INVESTMENT ADVISER
BANC ONE INVESTMENT ADVISORS CORPORATION
416 West Jefferson Street
Louisville, Kentucky 40202
ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
ANNUAL
REPORT
DECEMBER 31, 1997
AQUILA
[Logo of Aquila Group of Funds: an eagle's head]
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus with a
circle around it]
ONE OF THE
AQUILASM GROUP OF FUNDS
<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
ANNUAL REPORT
"QUALITY FOSTERS PEACE OF MIND"
February 20, 1998
Dear Investor:
Recently, there has been a lot of news about the Far East and the
problems that a number of countries in that area are experiencing. These
problems have included some failures of major financial corporations in
Japan, South Korea, Indonesia, Hong Kong, and various other countries. Also,
there have been major deterioration changes in the currencies of these
countries as they relate to U.S. dollars.
It is hard to believe the magnitude of recent currency
depreciation that has taken place in various countries vs. the U.S. dollar.
The currency deteriorations against the U.S. dollar have ranged from 10% to
well over 70% with various countries around the world. While we may have some
problems in our own country, these are very substantially less than those of
other countries.
What has occurred as a result of the problems of these countries
is a flight to quality. In comparison to various economies and currencies of
the Far East, as well as other countries in the world, the U.S. economy
securities markets and currency stand out as a beacon of quality.
Quality has also been one of the trademarks of Churchill Tax-Free
Fund of Kentucky from the inception of the fund. It has been our strong
belief that you can sleep much better at night by having high quality issues
in the fund in which you invest. Indeed, presently, the portfolio of
Churchill Tax-Free Fund of Kentucky consists of 54.35% of tax-exempt
securities having a AAA rating, and 15.79% of securities having a AA rating.
Thus, 70.14% of the Fund's overall portfolio is rated as AA or AAA. These are
the two highest quality securities you can possibly own.
Just as important for you to know, in the portfolio management of
the fund, separate credit analysis is done by the portfolio adviser to
confirm that such top-quality assessment of the individual securities is
justified. In other words, we do not merely rely upon the judgment of rating
agencies, but rather independently verify the credit quality of each
security.
Why do we structure the portfolio this way? Primarily, so that
you can feel comfortable with your investment in Churchill Tax-Free Fund of
Kentucky in terms of knowing that that portion of your savings possesses a
high level of capital preservation.
<PAGE>
PATTERN OF PRICING OF SHARE VALUE
When you look at the pricing of share value of Churchill Tax-Free
Fund of Kentucky, you will note that it presents a high level of share price
consistency. This is in stark contrast to the currency deterioration and
volatility of currency and securities markets that is taking place around the
world. The chart below shows you that consistency for every year since the
Fund began.
[Graphic of bar chart with the following information:]
SHARE NET ASSET VALUE
In Dollars
<TABLE>
<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
</TABLE>
OTHER STEPS TAKEN TO PROTECT YOUR MONEY
As we have pointed out in previous reports to you, we have also
consistently sought to diversify the holdings of municipal bonds in the
portfolio so that no one segment could hurt the overall value of your money
in the remote event a problem occurred. As a result, it is worth pointing out
that the portfolio of securities presently consists of 168 issues spread over
a variety of categories. This diversification is illustrated in the pie chart
below.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY PROJECT
<TABLE>
<C> <C>
State Agencies 9.89%
Local Public Property 17.77%
Industrial Buildings 3.77%
Utilities 5.79%
Pollution Control 10.60%
Transportation 4.96%
Hospitals 12.54%
Housing 16.25%
Education 15.91%
Airports 2.52%
</TABLE>
<PAGE>
We also ensure that the maturity of the portfolio is spread out
over various time periods, with the average portfolio maturity being 17
years, as is indicated in the pie chart below.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY MATURITY (in Years)
<TABLE>
<C> <C>
1 - 5 14.99%
6 - 10 8.57%
11 - 20 35.64%
21 - 25 25.42%
Over 25 Years 15.38%
</TABLE>
Altogether then, when you consider the quality, diversification,
and maturity of the portfolio, what we have consistently tried to do for you
is to provide you with the means by which you can have "PEACE OF MIND" with
your investment in Churchill Tax-Free Fund of Kentucky.
WORKING IN YOUR INTEREST
You can be assured that all those associated with the management
of your investment will consistently work in your investment interest. We
very much value you as a shareholder and appreciate the confidence you have
shown in Churchill Tax-Free Fund of Kentucky.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The graph below illustrates the value of $10,000 invested in
Class A shares of Churchill Tax-Free Fund of Kentucky at inception of the
Fund in May, 1987 and maintaining this investment through the Fund's latest
fiscal year end, December 31, 1997, as compared with a hypothetical similar
size investment in the Lehman Brothers Quality Intermediate Municipal Bond
Index (the "Index") of municipal securities and the Consumer Price Index (a
cost of living index) over that same period. The total return of the
investment in the Fund is shown after deduction of the maximum sales charge
of 4% at the time of initial investment. It also reflects deduction of the
Fund's annual operating expenses and reinvestment of monthly dividends and
capital gains distributions without sales charge. On the other hand, the
Index does not reflect any sales charge nor operating expenses but does
reflect reinvestment of interest. The performance of the Fund's other
classes, first offered on April 30, 1996, may be greater or less than the
Class A shares performance indicated on this graph, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in the other classes.
It should also be specifically noted that the Index is nationally
oriented and consists of an unmanaged mix of 22,000 investment-grade
intermediate-term municipal securities of issuers throughout the United
States. However, the Fund's investment portfolio consisted of a significantly
lesser number of investment-grade tax-free municipal obligations, principally
of Kentucky issuers, over the same period. The maturities, market prices, and
behavior of the individual securities in the Fund's investment portfolio can
be affected by local and regional factors which might well result in
variances from the market action of the securities in the Index.
