INVESTMENT ADVISER
BANC ONE INVESTMENT ADVISORS CORPORATION
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
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.
ANNUAL
REPORT
JUNE 30, 1997
A TAX-FREE INCOME INVESTMENT
(TAX-FREE TRUST OF ARIZONA EAGLE LOGO)
One of the
AQUILAsm Group of Funds
<PAGE>
(TAX-FREE TRUST OF ARIZONA EAGLE LOGO)
SERVING ARIZONA INVESTORS FOR OVER A DECADE
TAX-FREE TRUST OF ARIZONA
ANNUAL REPORT
"INCREASED SAFETY IN NUMBERS"
August 15, 1997
Dear Investor:
A childhood lesson that is often imparted generation after generation
is "don't wander off by yourself - stick with the crowd." The underlying
premise is that there is "safety in numbers."
The idea of increased safety in numbers is also very appropriate when
discussing municipal bond funds. In fact, one of the most significant
benefits gained by owning shares of a municipal bond mutual fund is that of
"numbers."
Participating in the ownership of many different issues through such
a fund is generally less risky than purchasing individual issues. Instead of
having your money ride on a handful of securities, you can spread the risk
over a larger number of issues. And, you have the advantage of a skilled and
knowledgeable portfolio manager selecting and continuously monitoring each
security in the portfolio.
But, how does the manager decide which security to purchase? After
all, you need to know the crowd with whom you're about to associate. Being
with a large unruly group could be far worse than being alone.
KNOWING THE TERRITORY
Shareholders of Tax-Free Trust of Arizona have the added advantage of
having a locally-based portfolio manager. Banc One Investment Advisors
Corporation, located in Phoenix, is well aware of the issues facing the state
as a whole, as well as the nuances of many of the cities and counties.
FINDING THE RIGHT MIX
Unfortunately, there is no foolproof test to follow when considering
an issue for purchase. Security selection is really more art than science. A
portfolio manager needs to look for a security which meets certain specific
criteria and which fits in with the overall mix of the portfolio and the
Trust's investment objective.
Among other things, Banc One Investment Advisors Corporation
carefully examines a security's yield, quality, maturity, and whether or not
its inclusion in the portfolio enhances overall diversification.
Keeping in mind the Trust's objective of providing as high a level of
current income as is consistent with preservation of capital, let's take a
look at each of these areas.
QUALITY
As you know, the Trust limits its investments to only those
securities in the top four credit ratings or equivalent. We have adopted this
policy since we have found from experience that high quality is best in the
long run. Of course, it is true that securities which possess a lower credit
rating generally produce a higher yield, since investors require compensation
for the additional potential
<PAGE>
risk. However, purchasing solely for yield can cause feelings of unease for
a risk adverse investor. Consequently, Tax-Free Trust of Arizona looks for
high quality securities which should produce relatively good yields.
Currently, 95.5% of the investment portfolio is in the top three credit
ratings - AAA, AA, AND A. Such high quality helps preserve shareholders'
capital and promotes stability.
MATURITY
The key here is to assemble a blend of maturities which offers a
reasonable level of DOUBLE TAX-FREE* return yet still avoids the problem
of excessive market price volatility. As you probably are aware, short-term
maturities tend to have very little price fluctuation, but generally produce
a substantially lesser rate of return than longer maturity securities.
Conversely, long-term maturities usually produce a higher return level, but
have a much higher price volatility factor than shorter-term issues since
they reflect the risks associated with potential interest rate changes over
the extended life of the municipal bond.
By creating a blend of maturities, 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.
The Trust utilizes a spread of maturities for the portfolio which
centers upon the relatively intermediate term average maturity of 15 years.
In constructing the portfolio, maturities of securities in the Trust range
from one year and under to over 20 years in length. However, in order to
achieve a reasonably high level of stability for the Trust's share value, in
good markets and bad and in up and down interest rate environments, the
focus has been to keep the average of maturities relatively limited in term.
DIVERSIFICATION
Having a breadth of participation in the portfolio helps to spread
risk and protect against any significant loss of principal in the event of
unforseen problems with any particular security.
Although Tax-Free Trust of Arizona is classified a "non-diversified"
fund under the Investment Company Act of 1940, the Trust does attempt to vary
its portfolio in several ways. First, there is the use of a number of issues.
At June 30, 1997, over 220 issues made up the Trust's portfolio, with no one
issue representing more than 3% of the Trust's net assets. Next, there is
investment among different types of municipal projects - universities, basic
services, utilities, health care, pollution control, etc. - so that there is
no undue concentration in any one type of municipal project. And, finally,
there is variety achieved through geographic representation throughout
various cities, counties, and communities within Arizona.
Such portfolio mixture by number of issues, by geographic
distribution, and by variety of projects lends itself to a further high level
of preservation and stability for your investment in the Trust.
HOW IS OUR "GROUP" DOING?
As you have seen, selecting investments for the Trust's portfolio is
really a balancing act. On one side, you have yield and, on the other, you
have risk. The Trust strives to construct a portfolio which keeps these two
opposing forces on an even keel - accepting a reasonable level of risk to
achieve a satisfactory return.
As mentioned, the Trust strives to provide shareholders with as high
a level of DOUBLE TAX-FREE income as practicable, commensurate with the
degree of capital preservation we strive to achieve.
Is our security selection process working well for us? We believe it
is.
<PAGE>
RATE OF RETURN
From July 1, 1996 through June 30, 1997, the Trust distributed to
shareholders a DOUBLE TAX-FREE income return, as measured against
the maximum public offering price, at the annualized rate
of approximately 4.99%**.
