UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-5086
Churchill Tax-Free Trust
(Exact name of Registrant as specified in charter)
380 Madison Avenue
New York, New York 10017
(Address of principal executive offices) (Zip code)
Joseph P. DiMaggio
380 Madison Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 697-6666
Date of fiscal year end: 12/31
Date of reporting period: 12/31/03
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
[Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a
circle]
SERVING KENTUCKY INVESTORS FOR MORE THAN 15 YEARS
CHURCHILL TAX-FREE FUND OF KENTUCKY
ANNUAL REPORT
MANAGEMENT DISCUSSION
2003 was a year in which both bonds and stocks prospered - a phenomenon not
seen too often. Last year saw the equity market finally rise out of the doldrums
and produce positive 12-month returns. The Federal Reserve maintained
historically low short-term interest rates at levels not seen in over 40 years.
And, as we begin 2004, it too promises to be just as eventful: the United States
continues postwar operations in Iraq; Libya and North Korea have both discussed
dismantling their state-run nuclear programs; the planet Mars currently has two
"visitors" from Earth exploring its surface; and the battle for the White House
begins in earnest, with the presidential election coming in November.
Last year, inflation again remained in check. As measured by the Producer
Price Index (PPI), inflation rose 4.0%. The "Core PPI" (PPI minus food and
energy costs) rose only 1.0% in 2003. The "Core CPI" (CPI minus food and energy)
rose only 1.1%, the lowest increase since the 1960's. The Consumer Price Index
(CPI) rose 1.9% in 2003. The best overall measure of the nation's economic
health - the Gross Domestic Product (GDP) is expected to have risen
approximately 4.6% in 2003, versus 2.4% in 2002. The Federal Reserve continued
to keep interest rates at historical lows, hoping to spur an economic recovery.
The national unemployment rate has recently shown signs of turning around, based
on a December 2003 unemployment rate of 5.7% vs. levels in excess of 6.0%
earlier in the year.
2003 marked the first time in four years that stocks provided investors
with positive year-end results. The Dow Jones Industrial Average rose 28.29%
last year. Other measures of equity performance fared even better: the S & P 500
closed up 28.68%; and the NASDAQ Composite Index soared 50.77%! We are proud to
report that Churchill Tax-Free Fund of Kentucky provided Class A shareholders
with a positive total rate of return of 4.50% in 2003.
Individual states - Kentucky included - have not been able to avoid the
effects of the sustained slowdown in the national economy. Budget deficits are
being forecasted in nearly all fifty states for 2004 and 2005. While not nearly
as massive as other states, Kentucky's economic challenges are formidable. With
the first Republican administration in Frankfort since Louie Nunn, the pressure
will be on first-term Governor Fletcher to return the Commonwealth to the
prosperity "to which we have become accustomed". Budget cuts with no tax
increases will certainly be stressful on the citizens of Kentucky. In light of
the state's overall weaker economy, we should expect to see "lighter" new bond
issuance. As long as interest rates remain low, we can, however, expect to see
municipalities refinancing their higher-cost debt. In the meantime, demand for
quality Kentucky tax-free bonds remains strong.
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. We seek to continually, and successfully,
address this objective by adhering to a discipline of solid fundamental,
conservative portfolio management ideals. The Fund continues to maintain an
average credit quality of "AA", with no bonds rated less than "A". Our
"laddered" maturity structure helps us manage price volatility. The Fund has an
average life of approximately 14.0 years and a duration of approximately 5.0
years. We maintain a well-diversified portfolio of over 180 different Kentucky
issues.
We are optimistic about the prospects for the U.S. economy in 2004, and
will continue to watch for any signs of rising inflation. It is going to take
continued vigilance by the Federal Reserve to revive and re-energize our economy
without driving up interest rates over the course of 2004. To address these
concerns, we will seek to "stay the course" and manage the portfolio by taking
advantage of opportunities in the Kentucky marketplace that are consistent with
the investment objectives of the Fund.
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, 2003 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:]
Lehman Brothers
Quality Intermediate Fund's Class A Shares
Municipal Bond Index With Sales Charge Without Sales Charge Cost of Living Index
$10,000 $ 9,600 $10,000 $10,000
$ 9,727 $ 9,274 $ 9,664 $10,267
$11,069 $10,528 $10,971 $10,528
$11,541 $11,007 $11,470 $10,878
$12,386 $11,873 $12,372 $11,063
$13,129 $12,475 $13,000 $11,241
$13,167 $12,287 $12,804 $11,543
$14,303 $13,312 $13,872 $11,934
$15,092 $13,850 $14,433 $12,119
$16,485 $14,924 $15,552 $12,407
$17,250 $15,684 $16,344 $12,641
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 2003
---------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A (5/21/87)
With Sales Charge ................ 0.36% 3.81% 4.60% 6.32%
Without Sales Charge ............. 4.50% 4.66% 5.04% 6.58%
Class C (4/1/96)
With CDSC ........................ 2.62% 3.77% n/a 4.51%
Without CDSC ..................... 3.62% 3.77% n/a 4.51%
Class Y (4/1/96)
No Sales Charge .................. 4.65% 4.81% n/a 5.53%
Class I (8/6/01)
No Sales Charge .................. 4.33% n/a n/a 5.34%
Lehman Index ........................ 4.64% 5.61% 5.60% 6.56% (Class A)
4.64% 5.61% n/a 5.92% (Class C&Y)
4.64% n/a n/a 6.16% (Class I)
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 I and 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.
[Logo of KPMG LLP: four solid rectangles with the letters KPMG in front of them]
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, 2003, 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 auditing standards generally
accepted in the United States of America. 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 and financial highlights. Our procedures
included confirmation of securities owned as of December 31, 2003, by
correspondence with the custodian. As to securities sold but not yet 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, 2003, 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 accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
February 13, 2004
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF INVESTMENTS
DECEMBER 31, 2003
RATING
FACE MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (1.3%) S&P VALUE
- ---------- ------------------------------------------------------ -------- ------------
Bowling Green, Kentucky
$ 200,000 5.300%, 06/01/18 .................................. Aa3/NR $ 217,500
Lexington-Fayette Urban County, Kentucky
Government Project Unlimited Tax
125,000 5.000%, 12/01/15 .................................. Aa2/AA+ 135,313
340,000 5.150%, 12/01/17 .................................. Aa2/AA+ 366,775
Louisville, Kentucky Unlimited Tax
2,205,000 5.000%, 10/01/21 FGIC Insured ..................... Aaa/AAA 2,315,250
Warren County, Kentucky Judicial Unlimited Tax
345,000 5.100%, 09/01/17 AMBAC Insured .................... Aaa/NR 373,463
365,000 5.150%, 09/01/18 AMBAC Insured .................... Aaa/NR 393,744
------------
Total General Obligation Bonds ................. 3,802,045
------------
REVENUE BONDS (97.0%)
------------------------------------------------------
STATE AGENCIES (35.6%)
------------------------------------------------------
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank ................ NR/AA 513,125
Kentucky Infrastructure Authority
1,000,000 5.250%, 06/01/12 .................................. Aa3/A+ 1,118,750
635,000 5.250%, 06/01/12 .................................. Aa3/A+ 691,356
2,740,000 5.250%, 06/01/14 .................................. Aa3/A+ 3,037,975
1,500,000 5.375%, 02/01/18 .................................. NR/A- 1,519,515
Kentucky Local Correctional Facilities Construction
Authority
6,355,000 5.500%, 11/01/14 FSA Insured ...................... Aaa/AAA 6,691,497