Whatever difference in performance of the Index versus the Fund
might also be attributed to the lack of application of annual operating
expenses and initial sales charge to the Index. Additionally, a portion of
the difference in performance can be attributed to the different
characteristics in the single-state market of the securities in the Fund's
portfolio as compared with the national orientation of the securities in the
Index.
Since its inception, the Fund has been managed to provide as
stable a share value as possible consistent with producing a competitive
income return to shareholders. It has not been managed for maximum total
return, since one of the aims of management in structuring the portfolio of
the Fund is to reduce fluctuations in the price of the Fund's shares
resulting from changes in interest rates.
As can be observed, however, the pattern of the Fund's results
and that of the Index over the period since inception of the Fund track quite
similarly, even though they are not entirely comparable in character.
Previously, the Fund's performance was compared to the Lehman
Brothers Municipal Bond Index (an index of long-term municipal securities)
rather than the Lehman Brothers Quality Intermediate Municipal Bond Index. A
change in the particular index was made by the Fund because it provides a
better basis of comparison inasmuch as the Fund has maintained an
intermediate-term average maturity since inception. Had the longer-term
Lehman Brothers Municipal Bond Index been used at December 31, 1997, the
value of a $10,000 investment at inception of the Fund would have been
$23,905. However, the correlation between the Fund's behavior and the Lehman
Brothers Quality Intermediate Municipal Bond Index is more closely related.
(Graphic of line chart with the following information:)
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
Lehman Brothers Fund After Sales Cost of
Quality Municipal Charge and Expenses Living Index
Bond Index
<S> <C> <C> <C>
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
</TABLE>
(Graphic of table with the following information:)
<TABLE>
<CAPTION>
Fund's average annual total return
1 5 10 Life of Fund
For the Period Ended December 31, 1997 Year Years Years Since 5/21/87
<S> <C> <C> <C> <C>
Including Sales Charge and Expenses 3.75% 5.60% 7.73% 7.20%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
1997 proved to be another year of significant financial
milestones:
1. The Dow Jones Industrial Average broke the 8,000 mark for the first
time in history. The Standard & Poor's 500 Index rose 33.38%,
making 1997 the third consecutive year of double-digit returns.
2. Domestic inflation, as measured by the Producer Price Index (PPI)
actually declined by 1.3% for the year. Prices on the retail level,
as measured by the Consumer Price Index (CPI) rose a modest 1.6%,
the lowest rate since 1986.
3. With the decline in inflation, we saw long-term bond yields drop to
levels approaching those not seen since the early 1970's. Yields on
30-year U.S. Treasury bonds dropped from 6.64% in January to 5.92%
at year-end.
4. The municipal Bond Buyer 20 Bond Index ended the year at 5.50%,
down from 5.76% in December 1996. A typical AAA-rated 15-year bond
began the year yielding 5.19%. By the end of the year, that same
bond was yielding 4.79%.
5. The Taxpayer Relief Act of 1997 was signed into law in August. A
reduction was made in the maximum capital gains tax rate for
long-term capital gain on those assets sold after holding for
longer than 18 months. It was projected that investors would "flood
the market" with highly appreciated assets, thus putting upside
pressure on interest rates. It didn't happen.
6. Kentucky municipal bonds continued to be in short supply, as lower
rates led to many bonds being called. Strong demand, coupled with
meager supply, helped drive rates on Kentucky municipal bonds lower
than we have seen in years.
7. The Kentucky Intangibles Property Tax was declared unconstitutional
in early 1997. Refund checks started going out to eligible
taxpayers in the fourth quarter.
Interest rates declined - and bond prices rose - across the board
over the course of 1997. While the Federal Reserve moved early in 1997 to
modestly increase short-term rates to stem inflationary pressures, these
"preemptive moves" drove long-term rates lower.
The conservative intermediate-term maturity structure of the
Churchill Tax-Free Fund of Kentucky led to an increase in the net asset value
of the Fund in 1997: beginning 1997 at $10.55 and closing out the year at
$10.81. The class "A" shares of the Fund had an annual total rate of return
of 8.08%. This compares favorably to a 4.17% return in 1996.
Demand for quality Kentucky municipal bonds continues to be
strong. Once again, the Commonwealth of Kentucky is expected to post a
surplus in the General Fund. Governor Patton also anticipates a balance of
more than $200 million in the Commonwealth's "rainy day" fund.
The investment objective of the Churchill Tax-Free Fund of
Kentucky is to provide as high a level of triple tax-free current income as
is consistent with the preservation of capital. This objective continues to
be successfully addressed by adhering to a discipline of fundamental,
conservative portfolio management ideals. The Fund has an average quality
rating of "AA". We are proud to have once again earned a four star - **** -
rating from Morningstar, an independent mutual fund rating service. Our
"laddered" portfolio maturity structure helps us manage price volatility.
The Fund has an effective maturity of approximately 7.1 years. We maintain a
well-diversified portfolio of over 160 different Kentucky issues, thus
reducing issuer credit risk by not having all of our eggs in one basket.
We continue to be optimistic about the domestic economy in 1998.
The recent financial crisis being experienced in numerous Asian economies has
made the American bond market a "safe haven" for international investors. We
expect growth to slow with the Gross Domestic Product (GDP) to be below 2%
for all of 1998. We forecast inflation, as measured by the CPI, to average
approximately 2% for the year. Slow growth plus moderate inflationary
expectations should translate into another banner year for the bond market
and interest rates for 1998.
