ANNUAL
REPORT
JUNE 30, 1996
A TAX-FREE INCOME INVESTMENT
[Logo of Tax-Free Trust of Arizona: Eagle sitting on Flag]
ONE OF THE
AQUILAsm GROUP OF FUNDS
<PAGE>
[Logo of Tax-Free Trust of Arizona: Eagle sitting on Flag]
TAX-FREE TRUST OF ARIZONA
ANNUAL REPORT
"FLUCTUATIONS, YET HIGH STABILITY"
August 20, 1996
<TABLE>
<CAPTION>
6/30/96 12/31/95 6/30/95
<S> <C> <C> <C>
SHARE NET ASSET VALUE $10.38 $10.72 $10.37
DISTRIBUTION YIELD 5.05%* 5.19%* 5.34%*
</TABLE>
Dear Investor:
We live in a world that is ever changing.
As the above table illustrates, the price of the Trust's shares
can and does move up and down over time. Also, the rate of DOUBLE TAX-FREE
income return distributed to shareholders can and will change. Movements in
these two key areas reflect the changes in market conditions that occurred
over the time period of this past fiscal year.
Yet, while changes have occured, looking at these numbers in a
broader perspective, there has tended to be a relatively high level of
stability to the performance results. Indeed, these results compare favorably
to what occurred in the municipal securities market itself during this
period.
MARKET FORCES
As indicated, the changes in share price and income return are
influenced considerably by market forces. Market forces are governed by
several main factors in the area of fixed-income securities. This area
encompasses the tax-free municipal securities in which the Trust invests.
Key among these factors is action taken by the Federal Reserve
Board. This Federal government organization has the power to raise and lower
interest rates in key areas which, in turn, can have an effect on all types
of fixed-income securities. The Fed can also control the supply of money in
our financial system - increasing or decreasing the amount of dollars in
circulation. This, in turn, can affect the market.
The other key factor influencing market action is the psychology
of investors. By psychology of investors, we mean the level of confidence
that investors as a whole have toward what is happening in our country's
overall financial affairs. We now live in a world that is not only ever
changing, but also one that is very global in nature. Consequently, the
psychology factor within market activity is influenced not only by the
confidence level, or lack thereof, which investors in the United States have,
but also by the confidence level that investors all around the world have
toward the handling of major financial affairs in our country.
* Indicates trailing 12-month yield distributed to shareholders as
measured against share maximum public offering price.
<PAGE>
Altogether, then, what happens to the share price and
distribution return of the Trust is very much driven by market forces. This
is an important factor which shareholders in the Trust must appreciate and
come to understand. And, this is the case whether investors own municipal
securities individually, or whether they do so through the portfolio of
municipal securities such as the Trust provides to shareholders.
THE VALUE THE TRUST PROVIDES
While accepting the fact that market forces can and do have an
effect upon the Trust's performance, it must also be recognized that Tax-Free
Trust of Arizona brings to bear very specific factors to dampen the extremes
of such market forces.
Most significant of these factors is the professional investment
management team of the Trust's Investment Adviser, Bank One, Arizona, N.A.
Under the guidance of the Trust's management and the Trustees, the Investment
Adviser oversees, on a continuing basis, the investments of the Trust. And,
in doing so, they moderate forces that can or might cause anxieties with
investors. A very special element that the professional investment
management team brings to bear is the implementation of the Trust's
investment approach.
QUALITY FACTOR
A key moderation factor in containing damage from market forces
is quality - quality of the municipal issues within the Trust's investment
portfolio. Quality of issues is a very protective factor when it comes to
capital preservation.
That is why the Trust has chosen to invest in only those
municipal securities within the TOP FOUR CREDIT RATINGS, or equivalent.
It is noteworthy that at the June 30, 1996 fiscal year end, 94%
of the Trust's holdings carried a credit rating of A OR BETTER - the top
three ratings.
Moreover, 77.5% of the Trust's investments were rated AA OR AAA.
DIVERSIFICATION FACTOR
Another very important factor in moderating market forces is
diversification among portfolio holdings.
At June 30, 1996, the Trust had 227 SEPARATE ISSUES within the
investment portfolio, representing many different municipal projects within
numerous communities throughout Arizona.
MATURITY FACTOR
Through creating a variety of different maturities among the
securities in the Trust's portfolio, it is possible to avoid extremes in
volatility that can come about with market fluctuations. As you are aware,
short maturity securities possess little fluctuation in price, but
<PAGE>
pay low yields. On the other hand, long maturity securities give higher
yields, but possess considerable price volatility due to the uncertainties
involved over the time between the present and the specified maturity date.
The Trust seeks an average intermediate maturity within the investment
portfolio. Currently, at June 30, 1996, the average maturity was 15.2 YEARS,
so as to provide an adequate income return, yet only moderate volatility in
share price.
INCOME RETURN
As the table above illustrates, the trailing 12-month yield
distributed to shareholders, as measured against average maximum public
offering price, was running at the rate of 5.05% at June 30, 1996.
This was somewhat lower than it was six months and a year
earlier. However, it reflects the declining level of general market return
of municipal securities over this period.
Despite the modest decline in yield to shareholders, it must be
remembered that this income amount is the DOUBLE TAX-FREE return that
shareholders received from the Trust.
It is worth noting from the below graph that one would have had
to earn a substantially higher income return from a TAXABLE investment in
order to match the DOUBLE TAX-FREE amount distributed by the Trust.
[Graphic of Bar Chart with the following information:]
TAX-FREE TRUST OF ARIZONA'S DOUBLE TAX-FREE DISTRIBUTION
RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN
INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
<TABLE>
<CAPTION>
Tax Bracket Taxable Equivalent Rate Double Tax-Free Distribution Rate
<C> <C> <C>
28% 7.40% 5.05%
31% 7.72% 5.05%
36% 8.36% 5.05%
39.6% 8.86% 5.05%
</TABLE>
As you will note, if one were in the 28% Federal income tax
bracket, a TAXABLE return of 7.40% would have to be achieved to match the
5.05% DOUBLE TAX-FREE return of the Trust. In the highest Federal income
tax bracket of 39.6%, the equivalent return would have had to have been
8.86%. In general, it would not have been possible for an investor to
obtain such levels of taxable return unless additional risk was taken in
the form of lesser quality or longer maturity securities, or both such
elements.
<PAGE>
COMMITMENT TO CONSISTENCY
Management is committed to providing shareholders with as
consistent results from Tax-Free Trust of Arizona as are possible to achieve,
considering prevailing market forces.
You should be aware that we are not able to eliminate completely
the market forces that swirl around us on a continuing basis.
However, as indicated, a number of investment management
techniques are used by the Trust to moderate market forces.
