N-CSR 1 ctftncsr.txt CHURCHILL TAX-FREE TRUST 12/31/07 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: 12/31/07 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. ANNUAL REPORT DECEMBER 31, 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](R) [LOGO OF THE AQUILA GROUP OF FUNDS: ONE OF THE AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS(R) [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE](R) SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY "HOW YOUR FUND IS COPING WITH THE CURRENT MARKET SITUATION" February, 2008 Dear Fellow Shareholder: As you are well aware, our country has been going through a credit crunch that began last year, particularly in August, 2007. This credit situation and liquidity crisis have continued to worsen in various forms since that time which has also led to a weakening in the U.S. dollar. While things have continued to be quite messy in the securities market despite the actions of the Federal Reserve to lower interest rates, we feel it is important for you to know that we are doing everything possible to ensure that your investment in Churchill Tax-Free Fund of Kentucky does not have any problems. By design, Churchill Tax-Free Fund of Kentucky contains an overwhelming percentage of securities - 100% as of 12/31/07 - which, due to the addition of insurance bought by issuers or otherwise, are credit rated as A or higher. You should be aware, however, that when purchasing securities for the Fund's portfolio, we always look to the UNDERLYING CREDIT QUALITY of the issues. Even without insurance and other credit enhancements, your Fund's portfolio manager has confirmed that the underlying credit quality of the Fund's portfolio holdings is approximately 99.4% A-rated or higher. Additionally, the average maturity of the securities in the Fund's portfolio is intermediate in nature. Thus, with a portfolio of high quality and intermediate maturity securities, the Fund's share value has remained reasonably stable. We strongly believe that when things get tough in the securities markets, that's when a portfolio of high quality investments pays off. You can be assured that we will seek to continue operating the Fund and maintaining its portfolio in your best interest. As we have emphasized to you since the founding of Churchill Tax-Free Fund of Kentucky, the Trustees and management team of your Fund fully realize that it is YOUR money, invested in YOUR Fund, invested in projects throughout YOUR communities and state. Not only are YOUR investments in the Fund being handled as well as we can in terms of its portfolio construction, but your Fund is also helping to fund hundreds of vital municipal projects throughout Kentucky. Because it is YOUR Fund, we try to ensure that all shareholders always have the chance to know what is going on with their investment. Furthermore, we want shareholders to have the chance to ask any questions of the management team, to ease any concern they might have. Thus, to provide you with face-to-face access to your management team, we always hold IN-STATE Annual Meetings of Shareholders. NOT A PART OF THE SEMI-ANNUAL REPORT One question asked during a recent shareholder meeting of another fund in the Aquila Group of Funds that we think you might find of interest concerned the cost of running the fund. This question gives us an opportunity to emphasize that the total expense ratio of Churchill Tax-Free Fund of Kentucky Class A Shares is 0.74% (as you will note in the enclosed Annual Report). Or, put another way, the total annual operating cost is only 0.74 of 1%. With the average expense ratio of similar type funds being 0.83%, we believe that Churchill Tax-Free Fund of Kentucky is doing a good job of controlling costs. It is also very important for us to point out that the Fund's expense ratio is NOT subsidized. When comparing expense ratios, it is important to read the fine print to see whether or not operating costs are subsidized. We appreciate your loyalty to Churchill Tax-Free Fund of Kentucky. We will do everything we can to merit your continued trust. Sincerely, [PHOTO OMITTED] /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 [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT MANAGEMENT DISCUSSION OF FUND PERFORMANCE The year that ended December 31, 2007 was very challenging. 2008 is shaping up to be every bit as interesting! With the prospect of a just-announced economic stimulus package on the near horizon, investors have a full plate of significant financial developments to watch. As we begin 2008, the country is facing the real prospect of an economic slowdown - one that Federal Reserve (Fed) Chairman Bernanke is fighting to avoid. Investor confidence in the domestic and international stock markets seems to be eroding. The financial viability of several AAA-rated municipal bond insurers is being called into question. And if that weren't enough, the Supreme Court is expected to announce its ruling on "Davis vs. the Commonwealth of Kentucky" perhaps as early as mid year (see note 11). In September 2007, the Fed began to lower short-term interest rates in order to keep the nation's economic growth on a positive track. The federal funds target rate has been reduced, so far, from 5.50% to 3.50% (on January 22, 2008). While the jury is still out, we are optimistic that the Fed is moving us in the right direction. Interest rates, across the spectrum, have fallen in response to the Fed's "easing" strategy, in spite of on-going inflation fears. From December 31, 2006 to December 31, 2007, we saw short-term rates fall dramatically - over 175 basis points on a two-year U. S. Treasury note and a 50 basis point drop for a AAA-rated 2 year municipal bond. Over the same time period, we actually saw long-term bond rates on a typical AAA-rated 30-year municipal bond rise 25 basis points, as the flight to quality continued. Demand for longer maturity higher yielding bonds has been especially strong from cash-rich foreign central banks - especially China. Inflation, a bond's greatest nemesis, began to edge up, especially when measuring energy costs. Overall, on a wholesale basis, inflation rose in 2007 by a troubling 6.3% as measured by the Producer Price Index - the largest annual increase in 26 years. This compares to a modest increase of 1.1% in 2006. The national unemployment rate remained unchanged from 2006, averaging 4.6%. However, December 2007 posted a rate of 5.0%, up from November's 4.7%, making it the largest one month jump since 2001. With the November 2008 presidential election looming, heated campaign rhetoric and political debates are filling the airwaves. While neither party has a clear frontrunner, the next few months should prove to be exciting. On the international front, we work to bring the ongoing war in Iraq to a satisfactory conclusion and monitor the ever-present "saber rattling" by the government of Iran and extremists across the globe. Oil prices, once again, are a major factor of how the U. S. economy will perform this year. Oil prices skyrocketed throughout most of the past year, and recently traded at an all-time record high of just over $100 a barrel. 2007 was a mixed year for stocks. While the major indices all turned in positive investment performance for the year, that performance, for the most part, lagged the returns posted in 2006. The Dow Jones Industrial Average rose 8.9% versus 19% in 2006. Other measures of equity performance MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED) were also positive: the S & P 500 closed up 5.5% versus 16% last year; and the NASDAQ Composite Index rose 10.7%, up from 10% last year. Fixed income securities provided respectable returns. We are pleased to report that Churchill Tax-Free Fund of Kentucky Class A Shares provided its shareholders a positive total rate of return of 2.38% in 2007, outperforming 45% of our peer group of all intermediate single-state municipal bond funds. As we enter 2008, the Kentucky economy is in worse shape than when we began 2007 - and, frankly, worse than anyone had forecast. Tax receipts are down and unemployment - especially in manufacturing - is up. Significant belt tightening will be necessary to overcome Kentucky's projected budget imbalance. That being said, Kentucky municipal bonds continued to be in tremendous demand throughout 2007. A light new issue calendar and continued strong retail and institutional demand worked to help keep rates lower than we have seen in several years. 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 Class A Share net asset value of the Fund began 2007 at $10.59 per share. It ended the year with a net asset value of $10.38 per share. The Fund continues to maintain an average credit quality of "AA", with no bonds rated less than "A". At year-end, 77.6% of the portfolio was rated "AAA". Our "laddered" maturity structure helps us manage price volatility. The Fund has an average life of approximately 14.50 years and a modified duration of approximately 6.80 years. We maintain a well-diversified portfolio of over 180 different Kentucky issues. We remain cautiously optimistic about the prospects for the U. S. and Kentucky economies in 2008, and will continue to strive to react appropriately to any signs of rising inflation. It is going to take continued vigilance and, if necessary, continued intervention by the Fed to keep our economy on a positive track while addressing inflation pressures and economic growth over the course of 2008. To address these concerns, we will strive to "stay the course" and manage the portfolio by seeking to take 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, 2007 as compared with the Lehman Brothers Quality Intermediate Municipal Bond Index ("Lehman Index") and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Lehman Index does not include any operating expenses nor sales charges and being nationally oriented, does not reflect state specific bond market performance. [Graphic of a line chart with the following information:]
