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: 06/30/06
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2006
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: ONE OF THE
AN EAGLE'S HEAD] AQUILA(SM) GROUP OF FUNDS
[LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY:
A STANDING PEGASUS IN A CIRCLE]
SERVING KENTUCKY INVESTORS FOR ALMOST TWO DECADES
CHURCHILL TAX-FREE FUND OF KENTUCKY
"BUILT TO RIDE THE WAVES"
August, 2006
Dear Fellow Shareholder:
As you are no doubt aware, the financial markets have certainly had their
fair share of crests and troughs recently - one day the markets are up, and the
next day, they are down. Riding these waves is not always easy for investors.
The management of Churchill Tax-Free Fund of Kentucky understands
investors' apprehension when it comes to fluctuations with your hard-earned
investment monies. And, this concern is especially pertinent as it relates to
saving for and funding your retirement.
With this very real and inevitable concern in mind, Churchill Tax-Free
Fund of Kentucky has endeavored to structure the Fund to "ride the waves" with
the least upset to investors as possible. How do we go about seeking to
accomplish this?
INVESTMENT QUALITY
No matter what quality rating exists with a security, it will still be
subject to market fluctuations. However, our experience has been that
top-quality ratings do not fluctuate as much as lower quality ratings.
Furthermore, when they do fluctuate, they tend to fluctuate less and return to
their base market price at a quicker rate than lower-grade securities.
In accordance with the Fund's prospectus, Churchill Tax-Free Fund of
Kentucky can only purchase investment-grade securities - those within the top
four credit quality ratings - AAA, AA, A and Baa. In point of practice, however,
we have consistently sought to have the bulk of the portfolio securities
invested within the top two grades - AAA and AA. On June 30, 2006, 97.6% of the
portfolio consisted of AAA and AA rated securities.
INTERMEDIATE MATURITY
As we have emphasized in the past, long-term bonds tend to produce a
higher return than short-term bonds. However, such longer maturity bonds also
tend to experience a higher degree of volatility in their price.
Churchill Tax-Free Fund of Kentucky balances out longer-term maturities by
having a portion of the Fund's investments in shorter-term maturities. Through
utilizing a blend of maturities - both shorter-term and longer-term - Churchill
Tax-Free Fund of Kentucky attempts to provide a satisfactory level of return
without subjecting the share price to excessive swings as interest rates
increase and decrease. We feel that this focus on keeping the average of
maturities relatively intermediate in term
NOT A PART OF THE SEMI-ANNUAL REPORT
takes the best that each investment has to offer - gaining stability from the
shorter-term maturities and higher yields from the longer-term maturities.
DIVERSIFICATION OF THE PORTFOLIO
To the maximum extent possible, Churchill Tax-Free Fund of Kentucky
strives to invest in as many projects as possible throughout the state. The
portfolio might be comprised of a school district bond in Louisville, a
transportation bond in Lexington and a housing bond in Bewling Green. In this
way, we strive to ensure that no one project, type of project, or area of the
State can have any significant adverse influence upon your investment in the
Fund.
TAX-FREE INCOME
No matter what return Churchill Tax-Free Fund of Kentucky provides, it
must be remembered that you would have to earn significantly more from a taxable
investment in order to be equal to what you get to keep from a tax-free
investment.
As an example, you would have to earn 6.6%* on a taxable investment in
order to equal the tax-free level of 4%.
Keep this illustration in mind the next time you examine the yield that
Churchill Tax-Free Fund of Kentucky offers you. You will find that a 3%, 4% or
5% tax-free yield looks considerably more attractive to you when you consider
the implications of taxes.
SUMMARY
The Fund uses this combination of quality, maturity, and diversification
as it seeks to provide you with as high a level of tax-free income as is
consistent with preservation of capital.
As we are sure you are aware, there is no way to take ALL the waves out of
investing. But, you can rest assured that Churchill Tax-Free Fund of Kentucky
continually strives to do its very best to make sure your ride is as smooth as
possible.
Sincerely,
/s/ Diana P. Herrmann /s/ Lacy B. Herrmann
Diana P. Herrmann Lacy B. Herrmann
President Founder and Chairman Emeritus
* For illustration purposes only - assumes a 35% Federal and 6% state tax-rate.
This does not represent past or future performance of any investment.
NOT A PART OF THE SEMI-ANNUAL REPORT
CHURCHILL TAX-FREE FUND OF KENTUCKY
SCHEDULE OF INVESTMENTS
JUNE 30, 2006
(UNAUDITED)
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (3.4%) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
Bowling Green, Kentucky
$ 200,000 5.300%, 06/01/18 .............................................. Aa3/NR $ 211,610
Hardin County, Kentucky
170,000 5.000%, 06/01/17 AMBAC Insured ................................ Aaa/NR 174,570
Lexington-Fayette Urban County Government, Kentucky
2,000,000 4.750%, 05/01/24 FGIC Insured ................................. Aaa/AAA 2,021,320
Lexington-Fayette Urban County, Kentucky
Government Project Unlimited Tax
340,000 5.150%, 12/01/17 .............................................. Aa2/AA+ 356,099
Louisville-Jefferson County, Kentucky Metro
Government Unlimited Tax
1,590,000 5.000%, 11/01/19 .............................................. Aa2/AA 1,667,051
1,825,000 5.000%, 11/01/20 .............................................. Aa2/AA 1,906,961
Louisville, Kentucky Unlimited Tax
2,205,000 5.000%, 10/01/21 FGIC Insured ................................. Aaa/AAA 2,272,694
Warren County, Kentucky Judicial Unlimited Tax
345,000 5.100%, 09/01/17 AMBAC Insured ................................ Aaa/NR 364,151
365,000 5.150%, 09/01/18 AMBAC Insured ................................ Aaa/NR 385,951
-------------
Total General Obligation Bonds 9,360,407
-------------
REVENUE BONDS (96.5%)
STATE AGENCIES (32.0%)
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank ............................ NR/AA 513,595
Kentucky Asset/Liability Commission
500,000 4.500%, 10/01/22 FGIC Insured ................................. Aaa/AAA 496,555
Kentucky Infrastructure Authority
1,000,000 5.250%, 06/01/12 .............................................. Aa3/A+ 1,052,840
635,000 5.250%, 06/01/12 .............................................. Aa3/A+ 648,526
2,740,000 5.250%, 06/01/14 .............................................. Aa3/A+ 2,873,602
1,235,000 5.250%, 08/01/17 .............................................. NR/AA 1,314,238
100,000 5.000%, 06/01/18 .............................................. Aa3/A+ 103,239
230,000 5.000%, 06/01/21 .............................................. Aa3/A+ 236,836
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
STATE AGENCIES (CONTINUED)
Kentucky State Property and Buildings Commission
$ 4,000,000 5.375%, 02/01/14 FSA Insured (pre-refunded) ................... Aaa/AAA $ 4,276,160
1,000,000 5.000%, 11/01/15 AMBAC Insured ................................ Aaa/AAA 1,054,420
3,775,000 5.375%, 08/01/16 (pre-refunded) ............................... Aaa/AAA 4,019,847
2,725,000 5.375%, 08/01/16 FSA Insured .................................. Aaa/AAA 2,872,286
3,905,000 5.125%, 09/01/16 (pre-refunded) ............................... Aa3/AAA 4,085,060
4,000,000 5.250%, 10/01/16 .............................................. Aa3/A+ 4,202,960
1,265,000 5.250%, 08/01/17 MBIA Insured (pre-refunded) .................. Aaa/AAA 1,353,461
