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: 12/31/06
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL
REPORT
DECEMBER 31, 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
"TAX-FREE IN BLACK AND WHITE"
February, 2007
Dear Fellow Shareholder:
We have all seen and heard the words "tax-free" over and over in various
contexts. In fact, the name of the Fund contains the words "tax-free." But, what
does that really mean to you in black and white?
As you know, you have to pay federal, state, and/or local taxes on the
dividends distributed to you by a taxable mutual fund. Thus, a bond fund which
invests in tax-free municipal bonds, such as Churchill Tax-Free Fund of
Kentucky, may actually generate more net dividend income than a taxable bond
fund with a higher stated yield.
How is this possible? Let's use a simple example.
Suppose you invest $10,000 in a hypothetical TAX-FREE municipal bond fund
with a yield of 4%, paying dividends that are EXEMPT FROM FEDERAL INCOME TAXES,
and you also invest $10,000 in a hypothetical TAXABLE bond fund with a yield of
5.5%, paying dividends that are TAXABLE AT THE FEDERAL LEVEL. The example below
shows the outcome for an investor in the 33% federal income tax bracket. As you
can see, your investment in the tax-free municipal bond fund would have ended up
with more after-tax income even though the fund's yield was lower.
[BAR CHART]
Federal Income Interest Income
Taxes After Taxes
Tax-Free Municipal Bond $400
Fund Yielding 4% (Assumes no taxes)
Taxable Bond Fund Yielding 5.5% $181.50 $368.50
Tax Rate 33%
To help you compare taxable bond funds versus tax-free municipal bond
funds, a taxable-equivalent yield is often used. The taxable-equivalent yield
provides you with the rate that a taxable bond fund would have to yield to give
you the same after-tax yield as a tax-free municipal bond fund. (You should be
aware that the calculation does not take into account the impact of state income
taxes, or any alternative minimum taxes, to which some investors may be
subject.)
NOT A PART OF THE ANNUAL REPORT
In its simplest terms,
- --------------------------------------------------------------------------------
Yield of tax-free municipal bond fund
- ------------------------------------- = Your taxable-equivalent yield
1.00 - your federal income tax rate
- --------------------------------------------------------------------------------
Using the above tax-free example of a 4% yield and a federal tax bracket
of 33%, the calculation would be as follows:
- --------------------------------------------------------------------------------
4
- ------------ = 5.97%
1.00 - 0.33
- --------------------------------------------------------------------------------
In other words, a tax-free investment of 4.00% and a taxable investment of
5.97% would provide the same yield after taxes.
EFFECT OF FEDERAL INCOME TAXES ON YIELDS OF TAX-EXEMPT AND TAXABLE
INSTRUMENTS
4.00% TAX-FREE BOND 5.97% TAXABLE BOND
Cash investment $10,000 $10,000
Interest $400 $597
33% Federal income tax $0 $197.01
Net return $400 $399.99
Yield on investment after federal taxes 4.0% 4.0%
You should be aware that dividends paid by tax-free municipal bond funds,
such as Churchill Tax-Free Fund of Kentucky, are often also exempt from state
and/or local taxes. FACTORING IN THE EXEMPTION AT THE STATE AND/OR LOCAL LEVEL
WOULD HAVE THE EFFECT OF INCREASING THE TAXABLE EQUIVALENT YIELD EVEN FURTHER.
So, the next time that you see the phrase "tax-free," remember that in
black and white, it oftentimes means more money into your pocket.
Sincerely,
/s/ Diana P. Herrmann /s/ Lacy B. Herrmann
Diana P. Herrmann Lacy B. Herrmann
President Founder and Chairman Emeritus
For certain investors, some dividends of your Fund may be subject to Federal and
State taxes, including the Alternative Minimum Tax. These hypothetical examples
are not intended to predict or project investment performance. Your own results
will vary. State and local taxes, fees and expenses, if any, are not taken into
account.
NOT A PART OF THE ANNUAL REPORT
[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
ANNUAL REPORT
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The year ended December 31, 2006 was very challenging. In order to keep
inflation in check - due in large part to skyrocketing oil prices - the Federal
Reserve continued to raise short-term interest rates a number of times - from
4.25% in January to 5.25%. While certainly not the norm, U. S. Treasury yields
once again were higher for short-term maturities than for the longer end of the
yield curve. This "inverted yield curve" kept many investors more interested in
shorter term rates - the logic being "Why extend when I'm not being compensated
for the risk of extending maturities?" However, the municipal bond yield curve
remained positively sloped, with longer maturities providing yields higher than
short maturities.
From December 31, 2005 to December 31, 2006, we saw short-term rates rise
a quarter of one percent (25 basis points on a typical AAA-rated 2 year
municipal bond) before leveling off in August. Over the same time period, we saw
long-term rates actually decline 21 basis points (on a typical AAA-rated 30-year
municipal bond). Demand for longer maturity higher yielding bonds has been
especially strong from cash-rich foreign central banks - especially China. And
inflation, a bond's greatest nemesis, stayed somewhat "manageable" - except for
energy costs. Overall, inflation rose in 2006 by a modest 2.5% as measured by
the Consumer Price Index - the smallest rise in three years. The national
unemployment rate ended the year at an annual rate of 4.5%, a nice improvement
versus 2005's rate of 4.9%.
And, as we begin 2007, it too promises to be every bit as eventful as was
2006: the Bush administration struggling with an increasingly unpopular war in
Iraq; ongoing "saber rattling" by the governments of North Korea and Iran;
continuing work to rebuild New Orleans and other areas of Louisiana, Alabama,
and Mississippi after the devastation caused by Hurricane Katrina; and the
usual, ongoing partisan political wrangling in Washington, now that we are in
the final two years of the Bush presidency with a newly elected Democratic house
and senate. We expect that oil prices, once again, will be a major factor in how
well the U. S. economy does this year.
2006 was a year in which stocks provided above average returns while fixed
income securities provided only modest returns. The Dow Jones Industrial Average
rose 19%. Other measures of equity performance were also positive: the S & P 500
closed up 16%; and the NASDAQ Composite Index rose 10%. We are proud to report
that Churchill Tax-Free Fund of Kentucky provided its Class A shareholders a
positive total rate of return of 4.02% in 2006, outperforming 68% of our peer
group of all intermediate single-state municipal bond funds.
As we enter 2007, the Kentucky economy is in better shape than when we
began 2006. Tax receipts are up and unemployment is down. Kentucky municipal
bonds continued to be in great
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
demand in 2006. Reduced availability, due in large part to continued strong
retail and institutional demand, caused rates to remain relatively unchanged
from the previous year.
The investment objective of Churchill Tax-Free Fund of Kentucky is to
provide as high a level of double tax-exempt current income as is consistent
with the preservation of capital. This objective continues to be successfully
addressed by adhering to a discipline of solid fundamental, conservative
portfolio management ideals. The net asset value of the Fund's Class A shares
began 2006 at $10.60 per share. We ended the year with a net asset value of
$10.59 per share. The Fund continues to maintain an average credit quality of
"AA", with no bonds rated less than "A". At year-end, nearly 80% of the
portfolio was rated "AAA". Our "laddered" maturity structure helps us manage
price volatility. The Fund has an average life of approximately 13.75 years and
a modified duration of approximately 5.50 years. We continue to maintain a
well-diversified portfolio of over 200 different Kentucky issues.
