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: 12/31/08
Date of reporting period: 12/31/08
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
Annual
Report
December 31, 2008
CHURCHILL
TAX-FREE FUND OF
KENTUCKY
A TAX-FREE INCOME INVESTMENT
[LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY:
A STANDING PEGASUS IN A CIRCLE]
[LOGO OF THE AQUILA
GROUP OF FUNDS: ONE OF THE
AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS(SM)
[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
"PROPER ASSET ALLOCATION -
A STRATEGY FOR ALL SEASONS"
February, 2009
The market has definitely been volatile enough recently to cause even the
most seasoned investor to ask, "What should I do now?"
We believe you will be in a better position to weather this, or any,
economic storm, if your portfolio is built with a strong foundation. In short,
is your portfolio properly allocated based on your specific needs?
As you hopefully already know, asset allocation is an investment strategy
that strives to balance risk and reward by diversifying assets according to your
specific desires. These include:
o investment time horizon (specifically your age and retirement
objectives);
o risk threshold (how much of your investment capital you are willing
to lose during a given time frame);
o financial situation (your wealth, income, expenses, tax bracket,
liquidity needs, etc.); and
o goals (the financial goals you and your family want to achieve).
Since the three main asset classes - equities, fixed-income, and cash/cash
equivalents - have different levels of risk and return, each is expected to
behave differently over time. The objective of asset allocation is to create a
diversified portfolio with an acceptable level of risk and the highest possible
return given that level of risk.
Although there is no simple formula that can find the right asset
allocation for every individual, the consensus among most financial
professionals is that asset allocation is one of the most important decisions
that investors make.
NOT A PART OF THE ANNUAL REPORT
The way you allocate your investment among stocks, bonds, and cash/cash
equivalents will be the principal determinant of your investment results -
secondary to your selection of individual securities.
Once you and your financial professional have developed an appropriate
asset allocation for your portfolio, we believe that changes should be made
based on need, not on scary headlines.
A properly constructed portfolio with sound asset allocation should be in
a good position to weather all seasons.
Sincerely
[PHOTO OMITTED]
/s/ Lacy B. Herrmann /s/ Diana P. Herrmann
Lacy B. Herrmann Diana P. Herrmann
Founder and Chairman Emeritus President
NOT A PART OF THE ANNUAL REPORT
[LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY:
A STANDING PEGASUS IN A CIRCLE]
SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES
CHURCHILL TAX-FREE FUND OF KENTUCKY
ANNUAL REPORT
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The year ended December 31, 2008 was the worst year for the American
economy since the Great Depression. Asset values tumbled - real estate, stocks,
and non-U. S. Treasury fixed-income securities. Home foreclosures and personal
and corporate bankruptcy became frighteningly commonplace. Economic life as we
know it has changed forever. 2009 will be a year of monumental challenges. As
the Obama presidency begins, so does the President's challenge to fix this
deeply troubled economy. With the prospect of a just-announced economic stimulus
package on the horizon, investors have a full plate of significant financial
developments to watch.
As we begin 2009, the country is in the midst of an economic slowdown that
has resulted in the highest unemployment rate seen in over a decade: 5.8% for
calendar year 2008 and 7.2% for the month of December. Gross Domestic Product,
retail sales, industrial production, and productivity are all down
significantly. Federal, state, and local budget deficits are all weighing
heavily on an already strained financial system. Tax and revenue shortfalls are
of growing concern. There has been an erosion of investor confidence in the
domestic and international stock markets. As we saw earlier in 2008, the
financial viability of several AAA rated municipal bond insurers has been shown,
in most cases, to be sorely lacking.
2008 was witness to the decline and disappearance of many household names
in the financial arena: Lehman Brothers is gone; Bear Stearns and Washington
Mutual were purchased by JP Morgan; Wachovia was bought by Wells Fargo; Merrill
Lynch became a part of Bank of America; Morgan Stanley obtained a controlling
interest in the securities arm of CitiGroup (Smith Barney); and locally, PNC
purchased National City. Conventional wisdom suggests that the "streamlining" of
the financial sector is far from complete, with ongoing concern about the
strength of many large banks. As part of the federal bailout program, resources
have been made available to shore-up liquidity-strapped lenders. While the jury
is still out on the success of the program, the importance of this federal
intervention cannot be overlooked. We have seen the U. S. Government step in and
offer funds to the "Big 3" automakers, all struggling to stay in business. It
has been determined that all were "too big to fail" and the consequences of
their demise would be too much additional strain on the soaring unemployment
ranks.
While it is barely a glimmer, there is a somewhat bright side to this dire
economic news: inflation is virtually non-existent. Oil prices fluctuated wildly
in 2008 - plummeting from a high of over $149 a barrel in July to a low of
$44.60 on December 31. And, early 2009 saw prices as low as $36 a barrel.
Short-term interest rates were well less than 1% - in some rare instances, even
negative! Long-term rates, as measured by the 30-year U. S. Treasury bond were
approximately 3%. These low funding rates have led to the lowest fixed-rate home
mortgage rates seen in many years.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)
With so much financial turmoil, there was a frantic flight to quality
throughout most of 2008. If you owned anything but the highest quality
investments (most notably U. S. Treasury securities), you were in for a shock
when market valuations were made. While U. S. Treasury rates dropped to unheard
of levels, everything else moved up in yield - down in price. This situation
resulted in a supply/demand imbalance that sent security prices even lower. With
the recent actions by the federal government, much of the uncertainty and
nervousness has been alleviated in the municipal bond market. With the new year,
some stability has finally shown up!
While 2008 was very challenging for bonds, it was a disastrous year for
stocks. All the major indices posted miserable investment performance for the
year. The Dow Jones Industrial Average fell 31.9% versus a gain of 8.9% in 2007.
The S & P 500 closed down 37.0% versus 5.5% last year; and the NASDAQ Composite
Index plummeted 40.0%, after a gain of 10.7% in 2007. Fixed income securities,
excluding U. S. Treasuries, posted negative performance, as well. The Class A
shares of Churchill Tax-Free Fund of Kentucky also had a negative total rate of
return of 5.05% in 2008. While we wish the results had been better, the Fund
fared better than the average performance of the investment-grade municipal
market which had a decline of 9.50%. Lower quality municipal bond funds were off
as much as 40%!
As we enter 2009, the Kentucky economy - and virtually every other state
economy - is in much worse shape than when we began 2008 - worse than anyone had
forecast. Tax receipts and revenues 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 highly sought after throughout 2008 and in the early days of
2009.
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 our adherence to a discipline of solid fundamental,
conservative portfolio management ideals. The net asset value of the Fund's
Class A shares began 2008 at $10.38 per share. We ended the year with a net
asset value of $9.42 per share. The Fund continues to maintain an average credit
quality of "AA", with no bonds rated less than "A". At year-end, 88% of the
portfolio was rated AA or AAA. The Fund's "laddered" maturity structure helps us
manage price volatility. The Fund has an average life of approximately 15 years
and a modified duration of approximately 8.4 years. We maintain a
well-diversified portfolio of 170 different Kentucky issues.
