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: 6/30/09
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
SEMI-ANNUAL
REPORT
JUNE 30, 2009
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(R)
[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
"SOME COMFORT IN UNSETTLING TIMES"
August, 2009
Dear Fellow Shareholder:
We know it. And, you know it too. The United States has seen better
economic days.
Like it or not, unpleasant market cycles do occur periodically. This tends
to distract some people's focus from the longer-term objective that influenced
their investment decision in the first place.
Our shareholder and financial professional surveys have consistently
indicated over the years that the original investment objective and decision for
investors in Churchill Tax-Free Fund of Kentucky, has generally been aligned
with the Fund's objective: to seek as high a level of current income exempt from
Kentucky state and regular Federal income taxes as is consistent with
preservation of capital.
How does the Fund seek to fulfill its and your investment objective?
Perhaps the single most significant matter we wish to emphasize is the
element of professional management that we have continually sought to bring to
bear on your behalf. The job of investment managers is to be keen observers of
the scene, setting aside emotions. This is particularly true in the constantly
changing environment that exists today. One must make every effort to be as
objective as possible, adjusting the portfolio of investments as necessary, to
try to be of most benefit to shareholders.
Management of Churchill Tax-Free Fund of Kentucky and its municipal bond
portfolio management team believe that when you are dealing with investments,
quality counts.
As you may recall, there are nine separate credit ratings assignable to
municipal securities, ranging from the most conservative to the highly
speculative. For protection of investors' capital, the Fund intentionally limits
its purchases to securities rated (or, if unrated, deemed by the Manager to be)
investment grade quality - that is rated within the four highest credit ratings:
AAA, AA, A, AND BBB.
In general, the higher the quality rating of a municipal security, the
greater or more reliable the cash flow there is for the municipality to cover
interest and principal payments when due
NOT A PART OF THE SEMI-ANNUAL REPORT
on the security. While exaggerated price changes may occur in emotionally
charged securities markets, they normally are not reflective of a municipal
issuer's capability to pay interest and principal in a timely manner on any
particular security. It is the cash flow and solidness of the municipal issuer
that count - and this is reflected in the quality level of the credit rating.
We can assure you that the Fund's portfolio management team pays
considerable attention to this factor before any security is purchased for the
portfolio as well as in conducting continuing analysis and evaluation with each
and every security once it is a part of the Fund's investment portfolio. It is
additionally important for you to know that, with any insured securities, our
portfolio management team has always sought to look beyond the insurance to the
credit quality of the underlying issuer rather than relying upon any insurance.
We fully recognize that the current times can be unsettling. However, we
hope that you are comforted to know that we believe you have a knowledgeable
team of financial experts, which has continually sought to carefully choose the
securities in the Fund's portfolio and seeks to continuously monitor your
investment in Churchill Tax-Free Fund of Kentucky.
Sincerely,
/s/ Lacy B. Herrmann /s/ Diana P. Herrmann
Lacy B. Herrmann Diana P. Herrmann
Founder and Chairman Emeritus President
NOT A PART OF THE SEMI-ANNUAL REPORT
CHURCHILL TAX-FREE FUND OF KENTUCKY
SCHEDULE OF INVESTMENTS
JUNE 30, 2009 (UNAUDITED)
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 National-re Insured .................... Aa2/AA+ $ 4,127,489
Louisville & Jefferson County, Kentucky
955,000 4.200%, 11/01/22 National-re Insured .................... Aa2/AA+ 950,130
---------------
Total General Obligation Bonds .......................... 5,077,619
---------------
REVENUE BONDS (96.0%)
---------------------------------------------------------
STATE AGENCIES (15.5%)
Kentucky Area Development District Financing
500,000 5.000%, 12/01/23 LOC Wachovia Bank ...................... NR/AA 512,455
Kentucky Asset/Liability Commission
500,000 4.500%, 10/01/22 National-re FGIC Insured ............... Aa3/AA- 510,880
Kentucky Asset & Liability Commission University
of Kentucky Project
500,000 5.000%, 10/01/25 Series B ............................... Aa3/AA- 520,155
750,000 5.000%, 10/01/26 Series B ............................... Aa3/AA- 776,040
1,000,000 5.000%, 10/01/27 Series B ............................... Aa3/AA- 1,027,790
Kentucky Economic Development Finance Authority
Louisville Arena Project
5,725,000 5.750%, 12/01/28 Assured Guaranty Insured ............... Aa2/AAA 5,889,250
Kentucky Infrastructure Authority
230,000 5.000%, 06/01/21 ........................................ Aa3/A+ 232,985
Kentucky State Property and Buildings Commission
1,000,000 5.000%, 11/01/17 AMBAC Insured .......................... A1/A+ 1,030,050
6,000,000 5.250%, 10/01/18 ........................................ Aa3/A+ 6,149,580
1,925,000 5.000%, 10/01/19 ........................................ Aa3/A+ 1,959,766
3,000,000 5.000%, 11/01/19 FSA Insured ............................ Aa3/AAA 3,102,600
1,020,000 5.000%, 11/01/20 ........................................ Aa3/A+ 1,083,148
1,375,000 5.375%, 11/01/23 ........................................ Aa3/A+ 1,462,436
2,820,000 5.750%, 04/01/24 AMBAC Insured .......................... A1/A+ 3,044,613
1,300,000 5.250%, 02/01/28 Assured Guaranty Insured ............... Aa2/AAA 1,353,534
750,000 5.500%, 11/01/28 ........................................ Aa3/A+ 784,433
2,500,000 5.000%, 02/01/29 ........................................ Aa2/AAA 2,534,075
2,625,000 5.750%, 04/01/29 AMBAC Insured .......................... A1/A+ 2,749,504
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 National-re FGIC Insured ............... Aa3/A+ $ 2,051,258
---------------
Total State Agencies .................................... 36,774,552
---------------
COUNTY AGENCIES (2.0%)
Jefferson County, Kentucky Capital Projects
1,575,000 4.250%, 06/01/23 FSA Insured ............................ Aa3/NR* 1,536,160
2,640,000 4.375%, 06/01/28 FSA Insured ............................ Aa3/NR* 2,409,000
Lexington-Fayette Urban County, Kentucky Public
Facilities Revenue
500,000 4.125%, 10/01/23 National-re Insured .................... Aa3/NR 488,125
Warren County, Kentucky Justice Center
365,000 4.300%, 09/01/22 National-re Insured .................... Aa3/NR 366,945
---------------
Total County Agencies ................................... 4,800,230
---------------
HOSPITALS (8.9%)
