<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.
ANNUAL
REPORT
DECEMBER 31, 1998
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
(Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus
with a
circle around it)
(Logo for the Aquila Group of Funds: an eagle's head)
ONE OF THE
AQUILAsm GROUP OF FUNDS
</PAGE>
<PAGE>
SERVING KENTUCKY INVESTORS FOR OVER A DECADE
(Logo for Churchill Tax-Free Fund of Kentucky: a standing pegasus
with a
circle around it)
CHURCHILL TAX-FREE FUND OF KENTUCKY
ANNUAL REPORT
"THE BEST THINGS IN LIFE CAN BE TAX-FREE"
February 17, 1999
Dear Fellow Shareholder:
When you compare TAX-FREE municipal bonds with similar
maturity high quality taxable U.S. Treasuries, we think it is fair
to say,
"THE BEST THINGS IN LIFE CAN BE TAX-FREE."
You may well come out way ahead owning a TAX-FREE bond, since
recently the ratio of return on TAXABLE U.S. Treasuries versus
TAX-FREE municipals has been running ahead of what has normally
been the case.
What this means to you in dollars and cents is that when you
take into consideration the effect of taxes you pay with a TAXABLE
bond, you actually get to keep more of your return with the
TAX-FREE investment.
Let us show you the mathematics of how this works out. Let's
suppose you purchase a $1,000 15-year U.S. Treasury bond yielding
5% and a $1,000 tax-free municipal bond with a maturity of 15 years
yielding 4.4%. Your investments would look as follows*:
U.S. TREASURY TAX-FREE
Interest Income $50.00 $44.00
Federal Tax Bracket 28% 28%
Federal Tax Paid $14.00 $-0-
Net Income Retained $36.00 $44.00
Even though on the surface the U.S. Treasury appears to be
yielding higher than the TAX-FREE municipal, once the effect of
Federal taxes is taken into consideration, the TAX-FREE investment
allows you to keep more money in your pocket. State taxes are not
applicable to either investment.
Obviously, investors in higher income tax brackets will obtain
an even greater advantage.
Given the desirability of making sure you have the right asset
allocation with your investment money, the fact that there is an
increased supply of high quality municipal bonds and a rising ratio
of taxable vs. tax-free bonds, we believe it is fair to say that,
"THE BEST THINGS IN LIFE CAN BE TAX-FREE."
This is particularly true considering the high quality of the
bonds in Churchill Tax-Free Fund of Kentucky and the intermediate
maturity of the overall portfolio of the Fund. Both these factors
lend themselves to the kind of investment that allows you to "sleep
well at night."
</PAGE>
<PAGE>
You can be assured that all those associated with the
management of your investment in Churchill Tax-Free Fund of
Kentucky are consistently working in your best interest. We very
much value you as a shareholder and appreciate the confidence you
have shown in the Fund.
Sincerely,
Lacy B. Herrmann
Chairman, Board of Trustees
* The examples given, while realistic, are for illustrative
purposes only, are strictly hypothetical in nature and do not
represent the performance of any particular investment. For
simplicity, a stable net asset value has been assumed over the life
of each investment and the effect of dividend reinvestment was not
taken into account. Of course, the actual rate of return and share
price of a municipal bond fund, such as Churchill Tax-Free Fund of
Kentucky, will fluctuate with general interest rate changes. Thus,
redemption price may be more or less than original purchase price.
</PAGE>
<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, 1998, as compared
with a hypothetical similar size investment in the Lehman Brothers
Quality Intermediate Municipal Bond Index (the "Index") of
municipal securities and the Consumer Price Index (a cost of
living index) over that same period. The total return of the
investment in the Fund is shown after deduction of the maximum
sales charge of 4% at the time of initial investment. It also
reflects deduction of the Fund's annual operating expenses and
reinvestment of monthly dividends and capital gains distributions
without sales charge. On the other hand, the Index does not reflect
any sales charge nor operating expenses but does reflect
reinvestment of interest. The performance of the Fund's other
classes, first offered on April 30, 1996, may be greater or less
than the Class A shares performance indicated on this graph,
depending on whether greater or lesser sales charges and fees were
incurred by shareholders investing in the other classes.
It should also be specifically noted that the Index is
nationally oriented and consists of an unmanaged mix of
approximately 28,000 investment-grade intermediate-term municipal
securities of issuers throughout the United States. However, the
Fund's investment portfolio consisted of a significantly lesser
number of investment-grade tax-free municipal obligations,
principally of Kentucky issuers, over the same period.
The maturities, market prices, and behavior of the individual
securities in the Fund's investment portfolio can be affected by
local and regional factors which might well result in variances
from the market action of the securities in the Index. Furthermore,
whatever the difference in performance of the Index versus the Fund
might also be attributed to the lack of application of annual
operating expenses and initial sales charge to the Index.
Since its inception, the Fund has been managed to provide as
stable a share value as possible consistent with producing a
competitive income return to shareholders. It has not been managed
for maximum total return, since one of the aims of management in
structuring the portfolio of the Fund is to reduce fluctuations in
the price of the Fund's shares resulting from changes in interest
rates.
