-----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, Ux4nN1/3c+asgRzC9uZONj8YwW/7+VgbWJzvWn8Z43D3HlRx4vwySVgXkr/2/+SE jAYcYvFX5NMR/gjJROLBjg== 0000812006-06-000008.txt : 20060309 0000812006-06-000008.hdr.sgml : 20060309 20060309171854 ACCESSION NUMBER: 0000812006-06-000008 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060309 DATE AS OF CHANGE: 20060309 EFFECTIVENESS DATE: 20060309 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 SEC ACT: 1940 Act SEC FILE NUMBER: 811-05086 FILM NUMBER: 06676891 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 0000812006 S000009083 Churchill Tax-Free Fund of Kentucky C000024671 Churchill Tax-Free Trust of Kentucky Class A CHTFX C000024672 Churchill Tax-Free Fund of Kentucky Class C CHKCX C000024673 Churchill Tax-Free Fund of Kentucky Class I CHTSX C000024674 Churchill Tax-Free Fund of Kentucky Class Y CHKYX N-CSR 1 ctft1205ncsr.txt CHURCHILL TAX-FREE TRUST 12/31/05 ANNUAL NCSR 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: 12/31/05 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. ANNUAL REPORT DECEMBER 31, 2005 CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] [LOGO OF THE AQUILA GROUP OF FUNDS: ONE OF THE AN EAGLE'S HEAD] AQUILA(SM) GROUP OF FUNDS [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR ALMOST TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY "THE BENEFITS OF TAX-FREE INVESTING" February, 2006 Dear Fellow Shareholder: As the name of your fund clearly states, Churchill Tax-Free Fund of Kentucky is tax-free* - free from Kentucky state and regular Federal income taxes. This tax-free status serves many purposes. It obviously provides you, and our other shareholders, with tax-free income. But, it also provides municipalities with an attractive motivator to help them raise revenue. Additionally, the projects funded by these tax-free securities enhance the quality of life for all community residents. Many individuals pay as much as 30% to 40% of their income in Federal and state taxes. Obviously, if you have to pay that much in taxes, it significantly reduces what you get to keep in your pocket. BENEFITS TO INVESTORS As an investor seeking tax-free income, do you have to forego higher yields? Not necessarily. [BAR CHART] Hypothetical Tax-Free Yield 3% Hypothetical Taxable Equivalent Yield 5.0% Hypothetical Tax-Free Yield 4% Hypothetical Taxable Equivalent Yield 6.6% Hypothetical Tax-Free Yield 5% Hypothetical Taxable Equivalent Yield 8.8% This chart assumes a 35% federal and 6% state tax-rate and is for illustration purposes only; it does not represent past or future performance of any investment. The chart above shows that you would have to earn significantly more from a taxable investment in order to be equal to what you get to keep from a tax-free investment. As you can clearly see from the chart, you would have to earn 6.6% on a taxable investment in order to equal the tax-free level of 4%. Keep this illustration in mind the next time you examine the yield that Churchill Tax-Free Fund of Kentucky offers you. You will find that a 3%, 4% or 5% tax-free yield looks considerably more attractive to you when you consider the implications of taxes. NOT A PART OF THE ANNUAL REPORT BENEFITS TO MUNICIPALITIES As you are most likely aware, states, counties, cities, towns, and other forms of municipalities issue tax-free bonds to raise monies. These issues generally take two forms - general obligation securities and revenue securities. General obligation municipal securities are primarily those securities used to finance the general needs of such municipalities. General obligation securities are secured by the tax-raising power of the specific municipality in terms of its ability to pay interest and repay principal on a timely basis. Thus, these securities are considered to be "backed by the full faith and credit" of the issuer. Revenue securities are issued to finance specific projects, such as a hospital or airport. In this instance, the municipal issuer pledges the operating revenues derived from the specific project to pay the interest and repay the principal when due. In many cases, smaller municipalities would have difficulty selling these securities to the marketplace were it not for the added attractiveness of tax-free status. BENEFITS TO QUALITY OF LIFE The benefit you may not have considered - when you made your investment in the Fund - was that in the process of having the Fund provide you with tax-free income, it also provides help to a variety of others within your community and Kentucky. This is a benefit in which you can take real pride. Municipal bonds, such as those in which Churchill Tax-Free Fund of Kentucky invests, are the primary way infrastructure is financed. Infrastructure is a relatively obscure word that by itself doesn't mean much to most people. But, when you translate the word "infrastructure" into projects such as schools, roads, bridges, water facilities, pollution control, airports, hospitals, and fire and police stations, then you are speaking in terms that people more easily understand. As the economy of Kentucky grows, new and additional municipal projects are needed for the benefit of the citizens of Kentucky and the various communities throughout the Commonwealth. In essence, your money invested in the Fund helps pay for that new school, road, airport, etc. that you and your neighbors now enjoy. So, as an investor in Churchill Tax-Free Fund of Kentucky, you can take pride in knowing that you are playing a vital role and a very real part in enhancing the quality of life for your family, friends, neighbors and future generations of Kentuckians. SUMMARY So the next time that you receive your statement from Churchill Tax-Free Fund of Kentucky, remember that the benefits that are reaped from your investment are more than just what is evident on that piece of paper. Sincerely, /s/ Diana P. Herrmann /s/ Lacy B. Herrmann Diana P. Herrmann Lacy B. Herrmann President Founder and Chairman Emeritus * For certain investors, some dividends may be subject to Federal and State taxes, including the Alternative Minimum Tax. NOT A PART OF THE ANNUAL REPORT [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR MORE THAN 15 YEARS CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT MANAGEMENT DISCUSSION OF FUND PERFORMANCE The year ended December 31, 2005 proved to be a bit of an enigma that challenged our long-held perception of how markets are supposed to perform. Throughout 2005, the Federal Reserve continued to raise short-term interest rates - from 2.25% in January to 4.25% in December. Traditionally, we have come to expect a corresponding mirror reaction at the longer end of the yield curve: short rates going up = long rates going up. Instead, due to a number of technical factors, we saw long-term interest rates actually decline. From December 31, 2004 to December 31, 2005, we saw short-term rates rise a full percentage point (100 basis points on a typical AAA-rated 2 year municipal bond). Over the same time period, we saw long-term rates decline 22 basis points (on a typical AAA-rated 30-year municipal bond). Demand for longer maturity bonds has been especially strong from cash-rich foreign central banks. And inflation, a bond's greatest nemesis, stayed somewhat "manageable" - except for energy costs. Overall, inflation rose 3.4% in 2005 as measured by the Consumer Price Index. The national unemployment rate ended the year at an annual rate of 4.9%, a nice improvement versus last December's rate of 5.4%. As the Gulf Coast states were ravaged time and again by a record number of hurricanes, the price of oil rose to all time present day high levels, approaching $70 a barrel. Natural gas and heating oil prices also surged - thank goodness for a relatively mild winter- so far. Overall, energy prices rose a staggering 17% in 2005. The year 2005 was one in which both bonds and stocks provided relatively modest returns. The past 12 months marked a period when stock market returns were slightly positive. The Dow Jones Industrial Average rose 1.72%. Other measures of equity performance fared a little better: the S & P 500 closed up 4.91%; and the NASDAQ Composite Index rose 2.13%. We are proud to report that Churchill Tax-Free Fund of Kentucky provided its shareholders a positive total rate of return of 2.39% in 2005, outperforming 64% of our peer group of all intermediate single-state municipal bond funds. As we begin 2006, it too promises to be every bit as eventful as was 2005, with the United States working towards a more peaceful, democratic Iraq; the rebuilding of New Orleans and other areas of Louisiana, Alabama, and Mississippi after the devastation caused by a catastrophic series of hurricanes; and the usual, ongoing partisan political wrangling in Washington. 