We approach the municipal bond market in 2009 with caution. The prospects
for the U. S. and Kentucky economies in 2009 are still very much in doubt. We
intend to continue to react appropriately to any signs of rising inflation. It
is going to take continued vigilance and, if necessary, continued intervention
by the Federal Reserve and the Congress to get our economy back on a positive
track while addressing inflation pressures and growth over the course of 2009.
To address these concerns, we will seek to "stay the course" and manage the
Fund's portfolio by taking advantage of opportunities in the Kentucky
marketplace that are consistent with the investment objectives of the Fund.
PERFORMANCE REPORT
The following graph illustrates the value of $10,000 invested in the Class
A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended
December 31, 2008 as compared with the Barclays Capital Quality Intermediate
Municipal Bond Index (formerly known as the Lehman Brothers Quality Intermediate
Municipal Bond Index) and the Consumer Price Index (a cost of living index). The
performance of each of the other classes is not shown in the graph but is
included in the table below. It should be noted that the Barclays Capital
Quality Intermediate Municipal Bond 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:]
Churchill Tax-Free Churchill Tax-Free
Fund of Kentucky Fund of Kentucky Barclays
Cost of Fund Class A Shares Fund Class A Shares Capital
Living Index no sales charge with sales charge Index
12/98 10,000 10,000 9,600 10,000
12/99 10,268 9,838 9,444 10,029
12/00 10,616 10,658 10,232 10,895
12/01 10,781 11,089 10,646 11,495
12/02 11,037 11,949 11,471 12,557
12/03 11,245 12,546 12,045 13,139
12/04 11,611 13,115 12,590 13,536
12/05 12,007 13,385 12,850 13,761
12/06 12,312 13,994 13,434 14,281
12/07 12,815 14,219 13,651 14,977
12/08 12,827 13,587 13,044 15,651
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 2008
------------------------------------------
SINCE
CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A (commenced operations on 5/21/87)
With Maximum Sales Charge .............. (8.82)% 0.75% 2.69% 5.20%
Without Sales Charge ................... (5.05)% 1.59% 3.11% 5.40%
Class C (commenced operations on 4/01/96)
With CDSC .............................. (6.79)% 0.73% 2.24% 3.01%
Without CDSC ........................... (5.85)% 0.73% 2.24% 3.01%
Class I (commenced operations on 8/06/01)
No Sales Charge ........................ (5.16)% 1.44% n/a 2.69%
Class Y (commenced operations on 4/01/96)
No Sales Charge ........................ (4.88)% 1.75% 3.27% 4.03%
Barclays Capital Quality
Intermediate Municipal Bond Index ...... 4.49% 3.56% 4.58% 5.85% (Class A)
4.99% (Class C&Y)
3.11% (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, 2008 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 four 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 the year ended December 31, 2004 were
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, 2008, by correspondence with
the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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, 2008, 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 four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 26, 2009
- --------------------------------------------------------------------------------
CHURCHILL TAX-FREE FUND OF KENTUCKY
SCHEDULE OF INVESTMENTS
December 31, 2008
RATING
PRINCIPAL MOODY'S/
AMOUNT GENERAL OBLIGATION BONDS (2.2%) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
Lexington-Fayette Urban County, Kentucky
$ 4,175,000 4.250%, 05/01/23 MBIA Insured ........................... Aa2/AA+ $ 3,795,785
Louisville & Jefferson County, Kentucky
955,000 4.200%, 11/01/22 MBIA Insured ........................... Aa2/AA+ 881,026
---------------
Total General Obligation Bonds .......................... 4,676,811
---------------
REVENUE BONDS (97.3%)
STATE AGENCIES (15.1%)
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank ...................... NR/AA 504,485
Kentucky Asset/Liability Commission
500,000 4.500%, 10/01/22 FGIC Insured ........................... Aa3/AA 489,930
Kentucky Asset & Liability Commission University of
Kentucky Project
500,000 5.000%, 10/01/25 Series ................................. BAa3/AA- 494,930
750,000 5.000%, 10/01/26 Series ................................. BAa3/AA- 736,103
1,000,000 5.000%, 10/01/27 Series ................................. BAa3/AA- 972,660
Kentucky Economic Development Finance Authority
Louisville Arena Project
5,725,000 5.750%, 12/01/28 Assured Guaranty Insured ............... Aa2/AAA 5,605,176
Kentucky Infrastructure Authority
230,000 5.000%, 06/01/21 ........................................ Aa3/A+ 230,918
Kentucky State Property and Buildings Commission
1,000,000 5.000%, 11/01/15 AMBAC Insured .......................... Aa3/AA 1,060,020
1,250,000 5.500%, 11/01/17 FSA Insured ............................ Aa3/AAA 1,326,187
1,000,000 5.000%, 11/01/17 AMBAC Insured .......................... Aa3/AA 1,039,830
6,000,000 5.250%, 10/01/18 ........................................ Aa3/A+ 6,130,140
1,925,000 5.000%, 10/01/19 ........................................ Aa3/A+ 1,946,752
3,000,000 5.000%, 11/01/19 FSA Insured ............................ Aa3/AAA 3,089,040
1,375,000 5.375%, 11/01/23 ........................................ Aa3/A+ 1,407,024
2,820,000 5.750%, 04/01/24 AMBAC Insured .......................... A1/A+ 2,909,394
250,000 5.500%, 11/01/28 ........................................ Aa3/A+ 251,865
2,625,000 5.750%, 04/01/29 AMBAC Insured .......................... A1/A+ 2,643,427
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
STATE AGENCIES (CONTINUED)
Kentucky State Property and Buildings Commission
Project #88
$ 2,200,000 4.500%, 11/01/26 FGIC Insured ........................... Aa3/A+ $ 1,985,192
---------------
Total State Agencies .................................... 32,823,073
---------------
COUNTY AGENCIES (2.6%)
Jefferson County, Kentucky Capital Projects
1,575,000 4.250%, 06/01/23 FSA Insured ............................ Aa3/NR* 1,409,389
4,140,000 4.375%, 06/01/28 FSA Insured ............................ Aa3/NR* 3,469,817
Lexington-Fayette Urban County, Kentucky Public
Facilities Revenue
500,000 4.125%, 10/01/23 MBIA Insured ........................... Aa3/NR 457,360
Warren County, Kentucky Justice Center
365,000 4.300%, 09/01/22 MBIA Insured ........................... Aa3/NR 343,786
---------------
Total County Agencies ................................... 5,680,352
---------------
HOSPITALS (8.2%)
Jefferson County, Kentucky Health Facilities
1,715,000 5.650%, 01/01/17 AMBAC Insured .......................... Aa3/AA 1,717,127
2,200,000 5.250%, 05/01/17 ........................................ NR/A 2,139,192
Jefferson County, Kentucky Medical Center
2,000,000 5.500%, 05/01/22 ........................................ NR/A 1,916,060
Lexington-Fayette Urban County, Kentucky Public
Facilities
500,000 4.250%, 10/01/26 MBIA Insured ........................... Aa3/NR 441,790
Louisville & Jefferson County, Kentucky Medical
Center
1,000,000 5.000%, 06/01/18 ........................................ NR/A 960,190