Jefferson County, Kentucky Health Facilities
1,715,000 5.650%, 01/01/17 AMBAC Insured .......................... A3/A 1,715,206
2,200,000 5.250%, 05/01/17 ........................................ NR/A 2,220,262
Jefferson County, Kentucky Health Facilities
University Hospital
1,000,000 5.250%, 07/01/22 National-re Insured .................... Baa1/A 970,060
Jefferson County, Kentucky Medical Center
2,000,000 5.500%, 05/01/22 ........................................ NR/A 2,016,260
Lexington-Fayette Urban County, Kentucky
Public Facilities
500,000 4.250%, 10/01/26 National-re Insured .................... Aa3/NR 477,005
Louisville & Jefferson County, Kentucky Medical Center
1,000,000 5.000%, 06/01/18 ........................................ NR/A 1,011,650
Louisville & Jefferson County, Kentucky Metro Health,
Jewish Hospital Revenue
1,250,000 6.000%, 02/01/22 ........................................ A3/A 1,270,750
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
HOSPITALS (CONTINUED)
Louisville & Jefferson County, Kentucky Metropolitan
Government Health System (Norton)
$ 8,045,000 5.000%, 10/01/26 ........................................ NR/A-** $ 7,161,981
5,000,000 5.000%, 10/01/30 ........................................ NR/A-** 4,308,200
---------------
Total Hospitals ......................................... 21,151,374
---------------
HOUSING (13.3%)
Kentucky Housing Corporation Housing Revenue
555,000 4.200%, 01/01/17 ........................................ Aaa/AAA 560,395
100,000 5.125%, 07/01/17 ........................................ Aaa/AAA 100,498
470,000 4.800%, 01/01/18 AMT .................................... Aaa/AAA 465,159
285,000 4.250%, 01/01/18 ........................................ Aaa/AAA 286,664
575,000 4.800%, 07/01/18 AMT .................................... Aaa/AAA 568,801
180,000 4.250%, 07/01/18 ........................................ Aaa/AAA 181,044
900,000 4.800%, 07/01/20 AMT .................................... Aaa/AAA 881,199
1,150,000 5.350%, 01/01/21 AMT .................................... Aaa/AAA 1,156,003
6,025,000 5.450%, 07/01/22 AMT .................................... Aaa/AAA 6,069,404
4,565,000 5.250%, 07/01/22 AMT .................................... Aaa/AAA 4,582,849
245,000 5.200%, 07/01/22 ........................................ Aaa/AAA 247,075
415,000 5.100%, 07/01/22 AMT .................................... Aaa/AAA 414,216
2,570,000 4.800%, 07/01/22 AMT .................................... Aaa/AAA 2,502,178
2,000,000 4.700%, 07/01/22 Series E AMT ........................... Aaa/AAA 1,914,600
1,635,000 5.000%, 01/01/23 AMT .................................... Aaa/AAA 1,591,215
665,000 5.000%, 07/01/24 ........................................ Aaa/AAA 673,060
4,140,000 5.200%, 07/01/25 AMT .................................... Aaa/AAA 4,069,454
275,000 5.375%, 07/01/27 ........................................ Aaa/AAA 277,381
2,300,000 5.000%, 07/01/27 Series N AMT ........................... Aaa/AAA 2,141,369
1,000,000 4.750%, 07/01/27 Series E AMT ........................... Aaa/AAA 898,500
560,000 5.550%, 07/01/33 ........................................ Aaa/AAA 561,338
Kentucky Housing Multifamily Mortgage Revenue
1,325,000 5.000%, 06/01/35 AMT .................................... NR/AAA 1,300,223
---------------
Total Housing ........................................... 31,442,625
---------------
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (33.6%)
Barren County, Kentucky School Building Revenue
$ 1,265,000 4.250%, 08/01/25 CIFG Insured ........................... Aa3/NR $ 1,226,240
1,670,000 4.375%, 08/01/26 CIFG Insured ........................... Aa3/NR 1,627,782
Berea, Kentucky Educational Facilities (Berea College)
1,000,000 4.125%, 06/01/25 ........................................ Aaa/NR 953,320
Boone County, Kentucky School District Finance Corp.
1,730,000 4.125%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,683,048
Boone County, Kentucky School District Finance Corp.
School Building Revenue
140,000 4.750%, 06/01/20 FSA Insured ............................ Aa3/AAA 142,194
1,580,000 4.500%, 08/01/23 FSA Insured ............................ Aa3/NR* 1,588,516
1,250,000 4.125%, 03/01/25 FSA Insured ............................ Aa3/NR* 1,139,312
Boyle County, Kentucky College Refunding &
Improvement
1,035,000 4.500%, 06/01/22 CIFG Insured ........................... A3/A- 1,062,666
200,000 4.625%, 06/01/24 CIFG Insured ........................... A3/A- 204,578
Bullitt County, Kentucky School District Finance Corp.
200,000 4.300%, 10/01/21 National-re Insured .................... Aa3/NR 198,860
2,455,000 4.500%, 10/01/22 National-re Insured .................... Aa3/NR 2,483,404
2,590,000 4.500%, 10/01/23 National-re Insured .................... Aa3/NR 2,606,654
1,145,000 4.500%, 04/01/27 FSA Insured ............................ Aa3/NR 1,114,886
1,200,000 4.500%, 04/01/28 FSA Insured ............................ Aa3/NR 1,155,756
Christian County, Kentucky School District Finance Corp.
720,000 4.000%, 08/01/19 Syncora Guarantee Inc. Insured ......... Aa3/NR 724,226
855,000 4.000%, 08/01/20 Syncora Guarantee Inc. Insured ......... Aa3/NR 853,461
905,000 4.000%, 08/01/21 Syncora Guarantee Inc. Insured ......... Aa3/NR 899,842
1,465,000 4.000%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,442,966
1,525,000 4.125%, 08/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,495,430
1,590,000 4.125%, 08/01/24 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,537,053
Daviess County, Kentucky School District Finance Corp.
200,000 5.000%, 06/01/24 ........................................ Aa3/NR 206,300
Fayette County, Kentucky School District Finance Corp.
5,000,000 4.250%, 04/01/23 FSA Insured ............................ Aa3/AAA 4,994,550
4,335,000 4.375%, 05/01/26 FSA Insured ............................ Aa3/AAA 4,226,365
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Floyd County, Kentucky School Building
$ 680,000 4.375%, 10/01/22 ........................................ Aa3/NR $ 679,619
Floyd County, Kentucky School Finance Corp.
School Building
1,320,000 4.000%, 03/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,278,037
1,855,000 4.125%, 03/01/26 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,755,238
Fort Thomas, Kentucky Independent School
District Building Revenue
610,000 4.375%, 04/01/25 ........................................ Aa3/NR 594,042
Fort Thomas, Kentucky Independent School
District Finance
785,000 4.375%, 04/01/21 ........................................ Aa3/NR 793,399
Franklin County, Kentucky School District Finance Corp.
1,000,000 5.000%, 04/01/24 ........................................ Aa3/NR 1,030,510
Graves County, Kentucky School Building Revenue
1,260,000 5.000%, 06/01/22 ........................................ Aa3/NR 1,305,990
1,320,000 5.000%, 06/01/23 ........................................ Aa3/NR 1,356,168
Hardin County, Kentucky School District Finance Corp.
