-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rrg0vAXzvjIa0X26HKeIh9+UWZSgvcb0tLhTffxub62fhVc8qrCHF0aqbod/yYl7 nChk3XjaHENW/abjajpE0g== 0000812006-04-000005.txt : 20040308 0000812006-04-000005.hdr.sgml : 20040308 20040308154001 ACCESSION NUMBER: 0000812006-04-000005 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040308 EFFECTIVENESS DATE: 20040308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TAX FREE TRUST CENTRAL INDEX KEY: 0000812006 IRS NUMBER: 136864349 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-05086 FILM NUMBER: 04654790 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STREET 2: SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHURCHILL TAX FREE FUND OF KENTUCKY DATE OF NAME CHANGE: 19880911 N-CSR/A 1 ctftformncsr1231.txt CHURCHILL TAX-FREE TRUST 12/31/03 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5086 Churchill Tax-Free Trust (Exact name of Registrant as specified in charter) 380 Madison Avenue New York, New York 10017 (Address of principal executive offices) (Zip code) Joseph P. DiMaggio 380 Madison Avenue New York, New York 10017 (Name and address of agent for service) Registrant's telephone number, including area code: (212) 697-6666 Date of fiscal year end: 12/31 Date of reporting period: 12/31/03 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. [Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a circle] SERVING KENTUCKY INVESTORS FOR MORE THAN 15 YEARS CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT MANAGEMENT DISCUSSION 2003 was a year in which both bonds and stocks prospered - a phenomenon not seen too often. Last year saw the equity market finally rise out of the doldrums and produce positive 12-month returns. The Federal Reserve maintained historically low short-term interest rates at levels not seen in over 40 years. And, as we begin 2004, it too promises to be just as eventful: the United States continues postwar operations in Iraq; Libya and North Korea have both discussed dismantling their state-run nuclear programs; the planet Mars currently has two "visitors" from Earth exploring its surface; and the battle for the White House begins in earnest, with the presidential election coming in November. Last year, inflation again remained in check. As measured by the Producer Price Index (PPI), inflation rose 4.0%. The "Core PPI" (PPI minus food and energy costs) rose only 1.0% in 2003. The "Core CPI" (CPI minus food and energy) rose only 1.1%, the lowest increase since the 1960's. The Consumer Price Index (CPI) rose 1.9% in 2003. The best overall measure of the nation's economic health - the Gross Domestic Product (GDP) is expected to have risen approximately 4.6% in 2003, versus 2.4% in 2002. The Federal Reserve continued to keep interest rates at historical lows, hoping to spur an economic recovery. The national unemployment rate has recently shown signs of turning around, based on a December 2003 unemployment rate of 5.7% vs. levels in excess of 6.0% earlier in the year. 2003 marked the first time in four years that stocks provided investors with positive year-end results. The Dow Jones Industrial Average rose 28.29% last year. Other measures of equity performance fared even better: the S & P 500 closed up 28.68%; and the NASDAQ Composite Index soared 50.77%! We are proud to report that Churchill Tax-Free Fund of Kentucky provided Class A shareholders with a positive total rate of return of 4.50% in 2003. Individual states - Kentucky included - have not been able to avoid the effects of the sustained slowdown in the national economy. Budget deficits are being forecasted in nearly all fifty states for 2004 and 2005. While not nearly as massive as other states, Kentucky's economic challenges are formidable. With the first Republican administration in Frankfort since Louie Nunn, the pressure will be on first-term Governor Fletcher to return the Commonwealth to the prosperity "to which we have become accustomed". Budget cuts with no tax increases will certainly be stressful on the citizens of Kentucky. In light of the state's overall weaker economy, we should expect to see "lighter" new bond issuance. As long as interest rates remain low, we can, however, expect to see municipalities refinancing their higher-cost debt. In the meantime, demand for quality Kentucky tax-free bonds remains strong. 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 seek to continually, and successfully, address this objective by adhering to a discipline of solid fundamental, conservative portfolio management ideals. The Fund continues to maintain an average credit quality of "AA", with no bonds rated less than "A". Our "laddered" maturity structure helps us manage price volatility. The Fund has an average life of approximately 14.0 years and a duration of approximately 5.0 years. We maintain a well-diversified portfolio of over 180 different Kentucky issues. We are optimistic about the prospects for the U.S. economy in 2004, and will continue to watch for any signs of rising inflation. It is going to take continued vigilance by the Federal Reserve to revive and re-energize our economy without driving up interest rates over the course of 2004. To address these concerns, we will seek to "stay the course" and manage the portfolio by taking advantage of opportunities in the Kentucky marketplace that are consistent with the investment objectives of the Fund. PERFORMANCE REPORT The following graph illustrates the value of $10,000 invested in the Class A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended December 31, 2003 as compared with 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 Lehman Index does not include any operating expenses nor sales charges and being nationally oriented, does not reflect state specific bond market performance. [Graphic of a line chart with the following information:]
Lehman Brothers Quality Intermediate Fund's Class A Shares Municipal Bond Index With Sales Charge Without Sales Charge Cost of Living Index $10,000 $ 9,600 $10,000 $10,000 $ 9,727 $ 9,274 $ 9,664 $10,267 $11,069 $10,528 $10,971 $10,528 $11,541 $11,007 $11,470 $10,878 $12,386 $11,873 $12,372 $11,063 $13,129 $12,475 $13,000 $11,241 $13,167 $12,287 $12,804 $11,543 $14,303 $13,312 $13,872 $11,934 $15,092 $13,850 $14,433 $12,119 $16,485 $14,924 $15,552 $12,407 $17,250 $15,684 $16,344 $12,641
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 2003 --------------------------------------- SINCE 1 YEAR 5 YEARS 10 YEARS INCEPTION ------ ------- -------- --------- Class A (5/21/87) With Sales Charge ................ 0.36% 3.81% 4.60% 6.32% Without Sales Charge ............. 4.50% 4.66% 5.04% 6.58% Class C (4/1/96) With CDSC ........................ 2.62% 3.77% n/a 4.51% Without CDSC ..................... 3.62% 3.77% n/a 4.51% Class Y (4/1/96) No Sales Charge .................. 4.65% 4.81% n/a 5.53% Class I (8/6/01) No Sales Charge .................. 4.33% n/a n/a 5.34% Lehman Index ........................ 4.64% 5.61% 5.60% 6.56% (Class A) 4.64% 5.61% n/a 5.92% (Class C&Y) 4.64% n/a n/a 6.16% (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 classes' income may be subject to federal and state income taxes. Past performance is not predictive of future investment results. [Logo of KPMG LLP: four solid rectangles with the letters KPMG in front of them] INDEPENDENT AUDITORS' REPORT To the Board of Trustees and Shareholders of Churchill Tax-Free Fund of Kentucky: We have audited the accompanying statement of assets and liabilities of Churchill Tax-Free Fund of Kentucky, including the statement of investments, as of December 31, 2003, 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 five 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. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian. As to securities sold but not yet delivered, we performed other appropriate auditing procedures. 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, 2003, 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 five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP New York, New York February 13, 2004 CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF INVESTMENTS DECEMBER 31, 2003
