<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
Diana P. Herrmann, President
Jerry G. McGrew, Senior Vice President
L. Michele Robbins, Senior Vice President
Teresa M. Blair, 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, 1999
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo of Churchill Tax-Free Fund of Kentucky: a circle with a standing Pegasus]
[Logo of the Aquila Group of Funds: an eagle's head]
ONE OF THE
AQUILAsm GROUP OF FUNDS
</PAGE>
<PAGE>
[Logo of Churchill Tax-Free Fund of Kentucky: a circle with a standing Pegasus]
SERVING KENTUCKY INVESTORS FOR OVER A DECADE
CHURCHILL TAX-FREE FUND OF KENTUCKY
ANNUAL REPORT
"WE TAKE SPECIAL CARE TO ENSURE YOUR SAFETY"
February 22, 2000
Dear Fellow Shareholders:
Every now and then, we come across something that triggers a special point
worth considering. This happened to us on a recent trip on United Airlines. When
a pre-flight announcement was made that stated, "We take special care to ensure
your safety," that remark brought home to us a point that we practice on a
continuous basis with Churchill Tax-Free Fund of Kentucky.
We know from our surveys that most of the shareholders of Churchill
Tax-Free Fund of Kentucky are looking forward to retiring or have already
retired. These are a very special group of people - and we work very hard to
make sure that we are addressing their needs.
Once one is no longer in the work force, it is essential that very careful
attention be paid to whatever financial resources are available to ensure that
these resources are available when needed. It is just as important that these
financial resources produce the kind of return, on a consistent basis, that our
shareholders can count on.
SAFETY
Safety with municipal securities is a very important factor to which
management of your Fund pays considerable attention. Just like the United
Airlines announcement, "we take special care to ensure your safety" with all the
municipal securities in the Fund.
As you probably know, municipal securities have various credit ratings.
These ratings attempt to measure the kind of safety and trustworthiness that the
securities represent. With Churchill Tax-Free Fund of Kentucky, we specifically
limit the credit ratings to those within the top four grades - AAA, AA, A, and
Baa. This world in which we live is changing extremely rapidly. Therefore, we
feel it is important that we ensure that the majority of securities in the
Fund's portfolio are within the top TWO credit grades - AAA and AA - for your
safety. Through our portfolio management, we very carefully monitor the
characteristics of each investment and every type of investment in the
portfolio. Therefore, we do not expect "surprises" from any of the securities
that are in the portfolio of the Fund.
Recently, the marketplace for municipal securities has made it such that
the difference in yield for a AAA or AA credit rating versus a Baa credit rating
is relatively little. Therefore, our approach is to go with the best. Obviously,
if one can buy securities which provide a top rating without paying any
significant premium for them, we prefer to go in that direction.
We want you to know, that at the report date of December 31, 1999, the
combination of AAA and AA securities amounted to over 85% of the total assets in
the portfolio of your Fund.
In this way, we feel that "we take special care to ensure your safety."
<PAGE>
MATURITY OF TAX-FREE MUNICIPAL BONDS
Another factor that we feel is important in building quality for your
investment is the maturity structure of the municipal bonds in the portfolio.
As we have explained to you in the past, longer-term maturity bonds will
usually produce a higher return than short-term bonds. However, such longer
maturity bonds also have a higher degree of volatility of price fluctuations.
Therefore, we have structured the average maturity of Churchill Tax-Free
Fund of Kentucky to be at a somewhat intermediate level - currently 14.5 years.
This level is produced by using a "laddered" approach to the selection of bonds
in terms of their maturity. We have a certain number of short-term bonds and a
certain number of long-term bonds, but the overall average of these maturities
run at an intermediate level. In this way, we can capture a substantial amount
of possible income level available from the bonds, without exposing the
portfolio to an undue level of volatility.
Our goal is to maintain a reasonably high level of stability for the share
net asset value of the Fund, while producing the kind of tax-free return that
people want to see from their investment.
This is another strategy that we use in building quality, safety, and
stability into your investment in Churchill Tax-Free Fund of Kentucky.
RELIABILITY OF PAYMENTS
We also recognize that most of our shareholders depend upon the monthly
tax-free income produced by Churchill Tax-Free Fund of Kentucky. Shareholders
want to know that the income from the Fund is there when the time comes to pay
various bills.
The quality character of the portfolio ensures that this is the case.
We want to make sure that, to the best of our ability, the monthly payments
add up to a satisfactory level of income that you can be SURE will be there when
you need it.
YOUR CONFIDENCE IS APPRECIATED
As always, we again wish to express our appreciation for the confidence you
have shown by your investment in Churchill Tax-Free Fund of Kentucky. We can
assure you that we will continually do our best to merit your continued level of
trust.