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Churchill Tax-Free Fund of Kentucky:
We have audited the accompanying statement of assets and
liabilities of Churchill Tax-Free Fund of Kentucky, including the statement
of investments, as of December 31, 1997, the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian. As to securities sold but not delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the
accounting principles used, and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Churchill Tax-Free Fund of Kentucky as of December 31, 1997, the
results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then
ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 6, 1998
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (98.3%) S&P VALUE
<C> <S> <C> <C>
State Agencies (13.9%)
Kentucky Higher Education Student Loan
Corporaton Insured Student Loan Revenue,
$ 980,000 6.500%, 06/01/00 Aaa/AA- $ 1,025,325
1,490,000 6.500%, 06/01/02 Aaa/AA- 1,609,200
2,955,000 6.800%, 06/01/03 Aaa/AA- 3,268,969
1,915,000 7.100%, 12/01/11 Aaa/AA- 2,075,381
Kentucky Infrastructure Authority Revenue,
795,000 7.625%, 08/01/03, Pre-Refunded A/NR 852,637
205,000 7.625%, 08/01/03 NR/A 220,119
200,000 7.500%, 02/01/99, Pre-Refunded NR/AAA 211,298
1,500,000 5.375%, 02/01/18 NR/A 1,522,500
555,000 7.200%, 06/01/11 A/A 609,112
635,000 5.250%, 06/01/12 A2/A 649,288
875,000 6.500%, 06/01/12 A/A 951,562
125,000 5.250%, 06/01/14 A2/A 126,250
1,110,000 6.375%, 06/01/14 A/A 1,234,875
135,000 5.250%, 06/01/15 A2/A 135,844
100,000 5.375%, 06/01/17 A2/A 101,375
Kentucky Local Correctional Facilities
Construction Authority Revenue,
4,925,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,103,531
Kentucky Rural Economic Development Authority,
3,110,000 7.250%, 06/01/17 NR/AA 3,374,350
Kentucky State Properties and Buildings
Commission Revenue,
400,000 5.000%, 09/01/13, Pre-Refunded A2/A+ 403,500
500,000 5.500%, 11/01/09, Pre-Refunded Aaa/AAA 535,000
400,000 7.350%, 12/01/99, Pre-Refunded Aaa/AAA 431,500
365,000 7.000%, 02/01/01, Pre-Refunded Aaa/AAA 401,500
4,510,000 6.625%, 10/01/00, Pre-Refunded Aaa/AAA 4,972,275
750,000 7.375%, 12/01/99, Pre-Refunded Aaa/AAA 810,000
1,000,000 6.500%, 08/01/01, Pre-Refunded Aaa/AAA 1,095,000
Puerto Rico Public Buildings Authority,
1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,125,000
32,845,391
County Agencies (11.3%)
Clark County Kentucky Public Properties Corp.
Revenue,
1,120,000 6.700%, 06/01/01, Pre-Refunded A2/NR 1,215,200
Jefferson County Kentucky Capital Projects,
420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 425,775
1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,656,450
1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,672,800
5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 6,084,375
Jeffersontown Kentucky Public Project Corp.
Revenue,
500,000 5.750%, 11/01/15 A/NR 531,250
Kenton County Kentucky Public Properties Corp.
Revenue,
400,000 7.000%, 10/01/99, Pre-Refunded NR/NR* 427,000
Kenton County Kentucky Industrial Developement,
300,000 6.950%, 12/01/26 Aa2/NR 339,375
Kenton County Kentucky Industrial Developement,
345,000 5.750%, 12/01/27 NR/AA 348,881
Lincoln County Kentucky Public Properties Corp.,
430,000 6.500%, 03/01/22 NR/NR* 483,750
Muhlenberg County Kentucky Industrial
Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A- 1,635,000
Pendleton County Kentucky Multi-County Lease
Revenue,
500,000 7.300%, 03/01/02 NR/AA 543,750
570,000 7.550%, 03/01/10 NR/AA 616,312
4,500,000 6.500%, 03/01/19 NR/A 4,944,375
3,000,000 6.400%, 03/01/19 NR/A 3,513,750
Warren County Kentucky Justice,
2,350,000 5.350%, 09/01/29, MBIA Insured Aaa/AAA 2,397,000
26,835,043
City/Municipal Obligations (8.5%)
Kentucky League Cities Funding Trust COP,
700,000 5.900%, 08/01/16 NR/A 750,750
1,715,000 6.200%, 08/01/17 NR/A+ 1,867,206
Louisville Kentucky Public Properties Corp,
4,090,000 6.700%, 12/01/20 A/A- 4,539,900
Mount Sterling Kentucky Lease Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 2,037,600
7,000,000 6.200%, 03/01/18 Aa/NR 7,446,250
Munfordville Kentucky Industrial Development
Bond,
2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,765,625
Richmond Kentucky District Court
740,000 5.300%, 02/01/25 A3/NR 747,400
20,154,731
Utilities (5.7%)
Glasgow Kentucky Electric Plant Board Revenue,
280,000 7.600%, 12/01/09, Pre-Refunded NR/BBB 311,500
Hardin County, Kentucky Water District,
1,000,000 5.900%, 01/01/25 Aaa/AAA 1,068,750
Henderson County Kentucky Water District,
Waterworks Revenue,
190,000 5.600%, 09/01/21 NR/NR* 194,750
Kenton County Kentucky Water District
1,600,000 6.375%, 02/01/12, FGIC Insured Aaa/AAA 1,756,000
1,000,000 6.375%, 02/01/17, FGIC Insured Aaa/AAA 1,095,000
Lebanon Kentucky Waterworks Revenue,
250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 279,375
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue,
2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 2,020,000
4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,161,575
1,500,000 6.500%, 11/15/04, AMBAC Insured, Pre-Refunded Aaa/AAA 1,711,875
500,000 5.300%, 05/15/09, MBIA Insured Aaa/AAA 521,250
Muhlenberg County Kentucky Water District,
Waterworks Revenue,
100,000 5.500%, 01/01/12, AMBAC Insured Aaa/AAA 104,875
110,000 5.500%, 01/01/13, AMBAC Insured Aaa/AAA 114,950
115,000 5.600%, 01/01/14, AMBAC Insured Aaa/AAA 120,750
13,460,650
Pollution Control Revenue (10.4%)