YOUR CONFIDENCE APPRECIATED
We again wish to emphasize that your confidence in Tax-Free Trust
of Arizona is greatly appreciated. You can be assured that management will
do everything in its power to merit your continued trust.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<PAGE>
MANAGEMENT DISCUSSION OF TRUST PERFORMANCE
The graph below illustrates the value of $10,000 invested in Class A
shares of Tax-Free Trust of Arizona at inception of the Trust in March, 1986
and maintaining this investment through the Trust's latest fiscal year end,
June 30, 1996, as compared with a hypothetical similar size investment in the
Lehman Brothers Municipal Bond Index (the "Index") of municipal securities
and the Consumer Price Index (a cost of living index) over that same period.
The total return of the investment in the Trust is shown after deduction of
the maximum sales charge of 4% at the time of initial investment. It also
reflects deduction of the Trust's annual operating expenses and reinvestment
of monthly dividends and capital gains distributions without sales charge. On
the other hand, the Index does not reflect any sales charge nor operating
expenses but does reflect reinvestment of interest. The performance of the
Trust's other classes, first offered on April 1, 1996, may be greater or less
than the Class A shares performance indicated on this graph, depending on
whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
It should also be specifically noted that the Index is nationally
oriented and consisted, over the period covered by the graph, of an unmanaged
mix of between 8,000 to 32,000 investment-grade long-term municipal
securities of issuers throughout the United States. However, the Trust's
investment portfolio consisted of a significantly lesser number of
investment-grade tax-free municipal obligations, principally of Arizona
issuers, over the same period. The maturities, market prices, and behavior of
the individual securities in the Trust's investment portfolio can be affected
by local and regional factors which might well result in variances from the
market action of the securities in the Index.
Consequently, much of the difference in performance of the Index versus
the Trust can be attributed to the lack of application of annual operating
expenses and initial sales charge to the Index. Additionally, a portion of
the difference in performance can be attributed to the different
characteristics in the single-state market of the securities in the Trust's
portfolio as compared with the national orientation of the securities in the
Index.
Since its inception, the Trust has been managed to provide as stable a
share value as possible consistent with producing a competitive income return
to shareholders. It has not been managed for maximum total return, since one
of the aims of management in structuring the portfolio of the Trust is to
reduce fluctuations in the price of the Trust's shares resulting from changes
in interest rates.
As can be observed, however, the pattern of the Trust's results and that
of the Index over the period since inception of the Trust track quite
similarly, even though they are not entirely comparable in character.
[Graphic of Line Chart with the following information:]
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
LEHMAN BROTHERS TRUST AFTER SALES COST OF
MUNICIPAL BOND INDEX CHARGE AND EXPENSES LIVING INDEX
<C> <C> <C>
10,000 9,600 10,000
9,938 9,714 10,027
10,795 10,401 10,412
11,595 11,200 10,875
12,915 12,526 11,375
13,797 13,137 11,916
15,040 14,342 12,466
16,810 15,990 12,851
19,230 17,851 13,236
19,230 17,801 13,575
20,935 19,205 13,978
22,315 20,260 14,363
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
[Table with the following information:]
TRUST'S AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
For the Period Ended 1 Year 5 Years 10 Years Life of Trust
June 30, 1996 Since 3/13/86
<S> <C> <C> <C> <C>
Including Sales 1.29% 6.21% 7.19% 7.09%
Charge and Expenses
</TABLE>
<PAGE>
MANAGEMENT DISCUSSION OF TRUST PERFORMANCE (CONTINUED)
THE PAST FISCAL YEAR
The fiscal year ended June 30, 1996 was a combination of two distinct
market trends. The first culminated in January, 1996 with the Federal
Reserve lowering interest rates in response to the nation's slow economic
growth and subdued inflation. Such action and sentiment was substantiated
by the very meager growth rate of below 1% during 1995's fourth quarter.
However, starting with the March release of strong employment data,
expectations turned 180 degrees. Continuing through June, economic statistics
showed a stronger than anticipated economy, leading to higher inflation
expectations and a decline in bond prices. Moreover, speculation now centers
on the need for the Federal Reserve possibly to increase interest rates to
stem an over-heating economy.
The Trust's June 30, 1995 share net asset value of $10.37 climbed to a
52-week high of $10.82 in mid-February. With sentiment reversed and interest
rates rising, the net asset value then dropped to a low of $10.21 in early
June, 1996 before bouncing back to $10.38 at fiscal year end, June 30, 1996.
Distributed income for the twelve months was $0.552 for a total return of
5.49%, based on net asset value. This return, reflecting the blend of
securities in the Trust's portfolio, was consistent with the municipal
market, as intermediate term municipals returned 4.95% and long term
municipals 5.79%, over the same period.
During the fiscal year, we strived to maintain high credit quality. In
fact, our A rated and better positions increased from 88% to 94% of the total
portfolio. We continue to diversify the Trust's investments throughout
Arizona with an emphasis on city and county debt, school districts and
essential purpose revenue bonds for water, transportation and power. Our
largest single investment position remains Salt River Project.
THE YEAR AHEAD
We envision three themes having an effect upon the Trust's 1997 fiscal
year. First, the Presidential election will be center stage. Regardless of
which candidate occupies the White House, we suspect Federal tax reform again
will be a factor in the municipal market. Second, wage increases and their
impact on inflation will be a main economic concern. Finally, we anticipate
new Arizona municipal issuance - a key element in our supply of investment
securities for Tax-Free Trust of Arizona - to be scarce.
We do not know what direction Federal tax reform might take. Like
everyone else, we would like to see less taxes, but we believe a smaller
Federal budget deficit should take precedence. Economically, the Federal
Reserve and Mr. Greenspan are proven strong inflation fighters. Consequently,
our prediction is that during 1997 inflation will stay in the 2%-2 1/2% range
of the past three years, but there will be a slowing economy. Nationally,
municipal financing has declined in each of the past three years. Arizona
continues to be reflective of this national trend.
Overall, we believe 1997 will be constructive for the bond market.
Patience will be important as we await a slower economy, yet availability of
attractive investment opportunities through sporadic supply and political
uncertainties. Our goals remain that of providing shareholders a high level
of double tax-free income with minimum volatility of the Trust's share price.
