27 (0.12) 0.74 (0.96) 0.47
Total from Investment Operations 0.27 0.82 0.43 1.34 (0.36) 1.09
Less Distributions (note 6):
Dividends from net investment income (0.27) (0.55) (0.59) (0.60) (0.60) (0.62)
Distributions from capital gains - (0.01) - - - (0.03)
Total Distributions (0.27) (0.56) (0.59) (0.60) (0.60) (0.65)
Net Asset Value, End of Period $10.81 $10.81 $10.55 $10.71 $9.97 $10.93
Total Return (not reflecting sales
charge)(%) 2.54* 8.08 4.17 13.75 (3.31) 10.50
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 226,378 226,477 222,889 230,270 232,656 258,632
Ratio of Expenses to Average Net
Assets (%) 0.71** 0.72 0.74 0.79 0.72 0.59
Ratio of Net Investment Income to
Average Net Assets (%) 4.92** 5.20 5.23 5.75 5.81 5.67
Portfolio Turnover Rate (%) 6.82* 22.39 8.94 17.09 35.25 31.29
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the voluntary waiver of a portion of the
management fee and the expense offset in custodian fees for uninvested cash
balances would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.27 0.55 0.55 0.60 0.60 0.60
Ratio of Expenses to Average Net
Assets (%) 0.72** 0.73 0.75 0.80 0.73 0.73
Ratio of Net Investment Income to
Average Net Assets (%) 4.91** 5.19 5.22 5.74 5.80 5.52
<FN> (1) Designated as Class A Shares 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. 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.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Six Months Year Period(2) Six Months Year Period(2)
Ended June Ended Dec. Ended Dec. Ended June Ended Dec. Ended Dec.
30, 1998 31, 1997 31, 1996 30, 1998 31, 1997 31, 1996
<S> <C> <C> <C> <C> <C> <C>
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 0.23 0.46 0.37 0.28 0.56 0.43
Net gain on securities (both
realized and unrealized) (0.01) 0.27 0.11 (0.01) 0.29 0.11
Total from Investment Operations 0.22 0.73 0.48 0.27 0.85 0.54
Less Distributions (note 6):
Dividends from net investment income (0.23) (0.46) (0.40) (0.28) (0.57) (0.46)
Distributions from capital gains - (0.01) - - (0.01) -
Total Distributions (0.23) (0.47) (0.40) (0.28) (0.58) (0.46)
Net Asset Value, End of Period $10.80 $10.81 $10.55 $10.81 $10.82 $10.55
Total Return (not reflecting sales
charge)(%) 2.02* 7.16 4.72* 2.52* 8.34 5.24*
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 842 845 433 12,613 8,957 5,823
Ratio of Expenses to Average Net
Assets (%) 1.55** 1.56 1.55** 0.56** 0.56 0.56**
Ratio of Net Investment Income to
Average Net Assets (%) 4.08** 4.31 4.35** 5.06** 5.32 5.42**
Portfolio Turnover Rate (%) 6.82* 22.39 8.94 6.82* 22.39 8.94
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset in custodian fees for
uninvested cash balances would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.23 0.46 0.37 0.28 0.56 0.43
Ratio of Expenses to Average Net
Assets (%) 1.56** 1.57 1.56** 0.57** 0.57 0.58**
Ratio of Net Investment Income to
Average Net Assets (%) 4.07** 4.30 4.34** 5.05** 5.31 5.41**
<FN> (1) New Class of Shares established on April 1, 1996. </FN>
<FN> (2) From April 1, 1996 to December 31, 1996. </FN>
<FN> * Not annualized. </FN>
<FN> ** Annualized. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky
(the "Fund") was held on April 24, 1998. The holders of shares representing
65% of the total net asset value of the shares entitled to vote were present
in person or by proxy. At the meeting, the following matters were voted upon
and approved by the shareholders (the resulting votes for each matter are
presented below).
1. To elect Trustees.
Number of Votes:
TRUSTEE FOR WITHHELD
Lacy B. Herrmann 150,267,582.09 2,855,286.18
Thomas A. Christopher 150,200,696.01 2,922,172.26
Douglas Dean 150,388,141.65 2,734,726.62
Diana P. Herrmann 150,469,409.97 2,653,458.30
Theodore T. Mason 150,466,680.61 2,656,187.46
Anne J. Mills 150,551,902.08 2,570,966.19
William J. Nightingale 150,555,573.45 2,567,294.82
James R. Ramsey 150,555,573.45 2,567,294.82
2. To ratify the selection of KPMG Peat Marwick LLP as the Fund's
independent auditors.
Number of Votes:
FOR AGAINST ABSTAIN
147,874,704.42 920,679.96 4,327,440.57
3. To approve the new Investment Advisory and Administration Agreement
between the Fund and Aquila Management Corporation.
Number of Votes:
FOR AGAINST ABSTAIN BROKER NON-VOTES
146,251,633.98 998,894.22 5,872,307.58 0.00
4. To approve the new Sub-Advisory Agreement between Aquila Management
Corporation as Manager and Banc One Investment Advisors Corporation
as Sub-Adviser.
Number of Votes:
FOR AGAINST ABSTAIN BROKER NON-VOTES
145,491,162.21 1,866,734.61 5,764,917.30 0.00
<PAGE>