Ashland Kentucky Pollution Control Revenue,
1,000,000 7.375%, 07/01/09 Baa2/NR 1,076,250
3,000,000 6.650%, 08/01/09 Baa2/NR 3,255,000
Boone County Kentucky Pollution Control,
4,000,000 6.500%, 11/15/22 Aa3/AA- 4,390,000
Boone County Kentucky Pollution Control,
735,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 751,538
Carroll County Kentucky Pollution Control
Revenue,
3,500,000 7.450%, 09/15/16 Aa2/AA- 4,016,250
2,910,000 6.250%, 02/01/18 Aa2/AA- 3,102,788
Jefferson County Kentucky Pollution Control
Revenue,
3,800,000 5.900%, 04/15/23 Aa2/AA- 4,013,750
Wickliffe Kentucky Pollution Control,
3,900,000 6.200%, 10/01/07 A1/A 3,914,469
100,000 6.375%, 04/01/26 A1/A 108,875
24,628,920
Transportation (8.1%)
Kenton County Kentucky Airport Board Airport
Revenue,
4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 5,048,100
Kentucky Interlocal School Transportation
Authority
150,000 5.100%, 03/01/05 NR/A 154,688
200,000 6.000%, 12/01/20 NR/A 208,750
300,000 5.800%, 12/01/20 NR/A 308,250
400,000 5.650%, 12/01/20 NR/A 408,500
400,000 6.000%, 12/01/20 NR/A 416,500
350,000 5.600%, 12/01/20 NR/A 357,875
Kentucky State Turnpike Authority Economic
Development Road Revenue,
3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,689,012
1,035,000 7.250%, 05/15/00, Pre-Refunded Aaa/AAA 1,122,975
1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,172,500
Louisville Kentucky Airport Lease Revenue,
750,000 7.850%, 02/01/09 A/A- 798,668
Puerto Rico Commonwealth Highway &
Transportation Authority Highway Revenue,
4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,450,000
Puerto Rico Commonwealth Highway Authority
Highway Revenue,
1,000,000 6.750%, 07/01/00, Pre-Refunded Aaa/A 1,085,000
19,220,818
Hospitals (12.6%)
Floyd County Kentucky Hospital Revenue,
270,000 7.500%, 08/01/10 NR/AAA 296,325
510,000 5.500%, 09/01/14 NR/A 539,325
Hopkins County Kentucky Hospital Revenue,
1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,098,750
Jefferson County Kentucky Health Facilities
Revenue (Jewish Hospital),
1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,580,625
100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 105,375
1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,253,500
230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 242,362
3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,434,375
Kentucky Development Finance Authority Hospital
Revenue,
235,000 7.200%, 10/01/99 A3/A 247,338
2,570,000 7.300%, 10/01/99, Pre-Refunded A3/A 2,756,325
810,000 7.500%, 10/01/12, Pre-Refunded A3/A 871,762
400,000 7.250%, 11/01/06 A1/A+ 425,000
400,000 7.200%, 09/01/99, Pre-Refunded Aaa/AAA 427,500
750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 833,438
Kentucky Development Finance Authority, Sisters
of Charity Hospitals,
3,000,000 6.500%, 11/01/07 A1/A+ 3,232,500
100,000 6.250%, 11/01/13, MBIA Insured Aaa/AAA 106,125
2,150,000 6.750%, 11/01/12 A1/A+ 2,346,188
Kentucky Development Finance Authority Kings
Daughters Medical Center,
1,375,000 6.125%, 02/01/12, CGIC Insured Aaa/AAA 1,485,000
Kentucky Development Finance Authority Hospital
Revenue,
1,000,000 5.700%, 10/01/10 NR/BBB 1,028,750
3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,176,250
2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,557,625
1,705,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,653,850
29,698,288
Housing (15.9%)
Greater Kentucky Housing Assistance Corp. Multi-
Family Housing Revenue,
320,000 6.300%, 07/01/15 Aaa/AAA 340,400
275,000 6.400%, 07/01/23 Aaa/AAA 293,562
Greater Kentucky Housing Assistance Corp. Multi-
Family Housing Revenue,
2,025,000 6.050%, 07/01/22, Aaa/AAA 2,080,688
Jefferson County Kentucky Multi-Family Revenue,
1,530,000 5.750%, 06/01/23 NR/AA 1,595,025
Kenton County Kentucky Project Note,
1,000,000 6.125%, 12/01/17, FHA Insured Aa2/NR 1,073,750
Kentucky Housing Corporation Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 270,300
835,000 7.600%, 01/01/07 Aaa/AAA 883,012
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,077,500
65,000 7.875%, 01/01/08 Aaa/AAA 67,681
440,000 7.250%, 01/01/09 Aaa/AAA 464,200
980,000 7.125%, 01/01/10 Aaa/AAA 1,047,375
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,310,812
225,000 5.400%, 07/01/14 Aaa/AAA 231,188
750,000 6.250%, 07/01/15 Aaa/AAA 803,438
215,000 6.150%, 07/01/16 Aaa/AAA 228,707
1,615,000 6.400%, 01/01/17 Aaa/AAA 1,742,181
965,000 5.500%, 07/01/18 Aaa/AAA 977,062
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,500,750
435,000 7.900%, 01/01/21 Aaa/AAA 458,925
175,000 7.800%, 01/01/21 Aaa/AAA 184,844
135,000 8.100%, 01/01/22 Aaa/AAA 143,269
2,370,000 7.450%, 01/01/23 Aaa/AAA 2,521,088
900,000 6.800%, 01/01/24 Aaa/AAA 963,000
3,500,000 6.375%, 07/01/28 Aaa/AAA 3,740,625
6,900,000 6.300%, 01/01/28 Aaa/AAA 7,331,250
1,000,000 6.250%, 07/01/28 Aaa/AAA 1,063,750
Martin County Kentucky Housing Revenue
1,000,000 6.250%, 07/01/23 Aa/NR 1,030,000
37,424,382
Universities (0.1%)
Western Kentucky University Revenue,
275,000 7.100%, 12/01/00, Pre-Refunded Aaa/AAA 302,500
Schools (11.8%)
Boone County Kentucky School District Finance
Corp. School Building Revenue,
1,750,000 6.750%, 09/01/09 A1/A 1,944,687
2,250,000 6.125%, 12/01/17 A1/NR 2,390,625
2,295,000 5.700%, 05/01/18 A1/NR 2,395,406
Boyd County Kentucky School District,
575,000 5.375%, 10/01/17 A1/NR 586,500
Butler County Kentucky School Building Revenue,
270,000 7.200%, 05/01/07 NR/A 295,650
