-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JqYtIFNLR6nqdj3yKUfsPNm00ecuthJoGOOYx18Wr58FCehw97qFz1ccKkPHKZzh JsOjML/v1SG6aGvtKEkQrA== 0000812006-08-000025.txt : 20080904 0000812006-08-000025.hdr.sgml : 20080904 20080904111325 ACCESSION NUMBER: 0000812006-08-000025 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080904 DATE AS OF CHANGE: 20080904 EFFECTIVENESS DATE: 20080904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHURCHILL TAX FREE TRUST CENTRAL INDEX KEY: 0000812006 IRS NUMBER: 136864349 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05086 FILM NUMBER: 081055653 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STREET 2: SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: SUITE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHURCHILL TAX FREE FUND OF KENTUCKY DATE OF NAME CHANGE: 19880911 0000812006 S000009083 Churchill Tax-Free Fund of Kentucky C000024671 Churchill Tax-Free Trust of Kentucky Class A CHTFX C000024672 Churchill Tax-Free Fund of Kentucky Class C CHKCX C000024673 Churchill Tax-Free Fund of Kentucky Class I CHTSX C000024674 Churchill Tax-Free Fund of Kentucky Class Y CHKYX N-CSR 1 ctftncsr.txt CHURCHILL TAX-FREE FUND OF KENTUCKY 6/30/08 N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5086 Churchill Tax-Free Trust (Exact name of Registrant as specified in charter) 380 Madison Avenue New York, New York 10017 (Address of principal executive offices) (Zip code) Joseph P. DiMaggio 380 Madison Avenue New York, New York 10017 (Name and address of agent for service) Registrant's telephone number, including area code: (212) 697-6666 Date of fiscal year end: 12/31 Date of reporting period: 06/30/08 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. SEMI-ANNUAL REPORT JUNE 30, 2008 CHURCHILL TAX-FREE FUND OF KENTUCKY A TAX-FREE INCOME INVESTMENT [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] [LOGO OF THE AQUILA GROUP OF FUNDS: ONE OF THE AN EAGLE'S HEAD] AQUILA GROUP OF FUNDS(SM) [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY "A MORE PREDICTABLE RIDE" August, 2008 Dear Fellow Shareholder: If you've read any of our previous shareholder communications, you know that we try to skip the financial jargon and speak in terms with which we believe the average person can relate and understand. The recent movements in the stock market got us to thinking about how risk tolerance mirrors choosing rides at an amusement park. In our younger days, we always enjoyed the thrill of roller coasters. If you're like us, you can vividly remember holding your breath with anticipation as you climbed and climbed to the top, never knowing just when you would finally get there. Then, just as you began to relax, the roller coaster would begin its decline. The ride to the bottom seemed like it would never end as you laughed, screamed, and implored the heavens to let you make it through alive. Much of what has transpired in the stock market over the last year or so has reminded us of our younger roller coaster riding days. Of course, the ride to the "top" of the market is always exhilarating. But, as we've matured, we've come to realize that roller coasters have lost some of their allure. We no longer find adrenaline-pumping adventures so attractive. While you can be brought to dizzying heights, some dramatic lows are also inevitable. For those of us who don't have the stomach for this type of volatility, especially with our investment money, a more stable alternative may be the ticket. We like to think of investing in a tax-free municipal bond fund, such as Churchill Tax-Free Fund of Kentucky, as more like riding the swings at a county fair. There is definitely some up and down movement, but you usually don't go quite that far. In general, you know what to expect next and the ride is fairly pleasant. NOT A PART OF THE SEMI-ANNUAL REPORT Of course, we believe that there is a place in everyone's life for roller coasters. But, as one matures, it might be prudent to have the more stable predictable swings begin to play a larger role. After all, what good are highs if they are often followed by lows? Sincerely, [PHOTO OMITTED] /s/ Lacy B. Herrmann /s/ Diana P. Herrmann Lacy B. Herrmann Diana P. Herrmann Founder and Chairman Emeritus President NOT A PART OF THE SEMI-ANNUAL REPORT CHURCHILL TAX-FREE FUND OF KENTUCKY SCHEDULE OF INVESTMENTS JUNE 30, 2008 (UNAUDITED)
RATING PRINCIPAL MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (4.7%) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- Lexington-Fayette Urban County, Kentucky $ 4,175,000 4.250%, 05/01/23 MBIA Insured ........................... Aa2/AA+ $ 3,948,715 Louisville, Kentucky Unlimited Tax 2,205,000 5.000%, 10/01/21 FGIC Insured ........................... Aa2/AA+ 2,259,000 Louisville & Jefferson County, Kentucky 955,000 4.200%, 11/01/22 MBIA Insured ........................... Aa2/AA+ 905,779 Louisville & Jefferson County, Kentucky Metro Government Unlimited Tax 1,590,000 5.000%, 11/01/19 ........................................ Aa2/AA+ 1,677,116 1,825,000 5.000%, 11/01/20 ........................................ Aa2/AA+ 1,912,527 Warren County, Kentucky Judicial Unlimited Tax 345,000 5.100%, 09/01/17 AMBAC Insured .......................... Aa3/NR 361,374 365,000 5.150%, 09/01/18 AMBAC Insured .......................... Aa3/NR 382,151 --------------- Total General Obligation Bonds .......................... 11,446,662 --------------- REVENUE BONDS (94.1%) STATE AGENCIES (14.4%) Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank ...................... NR/AA 511,015 Kentucky Asset/LiabilityCommission 500,000 4.500%, 10/01/22 FGIC Insured ........................... Aa3/AA- 500,890 Kentucky Asset & Liability Commission University of Kentucky Project 500,000 5.000%, 10/01/25 Series B ............................... Aa3/AA- 511,485 750,000 5.000%, 10/01/26 Series B ............................... Aa3/AA- 764,408 1,000,000 5.000%, 10/01/27 Series B ............................... Aa3/AA- 1,015,460 Kentucky Infrastructure Authority 2,740,000 5.250%, 06/01/14 ........................................ Aa3/A+ 2,866,889 1,235,000 5.250%, 08/01/17 ........................................ NR/AA 1,322,339 230,000 5.000%, 06/01/21 ........................................ Aa3/A+ 235,111 Kentucky State Property and Buildings Commission 1,000,000 5.000%, 11/01/15 AMBAC Insured .......................... Aa3/AA 1,055,850 4,735,000 5.250%, 10/01/17 ........................................ Aa3/A+ 4,902,051 1,250,000 5.500%, 11/01/17 FSA Insured ............................ Aaa/AAA 1,343,812 1,000,000 5.000%, 11/01/17 AMBAC Insured .......................... Aa3/AA 1,045,060 6,000,000 5.250%, 10/01/18 ........................................ Aa3/A+ 6,202,200
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission (continued) $ 1,925,000 5.000%, 10/01/19 ........................................ Aa3/A+ $ 1,967,408 3,000,000 5.000%, 11/01/19 FSA Insured Aaa/AAA 3,113,130 5,000,000 5.000%, 10/01/22 MBIA Insured (pre-refunded) ............ Aaa/AA 5,386,050 Kentucky State Property and Buildings Commission Project #88 2,200,000 4.500%, 11/01/26 FGIC Insured ........................... Aa3/A+ 2,082,322 --------------- Total State Agencies .................................... 34,825,480 --------------- COUNTY AGENCIES (2.3%) Jefferson County, Kentucky Capital Projects 1,575,000 4.250%, 06/01/23 FSA Insured ............................ Aaa/NR 1,494,423 4,140,000 4.375%, 06/01/28 FSA Insured ............................ Aaa/NR 3,780,275 Warren County, Kentucky Justice Center 365,000 4.300%, 09/01/22 MBIA Insured ........................... Aa3/NR 354,787 --------------- Total County Agencies ................................... 5,629,485 --------------- CITY / MUNICIPALITY OBLIGATIONS (0.3%) Shelbyville, Kentucky Certificates of Participation 625,000 5.000%, 10/01/22 ........................................ A2/NR 640,794 --------------- Total City / Municipality Obligations ................... 640,794 --------------- HOSPITALS (8.9%) Jefferson County, Kentucky Health Facilities 1,715,000 5.650%, 01/01/17 AMBAC Insured .......................... Aa3/AA 1,735,700 2,200,000 5.250%, 05/01/17 ........................................ NR/A 2,255,396 Jefferson County, Kentucky Medical Center 2,000,000 5.500%, 05/01/22 ........................................ NR/A 2,061,280 Kentucky Economic Development Finance Authority 1,000,000 5.000%, 02/01/18 FSA Insured ............................ Aaa/AAA 1,021,830 Lexington-Fayette Urban County, Kentucky Public Facilities 500,000 4.250%, 10/01/26 MBIA Insured ........................... Aa3/NR 468,205 Louisville & Jefferson County, Kentucky Medical Center 1,000,000 5.000%, 06/01/18 ........................................ NR/A 1,029,320
