N-CSR 1 ctftncsr.txt CHURCHILL TAX-FREE TRUST 12/31/2008 NCSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5086 Churchill Tax-Free Trust (Exact name of Registrant as specified in charter) 380 Madison Avenue New York, New York 10017 (Address of principal executive offices) (Zip code) Joseph P. DiMaggio 380 Madison Avenue New York, New York 10017 (Name and address of agent for service) Registrant's telephone number, including area code: (212) 697-6666 Date of fiscal year end: 12/31/08 Date of reporting period: 12/31/08 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. Annual Report December 31, 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 "PROPER ASSET ALLOCATION - A STRATEGY FOR ALL SEASONS" February, 2009 The market has definitely been volatile enough recently to cause even the most seasoned investor to ask, "What should I do now?" We believe you will be in a better position to weather this, or any, economic storm, if your portfolio is built with a strong foundation. In short, is your portfolio properly allocated based on your specific needs? As you hopefully already know, asset allocation is an investment strategy that strives to balance risk and reward by diversifying assets according to your specific desires. These include: o investment time horizon (specifically your age and retirement objectives); o risk threshold (how much of your investment capital you are willing to lose during a given time frame); o financial situation (your wealth, income, expenses, tax bracket, liquidity needs, etc.); and o goals (the financial goals you and your family want to achieve). Since the three main asset classes - equities, fixed-income, and cash/cash equivalents - have different levels of risk and return, each is expected to behave differently over time. The objective of asset allocation is to create a diversified portfolio with an acceptable level of risk and the highest possible return given that level of risk. Although there is no simple formula that can find the right asset allocation for every individual, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. NOT A PART OF THE ANNUAL REPORT The way you allocate your investment among stocks, bonds, and cash/cash equivalents will be the principal determinant of your investment results - secondary to your selection of individual securities. Once you and your financial professional have developed an appropriate asset allocation for your portfolio, we believe that changes should be made based on need, not on scary headlines. A properly constructed portfolio with sound asset allocation should be in a good position to weather all seasons. 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 ANNUAL REPORT [LOGO OF THE CHURCHILL TAX-FREE FUND OF KENTUCKY: A STANDING PEGASUS IN A CIRCLE] SERVING KENTUCKY INVESTORS FOR MORE THAN TWO DECADES CHURCHILL TAX-FREE FUND OF KENTUCKY ANNUAL REPORT MANAGEMENT DISCUSSION OF FUND PERFORMANCE The year ended December 31, 2008 was the worst year for the American economy since the Great Depression. Asset values tumbled - real estate, stocks, and non-U. S. Treasury fixed-income securities. Home foreclosures and personal and corporate bankruptcy became frighteningly commonplace. Economic life as we know it has changed forever. 2009 will be a year of monumental challenges. As the Obama presidency begins, so does the President's challenge to fix this deeply troubled economy. With the prospect of a just-announced economic stimulus package on the horizon, investors have a full plate of significant financial developments to watch. As we begin 2009, the country is in the midst of an economic slowdown that has resulted in the highest unemployment rate seen in over a decade: 5.8% for calendar year 2008 and 7.2% for the month of December. Gross Domestic Product, retail sales, industrial production, and productivity are all down significantly. Federal, state, and local budget deficits are all weighing heavily on an already strained financial system. Tax and revenue shortfalls are of growing concern. There has been an erosion of investor confidence in the domestic and international stock markets. As we saw earlier in 2008, the financial viability of several AAA rated municipal bond insurers has been shown, in most cases, to be sorely lacking. 2008 was witness to the decline and disappearance of many household names in the financial arena: Lehman Brothers is gone; Bear Stearns and Washington Mutual were purchased by JP Morgan; Wachovia was bought by Wells Fargo; Merrill Lynch became a part of Bank of America; Morgan Stanley obtained a controlling interest in the securities arm of CitiGroup (Smith Barney); and locally, PNC purchased National City. Conventional wisdom suggests that the "streamlining" of the financial sector is far from complete, with ongoing concern about the strength of many large banks. As part of the federal bailout program, resources have been made available to shore-up liquidity-strapped lenders. While the jury is still out on the success of the program, the importance of this federal intervention cannot be overlooked. We have seen the U. S. Government step in and offer funds to the "Big 3" automakers, all struggling to stay in business. It has been determined that all were "too big to fail" and the consequences of their demise would be too much additional strain on the soaring unemployment ranks. While it is barely a glimmer, there is a somewhat bright side to this dire economic news: inflation is virtually non-existent. Oil prices fluctuated wildly in 2008 - plummeting from a high of over $149 a barrel in July to a low of $44.60 on December 31. And, early 2009 saw prices as low as $36 a barrel. Short-term interest rates were well less than 1% - in some rare instances, even negative! Long-term rates, as measured by the 30-year U. S. Treasury bond were approximately 3%. These low funding rates have led to the lowest fixed-rate home mortgage rates seen in many years. MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED) With so much financial turmoil, there was a frantic flight to quality throughout most of 2008. If you owned anything but the highest quality investments (most notably U. S. Treasury securities), you were in for a shock when market valuations were made. While U. S. Treasury rates dropped to unheard of levels, everything else moved up in yield - down in price. This situation resulted in a supply/demand imbalance that sent security prices even lower. With the recent actions by the federal government, much of the uncertainty and nervousness has been alleviated in the municipal bond market. With the new year, some stability has finally shown up! While 2008 was very challenging for bonds, it was a disastrous year for stocks. All the major indices posted miserable investment performance for the year. The Dow Jones Industrial Average fell 31.9% versus a gain of 8.9% in 2007. The S & P 500 closed down 37.0% versus 5.5% last year; and the NASDAQ Composite Index plummeted 40.0%, after a gain of 10.7% in 2007. Fixed income securities, excluding U. S. Treasuries, posted negative performance, as well. The Class A shares of Churchill Tax-Free Fund of Kentucky also had a negative total rate of return of 5.05% in 2008. While we wish the results had been better, the Fund fared better than the average performance of the investment-grade municipal market which had a decline of 9.50%. Lower quality municipal bond funds were off as much as 40%! As we enter 2009, the Kentucky economy - and virtually every other state economy - is in much worse shape than when we began 2008 - worse than anyone had forecast. Tax receipts and revenues are down and unemployment - especially in manufacturing - is up. Significant belt tightening will be necessary to overcome Kentucky's projected budget imbalance. That being said, Kentucky municipal bonds continued to be highly sought after throughout 2008 and in the early days of 2009. The investment objective of Churchill Tax-Free Fund of Kentucky is to provide as high a level of triple tax-exempt current income as is consistent with the preservation of capital. We believe this objective continues to be successfully addressed by our adherence to a discipline of solid fundamental, conservative portfolio management ideals. The net asset value of the Fund's Class A shares began 2008 at $10.38 per share. We ended the year with a net asset value of $9.42 per share. The Fund continues to maintain an average credit quality of "AA", with no bonds rated less than "A". At year-end, 88% of the portfolio was rated AA or AAA. The Fund's "laddered" maturity structure helps us manage price volatility. The Fund has an average life of approximately 15 years and a modified duration of approximately 8.4 years. We maintain a well-diversified portfolio of 170 different Kentucky issues. We approach the municipal bond market in 2009 with caution. The prospects for the U. S. and Kentucky economies in 2009 are still very much in doubt. We intend to continue to react appropriately to any signs of rising inflation. It is going to take continued vigilance and, if necessary, continued intervention by the Federal Reserve and the Congress to get our economy back on a positive track while addressing inflation pressures and growth over the course of 2009. To address these concerns, we will seek to "stay the course" and manage the Fund's portfolio by taking advantage of opportunities in the Kentucky marketplace that are consistent with the investment objectives of the Fund. PERFORMANCE REPORT The following graph illustrates the value of $10,000 invested in the Class A shares of Churchill Tax-Free Fund of Kentucky for the 10-year period ended December 31, 2008 as compared with the Barclays Capital Quality Intermediate Municipal Bond Index (formerly known as the Lehman Brothers Quality Intermediate Municipal Bond Index) and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Barclays Capital Quality Intermediate Municipal Bond Index does not include any operating expenses nor sales charges and being nationally oriented, does not reflect state specific bond market performance. [Graphic of a line chart with the following information:] Churchill Tax-Free Churchill Tax-Free Fund of Kentucky Fund of Kentucky Barclays Cost of Fund Class A Shares Fund Class A Shares Capital Living Index no sales charge with sales charge Index 12/98 10,000 10,000 9,600 10,000 12/99 10,268 9,838 9,444 10,029 12/00 10,616 10,658 10,232 10,895 12/01 10,781 11,089 10,646 11,495 12/02 11,037 11,949 11,471 12,557 12/03 11,245 12,546 12,045 13,139 12/04 11,611 13,115 12,590 13,536 12/05 12,007 13,385 12,850 13,761 12/06 12,312 13,994 13,434 14,281 12/07 12,815 14,219 13,651 14,977 12/08 12,827 13,587 13,044 15,651