One would have to earn an annualized taxable return of 7.28% at the
28% tax bracket and the even higher return of 8.65% at the 39.6% tax bracket
in order to match the Trust's DOUBLE TAX-FREE rate. 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 and/or longer
maturity securities.
COMMITMENT TO CONSISTENCY
Management is committed to providing shareholders with as consistent
investment and overall performance results from Tax-Free Trust of Arizona as
are possible to achieve, considering prevailing market forces.
You should be aware, however, that although there is indeed increased
safety in numbers, we are not able to eliminate the fluctuations from 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 create a mix of securities which will help moderate
these forces.
OUR PLEDGE TO YOU
All associated with Tax-Free Trust of Arizona pledge to you our
continued diligence in the operation of the Trust for your benefit.
Your confidence in the Tax-Free Trust of Arizona is most valued and
appreciated.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
* A portion of dividend income may be subject to Federal and state
taxes, including the alternative minimum tax.
** 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 6/30/97 for the past one-year period was 3.09%; for the past five year
period was 5.42% and for the past 10-year period was 7.22%. As of 6/30/97,
the Trust's 30-day SEC yield was 4.43%.
<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, 1997, 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 36,000 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.
[Graphic of line chart with the following information:]
<TABLE>
<CAPTION>
Lehman Brothers Trust After Sales Cost of
Municipal Bond Index Charge and Expenses Living Index
<S> <C> <C> <C>
3/86 10,000 9,600 10,000
6/86 9,938 9,714 10,027
6/87 10,795 10,401 10,412
6/88 11,595 11,200 10,875
6/89 12,915 12,526 11,375
6/90 13,797 13,137 11,916
6/91 15,040 14,342 12,466
6/92 16,810 15,990 12,851
6/93 19,230 17,851 13,236
6/94 19,230 17,801 13,575
6/95 20,935 19,205 13,978
6/96 22,315 20,260 14,363
6/97 24,161 21,744 14,693
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
Trust's average annual total return
<TABLE>
<CAPTION>
For the Period Ended 1 5 10 Life of Trust
June 30, 1997 Year Years Years Since 3/13/86
<S> <C> <C> <C> <C>
Including Sales
Charge and Expenses 3.09% 5.42% 17.22% 7.11%
</TABLE>
<PAGE>
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.
PORTFOLIO MANAGER'S ANALYSIS
THE YEAR IN REVIEW
The fiscal year ended June 30, 1997, was a challenging one. However,
the Trust's June 30, 1996 ending net asset value for Class A Shares of $10.38
improved to $10.58 as of June 30, 1997.
During the year, here are some of the things that we had to contend
with:
Five days into the new fiscal year, the June, 1996 unemployment
reports showed surprising economic strength which, in turn, sent interest
rates higher and the Trust's net asset value lower. Possible action by the
Federal Reserve to raise interest rates had been anticipated. When this
didn't happen, the net asset value commenced to rise again. Then, of course,
we had to contend with the uncertainties of the Presidential elections and
what that would do to the markets. In March, 1997, the Federal Reserve did
increase interest rates by 0.25 of 1%. Many expected this increase would be
the first in a series of moves pushing rates higher. However, this never
occurred. Meanwhile cash flows into the Trust were of a relative minimal
nature as excessive exuberance continued in the equity markets.
Reviewing the fiscal year as a whole, the Trust's net asset value per
share ranged from a low of $10.22 in July, 1996 to a high of $10.64 in June,
1997. Dividend income on Class A Shares for the twelve months was $.55 per
share for a total return of 7.36% based on net asset value. This compared
favorably to the Lipper State Specific Intermediate Muni Universe twelve
month return of 6.41%, but lagged the Lipper Arizona Muni Index return of
7.81%. These index returns, of course, do not reflect operating expenses, as
is the case with the Trust.
THE YEAR AHEAD
Looking ahead, we expect similar economic conditions to what has
occurred over the past year. Moderate economic growth and stable inflation
should continue. This should create an accommodative environment for bonds.
Our challenge is to provide a solid total return while maintaining an
attractive income level for shareholders. Over the coming months we expect to
see a reduction in the supply of Arizona municipal bonds, as well as
municipal securities in general. If money should shift into the tax-exempt
market from the equity market, a supply crunch in tax-exempts could develop.
We would expect such a scenario to increase the value of outstanding Arizona
municipal bonds. Through it all, we will continue to diversify the Trust's
portfolio in quality issues throughout Arizona. Our emphasis remains to
provide you, our shareholders, with a high level of double tax-free income
with minimum volatility of the Trust's share price.