1,475,000 4.000%, 02/01/19 AMBAC Insured .......................... Aa3/NR 1,483,024
Jefferson County, Kentucky School District Finance
Corp. School Building
150,000 5.000%, 04/01/20 FSA Insured ............................ Aa3/AAA 154,368
1,360,000 4.250%, 06/01/21 FSA Insured ............................ Aa3/AAA 1,373,396
Kenton County, Kentucky School Building Revenue
590,000 4.250%, 10/01/22 FSA Insured ............................ Aa3/NR* 589,965
Kenton County, Kentucky School District Finance Corp.
445,000 4.300%, 04/01/22 CIFG Insured ........................... Aa3/NR 447,563
4,250,000 5.000%, 06/01/22 National-re Insured .................... Aa3/NR 4,437,340
750,000 4.375%, 04/01/24 CIFG Insured ........................... Aa3/NR 749,550
325,000 4.400%, 04/01/26 CIFG Insured ........................... Aa3/NR 321,565
Larue County, Kentucky School District Finance Corp.
270,000 4.500%, 07/01/21 National-re Insured .................... Aa3/NR 275,513
470,000 4.500%, 07/01/22 National-re Insured .................... Aa3/NR 478,460
785,000 4.500%, 07/01/23 National-re Insured .................... Aa3/NR 793,910
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 National-re Insured .................... A3/A+ $ 1,323,181
Louisville & Jefferson County, Kentucky University
of Louisville
525,000 5.000%, 06/01/20 AMBAC Insured .......................... NR/BBB 556,022
Magoffin County, Kentucky School Building Revenue
375,000 4.250%, 08/01/23 AMBAC Insured .......................... Aa3/NR 372,634
Magoffin County, Kentucky School District
475,000 4.250%, 08/01/25 AMBAC Insured .......................... Aa3/NR 463,097
Meade County, Kentucky School District
490,000 4.250%, 09/01/26 National-re Insured .................... Aa3/NR 473,169
Murray State University Project, Kentucky General
Receipts Revenue
745,000 4.500%, 09/01/23 AMBAC Insured .......................... Aa3/A+ 727,425
Ohio County, Kentucky School Building Revenue
790,000 4.500%, 05/01/24 ........................................ Aa3/NR 791,098
325,000 4.500%, 05/01/25 ........................................ Aa3/NR 322,800
Oldham County, Kentucky School District Finance Corp.
500,000 5.000%, 05/01/19 National-re Insured .................... Aa3/NR 527,520
Owensboro, Kentucky Independent School District
Finance Corp. School Building Revenue
390,000 4.375%, 09/01/24 ........................................ Aa3/NR 389,766
Pendleton County, Kentucky School District Finance
Corp. School Building Revenue
730,000 4.000%, 02/01/23 National-re Insured .................... Aa3/NR 696,070
Pike County, Kentucky School Building Revenue
1,355,000 4.375%, 10/01/26 National-re Insured .................... Aa3/NR 1,320,475
Scott County, Kentucky School District Finance Corp.
1,115,000 4.200%, 01/01/22 AMBAC Insured .......................... Aa3/NR 1,124,243
1,955,000 4.250%, 01/01/23 AMBAC Insured .......................... Aa3/NR 1,964,501
1,560,000 4.300%, 01/01/24 AMBAC Insured .......................... Aa3/NR 1,564,524
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
SCHOOLS (CONTINUED)
Scott County, Kentucky School District Finance Corp.
School Building Revenue
$ 1,000,000 4.250%, 02/01/27 FSA Insured ............................ Aa3/NR* $ 932,330
University of Kentucky General Receipts
885,000 4.500%, 10/01/22 Syncora Guarantee Inc. Insured ......... Aa3/AA- 901,373
1,545,000 4.500%, 10/01/23 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,562,984
1,625,000 4.500%, 10/01/25 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,621,181
1,010,000 4.500%, 10/01/26 Syncora Guarantee Inc. Insured ......... Aa3/AA- 999,193
University of Louisville, Kentucky
1,055,000 4.000%, 09/01/25 National-re Insured .................... Aa3/AA 992,544
1,000,000 4.375%, 04/01/27 FSA Insured ............................ Aa3/NR* 978,790
Warren County, Kentucky School District Finance Corp.
295,000 4.125%, 02/01/23 National-re Insured .................... Aa3/NR 289,430
Western Kentucky University Revenue General Receipts
2,860,000 4.200%, 09/01/25 Series A National-re Insured ........... Aa3/A+ 2,637,749
2,980,000 4.200%, 09/01/26 Series A National-re Insured ........... Aa3/A+ 2,701,638
---------------
Total Schools ........................................... 79,698,803
---------------
TRANSPORTATION (8.0%)
Kenton County, Kentucky Airport Board Airport Revenue
1,300,000 5.000%, 03/01/23 National-re Insured AMT ................ A3/A 1,196,884
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+ 404,116
200,000 6.000%, 12/01/20 ........................................ Aa3/A+ 202,058
300,000 5.800%, 12/01/20 ........................................ Aa3/A+ 302,850
400,000 5.650%, 12/01/20 ........................................ Aa3/A+ 403,580
350,000 5.600%, 12/01/20 ........................................ Aa3/A+ 353,063
Kentucky State Turnpike Authority Revenue
2,250,000 5.000%, 07/01/27 ........................................ Aa3/AA+ 2,317,298
950,000 5.000%, 07/01/28 ........................................ Aa3/AA+ 972,088
700,000 5.000%, 07/01/29 ........................................ Aa3/AA+ 713,223
Louisville, Kentucky Regional Airport Authority
1,000,000 5.250%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 994,120
2,610,000 5.000%, 07/01/24 AMBAC Insured AMT ...................... A1/A+ 2,429,988
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
TRANSPORTATION (CONTINUED)
Louisville & Jefferson County Regional Airport, Kentucky
$ 1,000,000 5.250%, 07/01/18 FSA Insured AMT ........................ Aa3/AAA $ 1,011,080
2,000,000 5.250%, 07/01/20 FSA Insured AMT ........................ Aa3/AAA 2,007,100
1,370,000 5.250%, 07/01/21 FSA Insured AMT ........................ Aa3/AAA 1,365,164
3,390,000 5.250%, 07/01/22 FSA Insured AMT ........................ Aa3/AAA 3,361,660
275,000 5.375%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 274,062
500,000 5.000%, 07/01/25 National-re Insured AMT ................ A1/A+ 465,580
---------------
Total Transportation .................................... 18,918,937
---------------
UTILITIES (14.7%)
Bardstown, Kentucky Combined Utilities Revenue
200,000 5.000%, 12/01/19 National-re Insured .................... A2/NR 204,394
Boone County, Kentucky Pollution Control Revenue
Dayton Power & Light
2,000,000 4.700%, 01/01/28 FGIC Insured ........................... A1/A 1,843,180
Campbell & Kenton Counties, Kentucky Sanitation
District Revenue
1,695,000 4.300%, 08/01/24 National-re Insured .................... Aa3/AA 1,697,000
300,000 4.300%, 08/01/27 National-re Insured .................... Aa3/AA 290,820
1,450,000 4.300%, 08/01/28 National-re Insured .................... Aa3/AA 1,386,243
Carroll County, Kentucky Environmental Facilities
Revenue (KY Utilities) AMT
1,500,000 5.750%, 02/01/26 AMBAC Insured .......................... A2/NR 1,485,720
Kentucky Rural Water Finance Corp.