290,000 7.200%, 05/01/08 NR/A 317,550
Christian County Kentucky School District,
500,000 5.000%, 06/01/09 A1/NR 515,000
Fayette County School Building Revenue,
1,780,000 5.700%, 12/01/16 A1/A+ 1,877,900
Garrard County Kentucky School Building Revenue,
100,000 5.900%, 06/01/15 A1/NR 106,500
160,000 5.900%, 06/01/16 A1/NR 169,800
Grayson County Kentucky School Building Revenue,
1,940,000 6.000%, 01/01/15 A1/NR 2,100,050
Harlan County Kentucky School District Corp.
School Building Revenue,
205,000 7.400%, 12/01/06 A1/NR 224,731
200,000 7.250%, 09/01/00, Pre-Refunded A1/A 221,000
Hazard Kentucky Independent School District,
555,000 5.300%, 09/01/22 A1/NR 563,325
Jefferson County Kentucky School District Finance
Corp. School Building Revenue,
370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 403,762
210,000 6.750%, 08/01/09, MBIA Insured Aaa/AAA 224,700
500,000 5.875%, 01/01/11 A1/A+ 530,000
695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 702,819
Kenton County Kentucky School District Finance
Corp. School Building Revenue,
500,000 6.900%, 12/01/99, Pre-Refunded NR/NR* 540,000
600,000 7.000%, 12/01/99, Pre-Refunded NR/NR* 648,750
Lexington-Fayette Urban County Government
School Building Revenue,
250,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 270,625
400,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 433,000
370,000 7.000%, 12/01/99, Pre-Refunded Aaa/AAA 400,525
Meade County Kentucky School District,
500,000 6.000%, 07/01/16 A1/NR 540,000
400,000 5.700%, 07/01/15 A1/NR 422,500
Middlesboro Kentucky Independent School District
Finance Corp.,
100,000 6.100%, 08/01/16 A1/NR 108,500
Nelson County Kentucky School Building Revenue,
900,000 6.500%, 04/01/05 A3/NR 993,375
1,820,000 5.750%, 04/01/15 A1/NR 1,926,925
Pike County Kentucky School District Finance Corp.
School Building Revenue,
505,000 6.900%, 12/01/05 A1/A 545,400
720,000 7.000%, 12/01/09 A1/A 795,600
Rowan County Kentucky School District Finance
Corp.,
215,000 5.600%, 06/01/16 A1/NR 227,631
Scott County Kentucky School Building Revenue,
2,750,000 5.900%, 06/01/18 A1/NR 2,925,312
Taylor County Kentucky School Building Revenue,
280,000 6.000%, 08/01/16 A/NR 302,400
Todd County Kentucky School Building Revenue,
980,000 6.300%, 10/01/14 NR/A 1,076,775
27,727,323
Total Investments (cost $217,343,230**) 98.3% 232,298,046
Other assets in excess of liabilitites 1.7 3,981,254
Net Assets 100.0% $236,279,300
<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
DECEMBER 31, 1997
ASSETS
Investments at value (identified cost $217,343,230) $232,298,046
Cash 84,873
Interest receivable 3,944,647
Receivable for Fund shares sold 471,984
Receivable for investment securities sold 410,000
Other assets 8,190
Total assets 237,217,740
LIABILITIES
Payable for Fund shares redeemed 511,651
Dividends payable 195,792
Distribution fees payable 87,016
Adviser and Administrator fees payable 79,981
Accrued expenses 64,000
Total liabilities 938,440
NET ASSETS $236,279,300
Net Assets consist of:
Capital Stock - Authorized an unlimited number of
shares, par value $.01 per share $ 218,575
Additional paid-in capital 220,977,803
Undistributed net investment income 7,774
Accumulated net realized gain on investments 120,332
Net unrealized appreciation on investments 14,954,816
$236,279,300
CLASS A
Net Assets $226,476,719
Capital shares outstanding 220,951,105
Net asset value and redemption price per share $ 10.81
Offering price per share (100/96 of $10.81 adjusted
to nearest cent) $ 11.26
CLASS C
Net Assets $ 845,124
Capital shares outstanding 78,195
Net asset value and offering price per share $ 10.81
Redemption price per share (*generally, a charge of
1% is imposed on the proceeds of shares redeemed
during the first 12 months after purchase) $ 10.81*
CLASS Y
Net Assets $ 8,957,457
Capital shares outstanding 828,219
Net asset value, offering and redemption price per share $ 10.82
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $13,628,874
Expenses:
Investment Adviser fees (note 3) $ 322,582
Administrator fees (note 3) 599,081
Distribution and service fees (note 3) 340,309
Transfer and shareholder servicing agent fees 144,554
Trustees' fees and expenses (note 8) 72,402
Shareholders' reports and proxy statements 45,177
Legal fees 35,479
Audit and accounting fees 31,700
Custodian fees (note 7) 23,895
Registration fees and dues 8,063
Insurance 4,107
Miscellaneous 40,069
1,667,418
Expenses paid indirectly (note 7) (20,708)
Net expenses 1,646,710
Net investment income 11,982,164
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 690,738
Change in unrealized appreciation on investments 5,384,972
Net realized and unrealized gain on investments 6,075,710
Net increase in net assets resulting from operations $18,057,874
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income $ 11,982,164 $ 11,830,624
Net realized gain from securities
transactions 690,738 513,426
Change in unrealized appreciation
(depreciation) on investments 5,384,972 (3,273,903)
Change in net assets from operations 18,057,874 9,070,147
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (11,553,536) (11,653,180)
Distributions in excess of net investment
income - (796,825)
Net realized gain on investments (332,819) -
Class C Shares:
Net investment income (29,337) (5,800)
Distributions in excess of net investment
income - (410)
Net realized gain on investments (845) -
Class Y Shares:
Net investment income (391,517) (171,644)