Sincerely,
Diana P. Herrmann
President
Lacy B. Herrmann
Chairman, Board of Trustees
</PAGE>
<PAGE>
PERFORMANCE REPORT
The following graph illustrates the value of $10,000 invested in the Class
A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended
December 31, 1999 as compared with the Lehman Brothers Quality Intermediate
Municipal Bond Index and the Consumer Price Index (a cost of living index). The
performance of each of the other classes is not shown in the graph but is
included in the table below. It should be noted that the Lehman Index does not
include any operating expenses nor sales charges and being nationally oriented,
does not reflect state specific bond market performance.
[Graphic of a line chart with the following information:]
<TABLE>
<CAPTION>
Lehman Brothers
Quality Intermediate Fund's Class A Shares
Municipal Bond Index With Sales Charge Without Sales Charge Cost of Living Index
</CAPTION>
<S> <C> <C> <C> <C>
12/89 $10,000 $9,600 $10,000 $10,000
12/90 10,751 10,229 10,656 10,625
12/91 11,948 11,330 11,804 10,941
12/92 12,822 12,332 12,847 11,266
12/93 14,091 13,626 14,196 11,582
12/94 13,706 13,188 13,740 11,883
12/95 15,597 14,972 15,598 12,191
12/96 16,262 15,653 16,307 12,587
12/97 17,453 16,884 17,590 12,801
12/98 18,500 17,740 18,482 13,006
12/99 18,554 17,493 18,224 13,354
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 1999
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
Class A (5/21/87)
With Sales Charge (5.45)% 4.93% 5.75% 6.32%
Without Sales Charge (1.51)% 5.80% 6.19% 6.66%
Class C (4/1/96)
With CDSC (3.42)% n/a n/a 3.66%
Without CDSC (2.45)% n/a n/a 3.66%
Class Y (4/1/96)
No Sales Charge (1.46)% n/a n/a 4.68%
Lehman Index 0.29% 6.24% 6.38% 6.51% (Class A)
0.29% n/a n/a 4.97% (Class C&Y)
Total return figures shown for the Fund reflect any change in price and assume
all distributions within the period were invested in additional shares. Returns
for Class A shares are calculated with and without the effect of the initial 4%
maximum sales charge. Returns for Class C shares are calculated with and without
the effect of the 1% contingent deferred sales charge (CDSC), imposed on
redemptions made within the first 12 months after purchase. Class Y shares are
sold without any sales charge. The rates of return will vary and the principal
value of an investment will fluctuate with market conditions. Shares, if
redeemed, may be worth more or less than their original cost. A portion of each
classes' income may be subject to federal and state income taxes. Past
performance is not predictive of future investment results.
</PAGE>
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The financial markets in 1999 will certainly be remembered for a number of
dramatic events.
One of the most noteworthy events affecting all markets was the absolute
dominance in the equity market of technology stocks - primarily Internet stocks.
There was unparalleled excitement. It seems everyone knows about AOL, Yahoo, and
Dell. Investors who had never participated in the stock market were jumping in
to buy shares in the latest, hottest "dot.com" of the day. It looked like you
couldn't lose. There were many big winners, but there were some losers as well.
Without a doubt, the most anticipated event of the year was the coming of
and preparation for Y2K - the turn of the century. It was feared that all of the
systems controlled by older computers would come to a complete stop at the
stroke of midnight on December 31. Well, the lights stayed on, water faucets
flowed, telephones rang, and airplanes didn't fall from the sky. We survived
Y2K!
As we have seen in each of the last five years, the equity market took
center stage in 1999. The Dow Jones Industrial Average rose nearly 26%, to close
at another record level - approximately 11,500, up from 9,200 at the close of
1998. A broader measure of the stock market, the Standard & Poor's 500 Index
rose 21%. The technology-heavy NASDAQ Composite Index, however, was up nearly
84% from 1998.
The Federal Reserve Bank raised interest rates three times in 1999. There
was continued fear by the Fed that economic growth, a low level of inflation,
and the rise of underlying commodity prices - particularly the price of oil -
would eventually translate into a higher overall national level of inflation.
Oil prices soared in 1999 - up 176%, as producers cut supply to boost prices
from the 12-year low that we saw in 1998. The national unemployment rate dropped
to 4.2% in 1999, versus 4.5% in 1998. However, the two measures of inflation,
the Producer Price Index (PPI) and the Consumer Price Index (CPI), remained
relatively stable, although slightly higher in 1999 at the levels of 3.0% and
2.7%, respectively.
As you will recall, the price of bonds are affected inversely by changes in
interest rates. When interest rates decrease, such as happened in 1998, bond
prices rise. On the other hand, as interest rates increase, such as the case in
1999, bond prices decline.
As a result of the Fed's actions in the year 1999, bond prices declined
considerably. Consequently, the bond markets turned in their worst performance
since 1994, and the second-worst performing year since 1973. In terms of total
return, 30-year long maturity U. S. Treasury securities turned in the worst
performance of all fixed-income investments. Total return of these U.S.
Treasuries fell by 14.8% versus a positive return of 17.1% in 1998. On the other
hand, long-term maturity municipal bonds had a negative return of -6.3%.