RATING FACE MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (1.3%) S&P VALUE - ---------- ------------------------------------------------------ -------- ------------ Bowling Green, Kentucky $ 200,000 5.300%, 06/01/18 .................................. Aa3/NR $ 217,500 Lexington-Fayette Urban County, Kentucky Government Project Unlimited Tax 125,000 5.000%, 12/01/15 .................................. Aa2/AA+ 135,313 340,000 5.150%, 12/01/17 .................................. Aa2/AA+ 366,775 Louisville, Kentucky Unlimited Tax 2,205,000 5.000%, 10/01/21 FGIC Insured ..................... Aaa/AAA 2,315,250 Warren County, Kentucky Judicial Unlimited Tax 345,000 5.100%, 09/01/17 AMBAC Insured .................... Aaa/NR 373,463 365,000 5.150%, 09/01/18 AMBAC Insured .................... Aaa/NR 393,744 ------------ Total General Obligation Bonds ................. 3,802,045 ------------ REVENUE BONDS (97.0%) ------------------------------------------------------ STATE AGENCIES (35.6%) ------------------------------------------------------ Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank ................ NR/AA 513,125 Kentucky Infrastructure Authority 1,000,000 5.250%, 06/01/12 .................................. Aa3/A+ 1,118,750 635,000 5.250%, 06/01/12 .................................. Aa3/A+ 691,356 2,740,000 5.250%, 06/01/14 .................................. Aa3/A+ 3,037,975 1,500,000 5.375%, 02/01/18 .................................. NR/A- 1,519,515 Kentucky Local Correctional Facilities Construction Authority 6,355,000 5.500%, 11/01/14 FSA Insured ...................... Aaa/AAA 6,691,497 Kentucky Rural Economic Development Authority 3,110,000 7.250%, 06/01/17 LOC Bank One AMT ................. NR/A+ 3,169,557 Kentucky State Property and Buildings Commission 3,000,000 6.250%, 09/01/07 MBIA Insured ..................... Aaa/AAA 3,442,500 220,000 6.000%, 09/01/08 .................................. Aa3/A+ 253,825 500,000 5.500%, 11/01/09 AMBAC Insured .................... Aaa/AAA 543,750 4,000,000 5.375%, 02/01/14 FSA Insured ...................... Aaa/AAA 4,550,000 400,000 5.250%, 10/01/14 .................................. Aa3/A+ 442,500 3,250,000 5.625%, 09/01/15 .................................. Aa3/A+ 3,688,750 460,000 5.125%, 09/01/15 .................................. Aa3/A+ 501,400 Kentucky State Property and Buildings Commission (continued) $ 100,000 5.375%, 05/01/16 MBIA Insured ..................... Aaa/AAA $ 110,375 6,500,000 5.375%, 08/01/16 FSA Insured ...................... Aaa/AAA 7,239,375 3,905,000 5.125%, 09/01/16 .................................. Aa3/A+ 4,212,519 5,000,000 5.250%, 10/01/16 .................................. Aa3/A+ 5,462,500 1,100,000 5.000%, 11/01/16 AMBAC Insured .................... Aaa/AAA 1,203,125 1,265,000 5.250%, 08/01/17 MBIA Insured ..................... Aaa/AAA 1,400,988 1,150,000 5.000%, 08/01/17 FSA Insured ...................... Aaa/AAA 1,227,625 8,155,000 5.125%, 09/01/17 .................................. Aa3/A+ 8,766,625 200,000 5.375%, 10/01/17 MBIA Insured ..................... Aaa/AAA 221,750 4,735,000 5.250%, 10/01/17 .................................. Aa3/A+ 5,155,231 975,000 5.500%, 11/01/17 FSA Insured ...................... Aaa/AAA 1,101,750 1,000,000 5.000%, 11/01/17 AMBAC Insured .................... Aaa/AAA 1,085,000 165,000 5.375%, 02/01/18 FSA Insured ...................... Aaa/AAA 182,325 3,030,000 5.000%, 08/01/18 FSA Insured ...................... Aaa/AAA 3,215,587 3,950,000 5.125%, 09/01/18 .................................. Aa3/A+ 4,221,563 6,000,000 5.250%, 10/01/18 .................................. Aa3/A+ 6,487,500 145,000 5.100%, 11/01/18 .................................. Aa3/A+ 154,425 1,040,000 5.000%, 08/01/19 FSA Insured ...................... Aaa/AAA 1,097,200 4,000,000 5.375%, 10/01/19 MBIA Insured ..................... Aaa/AAA 4,395,000 1,925,000 5.000%, 10/01/19 .................................. Aa3/A+ 2,023,656 360,000 5.000%, 10/01/19 MBIA Insured ..................... Aaa/AAA 380,250 705,000 5.150%, 11/01/19 FSA Insured ...................... Aaa/AAA 756,994 3,000,000 5.000%, 11/01/19 FSA Insured ...................... Aaa/AAA 3,187,500 2,000,000 5.750%, 05/01/20 MBIA Insured ..................... Aaa/AAA 2,340,000 250,000 5.000%, 05/01/20 FSA Insured ...................... Aaa/AAA 262,187 160,000 5.000%, 10/01/20 MBIA Insured ..................... Aaa/AAA 168,200 200,000 5.100%, 10/01/21 MBIA Insured ..................... Aaa/AAA 210,500 205,000 5.150%, 02/01/22 FSA Insured ...................... Aaa/AAA 215,506 5,000,000 5.000%, 10/01/22 MBIA Insured ..................... Aaa/AAA 5,243,750 265,000 5.000%, 08/01/23 MBIA Insured ..................... Aaa/AAA 276,263 ------------ 102,169,769 ------------ COUNTY AGENCIES (8.7%) ------------------------------------------------------ Floyd County, Kentucky Public Property Courthouse 510,000 5.500%, 09/01/14 Pre-Refunded ..................... NR/NR* 562,275 Jefferson County, Kentucky Capital Projects $1,000,000 5.200%, 06/01/08 MBIA Insured ..................... Aaa/AAA $ 1,112,500 430,000 5.200%, 06/01/12 MBIA Insured ..................... Aaa/AAA 472,463 570,000 5.250%, 06/01/13 MBIA Insured ..................... Aaa/AAA 623,437 520,000 5.250%, 06/01/14 MBIA Insured ..................... Aaa/AAA 566,800 3,370,000 5.375%, 06/01/18 MBIA Insured ..................... Aaa/AAA 3,648,025 1,640,000 5.375%, 06/01/22 MBIA Insured ..................... Aaa/AAA 1,750,700 5,935,000 5.500%, 06/01/28 MBIA Insured ..................... Aaa/AAA 6,328,194 Pendleton County, Kentucky Multi-County Lease Revenue 4,500,000 6.500%, 03/01/19 .................................. NR/A 4,582,530 Warren County, Kentucky Justice Center 1,580,000 5.250%, 09/01/17 MBIA Insured ..................... Aaa/AAA 1,716,275 Warren County, Kentucky Justice Center Expansion Corp. Revenue 700,000 5.400%, 09/01/24 .................................. Aa3/NR 747,250 2,875,000 5.350%, 09/01/29 MBIA Insured ..................... Aaa/AAA 3,004,375 ------------ 25,114,824 ------------ CITY / MUNICIPALITY OBLIGATIONS (5.6%) ------------------------------------------------------ Jeffersontown, Kentucky Public Project Corp. 500,000 5.750%, 11/01/15 .................................. A3/NR 543,750 Kentucky League Cities Funding Trust Certificates of Participation (Covington) 1,715,000 6.200%, 08/01/17 .................................. NR/A+ 1,799,086 Lexington-Fayette Urban County Government, Kentucky Public Facilities Revenue 120,000 5.125%, 10/01/23 FSA Insured ...................... Aaa/AAA 124,650 Louisville, Kentucky Parking Authority 1,140,000 5.000%, 12/01/14 MBIA Insured ..................... Aaa/AAA 1,232,625 Mount Sterling, Kentucky Lease Revenue 2,020,000 6.150%, 03/01/13 .................................. Aa3/NR 2,055,976 7,000,000 6.200%, 03/01/18 .................................. Aa3/NR 7,125,160 Munfordville, Kentucky Industrial Development 2,500,000 7.000%, 06/01/19 LOC Bank One AMT ................. NR/A+ 2,572,825 Shelbyville, Kentucky Certificates of Participation 625,000 5.000%, 10/01/22 .................................. A2/NR 642,969 ------------ 16,097,041 ------------ HOSPITALS (4.2%) ------------------------------------------------------ Jefferson County, Kentucky Health Facilities Revenue $ 240,000 5.000%, 10/01/12 MBIA Insured ..................... Aaa/AAA $ 256,800 1,715,000 5.650%, 01/01/17 AMBAC Insured .................... Aaa/AAA 1,875,781 2,200,000 5.250%, 05/01/17 .................................. NR/A 2,293,500 2,815,000 5.125%, 10/01/17 AMBAC Insured ETM ................ Aaa/AAA 2,983,900 525,000 5.125%, 10/01/18 MBIA Insured ETM ................. Aaa/AAA 557,813 125,000 5.750%, 01/01/26 AMBAC Insured .................... Aaa/AAA 133,281 Kentucky Development Finance Authority Hospital Revenue 2,790,000 5.000%, 08/15/15 MBIA Insured ..................... Aaa/AAA 2,878,973 Louisville & Jefferson County, Kentucky Medical Center Revenue 1,000,000 5.000%, 06/01/18 .................................. NR/A 1,048,750 ------------ 12,028,798 ------------ HOUSING (7.8%) ------------------------------------------------------ Kentucky Housing Corp. Housing Revenue 1,150,000 6.250%, 07/01/15 AMT .............................. Aaa/AAA 1,150,000 315,000 6.100%, 07/01/16 AMT .............................. Aaa/AAA 331,931 10,000 6.400%, 01/01/17 .................................. Aaa/AAA 10,000 95,000 5.550%, 07/01/18 AMT .............................. Aaa/AAA 96,781 250,000 5.850%, 07/01/20 AMT .............................. Aaa/AAA 266,563 2,000,000 5.600%, 07/01/20 AMT .............................. Aaa/AAA 2,075,000 1,150,000 5.350%, 01/01/21 AMT .............................. Aaa/AAA 1,183,062 6,075,000 5.450%, 07/01/22 AMT .............................. Aaa/AAA 6,302,813 4,065,000 5.250%, 07/01/22 AMT .............................. Aaa/AAA 4,207,275 245,000 5.200%, 07/01/22 .................................. Aaa/AAA 254,800 300,000 5.100%, 07/01/22 AMT .............................. Aaa/AAA 306,000 4,140,000 5.200%, 07/01/25 AMT .............................. Aaa/AAA 4,233,150 275,000 5.375%, 07/01/27 .................................. Aaa/AAA 285,313 1,085,000 6.300%, 01/01/28 AMT .............................. Aaa/AAA 1,085,000 65,000 6.250%, 07/01/28 AMT .............................. Aaa/AAA 67,925 570,000 5.550%, 07/01/33 .................................. Aaa/AAA 590,663 ------------ 22,446,276 ------------ POLLUTION CONTROL REVENUE (1.4%) ------------------------------------------------------ Jefferson County, Kentucky Pollution Control (LGE Energy) $3,800,000 5.900%, 04/15/23 .................................. A1/A- $ 3,914,000 ------------ SCHOOLS (12.6%) ------------------------------------------------------ Beechwood, Kentucky Independent School District Finance Corp. 180,000 5.650%, 03/01/20 .................................. Aa3/NR 199,125 Boone County, Kentucky School District Finance Corp. School Building 660,000 5.000%, 06/01/15 .................................. Aa3/NR 705,375 225,000 5.250%, 08/01/15 .................................. Aa3/NR 248,344 285,000 5.700%, 02/01/16 .................................. Aa3/NR 322,406 1,000,000 5.375%, 08/01/20 FSA Insured ...................... AAA/NR 1,082,500 Boyd County, Kentucky School District Finance Corp. 1,025,000 5.000%, 10/01/15 .................................. Aa3/NR 1,103,156 575,000 5.375%, 10/01/17 .................................. Aa3/NR 631,063 Christian County, Kentucky School District Finance Corp. 500,000 5.000%, 06/01/09 .................................. Aa3/NR 553,125 Fayette County, Kentucky School Building 1,780,000 5.700%, 12/01/16 .................................. Aa3/AA- 1,971,350 Fayette County, Kentucky School Building Revenue 200,000 5.125%, 04/01/18 AMBAC Insured .................... Aaa/AAA 214,750 Floyd County, Kentucky School Building 250,000 5.000%, 12/01/09 .................................. Aa3/NR 280,625 Graves Co., Kentucky School Building Revenue 1,260,000 5.000%, 06/01/22 .................................. Aa3/NR 1,308,825 1,320,000 5.000%, 06/01/23 .................................. Aa3/NR 1,364,550 Grayson County, Kentucky School Building Revenue 1,940,000 6.000%, 01/01/15 .................................. Aa3/NR 2,071,163 Hardin County, Kentucky School District Finance Corp. 100,000 5.500%, 02/01/17 .................................. Aa3/NR 111,625 Jefferson County, Kentucky School District Finance Corp. School Building $ 750,000 5.300%, 01/01/13 FSA Insured ...................... Aaa/AAA $ 855,938 695,000 5.125%, 11/01/14 FSA Insured ...................... Aaa/AAA 746,256 3,195,000 5.125%, 02/01/16 MBIA Insured ..................... Aaa/AAA 3,366,731 250,000 5.250%, 07/01/16 FSA Insured ...................... Aaa/AAA 273,437 Kenton County, Kentucky School District 1,760,000 5.375%, 03/01/15 .................................. A1/A+ 1,931,600 955,000 5.000%, 04/01/16 .................................. Aa3/NR 1,030,206 1,055,000 5.000%, 04/01/17 .................................. Aa3/NR 1,128,850 605,000 5.000%, 04/01/19 .................................. Aa3/NR 636,763 Kentucky Economic Development Finance Authority College Revenue Centre College 1,230,000 5.000%, 04/01/17 FSA Insured ...................... Aaa/AAA 1,325,325 1,675,000 5.000%, 04/01/19 FSA Insured ...................... Aaa/AAA 1,779,687 Lexington-Fayette Urban County, Kentucky Government Project Transylvania University 1,250,000 5.125%, 08/01/18 MBIA Insured ..................... Aaa/AAA 1,337,500 Lexington-Fayette Urban County, Kentucky Government Project U.K. Library 725,000 5.000%, 11/01/15 MBIA Insured ..................... Aaa/AAA 791,156 205,000 5.000%, 11/01/18 MBIA Insured ..................... Aaa/AAA 219,606 Meade County, Kentucky School District Finance Corp. 400,000 5.700%, 07/01/15 .................................. Aa3/NR 441,000 500,000 6.000%, 07/01/16 .................................. Aa3/NR 552,500 Middlesboro, Kentucky Independent School District Finance Corp. 100,000 6.100%, 08/01/16 .................................. Aa3/NR 111,375 Nelson County, Kentucky School Building 1,820,000 5.750%, 04/01/15 .................................. Aa3/NR 1,958,775 Scott County, Kentucky School Building 2,750,000 5.900%, 06/01/18 Pre-Refunded ..................... Aa3/A 2,980,313 100,000 5.000%, 03/01/22 .................................. Aa3/NR 104,125 Taylor County, Kentucky School Building 280,000 6.000%, 08/01/16 .................................. Aa3/NR 311,150 175,000 5.250%, 06/01/19 .................................. Aa3/NR 189,875 University of Kentucky Revenue $1,335,000 5.000%, 05/01/16 FGIC Insured ..................... Aaa/AAA $ 1,421,775 385,000 5.000%, 06/01/18 FSA insured ...................... Aaa/AAA 405,212 Walton-Verona, Kentucky Independent School District 105,000 5.100%, 06/01/19 .................................. Aa3/NR 111,563 ------------ 36,178,700 ------------ TRANSPORTATION (12.2%) ------------------------------------------------------ Kenton County, Kentucky Airport Board Airport Revenue 800,000 5.000%, 03/01/08 MBIA Insured AMT ................. Aaa/AAA 871,000 500,000 5.625%, 03/01/13 MBIA Insured AMT ................. Aaa/AAA 555,000 1,570,000 5.000%, 03/01/13 MBIA Insured AMT ................. Aaa/AAA 1,687,750 750,000 5.625%, 03/01/14 MBIA Insured AMT ................. Aaa/AAA 832,500 1,000,000 5.500%, 03/01/17 MBIA Insured AMT ................. Aaa/AAA 1,092,500 380,000 5.500%, 03/01/18 MBIA Insured AMT ................. Aaa/AAA 412,300 1,625,000 5.000%, 03/01/23 MBIA Insured AMT ................. Aaa/AAA 1,651,406 Kentucky Interlocal School Transportation Authority 150,000 5.100%, 03/01/05 .................................. Aa3/A+ 156,563 145,000 5.400%, 06/01/17 .................................. NR/A+ 146,886 200,000 6.000%, 12/01/20 .................................. NR/A+ 205,576 400,000 6.000%, 12/01/20 .................................. NR/A+ 411,152 300,000 5.800%, 12/01/20 .................................. NR/A+ 305,847 400,000 5.650%, 12/01/20 .................................. NR/A+ 407,556 350,000 5.600%, 12/01/20 .................................. NR/A+ 356,545 Kentucky State Turnpike Authority Economic Development & Resource Recovery Road Revenue 120,000 8.500%, 07/01/06 .................................. Aa3/A+ 139,500 1,000,000 6.500%, 07/01/08 AMBAC Insured .................... Aaa/AAA 1,172,500 1,010,000 5.500%, 07/01/11 AMBAC Insured .................... Aaa/AAA 1,032,543 1,000,000 5.625%, 07/01/12 FSA Insured ...................... Aaa/AAA 1,141,250 200,000 5.625%, 07/01/13 FSA Insured ...................... Aaa/AAA 228,000 500,000 5.625%, 07/01/14 FSA Insured ...................... Aaa/AAA 570,000 250,000 5.200%, 07/01/14 FSA Insured ...................... Aaa/AAA 275,938 2,760,000 5.625%, 07/01/15 AMBAC Insured Pre-Refunded ....... Aaa/AAA 2,991,150 940,000 5.625%, 07/01/15 AMBAC Insured .................... Aaa/AAA 1,012,850 Kentucky State Turnpike Authority Economic Development & Resource Recovery Road Revenue (continued) $ 450,000 5.250%, 07/01/15 FSA Insured ...................... Aaa/AAA $ 496,125 3,455,000 5.100%, 07/01/18 FSA Insured ...................... Aaa/AAA 3,688,212 2,500,000 5.250%, 07/01/16 FSA Insured ...................... Aaa/AAA 2,753,125 Louisville-Jefferson County Regional Airport, Kentucky 1,000,000 5.500%, 07/01/12 FSA Insured AMT .................. Aaa/AAA 1,112,500 2,000,000 5.750%, 07/01/15 FSA Insured AMT .................. Aaa/AAA 2,227,500 1,500,000 5.500%, 07/01/15 FSA Insured AMT .................. Aaa/AAA 1,666,875 1,000,000 5.250%, 07/01/18 FSA Insured AMT .................. Aaa/AAA 1,063,750 1,370,000 5.250%, 07/01/21 FSA Insured AMT .................. Aaa/AAA 1,441,925 2,390,000 5.250%, 07/01/22 FSA Insured AMT .................. Aaa/AAA 2,503,525 275,000 5.375%, 07/01/23 FSA Insured AMT .................. Aaa/AAA 288,750 ------------ 34,898,599 ------------ UTILITIES (8.9%) ------------------------------------------------------ Campbell & Kenton Counties, Kentucky Sanitation Sewer District 100,000 5.000%, 08/01/18 FGIC Insured ..................... Aaa/AAA 106,500 Hardin County, Kentucky Water District 1,000,000 5.900%, 01/01/25 MBIA Insured ..................... Aaa/AAA 1,077,500 Lexington-Fayette Urban County Government, Kentucky Sewer System 1,000,000 5.000%, 07/01/19 .................................. Aa3/AA 1,056,250 Louisville and Jefferson County, Kentucky Metropolitan Sewer District 1,000,000 5.000%, 05/15/12 FGIC Insured ..................... Aaa/AAA 1,090,000 2,565,000 5.375%, 05/15/17 MBIA Insured Aaa/AAA 2,866,387 1,410,000 5.400%, 05/15/22 FGIC Insured Aaa/AAA 1,473,450 120,000 6.250%, 05/15/26 MBIA Insured Aaa/AAA 135,900 Louisville, Kentucky Waterworks Board Water System Revenue 1,000,000 5.250%, 11/15/16 FSA Insured ...................... Aaa/AAA 1,097,500 1,000,000 5.250%, 11/15/17 FSA Insured ...................... Aaa/AAA 1,086,250 2,435,000 5.250%, 11/15/18 FSA Insured ...................... Aaa/AAA 2,629,800 6,600,000 5.250%, 11/15/22 FSA Insured ...................... Aaa/AAA 6,996,000 2,415,000 5.250%, 11/15/24 FSA Insured ...................... Aaa/AAA 2,532,731 Kentucky Rural Water Finance Corp. $ 595,000 5.000%, 02/01/20 AMBAC Insured .................... Aaa/AAA $ 630,700 Northern Kentucky Water District 200,000 5.000%, 02/01/23 FGIC Insured ..................... Aaa/NR 207,500 1,015,000 5.000%, 02/01/27 FGIC Insured ..................... Aaa/NR 1,040,375 Owensboro-Davies County, Kentucky Water District 600,000 5.000%, 01/01/13 AMBAC Insured .................... Aaa/AAA 634,500 Owensboro, Kentucky Electric and Power 1,000,000 5.000%, 01/01/20 FSA Insured ...................... Aaa/AAA 1,047,500 ------------ 25,708,843 ------------ Total Revenue Bonds ............................ 278,556,850 ------------ Total Investments (cost $269,252,563**) .............. 98.3% 282,358,895 Other assets less liabilities ........................ 1.7 4,765,156 ----- ------------ Net Assets ........................................... 100.0% $287,124,051 ===== ============