As can be observed, however, the pattern of the Fund's results
and that of the Index over the period since inception of the Fund
track quite similarly, even though they are not entirely comparable
in character.
(Graphic of line chart with the following information:)
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON
Lehman Brothers Quality Fund After Sales Charge Cost of
Intermediate Municipal Bond Index and Expenses Living Index
</CAPTION>
<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
12/98 22,047 21,999 14,545
(Graphic of table with the following information:)
Fund's average annual total return
For the Period Ended December 31, 1998 1 Year 5 Years 10 Years Life of Fund Since 5/21/87
Including Sales Charge and Expenses 0.93% 4.55% 7.20% 7.02%
</TABLE>
</PAGE>
<PAGE>
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
No matter how you look at it, 1998 was a very dramatic year
for the world financial markets. It seemed that every time we
turned around, another Asian or Latin American securities market or
currency was on the "verge of collapse." The Russian government
devalued the ruble and delayed payment on billions of dollars of
its debt. Tensions in Iraq threatened to send oil prices higher.
And as if all that weren't enough, the markets had the distraction
of the Clinton scandal to contend with.
In spite of all the challenges it faced, the U. S. financial
markets continued to prosper. The U. S. Treasury market proved once
again to be the "safe haven" for both domestic and foreign
investors to "park" their funds, with rate of return taking a
backseat to safety. The yield to maturity on the 30-year U. S.
Treasury bond began the year at 5.92%. By the close of 1998, the
yield had fallen to 5.09%. While this decline was due in large part
to the "flight to quality" offered by the perceived safety provided
by U. S. Treasury securities, the fact that we experienced only
modest inflation during the year also contributed to this
unprecedented strength. In 1998 we saw the Federal Reserve move to
reduce short-term interest rates a number of times.
The Dow Jones Industrial Average continued to break records,
hitting a high of nearly 9400, before closing the year at just
under 9200. The Standard & Poor's 500 Index rose 26.67%, marking
the fourth consecutive year of double-digit returns.
We had great news on the inflation front in 1998 - domestic
inflation, as measured by the Producer Price Index (PPI) actually
declined by 0.1% for the year. Prices at the retail level, as
measured by the Consumer Price Index (CPI) rose a modest 1.6% for
the year, matching the increase we saw in 1997.
The municipal Bond Buyer Revenue Bond Index ended the year at
5.28%, virtually unchanged from the levels we saw at the end of
1997. Kentucky municipal bonds continued to be in strong demand.
The General Fund of the Commonwealth of Kentucky continues to
maintain a comfortable surplus. Consequently, in 1998, the State
was essentially absent from borrowing in the tax-free bond market.
Cities, counties, and other local municipalities accounted for
nearly all of the increase in borrowing that we saw last year,
as issuers took advantage of the prevailing lower interest rates to
refinance their higher cost debt.
The conservative intermediate maturity structure of the
portfolio and the high current income of the Churchill Tax-Free
Fund of Kentucky combined to produce a net asset value of $10.81
per share, exactly the same as where we ended 1997. The "A" class
shares of the Fund had an annual total rate of return of 5.13% for
1998.
The investment objective of the Churchill Tax-Free Fund
of Kentucky is to provide as high a level of triple tax-exempt
current income as is consistent with the preservation of capital.
This objective continues to be successfully addressed by adhering
to a discipline of solid fundamental, conservative portfolio
management ideals. The Fund has maintained an average credit
quality of "AA." We are proud to have once again earned a four star
rating from Morningstar, an independent mutual fund rating service.
Our "laddered" portfolio maturity structure helps us manage price
volatility. The Fund has an effective maturity of approximately 7.5
years. We maintain a well-diversified portfolio of over 160
different Kentucky issues, thus reducing issuer credit risk by "not
having all of our eggs in one basket."
We are optimistic about the prospects for the domestic
economy in 1999. We expect the economy to grow at a modest rate,
approximately 1.5% - 2.0%, as measured by the Gross Domestic
Product (GDP). We forecast inflation, as measured by the CPI, to
average approximately 1.75% for the year. There remain serious
concerns regarding financial turmoil still being experienced
in several foreign economies. Slow growth, moderate inflation, and
global economic concerns should again translate into another
positive year for the bond market and interest rates in 1999.