We are optimistic about the prospects for the U. S. and Kentucky economies
in 2007, and will continue to react appropriately to any signs of rising
inflation. We believe it is going to take continued vigilance and, if necessary,
intervention by the Federal Reserve to keep our economy on a positive track
while addressing inflation pressures over the course of 2007. To address these
concerns, we intend 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, 2006 as compared with the Lehman Brothers Quality Intermediate
Municipal Bond Index ("Lehman 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
Cost of Fund Class A Shares Fund Class A Shares Quality Intermediate
Living Index no sales charge with sales charge Municipal Bond Index
12/96 $10,000 $10,000 $ 9,600 $10,000
12/97 10,170 10,800 10,368 10,732
12/98 10,334 11,348 10,894 11,376
12/99 10,612 11,177 10,730 11,409
12/00 10,971 12,110 11,625 12,393
12/01 11,141 12,599 12,095 13,077
12/02 11,406 13,576 13,033 14,284
12/03 11,620 14,255 13,684 14,947
12/04 11,999 14,900 14,304 15,398
12/05 12,409 15,208 14,599 15,654
12/06 12,724 15,879 15,243 16,246
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 2006
-------------------------------------
SINCE
CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ------------------------ ------ ------- -------- ---------
Class A (5/21/87)
With Sales Charge .......... (0.12)% 3.84% 4.31% 5.90%
Without Sales Charge ....... 4.02% 4.69% 4.73% 6.12%
Class C (4/01/96)
With CDSC .................. 2.12% 3.79% 3.84% 4.01%
Without CDSC ............... 3.15% 3.79% 3.84% 4.01%
Class Y (4/01/96)
No Sales Charge ............ 4.08% 4.83% 4.89% 5.03%
Class I (8/06/01)
No Sales Charge ............ 3.87% 4.52% n/a 4.29%
COMPARATIVE INDEX
- ------------------------------
Lehman Index ................. 3.78% 4.44% 4.97% 5.98% (Class A)
5.04% (Class C&Y)
4.29% (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 class's income may be subject to Federal and state income taxes. Past
performance is not predictive of future investment results.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Churchill Tax-Free Fund of Kentucky:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Churchill Tax-Free Fund of Kentucky as
of December 31, 2006 and the related statement of operations for the year then
ended, and the changes in net assets and the financial highlights for each of
the two 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. The financial highlights for each of the years in the three
year period ended December 31, 2004 have been audited by other auditors, whose
report dated February 18, 2005 expressed an unqualified opinion on such
financial highlights.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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.
The Fund is not required to have, nor were we engaged to perform, an audit of
the Fund's internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2006, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Churchill Tax-Free Fund of Kentucky as of December 31, 2006, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 26, 2007
- --------------------------------------------------------------------------------
CHURCHILL TAX-FREE FUND OF KENTUCKY
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (4.6%) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
Bowling Green, Kentucky
$ 200,000 5.300%, 06/01/18 ...................................... Aa3/NR $ 213,576
Hardin County, Kentucky
170,000 5.000%, 06/01/17 AMBAC Insured ........................ Aaa/NR 176,001
Lexington-Fayette Urban County, Kentucky
4,175,000 4.250%, 05/01/23 MBIA Insured ......................... Aaa/AAA 4,188,109
Lexington-Fayette Urban County, Kentucky
Government Project Unlimited Tax
340,000 5.150%, 12/01/17 ...................................... Aa2/AA+ 360,594
Louisville, Kentucky Unlimited Tax
2,205,000 5.000%, 10/01/21 FGIC Insured ......................... Aaa/AAA 2,325,084
Louisville & Jefferson County, Kentucky
955,000 4.200%, 11/01/22 MBIA Insured ......................... Aaa/AAA 954,952
Louisville & Jefferson County, Kentucky Metro
Government Unlimited Tax
1,590,000 5.000%, 11/01/19 ...................................... Aa2/AA+ 1,713,559
1,825,000 5.000%, 11/01/20 ...................................... Aa2/AA+ 1,961,711
Warren County, Kentucky Judicial Unlimited Tax
345,000 5.100%, 09/01/17 AMBAC Insured ........................ Aaa/NR 368,505
365,000 5.150%, 09/01/18 AMBAC Insured ........................ Aaa/NR 390,488
-------------
Total General Obligation Bonds ........................ 12,652,579
-------------
REVENUE BONDS (94.2%)
State Agencies (21.0%)
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank .................... NR/AA 524,580
Kentucky Asset/Liability Commission
500,000 4.500%, 10/01/22 FGIC Insured ......................... Aaa/AAA 516,400
Kentucky Infrastructure Authority
1,000,000 5.250%, 06/01/12 ...................................... Aa3/A+ 1,061,650
635,000 5.250%, 06/01/12 ...................................... Aa3/A+ 645,166
2,740,000 5.250%, 06/01/14 ...................................... Aa3/A+ 2,907,770
1,235,000 5.250%, 08/01/17 ...................................... NR/AA 1,348,484
230,000 5.000%, 06/01/21 ...................................... Aa3/A+ 240,718
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 $ 4,318,840
1,000,000 5.000%, 11/01/15 AMBAC Insured ........................ Aaa/AAA 1,079,600
2,725,000 5.375%, 08/01/16 FSA Insured .......................... Aaa/AAA 2,915,396
4,735,000 5.250%, 10/01/17 ...................................... Aa3/A+ 5,012,755
1,250,000 5.500%, 11/01/17 FSA Insured .......................... Aaa/AAA 1,368,925
1,000,000 5.000%, 11/01/17 AMBAC Insured ........................ Aaa/AAA 1,074,600
6,000,000 5.250%, 10/01/18 ...................................... Aa3/A+ 6,351,960
1,500,000 5.000%, 11/01/18 AMBAC Insured ........................ Aaa/AAA 1,608,180
4,000,000 5.375%, 10/01/19 MBIA Insured (pre-refunded) .......... Aaa/AAA 4,301,320
1,925,000 5.000%, 10/01/19 ...................................... Aa3/A+ 2,008,468
785,000 5.150%, 11/01/19 FSA Insured .......................... Aaa/AAA 843,263
3,000,000 5.000%, 11/01/19 FSA Insured .......................... Aaa/AAA 3,183,150
5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) .......... Aaa/AAA 5,393,700
Kentucky State Property Buildings Community Revenues
7,200,000 5.000%, 08/01/21 FSA Insured .......................... Aaa/AAA 7,755,984
2,500,000 5.000%, 08/01/24 FSA Insured .......................... Aaa/AAA 2,689,300
-------------
Total State Agencies .................................. 57,150,209
-------------
COUNTY AGENCIES (4.8%)
Jefferson County, Kentucky Capital Projects
570,000 5.250%, 06/01/13 MBIA Insured ......................... Aaa/AAA 585,002
520,000 5.250%, 06/01/14 MBIA Insured ......................... Aaa/AAA 533,666
3,370,000 5.375%, 06/01/18 MBIA Insured ......................... Aaa/AAA 3,459,271
1,640,000 5.375%, 06/01/22 MBIA Insured ......................... Aaa/AAA 1,682,837
5,935,000 5.500%, 06/01/28 MBIA Insured ......................... Aaa/AAA 6,091,269
Nelson County, Kentucky Court Facilities Project Revenue
185,000 5.000%, 06/01/21 ..................................... Aa3/NR 194,922
Warren County, Kentucky Justice Center
365,000 4.300%, 09/01/22 MBIA Insured ......................... Aaa/NR 368,931
-------------
Total County Agencies ................................. 12,915,898
-------------
CITY/MUNICIPALITY OBLIGATIONS (0.2%)
Shelbyville, Kentucky Certificates of Participation
625,000 5.000%, 10/01/22 ...................................... A2/NR 654,781