2005 was a pretty good year for the Kentucky economy, overall. Modest employment gains in the manufacturing sector were well received. Tax revenues, as measured by the General Fund, are also on the rise. For 2006, Governor Fletcher has embarked on his quest to come up with an acceptable budget for the Commonwealth. The budgeting process from prior years has been streamlined and we are hopeful that a bipartisan plan will soon be presented, debated, and enacted in short order! Kentucky municipal bonds continue to be in somewhat short supply, due in large part to continued strong retail and institutional demand. The investment objective of Churchill Tax-Free Fund of Kentucky is to provide as high a level of triple tax-exempt current income as is consistent with the preservation of capital. We believe this objective continues to be successfully addressed by adhering to a discipline of solid fundamental, conservative portfolio management ideals. The net asset value of the Fund's Class A shares began 2005 at $10.74 per share and ended the year at $10.60 per share. The Fund continues to maintain an average credit quality of "AA", with no bonds rated less than "A". At year-end, nearly 80% of the portfolio was rated "AAA". Our "laddered" maturity structure helps us manage price volatility. The Fund has an average life of approximately 12.5 years and a modified duration of approximately 5.35 years. We maintain a well-diversified portfolio of over 200 different Kentucky issues. We are optimistic about the prospects for the U. S. and Kentucky economies in 2006, and will strive to continue to react appropriately to any signs of rising inflation. It is going to take continued vigilance and, if necessary, intervention by the Federal Reserve to keep our economy on a positive track while addressing inflation pressures over the course of 2006. To address these concerns, we intend to "stay the course" and manage the portfolio by taking advantage of opportunities in the Kentucky marketplace that are consistent with the investment objectives of the Fund. PERFORMANCE REPORT The following graph illustrates the value of $10,000 invested in the Class A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended December 31, 2005 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:] Cost Without With Lehman Brothers of Sales Sales Quality Intermediate Month/Year Living Charge Charge Municipal Bond Index - ----------- ------ -------- ---------- ------------ December-95 $10,000 $10,000 $ 9,600 $10,000 December-96 10,332 10,429 10,008 10,427 December-97 10,508 11,249 10,795 11,190 December-98 10,678 11,820 11,343 11,861 December-99 10,964 11,642 11,172 11,896 December-00 11,336 12,613 12,104 12,922 December-01 11,511 13,123 12,594 13,635 December-02 11,785 14,140 13,570 14,894 December-03 12,007 14,847 14,249 15,585 December-04 12,397 15,520 14,894 16,055 December-05 12,821 15,899 15,258 16,322 AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 2005 --------------------------------------- SINCE CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION ------ ------- -------- --------- Class A (5/21/87) With Sales Charge ......... (1.75)% 3.85% 4.32% 6.00% Without Sales Charge ...... 2.39% 4.69% 4.75% 6.23% Class C (4/01/96) With CDSC ................. 0.51% 3.81% n/a 4.10% Without CDSC .............. 1.53% 3.81% n/a 4.10% Class Y (4/01/96) No Sales Charge ........... 2.55% 4.87% n/a 5.13% Class I (8/06/01) No Sales Charge ........... 2.24% n/a n/a 4.38% COMPARATIVE INDEX Lehman Index ................ 1.66% 4.78% 5.02% 6.09% (Class A) 5.17% (Class C&Y) 4.40% (Class I) Total return figures shown for the Fund reflect any change in price and assume all distributions within the period were invested in additional shares. Returns for Class A shares are calculated with and without the effect of the initial 4% maximum sales charge. Returns for Class C shares are calculated with and without the effect of the 1% contingent deferred sales charge (CDSC), imposed on redemptions made within the first 12 months after purchase. Class I and Y shares are sold without any sales charge. The rates of return will vary and the principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each class's income may be subject to federal and state income taxes. Past performance is not predictive of future investment results. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Churchill Tax-Free Fund of Kentucky: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Churchill Tax-Free Fund of Kentucky as of December 31, 2005 and the related statement of operations, changes in net assets, and the financial highlights for the year 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 audit. The statement of changes in net assets for the year ended December 31, 2004 and the financial highlights for each of the years in the four year period ended December 31, 2004 have been audited by other auditors, whose report dated February 18, 2005 expressed an unqualified opinion on such financial statement and financial highlights. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers. 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 audit provides 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 the Churchill Tax-Free Fund of Kentucky as of December 31, 2005, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania February 16, 2006 - -------------------------------------------------------------------------------- CHURCHILL TAX-FREE FUND OF KENTUCKY SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
RATING FACE MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (3.4%) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- Bowling Green, Kentucky $ 200,000 5.300%, 06/01/18 ................................... Aa3/NR $ 215,440 Hardin County, Kentucky 170,000 5.000%, 06/01/17 AMBAC Insured ..................... Aaa/NR 176,732 Lexington-Fayette Urban County Government, Kentucky 2,000,000 4.750%, 05/01/24 FGIC Insured ...................... Aaa/AAA 2,047,080 Lexington-Fayette Urban County, Kentucky Government Project Unlimited Tax 125,000 5.000%, 12/01/15 ................................... Aa2/AA+ 132,172 340,000 5.150%, 12/01/17 ................................... Aa2/AA+ 362,552 Louisville - Jefferson County, Kentucky Metro Government Unlimited Tax 1,590,000 5.000%, 11/01/19 ................................... Aa2/AA 1,709,584 1,825,000 5.000%, 11/01/20 ................................... Aa2/AA 1,955,232 Louisville, Kentucky Unlimited Tax 2,205,000 5.000%, 10/01/21 FGIC Insured ...................... Aaa/AAA 2,316,705 Warren County, Kentucky Judicial Unlimited Tax 345,000 5.100%, 09/01/17 AMBAC Insured ..................... Aaa/NR 372,048 365,000 5.150%, 09/01/18 AMBAC Insured ..................... Aaa/NR 394,277 ------------- Total General Obligation Bonds 9,681,822 ------------- REVENUE BONDS (95.6%) STATE AGENCIES (34.5%) Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank ................. NR/AA 523,670 Kentucky Asset/Liability Commission 500,000 4.500%, 10/01/22 FGIC Insured ...................... Aaa/AAA 509,055 Kentucky Infrastructure Authority 1,000,000 5.250%, 06/01/12 ................................... Aa3/A+ 1,075,270 635,000 5.250%, 06/01/12 ................................... Aa3/A+ 656,228 2,740,000 5.250%, 06/01/14 ................................... Aa3/A+ 2,937,938 1,235,000 5.250%, 08/01/17 ................................... NR/AA 1,348,879 100,000 5.000%, 06/01/18 ................................... Aa3/A+ 105,211 230,000 5.000%, 06/01/21 ................................... Aa3/A+ 241,300 220,000 6.000%, 09/01/08 ................................... Aa3/A+ 234,454 Kentucky State Property and Buildings Commission 4,000,000 5.375%, 02/01/14 FSA Insured (pre-refunded) ........ Aaa/AAA 4,393,200 400,000 5.250%, 10/01/14 (pre-refunded) .................... Aa3/A+ 431,752
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission (continued) $ 3,250,000 5.625%, 09/01/15 (pre-refunded) .................... Aa3/A+ $ 3,555,858 460,000 5.125%, 09/01/15 (pre-refunded) .................... Aa3/AAA 493,470 1,000,000 5.000%, 11/01/15 AMBAC Insured ..................... Aaa/AAA 1,080,490 100,000 5.375%, 05/01/16 MBIA Insured (pre-refunded) ....... Aaa/AAA 107,092 3,775,000 5.375%, 08/01/16 (pre-refunded) .................... Aaa/AAA 4,126,415 2,725,000 5.375%, 08/01/16 FSA Insured ....................... Aaa/AAA 2,945,725 3,905,000 5.125%, 09/01/16 (pre-refunded) .................... Aa3/AAA 4,189,128 5,000,000 5.250%, 10/01/16 ................................... Aa3/A+ 5,360,800 1,100,000 5.000%, 11/01/16 AMBAC Insured ..................... Aaa/AAA 1,184,689 1,265,000 5.250%, 08/01/17 MBIA Insured (pre-refunded) ....... Aaa/AAA 1,395,181 975,000 5.000%, 08/01/17 FSA Insured ....................... Aaa/AAA 1,024,735 8,155,000 5.125%, 09/01/17 (pre-refunded) .................... Aa3/AAA 8,748,358 200,000 5.375%, 10/01/17 MBIA Insured (pre-refunded) ....... Aaa/AAA 219,116 4,735,000 5.250%, 10/01/17 ................................... Aa3/A+ 5,065,030 1,250,000 5.500%, 11/01/17 FSA Insured ....................... Aaa/AAA 1,382,913 1,000,000 5.000%, 11/01/17 AMBAC Insured ..................... Aaa/AAA 1,072,100 165,000 5.375%, 02/01/18 FSA Insured (pre-refunded) ........ Aaa/AAA 181,219 3,030,000 5.000%, 08/01/18 FSA Insured (pre-refunded) ........ Aaa/AAA 3,255,038 3,950,000 5.125%, 09/01/18 (pre-refunded) .................... Aa3/AAA 4,228,633 6,000,000 5.250%, 10/01/18 ................................... Aa3/A+ 6,403,500 1,000,000 5.500%, 11/01/18 FSA Insured ....................... Aaa/AAA 1,106,330 155,000 5.100%, 11/01/18 FSA Insured ....................... Aaa/AAA 165,847 145,000 5.100%, 11/01/18 (pre-refunded) .................... Aa3/AAA 153,598 1,500,000 5.000%, 11/01/18 AMBAC Insured ..................... Aaa/AAA 1,602,930 4,000,000 5.375%, 10/01/19 MBIA Insured (pre-refunded) ....... Aaa/AAA 4,382,320 1,925,000 5.000%, 10/01/19 ................................... Aa3/A+ 2,018,767 360,000 5.000%, 10/01/19 MBIA Insured (pre-refunded) ....... Aaa/AAA 387,450 785,000 5.150%, 11/01/19 FSA Insured ....................... Aaa/AAA 843,239 3,000,000 5.000%, 11/01/19 FSA Insured ....................... Aaa/AAA 3,177,420 2,000,000 5.750%, 05/01/20 MBIA Insured (pre-refunded) ....... Aaa/AAA 2,183,980 250,000 5.000%, 05/01/20 FSA Insured ....................... Aaa/AAA 261,377 200,000 5.000%, 08/01/21 FSA Insured (pre-refunded) ........ Aaa/AAA 214,854 270,000 5.100%, 10/01/21 MBIA Insured (pre-refunded) ....... Aaa/AAA 291,978 255,000 5.150%, 02/01/22 FSA Insured (pre-refunded) ........ Aaa/AAA 276,958
