INVESTMENT ADVISER, ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
BANC ONE INVESTMENT ADVISORS CORPORATION
Bank One Center
241 North Central Avenue
Phoenix, Arizona 85004
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
PFPC INC.
400 Bellevue Parkway
Wilmington, Delaware 19809
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, 1997
A TAX-FREE INCOME INVESTMENT
[Graphic of Logo: Eagle sitting on top of flag above the words 'TAX-FREE
TRUST OF ARIZONA']
[Graphic of the logo for Aquila Group of Funds: an eagle's head facing left]
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
[Graphic of Logo: Eagle sitting on top of flag above the words 'TAX-FREE
TRUST OF ARIZONA']
SERVING ARIZONA INVESTORS FOR OVER A DECADE
TAX-FREE TRUST OF ARIZONA
SEMI-ANNUAL REPORT
"QUALITY FOSTERS PEACE OF MIND"
February 20, 1998
Dear Investor:
Recently, there has been a lot of news about the Far East and the
problems that a number of countries in that area are experiencing. These
problems have included some failures of major financial corporations in
Japan, South Korea, Indonesia, Hong Kong, and various other countries. Also,
there have been major deterioration changes in the currencies of these
countries as they relate to U.S. dollars.
It is hard to believe the magnitude of recent currency
depreciation that has taken place in various countries vs. the U.S. dollar.
The currency deteriorations against the U.S. dollar have ranged from 10% to
well over 70% with various countries around the world. While we may have some
problems in our own country, these are very substantially less than those of
other countries.
What has occurred as a result of the problems of these countries
is a flight to quality. In comparison to various economies and currencies of
the Far East, as well as other countries in the world, the U.S. economy,
securities markets and currency stand out as a beacon of quality.
Quality has also been one of the trademarks of Tax-Free Trust of
Arizona from the inception of the fund. It has been our strong belief that
you can sleep much better at night by having high quality issues in the fund
in which you invest. Indeed, presently, the portfolio of Tax-Free Trust of
Arizona consists of 52.9% of tax-exempt securities having a AAA rating, and
29.8% of securities having a AA rating. Thus, 82.7% of the Trust's overall
portfolio is rated as AA or AAA. These are the two highest quality securities
you can possibly own.
Just as important for you to know, in the portfolio management of
the fund, separate credit analysis is done by the portfolio adviser to
confirm that such top-quality assessment of the individual securities is
justified. In other words, we do not merely rely upon the judgment of rating
agencies, but rather independently verify the credit quality of each
security.
Why do we structure the portfolio this way? Primarily, so that
you can feel comfortable with your investment in Tax-Free Trust of Arizona in
terms of knowing that that portion of your savings possesses a high level of
capital preservation.
<PAGE>
PATTERN OF PRICING OF SHARE VALUE
When you look at the pricing of share value of Tax-Free Trust of
Arizona, you will note that it presents a high level of share price
consistency. This is in stark contrast to the currency deterioration and
volatility of currency and securities markets that is taking place around the
world. The chart below shows you that consistency for every year since the
Trust began.
[Graphic of bar chart with the following information:]
SHARE NET ASSET VALUE (In Dollars)
12/31/87 9.41
12/31/88 9.60
12/31/89 9.88
12/31/90 9.79
12/31/91 10.24
12/31/92 10.49
12/31/93 10.95
12/31/94 9.81
12/31/95 10.72
12/31/96 10.54
12/31/97 10.86
OTHER STEPS TAKEN TO PROTECT YOUR MONEY
As we have pointed out in previous reports to you, we have also
consistently sought to diversify the holdings of municipal bonds in the
portfolio so that no one segment could hurt the overall value of your money
in the remote event a problem occurred. As a result, it is worth pointing out
that the portfolio of securities presently consists of 223 issues spread over
a variety of categories. This diversification is illustrated in the pie chart
below.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY PROJECT
City & County G.O. 8.1%
School Districts 21.6%
Basic Services 17.0%
Health Care 5.5%
Mortgages 6.2%
Pollution Control 5.9%
Universities 9.4%
Utilities 13.0%
Leases 6.9%
Airports 2.4%
Other 4.0%
<PAGE>
We also ensure that the maturity of the portfolio is spread out
over various time periods, with the average portfolio maturity being 15
years, as is indicated in the pie chart below.
[Graphic of pie chart with the following information:]
PORTFOLIO DISTRIBUTION BY MATURITY
(in Years)
0 - 5 7.4%
6 - 10 10.9%
11 - 15 28.3%
16 - 20 35.8%
21 - 25 10.7%
26 - 30 4.4%
Over 30 Years 2.5%
Altogether then, when you consider the quality, diversification,
and maturity of the portfolio, what we have consistently tried to do for you
is to provide you with the means by which you can have "PEACE OF MIND" with
your investment in Tax-Free Trust of Arizona.