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 2008 ------------------------------------------ SINCE CLASS AND INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION ------ ------- -------- --------- Class A (commenced operations on 5/21/87) With Maximum Sales Charge .............. (8.82)% 0.75% 2.69% 5.20% Without Sales Charge ................... (5.05)% 1.59% 3.11% 5.40% Class C (commenced operations on 4/01/96) With CDSC .............................. (6.79)% 0.73% 2.24% 3.01% Without CDSC ........................... (5.85)% 0.73% 2.24% 3.01% Class I (commenced operations on 8/06/01) No Sales Charge ........................ (5.16)% 1.44% n/a 2.69% Class Y (commenced operations on 4/01/96) No Sales Charge ........................ (4.88)% 1.75% 3.27% 4.03% Barclays Capital Quality Intermediate Municipal Bond Index ...... 4.49% 3.56% 4.58% 5.85% (Class A) 4.99% (Class C&Y) 3.11% (Class I)
Total return figures shown for the Fund reflect any change in price and assume all distributions within the period were invested in additional shares. Returns for Class A shares are calculated with and without the effect of the initial 4% maximum sales charge. Returns for Class C shares are calculated with and without the effect of the 1% contingent deferred sales charge (CDSC), imposed on redemptions made within the first 12 months after purchase. Class I and Y shares are sold without any sales charge. The rates of return will vary and the principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each class's income may be subject to Federal and state income taxes. Past performance is not predictive of future investment results. -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Churchill Tax-Free Fund of Kentucky: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Churchill Tax-Free Fund of Kentucky as of December 31, 2008 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended December 31, 2004 were audited by other auditors, whose report dated February 18, 2005 expressed an unqualified opinion on such financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2008, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Churchill Tax-Free Fund of Kentucky as of December 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania February 26, 2009 -------------------------------------------------------------------------------- CHURCHILL TAX-FREE FUND OF KENTUCKY SCHEDULE OF INVESTMENTS December 31, 2008
RATING PRINCIPAL MOODY'S/ AMOUNT GENERAL OBLIGATION BONDS (2.2%) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- Lexington-Fayette Urban County, Kentucky $ 4,175,000 4.250%, 05/01/23 MBIA Insured ........................... Aa2/AA+ $ 3,795,785 Louisville & Jefferson County, Kentucky 955,000 4.200%, 11/01/22 MBIA Insured ........................... Aa2/AA+ 881,026 --------------- Total General Obligation Bonds .......................... 4,676,811 --------------- REVENUE BONDS (97.3%) STATE AGENCIES (15.1%) Kentucky Area Development District Financing 500,000 5.000%, 12/01/23 LOC Wachovia Bank ...................... NR/AA 504,485 Kentucky Asset/Liability Commission 500,000 4.500%, 10/01/22 FGIC Insured ........................... Aa3/AA 489,930 Kentucky Asset & Liability Commission University of Kentucky Project 500,000 5.000%, 10/01/25 Series ................................. BAa3/AA- 494,930 750,000 5.000%, 10/01/26 Series ................................. BAa3/AA- 736,103 1,000,000 5.000%, 10/01/27 Series ................................. BAa3/AA- 972,660 Kentucky Economic Development Finance Authority Louisville Arena Project 5,725,000 5.750%, 12/01/28 Assured Guaranty Insured ............... Aa2/AAA 5,605,176 Kentucky Infrastructure Authority 230,000 5.000%, 06/01/21 ........................................ Aa3/A+ 230,918 Kentucky State Property and Buildings Commission 1,000,000 5.000%, 11/01/15 AMBAC Insured .......................... Aa3/AA 1,060,020 1,250,000 5.500%, 11/01/17 FSA Insured ............................ Aa3/AAA 1,326,187 1,000,000 5.000%, 11/01/17 AMBAC Insured .......................... Aa3/AA 1,039,830 6,000,000 5.250%, 10/01/18 ........................................ Aa3/A+ 6,130,140 1,925,000 5.000%, 10/01/19 ........................................ Aa3/A+ 1,946,752 3,000,000 5.000%, 11/01/19 FSA Insured ............................ Aa3/AAA 3,089,040 1,375,000 5.375%, 11/01/23 ........................................ Aa3/A+ 1,407,024 2,820,000 5.750%, 04/01/24 AMBAC Insured .......................... A1/A+ 2,909,394 250,000 5.500%, 11/01/28 ........................................ Aa3/A+ 251,865 2,625,000 5.750%, 04/01/29 AMBAC Insured .......................... A1/A+ 2,643,427
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- STATE AGENCIES (CONTINUED) Kentucky State Property and Buildings Commission Project #88 $ 2,200,000 4.500%, 11/01/26 FGIC Insured ........................... Aa3/A+ $ 1,985,192 --------------- Total State Agencies .................................... 32,823,073 --------------- COUNTY AGENCIES (2.6%) Jefferson County, Kentucky Capital Projects 1,575,000 4.250%, 06/01/23 FSA Insured ............................ Aa3/NR* 1,409,389 4,140,000 4.375%, 06/01/28 FSA Insured ............................ Aa3/NR* 3,469,817 Lexington-Fayette Urban County, Kentucky Public Facilities Revenue 500,000 4.125%, 10/01/23 MBIA Insured ........................... Aa3/NR 457,360 Warren County, Kentucky Justice Center 365,000 4.300%, 09/01/22 MBIA Insured ........................... Aa3/NR 343,786 --------------- Total County Agencies ................................... 5,680,352 --------------- HOSPITALS (8.2%) Jefferson County, Kentucky Health Facilities 1,715,000 5.650%, 01/01/17 AMBAC Insured .......................... Aa3/AA 1,717,127 2,200,000 5.250%, 05/01/17 ........................................ NR/A 2,139,192 Jefferson County, Kentucky Medical Center 2,000,000 5.500%, 05/01/22 ........................................ NR/A 1,916,060 Lexington-Fayette Urban County, Kentucky Public Facilities 500,000 4.250%, 10/01/26 MBIA Insured ........................... Aa3/NR 441,790 Louisville & Jefferson County, Kentucky Medical Center 1,000,000 5.000%, 06/01/18 ........................................ NR/A 960,190 Louisville & Jefferson County, Kentucky Metro Health, Jewish Hospital Revenue 1,250,000 6.000%, 02/01/22 ........................................ A3/A+ 1,156,650 Louisville & Jefferson County, Kentucky Metropolitan Government Health System (Norton) 8,045,000 5.000%, 10/01/26 ........................................ NR/A- 5,598,596 6,000,000 5.000%, 10/01/30 ........................................ NR/A- 3,958,560 --------------- Total Hospitals ......................................... 17,888,165 ---------------
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- HOUSING (12.1%) Kentucky Housing Corporation Housing Revenue $ 555,000 4.200%, 01/01/17 ........................................ Aaa/AAA $ 489,471 100,000 5.125%, 07/01/17 ........................................ Aaa/AAA 94,710 470,000 4.800%, 01/01/18 AMT .................................... Aaa/AAA 415,471 285,000 4.250%, 01/01/18 ........................................ Aaa/AAA 246,519 575,000 4.800%, 07/01/18 AMT .................................... Aaa/AAA 506,063 180,000 4.250%, 07/01/18 ........................................ Aaa/AAA 154,865 900,000 4.800%, 07/01/20 AMT .................................... Aaa/AAA 740,079 1,150,000 5.350%, 01/01/21 AMT .................................... Aaa/AAA 1,007,710 6,025,000 5.450%, 07/01/22 AMT .................................... Aaa/AAA 5,348,272 4,565,000 5.250%, 07/01/22 AMT .................................... Aaa/AAA 3,856,558 245,000 5.200%, 07/01/22 ........................................ Aaa/AAA 215,735 415,000 5.100%, 07/01/22 AMT .................................... Aaa/AAA 349,480 2,570,000 4.800%, 07/01/22 AMT .................................... Aaa/AAA 2,075,403 2,000,000 4.700%, 07/01/22 Series E AMT ........................... Aaa/AAA 1,593,300 1,635,000 5.000%, 01/01/23 AMT .................................... Aaa/AAA 1,353,616 4,140,000 5.200%, 07/01/25 AMT .................................... Aaa/AAA 3,451,601 275,000 5.375%, 07/01/27 ........................................ Aaa/AAA 236,302 2,300,000 5.000%, 07/01/27 Series N AMT ........................... Aaa/AAA 1,797,151 1,000,000 4.750%, 07/01/27 Series E AMT ........................... Aaa/AAA 753,520 560,000 5.550%, 07/01/33 ........................................ Aaa/AAA 495,449 Kentucky Housing Multifamily Mortgage Revenue 1,325,000 5.000%, 06/01/35 AMT .................................... NR/AAA 1,096,239 --------------- Total Housing ........................................... 26,277,514 --------------- SCHOOLS (34.9%) Barren County, Kentucky School Building Revenue 1,265,000 4.250%, 08/01/25 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 1,116,122 1,670,000 4.375%, 08/01/26 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 1,480,355 Berea, Kentucky Educational Facilities (Berea College) 1,000,000 4.125%, 06/01/25 ........................................ Aaa/NR 862,510 Boone County, Kentucky School District Finance Corp. 1,730,000 4.125%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,555,426