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- HOSPITALS (CONTINUED) Louisville & Jefferson County, Kentucky Metropolitan Government Health System (Norton) $ 8,075,000 5.000%, 10/01/26 ........................................ NR/A- $ 7,543,988 6,000,000 5.000%, 10/01/30 ........................................ NR/A- 5,461,500 --------------- Total Hospitals ......................................... 21,577,219 --------------- HOUSING (14.0%) Kentucky Housing Corporation Housing Revenue 405,000 4.350%, 01/01/15 AMT .................................... Aaa/AAA 399,593 140,000 4.200%, 01/01/15 AMT .................................... Aaa/AAA 135,176 250,000 4.100%, 01/01/15 AMT .................................... Aaa/AAA 241,338 170,000 4.100%, 07/01/15 AMT .................................... Aaa/AAA 163,773 265,000 4.650%, 01/01/16 AMT .................................... Aaa/AAA 264,006 210,000 4.300%, 01/01/16 AMT .................................... Aaa/AAA 205,823 150,000 4.250%, 01/01/16 AMT .................................... Aaa/AAA 144,284 200,000 4.200%, 01/01/16 AMT .................................... Aaa/AAA 191,692 420,000 4.650%, 07/01/16 AMT .................................... Aaa/AAA 418,337 610,000 4.300%, 07/01/16 AMT .................................... Aaa/AAA 599,471 550,000 4.200%, 07/01/16 AMT .................................... Aaa/AAA 526,075 555,000 4.200%, 01/01/17 ........................................ Aaa/AAA 529,320 100,000 5.125%, 07/01/17 ........................................ Aaa/AAA 100,575 680,000 4.200%, 07/01/17 ........................................ Aaa/AAA 647,278 470,000 4.800%, 01/01/18 AMT .................................... Aaa/AAA 462,786 285,000 4.250%, 01/01/18 ........................................ Aaa/AAA 268,698 575,000 4.800%, 07/01/18 AMT .................................... Aaa/AAA 565,817 180,000 4.250%, 07/01/18 ........................................ Aaa/AAA 169,351 900,000 4.800%, 07/01/20 AMT .................................... Aaa/AAA 848,538 1,150,000 5.350%, 01/01/21 AMT .................................... Aaa/AAA 1,152,231 6,025,000 5.450%, 07/01/22 AMT .................................... Aaa/AAA 6,074,646 4,065,000 5.250%, 07/01/22 AMT .................................... Aaa/AAA 4,072,805 245,000 5.200%, 07/01/22 ........................................ Aaa/AAA 245,083 415,000 5.100%, 07/01/22 AMT .................................... Aaa/AAA 407,310 2,570,000 4.800%, 07/01/22 AMT .................................... Aaa/AAA 2,409,992 2,000,000 4.700%, 07/01/22 Series E AMT ........................... Aaa/AAA 1,850,460
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- HOUSING (CONTINUED) Kentucky Housing Corporation Housing Revenue (continued) $ 1,635,000 5.000%, 01/01/23 AMT .................................... Aaa/AAA $ 1,593,880 4,140,000 5.200%, 07/01/25 AMT .................................... Aaa/AAA 4,140,000 275,000 5.375%, 07/01/27 ........................................ Aaa/AAA 275,831 2,300,000 5.000%, 07/01/27 Series N AMT ........................... Aaa/AAA 2,169,774 1,000,000 4.750%, 07/01/27 Series E AMT ........................... Aaa/AAA 910,950 560,000 5.550%, 07/01/33 ........................................ Aaa/AAA 564,267 Kentucky Housing Multifamily Mortgage Revenue 1,325,000 5.000%, 06/01/35 AMT .................................... NR/AAA 1,288,311 --------------- Total Housing ........................................... 34,037,471 --------------- SCHOOLS (34.1%) Barren County, Kentucky School Building Revenue 1,265,000 4.250%, 08/01/25 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 1,175,425 1,670,000 4.375%, 08/01/26 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 1,563,220 Berea, Kentucky Educational Facilities (Berea College) 1,000,000 4.125%, 06/01/25 ........................................ Aaa/NR 921,880 Boone County, Kentucky School District Finance Corp. 1,730,000 4.125%, 08/01/22 XLCA Insured ........................... Aa3/NR 1,659,347 Boone County, Kentucky School District Finance Corp. School Building Revenue 140,000 4.750%, 06/01/20 FSA Insured ............................ Aaa/AAA 142,544 1,580,000 4.500%, 08/01/23 FSA Insured ............................ Aaa/NR 1,588,453 1,250,000 4.125%, 03/01/25 FSA Insured ............................ Aaa/NR 1,141,875 Boyle County, Kentucky College Refunding & Improvement 1,035,000 4.500%, 06/01/22 CIFG Insured ........................... A3/A- 1,006,786 200,000 4.625%, 06/01/24 CIFG Insured ........................... A3/A- 194,610 Bullitt County, Kentucky School District Finance Corp. 200,000 4.300%, 10/01/21 MBIA Insured ........................... Aa3/NR 195,834 2,455,000 4.500%, 10/01/22 MBIA Insured ........................... Aa3/NR 2,472,136 2,590,000 4.500%, 10/01/23 MBIA Insured ........................... Aa3/NR 2,601,033 1,145,000 4.500%, 04/01/27 FSA Insured ............................ Aaa/NR 1,081,533 1,200,000 4.500%, 04/01/28 FSA Insured ............................ Aaa/NR 1,123,620
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Christian County, Kentucky School District Finance Corp. $ 820,000 4.000%, 08/01/19 XLCA Insured ........................... Aa3/NR $ 799,180 855,000 4.000%, 08/01/20 XLCA Insured ........................... Aa3/NR 823,972 905,000 4.000%, 08/01/21 XLCA Insured ........................... Aa3/NR 864,058 1,465,000 4.000%, 08/01/22 XLCA Insured Aa3/NR 1,386,256 1,525,000 4.125%, 08/01/23 XLCA Insured ........................... Aa3/NR 1,431,106 1,590,000 4.125%, 08/01/24 XLCA Insured ........................... Aa3/NR 1,469,573 Daviess County, Kentucky School District Finance Corp. 200,000 5.000%, 06/01/24 ........................................ Aa3/NR 205,236 Fayette County, Kentucky School District Finance Corp. 5,000,000 4.250%, 04/01/23 FSA Insured ............................ Aaa/AAA 4,855,550 4,335,000 4.375%, 05/01/26 FSA Insured ............................ Aaa/AAA 4,125,663 Floyd County, Kentucky School Building 680,000 4.375%, 10/01/22 ........................................ Aa3/NR 661,327 Floyd County, Kentucky School Finance Corporation School Building 1,320,000 4.000%, 03/01/23 XLCA Insured ........................... Aa3/NR 1,233,474 1,855,000 4.125%, 03/01/26 XLCA Insured ........................... Aa3/NR 1,683,542 Fort Thomas, Kentucky Independent School District Building Revenue 610,000 4.375%, 04/01/25 ........................................ Aa3/NR 581,031 Fort Thomas, Kentucky Independent School District Finance 785,000 4.375%, 04/01/21 ........................................ Aa3/NR 769,543 Franklin County, Kentucky School District Finance Corp. 1,000,000 5.000%, 04/01/24 ........................................ Aa3/NR 1,022,960 Graves County, Kentucky School Building Revenue 1,260,000 5.000%, 06/01/22 ........................................ Aa3/NR 1,296,376 1,320,000 5.000%, 06/01/23 ........................................ Aa3/NR 1,355,178 Hardin County, Kentucky School District Finance Corp. 1,475,000 4.000%, 02/01/19 AMBAC Insured .......................... Aa3/NR 1,438,892 Jefferson County, Kentucky School District Finance Corp. School Building 150,000 5.000%, 04/01/20 FSA Insured ............................ Aaa/AAA 154,488 1,360,000 4.250%, 06/01/21 FSA Insured ............................ Aaa/AAA 1,338,702
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Kenton County, Kentucky School Building Revenue $ 590,000 4.250%, 10/10/22 FSA Insured ............................ Aaa/NR $ 570,359 Kenton County, Kentucky School District Finance Corp. 445,000 4.300%, 04/01/22 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 432,811 4,250,000 5.000%, 06/01/22 MBIA Insured ........................... Aa3/NR 4,376,820 750,000 4.375%, 04/01/24 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 725,483 325,000 4.400%, 04/01/26 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 312,195 Larue County, Kentucky School District Finance Corp. 270,000 4.500%, 07/01/21 MBIA Insured ........................... Aa3/NR 268,423 470,000 4.500%, 07/01/22 MBIA Insured ........................... Aa3/NR 466,625 785,000 4.500%, 07/01/23 MBIA Insured ........................... Aa3/NR 774,889 Lexington-Fayette Urban County, Kentucky Government Project Transylvania University 1,320,000 5.125%, 08/01/18 MBIA Insured ........................... A2/AA 1,334,546 Lexington-Fayette Urban County, Kentucky Government Project University of Kentucky Library 300,000 5.000%, 11/01/20 MBIA Insured ........................... A2/AA 306,939 Louisville & Jefferson County, Kentucky University of Louisville 525,000 5.000%, 06/01/20 AMBAC Insured .......................... Aa3/AA 547,071 Magoffin County, Kentucky School Building Revenue 375,000 4.250%, 08/01/23 AMBAC Insured .......................... Aa3/NR 360,038 Magoffin County, Kentucky School District 450,000 4.250%, 08/01/25 AMBAC Insured .......................... Aa3/NR 424,872 McCreary County, Kentucky School Building Revenue 935,000 4.500%, 05/01/28 ........................................ Aa3/NR 883,313 Meade County, Kentucky School District 490,000 4.250%, 09/01/26 MBIA Insured ........................... Aa3/NR 456,146 Murray State University Project, Kentucky General Receipts Revenue 745,000 4.500%, 09/01/23 AMBAC Insured .......................... Aa3/AA 727,351
