N-CSR 1 ctftncsr.txt CJURCHILL TAX-FREE TRUST 6/30/07 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: 06/30/07 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. SEMI-ANNUAL REPORT JUNE 30, 2007 CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] [LOGO OF THE AQUILA GROUP OF FUNDS: ONE OF THE AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS (SM) [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY "PROFESSIONAL MANAGEMENT" August, 2007 Dear Fellow Shareholder: Rising interest rates, reaching for yield and tightening yield curves - these are all topics that have been in the news as of late. While there is a plethora of information available on these topics and others if you are interested, the good news is that when it comes to Churchill Tax-Free Fund of Kentucky you don't need to be versed in "financialese" any more than you wish. Why? Because one of the conveniences afforded you through an investment in Churchill Tax-Free Fund of Kentucky is local active professional portfolio management. The Fund's portfolio manager continuously monitors economic, monetary and financial trends and adjusts the portfolio accordingly as and when he deems appropriate. Your Fund's portfolio manager provides ongoing surveillance of the marketplace and strives to maneuver cautiously through its ups and downs - much like a ship's captain whose job it is to ride out sudden storms. Not unlike the prudent ship's captain who ensures that the cargo is properly balanced and positioned, the Fund's portfolio manager is constantly monitoring the investment portfolio and the economic weather conditions striving to provide as stable a net asset value and as high a level of tax-free income as possible. As with a ship in choppy seas, your investment requires constant vigilance and nimble reflexes in all phases of its management. This does not, however, mean selling and buying securities continuously based upon market blips. What it does mean is being a keen observer of the scene, monitoring securities very carefully and taking action as appropriate whenever significant changes occur or are anticipated. NOT A PART OF THE SEMI-ANNUAL REPORT Your portfolio manager seeks opportunities that make sense within the prevailing marketplace and which provide double tax-free income while maintaining the overall conservative nature of the portfolio. In short, your professional manager does the work for you. So, the next time you come across a boring, complex analysis of the bond market, feel free to flip right past it. Your Fund's portfolio management team's job (and their passion) is to keep on top of and make sense out of all the news. Thus, like a seasoned traveler, you can enjoy your trip knowing that there are experienced eyes watching the waters and steady hands on the helm. Sincerely, /s/ Lacy B. Herrmann /s/ Diana P. Herrmann Lacy B. Herrmann Diana P. Herrmann Founder and Chairman Emeritus President For certain investors, some dividends of your Fund may be subject to Federal and State taxes, including the Alternative Minimum Tax. NOT A PART OF THE SEMI-ANNUAL REPORT
RATING PRINCIPAL MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (4.5%) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- Bowling Green, Kentucky $ 200,000 5.300%, 06/01/18 ......................................... Aa3/NR $ 208,336 Lexington-Fayette Urban County, Kentucky 4,175,000 4.250%, 05/01/23 MBIA Insured ............................ Aaa/AAA 3,983,660 Louisville, Kentucky Unlimited Tax 2,205,000 5.000%, 10/01/21 FGIC Insured ............................ Aaa/AAA 2,278,669 Louisville & Jefferson County, Kentucky 955,000 4.200%, 11/01/22 MBIA Insured ............................ Aaa/AAA 917,335 Louisville & Jefferson County, Kentucky Metro Government Unlimited Tax 1,590,000 5.000%, 11/01/19 ......................................... Aa2/AA+ 1,670,390 1,825,000 5.000%, 11/01/20 ......................................... Aa2/AA+ 1,912,582 Warren County, Kentucky Judicial Unlimited Tax 345,000 5.100%, 09/01/17 AMBAC Insured ........................... Aaa/NR 363,061 365,000 5.150%, 09/01/18 AMBAC Insured ........................... Aaa/NR 384,644 ------------- Total General Obligation Bonds ........................... 11,718,677 ------------- REVENUE BONDS (94.6%) STATE AGENCIES (19.1%) Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank NR/AA 514,200 Kentucky Asset/Liability Commission 500,000 4.500%, 10/01/22 FGIC Insured Aaa/AAA 503,050 Kentucky Infrastructure Authority 1,000,000 5.250%, 06/01/12 Aa3/A+ 1,043,270 635,000 5.250%, 06/01/12 Aa3/A+ 642,112 2,740,000 5.250%, 06/01/14 Aa3/A+ 2,857,573 1,235,000 5.250%, 08/01/17 NR/AA 1,315,152 230,000 5.000%, 06/01/21 Aa3/A+ 236,222 Kentucky State Property and Buildings Commission 4,000,000 5.375%, 02/01/14 FSA Insured (pre-refunded) Aaa/AAA 4,229,320 1,000,000 5.000%, 11/01/15 AMBAC Insured Aaa/AAA 1,054,750 2,725,000 5.375%, 08/01/16 FSA Insured Aaa/AAA 2,860,242 4,735,000 5.250%, 10/01/17 Aa3/A+ 4,925,016
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission (continued) $ 1,250,000 5.500%, 11/01/17 FSA Insured ............................. Aaa/AAA $ 1,333,450 1,000,000 5.000%, 11/01/17 AMBAC Insured ........................... Aaa/AAA 1,050,190 6,000,000 5.250%, 10/01/18 ......................................... Aa3/A+ 6,236,520 1,925,000 5.000%, 10/01/19 ......................................... Aa3/A+ 1,974,973 785,000 5.150%, 11/01/19 FSA Insured ............................. Aaa/AAA 823,245 3,000,000 5.000%, 11/01/19 FSA Insured ............................. Aaa/AAA 3,117,570 5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) ............. Aaa/AAA 5,270,550 Kentucky State Property Buildings Community Revenues 6,200,000 5.000%, 08/01/21 FSA Insured ............................. Aaa/AAA 6,593,142 2,500,000 5.000%, 08/01/24 FSA Insured ............................. Aaa/AAA 2,658,525 ------------- Total State Agencies 49,239,072 ------------- COUNTY AGENCIES (2.2%) Jefferson County, Kentucky Capital Projects 1,575,000 4.250%, 06/01/23 FSA Insured ............................. Aaa/NR 1,483,430 4,140,000 4.375%, 06/01/28 FSA Insured ............................. Aaa/NR 3,871,024 Warren County, Kentucky Justice Center 365,000 4.300%, 09/01/22 MBIA Insured ............................ Aaa/NR 356,631 ------------- Total County Agencies 5,711,085 ------------- CITY/MUNICIPALITY OBLIGATIONS (0.3%) Shelbyville, Kentucky Certificates of Participation 625,000 5.000%, 10/01/22 ......................................... A2/NR 641,744 ------------- Total City/Municipality Obligations 641,744 ------------- HOSPITALS (9.1%) Jefferson County, Kentucky Health Facilities Revenue 1,715,000 5.650%, 01/01/17 AMBAC Insured ........................... Aaa/AAA 1,747,894 2,200,000 5.250%, 05/01/17 ......................................... NR/A 2,277,858 815,000 5.125%, 10/01/17 AMBAC Insured ETM ....................... Aaa/AAA 825,994 Jefferson County, Kentucky Revenue Medical Center Revenue 2,000,000 5.500%, 05/01/22 ......................................... NR/A 2,098,180
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- HOSPITALS (CONTINUED) Kentucky Economic Development Finance Authority $ 1,000,000 5.000%, 02/01/18 FSA Insured ............................. Aaa/AAA $ 1,014,650 Lexington-Fayette Urban County, Kentucky Public Facilities Revenue 500,000 4.250%, 10/01/26 MBIA Insured ............................ Aaa/NR 475,330 Louisville & Jefferson County, Kentucky Medical Center Revenue 1,000,000 5.000%, 06/01/18 ......................................... NR/A 1,040,790 Louisville & Jefferson County, Kentucky Metropolitan Government Health System Revenue (Norton) 8,090,000 5.000%, 10/01/26 ......................................... NR/A- 8,125,021 6,000,000 5.000%, 10/01/30 ......................................... NR/A- 5,991,360 ------------- Total Hospitals .......................................... 