</PAGE>
<PAGE>
(Logo for KPMG LLP: The letters KPMG in front of four rectangles)
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Churchill Tax-Free Fund of Kentucky:
We have audited the accompanying statement of assets and
liabilities of Churchill Tax-Free Fund of Kentucky, including the
statement of investments, as of December 31, 1998, and the related
statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in
the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with
the custodian. As to securities sold but not delivered, we
performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used, and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Churchill Tax-Free Fund of
Kentucky as of December 31, 1998, the results of its operations for
the year then ended, the changes in its net assets for each of the
years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then
ended, in conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 1, 1999
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (98.3%) S&P VALUE
</CAPTION>
<S> <C> <C> <C>
STATE AGENCIES (13.9%)
Kentucky Higher Education Student Loan
Corporaton Insured Student Loan Revenue,
$ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,588,712
2,955,000 6.800%, 06/01/03 Aaa/AA- 3,206,175
1,915,000 7.100%, 12/01/11 Aaa/AA- 2,039,475
1,930,000 Kentucky Infrastructure Authority Revenue,
5.000%, 06/01/09, MBIA Insured Aaa/AAA 2,033,737
555,000 7.200%, 06/01/11 A/A 602,869
635,000 5.250%, 06/01/12 A2/A 661,987
875,000 6.500%, 06/01/12 A/A 946,094
125,000 5.250%, 06/01/14 A2/A 128,594
1,110,000 6.375%, 06/01/14 A/A 1,239,037
135,000 5.250%, 06/01/15 A2/A 138,375
100,000 5.375%, 06/01/17 A2/A 103,250
100,000 5.000%, 08/01/17 NR/A 98,875
1,500,000 5.375%, 02/01/18 NR/A 1,530,000
Kentucky Local Correctional Facilities Construction
Authority Revenue,
5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 5,343,575
Kentucky Area Development
345,000 5.750%, 12/01/27 NR/AA 357,506
145,000 5.600%, 6/01/28 NR/AA 148,625
785,000 5.500%, 6/01/28 NR/AA 797,756
Kentucky Rural Economic Development Authority
3,110,000 7.250%, 06/01/17 NR/AA 3,351,025
Kentucky State Properties and Buildings
Commission Revenue,
4,510,000 6.625%, 10/01/00, Pre-Refunded NR/AAA 4,932,812
365,000 7.000%, 02/01/01, Pre-Refunded NR/AAA 396,025
1,000,000 6.500%, 08/01/01, Pre-Refunded NR/AAA 1,087,500
220,000 6.000%, 09/01/08 A2/A+ 249,700
500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 542,500
400,000 5.000%, 09/01/13 A/A+ 404,000
1,000,000 5.100%, 10/01/17 A2/A+ 1,011,250
Puerto Rico Public Buildings Authority,
1,000,000 6.875%, 07/01/02, Pre-Refunded Aaa/AAA 1,117,500
</PAGE> 34,056,954
<PAGE>
COUNTY AGENCIES (13.3%)
Clark County Kentucky Public Properties Corp.
Revenue,
1,120,000 6.700%, 06/01/01, Pre-Refunded A/NR 1,201,200
Floyd County Public Property, Courthouse Revenue,
510,000 5.500%, 09/01/14 NR/A 545,063
Jefferson County Kentucky Capital Projects,
1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,075,000
420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 437,850
1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,680,750
1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,697,400
5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 6,187,625
Kenton County Kentucky Public Property County
Courthouse
455,000 5.000%, 03/01/14 A1/NR 455,569
250,000 5.000%, 03/01/15 A1/NR 248,750
345,000 5.000%, 03/01/20 A1/NR 335,081
1,000,000 5.000%, 03/01/23 A1/NR 962,500
Lincoln County Kentucky Public Properties Corp.,
430,000 6.500%, 03/01/22 NR/NR* 481,600
Muhlenberg County Kentucky Industrial
Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A 1,606,875
Nelson Co. IDR - (Mabex Universal),
2,900,000 6.500%, 04/01/05 A1/NR 3,146,500
Pendleton County Kentucky Multi-County Lease
Revenue,
500,000 7.300%, 03/01/02 NR/AA 535,000
570,000 7.550%, 03/01/10 NR/AA 607,050
4,500,000 6.500%, 03/01/19 NR/A 4,888,125
3,000,000 6.400%, 03/01/19 NR/A 3,476,250
Warren County Kentucky Justice,
2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,982,812
</PAGE>
<PAGE> 32,551,000
CITY/MUNICIPAL OBLIGATIONS (8.7%)
Danville Kentucky Multi-City Lease. Revenue,
545,000 5.000%, 09/01/11 NR/NR* 557,262
Jeffersontown Kentucky Public Project Corp.