205,000 4.250%, 08/01/19 National-re Insured .................... Baa1/AA- 208,883
595,000 5.000%, 02/01/20 National-re Insured .................... Baa1/AA- 616,670
210,000 4.250%, 08/01/20 National-re Insured .................... Baa1/AA- 212,297
200,000 4.375%, 08/01/22 National-re Insured .................... Baa1/AA- 202,728
240,000 4.500%, 08/01/23 National-re Insured .................... Baa1/AA- 243,478
200,000 4.500%, 02/01/24 National-re Insured .................... Baa1/AA- 201,660
255,000 4.500%, 08/01/24 National-re Insured .................... Baa1/AA- 257,609
355,000 4.600%, 02/01/25 ........................................ NR/AA- 358,497
RATING
PRINCIPAL MOODY'S/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
- --------------- --------------------------------------------------------- --------- ---------------
UTILITIES (CONTINUED)
Kentucky Rural Water Finance Corp. (continued)
$ 290,000 4.500%, 08/01/27 National-re Insured .................... Baa1/AA- $ 286,459
245,000 4.600%, 08/01/28 National-re Insured .................... Baa1/AA- 241,928
315,000 4.625%, 08/01/29 National-re Insured .................... Baa1/AA- 308,735
Louisville & Jefferson County, Kentucky Metropolitan
Sewer District
2,380,000 4.250%, 05/15/20 FSA Insured ............................ Aa3/AAA 2,421,912
2,510,000 4.250%, 05/15/21 FSA Insured ............................ Aa3/AAA 2,544,989
400,000 5.000%, 05/15/22 National-re FGIC Insured
(pre-refunded) ....................................... NR/AA-** 404,804
100,000 5.250%, 05/15/27 National-re Insured .................... Baa1/AA- 100,036
Louisville, Kentucky Waterworks Board Water System
2,530,000 5.250%, 11/15/18 FSA Insured ............................ Aa1/AAA 2,596,261
6,600,000 5.250%, 11/15/22 FSA Insured ............................ Aa1/AAA 6,724,344
2,415,000 5.250%, 11/15/24 FSA Insured ............................ Aa1/AAA 2,455,693
Northern Kentucky Water District
660,000 5.000%, 02/01/23 National-re FGIC Insured ............... A2/NR 665,828
1,825,000 6.000%, 02/01/28 FSA Insured ............................ Aa3/NR* 1,973,281
Owensboro, Kentucky Electric and Power
1,555,000 5.000%, 01/01/20 FSA Insured ............................ Aa3/AAA 1,570,395
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 847,844
Trimble County, Kentucky Environmental Facilities
3,000,000 4.600%, 06/01/33 AMBAC Insured .......................... A2/BBB+ 2,488,410
---------------
Total Utilities ......................................... 34,840,098
---------------
Total Revenue Bonds ..................................... 227,626,619
---------------
Total Investments (cost $234,715,256-note 4) ......... 98.2% 232,704,238
Other assets less liabilities ........................ 1.8 4,332,483
----- ---------------
Net Assets ........................................... 100.0% $ 237,036,721
===== ===============
PERCENT OF
PORTFOLIO DISTRIBUTION BY QUALITY RATING PORTFOLIO+
- ---------------------------------------- ----------
Aaa of Moody's or AAA of S&P or AAA of Fitch .............. 35.9%
Pre-refunded bonds++ ...................................... 0.2
Aa of Moody's or AA of S&P ................................ 45.8
A of Moody's or S&P ....................................... 17.9
BBB of S&P ................................................ 0.2
-----
100.0%
=====
+ Where applicable, calculated using the highest rating of the three rating
services.
++ Pre-refunded bonds are bonds for which U.S. Government obligations have
been placed in escrow to retire bonds at their earliest call date.
FITCH RATINGS
- -------------
* AA
** A
Note: National Public Finance Guarantee Corporation (National-re) is the
new name for Municipal Bond Investors Assurance Inc.'s U.S. public finance
platform.
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
National-re - National Public Finance Guarantee Corporation
National-re-FGIC - Reinsured FGIC bonds
NR - Not Rated
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2009 (UNAUDITED)
ASSETS
Investments at value (cost $234,715,256) ................................................ $ 232,704,238
Cash .................................................................................... 1,184,171
Interest receivable ..................................................................... 3,394,298
Receivable for Fund shares sold ......................................................... 226,859
Other assets ............................................................................ 16,794
-----------------
Total assets ............................................................................ 237,526,360
-----------------
LIABILITIES
Dividends payable ....................................................................... 266,077
Management fee payable .................................................................. 77,653
Payable for Fund shares redeemed ........................................................ 56,431
Distribution and service fees payable ................................................... 26,356
Accrued expenses ........................................................................ 63,122
-----------------
Total liabilities ....................................................................... 489,639
-----------------
NET ASSETS ...................................................................................... $ 237,036,721
=================
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share ..... $ 232,545
Additional paid-in capital .............................................................. 239,320,562
Net unrealized depreciation on investments (note 4) ..................................... (2,011,018)
Undistributed net investment income ..................................................... 85,527
Accumulated net realized loss on investments ............................................ (590,895)
-----------------
$ 237,036,721
=================
CLASS A
Net Assets .............................................................................. $ 183,571,109
=================
Capital shares outstanding .............................................................. 18,010,998
=================
Net asset value and redemption price per share .......................................... $ 10.19
=================
Maximum offering price per share (100/96 of $10.19 adjusted to nearest cent) ............ $ 10.61
=================
CLASS C
Net Assets .............................................................................. $ 2,919,154
=================
Capital shares outstanding .............................................................. 286,552
=================
Net asset value and offering price per share ............................................ $ 10.19
=================
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if redeemed
during the first 12 months after purchase) ...................................... $ 10.19*
=================
CLASS I
Net Assets .............................................................................. $ 7,954,143
=================
Capital shares outstanding .............................................................. 780,828
=================
Net asset value, offering and redemption price per share ................................ $ 10.19
=================
CLASS Y
Net Assets .............................................................................. $ 42,592,315
=================
Capital shares outstanding .............................................................. 4,176,110
=================
Net asset value, offering and redemption price per share ................................ $ 10.20
=================
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)
INVESTMENT INCOME:
Interest income ...................................... $ 5,539,298
Expenses:
Management fee (note 3) .............................. $ 458,390
Distribution and service fees (note 3) ............... 155,873
Transfer and shareholder servicing agent fees (note 3) 83,617
Trustees' fees and expenses (note 8) ................. 52,904
Legal fees (note 3) .................................. 40,268
Shareholders' reports and proxy statements ........... 24,622
Fund accounting fees ................................. 18,061
Auditing and tax fees ................................ 10,314
Custodian fees (note 6) .............................. 9,126
Registration fees and dues ........................... 8,126
