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: 12/31/07
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL
REPORT
DECEMBER 31, 2007
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](R)
[LOGO OF THE AQUILA
GROUP OF FUNDS: ONE OF THE
AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS(R)
[LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY:
A STANDING PEGASUS IN A CIRCLE](R)
SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES
CHURCHILL TAX-FREE FUND OF KENTUCKY
"HOW YOUR FUND IS COPING
WITH THE CURRENT MARKET SITUATION"
February, 2008
Dear Fellow Shareholder:
As you are well aware, our country has been going through a credit crunch
that began last year, particularly in August, 2007. This credit situation and
liquidity crisis have continued to worsen in various forms since that time which
has also led to a weakening in the U.S. dollar.
While things have continued to be quite messy in the securities market
despite the actions of the Federal Reserve to lower interest rates, we feel it
is important for you to know that we are doing everything possible to ensure
that your investment in Churchill Tax-Free Fund of Kentucky does not have any
problems.
By design, Churchill Tax-Free Fund of Kentucky contains an overwhelming
percentage of securities - 100% as of 12/31/07 - which, due to the addition of
insurance bought by issuers or otherwise, are credit rated as A or higher. You
should be aware, however, that when purchasing securities for the Fund's
portfolio, we always look to the UNDERLYING CREDIT QUALITY of the issues. Even
without insurance and other credit enhancements, your Fund's portfolio manager
has confirmed that the underlying credit quality of the Fund's portfolio
holdings is approximately 99.4% A-rated or higher. Additionally, the average
maturity of the securities in the Fund's portfolio is intermediate in nature.
Thus, with a portfolio of high quality and intermediate maturity securities, the
Fund's share value has remained reasonably stable. We strongly believe that when
things get tough in the securities markets, that's when a portfolio of high
quality investments pays off.
You can be assured that we will seek to continue operating the Fund and
maintaining its portfolio in your best interest. As we have emphasized to you
since the founding of Churchill Tax-Free Fund of Kentucky, the Trustees and
management team of your Fund fully realize that it is YOUR money, invested in
YOUR Fund, invested in projects throughout YOUR communities and state. Not only
are YOUR investments in the Fund being handled as well as we can in terms of its
portfolio construction, but your Fund is also helping to fund hundreds of vital
municipal projects throughout Kentucky.
Because it is YOUR Fund, we try to ensure that all shareholders always
have the chance to know what is going on with their investment. Furthermore, we
want shareholders to have the chance to ask any questions of the management
team, to ease any concern they might have. Thus, to provide you with
face-to-face access to your management team, we always hold IN-STATE Annual
Meetings of Shareholders.
NOT A PART OF THE SEMI-ANNUAL REPORT
One question asked during a recent shareholder meeting of another fund in
the Aquila Group of Funds that we think you might find of interest concerned the
cost of running the fund. This question gives us an opportunity to emphasize
that the total expense ratio of Churchill Tax-Free Fund of Kentucky Class A
Shares is 0.74% (as you will note in the enclosed Annual Report). Or, put
another way, the total annual operating cost is only 0.74 of 1%. With the
average expense ratio of similar type funds being 0.83%, we believe that
Churchill Tax-Free Fund of Kentucky is doing a good job of controlling costs. It
is also very important for us to point out that the Fund's expense ratio is NOT
subsidized. When comparing expense ratios, it is important to read the fine
print to see whether or not operating costs are subsidized.
We appreciate your loyalty to Churchill Tax-Free Fund of Kentucky. We will
do everything we can to merit your continued trust.
Sincerely,
[PHOTO OMITTED]
/s/ Lacy B. Herrmann /s/ Diana P. Herrmann
Lacy B. Herrmann Diana P. Herrmann
Founder and Chairman Emeritus President
For certain investors, some dividends of your Fund may be subject to Federal and
State taxes, including the Alternative Minimum Tax.
NOT A PART OF THE SEMI-ANNUAL REPORT
[LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY:
A STANDING PEGASUS IN A CIRCLE]
SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES
CHURCHILL TAX-FREE FUND OF KENTUCKY
ANNUAL REPORT
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The year that ended December 31, 2007 was very challenging. 2008 is
shaping up to be every bit as interesting! With the prospect of a just-announced
economic stimulus package on the near horizon, investors have a full plate of
significant financial developments to watch. As we begin 2008, the country is
facing the real prospect of an economic slowdown - one that Federal Reserve
(Fed) Chairman Bernanke is fighting to avoid. Investor confidence in the
domestic and international stock markets seems to be eroding. The financial
viability of several AAA-rated municipal bond insurers is being called into
question. And if that weren't enough, the Supreme Court is expected to announce
its ruling on "Davis vs. the Commonwealth of Kentucky" perhaps as early as mid
year (see note 11).
In September 2007, the Fed began to lower short-term interest rates in
order to keep the nation's economic growth on a positive track. The federal
funds target rate has been reduced, so far, from 5.50% to 3.50% (on January 22,
2008). While the jury is still out, we are optimistic that the Fed is moving us
in the right direction. Interest rates, across the spectrum, have fallen in
response to the Fed's "easing" strategy, in spite of on-going inflation fears.
From December 31, 2006 to December 31, 2007, we saw short-term rates fall
dramatically - over 175 basis points on a two-year U. S. Treasury note and a 50
basis point drop for a AAA-rated 2 year municipal bond. Over the same time
period, we actually saw long-term bond rates on a typical AAA-rated 30-year
municipal bond rise 25 basis points, as the flight to quality continued. Demand
for longer maturity higher yielding bonds has been especially strong from
cash-rich foreign central banks - especially China. Inflation, a bond's greatest
nemesis, began to edge up, especially when measuring energy costs. Overall, on a
wholesale basis, inflation rose in 2007 by a troubling 6.3% as measured by the
Producer Price Index - the largest annual increase in 26 years. This compares to
a modest increase of 1.1% in 2006. The national unemployment rate remained
unchanged from 2006, averaging 4.6%. However, December 2007 posted a rate of
5.0%, up from November's 4.7%, making it the largest one month jump since 2001.
With the November 2008 presidential election looming, heated campaign
rhetoric and political debates are filling the airwaves. While neither party has
a clear frontrunner, the next few months should prove to be exciting. On the
international front, we work to bring the ongoing war in Iraq to a satisfactory
conclusion and monitor the ever-present "saber rattling" by the government of
Iran and extremists across the globe. Oil prices, once again, are a major factor
of how the U. S. economy will perform this year. Oil prices skyrocketed
throughout most of the past year, and recently traded at an all-time record high
of just over $100 a barrel.
2007 was a mixed year for stocks. While the major indices all turned in
positive investment performance for the year, that performance, for the most
part, lagged the returns posted in 2006. The Dow Jones Industrial Average rose
8.9% versus 19% in 2006. Other measures of equity performance
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
were also positive: the S & P 500 closed up 5.5% versus 16% last year; and the
NASDAQ Composite Index rose 10.7%, up from 10% last year. Fixed income
securities provided respectable returns. We are pleased to report that Churchill
Tax-Free Fund of Kentucky Class A Shares provided its shareholders a positive
total rate of return of 2.38% in 2007, outperforming 45% of our peer group of
all intermediate single-state municipal bond funds.
