<PAGE>
MANAGER AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
BANC ONE INVESTMENT ADVISORS CORPORATION
416 West Jefferson Street
Louisville, Kentucky 40202
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Carroll F. Knicely
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT AUDITORS
KPMG LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus, which must precede or
accompany this report.
SEMI-ANNUAL
REPORT
JUNE 30, 1999
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo of Churchill Tax-Free Fund of Kentucky: a circle with a flying pegasus
inside)
ONE OF THE
AQUILAsm GROUP OF FUNDS
[Logo of the Aquila Group of Funds: an eagle's head]
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
SEMI-ANNUAL REPORT
"TAKE PRIDE IN HOW YOUR INVESTMENT IS HELPING OTHERS -
WHILE PRIMARILY HELPING YOU"
Dear Fellow Shareholders: August 20, 1999
Our surveys of shareholders of Churchill Tax-Free Fund of Kentucky have
shown that you and other owners of the Fund bought your shares primarily for
TAX-FREE INCOME. And, secondarily, the knowledge - provided through the
stability of the Fund - that your money would be there when you needed it.
Additionally, our surveys showed that most of our shareholders are
pre-retirees or retirees. These are people who are looking forward to making
sure that they have the security of a sound income source from the Fund when
they are no longer in the workforce.
The point you may not have fully appreciated - when you made your
investment in the Fund - was that in the process of having the Fund provide you
with these benefits, it also provides help to a variety of others within your
community and Kentucky. And, this is a factor in which you can take real PRIDE.
The economy of Kentucky is growing at a dynamic rate. As this growth takes
place, new and additional municipal projects are needed for the benefit of the
citizens of Kentucky and the various communities in it. These projects include
schools, highways, recreational facilities, and a whole array of useful public
purpose projects. These projects are what help economic development and provide
a high quality of life for the citizens of Kentucky.
We think it is important for you to realize this. The projects that the
Fund helped finance are all ones that you and others can reach out and touch. We
are illustrating for you some of the various kinds of municipal projects that
your investment in the Fund has helped create in Kentucky.
[Photo]
Kentucky Turnpike Authority
[Photo]
Warren County Judicial Center
[Photo]
Kenton County Airport Board
[Photo]
Jefferson County Hospital Revenue
</PAGE>
<PAGE>
The tax laws of Kentucky, as well as those of the Federal government, allow
you to receive income from your investment in the Fund TRIPLE TAX-FREE. It is
realized by the Commonwealth and Federal governmental authorities that it is
essential that various municipal projects be built with an advantage to the
investor. This advantage is primarily one of TAX-FREE income for you.
You can take comfort in the knowledge that your investment in the Fund is
comprised of a portfolio of municipal securities which possess extremely high
quality. Therefore, you can "SLEEP WELL AT NIGHT" knowing that the chances of
anything happening to these high quality bonds is very slight indeed. The reason
for this, of course, is that the various municipal projects represented in the
Fund have behind them a very sound stream of taxes and revenues generated by the
projects themselves.
We again wish to emphasize that while primarily helping you, Churchill
Tax-Free Fund of Kentucky is also helping others in your communities and
Kentucky.
Consequently, you can take great PRIDE in your investment in Churchill
Tax-Free Fund of Kentucky.
You can rest assured that the overall management of the Fund is doing a
very careful job of "MINDING THE STORE" for you.
We appreciate the continued confidence that you have placed in the Fund
through your investment in Churchill Tax-Free Fund of Kentucky.