23,597,077 ------------- HOUSING (11.1%) Kentucky Housing Corporation Housing Revenue 405,000 4.350%, 01/01/15 AMT ..................................... Aaa/AAA 401,173 140,000 4.200%, 01/01/15 AMT ..................................... Aaa/AAA 136,009 250,000 4.100%, 01/01/15 AMT ..................................... Aaa/AAA 242,210 170,000 4.100%, 07/01/15 AMT ..................................... Aaa/AAA 164,448 265,000 4.650%, 01/01/16 AMT ..................................... Aaa/AAA 266,847 210,000 4.300%, 01/01/16 AMT ..................................... Aaa/AAA 208,524 150,000 4.250%, 01/01/16 AMT ..................................... Aaa/AAA 145,889 200,000 4.200%, 01/01/16 AMT ..................................... Aaa/AAA 193,226 420,000 4.650%, 07/01/16 AMT ..................................... Aaa/AAA 424,519 610,000 4.300%, 07/01/16 AMT ..................................... Aaa/AAA 605,510 550,000 4.200%, 07/01/16 AMT ..................................... Aaa/AAA 530,618 555,000 4.200%, 01/01/17 ......................................... Aaa/AAA 543,933 100,000 5.125%, 07/01/17 ......................................... Aaa/AAA 101,456 680,000 4.200%, 07/01/17 ......................................... Aaa/AAA 665,870 470,000 4.800%, 01/01/18 AMT ..................................... Aaa/AAA 474,188 285,000 4.250%, 01/01/18 ......................................... Aaa/AAA 279,092 575,000 4.800%, 07/01/18 AMT ..................................... Aaa/AAA 580,123 180,000 4.250%, 07/01/18 ......................................... Aaa/AAA 176,132 900,000 4.800%, 07/01/20 AMT ..................................... Aaa/AAA 902,295 1,150,000 5.350%, 01/01/21 AMT ..................................... Aaa/AAA 1,171,034 6,125,000 5.450%, 07/01/22 AMT ..................................... Aaa/AAA 6,291,478
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- HOUSING (CONTINUED) Kentucky Housing Corporation Housing Revenue (continued) $ 4,065,000 5.250%, 07/01/22 AMT ..................................... Aaa/AAA $ 4,142,967 245,000 5.200%, 07/01/22 ......................................... Aaa/AAA 249,212 415,000 5.100%, 07/01/22 AMT ..................................... Aaa/AAA 421,013 4,140,000 5.200%, 07/01/25 AMT ..................................... Aaa/AAA 4,220,026 275,000 5.375%, 07/01/27 ......................................... Aaa/AAA 281,317 560,000 5.550%, 07/01/33 ......................................... Aaa/AAA 573,703 Kentucky Housing Corporation Housing Revenue 2,000,000 4.700%, 07/01/22 Series E AMT ........................... Aaa/AAA 1,961,820 1,000,000 4.750%, 07/01/27 Series E AMT ........................... Aaa/AAA 973,560 Kentucky Housing Multifamily Mortgage Revenue 1,325,000 5.000%, 06/01/35 AMT ..................................... NR/AAA 1,338,873 ------------- Total Housing ............................................ 28,667,065 ------------- Schools (30.5%) Barren County, Kentucky School Building Revenue 1,265,000 4.250%, 08/01/25 CIFG Assurance North America, Inc. Insured .......................................... Aaa/NR 1,208,024 1,670,000 4.375%, 08/01/26 CIFG Assurance North America, Inc. Insured .......................................... Aaa/NR 1,614,339 Beechwood, Kentucky Independent School District Finance Corp. 180,000 5.650%, 03/01/20 ......................................... Aa3/NR 189,209 Berea, Kentucky Educational Facilities Revenue (Berea College) 1,000,000 4.125%, 06/01/25 ......................................... Aaa/NR 923,460 Boone County, Kentucky School District Finance Corp. 1,730,000 4.125%, 08/01/22 XLCA Insured ............................ Aaa/NR 1,657,669 Boone County, Kentucky School District Finance Corp. School Building Revenue 285,000 5.700%, 02/01/16 ......................................... Aa3/NR 300,082 140,000 4.750%, 06/01/20 FSA Insured ............................. Aaa/AAA 142,754 1,000,000 5.375%, 08/01/20 FSA Insured ............................. Aaa/NR 1,051,460 1,580,000 4.500%, 08/01/23 FSA Insured ............................. Aaa/NR 1,586,968 1,250,000 4.125%, 03/01/25 FSA Insured ............................. Aaa/NR 1,148,400
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Boyd County, Kentucky School District Finance Corp. $ 1,025,000 5.000%, 10/01/15 ......................................... Aa3/NR $ 1,047,909 575,000 5.375%, 10/01/17 ......................................... Aa3/NR 588,553 Bullitt County, Kentucky School District Finance Corp. 200,000 4.300%, 10/01/21 ......................................... Aaa/NR 196,228 2,455,000 4.500%, 10/01/22 MBIA Insured ............................ Aaa/NR 2,483,601 2,590,000 4.500%, 10/01/23 MBIA Insured ............................ Aaa/NR 2,615,356 Christian County, Kentucky School District Finance Corp. 820,000 4.000%, 08/01/19 XLCA Insured ............................ Aaa/NR 795,498 855,000 4.000%, 08/01/20 XLCA Insured ............................ Aaa/NR 825,383 905,000 4.000%, 08/01/21 XLCA Insured ............................ Aaa/NR 869,135 1,465,000 4.000%, 08/01/22 XLCA Insured ............................ Aaa/NR 1,399,339 1,525,000 4.125%, 08/01/23 XLCA Insured ............................ Aaa/NR 1,453,310 1,590,000 4.125%, 08/01/24 XLCA Insured ............................ Aaa/NR 1,510,341 Daviess County, Kentucky School District Finance Corp. 200,000 5.000%, 06/01/24 ......................................... Aa3/NR 206,230 Fayette County, Kentucky School District Finance Corp. 5,000,000 4.250%, 04/01/23 FSA Insured ............................. Aaa/AAA 4,837,900 Floyd County, Kentucky School Building 680,000 4.375%, 10/01/22 ......................................... Aa3/NR 661,878 Floyd County, Kentucky School Finance Corporation School Building 380,000 4.000%, 03/01/17 XLCA Insured ............................ Aaa/NR 374,296 1,320,000 4.000%, 03/01/23 XLCA Insured ............................ Aaa/NR 1,254,898 1,855,000 4.125%, 03/01/26 XLCA Insured ............................ Aaa/NR 1,747,577 Fort Thomas, Kentucky Independent School District Finance 785,000 4.375%, 04/01/21 ......................................... Aa3/NR 767,895 Franklin County, Kentucky School District Finance Corp. 330,000 4.500%, 04/01/18 ......................................... Aa3/NR 334,000 1,000,000 5.000%, 04/01/24 ......................................... Aa3/NR 1,030,480 Graves County, Kentucky School Building Revenue 1,260,000 5.000%, 06/01/22 ......................................... Aa3/NR 1,300,874 1,320,000 5.000%, 06/01/23 ......................................... Aa3/NR 1,360,748
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Hardin County, Kentucky School District Finance Corp. $ 1,475,000 4.000%, 02/01/19 AMBAC Insured ........................... Aaa/NR $ 1,432,328 Jefferson County, Kentucky School District Finance Corp. School Building 250,000 5.250%, 07/01/16 FSA Insured ............................. Aaa/AAA 260,263 150,000 5.000%, 04/01/20 FSA Insured ............................. Aaa/AAA 155,177 1,360,000 4.250%, 06/01/21 FSA Insured ............................. Aaa/AAA 1,327,836 Kenton County, Kentucky School Building Revenue 590,000 4.250%, 10/10/22 FSA Insured ............................. Aaa/NR 563,592 Kenton County, Kentucky School District 955,000 5.000%, 04/01/16 ......................................... Aa3/NR 990,373 605,000 5.000%, 04/01/19 ......................................... Aa3/NR 624,777 Kenton County, Kentucky School District Finance Corp. 445,000 4.300%, 04/01/22 CIFG Assurance North America, Inc. Insured .......................................... Aaa/NR 434,992 4,250,000 5.000%, 06/01/22 MBIA Insured ............................ Aaa/NR 4,423,358 750,000 4.375%, 04/01/24 CIFG Assurance North America, Inc. Insured .......................................... Aaa/NR 734,693 325,000 4.400%, 04/01/26 CIFG Assurance North America, Inc. Insured .......................................... Aaa/NR 319,280 Kentucky Economic Development Finance Authority College Revenue Centre College 1,675,000 5.000%, 04/01/19 FSA Insured ............................. Aaa/AAA 1,735,736 Larue County, Kentucky School District Finance Corp. 270,000 4.500%, 07/01/21 MBIA Insured ............................ Aaa/NR 269,166 470,000 4.500%, 07/01/22 MBIA Insured ............................ Aaa/NR 469,488 785,000 4.500%, 07/01/23 MBIA Insured ............................ Aaa/NR 781,452 Lexington-Fayette Urban County, Kentucky Government Project Transylvania University 1,320,000 5.125%, 08/01/18 MBIA Insured ............................ Aaa/AAA 1,349,581 Lexington-Fayette Urban County, Kentucky Government Project U.K. Library 725,000 5.000%, 11/01/15 MBIA Insured ............................ Aaa/AAA 749,012 300,000 5.000%, 11/01/20 MBIA Insured ............................ Aaa/AAA 309,231