WORKING IN YOUR INTEREST
You can be assured that all those associated with the management
of your investment will consistently work in your investment interest. We
very much value you as a shareholder and appreciate the confidence you have
shown in Tax-Free Trust of Arizona.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<C> <S> <C> <C>
RATING
FACE MOODY'S/
AMOUNT ARIZONA GENERAL OBLIGATION BONDS (31.0%) S&P VALUE
Apache Co.,
$ 750,000 5.100%, 7-1-99 Baa/NR $ 756,562
Bullhead City Parkway Improvement District,
1,055,000 6.100%, 1-1-11 Baa/NR 1,126,212
1,000,000 6.100%, 1-1-12 Baa/NR 1,061,250
Chandler, Arizona,
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 493,875
2,000,000 5.125%, 7-1-14 MBIA Insured Aaa/AAA 2,037,500
Cochise Co. Unified School District No. 68
(Sierra Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured Aaa/AAA 1,080,000
1,000,000 6.100%, 7-1-08, FGIC Insured Aaa/AAA 1,077,500
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 981,656
Coconino Co. Unified School District No. 1
(Flagstaff),
2,000,000 5.000%, 7-1-05, AMBAC Insured Aaa/AAA 2,115,000
2,000,000 5.500%, 7-1-09, AMBAC Insured # Aaa/AAA 2,052,500
Coconino & Yavapai Unified School District
(Sedona),
1,000,000 5.900%, 7-1-07 NR/A- 1,057,500
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,058,750
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 532,500
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 1,012,500
Gila Co. Unified School District No. 10
(Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 536,250
Graham Co. Unified School District No. 1
(Safford),
300,000 5.000%, 7-1-10, FGIC Insured Aaa/AAA 307,873
Graham Co. Unified School District No. 4
(Thatcher),
400,000 5.000%, 7-1-10, FSA Insured Aaa/NR 411,500
La Paz Co. Unified School District No. 27
(Parker),
800,000 6.000%, 7-1-05 Baa/NR 846,000
Maricopa Co. Elementary School District No. 1
(Phoenix),
250,000 5.800%, 7-1-10, CGIC Insured Aaa/AAA 270,625
Arizona Gen. Obligation Bonds Maricopa Co.
Elementary School District No. 3 (Tempe),
500,000 8.000%, 7-1-01 A1/AA 564,375
1,000,000 5.400%, 7-1-12, FGIC Insured Aaa/AAA 1,032,500
2,780,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 3,009,350
Maricopa Co. Unified School District No. 4
(Mesa),
2,250,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,393,438
2,150,000 5.400%, 7-1-09, FSA Insured Aaa/AAA 2,292,437
3,225,000 5.000%, 7-1-09, FGIC Insured Aaa/AAA 3,337,875
750,000 5.650%, 7-1-11, FGIC Insured Aaa/AAA 799,688
Maricopa Co. School District No. 8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,190,556
Maricopa Co. Unified School District No. 9
(Wickenburg),
1,030,000 5.600%, 7-1-15, AMBAC Insured Aaa/AAA 1,080,212
Maricopa Co. Unified School District No. 11
(Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 585,000
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,207,500
Maricopa Co. Unified School District No. 25
(Liberty),
750,000 7.500%, 7-1-05.(pre-refunded) Baa3/NR 817,500
Maricopa Co. Elementary School District No. 28
(Kyrene),
835,000 6.000%, 7-1-12, (pre-refunded) Aaa/AAA 895,537
1,125,000 6.000%, 7-1-14, FGIC Insured Aaa/AAA 1,198,125
Maricopa Elementary School District No. 38
(Madison),
1,350,000 5.400%, 7-1-11, FGIC Insured Aaa/AAA 1,407,375
2,000,000 5.800%, 7-1-15, MBIA Insured Aaa/AAA 2,137,500
Maricopa Co. Unified School District No.41
(Gilbert),
1,750,000 6.250%, 7-1-15, FSA Insured Aaa/AAA 1,942,500
Maricopa Co. Unified School District No. 48
(Scottsdale),
750,000 6.750%, 7-1-09 (pre-refunded) Aa2/AA 819,375
1,000,000 5.000%, 7-1-14 Aa2/AA 1,011,250
Maricopa Co. Elementary School District No. 68
(Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured Aaa/AAA 1,432,455
Maricopa Co. Unified School District No. 69
(Paradise Valley),
3,250,000 7.000%, 7-1-07 A1/A+ 3,700,937
2,400,000 5.800%, 7-1-09, AMBAC Insured Aaa/AAA 2,655,000
1,000,000 5.300%, 7-1-11, MBIA Insured Aaa/AAA 1,063,750
Maricopa Co. Unified School District No. 80
(Chandler),
715,000 5.800%, 7-1-09, FGIC Insured Aaa/AAA 776,669