Sincerely,
Lacy B. Herrmann
President and
Chairman, Board of Trustees
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (99.8%) S&P VALUE
</CAPTION>
<S> <C> <C> <C> <C>
STATE AGENCIES (15.8%)
Kentucky Higher Education Student Loan
Corporation Insured Student Loan Revenue,
$ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,558,913
2,955,000 6.800%, 06/01/03 Aaa/AA- 3,139,688
1,915,000 7.100%, 12/01/11 Aaa/AA- 2,008,356
Kentucky Infrastructure Authority Revenue,
1,930,000 5.000%, 06/01/09, MBIA Insured Aaa/AAA 1,937,238
555,000 7.200%, 06/01/11 Aa3/A 589,688
635,000 5.250%, 06/01/12 Aa3/A 636,588
875,000 6.500%, 06/01/12 Aa3/A 925,313
125,000 5.250%, 06/01/14 Aa3/A 123,906
1,110,000 6.375%, 06/01/14, Pre-Refunded Aa3/A 1,225,160
135,000 5.250%, 06/01/15 Aa3/A 133,481
100,000 5.375%, 06/01/17 Aa3/A 100,125
100,000 5.000%, 08/01/17 Aa3/A 94,250
1,500,000 5.375%, 02/01/18 Aa3/A 1,496,250
Kentucky Local Correctional Facilities Construction
Authority Revenue,
5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,166,300
Kentucky Area Development,
345,000 5.750%, 12/01/27, LOCFifth Third Bank NR/AA 346,294
145,000 5.600%, 06/01/28, LOCFifth Third Bank NR/AA 143,006
785,000 5.500%, 06/01/28, LOCFifth Third Bank NR/AA 762,431
Kentucky Rural Economic Development Authority,
3,110,000 7.250%, 06/01/17, LOCBank One NR/AA 3,304,375
Kentucky State Properties and Buildings Commission
Revenue,
4,510,000 6.625%, 10/01/00, Pre-Refunded NR/AAA 4,825,700
365,000 7.000%, 02/01/01, Pre-Refunded NR/AAA 387,813
1,000,000 6.500%, 08/01/01, Pre-Refunded NR/AAA 1,065,000
220,000 6.000%, 09/01/08 Aa3/A+ 237,600
500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 518,750
400,000 5.000%, 09/01/13 Aa3/A+ 387,000
</PAGE>
<PAGE>
1,000,000 5.100%, 10/01/17 Aa3/A+ 966,250
1,135,000 5.100%, 11/01/18 Aa3/A+ 1,092,437
3,000,000 6.250%, 09/01/07 Aaa/AAA 3,292,500
Puerto Rico Public Buildings Authority,
1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,088,750
37,553,162
COUNTY AGENCIES (12.4%)
Clark County Kentucky Public Properties Corp.
Revenue,
1,120,000 6.700%, 06/01/01, Pre-Refunded A/NR 1,178,800
Floyd County Public Property, Courthouse Revenue,
510,000 5.500%, 09/01/14 NR/A 529,763
Jefferson County Kentucky Capital Projects,
1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,023,750
420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 422,100
1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,613,925
1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,635,900
5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 5,929,500
Kenton County Kentucky Public Property County
Courthouse,
455,000 5.000%, 03/01/14 A1/NR 434,525
250,000 5.000%, 03/01/15 A1/NR 236,875
345,000 5.000%, 03/01/20 A1/NR 320,417
1,000,000 5.000%, 03/01/23 A1/NR 925,000
Lincoln County Kentucky Public Properties Corp.,
430,000 6.500%, 03/01/22 NR/NR* 468,163
Lyon County Kentucky Properties Corp.,
1,085,000 5.100%, 03/01/20 NR/A 1,036,175
Muhlenberg County Kentucky Industrial
Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A 1,573,125
</PAGE>
<PAGE>
Pendleton County Kentucky Multi-County Lease
Revenue,
500,000 7.300%, 03/01/02 NR/AA 523,125
570,000 7.550%, 03/01/10 NR/AA 599,925
4,500,000 6.500%, 03/01/19 NR/A 4,786,875
3,000,000 6.400%, 03/01/19 NR/A 3,292,500
Warren County Kentucky Justice,
2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,831,875
29,362,318
CITY/MUNICIPAL OBLIGATIONS (8.8%)
Danville Kentucky Multi-City Lease Revenue,
545,000 5.000%, 09/01/11 NR/NR* 532,056
Jeffersontown Kentucky Public Project Corp.