As we enter 2008, the Kentucky economy is in worse shape than when we
began 2007 - and, frankly, worse than anyone had forecast. Tax receipts are down
and unemployment - especially in manufacturing - is up. Significant belt
tightening will be necessary to overcome Kentucky's projected budget imbalance.
That being said, Kentucky municipal bonds continued to be in tremendous demand
throughout 2007. A light new issue calendar and continued strong retail and
institutional demand worked to help keep rates lower than we have seen in
several years.
The investment objective of Churchill Tax-Free Fund of Kentucky is to
provide as high a level of triple tax-exempt current income as is consistent
with the preservation of capital. We believe this objective continues to be
successfully addressed by adhering to a discipline of solid fundamental,
conservative portfolio management ideals. The Class A Share net asset value of
the Fund began 2007 at $10.59 per share. It ended the year with a net asset
value of $10.38 per share. The Fund continues to maintain an average credit
quality of "AA", with no bonds rated less than "A". At year-end, 77.6% of the
portfolio was rated "AAA". Our "laddered" maturity structure helps us manage
price volatility. The Fund has an average life of approximately 14.50 years and
a modified duration of approximately 6.80 years. We maintain a well-diversified
portfolio of over 180 different Kentucky issues.
We remain cautiously optimistic about the prospects for the U. S. and
Kentucky economies in 2008, and will continue to strive to react appropriately
to any signs of rising inflation. It is going to take continued vigilance and,
if necessary, continued intervention by the Fed to keep our economy on a
positive track while addressing inflation pressures and economic growth over the
course of 2008. To address these concerns, we will strive to "stay the course"
and manage the portfolio by seeking to take 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, 2007 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
12/97 10,000 10,000 9,600 10,000
12/98 10,161 10,500 10,080 10,600
12/99 10,434 10,342 9,929 10,631
12/00 10,787 11,205 10,757 11,548
12/01 10,955 11,657 11,192 12,185
12/02 11,215 12,561 12,059 13,310
12/03 11,426 13,189 12,662 13,927
12/04 11,798 13,787 13,236 14,348
12/05 12,201 14,071 13,509 14,586
12/06 12,511 14,711 14,123 15,138
12/07 13,021 15,042 14,441 15,876
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 2007
--------------------------------------------
SINCE
CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ------------------------------------------------- ------ ------- -------- ---------
Class A (Commenced operations on 5/21/87)
With Sales Charge............................. (1.70)% 2.72% 3.74% 5.73%
Without Sales Charge.......................... 2.38% 3.55% 4.17% 5.94%
Class C (Commenced operations on 4/01/96)
With CDSC..................................... 0.60% 2.68% 3.29% 3.80%
Without CDSC.................................. 1.61% 2.68% 3.29% 3.80%
Class Y (Commenced operations on 4/01/96)
No Sales Charge............................... 2.63% 3.71% 4.32% 4.83%
Class I (Commenced operations on 8/06/01)
No Sales Charge............................... 2.33% 3.40% n/a 3.98%
Lehman Index..................................... 4.88% 3.59% 4.73% 5.92% (Class A)
5.03% (Class C&Y)
3.61% (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, 2007 and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the three 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 two 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, 2007, 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, 2007, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the three 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 28, 2008
- --------------------------------------------------------------------------------
CHURCHILL TAX-FREE FUND OF KENTUCKY
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2007
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (4.8%) S&P VALUE
- --------------- ----------------------------------------------------- --------- -------------
Bowling Green, Kentucky
$ 200,000 5.300%, 06/01/18 .................................... Aa3/NR $ 209,274
Lexington-Fayette Urban County, Kentucky
4,175,000 4.250%, 05/01/23 MBIA Insured ....................... Aaa/AAA 4,114,671
Louisville, Kentucky Unlimited Tax
2,205,000 5.000%, 10/01/21 FGIC Insured ....................... Aaa/AAA 2,293,443
Louisville & Jefferson County, Kentucky
955,000 4.200%, 11/01/22 MBIA Insured ....................... Aaa/AAA 942,499
Louisville & Jefferson County, Kentucky Metro
Government Unlimited Tax
1,590,000 5.000%, 11/01/19 .................................... Aa2/AA+ 1,704,671
1,825,000 5.000%, 11/01/20 .................................... Aa2/AA+ 1,948,699
Warren County, Kentucky Judicial Unlimited Tax
345,000 5.100%, 09/01/17 AMBAC Insured ...................... Aaa/NR 367,722
365,000 5.150%, 09/01/18 AMBAC Insured ...................... Aaa/NR 389,692
-------------
Total General Obligation Bonds ...................... 11,970,671
-------------
REVENUE BONDS (95.1%)
STATE AGENCIES (15.7%)
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank .................. NR/AA 518,575
Kentucky Asset/Liability Commission
500,000 4.500%, 10/01/22 FGIC Insured ....................... Aaa/AAA 510,795
Kentucky Asset & Liability Commission UK Project
500,000 5.000%, 10/01/25 Series B ........................... Aa3/AA- 524,740
750,000 5.000%, 10/01/26 Series B ........................... Aa3/AA- 784,688
1,000,000 5.000%, 10/01/27 Series B ........................... Aa3/AA- 1,043,830
Kentucky Infrastructure Authority
635,000 5.250%, 06/01/12 .................................... Aa3/A+ 640,728
2,740,000 5.250%, 06/01/14 .................................... Aa3/A+ 2,897,221
1,235,000 5.250%, 08/01/17 .................................... NR/AA 1,342,778
230,000 5.000%, 06/01/21 .................................... Aa3/A+ 238,365
Kentucky State Property and Buildings Commission
1,000,000 5.000%, 11/01/15 AMBAC Insured ...................... Aaa/AAA 1,077,830
2,725,000 5.375%, 08/01/16 FSA Insured ........................ Aaa/AAA 2,909,401
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
STATE AGENCIES (CONTINUED)
Kentucky State Property and Buildings Commission
(continued)
$ 4,735,000 5.250%, 10/01/17 .................................... Aa3/A+ $ 4,964,363
1,250,000 5.500%, 11/01/17 FSA Insured ........................ Aaa/AAA 1,363,513
1,000,000 5.000%, 11/01/17 AMBAC Insured ...................... Aaa/AAA 1,068,050
