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.
SEMI-ANNUAL
REPORT
DECEMBER 31, 1996
A TAX-FREE INCOME INVESTMENT
(Logo of Tax-Free Trust of Arizona: eagle sitting on top of flag with a star
on it)
(Logo of Aquila Group of Funds: eagle's head)
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
TAX-FREE TRUST OF ARIZONA
SEMI-ANNUAL REPORT
"THE VALUE OF STEADFASTNESS"
February 18, 1997
Dear Investor:
Most of us have heard, at one time or another, the story of the
tortoise and the hare. With respect to your investment in Tax-Free Trust of
Arizona, this old adage, detailing the virtue of steadfastness, speaks
volumes. If the finish line you are seeking to cross is one of capital
preservation and double tax-free income, then an investment which performs
much like the tortoise just might "win the race."
THE CALL OF THE STOCK MARKET
As I am sure you will agree, recent years have been banner ones for
the stock market. The spectacular price increases experienced have made the
appeal of investing in equity securities extremely powerful and, at times,
almost irresistible.
If it were possible to know in advance just what and when to buy or
sell in order to maximize profit, then constantly switching your investment
vehicle, trying to capture the latest trend, would be uncomplicated.
Unfortunately, "timing" the market, with any degree of consistency,
is near impossible. We have generally found that, for the average investor,
switching continuously from one security to another in the management of
his/her investment portfolio tends to be a fruitless, often imprudent,
exercise. With the degree of volatility inherent in the equity markets,
missing an upturn or downturn could result in a disastrous loss of invested
principal.
PROUD TO BE A TORTOISE
Our various survey results indicate that a substantial portion of
investors in Tax-Free Trust of Arizona are retirees or pre-retirees who are
concerned about capital preservation. Accordingly, staying on track with your
investment in the Trust could well prove to be the most appropriate course to
follow. Although equity investments can be rewarding for a portion of one's
capital, it is still critical to keep firmly in mind your overall investment
goal and not get disproportionately distracted by the dazzle of other
investments.
It is no great secret that municipal bonds, such as those in which
the Trust invests, are generally not exciting investments. Unlike stocks,
they do not experience abrupt, dramatic highs. However, it must be kept in
mind that municipal bonds also do not experience the dumbfounding lows of
stocks. Municipal bond trusts just plod along from year to year, much like
the tortoise, producing consistent double tax-free results for shareholders.
<PAGE>
While being a tortoise may not be as glamorous as being a hare, this
should not represent a cause for concern. The end result is really what
counts - not how you got there, but that you got there at all.
CAPITAL PRESERVATION STRATEGIES
Although capital preservation is not guaranteed, the Trust does take
some very deliberate steps to ensure that there will be minimal volatility in
share price over a reasonable time frame.
The Trust's basic philosophy is "don't put all your eggs in one
basket." And, when you choose the eggs for that basket, choose only quality
ones.
DIVERSIFICATION is a key stability tool used in the construction of
the Trust's investment portfolio. At year-end 1996, over 220 separate
municipal issues were represented in the Trust's portfolio. Having such a
breadth of participation helps to ensure against any significant loss of
principal by the Trust in the remote event anything ever did go wrong with a
particular issuer. Such diversification also enables the Trust to participate
in financing many different vital public purpose projects in numerous
communities throughout Arizona, thereby benefitting residents of the entire
state.
We have found from experience that sticking with QUALITY is best in
the long run. Therefore, investments in the Trust are specifically limited to
only the top four credit ratings, or equivalent, of the nine assignable to
municipal securities by nationally-known credit rating services. At December
31, 1996, 95.1% of the portfolio was comprised of the top three credit
ratings - AAA, AA, AND A.
Emphasis is also placed on having a SPREAD OF MATURITIES in the
Trust's investment portfolio. As you probably are aware, short term
maturities tend to have very little price fluctuation, but produce a lesser
rate of return than longer maturity securities. Conversely, long-term
maturities produce a higher return level, but have a much higher price
volatility factor than shorter-term issues since they reflect the risks
associated with the unpredictability of future events and the potential
interest rate changes over the extended life of the municipal bond.
By creating a blend of maturities, ranging from under one year to
over 20 years in length, the Trust attempts to provide you with a
satisfactory level of return without subjecting the share price to excessive
swings as interest rates move up and down. Thus, the current average maturity
of the Trust's portfolio is the relatively intermediate term of 15.1 years.
The Trust's Investment Adviser, Bank One, Arizona, NA, examines the
above elements very carefully when selecting each individual "egg" for your
basket of investments in order to obtain the most appropriate fit. Such
careful attention seeks to provide protection for shareholders' capital and
promote stability.
TAX-FREE RATE OF RETURN
What many investors sometime forget is that while the level of income
from the Trust may seem unimpressive on the surface, it is DOUBLE TAX-FREE* -
free of both regular Federal and State of Arizona income taxes. When the rate
of return achieved by the Trust is converted into a taxable equivalent rate,
the outcome is generally quite an eye-opener.
The following chart shows the average annualized level of DOUBLE
TAX-FREE income return distributed to shareholders from January 1, 1996 to
December 31, 1996, as measured against the maximum public offering price.**
It additionally illustrates the rate of taxable income return one would have
had to earn in order to equate to the DOUBLE TAX-FREE income return generated
by the Trust.