Kentucky Rural Economic Development Authority
3,110,000 7.250%, 06/01/17 LOC Bank One AMT ................. NR/A+ 3,169,557
Kentucky State Property and Buildings Commission
3,000,000 6.250%, 09/01/07 MBIA Insured ..................... Aaa/AAA 3,442,500
220,000 6.000%, 09/01/08 .................................. Aa3/A+ 253,825
500,000 5.500%, 11/01/09 AMBAC Insured .................... Aaa/AAA 543,750
4,000,000 5.375%, 02/01/14 FSA Insured ...................... Aaa/AAA 4,550,000
400,000 5.250%, 10/01/14 .................................. Aa3/A+ 442,500
3,250,000 5.625%, 09/01/15 .................................. Aa3/A+ 3,688,750
460,000 5.125%, 09/01/15 .................................. Aa3/A+ 501,400
Kentucky State Property and Buildings Commission
(continued)
$ 100,000 5.375%, 05/01/16 MBIA Insured ..................... Aaa/AAA $ 110,375
6,500,000 5.375%, 08/01/16 FSA Insured ...................... Aaa/AAA 7,239,375
3,905,000 5.125%, 09/01/16 .................................. Aa3/A+ 4,212,519
5,000,000 5.250%, 10/01/16 .................................. Aa3/A+ 5,462,500
1,100,000 5.000%, 11/01/16 AMBAC Insured .................... Aaa/AAA 1,203,125
1,265,000 5.250%, 08/01/17 MBIA Insured ..................... Aaa/AAA 1,400,988
1,150,000 5.000%, 08/01/17 FSA Insured ...................... Aaa/AAA 1,227,625
8,155,000 5.125%, 09/01/17 .................................. Aa3/A+ 8,766,625
200,000 5.375%, 10/01/17 MBIA Insured ..................... Aaa/AAA 221,750
4,735,000 5.250%, 10/01/17 .................................. Aa3/A+ 5,155,231
975,000 5.500%, 11/01/17 FSA Insured ...................... Aaa/AAA 1,101,750
1,000,000 5.000%, 11/01/17 AMBAC Insured .................... Aaa/AAA 1,085,000
165,000 5.375%, 02/01/18 FSA Insured ...................... Aaa/AAA 182,325
3,030,000 5.000%, 08/01/18 FSA Insured ...................... Aaa/AAA 3,215,587
3,950,000 5.125%, 09/01/18 .................................. Aa3/A+ 4,221,563
6,000,000 5.250%, 10/01/18 .................................. Aa3/A+ 6,487,500
145,000 5.100%, 11/01/18 .................................. Aa3/A+ 154,425
1,040,000 5.000%, 08/01/19 FSA Insured ...................... Aaa/AAA 1,097,200
4,000,000 5.375%, 10/01/19 MBIA Insured ..................... Aaa/AAA 4,395,000
1,925,000 5.000%, 10/01/19 .................................. Aa3/A+ 2,023,656
360,000 5.000%, 10/01/19 MBIA Insured ..................... Aaa/AAA 380,250
705,000 5.150%, 11/01/19 FSA Insured ...................... Aaa/AAA 756,994
3,000,000 5.000%, 11/01/19 FSA Insured ...................... Aaa/AAA 3,187,500
2,000,000 5.750%, 05/01/20 MBIA Insured ..................... Aaa/AAA 2,340,000
250,000 5.000%, 05/01/20 FSA Insured ...................... Aaa/AAA 262,187
160,000 5.000%, 10/01/20 MBIA Insured ..................... Aaa/AAA 168,200
200,000 5.100%, 10/01/21 MBIA Insured ..................... Aaa/AAA 210,500
205,000 5.150%, 02/01/22 FSA Insured ...................... Aaa/AAA 215,506
5,000,000 5.000%, 10/01/22 MBIA Insured ..................... Aaa/AAA 5,243,750
265,000 5.000%, 08/01/23 MBIA Insured ..................... Aaa/AAA 276,263
------------
102,169,769
------------
COUNTY AGENCIES (8.7%)
------------------------------------------------------
Floyd County, Kentucky Public Property Courthouse
510,000 5.500%, 09/01/14 Pre-Refunded ..................... NR/NR* 562,275
Jefferson County, Kentucky Capital Projects
$1,000,000 5.200%, 06/01/08 MBIA Insured ..................... Aaa/AAA $ 1,112,500
430,000 5.200%, 06/01/12 MBIA Insured ..................... Aaa/AAA 472,463
570,000 5.250%, 06/01/13 MBIA Insured ..................... Aaa/AAA 623,437
520,000 5.250%, 06/01/14 MBIA Insured ..................... Aaa/AAA 566,800
3,370,000 5.375%, 06/01/18 MBIA Insured ..................... Aaa/AAA 3,648,025
1,640,000 5.375%, 06/01/22 MBIA Insured ..................... Aaa/AAA 1,750,700
5,935,000 5.500%, 06/01/28 MBIA Insured ..................... Aaa/AAA 6,328,194
Pendleton County, Kentucky Multi-County
Lease Revenue
4,500,000 6.500%, 03/01/19 .................................. NR/A 4,582,530
Warren County, Kentucky Justice Center
1,580,000 5.250%, 09/01/17 MBIA Insured ..................... Aaa/AAA 1,716,275
Warren County, Kentucky Justice Center Expansion
Corp. Revenue
700,000 5.400%, 09/01/24 .................................. Aa3/NR 747,250
2,875,000 5.350%, 09/01/29 MBIA Insured ..................... Aaa/AAA 3,004,375
------------
25,114,824
------------
CITY / MUNICIPALITY OBLIGATIONS (5.6%)
------------------------------------------------------
Jeffersontown, Kentucky Public Project Corp.
500,000 5.750%, 11/01/15 .................................. A3/NR 543,750
Kentucky League Cities Funding Trust Certificates of
Participation (Covington)
1,715,000 6.200%, 08/01/17 .................................. NR/A+ 1,799,086
Lexington-Fayette Urban County Government,
Kentucky Public Facilities Revenue
120,000 5.125%, 10/01/23 FSA Insured ...................... Aaa/AAA 124,650
Louisville, Kentucky Parking Authority
1,140,000 5.000%, 12/01/14 MBIA Insured ..................... Aaa/AAA 1,232,625
Mount Sterling, Kentucky Lease Revenue
2,020,000 6.150%, 03/01/13 .................................. Aa3/NR 2,055,976
7,000,000 6.200%, 03/01/18 .................................. Aa3/NR 7,125,160
Munfordville, Kentucky Industrial Development
2,500,000 7.000%, 06/01/19 LOC Bank One AMT ................. NR/A+ 2,572,825
Shelbyville, Kentucky Certificates of Participation
625,000 5.000%, 10/01/22 .................................. A2/NR 642,969
------------
16,097,041
------------
HOSPITALS (4.2%)
------------------------------------------------------
Jefferson County, Kentucky Health Facilities Revenue
$ 240,000 5.000%, 10/01/12 MBIA Insured ..................... Aaa/AAA $ 256,800
1,715,000 5.650%, 01/01/17 AMBAC Insured .................... Aaa/AAA 1,875,781
2,200,000 5.250%, 05/01/17 .................................. NR/A 2,293,500
2,815,000 5.125%, 10/01/17 AMBAC Insured ETM ................ Aaa/AAA 2,983,900
525,000 5.125%, 10/01/18 MBIA Insured ETM ................. Aaa/AAA 557,813
125,000 5.750%, 01/01/26 AMBAC Insured .................... Aaa/AAA 133,281
Kentucky Development Finance Authority
Hospital Revenue
2,790,000 5.000%, 08/15/15 MBIA Insured ..................... Aaa/AAA 2,878,973
Louisville & Jefferson County, Kentucky Medical
Center Revenue
1,000,000 5.000%, 06/01/18 .................................. NR/A 1,048,750
------------
12,028,798
------------
HOUSING (7.8%)
------------------------------------------------------
Kentucky Housing Corp. Housing Revenue
1,150,000 6.250%, 07/01/15 AMT .............................. Aaa/AAA 1,150,000
315,000 6.100%, 07/01/16 AMT .............................. Aaa/AAA 331,931
10,000 6.400%, 01/01/17 .................................. Aaa/AAA 10,000
95,000 5.550%, 07/01/18 AMT .............................. Aaa/AAA 96,781
250,000 5.850%, 07/01/20 AMT .............................. Aaa/AAA 266,563
2,000,000 5.600%, 07/01/20 AMT .............................. Aaa/AAA 2,075,000
1,150,000 5.350%, 01/01/21 AMT .............................. Aaa/AAA 1,183,062
6,075,000 5.450%, 07/01/22 AMT .............................. Aaa/AAA 6,302,813
4,065,000 5.250%, 07/01/22 AMT .............................. Aaa/AAA 4,207,275
245,000 5.200%, 07/01/22 .................................. Aaa/AAA 254,800
300,000 5.100%, 07/01/22 AMT .............................. Aaa/AAA 306,000
4,140,000 5.200%, 07/01/25 AMT .............................. Aaa/AAA 4,233,150
275,000 5.375%, 07/01/27 .................................. Aaa/AAA 285,313
1,085,000 6.300%, 01/01/28 AMT .............................. Aaa/AAA 1,085,000
65,000 6.250%, 07/01/28 AMT .............................. Aaa/AAA 67,925
570,000 5.550%, 07/01/33 .................................. Aaa/AAA 590,663
------------
22,446,276
------------
POLLUTION CONTROL REVENUE (1.4%)
------------------------------------------------------
Jefferson County, Kentucky Pollution Control
(LGE Energy)
$3,800,000 5.900%, 04/15/23 .................................. A1/A- $ 3,914,000
------------
SCHOOLS (12.6%)
------------------------------------------------------
Beechwood, Kentucky Independent School District
Finance Corp.