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Boone County, Kentucky School District Finance Corp. School Building Revenue $ 140,000 4.750%, 06/01/20 FSA Insured ............................ Aaa/AAA $ 140,736 1,580,000 4.500%, 08/01/23 FSA Insured ............................ Aa3/NR* 1,477,521 1,250,000 4.125%, 03/01/25 FSA Insured ............................ Aa3/NR* 1,043,063 Boyle County, Kentucky College Refunding & Improvement 1,035,000 4.500%, 06/01/22 CIFG Insured ........................... A3/A- 966,203 200,000 4.625%, 06/01/24 CIFG Insured ........................... A3/A- 183,284 Bullitt County, Kentucky School District Finance Corp. 200,000 4.300%, 10/01/21 MBIA Insured ........................... Aa3/NR 193,130 2,455,000 4.500%, 10/01/22 MBIA Insured ........................... Aa3/NR 2,430,057 2,590,000 4.500%, 10/01/23 MBIA Insured ........................... Aa3/NR 2,524,447 1,145,000 4.500%, 04/01/27 FSA Insured ............................ Aa3/NR 1,020,092 1,200,000 4.500%, 04/01/28 FSA Insured ............................ Aa3/NR 1,057,764 Christian County, Kentucky School District Finance Corp. 820,000 4.000%, 08/01/19 Syncora Guarantee Inc. Insured ......... Aa3/NR 806,101 855,000 4.000%, 08/01/20 Syncora Guarantee Inc. Insured ......... Aa3/NR 817,602 905,000 4.000%, 08/01/21 Syncora Guarantee Inc. Insured ......... Aa3/NR 843,795 1,465,000 4.000%, 08/01/22 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,338,717 1,525,000 4.125%, 08/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,374,955 1,590,000 4.125%, 08/01/24 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,404,813 Daviess County, Kentucky School District Finance Corp. 200,000 5.000%, 06/01/24 ........................................ Aa3/NR 200,366 Fayette County, Kentucky School District Finance Corp. 5,000,000 4.250%, 04/01/23 FSA Insured ............................ Aa3/AAA 4,674,250 4,335,000 4.375%, 05/01/26 FSA Insured ............................ Aa3/AAA 3,857,500 Floyd County, Kentucky School Building 680,000 4.375%, 10/01/22 ........................................ Aa3/NR 633,250 Floyd County, Kentucky School Finance Corporation School Building 1,320,000 4.000%, 03/01/23 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,177,440 1,855,000 4.125%, 03/01/26 Syncora Guarantee Inc. Insured ......... Aa3/NR 1,595,337
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Fort Thomas, Kentucky Independent School District Building Revenue $ 610,000 4.375%, 04/01/25 ........................................ Aa3/NR $ 541,265 Fort Thomas, Kentucky Independent School District Finance 785,000 4.375%, 04/01/21 ........................................ Aa3/NR 759,283 Franklin County, Kentucky School District Finance Corp. 1,000,000 5.000%, 04/01/24 ........................................ Aa3/NR 1,001,750 Graves County, Kentucky School Building Revenue 1,260,000 5.000%, 06/01/22 ........................................ Aa3/NR 1,279,328 1,320,000 5.000%, 06/01/23 ........................................ Aa3/NR 1,326,666 Hardin County, Kentucky School District Finance Corp. 1,475,000 4.000%, 02/01/19 AMBAC Insured .......................... Aa3/NR 1,450,943 Jefferson County, Kentucky School District Finance Corp. School Building 150,000 5.000%, 04/01/20 FSA Insured ............................ Aa3/AAA 153,828 1,360,000 4.250%, 06/01/21 FSA Insured ............................ Aa3/AAA 1,302,690 Kenton County, Kentucky School Building Revenue 590,000 4.250%, 10/01/22 FSA Insured ............................ Aaa/NR 547,496 Kenton County, Kentucky School District Finance Corp. 445,000 4.300%, 04/01/22 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 421,059 4,250,000 5.000%, 06/01/22 MBIA Insured ........................... Aa3/NR 4,330,325 750,000 4.375%, 04/01/24 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 691,290 325,000 4.400%, 04/01/26 CIFG Assurance North America, Inc. Insured ......................................... Aa3/NR 294,551 Larue County, Kentucky School District Finance Corp. 270,000 4.500%, 07/01/21 MBIA Insured ........................... Aa3/NR 264,692 470,000 4.500%, 07/01/22 MBIA Insured ........................... Aa3/NR 456,116 785,000 4.500%, 07/01/23 MBIA Insured ........................... Aa3/NR 749,557
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Lexington-Fayette Urban County, Kentucky Government Project Transylvania University $ 1,320,000 5.125%, 08/01/18 MBIA Insured ........................... A2/AA $ 1,327,432 Lexington-Fayette Urban County, Kentucky Government Project University of Kentucky Library 300,000 5.000%, 11/01/20 MBIA Insured ........................... A2/AA 304,197 Louisville & Jefferson County, Kentucky University of Louisville 525,000 5.000%, 06/01/20 AMBAC Insured .......................... Aa3/AA 545,953 Magoffin County, Kentucky School Building Revenue 375,000 4.250%, 08/01/23 AMBAC Insured .......................... Aa3/NR 343,879 Magoffin County, Kentucky School District 450,000 4.250%, 08/01/25 AMBAC Insured .......................... Aa3/NR 400,455 McCreary County, Kentucky School Building Revenue 935,000 4.500%, 05/01/28 ........................................ Aa3/NR 821,510 Meade County, Kentucky School District 490,000 4.250%, 09/01/26 MBIA Insured ........................... Aa3/NR 430,592 Murray State University Project, Kentucky General Receipts Revenue 745,000 4.500%, 09/01/23 AMBAC Insured .......................... Aa3/AA 667,878 Ohio County, Kentucky School Building Revenue 790,000 4.500%, 05/01/24 ........................................ Aa3/NR 725,394 325,000 4.500%, 05/01/25 ........................................ Aa3/NR 294,765 Oldham County, Kentucky School District Finance Corp. 500,000 5.000%, 05/01/19 MBIA Insured ........................... Aa3/NR 522,500 Owensboro, Kentucky Independent School District Finance Corp. School Building Revenue 390,000 4.375%, 09/01/24 ........................................ Aa3/NR 356,323 Pendleton County, Kentucky School District Finance Corp. School Building Revenue 730,000 4.000%, 02/01/23 MBIA Insured ........................... Aa3/NR 637,093
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- SCHOOLS (CONTINUED) Pike County, Kentucky School Building Revenue $ 1,355,000 4.375%, 10/01/26 MBIA Insured ........................... Aa3/NR $ 1,204,270 Scott County, Kentucky School District Finance Corp. 1,115,000 4.200%, 01/01/22 AMBAC Insured .......................... Aa3/NR 1,053,173 1,955,000 4.250%, 01/01/23 AMBAC Insured .......................... Aa3/NR 1,831,092 1,560,000 4.300%, 01/01/24 AMBAC Insured .......................... Aa3/NR 1,450,410 Scott County, Kentucky School District Finance Corp. School Building Revenue 1,000,000 4.250%, 02/01/27 FSA Insured ............................ Aa3/NR 854,610 University of Kentucky General Receipts 885,000 4.500%, 10/01/22 Syncora Guarantee Inc. Insured ......... Aa3/AA- 858,459 1,545,000 4.500%, 10/01/23 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,462,837 1,625,000 4.500%, 10/01/25 Syncora Guarantee Inc. Insured ......... Aa3/AA- 1,487,005 1,010,000 4.500%, 10/01/26 Syncora Guarantee Inc. Insured ......... Aa3/AA- 914,555 University of Louisville, Kentucky 1,055,000 4.000%, 09/01/25 MBIA Insured ........................... Aa3/AA 901,402 1,000,000 4.375%, 04/01/27 FSA Insured ............................ Aa3/NR* 898,110 Warren County, Kentucky School District Finance Corp. 295,000 4.125%, 02/01/23 MBIA Insured ........................... Aa3/NR 266,804 Western Kentucky University Revenue General Receipts 2,860,000 4.200%, 09/01/25 Series A MBIA Insured .................. Aa3/AA 2,401,399 2,980,000 4.200%, 09/01/26 Series A MBIA Insured .................. Aa3/AA 2,469,407 --------------- Total Schools ........................................... 75,777,179 --------------- TRANSPORTATION (6.8%) Kenton County, Kentucky Airport Board Airport Revenue 1,300,000 5.000%, 03/01/23 MBIA Insured AMT ....................... A2/AA 1,071,798 Kentucky Interlocal School Transportation Authority 145,000 5.400%, 06/01/17 ........................................ Aa3/A+ 145,023 400,000 6.000%, 12/01/20 ........................................ Aa3/A+ 403,440 200,000 6.000%, 12/01/20 ........................................ Aa3/A+ 201,720
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- TRANSPORTATION (CONTINUED) Kentucky Interlocal School Transportation Authority (continued) $ 300,000 5.800%, 12/01/20 ........................................ Aa3/A+ $ 302,343 400,000 5.650%, 12/01/20 ........................................ Aa3/A+ 402,904 350,000 5.600%, 12/01/20 ........................................ Aa3/A+ 352,471 Kentucky State Turnpike Authority Revenue 2,250,000 5.000%, 07/01/27 ........................................ Aa3/AA+ 2,189,137 950,000 5.000%, 07/01/28 ........................................ Aa3/AA+ 915,619 Louisville, Kentucky Regional Airport Authority 2,610,000 5.000%, 07/01/24 AMBAC Insured AMT ...................... Aa3/AA 2,125,245 1,000,000 5.250%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 864,000 Louisville & Jefferson County Regional Airport, Kentucky 1,000,000 5.250%, 07/01/18 FSA Insured AMT ........................ Aa3/AAA 950,150 1,370,000 5.250%, 07/01/21 FSA Insured AMT ........................ Aa3/AAA 1,229,657 3,390,000 5.250%, 07/01/22 FSA Insured AMT ........................ Aa3/AAA 2,996,150 275,000 5.375%, 07/01/23 FSA Insured AMT ........................ Aa3/AAA 245,149 500,000 5.000%, 07/01/25 MBIA Insured AMT ....................... A1/AA 413,180 --------------- Total Transportation .................................... 14,807,986 --------------- UTILITIES (17.6%) Bardstown, Kentucky Combined Utilities Revenue 200,000 5.000%, 12/01/19 MBIA Insured ........................... A2/NR 204,074 Boone County, Kentucky Pollution Control Revenue Dayton Power & Light 2,000,000 4.700%, 01/01/28 FGIC Insured ........................... A2/A- 1,667,900 Campbell & Kenton Counties, Kentucky Sanitation District Revenue 1,695,000 4.300%, 08/01/24 MBIA Insured ........................... Aa3/AA 1,565,197 300,000 4.300%, 08/01/27 MBIA Insured ........................... Aa3/AA 265,887 1,450,000 4.300%, 08/01/28 MBIA Insured ........................... Aa3/AA 1,266,503 805,000 4.375%, 08/01/30 MBIA Insured ........................... Aa3/AA 697,146 505,000 4.375%, 08/01/33 MBIA Insured ........................... Aa3/AA 424,685