-------------
Total City/Municipality Obligations ................... 654,781
-------------
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
HOSPITALS (6.9%)
Jefferson County, Kentucky Health Facilities Revenue
$ 1,715,000 5.650%, 01/01/17 AMBAC Insured ........................ Aaa/AAA $ 1,751,855
2,200,000 5.250%, 05/01/17 ...................................... NR/A 2,334,266
815,000 5.125%, 10/01/17 AMBAC Insured ETM .................... Aaa/AAA 833,052
Jefferson County, Kentucky Revenue
Medical Center Revenue
2,000,000 5.500%, 05/01/22 ...................................... NR/A 2,148,720
Kentucky Economic Development Finance Authority
1,000,000 5.000%, 02/01/18 FSA Insured .......................... Aaa/AAA 1,027,470
Lexington-Fayette Urban County, Kentucky Public
Facilities Revenue
500,000 4.250%, 10/01/26 MBIA Insured ......................... Aaa/NR 488,855
Louisville & Jefferson County, Kentucky
Medical Center Revenue
1,000,000 5.000%, 06/01/18 ...................................... NR/A 1,069,030
Louisville & Jefferson County, Kentucky Metropolitan
Government Health System Revenue (Norton)
7,590,000 5.000%, 10/01/26 ...................................... NR/A- 7,916,598
1,000,000 5.000%, 10/01/30 ...................................... NR/A- 1,038,220
-------------
Total Hospitals ....................................... 18,608,066
-------------
HOUSING (9.7%)
Kentucky Housing Corporation Housing Revenue
405,000 4.350%, 01/01/15 AMT .................................. Aaa/AAA 409,086
140,000 4.200%, 01/01/15 AMT .................................. Aaa/AAA 141,898
250,000 4.100%, 01/01/15 AMT .................................. Aaa/AAA 251,765
170,000 4.100%, 07/01/15 AMT .................................. Aaa/AAA 171,200
265,000 4.650%, 01/01/16 AMT .................................. Aaa/AAA 272,852
210,000 4.300%, 01/01/16 AMT .................................. Aaa/AAA 213,131
150,000 4.250%, 01/01/16 AMT .................................. Aaa/AAA 152,364
200,000 4.200%, 01/01/16 AMT .................................. Aaa/AAA 201,960
420,000 4.650%, 07/01/16 AMT .................................. Aaa/AAA 434,158
610,000 4.300%, 07/01/16 AMT .................................. Aaa/AAA 619,095
550,000 4.200%, 07/01/16 AMT .................................. Aaa/AAA 555,390
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
HOUSING (CONTINUED)
Kentucky Housing Corp. Housing Revenue (continued)
$ 555,000 4.200%, 01/01/17 ...................................... Aaa/AAA $ 560,689
100,000 5.125%, 07/01/17 ...................................... Aaa/AAA 102,092
680,000 4.200%, 07/01/17 ...................................... Aaa/AAA 686,970
470,000 4.800%, 01/01/18 AMT .................................. Aaa/AAA 484,039
285,000 4.250%, 01/01/18 ...................................... Aaa/AAA 287,733
575,000 4.800%, 07/01/18 AMT .................................. Aaa/AAA 592,175
180,000 4.250%, 07/01/18 ...................................... Aaa/AAA 181,726
900,000 4.800%, 07/01/20 AMT .................................. Aaa/AAA 920,439
1,150,000 5.350%, 01/01/21 AMT .................................. Aaa/AAA 1,187,467
6,285,000 5.450%, 07/01/22 AMT .................................. Aaa/AAA 6,557,832
4,065,000 5.250%, 07/01/22 AMT .................................. Aaa/AAA 4,205,446
245,000 5.200%, 07/01/22 ...................................... Aaa/AAA 252,921
415,000 5.100%, 07/01/22 AMT .................................. Aaa/AAA 427,608
4,140,000 5.200%, 07/01/25 AMT .................................. Aaa/AAA 4,285,728
275,000 5.375%, 07/01/27 ...................................... Aaa/AAA 285,524
570,000 5.550%, 07/01/33 ...................................... Aaa/AAA 591,854
Kentucky Housing Multifamily Mortgage Revenue
1,325,000 5.000%, 06/01/35 AMT .................................. NR/AAA 1,371,163
-------------
Total Housing ......................................... 26,404,305
-------------
SCHOOLS (27.4%)
Barren County, Kentucky School Building Revenue
1,265,000 4.250%, 08/01/25 CIFG Assurance North
America, Inc. Insured .............................. Aaa/NR 1,264,962
1,670,000 4.375%, 08/01/26 CIFG Assurance North
America, Inc. Insured .............................. Aaa/NR 1,683,610
Beechwood, Kentucky Independent School District
Finance Corp.
180,000 5.650%, 03/01/20 ...................................... Aa3/NR 192,188
Berea, Kentucky Educational Facilities Revenue
(Berea College)
1,000,000 4.125%, 06/01/25 ...................................... Aaa/NR 975,380
Boone County, Kentucky School District Finance Corp.
1,730,000 4.125%, 08/01/22 XLCA Insured ......................... Aaa/NR 1,725,035
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Boone County, Kentucky School District Finance Corp.
School Building
$ 660,000 5.000%, 06/01/15 ...................................... Aa3/NR $ 676,790
285,000 5.700%, 02/01/16 ...................................... Aa3/NR 304,648
140,000 4.750%, 06/01/20 FSA Insured .......................... Aaa/AAA 145,401
1,000,000 5.375%, 08/01/20 FSA Insured .......................... Aaa/NR 1,067,120
1,580,000 4.500%, 08/01/23 FSA Insured .......................... Aaa/NR 1,634,652
Boyd County, Kentucky School District Finance Corp.
1,025,000 5.000%, 10/01/15 ...................................... Aa3/NR 1,055,391
575,000 5.375%, 10/01/17 ...................................... Aa3/NR 593,440
Bullitt County, Kentucky School District Finance Corp.
200,000 4.300%, 10/01/21 ...................................... Aaa/NR 202,222
2,455,000 4.500%, 10/01/22 MBIA Insured ......................... Aaa/NR 2,544,166
2,590,000 4.500%, 10/01/23 MBIA Insured ......................... Aaa/NR 2,682,333
Christian County, Kentucky School District Finance Corp.
820,000 4.000%, 08/01/19 XLCA Insured ......................... Aaa/NR 821,755
855,000 4.000%, 08/01/20 XLCA Insured ......................... Aaa/NR 854,974
905,000 4.000%, 08/01/21 XLCA Insured ......................... Aaa/NR 902,004
1,465,000 4.000%, 08/01/22 XLCA Insured ......................... Aaa/NR 1,456,562
1,525,000 4.125%, 08/01/23 XLCA Insured ......................... Aaa/NR 1,518,610
1,590,000 4.125%, 08/01/24 XLCA Insured ......................... Aaa/NR 1,579,140
Daviess County, Kentucky School District Finance Corp.
200,000 5.000%, 06/01/24 ...................................... Aa3/NR 211,392
Fayette County, Kentucky School District Finance Corp.
5,000,000 4.250%, 04/01/23 FSA Insured .......................... Aaa/AAA 5,030,850
Floyd County, Kentucky School Building
680,000 4.375%, 10/01/22 ...................................... Aa3/NR 685,617
Floyd County, Kentucky School Finance
Corporation School Building
380,000 4.000%, 03/01/17 XLCA Insured ......................... Aaa/NR 384,347
1,320,000 4.000%, 03/01/23 XLCA Insured ......................... Aaa/NR 1,310,628
1,855,000 4.125%, 03/01/26 XLCA Insured ......................... Aaa/NR 1,831,924
Fort Thomas, Kentucky Independent
School District Finance
785,000 4.375%, 04/01/21 ...................................... Aa3/NR 792,991
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Franklin County, Kentucky School District Finance Corp.
$ 330,000 4.500%, 04/01/18 ...................................... Aa3/NR $ 341,527
1,000,000 5.000%, 04/01/24 ...................................... Aa3/NR 1,055,840
Graves County, Kentucky School Building Revenue
1,260,000 5.000%, 06/01/22 ...................................... Aa3/NR 1,329,829
1,320,000 5.000%, 06/01/23 ...................................... Aa3/NR 1,391,636
Hardin County, Kentucky School District Finance Corp.