Revenue,
500,000 5.750%, 11/01/15 A/NR 519,375
Kentucky League Cities Funding Trust COP,
700,000 5.900%, 08/01/16, (Owensboro) NR/A 735,000
1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,826,475
Louisville Kentucky Public Properties Corp.,
4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,463,213
Mount Sterling Kentucky Lease Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 2,030,400
7,000,000 6.200%, 03/01/18 Aa/NR 7,376,250
Munfordville Kentucky Industrial Development
Revenue,
2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,693,750
Richmond Kentucky District Court Facility Revenue
740,000 5.300%, 02/01/25 A3/NR 718,725
20,895,244
</PAGE>
<PAGE>
UTILITIES (8.0%)
Carrolton & Henderson Kentucky Gas Revenue,
1,000,000 5.000%, 01/01/07, FSA Insured Aaa/AAA 1,012,500
Carrolton & Henderson Kentucky Gas Revenue,
1,750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 1,758,750
Hardin County, Kentucky Water District,
1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA 1,050,000
Henderson County Kentucky Water District,
Waterworks Revenue,
190,000 5.600%, 09/01/21 NR/NR* 185,961
Lebanon Kentucky Waterworks Revenue,
250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 268,438
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue,
1,525,000 6.500%, 11/15/04, MBIA Insured, Pre-Refunded Aaa/AAA 1,692,750
1,000,000 5.000%, 05/15/12, MBIA Insured Aaa/AAA 988,750
250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 245,000
230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 223,963
2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 1,970,000
2,500,000 5.000%, 05/15/19, MBIA Insured Aaa/AAA 2,359,375
1,745,000 5.000%, 05/15/22, MBIA Insured Aaa/AAA 1,635,938
4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,100,525
1,000,000 5.250%, 05/15/27, MBIA Insured Aaa/AAA 977,500
Muhlenberg County Kentucky Water District,
Waterworks Revenue,
100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 103,375
110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 113,025
115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 118,019
North Nelson County Kentucky, Water Revenue,
205,000 5.200%, 01/01/20 NR/NR* 196,800
19,000,669
</PAGE>
<PAGE>
POLLUTION CONTROL REVENUE (9.3%)
Ashland Kentucky Pollution Control Revenue,
(Ashland Oil)
3,000,000 6.650%, 08/01/09 Baa2/NR 3,176,250
Boone County Kentucky Pollution Control,
(Dayton Power & Light)
4,000,000 6.500%, 11/15/22 Aa3/AA- 4,325,000
Boone County Kentucky Pollution Control, (Cinergy)
750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 757,500
Carroll County Kentucky Pollution Control Revenue,
(LG&E Energy)
3,500,000 7.450%, 09/15/16 Aa2/AA- 3,880,625
2,910,000 6.250%, 02/01/18 Aa2/AA- 3,080,963
Jefferson County Kentucky Pollution Control
Revenue, (LG&E Energy)
3,800,000 5.900%, 04/15/23 Aa2/AA 4,004,250
Wickliffe Kentucky Pollution Control, (Westvaco)
2,605,000 6.200%, 04/01/07 A1/A 2,609,272
100,000 6.375%, 04/01/26 A1/A 105,750
21,939,610
TRANSPORTATION (6.8%)
Kenton County Kentucky Airport Board Airport
Revenue,
4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 4,947,375
Kentucky Interlocal School Transportation Authority,
150,000 5.100%, 03/01/05 NR/A 152,250
145,000 5.400%, 06/01/17 NR/A 146,088
200,000 6.000%, 12/01/20 NR/A 205,250
300,000 5.800%, 12/01/20 NR/A 305,625
400,000 6.000%, 12/01/20 NR/A 410,500
400,000 5.650%, 12/01/20 NR/A 403,500
350,000 5.600%, 12/01/20 NR/A 351,750
</PAGE>
<PAGE>
Kentucky State Turnpike Authority Economic
Development Road Revenue,
120,000 8.500%, 07/01/06 A1/A+ 146,850
1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,118,750
3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,618,912
Puerto Rico Commonwealth Highway &
Transportation Authority Highway Revenue,
4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,315,000
16,121,850
HOSPITALS (11.1%)
Floyd County Kentucky Hospital Revenue,
245,000 7.500%, 08/01/10, FHAInsured NR/AAA 258,475
Hopkins County Kentucky Hospital Revenue,
1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,060,000
Jefferson County Kentucky Health Facilities Revenue,
1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,531,875
100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 103,125
1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,223,313
230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 237,186
1,000,000 5.125%, 10/01/18, MBIA Insured Aaa/AAA 958,750
3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,255,000
Kentucky Development Finance Authority Hospital
Revenue,
750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 807,188
3,000,000 6.500%, 11/01/01, Pre-Refunded A1/A+ 3,210,000
2,150,000 6.750%, 11/01/01, Pre-Refunded A1/A+ 2,311,250
420,000 5.250%, 02/01/09, FSA Insured Aaa/AAA 428,400
1,000,000 5.700%, 10/01/10, ACA Insured NR/A 1,018,750
1,375,000 6.125%, 02/01/12, CGIC Insured, (Kingsdaughters) Aaa/AAA 1,460,938
2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,479,925
3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,138,750
1,000,000 5.850%, 10/01/17, ACA Insured NR/A 992,500
1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,850,700
26,326,125
</PAGE>
<PAGE>
HOUSING (17.3%)
Greater Kentucky Housing Assistance Corp.