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission (continued) $ 5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) ....... Aaa/AAA $ 5,440,700 235,000 5.000%, 08/01/23 MBIA Insured (pre-refunded) ....... Aaa/AAA 255,332 80,000 5.000%, 08/01/23 MBIA Insured (pre-refunded) ....... Aaa/AAA 86,922 Kentucky State Property Buildings Community Revenues 7,200,000 5.000%, 08/01/21 FSA Insured ....................... Aaa/AAA 7,690,896 ------------- Total State Agencies 99,017,345 ------------- COUNTY AGENCIES (6.5%) Jefferson County, Kentucky Capital Projects 430,000 5.200%, 06/01/12 MBIA Insured ...................... Aaa/AAA 449,208 570,000 5.250%, 06/01/13 MBIA Insured ...................... Aaa/AAA 595,451 520,000 5.250%, 06/01/14 MBIA Insured ...................... Aaa/AAA 543,218 3,370,000 5.375%, 06/01/18 MBIA Insured ...................... Aaa/AAA 3,526,200 1,640,000 5.375%, 06/01/22 MBIA Insured ...................... Aaa/AAA 1,713,702 5,935,000 5.500%, 06/01/28 MBIA Insured ...................... Aaa/AAA 6,211,749 Nelson County, Kentucky Court Facilities Project Revenue 185,000 5.000%, 06/01/21 ................................... Aa3/NR 194,502 Warren County, Kentucky Justice Center 1,580,000 5.250%, 09/01/17 MBIA Insured ...................... Aaa/AAA 1,660,422 Warren County, Kentucky Justice Center Expansion Corp. Revenue 700,000 5.400%, 09/01/24 ................................... Aa3/NR 761,355 2,895,000 5.350%, 09/01/29 MBIA Insured ...................... Aaa/AAA 3,046,988 ------------- Total County Agencies 18,702,795 ------------- CITY/MUNICIPALITY OBLIGATIONS (0.9%) Jeffersontown, Kentucky Public Project Corp. 500,000 5.750%, 11/01/15 ................................... A3/NR 519,690 Lexington-Fayette Urban County Government, Kentucky Public Facilities Revenue 180,000 5.125%, 10/01/23 FSA Insured ....................... Aaa/AAA 189,909 Louisville, Kentucky Parking Authority 1,140,000 5.000%, 12/01/14 MBIA Insured ...................... Aaa/AAA 1,190,833 Shelbyville, Kentucky Certificates of Participation 625,000 5.000%, 10/01/22 ................................... A2/NR 653,669 ------------- Total City/Municipality Obligations 2,554,101 -------------
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- HOSPITALS (3.4%) Jefferson County, Kentucky Health Facilities Revenue $ 240,000 5.000%, 10/01/12 MBIA Insured ...................... Aaa/AAA $ 250,051 1,715,000 5.650%, 01/01/17 AMBAC Insured ..................... Aaa/AAA 1,783,326 2,200,000 5.250%, 05/01/17 ................................... NR/A 2,331,384 815,000 5.125%, 10/01/17 AMBAC Insured ETM ................. Aaa/AAA 844,079 125,000 5.750%, 01/01/26 AMBAC Insured ..................... Aaa/AAA 130,037 Jefferson County, Kentucky Revenue Medical Center Revenue 2,000,000 5.500%, 05/01/22 ................................... NR/A 2,149,080 Kentucky Economic Development Finance Authority 1,000,000 5.000%, 02/01/18 FSA Insured ....................... Aaa/AAA 1,028,870 Louisville - Jefferson County, Kentucky Medical Center Revenue 1,000,000 5.000%, 06/01/18 ................................... NR/A 1,067,070 ------------- Total Hospitals 9,583,897 ------------- HOUSING (8.2%) Kentucky Housing Corp. Housing Revenue 250,000 4.100%, 01/01/15 AMT ............................... Aaa/AAA 248,882 170,000 4.100%, 07/01/15 AMT ............................... Aaa/AAA 169,206 210,000 4.300%, 01/01/16 AMT ............................... Aaa/AAA 211,527 200,000 4.200%, 01/01/16 AMT ............................... Aaa/AAA 199,402 610,000 4.300%, 07/01/16 AMT ............................... Aaa/AAA 604,461 550,000 4.200%, 07/01/16 AMT ............................... Aaa/AAA 548,289 555,000 4.200%, 01/01/17 ................................... Aaa/AAA 553,546 100,000 5.125%, 07/01/17 ................................... Aaa/AAA 102,355 680,000 4.200%, 07/01/17 ................................... Aaa/AAA 678,157 285,000 4.250%, 01/01/18 ................................... Aaa/AAA 283,940 95,000 5.550%, 07/01/18 AMT ............................... Aaa/AAA 95,000 180,000 4.250%, 07/01/18 ................................... Aaa/AAA 179,309 2,000,000 5.600%, 07/01/20 AMT ............................... Aaa/AAA 2,091,860 1,150,000 5.350%, 01/01/21 AMT ............................... Aaa/AAA 1,184,109 6,275,000 5.450%, 07/01/22 AMT ............................... Aaa/AAA 6,528,134 4,065,000 5.250%, 07/01/22 AMT ............................... Aaa/AAA 4,186,909 245,000 5.200%, 07/01/22 ................................... Aaa/AAA 251,715
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- HOUSING (CONTINUED) Kentucky Housing Corp. Housing Revenue (continued) $ 300,000 5.100%, 07/01/22 AMT ............................... Aaa/AAA $ 307,149 4,140,000 5.200%, 07/01/25 AMT ............................... Aaa/AAA 4,252,277 275,000 5.375%, 07/01/27 ................................... Aaa/AAA 283,866 570,000 5.550%, 07/01/33 ................................... Aaa/AAA 590,554 ------------- Total Housing 23,550,647 ------------- SCHOOLS (19.0%) Beechwood, Kentucky Independent School District Finance Corp. 180,000 5.650%, 03/01/20 ................................... Aa3/NR 193,786 Berea, Kentucky Educational Facilities Revenue (Berea College) 1,000,000 4.125%, 06/01/25 ................................... Aaa/NR 975,810 Boone County, Kentucky School District Finance Corp. 1,730,000 4.125%, 08/01/22 XLCA Insured ...................... Aaa/NR 1,690,314 Boone County, Kentucky School District Finance Corp. School Building 660,000 5.000%, 06/01/15 ................................... Aa3/NR 686,756 225,000 5.250%, 08/01/15 ................................... Aa3/NR 240,266 285,000 5.700%, 02/01/16 ................................... Aa3/NR 308,587 140,000 4.750%, 06/01/20 FSA Insured ....................... Aaa/AAA 145,156 1,000,000 5.375%, 08/01/20 FSA Insured ....................... AAA/NR 1,067,840 Boyd County, Kentucky School District Finance Corp. 1,025,000 5.000%, 10/01/15 ................................... Aa3/NR 1,079,797 575,000 5.375%, 10/01/17 ................................... Aa3/NR 603,830 Bullitt County, Kentucky School District Finance Corp. 200,000 4.300%, 10/01/21 ................................... Aaa/NR 201,730 2,455,000 4.500%, 10/01/22 MBIA Insured ...................... Aaa/NR 2,531,842 2,590,000 4.500%, 10/01/23 MBIA Insured ...................... Aaa/NR 2,665,291 Christian County, Kentucky School District Finance Corp. 500,000 5.000%, 06/01/09 ................................... Aa3/NR 521,115 820,000 4.000%, 08/01/19 XLCA Insured ...................... Aaa/NR 807,315 855,000 4.000%, 08/01/20 XLCA Insured ...................... Aaa/NR 837,396 905,000 4.000%, 08/01/21 XLCA Insured ...................... Aaa/NR 881,407
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- SCHOOLS (CONTINUED) Christian County, Kentucky School District Finance Corp. (continued) $ 1,465,000 4.000%, 08/01/22 XLCA Insured ...................... Aaa/NR $ 1,418,325 1,525,000 4.125%, 08/01/23 XLCA Insured ...................... Aaa/NR 1,483,108 1,590,000 4.125%, 08/01/24 XLCA Insured ...................... Aaa/NR 1,536,830 Daviess County, Kentucky School District Finance Corp. 200,000 5.000%, 06/01/24 ................................... Aa3/NR 210,646 Fayette County, Kentucky School Building Revenue 200,000 5.125%, 04/01/18 AMBAC Insured ..................... Aaa/AAA 213,228 Fayette County, Kentucky School District Finance Corp. 5,000,000 4.250%, 04/01/23 FSA Insured ....................... Aaa/AAA 4,939,500 Floyd County, Kentucky School Building 250,000 5.000%, 12/01/09 ................................... Aa3/NR 263,945 680,000 4.375%, 10/01/22 ................................... Aa3/NR 688,847 Franklin County, Kentucky School District Finance Corp. 1,000,000 5.000%, 04/01/24 ................................... Aa3/NR 1,052,320 Graves County, Kentucky School Building Revenue 1,260,000 5.000%, 06/01/22 ................................... Aa3/NR 1,330,925 1,320,000 5.000%, 06/01/23 ................................... Aa3/NR 1,390,858 Hardin County, Kentucky School District Finance Corp. 100,000 5.500%, 02/01/17 (pre-refunded) .................... Aa3/NR 108,832 1,475,000 4.000%, 02/01/19 AMBAC Insured ..................... Aaa/NR 1,452,816 Hickman County, Kentucky School District Finance Corp. School Building Revenue 250,000 5.000%, 06/01/24 ................................... Aa3/NR 263,308 Jefferson County, Kentucky School District Finance Corp. School Building 750,000 5.300%, 01/01/13 FSA Insured ....................... Aaa/AAA 825,240 250,000 5.250%, 07/01/16 FSA Insured ....................... Aaa/AAA 265,450 150,000 9.500%, 04/01/20 FSA Insured ....................... Aaa/AAA 157,654 1,360,000 4.250%, 06/01/21 FSA Insured ....................... Aaa/AAA 1,362,040 Jessamine County, Kentucky School District Finance Corp. School Building Revenue 1,205,000 4.900%, 05/01/22 ................................... Aa3/NR 1,250,657
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- SCHOOLS (CONTINUED) Kenton County, Kentucky School District $ 955,000 5.000%, 04/01/16 ................................... Aa3/NR $ 1,008,833 1,055,000 5.000%, 04/01/17 ................................... Aa3/NR 1,114,470 605,000 5.000%, 04/01/19 ................................... Aa3/NR 637,737 Kentucky Economic Development Finance Authority College Revenue Centre College 1,230,000 5.000%, 04/01/17 FSA Insured ....................... Aaa/AAA 1,304,194 1,675,000 5.000%, 04/01/19 FSA Insured ....................... Aaa/AAA 1,767,929 Lexington-Fayette Urban County, Kentucky Government Project Transylvania University 1,320,000 5.125%, 08/01/18 MBIA Insured ...................... Aaa/AAA 1,384,693 Lexington-Fayette Urban County, Kentucky Government Project U.K. Library 725,000 5.000%, 11/01/15 MBIA Insured ...................... Aaa/AAA 765,085 305,000 5.000%, 11/01/18 MBIA Insured ...................... Aaa/AAA 320,851 300,000 5.000%, 11/01/20 MBIA Insured ...................... Aaa/AAA 314,598 Lincoln County, Kentucky School District 250,000 4.800%, 08/01/19 ................................... Aa3/NR 261,135 Louisville & Jefferson County, Kentucky University of Louisville 500,000 5.000%, 06/01/19 AMBAC Insured ..................... Aaa/AAA 536,825 525,000 5.000%, 06/01/20 AMBAC Insured ..................... Aaa/AAA 561,970 Oldham County, Kentucky School District Finance Corp. 700,000 5.000%, 05/01/19 MBIA Insured ...................... Aaa/NR 746,543 Scott County, Kentucky School Building 100,000 5.000%, 03/01/22 ................................... Aa3/NR 105,570 Scott County, Kentucky School District Finance Corp. 1,115,000 4.200%, 01/01/22 AMBAC Insured ..................... Aaa/NR 1,117,486 1,955,000 4.250%, 01/01/23 AMBAC Insured ..................... Aaa/NR 1,962,253 1,560,000 4.300%, 01/01/24 AMBAC Insured ..................... Aaa/NR 1,565,772 Spencer County, Kentucky School District Finance Corp. 1,415,000 5.000%, 07/01/19 FSA insured ....................... Aaa/NR 1,510,739 University of Kentucky Revenue 1,335,000 5.000%, 05/01/16 FGIC Insured (pre-refunded) ....... Aaa/AAA 1,420,680 505,000 5.000%, 06/01/18 FSA insured ....................... Aaa/NR 531,654 ------------- Total Schools 54,591,784 -------------