* Any security not rated (NR) has been determined by the Manager to have sufficient quality to be ranked in the top four credit ratings if a credit rating was to be assigned by a rating service. ** See note 4. PORTFOLIO ABBREVIATIONS: AMBAC - American Municipal Bond Assurance Corp. AMT - Alternative Minimum Tax ETM - Escrowed To Maturity FGIC - Financial Guaranty Insurance Co. FSA - Financial Security Assurance LOC - Letter of Credit MBIA - Municipal Bond Investors Assurance See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments at value (cost $269,252,563) .................... $282,358,895 Interest receivable ......................................... 4,332,672 Receivable for investment securities sold ................... 1,265,000 Receivable for Fund shares sold ............................. 285,412 ------------ Total assets ................................................ 288,241,979 ------------ LIABILITIES Cash overdraft .............................................. 355,708 Dividends payable ........................................... 275,731 Payable for Fund shares redeemed ............................ 240,192 Management fee payable ...................................... 97,117 Distribution fees payable ................................... 73,571 Accrued expenses ............................................ 75,609 ------------ Total liabilities ........................................... 1,117,928 ------------ NET ASSETS ..................................................... $287,124,051 ============ Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share ................................. $ 268,457 Additional paid-in capital .................................. 274,505,016 Net unrealized appreciation on investments (note 4) ......... 13,106,332 Undistributed net investment income ......................... 384,527 Accumulated net realized loss on investments ................ (1,140,281) ------------ $287,124,051 ============ CLASS A Net Assets .................................................. $229,176,036 ============ Capital shares outstanding .................................. 21,429,521 ============ Net asset value and redemption price per share .............. $ 10.69 ============ Offering price per share (100/96 of $10.69 adjusted to nearest cent) ............................................ $ 11.14 ============ CLASS C Net Assets .................................................. $ 7,197,024 ============ Capital shares outstanding .................................. 673,249 ============ Net asset value and offering price per share ................ $ 10.69 ============ 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) ...................... $ 10.69* ============ CLASS I Net Assets .................................................. $ 4,437,822 ============ Capital shares outstanding .................................. 415,134 ============ Net asset value, offering and redemption price per share .... $ 10.69 ============ CLASS Y Net Assets .................................................. $ 46,313,169 ============ Capital shares outstanding .................................. 4,327,838 ============ Net asset value, offering and redemption price per share .... $ 10.70 ============ See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME: Interest income ............................................. $13,711,858 Expenses: Management fee (note 3) ..................................... $1,129,293 Distribution and service fees (note 3) ...................... 409,376 Transfer and shareholder servicing agent fees ............... 125,277 Trustees' fees and expenses (note 8) ........................ 87,053 Legal fees .................................................. 68,594 Shareholders' reports and proxy statements .................. 57,190 Fund accounting fees ........................................ 32,379 Custodian fees .............................................. 27,387 Auditing and tax fees ....................................... 26,742 Registration fees and dues .................................. 23,005 Insurance ................................................... 13,627 Miscellaneous ............................................... 20,851 ---------- Total expenses .............................................. 2,020,774 Expenses paid indirectly (note 6) ........................... (18,294) ---------- Net expenses ................................................ 2,002,480 ----------- Net investment income ....................................... 11,709,378 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from securities transactions ....... 259,635 Change in unrealized appreciation on investments ............ 183,334 ---------- Net realized and unrealized gain (loss) on investments ...... 442,969 ----------- Net change in net assets resulting from operations .......... $12,152,347 ===========
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------- ----------------- OPERATIONS: Net investment income ....................................... $ 11,709,378 $ 11,410,017 Net realized gain (loss) from securities transactions ....... 259,635 773,552 Change in unrealized appreciation on investments ............ 183,334 7,631,648 ------------ ------------ Change in net assets from operations ..................... 12,152,347 19,815,217 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10): Class A Shares: Net investment income ....................................... (9,367,500) (9,598,236) Class C Shares: Net investment income ....................................... (200,217) (146,784) Class I Shares: Net investment income ....................................... (146,438) (86,355) Class Y Shares: Net investment income ....................................... (1,944,616) (1,537,493) ------------ ------------ Change in net assets from distributions .................. (11,658,771) (11,368,868) ------------ ------------ CAPITAL SHARE TRANSACTIONS (NOTE 7): Proceeds from shares sold ................................... 44,639,694 52,239,557 Reinvested dividends and distributions ...................... 5,821,000 5,609,442 Cost of shares redeemed ..................................... (38,277,178) (23,818,330) ------------ ------------ Change in net assets from capital share transactions ........ 12,183,516 34,030,669 ------------ ------------ Change in net assets ........................................ 12,677,092 42,477,018 NET ASSETS: Beginning of period ......................................... 274,446,959 231,969,941 ------------ ------------ End of period* .............................................. $287,124,051 $274,446,959 ============ ============ * Includes undistributed net investment income of: .......... $ 384,527 $ 333,920 ============ ============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS 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 at the mean of bid and asked quotations and, in the case of other securities, at fair value determined under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase is 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeds 60 days. b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on the identified cost basis. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue and market discount. c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code applicable to certain investment companies. The Fund intends to make distributions of income and securities profits sufficient to relieve it from all, or substantially all, Federal income and excise taxes. d) ALLOCATION OF EXPENSES: Expenses, other than class-specific expenses, are allocated daily to each class of shares based on the relative net assets of each class. Class-specific expenses, which include distribution and service fees and any other items that are specifically attributed to a particular class, are charged directly to such class. e) USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Aquila Management Corporation (the "Manager"), the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. Refer to Note 11 for Subsequent Event footnote. 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 overseeing the activities of all the various support organizations to the Fund such as the shareholder servicing agent, custodian, legal counsel, fund accounting agent, auditors and distributor. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's average net assets. 