Multi-Family Housing Revenue,
320,000 6.300%, 07/01/15 Aaa/NR 333,600
2,025,000 6.050%, 07/01/22 Aaa/AAA 2,052,844
275,000 6.400%, 07/01/23 Aaa/NR 288,063
Jefferson County Kentucky Multi-Family Revenue,
1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,581,638
Jefferson County Kentucky Multi-Family Revenue,
1,200,000 5.650%, 08/20/34 (Kentucky Towers Project) Aaa/AAA 1,215,000
Kenton County Kentucky Indus. Dev.,
1,000,000 6.125%, 12/01/17, FHA Insured Aa/NR 1,038,750
Kenton County Kentucky Industrial Development,
300,000 6.950%, 12/01/26 Aa/NR 328,125
Kentucky Housing Corporation Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 263,846
835,000 7.600%, 01/01/07 Aaa/AAA 835,000
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,046,250
275,000 7.250%, 01/01/09 Aaa/AAA 282,626
980,000 7.125%, 01/01/10 Aaa/AAA 1,021,650
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,186,435
725,000 5.300%, 07/01/10 Aaa/AAA 731,344
230,000 5.400%, 07/01/14 Aaa/AAA 231,725
750,000 6.250%, 07/01/15 Aaa/AAA 776,250
315,000 6.100%, 07/01/16 Aaa/AAA 324,056
1,450,000 6.400%, 01/01/17 Aaa/AAA 1,513,437
3,445,000 5.300%, 07/01/18 Aaa/AAA 3,350,263
1,065,000 5.550%, 07/01/18 Aaa/AAA 1,065,000
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,469,938
280,000 7.900%, 01/01/21 Aaa/AAA 288,854
30,000 7.800%, 01/01/21 Aaa/AAA 30,000
105,000 8.100%, 01/01/22 Aaa/AAA 108,624
1,625,000 7.450%, 01/01/23 Aaa/AAA 1,690,000
135,000 6.800%, 01/01/24 Aaa/AAA 135,000
</PAGE>
<PAGE>
290,000 5.850%, 07/01/27 Aaa/AAA 292,175
3,500,000 6.375%, 07/01/28 Aaa/AAA 3,618,125
6,900,000 6.300%, 01/01/28 Aaa/AAA 7,107,000
1,000,000 6.250%, 07/01/28 Aaa/AAA 1,028,750
2,000,000 5.125%, 07/01/38 Aaa/AAA 1,855,000
41,089,368
SCHOOLS (10.3%)
Boone County Kentucky School District Finance
Corp. School Building Revenue,
1,750,000 6.750%, 09/01/01, Pre-Refunded Aa3/A 1,890,000
2,250,000 6.125%, 12/01/17, Pre-Refunded Aa3/NR 2,413,125
2,295,000 5.700%, 05/01/18 Aa3/NR 2,343,769
Boyd County Kentucky School District Finance Corp.,
575,000 5.375%, 10/01/17 Aa3/NR 575,717
Christian County Kentucky School District Finance
Corp.,
500,000 5.000%, 06/01/09 Aa3/NR 498,750
Fayette County School Building Revenue,
160,000 5.350%, 01/01/14 Aa3/A+ 160,400
1,780,000 5.700%, 12/01/16 Aa3/A+ 1,835,625
Floyd County Kentucky School Building Revenue,
250,000 5.000%, 12/01/09 Aa3/NR 249,688
Garrard County Kentucky School Building Revenue,
100,000 5.900%, 06/01/15 Aa3/NR 104,125
160,000 5.900%, 06/01/16 Aa3/NR 165,600
Grayson County Kentucky School Building Revenue,
1,940,000 6.000%, 01/01/15 Aa3/NR 2,073,375
Hazard Kentucky Independent School District
Finance Corp.,
555,000 5.300%, 09/01/22 Aa3/NR 543,900
</PAGE>
<PAGE>
Jefferson County Kentucky School District Finance
Corp. School Building Revenue,
370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 392,200
100,000 5.250%, 07/01/09 Aaa/AAA 102,000
500,000 5.875%, 01/01/11 Aa3/A+ 528,125
695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 688,050
Kenton County Kentucky School District Finance
Corp. School Building Revenue,
100,000 5.250%, 03/01/06 Aa3/A+ 102,500
Lexington-Fayette Urban County Government
Project U.K. Library
725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 694,188
1,000,000 5.000%, 11/01/20, MBIA Insured Aaa/AAA 940,000
Meade County Kentucky School District Finance
Corp.,
400,000 5.700%, 07/01/15 Aa3/NR 422,000
500,000 6.000%, 07/01/16 Aa3/NR 533,750
Middlesboro Kentucky Independent School District
Finance Corp.