<PAGE>
(KPMG PEAT MARWICK LLP LOGO)
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, 1997, 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, 1997, 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, 1997, 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 8, 1997
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/ Value
AMOUNT S&P
<C> <S> <C>
ARIZONA GENERAL OBLIGATION BONDS
(32.6% of Net Assets)
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 1,084,012
1,000,000 6.100%, 1-1-12 Baa/NR 1,038,750
Chandler, Arizona,
500,000 7.100%, 7-1-04 (pre-refunded) A1/NR 538,125
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 492,750
2,000,000 5.125%, 7-1-14 MBIA Insured Aaa/AAA 1,947,500
Cochise Co. Unified School's
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 1,060,000
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 959,687
Coconino Co. Unified School's
District No. 1 (Flagstaff),
2,000,000 5.000%, 7-1-05, AMBAC Insured Aaa/AAA 2,027,500
2,000,000 5.500%, 7-1-09, AMBAC Insured# Aaa/AAA 2,042,500
Coconino & Yavapai Unified School's
District (Sedona),
1,000,000 5.900%, 7-1-07 NR/A- 1,036,250
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,040,000
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 530,000
1,580,000 6.000%, 7-1-07, FGIC Insured Aaa/AAA 1,639,250
1,000,000 5.000%, 7-1-12, FGIC Insured Aaa/AAA 971,250
Gila Co. Unified School's
District No. 10 (Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 521,875
Graham Co. Unified School District's
No. 4 (Thatcher),
400,000 5.000%, 7-1-10, FSA Insured AAA/NR 393,500
La Paz Co. Unified School's
District No. 27 (Parker),
800,000 6.000%, 7-1-05 Baa/NR 827,000
<PAGE>
Maricopa Co.Elementary School's
District No. 1 (Phoenix)
250,000 5.800%, 7-1-10, CGIC Insured Aaa/AAA 261,250
Maricopa Co. Elementary School's
District No. 3 (Tempe),
500,000 8.000%, 7-1-01 A1/AA 563,750
1,000,000 5.400%, 7-1-12, FGIC Insured Aaa/AAA 1,008,750
2,780,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 2,932,900
Maricopa Co. Unified School's
District No. 4 (Mesa),
2,750,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,860,000
2,150,000 5.400%, 7-1-09, FSA Insured Aaa/AAA 2,203,750
3,225,000 5.000%, 7-1-09, FGIC Insured Aaa/AAA 3,225,000
750,000 5.650%, 7-1-11, FGIC Insured Aaa/AAA 775,312
Maricopa Co. Schools
District No. 8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,139,500
Maricopa Co. Unified School's
District No. 9 (Wickenburg),
1,030,000 5.600%, 7-1-15, AMBAC Insured Aaa/AAA 1,044,163
Maricopa Co. Unified School's
District No. 11 (Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 586,875
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,152,500
Maricopa Co. Unified School's
District No. 25 (Liberty),
750,000 7.500%, 7-1-05 Baa/NR 811,875
Maricopa Co. Elementary School's
District No. 28 (Kyrene),
835,000 6.000%, 7-1-12, (pre-refunded) Aaa/AAA 892,406
1,125,000 6.000%, 7-1-14, FGIC Insured Aaa/AAA 1,172,812
Maricopa Elementary School's
District No. 38 (Madison),
1,350,000 5.400%, 7-1-11, FGIC Insured Aaa/AAA 1,365,188
2,000,000 5.800%, 7-1-15, MBIA Insured Aaa/AAA 2,062,500
Maricopa Co. Unified School's
District No. 41 (Gilbert),
1,750,000 6.250%, 7-1-15, FSA Insured Aaa/AAA 1,868,125
Maricopa Co. Unified School's
District No. 48 (Scottsdale),
750,000 6.750%, 7-1-09 (pre-refunded) Aa/AA 820,312
1,000,000 5.000%, 7-1-14 Aa/AA 962,500
<PAGE>
Maricopa Co. Elementary School's
District No. 68 (Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured Aaa/AAA 1,442,401
Maricopa Co. Unified School's
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 2,568,000
1,000,000 5.300%, 7-1-11, MBIA Insured Aaa/AAA 1,013,750
Maricopa Co. Unified School's
District No. 80 (Chandler),
715,000 5.800%, 7-1-09, FGIC Insured Aaa/AAA 751,644
Maricopa Co. Unified School's
District No. 98 (Fountain Hills),
1,000,000 5.750%, 7-1-12, Ambac Insured Aaa/AAA 1,037,500
Maricopa Co. High School's
District No. 205 (Glendale Union),
1,000,000 5.350%, 7-1-08 A1/AA- 1,025,000
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 1,017,500
5,000,000 5.700%, 7-1-14, FGIC Insured Aaa/AAA 5,125,000
Maricopa Co. High School's
District No. 210 (Phoenix Union),
2,000,000 6.750%, 7-1-04 (pre-refunded) Aa3/AA 2,187,500
1,000,000 7.100%, 7-1-04 Aa3/AA 1,133,750
2,000,000 6.200%, 7-1-06 Aa3/AA 2,145,000
3,000,000 5.450%, 7-1-08 Aa3/AA 3,093,750
1,000,000 5.375%, 7-1-13 Aa3/AA 997,500