6,000,000 5.250%, 10/01/18 .................................... Aa3/A+ 6,285,060
1,925,000 5.000%, 10/01/19 .................................... Aa3/A+ 1,992,933
3,000,000 5.000%, 11/01/19 FSA Insured ........................ Aaa/AAA 3,159,900
5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) ........ Aaa/AAA 5,438,300
Kentucky State Property and Buildings Commission
Project #88
2,200,000 4.500%, 11/01/26 FGIC Insured ....................... Aaa/AAA 2,180,574
-------------
Total State Agencies ................................ 38,941,644
-------------
COUNTY AGENCIES (2.4%)
Jefferson County, Kentucky Capital Projects
1,575,000 4.250%, 06/01/23 FSA Insured ........................ Aaa/NR 1,555,659
4,140,000 4.375%, 06/01/28 FSA Insured ........................ Aaa/NR 4,001,434
Warren County, Kentucky Justice Center
365,000 4.300%, 09/01/22 MBIA Insured ....................... Aaa/NR 365,690
-------------
Total County Agencies ............................... 5,922,783
-------------
CITY/MUNICIPALITY OBLIGATIONS (0.3%)
Shelbyville, Kentucky Certificates of Participation
625,000 5.000%, 10/01/22 .................................... A2/NR 648,706
-------------
Total City/Municipality Obligations ................. 648,706
-------------
HOSPITALS (9.0%)
Jefferson County, Kentucky Health Facilities
1,715,000 5.650%, 01/01/17 AMBAC Insured ...................... Aaa/AAA 1,735,666
2,200,000 5.250%, 05/01/17 .................................... NR/A 2,297,328
Jefferson County, Kentucky Medical Center
2,000,000 5.500%, 05/01/22 .................................... NR/A 2,097,380
Kentucky Economic Development Finance Authority
1,000,000 5.000%, 02/01/18 FSA Insured ........................ Aaa/AAA 1,020,490
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
HOSPITALS (CONTINUED)
Lexington-Fayette Urban County, Kentucky
Public Facilities
$ 500,000 4.250%, 10/01/26 MBIA Insured ....................... Aaa/NR $ 483,025
Louisville & Jefferson County, Kentucky
Medical Center
1,000,000 5.000%, 06/01/18 .................................... NR/A 1,051,960
Louisville & Jefferson County, Kentucky Metropolitan
Government Health System (Norton)
8,075,000 5.000%, 10/01/26 .................................... NR/A- 7,910,835
6,000,000 5.000%, 10/01/30 .................................... NR/A- 5,702,400
-------------
Total Hospitals ..................................... 22,299,084
-------------
HOUSING (13.4%)
Kentucky Housing Corporation Housing Revenue
405,000 4.350%, 01/01/15 AMT ................................ Aaa/AAA 405,482
140,000 4.200%, 01/01/15 AMT ................................ Aaa/AAA 138,579
250,000 4.100%, 01/01/15 AMT ................................ Aaa/AAA 247,007
170,000 4.100%, 07/01/15 AMT ................................ Aaa/AAA 167,841
265,000 4.650%, 01/01/16 AMT ................................ Aaa/AAA 268,352
210,000 4.300%, 01/01/16 AMT ................................ Aaa/AAA 209,859
150,000 4.250%, 01/01/16 AMT ................................ Aaa/AAA 147,911
200,000 4.200%, 01/01/16 AMT ................................ Aaa/AAA 195,060
420,000 4.650%, 07/01/16 AMT ................................ Aaa/AAA 425,313
610,000 4.300%, 07/01/16 AMT ................................ Aaa/AAA 609,567
550,000 4.200%, 07/01/16 AMT ................................ Aaa/AAA 537,262
555,000 4.200%, 01/01/17 .................................... Aaa/AAA 544,405
100,000 5.125%, 07/01/17 .................................... Aaa/AAA 101,244
680,000 4.200%, 07/01/17 .................................... Aaa/AAA 666,434
470,000 4.800%, 01/01/18 AMT ................................ Aaa/AAA 471,908
285,000 4.250%, 01/01/18 .................................... Aaa/AAA 275,669
575,000 4.800%, 07/01/18 AMT ................................ Aaa/AAA 577,335
180,000 4.250%, 07/01/18 .................................... Aaa/AAA 173,916
900,000 4.800%, 07/01/20 AMT ................................ Aaa/AAA 881,784
1,150,000 5.350%, 01/01/21 AMT ................................ Aaa/AAA 1,165,352
6,125,000 5.450%, 07/01/22 AMT ................................ Aaa/AAA 6,254,911
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
HOUSING (CONTINUED)
Kentucky Housing Corporation Housing Revenue
(continued)
$ 4,065,000 5.250%, 07/01/22 AMT ................................ Aaa/AAA $ 4,122,032
245,000 5.200%, 07/01/22 .................................... Aaa/AAA 247,996
415,000 5.100%, 07/01/22 AMT ................................ Aaa/AAA 417,328
2,570,000 4.800%, 07/01/22 AMT ................................ Aaa/AAA 2,517,443
2,000,000 4.700%, 07/01/22 Series E AMT ....................... Aaa/AAA 1,904,600
4,140,000 5.200%, 07/01/25 AMT ................................ Aaa/AAA 4,199,657
275,000 5.375%, 07/01/27 .................................... Aaa/AAA 279,892
2,300,000 5.000%, 07/01/27 Series N AMT ....................... Aaa/AAA 2,283,003
1,000,000 4.750%, 07/01/27 Series E AMT ....................... Aaa/AAA 938,510
560,000 5.550%, 07/01/33 .................................... Aaa/AAA 568,456
Kentucky Housing Multifamily Mortgage Revenue
1,325,000 5.000%, 06/01/35 AMT ................................ NR/AAA 1,320,707
-------------
Total Housing ....................................... 33,264,815
-------------
SCHOOLS (33.3%)
Barren County, Kentucky School Building Revenue
1,265,000 4.250%, 08/01/25 CIFG Assurance North America,
Inc. Insured ..................................... Aaa/NR 1,244,950
1,670,000 4.375%, 08/01/26 CIFG Assurance North America,
Inc. Insured ..................................... Aaa/NR 1,660,498
Berea, Kentucky Educational Facilities (Berea College)
1,000,000 4.125%, 06/01/25 .................................... Aaa/NR 962,050
Boone County, Kentucky School District Finance Corp.
1,730,000 4.125%, 08/01/22 XLCA Insured ....................... Aaa/NR 1,712,198
Boone County, Kentucky School District Finance Corp.
School Building Revenue
140,000 4.750%, 06/01/20 FSA Insured ........................ Aaa/AAA 144,600
1,580,000 4.500%, 08/01/23 FSA Insured ........................ Aaa/NR 1,621,807
1,250,000 4.125%, 03/01/25 FSA Insured ........................ Aaa/NR 1,197,200
Boyd County, Kentucky School District Finance Corp.
1,025,000 5.000%, 10/01/15 .................................... Aa3/NR 1,048,749
575,000 5.375%, 10/01/17 .................................... Aa3/NR 589,392
Boyle County, Kentucky College Refunding &
Improvement
1,035,000 4.500%, 06/01/22 CIFG Insured ....................... Aaa/AAA 1,051,643
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
SCHOOLS (CONTINUED)
Bullitt County, Kentucky School District Finance Corp.