Revenue,
500,000 5.750%, 11/01/15 A/NR 538,125
Kentucky League Cities Funding Trust COP,
700,000 5.900%, 08/01/16, (Owensboro) NR/A 753,375
1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,871,494
Louisville Kentucky Public Properties Corp.,
4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,585,912
Mount Sterling Kentucky Lease Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 2,078,400
7,000,000 6.200%, 03/01/18 Aa/NR 7,533,750
Munfordville Kentucky Industrial Development
Revenue
2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,753,125
Richmond Kentucky District Court Facility
Revenue
740,000 5.300%, 02/01/25 A3/NR 750,175
21,421,618
UTILITIES (9.6%)
Carrolton & Henderson Kentucky Gas Revenue,
750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 792,187
Glasgow Kentucky Electric Plant Board Revenue,
280,000 7.600%, 12/01/09, Pre-Refunded NR/BBB 306,600
Hardin County, Kentucky Water District
1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA 1,086,250
Henderson County Kentucky Water District,
Waterworks Revenue,
190,000 5.600%, 09/01/21 NR/NR* 194,987
Lebanon Kentucky Waterworks Revenue,
250,000 7.500%, 04/01/01, Pre-Refunded NR/NR* 274,687
</PAGE>
<PAGE>
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue,
1,525,000 6.500%, 11/15/04, MBIA Insured, Pre-Refunded Aaa/AAA 1,749,937
250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 255,312
230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 233,162
2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 2,037,500
2,500,000 5.000%, 05/15/19, MBIA Insured Aaa/AAA 2,481,250
1,745,000 5.000%, 05/15/22, MBIA Insured Aaa/AAA 1,736,275
4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 4,217,537
1,000,000 5.250%, 05/15/27, MBIA Insured Aaa/AAA 1,025,000
7,000,000 4.750%, 05/15/28, MBIA Insured Aaa/AAA 6,693,750
Muhlenberg County Kentucky Water District,
Waterworks Revenue,
100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 107,500
110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 117,837
115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 122,619
North Nelson County Kentucky, Water Revenue
205,000 5.200%, 01/01/20 NR/NR* 203,462
23,635,852
POLLUTION CONTROL REVENUE (9.1%)
Ashland Kentucky Pollution Control Revenue,
(Ashland Oil)
3,000,000 6.650%, 08/01/09 Baa2/NR 3,240,000
Boone County Kentucky Pollution Control, (Dayton
Power & Light)
4,000,000 6.500%, 11/15/22 Aa3/AA- 4,355,000
Boone County Kentucky Pollution Control, (Cinergy)
750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 779,062
Carroll County Kentucky Pollution Control Revenue,
(LG&E Energy)
3,500,000 7.450%, 09/15/16 Aa2/AA- 3,950,625
2,910,000 6.250%, 02/01/18 Aa2/AA- 3,084,600
</PAGE>
<PAGE>
Jefferson County Kentucky Pollution Control
Revenue, (LG&E Energy)
3,800,000 5.900%, 04/15/23 Aa2/AA 4,037,500
Wickliffe Kentucky Pollution Control, (Westvaco)
2,755,000 6.200%, 04/01/07 A1/A 2,760,235
100,000 6.375%, 04/01/26 A1/A 109,000
22,316,022
TRANSPORTATION (6.8%)
Kenton County Kentucky Airport Board Airport
Revenue,
4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 5,048,100
Kentucky Interlocal School Transportation Authority
150,000 5.100%, 03/01/05 NR/A 156,938
145,000 5.400%, 06/01/17 NR/A 148,625
200,000 6.000%, 12/01/20 NR/A 208,250
300,000 5.800%, 12/01/20 NR/A 309,750
400,000 6.000%, 12/01/20 NR/A 416,500
400,000 5.650%, 12/01/20 NR/A 410,000
350,000 5.600%, 12/01/20 NR/A 357,875
Kentucky State Turnpike Authority Economic
Development Road Revenue,
120,000 8.500%, 07/01/06 A/A+ 152,850
1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,176,250
3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,763,494
Puerto Rico Commonwealth Highway &
Transportation Authority Highway Revenue,
4,000,000 6.625%, 07/01/02, Pre-Refunded Baa1/A 4,430,000
16,578,632
HOSPITALS (11.2%)
Floyd County Kentucky Hospital Revenue,
250,000 7.500%, 08/01/10 NR/AAA 269,375
</PAGE>
<PAGE>
Hopkins County Kentucky Hospital Revenue,
1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,083,750
Jefferson County Kentucky Health Facilities Revenue
(Jewish Hospital),
1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,601,250
100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 107,625
1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,249,188
230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 247,825
1,000,000 5.125%, 10/01/18, MBIA Insured Aaa/AAA 1,002,500
3,500,000 5.125%, 10/01/27, MBIA Insured Aaa/AAA 3,508,750
Kentucky Development Finance Authority Hospital
Revenue,
750,000 7.000%, 09/01/01, Pre-Refunded NR/NR* 825,938
3,000,000 6.500%, 11/01/01, Pre-Refunded A1/A+ 3,258,750
2,150,000 6.750%, 11/01/01, Pre-Refunded A1/A+ 2,351,563
420,000 5.250%, 02/01/09, FSA Insured Aaa/AAA 450,450
1,000,000 5.700%, 10/01/10, ACA Insured NR/A 1,068,750
1,375,000 6.125%, 02/01/12, CGIC Insured,