975,000 5.000%, 08/01/17 FSA Insured .................................. Aaa/AAA 1,006,658
8,155,000 5.125%, 09/01/17 (pre-refunded) ............................... Aa3/AAA 8,531,027
4,735,000 `5.250%, 10/01/17 ............................................. Aa3/A+ 4,966,920
1,250,000 5.500%, 11/01/17 FSA Insured .................................. Aaa/AAA 1,342,875
1,000,000 5.000%, 11/01/17 AMBAC Insured ................................ Aaa/AAA 1,047,980
165,000 5.375%, 02/01/18 FSA Insured (pre-refunded) ................... Aaa/AAA 176,392
3,030,000 5.000%, 08/01/18 FSA Insured (pre-refunded) ................... Aaa/AAA 3,174,773
3,950,000 5.125%, 09/01/18 (pre-refunded) ............................... Aa3/AAA 4,124,432
6,000,000 5.250%, 10/01/18 .............................................. Aa3/A+ 6,278,100
1,500,000 5.000%, 11/01/18 AMBAC Insured ................................ Aaa/AAA 1,567,170
4,000,000 5.375%, 10/01/19 MBIA Insured (pre-refunded) .................. Aaa/AAA 4,267,000
1,925,000 5.000%, 10/01/19 .............................................. Aa3/A+ 1,982,057
360,000 5.000%, 10/01/19 MBIA Insured (pre-refunded) .................. Aaa/AAA 377,701
785,000 5.150%, 11/01/19 FSA Insured .................................. Aaa/AAA 825,522
3,000,000 5.000%, 11/01/19 FSA Insured .................................. Aaa/AAA 3,113,280
250,000 5.000%, 05/01/20 FSA Insured .................................. Aaa/AAA 256,983
5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) .................. Aaa/AAA 5,279,000
235,000 5.000%, 08/01/23 MBIA Insured (pre-refunded) .................. Aaa/AAA 247,859
80,000 5.000%, 08/01/23 MBIA Insured (pre-refunded) .................. Aaa/AAA 84,378
Kentucky State Property Buildings Community Revenues
7,200,000 5.000%, 08/01/21 FSA Insured .................................. Aaa/AAA 7,503,552
2,500,000 5.000%, 08/01/24 FSA Insured .................................. Aaa/AAA 2,597,825
-------------
Total State Agencies 87,855,109
-------------
COUNTY AGENCIES (5.2%)
Jefferson County, Kentucky Capital Projects
430,000 5.200%, 06/01/12 MBIA Insured ................................. Aaa/AAA 443,588
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
COUNTY AGENCIES (CONTINUED)
Jefferson County, Kentucky Capital Projects (continued)
$ 570,000 5.250%, 06/01/13 MBIA Insured ................................. Aaa/AAA $ 588,263
520,000 5.250%, 06/01/14 MBIA Insured ................................. Aaa/AAA 536,661
3,370,000 5.375%, 06/01/18 MBIA Insured ................................. Aaa/AAA 3,481,682
1,640,000 5.375%, 06/01/22 MBIA Insured ................................. Aaa/AAA 1,693,021
5,935,000 5.500%, 06/01/28 MBIA Insured ................................. Aaa/AAA 6,118,332
Nelson County, Kentucky Court Facilities
Project Revenue
185,000 5.000%, 06/01/21 .............................................. Aa3/NR 190,513
Warren County, Kentucky Justice Center
365,000 4.300%, 09/01/22 MBIA Insured ............................. Aaa/NR 350,181
Warren County, Kentucky Justice Center Expansion
Corp. Revenue
700,000 5.400%, 09/01/24 .............................................. Aa3/NR 743,442
-------------
Total County Agencies 14,145,683
-------------
CITY/MUNICIPALITY OBLIGATIONS (0.5%)
Jeffersontown, Kentucky Public Project Corp.
500,000 5.750%, 11/01/15 .............................................. A3/NR 513,060
Lexington-Fayette Urban County Government,
Kentucky Public Facilities Revenue
180,000 5.125%, 10/01/23 FSA Insured .................................. Aaa/AAA 187,009
Shelbyville, Kentucky Certificates of Participation
625,000 5.000%, 10/01/22 .............................................. A2/NR 640,081
-------------
Total City / Municipality Obligations 1,340,150
-------------
HOSPITALS (3.4%)
Jefferson County, Kentucky Health Facilities Revenue
240,000 5.000%, 10/01/12 MBIA Insured ................................. Aaa/AAA 245,782
1,715,000 5.650%, 01/01/17 AMBAC Insured ................................ Aaa/AAA 1,762,951
2,200,000 5.250%, 05/01/17 .............................................. NR/A 2,277,528
815,000 5.125%, 10/01/17 AMBAC Insured ETM ............................ Aaa/AAA 835,253
Jefferson County, Kentucky Revenue Medical
Center Revenue
2,000,000 5.500%, 05/01/22 .............................................. NR/A 2,098,240
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
HOSPITALS (CONTINUED)
Kentucky Economic Development Finance Authority
$ 1,000,000 5.000%, 02/01/18 FSA Insured .................................. Aaa/AAA $ 1,015,300
Louisville-Jefferson County, Kentucky Medical
Center Revenue
1,000,000 5.000%, 06/01/18 .............................................. NR/A 1,038,290
-------------
Total Hospitals 9,273,344
-------------
HOUSING (9.7%)
Kentucky Housing Corporation Housing Revenue
140,000 4.200%, 01/01/15 AMT .......................................... Aaa/AAA 138,034
250,000 4.100%, 01/01/15 AMT .......................................... Aaa/AAA 243,282
170,000 4.100%, 07/01/15 AMT .......................................... Aaa/AAA 165,245
265,000 4.650%, 01/01/16 AMT+ ......................................... Aaa/AAA 264,589
210,000 4.300%, 01/01/16 AMT .......................................... Aaa/AAA 206,466
150,000 4.250%, 01/01/16 AMT .......................................... Aaa/AAA 147,710
200,000 4.200%, 01/01/16 AMT .......................................... Aaa/AAA 195,000
420,000 4.650%, 07/01/16 AMT+ ......................................... Aaa/AAA 418,009
610,000 4.300%, 07/01/16 AMT .......................................... Aaa/AAA 599,307
550,000 4.200%, 07/01/16 AMT .......................................... Aaa/AAA 538,269
555,000 4.200%, 01/01/17 .............................................. Aaa/AAA 543,018
100,000 5.125%, 07/01/17 .............................................. Aaa/AAA 101,426
680,000 4.200%, 07/01/17 .............................................. Aaa/AAA 664,768
470,000 4.800%, 01/01/18 AMT .......................................... Aaa/AAA 470,164
285,000 4.250%, 01/01/18 .............................................. Aaa/AAA 278,163
95,000 5.550%, 07/01/18 AMT .......................................... Aaa/AAA 96,682
575,000 4.800%, 07/01/18 AMT .......................................... Aaa/AAA 575,201
180,000 4.250%, 07/01/18 .............................................. Aaa/AAA 175,540
920,000 5.600%, 07/01/20 AMT .......................................... Aaa/AAA 950,130
900,000 4.800%, 07/01/20 AMT .......................................... Aaa/AAA 899,991
1,150,000 5.350%, 01/01/21 AMT .......................................... Aaa/AAA 1,170,608
6,395,000 5.450%, 07/01/22 AMT .......................................... Aaa/AAA 6,568,560
4,065,000 5.250%, 07/01/22 AMT .......................................... Aaa/AAA 4,136,585
245,000 5.200%, 07/01/22 .............................................. Aaa/AAA 248,731
415,000 5.100%, 07/01/22 AMT .......................................... Aaa/AAA 419,685
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
HOUSING (CONTINUED)
Kentucky Housing Corporation Housing Revenue
(continued)
$ 4,140,000 5.200%, 07/01/25 AMT .......................................... Aaa/AAA $ 4,203,715
275,000 5.375%, 07/01/27 .............................................. Aaa/AAA 280,684
570,000 5.550%, 07/01/33 .............................................. Aaa/AAA 584,524
Kentucky Housing Multifamily Mortgage Revenue
1,325,000 5.000%, 06/01/35 AMT .......................................... NR/AAA 1,324,192
-------------
Total Housing 26,608,278
-------------
SCHOOLS (23.3%)
Beechwood, Kentucky Independent School
District Finance Corp.