As we have pointed out in our letters to you and as a direct result of the
conservative intermediate maturity structure and the overall high quality of the
portfolio, Churchill Tax-Free Fund of Kentucky was, however, among the best
performers of all Kentucky municipal bond mutual funds. With falling interest
rates in 1998, the total rate of return was 5.13% for its Class A shares. With
rising interest rates, defensive actions taken by the Fund made it such that
total return for 1999 was only -1.5%. This kind of performance compared very
favorably with all other comparable fixed-income investments available in the
market.
<PAGE>
</PAGE>
From the standpoint of our shareholders, we have always attempted to
provide a highly dependable amount of actual income from the Fund, regardless of
what happens to bond prices in the marketplace. This we have done consistently
over the years, as well as for 1998 and 1999, in terms of distribution return
for the Fund's investors.
The investment objective of 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 continues to maintain an average credit
quality of "AA". We are proud to have once again earned a [graphic: four stars]
rating from Morningstar, an independent mutual fund rating service. Our
"laddered" maturity structure helps us manage price volatility. The Fund has an
average life of approximately 14.5 years and a duration of 6.3 years. We
maintain a well-diversified portfolio of over 150 different Kentucky issues.
We are forecasting another good year for the economy in 2000. Continued
strong job growth, low inflation, and a high level of consumer confidence should
help the economy to grow. While we are expecting a slightly higher inflation
rate, as measured by the CPI, we are not looking for any dramatic spikes in
inflation anytime in the near future, despite the vagaries of increased oil
prices.
</PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
[Logo of KPMG: four rectangles with the letters KPMG in front of them]
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, 1999, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the 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, 1999, by correspondence with the custodian. 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, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- ------------
New York, New York
February 18, 2000
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT REVENUE BONDS (98.8%) S&P VALUE
</CAPTION>
<S> <C> <C> <C> <C>
STATE AGENCIES (15.7%)
Kentucky Higher Education Student Loan Corporation
Insured Student Loan Revenue,
$ 1,490,000 6.500%, 06/01/02 Aaa/AA- $ 1,542,150
2,955,000 6.800%, 06/01/03 Aaa/AA- 3,099,056
1,915,000 7.100%, 12/01/11 Aaa/AA- 1,991,600
Kentucky Infrastructure Authority Revenue,
1,930,000 5.000%, 06/01/09, MBIA Insured Aaa/AAA 1,893,813
555,000 7.200%, 06/01/11 Aa3/A 581,363
635,000 5.250%, 06/01/12 Aa3/A 621,506
875,000 6.500%, 06/01/12 Aa3/A 914,375
125,000 5.250%, 06/01/14 Aa3/A 118,750
1,110,000 6.375%, 06/01/14, Pre-Refunded Aa3/A 1,201,575
135,000 5.250%, 06/01/15 Aa3/A 126,394
100,000 5.375%, 06/01/17 Aa3/A 93,750
1,500,000 5.375%, 02/01/18 Aa3/A 1,413,750
Kentucky Local Correctional Facilities Construction
Authority Revenue,
5,065,000 5.500%, 11/01/14, FSA Insured Aaa/AAA 4,976,363
Kentucky Area Development
345,000 5.750%, 12/01/27, LOC Fifth Third Bank NR/AA 329,044
145,000 5.600%, 06/01/28, LOC Fifth Third Bank NR/AA 135,394