(Kingsdaughters) Aaa/AAA 1,495,313
2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,590,000
3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,213,750
1,000,000 5.850%, 10/01/17, ACA Insured NR/A 1,041,250
1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,972,588
27,338,615
HOUSING (15.4%)
Greater Kentucky Housing Assistance Corp. Multi-
Family Housing Revenue,
320,000 6.300%, 07/01/15 Aaa/NR 339,600
2,025,000 6.050%, 07/01/22 Aaa/AAA 2,075,625
275,000 6.400%, 07/01/23 Aaa/NR 293,219
Jefferson County Kentucky Multi-Family Revenue,
1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,604,588
Jefferson County Kentucky Multi-Family Revenue,
1,200,000 5.650%, 08/20/34 (Kentucky Towers Project) Aaa/AAA 1,249,500
Kenton County Kentucky Project Note
1,000,000 6.125%, 12/01/17, FHA Insured Aa2/NR 1,080,000
</PAGE>
<PAGE>
Kenton County Kentucky Industrial Development,
300,000 6.950%, 12/01/26 Aa2/NR 339,000
Kentucky Housing Corporation Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 266,156
835,000 7.600%, 01/01/07 Aaa/AAA 870,488
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,066,250
45,000 7.875%, 01/01/08 Aaa/AAA 45,956
340,000 7.250%, 01/01/09 Aaa/AAA 353,141
980,000 7.125%, 01/01/10 Aaa/AAA 1,036,350
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,273,500
725,000 5.300%, 07/01/10 Aaa/AAA 750,375
230,000 5.400%, 07/01/14 Aaa/AAA 237,763
750,000 6.250%, 07/01/15 Aaa/AAA 798,750
315,000 6.100%, 07/01/16 Aaa/AAA 333,900
1,475,000 6.400%, 01/01/17 Aaa/AAA 1,576,406
445,000 5.300%, 07/01/18 Aaa/AAA 451,675
1,065,000 5.550%, 07/01/18 Aaa/AAA 1,103,606
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,504,375
300,000 7.900%, 01/01/21 Aaa/AAA 311,625
30,000 7.800%, 01/01/21 Aaa/AAA 31,238
110,000 8.100%, 01/01/22 Aaa/AAA 114,813
1,910,000 7.450%, 01/01/23 Aaa/AAA 2,005,500
225,000 6.800%, 01/01/24 Aaa/AAA 238,500
310,000 5.850%, 07/01/27 Aaa/AAA 320,850
3,500,000 6.375%, 07/01/28 Aaa/AAA 3,696,875
6,900,000 6.300%, 01/01/28 Aaa/AAA 7,296,750
1,000,000 6.250%, 07/01/28 Aaa/AAA 1,057,500
37,723,874
SCHOOLS (10.3%)
Boone County Kentucky School District Finance
Corp. School Building Revenue,
1,750,000 6.750%, 09/01/01, Pre-Refunded A1/A 1,931,563
2,250,000 6.125%, 12/01/17, Pre-Refunded A1/NR 2,477,813
2,295,000 5.700%, 05/01/18 A1/NR 2,398,275
</PAGE>
<PAGE>
Boyd County Kentucky School District Finance
Corp.,
575,000 5.375%, 10/01/17 A1/NR 595,844
Christian County Kentucky School District Finance
Corp.,
500,000 5.000%, 06/01/09 A1/NR 523,750
Fayette County School Building Revenue,
160,000 5.350%, 01/01/14 A1/A+ 166,200
1,780,000 5.700%, 12/01/16 A1/A+ 1,902,375
Floyd County Kentucky School Building Revenue
250,000 5.000%, 12/01/09 A1/NR 262,500
Garrard County Kentucky School Building Revenue,
100,000 5.900%, 06/01/15 A1/NR 107,750
160,000 5.900%, 06/01/16 A1/NR 171,800
Grayson County Kentucky School Building Revenue,
1,940,000 6.000%, 01/01/15 A1/NR 2,129,150
Hazard Kentucky Independent School District
Finance Corp.,
555,000 5.300%, 09/01/22 A1/NR 566,100
Jefferson County Kentucky School District Finance
Corp. School Building Revenue,
370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 401,913
100,000 5.250%, 07/01/09 Aaa/AAA 106,750
500,000 5.875%, 01/01/11 A1/A+ 541,250
695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 713,244
Kenton County Kentucky School District Finance
Corp. School Building Revenue,
100,000 5.250%, 03/01/06 NR/A+ 106,125
Lexington-Fayette Urban County Government
Project U.K. Library
725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 728,625
1,000,000 5.000%, 11/01/20, MBIA Insured Aaa/AAA 995,000
</PAGE>
<PAGE>
Meade County Kentucky School District Finance
Corp.,
400,000 5.700%, 07/01/15 A1/NR 435,000
500,000 6.000%, 07/01/16 A1/NR 551,250
Middlesboro Kentucky Independent School District
Finance Corp.
100,000 6.100%, 08/01/16 A1/NR 111,500
Nelson County Kentucky School Building Revenue,
1,820,000 5.750%, 04/01/15 A1/NR 1,940,575
Pike County Kentucky School District Finance Corp.
School Building Revenue,
720,000 7.000%, 12/01/00, Pre-Refunded A/A 786,600
Rowan County Kentucky School District Finance
Corp.
215,000 5.600%, 06/01/16 A1/NR 229,781
Scott County Kentucky School Building Revenue,
2,750,000 5.900%, 06/01/18 A1/A 2,932,188
Taylor County Kentucky School Building Revenue,
280,000 6.000%, 08/01/16 A1/NR 304,850
Todd County Kentucky School Building Revenue,
980,000 6.300%, 10/01/14 NR/A 1,079,225
25,196,996
Total Investments (cost $226,378,152**) 98.3% 240,819,563
Other assets in excess of liabilities 1.7 4,131,527
Net Assets 100.0% $ 244,951,090
* Any security not rated has been determined by
the Investment Sub-Adviser to have sufficient
quality to be ranked in the top four credit ratings
if a credit rating were to be assigned by a rating
service.