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Tax-Free Trust of Arizona:
We have audited the accompanying statement of assets and liabilities of
Tax-Free Trust of Arizona, including the statement of investments, as of June
30, 1996, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit 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 June 30, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used,
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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 Tax-Free Trust of Arizona as of June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
August 16, 1996
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
RATING
FACE ARIZONA GENERAL OBLIGATION BONDS MOODY'S/
AMOUNT (27.3% OF NET ASSETS) S&P VALUE
<C> <S> <C> <C>
Apache Co.,
$ 750,000 5.100%, 7-1-99 Baa/NR $ 750,937
Bullhead City Parkway Improvement
District,
1,055,000 6.100%, 1-1-11 Baa/NR 1,049,725
1,000,000 6.100%, 1-1-12 Baa/NR 1,007,500
Chandler, Arizona,
500,000 7.100%, 7-1-04 (pre-refunded) Baa1/A+ 544,375
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 493,312
2,000,000 5.125%, 7-1-14 MBIA Insured Aaa/AAA 1,832,500
Cochise Co. Unified School
District No. 68 (Sierra Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured Aaa/AAA 1,047,500
1,000,000 6.100%, 7-1-08, FGIC Insured Aaa/AAA 1,042,500
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 937,719
Coconino Co. Unified School
District No. 1 (Flagstaff),
2,000,000 5.500%, 7-1-09, AMBAC Insured Aaa/AAA 1,982,500
Coconino & Yavapai Unified
School District (Sedona),
1,000,000 5.900%, 7-1-07 NR/A- 1,013,750
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,028,750
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 528,750
1,580,000 6.000%, 7-1-07, FGIC Insured Aaa/AAA 1,637,275
Gila Co. Unified School District
No. 10 (Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 509,375
La Paz Co. Unified School District
No. 27 (Parker),
800,000 6.000%, 7-1-05 Baa/NR 808,000
Maricopa Co. Elementary School
District No. 1 (Phoenix),
250,000 5.800%, 7-1-10, CGIC Insured Aaa/AAA 253,125
Maricopa Co. Elementary School
District No. 3 (Tempe),
500,000 8.000%, 7-1-01 A1/AA 571,875
750,000 5.400%, 7-1-12, FGIC Insured Aaa/AAA 727,500
2,780,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 2,852,975
Maricopa Co. Unified School
District No. 4 (Mesa),
2,750,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,794,688
750,000 5.650%, 7-1-11, FGIC Insured Aaa/AAA 748,125
Maricopa Co. School District
No. 8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,112,756
1,010,000 7.200%, 7-1-08 (pre-refunded) A1/NR 1,097,113
Maricopa Co. Unified School
District No. 11 (Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 598,125
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,077,500
Maricopa Co. Unified School
District No. 25 (Liberty),
750,000 7.500%, 7-1-05 Baa/NR 816,563
Maricopa Co. Elementary School
District No. 28 (Kyrene),
835,000 6.000%, 7-1-12, (pre-refunded) Aaa/AAA 886,144
Maricopa Co. Unified School
District No.41 (Gilbert),
1,000,000 5.200%, 7-1-09, (pre-refunded) Aaa/AAA 1,016,250
1,750,000 6.250%, 7-1-15, FSA Insured Aaa/AAA 1,826,563
Maricopa Co. Unified School
District No. 48 (Scottsdale),
750,000 6.750%, 7-1-09 (pre-refunded) Aa/AA 822,188
Maricopa Co. Elementary School
District No. 68 (Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured Aaa/AAA 1,453,481
2,000,000 5.100%, 7-1-11, AMBAC Insured Aaa/AAA 1,875,000
1,000,000 5.125%, 7-1-12, AMBAC Insured Aaa/AAA 941,250
Maricopa Co. Unified School
District No. 69 (Paradise
Valley),
3,250,000 7.000%, 7-1-07 A1/A+ 3,591,250
2,400,000 5.800%, 7-1-09, AMBAC Insured Aaa/AAA 2,469,000
Maricopa Co. Unified School
District No. 98 (Fountain Hills),
1,000,000 5.750%, 7-1-12, AMBAC Insured Aaa/AAA 1,011,250
Maricopa Co. High School District
No. 205 (Glendale Union),
1,000,000 5.350%, 7-1-08 A1/AA- 990,000
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 987,500
2,000,000 5.700%, 7-1-14, FGIC Insured Aaa/AAA 1,997,500
Maricopa Co. High School District
No. 210 (Phoenix Union),
2,000,000 6.750%, 7-1-04 (pre-refunded) Aa/AA 2,192,500
1,000,000 7.100%, 7-1-04 Aa/AA 1,133,750
2,000,000 6.200%, 7-1-06 Aa/AA 2,100,000
3,000,000 5.450%, 7-1-08 Aa/AA 3,000,000
2,000,000 5.700%, 7-1-15 Aa/AA 1,980,000
Maricopa Co. High School District
No. 213 (Tempe),
1,000,000 6.000%, 7-1-12, FGIC Insured Aaa/AAA 1,036,250
Maricopa Co. Unified School
District No. 214 (Tolleson),
1,075,000 5.000%, 7-1-10, FGIC Insured Aaa/AAA 1,009,156
Mesa, Arizona,
5,425,000 5.700%, 7-1-08, MBIA Insured Aaa/AAA 5,567,406
Mohave Co. Unified School
District No. 1 (Lake Havasu),
650,000 5.150%, 7-1-08, AMBAC Insured Aaa/AAA 633,750
1,000,000 5.375%, 7-1-12, AMBAC Insured Aaa/AAA 962,500
Navajo Co. Unified School
District No. 1 (Winslow),
1,000,000 5.200%, 7-1-08, AMBAC Insured Aaa/AAA 981,250
Navajo Co. Unified School
District No. 2 (Joseph City),
550,000 6.700%, 7-1-00 NR/BBB- 580,937
Navajo Co. Unified School
District No. 32 (Blue Ridge),
985,000 5.900%, 7-1-08, CGIC Insured Aaa/AAA 1,021,937
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 AAA/AA+ 1,201,200
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,340,750
900,000 5.600%, 7-1-11 Aa1/AA+ 903,375
1,000,000 6.250%, 7-1-16 Aa1/AA+ 1,085,000
2,000,000 5.000%, 7-1-19 Aa1/AA+ 1,795,000
Pima Co. Unified School
District No. 1 (Tucson),
1,000,000 6.875%, 7-1-10, (pre-refunded) Aaa/AAA 1,103,750
2,000,000 6.100%, 7-1-11, FGIC Insured Aaa/AAA 2,055,000
Pima Co.Unified School District
No.8 (Flowing Wells),
1,090,000 5.900%, 7-1-13, A/NR 1,094,088
Pima Co. Unified School District
No. 12 (Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA 1,237,500
Pima Co. Unified School District
No. 16 (Catalina Foothills),
325,000 3.600%, 7-1-97 A/A+ 323,694
450,000 6.600%, 7-1-98 A/A+ 469,688
475,000 6.600%, 7-1-99 A/A+ 502,906
Pinal Co. Elementary School
District No. 4 (Casa Grande),
750,000 6.000%, 7-1-04, AMBAC Insured Aaa/AAA 791,250
Pinal Co. School District No. 8
(San Manuel),
1,000,000 6.800%, 7-1-10 NR/BBB 1,058,750
Pinal Co. Unified School District
No. 43 (Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,509,375
Pinal Co. High School District No.