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- UTILITIES (CONTINUED) Carroll County, Kentucky Environmental Facilities Revenue (KY Utilities) AMT $ 1,500,000 5.750%, 02/01/26 AMBAC Insured .......................... Aa3/AAA $ 1,409,280 Kentucky Rural Water Finance Corp. 205,000 4.250%, 08/01/19 MBIA Insured ........................... A2/AA 204,994 595,000 5.000%, 02/01/20 MBIA Insured ........................... A2/AA 612,404 210,000 4.250%, 08/01/20 MBIA Insured ........................... A2/AA 205,670 200,000 4.375%, 08/01/22 MBIA Insured ........................... A2/AA 192,554 240,000 4.500%, 08/01/23 MBIA Insured ........................... A2/AA 228,293 200,000 4.500%, 02/01/24 MBIA Insured ........................... A2/AA 188,338 255,000 4.500%, 08/01/24 MBIA Insured ........................... A2/AA 239,649 355,000 4.600%, 02/01/25 ........................................ NR/AA- 328,595 290,000 4.500%, 08/01/27 MBIA Insured ........................... A2/AA 262,172 245,000 4.600%, 08/01/28 MBIA Insured ........................... A2/AA 221,634 315,000 4.625%, 08/01/29 MBIA Insured ........................... A2/AA 283,355 Louisville & Jefferson County, Kentucky Metropolitan Sewer District 2,565,000 5.375%, 05/15/17 MBIA Insured ........................... A2/AA 2,682,143 2,380,000 4.250%, 05/15/20 FSA Insured ............................ Aa3/AAA 2,352,439 2,510,000 4.250%, 05/15/21 FSA Insured ............................ Aa3/AAA 2,436,984 400,000 5.000%, 05/15/22 FGIC Insured ........................... NR/AA 402,324 Louisville, Kentucky Waterworks Board Water System 1,000,000 5.250%, 11/15/16 FSA Insured ............................ Aa3/AAA 1,037,760 2,530,000 5.250%, 11/15/18 FSA Insured ............................ Aa3/AAA 2,604,281 6,600,000 5.250%, 11/15/22 FSA Insured ............................ Aa3/AAA 6,697,482 2,415,000 5.250%, 11/15/24 FSA Insured ............................ Aa3/AAA 2,442,507 Northen Kentucky Water District 660,000 5.000%, 02/01/23 FGIC Insured ........................... A2/NR 641,150 1,825,000 6.000%, 02/01/28 FSA Insured ............................ Aa3/NR 1,887,981 Owensboro, Kentucky Electric and Power 1,555,000 5.000%, 01/01/20 FSA Insured ............................ Aa3/AAA 1,572,836
RATING PRINCIPAL MOODY'S/ AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE --------------- --------------------------------------------------------- --------- --------------- UTILITIES (CONTINUED) Owensboro-Daviess County, Kentucky Regional Water Resource Agency Wastewater Refunding & Improvement Revenue $ 930,000 4.375%, 01/01/27 Series A Syncora Guarantee Inc. Insured .............................................. NR/A $ 778,810 Trimble County, Kentucky Environmental Facilities 3,000,000 4.600%, 06/01/33 AMBAC Insured .......................... Aa3/AA 2,342,100 --------------- Total Utilities 38,347,127 --------------- Total Revenue Bonds 211,601,396 --------------- Total Investments (cost $236,055,572-note 4) ......... 99.5% 216,278,207 Other assets less liabilities ........................ 0.5 1,106,215 --------- --------------- Net Assets ........................................... 100.0% $ 217,384,422 ========= =============== PERCENT OF PORTFOLIO DISTRIBUTION BY QUALITY RATING (UNAUDITED) PORTFOLIO ---------------------------------------------------- --------- Aaa of Moody's or AAA of S&P or AAA of Fitch ............... 38.4% Aa of Moody's or AA of S&P ................................. 49.7 A of Moody's or S&P ........................................ 11.9 --------- 100.0% =========
+ Calculated using the highest rating of the three rating services. * Rated AAA by Fitch. 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 See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2008 ASSETS Investments at value (cost $236,055,572) ........................................... $ 216,278,207 Cash ............................................................................... 1,803,926 Interest receivable ................................................................ 3,267,161 Receivable for Fund shares sold .................................................... 162,327 Other assets ....................................................................... 14,279 ------------------ Total assets ....................................................................... 221,525,900 ------------------ LIABILITIES Payable for investment securities purchased ........................................ 1,810,583 Payable for Fund shares redeemed ................................................... 1,180,116 Dividends and capital gains payable ................................................ 990,924 Management fee payable ............................................................. 72,737 Distribution and service fees payable .............................................. 24,691 Accrued expenses ................................................................... 62,427 ------------------ Total liabilities .................................................................. 4,141,478 ------------------ NET ASSETS ............................................................................ $ 217,384,422 ================== Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $0.01 per share $ 230,632 Additional paid-in capital ......................................................... 237,364,924 Net unrealized depreciation on investments (note 4) ................................ (19,777,365) Undistributed net investment income ................................................ 63,972 Accumulated net realized loss on investments ....................................... (497,741) ------------------ $ 217,384,422 ================== CLASS A Net Assets ......................................................................... $ 169,582,438 ================== Capital shares outstanding ......................................................... 17,993,284 ================== Net asset value and redemption price per share ..................................... $ 9.42 ================== Maximum offering price per share (100/96 of $9.42 adjusted to nearest cent) ........ $ 9.81 ================== CLASS C Net Assets ......................................................................... $ 2,693,735 ================== Capital shares outstanding ......................................................... 285,957 ================== Net asset value and offering price per share ....................................... $ 9.42 ================== 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) ...................................... $ 9.42* ================== CLASS I Net Assets ......................................................................... $ 7,809,599 ================== Capital shares outstanding ......................................................... 829,035 ================== Net asset value, offering and redemption price per share ........................... $ 9.42 ================== CLASS Y Net Assets ......................................................................... $ 37,298,650 ================== Capital shares outstanding ......................................................... 3,954,903 ================== Net asset value, offering and redemption price per share ........................... $ 9.43 ==================
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2008 INVESTMENT INCOME: Interest income ...................................... $ 11,365,516 Expenses: Management fee (note 3) .............................. $ 956,228 Distribution and service fees (note 3) ............... 329,388 Transfer and shareholder servicing agent fees (note 3) 155,287 Trustees' fees and expenses (note 8) ................. 106,185 Legal fees (note 3) .................................. 100,124 Shareholders' reports and proxy statements ........... 58,061 Fund accounting fees ................................. 36,420 Registration fees and dues ........................... 28,841 Custodian fees (note 6) .............................. 25,404 Auditing and tax fees ................................ 21,400 Insurance ............................................ 11,191 Chief compliance officer (note 3) .................... 4,159 Miscellaneous ........................................ 28,754 ------------ Total expenses ....................................... 1,861,442 Expenses paid indirectly (note 6) .................... (18,428) ------------ Net expenses ......................................... 1,843,014 ------------ Net investment income ................................ 9,522,502 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from securities transactions (497,741) Change in unrealized appreciation on investments ..... (21,839,357) ------------ Net realized and unrealized gain (loss) on investments (22,337,098) ------------ Net change in net assets resulting from operations ... $(12,814,596) ============
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31, 2008 DECEMBER 31, 2007 ----------------- ----------------- OPERATIONS: Net investment income ............................... $ 9,522,502 $ 9,882,991 Net realized gain (loss) from securities transactions (497,741) 1,189,986 Change in unrealized appreciation on investments .... (21,839,357) (4,997,398) ----------------- ----------------- Change in net assets from operations ............. (12,814,596) 6,075,579 ----------------- ----------------- DISTRIBUTIONS TO SHAREHOLDERS (note 10): Class A Shares: Net investment income ............................... (7,345,786) (7,653,537) Net realized gain on investments .................... (929,036) (1,167,715) Class C Shares: Net investment income ............................... (107,381) (149,329) Net realized gain on investments .................... (14,676) (24,440) Class I Shares: Net investment income ............................... (311,177) (295,398) Net realized gain on investments .................... (42,568) (49,465) Class Y Shares: Net investment income ............................... (1,718,581) (1,764,718) Net realized gain on investments .................... (203,981) (247,505) ----------------- ----------------- Change in net assets from distributions .......... (10,673,186) (11,352,107) ----------------- ----------------- CAPITAL SHARE TRANSACTIONS (note 7): Proceeds from shares sold ........................... 24,423,276 50,733,976 Reinvested dividends and distributions .............. 4,636,181 4,967,956 Cost of shares redeemed ............................. (36,459,652) (73,982,877) ----------------- ----------------- Change in net assets from capital share transactions (7,400,195) (18,280,945) ----------------- ----------------- Change in net assets ................................ (30,887,977) (23,557,473) NET ASSETS: Beginning of period ................................. 248,272,399 271,829,872 ----------------- ----------------- End of period* ...................................... $ 217,384,422 $ 248,272,399 ================= ================= * Includes undistributed net investment income of: .. $ 63,972 $ 28,899 ================= =================