100,000 6.100%, 08/01/16 Aa3/NR 108,000
Nelson County Kentucky School Building Revenue,
1,820,000 5.750%, 04/01/15 Aa3/NR 1,892,800
Pike County Kentucky School District Finance Corp.
School Building Revenue,
720,000 7.000%, 12/01/00, Pre-Refunded Aa3/A 771,300
Rowan County Kentucky School District Finance
Corp.,
215,000 5.600%, 06/01/16 Aa3/NR 222,794
Scott County Kentucky School Building Revenue,
2,750,000 5.900%, 06/01/18 Aa3/A 2,856,563
</PAGE>
<PAGE>
Taylor County Kentucky School Building Revenue,
280,000 6.000%, 08/01/16 Aa3/NR 295,750
Todd County Kentucky School Building Revenue,
980,000 6.300%, 10/01/14, Pre-Refunded Aa3/A 1,074,325
24,478,419
Total Investments (cost $228,912,023**) 99.8% 236,766,765
Other assets in excess of liabilities 0.2 476,612
Net Assets 100.0% $237,243,377
</TABLE>
* Any security not rated has been determined by the
Investment Sub-Adviser to have sufficient quality to
be ranked in the top four credit ratings if a credit
rating were to be assigned by a rating service.
** Cost for Federal tax purposes is identical.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
ASSETS
Investments at value (cost $228,912,023) $ 236,766,765
Cash 1,036,294
Interest receivable 3,965,470
Receivable for investment securities sold 240,000
Receivable for Fund shares sold 186,699
Other assets 900
Total assets 242,196,128
LIABILITIES
Payable for investment securities purchased 4,352,169
Dividends payable 243,819
Payable for Fund shares redeemed 149,218
Distribution fees payable 87,962
Management fee payable 78,613
Accrued expenses 40,970
Total liabilities 4,952,751
NET ASSETS $ 237,243,377
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 225,883
Additional paid-in capital 228,926,703
Accumulated net realized gain on investments 334,036
Distributions in excess of net investment income (97,987)
Net unrealized appreciation on investments 7,854,742
$ 237,243,377
CLASS A
Net Assets $ 221,314,128
Capital shares outstanding 21,072,318
Net asset value and redemption price per share $ 10.50
Offering price per share (100/96 of $10.50 adjusted to nearest cent) $ 10.94
CLASS C
Net Assets $ 1,752,222
Capital shares outstanding 166,912
Net asset value and offering price per share $ 10.50
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if
redeemed during the first 12 months after purchase) $ 10.50*
CLASS Y
Net Assets $ 14,177,027
Capital shares outstanding 1,349,066
Net asset value, offering and redemption price per share $ 10.51
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 6,788,025
Expenses:
Management fee (note 3) $ 485,168
Distribution and service fees (note 3) 175,232
Transfer and shareholder servicing agent fees 70,000
Trustees' fees and expenses 40,000
Legal fees 27,000
Shareholders' reports and proxy statements 22,000
Audit and accounting fees 13,000
Registration fees and dues 12,000
Custodian fees 9,500
Insurance 5,000
Miscellaneous 12,001
870,901
Expenses paid indirectly (note 7) (9,500)
Net expenses 861,401
Net investment income 5,926,624
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss from securities transactions (431,379)
Change in unrealized appreciation on investments (6,586,669)
Net realized and unrealized loss on investments (7,018,048)
Net decrease in net assets resulting from operations $ (1,091,424)
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
</CAPTION>
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 5,926,624 $ 11,773,350
Net realized loss from securities transactions (431,379) 865,993
Change in unrealized appreciation on investments (6,586,669) (513,405)
Change in net assets from operations (1,091,424) 12,125,938
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income (5,608,146) (11,135,477)
Net realized gain on investments - (207,578)
Class C Shares:
Net investment income (23,370) (35,988)
Net realized gain on investments - (671)
Class Y Shares:
Net investment income (393,094) (610,932)
Net realized gain on investments - (11,388)
Change in net assets from distributions (6,024,610) (12,002,034)