<PAGE>
[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
<S> <C> <C>
28% 7.38% 5.04%
31% 7.81% 5.04%
36% 8.48% 5.04%
39.6% 9.02% 5.04%
</TABLE>
No matter which Federal income tax bracket applies, you can readily
see that there is quite a difference between the TAXABLE and the DOUBLE
TAX-FREE return levels.
OUR PLEDGE TO YOU
Management of Tax-Free Trust of Arizona values the confidence you
have placed in us. You can be assured that we will steadfastly strive to help
you cross the finish line of your investment goal.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
* Some income may be subject to the alternative minimum tax for
certain investors.
** The performance shown represents that of Class A shares. Such
performance data quoted represents past performance and is not
indicative of future results. The investment return and principal value
of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. The
Trust's average annual total return as of 12/31/96 for the past one-year
period was 3.60%; for the past five-year period was 6.57%; and for the
past ten-year period was 7.02%. These returns do not take into
consideration the maximum sales charge of 4%. Returns would be less if
the sales charge was applied. As of 12/31/96, the Trust's 30-day SEC
yield was 4.36%.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
RATING
FACE ARIZONA GENERAL OBLIGATION BONDS MOODY'S/ MARKET
AMOUNT (29.4% OF NET ASSETS) S&P VALUE
<C> <S> <C> <C>
Apache Co.,
$ 750,000 5.100%, 7-1-99 Baa/NR $ 754,687
Bullhead City Parkway
Improvement District,
1,055,000 6.100%, 1-1-11 Baa/NR 1,077,419
1,000,000 6.100%, 1-1-12 Baa/NR 1,031,250
Chandler, Arizona,
500,000 7.100%, 7-1-04 (pre-refunded) Baa1/A+ 545,000
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 496,688
2,000,000 5.125%, 7-1-14, MBIA Insured Aaa/AAA 1,917,500
Cochise Co. Unified School
District No. 68 (Sierra
Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured Aaa/AAA 1,062,500
1,000,000 6.100%, 7-1-08, FGIC Insured Aaa/AAA 1,056,250
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 956,219
Coconino Co. Unified School
District No. 1 (Flagstaff),
2,000,000 5.500%, 7-1-09, AMBAC Insured Aaa/AAA 2,030,000
Coconino & Yavapai Unified
School District (Sedona),
1,000,000 5.900%, 7-1-07 NR/A- 1,032,500
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,042,500
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 531,875
1,580,000 6.000%, 7-1-07, FGIC Insured Aaa/AAA 1,643,200
Gila Co. Unified School District
No. 10 (Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 520,000
La Paz Co. Unified School
District No. 27 (Parker),
800,000 6.000%, 7-1-05 Baa/NR 825,000
Maricopa Co. Elementary School
District No. 1 (Phoenix),
250,000 5.800%, 7-1-10, FSA Insured Aaa/AAA 259,375
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 751,875
2,780,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 2,929,425
Maricopa Co. Unified School
District No. 4 (Mesa),
2,750,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,853,125
2,375,000 5.400%, 7-1-09, FSA Insured Aaa/AAA 2,410,625
750,000 5.650%, 7-1-11, FGIC Insured Aaa/AAA 768,750
<PAGE>
Maricopa Co. School District No.
8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,146,794
1,010,000 7.200%, 7-1-08 (pre-refunded) A1/NR 1,090,800
Maricopa Co. Unified School
District No. 11 (Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 595,625
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,137,500
Maricopa Co. Unified School
District No. 25 (Liberty),
750,000 7.500%, 7-1-05 Baa/NR 818,437
Maricopa Co. Elementary School
District No. 28 (Kyrene),
835,000 6.000%, 7-1-12,(pre-refunded) Aaa/AAA 895,538
Maricopa Elementary School
District No. 38 (Madison),
1,350,000 5.400%, 7-1-11, FGIC Insured Aaa/AAA 1,356,750
2,000,000 5.800%, 7-1-15, MBIA Insured Aaa/AAA 2,065,000
Maricopa Co. Unified School
District No. 41 (Gilbert),
1,750,000 6.250%, 7-1-15, FSA Insured Aaa/AAA 1,872,500
Maricopa Co. Unified School
District No. 48 (Scottsdale),
750,000 6.750%, 7-1-09 (pre-refunded) Aa/AA 825,938
1,000,000 5.000%, 7-1-14 Aa/AA 955,000
Maricopa Co. Elementary School
District No. 68 (Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured Aaa/AAA 1,451,812
1,000,000 5.100%, 7-1-11, AMBAC Insured Aaa/AAA 971,250
1,000,000 5.125%, 7-1-12, AMBAC Insured Aaa/AAA 975,000
Maricopa Co. Unified School
District No. 69 (Paradise
Valley),
3,250,000 7.000%, 7-1-07 A1/A+ 3,644,062
2,400,000 5.800%, 7-1-09, AMBAC Insured Aaa/AAA 2,556,000
1,000,000 5.300%, 7-1-11, MBIA Insured Aaa/AAA 1,001,250
Maricopa Co. Unified School
District No. 80 (Chandler),
715,000 5.800%, 7-1-09, FGIC Insured Aaa/AAA 747,175
Maricopa Co. Unified School