Louisville & Jefferson County, Kentucky Metro Health,
Jewish Hospital Revenue
1,250,000 6.000%, 02/01/22 ........................................ A3/A+ 1,156,650
Louisville & Jefferson County, Kentucky Metropolitan
Government Health System (Norton)
8,045,000 5.000%, 10/01/26 ........................................ NR/A- 5,598,596
6,000,000 5.000%, 10/01/30 ........................................ NR/A- 3,958,560
---------------
Total Hospitals ......................................... 17,888,165
---------------
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
HOUSING (12.1%)
Kentucky Housing Corporation Housing Revenue
$ 555,000 4.200%, 01/01/17 ........................................ Aaa/AAA $ 489,471
100,000 5.125%, 07/01/17 ........................................ Aaa/AAA 94,710
470,000 4.800%, 01/01/18 AMT .................................... Aaa/AAA 415,471
285,000 4.250%, 01/01/18 ........................................ Aaa/AAA 246,519
575,000 4.800%, 07/01/18 AMT .................................... Aaa/AAA 506,063
180,000 4.250%, 07/01/18 ........................................ Aaa/AAA 154,865
900,000 4.800%, 07/01/20 AMT .................................... Aaa/AAA 740,079
1,150,000 5.350%, 01/01/21 AMT .................................... Aaa/AAA 1,007,710
6,025,000 5.450%, 07/01/22 AMT .................................... Aaa/AAA 5,348,272
4,565,000 5.250%, 07/01/22 AMT .................................... Aaa/AAA 3,856,558
245,000 5.200%, 07/01/22 ........................................ Aaa/AAA 215,735
415,000 5.100%, 07/01/22 AMT .................................... Aaa/AAA 349,480
2,570,000 4.800%, 07/01/22 AMT .................................... Aaa/AAA 2,075,403
2,000,000 4.700%, 07/01/22 Series E AMT ........................... Aaa/AAA 1,593,300
1,635,000 5.000%, 01/01/23 AMT .................................... Aaa/AAA 1,353,616
4,140,000 5.200%, 07/01/25 AMT .................................... Aaa/AAA 3,451,601
275,000 5.375%, 07/01/27 ........................................ Aaa/AAA 236,302
2,300,000 5.000%, 07/01/27 Series N AMT ........................... Aaa/AAA 1,797,151
1,000,000 4.750%, 07/01/27 Series E AMT ........................... Aaa/AAA 753,520
560,000 5.550%, 07/01/33 ........................................ Aaa/AAA 495,449
Kentucky Housing Multifamily Mortgage Revenue
1,325,000 5.000%, 06/01/35 AMT .................................... NR/AAA 1,096,239
---------------
Total Housing ........................................... 26,277,514
---------------
SCHOOLS (34.9%)
Barren County, Kentucky School Building Revenue
1,265,000 4.250%, 08/01/25 CIFG Assurance North America,
Inc. Insured ......................................... Aa3/NR 1,116,122
1,670,000 4.375%, 08/01/26 CIFG Assurance North America,
Inc. Insured ......................................... Aa3/NR 1,480,355
Berea, Kentucky Educational Facilities (Berea College)
1,000,000 4.125%, 06/01/25 ........................................ Aaa/NR 862,510
Boone County, Kentucky School District Finance Corp.
1,730,000 4.125%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,555,426
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Boone County, Kentucky School District Finance Corp.
School Building Revenue
$ 140,000 4.750%, 06/01/20 FSA Insured ............................ Aaa/AAA $ 140,736
1,580,000 4.500%, 08/01/23 FSA Insured ............................ Aa3/NR* 1,477,521
1,250,000 4.125%, 03/01/25 FSA Insured ............................ Aa3/NR* 1,043,063
Boyle County, Kentucky College Refunding &
Improvement
1,035,000 4.500%, 06/01/22 CIFG Insured ........................... A3/A- 966,203
200,000 4.625%, 06/01/24 CIFG Insured ........................... A3/A- 183,284
Bullitt County, Kentucky School District Finance Corp.
200,000 4.300%, 10/01/21 MBIA Insured ........................... Aa3/NR 193,130
2,455,000 4.500%, 10/01/22 MBIA Insured ........................... Aa3/NR 2,430,057
2,590,000 4.500%, 10/01/23 MBIA Insured ........................... Aa3/NR 2,524,447
1,145,000 4.500%, 04/01/27 FSA Insured ............................ Aa3/NR 1,020,092
1,200,000 4.500%, 04/01/28 FSA Insured ............................ Aa3/NR 1,057,764
Christian County, Kentucky School District Finance
Corp.
820,000 4.000%, 08/01/19 Syncora Guarantee Inc. Insured ......... Aa3/NR 806,101
855,000 4.000%, 08/01/20 Syncora Guarantee Inc. Insured ......... Aa3/NR 817,602
905,000 4.000%, 08/01/21 Syncora Guarantee Inc. Insured ......... Aa3/NR 843,795
1,465,000 4.000%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,338,717
1,525,000 4.125%, 08/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,374,955
1,590,000 4.125%, 08/01/24 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,404,813
Daviess County, Kentucky School District Finance Corp.
200,000 5.000%, 06/01/24 ........................................ Aa3/NR 200,366
Fayette County, Kentucky School District Finance Corp.
5,000,000 4.250%, 04/01/23 FSA Insured ............................ Aa3/AAA 4,674,250
4,335,000 4.375%, 05/01/26 FSA Insured ............................ Aa3/AAA 3,857,500
Floyd County, Kentucky School Building
680,000 4.375%, 10/01/22 ........................................ Aa3/NR 633,250
Floyd County, Kentucky School Finance Corporation
School Building
1,320,000 4.000%, 03/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,177,440
1,855,000 4.125%, 03/01/26 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,595,337
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Fort Thomas, Kentucky Independent School District
Building Revenue
$ 610,000 4.375%, 04/01/25 ........................................ Aa3/NR $ 541,265
Fort Thomas, Kentucky Independent School District
Finance
785,000 4.375%, 04/01/21 ........................................ Aa3/NR 759,283
Franklin County, Kentucky School District Finance
Corp.
1,000,000 5.000%, 04/01/24 ........................................ Aa3/NR 1,001,750
Graves County, Kentucky School Building Revenue
1,260,000 5.000%, 06/01/22 ........................................ Aa3/NR 1,279,328
1,320,000 5.000%, 06/01/23 ........................................ Aa3/NR 1,326,666
Hardin County, Kentucky School District Finance
Corp.
1,475,000 4.000%, 02/01/19 AMBAC Insured .......................... Aa3/NR 1,450,943
Jefferson County, Kentucky School District Finance
Corp. School Building
150,000 5.000%, 04/01/20 FSA Insured ............................ Aa3/AAA 153,828
1,360,000 4.250%, 06/01/21 FSA Insured ............................ Aa3/AAA 1,302,690
Kenton County, Kentucky School Building Revenue
590,000 4.250%, 10/01/22 FSA Insured ............................ Aaa/NR 547,496
Kenton County, Kentucky School District Finance
Corp.
445,000 4.300%, 04/01/22 CIFG Assurance North America,
Inc. Insured ......................................... Aa3/NR 421,059
4,250,000 5.000%, 06/01/22 MBIA Insured ........................... Aa3/NR 4,330,325
750,000 4.375%, 04/01/24 CIFG Assurance North America,
Inc. Insured ......................................... Aa3/NR 691,290
325,000 4.400%, 04/01/26 CIFG Assurance North America,
Inc. Insured ......................................... Aa3/NR 294,551
Larue County, Kentucky School District Finance
Corp.