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- TRANSPORTATION (11.8%) Kenton County, Kentucky Airport Board Airport Revenue $ 500,000 5.625%, 03/01/13 MBIA Insured AMT .................. Aaa/AAA $ 545,055 1,570,000 5.000%, 03/01/13 MBIA Insured AMT .................. Aaa/AAA 1,665,770 750,000 5.625%, 03/01/14 MBIA Insured AMT .................. Aaa/AAA 816,300 1,000,000 5.500%, 03/01/17 MBIA Insured AMT .................. Aaa/AAA 1,081,500 2,230,000 5.500%, 03/01/18 MBIA Insured AMT .................. Aaa/AAA 2,406,014 1,300,000 5.000%, 03/01/23 MBIA Insured AMT .................. Aaa/AAA 1,340,924 Kentucky Interlocal School Transportation Authority 145,000 5.400%, 06/01/17 ................................... Aa3/A+ 145,905 400,000 6.000%, 12/01/20 ................................... Aa3/A+ 406,676 200,000 6.000%, 12/01/20 ................................... Aa3/A+ 203,338 300,000 5.800%, 12/01/20 ................................... Aa3/A+ 304,767 400,000 5.650%, 12/01/20 ................................... Aa3/A+ 406,116 350,000 5.600%, 12/01/20 ................................... Aa3/A+ 355,281 Kentucky State Turnpike Authority Economic Development & Resource Recovery Road Revenue 1,000,000 5.625%, 07/01/12 FSA Insured (pre-refunded) ........ Aaa/AAA 1,096,980 200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) ........ Aaa/AAA 219,396 500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) ........ Aaa/AAA 548,490 250,000 5.200%, 07/01/14 FSA Insured (pre-refunded) ........ Aaa/AAA 269,417 450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) ........ Aaa/AAA 485,973 2,775,000 5.250%, 07/01/16 FSA Insured ....................... Aaa/AAA 2,996,889 160,000 5.000%, 07/01/17 FSA Insured ....................... Aaa/AAA 168,862 3,455,000 5.100%, 07/01/18 FSA Insured ....................... Aaa/AAA 3,659,812 Louisville-Jefferson County Regional Airport, Kentucky 1,000,000 5.500%, 07/01/12 FSA Insured AMT ................... Aaa/AAA 1,086,170 2,000,000 5.750%, 07/01/15 FSA Insured AMT ................... Aaa/AAA 2,191,180 2,000,000 5.500%, 07/01/15 FSA Insured AMT ................... Aaa/AAA 2,184,360 1,650,000 5.750%, 07/01/17 FSA Insured AMT ................... Aaa/AAA 1,794,111 1,000,000 5.250%, 07/01/18 FSA Insured AMT ................... Aaa/AAA 1,062,900 1,000,000 5.000%, 07/01/18 FSA Insured AMT ................... Aaa/AAA 1,033,490 1,370,000 5.250%, 07/01/21 FSA Insured AMT ................... Aaa/AAA 1,445,391 3,390,000 5.250%, 07/01/22 FSA Insured AMT ................... Aaa/AAA 3,572,145 275,000 5.375%, 07/01/23 FSA Insured AMT ................... Aaa/AAA 290,309 ------------- Total Transportation 33,783,521 -------------
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- UTILITIES (11.3%) Bardstown, Kentucky $ 200,000 5.000%, 12/01/19 MBIA Insured ...................... Aaa/NR $ 213,044 Boone County, Kentucky Pollution Control Rev. - Dayton Power & Light 1,000,000 4.700%, 01/01/28 FGIC Insured ...................... Aaa/AAA 1,013,760 Campbell & Kenton Counties, Kentucky Sanitation Sewer District 100,000 5.000%, 08/01/24 FSA Insured ....................... Aaa/AAA 104,258 Kentucky Rural Water Finance Corp. 595,000 5.000%, 02/01/20 AMBAC Insured ..................... Aaa/AAA 628,487 Lexington-Fayette Urban County Government, Kentucky Sewer System 1,000,000 5.000%, 07/01/19 ................................... Aa3/AA 1,058,920 Louisville & Jefferson County, Kentucky Metropolitan Sewer District 1,000,000 5.000%, 05/15/12 FGIC Insured ...................... Aaa/AAA 1,044,270 2,565,000 5.375%, 05/15/17 MBIA Insured ...................... Aaa/AAA 2,800,159 125,000 5.300%, 05/15/18 MBIA Insured ...................... Aaa/AAA 130,370 2,180,000 5.000%, 05/15/18 FSA Insured ....................... Aaa/AAA 2,345,200 2,380,000 4.250%, 05/15/20 FSA Insured ....................... Aaa/AAA 2,381,714 2,510,000 4.250%, 05/15/21 FSA Insured ....................... Aaa/AAA 2,501,466 400,000 5.000%, 05/15/22 FGIC Insured ...................... Aaa/AAA 415,304 Louisville, Kentucky Waterworks Board Water System Revenue 1,000,000 5.250%, 11/15/16 FSA Insured ....................... Aaa/AAA 1,071,090 1,000,000 5.250%, 11/15/17 FSA Insured ....................... Aaa/AAA 1,071,090 2,530,000 5.250%, 11/15/18 FSA Insured ....................... Aaa/AAA 2,709,858 205,000 5.250%, 11/15/19 FSA Insured ....................... Aaa/AAA 217,138 6,600,000 5.250%, 11/15/22 FSA Insured ....................... Aaa/AAA 7,060,086 2,415,000 5.250%, 11/15/24 FSA Insured ....................... Aaa/AAA 2,578,930 Northern Kentucky Water District 660,000 5.000%, 02/01/23 FGIC Insured ...................... Aaa/NR 688,024 Owensboro-Davies County, Kentucky Water District 600,000 5.000%, 01/01/13 AMBAC Insured ..................... Aaa/AAA 616,860
RATING FACE MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - ------------ ---------------------------------------------------- -------- ------------- UTILITIES (CONTINUED) Owensboro, Kentucky Electric and Power $ 1,555,000 5.000%, 01/01/20 FSA Insured ....................... Aaa/AAA $ 1,628,785 ------------- Total Utilities 32,278,813 ------------- Total Revenue Bonds 274,062,903 ------------- Total Investments (cost $275,656,661**) ......... 99.0% 283,744,725 Other assets less liabilities ................... 1.0 2,941,995 ------ ------------- Net Assets ...................................... 100.0% $ 286,686,720 ====== =============
PERTCENT OF PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO ------------------------------------------------------------------------- Aaa of Moody's or AAA of S&P .......................... 79.5% Aa of Moody's or AA of S&P ............................ 18.1 A of Moody's or S&P ................................... 2.4 ------ 100.0% ====== * Any security not rated (NR) by either credit rating service 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 NR - Not Rated XLCA - XL Capital Assurance See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investments at value (cost $275,656,661) ......................................... $283,744,725 Cash ............................................................................. 335,218 Interest receivable .............................................................. 4,084,023 Receivable for Fund shares sold .................................................. 105,333 Other assets ..................................................................... 10,876 ------------ Total assets ..................................................................... 288,280,175 ------------ LIABILITIES Payable for investment securities purchased ........................................ 520,886 Payable for Fund shares redeemed ................................................... 434,299 Dividends payable .................................................................. 356,158 Management fee payable ............................................................. 97,275 Distribution and service fees payable .............................................. 68,330 Accrued expenses ................................................................... 116,507 ------------ Total liabilities ..................................................................... 1,593,455 ------------ NET ASSETS ............................................................................ $286,686,720 ============ Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 270,458 Additional paid-in capital ......................................................... 277,019,303 Net unrealized appreciation on investments (note 4) ................................ 8,088,064 Undistributed net investment income ................................................ 434,620 Accumulated net realized gain on investments ....................................... 874,275 ------------ $286,686,720 ============ CLASS A Net Assets ......................................................................... $223,810,514 ============ Capital shares outstanding ......................................................... 21,115,833 ============ Net asset value and redemption price per share ..................................... $ 10.60 ============ Offering price per share (100/96 of $10.60 adjusted to nearest cent) ............... $ 11.04 ============ CLASS C Net Assets ......................................................................... $ 7,295,962 ============ Capital shares outstanding ......................................................... 688,650 ============ Net asset value and offering price per share ....................................... $ 10.59 ============ 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) ...................................... $ 10.59* ============ CLASS I Net Assets ......................................................................... $ 7,764,453 ============ Capital shares outstanding ......................................................... 732,909 ============ Net asset value, offering and redemption price per share ........................... $ 10.59 ============ CLASS Y Net Assets ......................................................................... $ 47,815,791 ============ Capital shares outstanding ......................................................... 4,508,378 ============ Net asset value, offering and redemption price per share ........................... $ 10.61 ============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS YEAR ENDED DECEmber 31, 2005 INVESTMENT INCOME: Interest income ................................................ $ 13,123,385 Expenses: Management fee (note 3) ........................................ $ 1,183,610 Distribution and service fees (note 3) ......................... 441,913 Transfer and shareholder servicing agent fees .................. 174,325 Trustees' fees and expenses (note 8) ........................... 