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, 2003, distribution fees on Class A Shares amounted to $340,461 of which the Distributor retained $8,968. 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, 2003, amounted to $46,125. 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, 2003, amounted to $15,375. The total of these payments with respect to Class C Shares amounted to $61,500 of which the Distributor retained $10,904. 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, 2003, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $12,976 of which $7,415 related to the Plan and $5,561 related to the Shareholder Services Plan. Specific details about the Plans are more fully defined in the Fund's Prospectus and Statement of Additional Information. Under a Distribution Agreement, the Distributor serves as the exclusive distributor of the Fund's shares. Through agreements between the Distributor and various broker-dealer firms ("dealers"), the Fund's shares are sold primarily through the facilities of these dealers having offices within Kentucky, with the bulk of sales commissions inuring to such dealers. For the year ended December 31, 2003, total commissions on sales of Class A Shares amounted to $480,078 of which the Distributor received $42,855. c) OTHER RELATED PARTY TRANSACTIONS: For the year ended December 31, 2003, the Fund incurred $66,895 of legal fees allocable to Hollyer Brady Smith & Hines LLP, counsel to the Fund for legal services in conjunction with the Fund's ongoing operations. The Secretary of the Fund is a Partner of Hollyer Brady Smith & Hines LLP. 4. PURCHASES AND SALES OF SECURITIES During the year ended December 31, 2003, purchases of securities and proceeds from the sales of securities aggregated $56,486,203 and $49,905,685, respectively. At December 31, 2003, the aggregate tax cost for all securities was $268,926,644. At December 31, 2003, the aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $13,530,228 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $97,977 for a net unrealized appreciation of $13,432,251. 5. PORTFOLIO ORIENTATION Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. 6. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. It is the general intention of the Fund to invest, to the extent practicable, some or all of cash balances in income-producing assets rather than leave cash on deposit. 7. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ CLASS A SHARES: Proceeds from shares sold ....... 2,169,701 $ 23,197,568 2,800,411 $ 29,436,982 Reinvested distributions ........ 423,111 4,508,492 454,110 4,764,701 Cost of shares redeemed ......... (2,359,392) (25,070,993) (1,611,194) (16,933,028) ---------- ------------ ---------- ------------ Net change ................... 233,420 2,635,067 1,643,327 17,268,655 ---------- ------------ ---------- ------------ CLASS C SHARES: Proceeds from shares sold ....... 285,083 3,053,437 166,058 1,743,988 Reinvested distributions ........ 12,041 128,176 9,211 96,673 Cost of shares redeemed ......... (74,572) (795,113) (50,063) (523,419) ---------- ------------ ---------- ------------ Net change ................... 222,552 2,386,500 125,206 1,317,242 ---------- ------------ ---------- ------------ CLASS I SHARES: Proceeds from shares sold ....... 198,482 2,130,432 85,241 895,032 Reinvested distributions ........ 12,722 135,513 7,325 77,007 Cost of shares redeemed ......... (21,821) (232,654) (5,158) (53,879) ---------- ------------ ---------- ------------ Net change ................... 189,383 2,033,291 87,408 918,160 ---------- ------------ ---------- ------------ CLASS Y SHARES: Proceeds from shares sold ....... 1,511,098 16,258,257 1,918,939 20,163,555 Reinvested distributions ........ 98,382 1,048,819 63,761 671,061 Cost of shares redeemed ......... (1,145,269) (12,178,418) (599,076) (6,308,004) ---------- ------------ ---------- ------------ Net change ................... 464,211 5,128,658 1,383,624 14,526,612 ---------- ------------ ---------- ------------ Total transactions in Fund shares .......................... 1,109,566 $ 12,183,516 3,239,565 $ 34,030,669 ========== ============ ========== ============
8. TRUSTEES' FEES AND EXPENSES During the fiscal year ended December 31, 2003 there were nine trustees, two of whom were affiliated with the Manager and are not paid any trustee fees. Each Trustees' fees paid during the year were at the average annual rate of $7,250 for carrying out responsibilities and attendance at regularly scheduled Board Meetings. If additional or special meetings are scheduled for the Fund, separate meeting fees are paid for each such meeting to those Trustees in attendance. The Fund also reimburses Trustees for expenses such as travel, accommodations, and meals incurred in connection with attendance at regularly scheduled or special Board Meetings and at the Annual Meeting of Shareholders. For the fiscal year ended December 31, 2003 such reimbursements averaged approximately $3,400 per Trustee. 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. DISTRIBUTIONS The Fund declares dividends daily from net investment income and makes payments monthly in additional shares at the net asset value per share, in cash, or in a combination of both, at the shareholder's option. Net realized capital gains, if any, are distributed annually and are taxable. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, due to differences between financial statement reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund's net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividend income may, under some circumstances, be subject to the alternative minimum tax. At December 31, 2003, the Fund had a capital loss carryover of $1,077,355, $54,468 of which expires on December 31, 2007 and $1,022,887 will expire on December 31, 2008. This carryover is available to offset future net realized gains on securities transactions to the extent provided for in the Internal Revenue Code. To the extent that this loss carryover is used to offset future realized capital gains, it is probable the gains so offset will not be distributed. In addition, the Fund generated a post October net capital loss of $57,959. Tax character of distributions paid by the Fund: Year Ended December 31, ------------------------- 2003 2002 ----------- ----------- Net tax-exempt income $11,625,804 $11,355,823 Ordinary income 32,967 13,045 ----------- ----------- $11,658,771 $11,368,868 =========== =========== As of December 31, 2003, the components of distributable earnings on a tax basis were as follows: Accumulated net realized loss $(1,135,314) Unrealized appreciation 13,432,250 Undistributed tax-exempt income 53,642 ----------- $12,350,578 =========== The difference between book basis and tax basis unrealized appreciation is attributable primarily to wash sales and premium/discount adjustments. 11. SUBSEQUENT EVENT Effective January 1, 2004, Aquila Management Corporation, founder of the Fund, assigned its Advisory and Administration Agreement to its wholly-owned subsidiary, Aquila Investment Management LLC, which will continue the management of the Fund. The transfer was made for reasons of corporate and tax planning and will have no effect on the management of the Fund or the fees being paid. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A CLASS I ---------------------------------------------- ------------------------------ YEAR ENDED PERIOD YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED ---------------------------------------------- ---------------- ----------- 2003 2002 2001 2000 1999 2003 2002 12/31/01(1) ------ ------ ------ ------ ------ ------ ------ ----------- Net asset value, beginning of period .......... $10.66 $10.31 $10.40 $10.09 $10.81 $10.66 $10.31 $10.44 ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income + .................... 0.44 0.47 0.50 0.52 0.52 0.43 0.46 0.19 Net gain (loss) on securities (both realized and unrealized) ................ 0.03 0.35 (0.09) 0.31 (0.68) 0.02 0.35 (0.13) ------ ------ ------ ------ ------ ------ ------ ------ Total from investment operations ........... 0.47 0.82 0.41 0.83 (0.16) 0.45 0.81 0.06 ------ ------ ------ ------ ------ ------ ------ ------ Less distributions (note 10): Dividends from net investment income ....... (0.44) (0.47) (0.50) (0.52) (0.53) (0.42) (0.46) (0.19) Distributions from capital gains ........... -- -- -- -- (0.03) -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ Total distributions ........................ (0.44) (0.47) (0.50) (0.52) (0.56) (0.42) (0.46) (0.19) ------ ------ ------ ------ ------ ------ ------ ------ Net asset value, end of period ................ $10.69 $10.66 $10.31 $10.40 $10.09 $10.69 $10.66 $10.31 ====== ====== ====== ====== ====== ====== ====== ====== Total return (not reflecting sales charge) .... 4.50% 8.15% 4.02% 8.45% (1.51)% 4.33% 7.98% 0.58%++ Ratios/supplemental data Net assets, end of period (in thousands) ... $229,176 $226,014 $201,604 $196,890 $205,842 $4,438 $2,407 $1,426 Ratio of expenses to average net assets .... 0.72% 0.72% 0.72% 0.74% 0.72% 0.88% 0.87% 0.83%* Ratio of net investment income to average net assets .............................. 4.14% 4.50% 4.82% 5.10% 4.95% 3.95% 4.32% 4.47%* Portfolio turnover rate .................... 17.92% 18.27% 21.44% 6.61% 6.35% 17.92% 18.27% 21.44%++ The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets .... 0.71% 0.71% 0.70% 0.73% 0.71% 0.87% 0.86% 0.82%*