180,000 5.650%, 03/01/20 .................................. Aa3/NR 199,125
Boone County, Kentucky School District Finance
Corp. School Building
660,000 5.000%, 06/01/15 .................................. Aa3/NR 705,375
225,000 5.250%, 08/01/15 .................................. Aa3/NR 248,344
285,000 5.700%, 02/01/16 .................................. Aa3/NR 322,406
1,000,000 5.375%, 08/01/20 FSA Insured ...................... AAA/NR 1,082,500
Boyd County, Kentucky School District Finance Corp.
1,025,000 5.000%, 10/01/15 .................................. Aa3/NR 1,103,156
575,000 5.375%, 10/01/17 .................................. Aa3/NR 631,063
Christian County, Kentucky School District
Finance Corp.
500,000 5.000%, 06/01/09 .................................. Aa3/NR 553,125
Fayette County, Kentucky School Building
1,780,000 5.700%, 12/01/16 .................................. Aa3/AA- 1,971,350
Fayette County, Kentucky School Building Revenue
200,000 5.125%, 04/01/18 AMBAC Insured .................... Aaa/AAA 214,750
Floyd County, Kentucky School Building
250,000 5.000%, 12/01/09 .................................. Aa3/NR 280,625
Graves Co., Kentucky School Building Revenue
1,260,000 5.000%, 06/01/22 .................................. Aa3/NR 1,308,825
1,320,000 5.000%, 06/01/23 .................................. Aa3/NR 1,364,550
Grayson County, Kentucky School Building Revenue
1,940,000 6.000%, 01/01/15 .................................. Aa3/NR 2,071,163
Hardin County, Kentucky School District Finance Corp.
100,000 5.500%, 02/01/17 .................................. Aa3/NR 111,625
Jefferson County, Kentucky School District Finance
Corp. School Building
$ 750,000 5.300%, 01/01/13 FSA Insured ...................... Aaa/AAA $ 855,938
695,000 5.125%, 11/01/14 FSA Insured ...................... Aaa/AAA 746,256
3,195,000 5.125%, 02/01/16 MBIA Insured ..................... Aaa/AAA 3,366,731
250,000 5.250%, 07/01/16 FSA Insured ...................... Aaa/AAA 273,437
Kenton County, Kentucky School District
1,760,000 5.375%, 03/01/15 .................................. A1/A+ 1,931,600
955,000 5.000%, 04/01/16 .................................. Aa3/NR 1,030,206
1,055,000 5.000%, 04/01/17 .................................. Aa3/NR 1,128,850
605,000 5.000%, 04/01/19 .................................. Aa3/NR 636,763
Kentucky Economic Development Finance
Authority College Revenue Centre College
1,230,000 5.000%, 04/01/17 FSA Insured ...................... Aaa/AAA 1,325,325
1,675,000 5.000%, 04/01/19 FSA Insured ...................... Aaa/AAA 1,779,687
Lexington-Fayette Urban County, Kentucky
Government Project Transylvania University
1,250,000 5.125%, 08/01/18 MBIA Insured ..................... Aaa/AAA 1,337,500
Lexington-Fayette Urban County, Kentucky
Government Project U.K. Library
725,000 5.000%, 11/01/15 MBIA Insured ..................... Aaa/AAA 791,156
205,000 5.000%, 11/01/18 MBIA Insured ..................... Aaa/AAA 219,606
Meade County, Kentucky School District Finance Corp.
400,000 5.700%, 07/01/15 .................................. Aa3/NR 441,000
500,000 6.000%, 07/01/16 .................................. Aa3/NR 552,500
Middlesboro, Kentucky Independent School District
Finance Corp.
100,000 6.100%, 08/01/16 .................................. Aa3/NR 111,375
Nelson County, Kentucky School Building
1,820,000 5.750%, 04/01/15 .................................. Aa3/NR 1,958,775
Scott County, Kentucky School Building
2,750,000 5.900%, 06/01/18 Pre-Refunded ..................... Aa3/A 2,980,313
100,000 5.000%, 03/01/22 .................................. Aa3/NR 104,125
Taylor County, Kentucky School Building
280,000 6.000%, 08/01/16 .................................. Aa3/NR 311,150
175,000 5.250%, 06/01/19 .................................. Aa3/NR 189,875
University of Kentucky Revenue
$1,335,000 5.000%, 05/01/16 FGIC Insured ..................... Aaa/AAA $ 1,421,775
385,000 5.000%, 06/01/18 FSA insured ...................... Aaa/AAA 405,212
Walton-Verona, Kentucky Independent School District
105,000 5.100%, 06/01/19 .................................. Aa3/NR 111,563
------------
36,178,700
------------
TRANSPORTATION (12.2%)
------------------------------------------------------
Kenton County, Kentucky Airport Board Airport Revenue
800,000 5.000%, 03/01/08 MBIA Insured AMT ................. Aaa/AAA 871,000
500,000 5.625%, 03/01/13 MBIA Insured AMT ................. Aaa/AAA 555,000
1,570,000 5.000%, 03/01/13 MBIA Insured AMT ................. Aaa/AAA 1,687,750
750,000 5.625%, 03/01/14 MBIA Insured AMT ................. Aaa/AAA 832,500
1,000,000 5.500%, 03/01/17 MBIA Insured AMT ................. Aaa/AAA 1,092,500
380,000 5.500%, 03/01/18 MBIA Insured AMT ................. Aaa/AAA 412,300
1,625,000 5.000%, 03/01/23 MBIA Insured AMT ................. Aaa/AAA 1,651,406
Kentucky Interlocal School Transportation Authority
150,000 5.100%, 03/01/05 .................................. Aa3/A+ 156,563
145,000 5.400%, 06/01/17 .................................. NR/A+ 146,886
200,000 6.000%, 12/01/20 .................................. NR/A+ 205,576
400,000 6.000%, 12/01/20 .................................. NR/A+ 411,152
300,000 5.800%, 12/01/20 .................................. NR/A+ 305,847
400,000 5.650%, 12/01/20 .................................. NR/A+ 407,556
350,000 5.600%, 12/01/20 .................................. NR/A+ 356,545
Kentucky State Turnpike Authority Economic
Development & Resource Recovery Road Revenue
120,000 8.500%, 07/01/06 .................................. Aa3/A+ 139,500
1,000,000 6.500%, 07/01/08 AMBAC Insured .................... Aaa/AAA 1,172,500
1,010,000 5.500%, 07/01/11 AMBAC Insured .................... Aaa/AAA 1,032,543
1,000,000 5.625%, 07/01/12 FSA Insured ...................... Aaa/AAA 1,141,250
200,000 5.625%, 07/01/13 FSA Insured ...................... Aaa/AAA 228,000
500,000 5.625%, 07/01/14 FSA Insured ...................... Aaa/AAA 570,000
250,000 5.200%, 07/01/14 FSA Insured ...................... Aaa/AAA 275,938
2,760,000 5.625%, 07/01/15 AMBAC Insured Pre-Refunded ....... Aaa/AAA 2,991,150
940,000 5.625%, 07/01/15 AMBAC Insured .................... Aaa/AAA 1,012,850
Kentucky State Turnpike Authority Economic
Development & Resource Recovery Road Revenue
(continued)
$ 450,000 5.250%, 07/01/15 FSA Insured ...................... Aaa/AAA $ 496,125
3,455,000 5.100%, 07/01/18 FSA Insured ...................... Aaa/AAA 3,688,212
2,500,000 5.250%, 07/01/16 FSA Insured ...................... Aaa/AAA 2,753,125
Louisville-Jefferson County Regional Airport, Kentucky
1,000,000 5.500%, 07/01/12 FSA Insured AMT .................. Aaa/AAA 1,112,500
2,000,000 5.750%, 07/01/15 FSA Insured AMT .................. Aaa/AAA 2,227,500
1,500,000 5.500%, 07/01/15 FSA Insured AMT .................. Aaa/AAA 1,666,875
1,000,000 5.250%, 07/01/18 FSA Insured AMT .................. Aaa/AAA 1,063,750
1,370,000 5.250%, 07/01/21 FSA Insured AMT .................. Aaa/AAA 1,441,925
2,390,000 5.250%, 07/01/22 FSA Insured AMT .................. Aaa/AAA 2,503,525
275,000 5.375%, 07/01/23 FSA Insured AMT .................. Aaa/AAA 288,750
------------
34,898,599
------------
UTILITIES (8.9%)
------------------------------------------------------
Campbell & Kenton Counties, Kentucky Sanitation
Sewer District
100,000 5.000%, 08/01/18 FGIC Insured ..................... Aaa/AAA 106,500
Hardin County, Kentucky Water District
1,000,000 5.900%, 01/01/25 MBIA Insured ..................... Aaa/AAA 1,077,500
Lexington-Fayette Urban County Government,
Kentucky Sewer System
1,000,000 5.000%, 07/01/19 .................................. Aa3/AA 1,056,250
Louisville and Jefferson County, Kentucky
Metropolitan Sewer District
1,000,000 5.000%, 05/15/12 FGIC Insured ..................... Aaa/AAA 1,090,000
2,565,000 5.375%, 05/15/17 MBIA Insured Aaa/AAA 2,866,387
1,410,000 5.400%, 05/15/22 FGIC Insured Aaa/AAA 1,473,450