** Cost for Federal tax purposes is identical.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $226,378,152) $ 240,819,563
Cash 389,974
Interest receivable 3,837,674
Receivable for securities called for redemption 450,000
Receivable for Fund shares sold 102,448
Other assets 1,242
Total assets 245,600,901
LIABILITIES
Dividends payable 338,227
Distribution fees payable 89,075
Management fee payable 83,129
Accrued expenses 71,931
Payable for Fund shares redeemed 67,449
Total liabilities 649,811
NET ASSETS $ 244,951,090
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 226,486
Additional paid-in capital 229,517,778
Accumulated net realized gain on investments 765,415
Net unrealized appreciation on investments 14,441,411
$ 244,951,090
CLASS A
Net Assets $ 229,667,000
Capital shares outstanding 21,236,109
Net asset value and redemption price per share $ 10.81
Offering price per share (100/96 of $10.81 adjusted to nearest cent) $ 11.26
CLASS C
Net Assets $ 949,491
Capital shares outstanding 87,810
Net asset value and offering price per share $ 10.81
Redemption price per share (*generally, a charge of 1% is imposed on the
proceeds of shares redeemed during the first 12 months after purchase) $ 10.81*
CLASS Y
Net Assets $ 14,334,599
Capital shares outstanding 1,324,689
Net asset value, offering and redemption price per share $ 10.82
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 13,488,508
Expenses:
Management fee (note 3) $ 958,774
Distribution and service fees (note 3) 348,905
Transfer and shareholder servicing agent fees 143,559
Trustees' fees and expenses (note 8) 74,368
Legal fees 61,335
Shareholders' reports and proxy statements 51,584
Registration fees and dues 31,113
Audit and accounting fees 28,750
Custodian fees 22,490
Insurance 3,766
Miscellaneous 23,715
1,748,359
Expenses paid indirectly (note 7) (33,201)
Net expenses 1,715,158
Net investment income 11,773,350
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 865,993
Change in unrealized appreciation on investments (513,405)
Net realized and unrealized gain on investments 352,588
Net increase in net assets resulting from operations $ 12,125,938
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
1998 1997
</CAPTION>
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 11,773,350 $ 11,982,164
Net realized gain from securities transactions 865,993 690,738
Change in unrealized appreciation on investments (513,405) 5,384,972
Change in net assets from operations 12,125,938 18,057,874
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income (11,135,477) (11,553,536)
Net realized gain on investments (207,578) (332,819)
Class C Shares:
Net investment income (35,988) (29,337)
Net realized gain on investments (671) (845)
Class Y Shares:
Net investment income (610,932) (391,517)
Net realized gain on investments (11,388) (11,278)
Change in net assets from distributions (12,002,034) (12,319,332)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 28,425,496 25,210,705
Reinvested dividends and distributions 6,370,081 6,701,119
Cost of shares redeemed (26,247,691) (30,516,063)
Change in net assets from capital share transactions 8,547,886 1,395,761
Change in net assets 8,671,790 7,134,303
NET ASSETS:
Beginning of period 236,279,300 229,144,997
End of period $ 244,951,090 $ 236,279,300
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<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. On April
30, 1998 the Fund established Class I shares, which are offered and
sold only through financial intermediaries and are not offered
directly to retail investors. At December 31, 1998 there were no
Class I shares outstanding. All classes of shares represent
interests in the same portfolio of investments in the Fund and are
identical as to rights and privileges. They differ only with
respect to the effect of sales charges, the distribution and/or
service fees borne by the respective class, expenses specific to
each class, voting rights on matters affecting a single class and
the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles for investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value each
business day based upon information provided by a nationally
prominent independent pricing service and periodically verified
through other pricing services. In the case of securities for which
market quotations are readily available, securities are valued at
the mean of bid and asked quotations and, in the case of other
securities, at fair value determined under procedures established
by and under the general supervision of the Board of Trustees.
Securities which mature in 60 days or less are valued at amortized
cost if their term to maturity at purchase was 60 days or less,
or by amortizing their unrealized appreciation or depreciation on
the 61st day prior to maturity, if their term to maturity at
purchase exceeded 60 days.
</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-Adviser is entitled to receive a fee
from the Manager which is payable monthly and computed as of the
close of business each day at the annual rate of 0.14 of 1% on the
Fund's net assets.
</PAGE>
<PAGE>
For the year ended December 31, 1998, the Fund incurred fees
for advisory and administrative services of $958,774.
Specific details as to the nature and extent of the services
provided by the Manager and the Sub-Adviser are more fully defined
in the Fund's Prospectus and Statement of Additional Information.
b) DISTRIBUTION AND SERVICE FEES:
The Fund has adopted a Distribution Plan (the "Plan") pursuant
to Rule 12b-1 (the "Rule") under the Investment Company Act of
1940. Under one part of the Plan, with respect to Class A Shares,
the Fund is authorized to make service fee payments to
broker-dealers ("Qualified Recipients") or others selected by
Aquila Distributors, Inc. (the "Distributor") including,
but not limited to, any principal underwriter of the Fund, with
which the Distributor has entered into written agreements
contemplated by the Rule and which have rendered assistance in the
distribution and/or retention of the Fund's shares or servicing of
shareholder accounts. The Fund makes payment of this service fee at
the annual rate of 0.15% of the Fund's average net assets
represented by Class A Shares. For the year ended December 31,
1998, service fees on Class A Shares amounted to $340,056, of which
the Distributor received $8,641.