270,000 4.500%, 07/01/21 MBIA Insured ........................... Aa3/NR 264,692
470,000 4.500%, 07/01/22 MBIA Insured ........................... Aa3/NR 456,116
785,000 4.500%, 07/01/23 MBIA Insured ........................... Aa3/NR 749,557
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Lexington-Fayette Urban County, Kentucky
Government Project Transylvania University
$ 1,320,000 5.125%, 08/01/18 MBIA Insured ........................... A2/AA $ 1,327,432
Lexington-Fayette Urban County, Kentucky
Government Project University of Kentucky Library
300,000 5.000%, 11/01/20 MBIA Insured ........................... A2/AA 304,197
Louisville & Jefferson County, Kentucky University
of Louisville
525,000 5.000%, 06/01/20 AMBAC Insured .......................... Aa3/AA 545,953
Magoffin County, Kentucky School Building Revenue
375,000 4.250%, 08/01/23 AMBAC Insured .......................... Aa3/NR 343,879
Magoffin County, Kentucky School District
450,000 4.250%, 08/01/25 AMBAC Insured .......................... Aa3/NR 400,455
McCreary County, Kentucky School Building Revenue
935,000 4.500%, 05/01/28 ........................................ Aa3/NR 821,510
Meade County, Kentucky School District
490,000 4.250%, 09/01/26 MBIA Insured ........................... Aa3/NR 430,592
Murray State University Project, Kentucky General
Receipts Revenue
745,000 4.500%, 09/01/23 AMBAC Insured .......................... Aa3/AA 667,878
Ohio County, Kentucky School Building Revenue
790,000 4.500%, 05/01/24 ........................................ Aa3/NR 725,394
325,000 4.500%, 05/01/25 ........................................ Aa3/NR 294,765
Oldham County, Kentucky School District Finance
Corp.
500,000 5.000%, 05/01/19 MBIA Insured ........................... Aa3/NR 522,500
Owensboro, Kentucky Independent School District
Finance Corp. School Building Revenue
390,000 4.375%, 09/01/24 ........................................ Aa3/NR 356,323
Pendleton County, Kentucky School District Finance
Corp. School Building Revenue
730,000 4.000%, 02/01/23 MBIA Insured ........................... Aa3/NR 637,093
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Pike County, Kentucky School Building Revenue
$ 1,355,000 4.375%, 10/01/26 MBIA Insured ........................... Aa3/NR $ 1,204,270
Scott County, Kentucky School District Finance Corp.
1,115,000 4.200%, 01/01/22 AMBAC Insured .......................... Aa3/NR 1,053,173
1,955,000 4.250%, 01/01/23 AMBAC Insured .......................... Aa3/NR 1,831,092
1,560,000 4.300%, 01/01/24 AMBAC Insured .......................... Aa3/NR 1,450,410
Scott County, Kentucky School District Finance
Corp. School Building Revenue
1,000,000 4.250%, 02/01/27 FSA Insured ............................ Aa3/NR 854,610
University of Kentucky General Receipts
885,000 4.500%, 10/01/22 Syncora Guarantee Inc. Insured ......... Aa3/AA- 858,459
1,545,000 4.500%, 10/01/23 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,462,837
1,625,000 4.500%, 10/01/25 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,487,005
1,010,000 4.500%, 10/01/26 Syncora Guarantee Inc. Insured ......... Aa3/AA- 914,555
University of Louisville, Kentucky
1,055,000 4.000%, 09/01/25 MBIA Insured ........................... Aa3/AA 901,402
1,000,000 4.375%, 04/01/27 FSA Insured ............................ Aa3/NR* 898,110
Warren County, Kentucky School District Finance
Corp.
295,000 4.125%, 02/01/23 MBIA Insured ........................... Aa3/NR 266,804
Western Kentucky University Revenue General
Receipts
2,860,000 4.200%, 09/01/25 Series A MBIA Insured .................. Aa3/AA 2,401,399
2,980,000 4.200%, 09/01/26 Series A MBIA Insured .................. Aa3/AA 2,469,407
---------------
Total Schools ........................................... 75,777,179
---------------
TRANSPORTATION (6.8%)
Kenton County, Kentucky Airport Board Airport
Revenue
1,300,000 5.000%, 03/01/23 MBIA Insured AMT ....................... A2/AA 1,071,798
Kentucky Interlocal School Transportation Authority
145,000 5.400%, 06/01/17 ........................................ Aa3/A+ 145,023
400,000 6.000%, 12/01/20 ........................................ Aa3/A+ 403,440
200,000 6.000%, 12/01/20 ........................................ Aa3/A+ 201,720
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
TRANSPORTATION (CONTINUED)
Kentucky Interlocal School Transportation Authority
(continued)
$ 300,000 5.800%, 12/01/20 ........................................ Aa3/A+ $ 302,343
400,000 5.650%, 12/01/20 ........................................ Aa3/A+ 402,904
350,000 5.600%, 12/01/20 ........................................ Aa3/A+ 352,471
Kentucky State Turnpike Authority Revenue
2,250,000 5.000%, 07/01/27 ........................................ Aa3/AA+ 2,189,137
950,000 5.000%, 07/01/28 ........................................ Aa3/AA+ 915,619
Louisville, Kentucky Regional Airport Authority
2,610,000 5.000%, 07/01/24 AMBAC Insured AMT ...................... Aa3/AA 2,125,245
1,000,000 5.250%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 864,000
Louisville & Jefferson County Regional Airport,
Kentucky
1,000,000 5.250%, 07/01/18 FSA Insured AMT ........................ Aa3/AAA 950,150
1,370,000 5.250%, 07/01/21 FSA Insured AMT ........................ Aa3/AAA 1,229,657
3,390,000 5.250%, 07/01/22 FSA Insured AMT ........................ Aa3/AAA 2,996,150
275,000 5.375%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 245,149
500,000 5.000%, 07/01/25 MBIA Insured AMT ....................... A1/AA 413,180
---------------
Total Transportation .................................... 14,807,986
---------------
UTILITIES (17.6%)
Bardstown, Kentucky Combined Utilities Revenue
200,000 5.000%, 12/01/19 MBIA Insured ........................... A2/NR 204,074
Boone County, Kentucky Pollution Control Revenue
Dayton Power & Light
2,000,000 4.700%, 01/01/28 FGIC Insured ........................... A2/A- 1,667,900
Campbell & Kenton Counties, Kentucky Sanitation
District Revenue
1,695,000 4.300%, 08/01/24 MBIA Insured ........................... Aa3/AA 1,565,197
300,000 4.300%, 08/01/27 MBIA Insured ........................... Aa3/AA 265,887
1,450,000 4.300%, 08/01/28 MBIA Insured ........................... Aa3/AA 1,266,503
805,000 4.375%, 08/01/30 MBIA Insured ........................... Aa3/AA 697,146
505,000 4.375%, 08/01/33 MBIA Insured ........................... Aa3/AA 424,685
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
UTILITIES (CONTINUED)
Carroll County, Kentucky Environmental Facilities
Revenue (KY Utilities) AMT
$ 1,500,000 5.750%, 02/01/26 AMBAC Insured .......................... Aa3/AAA $ 1,409,280
Kentucky Rural Water Finance Corp.