Maricopa Co. Unified School District No. 98
(Fountain Hills),
1,000,000 5.750%, 7-1-12, AMBAC Insured Aaa/AAA 1,067,500
Maricopa Co. High School District No. 205
(Glendale Union),
1,000,000 5.350%, 7-1-08 A1/AA- 1,047,500
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 1,053,750
5,000,000 5.700%, 7-1-14, FGIC Insured Aaa/AAA 5,306,250
Maricopa Co. High School District No. 210
(Phoenix Union),
2,000,000 6.750%, 7-1-04 (pre-refunded) Aa3/AA 2,185,000
1,700,000 6.200%, 7-1-06 (pre-refunded) Aa3/AA 1,848,750
3,000,000 5.450%, 7-1-08 Aa3/AA 3,165,000
1,000,000 5.375%, 7-1-13 Aa3/AA 1,037,500
2,000,000 5.700%, 7-1-15 Aa3/AA 2,125,000
2,500,000 5.500%, 7-1-17 Aa3/AA 2,606,250
Maricopa Co. High School District No. 213
(Tempe),
1,000,000 6.000%, 7-1-12, FGIC Insured Aaa/AAA 1,087,500
Mesa, Arizona,
5,425,000 5.700%, 7-1-08, MBIA Insured Aaa/AAA 5,818,312
Navajo Co. Unified School District No. 10
(Show Low),
1,000,000 5.250%, 7-1-16, FGIC Insured Aaa/NR 1,021,250
Navajo Co. Unified School District No. 32
(Blue Ridge),
985,000 5.900%, 7-1-08, CGIC Insured Aaa/AAA 1,077,344
640,000 5.800%, 7-1-14, FGIC Insured Aaa/AAA 688,800
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 Aaa/AA 1,203,800
900,000 5.600%, 7-1-11 Aa1/AA+ 949,500
1,000,000 6.250%, 7-1-16 Aa1/AA+ 1,180,000
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,463,200
1,665,000 5.000%, 7-1-19 Aa1/AA+ 1,658,756
Pima Co. Unified School District No. 1
(Tucson),
1,000,000 6.875%, 7-1-10, (pre-refunded) Aaa/AAA 1,097,500
2,000,000 6.100%, 7-1-11, FGIC Insured Aaa/AAA 2,187,500
Pima Co. Unified School District No.8 (Flowing
Wells),
1,090,000 5.900%, 7-1-13, A/NR 1,169,025
Pima Co. Unified School District No.12
(Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA 1,326,562
Pinal Co. Elementary School District No. 4
(Casa Grande),
750,000 6.000%, 7-1-04, AMBAC Insured Aaa/AAA 811,875
Pinal Co. Unified School District No. 43
(Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,616,250
1,000,000 5.000%, 7-1-15,FGIC Insured Aaa/AAA 997,500
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 636,006
Prescott Valley Sewer Collection Improvement
District,
500,000 7.900%, 1-1-12 NR/BBB- 563,750
Santa Cruz Co. Unified School District No.1
(Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 450,000
Scottsdale, Arizona,
1,250,000 6.000%, 7-1-14 (pre-refunded) Aa1/AA+ 1,348,437
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa1/AA+ 1,076,250
1,450,000 6.000%, 7-1-10 Aa1/AA+ 1,542,437
1,290,000 5.400%, 7-1-11 Aa1/AA+ 1,401,263
830,000 5.400%, 7-1-11 Aa1/AA+ 869,425
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 542,500
2,260,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,432,325
2,500,000 5.750%, 7-1-20 Aa3/AA 2,628,125
Yavapai Co. Unified School District No. 22
(Humboldt),
575,000 5.400%, 7-1-14, FGIC Insured Aaa/AAA 597,291
Yavapai Co. Unified School District No. 28
(Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 555,625
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured Aaa/AAA 2,197,500
Total Arizona General Obligation Bonds 123,443,815
ARIZONA REVENUE BONDS (65.7% OF NET ASSETS)
Airport Revenue Bonds (1.7% of Net Assets)
Phoenix, Municipal Airport Authority,
3,965,000 7.800%, 7-1-11, AMT Aa/AA+ 4,103,934
1,010,000 7.875%, 7-1-14, AMT Aa/AA+ 1,046,552
565,000 6.400%, 7-1-12, AMT, MBIA Insured Aaa/AAA 627,856
Tucson, Municipal Airport Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 1,051,250
Total Airport Revenue Bonds 6,829,592
Basic Service Revenue Bonds (15.5% of
Net Assets)
Casa Grande Excise Tax Revenue Bonds,
365,000 6.000%, 4-1-10, FGIC Insured Aaa/AAA 392,375
440,000 5.200%, 4-1-17, MBIA Insured Aaa/AAA 443,850
Chandler Street & Highway User Revenue Bonds,
1,300,000 5.400%, 7-1-13, FGIC Insured Aaa/AAA 1,347,125
1,000,000 5.500%, 7-1-16 A2/A+ 1,021,250
Chandler Water & Sewer Revenue Bonds,
2,015,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 2,191,312
Gilbert Water & Sewer Revenue Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,806,250