Insurance ............................................ 5,895
Chief compliance officer (note 3) .................... 2,017
Miscellaneous ........................................ 14,577
------------
Total expenses ....................................... 883,790
Expenses paid indirectly (note 6) .................... (257)
------------
Net expenses ......................................... 883,533
------------
Net investment income ................................ 4,655,765
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from securities transactions (93,154)
Change in unrealized appreciation on investments ..... 17,766,346
------------
Net realized and unrealized gain (loss) on investments 17,673,192
------------
Net change in net assets resulting from operations ... $ 22,328,957
============
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2009 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2008
----------------- -----------------
OPERATIONS:
Net investment income ............................... $ 4,655,765 $ 9,522,502
Net realized gain (loss) from securities transactions (93,154) (497,741)
Change in unrealized appreciation on investments .... 17,766,346 (21,839,357)
----------------- -----------------
Change in net assets from operations .............. 22,328,957 (12,814,596)
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
Class A Shares:
Net investment income ............................... (3,601,522) (7,345,786)
Net realized gain on investments .................... -- (929,036)
Class C Shares:
Net investment income ............................... (44,589) (107,381)
Net realized gain on investments .................... -- (14,676)
Class I Shares:
Net investment income ............................... (152,933) (311,177)
Net realized gain on investments .................... -- (42,568)
Class Y Shares:
Net investment income ............................... (835,166) (1,718,581)
Net realized gain on investments .................... -- (203,981)
----------------- -----------------
Change in net assets from distributions ........... (4,634,210) (10,673,186)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS (note 7):
Proceeds from shares sold ........................... 16,615,539 24,423,276
Reinvested dividends and distributions .............. 1,804,047 4,636,181
Cost of shares redeemed ............................. (16,462,034) (36,459,652)
----------------- -----------------
Change in net assets from capital share transactions 1,957,552 (7,400,195)
----------------- -----------------
Change in net assets ................................ 19,652,299 (30,887,977)
NET ASSETS:
Beginning of period ................................. 217,384,422 248,272,399
----------------- -----------------
End of period* ...................................... $ 237,036,721 $ 217,384,422
================= =================
* Includes undistributed net investment income of: .. $ 85,527 $ 63,972
================= =================
See accompanying notes to financial statements.
CHURCHILL TAX-FREE FUND OF KENTUCKY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 (UNAUDITED)
1. ORGANIZATION
Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified,
open-end investment company, was organized in March, 1987 as a Massachusetts
business trust and commenced operations on May 21, 1987. The Fund is authorized
to issue an unlimited number of shares and, since its inception to April 1,
1996, offered only one class of shares. On that date, the Fund began offering
two additional classes of shares, Class C and Class Y Shares. All shares
outstanding prior to that date were designated as Class A Shares and are sold
with a front-payment sales charge and bear an annual distribution fee. Class C
Shares are sold with a level-payment sales charge with no payment at time of
purchase but level service and distribution fees from date of purchase through a
period of six years thereafter. A contingent deferred sales charge of 1% is
assessed to any Class C shareholder who redeems shares of this Class within one
year from the date of purchase. Class C Shares together with a pro-rata portion
of all Class C Shares acquired through reinvestment of dividends and other
distributions paid in additional Class C Shares, automatically convert to Class
A Shares after 6 years. The Class Y Shares are only offered to institutions
acting for an investor in a fiduciary, advisory, agency, custodian or similar
capacity and are not offered directly to retail investors. Class Y Shares are
sold at net asset value without any sales charge, redemption fees, contingent
deferred sales charge or distribution or service fees. On April 30, 1998, the
Fund established Class I Shares, which are offered and sold only through
financial intermediaries and are not offered directly to retail investors. Class
I Shares are sold at net asset value without any sales charge, redemption fees,
or contingent deferred sales charge. Class I Shares carry a distribution fee and
a service fee. All classes of shares represent interests in the same portfolio
of investments and are identical as to rights and privileges but differ with
respect to the effect of sales charges, the distribution and/or service fees
borne by each class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities
of more than 60 days are valued each business day based upon information
provided by a nationally prominent independent pricing service and
periodically verified through other pricing services. In the case of
securities for which market quotations are readily available, securities
are valued by the pricing service at the mean of bid and asked quotations.
If market quotations or a valuation from the pricing service is not
readily available, the security is valued at fair value determined in good
faith under procedures established by and under the general supervision of
the Board of Trustees. Securities which mature in 60 days or less are
valued at amortized cost if their term to maturity at purchase is 60 days
or less, or by amortizing their unrealized appreciation or depreciation on
the 61st day prior to maturity, if their term to maturity at purchase
exceeds 60 days.
b) 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 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 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 (details of which can be found in the schedule of
investments), used to value the Fund's net assets as of June 30, 2009:
VALUATION INPUTS INVESTMENTS IN SECURITIES
---------------- -------------------------
Level 1 - Quoted Prices ....................... $ --
Level 2 - Other Significant Observable Inputs
Municipal Bonds ............................ 232,704,238
Level 3 - Significant Unobservable Inputs ..... --
------------
Total ......................................... $232,704,238
============
c) ACCOUNTING PRONOUNCEMENTS: In April 2009, the Financial Accounting
Standards Board ("FASB") issued FASB Staff Position No. 157-4,
"Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 provides
additional guidance for estimating fair value in accordance with FASB
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("FAS 157"), when the volume and level of activity for the
asset or liability have significantly decreased as well as guidance on
identifying circumstances that indicate a transaction is not orderly. FSP
157-4 is effective for fiscal years and interim periods ending after June
15, 2009. The adoption of FSP 157-4 did not have an impact on the Fund's
financial statements and the Fund has made the required additional
disclosures.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS No.
165). The Fund adopted SFAS No. 165 which requires an entity to recognize
in the financial statements the effects of all subsequent events that
provide additional evidence about conditions that existed at the date of
the balance sheet. For non-recognized subsequent events that must be
disclosed to keep financial statements from being misleading, an entity is
required to disclose the nature of the event
as well as an estimate of its financial effect, or a statement that such
an estimate cannot be made. In addition, SFAS No. 165 requires an entity
to disclose the date through which subsequent events have been evaluated.
The Fund has evaluated subsequent events through the issuance of its
financial statements on August 28, 2009.