120,000 6.250%, 05/15/26 MBIA Insured Aaa/AAA 135,900
Louisville, Kentucky Waterworks Board Water
System Revenue
1,000,000 5.250%, 11/15/16 FSA Insured ...................... Aaa/AAA 1,097,500
1,000,000 5.250%, 11/15/17 FSA Insured ...................... Aaa/AAA 1,086,250
2,435,000 5.250%, 11/15/18 FSA Insured ...................... Aaa/AAA 2,629,800
6,600,000 5.250%, 11/15/22 FSA Insured ...................... Aaa/AAA 6,996,000
2,415,000 5.250%, 11/15/24 FSA Insured ...................... Aaa/AAA 2,532,731
Kentucky Rural Water Finance Corp.
$ 595,000 5.000%, 02/01/20 AMBAC Insured .................... Aaa/AAA $ 630,700
Northern Kentucky Water District
200,000 5.000%, 02/01/23 FGIC Insured ..................... Aaa/NR 207,500
1,015,000 5.000%, 02/01/27 FGIC Insured ..................... Aaa/NR 1,040,375
Owensboro-Davies County, Kentucky Water District
600,000 5.000%, 01/01/13 AMBAC Insured .................... Aaa/AAA 634,500
Owensboro, Kentucky Electric and Power
1,000,000 5.000%, 01/01/20 FSA Insured ...................... Aaa/AAA 1,047,500
------------
25,708,843
------------
Total Revenue Bonds ............................ 278,556,850
------------
Total Investments (cost $269,252,563**) .............. 98.3% 282,358,895
Other assets less liabilities ........................ 1.7 4,765,156
----- ------------
Net Assets ........................................... 100.0% $287,124,051
===== ============
* Any security not rated (NR) has been determined by the
Manager to have sufficient quality to be ranked in the top
four credit ratings if a credit rating was to be assigned by
a rating service.
** See note 4.
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Tax
ETM - Escrowed To Maturity
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
ASSETS
Investments at value (cost $269,252,563) .................... $282,358,895
Interest receivable ......................................... 4,332,672
Receivable for investment securities sold ................... 1,265,000
Receivable for Fund shares sold ............................. 285,412
------------
Total assets ................................................ 288,241,979
------------
LIABILITIES
Cash overdraft .............................................. 355,708
Dividends payable ........................................... 275,731
Payable for Fund shares redeemed ............................ 240,192
Management fee payable ...................................... 97,117
Distribution fees payable ................................... 73,571
Accrued expenses ............................................ 75,609
------------
Total liabilities ........................................... 1,117,928
------------
NET ASSETS ..................................................... $287,124,051
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share ................................. $ 268,457
Additional paid-in capital .................................. 274,505,016
Net unrealized appreciation on investments (note 4) ......... 13,106,332
Undistributed net investment income ......................... 384,527
Accumulated net realized loss on investments ................ (1,140,281)
------------
$287,124,051
============
CLASS A
Net Assets .................................................. $229,176,036
============
Capital shares outstanding .................................. 21,429,521
============
Net asset value and redemption price per share .............. $ 10.69
============
Offering price per share (100/96 of $10.69 adjusted to
nearest cent) ............................................ $ 11.14
============
CLASS C
Net Assets .................................................. $ 7,197,024
============
Capital shares outstanding .................................. 673,249
============
Net asset value and offering price per share ................ $ 10.69
============
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) ...................... $ 10.69*
============
CLASS I
Net Assets .................................................. $ 4,437,822
============
Capital shares outstanding .................................. 415,134
============
Net asset value, offering and redemption price per share .... $ 10.69
============
CLASS Y
Net Assets .................................................. $ 46,313,169
============
Capital shares outstanding .................................. 4,327,838
============
Net asset value, offering and redemption price per share .... $ 10.70
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
INVESTMENT INCOME:
Interest income ............................................. $13,711,858
Expenses:
Management fee (note 3) ..................................... $1,129,293
Distribution and service fees (note 3) ...................... 409,376
Transfer and shareholder servicing agent fees ............... 125,277
Trustees' fees and expenses (note 8) ........................ 87,053
Legal fees .................................................. 68,594
Shareholders' reports and proxy statements .................. 57,190
Fund accounting fees ........................................ 32,379
Custodian fees .............................................. 27,387
Auditing and tax fees ....................................... 26,742
Registration fees and dues .................................. 23,005
Insurance ................................................... 13,627
Miscellaneous ............................................... 20,851
----------
Total expenses .............................................. 2,020,774
Expenses paid indirectly (note 6) ........................... (18,294)
----------
Net expenses ................................................ 2,002,480
-----------
Net investment income ....................................... 11,709,378
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ....... 259,635
Change in unrealized appreciation on investments ............ 183,334
----------
Net realized and unrealized gain (loss) on investments ...... 442,969
-----------
Net change in net assets resulting from operations .......... $12,152,347
===========
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
OPERATIONS:
Net investment income ....................................... $ 11,709,378 $ 11,410,017
Net realized gain (loss) from securities transactions ....... 259,635 773,552
Change in unrealized appreciation on investments ............ 183,334 7,631,648
------------ ------------
Change in net assets from operations ..................... 12,152,347 19,815,217
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ....................................... (9,367,500) (9,598,236)
Class C Shares:
Net investment income ....................................... (200,217) (146,784)
Class I Shares:
Net investment income ....................................... (146,438) (86,355)
Class Y Shares:
Net investment income ....................................... (1,944,616) (1,537,493)
------------ ------------
Change in net assets from distributions .................. (11,658,771) (11,368,868)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ................................... 44,639,694 52,239,557
Reinvested dividends and distributions ...................... 5,821,000 5,609,442
Cost of shares redeemed ..................................... (38,277,178) (23,818,330)
------------ ------------
Change in net assets from capital share transactions ........ 12,183,516 34,030,669
------------ ------------
Change in net assets ........................................ 12,677,092 42,477,018
NET ASSETS:
Beginning of period ......................................... 274,446,959 231,969,941
------------ ------------
End of period* .............................................. $287,124,051 $274,446,959
============ ============
* Includes undistributed net investment income of: .......... $ 384,527 $ 333,920
============ ============
See accompanying notes to financial statements.