$ 200,000 4.300%, 10/01/21 MBIA Insured ....................... Aaa/NR $ 201,036
2,455,000 4.500%, 10/01/22 MBIA Insured ....................... Aaa/NR 2,516,547
2,590,000 4.500%, 10/01/23 MBIA Insured ....................... Aaa/NR 2,645,737
Christian County, Kentucky School District
Finance Corp.
820,000 4.000%, 08/01/19 XLCA Insured ....................... Aaa/NR 817,720
855,000 4.000%, 08/01/20 XLCA Insured ....................... Aaa/NR 848,305
905,000 4.000%, 08/01/21 XLCA Insured ....................... Aaa/NR 890,077
1,465,000 4.000%, 08/01/22 XLCA Insured ....................... Aaa/NR 1,430,133
1,525,000 4.125%, 08/01/23 XLCA Insured ....................... Aaa/NR 1,489,803
1,590,000 4.125%, 08/01/24 XLCA Insured ....................... Aaa/NR 1,531,631
Daviess County, Kentucky School District
Finance Corp.
200,000 5.000%, 06/01/24 .................................... Aa3/NR 209,130
Fayette County, Kentucky School District Finance Corp.
5,000,000 4.250%, 04/01/23 FSA Insured ........................ Aaa/AAA 5,005,900
4,335,000 4.375%, 05/01/26 FSA Insured ........................ Aaa/AAA 4,283,630
Floyd County, Kentucky School Building
680,000 4.375%, 10/01/22 .................................... Aa3/NR 680,626
Floyd County, Kentucky School Finance Corporation
School Building
1,320,000 4.000%, 03/01/23 XLCA Insured ....................... Aaa/NR 1,271,886
1,855,000 4.125%, 03/01/26 XLCA Insured ....................... Aaa/NR 1,764,791
Fort Thomas, Kentucky Independent School District
Building Revenue
610,000 4.375%, 04/01/25 .................................... Aa3/NR 603,046
Fort Thomas, Kentucky Independent School District
Finance
785,000 4.375%, 04/01/21 .................................... Aa3/NR 791,720
Franklin County, Kentucky School District
Finance Corp.
330,000 4.500%, 04/01/18 .................................... Aa3/NR 341,784
1,000,000 5.000%, 04/01/24 .................................... Aa3/NR 1,044,580
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
SCHOOLS (CONTINUED)
Graves County, Kentucky School Building Revenue
$ 1,260,000 5.000%, 06/01/22 .................................... Aa3/NR $ 1,323,189
1,320,000 5.000%, 06/01/23 .................................... Aa3/NR 1,379,004
Hardin County, Kentucky School District Finance Corp.
1,475,000 4.000%, 02/01/19 AMBAC Insured ...................... Aaa/NR 1,476,770
Jefferson County, Kentucky School District Finance
Corp. School Building
150,000 5.000%, 04/01/20 FSA Insured ........................ Aaa/AAA 156,434
1,360,000 4.250%, 06/01/21 FSA Insured ........................ Aaa/AAA 1,372,009
Kenton County, Kentucky School Building Revenue
590,000 4.250%, 10/10/22 FSA Insured ........................ Aaa/NR 588,684
Kenton County, Kentucky School District Finance Corp.
445,000 4.300%, 04/01/22 CIFG Assurance North America,
Inc. Insured ..................................... Aaa/NR 448,974
4,250,000 5.000%, 06/01/22 MBIA Insured ....................... Aaa/NR 4,458,590
750,000 4.375%, 04/01/24 CIFG Assurance North America,
Inc. Insured ..................................... Aaa/NR 754,343
325,000 4.400%, 04/01/26 CIFG Assurance North America,
Inc. Insured ..................................... Aaa/NR 326,768
Larue County, Kentucky School District Finance Corp.
270,000 4.500%, 07/01/21 MBIA Insured ....................... Aaa/NR 274,577
470,000 4.500%, 07/01/22 MBIA Insured ....................... Aaa/NR 477,628
785,000 4.500%, 07/01/23 MBIA Insured ....................... Aaa/NR 794,396
Lexington-Fayette Urban County, Kentucky
Government Project Transylvania University
1,320,000 5.125%, 08/01/18 MBIA Insured ....................... Aaa/AAA 1,346,228
Lexington-Fayette Urban County, Kentucky
Government Project U.K. Library
725,000 5.000%, 11/01/15 MBIA Insured ....................... Aaa/AAA 748,787
300,000 5.000%, 11/01/20 MBIA Insured ....................... Aaa/AAA 309,594
Louisville & Jefferson County, Kentucky University
of Louisville
525,000 5.000%, 06/01/20 AMBAC Insured ...................... Aaa/AAA 560,784
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
SCHOOLS (CONTINUED)
Magoffin County, Kentucky School Building Revenue
$ 375,000 4.250%, 08/01/23 AMBAC Insured ...................... Aaa/NR $ 373,721
Magoffin County, Kentucky School District
450,000 4.250%, 08/01/25 AMBAC Insured ...................... Aaa/NR 442,868
Meade County, Kentucky School District
490,000 4.250%, 09/01/26 MBIA Insured ....................... Aaa/NR 476,427
Murray State University Project, Kentucky General
Receipts Revenue
745,000 4.500%, 09/01/23 AMBAC Insured ...................... Aaa/AAA 751,943
Oldham County, Kentucky School District
Finance Corp.
900,000 5.000%, 05/01/19 MBIA Insured ....................... Aaa/NR 953,415
Pendleton County, Kentucky School District
Finance Corp. School Building Revenue
730,000 4.000%, 02/01/23 MBIA Insured ....................... Aaa/NR 691,872
Pike County, Kentucky School Building Revenue
1,355,000 4.375%, 10/01/26 MBIA Insured ....................... Aaa/NR 1,330,258
Scott County, Kentucky School District Finance Corp.
1,115,000 4.200%, 01/01/22 AMBAC Insured ...................... Aaa/NR 1,115,000
1,955,000 4.250%, 01/01/23 AMBAC Insured ...................... Aaa/NR 1,952,850
1,560,000 4.300%, 01/01/24 AMBAC Insured ...................... Aaa/NR 1,547,520
Scott County, Kentucky School District Finance
Corp. School Building Revenue
2,435,000 4.250%, 02/01/26 FSA Insured ........................ Aaa/NR 2,339,767
1,000,000 4.250%, 02/01/27 FSA Insured ........................ Aaa/NR 955,840
Spencer County, Kentucky School District Finance Corp.
1,415,000 5.000%, 07/01/19 FSA insured ........................ Aaa/NR 1,509,352
University of Kentucky General Receipts
885,000 4.500%, 10/01/22 XLCA Insured ....................... Aaa/AAA 899,664
1,545,000 4.500%, 10/01/23 XLCA Insured ....................... Aaa/AAA 1,563,849
1,625,000 4.500%, 10/01/25 XLCA Insured ....................... Aaa/AAA 1,627,226
1,010,000 4.500%, 10/01/26 XLCA Insured ....................... Aaa/AAA 1,007,404
University of Louisville, Kentucky
1,055,000 4.000%, 09/01/25 MBIA Insured ....................... Aaa/AAA 993,610
Warren County, Kentucky School District Finance Corp.