82 (Casa Grande),
1,500,000 5.375%, 7-1-09, AMBAC Insured Aaa/AAA 1,488,750
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 594,412
Prescott Valley Sewer Collection
Improvement District,
500,000 7.900%, 1-1-12 NR/BBB- 551,250
Santa Cruz Co. Unified School
District No. 1 (Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 456,000
1,000,000 5.800%, 7-1-13, FSA Insured Aaa/AAA 1,002,500
Scottsdale, Arizona,
1,250,000 6.000%, 7-1-14 Aa1/AA+ 1,275,000
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa/AA+ 990,000
1,450,000 6.000%, 7-1-10 Aa/AA+ 1,482,625
1,290,000 5.400%, 7-1-11 Aa/AA+ 1,275,488
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 518,750
2,000,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,057,500
2,500,000 5.750%, 7-1-20 Aa/AA 2,487,500
Yavapai Co. Unified School
District No. 28 (Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 524,375
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured Aaa/AAA 2,082,500
Total Arizona General Obligation
Bonds 106,189,601
ARIZONA REVENUE BONDS (65.5% OF
NET ASSETS)
Airport Revenue Bonds (1.5% of
Net Assets)
Phoenix, Municipal Airport
Authority,
2,750,000 7.800%, 7-1-11, AMT Aa/AA+ 2,869,570
1,210,000 7.875%, 7-1-14, AMT Aa/AA+ 1,265,648
565,000 6.400%, 7-1-12, AMT, MBIA
Insured Aaa/AAA 591,838
Tucson, Municipal Airport
Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 997,500
Total Arizona Airport Authority
Bonds 5,724,556
Basic Service Revenue Bonds (12.6%
of Net Assets)
Arizona Department of
Transportation Revenue Bonds,
900,000 5.100%, 7-1-11 Aa/AA 852,750
Casa Grande Excise Tax Revenue
Bonds,
365,000 6.000%, 4-1-10, FGIC Insured Aaa/AAA 375,037
Chandler Water & Sewer Revenue
Bonds,
1,815,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 1,898,944
Gilbert Water & Sewer Revenue
Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,671,875
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 3,890,000
2,000,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 1,917,500
Phoenix, Civic Improvement Corp.
Water System Revenue Bonds,
4,200,000 5.500%, 7-1-10 Aa/AA- 4,158,000
1,885,000 5.000%, 7-1-13 A1/A 1,701,212
1,500,000 5.400%, 7-1-14 A1/AA- 1,423,125
Phoenix, Street & Highway User
Revenue Bonds,
2,490,000 6.250%, 7-1-06 A1/AA 2,670,525
1,000,000 6.500%, 7-1-08, (pre-refunded) NR/AA 1,100,000
3,700,000 6.250%, 7-1-11 A1/AA 3,922,000
5,000,000 6.250%, 7-1-11 A/A+ 5,175,000
3,265,000 6.250%, 7-1-11 MBIA Insured Aaa/AAA 3,440,494
Pima County, Sewer Revenue Bonds,
1,350,000 6.750%, 7-1-15 FGIC Insured Aaa/AAA 1,432,688
Sedona Sewer Revenue Bonds,
2,600,000 8.750%, 7-1-10 (pre-refunded) NR/AAA 3,006,250
700,000 7.400%, 7-1-11 (pre-refunded) NR/AAA 782,250
1,055,000 7.000%, 7-1-12 NR/BBB 1,114,344
Sierra Vista, Street & Highway
Revenue Bonds,
500,000 6.400%, 7-1-03 AMBAC Insured Aaa/AAA 519,375
Tucson, Water System Revenue
Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 527,500
1,500,000 6.700%, 7-1-12 A1/A+ 1,608,750
1,900,000 6.500%, 7-1-16 A1/A+ 2,002,125
2,245,000 5.750%, 7-1-18 A1/A+ 2,205,712
500,000 6.000%, 7-1-21, MBIA Insured Aaa/AAA 505,625
Total Basic Service Revenue Bonds 48,901,081
Hospital Revenue Bonds (4.2% of
Net Assets)
Arizona Health Facilities (St.
Luke's Health System),
3,260,000 7.250%, 11-1-14, (pre-refunded) Aaa/NR 3,716,400
Arizona Health Facilities
(Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured Aaa/AAA 2,428,125
Chandler Industrial Development
Authority (Ahwatukee Medical
Facility),
900,000 7.000%, 7-1-22 NR/NR* 841,500
Maricopa Co. Industrial
Development Authority (Mercy
Health Care System-St. Joseph's
Hospital) Revenue Bonds,
1,015,000 7.750%, 11-1-10 NR/AAA 1,153,294
Mesa Industrial Development
Authority (Western Health),
2,000,000 7.625%, 1-1-19, BIGI Insured Aaa/AAA 2,177,500
Mohave Co. Industrial Development
Authority (Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,128,438
Pima Co. Industrial Development
Authority (Tucson Medical
Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,045,000
400,000 7.000%, 4-1-14, MBIA Insured Aaa/AAA 409,980
500,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 458,125
Scottsdale Industrial Development
Authority (Scottsdale Memorial
Hospital),
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 1,980,000
1,000,000 6.125%, 9-1-17, AMBAC Insured+ Aaa/AAA 960,000
Total Hospital Revenue Bonds 16,298,362
Lease Revenue Bonds (9.4% of Net
Assets)
Arizona Certificates of
Participation Lease Revenue
Bonds,
840,000 6.625%, 9-1-08, FSA Insured Aaa/AAA 904,050
2,000,000 6.500%, 3-1-08, FSA Insured Aaa/AAA 2,140,000
Arizona Municipal Finance Program
No. 7,
855,000 7.600%, 8-1-00, BIGI Insured Aaa/AAA 881,890
Arizona Municipal Finance Program
No. 15,
1,000,000 8.650%, 8-1-04, BIGI Insured Aaa/AAA 1,038,720
500,000 8.750%, 8-1-06, BIGI Insured Aaa/AAA 521,005
Arizona Municipal Finance Program
No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured Aaa/AAA 1,514,500
Arizona Municipal Finance Program
No. 34,
1,000,000 7.250%, 8-1-09, BIGI Insured Aaa/AAA 1,161,250
Avondale Municipal Facilities
Lease Revenue Bonds,
500,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 533,125
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,121,306
Bullhead City Municipal Property
Corp. Lease Revenue,
500,000 7.200%, 7-1-10, FGIC Insured Aaa/AAA 542,500
Cochise Co. Certificates of
Participation Lease Revenue
Bonds,
390,000 6.000%, 8-1-04, MBIA Insured Aaa/AAA 396,022
Glendale Municipal Property Corp.
Lease Revenue Bonds, MBIA
Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,058,750
Lake Havasu City Certificates of
Participation Lease Revenue
Bonds,
950,000 5.625%, 6-1-04, FGIC Insured Aaa/AAA 980,875
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 544,375
Maricopa Co. Certificates of
Participation Lease Revenue
Bonds,
1,000,000 6.000%, 6-1-04 Baa/BBB 1,020,000
Nogales Municipal Development
Authority Lease Revenue Bonds,
500,000 8.000%, 6-1-08, (pre-refunded) Aaa/AAA 540,000
Phoenix Civic Improvement Revenue
Bonds,
1,890,000 6.300%, 7-1-14 Aa/AA+ 1,965,600
1,500,000 6.000%, 7-1-14 Aa/AA+ 1,530,000
Pinal Co. Certificates of
Participation Lease Revenue
Bonds,
865,000 7.900%, 6-1-01 NR/BBB 885,103
1,180,000 6.250%, 6-1-04 NR/AA 1,252,275
525,000 6.375%, 6-1-06 NR/AA 554,531
Prescott Municipal Property Corp.