Distributions in excess of net investment
income - (10,323)
Net realized gain on investments (11,278) -
Change in net assets from distributions (12,319,332) (12,638,182)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 25,210,705 25,334,669
Reinvested dividends and distributions 6,701,119 7,120,982
Cost of shares redeemed (30,516,063) (30,012,962)
Change in net assets from capital share
transactions 1,395,761 2,442,689
Change in net assets 7,134,303 (1,125,346)
NET ASSETS:
Beginning of period 229,144,997 230,270,343
End of period $236,279,300 $229,144,997
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Churchill Tax-Free Fund of Kentucky (the "Fund"), a
non-diversified, open-end investment company, was organized in March, 1987 as
a Massachusetts business trust and commenced operations on May 21, 1987. The
Fund is authorized to issue an unlimited number of shares and, since its
inception to April 1, 1996, offered only one class of shares. On that date,
the Fund began offering two additional classes of shares, Class C and Class Y
shares. All shares outstanding prior to that date were designated as Class A
shares and, as was the case since inception, are sold with a front-payment
sales charge and bear an annual service fee. Class C shares are sold with a
level-payment sales charge with no payment at time of purchase but level
service and distribution fees from date of purchase through a period of six
years thereafter. A contingent deferred sales charge of 1% is assessed to any
Class C shareholder who redeems shares of this Class within one year from the
date of purchase. The Class Y shares are only offered to institutions acting
for an investor in a fiduciary, advisory, agency, custodian or similar
capacity. They are not available to individual retail investors. Class Y
shares are sold at net asset value without any sales charge, redemption fees,
contingent deferred sales charge or distribution or service fees. All classes
of shares represent interests in the same portfolio of investments in the
Fund and are identical as to rights and privileges. They differ only with
respect to the effect of sales charges, the distribution and/or service fees
borne by the respective class, expenses specific to each class, voting rights
on matters affecting a single class and the exchange privileges of each
class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value each business day
based upon information provided by a nationally prominent independent
pricing service and periodically verified through other pricing services.
In the case of securities for which market quotations are readily
available, securities are valued at the mean of bid and asked quotations
and, in the case of other securities, at fair value determined under
procedures established by and under the general supervision of the Board
of Trustees. Securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or less,
or by amortizing their unrealized appreciation or depreciation on the 61st
day prior to maturity, if their term to maturity at purchase exceeded 60
days.
In Fiscal 1996, the Fund began amortizing bond premium using the
constant yield method. Accordingly, net unrealized appreciation and
additional paid-in capital have been adjusted by equal amounts at the
beginning of the year. This change had no effect on the Fund's net asset
value or distribution policy and conforms to the amortization policy
followed by the Fund for Federal tax purposes.
<PAGE>
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Interest income is recorded daily on the accrual basis and is adjusted for
amortization of premium and accretion of original issue discount. Market
discount is recognized upon disposition of the security.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as
a regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The Fund
intends to make distributions of income and securities profits sufficient
to relieve it from all, or substantially all, Federal income and excise
taxes.
d) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on
the relative net assets of each class. Class-specific expenses,
which include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly to
such class.
e) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from
those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Management affairs of the Fund are conducted through two separate
management arrangements.
Banc One Investment Advisors Corporation (the "Adviser") became
Adviser to the Fund, effective September 11, 1995. In this role, under an
Investment Advisory Agreement, the Adviser supervises the Fund's investments
and provides various services to the Fund for which it is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.14 of 1% of the net assets of the Fund.
The Fund also has an Administration Agreement with Aquila
Management Corporation (the "Administrator"), the Fund's founder and sponsor.
Under this Agreement, the Administrator provides all administrative services,
other than those relating to the management of the Fund's investments. These
include providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the
Fund such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor and additionally maintaining the Fund's accounting
books and records. For its services, the Administrator is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.26 of 1% of the net assets of the Fund.