295,000 4.125%, 02/01/23 MBIA Insured ....................... Aaa/NR 288,348
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
SCHOOLS (CONTINUED)
Western Kentucky University Revenue General Receipts
$ 2,860,000 4.200%, 09/01/25 Series A MBIA Insured .............. Aaa/AAA $ 2,704,788
2,980,000 4.200%, 09/01/26 Series A MBIA Insured .............. Aaa/AAA 2,797,147
-------------
Total Schools ....................................... 82,720,797
-------------
TRANSPORTATION (5.3%)
Kenton County, Kentucky Airport Board
Airport Revenue
1,300,000 5.000%, 03/01/23 MBIA Insured AMT ................... Aaa/AAA 1,319,981
Kentucky Interlocal School Transportation Authority
145,000 5.400%, 06/01/17 .................................... Aa3/A+ 145,995
400,000 6.000%, 12/01/20 .................................... Aa3/A+ 403,764
200,000 6.000%, 12/01/20 .................................... Aa3/A+ 201,882
300,000 5.800%, 12/01/20 .................................... Aa3/A+ 302,583
400,000 5.650%, 12/01/20 .................................... Aa3/A+ 403,288
350,000 5.600%, 12/01/20 .................................... Aa3/A+ 352,804
Kentucky State Turnpike Authority Economic
Development & Resource Recovery Road Revenue
200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) ......... Aaa/AAA 213,968
500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) ......... Aaa/AAA 534,920
450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) ......... Aaa/AAA 476,645
2,000,000 5.100%, 07/01/18 FSA Insured ........................ Aaa/AAA 2,090,260
Louisville & Jefferson County Regional Airport, Kentucky
1,000,000 5.250%, 07/01/18 FSA Insured AMT .................... Aaa/AAA 1,046,030
1,370,000 5.250%, 07/01/21 FSA Insured AMT .................... Aaa/AAA 1,420,169
3,390,000 5.250%, 07/01/22 FSA Insured AMT .................... Aaa/AAA 3,504,141
275,000 5.375%, 07/01/23 FSA Insured AMT .................... Aaa/AAA 284,009
500,000 5.000%, 07/01/25 MBIA Insured AMT ................... Aaa/AAA 502,670
-------------
Total Transportation ................................ 13,203,109
-------------
UTILITIES (15.7%)
Bardstown, Kentucky
200,000 5.000%, 12/01/19 MBIA Insured ....................... Aaa/NR 209,350
Boone County, Kentucky Pollution Control Revenue
Dayton Power & Light
2,000,000 4.700%, 01/01/28 FGIC Insured ....................... Aaa/AAA 2,008,760
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 $ 1,667,321
300,000 4.300%, 08/01/27 MBIA Insured ....................... Aaa/AAA 286,593
1,450,000 4.300%, 08/01/28 MBIA Insured ....................... Aaa/AAA 1,377,674
805,000 4.375%, 08/01/30 MBIA Insured ....................... Aaa/AAA 765,587
505,000 4.375%, 08/01/33 MBIA Insured ....................... Aaa/AAA 475,690
Kentucky Rural Water Finance Corp.
205,000 4.250%, 08/01/19 MBIA Insured ....................... Aaa/AAA 207,495
595,000 5.000%, 02/01/20 AMBAC Insured ...................... Aaa/AAA 622,673
210,000 4.250%, 08/01/20 MBIA Insured ....................... Aaa/AAA 211,798
200,000 4.375%, 08/01/22 MBIA Insured ....................... Aaa/AAA 202,206
240,000 4.500%, 08/01/23 MBIA Insured ....................... Aaa/AAA 243,749
200,000 4.500%, 02/01/24 MBIA Insured ....................... Aaa/AAA 201,926
255,000 4.500%, 08/01/24 MBIA Insured ....................... Aaa/AAA 257,887
290,000 4.500%, 08/01/27 MBIA Insured ....................... Aaa/AAA 291,015
245,000 4.600%, 08/01/28 MBIA Insured ....................... Aaa/AAA 247,065
315,000 4.625%, 08/01/29 MBIA Insured ....................... Aaa/AAA 317,542
Lexington-Fayette Urban County Government,
Kentucky Sewer System
1,000,000 5.000%, 07/01/19 .................................... Aa3/AA 1,050,340
Louisville & Jefferson County, Kentucky Metropolitan
Sewer District
1,000,000 5.000%, 05/15/12 FGIC Insured ....................... Aaa/AAA 1,015,580
2,565,000 5.375%, 05/15/17 MBIA Insured ....................... Aaa/AAA 2,763,582
2,380,000 4.250%, 05/15/20 FSA Insured ........................ Aaa/AAA 2,412,987
2,510,000 4.250%, 05/15/21 FSA Insured ........................ Aaa/AAA 2,532,038
400,000 5.000%, 05/15/22 FGIC Insured ....................... Aaa/AAA 406,012
Louisville, Kentucky Waterworks Board Water System
1,000,000 5.250%, 11/15/16 FSA Insured ........................ Aaa/AAA 1,053,390
2,530,000 5.250%, 11/15/18 FSA Insured ........................ Aaa/AAA 2,665,077
6,600,000 5.250%, 11/15/22 FSA Insured ........................ Aaa/AAA 6,926,568
2,415,000 5.250%, 11/15/24 FSA Insured ........................ Aaa/AAA 2,530,461
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- ----------------------------------------------------- ---------- -------------
UTILITIES (CONTINUED)
Northern Kentucky Water District
$ 660,000 5.000%, 02/01/23 FGIC Insured ....................... Aaa/NR $ 680,064
Owensboro, Kentucky Electric and Power
1,555,000 5.000%, 01/01/20 FSA Insured ........................ Aaa/AAA 1,594,404
Owensboro-Daviess County, Kentucky Regional
Water Resource Agency Wastewater Refunding &
Improvement Revenue
930,000 4.375%, 01/01/27 Series A XLCA Insured .............. NR/AAA 897,971
Trimble County, Kentucky Environmental Facilities
3,000,000 4.600%, 06/01/33 AMBAC Insured ...................... Aaa/AAA 2,986,530
-------------
Total Utilities ..................................... 39,109,335
-------------
Total Revenue Bonds .............................. 236,110,273
-------------
Total Investments (cost $246,018,952-note 4) ..... 99.9% 248,080,944
Other assets less liabilities .................... 0.1 191,455
------ -------------
Net Assets ....................................... 100.0% $ 248,272,399
====== =============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO
---------------------------------------------------- ---------
Aaa of Moody's or AAA of S&P ......................... 77.6%
Aa of Moody's or AA of S&P ........................... 14.5
A of Moody's or S&P .................................. 7.9
------
100.0%
======
PORTFOLIO ABBREVIATIONS:
-----------------------------------------------
AMBAC - American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Tax
CIFG - CDC IXIS Financial Guaranty
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, 2007
ASSETS
Investments at value (cost $246,018,952) ......................................... $248,080,944
Interest receivable .............................................................. 3,424,280
Receivable for Fund shares sold .................................................. 14,826
Other assets ..................................................................... 12,081
------------
Total assets ..................................................................... 251,532,131
------------
LIABILITIES
Cash overdraft ..................................................................... 147,974
Payable for Fund shares redeemed ................................................... 2,728,004
Dividends payable .................................................................. 237,543
Management fee payable ............................................................. 85,295
Distribution and service fees payable .............................................. 29,980
Accrued expenses ................................................................... 30,936
------------
Total liabilities .................................................................. 3,259,732
------------
NET ASSETS ............................................................................ $248,272,399
============
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 239,150
Additional paid-in capital ......................................................... 244,754,393
Net unrealized appreciation on investments (note 4) ................................ 2,061,992
Undistributed net investment income ................................................ 28,899
Accumulated net realized gain on investments ....................................... 1,187,965