1,475,000 4.000%, 02/01/19 AMBAC Insured ........................ Aaa/NR 1,477,994
Hickman County, Kentucky School District Finance
Corp. School Building Revenue
250,000 5.000%, 06/01/24 ...................................... Aa3/NR 264,240
Jefferson County, Kentucky School District Finance
Corp. School Building
250,000 5.250%, 07/01/16 FSA Insured .......................... Aaa/AAA 263,338
150,000 5.000%, 04/01/20 FSA Insured .......................... Aaa/AAA 157,717
1,360,000 4.250%, 06/01/21 FSA Insured .......................... Aaa/AAA 1,371,451
Jessamine County, Kentucky School District Finance
Corp. School Building Revenue
1,205,000 4.900%, 05/01/22 ...................................... Aa3/NR 1,252,971
Kenton County, Kentucky School Building Revenue
590,000 4.250%, 10/10/22 FSA Insured .......................... Aaa/NR 589,965
Kenton County, Kentucky School District
955,000 5.000%, 04/01/16 ...................................... Aa3/NR 1,004,307
1,055,000 5.000%, 04/01/17 ...................................... Aa3/NR 1,112,540
605,000 5.000%, 04/01/19 ...................................... Aa3/NR 636,823
Kenton County, Kentucky School District
Finance Corporation
445,000 4.300%, 04/01/22 CIFG Assurance North America,
Inc. Insured ....................................... Aaa/NR 450,055
4,250,000 5.000%, 06/01/22 MBIA Insured ......................... Aaa/NR 4,534,070
750,000 4.375%, 04/01/24 CIFG Assurance North America,
Inc. Insured ....................................... Aaa/NR 761,078
325,000 4.400%, 04/01/26 CIFG Assurance North America,
Inc. Insured ....................................... Aaa/NR 330,665
Kentucky Economic Development Finance Authority
College Revenue Centre College
1,230,000 5.000%, 04/01/17 FSA Insured .......................... Aaa/AAA 1,305,424
1,675,000 5.000%, 04/01/19 FSA Insured .......................... Aaa/AAA 1,771,514
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
SCHOOLS (CONTINUED)
Larue County, Kentucky School District Finance Corp.
$ 270,000 4.500%, 07/01/21 MBIA Insured ......................... Aaa/NR $ 276,712
470,000 4.500%, 07/01/22 MBIA Insured ......................... Aaa/NR 482,798
785,000 4.500%, 07/01/23 MBIA Insured ......................... Aaa/NR 805,755
Lexington-Fayette Urban County, Kentucky
Government Project Transylvania University
1,320,000 5.125%, 08/01/18 MBIA Insured ......................... Aaa/AAA 1,361,356
Lexington-Fayette Urban County, Kentucky
Government Project U.K. Library
725,000 5.000%, 11/01/15 MBIA Insured ......................... Aaa/AAA 756,059
300,000 5.000%, 11/01/20 MBIA Insured ......................... Aaa/AAA 312,690
Louisville & Jefferson County, Kentucky University
of Louisville
500,000 5.000%, 06/01/19 AMBAC Insured ........................ Aaa/AAA 540,205
525,000 5.000%, 06/01/20 AMBAC Insured ........................ Aaa/AAA 566,044
Magoffin County, Kentucky School District
450,000 4.250%, 08/01/25 AMBAC Insured ........................ Aaa/NR 451,746
Meade County, Kentucky School District
490,000 4.250%, 09/01/26 MBIA Insured ......................... Aaa/NR 491,132
Oldham County, Kentucky School District Finance Corp.
900,000 5.000%, 05/01/19 MBIA Insured ......................... Aaa/NR 964,278
Scott County, Kentucky School Building
100,000 5.000%, 03/01/22 ...................................... Aa3/NR 105,621
Scott County, Kentucky School District Finance Corp.
1,115,000 4.200%, 01/01/22 AMBAC Insured ........................ Aaa/NR 1,126,317
1,955,000 4.250%, 01/01/23 AMBAC Insured ........................ Aaa/NR 1,980,122
1,560,000 4.300%, 01/01/24 AMBAC Insured ........................ Aaa/NR 1,577,893
200,000 5.000%, 06/01/24 FSA Insured .......................... Aaa/NR 213,632
Spencer County, Kentucky School District Finance Corp.
1,415,000 5.000%, 07/01/19 FSA insured .......................... Aaa/NR 1,518,125
University Kentucky General Receipts
885,000 4.500%, 10/01/22 XLCA Insured ......................... Aaa/AAA 905,992
1,545,000 4.500%, 10/01/23 XLCA Insured ......................... Aaa/AAA 1,580,411
1,625,000 4.500%, 10/01/25 XLCA Insured ......................... Aaa/AAA 1,657,029
1,010,000 4.500%, 10/01/26 XLCA Insured ......................... Aaa/AAA 1,028,291
Warren County, Kentucky School District Finance Corp.
295,000 4.125%, 02/01/23 MBIA Insured ......................... Aaa/NR 293,790
-------------
Total Schools ......................................... 74,527,114
-------------
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
TRANSPORTATION (10.4%)
Kenton County, Kentucky Airport Board Airport Revenue
$ 1,570,000 5.000%, 03/01/13 MBIA Insured AMT ..................... Aaa/AAA $ 1,658,375
750,000 5.625%, 03/01/14 MBIA Insured AMT ..................... Aaa/AAA 809,153
1,000,000 5.500%, 03/01/17 MBIA Insured AMT ..................... Aaa/AAA 1,081,100
2,230,000 5.500%, 03/01/18 MBIA Insured AMT ..................... Aaa/AAA 2,407,084
1,300,000 5.000%, 03/01/23 MBIA Insured AMT ..................... Aaa/AAA 1,352,988
Kentucky Interlocal School Transportation Authority
145,000 5.400%, 06/01/17 ...................................... Aa3/A+ 145,766
400,000 6.000%, 12/01/20 ...................................... Aa3/A+ 405,868
200,000 6.000%, 12/01/20 ...................................... Aa3/A+ 202,934
300,000 5.800%, 12/01/20 ...................................... Aa3/A+ 304,161
400,000 5.650%, 12/01/20 ...................................... Aa3/A+ 405,308
350,000 5.600%, 12/01/20 ...................................... Aa3/A+ 354,575
Kentucky State Turnpike Authority Economic
Development & Resource Recovery Road Revenue
1,000,000 5.625%, 07/01/12 FSA Insured (pre-refunded) ........... Aaa/AAA 1,073,510
200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) ........... Aaa/AAA 214,702
500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) ........... Aaa/AAA 536,755
450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) ........... Aaa/AAA 476,861
3,455,000 5.100%, 07/01/18 FSA Insured .......................... Aaa/AAA 3,640,326
Louisville & Jefferson County Regional Airport, Kentucky
2,000,000 5.750%, 07/01/15 FSA Insured AMT ...................... Aaa/AAA 2,170,500
2,000,000 5.500%, 07/01/15 FSA Insured AMT ...................... Aaa/AAA 2,175,980
1,650,000 5.750%, 07/01/17 FSA Insured AMT ...................... Aaa/AAA 1,785,696
1,000,000 5.250%, 07/01/18 FSA Insured AMT ...................... Aaa/AAA 1,066,130
1,370,000 5.250%, 07/01/21 FSA Insured AMT ...................... Aaa/AAA 1,453,392
3,390,000 5.250%, 07/01/22 FSA Insured AMT ...................... Aaa/AAA 3,594,349
275,000 5.375%, 07/01/23 FSA Insured AMT ...................... Aaa/AAA 291,077
500,000 5.000%, 07/01/25 MBIA Insured AMT ..................... Aaa/AAA 512,540
-------------
Total Transportation .................................. 28,119,130
-------------
UTILITIES (13.8%)
Bardstown, Kentucky
200,000 5.000%, 12/01/19 MBIA Insured ......................... Aaa/NR 210,510
Boone County, Kentucky Pollution Control
Rev. - Dayton Power & Light
1,000,000 4.700%, 01/01/28 FGIC Insured ......................... Aaa/AAA 1,035,400
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
UTILITIES (CONTINUED)
Campbell & Kenton Counties, Kentucky Sanitation
District Revenue
$ 1,695,000 4.300%, 08/01/24 MBIA Insured ......................... Aaa/AAA $ 1,704,221
300,000 4.300%, 08/01/27 MBIA Insured ......................... Aaa/AAA 296,358
1,450,000 4.300%, 08/01/28 MBIA Insured ......................... Aaa/AAA 1,429,889
805,000 4.375%, 08/01/30 MBIA Insured ......................... Aaa/AAA 799,703
Campbell & Kenton Counties, Kentucky Sanitation
Sewer District
100,000 5.000%, 08/01/24 FSA Insured .......................... Aaa/AAA 105,052
Kentucky Rural Water Finance Corp.