205,000 4.250%, 08/01/19 MBIA Insured ........................... A2/AA 204,994
595,000 5.000%, 02/01/20 MBIA Insured ........................... A2/AA 612,404
210,000 4.250%, 08/01/20 MBIA Insured ........................... A2/AA 205,670
200,000 4.375%, 08/01/22 MBIA Insured ........................... A2/AA 192,554
240,000 4.500%, 08/01/23 MBIA Insured ........................... A2/AA 228,293
200,000 4.500%, 02/01/24 MBIA Insured ........................... A2/AA 188,338
255,000 4.500%, 08/01/24 MBIA Insured ........................... A2/AA 239,649
355,000 4.600%, 02/01/25 ........................................ NR/AA- 328,595
290,000 4.500%, 08/01/27 MBIA Insured ........................... A2/AA 262,172
245,000 4.600%, 08/01/28 MBIA Insured ........................... A2/AA 221,634
315,000 4.625%, 08/01/29 MBIA Insured ........................... A2/AA 283,355
Louisville & Jefferson County, Kentucky Metropolitan
Sewer District
2,565,000 5.375%, 05/15/17 MBIA Insured ........................... A2/AA 2,682,143
2,380,000 4.250%, 05/15/20 FSA Insured ............................ Aa3/AAA 2,352,439
2,510,000 4.250%, 05/15/21 FSA Insured ............................ Aa3/AAA 2,436,984
400,000 5.000%, 05/15/22 FGIC Insured ........................... NR/AA 402,324
Louisville, Kentucky Waterworks Board Water System
1,000,000 5.250%, 11/15/16 FSA Insured ............................ Aa3/AAA 1,037,760
2,530,000 5.250%, 11/15/18 FSA Insured ............................ Aa3/AAA 2,604,281
6,600,000 5.250%, 11/15/22 FSA Insured ............................ Aa3/AAA 6,697,482
2,415,000 5.250%, 11/15/24 FSA Insured ............................ Aa3/AAA 2,442,507
Northen Kentucky Water District
660,000 5.000%, 02/01/23 FGIC Insured ........................... A2/NR 641,150
1,825,000 6.000%, 02/01/28 FSA Insured ............................ Aa3/NR 1,887,981
Owensboro, Kentucky Electric and Power
1,555,000 5.000%, 01/01/20 FSA Insured ............................ Aa3/AAA 1,572,836
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
UTILITIES (CONTINUED)
Owensboro-Daviess County, Kentucky Regional
Water Resource Agency Wastewater Refunding
& Improvement Revenue
$ 930,000 4.375%, 01/01/27 Series A Syncora Guarantee Inc.
Insured .............................................. NR/A $ 778,810
Trimble County, Kentucky Environmental Facilities
3,000,000 4.600%, 06/01/33 AMBAC Insured .......................... Aa3/AA 2,342,100
---------------
Total Utilities 38,347,127
---------------
Total Revenue Bonds 211,601,396
---------------
Total Investments (cost $236,055,572-note 4) ......... 99.5% 216,278,207
Other assets less liabilities ........................ 0.5 1,106,215
--------- ---------------
Net Assets ........................................... 100.0% $ 217,384,422
========= ===============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO
---------------------------------------------------- ---------
Aaa of Moody's or AAA of S&P or AAA of Fitch ............... 38.4%
Aa of Moody's or AA of S&P ................................. 49.7
A of Moody's or S&P ........................................ 11.9
---------
100.0%
=========
+ Calculated using the highest rating of the three
rating services.
* Rated AAA by Fitch.
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
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008
ASSETS
Investments at value (cost $236,055,572) ........................................... $ 216,278,207
Cash ............................................................................... 1,803,926
Interest receivable ................................................................ 3,267,161
Receivable for Fund shares sold .................................................... 162,327
Other assets ....................................................................... 14,279
------------------
Total assets ....................................................................... 221,525,900
------------------
LIABILITIES
Payable for investment securities purchased ........................................ 1,810,583
Payable for Fund shares redeemed ................................................... 1,180,116
Dividends and capital gains payable ................................................ 990,924
Management fee payable ............................................................. 72,737
Distribution and service fees payable .............................................. 24,691
Accrued expenses ................................................................... 62,427
------------------
Total liabilities .................................................................. 4,141,478
------------------
NET ASSETS ............................................................................ $ 217,384,422
==================
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 230,632
Additional paid-in capital ......................................................... 237,364,924
Net unrealized depreciation on investments (note 4) ................................ (19,777,365)
Undistributed net investment income ................................................ 63,972
Accumulated net realized loss on investments ....................................... (497,741)
------------------
$ 217,384,422
==================
CLASS A
Net Assets ......................................................................... $ 169,582,438
==================
Capital shares outstanding ......................................................... 17,993,284
==================
Net asset value and redemption price per share ..................................... $ 9.42
==================
Maximum offering price per share (100/96 of $9.42 adjusted to nearest cent) ........ $ 9.81
==================
CLASS C
Net Assets ......................................................................... $ 2,693,735
==================
Capital shares outstanding ......................................................... 285,957
==================
Net asset value and offering price per share ....................................... $ 9.42
==================
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) ...................................... $ 9.42*
==================
CLASS I
Net Assets ......................................................................... $ 7,809,599
==================
Capital shares outstanding ......................................................... 829,035
==================
Net asset value, offering and redemption price per share ........................... $ 9.42
==================
CLASS Y
Net Assets ......................................................................... $ 37,298,650
==================
Capital shares outstanding ......................................................... 3,954,903
==================
Net asset value, offering and redemption price per share ........................... $ 9.43
==================
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008
INVESTMENT INCOME:
Interest income ...................................... $ 11,365,516
Expenses:
Management fee (note 3) .............................. $ 956,228
Distribution and service fees (note 3) ............... 329,388
Transfer and shareholder servicing agent fees (note 3) 155,287
Trustees' fees and expenses (note 8) ................. 106,185
Legal fees (note 3) .................................. 100,124
Shareholders' reports and proxy statements ........... 58,061
Fund accounting fees ................................. 36,420
Registration fees and dues ........................... 28,841
Custodian fees (note 6) .............................. 25,404
Auditing and tax fees ................................ 21,400
Insurance ............................................ 11,191
Chief compliance officer (note 3) .................... 4,159
Miscellaneous ........................................ 28,754
------------
Total expenses ....................................... 1,861,442
Expenses paid indirectly (note 6) .................... (18,428)
------------
Net expenses ......................................... 1,843,014
------------
Net investment income ................................ 9,522,502
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions (497,741)
Change in unrealized appreciation on investments ..... (21,839,357)
------------
Net realized and unrealized gain (loss) on investments (22,337,098)
------------
Net change in net assets resulting from operations ... $(12,814,596)
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2008 DECEMBER 31, 2007
----------------- -----------------
OPERATIONS:
Net investment income ............................... $ 9,522,502 $ 9,882,991
Net realized gain (loss) from securities transactions (497,741) 1,189,986
Change in unrealized appreciation on investments .... (21,839,357) (4,997,398)
----------------- -----------------
Change in net assets from operations ............. (12,814,596) 6,075,579
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (note 10):
Class A Shares:
Net investment income ............................... (7,345,786) (7,653,537)
Net realized gain on investments .................... (929,036) (1,167,715)
Class C Shares:
Net investment income ............................... (107,381) (149,329)
Net realized gain on investments .................... (14,676) (24,440)
Class I Shares:
Net investment income ............................... (311,177) (295,398)
Net realized gain on investments .................... (42,568) (49,465)
Class Y Shares:
Net investment income ............................... (1,718,581) (1,764,718)
Net realized gain on investments .................... (203,981) (247,505)
----------------- -----------------
Change in net assets from distributions .......... (10,673,186) (11,352,107)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS (note 7):
Proceeds from shares sold ........................... 24,423,276 50,733,976
Reinvested dividends and distributions .............. 4,636,181 4,967,956
Cost of shares redeemed ............................. (36,459,652) (73,982,877)
----------------- -----------------
Change in net assets from capital share transactions (7,400,195) (18,280,945)
----------------- -----------------
Change in net assets ................................ (30,887,977) (23,557,473)
NET ASSETS:
Beginning of period ................................. 248,272,399 271,829,872
----------------- -----------------
End of period* ...................................... $ 217,384,422 $ 248,272,399
================= =================
* Includes undistributed net investment income of: .. $ 63,972 $ 28,899
================= =================
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008
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) FAIR VALUE MEASUREMENTS: The Fund adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 157, ("Fair Value
Measurements" ("SFAS 157"), effective January 1, 2008. SFAS 157
established a three-tier hierarchy of inputs to establish classification
of fair value measurements for disclosure purposes. Inputs may be
observable or unobservable. Observable inputs reflect the assumptions
market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of the reporting
entity. Unobservable inputs reflect the reporting entity's own assumptions
about the assumptions market participants would use in pricing the asset
or liability developed based on the best information available in the
circumstances. The Fund's investments are assigned levels based upon the
observability.