180,000 5.650%, 03/01/20 .............................................. Aa3/NR 189,601
Berea, Kentucky Educational Facilities
Revenue (Berea College)
1,000,000 4.125%, 06/01/25 .............................................. Aaa/NR 931,670
Boone County, Kentucky School District Finance Corp.
1,730,000 4.125%, 08/01/22 XLCA Insured ................................. Aaa/NR 1,646,787
Boone County, Kentucky School District Finance
Corp. School Building
660,000 5.000%, 06/01/15 .............................................. Aa3/NR 679,701
285,000 5.700%, 02/01/16 .............................................. Aa3/NR 301,772
140,000 4.750%, 06/01/20 FSA Insured .................................. Aaa/AAA 142,517
1,000,000 5.375%, 08/01/20 FSA Insured .................................. AAA/NR 1,049,270
1,580,000 4.500%, 08/01/23 FSA Insured+ ................................. Aaa/NR 1,574,359
Boyd County, Kentucky School District Finance Corp.
1,025,000 5.000%, 10/01/15 .............................................. Aa3/NR 1,060,106
575,000 5.375%, 10/01/17 .............................................. Aa3/NR 595,780
Bullitt County, Kentucky School District Finance Corp.
200,000 4.300%, 10/01/21 .............................................. Aaa/NR 196,044
2,455,000 4.500%, 10/01/22 MBIA Insured ................................. Aaa/NR 2,478,421
2,590,000 4.500%, 10/01/23 MBIA Insured ................................. Aaa/NR 2,611,134
Christian County, Kentucky School District Finance Corp.
500,000 5.000%, 06/01/09 .............................................. Aa3/NR 514,835
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Christian County, Kentucky School District Finance Corp.
$ 820,000 4.000%, 08/01/19 XLCA Insured ................................. Aaa/NR $ 775,859
855,000 4.000%, 08/01/20 XLCA Insured ................................. Aaa/NR 803,503
905,000 4.000%, 08/01/21 XLCA Insured ................................. Aaa/NR 846,465
1,465,000 4.000%, 08/01/22 XLCA Insured ................................. Aaa/NR 1,361,776
1,525,000 4.125%, 08/01/23 XLCA Insured ................................. Aaa/NR 1,422,276
1,590,000 4.125%, 08/01/24 XLCA Insured++ ............................... Aaa/NR 1,480,290
Daviess County, Kentucky School District Finance Corp.
200,000 5.000%, 06/01/24 .............................................. Aa3/NR 206,044
Fayette County, Kentucky School Building Revenue
200,000 5.125%, 04/01/18 AMBAC Insured ................................ Aaa/AAA 209,500
Fayette County, Kentucky School District Finance Corp.
5,000,000 4.250%, 04/01/23 FSA Insured .................................. Aaa/AAA 4,737,350
Floyd County, Kentucky School Building
680,000 4.375%, 10/01/22 .............................................. Aa3/NR 662,592
Floyd County, Kentucky School Finance Corporation
School Building
380,000 4.000%, 03/01/17 XLCA Insured ................................. Aaa/NR 367,118
1,320,000 4.000%, 03/01/23 XLCA Insured ................................. Aaa/NR 1,231,415
1,855,000 4.125%, 03/01/26 XLCA Insured ................................. Aaa/NR 1,730,325
Fort Thomas, Kentucky Ind. School District Finance
785,000 4.375%, 04/01/21 .............................................. Aa3/NR 768,664
Franklin County, Kentucky School District Finance Corp.
330,000 4.500%, 04/01/18 .............................................. Aa3/NR 331,907
1,000,000 5.000%, 04/01/24 .............................................. Aa3/NR 1,029,660
Graves County, Kentucky School Building Revenue
1,260,000 5.000%, 06/01/22 .............................................. Aa3/NR 1,300,748
1,320,000 5.000%, 06/01/23 .............................................. Aa3/NR 1,361,105
Hardin County, Kentucky School District Finance Corp.
1,475,000 4.000%, 02/01/19 AMBAC Insured ................................ Aaa/NR 1,400,660
Hickman County, Kentucky School District Finance
Corp. School Building Revenue
250,000 5.000%, 06/01/24 .............................................. Aa3/NR 257,555
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Jefferson County, Kentucky School District Finance
Corp. School Building
$ 250,000 5.250%, 07/01/16 FSA Insured .................................. Aaa/AAA $ 261,005
150,000 5.000%, 04/01/20 FSA Insured .................................. Aaa/AAA 155,085
1,360,000 4.250%, 06/01/21 FSA Insured .................................. Aaa/AAA 1,310,156
Jessamine County, Kentucky School District Finance
Corp. School Building Revenue
1,205,000 4.900%, 05/01/22 .............................................. Aa3/NR 1,226,280
Kenton County, Kentucky School District
955,000 5.000%, 04/01/16 .............................................. Aa3/NR 985,665
1,055,000 5.000%, 04/01/17 .............................................. Aa3/NR 1,092,115
605,000 5.000%, 04/01/19 .............................................. Aa3/NR 624,735
Kenton County, Kentucky School District Finance Corp.