785,000 5.500%, 06/01/28, LOC Fifth Third Bank NR/AA 722,200
Kentucky Rural Economic Development Authority
3,110,000 7.250%, 06/01/17, LOC Bank One NR/AA 3,249,950
Kentucky State Properties and Buildings
Commission Revenue,
3,000,000 6.250%, 09/01/07 Aaa/AAA 3,217,500
4,510,000 6.625%, 10/01/07, Pre-Refunded NR/AAA 4,752,413
365,000 7.000%, 02/01/06, Pre-Refunded NR/AAA 381,706
220,000 6.000%, 09/01/08 Aa3/A+ 231,550
500,000 5.500%, 11/01/09, AMBAC Insured Aaa/AAA 508,125
1,000,000 6.500%, 08/01/11, Pre-Refunded Aaa/AAA 1,048,750
400,000 5.000%, 09/01/13 Aa3/A+ 373,500
Puerto Rico Public Buildings Authority,
1,000,000 6.875%, 07/01/12, Pre-Refunded Aaa/AAA 1,071,250
34,595,827
</PAGE>
<PAGE>
COUNTY AGENCIES (11.6%)
Clark County Kentucky Public Properties
Corp. Revenue,
1,120,000 6.700%, 06/01/16, Pre-Refunded A/NR 1,162,000
Floyd County Public Property, Courthouse Revenue,
510,000 5.500%, 09/01/14 NR/A 508,725
Jefferson County Kentucky Capital Projects,
1,000,000 5.200%, 06/01/08, MBIA Insured Aaa/AAA 1,003,750
420,000 5.250%, 06/01/14, MBIA Insured Aaa/AAA 403,200
1,620,000 5.375%, 06/01/18, MBIA Insured Aaa/AAA 1,518,750
1,640,000 5.375%, 06/01/22, MBIA Insured Aaa/AAA 1,521,100
5,900,000 5.500%, 06/01/28, MBIA Insured Aaa/AAA 5,435,375
Kenton County Kentucky Public Property
County Courthouse
455,000 5.000%, 03/01/14 A1/NR 415,187
250,000 5.000%, 03/01/15 A1/NR 225,937
Lincoln County Kentucky Public Properties Corp.,
430,000 6.500%, 03/01/22 NR/NR* 449,350
Muhlenberg County Kentucky Industrial
Development Revenue,
1,500,000 7.000%, 09/01/01 NR/A 1,545,000
Pendleton County Kentucky Multi-County
Lease Revenue,
500,000 7.300%, 03/01/02 NR/AA 514,375
570,000 7.550%, 03/01/10 NR/AA 592,920
4,500,000 6.500%, 03/01/19 NR/A 4,612,500
3,000,000 6.400%, 03/01/19 NR/A 3,108,750
Warren County Kentucky Justice,
2,875,000 5.350%, 09/01/29, MBIA Insured Aaa/NR 2,605,469
25,622,388
</PAGE>
<PAGE>
CITY/MUNICIPAL OBLIGATIONS (9.2%)
Danville Kentucky Multi-City Lease Revenue,
545,000 5.000%, 09/01/11 NR/NR* 517,069
Jeffersontown Kentucky Public Project Corp. Revenue,
500,000 5.750%, 11/01/15 A/NR 498,125
Kentucky League Cities Funding Trust COP,
700,000 5.900%, 08/01/16, (Owensboro) NR/A 712,250
1,715,000 6.200%, 08/01/17, (Covington) NR/A+ 1,777,169
Louisville Kentucky Public Properties Corp.,
4,090,000 6.700%, 12/01/20, Pre-Refunded A/A- 4,386,525
Mount Sterling Kentucky Lease Revenue,
1,920,000 6.150%, 03/01/13 Aa/NR 1,984,800
7,000,000 6.200%, 03/01/18 Aa/NR 7,157,500
Munfordville Kentucky Industrial Development Revenue
2,500,000 7.000%, 06/01/19, LOC Bank One NR/AA 2,640,625
Richmond Kentucky District Court Facility Revenue
740,000 5.300%, 02/01/25 A3/NR 671,550
20,345,613
UTILITIES (6.0%)
Carrolton & Henderson Kentucky Gas Revenue,
1,000,000 5.000%, 01/01/07, FSA Insured Aaa/AAA 971,250
Carrolton & Henderson Kentucky Gas Revenue,
1,750,000 5.000%, 01/01/09, FSA Insured Aaa/AAA 1,673,437
Hardin County, Kentucky Water District
1,000,000 5.900%, 01/01/25, MBIA Insured Aaa/AAA 986,250
Henderson County Kentucky Water District,
Waterworks Revenue,
190,000 5.600%, 09/01/21 NR/NR* 174,325
Lebanon Kentucky Waterworks Revenue,
250,000 7.500%, 04/01/16, Pre-Refunded NR/NR* 263,438
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue,
1,000,000 5.000%, 05/15/12, MBIA Insured Aaa/AAA 952,500
250,000 5.000%, 05/15/13, MBIA Insured Aaa/AAA 233,125
</PAGE>
<PAGE>
Louisville and Jefferson County Kentucky
Metropolitan Sewer District Revenue (continued)