Lease Revenue Bonds,
1,360,000 7.000%, 7-1-10 (pre-refunded) Aaa/AAA 1,472,200
Oro Valley Municipal Property
Corp. Lease Revenue Bonds,
2,585,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,413,744
Scottsdale Municipal Property
Corp. Lease Revenue Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,296,250
1,155,000 7.875%, 11-1-14, (pre-refunded) Aaa/AAA 1,194,027
1,870,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 1,928,438
Tucson Certificate of
Participation Lease Revenue
Bonds,
525,000 5.700%, 7-1-02 NR/A- 526,312
1,000,000 6.375%, 7-1-09 Baa1/AA 1,050,000
Tucson Business Development
Finance Corp.,
2,275,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 2,380,219
University of Arizona
Certificates of Participation
Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, CGIC Insured Aaa/AAA 1,001,250
Yuma Municipal Property Corp.
Lease Revenue Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,320,944
Total Lease Revenue Bonds 36,669,261
Mortgage Revenue Bonds (3.8% of
Net Assets)
Maricopa Co. Industrial
Development Authority Single
Family Mortgage Revenue Bonds,
485,000 7.500%, 8-1-12 Aa/NR 511,675
1,250,000 0.000%, 12-31-14 Aaa/AAA 407,813
Maricopa Co. Industrial
Development Authority Multi-Family
Mortgage Revenue Bonds (Advantage
Point Project),
1,000,000 6.500%, 7-1-16 A/NR 991,250
Mohave Co. Industrial Development
Authority (Chris Ridge Village),
1,040,000 6.250%, 11-1-16 NR/AAA 1,055,600
Peoria Industrial Development
Authority (Casa Del Rio),
2,500,000 7.300%, 2-20-28 NR/AAA 2,640,625
Phoenix Industrial Development
Authority Single Family Mortgage
Revenue,
1,750,000 6.300%, 12-1-12, AMT NR/AAA 1,780,625
Pima Co. Industrial Development
Authority (Broadway Proper),
500,000 8.150%, 12-1-25 NR/A- 550,885
Pima Co. Industrial Development
Authority Single Family Mortgage
Revenue,
380,000 7.625%, 2-1-12 A/NR 394,725
1,040,000 6.500%, 2-1-17 A/NR 1,049,100
2,000,000 6.750%, 11-1-27, AMT NR/AAA 2,060,000
Scottsdale Industrial Development
Authority (Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,247,212
500,000 10.000%, 6-1-17 (pre-refunded) NR/NR* 541,485
Tempe Industrial Development
Authority (Friendship Village),
1,500,000 6.500%, 12-1-08 NR/NR* 1,458,750
Total Mortgage Revenue Bonds 14,689,745
Pollution Control Revenue Bonds
(6.3% of Net Assets)
Casa Grande Industrial Development
Authority (Frito Lay) Revenue
Bonds,
250,000 6.650%, 12-1-14 A1/NR 266,875
Gila Co. Pollution Control (Asarco)
Revenue Bonds,
3,900,000 8.900%, 7-1-06 Baa2/BBB 4,150,419
Gilbert Industrial Development
Authority Wastewater Reclamation
Facility Revenue Bonds,
600,000 10.000%, 10-1-10 (pre-refunded) NR/NR* 724,500
Greenlee Co. Pollution Control
(Phelps Dodge) Revenue Bonds,
9,185,000 5.450%, 6-1-09 A2/A 8,989,819
Mohave Co. Industrial Development
Authority (North Star Steel)
Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT Aa3/AA- 3,880,250
Navajo Co. Pollution Control
Revenue Bonds (Arizona Public
Service),
5,000,000 5.875%, 8-15-28 Baa1/BBB 4,775,000
Pinal Co. Industrial Development
Authority Bonds (Browning
Ferris),
2,000,000 5.000%, 2-1-06, AMT A2/A 1,920,000
Total Pollution Control Revenue
Bonds 24,706,863
University Revenue Bonds (10.3% of
Net Assets)
Arizona Board of Regents-Arizona
State University System Revenue
Bonds,
3,000,000 5.500%, 7-1-19 A1/AA 2,812,500
6,750,000 5.750%, 7-1-12 A1/AA 6,716,250
3,000,000 5.500%, 7-1-19 MBIA Insured Aaa/AAA 2,887,500
7,000,000 6.125%, 7-1-15 A1/AA 7,096,250
Arizona Board of Regents-Northern
Arizona University System Revenue
Bonds,
500,000 9.900%, 6-1-98 A1/A+ 551,250
685,000 7.400%, 6-1-02 (pre-refunded) A1/A+ 740,656
1,000,000 6.400%, 6-1-07, FGIC Insured Aaa/AAA 1,062,500
1,480,000 7.500%, 6-1-07 (pre-refunded) A1/A+ 1,603,950
3,150,000 5.800%, 6-1-08, AMBAC Insured Aaa/AAA 3,213,000
Arizona Board of Regents-University
of Arizona System Revenue Bonds,
2,750,000 6.250%, 6-1-11 A1/AA 2,853,125
3,000,000 7.000%, 6-1-15 (pre-refunded) A1/AA 3,300,000
Arizona Educational Loan Mktg
Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,032,500
450,000 7.000%, 3-1-05, AMT A/NR 479,812
1,720,000 5.700%, 12-1-08, AMT A/NR 1,687,750
Arizona Student Loan Revenue
500,000 6.600%, 5-1-10 Aa/NR 521,875
East Valley Institute of
Technology
820,000 6.000%, 7-1-05, AMBAC Insured Aaa/AAA 850,750
Glendale Industrial Development
Authority (American Graduate
School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 333,750
1,000,000 5.625%, 7-1-20, CONLEE Insured NR/AAA 962,500
Yavapai Co. Community College
District Revenue Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured Aaa/AAA 1,055,288
500,000 6.000%, 7-1-12 NR/A- 509,375
Total University Revenue Bonds 40,270,581
Utility Revenue Bonds (17.4% of
Net Assets)
Arizona Power Authority (Hoover
Dam Project) Revenue Bonds,
2,870,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA 2,887,938
8,500,000 5.375%, 10-1-13, MBIA Insured++ Aaa/AAA 8,181,250
2,675,000 5.250%, 10-1-17, MBIA Insured Aaa/AAA 2,474,375
Arizona Wastewater Management
Authority Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa/AA+ 1,844,500
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,215,200
Central Arizona Water Conservation
District Revenue Bonds,
1,500,000 7.500%, 11-1-05 (pre-refunded) A1/AA- 1,689,375
1,500,000 4.750%, 5-1-09, MBIA Insured Aaa/AAA 1,385,625
2,000,000 5.500%, 11-1-09 A1/AA- 2,007,500
1,000,000 5.500%, 11-1-10 A1/AA- 1,002,500
3,000,000 7.125%, 11-1-11 (pre-refunded) A1/AA- 3,337,500
4,490,000 6.500%, 11-1-11 (pre-refunded) A1/AA- 4,894,100
Maricopa Co. Industrial Development
Authority (Citizens Utility),
1,000,000 6.875%, 9-1-03 AMT NR/AA+ 1,038,750
Mohave Co. Industrial Development
Authority (Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA+ 3,247,500
Pima Co. Industrial Development
Authority (Tucson Electric)
Revenue Bonds,
3,500,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 3,788,750
Salt River Project Agricultural
Improvement and Power Revenue
Bonds,
4,500,000 6.200%, 1-1-12 Aa/AA 4,651,875
2,000,000 5.250%, 1-1-13 Aa/AA 1,905,000
650,000 6.000%, 1-1-13 Aa/AA 659,750
Salt River Project Agricultural
Improvement and
Power Revenue Bonds,
1,200,000 5.250%, 1-1-19 Aa/AA 1,107,000
8,500,000 6.250%, 1-1-19 Aa/AA 8,808,125