See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 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, ("Fair Value Measurements" ("SFAS 157"), effective January 1, 2008. SFAS 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 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 December 31, 2008: Valuation Inputs Investments in Securities ---------------- ------------------------- Level 1 - Quoted Prices ....................... $ -- Level 2 - Other Significant Observable Inputs . 216,278,207 Level 3 - Significant Unobservable Inputs ..... -- ------------ Total ......................................... $216,278,207 ============ 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. The Fund has adopted FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). Management has reviewed the tax positions for each of the open tax years (2005-2008) 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, 2008 the Fund decreased undistributed net investment income by $4,504, decreased undistributed net realized loss on investments by $2,296 and increased additional paid-in capital by $2,208. h) ACCOUNTING PRONOUNCEMENT: In March 2008, Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161") was issued and is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity's results of operations and financial position. Management is currently evaluating the implications of SFAS 161 and its impact, if any, on the Fund's financial statement disclosures. 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 year ended December 31, 2008, distribution fees on Class A Shares amounted to $278,370 of which the Distributor retained $11,430. Under another part of the Plan, the Fund is authorized to make payments with respect to Class C Shares to Qualified Recipients which have rendered assistance in the distribution and/or retention of the Fund's Class C shares or servicing of shareholder accounts. These payments are made at the annual rate of 0.75% of the Fund's average net assets represented by Class C Shares and for the year ended December 31, 2008, amounted to $26,048. In addition, under a Shareholder Services Plan, the Fund is authorized to make service fee payments with respect to Class C Shares to Qualified Recipients for providing personal services and/or maintenance of shareholder accounts. These payments are made at the annual rate of 0.25% of the Fund's average net assets represented by Class C Shares and for the year ended December 31, 2008, amounted to $8,682. The total of these payments with respect to Class C Shares amounted to $34,730 of which the Distributor retained $8,251. Under another part of the Plan, the Fund is authorized to make payments with respect to Class I Shares to Qualified Recipients. Class I payments, under the Plan, may not exceed for any fiscal year of the Fund a rate (currently 0.20%), set from time to time by the Board of Trustees, of not more than 0.25% of the average annual net assets represented by the Class I Shares. In addition, Class I has a Shareholder Services Plan under which it may pay service fees (currently 0.15%) of not more than 0.25% of the average annual net assets represented by Class I Shares. That is, the total payments under both plans will not exceed 0.50% of such net assets. For the year ended December 31, 2008, these payments were made at the average annual rate of 0.35% of such net assets and amounted to $28,504 of which $16,288 related to the Plan and $12,216 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 intermediaries having offices within Kentucky, with the bulk of sales commissions inuring to such intermediaries. For the year ended December 31, 2008, total commissions on sales of Class A Shares amounted to $131,646 of which the Distributor received $15,125. c) OTHER RELATED PARTY TRANSACTIONS: For the year ended December 31, 2008, the Fund incurred $95,229 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 year ended December 31, 2008, purchases of securities and proceeds from the sales of securities aggregated $32,468,716 and $41,617,346, respectively. At December 31, 2008 the aggregate tax cost for all securities was $235,991,600. At December 31, 2008, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost amounted to $1,044,958 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value amounted to $20,758,351 for a net unrealized depreciation of $19,713,393. 5. PORTFOLIO ORIENTATION Since the Fund invests principally and may invest entirely in triple tax-free municipal obligations of issuers within Kentucky, it is subject to possible risks associated with economic, political, or legal developments or industrial or regional matters specifically affecting Kentucky and whatever effects these may have upon Kentucky issuers' ability to meet their obligations. 6. EXPENSES The Fund has negotiated an expense offset arrangement with its custodian wherein it receives credit toward the reduction of custodian fees and other Fund expenses whenever there are uninvested cash balances. The Statement of Operations reflects the total expenses before any offset, the amount of offset and the net expenses. 7. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Fund were as follows:
Year Ended Year Ended December 31, 2008 December 31, 2007 ----------------------------- ----------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ CLASS A SHARES: Proceeds from shares sold 1,752,221 $ 17,615,276 1,253,821 $ 13,109,577 Reinvested distributions 407,510 4,010,870 408,743 4,254,990 Cost of shares redeemed . (2,868,625) (28,007,543) (2,936,397) (30,619,982) ------------ ------------ ------------ ------------ Net change ........... (708,894) (6,381,397) (1,273,833) (13,255,415) ------------ ------------ ------------ ------------ CLASS C SHARES: Proceeds from shares sold 36,194 370,078 81,155 852,011 Reinvested distributions 7,776 76,395 9,963 103,674 Cost of shares redeemed . (155,154) (1,542,526) (231,239) (2,412,850) ------------ ------------ ------------ ------------ Net change ........... (111,184) (1,096,053) (140,121) (1,457,165) ------------ ------------ ------------ ------------ CLASS I SHARES: Proceeds from shares sold 9,148 93,333 51,362 540,822 Reinvested distributions 32,930 322,736 29,887 311,248 Cost of shares redeemed . (19,082) (187,682) (32,909) (345,172) ------------ ------------ ------------ ------------ Net change ........... 22,996 228,387 48,340 506,898 ------------ ------------ ------------ ------------ CLASS Y SHARES: Proceeds from shares sold 627,670 6,344,589 3,449,070 36,231,566 Reinvested distributions 23,664 226,180 28,753 298,044 Cost of shares redeemed . (706,040) (6,721,901) (3,869,057) (40,604,873) ------------ ------------ ------------ ------------ Net change ........... (54,706) (151,132) (391,234) (4,075,263) ------------ ------------ ------------ ------------ Total transactions in Fund shares ............. (851,788) $ (7,400,195) (1,756,848) $(18,280,945) ============ ============ ============ ============
8. TRUSTEES' FEES AND EXPENSES At December 31, 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 year ended December 31, 2008 was $82,500 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, meeting fees are paid to those Trustees in attendance. Trustees are reimbursed for their expenses such as travel, accommodations, and meals incurred in connection with attendance at Board Meetings and the Annual Meeting of Shareholders. For the year ended December 31, 2008, such meeting-related expenses amounted to $23,685. 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. As of December 31, 2008, the Fund had a capital loss carryover of $477,760 that if not offset by capital gains will expire in 2016. As of December 31, 2008, there were post-October capital loss deferrals of $19,981, which will be recognized in the following year. The tax character of distributions: Year Ended December 31, 2008 2007 ----------- ----------- Net tax-exempt income $ 9,482,925 $ 9,862,982 Net realized gain on investments 1,190,261 1,489,125 ----------- ----------- $10,673,186 $11,352,107 =========== =========== As of December 31, 2008, the components of distributable earnings on a tax basis were as follows: Accumulated net realized loss $ (477,760) Unrealized depreciation (19,713,393) Undistributed tax-exempt income 553,588 Other accumulated losses (19,981) Other temporary differences (553,588) ------------ $(20,211,134) ============ The difference between book basis and tax basis unrealized appreciation is attributable primarily to premium/discount adjustments. The difference between book basis and tax basis undistributed income is due to the timing difference in recognizing dividends paid. 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 year, 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 ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.38 $ 10.59 $ 10.60 $ 10.74 $ 10.69 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................. 