The three-tier hierarchy of inputs is summarized below:
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities.
The following is a summary of the valuation inputs, representing 100% of
the Fund's investments, used to value the Fund's net assets as of December
31, 2008:
Valuation Inputs Investments in Securities
---------------- -------------------------
Level 1 - Quoted Prices ....................... $ --
Level 2 - Other Significant Observable Inputs . 216,278,207
Level 3 - Significant Unobservable Inputs ..... --
------------
Total ......................................... $216,278,207
============
c) 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.
d) 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.
The Fund has adopted FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). Management has reviewed the tax
positions for each of the open tax years (2005-2008) and has determined
that the implementation of FIN 48 did not have a material impact on the
Fund's financial statements.
e) 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.
f) 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.
g) 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, 2008 the Fund
decreased undistributed net investment income by $4,504, decreased
undistributed net realized loss on investments by $2,296 and increased
additional paid-in capital by $2,208.
h) ACCOUNTING PRONOUNCEMENT: In March 2008, Statement of Financial Accounting
Standards No. 161, "Disclosures about Derivative Instruments and Hedging
Activities" ("SFAS 161") was issued and is effective for fiscal years
beginning after November 15, 2008. SFAS 161 is intended to improve
financial reporting for derivative instruments by requiring enhanced
disclosure that enables investors to understand how and why an entity uses
derivatives, how derivatives are accounted for, and how derivative
instruments affect an entity's results of operations and financial
position. Management is currently evaluating the implications of SFAS 161
and its impact, if any, on the Fund's financial statement disclosures.
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 all of the various
support organizations to the Fund such as the shareholder servicing agent,
custodian, legal counsel, fund accounting agent, auditors and distributor.
For its services, the Manager is entitled to receive a fee which is payable
monthly and computed as of the close of business each day at the annual rate of
0.40 of 1% on the Fund's average net assets.
Under a Compliance Agreement with the Manager, the Manager is compensated
for Chief Compliance Officer related services provided to enable the Fund to
comply with Rule 38a-1 of the Investment Company Act of 1940.
Specific details as to the nature and extent of the services provided by
the Manager are more fully defined in the Fund's Prospectus and Statement of
Additional Information.
b) DISTRIBUTION AND SERVICE FEES:
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of
the Plan, with respect to Class A Shares, the Fund is authorized to make
distribution fee payments to broker-dealers ("Qualified Recipients") or others
selected by Aquila Distributors, Inc. (the "Distributor") including, but not
limited to, any principal underwriter of the Fund, with which the Distributor
has entered into written agreements contemplated by the Rule and which have
rendered assistance in the distribution and/or retention of the Fund's shares or
servicing of shareholder accounts. The Fund makes payment of this service fee at
the annual rate of 0.15% of the Fund's average net assets represented by Class A
Shares. For the year ended December 31, 2008, distribution fees on Class A
Shares amounted to $278,370 of which the Distributor retained $11,430.
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, 2008, amounted to $26,048. 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, 2008, amounted to $8,682. The total
of these payments with respect to Class C Shares amounted to $34,730 of which
the Distributor retained $8,251.
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, 2008,
these payments were made at the average annual rate of 0.35% of such net assets
and amounted to $28,504 of which $16,288 related to the Plan and $12,216 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 intermediaries having offices within
Kentucky, with the bulk of sales commissions inuring to such intermediaries. For
the year ended December 31, 2008, total commissions on sales of Class A Shares
amounted to $131,646 of which the Distributor received $15,125.
c) OTHER RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2008, the Fund incurred $95,229 of legal
fees allocable to Butzel Long PC, counsel to the Fund, for legal services in
conjunction with the Fund's ongoing operations. The Secretary of the Fund is a
shareholder of that firm.
4. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 2008, purchases of securities and
proceeds from the sales of securities aggregated $32,468,716 and $41,617,346,
respectively.
At December 31, 2008 the aggregate tax cost for all securities was
$235,991,600. At December 31, 2008, the aggregate gross unrealized appreciation
for all securities in which there is an excess of value over tax cost amounted
to $1,044,958 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $20,758,351 for a
net unrealized depreciation of $19,713,393.
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, 2008 December 31, 2007
----------------------------- -----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold 1,752,221 $ 17,615,276 1,253,821 $ 13,109,577
Reinvested distributions 407,510 4,010,870 408,743 4,254,990
Cost of shares redeemed . (2,868,625) (28,007,543) (2,936,397) (30,619,982)
------------ ------------ ------------ ------------
Net change ........... (708,894) (6,381,397) (1,273,833) (13,255,415)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold 36,194 370,078 81,155 852,011
Reinvested distributions 7,776 76,395 9,963 103,674
Cost of shares redeemed . (155,154) (1,542,526) (231,239) (2,412,850)
------------ ------------ ------------ ------------
Net change ........... (111,184) (1,096,053) (140,121) (1,457,165)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold 9,148 93,333 51,362 540,822
Reinvested distributions 32,930 322,736 29,887 311,248
Cost of shares redeemed . (19,082) (187,682) (32,909) (345,172)
------------ ------------ ------------ ------------
Net change ........... 22,996 228,387 48,340 506,898
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold 627,670 6,344,589 3,449,070 36,231,566
Reinvested distributions 23,664 226,180 28,753 298,044
Cost of shares redeemed . (706,040) (6,721,901) (3,869,057) (40,604,873)
------------ ------------ ------------ ------------
Net change ........... (54,706) (151,132) (391,234) (4,075,263)
------------ ------------ ------------ ------------
Total transactions in Fund
shares ............. (851,788) $ (7,400,195) (1,756,848) $(18,280,945)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At December 31, 2008 there were 5 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, 2008 was $82,500 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,
Shareholder and special meetings) are held, 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, 2008, such meeting-related expenses amounted to $23,685.