205,000 4.250%, 08/01/19 MBIA Insured ......................... Aaa/AAA 208,711
595,000 5.000%, 02/01/20 AMBAC Insured ........................ Aaa/AAA 629,748
210,000 4.250%, 08/01/20 MBIA Insured ......................... Aaa/AAA 213,301
200,000 4.375%, 08/01/22 MBIA Insured ......................... Aaa/AAA 203,520
240,000 4.500%, 08/01/23 MBIA Insured ......................... Aaa/AAA 247,342
200,000 4.500%, 02/01/24 MBIA Insured ......................... Aaa/AAA 205,032
255,000 4.500%, 08/01/24 MBIA Insured ......................... Aaa/AAA 262,392
290,000 4.500%, 08/01/27 MBIA Insured ......................... Aaa/AAA 297,024
245,000 4.600%, 08/01/28 MBIA Insured ......................... Aaa/AAA 252,654
315,000 4.625%, 08/01/29 MBIA Insured ......................... Aaa/AAA 325,206
Lexington-Fayette Urban County Government,
Kentucky Sewer System
1,000,000 5.000%, 07/01/19 ...................................... Aa3/AA 1,056,290
Louisville, Kentucky Waterworks Board
Water System Revenue
1,000,000 5.250%, 11/15/16 FSA Insured .......................... Aaa/AAA 1,056,760
1,000,000 5.250%, 11/15/17 FSA Insured .......................... Aaa/AAA 1,056,020
2,530,000 5.250%, 11/15/18 FSA Insured .......................... Aaa/AAA 2,668,948
6,600,000 5.250%, 11/15/22 FSA Insured .......................... Aaa/AAA 6,947,886
2,415,000 5.250%, 11/15/24 FSA Insured .......................... Aaa/AAA 2,541,401
Louisville & Jefferson County, Kentucky
Metropolitan Sewer District
1,000,000 5.000%, 05/15/12 FGIC Insured ......................... Aaa/AAA 1,027,820
2,565,000 5.375%, 05/15/17 MBIA Insured ......................... Aaa/AAA 2,785,539
2,180,000 5.000%, 05/15/18 FSA Insured .......................... Aaa/AAA 2,359,349
2,380,000 4.250%, 05/15/20 FSA Insured .......................... Aaa/AAA 2,413,391
2,510,000 4.250%, 05/15/21 FSA Insured .......................... Aaa/AAA 2,531,009
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- -------------- ------------------------------------------------------- -------- -------------
UTILITIES (CONTINUED)
Louisville & Jefferson County, Kentucky
Metropolitan Sewer District (continued)
$ 400,000 5.000%, 05/15/22 FGIC Insured ......................... Aaa/AAA $ 409,940
Northern Kentucky Water District
660,000 5.000%, 02/01/23 FGIC Insured ......................... Aaa/NR 691,258
Owensboro, Kentucky Electric and Power
1,555,000 5.000%, 01/01/20 FSA Insured .......................... Aaa/AAA 1,604,278
-------------
Total Utilities ....................................... 37,575,952
-------------
Total Revenue Bonds ................................ 255,955,455
-------------
Total Investments (cost $261,548,644 - note 4) ..... 98.8% 268,608,034
Other assets less liabilities ...................... 1.2 3,221,838
------- -------------
Net Assets ......................................... 100.0% $ 271,829,872
======= =============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO
---------------------------------------------------- ---------
Aaa of Moody's or AAA of S&P ....................... 79.3%
Aa of Moody's or AA of S&P ......................... 15.1
A of Moody's or S&P ................................ 5.6
------
100.0%
======
PORTFOLIO ABBREVIATIONS:
----------------------------------------------------
AMBAC - American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Tax
CIFG - CDC IXIS Financial Guaranty
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
DECEMBER 31, 2006
ASSETS
Investments at value (cost $261,548,644) ......................................... $268,608,034
Interest receivable .............................................................. 3,757,364
Receivable for Fund shares sold .................................................. 538,120
Other assets ..................................................................... 17,889
------------
Total assets ..................................................................... 272,921,407
------------
LIABILITIES
Cash overdraft ..................................................................... 276,980
Payable for Fund shares redeemed ................................................... 296,761
Dividends payable .................................................................. 280,368
Management fee payable ............................................................. 92,766
Distribution and service fees payable .............................................. 64,985
Accrued expenses ................................................................... 79,675
------------
Total liabilities .................................................................. 1,091,535
------------
NET ASSETS ............................................................................ $271,829,872
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 256,718
Additional paid-in capital ......................................................... 262,597,370
Net unrealized appreciation on investments (note 4) ................................ 7,059,390
Undistributed net investment income ................................................ 428,272
Accumulated net realized gain on investments ....................................... 1,488,122
------------
$271,829,872
============
CLASS A
Net Assets ......................................................................... $211,501,102
============
Capital shares outstanding ......................................................... 19,976,011
============
Net asset value and redemption price per share ..................................... $ 10.59
============
Offering price per share (100/96 of $10.59 adjusted to nearest cent) ............... $ 11.03
============
CLASS C
Net Assets ......................................................................... $ 5,685,676
============
Capital shares outstanding ......................................................... 537,262
============
Net asset value and offering price per share ....................................... $ 10.58
============
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) ...................................... $ 10.58*
============
CLASS I
Net Assets ......................................................................... $ 8,018,312
============
Capital shares outstanding ......................................................... 757,699
============
Net asset value, offering and redemption price per share ........................... $ 10.58
============
CLASS Y
Net Assets ......................................................................... $ 46,624,782
============
Capital shares outstanding ......................................................... 4,400,843
============
Net asset value, offering and redemption price per share ........................... $ 10.59
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
YEAR ENDED DECMBER 31, 2006
INVESTMENT INCOME:
Interest income ...................................... $ 12,434,062
Expenses:
Management fee (note 3) .............................. $ 1,110,962
Distribution and service fees (note 3) ............... 405,055
Transfer and shareholder servicing agent fees ........ 165,768
Trustees' fees and expenses (note 8) ................. 136,677
Legal fees (note 3) .................................. 68,145
Fund accounting fees ................................. 59,369
Custodian fees ....................................... 46,231
Shareholders' reports and proxy statements ........... 41,541
Insurance ............................................ 19,132
Auditing and tax fees ................................ 18,998
Registration fees and dues ........................... 9,223
Chief compliance officer (note 3) .................... 4,544
Miscellaneous ........................................ 28,665
-------------
Total expenses ....................................... 2,114,310
Expenses paid indirectly (note 6) .................... (18,662)
-------------
Net expenses ......................................... 2,095,648
-------------
Net investment income ................................ 10,338,414
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions 1,488,134
Change in unrealized appreciation on investments ..... (1,028,674)
-------------
Net realized and unrealized gain (loss) on investments 459,460
-------------
Net change in net assets resulting from operations ... $ 10,797,874
=============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income ............................... $ 10,338,414 $ 10,856,949
Net realized gain (loss) from securities transactions 1,488,134 1,064,505
Change in unrealized appreciation on investments .... (1,028,674) (4,961,711)
------------- -------------
Change in net assets from operations .............. 10,797,874 6,959,743
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ............................... (8,091,702) (8,497,105)
Net realized gain on investments .................... (683,967) --
Class C Shares:
Net investment income ............................... (182,422) (226,903)
Net realized gain on investments .................... (18,381) --
Class I Shares:
Net investment income ............................... (280,046) (277,644)
Net realized gain on investments .................... (25,907) --
Class Y Shares:
Net investment income ............................... (1,790,592) (1,888,768)
Net realized gain on investments .................... (150,999) --
------------- -------------
Change in net assets from distributions ........... (11,224,016) (10,890,420)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 7):
Proceeds from shares sold ........................... 23,546,485 33,559,576
Reinvested dividends and distributions .............. 4,954,954 4,311,984
Cost of shares redeemed ............................. (42,932,145) (44,707,514)
------------- -------------
Change in net assets from capital share transactions (14,430,706) (6,835,954)
------------- -------------
Change in net assets ................................ (14,856,848) (10,766,631)
NET ASSETS:
Beginning of period ................................. 286,686,720 297,453,351
------------- -------------
End of period* ...................................... $ 271,829,872 $ 286,686,720
============= =============
* Includes undistributed net investment income of: .. $ 428,272 $ 434,620
============= =============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
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. On December 31, 2006 the Fund
increased undistributed net realized gain on investments by $4,967 and
decreased additional paid-in capital by $4,967.