Under another part of the Plan, the Fund is authorized to make
payments with respect to Class C Shares to Qualified Recipients
which have rendered assistance in the distribution and/or retention
of the Fund's Class C shares or servicing of shareholder accounts.
These payments are made at the annual rate of 0.75% of the Fund's
net assets represented by Class C Shares and for the year ended
December 31, 1998, amounted to $6,637. In addition, under a
Shareholder Services Plan, the Fund is authorized to make service
fee payments with respect to Class C Shares to Qualified Recipients
for providing personal services and/or maintenance of shareholder
accounts. These payments are made at the annual rate of 0.25% of
the Fund's net assets represented by Class C Shares and for the
year ended December 31, 1998, amounted to $2,212. The total of
these payments with respect to Class C Shares amounted to $8,849,
of which the Distributor received $5,934.
Specific details about the Plans are more fully defined in the
Fund's Prospectus and Statement of Additional Information.
Under a Distribution Agreement, the Distributor serves as the
exclusive distributor of the Fund's shares. Through agreements
between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the
facilities of these dealers having offices within Kentucky, with
the bulk of sales commissions inuring to such dealers. For the year
ended December 31, 1998, the Distributor received commissions of
$27,253 on sales of Class A Shares.
</PAGE>
<PAGE>
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1998, purchases of
securities and proceeds from the sales of securities aggregated
$38,565,149 and $30,199,628, respectively.
At December 31, 1998, aggregate gross unrealized appreciation
for all securities in which there is an excess of market value over
tax cost amounted to $14,646,285 and aggregate gross unrealized
depreciation for all securities in which there is an excess of tax
cost over market value amounted to $204,874 for a net unrealized
appreciation of $14,441,411.
5. PORTFOLIO ORIENTATION
Since the Fund invests principally and may invest entirely in
triple tax-free municipal obligations of issuers within Kentucky,
it is subject to possible risks associated with economic,
political, or legal developments or industrial or regional matters
specifically affecting Kentucky and whatever effects these may have
upon Kentucky issuers' ability to meet their obligations.
6. DISTRIBUTIONS
The Fund declares dividends daily from net investment income
and makes payments monthly in additional shares at the net asset
value per share or in cash, at the shareholder's option. Net
realized capital gains, if any, are distributed annually and are
taxable.
The Fund intends to maintain, to the maximum extent possible,
the tax-exempt status of interest payments received from portfolio
municipal securities in order to allow dividends paid to
shareholders from net investment income to be exempt from regular
Federal and State of Kentucky income taxes. However, due to
differences between financial statement reporting and Federal
income tax reporting requirements, distributions made by the Fund
may not be the same as the Fund's net investment income, and/or
net realized securities gains. Further, a small portion of the
dividends may, under some circumstances, be subject to taxes at
ordinary income and/or capital gain rates. For certain
shareholders, some dividends may, under some circumstances, be
subject to the alternative minimum tax.
7. EXPENSES
The Fund has negotiated an expense offset arrangement with its
custodian wherein it receives credit toward the reduction of
custodian fees and other Fund expenses whenever there are
uninvested cash balances. The Statement of Operations reflects the
total expenses before any offset, the amount of offset and the net
expenses. It is the general intention of the Fund to invest, to the
extent practicable, some or all of cash balances in
income-producing assets rather than leave cash on deposit.
</PAGE>
<PAGE>
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were nine Trustees. Trustees'
fees paid during the year were at the annual rate of $5,000 for
carrying out their responsibilities and attendance at regularly
scheduled Board Meetings. If additional or special meetings are
scheduled for the Fund, separate meeting fees are paid for each
such meeting to those Trustees in attendance. The Fund also
reimburses Trustees for expenses such as travel, accommodations,
and meals incurred in connection with attendance at regularly
scheduled or special Board Meetings and at the Annual Meeting and
outreach meetings of Shareholders. For the fiscal year ended
December 31, 1998 such reimbursements averaged approximately $3,700
per Trustee. Two of the Trustees, who are affiliated with the
Manager, are not paid any Trustee fees.