CAPITAL SHARE TRANSACTIONS (NOTE 8):
Proceeds from shares sold 13,356,927 28,425,496
Reinvested dividends and distributions 3,103,876 6,370,081
Cost of shares redeemed (17,052,482) (26,247,691)
Change in net assets from capital share transactions (591,679) 8,547,886
Change in net assets (7,707,713) 8,671,790
NET ASSETS:
Beginning of period 244,951,090 236,279,300
End of period $ 237,243,377 $ 244,951,090
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<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 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
and are not offered directly to 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, 1999 there were no
Class I shares outstanding. All classes of shares represent interests in the
same portfolio of investments and are identical as to rights and privileges but
differ with respect to the effect of sales charges, the distribution and/or
service fees borne by each class, expenses specific to each class, voting rights
on matters affecting a single class and the exchange privileges of each class.
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.
</PAGE>
<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 and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Aquila Management Corporation (the "Manager"), the Fund's founder and
sponsor, serves as the Manager for the Fund under an Advisory and Administration
Agreement with the Fund. The portfolio management of the Fund has been delegated
to a Sub-Adviser as described below. Under the Advisory and Administration
Agreement, the Manager provides all administrative services to the Fund, other
than those relating to the day-to-day portfolio management. The Manager's
services include providing the office of the Fund and all related services as
well as overseeing the activities of the Sub-Adviser and all the various support
organizations to the Fund such as the shareholder servicing agent, custodian,
legal counsel, auditors and distributor and additionally maintaining the Fund's
accounting books and records. For its services, the Manager is entitled to
receive a fee which is payable monthly and computed as of the close of business
each day at the annual rate of 0.40 of 1% on the Fund's net assets.
Banc One Investment Advisors Corporation (the "Sub-Adviser") serves as
the Investment Sub-Adviser for the Fund under a Sub-Advisory Agreement between
the Manager and the Sub-Adviser. Under this agreement, the Sub-Adviser
continuously provides, subject to oversight of the Manager and the Board of
Trustees of the Fund, the investment program of the Fund and the composition of
its portfolio, arranges for the purchases and sales of portfolio securities, and
provides for daily pricing of the Fund's portfolio. For its services, the Sub-
</PAGE>
<PAGE>
Adviser is entitled to receive a fee from the Manager which is payable monthly
and computed as of the close of business each day at the annual rate of 0.14 of
1% on the Fund's net assets.
For the six months ended June 30, 1999, the Fund incurred fees for
advisory and administrative services of $485,168.
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, 1999, service fees on Class A Shares amounted
to $169,518, of which the Distributor received $3,834.
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, 1999, amounted to $4,286. 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, 1999, amounted to $1,428. The total of
these payments with respect to Class C Shares amounted to $5,714, of which the
Distributor received $3,202.
Specific details about the Plans are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as the
exclusive distributor of the Fund's shares. Through agreements between the
Distributor and various broker-dealer firms ("dealers"), the Fund's shares are
sold primarily through the facilities of these dealers having offices within
Kentucky, with the bulk of sales commissions inuring to such dealers. For the
six months ended June 30, 1999, the Distributor received commissions of $12,877
on sales of Class A Shares.