230,000 5.000%, 12/01/14, MBIA Insured Aaa/AAA 211,025
2,000,000 5.300%, 05/15/19, MBIA Insured Aaa/AAA 1,840,000
4,070,000 5.500%, 05/15/23, MBIA Insured Aaa/AAA 3,835,975
1,525,000 6.500%, 05/15/24, MBIA Insured, Pre-Refunded Aaa/AAA 1,660,344
Muhlenberg County Kentucky Water District,
Waterworks Revenue,
100,000 5.500%, 01/01/12, AMBAC Insured Aaa/NR 100,250
110,000 5.500%, 01/01/13, AMBAC Insured Aaa/NR 109,038
115,000 5.600%, 01/01/14, AMBAC Insured Aaa/NR 113,706
North Nelson County Kentucky, Water Revenue
205,000 5.200%, 01/01/20 NR/NR* 182,194
13,306,857
POLLUTION CONTROL REVENUE (9.5%)
Ashland Kentucky Pollution Control Revenue,
(Ashland Oil)
3,000,000 6.650%, 08/01/09 Baa2/NR 3,112,500
Boone County Kentucky Pollution Control,
(Dayton Power & Light)
4,000,000 6.500%, 11/15/22 Aa3/AA- 4,130,000
Boone County Kentucky Pollution Control, (Cinergy)
750,000 5.500%, 01/01/24, MBIA Insured Aaa/AAA 705,000
Carroll County Kentucky Pollution Control Revenue,
(LG&E Energy)
3,500,000 7.450%, 09/15/16 Aa2/AA- 3,766,875
2,910,000 6.250%, 02/01/18 Aa2/AA- 2,939,100
Jefferson County Kentucky Pollution Control Revenue,
(LG&E Energy)
3,800,000 5.900%, 04/15/23 Aa2/AA 3,681,250
Wickliffe Kentucky Pollution Control, (Westvaco)
2,605,000 6.200%, 04/01/07 A1/A 2,607,970
100,000 6.375%, 04/01/26 A1/A 98,625
21,041,320
</PAGE>
<PAGE>
TRANSPORTATION (7.1%)
Kenton County Kentucky Airport Board
Airport Revenue,
4,740,000 6.300%, 03/01/15, FSA Insured Aaa/AAA 4,846,650
Kentucky Interlocal School Transportation Authority
150,000 5.100%, 03/01/05 NR/A 149,813
145,000 5.400%, 06/01/17 NR/A 138,294
200,000 6.000%, 12/01/20 NR/A 200,500
300,000 5.800%, 12/01/20 NR/A 292,125
400,000 6.000%, 12/01/20 NR/A 401,000
400,000 5.650%, 12/01/20 NR/A 381,500
350,000 5.600%, 12/01/20 NR/A 331,625
Kentucky State Turnpike Authority Economic
Development Road Revenue,
120,000 8.500%, 07/01/06 A1/A+ 142,350
1,000,000 6.500%, 07/01/08, AMBAC Insured Aaa/AAA 1,092,500
3,505,000 5.625%, 07/01/15, AMBAC Insured Aaa/AAA 3,478,713
Puerto Rico Commonwealth Highway & Transportation
Authority Highway Revenue,
4,000,000 6.625%, 07/01/12, Pre-Refunded Baa1/A 4,250,000
15,705,070
HOSPITALS (9.6%)
Floyd County Kentucky Hospital Revenue,
235,000 7.500%, 08/01/10, FHA Insured NR/AAA 244,374
Hopkins County Kentucky Hospital Revenue,
1,000,000 6.625%, 11/15/11, MBIA Insured Aaa/AAA 1,043,750
Jefferson County Kentucky Health Facilities Revenue,
1,500,000 5.650%, 01/01/17, AMBAC Insured Aaa/AAA 1,449,375
100,000 5.700%, 01/01/21, AMBAC Insured Aaa/AAA 96,375
1,150,000 6.550%, 05/01/22, AMBAC Insured Aaa/AAA 1,206,062
230,000 5.750%, 01/01/26, AMBAC Insured Aaa/AAA 218,787
Kentucky Development Finance Authority
Hospital Revenue,
750,000 7.000%, 09/01/06, Pre-Refunded NR/NR* 793,125
</PAGE>
<PAGE>
Kentucky Development Finance Authority
Hospital Revenue (continued)
3,000,000 6.500%, 11/01/07, Pre-Refunded A1/A+ 3,157,500
420,000 5.250%, 02/01/09, FSA Insured Aaa/AAA 416,850
1,000,000 5.700%, 10/01/10, ACA Insured NR/A 987,500
2,150,000 6.750%, 11/01/12, Pre-Refunded A1/A+ 2,273,625
1,375,000 6.125%, 02/01/12, FSA Insured, (Kingsdaughters) Aaa/AAA 1,430,000
2,590,000 5.000%, 08/15/15, MBIA Insured Aaa/AAA 2,331,000
3,000,000 5.900%, 12/01/15, FGIC Insured Aaa/AAA 3,007,500
1,000,000 5.850%, 10/01/17, ACA Insured NR/A 928,750
1,990,000 5.000%, 08/15/24, MBIA Insured Aaa/AAA 1,684,037
21,268,610
HOUSING (16.4%)
Greater Kentucky Housing Assistance Corp.