445,000 4.300%, 04/01/22 CIFG Insured ................................. Aaa/NR 434,525
4,250,000 5.000%, 06/01/22 MBIA Insured ................................. Aaa/NR 4,401,257
750,000 4.375%, 04/01/24 CIFG Insured ................................. Aaa/NR 734,092
325,000 4.400%, 04/01/26 CIFG Insured ................................. Aaa/NR 316,196
Kentucky Economic Development Finance Authority
College Revenue Centre College
1,230,000 5.000%, 04/01/17 FSA Insured .................................. Aaa/AAA 1,277,945
1,675,000 5.000%, 04/01/19 FSA Insured .................................. Aaa/AAA 1,732,871
Lexington-Fayette Urban County, Kentucky
Government Project Transylvania University
1,320,000 5.125%, 08/01/18 MBIA Insured ................................. Aaa/AAA 1,365,329
Lexington-Fayette Urban County, Kentucky
Government Project U.K. Library
725,000 5.000%, 11/01/15 MBIA Insured++ ............................... Aaa/AAA 755,247
300,000 5.000%, 11/01/20 MBIA Insured ................................. Aaa/AAA 309,972
Lincoln County, Kentucky School District
250,000 4.800%, 08/01/19 .............................................. Aa3/NR 256,013
Louisville & Jefferson County, Kentucky University
of Louisville
500,000 5.000%, 06/01/19 AMBAC Insured ................................ Aaa/AAA 523,380
525,000 5.000%, 06/01/20 AMBAC Insured ................................ Aaa/AAA 547,974
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Oldham County, Kentucky School District Finance Corp.
$ 900,000 5.000%, 05/01/19 MBIA Insured ................................. Aaa/NR $ 937,764
Scott County, Kentucky School Building
100,000 5.000%, 03/01/22 .............................................. Aa3/NR 103,496
Scott County, Kentucky School District Finance Corp.
1,115,000 4.200%, 01/01/22 AMBAC Insured ................................ Aaa/NR 1,082,821
1,955,000 4.250%, 01/01/23 AMBAC Insured ................................ Aaa/NR 1,902,958
1,560,000 4.300%, 01/01/24 AMBAC Insured ................................ Aaa/NR 1,522,498
200,000 5.000%, 06/01/24 FSA Insured .................................. Aaa/NR 207,254
Spencer County, Kentucky School District Finance Corp.
1,415,000 5.000%, 07/01/19 FSA insured .................................. Aaa/NR 1,475,520
University of Kentucky Revenue
1,335,000 5.000%, 05/01/16 FGIC Insured (pre-refunded) .................. Aaa/AAA 1,386,090
505,000 5.000%, 06/01/18 FSA insured .................................. Aaa/NR 521,771
Warren County, Kentucky School District
Finance Corporation
295,000 4.125%, 02/01/23 MBIA Insured ................................ Aaa/NR 279,524
-------------
Total Schools 63,986,347
-------------
TRANSPORTATION (10.4%)
Kenton County, Kentucky Airport Board Airport Revenue
1,570,000 5.000%, 03/01/13 MBIA Insured AMT ............................. Aaa/AAA 1,625,562
750,000 5.625%, 03/01/14 MBIA Insured AMT ............................. Aaa/AAA 797,422
1,000,000 5.500%, 03/01/17 MBIA Insured AMT ............................. Aaa/AAA 1,058,650
2,230,000 5.500%, 03/01/18 MBIA Insured AMT ............................. Aaa/AAA 2,352,918
1,300,000 5.000%, 03/01/23 MBIA Insured AMT ............................. Aaa/AAA 1,318,278
Kentucky Interlocal School Transportation Authority
145,000 5.400%, 06/01/17 .............................................. Aa3/A+ 145,838
400,000 6.000%, 12/01/20 .............................................. Aa3/A+ 405,684
200,000 6.000%, 12/01/20 .............................................. Aa3/A+ 202,842
300,000 5.800%, 12/01/20 .............................................. Aa3/A+ 304,026
400,000 5.650%, 12/01/20 .............................................. Aa3/A+ 405,132
350,000 5.600%, 12/01/20 .............................................. Aa3/A+ 354,421
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
TRANSPORTATION (CONTINUED)
Kentucky State Turnpike Authority Economic
Development & Resource Recovery Road Revenue
$ 1,000,000 5.625%, 07/01/12 FSA Insured (pre-refunded) ................... Aaa/AAA $ 1,068,240
200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) ................... Aaa/AAA 213,648
500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) ................... Aaa/AAA 534,120
450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) ................... Aaa/AAA 473,832
3,455,000 5.100%, 07/01/18 FSA Insured .................................. Aaa/AAA 3,580,969
Louisville-Jefferson County Regional Airport, KY
2,000,000 5.750%, 07/01/15 FSA Insured AMT .............................. Aaa/AAA 2,144,140
2,000,000 5.500%, 07/01/15 FSA Insured AMT .............................. Aaa/AAA 2,129,840
1,650,000 5.750%, 07/01/17 FSA Insured AMT .............................. Aaa/AAA 1,761,260
1,000,000 5.250%, 07/01/18 FSA Insured AMT .............................. Aaa/AAA 1,039,670
1,000,000 5.000%, 07/01/18 FSA Insured AMT .............................. Aaa/AAA 1,022,560
1,370,000 5.250%, 07/01/21 FSA Insured AMT .............................. Aaa/AAA 1,417,717
3,390,000 5.250%, 07/01/22 FSA Insured AMT .............................. Aaa/AAA 3,504,006
275,000 5.375%, 07/01/23 FSA Insured AMT .............................. Aaa/AAA 285,313
500,000 5.000%, 07/01/25 MBIA Insured AMT ............................. Aaa/AAA 511,090
-------------
Total Transportation 28,657,178
-------------
UTILITIES (12.0%)
Bardstown, Kentucky
200,000 5.000%, 12/01/19 MBIA Insured ................................. Aaa/NR 208,766
Boone County, Kentucky Pollution Control Rev.
Dayton Power & Light
1,000,000 4.700%, 01/01/28 FGIC Insured ................................. Aaa/AAA 991,980
Campbell & Kenton Counties, Kentucky
Sanitation Sewer District
100,000 5.000%, 08/01/24 FSA Insured .................................. Aaa/AAA 102,627
Kentucky Rural Water Finance Corp.