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 4,165,000
2,750,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 2,835,938
Phoenix, Civic Improvement Corp. Water System
Revenue Bonds,
1,690,000 6.000%, 7-1-03 Aa3/AA- 1,842,100
4,200,000 5.500%, 7-1-10 Aa3/AA- 4,425,750
1,885,000 5.000%, 7-1-13 Aa3/A 1,892,069
1,500,000 5.400%, 7-1-14 Aa3/AA- 1,537,500
1,250,000 5.000%, 7-1-18 Aa3/A 1,225,000
2,000,000 6.000%, 7-1-19 Aa3/AA- 2,125,000
2,250,000 5.375%, 7-1-22, MBIA Insured Aaa/AAA 2,295,000
Phoenix, Street & Highway User Revenue Bonds,
2,490,000 6.250%, 7-1-06 A1/AA 2,735,887
1,000,000 6.500%, 7-1-08, (pre-refunded) NR/AA 1,107,500
3,200,000 6.250%, 7-1-11 NR/AA 3,452,000
5,000,000 6.250%, 7-1-11 A2/A+ 5,356,250
3,265,000 6.250%, 7-1-11 MBIA Insured Aaa/AAA 3,546,606
Pima County, Sewer Revenue Bonds,
2,000,000 6.750%, 7-1-15 FGIC Insured Aaa/AAA 2,180,000
Scottsdale Preserve Authority Excise Tax
Revenue Bonds
1,890,000 5.625%, 7-1-18, FGIC Insured Aaa/AAA 1,970,325
Sedona Sewer Revenue Bonds,
250,000 6.550%, 7-1-04 NR/BBB 277,500
2,600,000 8.750%, 7-1-10 (pre-refunded) NR/AAA 2,912,000
700,000 7.400%, 7-1-11 (pre-refunded) NR/AAA 768,250
1,055,000 7.000%, 7-1-12 NR/BBB 1,159,181
Sierra Vista, Street & Highway Revenue Bonds,
500,000 6.400%, 7-1-03 AMBAC Insured Aaa/AAA 510,590
Tucson, Water System Revenue Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 527,500
1,500,000 6.700%, 7-1-12 A1/A+ 1,633,125
2,245,000 5.750%, 7-1-18 A1/A+ 2,317,962
500,000 6.000%, 7-1-21, MBIA Insured Aaa/AAA 559,375
Total Basic Service Revenue Bonds 61,559,570
Hospital Revenue Bonds (5.5% of Net Assets)
Arizona Health Facilities (Northern Arizona
Healthcare System),
1,000,000 5.250%, 10-1-16, AMBAC Insured Aaa/AAA 1,015,000
Arizona Health Facilities (St. Luke's Health
System),
3,085,000 7.250%, 11-1-14, (pre-refunded) Aaa/NR 3,536,181
Arizona Health Facilities (Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured Aaa/AAA 2,590,625
Chandler Industrial Development Authority
(Ahwatukee Medical Facility),
900,000 7.000%, 7-1-22 NR/NR* 932,625
Maricopa Co. Industrial Development Authority
(Mercy Health Care System-St. Joseph's
Hospital) Revenue Bonds,
975,000 7.750%, 11-1-10 NR/AAA 1,173,656
Mesa Industrial Development Authority (Western
Health),
2,000,000 7.625%, 1-1-19, BIGI Insured Aaa/AAA 2,112,280
Mohave Co. Industrial Development Authority
(Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,219,000
Phoenix Industrial Development Authority
(John C. Lincoln Hospital),
1,070,000 5.500%, 12-1-13, FSA Insured Aaa/AAA 1,123,500
Pima Co. Industrial Development Authority
(Tucson Medical Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,090,000
500,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 500,000
Pima Co. Industrial Development Authority
(Healthpartners)
1,000,000 5.625%, 4-1-14, MBIA Insured Aaa/AAA 1,062,500
Scottsdale Industrial Development Authority
(Scottsdale Memorial Hospital),
530,000 6.500%, 9-1-06, AMBAC Insured Aaa/AAA 604,863
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 2,155,000
1,000,000 6.125%, 9-1-17, AMBAC Insured Aaa/AAA 1,113,750
Yavapai Co. Industrial Development Authority
(Yavapai Regional Medical Center)
1,130,000 5.125%, 12-1-13, FSA Insured Aaa/AAA 1,148,362
Yuma Co. Industrial Development Authority (Yuma
Regional Medical Center),
500,000 5.850%, 8-1-08, MBIA Insured Aaa/AAA 558,125
Total Hospital Revenue Bonds 21,935,467
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 921,900
2,000,000 6.500%, 3-1-08, FSA Insured Aaa/AAA 2,197,500
Arizona Municipal Finance Program No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured Aaa/AAA 1,633,125
Arizona Municipal Finance Program No. 34,
1,000,000 7.250%, 8-1-09, MBIA Insured Aaa/AAA 1,243,750
Avondale Municipal Facilities Lease Revenue
Bonds,
350,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 361,599
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,207,219
Bullhead City Municipal Property Corp.