------------
$248,272,399
============
CLASS A
Net Assets ......................................................................... $194,140,457
============
Capital shares outstanding ......................................................... 18,702,178
============
Net asset value and redemption price per share ..................................... $ 10.38
============
Offering price per share (100/96 of $10.38 adjusted to nearest cent) ............... $ 10.81
============
CLASS C
Net Assets ......................................................................... $ 4,120,480
============
Capital shares outstanding ......................................................... 397,141
============
Net asset value and offering price per share ....................................... $ 10.38
============
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if redeemed
during the first 12 months after purchase) ...................................... $ 10.38*
============
CLASS I
Net Assets ......................................................................... $ 8,363,007
============
Capital shares outstanding ......................................................... 806,039
============
Net asset value, offering and redemption price per share ........................... $ 10.38
============
CLASS Y
Net Assets ......................................................................... $ 41,648,455
============
Capital shares outstanding ......................................................... 4,009,609
============
Net asset value, offering and redemption price per share ........................... $ 10.39
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
INVESTMENT INCOME:
Interest income .................................................. $ 11,811,990
Expenses:
Management fee (note 3) .......................................... $ 1,046,917
Distribution and service fees (note 3) ........................... 372,596
Transfer and shareholder servicing agent fees (note 3) ........... 164,405
Trustees' fees and expenses (note 8) ............................. 118,997
Legal fees (note 3) .............................................. 43,511
Shareholders' reports and proxy statements ....................... 41,146
Fund accounting fees ............................................. 37,171
Custodian fees ................................................... 29,984
Auditing and tax fees ............................................ 19,001
Insurance ........................................................ 15,492
Registration fees and dues ....................................... 13,948
Chief compliance officer (note 3) ................................ 4,544
Miscellaneous .................................................... 34,693
------------
Total expenses ................................................... 1,942,405
Expenses paid indirectly (note 6) ................................ (13,406)
------------
Net expenses ..................................................... 1,928,999
-------------
Net investment income ............................................ 9,882,991
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions ............ 1,189,986
Change in unrealized appreciation on investments ................. (4,997,398)
------------
Net realized and unrealized gain (loss) on investments ........... (3,807,412)
-------------
Net change in net assets resulting from operations ............... $ 6,075,579
=============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------- -----------------
OPERATIONS:
Net investment income ............................... $ 9,882,991 $ 10,338,414
Net realized gain (loss) from securities transactions 1,189,986 1,488,134
Change in unrealized appreciation on investments .... (4,997,398) (1,028,674)
------------- -------------
Change in net assets from operations .............. 6,075,579 10,797,874
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (note 10):
Class A Shares:
Net investment income ................................. (7,653,537) (8,091,702)
Net realized gain on investments ...................... (1,167,715) (683,967)
Class C Shares:
Net investment income ................................. (149,329) (182,422)
Net realized gain on investments ...................... (24,440) (18,381)
Class I Shares:
Net investment income ................................. (295,398) (280,046)
Net realized gain on investments ...................... (49,465) (25,907)
Class Y Shares:
Net investment income ................................. (1,764,718) (1,790,592)
Net realized gain on investments ...................... (247,505) (150,999)
------------- -------------
Change in net assets from distributions ............ (11,352,107) (11,224,016)
------------- -------------
CAPITAL SHARE TRANSACTIONS (note 7):
Proceeds from shares sold ............................. 50,733,976 23,546,485
Reinvested dividends and distributions ................ 4,967,956 4,954,954
Cost of shares redeemed ............................... (73,982,877) (42,932,145)
------------- -------------
Change in net assets from capital share transactions .. (18,280,945) (14,430,706)
------------- -------------
Change in net assets .................................. (23,557,473) (14,856,848)
NET ASSETS:
Beginning of period ................................... 271,829,872 286,686,720
------------- -------------
End of period* ........................................ $ 248,272,399 $ 271,829,872
============= =============
* Includes undistributed net investment income of: .... $ 28,899 $ 428,272
============= =============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
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.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
("FIN 48") was adopted on June 29, 2007. Management has reviewed the tax
positions for each of the open tax years (2004-2007) and has determined
that the implementation of FIN 48 did not have a material impact on the
Fund's financial statements.
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, 2007 the Fund
decreased undistributed net investment income by $419,382, decreased
undistributed net realized gain on investments by $1,018 and increased
additional paid-in capital by $420,400.
g) ACCOUNTING PRONOUNCEMENT: 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, 2007, distribution fees on Class A
Shares amounted to $305,016 of which the Distributor retained $10,936.
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, 2007, amounted to $38,445. 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, 2007, amounted to $12,815. The total
of these payments with respect to Class C Shares amounted to $51,260 of which
the Distributor retained $12,816.
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, 2007, these payments were made at the average
annual rate of 0.35% of such net assets and amounted to $28,561 of which $16,320
related to the Plan and $12,241 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 brokerage and advisory firms ("intermediaries"), the Fund's shares are
sold primarily through the facilities of these intermediaries having offices
within Kentucky, with the bulk of sales commissions inuring to such
intermediaries. For the year ended December 31, 2007, total commissions on sales
of Class A Shares amounted to $109,346 of which the Distributor received $9,351.
c) OTHER RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2007, the Fund incurred $23,594 of legal
fees allocable to Hollyer Brady Barrett & Hines LLP ("Hollyer Brady") and
$18,045 to its successor, Butzel Long PC, counsel to the Fund, for legal
services in conjunction with the Fund's ongoing operations. The Secretary of the
Fund was a partner at Hollyer Brady and is a shareholder of its successor.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 2007, purchases of securities and
proceeds from the sales of securities aggregated $49,299,922 and $65,491,502,
respectively.