Lehman Brothers Cost of Fund Class A Shares Fund Class A Shares Quality Intermediate Living Index no sales charge with sales charge Municipal Bond Index 12/97 10,000 10,000 9,600 10,000 12/98 10,161 10,500 10,080 10,600 12/99 10,434 10,342 9,929 10,631 12/00 10,787 11,205 10,757 11,548 12/01 10,955 11,657 11,192 12,185 12/02 11,215 12,561 12,059 13,310 12/03 11,426 13,189 12,662 13,927 12/04 11,798 13,787 13,236 14,348 12/05 12,201 14,071 13,509 14,586 12/06 12,511 14,711 14,123 15,138 12/07 13,021 15,042 14,441 15,876
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 2007 -------------------------------------------- SINCE CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION ------------------------------------------------- ------ ------- -------- --------- Class A (Commenced operations on 5/21/87) With Sales Charge............................. (1.70)% 2.72% 3.74% 5.73% Without Sales Charge.......................... 2.38% 3.55% 4.17% 5.94% Class C (Commenced operations on 4/01/96) With CDSC..................................... 0.60% 2.68% 3.29% 3.80% Without CDSC.................................. 1.61% 2.68% 3.29% 3.80% Class Y (Commenced operations on 4/01/96) No Sales Charge............................... 2.63% 3.71% 4.32% 4.83% Class I (Commenced operations on 8/06/01) No Sales Charge............................... 2.33% 3.40% n/a 3.98% Lehman Index..................................... 4.88% 3.59% 4.73% 5.92% (Class A) 5.03% (Class C&Y) 3.61% (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, 2007 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the years in the two 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 highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Churchill Tax-Free Fund of Kentucky as of December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania February 28, 2008 -------------------------------------------------------------------------------- CHURCHILL TAX-FREE FUND OF KENTUCKY SCHEDULE OF INVESTMENTS DECEMBER 31, 2007
RATING PRINCIPAL MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (4.8%) S&P VALUE --------------- ----------------------------------------------------- --------- ------------- Bowling Green, Kentucky $ 200,000 5.300%, 06/01/18 .................................... Aa3/NR $ 209,274 Lexington-Fayette Urban County, Kentucky 4,175,000 4.250%, 05/01/23 MBIA Insured ....................... Aaa/AAA 4,114,671 Louisville, Kentucky Unlimited Tax 2,205,000 5.000%, 10/01/21 FGIC Insured ....................... Aaa/AAA 2,293,443 Louisville & Jefferson County, Kentucky 955,000 4.200%, 11/01/22 MBIA Insured ....................... Aaa/AAA 942,499 Louisville & Jefferson County, Kentucky Metro Government Unlimited Tax 1,590,000 5.000%, 11/01/19 .................................... Aa2/AA+ 1,704,671 1,825,000 5.000%, 11/01/20 .................................... Aa2/AA+ 1,948,699 Warren County, Kentucky Judicial Unlimited Tax 345,000 5.100%, 09/01/17 AMBAC Insured ...................... Aaa/NR 367,722 365,000 5.150%, 09/01/18 AMBAC Insured ...................... Aaa/NR 389,692 ------------- Total General Obligation Bonds ...................... 11,970,671 ------------- REVENUE BONDS (95.1%) STATE AGENCIES (15.7%) Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank .................. NR/AA 518,575 Kentucky Asset/Liability Commission 500,000 4.500%, 10/01/22 FGIC Insured ....................... Aaa/AAA 510,795 Kentucky Asset & Liability Commission UK Project 500,000 5.000%, 10/01/25 Series B ........................... Aa3/AA- 524,740 750,000 5.000%, 10/01/26 Series B ........................... Aa3/AA- 784,688 1,000,000 5.000%, 10/01/27 Series B ........................... Aa3/AA- 1,043,830 Kentucky Infrastructure Authority 635,000 5.250%, 06/01/12 .................................... Aa3/A+ 640,728 2,740,000 5.250%, 06/01/14 .................................... Aa3/A+ 2,897,221 1,235,000 5.250%, 08/01/17 .................................... NR/AA 1,342,778 230,000 5.000%, 06/01/21 .................................... Aa3/A+ 238,365 Kentucky State Property and Buildings Commission 1,000,000 5.000%, 11/01/15 AMBAC Insured ...................... Aaa/AAA 1,077,830 2,725,000 5.375%, 08/01/16 FSA Insured ........................ Aaa/AAA 2,909,401
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission (continued) $ 4,735,000 5.250%, 10/01/17 .................................... Aa3/A+ $ 4,964,363 1,250,000 5.500%, 11/01/17 FSA Insured ........................ Aaa/AAA 1,363,513 1,000,000 5.000%, 11/01/17 AMBAC Insured ...................... Aaa/AAA 1,068,050 6,000,000 5.250%, 10/01/18 .................................... Aa3/A+ 6,285,060 1,925,000 5.000%, 10/01/19 .................................... Aa3/A+ 1,992,933 3,000,000 5.000%, 11/01/19 FSA Insured ........................ Aaa/AAA 3,159,900 5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) ........ Aaa/AAA 5,438,300 Kentucky State Property and Buildings Commission Project #88 2,200,000 4.500%, 11/01/26 FGIC Insured ....................... Aaa/AAA 2,180,574 ------------- Total State Agencies ................................ 38,941,644 ------------- COUNTY AGENCIES (2.4%) Jefferson County, Kentucky Capital Projects 1,575,000 4.250%, 06/01/23 FSA Insured ........................ Aaa/NR 1,555,659 4,140,000 4.375%, 06/01/28 FSA Insured ........................ Aaa/NR 4,001,434 Warren County, Kentucky Justice Center 365,000 4.300%, 09/01/22 MBIA Insured ....................... Aaa/NR 365,690 ------------- Total County Agencies ............................... 5,922,783 ------------- CITY/MUNICIPALITY OBLIGATIONS (0.3%) Shelbyville, Kentucky Certificates of Participation 625,000 5.000%, 10/01/22 .................................... A2/NR 648,706 ------------- Total City/Municipality Obligations ................. 648,706 ------------- HOSPITALS (9.0%) Jefferson County, Kentucky Health Facilities 1,715,000 5.650%, 01/01/17 AMBAC Insured ...................... Aaa/AAA 1,735,666 2,200,000 5.250%, 05/01/17 .................................... NR/A 2,297,328 Jefferson County, Kentucky Medical Center 2,000,000 5.500%, 05/01/22 .................................... NR/A 2,097,380 Kentucky Economic Development Finance Authority 1,000,000 5.000%, 02/01/18 FSA Insured ........................ Aaa/AAA 1,020,490
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- HOSPITALS (CONTINUED) Lexington-Fayette Urban County, Kentucky Public Facilities $ 500,000 4.250%, 10/01/26 MBIA Insured ....................... Aaa/NR $ 483,025 Louisville & Jefferson County, Kentucky Medical Center 1,000,000 5.000%, 06/01/18 .................................... NR/A 1,051,960 Louisville & Jefferson County, Kentucky Metropolitan Government Health System (Norton) 8,075,000 5.000%, 10/01/26 .................................... NR/A- 7,910,835 6,000,000 5.000%, 10/01/30 .................................... NR/A- 5,702,400 ------------- Total Hospitals ..................................... 22,299,084 ------------- HOUSING (13.4%) Kentucky Housing Corporation Housing Revenue 405,000 4.350%, 01/01/15 AMT ................................ Aaa/AAA 405,482 140,000 4.200%, 01/01/15 AMT ................................ Aaa/AAA 138,579 250,000 4.100%, 01/01/15 AMT ................................ Aaa/AAA 247,007 170,000 4.100%, 07/01/15 AMT ................................ Aaa/AAA 167,841 265,000 4.650%, 01/01/16 AMT ................................ Aaa/AAA 268,352 210,000 4.300%, 01/01/16 AMT ................................ Aaa/AAA 209,859 150,000 4.250%, 01/01/16 AMT ................................ Aaa/AAA 147,911 200,000 4.200%, 01/01/16 AMT ................................ Aaa/AAA 195,060 420,000 4.650%, 07/01/16 AMT ................................ Aaa/AAA 425,313 610,000 4.300%, 07/01/16 AMT ................................ Aaa/AAA 609,567 550,000 4.200%, 07/01/16 AMT ................................ Aaa/AAA 537,262 555,000 4.200%, 01/01/17 .................................... Aaa/AAA 544,405 100,000 5.125%, 07/01/17 .................................... Aaa/AAA 101,244 680,000 4.200%, 07/01/17 .................................... Aaa/AAA 666,434 470,000 4.800%, 01/01/18 AMT ................................ Aaa/AAA 471,908 285,000 4.250%, 01/01/18 .................................... Aaa/AAA 275,669 575,000 4.800%, 07/01/18 AMT ................................ Aaa/AAA 577,335 180,000 4.250%, 07/01/18 .................................... Aaa/AAA 173,916 900,000 4.800%, 07/01/20 AMT ................................ Aaa/AAA 881,784 1,150,000 5.350%, 01/01/21 AMT ................................ Aaa/AAA 1,165,352 6,125,000 5.450%, 07/01/22 AMT ................................ Aaa/AAA 6,254,911