132,112 Legal fees (note 3) ............................................ 77,219 Fund accounting fees ........................................... 66,928 Shareholders' reports and proxy statements ..................... 66,053 Custodian fees ................................................. 57,745 Registration fees and dues ..................................... 23,483 Auditing and tax fees .......................................... 21,000 Insurance ...................................................... 19,199 Chief compliance officer (note 3) .............................. 4,544 Miscellaneous .................................................. 22,057 -------------- Total expenses ................................................. 2,290,188 Expenses paid indirectly (note 6) .............................. (23,752) -------------- Net expenses ................................................... 2,266,436 ------------- Net investment income .......................................... 10,856,949 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from securities transactions .......... 1,064,505 Change in unrealized appreciation on investments ............... (4,961,711) -------------- Net realized and unrealized gain (loss) on investments ......... (3,897,206) ------------- Net change in net assets resulting from operations ............. $ 6,959,743 =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, 2005 DECEMBER 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income ............................... $ 10,856,949 $ 11,464,403 Net realized gain (loss) from securities transactions 1,064,505 950,051 Change in unrealized appreciation on investments .... (4,961,711) (56,557) ------------- ------------- Change in net assets from operations .............. 6,959,743 12,357,897 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10): Class A Shares: Net investment income ............................... (8,497,105) (9,151,161) Class C Shares: Net investment income ............................... (226,903) (225,967) Class I Shares: Net investment income ............................... (277,644) (239,947) Class Y Shares: Net investment income ............................... (1,888,768) (1,763,764) ------------- ------------- Change in net assets from distributions ........... (10,890,420) (11,380,839) ------------- ------------- CAPITAL SHARE TRANSACTIONS (NOTE 7): Proceeds from shares sold ........................... 33,559,576 45,176,081 Reinvested dividends and distributions .............. 4,311,984 5,174,766 Cost of shares redeemed ............................. (44,707,514) (40,998,605) ------------- ------------- Change in net assets from capital share transactions (6,835,954) 9,352,242 ------------- ------------- Change in net assets ................................ (10,766,631) 10,329,300 NET ASSETS: Beginning of period ................................. 297,453,351 287,124,051 ------------- ------------- End of period* ...................................... $ 286,686,720 $ 297,453,351 ============= ============= * Includes undistributed net investment income of: $ 434,620 $ 468,091 ============= =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 1. ORGANIZATION Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 1, 1996, offered only one class of shares. On that date, the Fund began offering two additional classes of shares, Class C and Class Y shares. All shares outstanding prior to that date were designated as Class A shares and are sold with a front-payment sales charge and bear an annual distribution fee. Class C shares are sold with a level-payment sales charge with no payment at time of purchase but level service and distribution fees from date of purchase through a period of six years thereafter. A contingent deferred sales charge of 1% is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. Class C Shares together with a pro-rata portion of all Class C Shares acquired through reinvestment of dividends and other distributions paid in additional Class C Shares, automatically convert to Class A Shares after 6 years. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity and are not offered directly to retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. On April 30, 1998, the Fund established Class I shares, which are offered and sold only through financial intermediaries and are not offered directly to retail investors. Class I Shares are sold at net asset value without any sales charge, redemption fees, or contingent deferred sales charge. Class I shares carry a distribution fee and a service fee. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued by the pricing service at the mean of bid and asked quotations. If market quotations or a valuation from the pricing service is not readily available, the security is valued at fair value determined in good faith under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase is 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeds 60 days. b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on the identified cost basis. Interest income is recorded daily on the accrual basis and is adjusted for amortization of premium and accretion of original issue and market discount. c) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code applicable to certain investment companies. The Fund intends to make distributions of income and securities profits sufficient to relieve it from all, or substantially all, Federal income and excise taxes. d) MULTIPLE CLASS ALLOCATIONS: All income, expenses (other than class-specific expenses), and realized and unrealized gains or losses are allocated daily to each class of shares based on the relative net assets of each class. Class-specific expenses, which include distribution and service fees and any other items that are specifically attributed to a particular class, are charged directly to such class. e) USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. f) RECLASSIFICATION OF CAPITAL ACCOUNTS: Accounting principles generally accepted in the United States of America require that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. No reclassifications were made during the year ended December 31, 2005. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Aquila Investment Management LLC (the "Manager"), a wholly-owned subsidiary of Aquila Management Corporation, the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. Under the Advisory and Administration Agreement, the Manager provides all investment management and administrative services to the Fund. The Manager's services include providing the office of the Fund and all related services as well as managing relationships with of all the various support organizations to theFund such as the shareholder servicing agent, custodian, legal counsel, fund accounting agent, auditors and distributor. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's average net assets. Under a Compliance Agreement with the Manager, the Manager is compensated for Chief Compliance Officer related services provided to enable the Fund to comply with Rule 38a-1 of the Investment Company Act of 1940. Specific details as to the nature and extent of the services provided by the Manager are more fully defined in the Fund's Prospectus and Statement of Additional Information. b) DISTRIBUTION AND SERVICE FEES: The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make distribution fee payments to broker-dealers ("Qualified Recipients") or others selected by Aquila Distributors, Inc. (the "Distributor") including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund's shares or servicing of shareholder accounts. The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the year ended December 31, 2005, distribution fees on Class A Shares amounted to $346,088 of which the Distributor retained $19,970. 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, 2005, amounted to $60,095. 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, 2005, amounted to $20,031. The total of these payments with respect to Class C Shares amounted to $80,126 of which the Distributor retained $15,900. 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, 2005, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $27,474 of which $15,699 related to the Plan and $11,775 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, 2005, total commissions on sales of Class A Shares amounted to $214,451 of which the Distributor received $20,785. c) OTHER RELATED PARTY TRANSACTIONS: For the year ended December 31, 2005, the Fund incurred $74,729 of legal fees allocable to Hollyer Brady Barrett & Hines LLP, counsel to the Fund for legal services in conjunction with the Fund's ongoing operations. The Secretary of the Fund is a Partner of that firm. 4. PURCHASES AND SALES OF SECURITIES During the year ended December 31, 2005, purchases of securities and proceeds from the sales of securities aggregated $72,949,925 and $75,859,757, respectively. At December 31, 2005 the aggregate tax cost for all securities was $275,644,271. At December 31, 2005, the aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $8,393,352 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $292,898 for a net unrealized appreciation of $8,100,454. 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, 2005 DECEMBER 31, 2004 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ CLASS A SHARES: Proceeds from shares sold 2,024,652 $ 21,593,854 1,986,073 $ 21,266,749 Reinvested distributions 362,716 3,868,074 404,551 4,328,795 Cost of shares redeemed . (2,962,111) (31,537,026) (2,129,569) (22,709,719) ------------ ------------ ------------ ------------ Net change ........... (574,743) (6,075,098) 261,055 2,885,825 ------------ ------------ ------------ ------------ CLASS C SHARES: Proceeds from shares sold 90,038 959,910 262,256 2,800,388 Reinvested distributions 13,187 140,559 13,189 141,099 Cost of shares redeemed . (175,383) (1,859,038) (187,886) (2,010,343) ------------ ------------ ------------ ------------ Net change ........... (72,158) (758,569) 87,559 931,144 ------------ ------------ ------------ ------------ CLASS I SHARES: Proceeds from shares sold 44,082 471,889 283,026 2,993,441 Reinvested distributions 22,690 241,811 21,333 227,786 Cost of shares redeemed . (38,599) (410,675) (14,757) (156,921) ------------ ------------ ------------ ------------ Net change ........... 