Lease Revenue Bonds
1,670,000 5.200%, 7-1-09, MBIA Insured Aaa/AAA 1,755,588
500,000 7.200%, 7-1-10, (pre-refunded) Aaa/AAA 541,875
Glendale Municipal Property Corp. Lease
Revenue Bonds, MBIA Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,052,500
Lake Havasu City Certificates of Participation
Lease Revenue Bonds,
950,000 5.625%, 6-1-04, FGIC Insured Aaa/AAA 1,011,750
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 548,125
Maricopa Co. Certificates of Participation
Lease Revenue Bonds,
1,000,000 6.000%, 6-1-04 Baa1/BBB+ 1,052,500
Nogales Municipal Development Authority Lease
Revenue Bonds,
500,000 8.000%, 6-1-08, (pre-refunded) Aaa/AAA 513,605
Oro Valley Municipal Property Corp. Lease
Revenue Bonds,
2,085,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,137,125
Phoenix Civic Improvement Revenue Bonds,
1,890,000 6.300%, 7-1-14 Aa/AA+ 2,069,550
1,500,000 6.000%, 7-1-14 Aa/AA+ 1,620,000
Pinal Co. Certificates of Participation Lease
Revenue Bonds,
1,180,000 6.250%, 6-1-04 NR/AA 1,278,825
Prescott Municipal Property Corp. Lease
Revenue Bonds,
1,000,000 5.125%, 1-1-18 FGIC Insured NR/AAA 1,010,000
Scottsdale Municipal Property Corp. Lease
Revenue Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,392,500
2,620,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 2,836,150
Tucson Certificate of Participation Lease
Revenue Bonds,
1,000,000 6.375%, 7-1-09 Baa1/AA 1,092,500
Tucson Business Development Finance Corp,
2,275,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 2,476,906
University of Arizona Certificates of
Participation Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured Aaa/AAA 1,073,750
Yuma Municipal Property Corp. Lease Revenue
Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,416,162
Total Lease Revenue Bonds 33,444,504
Mortgage Revenue Bonds (4.5% of Net Assets)
Maricopa Co. Industrial Development Authority
Single Family Mortgage Revenue Bonds,
1,250,000 0.000%, 12-31-14 Aaa/AAA 521,875
2,215,000 0.000%, 12-31-16 Aaa/AAA 838,931
Maricopa Co. Industrial Development Authority
Multi-Family Mortgage Revenue Bonds
(Advantage Point Project),
1,000,000 6.500%, 7-1-16 A/NR 1,078,750
Mohave Co. Industrial Development Authority
(Chris Ridge Village),
1,040,000 6.250%, 11-1-16 NR/AAA 1,134,900
Peoria Industrial Development Authority (Casa
Del Rio),
2,500,000 7.300%, 2-20-28 NR/AAA 2,784,375
Phoenix Industrial Development Authority
Single Family Mortgage Revenue,
1,555,000 6.300%, 12-1-12, AMT NR/AAA 1,677,456
Pima Co. Industrial Development Authority
(Broadway Proper),
500,000 8.150%, 12-1-25 NR/AA- 547,500
Pima Co. Industrial Development Authority
Single Family Mortgage Revenue,
270,000 7.625%, 2-1-12 A2/NR 285,187
910,000 6.500%, 2-1-17 A/NR 971,425
1,265,000 6.750%, 11-1-27, AMT NR/AAA 1,363,037
2,000,000 6.250%, 11-1-29, AMT NR/AAA 2,122,500
Scottsdale Industrial Development Authority
(Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,336,087
Tempe Industrial Development Authority
(Friendship Village),
1,500,000 6.500%, 12-1-08 NR/NR* 1,524,375
Tucson & Pima Co. Single Family Mortgage
Revenue Bonds,
4,000,000 0.000%, 12-1-14 Aaa/AAA 1,680,000
Total Mortgage Revenue Bonds 17,866,398
Pollution Control Revenue Bonds (6.5% of Net
Assets)
Casa Grande Industrial Developement Authority
(Frito Lay) Revenue Bonds,
250,000 6.650%, 12-1-14 A1/NR 277,500
Gila Co. Pollution Control (Asarco) Revenue
Bonds,
3,900,000 8.900%, 7-1-06 Baa2/BBB 4,040,244
2,000,000 5.550%, 1-1-27# Baa2/BBB 2,032,500
Gilbert Industrial Development Authority
Wastewater Reclamation Facility Revenue
Bonds,
600,000 10.000%, 10-1-10 (pre-refunded) NR/NR* 696,000
1,000,000 6.875%, 4-1-14 NR/NR* 1,016,250
Greenlee Co. Pollution Control (Phelps Dodge)
Revenue Bonds,
8,000,000 5.450%, 6-1-09 A2/A 8,360,000
Mohave Co. Industrial Development Authority
(North Star Steel) Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT NR/AA- 4,290,063
Navajo Co. Pollution Control Revenue Bonds
(Arizona Public Service),
5,000,000 5.875%, 8-15-28, MBIA Insured Aaa/AAA 5,256,250
Total Pollution Control Revenue Bonds 25,968,807
University Revenue Bonds (9.2% of Net Assets)
Arizona Board of Regents-Arizona State
University System Revenue Bonds,
1,000,000 5.500%, 7-1-19 A1/AA 1,022,500
6,750,000 5.750%, 7-1-12 A1/AA 7,062,187
3,000,000 5.500%, 7-1-19 MBIA Insured Aaa/AAA 3,067,500
7,000,000 6.125%, 7-1-15 A1/AA 7,446,250
Arizona Board of Regents-Northern Arizona
University System Revenue Bonds,
500,000 9.900%, 6-1-98 A2/A+ 512,745
3,150,000 5.800%, 6-1-08 AMBAC Insured) Aaa/AAA 3,370,500
3,000,000 5.200%, 6-1-13, FGIC Insured Aaa/AAA 3,075,000
Arizona Board of Regents-University of
Arizona System Revenue Bonds,
2,750,000 6.250%, 6-1-11 A1/AA 2,973,438
Arizona Educational Loan Mktg Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,051,250
450,000 7.000%, 3-1-05, AMT Aa2/NR 487,125
1,720,000 5.700%, 12-1-08, AMT Aa2/NR 1,782,350
Arizona Student Loan Revenue
500,000 6.600%, 5-1-10 Aa/NR 546,250
Glendale Industrial Development Authority
(American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 354,750