2,000,000 5.700%, 7-1-15 Aa3/AA 2,042,500
2,500,000 5.500%, 7-1-17 Aa3/AA 2,484,375
Maricopa Co. High School's
District No. 213 (Tempe),
1,000,000 6.000%, 7-1-12, FGIC Insured Aaa/AAA 1,061,250
Maricopa Co. Unified School's
District No. 214 (Tolleson),
1,075,000 5.000%, 7-1-10, FGIC Insured Aaa/AAA 1,053,500
<PAGE>
Mesa, Arizona,
5,425,000 5.700%, 7-1-08, MBIA Insured Aaa/AAA 5,696,250
Mohave Co. Unified School's
District No. 1 (Lake Havasu),
1,000,000 5.375%, 7-1-12, AMBAC Insured Aaa/AAA 1,006,250
Navajo Co. Unified School's
District No. 1 (Winslow),
1,000,000 5.200%, 7-1-08, AMBAC Insured Aaa/AAA 1,013,750
Navajo Co. Unified School's
District No. 2 (Joseph City),
550,000 6.700%, 7-1-00 NR/NR* 578,188
Navajo Co. Unified School's
District No. 32 (Blue Ridge),
985,000 5.900%, 7-1-08, CGIC Insured Aaa/AAA 1,047,794
640,000 5.800%, 7-1-14, FGIC Insured Aaa/AAA 662,400
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 AAA/AA 1,198,600
900,000 5.600%, 7-1-11 Aa1/AA+ 924,750
1,000,000 6.250%, 7-1-16 Aa1/AA+ 1,115,000
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,387,250
4,165,000 5.000%, 7-1-19 Aa1/AA+ 3,930,719
Pima Co. Unified Schools
District No. 1 (Tucson),
1,000,000 6.875%, 7-1-10, (pre-refunded) Aaa/AAA 1,100,000
2,000,000 6.100%, 7-1-11, FGIC Insured Aaa/AAA 2,120,000
Pima Co. Unified School's
District No. 8 (Flowing Wells),
1,090,000 5.900%, 7-1-13, A/NR 1,126,788
Pima Co. Unified School's
District No. 12 (Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA 1,278,125
Pinal Co. Elementary School's
District No. 4 (Casa Grande),
750,000 6.000%, 7-1-04, AMBAC Insured Aaa/AAA 800,625
Pinal Co. Unified School's
District No. 43 (Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,556,250
<PAGE>
Pinal Co. High School's
District No.82 (Casa Grande),
1,500,000 5.375%, 7-1-09, AMBAC Insured Aaa/AAA 1,539,375
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 620,125
Prescott Valley Sewer Collection's
Improvement District,
500,000 7.900%, 1-1-12 NR/BBB- 557,500
Santa Cruz Co. Unified School's
District No.1 (Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 452,000
Scottsdale, Arizona,
1,250,000 6.000%, 7-1-14 Aa1/AA+ 1,298,438
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa1/AA+ 1,021,250
1,450,000 6.000%, 7-1-10 Aa1/AA+ 1,511,625
1,290,000 5.400%, 7-1-11 Aa1/AA+ 1,320,637
830,000 5.400%, 7-1-11 Aa1/AA+ 839,338
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 526,250
2,260,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,389,950
2,500,000 5.750%, 7-1-20 Aa3/AA 2,534,375
Yavapai Co. Unified School's
District No. 22 (Humboldt),
575,000 5.400%, 7-1-14, FGIC Insured Aaa/AAA 574,281
Yavapai Co. Unified School's
District No. 28 (Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 541,875
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured Aaa/AAA 2,122,500
Total Arizona General Obligation Bonds 127,892,844
<PAGE>
ARIZONA REVENUE BONDS (65.4% OF NET ASSETS)
Airport Revenue Bonds (1.4% of Net Assets)
Phoenix, Municipal Airport Authority,
2,750,000 7.800%, 7-1-11, AMT Aa/AA+ 2,841,190
1,210,000 7.875%, 7-1-14, AMT Aa/AA+ 1,251,467
565,000 6.400%, 7-1-12, AMT, MBIA Insured Aaa/AAA 608,787
Tucson, Municipal Airport Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 1,016,250
Total Airport Revenue Bonds 5,717,694
BASIC SERVICE REVENUE BONDS
(14.3% of Net Assets)
Arizona Department of
Transportation Revenue Bonds,
1,400,000 5.100%, 7-1-11 Aa/AA 1,370,250
Casa Grande Excise Tax Revenue Bonds,
365,000 6.000%, 4-1-10, FGIC Insured Aaa/AAA 381,881
Chandler Street & Highway User
Revenue Bonds,
1,300,000 5.400%, 7-1-13, FGIC Insured Aaa/AAA 1,295,125
1,000,000 5.500%, 7-1-16 A2/A+ 980,000
Chandler Water & Sewer Revenue Bonds,
2,015,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 2,145,975
Gilbert Water & Sewer Revenue Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,725,000
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 4,025,000
2,750,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 2,743,125
Phoenix, Civic Improvement Corp.
Water System Revenue Bonds,
4,200,000 5.500%, 7-1-10 Aa/AA- 4,273,500
1,885,000 5.000%, 7-1-13 Aa3/A 1,786,038
1,500,000 5.400%, 7-1-14 Aa/AA- 1,473,750
1,250,000 5.000%, 7-1-18 Aa3/A 1,146,875
2,000,000 6.000%, 7-1-19 Aa/AA- 2,055,000
<PAGE>
Phoenix, Street & Highway User
Revenue Bonds,
2,490,000 6.250%, 7-1-06 A1/AA 2,695,425
1,000,000 6.500%, 7-1-08, (pre-refunded) NR/AA 1,103,750