- ---------- (1) For the period August 6, 2001 to December 31, 2001. + Per share amounts have been calculated using the monthly average shares method. ++ Not annualized. * Annualized. Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's Investment adviser, assuming investment management responsibilities, replacing Banc One Investment Advisers Corporation the Fund's Investment Sub-Adviser. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C CLASS Y -------------------------------------- ------------------------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, -------------------------------------- ------------------------------------------- 2003 2002 2001 2000 1999 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net asset value, beginning of period ....... $10.66 $10.31 $10.39 $10.08 $10.81 $10.67 $10.32 $10.40 $10.09 $10.82 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income + ................. 0.35 0.38 0.41 0.43 0.43 0.46 0.49 0.51 0.53 0.53 Net gain (loss) on securities (both realized and unrealized) ............. 0.03 0.35 (0.08) 0.31 (0.69) 0.03 0.35 (0.07) 0.32 (0.69) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total from investment operations ........ 0.38 0.73 0.33 0.74 (0.26) 0.49 0.84 0.44 0.85 (0.16) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Less distributions (note 10): Dividends from net investment income .... (0.35) (0.38) (0.41) (0.43) (0.44) (0.46) (0.49) (0.52) (0.54) (0.54) Distributions from capital gains ........ -- -- -- -- (0.03) -- -- -- -- (0.03) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total distributions ..................... (0.35) (0.38) (0.41) (0.43) (0.47) (0.46) (0.49) (0.52) (0.54) (0.57) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net asset value, end of period ............. $10.69 $10.66 $10.31 $10.39 $10.08 $10.70 $10.67 $10.32 $10.40 $10.09 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Total return (not reflecting sales charge).. 3.62% 7.23% 3.24% 7.54% (2.45)% 4.65% 8.30% 4.28% 8.62% (1.46)% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $7,197 $4,804 $3,355 $1,861 $1,932 $46,313 $41,223 $25,585 $15,745 $13,346 Ratio of expenses to average net assets ........................... 1.57% 1.56% 1.56% 1.59% 1.56% 0.57% 0.57% 0.57% 0.59% 0.57% Ratio of net investment income to average net assets ................ 3.26% 3.62% 3.92% 4.24% 4.09% 4.28% 4.63% 4.94% 5.25% 5.09% Portfolio turnover rate ................. 17.92% 18.27% 21.44% 6.61% 6.35% 17.92% 18.27% 21.44% 6.61 6.35% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 1.56% 1.55% 1.55% 1.58% 1.55% 0.56% 0.56% 0.55% 0.58% 0.56%
- ---------- + Per share amounts have been calculated using the monthly average shares method. Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's Investment adviser, assuming investment management responsibilities, replacing Banc One Investment Advisers Corporation the Fund's Investment Sub-Adviser. See accompanying notes to financial statements. ADDITIONAL INFORMATION (UNAUDITED) TRUSTEES(1) AND OFFICERS
NUMBER OF POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS HELD WITH IN FUND HELD BY TRUSTEE NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.) - ----------------- ---------- ------------------- ---------- --------------------- INTERESTED TRUSTEES(4) Lacy B. Herrmann Chairman of Founder and Chairman of the Board, Aquila 11 Director or trustee, New York, NY the Board of Management Corporation, the sponsoring Pimco Advisors VIT, (05/12/29) Trustees since organization and parent of the Manager or Oppenheimer Quest 1987 Administrator and/or Adviser or Sub-Adviser Value Funds Group, to each fund of the Aquila(SM) Group of Oppenheimer Small Cap Funds,(5) Chairman and Chief Executive Value Fund, Oppenheimer Officer and Manager of the Manager or Midcap Fund, and Administrator and/or Advisor or Sub-Adviser Oppenheimer Rochester to each since 2003, and Founder, Chairman Group of Funds. of the Board of Trustees and (currently or until 1998) President of each since its establishment, beginning in 1984; 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. Diana P. Herrmann Trustee since Vice Chair of Aquila Management 6 None New York, NY 1995, President Corporation, Founder of the Aquila(SM) Group (02/25/58) since 1999, of Funds and parent of the Manager, since and Vice Chair 2004, President and Chief Operating Officer since 2004 since 1997, a Director since 1984, Secretary since 1986 and previously its Executive Vice President, Senior Vice President or Vice President, 1986-1997; Vice Chair since 2004 and President, Chief Operating Officer and Manager of the Manager since 2003; Vice Chair, President, Senior Vice President or Executive Vice President of funds in the Aquila(SM) Group of Funds since 1986; Director of the Distributor since 1997; trustee, Reserve Money-Market Funds, 1999- 2000 and Reserve Private Equity Series, 1998-2000; active in mutual fund and trade organizations and in charitable and volunteer organizations. NON-INTERESTED TRUSTEES Thomas A. Christopher Trustee since Vice President of Robinson, Hughes & 1 None Danville, KY 1992 Christopher, C.P.A.s, P.S.C., since 1977; (12/19/47) President, A Good Place for Fun, Inc., a sports facility, since 1987. Douglas Dean Trustee since Founder and Chairman of the Board of 1 None Lexington, KY 1987 Directors, Dean, Dorton & Ford P.S.C., a (03/21/49) public accounting firm, since 1982; active as an officer and member of various charitable and community organizations. Carroll F. Knicely Trustee since President, Associated Publications Inc, 1 West Kentucky Glasgow, KY 1998 Glasgow, Kentucky; director and member, Corporation; South Gate (12/08/28) Executive Board of West Kentucky Plaza, Inc.; Knicely and Corporation and director and Secretary- Knicely, Inc. Treasurer, South Gate Plaza, Inc. (owner and developer of shopping centers and commercial real estate); director, Vice President and Treasurer, Knicely and Knicely, Inc. (owner and developer of rental properties and residential real estate); former trustee, Cambellsville University; formerly Secretary of Commerce and Commissioner of Commerce, Commonwealth of Kentucky. Theodore T. Mason Trustee since Executive Director, East Wind Power 6 Trustee, Pimco Advisors New York, NY 1992 Partners LTD since 1994 and Louisiana VIT. (11/24/35) Power Partners, LLC since 1999; President, Alumni Association of SUNY Maritime College since 2002 (First Vice President, 2000-2001, Second Vice President, 1998- 2000) and director of the same organization since 1997; Director, STCM Management Company, Inc., since 1973; 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 and the Maritime College at Fort Schuyler Foundation, Inc. since 2000. Anne J. Mills Trustee since President, Loring Consulting Company since 4 None Castle Rock, CO 1987 2001; Vice President for Business Affairs, (12/23/38) Ottawa University, 1992-2001; IBM Corporation, 1965-1991; Budget Review Officer, the American Baptist Churches/USA, 1994-1997; director, the American Baptist Foundation; Trustee, Ottawa University; and Trustee Emerita, Brown University. William J. Nightingale Trustee since Retired; formerly Chairman, founder (1975) 2 Ring's End, Inc. Rowayton, CT 1993 and Senior Advisor until 2000 of Nightingale (09/16/29) & Associates, L.L.C., a general management consulting firm focusing on interim management, divestitures, turnaround of troubled companies, corporate restructuring and financial advisory services. James R. Ramsey Trustee since President, University of Louisville since 1 Community Bank and Louisville, KY 1987 Nov. 2002; Professor of Economics, Trust, Pikeville, KY (11/14/48) University of Louisville, 1999-present; Kentucky Governor's Senior Policy Advisor and State Budget Director, 1999-2002; Vice Chancellor for Finance and Administration, the University of North Carolina at Chapel Hill, 1998 to 1999; previously Vice President for Finance and Administration at Western Kentucky University, State Budget Director for the Commonwealth of Kentucky, Chief State Economist and Executive Director for the Office of Financial Management and Economic Analysis for the Commonwealth of Kentucky, Adjunct Professor at the University of Kentucky, Associate Professor at Loyola University-New Orleans and Assistant Professor at Middle Tennessee State University. OFFICERS Charles E. Childs, III Executive Vice Executive Vice President of all Funds since N/A N/A New York, NY President since 2003; Senior Vice President, corporate (04/01/57) 2003 