At December 31, 2007 the aggregate tax cost for all securities was
$245,990,053. At December 31, 2007, the aggregate gross unrealized appreciation
for all securities in which there is an excess of value over tax cost amounted
to $3,916,537 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $1,825,646 for a net
unrealized appreciation of $2,090,891.
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, 2007 DECEMBER 31, 2006
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold 1,253,821 $ 13,109,577 1,487,718 $ 15,671,235
Reinvested distributions 408,743 4,254,990 412,423 4,351,152
Cost of shares redeemed . (2,936,397) (30,619,982) (3,039,963) (32,001,358)
------------ ------------ ------------ ------------
Net change ........... (1,273,833) (13,255,415) (1,139,822) (11,978,971)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold 81,155 852,011 42,869 453,039
Reinvested distributions 9,963 103,674 12,141 128,026
Cost of shares redeemed . (231,239) (2,412,850) (206,398) (2,171,663)
------------ ------------ ------------ ------------
Net change ........... (140,121) (1,457,165) (151,388) (1,590,598)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold 51,362 540,822 -- --
Reinvested distributions 29,887 311,248 25,480 268,623
Cost of shares redeemed . (32,909) (345,172) (690) (7,267)
------------ ------------ ------------ ------------
Net change ........... 48,340 506,898 24,790 261,356
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold 3,449,070 36,231,566 704,473 7,422,211
Reinvested distributions 28,753 298,044 19,553 207,153
Cost of shares redeemed . (3,869,057) (40,604,873) (831,561) (8,751,857)
------------ ------------ ------------ ------------
Net change ........... (391,234) (4,075,263) (107,535) (1,122,493)
------------ ------------ ------------ ------------
Total transactions in Fund
shares .................. (1,756,848) $(18,280,945) (1,373,955) $(14,430,706)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At December 31, 2007 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, 2007 was $88,370 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 meetings (Audit, Nominating and
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,
2007, such meeting-related expenses amounted to $30,627.
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. Net realized capital gains, if any, are distributed annually
and are taxable. Dividends and capital gains distributions are paid in
additional shares at the net asset value per share, in cash, or in a combination
of both, at the shareholder's option.
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,
2007 2006
----------- -----------
Net tax-exempt income $ 9,862,982 $10,343,290
Ordinary income -- 1,472
Net realized gain on investments 1,489,125 879,254
----------- -----------
$11,352,107 $11,224,016
=========== ===========
As of December 31, 2007, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized gain $1,187,965
Unrealized appreciation 2,090,891
Undistributed tax-exempt income 238,561
----------
$3,517,417
==========
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments.
11. RECENT DEVELOPMENTS
In late May, 2007, the U. S. Supreme Court agreed to hear an appeal in
DEPARTMENT OF REVENUE OF KENTUCKY V. DAVIS, a case concerning the
constitutionality of differential tax treatment for interest from in-state vs.
out-of-state municipal securities, a practice which is common among the majority
of the states. If the U.S. Supreme Court affirms the prior decision, Kentucky
(and all other states that differentially tax interest on municipal bonds) may
then be required to accord equal income tax treatment to all municipal bond
interest. While it is impossible to predict the consequences of such an outcome,
they may include effects on the net asset values of the shares, and/or on the
tax treatment of the dividends, of some or all single-state municipal bond
funds, including the Fund. The U.S. Supreme Court heard the case on November 5,
2007 and is expected to hand a decision down in 2008.
Over the past few months, municipal bond insurance companies have been
under review by the three major rating agencies Standard & Poor's, Moody's and
Fitch. The ratings of some of the insurance companies have now either been
downgraded and/or have a negative outlook. The financial markets continue to
assess the severity of the losses caused by the subprime credit crisis and its
impact on municipal bond insurance companies and insured municipal bond prices.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................. 0.39++ 0.39+ 0.39+ 0.42+ 0.44+
Net gain (loss) on securities (both
realized and unrealized) ............. (0.15) 0.03 (0.14) 0.05 0.03
-------- -------- -------- -------- --------
Total from investment operations ....... 0.24 0.42 0.25 0.47 0.47
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ... (0.39) (0.40) (0.39) (0.42) (0.44)
Distributions from capital gains ....... (0.06) (0.03) -- -- --
-------- -------- -------- -------- --------
Total distributions .................... (0.45) (0.43) (0.39) (0.42) (0.44)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69
======== ======== ======== ======== ========
Total return (not reflecting sales charge) 2.38% 4.02% 2.39% 4.49% 4.50%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $194,140 $211,501 $223,811 $232,927 $229,176
Ratio of expenses to average
net assets ........................... 0.75% 0.76% 0.77% 0.73% 0.72%
Ratio of net investment income to
average net assets ................... 3.77% 3.71% 3.66% 3.96% 4.14%
Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ........................... 0.74% 0.76% 0.76% 0.73% 0.71%
Class C
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................. 0.31++ 0.30+ 0.30+ 0.33+ 0.35+
Net gain (loss) on securities (both
realized and unrealized) ............. (0.15) 0.03 (0.14) 0.04 0.03
-------- -------- -------- -------- --------
Total from investment operations ....... 0.16 0.33 0.16 0.37 0.38
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ... (0.30) (0.31) (0.30) (0.33) (0.35)
Distributions from capital gains ....... (0.06) (0.03) -- -- --
-------- -------- -------- -------- --------
Total distributions .................... (0.36) (0.34) (0.30) (0.33) (0.35)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
======== ======== ======== ======== ========
Total return (not reflecting sales charge) 1.61% 3.15% 1.53% 3.51% 3.62%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 4,120 $ 5,686 $ 7,296 $ 8,166 $ 7,197
Ratio of expenses to average
net assets ........................... 1.60% 1.62% 1.62% 1.58% 1.57%
Ratio of net investment income to
average net assets ................... 2.92% 2.87% 2.81% 3.11% 3.26%
Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ........................... 1.59% 1.61% 1.61% 1.58% 1.56%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily 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,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................. 0.38++ 0.38+ 0.38+ 0.41+ 0.43+
Net gain (loss) on securities (both
realized and unrealized) ............. (0.14) 0.02 (0.14) 0.03 0.02
-------- -------- -------- -------- --------
Total from investment operations ....... 0.24 0.40 0.24 0.44 0.45
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ... (0.38) (0.38) (0.38) (0.40) (0.42)
Distributions from capital gains ....... (0.06) (0.03) -- -- --
-------- -------- -------- -------- --------
Total distributions .................... (0.44) (0.41) (0.38) (0.40) (0.42)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
======== ======== ======== ======== ========
Total return (not reflecting sales charge) 2.33% 3.87% 2.24% 4.24% 4.33%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 8,363 $ 8,018 $ 7,764 $ 7,564 $ 4,438
Ratio of expenses to average
net assets ........................... 0.89% 0.91% 0.92% 0.89% 0.88%
Ratio of net investment income to
average net assets ................... 3.62% 3.57% 3.52% 3.79% 3.95%
Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ........................... 0.88% 0.90% 0.91% 0.89% 0.87%
Class Y
-----------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .................. 0.41++ 0.41+ 0.41+ 0.44+ 0.46+
Net gain (loss) on securities (both
realized and unrealized) ............. (0.14) 0.01 (0.14) 0.05 0.03
-------- -------- -------- -------- --------
Total from investment operations ....... 0.27 0.42 0.27 0.49 0.49
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income ... (0.41) (0.41) (0.41) (0.44) (0.46)
Distributions from capital gains ....... (0.06) (0.03) -- -- --
-------- -------- -------- -------- --------
Total distributions .................... (0.47) (0.44) (0.41) (0.44) (0.46)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70
======== ======== ======== ======== ========
Total return (not reflecting sales charge) 2.63% 4.08% 2.55% 4.65% 4.65%
Ratios/supplemental data
Net assets, end of period
(in thousands) ....................... $ 41,648 $ 46,625 $ 47,816 $ 48,795 $ 46,313
Ratio of expenses to average
net assets ........................... 0.60% 0.61% 0.62% 0.58% 0.57%
Ratio of net investment income to
average net assets ................... 3.92% 3.86% 3.81% 4.11% 4.28%
Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ........................... 0.59% 0.61% 0.61% 0.58% 0.56%
- ----------
+ Per share amounts have been calculated using the monthly average shares
method.