3,200,000 6.250%, 7-1-11 NR/AA 3,416,000
5,000,000 6.250%, 7-1-11 A/A+ 5,275,000
3,265,000 6.250%, 7-1-11 MBIA Insured Aaa/AAA 3,473,144
Pima County, Sewer Revenue Bonds,
1,350,000 6.750%, 7-1-15 FGIC Insured Aaa/AAA 1,459,688
Scottsdale Preserve Authority
Excise Tax Revenue Bonds,
1,890,000 5.625%, 7-1-18, FGIC Insured Aaa/AAA 1,897,087
Sedona Sewer Revenue Bonds,
2,600,000 8.750%, 7-1-10 (pre-refunded) NR/AAA 2,944,500
700,000 7.400%, 7-1-11 (pre-refunded) NR/AAA 772,625
1,055,000 7.000%, 7-1-12 NR/BBB 1,128,850
Sierra Vista, Street & Highway Revenue Bonds,
500,000 6.400%, 7-1-03 AMBAC Insured Aaa/AAA 514,200
Tucson, Water System Revenue Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 526,875
1,500,000 6.700%, 7-1-12 A1/A+ 1,614,375
2,245,000 5.750%, 7-1-18 A1/A+ 2,253,419
500,000 6.000%, 7-1-21, MBIA Insured Aaa/AAA 521,250
Total Basic Service Revenue Bonds 55,997,707
Hospital Revenue Bonds (5.2% of Net Assets)
Arizona Health Facilities
(Northern Arizona Healthcare System),
1,000,000 5.250%, 10-1-16, MBIA Insured Aaa/AAA 971,250
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 2,506,250
<PAGE>
Chandler Industrial Development
Authority (Ahwatukee Medical Facility),
900,000 7.000%, 7-1-22 NR/NR* 896,625
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 1,190,087
Mesa Industrial Development Authority
(Western Health),
2,000,000 7.625%, 1-1-19, BIGI Insured Aaa/AAA 2,132,500
Mohave Co. Industrial Development
Authority (Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,164,375
Phoenix Industrial Development
Authority (John C. Lincoln Hospital),
1,070,000 5.500%, 12-1-13, FSA Insured Aaa/AAA 1,072,675
Pima Co. Industrial Development
Authority (Tucson Medical Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,070,000
500,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 475,000
Pima Co. Industrial Development
Authority (Healthpartners),
1,000,000 5.625%, 4-1-14, MBIA Insured Aaa/AAA 1,013,750
Scottsdale Industrial Development
Authority (Scottsdale Memorial Hospital),
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 2,045,000
1,000,000 6.125%, 9-1-17, AMBAC Insured Aaa/AAA 1,061,250
Yavapai Co. Industrial Development
Authority (Yavapai Regional
Medical Center),
1,130,000 5.125%, 12-1-13, FSA Insured Aaa/AAA 1,091,862
Total Hospital Revenue Bonds 20,290,280
<PAGE>
Lease Revenue Bonds (8.3% 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 1,574,625
Arizona Municipal Finance Program No. 34,
1,000,000 7.250%, 8-1-09, BIGI Insured Aaa/AAA 1,192,500
Avondale Municipal Facilities
Lease Revenue Bonds,
350,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 364,290
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,155,375
Bullhead City Municipal
Property Corp. Lease Rev.,
1,670,000 5.200%, 7-1-09, MBIA Insured Aaa/AAA 1,690,875
500,000 7.200%, 7-1-10, (pre-refunded) Aaa/AAA 545,625
Glendale Municipal Property Corp.
Lease Revenue Bonds, MBIA Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,053,750
Lake Havasu City Certificates of
Participation Lease Revenue Bonds,
950,000 5.625%, 6-1-04, FGIC Insured Aaa/AAA 992,750
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 543,750
Maricopa Co. Certificates of
Participation Lease Revenue Bonds,
1,000,000 6.000%, 6-1-04 Baa1/BBB 1,035,000
Nogales Municipal Development
Authority Lease Revenue Bonds,
500,000 8.000%, 6-1-08, (pre-refunded) Aaa/AAA 523,620
Oro Valley Municipal Property Corp.
Lease Revenue Bonds,
2,085,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,038,087
<PAGE>
Phoenix Civic Improvement Revenue Bonds,
1,890,000 6.300%, 7-1-14 Aa/AA+ 2,010,487
1,500,000 6.000%, 7-1-14 Aa/AA+ 1,565,625
Pinal Co. Certificates of Participation
Lease Revenue Bonds,
1,180,000 6.250%, 6-1-04 NR/AA 1,259,650
Prescott Municipal Property Corp.
Lease Revenue Bonds,
1,000,000 7.000%, 7-1-10 (pre-refunded) Aaa/AAA 1,063,750
Scottsdale Municipal Property Corp.
Lease Revenue Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,343,000
2,620,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 2,747,725
Tucson Certificate of Participation
Lease Revenue Bonds,
1,000,000 6.375%, 7-1-09 Baa1/AA 1,066,250
Tucson Business Development Finance Corp.,
2,275,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 2,428,562
University of Arizona Certificates
of Participation Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured Aaa/AAA 1,033,750
Yuma Municipal Property Corp.