28,173 303,025 289,602 3,064,306 ------------ ------------ ------------ ------------ CLASS Y SHARES: Proceeds from shares sold 984,142 10,533,923 1,685,639 18,115,503 Reinvested distributions 5,130 61,540 44,562 477,086 Cost of shares redeemed . (1,022,004) (10,900,775) (1,516,929) (16,121,622) ------------ ------------ ------------ ------------ Net change ........... (32,732) (305,312) 213,272 2,470,967 ------------ ------------ ------------ ------------ Total transactions in Fund shares .................. (651,460) $ (6,835,954) 851,488 $ 9,352,242 ============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES At December 31, 2005 there were 7 Trustees, one of which is affiliated with the Manager and is not paid any fees. The total amount of Trustees' service and attendance fees paid during the year ended December 31, 2005 was $106,125 to cover carrying out their responsibilities and attendance at regularly scheduled quarterly Board Meetings and meetings of the Independent Trustees held prior to each quarterly Board Meeting. When additional or special meetings are held, the meeting fees are paid to those Trustees in attendance. Trustees are reimbursed for their expenses such as travel, accommodations, and meals incurred in connection with attendance at Board Meetings and the Annual Meeting of Shareholders. For the year ended December 31, 2005, such meeting-related expenses amounted to $25,987. 9. SECURITIES TRADED ON A WHEN-ISSUED BASIS The Fund may purchase or sell securities on a when-issued basis. When-issued transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. Beginning on the date the Fund enters into a when-issued transaction, cash or other liquid securities are segregated in an amount equal to or greater than the amount of the when-issued transaction. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. 10. INCOME TAX INFORMATION AND DISTRIBUTIONS The Fund declares dividends daily from net investment income and makes payments monthly in additional shares at the net asset value per share, in cash, or in a combination of both, at the shareholder's option. Net realized capital gains, if any, are distributed annually and are taxable. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, due to differences between financial statement reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund's net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividend income may, under some circumstances, be subject to the alternative minimum tax. The tax character of distributions: Year Ended December 31, 2005 2004 ----------- ----------- Net tax-exempt income $10,817,058 $11,146,096 Ordinary income 73,362 234,743 ----------- ----------- $10,890,420 $11,380,839 =========== =========== As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Accumulated net realized gain $ 879,242 Unrealized appreciation 8,100,454 Undistributed tax-exempt income 422,230 ---------- $9,401,926 ========== The difference between book basis and tax basis unrealized appreciation is attributable primarily to premium/discount adjustments. 11. CHANGE IN PRINCIPAL ACCOUNTANTS KPMG LLP was previously the principal accountants for the Churchill Tax-Free Fund of Kentucky (the "Fund"). On July 27, 2005 KPMG LLP resigned as the principal accountants of the Fund and Tait, Weller & Baker LLP was engaged as the principal accountants to audit the Fund's financial statements for the fiscal year of 2005. The decision was made by the Audit Committee of the Board of Trustees. The audit reports of KPMG LLP on the Fund's financial statements as of and for the years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the two fiscal years ended December 31, 2004 and 2003 and the subsequent interim period through July 27, 2005, there were no reportable events or disagreements with KPMG LLP on any matter of accounting principles of practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of KPMG LLP would have caused them to make reference in connection with their opinion to the subject matter of the disagreements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A ---------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.74 $ 10.69 $ 10.66 $ 10.31 $ 10.40 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income+ ................ 0.39 0.42 0.44 0.47 0.50 Net gain (loss) on securities (both realized and unrealized) ............ (0.14) 0.05 0.03 0.35 (0.09) -------- -------- -------- -------- -------- Total from investment operations ...... 0.25 0.47 0.47 0.82 0.41 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.39) (0.42) (0.44) (0.47) (0.50) Distributions from capital gains ...... -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.39) (0.42) (0.44) (0.47) (0.50) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.60 $ 10.74 $ 10.69 $ 10.66 $ 10.31 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 2.39% 4.49% 4.50% 8.15% 4.02% Ratios/supplemental data Net assets, end of period (in thousands) ...................... $223,811 $232,927 $229,176 $226.014 $201,604 Ratio of expenses to average net assets .......................... 0.77% 0.73% 0.72% 0.72% 0.72% Ratio of net investment income to average net assets .................. 3.66% 3.96% 4.14% 4.82% 4.82% Portfolio turnover rate ............... 24.87% 14.31% 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 .......................... 0.76% 0.73% 0.71% 0.71% 0.70% Class C ---------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.73 $ 10.69 $ 10.66 $ 10.31 $ 10.39 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income+ ................ 0.30 0.33 0.35 0.38 0.41 Net gain (loss) on securities (both realized and unrealized) ............ (0.14) 0.04 0.03 0.35 (0.08) -------- -------- -------- -------- -------- Total from investment operations ...... 0.16 0.37 0.38 0.73 0.33 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.30) (0.33) (0.35) (0.38) (0.41) Distributions from capital gains ...... -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.30) (0.33) (0.35) (0.38) (0.41) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 1.53% 3.51% 3.62% 7.23% 3.24% Ratios/supplemental data Net assets, end of period (in thousands) ...................... 7,296 $ 8,166 $ 7,197 $ 4,804 $ 3,355 Ratio of expenses to average net assets .......................... 1.62% 1.58% 1.57% 1.56% 1.56% Ratio of net investment income to average net assets .................. 2.81% 3.11% 3.26% 3.62% 3.92% Portfolio turnover rate ............... 24.87% 14.31% 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 .......................... 1.61% 1.58% 1.56% 1.55% 1.55%
+ Per share amounts have been calculated using the monthly average shares method. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class I ------------------------------------------------- Year Ended December 31, Period ------------------------------------------------- Ended 2005 2004 2003 2002 12/31/01(1) ------- ------- ------- ------- ----------- Net asset value, beginning of period .......... $ 10.73 $ 10.69 $ 10.66 $ 10.31 $ 10.44 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income+ ..................... 0.38 0.41 0.43 0.46 0.19 Net gain (loss) on securities (both realized and unrealized) .......................... (0.14) 0.03 0.02 0.35 (0.13) ------- ------- ------- ------- ------- Total from investment operations ........... 0.24 0.44 0.45 0.81 0.06 ------- ------- ------- ------- ------- Less distributions (note 10): Dividends from net investment income ....... (0.38) (0.40) (0.42) (0.46) (0.19) Distributions from capital gains ........... -- -- -- -- -- ------- ------- ------- ------- ------- Total distributions ........................ (0.38) (0.40) (0.42) (0.46) (0.19) ------- ------- ------- ------- ------- Net asset value, end of period ................ $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 ======= ======= ======= ======= ======= Total return (not reflecting sales charge) .... 2.24% 4.24% 4.33% 7.98% 0.58%* Ratios/supplemental data Net assets, end of period (in thousands) ........................... $ 7,764 $ 7,564 $ 4,438 $ 2,407 $ 1,426 Ratio of expenses to average net assets .... 0.92% 0.89% 0.88% 0.87% 0.83%** Ratio of net investment income to average net assets ............................... 3.52% 3.79% 3.95% 4.32% 4.47%** Portfolio turnover rate .................... 24.87% 14.31% 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 .... 0.91% 0.89% 0.87% 0.86% 0.82%** Class Y ------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- Net asset value, beginning of period .......... $ 10.75 $ 10.70 $ 10.67 $ 10.32 $ 10.40 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income+ ..................... 0.41 0.44 0.46 0.49 0.51 Net gain (loss) on securities (both realized and unrealized) .......................... (0.14) 0.05 0.03 0.35 (0.07) ------- ------- ------- ------- ------- Total from investment operations ........... 0.27 0.49 0.49 0.84 0.44 ------- ------- ------- ------- ------- Less distributions (note 10): Dividends from net investment income ....... (0.41) (0.44) (0.46) (0.49) (0.52) Distributions from capital gains ........... -- -- -- -- -- ------- ------- ------- ------- ------- Total distributions ........................ (0.41) (0.44) (0.46) (0.49) (0.52) ------- ------- ------- ------- ------- Net asset value, end of period ................ $ 10.61 $ 10.75 $ 10.70 $ 10.67 $ 10.32 ======= ======= ======= ======= ======= Total return (not reflecting sales charge) .... 2.55% 4.65% 4.65% 8.30% 4.28% Ratios/supplemental data Net assets, end of period (in thousands) ........................... $47,816 $48,795 $46,313 $41,223 $25,585 Ratio of expenses to average net assets .... 0.62% 0.58% 0.57% 0.57% 0.57% Ratio of net investment income to average net assets ............................... 3.81% 4.11% 4.28% 4.63% 4.94% Portfolio turnover rate .................... 24.87% 14.31% 17.92% 18.27% 21.44% The expense ratios after giving effect to the expe Ratio of expenses to average net assets .... 0.61% 0.58% 0.56% 0.56% 0.55%