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 $ 4,122,032 245,000 5.200%, 07/01/22 .................................... Aaa/AAA 247,996 415,000 5.100%, 07/01/22 AMT ................................ Aaa/AAA 417,328 2,570,000 4.800%, 07/01/22 AMT ................................ Aaa/AAA 2,517,443 2,000,000 4.700%, 07/01/22 Series E AMT ....................... Aaa/AAA 1,904,600 4,140,000 5.200%, 07/01/25 AMT ................................ Aaa/AAA 4,199,657 275,000 5.375%, 07/01/27 .................................... Aaa/AAA 279,892 2,300,000 5.000%, 07/01/27 Series N AMT ....................... Aaa/AAA 2,283,003 1,000,000 4.750%, 07/01/27 Series E AMT ....................... Aaa/AAA 938,510 560,000 5.550%, 07/01/33 .................................... Aaa/AAA 568,456 Kentucky Housing Multifamily Mortgage Revenue 1,325,000 5.000%, 06/01/35 AMT ................................ NR/AAA 1,320,707 ------------- Total Housing ....................................... 33,264,815 ------------- SCHOOLS (33.3%) Barren County, Kentucky School Building Revenue 1,265,000 4.250%, 08/01/25 CIFG Assurance North America, Inc. Insured ..................................... Aaa/NR 1,244,950 1,670,000 4.375%, 08/01/26 CIFG Assurance North America, Inc. Insured ..................................... Aaa/NR 1,660,498 Berea, Kentucky Educational Facilities (Berea College) 1,000,000 4.125%, 06/01/25 .................................... Aaa/NR 962,050 Boone County, Kentucky School District Finance Corp. 1,730,000 4.125%, 08/01/22 XLCA Insured ....................... Aaa/NR 1,712,198 Boone County, Kentucky School District Finance Corp. School Building Revenue 140,000 4.750%, 06/01/20 FSA Insured ........................ Aaa/AAA 144,600 1,580,000 4.500%, 08/01/23 FSA Insured ........................ Aaa/NR 1,621,807 1,250,000 4.125%, 03/01/25 FSA Insured ........................ Aaa/NR 1,197,200 Boyd County, Kentucky School District Finance Corp. 1,025,000 5.000%, 10/01/15 .................................... Aa3/NR 1,048,749 575,000 5.375%, 10/01/17 .................................... Aa3/NR 589,392 Boyle County, Kentucky College Refunding & Improvement 1,035,000 4.500%, 06/01/22 CIFG Insured ....................... Aaa/AAA 1,051,643
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Bullitt County, Kentucky School District Finance Corp. $ 200,000 4.300%, 10/01/21 MBIA Insured ....................... Aaa/NR $ 201,036 2,455,000 4.500%, 10/01/22 MBIA Insured ....................... Aaa/NR 2,516,547 2,590,000 4.500%, 10/01/23 MBIA Insured ....................... Aaa/NR 2,645,737 Christian County, Kentucky School District Finance Corp. 820,000 4.000%, 08/01/19 XLCA Insured ....................... Aaa/NR 817,720 855,000 4.000%, 08/01/20 XLCA Insured ....................... Aaa/NR 848,305 905,000 4.000%, 08/01/21 XLCA Insured ....................... Aaa/NR 890,077 1,465,000 4.000%, 08/01/22 XLCA Insured ....................... Aaa/NR 1,430,133 1,525,000 4.125%, 08/01/23 XLCA Insured ....................... Aaa/NR 1,489,803 1,590,000 4.125%, 08/01/24 XLCA Insured ....................... Aaa/NR 1,531,631 Daviess County, Kentucky School District Finance Corp. 200,000 5.000%, 06/01/24 .................................... Aa3/NR 209,130 Fayette County, Kentucky School District Finance Corp. 5,000,000 4.250%, 04/01/23 FSA Insured ........................ Aaa/AAA 5,005,900 4,335,000 4.375%, 05/01/26 FSA Insured ........................ Aaa/AAA 4,283,630 Floyd County, Kentucky School Building 680,000 4.375%, 10/01/22 .................................... Aa3/NR 680,626 Floyd County, Kentucky School Finance Corporation School Building 1,320,000 4.000%, 03/01/23 XLCA Insured ....................... Aaa/NR 1,271,886 1,855,000 4.125%, 03/01/26 XLCA Insured ....................... Aaa/NR 1,764,791 Fort Thomas, Kentucky Independent School District Building Revenue 610,000 4.375%, 04/01/25 .................................... Aa3/NR 603,046 Fort Thomas, Kentucky Independent School District Finance 785,000 4.375%, 04/01/21 .................................... Aa3/NR 791,720 Franklin County, Kentucky School District Finance Corp. 330,000 4.500%, 04/01/18 .................................... Aa3/NR 341,784 1,000,000 5.000%, 04/01/24 .................................... Aa3/NR 1,044,580
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Graves County, Kentucky School Building Revenue $ 1,260,000 5.000%, 06/01/22 .................................... Aa3/NR $ 1,323,189 1,320,000 5.000%, 06/01/23 .................................... Aa3/NR 1,379,004 Hardin County, Kentucky School District Finance Corp. 1,475,000 4.000%, 02/01/19 AMBAC Insured ...................... Aaa/NR 1,476,770 Jefferson County, Kentucky School District Finance Corp. School Building 150,000 5.000%, 04/01/20 FSA Insured ........................ Aaa/AAA 156,434 1,360,000 4.250%, 06/01/21 FSA Insured ........................ Aaa/AAA 1,372,009 Kenton County, Kentucky School Building Revenue 590,000 4.250%, 10/10/22 FSA Insured ........................ Aaa/NR 588,684 Kenton County, Kentucky School District Finance Corp. 445,000 4.300%, 04/01/22 CIFG Assurance North America, Inc. Insured ..................................... Aaa/NR 448,974 4,250,000 5.000%, 06/01/22 MBIA Insured ....................... Aaa/NR 4,458,590 750,000 4.375%, 04/01/24 CIFG Assurance North America, Inc. Insured ..................................... Aaa/NR 754,343 325,000 4.400%, 04/01/26 CIFG Assurance North America, Inc. Insured ..................................... Aaa/NR 326,768 Larue County, Kentucky School District Finance Corp. 270,000 4.500%, 07/01/21 MBIA Insured ....................... Aaa/NR 274,577 470,000 4.500%, 07/01/22 MBIA Insured ....................... Aaa/NR 477,628 785,000 4.500%, 07/01/23 MBIA Insured ....................... Aaa/NR 794,396 Lexington-Fayette Urban County, Kentucky Government Project Transylvania University 1,320,000 5.125%, 08/01/18 MBIA Insured ....................... Aaa/AAA 1,346,228 Lexington-Fayette Urban County, Kentucky Government Project U.K. Library 725,000 5.000%, 11/01/15 MBIA Insured ....................... Aaa/AAA 748,787 300,000 5.000%, 11/01/20 MBIA Insured ....................... Aaa/AAA 309,594 Louisville & Jefferson County, Kentucky University of Louisville 525,000 5.000%, 06/01/20 AMBAC Insured ...................... Aaa/AAA 560,784
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- SCHOOLS (CONTINUED) Magoffin County, Kentucky School Building Revenue $ 375,000 4.250%, 08/01/23 AMBAC Insured ...................... Aaa/NR $ 373,721 Magoffin County, Kentucky School District 450,000 4.250%, 08/01/25 AMBAC Insured ...................... Aaa/NR 442,868 Meade County, Kentucky School District 490,000 4.250%, 09/01/26 MBIA Insured ....................... Aaa/NR 476,427 Murray State University Project, Kentucky General Receipts Revenue 745,000 4.500%, 09/01/23 AMBAC Insured ...................... Aaa/AAA 751,943 Oldham County, Kentucky School District Finance Corp. 900,000 5.000%, 05/01/19 MBIA Insured ....................... Aaa/NR 953,415 Pendleton County, Kentucky School District Finance Corp. School Building Revenue 730,000 4.000%, 02/01/23 MBIA Insured ....................... Aaa/NR 691,872 Pike County, Kentucky School Building Revenue 1,355,000 4.375%, 10/01/26 MBIA Insured ....................... Aaa/NR 1,330,258 Scott County, Kentucky School District Finance Corp. 1,115,000 4.200%, 01/01/22 AMBAC Insured ...................... Aaa/NR 1,115,000 1,955,000 4.250%, 01/01/23 AMBAC Insured ...................... Aaa/NR 1,952,850 1,560,000 4.300%, 01/01/24 AMBAC Insured ...................... Aaa/NR 1,547,520 Scott County, Kentucky School District Finance Corp. School Building Revenue 2,435,000 4.250%, 02/01/26 FSA Insured ........................ Aaa/NR 2,339,767 1,000,000 4.250%, 02/01/27 FSA Insured ........................ Aaa/NR 955,840 Spencer County, Kentucky School District Finance Corp. 1,415,000 5.000%, 07/01/19 FSA insured ........................ Aaa/NR 1,509,352 University of Kentucky General Receipts 885,000 4.500%, 10/01/22 XLCA Insured ....................... Aaa/AAA 899,664 1,545,000 4.500%, 10/01/23 XLCA Insured ....................... Aaa/AAA 1,563,849 1,625,000 4.500%, 10/01/25 XLCA Insured ....................... Aaa/AAA 1,627,226 1,010,000 4.500%, 10/01/26 XLCA Insured ....................... Aaa/AAA 1,007,404 University of Louisville, Kentucky 1,055,000 4.000%, 09/01/25 MBIA Insured ....................... Aaa/AAA 993,610 Warren County, Kentucky School District Finance Corp. 295,000 4.125%, 02/01/23 MBIA Insured ....................... Aaa/NR 288,348