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Ohio County, Kentucky School Building Revenue $ 790,000 4.500%, 05/01/24 ........................................ Aa3/NR $ 769,010 325,000 4.500%, 05/01/25 ........................................ Aa3/NR 314,174 Oldham County, Kentucky School District Finance Corp. 900,000 5.000%, 05/01/19 MBIA Insured ........................... Aa3/NR 937,296 Pendleton County, Kentucky School District Finance Corp. School Building Revenue 730,000 4.000%, 02/01/23MBIA Insured ............................ Aa3/NR 661,935 Pike County, Kentucky School Building Revenue 1,355,000 4.375%, 10/01/26 MBIA Insured ........................... Aa3/NR 1,280,705 Scott County, Kentucky School District Finance Corp. 1,115,000 4.200%, 01/01/22 AMBAC Insured .......................... Aa3/NR 1,072,697 1,955,000 4.250%, 01/01/23 AMBAC Insured .......................... Aa3/NR 1,877,191 1,560,000 4.300%, 01/01/24 AMBAC Insured .......................... Aa3/NR 1,479,270 Scott County, Kentucky School District Finance Corp. School Building Revenue 2,435,000 4.250%, 02/01/26 FSA Insured ............................ Aa3/NR 2,228,268 1,000,000 4.250%, 02/01/27 FSA Insured ............................ Aa3/NR 906,380 Spencer County, Kentucky School District Finance Corp. 1,415,000 5.000%, 07/01/19FSA insured ............................. Aaa/NR 1,482,835 University of Kentucky General Receipts 885,000 4.500%, 10/01/22 XLCA Insured ........................... Aa3/AA- 878,513 1,545,000 4.500%, 10/01/23 XLCA Insured ........................... Aa3/AA- 1,524,776 1,625,000 4.500%, 10/01/25 XLCA Insured ........................... Aa3/AA- 1,571,862 1,010,000 4.500%, 10/01/26 XLCA Insured ........................... Aa3/AA- 969,812 University of Louisville, Kentucky 1,055,000 4.000%, 09/01/25 MBIA Insured ........................... Aa3/AA 949,394 1,000,000 4.375%, 04/01/27 FSA Insured ............................ Aaa/NR 962,150 Warren County, Kentucky School District Finance Corp. 295,000 4.125%, 02/01/23 MBIA Insured ........................... Aa3/NR 278,188 Western Kentucky University Revenue General Receipts 2,860,000 4.200%, 09/01/25 Series A MBIA Insured .................. A1/AA 2,613,382 2,980,000 4.200%, 09/01/26 Series A MBIA Insured .................. A1/AA 2,696,781 --------------- Total Schools ........................................... 82,786,903 ---------------
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- TRANSPORTATION (4.0%) Kenton County, Kentucky Airport Board Airport Revenue $ 1,300,000 5.000%, 03/01/23 MBIA Insured AMT ....................... A2/AA $ 1,223,378 Kentucky Interlocal School Transportation Authority 145,000 5.400%, 06/01/17 ........................................ Aa3/A+ 145,200 400,000 6.000%, 12/01/20 ........................................ Aa3/A+ 403,464 200,000 6.000%, 12/01/20 ........................................ Aa3/A+ 201,732 300,000 5.800%, 12/01/20 ........................................ Aa3/A+ 302,355 400,000 5.650%, 12/01/20 ........................................ Aa3/A+ 402,996 350,000 5.600%, 12/01/20 ........................................ Aa3/A+ 352,552 Louisville & Jefferson County Regional Airport, Kentucky 1,000,000 5.250%, 07/01/18 FSA Insured AMT ........................ Aaa/AAA 1,009,610 1,370,000 5.250%, 07/01/21 FSA Insured AMT ........................ Aaa/AAA 1,370,589 3,390,000 5.250%, 07/01/22 FSA Insured AMT ........................ Aaa/AAA 3,383,322 275,000 5.375%, 07/01/23 FSA Insured AMT ........................ Aaa/AAA 275,732 500,000 5.000%, 07/01/25 MBIA Insured AMT ....................... A2/AA 480,625 --------------- Total Transportation .................................... 9,551,555 --------------- UTILITIES (16.1%) Bardstown, Kentucky Combined Utilities Revenue 200,000 5.000%, 12/01/19 MBIA Insured ........................... A2/NR 206,318 Boone County, Kentucky Pollution Control Revenue Dayton Power & Light 2,000,000 4.700%, 01/01/28 FGIC Insured ........................... A2/A- 1,834,320 Campbell & Kenton Counties, Kentucky Sanitation District Revenue 1,695,000 4.300%, 08/01/24 MBIA Insured ........................... Aa3/AA 1,643,235 300,000 4.300%, 08/01/27 MBIA Insured ........................... Aa3/AA 283,896 1,450,000 4.300%, 08/01/28 MBIA Insured ........................... Aa3/AA 1,360,753 805,000 4.375%, 08/01/30 MBIA Insured ........................... Aa3/AA 751,435 505,000 4.375%, 08/01/33 MBIA Insured ........................... Aa3/AA 464,893 Carroll County, Kentucky Environmental Facilities Revenue (KY Utilities) AMT 1,500,000 5.750%, 02/01/26 AMBAC Insured .......................... Aa3/AAA 1,527,120
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- UTILITIES (CONTINUED) Kentucky Rural Water Finance Corp. $ 205,000 4.250%, 08/01/19 MBIA Insured ........................... A2/AA $ 203,385 595,000 5.000%, 02/01/20 MBIA Insured ........................... A2/AA 613,963 210,000 4.250%, 08/01/20 MBIA Insured ........................... A2/AA 206,294 200,000 4.375%, 08/01/22 MBIA Insured ........................... A2/AA 196,998 240,000 4.500%, 08/01/23 MBIA Insured ........................... A2/AA 238,176 200,000 4.500%, 02/01/24 MBIA Insured ........................... A2/AA 197,348 255,000 4.500%, 08/01/24 MBIA Insured ........................... A2/AA 251,547 355,000 4.600%, 02/01/25 ........................................ NR/AA- 351,333 290,000 4.500%, 08/01/27 MBIA Insured ........................... A2/AA 279,902 245,000 4.600%, 08/01/28 MBIA Insured ........................... A2/AA 237,799 315,000 4.625%, 08/01/29 MBIA Insured ........................... A2/AA 304,889 Lexington-Fayette Urban County Government, Kentucky Sewer System 1,000,000 5.000%, 07/01/19 ........................................ Aa3/AA 1,036,550 Louisville & Jefferson County, Kentucky Metropolitan Sewer District 2,565,000 5.375%, 05/15/17 MBIA Insured ........................... A2/AA 2,734,983 2,380,000 4.250%, 05/15/20 FSA Insured ............................ Aaa/AAA 2,371,123 2,510,000 4.250%, 05/15/21 FSA Insured ............................ Aaa/AAA 2,482,917 400,000 5.000%, 05/15/22 FGIC Insured ........................... Baa3/A 404,448 Louisville, Kentucky Waterworks Board Water System 1,000,000 5.250%, 11/15/16 FSA Insured ............................ Aaa/AAA 1,039,600 2,530,000 5.250%, 11/15/18 FSA Insured ............................ Aaa/AAA 2,618,550 6,600,000 5.250%, 11/15/22 FSA Insured ............................ Aaa/AAA 6,787,242 2,415,000 5.250%, 11/15/24 FSA Insured ............................ Aaa/AAA 2,472,525 Northern Kentucky Water District 660,000 5.000%, 02/01/23 FGIC Insured ........................... A2/NR 674,705 Owensboro, Kentucky Electric and Power 1,555,000 5.000%, 01/01/20 FSA Insured ............................ Aaa/AAA 1,579,165 Owensboro-Daviess County, Kentucky Regional Water Resource Agency Wastewater Refunding & Improvement Revenue 930,000 4.375%, 01/01/27 Series A XLCA Insured .................. A3/A 878,627
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE - --------------- --------------------------------------------------------- --------- --------------- UTILITIES (CONTINUED) Trimble County, Kentucky Environmental Facilities $ 3,000,000 4.600%, 06/01/33 AMBAC Insured .......................... Aa3/AA $ 2,879,550 --------------- Total Utilities ......................................... 39,113,589 --------------- Total Revenue Bonds ..................................... 228,162,496 --------------- Total Investments (cost $244,143,231-note 4) ......... 98.8% 239,609,158 Other assets less liabilities ........................ 1.2 2,913,253 --------- --------------- Net Assets ........................................... 100.0% $ 242,522,411 ========= =============== PERCENT OF PORTFOLIO DISTRIBUTION BY QUALITY RATING PORTFOLIO* ---------------------------------------- --------- Aaa of Moody's or AAA of S&P ............................... 40.3% Aa of Moody's or AA of S&P ................................. 49.6 A of Moody's or S&P ........................................ 10.1 --------- 100.0% =========
* Calculated using the highest rating of the two rating services. 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 JUNE 30, 2008 (UNAUDITED) ASSETS Investments at value (cost $244,143,231) ............................................ $ 239,609,158 Interest receivable ................................................................. 3,371,907 Receivable for Fund shares sold ..................................................... 300,097 Other assets ........................................................................ 27,848 ------------- Total assets ........................................................................ 243,309,010 ------------- LIABILITIES Cash overdraft ...................................................................... 338,448 Dividends payable ................................................................... 306,446 Management fee payable .............................................................. 79,927 Distribution and service fees payable ............................................... 27,651 Payable for Fund shares redeemed .................................................... 21,284 Accrued expenses .................................................................... 12,843 ------------- Total liabilities ................................................................... 786,599 ------------- NET ASSETS .............................................................................. $ 242,522,411 ============= Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share . $ 239,673 Additional paid-in capital .......................................................... 245,336,185 Net unrealized depreciation on investments (note 4) ................................. (4,534,073) Undistributed net investment income ................................................. 46,675 Accumulated net realized gain on investments ........................................ 