<PAGE>
Specific details as to the nature and extent of the services
provided by the Adviser and the Administrator are more fully defined in the
Fund's Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees
shall be reduced, but not below zero, by an amount equal to its pro-rata
portion (determined on the basis of the respective fees computed as described
above) of the amount, if any, by which the total expenses of the Fund in any
fiscal year, exclusive of taxes, interest and brokerage fees, shall exceed
the lesser of (i) 2.5% of the first $30 million of average annual net assets
of the Fund plus 2% of the next $70 million of such assets and 1.5% of its
average annual net assets in excess of $100 million, or (ii) 25% of the
Fund's total annual investment income. The payment of the above fees at the
end of any month will be reduced or postponed so that at no time will there
be any accrued but unpaid liability under this expense limitation. No such
reduction in fees was required during the year ended December 31, 1997.
For the year ended December 31, 1997, the Fund incurred fees under
the Advisory Agreement and Administration Agreement of $322,582 and $599,081,
respectively.
b) DISTRIBUTION AND SERVICE FEES:
The Fund has adopted a Distribution Plan (the "Plan") pursuant to
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one
part of the Plan, with respect to Class A Shares, the Fund is authorized to
make service fee payments to broker-dealers ("Qualified Recipients") or
others selected by Aquila Distributors, Inc. (the "Distributor") including,
but not limited to, any principal underwriter of the Fund, with which the
Distributor has entered into written agreements contemplated by the Rule and
which have rendered assistance in the distribution and/or retention of the
Fund's shares or servicing of shareholder accounts. The Fund makes payment of
this service fee at the annual rate of 0.15% of the Fund's average net assets
represented by Class A Shares. For the year ended December 31, 1997, service
fees on Class A Shares amounted to $333,695, of which the Distributor
received $6,454.
Under another part of the Plan, the Fund is authorized to make
payments with respect to Class C Shares to Qualified Recipients which have
rendered assistance in the distribution and/or retention of the Fund's Class
C shares or servicing of shareholder accounts. These payments are made at the
annual rate of 0.75% of the Fund's net assets represented by Class C Shares
and for the year ended December 31, 1997, amounted to $4,961. In addition,
under a Shareholder Services Plan, the Fund is authorized to make service fee
payments with respect to Class C Shares to Qualified Recipients for providing
personal services and/or maintenance of shareholder accounts. These payments
are made at the annual rate of 0.25% of the Fund's net assets represented by
Class C Shares and for the year ended December 31, 1997, amounted to $1,653.
The total of these payments with respect to Class C Shares amounted to
$6,614, of which the Distributor received $6,286.
<PAGE>
Specific details about the Plans are more fully defined in the
Fund's Prospectus and Statement of Additional Information.
Under a Distribution Agreement, Aquila Distributors, Inc. serves as
the exclusive distributor of the Fund's shares. Through agreements between
the Distributor and various broker-dealer firms ("dealers"), the Fund's
shares are sold primarily through the facilities of these dealers having
offices within Kentucky, with the bulk of sales commissions inuring to such
dealers. For the year ended December 31, 1997, the Distributor received sales
commissions of $37,896.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1997, purchases of securities
and proceeds from the sales of securities aggregated $52,469,221and
$51,018,231, respectively.
At December 31, 1997, aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $14,954,816, for net unrealized appreciation of $14,954,816.
There are no securities in which there is an excess of tax cost over market
value.
5. PORTFOLIO ORIENTATION
Since the Fund invests principally and may invest entirely in
triple tax-free municipal obligations of issuers within Kentucky, it is
subject to possible risks associated with economic, political, or legal
developments or industrial or regional matters specifically affecting
Kentucky and whatever effects these may have upon Kentucky issuers' ability
to meet their obligations.
6. DISTRIBUTIONS
The Fund declares dividends daily from net investment income and
makes payments monthly in additional shares at the net asset value per share
or in cash, at the shareholder's option. Net realized capital gains, if any,
are distributed annually.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Kentucky
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized secur
ities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. For certain shareholders,
some dividends may, under some circumstances, be subject to the alternative
minimum tax. Also, annual capital gains distributions, if any, are taxable.
<PAGE>
7. CUSTODIAN FEES
The Fund has negotiated an expense offset arrangement with its
custodian, Bank One Trust Company, N.A., an affiliate of the Adviser, wherein
it receives credit toward the reduction of custodian fees whenever there are
uninvested cash balances. During the year ended December 31, 1997, the Fund's
custodian fees amounted to $23,895, of which $20,708 was offset by such
credits. It is the general intention of the Fund to invest, to the extent
practicable, some or all of cash balances in income-producing assets rather
than leave cash on deposit with the custodian.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were nine Trustees. Trustee' fees paid
during the year were at the annual rate of $5,000 for carrying out their
responsibilities and attendance at regularly scheduled Board Meetings. If
additional or special meetings are scheduled for the Fund, separate meeting
fees are paid for each such meeting to those Trustees in attendance. The Fund
also reimburses Trustees for expenses such as travel, accommodations, and
meals incurred in connection with attendance at regularly scheduled or
special Board Meetings and at the Annual Meeting and outreach meetings of
Shareholders. For the fiscal year ended December 31, 1997, such
reimbursements averaged approximately $4,200 per Trustee. Two of the
Trustees, who are affiliated with the Administrator, are not paid any Trustee
fees.