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 $ 2,704,788 2,980,000 4.200%, 09/01/26 Series A MBIA Insured .............. Aaa/AAA 2,797,147 ------------- Total Schools ....................................... 82,720,797 ------------- TRANSPORTATION (5.3%) Kenton County, Kentucky Airport Board Airport Revenue 1,300,000 5.000%, 03/01/23 MBIA Insured AMT ................... Aaa/AAA 1,319,981 Kentucky Interlocal School Transportation Authority 145,000 5.400%, 06/01/17 .................................... Aa3/A+ 145,995 400,000 6.000%, 12/01/20 .................................... Aa3/A+ 403,764 200,000 6.000%, 12/01/20 .................................... Aa3/A+ 201,882 300,000 5.800%, 12/01/20 .................................... Aa3/A+ 302,583 400,000 5.650%, 12/01/20 .................................... Aa3/A+ 403,288 350,000 5.600%, 12/01/20 .................................... Aa3/A+ 352,804 Kentucky State Turnpike Authority Economic Development & Resource Recovery Road Revenue 200,000 5.625%, 07/01/13 FSA Insured (pre-refunded) ......... Aaa/AAA 213,968 500,000 5.625%, 07/01/14 FSA Insured (pre-refunded) ......... Aaa/AAA 534,920 450,000 5.250%, 07/01/15 FSA Insured (pre-refunded) ......... Aaa/AAA 476,645 2,000,000 5.100%, 07/01/18 FSA Insured ........................ Aaa/AAA 2,090,260 Louisville & Jefferson County Regional Airport, Kentucky 1,000,000 5.250%, 07/01/18 FSA Insured AMT .................... Aaa/AAA 1,046,030 1,370,000 5.250%, 07/01/21 FSA Insured AMT .................... Aaa/AAA 1,420,169 3,390,000 5.250%, 07/01/22 FSA Insured AMT .................... Aaa/AAA 3,504,141 275,000 5.375%, 07/01/23 FSA Insured AMT .................... Aaa/AAA 284,009 500,000 5.000%, 07/01/25 MBIA Insured AMT ................... Aaa/AAA 502,670 ------------- Total Transportation ................................ 13,203,109 ------------- UTILITIES (15.7%) Bardstown, Kentucky 200,000 5.000%, 12/01/19 MBIA Insured ....................... Aaa/NR 209,350 Boone County, Kentucky Pollution Control Revenue Dayton Power & Light 2,000,000 4.700%, 01/01/28 FGIC Insured ....................... Aaa/AAA 2,008,760
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- ----------------------------------------------------- ---------- ------------- UTILITIES (CONTINUED) Campbell & Kenton Counties, Kentucky Sanitation District Revenue $ 1,695,000 4.300%, 08/01/24 MBIA Insured ....................... Aaa/AAA $ 1,667,321 300,000 4.300%, 08/01/27 MBIA Insured ....................... Aaa/AAA 286,593 1,450,000 4.300%, 08/01/28 MBIA Insured ....................... Aaa/AAA 1,377,674 805,000 4.375%, 08/01/30 MBIA Insured ....................... Aaa/AAA 765,587 505,000 4.375%, 08/01/33 MBIA Insured ....................... Aaa/AAA 475,690 Kentucky Rural Water Finance Corp. 205,000 4.250%, 08/01/19 MBIA Insured ....................... Aaa/AAA 207,495 595,000 5.000%, 02/01/20 AMBAC Insured ...................... Aaa/AAA 622,673 210,000 4.250%, 08/01/20 MBIA Insured ....................... Aaa/AAA 211,798 200,000 4.375%, 08/01/22 MBIA Insured ....................... Aaa/AAA 202,206 240,000 4.500%, 08/01/23 MBIA Insured ....................... Aaa/AAA 243,749 200,000 4.500%, 02/01/24 MBIA Insured ....................... Aaa/AAA 201,926 255,000 4.500%, 08/01/24 MBIA Insured ....................... Aaa/AAA 257,887 290,000 4.500%, 08/01/27 MBIA Insured ....................... Aaa/AAA 291,015 245,000 4.600%, 08/01/28 MBIA Insured ....................... Aaa/AAA 247,065 315,000 4.625%, 08/01/29 MBIA Insured ....................... Aaa/AAA 317,542 Lexington-Fayette Urban County Government, Kentucky Sewer System 1,000,000 5.000%, 07/01/19 .................................... Aa3/AA 1,050,340 Louisville & Jefferson County, Kentucky Metropolitan Sewer District 1,000,000 5.000%, 05/15/12 FGIC Insured ....................... Aaa/AAA 1,015,580 2,565,000 5.375%, 05/15/17 MBIA Insured ....................... Aaa/AAA 2,763,582 2,380,000 4.250%, 05/15/20 FSA Insured ........................ Aaa/AAA 2,412,987 2,510,000 4.250%, 05/15/21 FSA Insured ........................ Aaa/AAA 2,532,038 400,000 5.000%, 05/15/22 FGIC Insured ....................... Aaa/AAA 406,012 Louisville, Kentucky Waterworks Board Water System 1,000,000 5.250%, 11/15/16 FSA Insured ........................ Aaa/AAA 1,053,390 2,530,000 5.250%, 11/15/18 FSA Insured ........................ Aaa/AAA 2,665,077 6,600,000 5.250%, 11/15/22 FSA Insured ........................ Aaa/AAA 6,926,568 2,415,000 5.250%, 11/15/24 FSA Insured ........................ Aaa/AAA 2,530,461
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 $ 680,064 Owensboro, Kentucky Electric and Power 1,555,000 5.000%, 01/01/20 FSA Insured ........................ Aaa/AAA 1,594,404 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 897,971 Trimble County, Kentucky Environmental Facilities 3,000,000 4.600%, 06/01/33 AMBAC Insured ...................... Aaa/AAA 2,986,530 ------------- Total Utilities ..................................... 39,109,335 ------------- Total Revenue Bonds .............................. 236,110,273 ------------- Total Investments (cost $246,018,952-note 4) ..... 99.9% 248,080,944 Other assets less liabilities .................... 0.1 191,455 ------ ------------- Net Assets ....................................... 100.0% $ 248,272,399 ====== =============
PERCENT OF PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO ---------------------------------------------------- --------- Aaa of Moody's or AAA of S&P ......................... 77.6% Aa of Moody's or AA of S&P ........................... 14.5 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 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, 2007 ASSETS Investments at value (cost $246,018,952) ......................................... $248,080,944 Interest receivable .............................................................. 3,424,280 Receivable for Fund shares sold .................................................. 14,826 Other assets ..................................................................... 12,081 ------------ Total assets ..................................................................... 251,532,131 ------------ LIABILITIES Cash overdraft ..................................................................... 147,974 Payable for Fund shares redeemed ................................................... 2,728,004 Dividends payable .................................................................. 237,543 Management fee payable ............................................................. 85,295 Distribution and service fees payable .............................................. 29,980 Accrued expenses ................................................................... 30,936 ------------ Total liabilities .................................................................. 3,259,732 ------------ NET ASSETS ............................................................................ $248,272,399 ============ Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 239,150 Additional paid-in capital ......................................................... 244,754,393 Net unrealized appreciation on investments (note 4) ................................ 2,061,992 Undistributed net investment income ................................................ 28,899 Accumulated net realized gain on investments ....................................... 1,187,965 ------------ $248,272,399 ============ CLASS A Net Assets ......................................................................... $194,140,457 ============ Capital shares outstanding ......................................................... 18,702,178 ============ Net asset value and redemption price per share ..................................... $ 10.38 ============ Offering price per share (100/96 of $10.38 adjusted to nearest cent) ............... $ 10.81 ============ CLASS C Net Assets ......................................................................... $ 4,120,480 ============ Capital shares outstanding ......................................................... 397,141 ============ Net asset value and offering price per share ....................................... $ 10.38 ============ 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) ...................................... $ 10.38* ============ CLASS I Net Assets ......................................................................... $ 8,363,007 ============ Capital shares outstanding ......................................................... 806,039 ============ Net asset value, offering and redemption price per share ........................... $ 10.38 ============ CLASS Y Net Assets ......................................................................... $ 41,648,455 ============ Capital shares outstanding ......................................................... 4,009,609 ============ Net asset value, offering and redemption price per share ........................... $ 10.39 ============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2007 INVESTMENT INCOME: Interest income .................................................. $ 11,811,990 Expenses: Management fee (note 3) .......................................... $ 1,046,917 Distribution and service fees (note 3) ........................... 372,596 Transfer and shareholder servicing agent fees (note 3) ........... 164,405 Trustees' fees and expenses (note 8) ............................. 