Lease Revenue Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,365,956
Total Lease Revenue Bonds 32,668,902
MORTGAGE REVENUE BONDS (4.3% OF NET ASSETS)
Maricopa Co. Industrial Development
Authority Single Family Mortgage Revenue
Bonds,
1,250,000 0.000%, 12-31-14 Aaa/AAA 473,438
Maricopa Co. Industrial Development
Authority Multi-Family Mortgage
Revenue Bonds (Advantage Point Project),
1,000,000 6.500%, 7-1-16 NR/A 1,038,750
<PAGE>
Mohave Co. Industrial Development
Authority (Chris Ridge Village),
1,040,000 6.250%, 11-1-16 NR/AAA 1,089,400
Peoria Industrial Development
Authority (Casa Del Rio),
2,500,000 7.300%, 2-20-28 NR/AAA 2,728,125
Phoenix Industrial Development
Authority Single Family Mortgage Revenue,
1,680,000 6.300%, 12-1-12, AMT NR/AAA 1,747,200
Pima Co. Industrial Development
Authority (Broadway Proper),
500,000 8.150%, 12-1-25 NR/AA- 549,115
Pima Co. Industrial Development
Authority Single Family Mortgage Revenue,
310,000 7.625%, 2-1-12 A/NR 324,725
935,000 6.500%, 2-1-17 A/NR 965,387
1,335,000 6.750%, 11-1-27, AMT NR/AAA 1,400,081
2,000,000 6.250%, 11-1-29, AMT NR/AAA 2,133,700
Scottsdale Industrial Development
Authority (Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,300,537
Tempe Industrial Development
Authority (Friendship Village),
1,500,000 6.500%, 12-1-08 NR/NR* 1,507,500
Tucson & Pima Co. Single Family
Mortgage Revenue Bonds,
4,000,000 0.000%, 12-1-14 Aaa/AAA 1,495,000
Total Mortgage Revenue Bonds 16,752,958
Pollution Control Revenue Bonds
(7.5% of Net Assets)
Casa Grande Industrial Development
Authority (Frito Lay) Revenue Bonds,
250,000 6.650%, 12-1-14 A1/NR 271,250
<PAGE>
Gila Co. Pollution Control (Asarco)
Revenue Bonds,
3,900,000 8.900%, 7-1-06 Baa2/BBB 4,031,625
Gilbert Industrial Development
Authority Wastewater Reclamation
Facility Revenue Bonds,
600,000 10.000%, 10-1-10 (pre-refunded) NR/NR* 705,750
1,000,000 6.875%, 4-1-14 NR/NR* 1,005,000
Greenlee Co. Pollution Control
(Phelps Dodge) Revenue Bonds,
9,000,000 5.450%, 6-1-09 A2/A 9,090,000
Mohave Co. Industrial Development
Authority (North Star Steel) Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT NR/AA- 4,103,312
Navajo Co. Pollution Control
Revenue Bonds (Arizona Public Service),
5,000,000 5.875%, 8-15-28, MBIA Insured Aaa/AAA 5,081,250
Pinal Co. Industrial Development
Authority Bonds (Browning Ferris),
5,000,000 5.000%, 2-1-06, AMT A3/A 4,956,250
Total Pollution Control Revenue Bonds 29,244,437
University Revenue Bonds (8.7% of Net Assets)
Arizona Board of Regents-Arizona
State University System Revenue Bonds,
1,000,000 5.500%, 7-1-19 A1/AA 995,000
6,750,000 5.750%, 7-1-12 A1/AA 6,859,687
3,000,000 5.500%, 7-1-19 MBIA Insured Aaa/AAA 2,996,250
7,000,000 6.125%, 7-1-15 A1/AA 7,210,000
Arizona Board of Regents-Northern
Arizona University System Revenue Bonds,
500,000 9.900%, 6-1-98 A2/A+ 526,055
1,480,000 7.500%, 6-1-07 (pre-refunded) Aaa/NR 1,570,650
3,150,000 5.800%, 6-1-08, AMBAC Insured Aaa/AAA 3,291,750
<PAGE>
Arizona Board of Regents-University
of Arizona System Revenue Bonds,
2,750,000 6.250%, 6-1-11 A1/AA 2,897,813
Arizona Educational Loan Mktg Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,035,000
450,000 7.000%, 3-1-05, AMT A/NR 480,937
1,720,000 5.700%, 12-1-08, AMT A/NR 1,726,450
Arizona Student Loan Revenue,
500,000 6.600%, 5-1-10 Aa/NR 533,125
Glendale Industrial Development
Authority (American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 349,875
2,100,000 5.625%, 7-1-20, CONLEE Insured NR/AAA 2,084,250
Yavapai Co. Community College
District Revenue Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured Aaa/AAA 1,084,712
500,000 6.000%, 7-1-12 NR/A- 515,625
Total University Revenue Bonds 34,157,179
Utility Revenue Bonds (15.7% of Net Assets)
Arizona Power Authority (Hoover
Dam Project) Revenue Bonds,
2,720,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA 2,801,600
8,500,000 5.375%, 10-1-13, MBIA Insured## Aaa/AAA 8,436,251
2,425,000 5.250%, 10-1-17, MBIA Insured Aaa/AAA 2,328,000
Arizona Wastewater Management
Authority Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa1/AA+ 1,870,000
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,252,400
<PAGE>
Central Arizona Water Conservation
District Revenue Bonds,
1,500,000 4.750%, 5-1-09, MBIA Insured Aaa/AAA 1,453,125
2,000,000 5.500%, 11-1-09 A1/AA- 2,067,500
1,000,000 5.500%, 11-1-10 A1/AA- 1,025,000
3,000,000 7.125%, 11-1-11 (pre-refunded) NR/AA- 3,307,500
3,150,000 6.500%, 11-1-11 (pre-refunded) A1/AA- 3,433,501
Maricopa Co. Industrial Development
Authority (Citizens Utility),
1,000,000 6.875%, 9-1-03 AMT NR/AA+ 1,023,180
Mohave Co. Industrial Development
Authority (Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA+ 3,210,000
Pima Co. Industrial Development
Authority (Tucson Electric)
Revenue Bonds,
2,910,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 3,222,826
Salt River Project Agricultural
Improvement and Power Revenue Bonds,
4,485,000 6.200%, 1-1-12 Aa/AA 4,720,463
650,000 6.000%, 1-1-13 Aa/AA 675,189
1,200,000 5.250%, 1-1-19 Aa/AA 1,150,500
8,500,000 6.250%, 1-1-19 Aa/AA 8,893,125
7,000,000 6.250%, 1-1-27 Aa/AA 7,297,500
2,500,000 5.000%, 1-1-13 Aa/AA 2,396,875
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 61,638,085
Total Arizona Revenue Bonds 256,467,242
<PAGE>
Puerto Rico General Obligation Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,051,250
1,500,000 6.350%, 7-1-10 Baa1/A 1,605,000
2,035,000 6.450%, 7-1-17 Baa1/A 2,190,169
PUERTO RICO BONDS (2.5% OF NET ASSETS)
Puerto Rico Industrial, Medical
& Environmental Revenue Bonds,
3,500,000 6.250%, 11-15-13, (Pepsico) A1/A 3,749,375
1,000,000 7.600%, 5-1-14, (Warner Lambert) Aa3/NR 1,081,250
Total Puerto Rico Bonds 9,677,044
Total Investments (cost $378,138,834**) 100.5% 394,037,130
Liabilities in excess of other assets (0.5) (2,100,361)