District No. 98 (Fountain
Hills),
1,000,000 5.750%, 7-1-12, AMBAC Insured Aaa/AAA 1,030,000
<PAGE>
Maricopa Co. High School
District No. 205 (Glendale
Union),
1,000,000 5.350%, 7-1-08 A1/AA- 1,018,750
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 1,010,000
2,000,000 5.700%, 7-1-14, FGIC Insured Aaa/AAA 2,050,000
Maricopa Co. High School
District No. 210 (Phoenix
Union),
2,000,000 6.750%, 7-1-04 (pre-refunded) Aa/AA 2,202,500
1,000,000 7.100%, 7-1-04 Aa/AA 1,145,000
2,000,000 6.200%, 7-1-06 Aa/AA 2,150,000
3,000,000 5.450%, 7-1-08 Aa/AA 3,075,000
2,000,000 5.700%, 7-1-15 Aa/AA 2,020,000
Maricopa Co. High School
District No. 213 (Tempe),
1,000,000 6.000%, 7-1-12, FGIC Insured Aaa/AAA 1,057,500
Maricopa Co. Unified School
District No. 214 (Tolleson),
1,075,000 5.000%, 7-1-10, FGIC Insured Aaa/AAA 1,045,437
Mesa, Arizona,
5,425,000 5.700%, 7-1-08, MBIA Insured Aaa/AAA 5,675,906
Mohave Co. Unified School
District No. 1 (Lake Havasu),
650,000 5.150%, 7-1-08, AMBAC Insured Aaa/AAA 650,812
1,000,000 5.375%, 7-1-12, AMBAC Insured Aaa/AAA 995,000
Navajo Co. Unified School
District No. 1 (Winslow),
1,000,000 5.200%, 7-1-08, AMBAC Insured Aaa/AAA 1,006,250
Navajo Co. Unified School
District No. 2 (Joseph City),
550,000 6.700%, 7-1-00 NR/BBB- 582,312
Navajo Co. Unified School
District No. 32 (Blue Ridge),
985,000 5.900%, 7-1-08, FSA Insured Aaa/AAA 1,042,869
640,000 5.800%, 7-1-14, FGIC Insured Aaa/AAA 660,000
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 Aaa/AA+ 1,207,700
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,371,750
900,000 5.600%, 7-1-11 Aa1/AA+ 922,500
1,500,000 5.100%, 7-1-13 Aa1/AA+ 1,460,625
1,000,000 6.250%, 7-1-16 Aa1/AA+ 1,102,500
2,000,000 5.000%, 7-1-19 Aa1/AA+ 1,900,000
<PAGE>
Pima Co. Unified School District
No. 1 (Tucson),
1,000,000 6.875%, 7-1-10, (pre-refunded) Aaa/AAA 1,107,500
2,000,000 6.100%, 7-1-11, FGIC Insured Aaa/AAA 2,097,500
Pima Co. Unified School District
No. 8 (Flowing Wells),
1,090,000 5.900%, 7-1-13 A/NR 1,121,337
Pima Co. Unified School District
No.12 (Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA 1,268,750
Pinal Co. Elementary School
District No. 4 (Casa Grande),
750,000 6.000%, 7-1-04, AMBAC Insured Aaa/AAA 802,500
Pinal Co. School District No. 8
(San Manuel),
1,000,000 6.800%, 7-1-10 NR/BBB 1,071,250
Pinal Co. Unified School District
No. 43 (Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,550,625
Pinal Co. High School District
No. 82 (Casa Grande),
1,500,000 5.375%, 7-1-09, AMBAC Insured Aaa/AAA 1,526,250
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 612,562
Prescott Valley Sewer Collection
Improvement District,
500,000 7.900%, 1-1-12 NR/BBB- 557,500
Santa Cruz Co. Unified School
District No. 1 (Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 456,500
1,000,000 5.800%, 7-1-13, FSA Insured Aaa/AAA 1,016,250
Scottsdale, Arizona,
1,250,000 6.000%, 7-1-14 Aa1/AA+ 1,296,875
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa/AA+ 1,015,000
1,450,000 6.000%, 7-1-10 Aa/AA+ 1,506,187
1,290,000 5.400%, 7-1-11 Aa/AA+ 1,304,512
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 523,750
2,000,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,370,175
2,500,000 5.750%, 7-1-20 Aa/AA 2,540,625
Yavapai Co. Unified School
District No. 28 (Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 538,750
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured Aaa/AAA 2,117,500
Total Arizona General
Obligation Bonds 115,958,378
<PAGE>
ARIZONA REVENUE BONDS (65.4%
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+ 2,840,145
1,210,000 7.875%, 7-1-14, AMT Aa/AA+ 1,251,104
565,000 6.400%, 7-1-12, AMT, MBIA
Insured Aaa/AAA 604,550
Tucson, Municipal Airport
Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 1,012,500
Total Arizona Airport Authority
Bonds 5,708,299
Basic Service Revenue Bonds
(13.2% of Net Assets)
Arizona Department of
Transportation Revenue Bonds,
1,400,000 5.100%, 7-1-11 Aa/AA 1,361,500
Casa Grande Excise Tax Revenue
Bonds,
365,000 6.000%, 4-1-10, FGIC Insured Aaa/AAA 380,512
Chandler Solid Waste System
Revenue Bonds,
525,000 5.375%, 7-1-16 A/A 502,031
Chandler Street & Highway User
Revenue Bonds,
1,000,000 5.500%, 7-1-16 A/A+ 978,750
Chandler Water & Sewer Revenue
Bonds,
2,015,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 2,143,456
Gilbert Water & Sewer Revenue
Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,712,500
Mesa Utility System Revenue
Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 3,975,000
2,750,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 2,715,625
Phoenix, Civic Improvement
Corp. Water System Revenue
Bonds,
4,200,000 5.500%, 7-1-10 Aa/AA- 4,242,000
1,885,000 5.000%, 7-1-13 A1/A 1,750,694