0.40++ 0.39++ 0.39+ 0.39+ 0.42+ Net gain (loss) on securities (both realized and unrealized) ........... (0.92) (0.15) 0.03 (0.14) 0.05 -------- -------- -------- -------- -------- Total from investment operations ...... (0.52) 0.24 0.42 0.25 0.47 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.39) (0.39) (0.40) (0.39) (0.42) Distributions from capital gains ...... (0.05) (0.06) (0.03) -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.44) (0.45) (0.43) (0.39) (0.42) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.59 $ 10.60 $ 10.74 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (5.05)% 2.38% 4.02% 2.39% 4.49% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $169,582 $194,140 $211,501 $223,811 $232,927 Ratio of expenses to average net assets ......................... 0.79% 0.75% 0.76% 0.77% 0.73% Ratio of net investment income to average net assets ................. 3.97% 3.77% 3.71% 3.66% 3.96% Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ......................... 0.78% 0.74% 0.76% 0.76% 0.73% Class C ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................. 0.31++ 0.31++ 0.30+ 0.30+ 0.33+ Net gain (loss) on securities (both realized and unrealized) ........... (0.91) (0.15) 0.03 (0.14) 0.04 -------- -------- -------- -------- -------- Total from investment operations ...... (0.60) 0.16 0.33 0.16 0.37 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.31) (0.30) (0.31) (0.30) (0.33) Distributions from capital gains ...... (0.05) (0.06) (0.03) -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.36) (0.36) (0.34) (0.30) (0.33) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (5.85)% 1.61% 3.15% 1.53% 3.51% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $ 2,694 $ 4,120 $ 5,686 $ 7,296 $ 8,166 Ratio of expenses to average net assets ......................... 1.64% 1.60% 1.62% 1.62% 1.58% Ratio of net investment income to average net assets ................. 3.10% 2.92% 2.87% 2.81% 3.11% Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ......................... 1.63% 1.59% 1.61% 1.61% 1.58%
---------- + Per share amounts have been calculated using the monthly average shares method. ++ Per share amounts have been calculated using the daily average shares method. See accompanying notes to financial statements. CHURCHILL TAX-FREE FUND OF KENTUCKY FINANCIAL HIGHLIGHTS (continued) For a share outstanding throughout each period
Class I ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.38 $ 10.58 $ 10.59 $ 10.73 $ 10.69 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................. 0.38++ 0.38++ 0.38+ 0.38+ 0.41+ Net gain (loss) on securities (both realized and unrealized) ........... (0.91) (0.14) 0.02 (0.14) 0.03 -------- -------- -------- -------- -------- Total from investment operations ...... (0.53) 0.24 0.40 0.24 0.44 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.38) (0.38) (0.38) (0.38) (0.40) Distributions from capital gains ...... (0.05) (0.06) (0.03) -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.43) (0.44) (0.41) (0.38) (0.40) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 9.42 $ 10.38 $ 10.58 $ 10.59 $ 10.73 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (5.16)% 2.33% 3.87% 2.24% 4.24% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $ 7,810 $ 8,363 $ 8,018 $ 7,764 $ 7,564 Ratio of expenses to average net assets ......................... 0.93% 0.89% 0.91% 0.92% 0.89% Ratio of net investment income to average net assets ................. 3.83% 3.62% 3.57% 3.52% 3.79% Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ......................... 0.92% 0.88% 0.90% 0.91% 0.89% Class Y ------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------ 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- Net asset value, beginning of period ..... $ 10.39 $ 10.59 $ 10.61 $ 10.75 $ 10.70 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income ................. 0.41++ 0.41++ 0.41+ 0.41+ 0.44+ Net gain (loss) on securities (both realized and unrealized) ........... (0.91) (0.14) 0.01 (0.14) 0.05 -------- -------- -------- -------- -------- Total from investment operations ...... (0.50) 0.27 0.42 0.27 0.49 -------- -------- -------- -------- -------- Less distributions (note 10): Dividends from net investment income .. (0.41) (0.41) (0.41) (0.41) (0.44) Distributions from capital gains ...... (0.05) (0.06) (0.03) -- -- -------- -------- -------- -------- -------- Total distributions ................... (0.46) (0.47) (0.44) (0.41) (0.44) -------- -------- -------- -------- -------- Net asset value, end of period ........... $ 9.43 $ 10.39 $ 10.59 $ 10.61 $ 10.75 ======== ======== ======== ======== ======== Total return (not reflecting sales charge) (4.88)% 2.63% 4.08% 2.55% 4.65% Ratios/supplemental data Net assets, end of period (in thousands) ..................... $ 37,299 $ 41,648 $ 46,625 $ 47,816 $ 48,795 Ratio of expenses to average net assets ......................... 0.64% 0.60% 0.61% 0.62% 0.58% Ratio of net investment income to average net assets ................. 4.12% 3.92% 3.86% 3.81% 4.11% Portfolio turnover rate ............... 13.76% 18.92% 19.07% 24.87% 14.31% The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of expenses to average net assets ......................... 0.63% 0.59% 0.61% 0.61% 0.58%
---------- + Per share amounts have been calculated using the monthly average shares method. ++ Per share amounts have been calculated using the daily average shares method. See accompanying notes to financial statements. -------------------------------------------------------------------------------- ANALYSIS OF EXPENSES (UNAUDITED) As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end sales charges with respect to Class A shares or contingent deferred sales charges ("CDSC") with respect to Class C shares; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. The table below is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The table below is based on an investment of $1,000 invested on July 1, 2008 and held for the six months ended December 31, 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 DECEMBER 31, 2008 ACTUAL TOTAL RETURN BEGINNING ENDING EXPENSES WITHOUT ACCOUNT ACCOUNT PAID DURING SALES CHARGES(1) VALUE VALUE THE PERIOD(2) -------------------------------------------------------------------------------- Class A (4.44)% $1,000.00 $955.60 $3.88 -------------------------------------------------------------------------------- Class C (4.75)% $1,000.00 $952.50 $8.05 -------------------------------------------------------------------------------- Class I (4.40)% $1,000.00 $956.00 $4.52 -------------------------------------------------------------------------------- Class Y (4.26)% $1,000.00 $957.40 $3.15 -------------------------------------------------------------------------------- (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 0.79%, 1.64%, 0.92% AND 0.64% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (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 DECEMBER 31, 2008 HYPOTHETICAL ANNUALIZED BEGINNING ENDING EXPENSES TOTAL ACCOUNT ACCOUNT PAID DURING RETURN VALUE VALUE THE PERIOD(1) -------------------------------------------------------------------------------- Class A 5.00% $1,000.00 $1,021.17 $4.01 -------------------------------------------------------------------------------- Class C 5.00% $1,000.00 $1,016.89 $8.31 -------------------------------------------------------------------------------- Class I 5.00% $1,000.00 $1,020.51 $4.67 -------------------------------------------------------------------------------- Class Y 5.00% $1,000.00 $1,021.92 $3.25 -------------------------------------------------------------------------------- (1) EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.79%, 1.64%, 0.92% AND 0.64% FOR THE FUND'S CLASS A, C, I AND Y SHARES, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/366 (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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED) This information is presented in order to comply with a requirement of the Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED. For the calendar year ended December 31, 2008, $9,482,925 of dividends paid by Churchill Tax-Free Fund of Kentucky, constituting 88.85% of total dividends paid during calendar year 2008, were exempt-interest dividends; $1,190,261 of dividends paid by the Fund constituting 11.15% of total dividends paid during the calendar year were capital gain distributions; and the balance was ordinary dividend income. Prior to January 31, 2009, shareholders were mailed the appropriate tax form(s) which contained information on the status of distributions paid for the 2008 CALENDAR YEAR. -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (UNAUDITED) TRUSTEES(1) AND OFFICERS
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) ----------------- ---------- ------------------- ---------- -------------------- INTERESTED TRUSTEE(5) Diana P. Herrmann Trustee since 1995 Vice Chair and Chief Executive Officer of Aquila 12 ICI Mutual Insurance New York, NY and President since Management Corporation, Founder of the Aquila Group Company (02/25/58) 1999 of Funds(6) and parent of Aquila Investment Management LLC, Manager since 2004, President since 1997, Chief Operating Officer, 1997-2008, a Director since 1984, Secretary since 1986 and previously its Executive Vice President, Senior Vice President or Vice President, 1986-1997; Chief Executive Officer and Vice Chair since 2004, President and Manager of the Manager since 2003, and Chief Operating Officer of the Manager, 2003-2008; Chair, Vice Chair, President, Executive Vice President or Senior Vice President of funds in the Aquila Group of Funds since 1986; Director of the Distributor since 1997; Governor, Investment Company Institute (a trade organization for the U.S. mutual fund industry dedicated to protecting shareholder interests and educating the public about investing) and head of its Small Funds Committee since 2004; active in charitable and volunteer organizations. NON-INTERESTED TRUSTEES Thomas A. Christopher Chair of the Board Vice President of Robinson, Hughes & Christopher, 3 None Danville, KY of Trustees since C.P.A.s, P.S.C., since 1977; President, A Good Place (12/19/47) 2005 and Trustee for Fun, Inc., a sports facility, since 1987; since 1992 currently or formerly active with various professional and community organizations.