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 distribution 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. Class C Shares together with a pro-rata portion
of all Class C Shares acquired through reinvestment of dividends and other
distributions paid in additional Class C Shares, automatically convert to Class
A Shares after 6 years. 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. Class
I Shares are sold at net asset value without any sales charge, redemption fees,
or contingent deferred sales charge. Class I shares carry a distribution fee and
a service fee. 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 accounting principles generally accepted in the United States of
America for investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities
of more than 60 days are valued 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 is 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 exceeds 60 days.
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses from
securities transactions are reported on the identified cost basis. Interest
income is recorded daily on the accrual basis and is adjusted for
amortization of premium and accretion of original issue and market
discount.
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 accounting principles generally accepted in the United States of
America 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. Refer to Note 11 for Subsequent Event footnote. Under
the Advisory and Administration Agreement, the Manager provides all investment
management and administrative services to the Fund. The Manager's services
include providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the Fund
such as the shareholder servicing agent, custodian, legal counsel, fund
accounting agent, auditors and distributor. 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 average net
assets.
Specific details as to the nature and extent of the services provided by
the Manager 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
distribution 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, 2003, distribution fees on Class A
Shares amounted to $340,461 of which the Distributor retained $8,968.
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 average net assets represented by Class C Shares and for the
year ended December 31, 2003, amounted to $46,125. 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 average net assets represented by Class C
Shares and for the year ended December 31, 2003, amounted to $15,375. The total
of these payments with respect to Class C Shares amounted to $61,500 of which
the Distributor retained $10,904.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class I Shares to Qualified Recipients. Class I payments, under
the Plan, may not exceed for any fiscal year of the Fund a rate (currently
0.20%), set from time to time by the Board of Trustees, of not more than 0.25%
of the average annual net assets represented by the Class I Shares. In addition,
Class I has a Shareholder Services Plan under which it may pay service fees
(currently 0.15%) of not more than 0.25% of the average annual net assets
represented by Class I Shares. That is, the total payments under both plans will
not exceed 0.50% of such net assets. For the year ended December 31, 2003, these
payments were made at the average annual rate of 0.35% of such net assets and
amounted to $12,976 of which $7,415 related to the Plan and $5,561 related to
the Shareholder Services Plan.
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, 2003, total commissions on sales of Class A Shares amounted to $480,078 of
which the Distributor received $42,855.
c) OTHER RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2003, the Fund incurred $66,895 of legal
fees allocable to Hollyer Brady Smith & Hines LLP, counsel to the Fund for legal
services in conjunction with the Fund's ongoing operations. The Secretary of the
Fund is a Partner of Hollyer Brady Smith & Hines LLP.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 2003, purchases of securities and
proceeds from the sales of securities aggregated $56,486,203 and $49,905,685,
respectively.
At December 31, 2003, the aggregate tax cost for all securities was
$268,926,644. At December 31, 2003, the aggregate gross unrealized appreciation
for all securities in which there is an excess of market value over tax cost
amounted to $13,530,228 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted to
$97,977 for a net unrealized appreciation of $13,432,251.
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. 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.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES:
Proceeds from shares sold ....... 2,169,701 $ 23,197,568 2,800,411 $ 29,436,982
Reinvested distributions ........ 423,111 4,508,492 454,110 4,764,701
Cost of shares redeemed ......... (2,359,392) (25,070,993) (1,611,194) (16,933,028)
---------- ------------ ---------- ------------
Net change ................... 233,420 2,635,067 1,643,327 17,268,655
---------- ------------ ---------- ------------
CLASS C SHARES:
Proceeds from shares sold ....... 285,083 3,053,437 166,058 1,743,988
Reinvested distributions ........ 12,041 128,176 9,211 96,673
Cost of shares redeemed ......... (74,572) (795,113) (50,063) (523,419)
---------- ------------ ---------- ------------
Net change ................... 222,552 2,386,500 125,206 1,317,242
---------- ------------ ---------- ------------
CLASS I SHARES:
Proceeds from shares sold ....... 198,482 2,130,432 85,241 895,032
Reinvested distributions ........ 12,722 135,513 7,325 77,007
Cost of shares redeemed ......... (21,821) (232,654) (5,158) (53,879)
---------- ------------ ---------- ------------
Net change ................... 189,383 2,033,291 87,408 918,160
---------- ------------ ---------- ------------
CLASS Y SHARES:
Proceeds from shares sold ....... 1,511,098 16,258,257 1,918,939 20,163,555
Reinvested distributions ........ 98,382 1,048,819 63,761 671,061
Cost of shares redeemed ......... (1,145,269) (12,178,418) (599,076) (6,308,004)
---------- ------------ ---------- ------------
Net change ................... 464,211 5,128,658 1,383,624 14,526,612
---------- ------------ ---------- ------------
Total transactions in Fund
shares .......................... 1,109,566 $ 12,183,516 3,239,565 $ 34,030,669
========== ============ ========== ============
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year ended December 31, 2003 there were nine trustees,
two of whom were affiliated with the Manager and are not paid any trustee fees.
Each Trustees' fees paid during the year were at the average annual rate of
$7,250 for carrying out 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 of Shareholders.
For the fiscal year ended December 31, 2003 such reimbursements averaged
approximately $3,400 per Trustee.
9. SECURITIES TRADED ON A WHEN-ISSUED BASIS
The Fund may purchase or sell securities on a when-issued basis.
When-issued transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. Beginning on the date the Fund enters into a
when-issued transaction, cash or other liquid securities are segregated in an
amount equal to or greater than the amount of the when-issued transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
10. 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.
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 dividend income may, under some circumstances, be subject to
the alternative minimum tax.
At December 31, 2003, the Fund had a capital loss carryover of $1,077,355,
$54,468 of which expires on December 31, 2007 and $1,022,887 will expire on
December 31, 2008. 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 carryover is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed. In addition, the Fund generated a post October net capital loss of
$57,959.
Tax character of distributions paid by the Fund:
Year Ended December 31,
-------------------------
2003 2002
----------- -----------
Net tax-exempt income $11,625,804 $11,355,823
Ordinary income 32,967 13,045
----------- -----------
$11,658,771 $11,368,868
=========== ===========
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized loss $(1,135,314)
Unrealized appreciation 13,432,250
Undistributed tax-exempt income 53,642
-----------
$12,350,578
===========
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to wash sales and premium/discount adjustments.