1,433,951 ------------- $ 242,522,411 ============= CLASS A Net Assets .......................................................................... $ 187,654,554 ============= Capital shares outstanding .......................................................... 18,546,690 ============= Net asset value and redemption price per share ...................................... $ 10.12 ============= Offering price per share (100/96 of $10.12 adjusted to nearest cent) ................ $ 10.54 ============= CLASS C Net Assets .......................................................................... $ 3,646,846 ============= Capital shares outstanding .......................................................... 360,610 ============= Net asset value and offering price per share ........................................ $ 10.11 ============= 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) ...................................... $ 10.11* ============= CLASS I Net Assets .......................................................................... $ 8,309,096 ============= Capital shares outstanding .......................................................... 821,631 ============= Net asset value, offering and redemption price per share ............................ $ 10.11 ============= CLASS Y Net Assets .......................................................................... $ 42,911,915 ============= Capital shares outstanding .......................................................... 4,238,330 ============= Net asset value, offering and redemption price per share ............................ $ 10.12 =============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED) INVESTMENT INCOME: Interest income ...................................... $ 5,622,291 EXPENSES: Management fee (note 3) .............................. $ 489,744 Distribution and service fees (note 3) ............... 170,782 Transfer and shareholder servicing agent fees (note 3) 76,792 Trustees' fees and expenses (note 8) ................. 54,860 Legal fees (note 3) .................................. 44,268 Shareholders' reports and proxy statements ........... 30,961 Fund accounting fees ................................. 18,061 Custodian fees (note 6) .............................. 13,886 Registration fees and dues ........................... 12,103 Auditing and tax fees ................................ 8,678 Insurance ............................................ 5,499 Chief compliance officer (note 3) .................... 2,135 Miscellaneous ........................................ 16,701 ----------- Total expenses ....................................... 944,470 Expenses paid indirectly (note 6) .................... (5,320) ----------- Net expenses ......................................... 939,150 ----------- Net investment income ................................ 4,683,141 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from securities transactions 245,986 Change in unrealized appreciation on investments ..... (6,596,065) ----------- Net realized and unrealized gain (loss) on investments (6,350,079) ----------- Net change in net assets resulting from operations ... $(1,666,938) ===========
CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2008 YEAR ENDED (UNAUDITED) DECEMBER 31, 2007 ----------------- ----------------- OPERATIONS: Net investment income ............................... $ 4,683,141 $ 9,882,991 Net realized gain (loss) from securities transactions 245,986 1,189,986 Change in unrealized appreciation on investments .... (6,596,065) (4,997,398) ----------------- ----------------- Change in net assets from operations ............ (1,666,938) 6,075,579 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS (note 10): Class A Shares: Net investment income ............................... (3,626,609) (7,653,537) Net realized gain on investments .................... -- (1,167,715) Class C Shares: Net investment income ............................... (57,626) (149,329) Net realized gain on investments .................... -- (24,440) Class I Shares: Net investment income ............................... (151,783) (295,398) Net realized gain on investments .................... -- (49,465) Class Y Shares: Net investment income ............................... (829,347) (1,764,718) Net realized gain on investments .................... -- (247,505) ----------------- ----------------- Change in net assets from distributions ......... (4,665,365) (11,352,107) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS (note 7): Proceeds from shares sold ........................... 12,500,702 50,733,976 Reinvested dividends and distributions .............. 1,839,488 4,967,956 Cost of shares redeemed ............................. (13,757,875) (73,982,877) ----------------- ----------------- Change in net assets from capital share transactions 582,315 (18,280,945) ----------------- ----------------- Change in net assets ................................ (5,749,988) (23,557,473) NET ASSETS: Beginning of period ................................. 248,272,399 271,829,872 ----------------- ----------------- End of period* ...................................... $ 242,522,411 $ 248,272,399 ================= ================= * Includes undistributed net investment income of: $ 46,675 $ 28,899 ================= =================
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2008 (UNAUDITED) 1. ORGANIZATION Churchill Tax-Free Fund of Kentucky (the "Fund"), a non-diversified, open-end investment company, was organized in March, 1987 as a Massachusetts business trust and commenced operations on May 21, 1987. The Fund is authorized to issue an unlimited number of shares and, since its inception to April 1, 1996, offered only one class of shares. On that date, the Fund began offering two additional classes of shares, Class C and Class Y shares. All shares outstanding prior to that date were designated as Class A shares and are sold with a front-payment sales charge and bear an annual distribution fee. Class C shares are sold with a level-payment sales charge with no payment at time of purchase but level service and distribution fees from date of purchase through a period of six years thereafter. A contingent deferred sales charge of 1% is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. Class C Shares together with a pro-rata portion of all Class C Shares acquired through reinvestment of dividends and other distributions paid in additional Class C Shares, automatically convert to Class A Shares after 6 years. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity and are not offered directly to retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. On April 30, 1998, the Fund established Class I shares, which are offered and sold only through financial intermediaries and are not offered directly to retail investors. Class I Shares are sold at net asset value without any sales charge, redemption fees, or contingent deferred sales charge. Class I shares carry a distribution fee and a service fee. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America for investment companies. a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services. In the case of securities for which market quotations are readily available, securities are valued by the pricing service at the mean of bid and asked quotations. If market quotations or a valuation from the pricing service is not readily available, the security is valued at fair value determined in good faith under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase is 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeds 60 days. b) FAIR VALUE MEASUREMENTS: The Fund adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157 (FAS 157), "Fair Value Measurements", effective January 1, 2008. FAS 157 established a three-tier hierarchy of inputs to establish classification of fair value measurements for disclosure purposes. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Fund's investments in their entirety are assigned levels based upon the observability. The three-tier hierarchy of inputs is summarized below: Level 1 - quoted prices in active markets for identical securities Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the valuation inputs, representing 100% of the Fund's investments, used to value the Fund's net assets as of June 30, 2008: VALUATION INPUTS INVESTMENTS IN SECURITIES ---------------- ------------------------- Level 1 - Quoted Prices ..................... $ -- Level 2 - Other Significant Observable Inputs 239,609,158 Level 3 - Significant Unobservable Inputs ... -- ------------ Total ....................................... $239,609,158 ============ c) 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. d) 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. e) 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. f) 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. g) 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. 