development, formerly 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 Money-Market Funds since 1988. Thomas S. Albright Senior Vice Senior Vice President and Portfolio N/A N/A Louisville, KY President since Manager, Churchill Tax-Free Fund of (07/26/52) 2000 Kentucky since July 2000; Vice President and Co-portfolio manager, Tax-Free Fund For Utah since 2001; Vice President and Portfolio Manager, Banc One Investment Advisors, Inc., 1994-2000. Jerry G. McGrew Senior Vice President of the Distributor since 1998, N/A N/A New York, NY President since Registered Principal since 1993, Senior Vice (06/18/44) 1994 President, 1997-1998 and Vice President, 1993-1997; Senior Vice President, Aquila Rocky Mountain Equity Fund and five Aquila Bond Funds since 1995; Vice President, Churchill Cash Reserves Trust, 1995-2001. James M. McCullough Vice President Senior Vice President or Vice President of N/A N/A Portland, OR since 2000 Aquila Rocky Mountain Equity Fund and (06/11/45) four Aquila Bond Funds; Senior Vice President of the Distributor since 2000; Director of Fixed Income Institutional Sales, CIBC Oppenheimer & Co. Inc., Seattle, WA, 1995-1999. Jason T. McGrew Vice President Vice President, Churchill Tax-Free Fund of N/A N/A Elizabethtown, KY since 2001 Kentucky since 2001, Assistant Vice (08/14/71) President, 2000-2001; 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. Joseph P. DiMaggio Chief Financial Chief Financial Officer of the Aquila(SM) N/A N/A New York, NY Officer since Group of Funds since 2003 and Treasurer (11/06/56) 2003 and since 2000; Controller, Van Eck Global Treasurer Since Funds, 1993-2000. 2000 Edward M. W. Hines Secretary since Partner, Hollyer Brady Smith & Hines LLP, N/A N/A New York, NY 1987 legal counsel to the Fund, since 1989; (12/16/39) Secretary of the Aquila(SM) Group of Funds. Robert W. Anderson Assistant Compliance Officer of the Manager or its N/A N/A New York, NY Secretary since predecessor and current parent since 1998 (08/23/40) 2000 and Assistant Secretary of the Aquila(SM) Group of Funds since 2000; trustee, Alpha Strategies Fund since July, 2002; Consultant, The Wadsworth Group, 1995-1998. John M. Herndon Assistant Assistant Secretary of the Aquila(SM) Group N/A N/A New York, NY Secretary since of Funds since 1995 and Vice President of (12/17/39) 1995 the three Aquila Money-Market Funds since 1990; Vice President of the Manager or its predecessor and current parent since 1990. Lori A. Vindigni Assistant Assistant Treasurer of the Aquila(SM) Group N/A N/A New York, NY Treasurer since of Funds since 2000; Assistant Vice (11/02/66) 2000 President of the Manager or its predecessor and current parent since 1998; Fund Accountant for the Aquila(SM) 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). (2) The mailing address of each Trustee and officer is c/o Churchill Tax-Free Fund of Kentucky, 380 Madison Avenue, New York, NY 10017. (3) Each Trustee holds office until the next annual meeting of shareholders or until his or her successor is elected and qualifies. The term of office of each officer is one year. (4) Mr. Herrmann is an interested person of the Fund as that term is defined in the 1940 Act as an officer of the Fund and 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 an interested person of the Trust as an officer of the Trust, 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. Each is also an interested person as a member of the immediate family of the other. (5) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S. Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets Trust, each of which is a money-market fund, are called the "Aquila Money-Market Funds"; Hawaiian Tax-Free Trust, Tax- Free Trust of Arizona, Tax-Free Trust of Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of which is a tax-free municipal bond fund, are called the "Aquila Bond Funds"; Aquila Rocky Mountain Equity Fund is an equity fund; considered together, these 11 funds are called the "Aquila(SM) Group of Funds." PRIVACY NOTICE (UNAUDITED) OUR PRIVACY POLICY. in providing services to you as an individual who owns or is considering investing in shares of a fund of the Aquila(SM) Group of Funds, we collect certain nonpublic 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 a fund. INFORMATION WE COLLECT. "Nonpublic personal information" is personally identifiable financial information about you as an individual or your family. The kinds of nonpublic 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 nonpublic personal information about you to companies that provide necessary services to your fund, such as the fund's transfer agent, distributor, investment adviser or sub-adviser and to our affiliates, as permitted or required by law, or as authorized by you. We also may disclose this information to another fund of the Aquila(SM) Group of Funds or its distributor, or to the broker-dealer that holds your fund shares, under agreements that permit them to use the information only to provide you information about your fund, other funds in the Aquila(SM) Group of Funds or new services we are offering which may be of interest to you. Any other use is strictly prohibited. We do not sell information about you or any of our fund shareholders to anyone. HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to nonpublic 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 nonpublic personal information we have about you. If you have any questions regarding our Privacy Policy, please contact us at 1-800-437-1020. 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 fiscal year ended December 31, 2003, $11,625,804 of dividends paid by Churchill Tax-Free Fund of Kentucky, constituting 99.972% of total dividends paid during fiscal 2003, were exempt-interest dividends. Prior to January 31, 2004, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 2003 CALENDAR YEAR. INFORMATION AVAILABLE (UNAUDITED) Much of the information that the funds in the Aquila(sm) Group of Funds produce is automatically sent to you and all other shareholders. Specifically, you are routinely sent the entire list of portfolio of securities of your fund twice a year in the semi-annual and annual reports you receive. You should know, however, that we prepare, and have available, portfolio listings at the end of each quarter. Whenever you may be interested in seeing a listing of your trust's portfolio other than in your shareholder reports, please check our website (www.aquilafunds.com) or call us at 1-800-437-1020. FOUNDER AQUILA MANAGEMENT CORPORATION MANAGER AQUILA INVESTMENT MANAGEMENT LLC 380 Madison Avenue, Suite 2300 New York, New York 10017 BOARD OF TRUSTEES Lacy B. Herrmann, Chairman Thomas A. Christopher Douglas Dean Diana P. Herrmann Carroll F. Knicely Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Diana P. Herrmann, Vice Chair and President Thomas S. Albright, Senior Vice President and Portfolio Manager Jerry G. McGrew, Senior Vice President Jason T. McGrew, Vice President Joseph P. DiMaggio, Chief Financial Officer and Treasurer Edward M.W. Hines, Secretary DISTRIBUTOR AQUILA DISTRIBUTORS, INC. 380 Madison Avenue, Suite 2300 New York, New York 10017 CUSTODIAN BANK ONE TRUST COMPANY, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 TRANSFER AND SHAREHOLDER SERVICING AGENT PFPC INC. 760 Moore Road King of Prussia, Pennsylvania 19406 INDEPENDENT AUDITORS KPMG LLP 757 Third Avenue New York, New York 10017 Further information is contained in the Prospectus, which must precede or accompany this report. ANNUAL REPORT DECEMBER 31, 2003 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: an eagle's head] ONE OF THE AQUILA(SM) GROUP OF FUNDS ITEM 2. CODE OF ETHICS. (a) As of December 31, 2003 (the end of the reporting period) the Trust has adopted a code of ethics that applies to the Fund's principal executive officer(s)and principal financial officer(s) and persons performing similar functions ("Covered Officers") as defined in the Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002.; (f)(1) Pursuant to Item 10(a)(1), a copy of the Fund'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 Fund's Code of Ethics that applies to the Fund'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 Fund'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 areas, including the specialized area of technical accounting and auditing matters, if and as the Board identifies the need, rather than by seeking to expand its numbers by adding technical experts in the areas constituting its domain of responsibility. The Fund's Audit Committee Charter explicitly authorizes the Committee to retain such experts as it deems necessary in fulfilling its duties under the Charter. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES a) Audit Fees - The aggregate fees billed for professional services rendered By the principal accountant for the audit of the Registrant's annual financial statements were $20,100 in 2003 and $19,500 in 2002. 