8,000,000 6.250%, 1-1-27 Aa/AA 8,240,000
565,000 8.250%, 1-1-28, (pre-refunded) NR/AAA 598,900
2,000,000 5.000%, 1-1-13 Aa/AA 1,842,500
Santa Cruz Industrial Development
Authority (Citizens Utility),
1,020,000 7.150%, 2-1-23, AMT NR/AA+ 1,073,550
Total Utility Revenue Bonds 67,881,563
Total Arizona Revenue Bonds 255,142,012
PUERTO RICO BONDS (6.3% OF NET
ASSETS)
Puerto Rico General Obligation
Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,031,250
2,300,000 6.000%, 7-1-14, MBIA Insured Aaa/AAA 2,357,500
2,035,000 6.450%, 7-1-17 Baa1/A 2,139,294
Puerto Rico Electric Power
Authority Revenue Bonds,
4,000,000 6.125%, 7-1-09 Baa1/A- 4,230,000
1,740,000 5.500%, 7-1-10 Baa1/A- 1,722,600
2,000,000 6.000%, 7-1-14 Baa1/A 2,015,000
2,000,000 6.000%, 7-1-16 Baa1/A- 2,015,000
Puerto Rico Highway Authority
Revenue Bonds,
850,000 7.600%, 7-1-02 (pre-refunded) Baa1/A 954,125
2,000,000 5.200%, 7-1-03 Baa1/A 2,015,000
Puerto Rico Industrial, Medical &
Environmental Revenue Bonds,
3,500,000 6.250%, 11-15-13, (Pepsico) A1/A 3,692,500
1,000,000 7.600%, 5-1-14, (Warner Lambert NR/AA3 1,095,000
Puerto Rico Urban Renewal &
Housing Corp. Revenue Bonds,
1,000,000 7.875%, 10-1-04 Baa/BBB 1,103,750
Total Puerto Rico Bonds 24,371,019
Total Investments-99.1% (Cost
$376,992,607**) 385,702,628
Other assets in excess of
liabilities-0.9% 3,386,160
Net Assets-100% $ 389,088,788
<FN>
* Any security not rated must be determined by the
Investment Adviser to have sufficient quality to be
ranked in the top four credit ratings if a credit
rating were to be assigned by a rating service.
</FN>
<FN>
+ When-issued security.
</FN>
<FN>
++ This security is pledged as collateral for the Trust's
when-issued commitments.
</FN>
<FN>
** Cost for Federal tax purposes is $375,798,576.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost $376,992,607) $ 385,702,628
Interest receivable 9,012,669
Receivable for Trust shares sold 477,171
Other assets 6,542
Total assets 395,199,010
LIABILITIES
Payable for investment securities purchased 5,081,490
Dividends payable 232,951
Payable for Trust shares redeemed 213,342
Cash overdraft 201,100
Distribution fees payable 144,128
Adviser and Administrator fees payable 126,037
Accrued expenses 111,174
Total liabilities 6,110,222
NET ASSETS $ 389,088,788
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 374,821
Additional paid-in capital 379,287,618
Accumulated net loss on investments (231,482)
Undistributed net investment income 947,810
Net unrealized appreciation on investments 8,710,021
$ 389,088,788
CLASS A
Net Assets $ 389,082,560
Capital shares outstanding 37,481,467
Net asset value and redemption price per share $ 10.38
Offering price per share (100/96 of $10.38 adjusted to
nearest cent) $ 10.81
CLASS C
Net Assets $ 6,127
Capital shares outstanding 590
Net asset value and offering price per share $ 10.38
Redemption price per share (*varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 101
Capital shares outstanding 10
Net asset value, offering and redemption price per share $ 10.38
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $23,300,823
Expenses:
Investment Adviser fees (note B) $777,611
Administrator fees (note B) 777,611
Distribution fees (note B) 584,611
Transfer and shareholder servicing agent fees 253,195
Legal fees 92,824
Trustees' fees and expenses (note G) 80,633
Shareholders' meeting, reports, and proxy
statements 57,696
Registration fees and dues 43,306
Custodian fees (note F) 36,436
Audit and accounting fees 31,850
Insurance 7,807
Miscellaneous 62,631
2,806,211
Expenses paid indirectly (note F) (28,184)
Net expenses 2,778,027
Net investment income 20,522,796
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain from securities
transactions 3,478,590
Change in unrealized appreciation on
investments (3,409,293)
Net realized and unrealized gain on
investments 69,297
Net increase in net assets resulting from
operations $20,592,093
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended June 30
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income $20,522,796 $20,536,651
Net realized gain (loss) from
securities transactions 3,478,590 (4,413,317)
Change in unrealized appreciation on
investments (3,409,293) 12,083,287
Change in net assets resulting from
operations 20,592,093 28,206,621
DISTRIBUTIONS TO SHAREHOLDERS (NOTE E):
Class A Shares:
Net investment income (20,402,751) (20,536,651)
Net realized gain on investments - -
Class C Shares:
Net investment income (30) -
Net realized gain on investments - -
Class Y Shares:
Net investment income - -
Net realized gain on investments - -
Change in net assets from distributions (20,402,781) (20,536,651)
CAPITAL SHARE TRANSACTIONS (NOTE H):
Proceeds from shares sold 40,514,488 39,810,048
Reinvested dividends and distributions 10,491,841 10,742,087
Cost of shares redeemed (42,852,271) (49,569,895)
Change in net assets from capital share
transactions 8,154,058 982,240
Change in net assets 8,343,370 8,652,210
NET ASSETS:
Beginning of period 380,745,418 372,093,208
End of period $389,088,788 $380,745,418
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Tax-Free Trust of Arizona (the "Trust"), a non-diversified, open-end
investment company, was organized on October 17, 1985, as a Massachusetts
business trust and commenced operations on March 13, 1986. The Trust 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 Trust
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, as was the case since inception, are sold with a front-payment sales
charge and bear a service fee. Class C shares are sold with no front-payment
sales charge but are assessed a contingent deferred sales charge if redeemed
within one year from the date of purchase and a level-payment charge for
service and distribution fees from date of purchase through six years
thereafter. Class Y shares are offered only to institutions acting for
investors in a fiduciary, advisory, agency, custodial or similar capacity,
are not offered directly to retail customers, and are sold at net asset value
with no sales charge, no redemption fee, no contingent deferred sales charge
and no service or distribution fees. 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.