3. FEES AND RELATED PARTY TRANSACTIONS a) MANAGEMENT ARRANGEMENTS: Aquila Investment Management LLC (the "Manager"), a wholly-owned subsidiary of Aquila Management Corporation, the Fund's founder and sponsor, serves as the Manager for the Fund under an Advisory and Administration Agreement with the Fund. Under the Advisory and Administration Agreement, the Manager provides all investment management and administrative services to the Fund. The Manager's services include providing the office of the Fund and all related services as well as managing relationships with all of the various support organizations to the Fund such as the shareholder servicing agent, custodian, legal counsel, fund accounting agent, auditors and distributor. For its services, the Manager is entitled to receive a fee which is payable monthly and computed as of the close of business each day at the annual rate of 0.40 of 1% on the Fund's average net assets. Under a Compliance Agreement with the Manager, the Manager is compensated for Chief Compliance Officer related services provided to enable the Fund to comply with Rule 38a-1 of the Investment Company Act of 1940. Specific details as to the nature and extent of the services provided by the Manager are more fully defined in the Fund's Prospectus and Statement of Additional Information. b) DISTRIBUTION AND SERVICE FEES: The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940. Under one part of the Plan, with respect to Class A Shares, the Fund is authorized to make distribution fee payments to broker-dealers ("Qualified Recipients") or others selected by Aquila Distributors, Inc. (the "Distributor") including, but not limited to, any principal underwriter of the Fund, with which the Distributor has entered into written agreements contemplated by the Rule and which have rendered assistance in the distribution and/or retention of the Fund's shares or servicing of shareholder accounts. The Fund makes payment of this service fee at the annual rate of 0.15% of the Fund's average net assets represented by Class A Shares. For the six months ended June 30, 2008, distribution fees on Class A Shares amounted to $142,966 of which the Distributor retained $5,808. Under another part of the Plan, the Fund is authorized to make payments with respect to Class C Shares to Qualified Recipients which have rendered assistance in the distribution and/or retention of the Fund's Class C shares or servicing of shareholder accounts. These payments are made at the annual rate of 0.75% of the Fund's average net assets represented by Class C Shares and for the six months ended June 30, 2008, amounted to $14,648. In addition, under a Shareholder Services Plan, the Fund is authorized to make service fee payments with respect to Class C Shares to Qualified Recipients for providing personal services and/or maintenance of shareholder accounts. These payments are made at the annual rate of 0.25% of the Fund's average net assets represented by Class C Shares and for the six months ended June 30, 2008, amounted to $4,882. The total of these payments with respect to Class C Shares amounted to $19,530 of which the Distributor retained $4,655. Under another part of the Plan, the Fund is authorized to make payments with respect to Class I Shares to Qualified Recipients. Class I payments, under the Plan, may not exceed for any fiscal year of the Fund a rate (currently 0.20%), set from time to time by the Board of Trustees, of not more than 0.25% of the average annual net assets represented by the Class I Shares. In addition, Class I has a Shareholder Services Plan under which it may pay service fees (currently 0.15%) of not more than 0.25% of the average annual net assets represented by Class I Shares. That is, the total payments under both plans will not exceed 0.50% of such net assets. For the six months ended June 30, 2008, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $14,499 of which $8,285 related to the Plan and $6,214 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 six months ended June 30, 2008, total commissions on sales of Class A Shares amounted to $58,391 of which the Distributor received $4,765. c) OTHER RELATED PARTY TRANSACTIONS: For the six months ended June 30, 2008, the Fund incurred $42,136 of legal fees allocable to Butzel Long PC, counsel to the Fund, for legal services in conjunction with the Fund's ongoing operations. The Secretary of the Fund is a shareholder of that firm. 4. PURCHASES AND SALES OF SECURITIES During the six months ended June 30, 2008, purchases of securities and proceeds from the sales of securities aggregated $8,925,357 and $10,873,912, respectively. At June 30, 2008 the aggregate tax cost for all securities was $244,098,354. At June 30, 2008, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost amounted to $1,743,799 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value amounted to $6,232,995 for a net unrealized depreciation of $4,489,196. 5. PORTFOLIO ORIENTATION Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. 6. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. 7. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
SIX MONTHS ENDED JUNE 30, 2008 YEAR ENDED (UNAUDITED) DECEMBER 31, 2007 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ CLASS A SHARES: Proceeds from shares sold 788,185 $ 8,122,546 1,253,821 $ 13,109,577 Reinvested distributions 162,893 1,666,706 408,743 4,254,990 Cost of shares redeemed . (1,106,566) (11,341,153) (2,936,397) (30,619,982) ------------ ------------ ------------ ------------ Net change .......... (155,488) (1,551,901) (1,273,833) (13,255,415) ------------ ------------ ------------ ------------ CLASS C SHARES: Proceeds from shares sold 26,315 270,531 81,155 852,011 Reinvested distributions 3,040 31,094 9,963 103,674 Cost of shares redeemed . (65,886) (673,990) (231,239) (2,412,850) ------------ ------------ ------------ ------------ Net change .......... (36,531) (372,365) (140,121) (1,457,165) ------------ ------------ ------------ ------------ CLASS I SHARES: Proceeds from shares sold 5,669 58,332 51,362 540,822 Reinvested distributions 11,284 114,684 29,887 311,248 Cost of shares redeemed . (1,361) (13,661) (32,909) (345,172) ------------ ------------ ------------ ------------ Net change .......... 15,592 159,355 48,340 506,898 ------------ ------------ ------------ ------------ CLASS Y SHARES: Proceeds from shares sold 395,555 4,049,293 3,449,070 36,231,566 Reinvested distributions 2,654 27,004 28,753 298,044 Cost of shares redeemed . (169,488) (1,729,071) (3,869,057) (40,604,873) ------------ ------------ ------------ ------------ Net change .......... 228,721 2,347,226 (391,234) (4,075,263) ------------ ------------ ------------ ------------ Total transactions in Fund shares .................. 52,294 $ 582,315 (1,756,848) $(18,280,945) ============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES At June 30, 2008 there were 5 Trustees, one of which is affiliated with the Manager and is not paid any fees. The total amount of Trustees' service and attendance fees paid during the six months ended June 30, 2008 was $42,151 to cover carrying out their responsibilities and attendance at regularly scheduled quarterly Board Meetings and meetings of the Independent Trustees held prior to each quarterly Board Meeting. When additional meetings (Audit, Nominating, Shareholder and special meetings) are held, the meeting fees are paid to those Trustees in attendance. Trustees are reimbursed for their expenses such as travel, accommodations, and meals incurred in connection with attendance at Board Meetings and the Annual Meeting of Shareholders. For the six months ended June 30, 2008, such meeting-related expenses amounted to $12,709. 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 a) THE DAVIS CASE: In 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. On May 19, 2008, the U. S. Supreme Court upheld the right of states to tax interest on out-of-state municipal bonds while exempting their own state's bond interest from taxation. The U. S. Supreme Court said differential tax treatment for interest from in-state vs. out-of-state municipal securities does not discriminate against interstate commerce, but rather promotes the financing of essential governmental services. b) INSURERS: 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 the prices of insured municipal bonds. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A ----------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 6/30/08 ----------------------------------------------------------------- (UNAUDITED) 2007 2006 2005 2004 2003 ----------- -------- -------- -------- -------- -------- Net asset value, beginning of period ....... $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.20++ 0.39++ 0.39+ 0.39+ 0.42+ 0.44+ Net gain (loss) on securities (both realized and unrealized) ........... (0.27) (0.15) 0.03 (0.14) 0.05 0.03 -------- -------- -------- -------- -------- -------- Total from investment operations ....... (0.07) 0.24 0.42 0.25 0.47 0.47 -------- -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.19) (0.39) (0.40) (0.39) (0.42) (0.44) Distributions from capital gains ....... -- (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions .................... (0.19) (0.45) (0.43) (0.39) (0.42) (0.44) -------- -------- -------- -------- -------- -------- Net asset value, end of period ............. $ 10.12 $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69 ======== ======== ======== ======== ======== ======== Total return (not reflecting sales charge) . (0.64)%* 2.38% 4.02% 2.39% 4.49% 4.50% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $187,655 $194,140 $211,501 $223,811 $232,927 $229,176 Ratio of expenses to average net assets ......................... 0.78%** 0.75% 0.76% 0.77% 0.73% 0.72% Ratio of net investment income to average net assets ................. 3.81%** 3.77% 3.71% 3.66% 3.96% 4.14% Portfolio turnover rate ................ 