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. As of December 31, 2008, the Fund had a capital
loss carryover of $477,760 that if not offset by capital gains will expire in
2016.
As of December 31, 2008, there were post-October capital loss deferrals of
$19,981, which will be recognized in the following year.
The tax character of distributions:
Year Ended December 31,
2008 2007
----------- -----------
Net tax-exempt income $ 9,482,925 $ 9,862,982
Net realized gain on investments 1,190,261 1,489,125
----------- -----------
$10,673,186 $11,352,107
=========== ===========
As of December 31, 2008, the components of distributable earnings on a tax
basis were as follows:
Accumulated net realized loss $ (477,760)
Unrealized depreciation (19,713,393)
Undistributed tax-exempt income 553,588
Other accumulated losses (19,981)
Other temporary differences (553,588)
------------
$(20,211,134)
============
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments. The difference between
book basis and tax basis undistributed income is due to the timing difference in
recognizing dividends paid.
11. RECENT DEVELOPMENTS
a) THE DAVIS CASE: In 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. On May 19, 2008, the U. S. Supreme Court
upheld the right of states to tax interest on out-of-state municipal bonds
while exempting their own state's bond interest from taxation. The U. S.
Supreme Court said differential tax treatment for interest from in-state
vs. out-of-state municipal securities does not discriminate against
interstate commerce, but rather promotes the financing of essential
governmental services.
b) INSURERS: Over the past year, 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 the prices of insured municipal bonds.
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................. 0.40++ 0.39++ 0.39+ 0.39+ 0.42+
Net gain (loss) on securities (both
realized and unrealized) ........... (0.92) (0.15) 0.03 (0.14) 0.05
-------- -------- -------- -------- --------
Total from investment operations ...... (0.52) 0.24 0.42 0.25 0.47
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income .. (0.39) (0.39) (0.40) (0.39) (0.42)
Distributions from capital gains ...... (0.05) (0.06) (0.03) -- --
-------- -------- -------- -------- --------
Total distributions ................... (0.44) (0.45) (0.43) (0.39) (0.42)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.59 $ 10.60 $ 10.74
======== ======== ======== ======== ========
Total return (not reflecting sales charge) (5.05)% 2.38% 4.02% 2.39% 4.49%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $169,582 $194,140 $211,501 $223,811 $232,927
Ratio of expenses to average
net assets ......................... 0.79% 0.75% 0.76% 0.77% 0.73%
Ratio of net investment income to
average net assets ................. 3.97% 3.77% 3.71% 3.66% 3.96%
Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ......................... 0.78% 0.74% 0.76% 0.76% 0.73%
Class C
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................. 0.31++ 0.31++ 0.30+ 0.30+ 0.33+
Net gain (loss) on securities (both
realized and unrealized) ........... (0.91) (0.15) 0.03 (0.14) 0.04
-------- -------- -------- -------- --------
Total from investment operations ...... (0.60) 0.16 0.33 0.16 0.37
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income .. (0.31) (0.30) (0.31) (0.30) (0.33)
Distributions from capital gains ...... (0.05) (0.06) (0.03) -- --
-------- -------- -------- -------- --------
Total distributions ................... (0.36) (0.36) (0.34) (0.30) (0.33)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73
======== ======== ======== ======== ========
Total return (not reflecting sales charge) (5.85)% 1.61% 3.15% 1.53% 3.51%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 2,694 $ 4,120 $ 5,686 $ 7,296 $ 8,166
Ratio of expenses to average
net assets ......................... 1.64% 1.60% 1.62% 1.62% 1.58%
Ratio of net investment income to
average net assets ................. 3.10% 2.92% 2.87% 2.81% 3.11%
Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ......................... 1.63% 1.59% 1.61% 1.61% 1.58%
- ----------
+ 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,
------------------------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................. 0.38++ 0.38++ 0.38+ 0.38+ 0.41+
Net gain (loss) on securities (both
realized and unrealized) ........... (0.91) (0.14) 0.02 (0.14) 0.03
-------- -------- -------- -------- --------
Total from investment operations ...... (0.53) 0.24 0.40 0.24 0.44
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income .. (0.38) (0.38) (0.38) (0.38) (0.40)
Distributions from capital gains ...... (0.05) (0.06) (0.03) -- --
-------- -------- -------- -------- --------
Total distributions ................... (0.43) (0.44) (0.41) (0.38) (0.40)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73
======== ======== ======== ======== ========
Total return (not reflecting sales charge) (5.16)% 2.33% 3.87% 2.24% 4.24%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 7,810 $ 8,363 $ 8,018 $ 7,764 $ 7,564
Ratio of expenses to average
net assets ......................... 0.93% 0.89% 0.91% 0.92% 0.89%
Ratio of net investment income to
average net assets ................. 3.83% 3.62% 3.57% 3.52% 3.79%
Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ......................... 0.92% 0.88% 0.90% 0.91% 0.89%
Class Y
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................. 0.41++ 0.41++ 0.41+ 0.41+ 0.44+
Net gain (loss) on securities (both
realized and unrealized) ........... (0.91) (0.14) 0.01 (0.14) 0.05
-------- -------- -------- -------- --------
Total from investment operations ...... (0.50) 0.27 0.42 0.27 0.49
-------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income .. (0.41) (0.41) (0.41) (0.41) (0.44)
Distributions from capital gains ...... (0.05) (0.06) (0.03) -- --
-------- -------- -------- -------- --------
Total distributions ................... (0.46) (0.47) (0.44) (0.41) (0.44)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 9.43 $ 10.39 $ 10.59 $ 10.61 $ 10.75
======== ======== ======== ======== ========
Total return (not reflecting sales charge) (4.88)% 2.63% 4.08% 2.55% 4.65%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 37,299 $ 41,648 $ 46,625 $ 47,816 $ 48,795
Ratio of expenses to average
net assets ......................... 0.64% 0.60% 0.61% 0.62% 0.58%
Ratio of net investment income to
average net assets ................. 4.12% 3.92% 3.86% 3.81% 4.11%
Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31%
The expense ratios after giving effect to the expense offset for uninvested cash balances were:
Ratio of expenses to average
net assets ......................... 0.63% 0.59% 0.61% 0.61% 0.58%
- ----------
+ 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,
2008 and held for the six months ended December 31, 2008.