11. SUBSEQUENT EVENT
Effective January 1, 2004, Aquila Management Corporation, founder of the
Fund, assigned its Advisory and Administration Agreement to its wholly-owned
subsidiary, Aquila Investment Management LLC, which will continue the management
of the Fund. The transfer was made for reasons of corporate and tax planning and
will have no effect on the management of the Fund or the fees being paid.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A CLASS I
---------------------------------------------- ------------------------------
YEAR ENDED PERIOD
YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED
---------------------------------------------- ---------------- -----------
2003 2002 2001 2000 1999 2003 2002 12/31/01(1)
------ ------ ------ ------ ------ ------ ------ -----------
Net asset value, beginning of period .......... $10.66 $10.31 $10.40 $10.09 $10.81 $10.66 $10.31 $10.44
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income + .................... 0.44 0.47 0.50 0.52 0.52 0.43 0.46 0.19
Net gain (loss) on securities (both
realized and unrealized) ................ 0.03 0.35 (0.09) 0.31 (0.68) 0.02 0.35 (0.13)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ........... 0.47 0.82 0.41 0.83 (0.16) 0.45 0.81 0.06
------ ------ ------ ------ ------ ------ ------ ------
Less distributions (note 10):
Dividends from net investment income ....... (0.44) (0.47) (0.50) (0.52) (0.53) (0.42) (0.46) (0.19)
Distributions from capital gains ........... -- -- -- -- (0.03) -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions ........................ (0.44) (0.47) (0.50) (0.52) (0.56) (0.42) (0.46) (0.19)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ................ $10.69 $10.66 $10.31 $10.40 $10.09 $10.69 $10.66 $10.31
====== ====== ====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge) .... 4.50% 8.15% 4.02% 8.45% (1.51)% 4.33% 7.98% 0.58%++
Ratios/supplemental data
Net assets, end of period (in thousands) ... $229,176 $226,014 $201,604 $196,890 $205,842 $4,438 $2,407 $1,426
Ratio of expenses to average net assets .... 0.72% 0.72% 0.72% 0.74% 0.72% 0.88% 0.87% 0.83%*
Ratio of net investment income to average
net assets .............................. 4.14% 4.50% 4.82% 5.10% 4.95% 3.95% 4.32% 4.47%*
Portfolio turnover rate .................... 17.92% 18.27% 21.44% 6.61% 6.35% 17.92% 18.27% 21.44%++
The expense ratios after giving effect to the expense offset for uninvested
cash balances were:
Ratio of expenses to average net assets .... 0.71% 0.71% 0.70% 0.73% 0.71% 0.87% 0.86% 0.82%*
- ----------
(1) For the period August 6, 2001 to December 31, 2001.
+ Per share amounts have been calculated using the monthly average shares
method.
++ Not annualized.
* Annualized.
Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
Investment adviser, assuming investment management responsibilities,
replacing Banc One Investment Advisers Corporation the Fund's Investment
Sub-Adviser.
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C CLASS Y
-------------------------------------- -------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------------------------
2003 2002 2001 2000 1999 2003 2002 2001 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, beginning of period ....... $10.66 $10.31 $10.39 $10.08 $10.81 $10.67 $10.32 $10.40 $10.09 $10.82
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income + ................. 0.35 0.38 0.41 0.43 0.43 0.46 0.49 0.51 0.53 0.53
Net gain (loss) on securities (both
realized and unrealized) ............. 0.03 0.35 (0.08) 0.31 (0.69) 0.03 0.35 (0.07) 0.32 (0.69)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ........ 0.38 0.73 0.33 0.74 (0.26) 0.49 0.84 0.44 0.85 (0.16)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions (note 10):
Dividends from net investment income .... (0.35) (0.38) (0.41) (0.43) (0.44) (0.46) (0.49) (0.52) (0.54) (0.54)
Distributions from capital gains ........ -- -- -- -- (0.03) -- -- -- -- (0.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ..................... (0.35) (0.38) (0.41) (0.43) (0.47) (0.46) (0.49) (0.52) (0.54) (0.57)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ............. $10.69 $10.66 $10.31 $10.39 $10.08 $10.70 $10.67 $10.32 $10.40 $10.09
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (not reflecting sales charge).. 3.62% 7.23% 3.24% 7.54% (2.45)% 4.65% 8.30% 4.28% 8.62% (1.46)%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $7,197 $4,804 $3,355 $1,861 $1,932 $46,313 $41,223 $25,585 $15,745 $13,346
Ratio of expenses to average
net assets ........................... 1.57% 1.56% 1.56% 1.59% 1.56% 0.57% 0.57% 0.57% 0.59% 0.57%
Ratio of net investment income
to average net assets ................ 3.26% 3.62% 3.92% 4.24% 4.09% 4.28% 4.63% 4.94% 5.25% 5.09%
Portfolio turnover rate ................. 17.92% 18.27% 21.44% 6.61% 6.35% 17.92% 18.27% 21.44% 6.61 6.35%
The expense ratios after giving effect to the expense offset for uninvested cash
balances were:
Ratio of expenses to average
net assets ........................... 1.56% 1.55% 1.55% 1.58% 1.55% 0.56% 0.56% 0.55% 0.58% 0.56%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
Investment adviser, assuming investment management responsibilities,
replacing Banc One Investment Advisers Corporation the Fund's Investment
Sub-Adviser.
See accompanying notes to financial statements.
ADDITIONAL INFORMATION (UNAUDITED)
TRUSTEES(1)
AND OFFICERS
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.)
- ----------------- ---------- ------------------- ---------- ---------------------
INTERESTED TRUSTEES(4)
Lacy B. Herrmann Chairman of Founder and Chairman of the Board, Aquila 11 Director or trustee,
New York, NY the Board of Management Corporation, the sponsoring Pimco Advisors VIT,
(05/12/29) Trustees since organization and parent of the Manager or Oppenheimer Quest
1987 Administrator and/or Adviser or Sub-Adviser Value Funds Group,
to each fund of the Aquila(SM) Group of Oppenheimer Small Cap
Funds,(5) Chairman and Chief Executive Value Fund, Oppenheimer
Officer and Manager of the Manager or Midcap Fund, and
Administrator and/or Advisor or Sub-Adviser Oppenheimer Rochester
to each since 2003, and Founder, Chairman Group of Funds.
of the Board of Trustees and (currently or
until 1998) President of each since its
establishment, beginning in 1984; Director
of the Distributor since 1981 and formerly
Vice President or Secretary, 1981-1998;
Trustee Emeritus, Brown University and the
Hopkins School; active in university, school
and charitable organizations.
Diana P. Herrmann Trustee since Vice Chair of Aquila Management 6 None
New York, NY 1995, President Corporation, Founder of the Aquila(SM) Group
(02/25/58) since 1999, of Funds and parent of the Manager, since
and Vice Chair 2004, President and Chief Operating Officer
since 2004 since 1997, a Director since 1984, Secretary
since 1986 and previously its Executive
Vice President, Senior Vice President or
Vice President, 1986-1997; Vice Chair since
2004 and President, Chief Operating Officer
and Manager of the Manager since 2003; Vice
Chair, President, Senior Vice President or
Executive Vice President of funds in the
Aquila(SM) Group of Funds since 1986;
Director of the Distributor since 1997;
trustee, Reserve Money-Market Funds, 1999-
2000 and Reserve Private Equity Series,
1998-2000; active in mutual fund and trade
organizations and in charitable and
volunteer organizations.
NON-INTERESTED TRUSTEES
Thomas A. Christopher Trustee since Vice President of Robinson, Hughes & 1 None
Danville, KY 1992 Christopher, C.P.A.s, P.S.C., since 1977;
(12/19/47) President, A Good Place for Fun, Inc., a
sports facility, since 1987.
Douglas Dean Trustee since Founder and Chairman of the Board of 1 None
Lexington, KY 1987 Directors, Dean, Dorton & Ford P.S.C., a
(03/21/49) public accounting firm, since 1982; active
as an officer and member of various
charitable and community organizations.
Carroll F. Knicely Trustee since President, Associated Publications Inc, 1 West Kentucky
Glasgow, KY 1998 Glasgow, Kentucky; director and member, Corporation; South Gate
(12/08/28) Executive Board of West Kentucky Plaza, Inc.; Knicely and
Corporation and director and Secretary- Knicely, Inc.
Treasurer, South Gate Plaza, Inc. (owner
and developer of shopping centers and
commercial real estate); director, Vice
President and Treasurer, Knicely and
Knicely, Inc. (owner and developer of rental
properties and residential real estate);
former trustee, Cambellsville University;
formerly Secretary of Commerce and
Commissioner of Commerce, Commonwealth of
Kentucky.