3.68%* 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 ......................... 0.77%** 0.74% 0.76% 0.76% 0.73% 0.71% CLASS C ----------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 6/30/08 ----------------------------------------------------------------- (UNAUDITED) 2007 2006 2005 2004 2003 ----------- -------- -------- -------- -------- -------- Net asset value, beginning of period ....... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income .................. 0.15++ 0.31++ 0.30+ 0.30+ 0.33+ 0.35+ Net gain (loss) on securities (both realized and unrealized) ........... (0.27) (0.15) 0.03 (0.14) 0.04 0.03 -------- -------- -------- -------- -------- -------- Total from investment operations ....... (0.12) 0.16 0.33 0.16 0.37 0.38 -------- -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income ... (0.15) (0.30) (0.31) (0.30) (0.33) (0.35) Distributions from capital gains ....... -- (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions .................... (0.15) (0.36) (0.34) (0.30) (0.33) (0.35) -------- -------- -------- -------- -------- -------- Net asset value, end of period ............. $ 10.11 $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 ======== ======== ======== ======== ======== ======== Total return (not reflecting sales charge) . (1.16)%* 1.61% 3.15% 1.53% 3.51% 3.62% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $ 3,647 $ 4,120 $ 5,686 $ 7,296 $ 8,166 $ 7,197 Ratio of expenses to average net assets ......................... 1.63%** 1.60% 1.62% 1.62% 1.58% 1.57% Ratio of net investment income to average net assets ................. 2.96%** 2.92% 2.87% 2.81% 3.11% 3.26% Portfolio turnover rate ................ 3.68%* 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 ......................... 1.62%** 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. * Not annualized. ** Annualized. See accompanying notes to financial statements. FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS I --------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 6/30/08 ----------------------------------------------------------------- (UNAUDITED) 2007 2006 2005 2004 2003 ----------- -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 $ 10.66 -------- -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................ 0.19++ 0.38++ 0.38+ 0.38+ 0.41+ 0.43+ Net gain (loss) on securities (both realized and unrealized) ......... (0.27) (0.14) 0.02 (0.14) 0.03 0.02 -------- -------- -------- -------- -------- -------- Total from investment operations ..... (0.08) 0.24 0.40 0.24 0.44 0.45 -------- -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income . (0.19) (0.38) (0.38) (0.38) (0.40) (0.42) Distributions from capital gains ..... -- (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions .................. (0.19) (0.44) (0.41) (0.38) (0.40) (0.42) -------- -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.11 $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 ======== ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (0.79)%* 2.33% 3.87% 2.24% 4.24% 4.33% Ratios/supplemental data Net assets, end of period (in thousands) ................... $ 8,309 $ 8,363 $ 8,018 $ 7,764 $ 7,564 $ 4,438 Ratio of expenses to average net assets ....................... 0.92%** 0.89% 0.91% 0.92% 0.89% 0.88% Ratio of net investment income to average net assets ............... 3.67%** 3.62% 3.57% 3.52% 3.79% 3.95% Portfolio turnover rate .............. 3.68%* 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 ....................... 0.91%** 0.88% 0.90% 0.91% 0.89% 0.87% CLASS Y --------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 6/30/08 ----------------------------------------------------------------- (UNAUDITED) 2007 2006 2005 2004 2003 ----------- -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70 $ 10.67 -------- -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................ 0.20++ 0.41++ 0.41+ 0.41+ 0.44+ 0.46+ Net gain (loss) on securities (both realized and unrealized) ......... (0.27) (0.14) 0.01 (0.14) 0.05 0.03 -------- -------- -------- -------- -------- -------- Total from investment operations ..... (0.07) 0.27 0.42 0.27 0.49 0.49 -------- -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income . (0.20) (0.41) (0.41) (0.41) (0.44) (0.46) Distributions from capital gains ..... -- (0.06) (0.03) -- -- -- -------- -------- -------- -------- -------- -------- Total distributions .................. (0.20) (0.47) (0.44) (0.41) (0.44) (0.46) -------- -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 10.12 $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70 ======== ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (0.65)%* 2.63% 4.08% 2.55% 4.65% 4.65% Ratios/supplemental data Net assets, end of period (in thousands) ................... $ 42,912 $ 41,648 $ 46,625 $ 47,816 $ 48,795 $ 46,313 Ratio of expenses to average net assets ....................... 0.63%** 0.60% 0.61% 0.62% 0.58% 0.57% Ratio of net investment income to average net assets ............... 3.96%** 3.92% 3.86% 3.81% 4.11% 4.28% Portfolio turnover rate .............. 3.68%* 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 ....................... 0.62%** 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. * Not annualized. ** Annualized. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end sales charges with respect to Class A shares or contingent deferred sales charges ("CDSC") with respect to Class C shares; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. The table below is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The table below is based on an investment of $1,000 invested on January 1, 2008 and held for the six months ended June 30, 2008. ACTUAL EXPENSES This table provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled "Expenses Paid During the Period". SIX MONTHS ENDED JUNE 30, 2008 ACTUAL TOTAL RETURN BEGINNING ENDING EXPENSES WITHOUT ACCOUNT ACCOUNT PAID DURING SALES CHARGES(1) VALUE VALUE THE PERIOD(2) - -------------------------------------------------------------------------------- Class A (0.64)% $1,000.00 $993.60 $3.82 - -------------------------------------------------------------------------------- Class C (1.16)% $1,000.00 $988.40 $8.01 - -------------------------------------------------------------------------------- Class I (0.79)% $1,000.00 $992.10 $4.51 - -------------------------------------------------------------------------------- Class Y (0.65)% $1,000.00 $993.50 $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 0.77%, 1.62%, 0.91% AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED) HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table below provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other mutual funds. To do so, compare this 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of other mutual funds. Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs with respect to Class A shares. The example does not reflect the deduction of contingent deferred sales charges ("CDSC") with respect to Class C shares. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different mutual funds. In addition, if these transaction costs were included, your costs would have been higher. SIX MONTHS ENDED JUNE 30, 2008 HYPOTHETICAL ANNUALIZED BEGINNING ENDING EXPENSES TOTAL ACCOUNT ACCOUNT PAID DURING RETURN VALUE VALUE THE PERIOD(1) - -------------------------------------------------------------------------------- Class A 5.00% $1,000.00 $1,021.03 $3.87 - -------------------------------------------------------------------------------- Class C 5.00% $1,000.00 $1,016.81 $8.12 - -------------------------------------------------------------------------------- Class I 5.00% $1,000.00 $1,020.34 $4.57 - -------------------------------------------------------------------------------- Class Y 5.00% $1,000.00 $1,021.78 $3.12 - -------------------------------------------------------------------------------- (1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.77%, 1.62%, 0.91% AND 0.62% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION AVAILABLE (UNAUDITED) Much of the information that the funds in the Aquila Group of Funds produce is automatically sent to you and all other shareholders. Specifically, you are routinely sent 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, 2008 with respect to which the Fund was entitled to vote. Applicable regulations require us to inform you that the foregoing proxy voting information is available on the SEC website at http://www.sec.gov. - -------------------------------------------------------------------------------- SHAREHOLDER MEETING RESULTS (UNAUDITED) The Annual Meeting of Shareholders of Churchill Tax-Free Fund of Kentucky (the "Fund") was held on April 25, 2008. The holders of shares representing 89% of the total net asset value of the shares entitled to vote were present in person or by proxy. At the meeting, the following matters were voted upon and approved by the shareholders (the resulting votes are presented below). 