++ Per share amounts have been calculated using the daily 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,
2007 and held for the six months ended December 31, 2007.
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, 2007
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 3.12% $1,000.00 $1,031.20 $3.84
Class C 2.82% $1,000.00 $1,028.20 $8.18
Class I 3.14% $1,000.00 $1,031.40 $4.61
Class Y 3.29% $1,000.00 $1,032.90 $3.07
(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 0.75%, 1.60%, 0.90%
AND 0.60% 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, 2007
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,021.42 $3.82
Class C 5.00% $1,000.00 $1,017.14 $8.13
Class I 5.00% $1,000.00 $1,020.67 $4.58
Class Y 5.00% $1,000.00 $1,022.18 $3.06
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.75%, 1.60%, 0.90%
AND 0.60% 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(R)
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 1-800-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, 2007 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, 2007, $9,862,982 of dividends
paid by Churchill Tax-Free Fund of Kentucky, constituting 86.88% of total
dividends paid during calendar year 2007, were exempt-interest dividends;
$1,489,125 of dividends paid by the Fund constituting 13.12% of total dividends
paid during the calendar year were capital gain distributions; and the balance
was ordinary dividend income.
Prior to January 31, 2008, shareholders were mailed IRS Form 1099-DIV
which contains information on the status of distributions paid for the 2007
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(R)(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(R) 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 (a trade
organization for the U.S. fund industry
dedicated to protecting shareholder interests
and educating the public about investing) 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 since President, A Good Place for Fun, Inc., a
2005 and sports facility, since 1987; currently or
Trustee since formerly active with various professional and
1992 community organizations.
Timothy J. Leach Trustee since UC Berkeley Haas School of Business, Executive 3 None
Orinda, CA 2007 Education Lecturer since 2006; member, Oxford
(08/28/55) Financial LLC Investment Policy Council since
January 2007; Expert Affiliate, LECG LLC since
June 2007; Regional Chief Executive Officer,
US Trust Company, N.A., 2005-2006; Executive
Vice President & Chief Investment Officer,
U.S. Trust Company, New York, NY, 2004-2005;
Executive Vice President & Chief Investment
Officer, Private Asset Management Group, Wells
Fargo Bank, San Francisco, CA, 1999-2003.
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 since Executive Director, East Wind Power Partners 8 Trustee, Premier VIT.
New York, NY 1987 LTD since 1994 and Louisiana Power Partners,
(11/24/35) 1999-2003; Treasurer, Fort Schuyler Maritime
Alumni Association, Inc., successor to 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 Fort
Schuyler Maritime Foundation, Inc., successor
to the Maritime College at Fort Schuyler
Foundation, Inc., since 2000.
Anne J. Mills Trustee since President, Loring Consulting Company since 4 None
Castle Rock, CO 1987 2001; Vice President for Business 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.
James R. Ramsey Trustee since President, University of Louisville since 2 Community Bank and Trust,
Louisville, KY 1987 November 2002; Professor of Economics, Pikeville, KY and Texas
(11/14/48) University of Louisville, 1999-present; 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.
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.)
- ----------------- ---------- ------------------- ---------- ---------------------
OTHER INDIVIDUALS
CHAIRMAN EMERITUS(7)
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 since organization and parent of the Manager or
2005, Chairman Administrator and/or Adviser or Sub-Adviser to
of the Board each fund of the Aquila Group of Funds(R);
of Trustees, Chairman of the Manager or Administrator
1987-2005 and/or Adviser or Sub-Adviser to each since
2004; Founder and Chairman Emeritus of each
fund in the Aquila Group of Funds(R);
previously Chairman and a Trustee of each fund
in the Aquila Group of Funds(R) 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.
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(R) 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 July
(07/26/52) since 2000 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.
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.)
- ----------------- ---------- ------------------- ---------- ---------------------
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 President,
(08/14/71) 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.
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 since Funds(R), the Manager and the Distributor
2004 and since 2004, Compliance Officer of the Manager
Assistant or its predecessor and current parent
Secretary 1998-2004; Assistant Secretary of the Aquila
since 2000 Group of Funds(R) since 2000.
Joseph P. DiMaggio Chief Chief Financial Officer of the Aquila Group of N/A N/A
New York, NY Financial Funds(R) since 2003 and Treasurer since 2000.
(11/06/56) Officer since
2003 and
Treasurer
since 2000
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.)
- ----------------- ---------- ------------------- ---------- ---------------------
Edward M. W. Hines Secretary Shareholder of Butzel Long, a professional N/A N/A
New York, NY since 1987 corporation, counsel to the Fund, since 2007;
(12/16/39) Partner of Hollyer Brady Barrett & Hines LLP,
its predecessor as counsel, 1989-2007;
Secretary of the Aquila Group of Funds(R).
John M. Herndon Assistant Assistant Secretary of the Aquila Group of N/A N/A
New York, NY Secretary Funds(R) 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(R) 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(R), 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) or by visiting the EDGAR Database at the SEC's
internet site at www.sec.gov.
(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. Ms. Herrmann is the daughter of Lacy B. Herrmann, the Founder and
Chairman Emeritus of the Fund.
(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 Municipal 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(R)."
(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(R) (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(R)
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(R) (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 Funds(R) 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
Timothy J. Leach
Theodore T. Mason
Anne J. Mills
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, 2007 (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
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 2006 and $16,000 in 2007.
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 2006 and 2007, 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
March 10, 2008
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Chief Financial Officer and Treasurer
March 10, 2008
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 10, 2008
By: /s/ Joseph P. DiMaggio
- - - -----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
March 10, 2008
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.