Multi-Family Housing Revenue,
320,000 6.300%, 07/01/15 Aaa/NR 326,800
2,025,000 6.050%, 07/01/22 Aaa/AAA 2,030,062
275,000 6.400%, 07/01/23 Aaa/NR 281,187
Jefferson County Kentucky Multi-Family Revenue,
1,530,000 5.750%, 06/01/23, (Taylorsville Road Project) NR/AA 1,560,600
Jefferson County Kentucky Multi-Family Revenue,
1,200,000 5.650%, 08/20/34 (Kentucky Towers Project) Aaa/AAA 1,131,000
Kenton County Kentucky Industrial Development
1,000,000 6.125%, 12/01/17, FHA Insured Aa/NR 978,750
Kenton County Kentucky Industrial Development,
300,000 6.950%, 12/01/26 Aa/NR 313,125
Kentucky Housing Corporation Housing Revenue,
255,000 7.750%, 01/01/07 Aaa/AAA 261,780
1,000,000 6.500%, 01/01/07 Aaa/AAA 1,031,250
200,000 7.250%, 01/01/09 Aaa/AAA 204,500
980,000 7.125%, 01/01/10 Aaa/AAA 1,013,075
725,000 5.300%, 07/01/10 Aaa/AAA 716,844
4,975,000 6.600%, 07/01/11 Aaa/AAA 5,111,812
230,000 5.400%, 07/01/14 Aaa/AAA 222,812
</PAGE>
<PAGE>
750,000 6.250%, 07/01/15 Aaa/AAA 760,312
315,000 6.100%, 07/01/16 Aaa/AAA 316,181
1,270,000 6.400%, 01/01/17 Aaa/AAA 1,298,575
3,445,000 5.300%, 07/01/18 Aaa/AAA 3,160,787
1,065,000 5.550%, 07/01/18 Aaa/AAA 1,006,425
1,450,000 5.800%, 01/01/19 Aaa/AAA 1,428,250
240,000 7.900%, 01/01/21 Aaa/AAA 235,764
80,000 8.100%, 01/01/22 Aaa/AAA 82,121
1,400,000 7.450%, 01/01/23 Aaa/AAA 1,443,750
275,000 5.850%, 07/01/27 Aaa/AAA 261,594
6,900,000 6.300%, 01/01/28 Aaa/AAA 6,917,250
3,120,000 6.375%, 07/01/28 Aaa/AAA 3,139,500
1,000,000 6.250%, 07/01/28 Aaa/AAA 997,500
36,231,606
SCHOOLS (10.3%)
Boone County Kentucky School District Finance
Corp. School Building Revenue,
1,750,000 6.750%, 09/01/09, Pre-Refunded Aa3/A 1,859,375
2,250,000 6.125%, 12/01/17, Pre-Refunded Aa3/NR 2,373,750
2,295,000 5.700%, 05/01/18 Aa3/NR 2,251,969
Boyd County Kentucky School District Finance Corp.,
575,000 5.375%, 10/01/17 Aa3/NR 545,531
Christian County Kentucky School District
Finance Corp.,
500,000 5.000%, 06/01/09 Aa3/NR 485,625
Fayette County School Building Revenue,
160,000 5.350%, 01/01/14 Aa3/A+ 154,000
1,780,000 5.700%, 12/01/16 Aa3/A+ 1,766,650
Floyd County Kentucky School Building Revenue
250,000 5.000%, 12/01/09 Aa3/NR 242,500
Garrard County Kentucky School Building Revenue,
100,000 5.900%, 06/01/15 Aa3/NR 100,750
160,000 5.900%, 06/01/16 Aa3/NR 159,600
Grayson County Kentucky School Building Revenue,
1,940,000 6.000%, 01/01/15 Aa3/NR 1,971,525
Hazard Kentucky Independent School District
Finance Corp.,
555,000 5.300%, 09/01/22 Aa3/NR 511,294
Jefferson County Kentucky School District Finance
Corp. School Building Revenue,
370,000 6.200%, 01/01/06, MBIA Insured Aaa/AAA 388,812
100,000 5.250%, 07/01/09 Aaa/AAA 100,000
500,000 5.875%, 01/01/11 Aa3/A+ 519,375
695,000 5.125%, 11/01/14, FSA Insured Aaa/AAA 652,431
Kenton County Kentucky School District Finance
Corp. School Building Revenue,
100,000 5.250%, 03/01/06 Aa3/A+ 100,750
Lexington-Fayette Urban County Government
Project U.K. Library
725,000 5.000%, 11/01/15, MBIA Insured Aaa/AAA 651,594
Meade County Kentucky School District Finance Corp.,
400,000 5.700%, 07/01/15 Aa3/NR 404,000
500,000 6.000%, 07/01/16 Aa3/NR 514,375
Middlesboro Kentucky Independent School District
Finance Corp.
100,000 6.100%, 08/01/16 Aa3/NR 102,250
Nelson County Kentucky School Building Revenue,
1,820,000 5.750%, 04/01/15 Aa3/NR 1,815,450
Pike County Kentucky School District Finance
Corp. School Building Revenue,
720,000 7.000%, 12/01/09, Pre-Refunded Aa3/A 759,161
Rowan County Kentucky School District Finance Corp.
215,000 5.600%, 06/01/16 Aa3/NR 211,238
Scott County Kentucky School Building Revenue,
2,750,000 5.900%, 06/01/18 Aa3/NR 2,743,125
Taylor County Kentucky School Building Revenue,
280,000 6.000%, 08/01/16 Aa3/NR 284,900
Todd County Kentucky School Building Revenue,
980,000 6.300%, 10/01/14, Pre-Refunded Aa3/A 1,055,950
</PAGE>
<PAGE>
22,725,980
TEMPORARY INVESTMENTS IN SHORT-TERM
MUNICIPAL SECURITIES (3.4%)
Georgetown Kentucky Edl Instn Imp,
1,200,000 5.550%, 06/01/04 +, LOC Fifth/Third Bank A1/NR 1,200,000
Jefferson County Kentucky Retirement,
1,000,000 5.500%, 10/01/19 + NR/NR* 1,000,000
Kentucky Economic Development,
4,600,000 5.400%, 01/01/22 + Aaa/NR 4,600,000
Louisville & Jefferson County,
500,000 5.600%, 06/30/02 + M1G1/NR 500,000
Louisville Kentucky Indl,
250,000 5.550%, 09/01/01 +, LOC National City Bank NR/NR* 250,000
7,550,000
Total Investments (cost $217,319,572**) 98.8% 218,393,271
Other assets in excess of liabilities 1.2 2,726,392
Net Assets 100.0% 221,119,663
</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.