118,997 Legal fees (note 3) .............................................. 43,511 Shareholders' reports and proxy statements ....................... 41,146 Fund accounting fees ............................................. 37,171 Custodian fees ................................................... 29,984 Auditing and tax fees ............................................ 19,001 Insurance ........................................................ 15,492 Registration fees and dues ....................................... 13,948 Chief compliance officer (note 3) ................................ 4,544 Miscellaneous .................................................... 34,693 ------------ Total expenses ................................................... 1,942,405 Expenses paid indirectly (note 6) ................................ (13,406) ------------ Net expenses ..................................................... 1,928,999 ------------- Net investment income ............................................ 9,882,991 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from securities transactions ............ 1,189,986 Change in unrealized appreciation on investments ................. (4,997,398) ------------ Net realized and unrealized gain (loss) on investments ........... (3,807,412) ------------- Net change in net assets resulting from operations ............... $ 6,075,579 =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, 2007 DECEMBER 31, 2006 ----------------- ----------------- OPERATIONS: Net investment income ............................... $ 9,882,991 $ 10,338,414 Net realized gain (loss) from securities transactions 1,189,986 1,488,134 Change in unrealized appreciation on investments .... (4,997,398) (1,028,674) ------------- ------------- Change in net assets from operations .............. 6,075,579 10,797,874 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS (note 10): Class A Shares: Net investment income ................................. (7,653,537) (8,091,702) Net realized gain on investments ...................... (1,167,715) (683,967) Class C Shares: Net investment income ................................. (149,329) (182,422) Net realized gain on investments ...................... (24,440) (18,381) Class I Shares: Net investment income ................................. (295,398) (280,046) Net realized gain on investments ...................... (49,465) (25,907) Class Y Shares: Net investment income ................................. (1,764,718) (1,790,592) Net realized gain on investments ...................... (247,505) (150,999) ------------- ------------- Change in net assets from distributions ............ (11,352,107) (11,224,016) ------------- ------------- CAPITAL SHARE TRANSACTIONS (note 7): Proceeds from shares sold ............................. 50,733,976 23,546,485 Reinvested dividends and distributions ................ 4,967,956 4,954,954 Cost of shares redeemed ............................... (73,982,877) (42,932,145) ------------- ------------- Change in net assets from capital share transactions .. (18,280,945) (14,430,706) ------------- ------------- Change in net assets .................................. (23,557,473) (14,856,848) NET ASSETS: Beginning of period ................................... 271,829,872 286,686,720 ------------- ------------- End of period* ........................................ $ 248,272,399 $ 271,829,872 ============= ============= * Includes undistributed net investment income of: .... $ 28,899 $ 428,272 ============= =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2007 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. FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") was adopted on June 29, 2007. Management has reviewed the tax positions for each of the open tax years (2004-2007) and has determined that the implementation of FIN 48 did not have a material impact on the Fund's financial statements. 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, 2007 the Fund decreased undistributed net investment income by $419,382, decreased undistributed net realized gain on investments by $1,018 and increased additional paid-in capital by $420,400. g) ACCOUNTING PRONOUNCEMENT: 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 year ended December 31, 2007, distribution fees on Class A Shares amounted to $305,016 of which the Distributor retained $10,936. 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, 2007, amounted to $38,445. 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, 2007, amounted to $12,815. The total of these payments with respect to Class C Shares amounted to $51,260 of which the Distributor retained $12,816. 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, 2007, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $28,561 of which $16,320 related to the Plan and $12,241 related to the Shareholder Services Plan. Specific details about the Plans are more fully defined in the Fund's Prospectus and Statement of Additional Information. Under a Distribution Agreement, the Distributor serves as the exclusive distributor of the Fund's shares. Through agreements between the Distributor and various brokerage and advisory firms ("intermediaries"), the Fund's shares are sold primarily through the facilities of these intermediaries having offices within Kentucky, with the bulk of sales commissions inuring to such intermediaries. For the year ended December 31, 2007, total commissions on sales of Class A Shares amounted to $109,346 of which the Distributor received $9,351. c) OTHER RELATED PARTY TRANSACTIONS: For the year ended December 31, 2007, the Fund incurred $23,594 of legal fees allocable to Hollyer Brady Barrett & Hines LLP ("Hollyer Brady") and $18,045 to 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 year ended December 31, 2007, purchases of securities and proceeds from the sales of securities aggregated $49,299,922 and $65,491,502, respectively. At December 31, 2007 the aggregate tax cost for all securities was $245,990,053. At December 31, 2007, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost amounted to $3,916,537 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value amounted to $1,825,646 for a net unrealized appreciation of $2,090,891. 5. PORTFOLIO ORIENTATION Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. 6. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. 7. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 2007 DECEMBER 31, 2006 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ CLASS A SHARES: Proceeds from shares sold 1,253,821 $ 13,109,577 1,487,718 $ 15,671,235 Reinvested distributions 408,743 4,254,990 412,423 4,351,152 Cost of shares redeemed . (2,936,397) (30,619,982) (3,039,963) (32,001,358) ------------ ------------ ------------ ------------ Net change ........... (1,273,833) (13,255,415) (1,139,822) (11,978,971) ------------ ------------ ------------ ------------ CLASS C SHARES: Proceeds from shares sold 81,155 852,011 42,869 453,039 Reinvested distributions 9,963 103,674 12,141 128,026 Cost of shares redeemed . (231,239) (2,412,850) (206,398) (2,171,663) ------------ ------------ ------------ ------------ Net change ........... (140,121) (1,457,165) (151,388) (1,590,598) ------------ ------------ ------------ ------------ CLASS I SHARES: Proceeds from shares sold 51,362 540,822 -- -- Reinvested distributions 29,887 311,248 25,480 268,623 Cost of shares redeemed . (32,909) (345,172) (690) (7,267) ------------ ------------ ------------ ------------ Net change ........... 48,340 506,898 24,790 261,356 ------------ ------------ ------------ ------------ CLASS Y SHARES: Proceeds from shares sold 3,449,070 36,231,566 704,473 7,422,211 Reinvested distributions 28,753 298,044 19,553 207,153 Cost of shares redeemed . (3,869,057) (40,604,873) (831,561) (8,751,857) ------------ ------------ ------------ ------------ Net change ........... (391,234) (4,075,263) (107,535) (1,122,493) ------------ ------------ ------------ ------------ Total transactions in Fund shares .................. (1,756,848) $(18,280,945) (1,373,955) $(14,430,706) ============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES At December 31, 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 year ended December 31, 2007 was $88,370 to cover carrying out their responsibilities and attendance at regularly scheduled quarterly Board Meetings and meetings of the Independent Trustees held prior to each quarterly Board Meeting. When additional meetings (Audit, Nominating and 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, 2007, such meeting-related expenses amounted to $30,627. 9. SECURITIES TRADED ON A WHEN-ISSUED BASIS The Fund may purchase or sell securities on a when-issued basis. When-issued transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. Beginning on the date the Fund enters into a when-issued transaction, cash or other liquid securities are segregated in an amount equal to or greater than the amount of the when-issued transaction. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. 