The Fund has adopted the provisions of Statement of Financial Accounting
Standards No. 161, "Disclosures about Derivative Instruments and Hedging
Activities" ("SFAS 161"), effective June 30, 2009. SFAS 161 requires
enhanced disclosures about a fund's derivative and hedging activities,
including how such activities are accounted for and their effect on a
fund's financial position, performance and cash flows. The Fund does not
invest in derivative instruments or engage in hedging activities. As a
result, SFAS 161 did not impact the Fund's financial statements.
d) 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.
e) 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 implementation of FIN 48 did not have a material impact on the Fund's
financial statements.
f) 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.
g) 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.
h) 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.
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 distribution
fee at the annual rate of 0.15% of the Fund's average net assets represented by
Class A Shares. For the six months ended June 30, 2009, distribution fees on
Class A Shares amounted to $133,921 of which the Distributor retained $5,580.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class C Shares to Qualified Recipients which have rendered
assistance in the distribution and/or retention of the Fund's Class C shares or
servicing of shareholder accounts. These payments are made at the annual rate of
0.75% of the Fund's average net assets represented by Class C Shares and for the
six months ended June 30, 2009, amounted to $10,588. In addition, under a
Shareholder Services Plan, the Fund is authorized to make service fee payments
with respect to Class C Shares to Qualified Recipients for providing personal
services and/or maintenance of shareholder accounts. These payments are made at
the annual rate of 0.25% of the Fund's average net assets represented by Class C
Shares and for the six months ended June 30, 2009, amounted to $3,530. The total
of these payments with respect to Class C Shares amounted to $14,118 of which
the Distributor retained $3,144.
Under another part of the Plan, the Fund is authorized to make payments
with respect to Class I Shares to Qualified Recipients. Class I payments, under
the Plan, may not exceed for any fiscal year of the Fund a rate (currently
0.20%), set from time to time by the Board of Trustees, of not more than 0.25%
of the average annual net assets represented by the Class I Shares. In addition,
Class I has a Shareholder Services Plan under which it may pay service fees
(currently 0.15%) of not more than 0.25% of the average annual net assets
represented by Class I Shares. That is, the total payments under both plans will
not exceed 0.50% of such net assets. For the six months ended June 30, 2009,
these payments were made at the average annual rate of 0.35% of such net assets
and amounted to $13,710 of which $7,834 related to the Plan and $5,876 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 six months ended June 30, 2009, total commissions on sales of Class A Shares
amounted to $80,663 of which the Distributor received $6,808.
c) OTHER RELATED PARTY TRANSACTIONS:
For the six months ended June 30, 2009, the Fund incurred $40,268 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 six months ended June 30, 2009, purchases of securities and
proceeds from the sales of securities aggregated $9,116,112 and $11,180,932,
respectively.
At June 30, 2009 the aggregate tax cost for all securities was
$234,654,137. At June 30, 2009, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost amounted to
$2,860,285 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $4,810,184 for a net
unrealized depreciation of $1,949,899.
5. PORTFOLIO ORIENTATION
Since the Fund invests principally and may invest entirely in double
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:
SIX MONTHS ENDED
JUNE 30, 2009 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2008
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
CLASS A SHARES:
Proceeds from shares sold 994,204 $ 10,001,872 1,752,221 $ 17,615,276
Reinvested distributions 160,414 1,619,917 407,510 4,010,870
Cost of shares redeemed . (1,136,904) (11,414,731) (2,868,625) (28,007,543)
------------ ------------ ------------ ------------
Net change ...... 17,714 207,058 (708,894) (6,381,397)
------------ ------------ ------------ ------------
CLASS C SHARES:
Proceeds from shares sold 63,668 643,007 36,194 370,078
Reinvested distributions 2,932 29,594 7,776 76,395
Cost of shares redeemed . (66,005) (664,899) (155,154) (1,542,526)
------------ ------------ ------------ ------------
Net change ...... 595 7,702 (111,184) (1,096,053)
------------ ------------ ------------ ------------
CLASS I SHARES:
Proceeds from shares sold 1,104 11,001 9,148 93,333
Reinvested distributions 12,143 122,013 32,930 322,736
Cost of shares redeemed . (61,454) (610,851) (19,082) (187,682)
------------ ------------ ------------ ------------
Net change ...... (48,207) (477,837) 22,996 228,387
------------ ------------ ------------ ------------
CLASS Y SHARES:
Proceeds from shares sold 593,854 5,959,659 627,670 6,344,589
Reinvested distributions 3,237 32,523 23,664 226,180
Cost of shares redeemed . (375,884) (3,771,553) (706,040) (6,721,901)
------------ ------------ ------------ ------------
Net change ...... 221,207 2,220,629 (54,706) (151,132)
------------ ------------ ------------ ------------
Total transactions in Fund
shares .................. 191,309 $ 1,957,552 (851,788) $ (7,400,195)
============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES
At June 30, 2009 there were 6 Trustees, one of which is affiliated with
the Manager and is not paid any fees. The total amount of Trustees' service and
attendance fees paid during the six months ended June 30, 2009 was $41,159 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 six months ended June
30, 2009, such meeting-related expenses amounted to $11,745.
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 Commonwealth 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 DEVELOPMENT
Since December 2007, municipal bond insurance companies have been under
review by the three major rating agencies: Standard & Poor's, Moody's and Fitch.