205,000 4.250%, 08/01/19 MBIA Insured ................................. NR/AAA 199,775
595,000 5.000%, 02/01/20 AMBAC Insured ................................ Aaa/AAA 617,116
210,000 4.250%, 08/01/20 MBIA Insured ................................. NR/AAA 203,500
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
UTILITIES (CONTINUED)
Kentucky Rural Water Finance Corp. (continued)
$ 200,000 4.375%, 08/01/22 MBIA Insured ................................. NR/AAA $ 194,700
240,000 4.500%, 08/01/23 MBIA Insured ................................. NR/AAA 236,340
200,000 4.500%, 02/01/24 MBIA Insured ................................. NR/AAA 196,420
255,000 4.500%, 08/01/24 MBIA Insured ................................. NR/AAA 250,351
290,000 4.500%, 08/01/27 MBIA Insured ................................. NR/AAA 280,781
245,000 4.600%, 08/01/28 MBIA Insured ................................. NR/AAA 239,674
315,000 4.625%, 08/01/29 MBIA Insured ................................. NR/AAA 308,212
Lexington-Fayette Urban County Government,
Kentucky Sewer System
1,000,000 5.000%, 07/01/19 .............................................. Aa3/AA 1,039,200
Louisville & Jefferson County, Kentucky
Metropolitan Sewer District
1,000,000 5.000%, 05/15/12 FGIC Insured ................................. Aaa/AAA 1,029,520
2,565,000 5.375%, 05/15/17 MBIA Insured ................................. Aaa/AAA 2,741,395
2,180,000 5.000%, 05/15/18 FSA Insured .................................. Aaa/AAA 2,286,406
2,380,000 4.250%, 05/15/20 FSA Insured .................................. Aaa/AAA 2,291,321
2,510,000 4.250%, 05/15/21 FSA Insured .................................. Aaa/AAA 2,404,982
400,000 5.000%, 05/15/22 FGIC Insured ................................. Aaa/AAA 410,140
Louisville, Kentucky Waterworks Board
Water System Revenue
1,000,000 5.250%, 11/15/16 FSA Insured .................................. Aaa/AAA 1,049,900
1,000,000 5.250%, 11/15/17 FSA Insured .................................. Aaa/AAA 1,047,860
2,530,000 5.250%, 11/15/18 FSA Insured .................................. Aaa/AAA 2,647,999
205,000 5.250%, 11/15/19 FSA Insured .................................. Aaa/AAA 213,233
6,600,000 5.250%, 11/15/22 FSA Insured .................................. Aaa/AAA 6,907,824
2,415,000 5.250%, 11/15/24 FSA Insured .................................. Aaa/AAA 2,521,743
Northern Kentucky Water District
660,000 5.000%, 02/01/23 FGIC Insured ................................. Aaa/NR 676,731
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- ------------ --------------------------------------------------- -------- -------------
UTILITIES (CONTINUED)
Owensboro, Kentucky Electric and Power
$ 1,555,000 5.000%, 01/01/20 FSA Insured .................................. Aaa/AAA $ 1,601,806
-------------
Total Utilities 32,900,302
-------------
Total Revenue Bonds 264,766,391
-------------
Total Investments (cost $272,332,339**) ................... 99.9% 274,126,798
Other assets less liabilities ............................. 0.1 300,293
------ -------------
Net Assets ................................................ 100.0% $ 274,427,091
====== =============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO
---------------------------------------------------- ---------
Aaa of Moody's or AAA of S&P ............................. 81.0%
Aa of Moody's or AA of S&P ............................... 16.6
A of Moody's or S&P ...................................... 2.4
------
100.0%
======
* Any security not rated (NR) by either credit rating service 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.
+ Security traded on a when-issued basis.
++ Security pledged as collateral for the Fund's when-issued
commitments.
PORTFOLIO ABBREVIATIONS:
-----------------------------------------------
AMBAC - American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Tax
CIFG - CIFG Assurance North America, Inc.
ETM - Escrowed To Maturity
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assurance
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance
NR - Not Rated
XLCA - XL Capital Assurance
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2006 (UNAUDITED)
ASSETS
Investments at value (cost $272,332,339) ........................................... $274,126,798
Interest receivable ................................................................ 3,971,278
Receivable for investment securities sold .......................................... 1,080,000
Receivable for Fund shares sold .................................................... 37,188
Other assets ....................................................................... 27,434
------------
Total assets ....................................................................... 279,242,698
------------
LIABILITIES
Cash overdraft ..................................................................... 536,851
Payable for investment securities purchased ........................................ 3,131,951
Payable for Fund shares redeemed ................................................... 585,882
Dividends payable .................................................................. 332,106
Management fee payable ............................................................. 97,163
Distribution and service fees payable .............................................. 67,570
Accrued expenses ................................................................... 64,084
------------
Total liabilities .................................................................. 4,815,607
------------
NET ASSETS ............................................................................. $274,427,091
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 264,365
Additional paid-in capital ......................................................... 270,651,607
Net unrealized appreciation on investments (note 4) ................................ 1,794,459
Undistributed net investment income ................................................ 438,146
Accumulated net realized gain on investments ....................................... 1,278,514
------------
$274,427,091
============
CLASS A
Net Assets ......................................................................... $217,086,509
============
Capital shares outstanding ......................................................... 20,914,318
============
Net asset value and redemption price per share ..................................... $ 10.38
============
Offering price per share (100/96 of $10.38 adjusted to nearest cent) ............... $ 10.81
============
CLASS C
Net Assets ......................................................................... $ 6,148,484
============
Capital shares outstanding ......................................................... 592,615
============
Net asset value and offering price per share ....................................... $ 10.38
============
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) ...................................... $ 10.38*
============
CLASS I
Net Assets ......................................................................... $ 7,696,364
============
Capital shares outstanding ......................................................... 741,840
============
Net asset value, offering and redemption price per share ........................... $ 10.37
============
CLASS Y
Net Assets ......................................................................... $ 43,495,734
============
Capital shares outstanding ......................................................... 4,187,729
============
Net asset value, offering and redemption price per share ........................... $ 10.39
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME:
Interest income ............................................ $ 6,347,543
Expenses:
Management fee (note 3) .................................... $ 564,079
Distribution and service fees (note 3) ..................... 207,640
Transfer and shareholder servicing agent fees .............. 101,822
Trustees' fees and expenses (note 8) ....................... 67,187
Fund accounting fees ....................................... 32,900
Legal fees (note 3) ........................................ 30,828
Custodian fees ............................................. 21,869
Shareholders' reports and proxy statements ................. 19,697
Insurance .................................................. 9,488
Auditing and tax fees ...................................... 9,416
Registration fees and dues ................................. 8,566
Chief compliance officer (note 3) .......................... 2,278
Miscellaneous .............................................. 18,328
-------------
Total expenses ............................................. 1,094,098
Expenses paid indirectly (note 6) .......................... (6,750)
-------------
Net expenses ............................................... 1,087,348
-------------
Net investment income ...................................... 5,260,195
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ...... 404,239
Change in unrealized appreciation on investments ........... (6,293,605)
-------------
Net realized and unrealized gain (loss) on investments ..... (5,889,366)
-------------
Net change in net assets resulting from operations ......... $ (629,171)
=============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended
June 30, 2006 Year Ended
(unaudited) December 31, 2005
---------------- -----------------
OPERATIONS:
Net investment income ...................................... $ 5,260,195 $ 10,856,949
Net realized gain (loss) from securities transactions ...... 404,239 1,064,505
Change in unrealized appreciation on investments ........... (6,293,605) (4,961,711)
------------- -------------
Change in net assets from operations ..................... (629,171) 6,959,743
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ...................................... (4,119,295) (8,497,105)
Class C Shares:
Net investment income ...................................... (98,259) (226,903)
Class I Shares:
Net investment income ...................................... (139,718) (277,644)
Class Y Shares:
Net investment income ...................................... (899,398) (1,888,768)
------------- -------------
Change in net assets from distributions .................. (5,256,670) (10,890,420)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold .................................. 13,249,108 33,559,576
Reinvested dividends and distributions ..................... 2,150,615 4,311,984
Cost of shares redeemed .................................... (21,773,511) (44,707,514)
------------- -------------
Change in net assets from capital share transactions ....... (6,373,788) (6,835,954)
------------- -------------
Change in net assets ....................................... (12,259,629) (10,766,631)
NET ASSETS:
Beginning of period ........................................ 286,686,720 297,453,351
End of period* ............................................. $ 274,427,091 $ 286,686,720
============= =============
* Includes undistributed net investment income of: ......... $ 438,146 $ 434,620
============= =============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION
Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified,
open-end investment company, was organized in March, 1987 as a Massachusetts
business trust and commenced operations on May 21, 1987. The Fund is authorized
to issue an unlimited number of shares and, since its inception to April 1,
1996, offered only one class of shares. On that date, the Fund began offering
two additional classes of shares, Class C and Class Y shares. All shares
outstanding prior to that date were designated as Class A shares and are sold
with a front-payment sales charge and bear an annual 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 by the pricing service at the mean of bid and asked quotations.