1,500,000 5.400%, 7-1-14 A1/AA- 1,464,375
1,250,000 5.000%, 7-1-18 A1/A 1,135,937
1,000,000 6.000%, 7-1-19 Aa/AA- 1,030,000
Phoenix, Street & Highway User
Revenue Bonds,
2,490,000 6.250%, 7-1-06 A1/AA 2,707,875
1,000,000 6.500%, 7-1-08,(pre-refunded) NR/AA 1,108,750
3,200,000 6.250%, 7-1-11 A1/AA 3,392,000
5,000,000 6.250%, 7-1-11 A/A+ 5,237,500
3,265,000 6.250%, 7-1-11 MBIA Insured Aaa/AAA 3,501,713
<PAGE>
Pima County, Sewer Revenue
Bonds,
1,350,000 6.750%, 7-1-15, FGIC Insured Aaa/AAA 1,464,750
Sedona Sewer Revenue Bonds,
2,600,000 8.750%, 7-1-10 (pre-refunded) NR/AAA 2,993,250
700,000 7.400%, 7-1-11 (pre-refunded) NR/AAA 783,125
1,055,000 7.000%, 7-1-12 NR/BBB 1,130,169
Sierra Vista, Street & Highway
Revenue Bonds,
500,000 6.400%, 7-1-03, AMBAC Insured Aaa/AAA 518,125
Tucson, Water System Revenue
Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 528,750
1,500,000 6.700%, 7-1-12 A1/A+ 1,621,875
2,245,000 5.750%, 7-1-18 A1/A+ 2,256,225
500,000 6.000%, 7-1-21, MBIA Insured Aaa/AAA 518,750
Total Basic Service Revenue
Bonds 52,155,237
Hospital Revenue Bonds (4.3%
of Net Assets)
Arizona Health Facilities (Northern
Arizona Healthcare System),
695,000 5.250%, 10-1-10, MBIA Insured Aaa/AAA 679,368
Arizona Health Facilities (St.
Luke's Health System),
3,175,000 7.250%, 11-1-14,(pre-refunded) Aaa/NR 3,599,656
Arizona Health Facilities
(Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured Aaa/AAA 2,500,000
Chandler Industrial Development
Authority (Ahwatukee Medical
Facility),
900,000 7.000%, 7-1-22 NR/NR* 885,375
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 1,167,250
Mesa Industrial Development
Authority (Western Health),
2,000,000 7.625%, 1-1-19, BIGI Insured Aaa/AAA 2,165,000
Mohave Co. Industrial
Development Authority
(Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,158,625
<PAGE>
Pima Co. Industrial Development
Authority (Tucson Medical
Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,067,500
400,000 7.000%, 4-1-14, MBIA Insured Aaa/AAA 406,300
500,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 473,125
Scottsdale Industrial
Development Authority
(Scottsdale Memorial Hospital),
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 2,025,000
1,000,000 6.125%, 9-1-17, AMBAC Insured# Aaa/AAA 1,011,250
Total Hospital Revenue Bonds 17,138,449
Lease Revenue Bonds (8.4% of Net
Assets)
Arizona Certificates of
Participation Lease Revenue
Bonds,
840,000 6.625%, 9-1-08, FSA Insured Aaa/AAA 911,400
2,000,000 6.500%, 3-1-08, FSA Insured Aaa/AAA 2,162,500
Arizona Municipal Finance
Program No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured Aaa/AAA 1,522,625
Arizona Municipal Finance
Program No. 34,
1,000,000 7.250%, 8-1-09, BIGI Insured Aaa/AAA 1,183,750
Avondale Municipal Facilities
Lease Revenue Bonds,
350,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 367,062
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,147,969
Bullhead City Municipal Property
Corp. Lease Revenue Bonds,
1,670,000 5.200%, 7-1-09, MBIA Insured Aaa/AAA 1,659,563
500,000 7.200%, 7-1-10, FGIC Insured Aaa/AAA 544,375
Glendale Municipal Property
Corp. Lease Revenue Bonds,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,061,250
Lake Havasu City Certificates
of Participation Lease
Revenue Bonds,
950,000 5.625%, 6-1-04, FGIC Insured Aaa/AAA 991,562
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 547,500
Maricopa Co. Certificates of
Participation Lease Revenue
Bonds,
1,000,000 6.000%, 6-1-04 Baa/BBB 1,033,750
Nogales Municipal Development
Authority Lease Revenue Bonds,
500,000 8.000%, 6-1-08, (pre-refunded) Aaa/AAA 532,500
<PAGE>
Oro Valley Municipal Property
Corp. Lease Revenue Bonds,
2,085,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,030,269
Phoenix Civic Improvement Lease
Revenue Bonds,
1,890,000 6.300%, 7-1-14 Aa/AA+ 2,008,125
1,500,000 6.000%, 7-1-14 Aa/AA+ 1,561,875
Pinal Co. Certificates of
Participation Lease Revenue
Bonds,
1,180,000 6.250%, 6-1-04 NR/AA 1,262,600
Prescott Municipal Property
Corp. Lease Revenue Bonds,
1,000,000 7.000%, 7-1-10 (pre-refunded) Aaa/AAA 1,077,500
Scottsdale Municipal Property
Corp. Lease Revenue Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,332,000
2,620,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 2,744,450
Tucson Certificate of
Participation Lease Revenue
Bonds,
525,000 5.700%, 7-1-02 NR/A- 528,937
1,000,000 6.375%, 7-1-09 Baa1/AA 1,063,750
Tucson Business Development
Finance Corp,
2,275,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 2,420,031
University of Arizona
Certificates of Participation
Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured Aaa/AAA 1,025,000
Yuma Municipal Property Corp.