2,100,000 5.625%, 7-1-20, CONLEE Insured NR/AAA 2,173,500
University Revenue Bonds Yavapai Co
Community College District Revenue Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured Aaa/AAA 1,115,475
500,000 6.000%, 7-1-12 NR/A- 528,750
Total University Revenue Bonds 36,569,570
Utility Revenue Bonds (14.4% of Net Assets)
Arizona Power Authority (Hoover Dam Project)
Revenue Bonds,
2,720,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA 2,886,600
8,500,000 5.375%, 10-1-13, MBIA Insured## Aaa/AAA 8,723,125
2,425,000 5.250%, 10-1-17, MBIA Insured Aaa/AAA 2,449,250
Arizona Wastewater Management Authority
Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa1/AA+ 1,895,500
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,311,300
Central Arizona Water Conservation District
Revenue Bonds,
2,000,000 5.500%, 11-1-09 A1/AA- 2,175,000
1,000,000 5.500%, 11-1-10 A1/AA- 1,083,750
2,000,000 7.125%, 11-1-11 (pre-refunded) NR/AA- 2,197,500
2,150,000 6.500%, 11-1-11 (pre-refunded) A1/AA- 2,346,187
Mohave Co. Industrial Development Authority
(Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA+ 3,221,250
Pima Co. Industrial Development Authority
(Tucson Electric) Revenue Bonds
2,715,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 3,054,375
Salt River Project Agricultural Improvement
and Power Revenue Bonds,
4,485,000 6.200%, 1-1-12 Aa/AA 4,810,163
650,000 6.000%, 1-1-13 Aa/AA 692,250
8,500,000 6.250%, 1-1-19 Aa/AA 9,116,250
7,000,000 6.250%, 1-1-27 Aa/AA 7,481,250
1,500,000 5.000%, 1-1-13 Aa/AA 1,509,375
1,000,000 5.125%, 1-1-18 Aa2/AA 1,000,000
Santa Cruz Industrial Development Authority
(Citizens Utility),
1,120,000 7.150%, 2-1-23, AMT NR/AA+ 1,183,000
Total Utility Revenue Bonds 57,136,125
Total Arizona Revenue Bonds 261,310,033
PUERTO RICO BONDS(3.0% OF NET ASSETS)
Puerto Rico General Obligation Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,067,500
1,500,000 6.350%, 7-1-10 Baa1/A 1,657,500
2,035,000 6.450%, 7-1-17 Baa1/A 2,266,481
Puerto Rico Highway & Transportation
Authority,
3,890,000 5.500%, 7-1-26 Baa1/A 3,962,937
Puerto Rico Electric Power Authority,
2,000,000 5.500%, 7-1-20 Baa1/BBB+ 2,017,500
Puerto Rico Industrial, Medical &
Environmental Revenue Bonds,
1,000,000 7.600%, 5-1-14, (Warner Lambert) NR/AA3 1,076,250
Total Puerto Rico Bonds 12,048,168
Total Investments (cost $371,541,841)* 99.7% 396,802,016
Other assets in excess of liabilities 0.3 1,293,095
Net Assets 100.0% $398,095,111
<FN> * Any security not rated has been determined by the
Investment Sub-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
DECEMBER 31, 1997 (UNAUDITED)
ASSETS
Investments at value (identified cost $371,541,841) $396,802,016
Cash 998,452
Interest receivable 9,300,763
Receivable for investment securities sold 210,079
Receivable for Fund shares sold 161,469
Other assets 5,070
Total assets 407,477,849
LIABILITIES
Payable for investment securities purchased 8,496,566
Payable for Trust shares redeemed 333,076
Dividends payable 264,024
Distribution fees payable 150,185
Management fees payable 134,617
Accrued expenses 4,270
Total liabilities 9,382,738
NET ASSETS $398,095,111
Net Assets consist of:
Capital Stock - Authorized an unlimited number
of shares, par value $.01 per share $ 366,455
Additional paid-in capital 370,967,629
Accumulated net gain on investments 1,500,852
Net unrealized appreciation on investments 25,260,175
$398,095,111
CLASS A
Net Assets $397,602,639
Capital shares outstanding 36,600,246
Net asset value and redemption price per share $ 10.86
Offering price per share (100/96 of $10.86
adjusted to nearest cent) $ 11.31
CLASS C
Net Assets $ 469,710
Capital shares outstanding 43,158
Net asset value and offering price per share $ 10.88
Redemption price per share (*generally, a charge
of 1% is imposed on the proceeds of shares
redeemed during the first 12 months after
purchase.) $ 10.88*
CLASS Y
Net Assets $ 22,762
Capital shares outstanding 2,090
Net asset value, offering and redemption price
per share $ 10.89
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $11,111,723
Expenses:
Management fee (note 3) $ 796,467
Distribution and service fees (note 3) 300,152
Transfer and shareholder servicing agent fees 133,000
Trustees' fees and expenses 44,000
Legal fees 35,000
Shareholders'meeting, reports and proxy statements 35,000
Custodian fees (note 7) 35,000
Registration fees and dues 20,000
Audit and accounting fees 15,000
Insurance 3,000
Miscellaneous 30,862
1,447,481
Expenses paid indirectly (note 7) (9,000)
Net expenses 1,438,481
Net investment income 9,673,242
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 1,412,620
Change in unrealized appreciation on investments 9,361,879
Net realized and unrealized gain on investments 10,774,499
Net increase in net assets resulting from operations $20,447,741
</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
Dec. 31, 1997 June 30, 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 9,673,242 $ 19,724,415
Net realized gain from securities transactions 1,412,620 1,605,406