g) NEW ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting
Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for
how uncertain tax positions should be recognized, measured, presented and
disclosed in the financial statements. FIN 48 requires the evaluation of
tax positions taken or expected to be taken in the course of preparing the
Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority.
Tax positions not deemed to meet the more-likely-than-not threshold would
be recorded as a tax benefit or expense in the current year. Adoption of
FIN 48 is required to be implemented no later than June 29, 2007 and is to
be applied to all open tax years as of that date. At this time, management
does not believe the adoption of FIN 48 will result in any material impact
on the Fund's financial statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Fund
believes adoption of SFAS 157 will have no material impact on the Fund's
financial statements.
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 theFund 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 year ended December 31, 2006, distribution fees on Class A
Shares amounted to $325,999 of which the Distributor retained $9,125.
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, 2006, amounted to $47,553. 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, 2006, amounted to $15,851. The total
of these payments with respect to Class C Shares amounted to $63,404 of which
the Distributor retained $15,787.
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, 2006, these
payments were made at the average annual rate of 0.35% of such net assets and
amounted to $27,391 of which $15,652 related to the Plan and $11,739 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, 2006, total commissions on sales of Class A Shares amounted to $123,670 of
which the Distributor received $11,112.
c) OTHER RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2006, the Fund incurred $66,480 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 year ended December 31, 2006, purchases of securities and
proceeds from the sales of securities aggregated $52,786,591 and $67,550,468,
respectively.
At December 31, 2006 the aggregate tax cost for all securities was
$261,538,823. At December 31, 2006, the aggregate gross unrealized appreciation
for all securities in which there is an excess of value over tax cost amounted
to $7,094,499 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $25,288 for a net
unrealized appreciation of $7,069,211.
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.
7. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Fund were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold 1,487,718 $ 15,671,235 2,024,652 $ 21,593,854
Reinvested distributions 412,423 4,351,152 362,716 3,868,074
Cost of shares redeemed . (3,039,963) (32,001,358) (2,962,111) (31,537,026)
------------ ------------ ------------ ------------
Net change ........... (1,139,822) (11,978,971) (574,743) (6,075,098)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold 42,869 453,039 90,038 959,910
Reinvested distributions 12,141 128,026 13,187 140,559
Cost of shares redeemed . (206,398) (2,171,663) (175,383) (1,859,038)
------------ ------------ ------------ ------------
Net change ........... (151,388) (1,590,598) (72,158) (758,569)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold -- -- 44,082 471,889
Reinvested distributions 25,480 268,623 22,690 241,811
Cost of shares redeemed . (690) (7,267) (38,599) (410,675)
------------ ------------ ------------ ------------
Net change ........... 24,790 261,356 28,173 303,025
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold 704,473 7,422,211 984,142 10,533,923
Reinvested distributions 19,553 207,153 5,130 61,540
Cost of shares redeemed . (831,561) (8,751,857) (1,022,004) (10,900,775)
------------ ------------ ------------ ------------
Net change ........... (107,535) (1,122,493) (32,732) (305,312)
------------ ------------ ------------ ------------
Total transactions in Fund
shares .................. (1,373,955) $(14,430,706) (651,460) $ (6,835,954)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At December 31, 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 year ended December 31, 2006 was $104,083 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 year ended December 31, 2006, such meeting-related
expenses amounted to $32,594.
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,
2006 2005
----------- -----------
Net tax-exempt income $10,343,290 $10,817,058
Ordinary income 1,472 73,362
Net realized gain on investments 879,254 --
----------- -----------
$11,224,016 $10,890,420
=========== ===========
As of December 31, 2006, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized gain $ 1,487,104
Unrealized appreciation 7,069,211
Undistributed tax-exempt income 419,469
-----------
$ 8,975,784
===========
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
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
Net asset value, beginning of period ................ $ 10.60 $ 10.74 $ 10.69 $ 10.66 $ 10.31
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income+ ........................... 0.39 0.39 0.42 0.44 0.47
Net gain (loss) on securities (both
realized and unrealized) ....................... 0.03 (0.14) 0.05 0.03 0.35
--------- --------- --------- --------- ---------
Total from investment operations ................. 0.42 0.25 0.47 0.47 0.82
--------- --------- --------- --------- ---------
Less distributions (note 10):
Dividends from net investment income ............. (0.40) (0.39) (0.42) (0.44) (0.47)
Distributions from capital gains ................. (0.03) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions .............................. (0.43) (0.39) (0.42) (0.44) (0.47)
--------- --------- --------- --------- ---------
Net asset value, end of period ...................... $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66
========= ========= ========= ========= =========
Total return (not reflecting sales charge) .......... 4.02% 2.39% 4.49% 4.50% 8.15%
Ratios/supplemental data
Net assets, end of period
(in thousands) ................................. $ 211,501 $ 223,811 $ 232,927 $ 229,176 $ 226.014
Ratio of expenses to average
net assets ..................................... 0.76% 0.77% 0.73% 0.72% 0.72%
Ratio of net investment income to
average net assets ............................. 3.71% 3.66% 3.96% 4.14% 4.82%
Portfolio turnover rate .......................... 19.07% 24.87% 14.31% 17.92% 18.27%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ..................................... 0.76% 0.76% 0.73% 0.71% 0.71%
Class C
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
Net asset value, beginning of period ................ $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income+ ........................... 0.30 0.30 0.33 0.35 0.38
Net gain (loss) on securities (both
realized and unrealized) ....................... 0.03 (0.14) 0.04 0.03 0.35
--------- --------- --------- --------- ---------
Total from investment operations ................. 0.33 0.16 0.37 0.38 0.73
--------- --------- --------- --------- ---------
Less distributions (note 10):
Dividends from net investment income ............. (0.31) (0.30) (0.33) (0.35) (0.38)
Distributions from capital gains ................. (0.03) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions .............................. (0.34) (0.30) (0.33) (0.35) (0.38)
--------- --------- --------- --------- ---------
Net asset value, end of period ...................... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66
========= ========= ========= ========= =========
Total return (not reflecting sales charge) .......... 3.15% 1.53% 3.51% 3.62% 7.23%
Ratios/supplemental data
Net assets, end of period
(in thousands) ................................. $ 5,686 $ 7,296 $ 8,166 $ 7,197 $ 4,804
Ratio of expenses to average
net assets ..................................... 1.62% 1.62% 1.58% 1.57% 1.56%
Ratio of net investment income to
average net assets ............................. 2.87% 2.81% 3.11% 3.26% 3.62%
Portfolio turnover rate .......................... 19.07% 24.87% 14.31% 17.92% 18.27%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ..................................... 1.61% 1.61% 1.58% 1.56% 1.55%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class I
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
Net asset value, beginning of period ................ $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income+ ........................... 0.38 0.38 0.41 0.43 0.46