<PAGE>
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,946,573 $20,614,221 1,793,117 $18,843,152
Reinvested distributions 629,661 6,662,872 676,874 7,110,206
Cost of shares redeemed (2,759,392) (29,203,137) (2,464,106) (25,843,142)
Exchanged into Class Y
Shares - - (369,589) (3,858,514)
Net change (183,158) (1,926,044) (363,704) (3,748,298)
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 47,349 501,768 40,643 424,784
Reinvested distributions 2,091 22,131 444 4,663
Cost of shares redeemed (12,332) (131,306) - -
Net change 37,108 392,593 41,087 429,447
<CAPTION>
Period Ended
December 31, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 387,049 4,094,716 211,416 2,208,219
Reinvested distributions 1,517 16,116 583 6,113
Exchanged from Class A
Shares - - 369,589 3,858,514
Cost of shares redeemed (112,210) (1,181,620) (29,725) (311,306)
Net change 276,356 2,929,212 551,863 5,761,540
Total transactions in Fund
shares 130,306 $1,395,761 229,246 $ 2,442,689
<FN> * From April 1, 1996 (date of inception) through December 31, 1996. </FN>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
</TABLE>
<TABLE>
<CAPTION>
Class A(1)
Year ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.55 $10.71 $9.97 $10.93 $10.49
Income from Investment
Operations:
Net investment income 0.55 0.55 0.60 0.60 0.62
Net gain (loss) on
securities (both
realized and unrealized) 0.27 (0.12) 0.74 (0.96) 0.47
Total from Investment
Operations 0.82 0.43 1.34 (0.36) 1.09
Less Distributions (note 6):
Dividends from net
investment income (0.55) (0.59) (0.60) (0.60) (0.62)
Distributions from capital
gains (0.01) - - - (0.03)
Total Distributions (0.56) (0.59) (0.60) (0.60) (0.65)
Net Asset Value, End of
Period $10.81 $10.55 $10.71 $9.97 $10.93
Total Return (not
reflecting sales charge)(%) 8.08 4.17 13.75 (3.31) 10.50
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 226,477 222,889 230,270 232,656 258,632
Ratio of Expenses to
Average Net Assets (%) 0.72 0.74 0.79 0.72 0.59
Ratio of Net Investment
Income to Average Net
Assets (%) 5.20 5.23 5.75 5.81 5.67
Portfolio Turnover Rate (%) 22.39 8.94 17.09 35.25 31.29
<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>
Net Investment Income ($) 0.55 0.55 0.60 0.60 0.60
Ratio of Expenses to
Average Net Assets (%) 0.73 0.75 0.80 0.73 0.73
Ratio of Net Investment
Income to Average Net
Assets (%) 5.19 5.22 5.74 5.80 5.52
<FN> (1) Designated as Class A Shares on April 1, 1996. </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>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Period(2) Year Period(2)
Ended Dec. Ended Dec. Ended Dec. Ended Dec.
31, 1997 31, 1996 31, 1997 31, 1996
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.55 $10.47 $10.55 $10.47
Income from Investment
Operations:
Net investment income 0.46 0.37 0.56 0.43
Net gain on securities (both
realized and unrealized) 0.27 0.11 0.29 0.11
Total from Investment
Operations 0.73 0.48 0.85 0.54
Less Distributions (note 6):
Dividends from net
investment income (0.46) (0.40) (0.57) (0.46)
Distributions from capital
gains (0.01) - (0.01) -
Total Distributions (0.47) (0.40) (0.58) (0.46)
Net Asset Value, End of Period $10.81 $10.55 $10.82 $10.55
Total Return (not reflecting
sales charge)(%) 7.16 4.72# 8.34 5.24#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 845 433 8,957 5,823
Ratio of Expenses to Average
Net Assets (%) 1.56 1.55* 0.56 0.56*
Ratio of Net Investment Income
to Average Net Assets (%) 4.31 4.35* 5.32 5.42*
Portfolio Turnover Rate (%) 22.39 8.94 22.39 8.94
<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>
Net Investment Income ($) 0.46 0.37 0.56 0.43
Ratio of Expenses to Average
Net Assets (%) 1.57 1.56* 0.57 0.58*
Ratio of Net Investment Income
to Average Net Assets (%) 4.30 4.34* 5.31 5.41*
<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>
REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of
Kentucky (the "Fund") was held on April 25, 1997.* At the meeting, the
following matters were submitted to a shareholder vote and approved:
(i) the election of Lacy B. Herrmann, Thomas A. Christopher,
Douglas Dean, Diana P. Herrmann, Ann R. Leven, Theodore T. Mason, Anne J.
Mills, William J. Nightingale, and James R. Ramsey as Trustees to hold office
until the next annual meeting of the Fund's shareholders or until his or her
successor is duly elected (each Trustee received at least 139,068,426
affirmative votes (98.37%); no more than 2,299,314 votes were withheld for
any Trustee (1.63%)), and
(ii) the ratification of the selection of KPMG Peat Marwick LLP
as the Fund's independent auditors for the fiscal year ending December 31,
1997 (votes for: 134,699,428 (95.28%); votes against: 454,454 (0.32%);
abstentions: 6,213,858 (4.40%); broker non-votes: 0 (0.00%)).
* On the record date for this meeting, the holders of 21,127,291.6 Class A
shares, 50,774.7 Class C shares, and 61,025.5 Class Y shares of the Fund were
outstanding and entitled to vote representing a total net asset value of
$229,227,356.99. The holders of shares entitled to vote representing a total
net asset value of $141,367,740 (61.6%) were present in person or by proxy at
the meeting.
FEDERAL TAX STATUS OF 1997 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1997, of the total amount
of dividends paid by Churchill Tax-Free Fund of Kentucky, 97.19% was
"exempt-interest dividends" and the balance was ordinary dividend income.
$344,942 of the amount distributed by the Fund during fiscal 1997 is
designated as a dividend from 20% net long-term capital gains. For those
shareholders subject to the Federal alternative minimum tax, 19.70% of your
Fund's dividends was derived from interest on "private activity bonds."
Prior to January 31, 1998, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions paid for
the 1997 CALENDAR YEAR.