1. To elect Trustees. DOLLAR AMOUNT OF VOTES ---------------------- TRUSTEE FOR WITHHELD ------- --- -------- Thomas A. Christopher $220,140,906 $3,285,268 Diana P. Herrmann $220,168,451 $3,205,371 Timothy J. Leach $220,175,619 $3,199,254 Theodore T. Mason $219,969,023 $3,404,798 Anne J. Mills $220,035,825 $3,338,007 James R. Ramsey $220,074,733 $3,299,089 2. To ratify the selection of Tait, Weller & Baker LLP as the Fund's independent registered public accounting firm. FOR AGAINST ABSTAIN --- ------- ------- $218,945,234 $1,006,427 $3,422,150 3. To act on an Advisory and Administration Agreement. FOR AGAINST ABSTAIN --- ------- ------- $155,335,403 $873,896 $67,164,512 ADDITIONAL INFORMATION (UNAUDITED) RENEWAL OF THE ADVISORY AND ADMINISTRATION AGREEMENT Renewal until June 30, 2009 of the Advisory and Administration Agreement (the "Advisory Agreement") between the Fund and the Manager was approved by the Board of Trustees and the independent Trustees in June, 2008. At a meeting called and held for that purpose at which a majority of the independent Trustees were present in person, the following materials were considered: o A copy of the agreement to be renewed; o A term sheet describing the material terms of the agreement; o The Annual Report of the Fund for the year ended December 31, 2007; o A report, prepared by the Manager and provided to the Trustees in advance of the meeting for the Trustees' review, containing data about the performance of the Fund, data about its fees, expenses and purchases and redemptions of capital stock together with comparisons of such data with similar data about other comparable funds, as well as data as to the profitability of the Manager; and o Quarterly materials reviewed at prior meetings on the Fund's performance, operations, portfolio and compliance. The Trustees reviewed materials relevant to, and considered the following factors: THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER. The Manager has provided local management of the Fund's portfolio. The Trustees noted that the Manager employed Thomas S. Albright as portfolio manager for the Fund and had provided facilities for credit analysis of the Fund's portfolio securities. Mr. Albright, based in Louisville, has provided local information regarding specific holdings in the Fund's portfolio. The portfolio manager has also been available to and has met with the brokerage and financial planner community and with investors and prospective investors to provide them with information generally about the Fund's portfolio, with which to assess the Fund as an investment vehicle for residents of Kentucky in light of prevailing interest rates and local economic conditions. In addition, he has been present at all regular meetings of the Board and Shareholders. The Board considered that the Manager had provided all services the Board deemed necessary or appropriate, including the specific services that the Board has determined are required for the Fund, given that its purpose is to provide shareholders with as high a level of current income exempt from Kentucky state and regular Federal income taxes as is consistent with preservation of capital. The Manager has additionally provided all administrative services to the Fund. The Board considered the nature and extent of the Manager's supervision of third-party service providers, including the Fund's shareholder servicing agent and custodian. The Board considered that the Manager had established and maintained a strong culture of ethical conduct and regulatory compliance. The Board concluded that the services provided were appropriate and satisfactory and that the Fund would be well served if they continued. Evaluation of this factor weighed in favor of renewal of the Advisory Agreement. THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER. The Board reviewed each aspect of the Fund's performance and compared its performance with that of its local competitors, with national averages and the benchmark index. It was noted that the materials provided by the Manager indicated that compared to the five largest competitive Kentucky funds, the Fund has had investment performance that is generally comparable to that of its peers for the one, five and ten-year periods. The Board concluded that the performance of the Fund was acceptable in light of market conditions, the length of its average maturities, its investment objectives and its long-standing emphasis on minimizing risk. Evaluation of this factor indicated to the Trustees that renewal of the Advisory Agreement would be appropriate. THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE MANAGER AND ITS AFFILIATE FROM THE RELATIONSHIP WITH THE FUND. The information provided contained expense data for the Fund and its local competitors as well as data for all single-state tax-free municipal bond funds nationwide, including data for all such front-end load funds of a comparable asset size. The materials also showed the profitability to the Manager of its services to the Fund. The Board compared the expense and fee data with respect to the Fund to similar data about other funds that it found to be relevant. The Board concluded that the expenses of the Fund and the fees paid were generally lower than those being paid by single-state tax-free municipal bond funds nationwide, and by the Fund's local competitors. The Board further concluded that the profitability to the Manager and the Distributor did not argue against approval of the fees to be paid under the Advisory Agreement. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS. Data provided to the Trustees showed that the Fund's asset size had declined in recent years. They concluded that the recent increases in prevailing interest rates and the possibility of further increases might make it difficult to achieve substantial growth in assets in the near future. The Trustees also noted that the materials indicated that the Fund's fees were already generally lower than those of its peers, including those with breakpoints. Evaluation of this factor indicated to the Board that the Advisory Agreement should be renewed without addition of breakpoints at this time. BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATE FROM THE RELATIONSHIP WITH THE FUND. The Board observed that, as is generally true of most fund complexes, the Manager and its affiliate, by providing services to a number of funds or other investment clients including the Fund, were able to spread costs as they would otherwise be unable to do. The Board noted that while that produces efficiencies and increased profitability for the Manager and its affiliate, it also makes their services available to the Fund at favorable levels of quality and cost which are more advantageous to the Fund than would otherwise have been possible. CONSIDERATION OF A NEW ADVISORY AND ADMINISTRATION AGREEMENT IN CONNECTION WITH PROPOSED CHANGES IN OWNERSHIP OF THE PARENT COMPANY OF THE MANAGER BASIS FOR THE TRUSTEES' APPROVAL OF THE NEW ADVISORY AGREEMENT In considering approval of the New Advisory Agreement, the Trustees noted that in connection with their annual review of the Fund's advisory arrangements (the "Annual Review"), on June 11, 2007, they had approved the Current Advisory Agreement (which is substantially identical to the New Advisory Agreement) for another one-year term commencing on June 30, 2007. In connection with the Annual Review, the Trustees considered a wide range of information of the type they regularly consider when determining whether to continue the Fund's advisory agreement as in effect from year to year. In approving the New Advisory Agreement, the Trustees considered the information provided and the factors considered in connection with the Annual Review as well as such new information (for example, information about the Transaction) as they considered appropriate. In considering the Advisory Agreements, the Trustees did not identify any single factor as determinative. Matters considered by the Trustees, including the independent Trustees, in connection with their review of the New Advisory Agreement included the following: THE TRANSACTION AND THE IMPLICATIONS FOR THE FUND In evaluating the Transaction, the Trustees considered a wide range of information, including ensuring, to the maximum extent possible, ongoing and future continuity of management of the Fund. THE NATURE, EXTENT AND QUALITY OF THE SERVICES PROVIDED BY THE MANAGER The Manager has provided local management of the Fund's portfolio. The Trustees noted that the Manager employed Thomas S. Albright as portfolio manager for the Fund and had provided facilities for credit analysis of the Fund's portfolio securities. Mr. Albright, based in Louisville, Kentucky, has provided local information regarding specific holdings in the Fund's portfolio. The portfolio manager has also been available to and has met with the brokerage and financial planner community and with investors and prospective investors to provide them with information generally about the Fund's portfolio, with which to assess the Fund as an investment vehicle for residents of Kentucky in light of prevailing interest rates and local economic conditions. In addition, he has been present at all regular meetings of the Board and at the Annual Meeting of Shareholders. The Board considered that the Manager had provided all services the Board deemed necessary or appropriate, including the specific services that the Board has determined are required for the Fund, given that its purpose is to provide shareholders with as high a level of current income exempt from Kentucky state and regular Federal income taxes as is consistent with preservation of capital. The Manager has additionally provided all administrative services to the Fund. The Board