The ratings of most 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
----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/09 ------------------------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 9.42 $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69
----------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................ 0.20 0.40++ 0.39++ 0.39+ 0.39+ 0.42+
Net gain (loss) on securities (both
realized and unrealized) ........... 0.77 (0.92) (0.15) 0.03 (0.14) 0.05
----------- -------- -------- -------- -------- --------
Total from investment operations ..... 0.97 (0.52) 0.24 0.42 0.25 0.47
----------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.20) (0.39) (0.39) (0.40) (0.39) (0.42)
Distributions from capital gains ..... -- (0.05) (0.06) (0.03) -- --
----------- -------- -------- -------- -------- --------
Total distributions .................. (0.20) (0.44) (0.45) (0.43) (0.39) (0.42)
----------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.19 $ 9.42 $ 10.38 $ 10.59 $ 10.60 $ 10.74
=========== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 10.34%* (5.05)% 2.38% 4.02% 2.39% 4.49%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $183,571 $169,582 $194,140 $211,501 $223,811 $232,927
Ratio of expenses to average
net assets ......................... 0.78%** 0.79% 0.75% 0.76% 0.77% 0.73%
Ratio of net investment income to
average net assets ................. 4.05%** 3.97% 3.77% 3.71% 3.66% 3.96%
Portfolio turnover rate .............. 4.03%* 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%** 0.78% 0.74% 0.76% 0.76% 0.73%
CLASS C
----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/09 ------------------------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
----------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................ 0.16 0.31++ 0.31++ 0.30+ 0.30+ 0.33+
Net gain (loss) on securities (both
realized and unrealized) ........... 0.77 (0.91) (0.15) 0.03 (0.14) 0.04
----------- -------- -------- -------- -------- --------
Total from investment operations ..... 0.93 (0.60) 0.16 0.33 0.16 0.37
----------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.16) (0.31) (0.30) (0.31) (0.30) (0.33)
Distributions from capital gains ..... -- (0.05) (0.06) (0.03) -- --
----------- -------- -------- -------- -------- --------
Total distributions .................. (0.16) (0.36) (0.36) (0.34) (0.30) (0.33)
----------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.19 $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73
=========== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 9.88%* (5.85)% 1.61% 3.15% 1.53% 3.51%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 2,919 $ 2,694 $ 4,120 $ 5,686 $ 7,296 $ 8,166
Ratio of expenses to average
net assets ......................... 1.63%** 1.64% 1.60% 1.62% 1.62% 1.58%
Ratio of net investment income to
average net assets ................. 3.17%** 3.10% 2.92% 2.87% 2.81% 3.11%
Portfolio turnover rate .............. 4.03%* 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%** 1.63% 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.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS I
----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/09 ------------------------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69
----------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................ 0.19 0.38++ 0.38++ 0.38+ 0.38+ 0.41+
Net gain (loss) on securities (both
realized and unrealized) ........... 0.77 (0.91) (0.14) 0.02 (0.14) 0.03
----------- -------- -------- -------- -------- --------
Total from investment operations ..... 0.96 (0.53) 0.24 0.40 0.24 0.44
----------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.19) (0.38) (0.38) (0.38) (0.38) (0.40)
Distributions from capital gains ..... -- (0.05) (0.06) (0.03) -- --
----------- -------- -------- -------- -------- --------
Total distributions .................. (0.19) (0.43) (0.44) (0.41) (0.38) (0.40)
----------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.19 $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73
=========== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 10.28%* (5.16)% 2.33% 3.87% 2.24% 4.24%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 7,954 $ 7,810 $ 8,363 $ 8,018 $ 7,764 $ 7,564
Ratio of expenses to average
net assets ......................... 0.91%** 0.93% 0.89% 0.91% 0.92% 0.89%
Ratio of net investment income to
average net assets ................. 3.92%** 3.83% 3.62% 3.57% 3.52% 3.79%
Portfolio turnover rate .............. 4.03%* 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 ......................... 0.91%** 0.92% 0.88% 0.90% 0.91% 0.89%
CLASS Y
----------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/09 ------------------------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------- -------- -------- -------- -------- --------
Net asset value, beginning of period ..... $ 9.43 $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70
----------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income ................ 0.21 0.41++ 0.41++ 0.41+ 0.41+ 0.44+
Net gain (loss) on securities (both
realized and unrealized) ........... 0.77 (0.91) (0.14) 0.01 (0.14) 0.05
----------- -------- -------- -------- -------- --------
Total from investment operations ..... 0.98 (0.50) 0.27 0.42 0.27 0.49
----------- -------- -------- -------- -------- --------
Less distributions (note 10):
Dividends from net investment income . (0.21) (0.41) (0.41) (0.41) (0.41) (0.44)
Distributions from capital gains ..... -- (0.05) (0.06) (0.03) -- --
----------- -------- -------- -------- -------- --------
Total distributions .................. (0.21) (0.46) (0.47) (0.44) (0.41) (0.44)
----------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.20 $ 9.43 $ 10.39 $ 10.59 $ 10.61 $ 10.75
=========== ======== ======== ======== ======== ========
Total return (not reflecting sales charge) 10.42%* (4.88)% 2.63% 4.08% 2.55% 4.65%
Ratios/supplemental data
Net assets, end of period
(in thousands) ..................... $ 42,592 $ 37,299 $ 41,648 $ 46,625 $ 47,816 $ 48,795
Ratio of expenses to average
net assets ......................... 0.63%** 0.64% 0.60% 0.61% 0.62% 0.58%
Ratio of net investment income to
average net assets ................. 4.19%** 4.12% 3.92% 3.86% 3.81% 4.11%
Portfolio turnover rate .............. 4.03%* 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%** 0.63% 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.
* Not annualized.
** Annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED)
As a shareholder of the Fund, you may incur two types of costs: (1)
transaction costs, including front-end sales charges with respect to Class A
shares or contingent deferred sales charges ("CDSC") with respect to Class C
shares; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other Fund expenses. The table below is intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The table below is based on an investment of $1,000 invested on January 1,
2009 and held for the six months ended June 30, 2009.
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 JUNE 30, 2009
ACTUAL
TOTAL RETURN BEGINNING ENDING EXPENSES
WITHOUT ACCOUNT ACCOUNT PAID DURING
SALES CHARGES(1) VALUE VALUE THE PERIOD(2)
- --------------------------------------------------------------------------------
Class A 10.34% $1,000.00 $1,103.40 $4.07
- --------------------------------------------------------------------------------
Class C 9.88% $1,000.00 $1,098.80 $8.48
- --------------------------------------------------------------------------------
Class I 10.28% $1,000.00 $1,102.80 $4.74
- --------------------------------------------------------------------------------
Class Y 10.42% $1,000.00 $1,104.20 $3.29
- --------------------------------------------------------------------------------
(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 0.78%, 1.63%, 0.91%
AND 0.63% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in the table below are meant to
highlight your ongoing costs only and do not reflect any transactional costs
with respect to Class A shares. The example does not reflect the deduction of
contingent deferred sales charges ("CDSC") with respect to Class C shares.
Therefore, the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different mutual funds. In
addition, if these transaction costs were included, your costs would have been
higher.
SIX MONTHS ENDED JUNE 30, 2009
HYPOTHETICAL
ANNUALIZED BEGINNING ENDING EXPENSES
TOTAL ACCOUNT ACCOUNT PAID DURING
RETURN VALUE VALUE THE PERIOD(1)
- --------------------------------------------------------------------------------
Class A 5.00% $1,000.00 $1,020.93 $3.91
- --------------------------------------------------------------------------------
Class C 5.00% $1,000.00 $1,016.71 $8.15
- --------------------------------------------------------------------------------
Class I 5.00% $1,000.00 $1,020.28 $4.56
- --------------------------------------------------------------------------------
Class Y 5.00% $1,000.00 $1,021.67 $3.16
- --------------------------------------------------------------------------------
(1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.78%, 1.63%, 0.91%
AND 0.63% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
181/365 (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 your Fund's entire list of portfolio securities twice a
year in the semi-annual and annual reports you receive. Additionally, under Fund
policies, the Manager publicly discloses the complete schedule of the Fund's
portfolio holdings, as of each calendar quarter, generally by the 15th day after
the end of each calendar quarter. Such information remains accessible until the
next schedule is made publicly available. You may obtain a copy of the Fund's
portfolio holding schedule for the most recently completed period by visiting
the Fund's website at www.aquilafunds.com. The Fund also discloses its five
largest holdings by value as of the close of the last business day of each
calendar month in a posting to its website on the 5th business day following the
month end. This information remains on the website until the next such posting.