Lease Revenue Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,352,106
Total Lease Revenue Bonds 33,072,449
Mortgage Revenue Bonds (3.8% of
Net Assets)
Maricopa Co. Industrial
Development Authority Single
Family Mortgage Revenue Bonds,
1,250,000 0.000%, 12-31-14 Aaa/AAA 437,500
Maricopa Co. Industrial
Development Authority
Multi-Family Mortgage Revenue
Bonds (Advantage Point
Project),
1,000,000 6.500%, 7-1-16 A/NR 1,007,500
Mohave Co. Industrial
Development Authority
(Chris Ridge Village),
1,040,000 6.250%, 11-1-16 NR/AAA 1,080,300
<PAGE>
Peoria Industrial Development
Authority (Casa Del Rio),
2,500,000 7.300%, 2-20-28 NR/AAA 2,712,500
Phoenix Industrial Development
Authority Single Family
Mortgage Revenue,
1,750,000 6.300%, 12-1-12, AMT NR/AAA 1,804,687
Pima Co. Industrial Development
Authority (Broadway Proper),
500,000 8.150%, 12-1-25 NR/A- 551,225
Pima Co. Industrial Development
Authority Single Family
Mortgage Revenue,
330,000 7.625%, 2-1-12 A/NR 344,850
1,015,000 6.500%, 2-1-17 A/NR 1,037,838
2,000,000 6.750%, 11-1-27, AMT NR/AAA 2,082,500
Scottsdale Industrial
Development Authority
(Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,270,912
500,000 10.000%, 6-1-17(pre-refunded) NR/NR* 527,735
Tempe Industrial Development
Authority (Friendship
Village),
1,500,000 6.500%, 12-1-08 NR/NR* 1,492,500
Tucson & Pima Co. Single Family
Mortgage Revenue Bonds,
2,000,000 0.000%, 12-1-14 Aaa/AAA 695,000
Total Mortgage Revenue Bonds 15,045,047
Pollution Control Revenue Bonds
(7.2% of Net Assets)
Casa Grande Industrial
Developement Authority (Frito
Lay) Revenue Bonds,
250,000 6.650%, 12-1-14 A1/NR 271,250
Gila Co. Pollution Control
(Asarco) Revenue Bonds,
3,900,000 8.900%, 7-1-06 Baa2/BBB 4,089,384
Gilbert Industrial Development
Authority Wastewater
Reclamation Facility Revenue
Bonds,
600,000 10.000%, 10-1-10 (pre-refunded) NR/NR* 719,250
Greenlee Co. Pollution Control
(Phelps Dodge) Revenue Bonds,
9,185,000 5.450%, 6-1-09 A2/A 9,207,962
<PAGE>
Mohave Co. Industrial Development
Authority (North Star Steel)
Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT Aa3/AA- 4,051,437
Navajo Co. Pollution Control
Revenue Bonds (Arizona
Public Service),
5,000,000 5.875%, 8-15-28, MBIA Insured Aaa/AAA 5,075,000
Pinal Co. Industrial Development
Authority Bonds (Browning
Ferris),
5,000,000 5.000%, 2-1-06, AMT A2/A 4,925,000
Total Pollution Control Revenue
Bonds 28,339,283
University Revenue Bonds
(10.5% of Net Assets)
Arizona Board of
Regents-Arizona State
University System Revenue
Bonds,
3,000,000 5.500%, 7-1-19 A1/AA 2,928,750
6,750,000 5.750%, 7-1-12 A1/AA 6,825,938
3,000,000 5.500%, 7-1-19 MBIA Insured Aaa/AAA 2,985,000
7,000,000 6.125%, 7-1-15 A1/AA 7,201,250
Arizona Board of
Regents-Northern Arizona
University System Revenue
Bonds,
500,000 9.900%, 6-1-98 A1/A+ 540,625
1,000,000 6.400%, 6-1-07, FGIC Insured Aaa/AAA 1,073,750
1,480,000 7.500%, 6-1-07 (pre-refunded) A1/A+ 1,592,850
3,150,000 5.800%, 6-1-08, AMBAC Insured Aaa/AAA 3,264,187
Arizona Board of
Regents-University of
Arizona System Revenue
Bonds,
2,750,000 6.250%, 6-1-11 A1/AA 2,897,813
3,000,000 7.000%, 6-1-15 (pre-refunded) A1/AA 3,303,750
Arizona Educational Loan Mktg
Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,036,250