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, 2008
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A (4.44)% $1,000.00 $955.60 $3.88
- --------------------------------------------------------------------------------
Class C (4.75)% $1,000.00 $952.50 $8.05
- --------------------------------------------------------------------------------
Class I (4.40)% $1,000.00 $956.00 $4.52
- --------------------------------------------------------------------------------
Class Y (4.26)% $1,000.00 $957.40 $3.15
- --------------------------------------------------------------------------------
(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 0.79%, 1.64%, 0.92%
AND 0.64% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/366 (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, 2008
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,021.17 $4.01
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,016.89 $8.31
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,020.51 $4.67
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,021.92 $3.25
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.79%, 1.64%, 0.92%
AND 0.64% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION AVAILABLE (UNAUDITED)
Much of the information that the funds in the Aquila Group of Funds
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, 2008 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, 2008, $9,482,925 of dividends
paid by Churchill Tax-Free Fund of Kentucky, constituting 88.85% of total
dividends paid during calendar year 2008, were exempt-interest dividends;
$1,190,261 of dividends paid by the Fund constituting 11.15% of total dividends
paid during the calendar year were capital gain distributions; and the balance
was ordinary dividend income.
Prior to January 31, 2009, shareholders were mailed the appropriate tax
form(s) which contained information on the status of distributions paid for the
2008 CALENDAR YEAR.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
TRUSTEES(1) AND OFFICERS
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
- ----------------- ---------- ------------------- ---------- --------------------
INTERESTED TRUSTEE(5)
Diana P. Herrmann Trustee since 1995 Vice Chair and Chief Executive Officer of Aquila 12 ICI Mutual Insurance
New York, NY and President since Management Corporation, Founder of the Aquila Group Company
(02/25/58) 1999 of Funds(6) and parent of Aquila Investment
Management LLC, Manager since 2004, President since
1997, Chief Operating Officer, 1997-2008, 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, President and Manager of
the Manager since 2003, and Chief Operating Officer
of the Manager, 2003-2008; Chair, Vice Chair,
President, Executive Vice President or Senior Vice
President of funds in the Aquila Group of Funds
since 1986; Director of the Distributor since 1997;
Governor, Investment Company Institute (a trade
organization for the U.S. mutual 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 Board Vice President of Robinson, Hughes & Christopher, 3 None
Danville, KY of Trustees since C.P.A.s, P.S.C., since 1977; President, A Good Place
(12/19/47) 2005 and Trustee for Fun, Inc., a sports facility, since 1987;
since 1992 currently or formerly active with various
professional and community organizations.
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
- ----------------- ---------- ------------------- ---------- --------------------
Theodore T. Mason Trustee since 1987 Executive Director, East Wind Power Partners LTD 8 Trustee, Premier
New York, NY since 1994 and Louisiana Power Partners, 1999-2003; VIT.
(11/24/35) 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 1987 President, Loring Consulting Company since 2001; 4 None
Castle Rock, CO Vice President for Business Management and CFO,
(12/23/38) Ottawa University, 1992-2001;2006-2008; IBM
Corporation, 1965-1991; currently active with
various charitable, educational and religious
organizations.
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
- ----------------- ---------- ------------------- ---------- --------------------
James R. Ramsey Trustee since 1987 President, University of Louisville since November 2 Community Bank and
Louisville, KY 2002; Professor of Economics, University of Trust, Pikeville, KY
(11/14/48) Louisville, 1999-present; Kentucky Governor's Senior and Texas Roadhouse
Policy Advisor and State Budget Director, 1999-2002; Inc.
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.
Lacy B. Herrmann Founder and Chairman Founder and Chairman of the Board, Aquila Management N/A N/A
New York, NY Emeritus since 2005, Corporation, the sponsoring organization and parent
(05/12/29) Chairman of the of the Manager or Administrator and/or Adviser or
Board of Trustees, Sub-Adviser to each fund of the Aquila Group of
1987-2005 Funds; Chairman of the Manager or Administrator
and/or Adviser or Sub-Adviser to each since 2004;
Founder and Chairman Emeritus of each fund in the
Aquila Group of Funds; previously Chairman and a
Trustee of each fund in the Aquila Group of Funds
since its establishment until 2004 or 2005; Director
of the Distributor since 1981 and formerly Vice
President or Secretary, 1981-1998; Trustee Emeritus,
Brown University and the Hopkins School; active in
university, school and charitable organizations.
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
- ----------------- ---------- ------------------- ---------- --------------------
Charles E. Childs, III Executive Vice Executive Vice President of all funds in the Aquila N/A N/A
New York, NY President since 2003 Group of Funds and the Manager and the Manager's
(04/01/57) parent since 2003; Executive Vice President and
Chief Operating Officer of the Manager's parent
since 2008; 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 since 2000 Churchill Tax-Free Fund of Kentucky since July 2000;
(07/26/52) 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.
Todd W. Curtis Vice President since Senior Vice President and Portfolio Manager, N/A N/A
Phoenix, AZ 2004 Tax-Free Trust of Arizona, since August 2004; Vice
(06/08/49) 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.
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
Jason T. McGrew Vice President since Vice President, Churchill Tax-Free Fund of Kentucky N/A N/A
Elizabethtown, KY 2001 since 2001, Assistant Vice President, 2000-2001;
(08/14/71) 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 Compliance Chief Compliance Officer of the Fund and each of the N/A N/A
New York, NY Officer since 2004 other funds in the Aquila Group of Funds, the
(08/23/40) and Assistant Manager and the Distributor since 2004, Compliance
Secretary since 2000 Officer of the Manager or its predecessor and
current parent 1998-2004; Assistant Secretary of the
Aquila Group of Funds since 2000.
Joseph P. DiMaggio Chief Financial Chief Financial Officer of the Aquila Group of Funds N/A N/A
New York, NY Officer since 2003 since 2003 and Treasurer since 2000.
(11/06/56) and Treasurer since
2000
Edward M. W. Hines Secretary since 1987 Shareholder of Butzel Long, a professional N/A N/A
New York, NY 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.
NUMBER OF OTHER DIRECTORSHIPS
POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE
HELD WITH IN FUND POSITION HELD IS A
NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS
ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED
AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.)
- ----------------- ---------- ------------------- ---------- --------------------
John M. Herndon Assistant Secretary Assistant Secretary of the Aquila Group of Funds N/A N/A
New York, NY since 1995 since 1995 and Vice President of the three Aquila
(12/17/39) Money-Market Funds since 1990; Vice President of the
Manager or its predecessor and current parent since
1990.
Lori A. Vindigni Assistant Treasurer Assistant Treasurer of the Aquila Group of Funds N/A N/A
New York, NY since 2000 since 2000; Assistant Vice President of the Manager
(11/02/66) or its predecessor and current parent since 1998;
Fund Accountant for the Aquila Group of Funds,
1995-1998.
- ----------
(1) The Fund's Statement of Additional Information includes additional
information about the Trustees and is available, without charge, upon request by
calling 800-437-1020 (toll-free) 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, Suite 2300, 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."
(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 (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 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
(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 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.
- --------------------------------------------------------------------------------
FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
Aquila Management Corporation
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Thomas A. Christopher, Chair
Diana P. Herrmann
Theodore T. Mason
Anne J. Mills
James R. Ramsey
OFFICERS
Diana P. Herrmann, President
Thomas S. Albright, Senior Vice President
and Portfolio Manager
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
PNC Global Investment Servicing
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, 2008 (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, as amended;
(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 2007 and $16,800 in 2008.
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 $3,100 in 2007 and 2008, 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 4, 2009
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Chief Financial Officer and Treasurer
March 4, 2009
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 4, 2009
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
March 4, 2009
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.