The following is a summary of significant accounting policies followed by
the Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
(1) 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 at the mean of bid and
asked quotations and, in the case of other securities, at fair
value determined 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 was 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 exceeded 60
days.
(2) 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 premiums and accretion of
discounts of securities purchased at other than par with less than
60 days to maturity.
(3) FEDERAL INCOME TAXES: It is the policy of the Trust to qualify as a
regulated investment company by complying with the provisions of
the Internal Revenue Code applicable to certain investment
companies. The Trust intends to make distributions of income and
securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
<PAGE>
(4) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, 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.
(5) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of 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.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Trust are conducted through two separate
management arrangements.
Bank One, Arizona, NA (the "Adviser"), formerly known as The Valley
National Bank of Arizona, became Investment Adviser to the Trust in March,
1986. In this role, under an Investment Advisory Agreement, the Adviser
supervises the Trust's investments and provides various services to the
Trust, including maintenance of the Trust's accounting books and records, for
which it 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 0.20 of 1% of the
net assets of the Trust.
The Trust also has an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Trust's founder and sponsor. Under
this Agreement, the Administrator provides all administrative services, other
than those relating to the management of the Trust's investments. These
include providing the office of the Trust and all related services as well as
overseeing the activities of all the various support organizations to the
Trust such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor. For its services, the Administrator 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 0.20 of 1% of the net assets of the
Trust.
Specific details as to the nature and extent of the services provided by
the Adviser and the Administrator are more fully defined in the Trust's
Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees shall
be reduced, but not below zero, by an amount equal to one-half of the amount,
if any, by which the total expenses of the Trust in any fiscal year,
exclusive of taxes, interest and brokerage fees, shall exceed the lesser of
(i) 2.5% of the first $30 million of average annual net assets of the Trust
plus 2% of the next $70 million of such assets and 1.5% of its average annual
net assets in excess of $100 million, or (ii) 25% of the Trust's total annual
investment income. The payment of the above fees at the end of any month will
be reduced or postponed so that at no time will there be any accrued but
unpaid liability under this expense limitation. No such reduction in fees was
required during the year ended June 30, 1996.
<PAGE>
For the year ended June 30, 1996, the Trust incurred fees under the
Advisory Agreement and Administration Agreement of $777,611 and $777,611,
respectively.
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Trust's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Trust's shares are sold primarily through the facilities of
these dealers having offices within Arizona, with the bulk of sales
commissions inuring to such dealers. For the year ended June 30, 1996, the
Distributor received sales commissions in the amount of $101,428.
The Trust 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 Trust is authorized to make
service fee payments to broker-dealers or others selected by the Distributor,
including, but not limited to, any principal underwriter of the Trust, 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 Trust's shares or servicing of shareholder accounts ("Qualified
Recipients"). The Trust makes payment of this service fee at the annual rate
of 0.15% of the Trust's average net assets represented by Class A Shares. For
the year ended June 30, 1996, service fees on Class A Shares amounted to
$584,611, of which the Distributor received $17,199.
Under another part of the Plan, the Trust 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 Trust's Class C shares
or servicing of shareholder accounts. These payments are made at the annual
rate of 0.75% of the Trust's net assets represented by Class C Shares. There
were no payments made during the period April 1, 1996 through June 30, 1996.
In addition, under a Shareholder Services Plan, the Trust 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 Trust's
net assets represented by Class C Shares. There were no payments made during
the period April 1, 1996 through June 30, 1996.
Specific details about the Plans are more fully defined in the Trust's
Prospectus and Statement of Additional Information.
NOTE C - PURCHASES AND SALES OF SECURITIES:
During the year ended June 30, 1996, purchases of securities and proceeds
from the sales of securities aggregated $113,108,045 and $105,621,376,
respectively.
At June 30, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $12,123,008 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to
$2,218,956 for a net unrealized appreciation of $9,904,052. At June 30, 1996,
the Trust has a capital loss carryover of approximately $953,897 which is
available to offset future net realized gains on securities transactions to
the extent provided for in the Internal Revenue Code. Such capital loss will
expire June 30, 2003. To the extent that this loss is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed.
<PAGE>
NOTE D - PORTFOLIO ORIENTATION:
Since the Trust invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Arizona, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Arizona and whatever
effects these may have upon Arizona issuers' ability to meet their
obligations. The Trust is also permitted to invest in U.S. territorial
municipal obligations meeting comparable quality standards and providing
income which is exempt from both regular Federal and Arizona income taxes.
The general policy of the Trust is to invest in such securities only when
comparable securities of Arizona issuers are not available in the market. At
June 30, 1996, the Trust had 6.3% of its total net assets invested in 12
Puerto Rico municipal issues.
NOTE E - DISTRIBUTIONS:
The Trust declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Trust 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 Arizona
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Trust
may not be the same as the Trust's net investment income, and/or net realized
securities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. For certain shareholders,
some dividend income may be subject to the alternative minimum tax. Also,
annual capital gains distributions, if any, are taxable.
NOTE F - CUSTODIAN FEES:
The Trust has negotiated an expense offset arrangement with its
custodian, Bank One Trust Company, N.A., an affiliate of the Adviser, wherein
it receives credit toward the reduction of custodian fees whenever there are
uninvested cash balances. During the year ended June 30, 1996, the Trust's
custodian fees amounted to $36,436, of which $28,184 was offset by such
credits. The Trust could have invested its cash balances in an
income-producing asset if it had not agreed to a reduction in fees under the
expense offset arrangement with the custodian.
NOTE G - TRUSTEES' FEES AND EXPENSES:
During the fiscal year from July 1, 1995 through June 30, 1996, there
were nine Trustees. Trustees' fees paid during the year were at the average
annual rate of $6,500 for carrying out their responsibilities and attendance
at regularly scheduled Board Meetings. If additional or special meetings are
scheduled for the Trust, separate meeting fees are paid for each such meeting
to those Trustees in attendance. The Trust also reimburses Trustees for
expenses such as travel, accommodations, and meals incurred in connection
with attendance at regularly scheduled or special Board Meetings and at the
Annual Meeting and outreach meetings of Shareholders. For the fiscal year
ended June 30, 1996 such reimbursements averaged approximately $3,600 per
Trustee. Two of the Trustees, who are affiliated with the Administrator, are
not paid any Trustee fees.