+ The security has a maturity of more than one year, but has
variable rate and demand features which qualify it as a
short-term security. The rate disclosed is that currently
in effect. This rate changes periodically based on market
conditions or a specified market index.
PORTFOLIO ABBREVIATIONS:
ACA - American Capital Access
AMBAC - American Municipal Bond Assurance Corp.
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Administration
FSA - Financial Security Assurance
MBIA - Municipal Bond Investors Assurance Corp.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C>
ASSETS
Investments at value (cost $217,319,572) $ 218,393,271
Interest receivable 3,737,436
Receivable for investment securities sold 570,000
Receivable for Fund shares sold 15,727
Other assets 900
Total assets 222,717,334
LIABILITIES
Payable for Fund shares redeemed 689,100
Cash overdraft 442,982
Dividends payable 290,032
Distribution fees payable 84,075
Management fee payable 12,150
Accrued expenses 79,332
Total liabilities 1,597,671
NET ASSETS $ 221,119,663
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 219,163
Additional paid-in capital 221,904,674
Accumulated net realized loss on investments (2,077,873)
Net unrealized appreciation on investments 1,073,699
$ 221,119,663
CLASS A
Net Assets $ 205,842,354
Capital shares outstanding 20,402,687
Net asset value and redemption price per share $ 10.09
Offering price per share (100/96 of $10.09 adjusted to nearest cent) $ 10.51
CLASS C
Net Assets $ 1,931,723
Capital shares outstanding $ 191,549
Net asset value and offering price per share $ 10.08
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) $ 10.08*
CLASS Y
Net Assets $ 13,345,586
Capital shares outstanding $ 1,322,022
Net asset value, offering and redemption price per share $ 10.09
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 13,460,227
Expenses:
Management fee (note 3) $ 949,606
Distribution and service fees (note 3) 346,812
Transfer and shareholder servicing agent fees 134,210
Trustees' fees and expenses (note 8) 76,080
Legal fees 53,029
Shareholders' reports and proxy statements 45,616
Audit and accounting fees 26,750
Custodian fees 22,519
Registration fees and dues 17,408
Insurance 10,455
Miscellaneous 23,228
1,705,713
Expenses paid indirectly (note 7) (22,519)
Net expenses 1,683,194
Net investment income 11,777,033
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss from securities transactions (2,077,873)
Change in unrealized depreciation on investments (13,367,712)
Net realized and unrealized loss on investments (15,445,585)
Net decrease in net assets resulting from operations $ (3,668,552)
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
</CAPTION>
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 11,777,033 $ 11,773,350
Net realized gain (loss) from securities transactions (2,077,873) 865,993
Change in unrealized depreciation on investments (13,367,712) (513,405)
Change in net assets from operations (3,668,552) 12,125,938
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income (11,098,723) (11,135,477)
Net realized gain on investments (712,904) (207,578)
Class C Shares:
Net investment income (61,991) (35,988)
Net realized gain on investments (6,285) (671)
Class Y Shares:
Net investment income (754,212) (610,932)
Net realized gain on investments (46,239) (11,388)
Change in net assets from distributions (12,680,354) (12,002,034)
CAPITAL SHARE TRANSACTIONS (NOTE 9):
Proceeds from shares sold 22,053,760 28,425,496
Reinvested dividends and distributions 6,456,809 6,370,081
Cost of shares redeemed (35,993,090) (26,247,691)
Change in net assets from capital share transactions (7,482,521) 8,547,886
Change in net assets (23,831,427) 8,671,790
NET ASSETS:
Beginning of period 244,951,090 236,279,300
End of period $ 221,119,663 $ 244,951,090
</TABLE>
See accompanying notes to financial statements.
</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 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 December 31, 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-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, 1999, the Fund incurred fees for advisory
and administrative services of $949,606.
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, 1999, service fees on Class A Shares amounted to
$331,919, of which the Distributor received $7,455.
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, 1999, amounted to $11,170. 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, 1999, amounted to $3,723. The total of these payments with
respect to Class C Shares amounted to $14,893, of which the Distributor received
$7,616.
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, 1999, the Distributor received commissions of $21,878 on sales of Class A
Shares.
</PAGE>
<PAGE>
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1999, purchases of securities and
proceeds from the sales of securities aggregated $14,772,849 and $29,119,782,
respectively.
At December 31, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted to
$4,904,931 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value amounted to $3,831,232
for a net unrealized appreciation of $1,073,699.
At December 31, 1999, the Fund has a capital loss carryover of $1,820,125
which expires on December 31, 2007. This carryover is available to offset future
net realized gains on securities transactions to the extent provided for in the
Internal Revenue Code. To the extent that this loss is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed.