Net Assets 100.0% 391,936,769
<FN> * Any security not rated has been 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>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost $378,138,834) $ 394,037,130
Interest receivable 9,098,370
Receivable for Trust shares sold 639,424
Other assets 10,800
Total assets 403,785,724
LIABILITIES
Payable for investment securities purchased 10,326,580
Cash overdraft 770,437
Payable for Trust shares redeemed 244,171
Dividends payable 162,691
Distribution fees payable 145,603
Adviser and Administrator fees payable 128,745
Accrued expenses 70,728
Total liabilities 11,848,955
NET ASSETS 391,936,769
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share 370,581
Additional paid-in capital 375,579,660
Accumulated net gain on investments 88,232
Net unrealized appreciation on investments 15,898,296
391,936,769
CLASS A
Net Assets 391,736,789
Capital shares outstanding 37,039,255
Net asset value and redemption price per share $ 10.58
Offering price per share (100/96 of $10.58 adjusted to
nearest cent) $ 11.02
CLASS C
Net Assets 199,870
Capital shares outstanding 18,854
Net asset value and offering price per share 10.60
Redemption price per share (*varies by length of time
shares are held) *
CLASS Y
Net Assets $ 110
Capital shares outstanding 10
Net asset value, offering and redemption price per share 10.59
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income 22,541,272
Expenses:
Investment Adviser fees (note 3) $ 782,451
Administrator fees (note 3) 782,451
Distribution and service fees (note 3) 589,811
Transfer and shareholder servicing agent fees 259,880
Trustees' fees and expenses (note 8) 88,816
Legal fees 80,934
Shareholders' meeting, reports, and proxy
statements 63,112
Custodian fees (note 7) 44,553
Registration fees and dues 41,360
Audit and accounting fees 37,947
Insurance 7,059
Miscellaneous 72,777
2,851,151
Expenses paid indirectly (note 7) (34,294)
Net expenses 2,816,857
Net investment income 19,724,415
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 1,605,406
Change in unrealized appreciation on investments 6,149,411
Net realized and unrealized gain on investments 7,754,817
Net increase in net assets resulting from operations $ 27,479,232
</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,
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,724,415 $ 20,522,796
Net realized gain from securities
transactions 1,605,406 3,478,590
Change in unrealized appreciation on
investments 6,149,411 (3,409,293)
Change in net assets resulting from
operations 27,479,232 20,592,093
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income (20,215,578) (20,402,751)
Distributions in excess of net investment
income - -
Net realized gain on investments - -
Class C Shares:
Net investment income (1,847) (30)
Distributions in excess of net investment
income - -
Net realized gain on investments - -
Class Y Shares:
Net investment income (7) -
Distributions in excess of net investment
income - -
Net realized gain on investments - -
Change in net assets from distributions (20,217,432) (20,402,781)
CAPITAL SHARE TRANSACTIONS (NOTE 9):
Proceeds from shares sold 34,306,885 40,514,488
Reinvested dividends and distributions 10,454,421 10,491,841
Cost of shares redeemed (49,175,125) (42,852,271)
Change in net assets from capital share
transactions (4,413,819) 8,154,058
Change in net assets 2,847,981 8,343,370
NET ASSETS:
Beginning of period 389,088,788 380,745,418
End of period $391,936,769 $ 389,088,788
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
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 of 1% 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.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
a) Portfolio valuation: Municipal securities which have
remaining maturities of more than 60 days are valued each
business day based upon information provided by a nationally prominent
independent pricing service and periodically verified through other pricing
services; in the case of securities for which market quotations are readily
available, securities are valued 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.
<PAGE>
b) Securities transactions and related investment
income: Securities transactions are recorded on the trade date.
Realized gains and losses from securities transactions are reported on the
identified cost basis. Interest income is recorded daily on the accrual basis
and is adjusted for amortization of premium and accretion of original issue
discount. Market discount is recognized upon disposition of the security.
c) 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.
d) 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.
e) Reclassification of Components of Net Assets:
Pursuant to AICPA Statement of Position 93-2 (Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies), book and tax
differences amounting to $563, 277 have been reclassified from accumulated
net gain in investments to overdistributed net investment income and
additional paid-in capital. These reclassifications had no effect on net
assets.
f) 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.
3. FEES AND RELATED PARTY TRANSACTIONS
a) Management Arrangements:
Management affairs of the Trust are conducted through two separate
management arrangements.
Banc One Investment Advisors Corporation, (the "Adviser"), a subsidiary
of BANC ONE CORPORATION ("Banc One"), became Investment Adviser to the Trust
on March 13, 1997 pursuant to the transfer to it of the Trust's investment
advisory agreement from another Banc One subsidiary, Banc One Arizona, NA.
Thus, Banc One, through its subsidiaries or predecessors, has provided
investment management services to the Trust since its inception 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.