<PAGE>
NOTE H - CAPITAL SHARE TRANSACTIONS:
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 3,904,052 $40,508,288 3,948,576 $39,810,048
Reinvested dividends and
distributions 1,001,618 10,491,806 1,059,761 10,742,087
Cost of shares redeemed (4,132,065) (42,852,271) (4,922,268) (49,569,895)
Net change 773,605 $8,147,823 86,069 $982,240
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 587 $6,100
Reinvested dividends and
distributions 3 33
Cost of shares redeemed - -
Net change 590 $6,133
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 10 $100
Reinvested dividends and
distributions - 2
Cost of shares redeemed - -
Net change 10 $102
<CAPTION>
Total transactions in
Trust shares
<C> <C> <C> <C>
774,205 $8,154,058 86,069 $982,240
<FN>
* From April 1, 1996 (date of inception) through June 30, 1996.
</FN>
</TABLE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class C(2) Class Y(2) Class A(1)
Period ended Year ended June 30
June 30, 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C.
Net Asset Value,
Beginning of Period $10.45 $10.45 $10.37 $10.16 $10.84 $10.36 $9.92
Income from Investment
Operations:
Net investment income 0.13 0.15 0.55 0.56 0.57 0.62 0.66
Net gain (loss) on
securities (both
realized and
unrealized) (0.07) (0.07) 0.01 0.21 (0.60) 0.54 0.43
Total from Investment
Operations 0.06 0.08 0.56 0.77 (0.03) 1.16 1.09
Less Distributions:
Dividends from net
investment income (0.13) (0.15) (0.55) (0.56) (0.57) (0.62) (0.65)
Distributions from
capital gains - - - - (0.08) (0.06) -
Total Distributions (0.13) (0.15) (0.55) (0.56) (0.65) (0.68) (0.65)
Net Asset Value,
End of Period $10.38 $10.38 $10.38 $10.37 $10.16 $10.84 $10.36
Total Return (not
reflecting sales
load) (%) 0.57# 0.76# 5.49 7.89 (0.38) 11.45 11.36
Ratios/Supplemental
Data
Net Assets, End of
Period ($ thousands) 6 0.1 389,083 380,745 372,093 349,920 237,433
Ratio of Expenses to
Average Net Assets
(%) 0.40# 0.15# 0.72 0.74 0.70 0.65 0.57
Ratio of Net
InvestmentIncome
to Average Net
Assets (%) 1.17# 1.42# 5.30 5.55 5.36 5.76 6.37
Portfolio Turnover
Rate (%) 27.37 27.37 27.37 34.44 31.20 18.78 23.53
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary waiver
of fees and the expense offset in custodian fees for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment
Income ($) 0.04 0.15 0.55 0.56 0.57 0.61 0.65
Ratio of Expenses
to Average Net
Assets (%) 0.40# 0.15# 0.73 0.74 0.71 0.73 0.70
Ratio of Net
Investment Income
to Average Net
Assets (%) 1.17# 1.42# 5.30 5.55 5.35 5.67 6.24
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(2) New Class of Shares established on April 1, 1996.
</FN>
<FN>
# Not annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT OF THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of the Tax-Free Trust of Arizona
(the "Trust") was held on September 22, 1995 and an adjourned session of the
meeting was held on October 20, 1995.* At the meeting, the following matters
were submitted to a shareholder vote and approved:
(i) the election of Lacy B. Herrmann, Philip E. Albrecht, Arthur K.
Carlson, Thomas W. Courtney, William L. Ensign, Diana P. Herrmann,
John C. Lucking, Anne J. Mills, and William T. Quinsler as Trustees
to hold office until the next annual meeting of the Trust's
shareholders or until his or her successor is duly elected (each
Trustee received at least 20,582,818 affirmative votes (97.3%); no
more than 580,977 votes (2.7%) were withheld for any Trustee),
(ii) the ratification of the selection of KPMG Peat Marwick LLP as
the Trust's independent auditors for the fiscal year ending June
30, 1996 (votes for: 20,322,664 (96.0%); votes against: 92,261
(0.4%); abstentions: 739,960 (3.5%)),
(iii) the approval of an amendment to the Trust's Declaration of
Trust to authorize the creation of additional classes of shares
(votes for: 19,108,140 (79.6%); votes against: 1,687,827 (7.0%);
abstentions: 1,937,034 (8.1%); broker non-votes 1,257,956 (5.2%)),
and
(iv) the approval of an amendment to the Trust's Declaration of
Trust to authorize voting by net asset value of shares (votes for:
19,255,371 (80.3%); votes against: 1,716,678 (7.2%); abstentions:
1,760,952 (7.3%); broker non-votes: 1,257,956 (5.2%)).
Special Meetings of the Trust's Class C and Class Y Shareholders were
held on March 29, 1996 and April 4, 1996, respectively.** At the Special
Meeting of Class C Shareholders of the Trust, the Class C Shareholders voted
on and unanimously approved amendments to the Trust's Distribution Plan
affecting the interests of the Class C Shareholders of the Trust. At the
Special Meeting of Class Y Shareholders of the Trust, the Class Y
Shareholders voted on and unanimously approved amendments to the Trust's
Distribution Plan affecting the interests of the Class Y Shareholders of the
Trust.
- - -----------
*On the record date for the Annual Meeting, 36,741,186 shares of the Trust
were outstanding and entitled to vote. The holders of 21,163,795 shares
(57.6%) entitled to vote were present in person or by proxy at the initial
session of the meeting and the holders of 23,990,957 shares (65.3%)
entitled to vote were present in person or by proxy at the adjourned session
of the meeting.
**On the record dates for the Special Meetings, the total net asset values of
the Class C and Class Y Shares of the Trust outstanding and entitled to vote
were $100 and $100, respectively. The holders of all Class C and Class Y
Shares entitled to vote were present in person at the meetings.
<PAGE>
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a requirement of
the Internal Revenue Code AND NO CURRENT ACTION ON THE PART OF SHAREHOLDERS
IS REQUIRED.
For the fiscal year ended June 30, 1996, of the total amount of dividends
paid by Tax-Free Trust of Arizona, 97.41% was "exempt-interest dividends" and
the balance was ordinary dividend income.
Prior to January 31, 1996, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1995
CALENDAR YEAR.
<PAGE>
INVESTMENT ADVISER
BANK ONE, ARIZONA, NA
Bank One Center
241 North Central Avenue
Phoenix, Arizona 85004
ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Philip E. Albrecht
Arthur K. Carlson
Thomas W. Courtney
William L. Ensign
Diana P. Herrmann
John C. Lucking
Anne J. Mills
William T. Quinsler
OFFICERS
Lacy B. Herrmann, President
William C. Wallace, Senior Vice President
Susan A. Cook, Vice President
Kristian P. Kjolberg, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, 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
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