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, in cash,
or in a combination of both, 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. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were nine Trustees, two of whom are affiliated
with the Manager and are not paid any trustee fees. Trustees' fees paid during
the year were at the average annual rate of $6,150 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, 1999 such reimbursements averaged
approximately $3,800 per Trustee.
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES:
Proceeds from shares sold 1,525,380 $ 16,084,824 2,030,723 $ 21,961,981
Reinvested distributions 607,660 6,362,827 584,567 6,317,336
Cost of shares redeemed (2,966,462) (31,041,782) (2,330,285) (25,200,489)
Net change (833,422) (8,594,131) 285,005 3,078,828
CLASS C SHARES:
Proceeds from shares sold 119,878 1,262,958 29,609 319,908
Reinvested distributions 4,864 50,548 2,314 25,002
Cost of shares redeemed (21,003) (217,677) (22,308) (240,974)
Net change 103,739 1,095,829 9,615 103,936
CLASS Y SHARES:
Proceeds from shares sold 439,346 4,705,978 568,483 6,143,607
Reinvested distributions 4,179 43,434 2,555 27,743
Cost of shares redeemed (446,192) (4,733,631) (74,568) (806,228)
Net change (2,667) 15,781 496,470 5,365,122
Total transactions in Fund
shares (732,350) $ (7,482,521) 791,090 $ 8,547,886
</PAGE>
<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,
</CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.81 $10.81 $10.55 $10.71 $9.97
Income from Investment Operations:
Net investment income 0.52 0.53 0.55 0.55 0.60
Net gain (loss) on securities (both realized
and unrealized) (0.68) 0.01 0.27 (0.12) 0.74
Total from Investment Operations (0.16) 0.54 0.82 0.43 1.34
Less Distributions (note 6):
Dividends from net investment income (0.53) (0.53) (0.55) (0.59) (0.60)
Distributions from capital gains (0.03) (0.01) (0.01) - -
Total Distributions (0.56) (0.54) (0.56) (0.59) (0.60)
Net Asset Value, End of Period $10.09 $10.81 $10.81 $10.55 $10.71
Total Return (not reflecting sales charge)(%) (1.51) 5.13 8.08 4.17 13.75
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 205,842 229,667 226,477 222,889 230,270
Ratio of Expenses to Average Net Assets (%) 0.72 0.73 0.73 0.75 0.80
Ratio of Net Investment Income to Average
Net Assets (%) 4.95 4.89 5.19 5.22 5.74
Portfolio Turnover Rate (%) 6.35 12.79 22.39 8.94 17.09
The expense ratios after giving effect to the expense offset for uninvested
cash balances were:
Ratio of Expenses to Average Net Assets (%) 0.71 0.72 0.72 0.74 0.79
</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.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C(1) CLASS Y(1)
PERIOD(2) PERIOD(2)
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED
1999 1998 1997 DEC. 31, 1996 1999 1998 1997 DEC. 31, 1996
<S> <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 0.43 0.44 0.46 0.37 0.53 0.54 0.56 0.43
Net gain on securities (both
realized and unrealized) (0.69) 0.01 0.27 0.11 (0.69) 0.02 0.29 0.11
Total from Investment Operations (0.26) 0.45 0.73 0.48 (0.16) 0.56 0.85 0.54
Less Distributions (note 6):
Dividends from net investment
income (0.44) (0.44) (0.46) (0.40) (0.54) (0.55) (0.57) (0.46)
Distributions from capital gains (0.03) (0.01) (0.01) - (0.03) (0.01) (0.01) -
Total Distributions (0.47) (0.45) (0.47) (0.40) (0.57) (0.56) (0.58) (0.46)
Net Asset Value, End of Period $10.08 $10.81 $10.81 $10.55 $10.09 $10.82 $10.82 $10.55
Total Return (not reflecting sales
charge)(%) (2.45) 4.24 7.16 4.72+ (1.46) 5.26 8.34 5.24+
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 1,932 949 845 433 13,346 14,335 8,957 5,823
Ratio of Expenses to Average Net
Assets (%) 1.56 1.59 1.57 1.56* 0.57 0.58 0.57 0.58*
Ratio of Net Investment Income to
Average Net Assets (%) 4.09 4.04 4.30 4.34* 5.09 5.03 5.31 5.41*
Portfolio Turnover Rate (%) 6.35 12.79 22.39 8.94 6.35 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 (%) 1.55 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.
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<PAGE>
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a requirement of the
Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED.
For the fiscal year ended December 31, 1999, $11,777,033 of dividends paid
by Churchill Tax-Free Fund of Kentucky, constituting 92.88% of total dividends
paid during fiscal 1999, were exempt-interest dividends; $765,416 of dividends
paid, constituting 6.04% of total dividends paid during fiscal 1999, were
capital gain dividends; and the balance was ordinary dividend income.
Prior to January 31, 2000, shareholders were mailed IRS Form 1099-DIV which
contained information on the status of distributions paid for the 1999 CALENDAR
YEAR.
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