450,000 7.000%, 3-1-05, AMT A/NR 475,312
1,720,000 5.700%, 12-1-08, AMT A/NR 1,715,700
Arizona Student Loan Revenue,
500,000 6.600%, 5-1-10 Aa/NR 527,500
East Valley Institute of
Technology,
820,000 6.000%, 7-1-05, AMBAC Insured Aaa/AAA 857,925
<PAGE>
Glendale Industrial Development
Authority
(American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 350,250
2,100,000 5.625%, 7-1-20, CONLEE Insured NR/AAA 2,076,375
Yavapai Co. Community College
District Revenue Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured Aaa/AAA 1,078,025
500,000 6.000%, 7-1-12 NR/A- 514,375
Total University Revenue Bonds 41,245,625
Utility Revenue Bonds (16.5% of
Net Assets)
Arizona Power Authority (Hoover
Dam Project) Revenue Bonds,
2,870,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA 2,941,750
8,500,000 5.375%, 10-1-13, MBIA
Insured## Aaa/AAA 8,372,500
2,425,000 5.250%, 10-1-17,MBIA Insured Aaa/AAA 2,318,906
Arizona Wastewater Management
Authority Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa/AA+ 1,876,375
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,249,300
Central Arizona Water
Conservation District Revenue
Bonds,
1,500,000 4.750%, 5-1-09, MBIA Insured Aaa/AAA 1,426,875
2,000,000 5.500%, 11-1-09 A1/AA- 2,052,500
1,000,000 5.500%, 11-1-10 A1/AA- 1,028,750
3,000,000 7.125%, 11-1-11 (pre-refunded) A1/AA- 3,345,000
2,000,000 6.500%, 11-1-11 (pre-refunded) A1/AA- 2,192,500
Maricopa Co. Industrial
Development Authority
(Citizens Utility),
1,000,000 6.875%, 9-1-03 AMT NR/AA+ 1,032,680
Mohave Co. Industrial Development
Authority (Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA+ 3,262,500
Pima Co. Industrial Development
Authority (Tucson Electric)
Revenue Bonds,
2,920,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 3,226,600
<PAGE>
Salt River Project Agricultural
Improvement and Power Revenue
Bonds,
4,500,000 6.200%, 1-1-12 Aa/AA 4,691,250
2,000,000 5.250%, 1-1-13 Aa/AA 1,952,500
650,000 6.000%, 1-1-13 Aa/AA 669,500
1,200,000 5.250%, 1-1-19 Aa/AA 1,143,000
8,500,000 6.250%, 1-1-19 Aa/AA 8,893,125
8,000,000 6.250%, 1-1-27 Aa/AA 7,288,750
3,230,000 5.750%, 1-1-19 Aa/AA 3,238,075
2,000,000 5.000%, 1-1-13 Aa/AA 1,897,500
Santa Cruz Industrial
Development Authority
(Citizens Utility),
1,020,000 7.150%, 2-1-23, AMT NR/AA+ 1,077,375
Total Utility Revenue Bonds 65,177,311
Total Arizona Revenue Bonds 257,881,700
PUERTO RICO BONDS (3.9% OF NET
ASSETS)
Puerto Rico General Obligation
Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,048,750
1,500,000 6.350%, 7-1-10 Baa1/A 1,597,500
2,300,000 6.000%, 7-1-14, MBIA Insured Aaa/AAA 2,394,875
2,035,000 6.450%, 7-1-17 Baa1/A 2,177,450
Puerto Rico Highway Authority
Revenue Bonds,
500,000 7.600%, 7-1-02 (pre-refunded) Baa1/A 561,250
2,750,000 5.500%, 7-1-26 Baa1/A 2,657,188
Puerto Rico Industrial, Medical
& Environmental Revenue Bonds,
3,500,000 6.250%, 11-15-13, (Pepsico) A1/A 3,745,000
1,000,000 7.600%, 5-1-14, (Warner
Lambert) NR/AA3 1,092,500
Total Puerto Rico Bonds 15,274,513
Total Investments (cost
$374,099,855**) 98.7% 389,114,591
Other assets in excess
of liabilities 1.3% 5,303,089
Net Assets 100.0% $ 394,417,680
<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 identical.