Change in unrealized appreciation on investments 9,361,879 6,149,411
Change in net assets resulting from operations 20,447,741 27,479,232
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (9,859,918) (20,215,578)
Net realized gain on investments - -
Class C Shares:
Net investment income (7,050) (1,847)
Net realized gain on investments - -
Class Y Shares:
Net investment income (6) (7)
Net realized gain on investments - -
Change in net assets from distributions (9,866,974) (20,217,432)
CAPITAL SHARE TRANSACTIONS (note 8):
Proceeds from shares sold 14,367,807 34,306,885
Reinvested dividends and distributions 5,185,929 10,454,421
Cost of shares redeemed (23,976,161) (49,175,125)
Change in net assets from capital share
transactions (4,422,425) (4,413,819)
Change in net assets 6,158,342 2,847,981
NET ASSETS:
Beginning of period 391,936,769 389,088,788
End of period $398,095,111 $391,936,769
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. On October
31, 1997 the Trust established Class I shares, which are offered and sold
only through financial intermediaries and are not offered directly to retail
customers. At December 31, 1997, there were no Class I shares outstanding.
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 at fair value 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
<PAGE>
value or distribution policy and conforms to the amortization
policy followed by the Trust for Federal tax purposes.
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) 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:
Aquila Management Corporation (the "Manager"), the Trust's founder
and sponsor, serves as the Manager for the Trust under an Advisory and
Administration Agreement with the Trust. The portfolio management of the
Trust has been delegated to a sub-adviser as described below. Under the
Advisory and Administrative Agreement, the Manager provides all
administrative services to the Trust, other than those relating to the
day-to-day portfolio management. The Manager's services include providing
the office of the Trust and all related services as well as overseeing the
activities of any sub-adviser and all the various support organizations to
the Trust such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor. For its services, the Manager is entitled to
receive a fee which is payable monthly and computed as of the close of
business each day at the annual rate of 0.40 of 1% on the Trust's net
assets.
Banc One Investment Advisors Corporation (the "Sub-Adviser"), a
subsidiary of BANC ONE CORPORATION ("Banc One"), serves as the Investment
Sub-Adviser for the Trust under a Sub-Advisory Agreement between the Manager
and the Sub-Adviser. Under this agreement, the Sub-Adviser continuously
provides, subject to oversight of the Manager and the Board of Trustees of
the
<PAGE>
Trust, the investment program of the Trust and the composition of its
portfolio, arranges for the purchases and sales of portfolio securities,
maintains the Trust's accounting books and records, and provides for daily
pricing of the Trust's portfolio. For its services, the Sub-Adviser is
entitled to receive a fee from the Manager which is payable monthly and
computed as of the close of business each day at the annual rate of 0.20 of
1% on the Trust's net assets.
On November 6, 1997, the Management arrangements described above
were approved by the Trust's shareholders and went into effect. From
inception of the Trust in March, 1996 to that date, Aquila Management
Corporation and Banc One, through its subsidiaries or predecessors, had
served as the Trust's Administrator and Investment Manager, respectively,
pursuant to agreements with the Trust. Prior to this change, the total fees
paid to them were at an annual rate of 0.40 of 1% of the Trust's net assets,
the same fee as under the new arrangements.
For the six months ended December 31, 1997, the Trust incurred fees
for advisory and administrative services of $796,467.
Specific details as to the nature and extent of the services
provided by the Manager and the Sub-Adviser are more fully defined in the
Trust's Prospectus and Statement of Additional Information.
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 Aquila Distributors, Inc. ("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, 1997, service fees on Class A Shares amounted to $298,421, of
which the Distributor received $10,190.
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, 1997, amounted to $1,298. 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, 1997,
amounted to $433. The total of these
<PAGE>
payments with respect to Class C Shares amounted to $1,731, of which the
Distributor received $1,731.
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. 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, 1997, the Distributor
received sales commissions of $56,043.
4. PURCHASES AND SALES OF SECURITIES
During the six months ended December 31, 1997, purchases of
securities and proceeds from the sales of securities aggregated $35,250,017
and $43,157,737, respectively.