- ---------- (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. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end sales charges with respect to Class A shares or contingent deferred sales charges ("CDSC") with respect to Class C shares; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. The tables below are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The tables below are based on an investment of $1,000 invested on July 1, 2005 and held for the six months ended December 31, 2005. ACTUAL EXPENSES This table provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled "Expenses Paid During the Period". FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 ACTUAL TOTAL RETURN BEGINNING ENDING EXPENSES WITHOUT ACCOUNT ACCOUNT PAID DURING SALES CHARGES(1) VALUE VALUE THE PERIOD(2) - -------------------------------------------------------------------------------- Class A 0.34% $1,000.00 $1,003.40 $3.89 - -------------------------------------------------------------------------------- Class C (0.08)% $1,000.00 $ 999.20 $8.16 - -------------------------------------------------------------------------------- Class I 0.28% $1,000.00 $1,002.80 $4.59 - -------------------------------------------------------------------------------- Class Y 0.52% $1,000.00 $1,005.20 $3.13 - -------------------------------------------------------------------------------- (1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES. TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE TOTAL RETURN FOR THE YEAR. (2) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.62%, 0.91% AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED) HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table below provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of other mutual funds. Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, with respect to Class A shares. The example does not reflect the deduction of contingent deferred sales charges ("CDSC") with respect to Class C shares. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different mutual funds. In addition, if these transaction costs were included, your costs would have been higher. FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 HYPOTHETICAL ANNUALIZED BEGINNING ENDING EXPENSES TOTAL ACCOUNT ACCOUNT PAID DURING RETURN VALUE VALUE THE PERIOD(1) - -------------------------------------------------------------------------------- Class A 5.00% $1,000.00 $1,021.32 $3.92 - -------------------------------------------------------------------------------- Class C 5.00% $1,000.00 $1,017.04 $8.24 - -------------------------------------------------------------------------------- Class I 5.00% $1,000.00 $1,020.62 $4.63 - -------------------------------------------------------------------------------- Class Y 5.00% $1,000.00 $1,022.08 $3.16 - -------------------------------------------------------------------------------- (1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.62%, 0.91% AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2005, $10,817,058 of dividends paid by Churchill Tax-Free Fund of Kentucky, constituting 99.33% of total dividends paid during fiscal 2005, were exempt-interest dividends. Prior to January 31, 2006, shareholders were mailed IRS Form 1099-DIV which contained information on the status of distributions paid for the 2005 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 securities of your Fund twice a year in the semi-annual and annual reports you receive. Additionally, we prepare, and have available, portfolio listings at the end of each quarter. Whenever you may be interested in seeing a listing of your Fund's portfolio other than in your shareholder reports, please check our website (http://www.aquilafunds.com) or call us at 1-800-437-1020. The Fund additionally files a complete list of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available free of charge on the SEC website at http://www.sec.gov. You may also review or, for a fee, copy the forms at the SEC's Public Reference Room in Washington, DC or by calling 800-SEC-0330. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROXY VOTING RECORD (UNAUDITED) The Fund does not invest in equity securities. Accordingly, there were no matters relating to a portfolio security considered at any shareholder meeting held during the 12 months ended June 30, 2005 with respect to which the Fund was entitled to vote. Applicable regulations require us to inform you that the foregoing proxy voting information is available on the SEC website at http://www.sec.gov. - -------------------------------------------------------------------------------- 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) Diana P. Herrmann Trustee Vice Chair and Chief Executive Officer 11 None New York, NY since 1995 of Aquila Management Corporation, (02/25/58) and President Founder of the Aquila(SM) Group of since 1999 Funds(5) and parent of Aquila Investment Management LLC, Manager, since 2004, President and Chief Operating Officer since 1997, a Director since 1984, Secretary since 1986 and previously its Executive Vice President, Senior Vice President or Vice President, 1986-1997; Chief Executive Officer and Vice Chair since 2004 and President, Chief Operating Officer and Manager of the Manager since 2003; Vice Chair, President, Executive Vice President or Senior 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; Governor, Investment Company Institute and head of its Small Funds Committee since 2004; active in charitable and volunteer organizations. NON-INTERESTED TRUSTEES Thomas A.Christopher Chair of the Vice President of Robinson, Hughes & 2 None Danville, KY Board of Trustees Christopher, C.P.A.s, P.S.C., since (12/19/47) since 2005 1977; President, A Good Place for Fun, and Trustee Inc., a sports facility, since 1987; since 1992 currently or formerly active with various professional and community organizations.
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.) - ----------------- ---------- ------------------- ---------- --------------------- Douglas Dean Trustee Founder and Chairman of the Board of 1 None Lexington, KY since 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. Theodore T. Mason Trustee Executive Director, East Wind Power 8 Trustee, Pimco Advisors New York, NY since 1987 Partners LTD since 1994 and Louisiana VIT. (11/24/35) Power Partners, 1999-2003; Treasurer, Alumni Association of SUNY Maritime College since 2004 (President, 2002-2003, First Vice President, 2000-2001, Second Vice President, 1998-2000) and director of the same organization since 1997; Director, STCM Management Company, Inc., 1973-2004; twice national officer of Naval Reserve Association, commanding officer of four naval reserve units and Captain, USNR (Ret); director, The Navy League of the United States New York Council since 2002; trustee, The Maritime Industry Museum at Fort Schuyler, 2000-2004; and the Maritime College at Fort Schuyler Foundation, Inc. since 2000. Anne J. Mills Trustee President, Loring Consulting Company 4 None Castle Rock, CO since 1987 since 2001; Vice President for Business (12/23/38) Affairs, 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 Retired; formerly Chairman, founder 2 Ring's End, Inc. Rowayton, CT since 1993 (1975) and Senior Advisor until 2000 of (09/16/29) Nightingale & Associates, L.L.C., a general management consulting firm focusing on interim management, divestitures, turnaround of troubled companies, corporate restructuring and financial advisory services.
NUMBER OF POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS HELD WITH IN FUND HELD BY TRUSTEE NAME, FUND AND PRINCIPAL COMPLEX (THE POSITION HELD IS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN A DIRECTORSHIP UNLESS AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE INDICATED OTHERWISE.) - ----------------- ---------- ------------------- ---------- --------------------- James R. Ramsey Trustee President, University of Louisville 2 Community Bank and Louisville, KY since 1987 since November 2002; Professor of Trust, Pikeville, KY (11/14/48) Economics, University of Louisville, and Texas Roadhouse 1999-present; Kentucky Governor's Senior Inc. Policy Advisor and State Budget Director, 1999-2002; Vice Chancellor for Finance and Administration, the University of North Carolina at Chapel Hill, 1998 to 1999; previously Vice President for Finance and Administration at Western Kentucky University, State Budget Director for the Commonwealth of Kentucky, Chief State Economist and Executive Director for the Office of Financial Management and Economic Analysis for the Commonwealth of Kentucky, Adjunct Professor at the University of Kentucky, Associate Professor at Loyola University-New Orleans and Assistant Professor at Middle Tennessee State University. OTHER INDIVIDUALS TRUSTEES EMERITUS(6) Lacy B. Herrmann Founder and Founder and Chairman of the Board, N/A N/A New York, NY Chairman Emeritus Aquila Management Corporation, the (05/12/29) since 2006, sponsoring organization and parent of Chairman of the the Manager or Administrator and/or Board of Trustees, Adviser or Sub-Adviser to each fund of 1987-2005 the Aquila(SM) Group of Funds; Chairman of the Manager or Administrator and/or Adviser or Sub-Adviser to each since 2004; Founder and Chairman Emeritus of Hawaiian Tax-Free Trust, Pacific Capital Cash Assets Trust, Pacific Capital Tax-Free Cash Assets Trust, Pacific Capital U.S. Government Securities Cash Assets Trust, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Narragansett Insured Tax-Free Income Fund, Tax-Free Trust of Arizona, Tax-Free Trust of Oregon, Tax-Free Fund For Utah and Aquila Rocky Mountain Equity Fund; previously Chairman and a Trustee of each fund in the Aquila(SM) Group of Funds since its establishment until 2004 or 2005; Director of the Distributor since 1981 and formerly Vice President or Secretary, 1981-1998; Trustee Emeritus, Brown University and the Hopkins School; active in university, school and charitable organizations.