<PAGE>
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, 1997.
For the year ended June 30, 1997, the Trust incurred fees under the
Advisory Agreement and Administration Agreement of $782,451 and $782,451,
respectively.
b) Distribution and Service Fees:
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 year ended June 30, 1997, service fees on Class A Shares
amounted to $589,361, of which the Distributor received $17,669.
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
<PAGE>
the annual rate of 0.75% of the Trust's net assets represented by Class C
Shares and for the year ended June 30, 1997, amounted to $337, of which the
Distributor received $337.
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 year ended June 30,
1997, amounted to $113, of which the Distributor received $113.
Specific details about the Plans are more fully defined in the Trust's
Prospectus and Statement of Additional Information.
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, 1997, the
Distributor received sales commissions in the amount of $77,956.
4. PURCHASES AND SALES OF SECURITIES
During the year ended June 30, 1997, purchases of securities and proceeds
from the sales of securities aggregated $78,478,207 and $77,568,247
respectively.
At June 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $16,001,988 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to
$103,692 for a net unrealized appreciation of $15,898,296.
5. 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, 1997, the Trust had 2.5% of its total net assets invested in five
Puerto Rico municipal issues.
<PAGE>
6. 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.
7. EXPENSES
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, 1997, the Trust's
custodian fees amounted to $44,553 of which $34,294 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.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were eight Trustees. Trustees' fees paid
during the year were at the annual rate of $7,000 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, 1997 such reimbursements
averaged approximately $4,000 per Trustee. Two of the Trustees, who are
affiliated with the Administrator, are not paid any Trustee fees.
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1997 June 30, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 3,253,601 $ 34,112,971 3,904,052 $ 40,508,288
Reinvested distributions 997,339 10,453,094 1,001,618 10,491,806
Cost of shares redeemed (4,693,152) (49,172,125) (4,132,065) (42,852,271)
Net change (442,212) (4,606,060) 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 18,424 193,914 587 6,100
Reinvested distributions 124 1,321 3 33
Cost of shares redeemed (284) (3,000) - -
Net change 18,264 192,235 590 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 distributions 1 6 - 2
Cost of shares redeemed - - - -
Net change 1 6 10 102
Total transactions
in Trust Shares (423,947) $ (4,413,819) 774,205 $ 8,154,058
<FN> * From April 1, 1996 (date of inception) through June 30, 1996. </FN>
</TABLE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class A(1)
Year Ended June 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.38 $10.37 $10.16 $10.84 $10.36
Income from Investment
Operations:
Net investment income 0.53 0.55 0.56 0.57 0.62
Net gain (loss) on securities
(both realized and unrealized) 0.22 0.01 0.21 (0.60) 0.54
Total from Investment Operations 0.75 0.56 0.77 (0.03) 1.16
Less Distributions (note 6):
Dividends from net investment
income (0.55) (0.55) (0.56) (0.57) (0.62)
Distributions from capital
gains - - - (0.08) (0.06)
Total Distributions (0.55) (0.55) (0.56) (0.65) (0.68)
Net Asset Value, End of Period $10.58 $10.38 $10.37 $10.16 $10.84
Total Return (not reflecting
sales charge) (%) 7.36 5.49 7.89 (0.38) 11.45
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 391,737 389,083 380,745 372,093 349,920
Ratio of Expenses to Average
Net Assets (%) 0.72 0.72 0.74 0.70 0.65
Ratio of Net Investment Income
to Average Net Assets (%) 5.03 5.30 5.55 5.36 5.76
Portfolio Turnover Rate (%) 19.98 27.37 34.44 31.20 18.78
<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>
Net Investment Income ($) 0.52 0.55 0.56 0.57 0.61
Ratio of Expenses to Average
Net Assets (%) 0.73 0.73 0.74 0.71 0.73
Ratio of Net Investment
Income to Average Net Assets
(%) 5.02 5.30 5.55 5.35 5.67
<FN> (1) Designated as Class A Shares on April 1, 1996. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Period(2) Year Period(2)
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 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 0.44 0.13 0.70 0.15
Net gain (loss) on securities
(both realized and unrealized) 0.23 (0.07) 0.21 (0.07)
Total from Investment Operations 0.67 0.06 0.91 0.08
Less Distributions (note 6):
Dividends from net investment
income (0.45) (0.13) (0.70) (0.15)
Distributions from capital gains - - - -
Total Distributions (0.45) (0.13) (0.70) (0.15)
Net Asset Value, End of Period $10.60 $10.38 $10.59 $10.38
Total Return (not reflecting sales
charge) (%) 6.64 0.57# 9.10 0.76#
Ratios/Supplemental Data
Net Assets, End of Period ($
thousands) 200 6 0.1 0.1
Ratio of Expenses to Average
Net Assets (%) 1.57 0.40# 0.57 0.15#
Ratio of Net Investment Income
to Average Net Assets (%) 4.18 1.17# 5.18 1.42#
Portfolio Turnover Rate (%) 19.98 27.37 19.98 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 ($) 0.43 0.04 0.70 0.15
Ratio of Expenses to Average Net
Assets (%) 1.58 0.40# 0.58 0.15#
Ratio of Net Investment Income to
Average Net Assets (%) 4.17 1.17# 5.17 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 MEETING 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 this 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.
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, 1997, of the total amount of
dividends paid by Tax-Free Trust of Arizona, 97.10% was "exempt-interest
dividends," 2.77% was capital gain dividends, and the balance was ordinary
dividend income.
Prior to January 31, 1997, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1996
CALENDAR YEAR.