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Louisville & Jefferson County, Kentucky University of Louisville $ 500,000 5.000%, 06/01/19 AMBAC Insured ........................... Aaa/AAA $ 525,965 525,000 5.000%, 06/01/20 AMBAC Insured ........................... Aaa/AAA 551,182 Magoffin County, Kentucky School District 450,000 4.250%, 08/01/25 AMBAC Insured ........................... Aaa/NR 432,401 Meade County, Kentucky School District 490,000 4.250%, 09/01/26 MBIA Insured ............................ Aaa/NR 468,896 Oldham County, Kentucky School District Finance Corp. 900,000 5.000%, 05/01/19 MBIA Insured ............................ Aaa/NR 941,184 Pendleton County, Kentucky School District Finance Corp. School Building Revenue 730,000 4.000%, 02/01/23 MBIA Insured ........................... Aaa/NR 666,490 Scott County, Kentucky School District Finance Corp. 1,115,000 4.200%, 01/01/22 AMBAC Insured ........................... Aaa/NR 1,090,124 1,955,000 4.250%, 01/01/23 AMBAC Insured ........................... Aaa/NR 1,915,861 1,560,000 4.300%, 01/01/24 AMBAC Insured ........................... Aaa/NR 1,523,948 Scott County, Kentucky School District Finance Corp. School Building Revenue 2,435,000 4.250%, 02/01/26 FSA Insured ............................. Aaa/NR 2,251,766 1,000,000 4.250%, 02/01/27 FSA Insured ............................. Aaa/NR 921,640 Spencer County, Kentucky School District Finance Corp. 1,415,000 5.000%, 07/01/19 FSA insured ............................ Aaa/NR 1,481,194 University of Kentucky General Receipts 885,000 4.500%, 10/01/22 XLCA Insured ............................ Aaa/AAA 879,159 1,545,000 4.500%, 10/01/23 XLCA Insured ............................ Aaa/AAA 1,529,102 1,625,000 4.500%, 10/01/25 XLCA Insured ............................ Aaa/AAA 1,601,031 1,010,000 4.500%, 10/01/26 XLCA Insured ............................ Aaa/AAA 992,073 University of Louisville, Kentucky 1,055,000 4.000%, 09/01/25 MBIA Insured ............................ Aaa/AAA 975,147 Warren County, Kentucky School District Finance Corp. 295,000 4.125%, 02/01/23 MBIA Insured ............................ Aaa/NR 281,430
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Western Kentucky University Revenue General Receipts $ 2,860,000 4.200%, 09/01/25 Series A MBIA Insured ................... Aaa/AAA $ 2,648,045 2,980,000 4.200%, 09/01/26 Series A MBIA Insured ................... Aaa/AAA 2,745,236 ------------- Total Schools 78,836,003 ------------- Transportation (7.0%) Kenton County, Kentucky Airport Board Airport Revenue 750,000 5.625%, 03/01/14 MBIA Insured AMT ........................ Aaa/AAA 793,748 1,000,000 5.500%, 03/01/17 MBIA Insured AMT ........................ Aaa/AAA 1,052,950 1,300,000 5.000%, 03/01/23 MBIA Insured AMT ........................ Aaa/AAA 1,324,908 Kentucky Interlocal School Transportation Authority 145,000 5.400%, 06/01/17 ......................................... Aa3/A+ 145,919 400,000 6.000%, 12/01/20 ......................................... Aa3/A+ 405,108 200,000 6.000%, 12/01/20 ......................................... Aa3/A+ 202,554 300,000 5.800%, 12/01/20 ......................................... Aa3/A+ 303,594 400,000 5.650%, 12/01/20 ......................................... Aa3/A+ 404,552 350,000 5.600%, 12/01/20 ......................................... Aa3/A+ 353,913 Kentucky State Turnpike Authority Economic Development & Resource Recovery Road Revenue 1,000,000 5.625%, 07/01/12 FSA Insured (pre-refunded) .............. Aaa/AAA 1,054,760 200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) .............. Aaa/AAA 210,952 500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) .............. Aaa/AAA 527,380 450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) .............. Aaa/AAA 469,188 2,000,000 5.100%, 07/01/18 FSA Insured ............................. Aaa/AAA 2,069,920 Louisville & Jefferson County Regional Airport, Kentucky 2,000,000 5.750%, 07/01/15 FSA Insured AMT ......................... Aaa/AAA 2,124,400 1,000,000 5.250%, 07/01/18 FSA Insured AMT ......................... Aaa/AAA 1,041,650 1,370,000 5.250%, 07/01/21 FSA Insured AMT ......................... Aaa/AAA 1,419,772 3,390,000 5.250%, 07/01/22 FSA Insured AMT ......................... Aaa/AAA 3,509,565 275,000 5.375%, 07/01/23 FSA Insured AMT ......................... Aaa/AAA 285,519 500,000 5.000%, 07/01/25 MBIA Insured AMT ........................ Aaa/AAA 507,055 ------------- Total Transportation 18,207,407 ------------- UTILITIES (15.3%) Bardstown, Kentucky 200,000 5.000%, 12/01/19 MBIA Insured Aaa/NR 207,530
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- UTILITIES (CONTINUED) Boone County, Kentucky Pollution Control Revenue - Dayton Power & Light $ 2,000,000 4.700%, 01/01/28 FGIC Insured ............................ Aaa/AAA $ 1,997,380 Campbell & Kenton Counties, Kentucky Sanitation District Revenue 1,695,000 4.300%, 08/01/24 MBIA Insured ............................ Aaa/AAA 1,635,268 300,000 4.300%, 08/01/27 MBIA Insured ............................ Aaa/AAA 282,645 1,450,000 4.300%, 08/01/28 MBIA Insured ............................ Aaa/AAA 1,361,826 805,000 4.375%, 08/01/30 MBIA Insured ............................ Aaa/AAA 758,632 505,000 4.375%, 08/01/33 MBIA Insured ............................ Aaa/AAA 471,827 Kentucky Rural Water Finance Corp. 205,000 4.250%, 08/01/19 MBIA Insured ............................ Aaa/AAA 202,706 595,000 5.000%, 02/01/20 AMBAC Insured ........................... Aaa/AAA 618,259 210,000 4.250%, 08/01/20 MBIA Insured ............................ Aaa/AAA 206,888 200,000 4.375%, 08/01/22 MBIA Insured ............................ Aaa/AAA 198,142 240,000 4.500%, 08/01/23 MBIA Insured ............................ Aaa/AAA 240,170 200,000 4.500%, 02/01/24 MBIA Insured ............................ Aaa/AAA 199,994 255,000 4.500%, 08/01/24 MBIA Insured ............................ Aaa/AAA 254,992 290,000 4.500%, 08/01/27 MBIA Insured ............................ Aaa/AAA 288,095 245,000 4.600%, 08/01/28 MBIA Insured ............................ Aaa/AAA 245,713 315,000 4.625%, 08/01/29 MBIA Insured ............................ Aaa/AAA 316,033 Lexington-Fayette Urban County Government, Kentucky Sewer System 1,000,000 5.000%, 07/01/19 ......................................... Aa3/AA 1,038,320 Louisville & Jefferson County, Kentucky Metropolitan Sewer District 1,000,000 5.000%, 05/15/12 FGIC Insured ............................ Aaa/AAA 1,019,280 2,565,000 5.375%, 05/15/17 MBIA Insured ............................ Aaa/AAA 2,730,545 2,380,000 4.250%, 05/15/20 FSA Insured ............................. Aaa/AAA 2,345,109 2,510,000 4.250%, 05/15/21 FSA Insured ............................. Aaa/AAA 2,450,739 400,000 5.000%, 05/15/22 FGIC Insured ............................ Aaa/AAA 407,028 Louisville, Kentucky Waterworks Board Water System Revenue 1,000,000 5.250%, 11/15/16 FSA Insured ............................. Aaa/AAA 1,040,170 1,000,000 5.250%, 11/15/17 FSA Insured ............................. Aaa/AAA 1,039,220 2,530,000 5.250%, 11/15/18 FSA Insured ............................. Aaa/AAA 2,627,607 6,600,000 5.250%, 11/15/22 FSA Insured ............................. Aaa/AAA 6,842,022 2,415,000 5.250%, 11/15/24 FSA Insured ............................. Aaa/AAA 2,502,012
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- Utilities (continued) Northern Kentucky Water District $ 660,000 5.000%, 02/01/23 FGIC Insured ............................ Aaa/NR $ 677,866 Owensboro, Kentucky Electric and Power 1,555,000 5.000%, 01/01/20 FSA Insured ............................. Aaa/AAA 1,591,682 Owensboro-Daviess County, Kentucky Regional Water Resource Agency Wastewater Refunding & Improvement Revenue 930,000 4.375%, 01/01/27 Series A XLCA Insured ................... NR/AAA 880,319 Trimble County, Kentucky Environmental Facilities Revenue 3,000,000 4.600%, 06/01/33 AMBAC Insured ........................... Aaa/AAA 2,902,830 ------------- Total Utilities 39,580,849 ------------- Total Revenue Bonds 244,480,302 ------------- Total Investments (cost $256,550,581-note 4) .......... 99.1% 256,198,979 Other assets less liabilities ......................... 0.9 2,397,189 ----- ------------- Net Assets ............................................ 100.0% $ 258,596,168 ===== =============