NUMBER OF 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.) - ----------------- ---------- ------------------- ---------- --------------------- Carroll F. Knicely Trustee Emeritus President, Associated Publications Inc., N/A N/A Glasgow, KY since 2004 Glasgow, Kentucky; director and member, (12/08/28) Executive Board of West Kentucky Corporation and director and Secretary-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. OFFICERS Charles E.Childs, III Executive Vice Executive Vice President of all funds in N/A N/A New York, NY President the Aquila(SM) Group of Funds and the (04/01/57) since 2003 Manager and the Manager's parent since 2003; formerly Senior Vice President, corporate development, Vice President, Assistant Vice President and Associate of the Manager's parent since 1987; Senior Vice President, Vice President or Assistant Vice President of the Aquila Money-Market Funds, 1988-2003. Thomas S. Albright Senior Vice Senior Vice President and Portfolio N/A N/A Louisville, KY President Manager, Churchill Tax-Free Fund of (07/26/52) since 2000 Kentucky since July 2000; Senior Vice President, Tax-Free Fund For Utah since 2003, Vice President, 2001-2003 and co-portfolio manager since 2001; Vice President and backup portfolio manager, Tax-Free Trust of Arizona, since 2004; Vice President and Portfolio Manager, Banc One Investment Advisors, Inc., 1994-2000.
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.) - ----------------- ---------- ------------------- ---------- --------------------- Jerry G. McGrew Senior Vice President of the Distributor since 1998, N/A N/A New York, NY President Registered Principal since 1993, Senior (06/18/44) since 1994 Vice 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. Todd W. Curtis Vice President Senior Vice President and Portfolio N/A N/A Phoenix, AZ since 2004 Manager, Tax-Free Trust of Arizona, (06/08/49) since August 2004; Vice President and backup portfolio manager, Churchill Tax-Free Fund of Kentucky, since 2004; Vice President and Portfolio Manager, Banc One Investment Advisors, Inc. and its predecessors, 1981-2004. Jason T. McGrew Vice President Vice President, Churchill Tax-Free Fund N/A N/A Elizabethtown, KY since 2001 of 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. Robert W. Anderson Chief Compliance Chief Compliance Officer of the Trust, N/A N/A New York, NY Officer since 2004 the Manager and the Distributor since (08/23/40) and Assistant 2004, Compliance Officer of the Manager Secretary or its predecessor and current parent since 2000 since 1998 and Assistant Secretary of the Aquila(SM) Group of Funds since 2000.
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.) - ----------------- ---------- ------------------- ---------- --------------------- Joseph P. DiMaggio Chief Financial Chief Financial Officer of the N/A N/A New York, NY Officer since 2003 Aquila(SM) Group of Funds since 2003 and (11/06/56) and Treasurer Treasurer since 2000. since 2000 Edward M. W. Hines Secretary Partner, Hollyer Brady Barrett & Hines N/A N/A New York, NY since 1987 LLP, legal counsel to the Fund, since (12/16/39) 1989; Secretary of the Aquila(SM) Group of Funds. John M. Herndon Assistant Assistant Secretary of the Aquila(SM) N/A N/A New York, NY Secretary Group of Funds since 1995 and Vice (12/17/39) since 1995 President of 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) N/A N/A New York, NY Treasurer Group of Funds since 2000; Assistant (11/02/66) since 2000 Vice 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) Ms. Herrmann is an interested person of the Fund as an officer of the Fund, as a director, officer and shareholder of the Manager's corporate parent, as an officer and Manager of the Manager, and as a shareholder and director of the Distributor. (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 "Aquilasm Group of Funds." (6) A Trustee Emeritus may attend Board meetings but has no voting power. - -------------------------------------------------------------------------------- PRIVACY NOTICE (UNAUDITED) CHURCHILL TAX-FREE FUND OF KENTUCKY OUR PRIVACY POLICY. In providing services to you as an individual who owns or is considering investing in shares of the Fund we collect certain 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 us, such as the Fund's transfer agent, distributor or investment adviser, as permitted or required by law, or as authorized by you. Any other use is strictly prohibited. We do not sell information about you or any of our fund shareholders to anyone. 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. AQUILA DISTRIBUTORS, INC. AQUILA INVESTMENT MANAGEMENT LLC This Privacy Policy also has been adopted by Aquila Distributors, Inc. and Aquila Investment Management LLC and applies to all nonpublic information about you that each of these companies may obtain in connection with services provided to the Fund or to you as a shareholder of the Fund. - -------------------------------------------------------------------------------- (THIS PAGE INTENTIONALLY LEFT BLANK) FOUNDERS Lacy B. Herrmann, Chairman Emeritus AQUILA MANAGEMENT CORPORATION MANAGER AQUILA INVESTMENT MANAGEMENT LLC 380 Madison Avenue, Suite 2300 New York, New York 10017 BOARD OF TRUSTEES Thomas A. Christopher, Chair Douglas Dean Diana P. Herrmann Theodore T. Mason Anne J. Mills William J. Nightingale James R. Ramsey OFFICERS Diana P. Herrmann, President Thomas S. Albright, Senior Vice President and Portfolio Manager Jerry G. McGrew, Senior Vice President Jason T. McGrew, Vice President Robert W. Anderson, Chief Compliance Officer Joseph P. DiMaggio, Chief Financial Officer and Treasurer Edward M.W. Hines, Secretary DISTRIBUTOR AQUILA DISTRIBUTORS, INC. 380 Madison Avenue, Suite 2300 New York, New York 10017 CUSTODIAN BANK ONE TRUST COMPANY, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 TRANSFER AND SHAREHOLDER SERVICING AGENT PFPC INC. 101 Sabin Street Pawtuckett, RI 02860 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Tait, Weller & Baker LLP 1818 Market Street, Suite 2400 Philadelphia, PA 19103 Further information is contained in the Prospectus, which must precede or accompany this report. ITEM 2. CODE OF ETHICS. (a) As of December 31, 2005 (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 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 each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were $16,000 in 2005 and $20,700 in 2004. b) Audit Related Fees - There were no amounts billed for audit-related fees over the past two years other than stated above. c) Tax Fees - The Registrant was billed by the principal accountant $3,000 and $8,942 in 2005 and 2004, respectively, for tax return preparation, tax compliance and tax planning. d) All Other Fees - There were no additional fees paid for audit and non- audit services other than those disclosed in a) thorough c) above. e)(1) Currently, the audit committee of the Registrant pre-approves audit services and fees on an engagement-by-engagement basis. e)(2) None of the services described in b) through d) above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, all were pre-approved on an engagement-by-engagement basis. f) No applicable. g) There were no non-audit services fees billed by the Registrant's accountant to the Registrant's investment adviser or distributor over the past two years. h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. 905: Not applicable. 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 filing of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 10. EXHIBITS. (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002 (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL TAX-FREE TRUST By: /s/ Diana P. Herrmann - - - --------------------------------- President and Trustee March 9, 2006 By: /s/ Joseph P. DiMaggio - - - ----------------------------------- Chief Financial Officer and Treasurer March 9, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Diana P. Herrmann - - - --------------------------------- Diana P. Herrmann President and Trustee March 9, 2006 By: /s/ Joseph P. DiMaggio - - - ----------------------------------- Joseph P. DiMaggio Chief Financial Officer and Treasurer March 9, 2006 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 ETH 2 sarbanes.txt SARBANES-OKLEY 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 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 January 1, 2006: Chairman and/or Chairman Emeritus And Founder Lacy B. Herrmann Vice Chair and/or Trustee and/or President Diana P. Herrmann Chief Financial Officer and Treasurer Joseph P. DiMaggio EX-99.CERT 3 ctft306cert.txt SECTION 306 CERTIFICATIONS CERTIFICATIONS 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; 3. 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 9, 2006 /s/ Diana P. Herrmann - - - ---------------------- Title: President and Trustee 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; 3. 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 9, 2006 /s/ Joseph P. DiMaggio - - - ------------------------ Title: Chief Financial Officer and Treasurer EX-99.906 CERT 4 ctft906cert.txt SECTION 906 CERTIFICATIONS CERTIFICATION Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) 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 March 31, 2005, (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 9, 2006 /s/ Diana P. Herrmann ------------------------ President and Trustee Churchill Tax-Free Trust Dated: March 9, 2006 /s/ Joseph P. DiMaggio --------------------------- Chief Financial Officer and Treasurer 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-----