Whenever you wish to see a listing of your Fund's portfolio other than in your
shareholder reports, please check our website (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, D.C. 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, 2009 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the
"Fund") was held on April 24, 2009. The holders of shares representing 89% of
the total net asset value of the shares entitled to vote were present in person
or by proxy. At the meeting, the following matters were voted upon and approved
by the shareholders (the resulting votes are presented below).
1. To elect Trustees.
Dollar Amount of Votes
----------------------
Trustee For Withheld
------- --- --------
Thomas A. Christopher $196,137,773 $2,470,163
David A. Duffy $196,108,683 $2,499,244
Diana P. Herrmann $196,096,907 $2,511,029
Theodore T. Mason $196,137,773 $2,470,163
Anne J. Mills $196,127,025 $2,480,910
James R. Ramsey $196,121,836 $2,486,100
2. To ratify the selection of Tait Weller & Baker LLP as the Fund's
independent registered public accounting firm.
Dollar Amount of Votes
----------------------
For Against Abstain
--- ------- -------
$196,028,076 $877,375 $1,692,475
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT
Renewal until June 30, 2010 of the Advisory and Administration Agreement
(the "Advisory Agreement") between the Fund and the Manager was approved by the
Board of Trustees and the independent Trustees in May, 2009. At a meeting called
and held for that purpose at which a majority of the independent Trustees were
present in person, the following materials were considered:
o A copy of the agreement to be renewed;
o A term sheet describing the material terms of the agreement;
o The Annual Report of the Fund for the year ended December 31, 2008;
o A report, prepared by the Manager and provided to the Trustees in advance
of the meeting for the Trustees' review, containing data about the
performance of the Fund, data about its fees, expenses and purchases and
redemptions of capital stock together with comparisons of such data with
similar data about other comparable funds, as well as data as to the
profitability of the Manager; and
o Quarterly materials reviewed at prior meetings on the Fund's performance,
operations, portfolio and compliance.
The Trustees reviewed materials relevant to, and considered the following
factors:
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER.
The Trustees noted that the Manager employed Mr. Todd W. Curtis as
portfolio manager for the Fund and had provided credit analysis of the Fund's
portfolio securities through a locally-based credit advisory firm. Todd Curtis
had been the back-up portfolio manager for Churchill Tax-Free Fund of Kentucky
since 2004 and the lead portfolio manager of the Manager's $300 million Tax-Free
Trust of Arizona since its inception in 1986. The Trustees noted the extensive
experience of Mr. Curtis which consisted of over 23 years of experience managing
Aquila's municipal bond funds. Moreover, he has been an investment professional
for close to 30 years.
The Board considered that the Manager had provided all services the Board
deemed necessary or appropriate, including the specific services that the Board
has determined are required for the Fund, given that its purpose is to provide
shareholders with as high a level of current income exempt from Kentucky state
and regular Federal income taxes as is consistent with preservation of capital.
The Manager has additionally provided all administrative services to the
Fund. The Board considered the nature and extent of the Manager's supervision of
third-party service providers, including the Fund's shareholder servicing agent
and custodian.
The Board concluded that the services provided were appropriate and
satisfactory and that the Fund would be well served if they continued.
Evaluation of this factor weighed in favor of renewal of the Advisory Agreement.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER.
The Board reviewed each aspect of the Fund's performance and compared its
performance with that of its local competitors, with national averages and the
benchmark index. It was noted that the materials provided by the Manager
indicated that compared to the five largest competitive Kentucky
funds, the Fund has had investment performance that is generally comparable to
that of its peers for the year-to-date, one, three, five and ten-year periods.
The Board concluded that the performance of the Fund was acceptable in
light of challenging economic and financial market conditions, the length of its
average maturities, its investment objectives and its long-standing emphasis on
minimizing risk. Evaluation of this factor indicated to the Trustees that
renewal of the Advisory Agreement would be appropriate.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
MANAGER AND ITS AFFILIATE FROM THE RELATIONSHIP WITH THE FUND.
The information provided contained expense data for the Fund and its local
competitors as well as data for all single-state tax-free municipal bond funds
nationwide, including data for all such front-end load funds of a comparable
asset size. The materials also showed the profitability to the Manager of its
services to the Fund.
The Board compared the expense and fee data with respect to the Fund to
similar data about other funds that it found to be relevant. The Board concluded
that the expenses of the Fund and the fees paid were generally lower than those
being paid by single-state tax-free municipal bond funds nationwide, and by the
Fund's local competitors.
The Board further concluded that the profitability to the Manager and the
Distributor did not argue against approval of the fees to be paid under the
Advisory Agreement.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS.
Data provided to the Trustees showed that the Fund's asset size had
generally declined in recent years. They observed that the extraordinary recent
turbulence in the financial markets might make it difficult to achieve
substantial growth in assets in the near future. The Trustees also noted that
the materials indicated that the Fund's fees were already generally lower than
those of its peers, including those with breakpoints. Evaluation of this factor
indicated to the Board that the Advisory Agreement should be renewed without
addition of breakpoints at this time.
BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATE FROM THE
RELATIONSHIP WITH THE FUND.
The Board observed that, as is generally true of most fund complexes, the
Manager and its affiliate, by providing services to a number of funds or other
investment clients including the Fund, were able to spread costs as they would
otherwise be unable to do. The Board noted that while that produces efficiencies
and increased profitability for the Manager and its affiliate, it also makes
their services available to the Fund at favorable levels of quality and cost
which are more advantageous to the Fund than would otherwise have been possible.
(THIS PAGE INTENTIONALLY LEFT BLANK)
FOUNDERS
Lacy B. Herrmann, Chairman Emeritus
Aquila Management Corporation
MANAGER
AQUILA INVESTMENT MANAGEMENT LLC
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Thomas A. Christopher, Chair
David A. Duffy
Diana P. Herrmann
Theodore T. Mason
Anne J. Mills
James R. Ramsey
OFFICERS
Diana P. Herrmann, President
Maryann Bruce, Senior Vice President
Todd W. Curtis, 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.
Not applicable
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.
(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act
of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
CHURCHILL TAX-FREE TRUST
By: /s/ Diana P. Herrmann
- -----------------------------------
President and Trustee
September 2, 2009
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Chief Financial Officer and Treasurer
September 2, 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
September 2, 2009
By: /s/ Joseph P. DiMaggio
- -------------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
September 2, 2009
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
(a) (2) Certifications of principal executive officer
and principal financial officer as required by Rule 30a-2(a)
under the Investment Company Act of 1940.
(b) Certification of chief executive officer and chief financial
officer as required by Rule 30a-2(b) of the Investment Company Act
of 1940.