PERCENT OF PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO ---------------------------------------------------- --------- Aaa of Moody's or AAA of S&P .................. 78.1% Aa of Moody's or AA of S&P .................... 14.0 A of Moody's or S&P ........................... 7.9 ----- 100.0% ===== PORTFOLIO ABBREVIATIONS: -------------------------------------------------------------------- AMBAC - American Municipal Bond Assurance Corp. AMT - Alternative Minimum Tax CIFG - CDC IXIS Financial Guaranty 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 JUNE 30, 2007 (unaudited) ASSETS Investments at value (cost $256,550,581) .............................................................. $ 256,198,979 Interest receivable ................................................................................... 3,600,774 Receivable for Fund shares sold ....................................................................... 36,871 Other assets .......................................................................................... 13,455 ------------- Total assets .......................................................................................... 259,850,079 ------------- LIABILITIES Cash overdraft .......................................................................................... 411,771 Payable for Fund shares redeemed ........................................................................ 436,004 Dividends payable ....................................................................................... 277,147 Management fee payable .................................................................................. 85,493 Distribution and service fees payable ................................................................... 26,897 Accrued expenses ........................................................................................ 16,599 ------------- Total liabilities ....................................................................................... 1,253,911 ------------- NET ASSETS ................................................................................................. $ 258,596,168 ============= Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share ..................... $ 250,662 Additional paid-in capital .............................................................................. 256,294,732 Net unrealized depreciation on investments (note 4) ..................................................... (351,602) Undistributed net investment income ..................................................................... 432,845 Accumulated net realized gain on investments ............................................................ 1,969,531 ------------- $ 258,596,168 ============= CLASS A Net Assets .............................................................................................. $ 200,032,187 ============= Capital shares outstanding .............................................................................. 19,391,126 ============= Net asset value and redemption price per share .......................................................... $ 10.32 ============= Offering price per share (100/96 of $10.32 adjusted to nearest cent) .................................... $ 10.75 ============= CLASS C Net Assets .............................................................................................. $ 5,364,894 ============= Capital shares outstanding .............................................................................. 520,334 ============= Net asset value and offering price per share ............................................................ $ 10.31 ============= 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) ........................................................... $ 10.31* ============= CLASS I Net Assets .............................................................................................. $ 8,189,745 ============= Capital shares outstanding .............................................................................. 794,306 ============= Net asset value, offering and redemption price per share ................................................ $ 10.31 ============= CLASS Y Net Assets .............................................................................................. $ 45,009,342 ============= Capital shares outstanding .............................................................................. 4,360,439 ============= Net asset value, offering and redemption price per share ................................................ $ 10.32 =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2007 (unaudited) Investment Income: Interest income .............................................................. $ 5,988,089 Expenses: Management fee (note 3) ...................................................... $ 532,697 Distribution and service fees (note 3) ....................................... 190,643 Transfer and shareholder servicing agent fees (note 3) ....................... 83,485 Trustees' fees and expenses (note 8) ......................................... 58,214 Shareholders' reports and proxy statements ................................... 21,169 Legal fees (note 3) .......................................................... 19,573 Fund accounting fees ......................................................... 18,433 Custodian fees ............................................................... 9,537 Insurance .................................................................... 9,519 Auditing and tax fees ........................................................ 9,423 Registration fees and dues ................................................... 6,182 Chief compliance officer (note 3) ............................................ 2,253 Miscellaneous ................................................................ 13,245 -------------- Total expenses ............................................................... 974,373 Expenses paid indirectly (note 6) ............................................ (8,183) -------------- Net expenses ................................................................. 966,190 -------------- Net investment income ........................................................ 5,021,899 Realized and Unrealized Gain (Loss) on Investments: Net realized gain (loss) from securities transactions ........................ 481,409 Change in unrealized appreciation on investments ............................. (7,410,992) -------------- Net realized and unrealized gain (loss) on investments ....................... (6,929,583) -------------- Net change in net assets resulting from operations ........................... $ (1,907,684) ==============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2007 YEAR ENDED (UNAUDITED) DECEMBER 31, 2006 ----------------- ----------------- OPERATIONS: Net investment income ....................................................... $ 5,021,899 $ 10,338,414 Net realized gain (loss) from securities transactions ....................... 481,409 1,488,134 Change in unrealized appreciation on investments ............................ (7,410,992) (1,028,674) ------------- ------------- Change in net assets from operations ...................................... (1,907,684) 10,797,874 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS (note 10): Class A Shares: Net investment income ......................................................... (3,888,093) (8,091,702) Net realized gain on investments .............................................. -- (683,967) Class C Shares: Net investment income ......................................................... (80,697) (182,422) Net realized gain on investments .............................................. -- (18,381) Class I Shares: Net investment income ......................................................... (144,190) (280,046) Net realized gain on investments .............................................. -- (25,907) Class Y Shares: Net investment income ......................................................... (904,346) (1,790,592) Net realized gain on investments .............................................. -- (150,999) ------------- ------------- Change in net assets from distributions .................................... (5,017,326) (11,224,016) ------------- ------------- CAPITAL SHARE TRANSACTIONS (note 7): Proceeds from shares sold ..................................................... 