10. INCOME TAX INFORMATION AND DISTRIBUTIONS The Fund declares dividends daily from net investment income and makes payments monthly. Net realized capital gains, if any, are distributed annually and are taxable. Dividends and capital gains distributions are paid in additional shares at the net asset value per share, in cash, or in a combination of both, at the shareholder's option. The Fund intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of Kentucky income taxes. However, due to differences between financial statement reporting and Federal income tax reporting requirements, distributions made by the Fund may not be the same as the Fund's net investment income, and/or net realized securities gains. Further, a small portion of the dividends may, under some circumstances, be subject to taxes at ordinary income and/or capital gain rates. For certain shareholders, some dividend income may, under some circumstances, be subject to the alternative minimum tax. The tax character of distributions: Year Ended December 31, 2007 2006 ----------- ----------- Net tax-exempt income $ 9,862,982 $10,343,290 Ordinary income -- 1,472 Net realized gain on investments 1,489,125 879,254 ----------- ----------- $11,352,107 $11,224,016 =========== =========== As of December 31, 2007, the components of distributable earnings on a tax basis were as follows: Accumulated net realized gain $1,187,965 Unrealized appreciation 2,090,891 Undistributed tax-exempt income 238,561 ---------- $3,517,417 ========== 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 U.S. Supreme Court heard the case on November 5, 2007 and is expected to hand a decision down in 2008. Over the past few months, municipal bond insurance companies have been under review by the three major rating agencies Standard & Poor's, Moody's and Fitch. The ratings of some of the insurance companies have now either been downgraded and/or have a negative outlook. The financial markets continue to assess the severity of the losses caused by the subprime credit crisis and its impact on municipal bond insurance companies and insured municipal bond prices. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class A ----------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.39++ 0.39+ 0.39+ 0.42+ 0.44+ Net gain (loss) on securities (both realized and unrealized) ............. (0.15) 0.03 (0.14) 0.05 0.03 -------- -------- -------- -------- -------- Total from investment operations ....... 0.24 0.42 0.25 0.47 0.47 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.39) (0.40) (0.39) (0.42) (0.44) Distributions from capital gains ....... (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- Total distributions .................... (0.45) (0.43) (0.39) (0.42) (0.44) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 2.38% 4.02% 2.39% 4.49% 4.50% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $194,140 $211,501 $223,811 $232,927 $229,176 Ratio of expenses to average net assets ........................... 0.75% 0.76% 0.77% 0.73% 0.72% Ratio of net investment income to average net assets ................... 3.77% 3.71% 3.66% 3.96% 4.14% Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.74% 0.76% 0.76% 0.73% 0.71% Class C ----------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.31++ 0.30+ 0.30+ 0.33+ 0.35+ Net gain (loss) on securities (both realized and unrealized) ............. (0.15) 0.03 (0.14) 0.04 0.03 -------- -------- -------- -------- -------- Total from investment operations ....... 0.16 0.33 0.16 0.37 0.38 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.30) (0.31) (0.30) (0.33) (0.35) Distributions from capital gains ....... (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- Total distributions .................... (0.36) (0.34) (0.30) (0.33) (0.35) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 1.61% 3.15% 1.53% 3.51% 3.62% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 4,120 $ 5,686 $ 7,296 $ 8,166 $ 7,197 Ratio of expenses to average net assets ........................... 1.60% 1.62% 1.62% 1.58% 1.57% Ratio of net investment income to average net assets ................... 2.92% 2.87% 2.81% 3.11% 3.26% Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 1.59% 1.61% 1.61% 1.58% 1.56%
---------- + Per share amounts have been calculated using the monthly average shares method. ++ Per share amounts have been calculated using the daily average shares method. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Class I ----------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.38++ 0.38+ 0.38+ 0.41+ 0.43+ Net gain (loss) on securities (both realized and unrealized) ............. (0.14) 0.02 (0.14) 0.03 0.02 -------- -------- -------- -------- -------- Total from investment operations ....... 0.24 0.40 0.24 0.44 0.45 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.38) (0.38) (0.38) (0.40) (0.42) Distributions from capital gains ....... (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- Total distributions .................... (0.44) (0.41) (0.38) (0.40) (0.42) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 2.33% 3.87% 2.24% 4.24% 4.33% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 8,363 $ 8,018 $ 7,764 $ 7,564 $ 4,438 Ratio of expenses to average net assets ........................... 0.89% 0.91% 0.92% 0.89% 0.88% Ratio of net investment income to average net assets ................... 3.62% 3.57% 3.52% 3.79% 3.95% Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.88% 0.90% 0.91% 0.89% 0.87% Class Y ----------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.41++ 0.41+ 0.41+ 0.44+ 0.46+ Net gain (loss) on securities (both realized and unrealized) ............. (0.14) 0.01 (0.14) 0.05 0.03 -------- -------- -------- -------- -------- Total from investment operations ....... 0.27 0.42 0.27 0.49 0.49 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.41) (0.41) (0.41) (0.44) (0.46) Distributions from capital gains ....... (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- Total distributions .................... (0.47) (0.44) (0.41) (0.44) (0.46) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) 2.63% 4.08% 2.55% 4.65% 4.65% Ratios/supplemental data Net assets, end of period (in thousands) ....................... $ 41,648 $ 46,625 $ 47,816 $ 48,795 $ 46,313 Ratio of expenses to average net assets ........................... 0.60% 0.61% 0.62% 0.58% 0.57% Ratio of net investment income to average net assets ................... 3.92% 3.86% 3.81% 4.11% 4.28% Portfolio turnover rate ................ 18.92% 19.07% 24.87% 14.31% 17.92% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ........................... 0.59% 0.61% 0.61% 0.58% 0.56%
---------- + Per share amounts have been calculated using the monthly average shares method. ++ Per share amounts have been calculated using the daily average shares method. See accompanying notes to financial statements. -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end sales charges with respect to Class A shares or contingent deferred sales charges ("CDSC") with respect to Class C shares; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. The table below is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The table below is based on an investment of $1,000 invested on July 1, 2007 and held for the six months ended December 31, 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 DECEMBER 31, 2007 ACTUAL TOTAL RETURN BEGINNING ENDING EXPENSES WITHOUT ACCOUNT ACCOUNT PAID DURING SALES CHARGES(1) VALUE VALUE THE PERIOD(2) -------------------------------------------------------------------------------- Class A 3.12% $1,000.00 $1,031.20 $3.84 Class C 2.82% $1,000.00 $1,028.20 $8.18 Class I 3.14% $1,000.00 $1,031.40 $4.61 Class Y 3.29% $1,000.00 $1,032.90 $3.07 (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 0.75%, 1.60%, 0.90% AND 0.60% 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. SIX MONTHS ENDED DECEMBER 31, 2007 HYPOTHETICAL ANNUALIZED BEGINNING ENDING EXPENSES TOTAL ACCOUNT ACCOUNT PAID DURING RETURN VALUE VALUE THE PERIOD(1) -------------------------------------------------------------------------------- Class A 5.00% $1,000.00 $1,021.42 $3.82 Class C 5.00% $1,000.00 $1,017.14 $8.13 Class I 5.00% $1,000.00 $1,020.67 $4.58 Class Y 5.00% $1,000.00 $1,022.18 $3.06 (1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.75%, 1.60%, 0.90% AND 0.60% 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). -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- INFORMATION AVAILABLE (UNAUDITED) Much of the information that the funds in the Aquila Group of Funds(R) produce is automatically sent to you and all other shareholders. Specifically, you are routinely sent the entire list of portfolio securities of your Fund twice a year in the semi-annual and annual reports you receive. Additionally, we prepare, and have available, portfolio listings at the end of each quarter. Whenever you may be interested in seeing a listing of your Fund's portfolio other than in your shareholder reports, please check our website (http://www.aquilafunds.com) or call us at 1-800-437-1020. The Fund additionally files a complete list of its portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available free of charge on the SEC website at http://www.sec.gov. You may also review or, for a fee, copy the forms at the SEC's Public Reference Room in Washington, DC or by calling 1-800-SEC-0330. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROXY VOTING RECORD (UNAUDITED) The Fund does not invest in equity securities. Accordingly, there were no matters relating to a portfolio security considered at any shareholder meeting held during the 12 months ended June 30, 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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED) This information is presented in order to comply with a requirement of the Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED. For the calendar year ended December 31, 2007, $9,862,982 of dividends paid by Churchill Tax-Free Fund of Kentucky, constituting 86.88% of total dividends paid during calendar year 2007, were exempt-interest dividends; $1,489,125 of dividends paid by the Fund constituting 13.12% of total dividends paid during the calendar year were capital gain distributions; and the balance was ordinary dividend income. Prior to January 31, 2008, shareholders were mailed IRS Form 1099-DIV which contains information on the status of distributions paid for the 2007 CALENDAR YEAR. -------------------------------------------------------------------------------- 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(4) (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 TRUSTEE(5) Diana P. Herrmann Trustee since Vice Chair and Chief Executive Officer of 12 ICI Mutual Insurance New York, NY 1995 and Aquila Management Corporation, Founder of the Company (02/25/58) President Aquila Group of Funds(R)(6) and parent of since 1999 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; Chair, Vice Chair, President, Executive Vice President or Senior Vice President of funds in the Aquila Group of Funds(R) 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 (a trade organization for the U.S. fund industry dedicated to protecting shareholder interests and educating the public about investing) and head of its Small Funds Committee since 2004; active in charitable and volunteer organizations. NON-INTERESTED TRUSTEES Thomas A. Christopher Chair of the Vice President of Robinson, Hughes & 3 None Danville, KY Board of Christopher, C.P.A.s, P.S.C., since 1977; (12/19/47) Trustees since President, A Good Place for Fun, Inc., a 2005 and sports facility, since 1987; currently or Trustee since formerly active with various professional and 1992 community organizations. Timothy J. Leach Trustee since UC Berkeley Haas School of Business, Executive 3 None Orinda, CA 2007 Education Lecturer since 2006; member, Oxford (08/28/55) Financial LLC Investment Policy Council since January 2007; Expert Affiliate, LECG LLC since June 2007; Regional Chief Executive Officer, US Trust Company, N.A., 2005-2006; Executive Vice President & Chief Investment Officer, U.S. Trust Company, New York, NY, 2004-2005; Executive Vice President & Chief Investment Officer, Private Asset Management Group, Wells Fargo Bank, San Francisco, CA, 1999-2003.
NUMBER OF POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS HELD WITH IN FUND HELD BY TRUSTEE NAME, FUND AND PRINCIPAL COMPLEX(4) (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.) ----------------- ---------- ------------------- ---------- --------------------- Theodore T. Mason Trustee since Executive Director, East Wind Power Partners 8 Trustee, Premier VIT. New York, NY 1987 LTD since 1994 and Louisiana Power Partners, (11/24/35) 1999-2003; Treasurer, Fort Schuyler Maritime Alumni Association, Inc., successor to Alumni Association of SUNY Maritime College, since 2004 (President, 2002-2003, First Vice President, 2000-2001, Second Vice President, 1998-2000) and director of the same organization since 1997; Director, STCM Management Company, Inc., 1973-2004; twice national officer of Naval Reserve Association, Commanding Officer of four naval reserve units and Captain, USNR (Ret); director, The Navy League of the United States New York Council since 2002; trustee, The Maritime Industry Museum at Fort Schuyler, 2000-2004; and Fort Schuyler Maritime Foundation, Inc., successor to the Maritime College at Fort Schuyler Foundation, Inc., since 2000. Anne J. Mills Trustee since President, Loring Consulting Company since 4 None Castle Rock, CO 1987 2001; Vice President for Business Management (12/23/38) and CFO, Ottawa University, since 2006, Vice President for Business Affairs, 1992-2001; IBM Corporation, 1965-1991; currently active with various charitable educational and religious organizations. James R. Ramsey Trustee since President, University of Louisville since 2 Community Bank and Trust, Louisville, KY 1987 November 2002; Professor of Economics, Pikeville, KY and Texas (11/14/48) University of Louisville, 1999-present; Roadhouse Inc. Kentucky Governor's Senior Policy Advisor and State Budget Director, 1999-2002; Vice Chancellor for Finance and Administration, the University of North Carolina at Chapel Hill, 1998 to 1999; previously Vice President for Finance and Administration at Western Kentucky University, State Budget Director for the Commonwealth of Kentucky, Chief State Economist and Executive Director for the Office of Financial Management and Economic Analysis for the Commonwealth of Kentucky, Adjunct Professor at the University of Kentucky, Associate Professor at Loyola University-New Orleans and Assistant Professor at Middle Tennessee State University.
NUMBER OF POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS HELD WITH IN FUND HELD BY TRUSTEE NAME, FUND AND PRINCIPAL COMPLEX(4) (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.) ----------------- ---------- ------------------- ---------- --------------------- OTHER INDIVIDUALS CHAIRMAN EMERITUS(7) Lacy B. Herrmann Founder and Founder and Chairman of the Board, Aquila N/A N/A New York, NY Chairman Management Corporation, the sponsoring (05/12/29) Emeritus since organization and parent of the Manager or 2005, Chairman Administrator and/or Adviser or Sub-Adviser to of the Board each fund of the Aquila Group of Funds(R); of Trustees, Chairman of the Manager or Administrator 1987-2005 and/or Adviser or Sub-Adviser to each since 2004; Founder and Chairman Emeritus of each fund in the Aquila Group of Funds(R); previously Chairman and a Trustee of each fund in the Aquila Group of Funds(R) 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. OFFICERS Charles E. Childs, III Executive Vice Executive Vice President of all funds in the N/A N/A New York, NY President Aquila Group of Funds(R) and the Manager and (04/01/57) since 2003 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 Manager, N/A N/A Louisville, KY President Churchill Tax-Free Fund of Kentucky since July (07/26/52) since 2000 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(4) (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 Vice (06/18/44) since 1994 President, 1997-1998 and Vice President, 1993-1997; Senior Vice President, Aquila Three Peaks High Income Fund, Aquila Rocky Mountain Equity Fund and five Aquila Municipal Bond Funds; Vice President, Churchill Cash Reserves Trust, 1995-2001. Todd W. Curtis Vice President Senior Vice President and Portfolio Manager, N/A N/A Phoenix, AZ since 2004 Tax-Free Trust of Arizona, since August 2004; (06/08/49) 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 of N/A N/A Elizabethtown, KY since 2001 Kentucky since 2001, Assistant Vice President, (08/14/71) 2000-2001; Vice President, Aquila Rocky Mountain Equity Fund since 2006; Investment Broker with Raymond James Financial Services 1999-2000 and with J.C. Bradford and Company 1997-1999; Associate Broker at Prudential Securities 1996-1997. Robert W. Anderson Chief Chief Compliance Officer of the Fund and each N/A N/A New York, NY Compliance of the other funds in the Aquila Group of (08/23/40) Officer since Funds(R), the Manager and the Distributor 2004 and since 2004, Compliance Officer of the Manager Assistant or its predecessor and current parent Secretary 1998-2004; Assistant Secretary of the Aquila since 2000 Group of Funds(R) since 2000. Joseph P. DiMaggio Chief Chief Financial Officer of the Aquila Group of N/A N/A New York, NY Financial Funds(R) since 2003 and Treasurer since 2000. (11/06/56) Officer since 2003 and Treasurer since 2000
NUMBER OF POSITIONS PORTFOLIOS OTHER DIRECTORSHIPS HELD WITH IN FUND HELD BY TRUSTEE NAME, FUND AND PRINCIPAL COMPLEX(4) (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.) ----------------- ---------- ------------------- ---------- --------------------- Edward M. W. Hines Secretary Shareholder of Butzel Long, a professional N/A N/A New York, NY since 1987 corporation, counsel to the Fund, since 2007; (12/16/39) Partner of Hollyer Brady Barrett & Hines LLP, its predecessor as counsel, 1989-2007; Secretary of the Aquila Group of Funds(R). John M. Herndon Assistant Assistant Secretary of the Aquila Group of N/A N/A New York, NY Secretary Funds(R) since 1995 and Vice President of the (12/17/39) since 1995 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 Group of N/A N/A New York, NY Treasurer Funds(R) since 2000; Assistant Vice President (11/02/66) since 2000 of the Manager or its predecessor and current parent since 1998; Fund Accountant for the Aquila Group of Funds(R), 1995-1998.