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 $8,942 and $9,500 in 2003 and 2002, respectively, for return preparation. d) All Other Fees - There were no additional fees plaid for audit and non- audit services other than those disclsed 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. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) as of a date within 90 days of the fling of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 10. EXHIBITS. (a)(1) (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/ Lacy B. Herrmann - --------------------------------- Chairman of the Board March 8, 2004 By: /s/ Diana P. Herrmann - --------------------------------- Vice Chair and President March 8, 2004 By: /s/ Joseph P. DiMaggio - ----------------------------------- Chief Financial Officer March 8, 2004 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/ Lacy B. Herrmann - --------------------------------- Lacy B. Herrmann Chairman of the Board March 8, 2004 By: /s/ Diana P. Herrmann - --------------------------------- Diana P. Herrmann Vice Chair and President March 8, 2004 By: /s/ Joseph P. DiMaggio - ----------------------------------- Joseph P. DiMaggio Chief Financial Officer March 8, 2004 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. EX-99.CODE AUTH 3 sarbanes.txt SARBANES-OXLEY CODE OF ETHICS AQUILASM GROUP OF FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS UNDER SECTION 406 OF THE SARBANES-OXLEY ACT OF 2002 I. Covered Officers/Purpose of the Code This is the code of ethics (the "Code") for the investment companies within the Aquilasm Group of Funds (collectively, "Funds" and each, a "Fund," each of which is detailed in Exhibit A). It applies to the Fund's Principal Executive Officer(s) and Principal Financial Officer(s) (the "Covered Officers," each of whom is listed in Exhibit B), for the purpose of promoting: *honest and ethical conduct, including the ethical handling of actual; *or apparent conflicts of interest between personal and professional relationships; *full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; *compliance with applicable laws and governmental rules and regulations; *the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and *accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest Overview. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his/her service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his/her family, receives improper personal benefits as a result of his/her position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" of the Fund. The Fund's and the investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Fund and the investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Fund. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must: *not use his/her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; *not cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund; There are some conflict of interest situations that should always be discussed with the general counsel of the Fund ("General Counsel"), if material. Examples of these include: *service as a director on the board of any public or private company; *the receipt of any non-nominal gifts; *the receipt of any entertainment from any company with which the Fund has current or prospective business dealings unless such entertainment is business- related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; *any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof; *a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. Disclosure and Compliance Each Covered Officer should familiarize himself/herself with the disclosure requirements generally applicable to the Fund; *each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Trustees and auditors, and to governmental regulators and self-regulatory organizations; each Covered Officer should, to the extent appropriate within his/her area of responsibility, consult with other officers and employees of the Funds and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. Reporting and Accountability Each Covered Officer must: *upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he/she has received, read, and understands the Code; *annually thereafter affirm to the Board that he/she has complied with the requirements of the Code; *not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and *notify the Chair of the Audit Committee of the Fund promptly if he/she knows of any violation of this Code. Failure to do so is itself a violation of this Code. *file at least annually a complete and accurate Funds' Trustees and Officers Questionnaire. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers1 sought by the Chairman of the Board or the President will be considered by the Audit Committee (the "Committee"). The Funds will follow these procedures in investigating and enforcing this Code: *the General Counsel will take all appropriate action to investigate any potential violations reported to him; *if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; any matter that the General Counsel believes is a violation will be reported to the Committee; * if the Committee concurs that a violation has occurred, it will inform the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; * the Committee will be responsible for granting waivers, as appropriate; and * any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as othe policies or procedures of the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' and their investment adviser's and principal underwriter's codes of ethics under Rule 17j-1 under the Investment Company Act and the adviser's more detailed policies and procedures set forth in their respective codes are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit B, must be approved or ratified by a majority vote of the Board, including a majority of independent Trustees. VII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board and the General Counsel, and if deemed appropriate by the Board, with other Funds in the complex where the Funds share a common Covered Officer. VIII. Internal Use The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion. Exhibit A Funds Covered by this Code of Ethics Aquila Cascadia Equity Fund Aquila Rocky Mountain Equity Fund Capital Cash Management Trust Cash Assets Trust series, consisting of Pacific Capital Cash Assets Trust Pacific Capital Tax-Free Cash Assets Trust Pacific Capital U.S. Government Cash Assets Trust Churchill Cash Reserves Trust Churchill Tax-Free Trust Hawaiian Tax-Free Trust Narragansett Insured Tax-Free Income Fund Prime Cash Fund Tax-Free Fund For Utah Tax-Free Fund of Colorado Tax-Free Trust of Arizona Tax-Free Trust of Oregon Exhibit B Persons Covered by this Code of Ethics The following officers of each Fund, and the identities of such officers as of October 1, 2003: Chairman Lacy B. Herrmann President Diana P. Herrmann Treasurer and Chief Financial Officer Joseph P. DiMaggio EX-99.CERT 4 ctft302cert.txt SECTION 302 CERTIFICATIONS EX-99.CERT CERTIFICATIONS I, Lacy B. Herrmann, certify that: 1. I have reviewed this report on Form N-CSR of Churchill Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report ("Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 8, 2004 /s/ Lacy B. Herrmann - ---------------------- Title: Chairman of the Board I, Diana P. Herrmann, certify that: 1. I have reviewed this report on Form N-CSR of Churchill Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report ("Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 8, 2004 /s/ Diana P. Herrmann - ---------------------- Title: Vice Chair and President I, Joseph P. DiMaggio, certify that: 1. I have reviewed this report on Form N-CSR of Churchill Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report ("Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 8, 2004 /s/ Joseph P. DiMaggio - ------------------------ Title: Chief Financial Officer EX-99.906 5 ctft906cert.txt SECTION 906 CERTIFICATIONS CERTIFICATION Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (subsections and (b) of section 1350, chapter 63 of title 18,United States Code), each of the undersigned officers of Churchill Tax-Free Trust, do hereby certify to such officer's knowledge, that: The report on Form N-CSR of Churchill Tax-Free Trust for the period ended December 31, 2003 (the "Form N-CSR")fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of Churchill Tax-Free Trust. Dated: March 8, 2004 /s/ Lacy B. Herrmann --------------------- Lacy B. Herrmann Chairman of the Board Churchill Tax-Free Trust Dated: March 8, 2004 /s/ Diana P. Herrmann ---------------------- Vice Chair and President Churchill Tax-Free Trust Dated: March 8, 2004 /s/ Joseph P. DiMaggio ----------------------- Chief Financial Officer Churchill Tax-Free Trust A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Churchill Tax-Free Trust and will be retained by Churchill Tax-Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----