Theodore T. Mason Trustee since Executive Director, East Wind Power 6 Trustee, Pimco Advisors
New York, NY 1992 Partners LTD since 1994 and Louisiana VIT.
(11/24/35) Power Partners, LLC since 1999; President,
Alumni Association of SUNY Maritime
College since 2002 (First Vice President,
2000-2001, Second Vice President, 1998-
2000) and director of the same organization
since 1997; Director, STCM Management
Company, Inc., since 1973; twice national
officer of Naval Reserve Association,
commanding officer of four naval reserve
units and Captain, USNR (Ret); director, The
Navy League of the United States New York
Council since 2002; trustee, The Maritime
Industry Museum at Fort Schuyler and the
Maritime College at Fort Schuyler
Foundation, Inc. since 2000.
Anne J. Mills Trustee since President, Loring Consulting Company since 4 None
Castle Rock, CO 1987 2001; Vice President for Business Affairs,
(12/23/38) Ottawa University, 1992-2001; IBM
Corporation, 1965-1991; Budget Review
Officer, the American Baptist
Churches/USA, 1994-1997; director, the
American Baptist Foundation; Trustee,
Ottawa University; and Trustee Emerita,
Brown University.
William J. Nightingale Trustee since Retired; formerly Chairman, founder (1975) 2 Ring's End, Inc.
Rowayton, CT 1993 and Senior Advisor until 2000 of Nightingale
(09/16/29) & Associates, L.L.C., a general management
consulting firm focusing on interim
management, divestitures, turnaround of
troubled companies, corporate restructuring
and financial advisory services.
James R. Ramsey Trustee since President, University of Louisville since 1 Community Bank and
Louisville, KY 1987 Nov. 2002; Professor of Economics, Trust, Pikeville, KY
(11/14/48) University of Louisville, 1999-present;
Kentucky Governor's Senior Policy
Advisor and State Budget Director,
1999-2002; Vice Chancellor for Finance
and Administration, the University of
North Carolina at Chapel Hill, 1998 to
1999; previously Vice President for
Finance and Administration at Western
Kentucky University, State Budget
Director for the Commonwealth of
Kentucky, Chief State Economist and
Executive Director for the Office of
Financial Management and Economic
Analysis for the Commonwealth of
Kentucky, Adjunct Professor at the
University of Kentucky, Associate
Professor at Loyola University-New
Orleans and Assistant Professor at
Middle Tennessee State University.
OFFICERS
Charles E. Childs, III Executive Vice Executive Vice President of all Funds since N/A N/A
New York, NY President since 2003; Senior Vice President, corporate
(04/01/57) 2003 development, formerly Vice President,
Assistant Vice President and Associate
of the Manager's parent since 1987;
Senior Vice President, Vice President or
Assistant Vice President of the
Money-Market Funds since 1988.
Thomas S. Albright Senior Vice Senior Vice President and Portfolio N/A N/A
Louisville, KY President since Manager, Churchill Tax-Free Fund of
(07/26/52) 2000 Kentucky since July 2000; Vice President
and Co-portfolio manager, Tax-Free Fund
For Utah since 2001; Vice President and
Portfolio Manager, Banc One Investment
Advisors, Inc., 1994-2000.
Jerry G. McGrew Senior Vice President of the Distributor since 1998, N/A N/A
New York, NY President since Registered Principal since 1993, Senior Vice
(06/18/44) 1994 President, 1997-1998 and Vice President,
1993-1997; Senior Vice President, Aquila
Rocky Mountain Equity Fund and five
Aquila Bond Funds since 1995; Vice
President, Churchill Cash Reserves Trust,
1995-2001.
James M. McCullough Vice President Senior Vice President or Vice President of N/A N/A
Portland, OR since 2000 Aquila Rocky Mountain Equity Fund and
(06/11/45) four Aquila Bond Funds; Senior Vice
President of the Distributor since 2000;
Director of Fixed Income Institutional
Sales, CIBC Oppenheimer & Co. Inc., Seattle,
WA, 1995-1999.
Jason T. McGrew Vice President Vice President, Churchill Tax-Free Fund of N/A N/A
Elizabethtown, KY since 2001 Kentucky since 2001, Assistant Vice
(08/14/71) President, 2000-2001; Investment Broker
with Raymond James Financial Services
1999-2000 and with J.C. Bradford and
Company 1997-1999; Associate Broker at
Prudential Securities 1996-1997.
Joseph P. DiMaggio Chief Financial Chief Financial Officer of the Aquila(SM) N/A N/A
New York, NY Officer since Group of Funds since 2003 and Treasurer
(11/06/56) 2003 and since 2000; Controller, Van Eck Global
Treasurer Since Funds, 1993-2000.
2000
Edward M. W. Hines Secretary since Partner, Hollyer Brady Smith & Hines LLP, N/A N/A
New York, NY 1987 legal counsel to the Fund, since 1989;
(12/16/39) Secretary of the Aquila(SM) Group of Funds.
Robert W. Anderson Assistant Compliance Officer of the Manager or its N/A N/A
New York, NY Secretary since predecessor and current parent since 1998
(08/23/40) 2000 and Assistant Secretary of the Aquila(SM)
Group of Funds since 2000; trustee,
Alpha Strategies Fund since July, 2002;
Consultant, The Wadsworth Group,
1995-1998.
John M. Herndon Assistant Assistant Secretary of the Aquila(SM) Group N/A N/A
New York, NY Secretary since of Funds since 1995 and Vice President of
(12/17/39) 1995 the three Aquila Money-Market Funds since
1990; Vice President of the Manager or its
predecessor and current parent since 1990.
Lori A. Vindigni Assistant Assistant Treasurer of the Aquila(SM) Group N/A N/A
New York, NY Treasurer since of Funds since 2000; Assistant Vice
(11/02/66) 2000 President of the Manager or its predecessor
and current parent since 1998; Fund
Accountant for the Aquila(SM) Group of
Funds, 1995-1998.
- ----------
(1)The Fund's Statement of Additional Information includes additional
information about the Trustees and is available, without charge, upon request by
calling 800-437-1020 (toll free).
(2) The mailing address of each Trustee and officer is c/o Churchill Tax-Free
Fund of Kentucky, 380 Madison Avenue, New York, NY 10017.
(3) Each Trustee holds office until the next annual meeting of shareholders or
until his or her successor is elected and qualifies. The term of office of each
officer is one year.
(4) Mr. Herrmann is an interested person of the Fund as that term is defined in
the 1940 Act as an officer of the Fund and a director, officer and shareholder
of the Manager's corporate parent, as an officer and Manager of the Manager, and
as a shareholder and director of the Distributor. Ms. Herrmann is an interested
person of the Trust as an officer of the Trust, as a director, officer and
shareholder of the Manager's corporate parent, as an officer and Manager of the
Manager, and as a shareholder and director of the Distributor. Each is also an
interested person as a member of the immediate family of the other.
(5) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S.
Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets
Trust, each of which is a money-market fund, are called the "Aquila Money-Market
Funds"; Hawaiian Tax-Free Trust, Tax- Free Trust of Arizona, Tax-Free Trust of
Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky,
Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of
which is a tax-free municipal bond fund, are called the "Aquila Bond Funds";
Aquila Rocky Mountain Equity Fund is an equity fund; considered together, these
11 funds are called the "Aquila(SM) Group of Funds."
PRIVACY NOTICE (UNAUDITED)
OUR PRIVACY POLICY. in providing services to you as an individual who owns or is
considering investing in shares of a fund of the Aquila(SM) Group of Funds, we
collect certain nonpublic personal information about you.Our policy is to keep
this information strictly safeguarded and confidential, and to use or disclose
it only as necessary to provide services to you or as otherwise permitted by
law. Our privacy policy applies equally to former shareholders and persons who
inquire about a fund.
INFORMATION WE COLLECT. "Nonpublic personal information" is personally
identifiable financial information about you as an individual or your family.