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
SHARES AMOUNT SHARES AMOUNT
</CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 2,030,723 $ 21,961,981 1,946,573 $ 20,614,221
Reinvested distributions 584,567 6,317,336 629,661 6,662,872
Cost of shares redeemed (2,330,285) (25,200,489) (2,759,392) (29,203,137)
Net change 285,005 3,078,828 (183,158) (1,926,044)
CLASS C SHARES:
Proceeds from shares sold 29,609 319,908 47,349 501,768
Reinvested distributions 2,314 25,002 2,091 22,131
Cost of shares redeemed (22,308) (240,974) (12,332) (131,306)
Net change 9,615 103,936 37,108 392,593
CLASS Y SHARES:
Proceeds from shares sold 568,483 6,143,607 387,049 4,094,716
Reinvested distributions 2,555 27,743 1,517 16,116
Cost of shares redeemed (74,568) (806,228) (112,210) (1,181,620)
Net change 496,470 5,365,122 276,356 2,929,212
Total transactions in Fund
shares 791,090 $ 8,547,886 130,306 $ 1,395,761
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A(1)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
</CAPTION>
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.55 $10.71 $9.97 $10.93
Income from Investment Operations:
Net investment income 0.53 0.55 0.55 0.60 0.60
Net gain (loss) on securities (both realized and
unrealized) 0.01 0.27 (0.12) 0.74 (0.96)
Total from Investment Operations 0.54 0.82 0.43 1.34 (0.36)
Less Distributions (note 6):
Dividends from net investment income (0.53) (0.55) (0.59) (0.60) (0.60)
Distributions from capital gains (0.01) (0.01) - - -
Total Distributions (0.54) (0.56) (0.59) (0.60) (0.60)
Net Asset Value, End of Period $10.81 $10.81 $10.55 $10.71 $ 9.97
Total Return (not reflecting sales charge)(%) 5.13 8.08 4.17 13.75 (3.31)
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 229,667 226,477 222,889 230,270 232,656
Ratio of Expenses to Average Net Assets (%) 0.73 0.73 0.75 0.80 0.73
Ratio of Net Investment Income to Average Net
Assets (%) 4.89 5.19 5.22 5.74 5.80
Portfolio Turnover Rate (%) 12.79 22.39 8.94 17.09 35.25
The expense ratios after giving effect to the expense offset for uninvested
cash balances were:
Ratio of Expenses to Average Net Assets (%) 0.72 0.72 0.74 0.79 0.72
(1) Designated as Class A Shares on April 1, 1996.
Note: Effective September 11, 1995, Banc One Investment Advisors Corporation
became the Fund's Investment Adviser replacing PNC Bank, Kentucky, Inc. and
effective on May 1, 1998, pursuant to new management arrangements, was
appointed as the Fund's Investment Sub-Adviser.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C(1) CLASS Y(1)
PERIOD(2) PERIOD(2)
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED
1998 1997 DEC. 31, 1996 1998 1997 DEC. 31, 1996
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.55 $10.47 $10.82 $10.55 $10.47
Income from Investment Operations:
Net investment income 0.44 0.46 0.37 0.54 0.56 0.43
Net gain on securities (both
realized and unrealized) 0.01 0.27 0.11 0.02 0.29 0.11
Total from Investment Operations 0.45 0.73 0.48 0.56 0.85 0.54
Less Distributions (note 6):
Dividends from net investment income (0.44) (0.46) (0.40) (0.55) (0.57) (0.46)
Distributions from capital gains (0.01) (0.01) - (0.01) (0.01) -
Total Distributions (0.45) (0.47) (0.40) (0.56) (0.58) (0.46)
Net Asset Value, End of Period $10.81 $10.81 $10.55 $10.82 $10.82 $10.55
Total Return (not reflecting sales charge)(%) 4.24 7.16 4.72+ 5.26 8.34 5.24+
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 949 845 433 14,335 8,957 5,823
Ratio of Expenses to Average Net
Assets (%) 1.59 1.57 1.56* 0.58 0.57 0.58*
Ratio of Net Investment Income to
Average Net Assets (%) 4.04 4.30 4.34* 5.03 5.31 5.41*
Portfolio Turnover Rate (%) 12.79 22.39 8.94 12.79 22.39 8.94
The expense ratios after giving effect to the expense offset for uninvested
cash balances were:
Ratio of Expenses to Average Net
Assets (%) 1.57 1.56 1.55* 0.57 0.56 0.56*
(1) New Class of Shares established on April 1, 1996.
(2) From April 1, 1996 to December 31, 1996.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
FEDERAL TAX STATUS OF 1998 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1998, of the total
amount of dividends paid by Churchill Tax-Free Fund of Kentucky,
98.10% was "exempt-interest dividends" and the balance was ordinary
dividend income. $205,041 of the amount distributed by the Fund
during fiscal 1998 is designated as a dividend from 20% net
long-term capital gains. For those shareholders subject to the
Federal alternative minimum tax, 19.41% of your Fund's dividends
was derived from interest on "private activity bonds."
Prior to January 31, 1999, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions
paid for the 1998 CALENDAR YEAR.
PREPARING FOR YEAR 2000 (UNAUDITED)
The Trustees and officers of the Fund have been monitoring
issues involving preparedness for the turn of the century for some
time in an effort to minimize or eliminate any potential impact
upon the Fund and its shareholders. Our officers have focussed
significant time and effort in order that the various computerized
functions that could affect the Fund are ready by the beginning of
the year 2000.
The Fund is highly reliant on certain mission-critical
suppliers' services. Each supplier of these services has provided
the Fund's officers with assurances that it is actively addressing
potential problems relating to the year 2000. The officers, in
turn, are monitoring and will continue to monitor the progress of
its suppliers.
As you can well understand, we cannot directly control our
supplier operations. We assure you, however, that we recognize a
responsibility to inform our shareholders if in the future we
become aware of any developments which would lead us to believe
that the Fund will be significantly affected by year 2000 problems.
We will continue to keep you up-to-date through future
communications.
</PAGE>