</FN>
</TABLE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost - $374,099,855) $ 389,114,591
Interest receivable 9,406,632
Receivable for Trust shares sold 271,865
Other assets 25,667
Total assets 398,818,755
LIABILITIES
Payable for investment securities purchased 3,371,726
Cash overdraft 495,720
Dividends payable 216,066
Distribution fees payable 160,710
Adviser and Administrator fees payable 133,521
Accrued expenses 23,332
Total liabilities 4,401,075
NET ASSETS $ 394,417,680
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 374,037
Additional paid-in capital 378,119,554
Accumulated net gain on investments 909,353
Net unrealized appreciation on investments 15,014,736
$ 394,417,680
CLASS A
Net Assets $ 394,402,168
Capital shares outstanding 37,402,215
Net asset value and redemption price per share $10.54
Offering price per share (100/96 of $10.54 adjusted
to nearest cent) $10.98
CLASS C
Net Assets $ 15,406
Capital shares outstanding 1,461
Net asset value and offering price per share $ 10.54
Redemption price per share (*varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 106
Capital shares outstanding 10
Net asset value, offering and redemption price per share $ 10.54
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 11,365,707
Expenses:
Investment Adviser fees (note B) $ 394,837
Administrator fees (note B) 394,837
Distribution fees (note B) 298,747
Transfer and shareholder servicing agent fees 136,000
Trustees' fees and expenses 42,000
Legal fees 38,000
Shareholders' meeting, reports, and proxy
statements 29,000
Registration fees and dues 18,000
Custodian fees (note F) 17,938
Audit and accounting fees 16,000
Insurance 3,000
Miscellaneous 28,037
1,416,396
Expenses paid indirectly (note F) (17,938)
Net expenses 1,398,458
Net investment income 9,967,249
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 1,140,835
Change in unrealized appreciation on
investments 5,269,214
Net realized and unrealized gain on investments 6,410,049
Net increase in net assets resulting from
operations $16,377,298
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
<S> <C> <C>
OPERATIONS:
Net investment income $ 9,967,249 $ 20,522,796
Net realized gain from securities
transactions 1,140,835 3,478,590
Change in unrealized appreciation on
investments 5,269,214 (3,409,293)
Change in net assets resulting from
operations 16,377,298 20,592,093
DISTRIBUTIONS TO SHAREHOLDERS (NOTE E):
Class A Shares:
Net investment income (9,985,040) (20,402,751)
Distributions in excess of net investment
income (242,323) -
Net realized gain on investments - -
Class C Shares:
Net investment income (144) (30)
Distributions in excess of net investment
income (5) -
Net realized gain on investments - -
Class Y Shares:
Net investment income (4) -
Distributions in excess of net investment
income - -
Net realized gain on investments - -
Change in net assets from distributions (10,227,516) (20,402,781)
CAPITAL SHARE TRANSACTIONS (NOTE G):
Proceeds from shares sold 15,405,615 40,514,488
Reinvested dividends and distributions 5,240,172 10,491,841
Cost of shares redeemed (21,466,677) (42,852,271)
Change in net assets from capital share
transactions (820,890) 8,154,058
Change in net assets 5,328,892 8,343,370
NET ASSETS:
Beginning of period 389,088,788 380,745,418
End of period $394,417,680 $ 389,088,788
</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 an annual service 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 is assessed to any Class
C shareholder who redeems shares of this Class within one year from the date
of purchase. The Class Y shares are only offered to institutions acting for
an investor in a fiduciary, advisory, agency, custodian or similar capacity.
They are not available to individual 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. All classes of shares
represent interests in the same portfolio of investments in the Trust and are
identical as to rights and privileges. They differ only with respect to the
effect of sales charges, the distribution and/or service fees borne by the
respective 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.
In Fiscal 1997, the Trust began amortizing bond premium using the
constant yield method. Accordingly, net unrealized appreciation and
additional paid-in capital have been adjusted by equal amounts at
the beginning of the year. This change had no effect on the Trust's
net asset value or distribution policy and conforms to the
amortization policy followed by the Trust for Federal tax purposes.
(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 premium and accretion of
original issue discount. Market discount is recognized upon
disposition of the security.
<PAGE>
(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.
(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
<PAGE>
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 six months ended December 31, 1996.
For the six months ended December 31, 1996, the Trust incurred fees under
the Advisory Agreement and Administration Agreement of $394,837 and $394,837,
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 six months ended December 31,
1996, the Distributor received sales commissions in the amount of $51,685.
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 ("Qualified Recipients")
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. 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 six months ended December 31, 1996, service fees on Class A
Shares amounted to $298,713, of which the Distributor received $8,616.
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 and for
the six months ended December 31, 1996, amounted to $25, of which the
Distributor received $25.
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 and for the six months ended
December 31, 1996, amounted to $9, of which the Distributor received $9.
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 six months ended December 31, 1996, purchases of securities
and proceeds from the sales of securities aggregated $37,487,206 and
$40,294,692, respectively.
At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost
amounted to $15,471,359 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over market value amounted
<PAGE>
to $456,623 for a net unrealized appreciation of $15,014,736.
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
December 31, 1996, the Trust had 3.9% of its total net assets invested in
eight 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, under some circumstances, 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 six months ended December 31, 1996, the
Trust's custodian fees amounted to $17,938, all of which was offset by such
credits. It is the general intention of the Trust to invest, to the extent
practicable, some or all of cash balances in income-producing assets rather
than leave cash on deposit with the custodian.