</PAGE>
<PAGE>
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1999, purchases of securities and
proceeds from the sales of securities aggregated $13,552,849 and $10,501,772,
respectively.
At June 30, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted to
$9,083,036 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $1,228,294
for a net unrealized appreciation of $7,854,742.
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. An additional distribution of gain may be
made to the extent necessary to avoid payment of Federal taxes by the Fund.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net investment
income to be exempt from regular Federal and State of Kentucky income taxes.
However, due to differences between financial statement reporting and Federal
income tax reporting requirements, distributions made by the Fund may not be the
same as the Fund's net investment income, and/or net realized securities gains.
Further, a small portion of the dividends may, under some circumstances, be
subject to taxes at ordinary income and/or capital gain rates. For certain
shareholders, some dividends may, under some circumstances, be subject to the
alternative minimum tax.
7. EXPENSES
The Fund has negotiated an expense offset arrangement with its
custodian wherein it receives credit toward the reduction of custodian fees and
other Fund expenses whenever there are uninvested cash balances. The Statement
of Operations reflects the total expenses before any offset, the amount of
offset and the net expenses. It is the general intention of the Fund to invest,
to the extent practicable, some or all of cash balances in income-producing
assets rather than leave cash on deposit.
</PAGE>
<PAGE>
8. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
SHARES AMOUNT SHARES AMOUNT
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 788,384 $ 8,456,720 2,030,723 $ 21,961,981
Reinvested distributions 286,644 3,073,939 584,567 6,317,336
Cost of shares redeemed (1,238,819) (13,260,893) (2,330,285) (25,200,489)
Net change (163,791) (1,730,234) 285,005 3,078,828
CLASS C SHARES:
Proceeds from shares sold 79,802 850,501 29,609 319,908
Reinvested distributions 1,657 17,719 2,314 25,002
Cost of shares redeemed (2,357) (25,300) (22,308) (240,974)
Net change 79,102 842,920 9,615 103,936
CLASS Y SHARES:
Proceeds from shares sold 375,615 4,049,706 568,483 6,143,607
Reinvested distributions 1,137 12,218 2,555 27,743
Cost of shares redeemed (352,375) (3,766,289) (74,568) (806,228)
Net change 24,377 295,635 496,470 5,365,122
Total transactions in Fund
shares (60,312) $ (591,679) 791,090 $ 8,547,886
</TABLE>
</PAGE>
<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, 1999 1998 1997 1996 1995 1994
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.81 $10.55 $10.71 $9.97 $10.93
Income from Investment Operations:
Net investment income 0.26 0.53 0.55 0.55 0.60 0.60
Net gain (loss) on securities (both realized
and unrealized) (0.33) 0.01 0.27 (0.12) 0.74 (0.96)
Total from Investment Operations (0.07) 0.54 0.82 0.43 1.34 (0.36)
Less Distributions (note 6):
Dividends from net investment income (0.24) (0.53) (0.55) (0.59) (0.60) (0.60)
Distributions from capital gains - (0.01) (0.01) - - -
Total Distributions (0.24) (0.54) (0.56) (0.59) (0.60) (0.60)
Net Asset Value, End of Period $10.50 $10.81 $10.81 $10.55 $10.71 $9.97
Total Return (not reflecting sales charge)(%) (0.45)+ 5.13 8.08 4.17 13.75 (3.31)
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 221,314 229,667 226,477 222,889 230,270 232,656
Ratio of Expenses to Average Net Assets (%) 0.72* 0.73 0.73 0.75 0.80 0.73
Ratio of Net Investment Income to Average
Net Assets (%) 4.87* 4.89 5.19 5.22 5.74 5.80
Portfolio Turnover Rate (%) 4.35+ 12.79 22.39 8.94 17.09 35.25
The expense ratios after giving effect to the expense offset for uninvested cash
balances were:
Ratio of Expenses to Average Net Assets (%) 0.72* 0.72 0.72 0.74 0.79 0.72
</TABLE>
(1) Designated as Class A Shares on April 1, 1996.
Note: Effective September 11, 1995, Banc One Investment Advisors
Corporation became the Fund's Investment Adviser replacing PNC Bank,
Kentucky, Inc. and effective on May 1, 1998, pursuant to new
management arrangements, was appointed as the Fund's Investment
Sub-Adviser.