42,657,088 23,546,485 Reinvested dividends and distributions ........................................ 2,013,687 4,954,954 Cost of shares redeemed ....................................................... (50,979,469) (42,932,145) ------------- ------------- Change in net assets from capital share transactions .......................... (6,308,694) (14,430,706) ------------- ------------- Change in net assets .......................................................... (13,233,704) (14,856,848) NET ASSETS: Beginning of period ........................................................... 271,829,872 286,686,720 ------------- ------------- End of period* ................................................................ $ 258,596,168 $ 271,829,872 ============= ============= * Includes undistributed net investment income of: ............................ $ 432,845 $ 428,272 ============= =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 (unaudited) 1. ORGANIZATION Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 1, 1996, offered only one class of shares. On that date, the Fund began offering two additional classes of shares, Class C and Class Y shares. All shares outstanding prior to that date were designated as Class A shares and are sold with a front-payment sales charge and bear an annual distribution fee. Class C shares are sold with a level-payment sales charge with no payment at time of purchase but level service and distribution fees from date of purchase through a period of six years thereafter. A contingent deferred sales charge of 1% is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. Class C Shares together with a pro-rata portion of all Class C Shares acquired through reinvestment of dividends and other distributions paid in additional Class C Shares, automatically convert to Class A Shares after 6 years. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity and are not offered directly to retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. On April 30, 1998, the Fund established Class I shares, which are offered and sold only through financial intermediaries and are not offered directly to retail investors. Class I Shares are sold at net asset value without any sales charge, redemption fees, or contingent deferred sales charge. Class I shares carry a distribution fee and a service fee. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued by the pricing service at the mean of bid and asked quotations. If market quotations or a valuation from the pricing service is not readily available, the security is valued at fair value determined in good faith under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase is 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeds 60 days. b) 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. On December 31, 2006 the Fund increased undistributed net realized gain on investments by $4,967 and decreased additional paid-in capital by $4,967. g) ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 required the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would have been recorded as a tax benefit or expense in the current year. FIN 48 was effective for the Fund on June 29, 2007 and there were no uncertain tax positions to be reflected in the Fund's financial statements at June 30, 2007. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Fund believes adoption of SFAS 157 will have no material impact on the Fund's financial statements. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Aquila Investment Management LLC (the "Manager"), a wholly-owned subsidiary of Aquila Management Corporation, the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. Under the Advisory and Administration Agreement, the Manager provides all investment management and administrative services to the Fund. The Manager's services include providing the office of the Fund and all related services as well as managing relationships with of all the various support organizations to theFund such as the shareholder servicing agent, custodian, legal counsel, fund accounting agent, auditors and distributor. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's average net assets. Under a Compliance Agreement with the Manager, the Manager is compensated for Chief Compliance Officer related services provided to enable the Fund to comply with Rule 38a-1 of the Investment Company Act of 1940. Specific details as to the nature and extent of the services provided by the Manager are more fully defined in the Fund's Prospectus and Statement of Additional Information. b) DISTRIBUTION AND SERVICE FEES: The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make distribution fee payments to broker-dealers ("Qualified Recipients") or others selected by Aquila Distributors, Inc. (the "Distributor") including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund's shares or servicing of shareholder accounts. The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the six months ended June 30, 2007, distribution fees on Class A Shares amounted to $154,951 of which the Distributor retained $5,381. Under another part of the Plan, the Fund is authorized to make payments with respect to Class C Shares to Qualified Recipients which have rendered assistance in the distribution and/or retention of the Fund's Class C shares or servicing of shareholder accounts. These payments are made at the annual rate of 0.75% of the Fund's average net assets represented by Class C Shares and for the six months ended June 30, 2007, amounted to $20,798. In addition, under a Shareholder Services Plan, the Fund is authorized to make service fee payments with respect to Class C Shares to Qualified Recipients for providing personal services and/or maintenance of shareholder accounts. These payments are made at the annual rate of 0.25% of the Fund's average net assets represented by Class C Shares and for the six months ended June 30, 2007, amounted to $6,933. The total of these payments with respect to Class C Shares amounted to $27,731 of which the Distributor retained $7,072. Under another part of the Plan, the Fund is authorized to make payments with respect to Class I Shares to Qualified Recipients. Class I payments, under the Plan, may not exceed for any fiscal year of the Fund a rate (currently 0.20%), set from time to time by the Board of Trustees, of not more than 0.25% of the average annual net assets represented by the Class I Shares. In addition, Class I has a Shareholder Services Plan under which it may pay service fees (currently 0.15%) of not more than 0.25% of the average annual net assets represented by Class I Shares. That is, the total payments under both plans will not exceed 0.50% of such net assets. For the six months ended June 30, 2007, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $13,932 of which $7,961 related to the Plan and $5,971 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 six months ended June 30, 2007, total commissions on sales of Class A Shares amounted to $63,166 of which the Distributor received $5,469. c) OTHER RELATED PARTY TRANSACTIONS: For the six months ended June 30, 2007, the Fund incurred $18,865 of legal fees allocable to Hollyer Brady Barrett & Hines LLP ("Hollyer Brady") and its successor, Butzel Long PC, counsel to the Fund, for legal services in conjunction with the Fund's ongoing operations. The Secretary of the Fund was a partner at Hollyer Brady and is a shareholder of its successor. 4. PURCHASES AND SALES OF SECURITIES During the six months ended June 30, 2007, purchases of securities and proceeds from the sales of securities aggregated $31,729,178 and $36,902,753, respectively. At June 30, 2007 the aggregate tax cost for all securities was $256,534,287. At June 30, 2007, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost amounted to $2,662,864 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value amounted to $2,998,172 for a net unrealized depreciation of $335,308. 5. PORTFOLIO ORIENTATION Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. 6. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. 7. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED JUNE 30, 2007 YEAR ENDED (UNAUDITED) DECEMBER 31, 2006 --------------------------------- --------------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ CLASS A SHARES: Proceeds from shares sold ................... 659,324 $ 6,943,473 1,487,718 $ 15,671,235 Reinvested distributions .................... 173,252 1,818,247 412,423 4,351,152 Cost of shares redeemed ..................... (1,417,461) (14,859,177) (3,039,963) (32,001,358) ------------ ------------ ------------ ------------ Net change ............................... (584,885) (6,097,457) (1,139,822) (11,978,971) ------------ ------------ ------------ ------------ CLASS C SHARES: Proceeds from shares sold ................... 68,839 724,237 42,869 453,039 Reinvested distributions .................... 4,632 48,585 12,141 128,026 Cost of shares redeemed ..................... (90,399) (949,076) (206,398) (2,171,663) ------------ ------------ ------------ ------------ Net change ............................... (16,928) (176,254) (151,388) (1,590,598) ------------ ------------ ------------ ------------ CLASS I SHARES: Proceeds from shares sold ................... 51,282 540,000 -- -- Reinvested distributions .................... 9,954 104,749 25,480 268,623 Cost of shares redeemed ..................... (24,629) (259,628) (690) (7,267) ------------ ------------ ------------ ------------ Net change ............................... 36,607 385,121 24,790 261,356 ------------ ------------ ------------ ------------ CLASS Y SHARES: Proceeds from shares sold ................... 3,277,209 34,449,378 704,473 7,422,211 Reinvested distributions .................... 3,996 42,106 19,553 207,153 Cost of shares redeemed ..................... (3,321,609) (34,911,588) (831,561) (8,751,857) ------------ ------------ ------------ ------------ Net change ............................... (40,404) (420,104) (107,535) (1,122,493) ------------ ------------ ------------ ------------ Total transactions in Fund shares ...................................... (605,610) $ (6,308,694) (1,373,955) $(14,430,706) ============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES At June 30, 2007 there were 6 Trustees, one of which is affiliated with the Manager and is not paid any fees. The total amount of Trustees' service and attendance fees paid during the six months ended June 30, 2007 was $44,035 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 six months ended June 30, 2007, such meeting-related expenses amounted to $14,179. 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, 2006 2005 ----------- ----------- Net tax-exempt income $ 10,343,290 $ 10,817,058 Ordinary income 1,472 73,362 Net realized gain on investments 879,254 -- ------------ ------------ $ 11,224,016 $ 10,890,420 ============ ============ As of December 31, 2006, the components of distributable earnings on a tax basis were as follows: Accumulated net realized gain $ 1,487,104 Unrealized appreciation 7,069,211 Undistributed tax-exempt income 419,469 ------------- $ 8,975,784 ============= The difference between book basis and tax basis unrealized appreciation is attributable primarily to premium/discount adjustments. 11. RECENT DEVELOPMENTS In late May, 2007, the U. S. Supreme Court agreed to hear an appeal in Department of Revenue of Kentucky v. Davis, a case concerning the constitutionality of differential tax treatment for interest from in-state vs. out-of-state municipal securities, a practice which is common among the majority of the states. If the U.S. Supreme Court affirms the prior decision, Kentucky (and all other states that differentially tax interest on municipal bonds) may then be required to accord equal income tax treatment to all municipal bond interest. While it is impossible to predict the consequences of such an outcome, they may include effects on the net asset values of the shares, and/or on the tax treatment of the dividends, of some or all single-state municipal bond funds, including the Fund. The case is expected to be heard and decided during the U.S. Supreme Court's October 2007 - April 2008 term, with a decision likely to be handed down in 2008. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Class A ---------------------------------------------------------------------------- Six Months Ended Year Ended December 31, 6/30/07 ------------------------------------------------------------- (unaudited) 2006 2005 2004 2003 2002 ------------ --------- --------- --------- --------- --------- Net asset value, beginning of period ..... $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66 $ 10.31 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income+ ................. 0.20 0.39 0.39 0.42 0.44 0.47 Net gain (loss) on securities (both realized and unrealized) ............. (0.27) 0.03 (0.14) 0.05 0.03 0.35 --------- --------- --------- --------- --------- --------- Total from investment operations ....... (0.07) 0.42 0.25 0.47 0.47 0.82 --------- --------- --------- --------- --------- --------- Less distributions (note 10): Dividends from net investment income ... (0.20) (0.40) (0.39) (0.42) (0.44) (0.47) Distributions from capital gains ....... -- (0.03) -- -- -- -- --------- --------- --------- --------- --------- --------- Total distributions .................... (0.20) (0.43) (0.39) (0.42) (0.44) (0.47) --------- --------- --------- --------- --------- --------- Net asset value, end of period ........... $ 10.32 $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66 ========= ========= ========= ========= ========= ========= Total return (not reflecting sales charge) (0.72)%* 4.02% 2.39% 4.49% 4.50% 8.15% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 200,032 $ 211,501 $ 223,811 $ 232,927 $ 229,176 $ 226,014 Ratio of expenses to average net assets ........................... 0.74%** 0.76% 0.77% 0.73% 0.72% 0.72% Ratio of net investment income to average net assets ................... 3.76%** 3.71% 3.66% 3.96% 4.14% 4.82% Portfolio turnover rate ................ 11.88%* 19.07% 24.87% 14.31% 17.92% 18.27% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.73%** 0.76% 0.76% 0.73% 0.71% 0.71% Class C ----------------------------------------------------------------------------- Six Months Ended Year Ended December 31, 6/30/07 ------------------------------------------------------------- (unaudited) 2006 2005 2004 2003 2002 ----------- --------- --------- --------- --------- --------- Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income+ ................. 0.15 0.30 0.30 0.33 0.35 0.38 Net gain (loss) on securities (both realized and unrealized) ............. (0.27) 0.03 (0.14) 0.04 0.03 0.35 --------- --------- --------- --------- --------- --------- Total from investment operations ....... (0.12) 0.33 0.16 0.37 0.38 0.73 --------- --------- --------- --------- --------- --------- Less distributions (note 10): Dividends from net investment income ... (0.15) (0.31) (0.30) (0.33) (0.35) (0.38) Distributions from capital gains ....... -- (0.03) -- -- -- -- --------- --------- --------- --------- --------- --------- Total distributions .................... (0.15) (0.34) (0.30) (0.33) (0.35) (0.38) --------- --------- --------- --------- --------- --------- Net asset value, end of period ........... $ 10.31 $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 ========= ========= ========= ========= ========= ========= Total return (not reflecting sales charge) (1.13)%* 3.15% 1.53% 3.51% 3.62% 7.23% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 5,365 $ 5,686 $ 7,296 $ 8,166 $ 7,197 $ 4,804 Ratio of expenses to average net assets ........................... 1.59%** 1.62% 1.62% 1.58% 1.57% 1.56% Ratio of net investment income to average net assets ................... 2.91%** 2.87% 2.81% 3.11% 3.26% 3.62% Portfolio turnover rate ................ 11.88%* 19.07% 24.87% 14.31% 17.92% 18.27% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 1.58%** 1.61% 1.61% 1.58% 1.56% 1.55%