---------- (1) The Fund's Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling 800-437-1020 (toll-free) or by visiting the EDGAR Database at the SEC's internet site at www.sec.gov. (2) The mailing address of each Trustee and officer is c/o Churchill Tax-Free Fund of Kentucky, 380 Madison Avenue, New York, NY 10017. (3) Each Trustee holds office until the next annual meeting of shareholders or until his or her successor is elected and qualifies. The term of office of each officer is one year. (4) Includes certain Aquila-sponsored funds that are dormant and have no public shareholders. (5) Ms. Herrmann is an interested person of the Fund as an officer of the Fund, as a director, officer and shareholder of the Manager's corporate parent, as an officer and Manager of the Manager, and as a shareholder and director of the Distributor. Ms. Herrmann is the daughter of Lacy B. Herrmann, the Founder and Chairman Emeritus of the Fund. (6) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S. Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets Trust, each of which is a money-market fund, are called the "Aquila Money-Market Funds"; Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of which is a tax-free municipal bond fund, are called the "Aquila Municipal Bond Funds"; Aquila Rocky Mountain Equity Fund is an equity fund; Aquila Three Peaks High Income Fund is a high income corporate bond fund; considered together, these 12 funds, which do not include the dormant funds described in footnote 4, are called the "Aquila Group of Funds(R)." (7) The Chairman Emeritus may attend Board meetings but has no voting power. -------------------------------------------------------------------------------- PRIVACY NOTICE (UNAUDITED) CHURCHILL TAX-FREE FUND OF KENTUCKY OUR PRIVACY POLICY. In providing services to you as an individual who owns or is considering investing in shares of the Fund, we collect certain non-public personal information about you. Our policy is to keep this information strictly safeguarded and confidential, and to use or disclose it only as necessary to provide services to you or as otherwise permitted by law. Our privacy policy applies equally to former shareholders and persons who inquire about the Fund. INFORMATION WE COLLECT. "Non-public personal information" is personally identifiable financial information about you as an individual or your family. The kinds of non-public personal information we have about you may include the information you provide us on your share purchase application or in telephone calls or correspondence with us, and information about your fund transactions and holdings, how you voted your shares and the account where your shares are held. INFORMATION WE DISCLOSE. We disclose non-public personal information about you to companies that provide necessary services to us, such as the Fund's transfer agent, distributor, or manager, as permitted or required by law, or as authorized by you. Any other use is strictly prohibited. We do not sell information about you or any of our fund shareholders to anyone. NON-CALIFORNIA RESIDENTS: We also may disclose some of this information to another fund in the Aquila Group of Funds(R) (or its service providers) under joint marketing agreements that permit the funds to use the information only to provide you with information about other funds in the Aquila Group of Funds(R) or new services we are offering that may be of interest to you. CALIFORNIA RESIDENTS ONLY: In addition, unless you "opt-out" of the following disclosures using the form that was mailed to you under separate cover, we may disclose some of this information to another fund in the Aquila Group of Funds(R) (or its sevice providers) under joint marketing agreements that permit the funds to use the information only to provide you with information about other funds in the Aquila Group of Funds(R) or new services we are offering that may be of interest to you. HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to non-public personal information about you to only those persons who need it to provide services to you or who are permitted by law to receive it. We maintain physical, electronic and procedural safeguards to protect the confidentiality of all non-public personal information we have about you. If you have any questions regarding our Privacy Policy, please contact us at 1-800-437-1020. AQUILA DISTRIBUTORS, INC. AQUILA INVESTMENT MANAGEMENT LLC This Privacy Policy also has been adopted by Aquila Distributors, Inc. and Aquila Investment Management LLC and applies to all non-public information about you that each of these companies may obtain in connection with services provided to the Fund or to you as a shareholder of the Fund. -------------------------------------------------------------------------------- (THIS PAGE INTENTIONALLY LEFT BLANK) (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. (a) As of December 31, 2007 (the end of the reporting period) the Trust has adopted a code of ethics that applies to the Trust's principal executive officer(s)and principal financial officer(s) and persons performing similar functions ("Covered Officers") as defined in the Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002; (f)(1) Pursuant to Item 10(a)(1), a copy of the Trust's Code of Ethics that applies to the Trust's principal executive officer(s) and principal financial officer(s) and persons performing similar functions is included as an exhibit to its annual report on this Form N-CSR; (f)(2) The text of the Trust's Code of Ethics that applies to the Trust's principal executive officer(s) and principal financial officer(s) and persons performing similar functions has been posted on its Internet website which can be found at the Trust's Internet address at aquilafunds.com. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1)(ii) The Board of Trustees of the Fund has determined that it does not have at least one audit committee financial expert serving on its audit committee. The Fund does not have such a person serving on the audit committee because none of the persons currently serving as Trustees happens to have the technical accounting and auditing expertise included in the definition of "audit committee financial expert" recently adopted by the Securities and Exchange Commission in connection with this Form N-CSR, and the Board has not heretofore deemed it necessary to seek such a person for election to the Board. The primary mission of the Board, which is that of oversight over the operations and affairs of the Fund, confronts the Trustees with a wide and expanding range of issues and responsibilities. The Trustees believe that, accordingly, it is essential that the Board's membership consist of persons with as extensive experience as possible in fulfilling the duties and responsibilities of mutual fund directors and audit committee members and, ideally, with extensive experience and background relating to the economic and financial sectors and securities in which the Fund invests, including exposure to the financial and accounting matters commonly encountered with respect to those sectors and securities. The Board believes that its current membership satisfies those criteria. It recognizes that it would also be helpful to have a member with the relatively focused accounting and auditing expertise reflected in the applicable definition of "audit committee financial expert," just as additional members with similarly focused technical expertise in other areas relevant to the Fund's operations and affairs would also contribute added value. However, the Board believes that the Fund is better served, and its assets better employed, by a policy of hiring experts in various the specialized area of technical accounting and auditing matters, if and as the Board identifies the need, rather than by seeking to expand its numbers by adding technical experts in the areas constituting its domain of responsibility. The Fund's Audit Committee Charter explicitly authorizes the Committee to retain such experts as it deems necessary in fulfilling its duties ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. a) Audit Fees - The aggregate fees billed for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements were $16,000 in 2006 and $16,000 in 2007. b) Audit Related Fees - There were no amounts billed for audit-related fees over the past two years. c) Tax Fees - The Registrant was billed by the principal accountant $3,000 and $3,000 in 2006 and 2007, respectively, for return preparation and tax compliance. d) All Other Fees - There were no additional fees paid for audit and non-audit services other than those disclosed in a) thorough c) above. e)(1) Currently, the audit committee of the Registrant pre-approves audit services and fees on an engagement-by-engagement basis e)(2) None of the services described in b) through d) above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, all were pre-approved on an engagement-by-engagement basis. f) No applicable. g) There were no non-audit services fees billed by the Registrant's accountant to the Registrant's investment adviser or distributor over the past two years h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Included in Item 1 above ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Directors of the Registrant has adopted a Nominating Committee Charter which provides that the Nominating Committee (the 'Committee') may consider and evaluate nominee candidates properly submitted by shareholders if a vacancy among the Independent Trustees of the Registrant occurs and if, based on the Board's then current size, composition and structure, the Committee determines that the vacancy should be filled. The Committee will consider candidates submitted by shareholders on the same basis as it considers and evaluates candidates recommended by other sources. A copy of the qualifications and procedures that must be met or followed by shareholders to properly submit a nominee candidate to the Committee may be obtained by submitting a request in writing to the Secretary of the Registrant. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 12. EXHIBITS. (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002. (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL TAX-FREE TRUST By: /s/ Diana P. Herrmann - - --------------------------------- President and Trustee March 10, 2008 By: /s/ Joseph P. DiMaggio - - ----------------------------------- Chief Financial Officer and Treasurer March 10, 2008 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 10, 2008 By: /s/ Joseph P. DiMaggio - - ----------------------------------- Joseph P. DiMaggio Chief Financial Officer and Treasurer March 10, 2008 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.