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) ----------------- ---------- ------------------- ---------- -------------------- Theodore T. Mason Trustee since 1987 Executive Director, East Wind Power Partners LTD 8 Trustee, Premier New York, NY since 1994 and Louisiana Power Partners, 1999-2003; VIT. (11/24/35) Treasurer, Fort Schuyler Maritime Alumni Association, Inc., successor to Alumni Association of SUNY Maritime College, since 2004 (President, 2002-2003, First Vice President, 2000-2001, Second Vice President, 1998-2000) and director of the same organization since 1997; Director, STCM Management Company, Inc., 1973-2004; twice national officer of Naval Reserve Association, Commanding Officer of four naval reserve units and Captain, USNR (Ret); director, The Navy League of the United States New York Council since 2002; trustee, The Maritime Industry Museum at Fort Schuyler, 2000-2004; and Fort Schuyler Maritime Foundation, Inc., successor to the Maritime College at Fort Schuyler Foundation, Inc., since 2000. Anne J. Mills Trustee since 1987 President, Loring Consulting Company since 2001; 4 None Castle Rock, CO Vice President for Business Management and CFO, (12/23/38) Ottawa University, 1992-2001;2006-2008; IBM Corporation, 1965-1991; currently active with various charitable, educational and religious organizations.
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) ----------------- ---------- ------------------- ---------- -------------------- James R. Ramsey Trustee since 1987 President, University of Louisville since November 2 Community Bank and Louisville, KY 2002; Professor of Economics, University of Trust, Pikeville, KY (11/14/48) Louisville, 1999-present; Kentucky Governor's Senior and Texas Roadhouse Policy Advisor and State Budget Director, 1999-2002; Inc. Vice Chancellor for Finance and Administration, the University of North Carolina at Chapel Hill, 1998 to 1999; previously Vice President for Finance and Administration at Western Kentucky University, State Budget Director for the Commonwealth of Kentucky, Chief State Economist and Executive Director for the Office of Financial Management and Economic Analysis for the Commonwealth of Kentucky, Adjunct Professor at the University of Kentucky, Associate Professor at Loyola University-New Orleans and Assistant Professor at Middle Tennessee State University. Lacy B. Herrmann Founder and Chairman Founder and Chairman of the Board, Aquila Management N/A N/A New York, NY Emeritus since 2005, Corporation, the sponsoring organization and parent (05/12/29) Chairman of the of the Manager or Administrator and/or Adviser or Board of Trustees, Sub-Adviser to each fund of the Aquila Group of 1987-2005 Funds; Chairman of the Manager or Administrator and/or Adviser or Sub-Adviser to each since 2004; Founder and Chairman Emeritus of each fund in the Aquila Group of Funds; previously Chairman and a Trustee of each fund in the Aquila Group of Funds since its establishment until 2004 or 2005; Director of the Distributor since 1981 and formerly Vice President or Secretary, 1981-1998; Trustee Emeritus, Brown University and the Hopkins School; active in university, school and charitable organizations.
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) ----------------- ---------- ------------------- ---------- -------------------- Charles E. Childs, III Executive Vice Executive Vice President of all funds in the Aquila N/A N/A New York, NY President since 2003 Group of Funds and the Manager and the Manager's (04/01/57) parent since 2003; Executive Vice President and Chief Operating Officer of the Manager's parent since 2008; formerly Senior Vice President, corporate development, Vice President, Assistant Vice President and Associate of the Manager's parent since 1987; Senior Vice President, Vice President or Assistant Vice President of the Aquila Money-Market Funds, 1988-2003. Thomas S. Albright Senior Vice Senior Vice President and Portfolio Manager, N/A N/A Louisville, KY President since 2000 Churchill Tax-Free Fund of Kentucky since July 2000; (07/26/52) Senior Vice President, Tax-Free Fund For Utah since 2003, Vice President, 2001-2003 and co-portfolio manager since 2001; Vice President and backup portfolio manager, Tax-Free Trust of Arizona, since 2004; Vice President and Portfolio Manager, Banc One Investment Advisors, Inc., 1994-2000. Todd W. Curtis Vice President since Senior Vice President and Portfolio Manager, N/A N/A Phoenix, AZ 2004 Tax-Free Trust of Arizona, since August 2004; Vice (06/08/49) President and backup portfolio manager, Churchill Tax-Free Fund of Kentucky, since 2004; Vice President and Portfolio Manager, Banc One Investment Advisors, Inc. and its predecessors, 1981-2004.
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) Jason T. McGrew Vice President since Vice President, Churchill Tax-Free Fund of Kentucky N/A N/A Elizabethtown, KY 2001 since 2001, Assistant Vice President, 2000-2001; (08/14/71) Vice President, Aquila Rocky Mountain Equity Fund since 2006; Investment Broker with Raymond James Financial Services 1999-2000 and with J.C. Bradford and Company 1997-1999; Associate Broker at Prudential Securities 1996-1997. Robert W. Anderson Chief Compliance Chief Compliance Officer of the Fund and each of the N/A N/A New York, NY Officer since 2004 other funds in the Aquila Group of Funds, the (08/23/40) and Assistant Manager and the Distributor since 2004, Compliance Secretary since 2000 Officer of the Manager or its predecessor and current parent 1998-2004; Assistant Secretary of the Aquila Group of Funds since 2000. Joseph P. DiMaggio Chief Financial Chief Financial Officer of the Aquila Group of Funds N/A N/A New York, NY Officer since 2003 since 2003 and Treasurer since 2000. (11/06/56) and Treasurer since 2000 Edward M. W. Hines Secretary since 1987 Shareholder of Butzel Long, a professional N/A N/A New York, NY corporation, counsel to the Fund, since 2007; (12/16/39) Partner of Hollyer Brady Barrett & Hines LLP, its predecessor as counsel, 1989-2007; Secretary of the Aquila Group of Funds.
NUMBER OF OTHER DIRECTORSHIPS POSITIONS PORTFOLIOS HELD BY TRUSTEE (THE HELD WITH IN FUND POSITION HELD IS A NAME, FUND AND PRINCIPAL COMPLEX(4) DIRECTORSHIP UNLESS ADDRESS(2) LENGTH OF OCCUPATION(S) OVERSEEN INDICATED AND DATE OF BIRTH SERVICE(3) DURING PAST 5 YEARS BY TRUSTEE OTHERWISE.) ----------------- ---------- ------------------- ---------- -------------------- John M. Herndon Assistant Secretary Assistant Secretary of the Aquila Group of Funds N/A N/A New York, NY since 1995 since 1995 and Vice President of the three Aquila (12/17/39) Money-Market Funds since 1990; Vice President of the Manager or its predecessor and current parent since 1990. Lori A. Vindigni Assistant Treasurer Assistant Treasurer of the Aquila Group of Funds N/A N/A New York, NY since 2000 since 2000; Assistant Vice President of the Manager (11/02/66) or its predecessor and current parent since 1998; Fund Accountant for the Aquila Group of Funds, 1995-1998.