* Annualized.
+ Not annualized.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C(1) CLASS Y(1)
SIX MONTHS YEAR ENDED PERIOD(2) SIX MONTHS YEAR ENDED PERIOD(2)
ENDED DECEMBER 31, ENDED ENDED DECEMBER 31, ENDED
JUNE 30, 1999 1998 1997 DEC. 31, 1996 JUNE 30, 1999 1998 1997 DEC. 31, 1996
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.81 $10.55 $10.47 $10.82 $10.82 $10.55 $10.47
Income from Investment Operations:
Net investment income 0.21 0.44 0.46 0.37 0.27 0.54 0.56 0.43
Net gain on securities (both
realized and unrealized) (0.30) 0.01 0.27 0.11 (0.31) 0.02 0.29 0.11
Total from Investment Operations (0.09) 0.45 0.73 0.48 (0.04) 0.56 0.85 0.54
Less Distributions (note 6):
Dividends from net investment
income (0.22) (0.44) (0.46) (0.40) (0.27) (0.55) (0.57) (0.46)
Distributions from capital gains - (0.01) (0.01) - - (0.01) (0.01) -
Total Distributions (0.22) (0.45) (0.47) (0.40) (0.27) (0.56) (0.58) (0.46)
Net Asset Value, End of Period $10.50 $10.81 $10.81 $10.55 $10.51 $10.82 $10.82 $10.55
Total Return (not reflecting sales
charge)(%) (0.87)+ 4.24 7.16 4.72+ (0.37)+ 5.26 8.34 5.24+
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 1,752 949 845 433 14,177 14,335 8,957 5,823
Ratio of Expenses to Average Net
Assets (%) 1.57* 1.59 1.57 1.56* 0.57* 0.58 0.57 0.58*
Ratio of Net Investment Income to
Average Net Assets (%) 4.00* 4.04 4.30 4.34* 5.01* 5.03 5.31 5.41*
Portfolio Turnover Rate (%) 4.35+ 12.79 22.39 8.94 4.35+ 12.79 22.39 8.94
The expense ratios after giving effect to the expense offset for uninvested cash
balances were:
Ratio of Expenses to Average Net
Assets (%) 1.56* 1.57 1.56 1.55* 0.56* 0.57 0.56 0.56*
</TABLE>
(1) New Class of Shares established on April 1, 1996.
(2) From April 1, 1996 to December 31, 1996.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the
"Fund") was held on April 23, 1999. The holders of shares representing 71% 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 174,223,169 2,611,811
Thomas A. Christopher 174,276,660 2,558,320
Douglas Dean 174,276,660 2,558,320
Diana P. Herrmann 174,452,657 2,382,324
Carroll F. Knicely 174,452,657 2,382,324
Theodore T. Mason 174,452,657 2,382,324
Anne J. Mills 174,556,617 2,278,363
William J. Nightingale 174,556,617 2,278,363
James R. Ramsey 174,556,617 2,278,363
2. To ratify the selection of KPMG LLP as the Fund's independent auditors.
NUMBER OF VOTES:
FOR AGAINST ABSTAIN
172,046,876 741,812 4,046,281
PREPARING FOR YEAR 2000 (UNAUDITED)
The Trustees and officers of the Fund have been monitoring issues
involving preparedness for the turn of the century for some time in an effort to
minimize or eliminate any potential impact upon the Fund and its shareholders.
Our officers have focussed significant time and effort in order that the various
computerized functions that could affect the Fund are ready by the beginning of
the year 2000.
The Fund is highly reliant on certain mission-critical suppliers'
services. Each supplier of these services has provided the Fund's officers with
assurances that it is actively addressing potential problems relating to the
year 2000. The officers, in turn, are monitoring and will continue to monitor
the progress of its suppliers.
The Fund has NOT incurred, nor is anticipated to incur, any costs
related to Y2K. All such costs are being incurred by the respective vendors.
As you can well understand, we cannot directly control our supplier
operations. We assure you, however, that we recognize a responsibility to inform
our shareholders if in the future we become aware of any developments which
would lead us to believe that the Fund will be significantly affected by year
2000 problems.
We will continue to keep you up-to-date through future
communications.
</PAGE>