---------- + Per share amounts have been calculated using the monthly average shares method. * Not annualized. ** Annualized. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class I --------------------------------------------------------------------------- Six Months Ended Year Ended December 31, 6/30/07 ------------------------------------------------------------- (unaudited) 2006 2005 2004 2003 2002 ----------- --------- --------- --------- --------- --------- Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 $ 10.31 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income+ ................. 0.19 0.38 0.38 0.41 0.43 0.46 Net gain (loss) on securities (both realized and unrealized) ............. (0.27) 0.02 (0.14) 0.03 0.02 0.35 --------- --------- --------- --------- --------- --------- Total from investment operations ....... (0.08) 0.40 0.24 0.44 0.45 0.81 --------- --------- --------- --------- --------- --------- Less distributions (note 10): Dividends from net investment income ... (0.19) (0.38) (0.38) (0.40) (0.42) (0.46) Distributions from capital gains ....... -- (0.03) -- -- -- -- --------- --------- --------- --------- --------- --------- Total distributions .................... (0.19) (0.41) (0.38) (0.40) (0.42) (0.46) --------- --------- --------- --------- --------- --------- Net asset value, end of period ........... $ 10.31 $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 ========= ========= ========= ========= ========= ========= Total return (not reflecting sales charge) (0.79)%* 3.87% 2.24% 4.24% 4.33% 7.98% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 8,190 $ 8,018 $ 7,764 $ 7,564 $ 4,438 $ 2,407 Ratio of expenses to average net assets ........................... 0.88%** 0.91% 0.92% 0.89% 0.88% 0.87% Ratio of net investment income to average net assets ................... 3.62%** 3.57% 3.52% 3.79% 3.95% 4.32% Portfolio turnover rate ................ 11.88%* 19.07% 24.87% 14.31% 17.92% 18.27% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.87%** 0.90% 0.91% 0.89% 0.87% 0.86% Class Y ---------------------------------------------------------------------------- Six Months Ended Year Ended December 31, 6/30/07 ------------------------------------------------------------- (unaudited) 2006 2005 2004 2003 2002 ----------- --------- --------- --------- --------- --------- Net asset value, beginning of period ..... $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67 $ 10.32 --------- --------- --------- --------- --------- --------- Income (loss) from investment operations: Net investment income+ ................. 0.20 0.41 0.41 0.44 0.46 0.49 Net gain (loss) on securities (both realized and unrealized) ............. (0.27) 0.01 (0.14) 0.05 0.03 0.35 --------- --------- --------- --------- --------- --------- Total from investment operations ....... (0.07) 0.42 0.27 0.49 0.49 0.84 --------- --------- --------- --------- --------- --------- Less distributions (note 10): Dividends from net investment income ... (0.20) (0.41) (0.41) (0.44) (0.46) (0.49) Distributions from capital gains ....... -- (0.03) -- -- -- -- --------- --------- --------- --------- --------- --------- Total distributions .................... (0.20) (0.44) (0.41) (0.44) (0.46) (0.49) --------- --------- --------- --------- --------- --------- Net asset value, end of period ........... $ 10.32 $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67 ========= ========= ========= ========= ========= ========= Total return (not reflecting sales charge) (0.64)%* 4.08% 2.55% 4.65% 4.65% 8.30% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 45,009 $ 46,625 $ 47,816 $ 48,795 $ 46,313 $ 41,223 Ratio of expenses to average net assets ........................... 0.59%** 0.61% 0.62% 0.58% 0.57% 0.57% Ratio of net investment income to average net assets ................... 3.91%** 3.86% 3.81% 4.11% 4.28% 4.63% Portfolio turnover rate ................ 11.88%* 19.07% 24.87% 14.31% 17.92% 18.27% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.58%** 0.61% 0.61% 0.58% 0.56% 0.56%
---------- + 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 table below is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The table below is based on an investment of $1,000 invested on January 1, 2007 and held for the six months ended June 30, 2007. ACTUAL EXPENSES This table provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled "Expenses Paid During the Period". SIX MONTHS ENDED JUNE 30, 2007 ACTUAL TOTAL RETURN BEGINNING ENDING EXPENSES WITHOUT ACCOUNT ACCOUNT PAID DURING SALES CHARGES(1) VALUE VALUE THE PERIOD(2) -------------------------------------------------------------------------------- Class A (0.72)% $1,000.00 $992.80 $3.61 -------------------------------------------------------------------------------- Class C (1.13)% $1,000.00 $988.70 $7.79 -------------------------------------------------------------------------------- Class I (0.79)% $1,000.00 $992.10 $4.30 -------------------------------------------------------------------------------- Class Y (0.64)% $1,000.00 $993.60 $2.87 -------------------------------------------------------------------------------- (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 0.73%, 1.58%, 0.87% AND 0.58% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED) HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table below provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of other mutual funds. Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs with respect to Class A shares. The example does not reflect the deduction of contingent deferred sales charges ("CDSC") with respect to Class C shares. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different mutual funds. In addition, if these transaction costs were included, your costs would have been higher. SIX MONTHS ENDED JUNE 30, 2007 HYPOTHETICAL ANNUALIZED BEGINNING ENDING EXPENSES TOTAL ACCOUNT ACCOUNT PAID DURING RETURN VALUE VALUE THE PERIOD(1) -------------------------------------------------------------------------------- Class A 5.00% $1,000.00 $1,021.17 $3.66 -------------------------------------------------------------------------------- Class C 5.00% $1,000.00 $1,016.96 $7.90 -------------------------------------------------------------------------------- Class I 5.00% $1,000.00 $1,020.48 $4.36 -------------------------------------------------------------------------------- Class Y 5.00% $1,000.00 $1,021.92 $2.91 -------------------------------------------------------------------------------- (1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.73%, 1.58%, 0.87% AND 0.58% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- INFORMATION AVAILABLE (UNAUDITED) Much of the information that the funds in the Aquila Group of Fundssm 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, 2007 with respect to which the Fund was entitled to vote. Applicable regulations require us to inform you that the foregoing proxy voting information is available on the SEC website at http://www.sec.gov. -------------------------------------------------------------------------------- SHAREHOLDER MEETING RESULTS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 27, 2007. The holders of shares representing 85% of the total net asset value of the shares entitled to vote were present in person or by proxy. At the meeting, the following matters were voted upon and approved by the shareholders (the resulting votes are presented below). 1. To elect Trustees. DOLLAR AMOUNT OF VOTES ---------------------- TRUSTEE FOR WITHHELD ------- --- -------- Thomas A. Christopher $229,290,668 $1,685,782 Diana P. Herrmann $229,439,122 $1,537,329 Timothy J. Leach $229,332,067 $1,644,384 Theodore T. Mason $229,232,065 $1,744,386 Anne J. Mills $229,343,471 $1,632,991 James R. Ramsey $228,254,456 $2,721,995 2. To ratify the selection of Tait, Weller & Baker LLP as the Fund's independent registered public accounting firm. DOLLAR AMOUNT OF VOTES ---------------------- FOR AGAINST ABSTAIN --- ------- ------- $228,502,912 $662,928 $1,809,979 ADDITIONAL INFORMATION (UNAUDITED) RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT Renewal until June 30, 2008 of the Advisory and Administration Agreement (the "Advisory Agreement") between the Fund and the Manager was approved by the Board of Trustees and the independent Trustees in June, 2007. At a meeting called and held for that purpose at which a majority of the independent Trustees were present in person, the following materials were considered: o Copies of the agreement to be renewed; o A term sheet describing the material terms of the agreement; o The Annual Report of the Fund for the year ended December 31, 2006; o A report, prepared by the Manager and provided to the Trustees in advance of the meeting for the Trustees' review, containing data about the performance of the Fund, data about its fees, expenses and