If market quotations or a valuation from the pricing service is not
readily available, the security is valued at fair value determined in good
faith 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) MULTIPLE CLASS ALLOCATIONS: All income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses 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.
f) RECLASSIFICATION OF CAPITAL ACCOUNTS: Accounting principles generally
accepted in the United States of America require that certain components
of net assets relating to permanent differences be reclassified between
financial and tax reporting. These reclassifications have no effect on net
assets or net asset value per share. No reclassifications were made during
the six months ended June 30, 2006.
3. FEES AND RELATED PARTY TRANSACTIONS
a) MANAGEMENT ARRANGEMENTS:
Aquila Investment Management LLC (the "Manager"), a wholly-owned
subsidiary of Aquila Management Corporation, the Fund's founder and sponsor,
serves as the Manager for the Fund under an Advisory and Administration
Agreement with the Fund. 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 managing relationships with 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.
Under a Compliance Agreement with the Manager, the Manager is compensated
for Chief Compliance Officer related services provided to enable the Fund to
comply with Rule 38a-1 of the Investment Company Act of 1940.
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 six months ended June 30, 2006, distribution fees on Class A
Shares amounted to $165,790 of which the Distributor retained $4,415.
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
six months ended June 30, 2006, amounted to $25,560. 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 six months ended June 30, 2006, amounted to $8,520. The total
of these payments with respect to Class C Shares amounted to $34,080 of which
the Distributor retained $8,209.
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 six months ended June 30, 2006,
these payments were made at the average annual rate of 0.35% of such net assets
and amounted to $13,596 of which $7,769 related to the Plan and $5,827 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 six months ended June
30, 2006, total commissions on sales of Class A Shares amounted to $86,515 of
which the Distributor received $7,571.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2006, the Fund incurred $29,663 of legal
fees allocable to Hollyer Brady Barrett & 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 at that firm.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 2006, purchases of securities and
proceeds from the sales of securities aggregated $22,879,075 and $26,155,130,
respectively.
At June 30, 2006 the aggregate tax cost for all securities was
$272,316,969. At June 30, 2006, the aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $4,206,753 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted to
$2,396,924 for a net unrealized appreciation of $1,809,829.
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, its cash balances in income-producing assets rather than
leave cash uninvested.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED
JUNE 30, 2006 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2005
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
CLASS A SHARES:
Proceeds from shares sold ..... 1,024,902 $ 10,781,617 2,024,652 $ 21,593,854
Reinvested distributions ...... 186,266 1,958,320 362,716 3,868,074
Cost of shares redeemed ....... (1,412,683) (14,842,526) (2,962,111) (31,537,026)
------------ ------------ ------------ ------------
Net change .................. (201,515) (2,102,589) (574,743) (6,075,098)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold ..... 23,013 243,743 90,038 959,910
Reinvested distributions ...... 5,830 61,301 13,187 140,559
Cost of shares redeemed ....... (124,878) (1,312,380) (175,383) (1,859,038)
------------ ------------ ------------ ------------
Net change .................. (96,035) (1,007,336) (72,158) (758,569)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold ..... -- -- 44,082 471,889
Reinvested distributions ...... 9,511 99,952 22,690 241,811
Cost of shares redeemed ....... (580) (6,111) (38,599) (410,675)
------------ ------------ ------------ ------------
Net change .................. 8,931 93,841 28,173 303,025
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold ..... 209,912 2,223,748 984,142 10,533,923
Reinvested distributions ...... 3,588 31,042 5,130 61,540
Cost of shares redeemed ....... (534,149) (5,612,494) (1,022,004) (10,900,775)
------------ ------------ ------------ ------------
Net change .................. (320,649) (3,357,704) (32,732) (305,312)
------------ ------------ ------------ ------------
Total transactions in Fund
shares ........................ (609,268) $ (6,373,788) (651,460) $ (6,835,954)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At June 30, 2006 there were 6 Trustees, one of which is affiliated with
the Manager and is not paid any fees. The total amount of Trustees' service and
attendance fees paid during the six months ended June 30, 2006 was $51,325 to
cover carrying out their responsibilities and attendance at
regularly scheduled quarterly Board Meetings and meetings of the Independent
Trustees held prior to each quarterly Board Meeting. When additional or special
meetings are held, the meeting fees are paid to those Trustees in attendance.
Trustees are reimbursed for their expenses such as travel, accommodations, and
meals incurred in connection with attendance at Board Meetings and the Annual
Meeting of Shareholders. For the six months ended June 30, 2006, such
meeting-related expenses amounted to $15,862.
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. INCOME TAX INFORMATION AND 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.