Net gain (loss) on securities (both
realized and unrealized) ....................... 0.02 (0.14) 0.03 0.02 0.35
--------- --------- --------- --------- ---------
Total from investment operations ................. 0.40 0.24 0.44 0.45 0.81
--------- --------- --------- --------- ---------
Less distributions (note 10):
Dividends from net investment income ............. (0.38) (0.38) (0.40) (0.42) (0.46)
Distributions from capital gains ................. (0.03) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions .............................. (0.41) (0.38) (0.40) (0.42) (0.46)
--------- --------- --------- --------- ---------
Net asset value, end of period ...................... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66
========= ========= ========= ========= =========
Total return (not reflecting sales charge) .......... 3.87% 2.24% 4.24% 4.33% 7.98%
Ratios/supplemental data
Net assets, end of period
(in thousands) ................................. $ 8,018 $ 7,764 $ 7,564 $ 4,438 $ 2,407
Ratio of expenses to average
net assets ..................................... 0.91% 0.92% 0.89% 0.88% 0.87%
Ratio of net investment income to
average net assets ............................. 3.57% 3.52% 3.79% 3.95% 4.32%
Portfolio turnover rate .......................... 19.07% 24.87% 14.31% 17.92% 18.27%
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%
Class Y
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
Net asset value, beginning of period ................ $ 10.61 $ 10.75 $ 10.70 $ 10.67 $ 10.32
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income+ ........................... 0.41 0.41 0.44 0.46 0.49
Net gain (loss) on securities (both
realized and unrealized) ....................... 0.01 (0.14) 0.05 0.03 0.35
--------- --------- --------- --------- ---------
Total from investment operations ................. 0.42 0.27 0.49 0.49 0.84
--------- --------- --------- --------- ---------
Less distributions (note 10):
Dividends from net investment income ............. (0.41) (0.41) (0.44) (0.46) (0.49)
Distributions from capital gains ................. (0.03) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions .............................. (0.44) 0.41) (0.44) (0.46) (0.49)
--------- --------- --------- --------- ---------
Net asset value, end of period ...................... $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67
========= ========= ========= ========= =========
Total return (not reflecting sales charge) .......... 4.08% 2.55% 4.65% 4.95% 8.30%
Ratios/supplemental data
Net assets, end of period
(in thousands) ................................. $ 46,625 $ 47,816 $ 48,795 $ 46,313 $ 41,223
Ratio of expenses to average
net assets ..................................... 0.61% 0.62% 0.58% 0.57% 0.57%
Ratio of net investment income to
average net assets ............................. 3.86% 3.81% 4.11% 4.28% 4.63%
Portfolio turnover rate .......................... 19.07% 24.87% 14.31% 17.92% 18.27%
The expense ratios after giving effect to
the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ..................................... 0.61% 0.61% 0.58% 0.56% 0.56%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
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 July 1,
2006 and held for the six months ended December 31, 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".
SIX MONTHS ENDED DECEMBER 31, 2006
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 4.28% $1,000.00 $1,042.80 $3.81
- --------------------------------------------------------------------------------
Class C 3.74% $1,000.00 $1,037.40 $8.17
- --------------------------------------------------------------------------------
Class I 4.20% $1,000.00 $1,042.00 $4.63
- --------------------------------------------------------------------------------
Class Y 4.26% $1,000.00 $1,042.60 $3.04
- --------------------------------------------------------------------------------
(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 0.74%, 1.59%, 0.90%
AND 0.59% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/365 (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.
SIX MONTHS ENDED DECEMBER 31, 2006
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,021.48 $3.77
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,017.19 $8.08
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,020.67 $4.58
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,022.23 $3.01
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.74%, 1.59%, 0.90%
AND 0.59% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila Group of Funds(SM)
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 calendar year ended December 31, 2006, $10,343,290 of dividends
paid by Churchill Tax-Free Fund of Kentucky, constituting 92.15% of total
dividends paid during calendar year 2006, were exempt-interest dividends;
$879,254 of dividends paid by the Fund constituting 7.83% of total dividends
paid during the calendar year were capital gain distributions; and the balance
was ordinary dividend income.
Prior to January 31, 2007, shareholders will be mailed IRS Form 1099-DIV
which will contain information on the status of distributions paid for the 2006
CALENDAR YEAR.
- --------------------------------------------------------------------------------
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(4) (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 TRUSTEE(5)
Diana P. Herrmann Trustee since Vice Chair and Chief Executive Officer of 12 ICI Mutual Insurance
New York, NY 1995 and Aquila Management Corporation, Founder of the Company
(02/25/58) President Aquila Group of Funds(SM)(6) and parent of
since 1999 Aquila Investment Management LLC, Manager,
since 2004, President and Chief Operating
Officer since 1997, a Director since 1984,
Secretary since 1986 and previously its
Executive Vice President, Senior Vice
President or Vice President, 1986-1997; Chief
Executive Officer and Vice Chair since 2004
and President, Chief Operating Officer and
Manager of the Manager since 2003; Chair,
Vice Chair, President, Executive Vice
President or Senior Vice President of funds
in the Aquila Group of Funds(SM) since 1986;
Director of the Distributor since 1997;
trustee, Reserve Money-Market Funds,
1999-2000 and Reserve Private Equity Series,
1998-2000; Governor, Investment Company
Institute and head of its Small Funds
Committee since 2004; active in charitable
and volunteer organizations.
NON-INTERESTED TRUSTEES
Thomas A. Christopher Chair of the Vice President of Robinson, Hughes & 3 None
Danville, KY Board of Christopher, C.P.A.s, P.S.C., since 1977;
(12/19/47) Trustees President, A Good Place for Fun, Inc., a
since 2005 sports facility, since 1987; currently or
and Trustee formerly active with various professional and
since 1992 community organizations.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX(4) (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.)
- ----------------- ---------- ------------------- ---------- ---------------------
Theodore T. Mason Trustee Executive Director, East Wind Power Partners 8 Trustee, Premier VIT.
New York, NY since 1987 LTD since 1994 and Louisiana Power Partners,
(11/24/35) 1999-2003; Treasurer, Alumni Association of
SUNY Maritime College since 2004 (President,
2002-2003, First Vice President, 2000-2001,
Second Vice President, 1998-2000) and
director of the same organization since 1997;
Director, STCM Management Company, Inc.,
1973-2004; 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, 2000-2004; and the Maritime College
at Fort Schuyler Foundation, Inc. since 2000.
Anne J. Mills Trustee President, Loring Consulting Company since 4 None
Castle Rock, CO since 1987 2001; Vice President for Business Management
(12/23/38) and CFO, Ottawa University, since 2006, Vice
President for Business Affairs, 1992-2001;
IBM Corporation, 1965-1991; currently active
with various charitable educational and
religious organizations.
William J. Nightingale Trustee Retired; formerly Chairman, founder (1975) 2 Ring's End, Inc.
Rowayton, CT since 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.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX(4) (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.)
- ----------------- ---------- ------------------- ---------- ---------------------
James R. Ramsey Trustee President, University of Louisville since 2 Community Bank and
Louisville, KY since 1987 November 2002; Professor of Economics, Trust, Pikeville, KY and
(11/14/48) University of Louisville, 1999-present; Texas Roadhouse Inc.
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.