considered the nature and extent of the Manager's supervision of third-party service providers, including the Fund's shareholder servicing agent and custodian. The Board considered that the Manager had established and maintained a strong culture of ethical conduct and regulatory compliance. The Trustees also considered representations by the Manager that the persons at the Manager involved in providing those services would not change as a result of the Transaction. The Board concluded that the services provided were appropriate and satisfactory and that the Fund would be well served if they continued. Evaluation of this factor weighed in favor of approval of the New Advisory Agreement. THE INVESTMENT PERFORMANCE OF THE FUND AND THE MANAGER The Board reviewed each aspect of the Fund's performance and compared its performance with that of its local competitors, with national averages and with the benchmark index. It was noted that the materials provided by the Manager indicated that compared to the five largest competitive Kentucky funds, the Fund has had investment performance that is generally comparable to that of its peers for the one-, five- and ten-year periods, with lower investment performance explained by the Fund's generally higher-quality portfolio and generally shorter average maturities. The Board considered these results to be consistent with the purposes of the Fund. The Trustees also considered representations from the Manager that the Transaction was not expected to result in any changes to the personnel managing the Fund's investment portfolio. The Board concluded that the performance of the Fund was acceptable in light of market conditions, the length of its average maturities, its investment objectives and its long-standing emphasis on minimizing risk. Evaluation of this factor indicated to the Trustees that approval of the New Advisory Agreement would be appropriate. THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE MANAGER FROM ITS RELATIONSHIP WITH THE FUND The information provided contained expense data for the Fund and its local competitors as well as data for single-state funds and all single-state tax-free municipal bond funds nationwide. The Board compared the expense and fee data with respect to the Fund to similar data about other funds that it found to be relevant. The Board concluded that the expenses of the Fund and the fees paid were generally lower than those being paid by single-state tax-free municipal bond funds nationwide, and by the Fund's local competitors. The Trustees noted that in connection with the Annual Review they had concluded that the costs of the services to be provided supported the renewal of the Current Advisory Agreement, and that the Transaction will not result in any change to the advisory fees paid by the Fund or the Fund's total expense ratio. The materials in connection with the Annual Review had shown the profitability to the Manager of its services to the Fund. The Trustees considered that the profitability to the Manager of its relationship to the Fund was not expected to change as a result of the Transaction because the Transaction will not result in a change to the fees received by the Manager or of the costs of the services to be provided by the Manager. THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS Data provided to the Trustees showed that the Fund's asset size had declined in recent years. The Trustees also noted that the materials indicated that the Fund's fees were already generally lower than those of its peers, including those with breakpoints. Evaluation of these factors indicated to the Board that the New Advisory Agreement should be approved without addition of breakpoints at this time. BENEFITS DERIVED OR TO BE DERIVED BY THE MANAGER AND ITS AFFILIATES FROM THEIR RELATIONSHIPS WITH THE FUND The Board observed that, as is generally true of most fund complexes, the Manager and its affiliates, by providing services to a number of funds including the Fund, were able to spread costs as they would otherwise be unable to do. The Board noted that while that produces efficiencies and increased profitability for the Manager and its affiliates, it also makes their services available to the Fund at favorable levels of quality and cost which are more advantageous to the Fund than would otherwise have been possible. In addition to considering the factors discussed above, which the Trustees regularly consider on an annual basis, the Trustees also gave particular consideration to matters relating to the change of control at AMC, including representations from representatives of AMC and the Manager that the proposed change of control is not expected to result in a change in the personnel or operations of the Manager, the investment approach or style of the Manager with respect to the Fund, or the services provided to the Fund by the Manager. The Trustees also considered other factors, either in connection with the Annual Review or with their approval of the New Advisory Agreement. These factors included but were not limited to whether the Fund has operated in compliance with its investment objective and the Fund's record of compliance with its investment restrictions, and the compliance programs of the Fund and the Manager. Based on their evaluation of all factors that they deemed to be material, including those factors described above, and assisted by the advice of independent counsel, the Trustees, including the independent Trustees, concluded that the New Advisory Agreement should be approved and recommended that the shareholders of the Fund vote to approve the New Advisory Agreement for an initial one-year term. (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 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 PNC Global Investment Servicing 101 Sabin Street Pawtucket, RI 02860 CUSTODIAN JPMORGAN CHASE BANK, N.A. 1111 Polaris Parkway Columbus, Ohio 43240 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TAIT, WELLER & BAKER LLP 1818 Market Street, Suite 2400 Philadelphia, PA 19103 Further information is contained in the Prospectus, which must precede or accompany this report. ITEM 2. CODE OF ETHICS. Not aplicable ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not appicable ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Included in Item 1 above ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Directors of the Registrant has adopted a Nominating Committee Charter which provides that the Nominating Committee (the 'Committee') may consider and evaluate nominee candidates properly submitted by shareholders if a vacancy among the Independent Trustees of the Registrant occurs and if, based on the Board's then current size, composition and structure, the Committee determines that the vacancy should be filled. The Committee will consider candidates submitted by shareholders on the same basis as it considers and evaluates candidates recommended by other sources. A copy of the qualifications and procedures that must be met or followed by shareholders to properly submit a nominee candidate to the Committee may be obtained by submitting a request in writing to the Secretary of the Registrant. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 12. EXHIBITS. (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL TAX-FREE TRUST By: /s/ Diana P. Herrmann - ----------------------------------- President and Trustee September 4, 2008 By: /s/ Joseph P. DiMaggio - ------------------------------------- Chief Financial Officer and Treasurer September 4, 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 September 4, 2008 By: /s/ Joseph P. DiMaggio - ------------------------------------- Joseph P. DiMaggio Chief Financial Officer and Treasurer September 4, 2008 CHURCHILL TAX-FREE TRUST EXHIBIT INDEX (a) (2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certification of chief executive officer and chief financial officer as required by Rule 30a-2(b) of the Investment Company Act of 1940. EX-99.CERT 2 ctft306cert.txt SECTION 306 CERTIFICATIONS CERTIFICATIONS I, Diana P. Herrmann, certify that: 1. I have reviewed this report on Form N-CSR of Churchill Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 4, 2008 /s/ Diana P. Herrmann - ------------------------ Title: President and Trustee I, Joseph P. DiMaggio, certify that: 1. I have reviewed this report on Form N-CSR of Churchill Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 4, 2008 /s/ Joseph P. DiMaggio - -------------------------- Title: Chief Financial Officer and Treasurer EX-99.906 CERT 3 ctft906cert.txt SECTION 906 CERTIFICATIONS CERTIFICATION Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18,United States Code), each of the undersigned officers of Churchill Tax-Free Trust, do hereby certify to such officer's knowledge, that: The report on Form N-CSR of Churchill Tax-Free Trust for the period ended June 30, 2008, (the "Form N-CSR") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of Churchill Tax-Free Trust. Dated: September 4, 2008 /s/ Diana P. Herrmann ------------------------ President and Trustee Churchill Tax-Free Trust Dated: September 4, 2008 /s/ Joseph P. DiMaggio --------------------------- Chief Financial Officer and Treasurer Churchill Tax-Free Trust A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Churchill Tax-Free Trust and will be retained by Churchill Tax-Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----