---------- (1) The Fund's Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling 800-437-1020 (toll-free) or by visiting the EDGAR Database at the SEC's internet site at www.sec.gov. (2) The mailing address of each Trustee and officer is c/o Churchill Tax-Free Fund of Kentucky, 380 Madison Avenue, Suite 2300, New York, NY 10017. (3) Each Trustee holds office until the next annual meeting of shareholders or until his or her successor is elected and qualifies. The term of office of each officer is one year. (4) Includes certain Aquila-sponsored funds that are dormant and have no public shareholders. (5) Ms. Herrmann is an interested person of the Fund as an officer of the Fund, as a director, officer and shareholder of the Manager's corporate parent, as an officer and Manager of the Manager, and as a shareholder and director of the Distributor. Ms. Herrmann is the daughter of Lacy B. Herrmann, the Founder and Chairman Emeritus of the Fund. (6) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S. Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets Trust, each of which is a money-market fund, are called the "Aquila Money-Market Funds"; Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky, Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of which is a tax-free municipal bond fund, are called the "Aquila Municipal Bond Funds"; Aquila Rocky Mountain Equity Fund is an equity fund; Aquila Three Peaks High Income Fund is a high income corporate bond fund; considered together, these 12 funds, which do not include the dormant funds described in footnote 4, are called the "Aquila Group of Funds." (7) The Chairman Emeritus may attend Board meetings but has no voting power. -------------------------------------------------------------------------------- PRIVACY NOTICE (unaudited) CHURCHILL TAX-FREE FUND OF KENTUCKY OUR PRIVACY POLICY. In providing services to you as an individual who owns or is considering investing in shares of the Fund, we collect certain non-public personal information about you. Our policy is to keep this information strictly safeguarded and confidential, and to use or disclose it only as necessary to provide services to you or as otherwise permitted by law. Our privacy policy applies equally to former shareholders and persons who inquire about the Fund. INFORMATION WE COLLECT. "Non-public personal information" is personally identifiable financial information about you as an individual or your family. The kinds of non-public personal information we have about you may include the information you provide us on your share purchase application or in telephone calls or correspondence with us, and information about your fund transactions and holdings, how you voted your shares and the account where your shares are held. INFORMATION WE DISCLOSE. We disclose non-public personal information about you to companies that provide necessary services to us, such as the Fund's transfer agent, distributor, or manager, as permitted or required by law, or as authorized by you. Any other use is strictly prohibited. We do not sell information about you or any of our fund shareholders to anyone. NON-CALIFORNIA RESIDENTS: We also may disclose some of this information to another fund in the Aquila Group of Funds (or its service providers) under joint marketing agreements that permit the funds to use the information only to provide you with information about other funds in the Aquila Group of Funds or new services we are offering that may be of interest to you. CALIFORNIA RESIDENTS ONLY: In addition, unless you "opt-out" of the following disclosures using the form that was mailed to you under separate cover, we may disclose some of this information to another fund in the Aquila Group of Funds (or its sevice providers) under joint marketing agreements that permit the funds to use the information only to provide you with information about other funds in the Aquila Group of Funds or new services we are offering that may be of interest to you. HOW WE SAFEGUARD YOUR INFORMATION. We restrict access to non-public personal information about you to only those persons who need it to provide services to you or who are permitted by law to receive it. We maintain physical, electronic and procedural safeguards to protect the confidentiality of all non-public personal information we have about you. If you have any questions regarding our Privacy Policy, please contact us at 1-800-437-1020. AQUILA DISTRIBUTORS, INC. AQUILA INVESTMENT MANAGEMENT LLC This Privacy Policy also has been adopted by Aquila Distributors, Inc. and Aquila Investment Management LLC and applies to all non-public information about you that each of these companies may obtain in connection with services provided to the Fund or to you as a shareholder of the Fund. -------------------------------------------------------------------------------- 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 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. (a) As of December 31, 2008 (the end of the reporting period) the Trust has adopted a code of ethics that applies to the Trust's principal executive officer(s)and principal financial officer(s) and persons performing similar functions ("Covered Officers") as defined in the Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002, as amended; (f)(1) Pursuant to Item 10(a)(1), a copy of the Trust's Code of Ethics that applies to the Trust's principal executive officer(s) and principal financial officer(s) and persons performing similar functions is included as an exhibit to its annual report on this Form N-CSR; (f)(2) The text of the Trust's Code of Ethics that applies to the Trust's principal executive officer(s) and principal financial officer(s) and persons performing similar functions has been posted on its Internet website which can be found at the Trust's Internet address at aquilafunds.com. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1)(ii) The Board of Trustees of the Fund has determined that it does not have at least one audit committee financial expert serving on its audit committee. The Fund does not have such a person serving on the audit committee because none of the persons currently serving as Trustees happens to have the technical accounting and auditing expertise included in the definition of "audit committee financial expert" recently adopted by the Securities and Exchange Commission in connection with this Form N-CSR, and the Board has not heretofore deemed it necessary to seek such a person for election to the Board. The primary mission of the Board, which is that of oversight over the operations and affairs of the Fund, confronts the Trustees with a wide and expanding range of issues and responsibilities. The Trustees believe that, accordingly, it is essential that the Board's membership consist of persons with as extensive experience as possible in fulfilling the duties and responsibilities of mutual fund directors and audit committee members and, ideally, with extensive experience and background relating to the economic and financial sectors and securities in which the Fund invests, including exposure to the financial and accounting matters commonly encountered with respect to those sectors and securities. The Board believes that its current membership satisfies those criteria. It recognizes that it would also be helpful to have a member with the relatively focused accounting and auditing expertise reflected in the applicable definition of "audit committee financial expert," just as additional members with similarly focused technical expertise in other areas relevant to the Fund's operations and affairs would also contribute added value. However, the Board believes that the Fund is better served, and its assets better employed, by a policy of hiring experts in various the specialized area of technical accounting and auditing matters, if and as the Board identifies the need, rather than by seeking to expand its numbers by adding technical experts in the areas constituting its domain of responsibility. The Fund's Audit Committee Charter explicitly authorizes the Committee to retain such experts as it deems necessary in fulfilling its duties ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. a) Audit Fees - The aggregate fees billed for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements were $16,000 in 2007 and $16,800 in 2008. b) Audit Related Fees - There were no amounts billed for audit-related fees over the past two years. c) Tax Fees - The Registrant was billed by the principal accountant $3,000 and $3,100 in 2007 and 2008, respectively, for return preparation and tax compliance. d) All Other Fees - There were no additional fees paid for audit and non-audit services other than those disclosed in a) thorough c) above. e)(1) Currently, the audit committee of the Registrant pre-approves audit services and fees on an engagement-by-engagement basis e)(2) None of the services described in b) through d) above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, all were pre-approved on an engagement-by-engagement basis. f) No applicable. g) There were no non-audit services fees billed by the Registrant's accountant to the Registrant's investment adviser or distributor over the past two years h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Included in Item 1 above ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Directors of the Registrant has adopted a Nominating Committee Charter which provides that the Nominating Committee (the 'Committee') may consider and evaluate nominee candidates properly submitted by shareholders if a vacancy among the Independent Trustees of the Registrant occurs and if, based on the Board's then current size, composition and structure, the Committee determines that the vacancy should be filled. The Committee will consider candidates submitted by shareholders on the same basis as it considers and evaluates candidates recommended by other sources. A copy of the qualifications and procedures that must be met or followed by shareholders to properly submit a nominee candidate to the Committee may be obtained by submitting a request in writing to the Secretary of the Registrant. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing of this report, the registrant's chief financial and executive officers have concluded that the disclosure controls and procedures of the registrant are appropriately designed to ensure that information required to be disclosed in the registrant's reports that are filed under the Securities Exchange Act of 1934 are accumulated and communicated to registrant's management, including its principal executive officer(s) and principal financial officer(s), to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. (b) There have been no significant changes in registrant's internal controls or in other factors that could significantly affect registrant's internal controls subsequent to the date of the most recent evaluation, including no significant deficiencies or material weaknesses that required corrective action. ITEM 12. EXHIBITS. (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002. (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL TAX-FREE TRUST By: /s/ Diana P. Herrmann ----------------------------------- President and Trustee March 4, 2009 By: /s/ Joseph P. DiMaggio ------------------------------------- Chief Financial Officer and Treasurer March 4, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Diana P. Herrmann ----------------------------------- Diana P. Herrmann President and Trustee March 4, 2009 By: /s/ Joseph P. DiMaggio ------------------------------------- Joseph P. DiMaggio Chief Financial Officer and Treasurer March 4, 2009 CHURCHILL TAX-FREE TRUST EXHIBIT INDEX (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002. (a) (2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. (b) Certification of chief executive officer and chief financial officer as required by Rule 30a-2(b) of the Investment Company Act of 1940.