OTHER INDIVIDUALS
CHAIRMAN EMERITUS(6)
Lacy B. Herrmann Founder and Founder and Chairman of the Board, Aquila N/A N/A
New York, NY Chairman Management Corporation, the sponsoring
(05/12/29) Emeritus organization and parent of the Manager or
since 2006, Administrator and/or Adviser or Sub-Adviser
Chairman of to each fund of the Aquila Group of Funds(SM);
the Board Chairman of the Manager or Administrator
of Trustees, and/or Adviser or Sub-Adviser to each since
1987-2005 2004; Founder and Chairman Emeritus of each
fund in the Aquila Group of Funds(SM);
previously Chairman and a Trustee of each
fund in the Aquila Group of Funds(SM) since its
establishment until 2004 or 2005; 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.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX(4) (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.)
- ----------------- ---------- ------------------- ---------- ---------------------
OFFICERS
Charles E. Childs, III Executive Vice Executive Vice President of all funds in the N/A N/A
New York, NY President Aquila Group of Funds(SM) and the Manager and
(04/01/57) since 2003 the Manager's parent since 2003; formerly
Senior Vice President, corporate development,
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 Aquila
Money-Market Funds, 1988-2003.
Thomas S. Albright Senior Vice Senior Vice President and Portfolio Manager, N/A N/A
Louisville, KY President Churchill Tax-Free Fund of Kentucky since
(07/26/52) since 2000 July 2000; Senior Vice President, Tax-Free
Fund For Utah since 2003, Vice President,
2001-2003 and co-portfolio manager since
2001; Vice President and backup portfolio
manager, Tax-Free Trust of Arizona, since
2004; 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 Registered Principal since 1993, Senior Vice
(06/18/44) since 1994 President, 1997-1998 and Vice President,
1993-1997; Senior Vice President, Aquila
Three Peaks High Income Fund, Aquila Rocky
Mountain Equity Fund and five Aquila
Municipal Bond Funds; Vice President,
Churchill Cash Reserves Trust, 1995-2001.
Todd W. Curtis Vice President Senior Vice President and Portfolio Manager, N/A N/A
Phoenix, AZ since 2004 Tax-Free Trust of Arizona, since August 2004;
(06/08/49) Vice President and backup portfolio manager,
Churchill Tax-Free Fund of Kentucky, since
2004; Vice President and Portfolio Manager,
Banc One Investment Advisors, Inc. and its
predecessors, 1981-2004.
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; Vice President, Aquila
Rocky Mountain Equity Fund since 2006;
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.
NUMBER OF
POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS
HELD WITH IN FUND HELD BY TRUSTEE
NAME, FUND AND PRINCIPAL COMPLEX(4) (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.)
- ----------------- ---------- ------------------- ---------- ---------------------
Robert W. Anderson Chief Chief Compliance Officer of the Fund and each N/A N/A
New York, NY Compliance of the other funds in the Aquila Group of
(08/23/40) Officer Funds(SM), the Manager and the Distributor
since 2004 since 2004, Compliance Officer of the Manager
and Assistant or its predecessor and current parent
Secretary 1998-2004; Assistant Secretary of the Aquila
since 2000 Group of Funds(SM) since 2000.
Joseph P. DiMaggio Chief Chief Financial Officer of the Aquila Group N/A N/A
New York, NY Financial of Funds(SM) since 2003 and Treasurer since
(11/06/56) Officer since 2000.
2003 and
Treasurer
since 2000
Edward M. W. Hines Secretary Partner, Hollyer Brady Barrett & Hines LLP, N/A N/A
New York, NY since 1987 legal counsel to the Fund, since 1989;
(12/16/39) Secretary of the Aquila Group of Funds(SM).
John M. Herndon Assistant Assistant Secretary of the Aquila Group of N/A N/A
New York, NY Secretary Funds(SM) since 1995 and Vice President of the
(12/17/39) since 1995 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 Group of N/A N/A
New York, NY Treasurer Funds(SM) since 2000; Assistant Vice President
(11/02/66) since 2000 of the Manager or its predecessor and current
parent since 1998; Fund Accountant for the
Aquila Group of Funds(SM), 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) Includes certain Aquila-sponsored funds that are dormant and have no
public shareholders.
(5) Ms. Herrmann is an interested person of the Fund as an officer of the
Fund, 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.
(6) 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; Aquila Three Peaks High Income Fund is a high income corporate bond
fund; considered together, these 12 funds, which do not include the
dormant funds described in footnote 4, are called the "Aquila Group of
Funds(SM)."
(7) The Chairman Emeritus may attend Board meetings but has no voting power.
- --------------------------------------------------------------------------------
PRIVACY NOTICE (unaudited)
CHURCHILL TAX-FREE FUND OF KENTUCKY
OUR PRIVACY POLICY. In providing services to you as an individual who owns or is
considering investing in shares of the Fund, we collect certain non-public
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 the Fund.
INFORMATION WE COLLECT. "Non-public personal information" is personally
identifiable financial information about you as an individual or your family.
The kinds of non-public 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 non-public personal information about you
to companies that provide necessary services to us, such as the Fund's transfer
agent, distributor, or manager, as permitted or required by law, or as
authorized by you. Any other use is strictly prohibited. We do not sell
information about you or any of our fund shareholders to anyone.
NON-CALIFORNIA RESIDENTS: We also may disclose some of this information to
another fund in the Aquila Group of Funds(SM) (or its service providers) under
joint marketing agreements that permit the funds to use the information only to
provide you with information about other funds in the Aquila Group of Funds(SM)
or new services we are offering that may be of interest to you.
CALIFORNIA RESIDENTS ONLY: In addition, unless you "opt-out" of the following
disclosures using the form that was mailed to you under separate cover, we may
disclose some of this information to another fund in the Aquila Group of
Funds(SM) (or its sevice providers) under joint marketing agreements that permit
the funds to use the information only to provide you with information about
other funds in the Aquila Group of Fundssm or new services we are offering that
may be of interest to you.
HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to non-public 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 non-public
personal information we have about you.
If you have any questions regarding our Privacy Policy, please contact us at
1-800-437-1020.
AQUILA DISTRIBUTORS, INC.
AQUILA INVESTMENT MANAGEMENT LLC
This Privacy Policy also has been adopted by Aquila Distributors, Inc. and
Aquila Investment Management LLC and applies to all non-public information about
you that each of these companies may obtain in connection with services provided
to the Fund or to you as a shareholder of the Fund.
- --------------------------------------------------------------------------------
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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
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC INC.
101 Sabin Street
Pawtucket, RI 02860
CUSTODIAN
JPMorgan Chase Bank, N.A.
1111 Polaris Parkway
Columbus, Ohio 43240
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.
(a) As of December 31, 2006 (the end of the reporting period) the
Trust has adopted a code of ethics that applies to the Trust'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 Trust'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 Trust's Code of Ethics that applies to the
Trust'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 Trust'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
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 $16,000 in 2005 and $16,000 in 2006.
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
$3,000 and $3,000 in 2005 and 2006, respectively, for return preparation
and tax compliance.
d) All Other Fees - There were no additional fees paid for audit and
non-audit services other than those disclosed 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. SCHEDULE OF INVESTMENTS.
Included in Item 1 above
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Directors of the Registrant has adopted a Nominating
Committee Charter which provides that the Nominating Committee (the 'Committee')
may consider and evaluate nominee candidates properly submitted by shareholders
if a vacancy among the Independent Trustees of the Registrant occurs and if,
based on the Board's then current size, composition and structure, the Committee
determines that the vacancy should be filled. The Committee will consider
candidates submitted by shareholders on the same basis as it considers and
evaluates candidates recommended by other sources. A copy of the qualifications
and procedures that must be met or followed by shareholders to properly submit
a nominee candidate to the Committee may be obtained by submitting a request
in writing to the Secretary of the Registrant.
ITEM 11. 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 12. EXHIBITS.
(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/ Diana P. Herrmann
- - - ---------------------------------
President and Trustee
March9, 2007
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Chief Financial Officer and Treasurer
March 9, 2007
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
March 9, 2007
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
March 9, 2007
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.