The kinds of nonpublic personal information we have about you may include the
information you provide us on your share purchase application or in telephone
calls or correspondence with us, and information about your fund transactions
and holdings, how you voted your shares and the account where your shares are
held.
INFORMATION WE DISCLOSE. We disclose nonpublic personal information about you to
companies that provide necessary services to your fund, such as the fund's
transfer agent, distributor, investment adviser or sub-adviser and to our
affiliates, as permitted or required by law, or as authorized by you. We also
may disclose this information to another fund of the Aquila(SM) Group of Funds
or its distributor, or to the broker-dealer that holds your fund shares, under
agreements that permit them to use the information only to provide you
information about your fund, other funds in the Aquila(SM) Group of Funds or new
services we are offering which may be of interest to you. Any other use is
strictly prohibited. We do not sell information about you or any of our fund
shareholders to anyone.
HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to nonpublic personal
information about you to only those persons who need it to provide services to
you or who are permitted by law to receive it. We maintain physical, electronic
and procedural safeguards to protect the confidentiality of all nonpublic
personal information we have about you.
If you have any questions regarding our Privacy Policy, please contact us at
1-800-437-1020.
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, 2003, $11,625,804 of dividends paid
by Churchill Tax-Free Fund of Kentucky, constituting 99.972% of total dividends
paid during fiscal 2003, were exempt-interest dividends.
Prior to January 31, 2004, shareholders were mailed IRS Form 1099-DIV which
contained information on the status of distributions paid for the 2003 CALENDAR
YEAR.
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila(sm) Group of Funds
produce is automatically sent to you and all other shareholders. Specifically,
you are routinely sent the entire list of portfolio of securities of your fund
twice a year in the semi-annual and annual reports you receive. You should know,
however, that we prepare, and have available, portfolio listings at the end of
each quarter.
Whenever you may be interested in seeing a listing of your trust's
portfolio other than in your shareholder reports, please check our website
(www.aquilafunds.com) or call us at 1-800-437-1020.
FOUNDER
AQUILA MANAGEMENT CORPORATION
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Carroll F. Knicely
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Diana P. Herrmann, Vice Chair and President
Thomas S. Albright, Senior Vice President
and Portfolio Manager
Jerry G. McGrew, Senior Vice President
Jason T. McGrew, Vice President
Joseph P. DiMaggio, Chief Financial Officer
and 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.
1111 Polaris Parkway
Columbus, Ohio 43240
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC INC.
760 Moore Road
King of Prussia, Pennsylvania 19406
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue
New York, New York 10017
Further information is contained in the Prospectus, which must precede or
accompany this report.
ANNUAL
REPORT
DECEMBER 31, 2003
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a
circle]
[Logo of the Aquila Group of Funds: an eagle's head]
ONE OF THE
AQUILA(SM) GROUP OF FUNDS
ITEM 2. CODE OF ETHICS.
(a) As of December 31, 2003 (the end of the reporting period) the
Trust has adopted a code of ethics that applies to the Fund's
principal executive officer(s)and principal financial officer(s)
and persons performing similar functions ("Covered Officers") as
defined in the Aquila Group of Funds Code of Ethics for Principal
Executive and Senior Financial Officers under Section 406 of the
Sarbanes-Oxley Act of 2002.;
(f)(1) Pursuant to Item 10(a)(1), a copy of the Fund's Code of
Ethics that applies to the Trust's principal executive officer(s)
and principal financial officer(s) and persons performing similar
functions is included as an exhibit to its annual report on this
Form N-CSR;
(f)(2) The text of the Fund's Code of Ethics that applies to the
Fund's principal executive officer(s) and principal financial
officer(s) and persons performing similar functions has been
posted on its Internet website which can be found at the Fund's
Internet address at aquilafunds.com.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1)(ii) The Board of Trustees of the Fund has determined that
it does not have at least one audit committee financial expert
serving on its audit committee. The Fund does not have such a
person serving on the audit committee because none of the persons
currently serving as Trustees happens to have the technical
accounting and auditing expertise included in the definition of
"audit committee financial expert" recently adopted by the Securities
and Exchange Commission in connection with this Form N-CSR, and the
Board has not heretofore deemed it necessary to seek such a person
for election to the Board.
The primary mission of the Board, which is that of oversight over
the operations and affairs of the Fund, confronts the Trustees with
a wide and expanding range of issues and responsibilities. The
Trustees believe that, accordingly, it is essential that the Board's
membership consist of persons with as extensive experience as possible
in fulfilling the duties and responsibilities of mutual fund directors
and audit committee members and, ideally, with extensive experience
and background relating to the economic and financial sectors and
securities in which the Fund invests, including exposure to the
financial and accounting matters commonly encountered with respect
to those sectors and securities. The Board believes that its current
membership satisfies those criteria. It recognizes that it would
also be helpful to have a member with the relatively focused accounting
and auditing expertise reflected in the applicable definition of
"audit committee financial expert," just as additional members with
similarly focused technical expertise in other areas relevant to
the Fund's operations and affairs would also contribute added value.
However, the Board believes that the Fund is better served, and its
assets better employed, by a policy of hiring experts in various
areas, including the specialized area of technical accounting and
auditing matters, if and as the Board identifies the need, rather
than by seeking to expand its numbers by adding technical experts
in the areas constituting its domain of responsibility. The Fund's
Audit Committee Charter explicitly authorizes the Committee to
retain such experts as it deems necessary in fulfilling its duties
under the Charter.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
a) Audit Fees - The aggregate fees billed for professional services rendered
By the principal accountant for the audit of the Registrant's annual
financial statements were $20,100 in 2003 and $19,500 in 2002.
b) Audit Related Fees - There were no amounts billed for audit-related
fees over the
past two years.
c) Tax Fees - The Registrant was billed by the principal accountant $8,942
and $9,500 in 2003 and 2002, respectively, for return preparation.
d) All Other Fees - There were no additional fees plaid for audit and non-
audit services other than those disclsed in a) thorough c) above.
e)(1) Currently, the audit committee of the Registrant pre-approves audit
services and fees on an engagement-by-engagement basis
e)(2) None of the services described in b) through d) above were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation
S-X, all were pre-approved on an engagement-by-engagement basis.
f) No applicable.
g) There were no non-audit services fees billed by the Registrant's accountant
to the Registrant's investment adviser or distributor over the past two years.
h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940) as of a date within 90 days of the fling of this report, the registrant's
chief financial and executive officers have concluded that the disclosure
controls and procedures of the registrant are appropriately designed to ensure
that information required to be disclosed in the registrant's reports that are
filed under the Securities Exchange Act of 1934 are accumulated and communicated
to registrant's management, including its principal executive officer(s) and
principal financial officer(s), to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms adopted by the Securities and Exchange
Commission.
(b) There have been no significant changes in registrant's internal controls or
in other factors that could significantly affect registrant's internal controls
subsequent to the date of the most recent evaluation, including no significant
deficiencies or material weaknesses that required corrective action.
ITEM 10. EXHIBITS.
(a)(1) (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and
Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002.
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
CHURCHILL TAX-FREE TRUST
By: /s/ Lacy B. Herrmann
- ---------------------------------
Chairman of the Board
March 8, 2004
By: /s/ Diana P. Herrmann
- ---------------------------------
Vice Chair and President
March 8, 2004
By: /s/ Joseph P. DiMaggio
- -----------------------------------
Chief Financial Officer
March 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Lacy B. Herrmann
- ---------------------------------
Lacy B. Herrmann
Chairman of the Board
March 8, 2004
By: /s/ Diana P. Herrmann
- ---------------------------------
Diana P. Herrmann
Vice Chair and President
March 8, 2004
By: /s/ Joseph P. DiMaggio
- -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer
March 8, 2004
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
(a)(1) Aquila Group of Funds Code of Ethics for Principal Executive
and Senior Financial Officers under Section 406 of the Sarbanes-Oxley
Act of 2002.
(a) (2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment
Company Act of 1940.
(b) Certification of chief executive officer and chief financial officer as
required by Rule 30a-2(b) of the Investment Company Act of 1940.