<PAGE>
NOTE G - CAPITAL SHARE TRANSACTIONS:
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1996 June 30, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 1,472,780 $15,395,616 3,904,052 $40,508,288
Reinvested dividends and
distributions 499,934 5,240,024 1,001,618 10,491,806
Cost of shares redeemed (2,051,965) (21,465,568) (4,132,065) (42,852,271)
Net change (79,251) $ (829,928) 773,605 $8,147,823
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 952 $10,000 587 $6,100
Reinvested dividends and
distributions 13 145 3 33
Cost of shares redeemed (95) (1,107) - -
Net change 870 $9,038 590 $6,133
<CAPTION>
Period Ended
June 30, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold - $- 10 $100
Reinvested dividends and
distributions - - - 2
Cost of shares redeemed - - - -
Net change - - 10 $102
<S> <C> <C> <C> <C>
Total transactions in Trust
shares (78,381) $ (820,890) 774,205 $8,154,058
<FN>
* From April 1, 1996 (date of inception) through June 30, 1996.
</FN>
</TABLE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
(UNAUDITED)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Six Months Class A (1)
Ended Year Ended June 30
Dec. 31, 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.38 $10.37 $10.16 $10.84 $10.36 $9.92
Income from Investment
Operations:
Net investment income 0.27 0.55 0.56 0.57 0.62 0.66
Net gain (loss) on
securities (both
realized and
unrealized) 0.17 0.01 0.21 (0.60) 0.54 0.43
Total from Investment
Operations 0.44 0.56 0.77 (0.03) 1.16 1.09
Less Distributions:
Dividends from net
investment income (0.28) (0.55) (0.56) (0.57) (0.62) (0.65)
Distributions from
capital gains - - - (0.08) (0.06) -
Total Distributions (0.28) (0.55) (0.56) (0.65) (0.68) (0.65)
Net Asset Value, End
of Period $10.54 $10.38 $10.37 $10.16 $10.84 $10.36
Total Return (not
reflecting sales
charge) (%) 4.25# 5.49 7.89 (0.38) 11.45 11.36
Ratios/Supplemental Data
Net Assets, End of
Period ($ thousands) 394,402 389,083 380,745 372,093 349,920 237,433
Ratio of Expenses to
Average Net Assets (%) 0.70* 0.72 0.74 0.70 0.65 0.57
Ratio of Net Investment
Income to Average Net
Assets (%) 5.06* 5.30 5.55 5.36 5.76 6.37
Portfolio Turnover
Rate (%) 9.65 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 Administrators 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>
Net Investment Income ($) 0.27 0.55 0.56 0.57 0.61 0.65
Ratio of Expenses to
Average Net Assets (%) 0.71* 0.73 0.74 0.71 0.73 0.70
Ratio of Net Investment
Income to Average Net
Assets (%) 5.05* 5.30 5.55 5.35 5.67 6.24
<FN>
(1) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
# Not annualized.
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Six Months Period(2) Six Months Period(2)
Ended Ended Ended Ended
Dec. 31, June 30, Dec. 31, June 30,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.38 $10.45 $10.38 $10.45
Income from Investment
Operations:
Net investment income 0.22 0.13 0.28 0.15
Net gain (loss) on
securities (both realized
and unrealized) 0.17 (0.07) 0.16 (0.07)
Total from Investment
Operations 0.39 0.06 0.44 0.08
Less Distributions:
Dividends from net
investment income (0.23) (0.13) (0.28) (0.15)
Distributions from capital
gains - - - -
Total Distributions (0.23) (0.13) (0.28) (0.15)
Net Asset Value, End of Period $10.54 $10.38 $10.54 $10.38
Total Return (not reflecting
sales charge) (%) 3.81# 0.57# 5.21# 0.76#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 15 6 0.1 0.1
Ratio of Expenses to Average
Net Assets (%) 1.54* 0.40# 0.54* 0.15#
Ratio of Net Investment
Income to Average Net
Assets (%) 4.25* 1.17# 5.21* 1.42#
Portfolio Turnover Rate (%) 9.65 27.37 9.65 27.37
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset in custodian fees for
uninvested cash balances would have been:
<S> <C> <C> <C> <C>
Net Investment Income ($) 0.22 0.04 0.28 0.15
Ratio of Expenses to Average
Net Assets (%) 1.55* 0.40# 0.55* 0.15#
Ratio of Net Investment Income
to Average Net Assets (%) 4.24* 1.17# 5.20* 1.42#
<FN>
(1) New Class of Shares established on April 1, 1996.
</FN>
<FN>
(2) From April 1, 1996 to June 30, 1996.
</FN>
<FN>
# Not annualized.
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT ON THE ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of the Tax-Free Trust of Arizona
(the "Trust") was held on October 28, 1996.* 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 233,506,702.16 affirmative votes
(98.33%); no more than 3,953,930.47 votes (1.67%) were withheld
for any Trustee), and
(ii) the ratification of the selection of KPMG Peat Marwick LLP as
the Trust's independent auditors for the fiscal year ending June
30, 1997 (votes for: 226,994,186.96 (95.59%); votes against:
755,311.06 (0.32%); abstentions: 9,711,134.65 (4.09%); broker
non-votes: 0 (0.00%)).
_______________________________________
*On the record date for the Annual Meeting, the holders of 37,512,699 Class A
Shares, 592 Class C Shares, and 10 Class Y Shares were outstanding and
entitled to vote representing a total net asset value of $396,515,589.49. The
holders of shares entitled to vote representing a total net asset value of
$237,460,632.63 (59.89%) were present in person or by proxy at the meeting.