purchases and redemptions of capital stock together with comparisons of such data with similar data about other comparable funds, as well as data as to the profitability of the Manager; and o Quarterly materials reviewed at prior meetings on the Fund's performance, operations, portfolio and compliance. The Trustees reviewed materials relevant to, and considered the following factors: THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER. The Manager has provided local management of the Fund's portfolio. The Trustees noted that the Manager employed Thomas S. Albright as portfolio manager for the Fund and has established facilities for credit analysis of the Fund's portfolio securities. Mr. Albright, based in Louisville, has provided local information regarding specific holdings in the Fund's portfolio. The portfolio manager has also been available to and has met with the brokerage and financial planner community and with investors and prospective investors to provide them with information generally about the Fund's portfolio, with which to assess the Fund as an investment vehicle for residents of Kentucky in light of prevailing interest rates and local economic conditions. The Board considered that the Manager had provided all services the Board deemed necessary or appropriate, including the specific services that the Board has determined are required for the Fund, given that its purpose is to provide shareholders with as high a level of current income exempt from Kentucky state and regular Federal income taxes as is consistent with preservation of capital. The Manager has additionally provided all administrative services to the Fund. The Board considered the nature and extent of the Manager's supervision of third-party service providers, including the Fund's shareholder servicing agent and custodian. The Board considered that the Manager had established and maintained a strong culture of ethical conduct and regulatory compliance. The Board concluded that the services provided were appropriate and satisfactory and that the Fund would be well served if they continued. Evaluation of this factor weighed in favor of renewal of the Advisory Agreement. THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER. The Board reviewed each aspect of the Fund's performance and compared its performance with that of its local competitors, with national averages and the benchmark index. It was noted that the materials provided by the Manager indicated that compared to the largest competitive Kentucky funds, the Fund has had investment performance that is generally comparable to that of its peers for the one- five- and ten-year periods, with lower investment performance explained by the Fund's generally higher-quality portfolio and generally shorter average maturities. The Board concluded that the performance of the Fund was acceptable in light of market conditions, the length of its average maturities, its investment objectives and its long-standing emphasis on minimizing risk. Evaluation of this factor indicated to the Trustees that renewal of the Advisory Agreement would be appropriate. THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE MANAGER AND ITS AFFILIATE FROM THE RELATIONSHIP WITH THE FUND. The information provided in connection with renewal contained expense data for the Fund and its competitors as well as data for all single-state tax-free municipal bond funds nationwide, including data for all such front-end load funds of a comparable asset size. The materials also showed the profitability to the Manager of its services to the Fund. The Board compared the expense and fee data with respect to the Fund to similar data about other funds that it found to be relevant. The Board concluded that the expenses of the Fund and the fees paid were similar to and were reasonable as compared to those being paid by single-state tax-free municipal bond funds nationwide, and by the Fund's local competitors, all of which had higher management fees except for one. The Board further concluded that the profitability to the Manager and the Distributor did not argue against approval of the fees to be paid under the Advisory Agreement. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS. Data provided to the Trustees showed that the Fund's asset size had declined in recent years. They concluded that the recent increases in prevailing interest rates and the possibility of further increases might make it difficult to achieve substantial growth in assets in the near future. The Trustees also noted that the materials indicated that the Fund's fees were already generally lower than those of its peers, including those with breakpoints. Evaluation of this factor indicated to the Board that the Advisory Agreement should be renewed without addition of breakpoints at this time. BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATE FROM THE RELATIONSHIP WITH THE FUND. The Board observed that, as is generally true of most fund complexes, the Manager and its affiliate, by providing services to a number of funds or other investment clients including the Fund, were able to spread costs as they would otherwise be unable to do. The Board noted that while that produces efficiencies and increased profitability for the Manager and its affiliate, it also makes their services available to the Fund at favorable levels of quality and cost which are more advantageous to the Fund than would otherwise have been possible. (THIS PAGE INTENTIONALLY LEFT BLANK) Founders Lacy B. Herrmann, Chairman Emeritus Aquila Management Corporation MANAGER AQUILA INVESTMENT MANAGEMENT LLC 380 Madison Avenue, Suite 2300 New York, New York 10017 BOARD OF TRUSTEES Thomas A. Christopher, Chair Diana P. Herrmann Timothy J. Leach Theodore T. Mason Anne J. Mills James R. Ramsey OFFICERS Diana P. Herrmann, President Thomas S. Albright, Senior Vice President and Portfolio Manager Jerry G. McGrew, Senior Vice President Jason T. McGrew, Vice President Robert W. Anderson, Chief Compliance Officer Joseph P. DiMaggio, Chief Financial Officer and Treasurer Edward M.W. Hines, Secretary DISTRIBUTOR AQUILA DISTRIBUTORS, INC. 380 Madison Avenue, Suite 2300 New York, New York 10017 TRANSFER AND SHAREHOLDER SERVICING AGENT PFPC INC. 101 Sabin Street Pawtucket, RI 02860 CUSTODIAN JPMorgan Chase Bank, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Tait, Weller & Baker LLP 1818 Market Street, Suite 2400 Philadelphia, PA 19103 Further information is contained in the Prospectus, which must precede or accompany this report. ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Included in Item 1 above ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Directors of the Registrant has adopted a Nominating Committee Charter which provides that the Nominating Committee (the 'Committee') may consider and evaluate nominee candidates properly submitted by shareholders if a vacancy among the Independent Trustees of the Registrant occurs and if, based on the Board's then current size, composition and structure, the Committee determines that the vacancy should be filled. The Committee will consider candidates submitted by shareholders on the same basis as it considers and evaluates candidates recommended by other sources. A copy of the qualifications and procedures that must be met or followed by shareholders to properly submit a nominee candidate to the Committee may be obtained by submitting a request in writing to the Secretary of the Registrant. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 12. EXHIBITS. (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL TAX-FREE TRUST By: /s/ Diana P. Herrmann - - --------------------------------- President and Trustee September 6, 2007 By: /s/ Joseph P. DiMaggio - - ----------------------------------- Chief Financial Officer and Treasurer September 6, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Diana P. Herrmann - - --------------------------------- Diana P. Herrmann President and Trustee September 6, 2007 By: /s/ Joseph P. DiMaggio - - ----------------------------------- Joseph P. DiMaggio Chief Financial Officer and Treasurer September 6, 2007 CHURCHILL TAX-FREE TRUST EXHIBIT INDEX (a) (2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certification of chief executive officer and chief financial officer as required by Rule 30a-2(b) of the Investment Company Act of 1940.