The tax character of distributions:
Year Ended December 31,
2005 2004
----------- -----------
Net tax-exempt income $10,817,058 $11,146,096
Ordinary income 73,362 234,743
----------- -----------
$10,890,420 $11,380,839
=========== ===========
As of December 31, 2005, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized gain $ 879,242
Unrealized appreciation 8,100,454
Undistributed tax-exempt income 422,230
----------
$9,401,926
==========
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A
---------------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/06 ---------------------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.60 $ 10.74 $ 10.69 $ 10.66 $ 10.31 $ 10.40
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income+ ............... 0.20 0.39 0.42 0.44 0.47 0.50
Net gain (loss) on securities (both
realized and unrealized) ........... (0.23) (0.14) 0.05 0.03 0.35 (0.09)
-------- -------- -------- -------- -------- --------
Total from investment operations ..... (0.03) 0.25 0.47 0.47 0.82 0.41
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.19) (0.39) (0.42) (0.44) (0.47) (0.50)
Distributions from capital gains ..... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions .................. (0.19) (0.39) (0.42) (0.44) (0.47) (0.50)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.38 $ 10.60 $ 10.74 $ 10.69 $ 10.66 $ 10.31
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) (0.25)%* 2.39% 4.49% 4.50% 8.15% 4.02%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $217,087 $223,811 $232,927 $229,176 $226.014 $201,604
Ratio of expenses to average
net assets ......................... 0.78%** 0.77% 0.73% 0.72% 0.72% 0.72%
Ratio of net investment income to
average net assets ................. 3.73%** 3.66% 3.96% 4.14% 4.82% 4.82%
Portfolio turnover rate .............. 8.19%* 24.87% 14.31% 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 ......................... 0.77%** 0.76% 0.73% 0.71% 0.71% 0.70%
Class C
---------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/06 ----------------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 $ 10.39
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income+ ............... 0.15 0.30 0.33 0.35 0.38 0.41
Net gain (loss) on securities (both
realized and unrealized) ........... (0.21) (0.14) 0.04 0.03 0.35 (0.08)
-------- -------- -------- -------- -------- --------
Total from investment operations ..... (0.06) 0.16 0.37 0.38 0.73 0.33
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.15) (0.30) (0.33) (0.35) (0.38) (0.41)
Distributions from capital gains ..... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions .................. (0.15) (0.30) (0.33) (0.35) (0.38) (0.41)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.38 $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) (0.57)%* 1.53% 3.51% 3.62% 7.23% 3.24%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 6,148 $ 7,296 $ 8,166 $ 7,197 $ 4,804 $ 3,355
Ratio of expenses to average
net assets ......................... 1.63%** 1.62% 1.58% 1.57% 1.56% 1.56%
Ratio of net investment income to
average net assets ................. 2.88%** 2.81% 3.11% 3.26% 3.62% 3.92%
Portfolio turnover rate .............. 8.19%* 24.87% 14.31% 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 ......................... 1.62%** 1.61% 1.58% 1.56% 1.55% 1.55%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class I
-------------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31, Period
6/30/06 ----------------------------------------------------- Ended
(unaudited) 2005 2004 2003 2002 12/31/01(1)
----------- -------- -------- -------- -------- -----------
Net asset value, beginning of period ..... $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 $ 10.44
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income + .............. 0.19 0.38 0.41 0.43 0.46 0.19
Net gain (loss) on securities (both
realized and unrealized) ........... (0.22) (0.14) 0.03 0.02 0.35 (0.13)
-------- -------- -------- -------- -------- --------
Total from investment operations ..... (0.03) 0.24 0.44 0.45 0.81 0.06
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.19) (0.38) (0.40) (0.42) (0.46) (0.19)
Distributions from capital gains ..... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions .................. (0.19) (0.38) (0.40) (0.42) (0.46) (0.19)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.37 $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) (0.31)%* 2.24% 4.24% 4.33% 7.98% 0.58%*
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 7,696 $ 7,764 $ 7,564 $ 4,438 $ 2,407 $ 1,426
Ratio of expenses to average
net assets ......................... 0.91%** 0.92% 0.89% 0.88% 0.87% 0.83%**
Ratio of net investment income to
average net assets ................. 3.59%** 3.52% 3.79% 3.95% 4.32% 4.47%**
Portfolio turnover rate .............. 8.19%* 24.87% 14.31% 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 ......................... 0.90%** 0.91% 0.89% 0.87% 0.86% 0.82%**
Class Y
---------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
6/30/06 ----------------------------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.61 $ 10.75 $ 10.70 $ 10.67 $ 10.32 $ 10.40
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income + .............. 0.21 0.41 0.44 0.46 0.49 0.51
Net gain (loss) on securities (both
realized and unrealized) ........... (0.23) (0.14) 0.05 0.03 (0.07)
-------- -------- -------- -------- -------- --------
Total from investment operations ..... (0.02) 0.27 0.49 0.49 0.84 0.44
-------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.20) (0.41) (0.44) (0.46) (0.49) (0.52)
Distributions from capital gains ..... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions .................. (0.20) (0.41) (0.44) (0.46) (0.49) (0.52)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.39 $ 10.61 $ 10.75 $ 10.70 $ 10.67 $ 10.32
======== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) (0.17)%* 2.55% 4.65% 4.65% 8.30% 4.28%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 43,496 $ 47,816 $ 48,795 $ 46,313 $ 41,223 $ 25,585
Ratio of expenses to average
net assets ......................... 0.63%** 0.62% 0.58% 0.57% 0.57% 0.57%
Ratio of net investment income to
average net assets ................. 3.88%** 3.81% 4.11% 4.28% 4.63% 4.94%
Portfolio turnover rate .............. 8.19%* 24.87% 14.31% 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 ......................... 0.62%** 0.61% 0.58% 0.56% 0.56% 0.55%
- ----------
(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.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED)
As a shareholder of the Fund, you may incur two types of costs: (1)
transaction costs, including front-end sales charges with respect to Class A
shares or contingent deferred sales charges ("CDSC") with respect to Class C
shares; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other Fund expenses. The table below is intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The table below is based on an investment of $1,000 invested on January 1,
2006 and held for the six months ended June 30, 2006.
ACTUAL EXPENSES
This table provides information about actual account values and actual
expenses. You may use the information provided in this table, together with the
amount you invested, to estimate the expenses that you paid over the period. To
estimate the expenses you paid on your account, divide your ending account value
by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During the Period".
FOR THE SIX MONTHS ENDED JUNE 30, 2006
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A (0.25)% $1,000.00 $997.50 $3.86
- --------------------------------------------------------------------------------
Class C (0.57)% $1,000.00 $994.30 $8.10
- --------------------------------------------------------------------------------
Class I (0.31)% $1,000.00 $996.90 $4.51
- --------------------------------------------------------------------------------
Class Y (0.17)% $1,000.00 $998.30 $3.11
- --------------------------------------------------------------------------------
(1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE
APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES.
TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
(2) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.62%, 0.90%
AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
183/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs
with respect to Class A shares. The example does not reflect the deduction of
contingent deferred sales charges ("CDSC") with respect to Class C shares.
Therefore, the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different mutual funds. In
addition, if these transaction costs were included, your costs would have been
higher.
FOR THE SIX MONTHS ENDED JUNE 30, 2006
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,021.21 $3.90
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,016.95 $8.19
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,020.56 $4.56
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,021.96 $3.14
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.62%, 0.90%
AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
183/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT
Renewal until June 30, 2007 of the Advisory and Administration Agreement
(the "Advisory Agreement") between the Fund and the Manager was approved by the
Board of Trustees and the independent Trustees in June, 2006. At a meeting
called and held for that purpose at which a majority of the independent Trustees
were present in person, the following materials were considered:
o Copies of the agreements to be renewed;
o A term sheet describing the material terms of the agreements;
o The Annual Report of the Fund for the year ended December 31, 2005;
o A report, prepared by the Manager and provided to the Trustees in
advance of the meeting for the Trustees' review, containing data
about the performance of the Fund, data about its fees, expenses and
purchases and redemptions of capital stock together with comparisons
of such data with similar data about other comparable funds, as well
as data as to the profitability of the Manager; and
o Quarterly materials reviewed at prior meetings on the Fund's
performance, operations, portfolio and compliance.
The Trustees reviewed materials relevant to, and considered the following
factors:
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER.
The Manager has provided local management of the Fund's portfolio. The
Trustees noted that the Manager employed Thomas S. Albright as portfolio manager
for the Fund and has established facilities for credit analysis of the Fund's
portfolio securities. Mr. Albright, based in Louisville, has provided local
information regarding specific holdings in the Fund's portfolio. The portfolio
manager has also been available to and has met with the brokerage and financial
planner community and with investors and prospective investors to provide them
with information generally about the Fund's portfolio, with which to assess the
Fund as an investment vehicle for residents of Kentucky in light of prevailing
interest rates and local economic conditions.
The Board considered that the Manager had provided all services the Board
deemed necessary or appropriate, including the specific services that the Board
has determined are required for the Fund, given that its purpose is to provide
shareholders with as high a level of current income exempt from Kentucky state
and regular Federal income taxes as is consistent with preservation of capital.
The Manager has additionally provided all administrative services to the
Fund. The Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian. The Board considered that the Manager had established and
maintained a strong culture of ethical conduct and regulatory compliance.
The Board concluded that the services provided were appropriate and
satisfactory and that the Fund would be well served if they continued.
Evaluation of this factor weighed in favor of renewal of the Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and the
benchmark index. It was noted that the materials provided by the Manager
indicated that compared to the five largest competitive Kentucky funds, the Fund
has had investment performance that is generally comparable to its peers for the
five- and ten-year periods, with lower rates of return explained by the Fund's
generally higher-quality portfolio and generally shorter average maturities. The
Board considered these results to be consistent with the purposes of the Fund.
The Board concluded that the performance of the Fund, in light of market
conditions, was satisfactory. Evaluation of this factor indicated to the
Trustees that renewal of the Advisory Agreement would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUND.
The information provided in connection with renewal contained expense data
for the Fund and its competitors as well as data for all single-state tax-free
municipal bond funds nationwide, including data for all such front-end load
funds of a comparable asset size. The materials also showed the profitability to
the Manager and of its services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were similar to and were
reasonable as compared to those being paid by single-state tax-free municipal
bond funds nationwide, and by the Fund's local competitors, all of which had
higher management fees except for one.
The Board further concluded that the profitability to the Manager and the
Distributor did not argue against approval of the fees to be paid under the
Advisory Agreement.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS.
Data provided to the Trustees showed that the Fund's asset size had been
generally increasing in recent years. However, they concluded that the recent
increases in prevailing interest rates and the possibility of further increases
might make it difficult to achieve substantial growth in assets in the near
future. The Trustees also noted that the materials indicated that the Fund's
fees were already generally lower than those of its peers, including those with
breakpoints. Evaluation of this factor indicated to the Board that the Advisory
Agreement should be renewed without addition of breakpoints at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATES FROM THE
RELATIONSHIPS WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliates, by providing services to a number of funds or other
investment clients including the Fund, were able to spread costs as they would
otherwise be unable to do. The Board noted that while that produces efficiencies
and increased profitability for the Manager and its affiliates, it also makes
their services available to the Fund at favorable levels of quality and cost
which are more advantageous to the Fund than would otherwise have been possible.
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky
(the "Fund") was held on April 28, 2006. The holders of shares representing 71%
of the total net asset value of the shares entitled to vote were present in
person or by proxy. At the meeting, the following matters were voted upon and
approved by the shareholders (the resulting votes are presented below).
1. To elect Trustees.
DOLLAR AMOUNT OF VOTES
TRUSTEE FOR WITHHELD
------- --- --------
Thomas A. Christopher $202,300,378 $ 926,498
Diana P. Herrmann $202,197,486 $1,029,390
Theodore T. Mason $201,945,708 $1,281,168
Anne J. Mills $202,121,778 $1,105,098
William J. Nightingale $202,103,256 $1,123,620
James R. Ramsey $202,077,363 $1,149,513
2. To ratify the selection of Tait, Weller & Baker LLP as the Fund's independent
registered accounting firm.
DOLLAR AMOUNT OF VOTES
FOR AGAINST ABSTAIN
--- ------- -------
$200,966,155 $ 247,128 $2,013,593
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila Group of Fundssm
produce is automatically sent to you and all other shareholders. Specifically,
you are routinely sent the entire list of portfolio securities of your Fund
twice a year in the semi-annual and annual reports you receive. Additionally, we
prepare, and have available, portfolio listings at the end of each quarter.
Whenever you may be interested in seeing a listing of your Fund's portfolio
other than in your shareholder reports, please check our website
(http://www.aquilafunds.com) or call us at 1-800-437-1020.
The Fund additionally files a complete list of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms
N-Q are available free of charge on the SEC website at http://www.sec.gov. You
may also review or, for a fee, copy the forms at the SEC's Public Reference Room
in Washington, DC or by calling 800-SEC-0330.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROXY VOTING RECORD (UNAUDITED)
The Fund does not invest in equity securities. Accordingly, there were no
matters relating to a portfolio security considered at any shareholder meeting
held during the 12 months ended June 30, 2006 with respect to which the Fund was
entitled to vote. Applicable regulations require us to inform you that the
foregoing proxy voting information is available on the SEC website at
http://www.sec.gov.
- --------------------------------------------------------------------------------
(THIS PAGE INTENTIONALLY LEFT BLANK)
FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
Aquila Management Corporation
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Thomas A. Christopher, Chair
Diana P. Herrmann
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Diana P. Herrmann, President
Thomas S. Albright, Senior Vice President and Portfolio Manager
Jerry G. McGrew, Senior Vice President
Jason T. McGrew, Vice President
Robert W. Anderson, Chief Compliance Officer
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.
101 Sabin Street
Pawtuckett, RI 02860
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite 2400
Philadelphia, PA 19103
Further information is contained in the Prospectus, which must precede or
accompany this report.
ITEM 2. CODE OF ETHICS.
Not applicable.
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
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
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.
905: Not applicable.
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 filing 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)(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/ Diana P. Herrmann
- - - ---------------------------------
President and Trustee
September 7, 2006
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Chief Financial Officer and Treasurer
September 7, 2006
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/ Diana P. Herrmann
- - - ---------------------------------
Diana P. Herrmann
President and Trustee
September 7, 2006
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 7, 2006
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
(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.