At December 31, 1997, aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $25,260,175 for a net unrealized appreciation of $25,260,175.
There are no securities in which there is an excess tax cost over market
value.
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 incom
e 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, 1997, the Trust had 3% of its net assets invested in six Puerto
Rico municipal issues.
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 statement
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
<PAGE>
shareholders, some dividend income may, under some circumstances, be subject
to the alternative minimum tax. Also, annual capital gains distributions, if
any, are taxable.
On December 5, 1997, the Board of Trustees declared a distribution
from long-term capital gain of $88,230, of which 24.2% represents "28% rate
gain" and 75.8% represents "20% rate gain". This distribution, approximately
$.0024 per share, will be paid in late June, 1998 to shareholders of record
for each class at that time.
7. CUSTODIAN FEES
The Trust has negotiated an expense offset arrangement with its
custodian, Bank One Trust Company, N.A., an affiliate of the Sub-Adviser,
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the six months ended December 31,
1997, the Trust's custodian fees amounted to $35,000, of which $9,000 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. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1997 June 30, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A Shares:
Proceeds from shares sold 1,312,980 $14,084,382 3,253,601 $34,112,971
Reinvested distributions 481,716 5,180,132 997,339 10,453,094
Cost of shares redeemed (2,233,706) (23,970,641) (4,693,152) (49,172,125)
Net change (439,010) (4,706,127) (442,212) (4,606,060)
Class C Shares:
Proceeds from shares sold 24,282 260,800 18,424 193,914
Reinvested distributions 537 5,794 124 1,321
Cost of shares redeemed (515) (5,520) (284) (3,000)
Net change 24,304 261,074 18,264 192,235
Class Y Shares:
Proceeds from shares sold 2,079 22,625 - -
Reinvested distributions - 3 1 6
Cost of shares redeemed - - - -
Net change 2,079 22,628 1 6
Total transactions in Trust
shares (412,627) $(4,422,425) (423,947) $(4,413,819)
</TABLE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class A(1)
Six Months
Ended Dec. Year ended June 30,
31, 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.58 $10.38 $10.37 $10.16 $10.84 $10.36
Income from Investment
Operations:
Net investment income 0.26 0.53 0.55 0.56 0.57 0.62
Net gain (loss) on
securities (both
realized and unrealized) 0.29 0.22 0.01 0.21 (0.60) 0.54
Total from Investment
Operations 0.55 0.75 0.56 0.77 (0.03) 1.16
Less Distributions (note 6):
Dividends from net
investment income (0.27) (0.55) (0.55) (0.56) (0.57) (0.62)
Distributions from
capital gains - - - - (0.08) (0.06)
Total Distributions (0.27) (0.55) (0.55) (0.56) (0.65) (0.68)
Net Asset Value, End
of Period $10.86 $10.58 $10.38 $10.37 $10.16 $10.84
Total Return (not
reflecting sales
charge)(%) 5.23# 7.36 5.49 7.89 (0.38) 11.45
Ratios/Supplemental Data
Net Assets, End of
Period ($ thousands) 397,603 391,737 389,083 380,745 372,093 349,920
Ratio of Expenses to
Average Net Assets (%) 0.72* 0.72 0.72 0.74 0.70 0.65
Ratio of Net Investment
Income to Average Net
Assets (%) 4.86* 5.03 5.30 5.55 5.36 5.76
Portfolio Turnover
Rate (%) 8.98# 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 Administrator's voluntary waiver
of fees and the expense offset in custodian fees for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.26 0.52 0.55 0.56 0.57 0.61
Ratio of Expenses to
Average Net Assets (%) 0.73* 0.73 0.73 0.74 0.71 0.73
Ratio of Net Investment
Income to Average
Net Assets (%) 4.85* 5.02 5.30 5.55 5.35 5.67
<FN> (1) Designated as Class A Shares on April 1, 1996. </FN>
<FN> # Not annualized. </FN>
<FN> * Annualized. </FN>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
</TABLE>
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Six Six
Months Year Period(2) Months Year Period(2)
Ended Ended Ended Ended Ended Ended
Dec. 31, June 30, June 30, Dec. 31, June 30, June 30,
1997 1997 1996 1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.60 $10.38 $10.45 $10.59 $10.38 $10.45
Income from Investment
Operations:
Net investment income 0.22 0.44 0.13 0.31 0.70 0.15
Net gain (loss) on
securities (both
realized and unrealized) 0.28 0.23 (0.07) 0.31 0.21 (0.07)
Total from Investment
Operations 0.50 0.67 0.06 0.62 0.91 0.08
Less Distributions
(note 6):
Dividends from net
investment income (0.22) (0.45) (0.13) (0.32) (0.70) (0.15)
Distributions from
capital gains - - - - - -
Total Distributions (0.22) (0.45) (0.13) (0.32) (0.70) (0.15)
Net Asset Value, End
of Period $10.88 $10.60 $10.38 $10.89 $10.59 $10.38
Total Return (not
reflecting sales
charge) (%) 4.78# 6.64 0.57# 5.96# 9.10 0.76#
Ratios/Supplemental Data
Net Assets, End of
Period ($ thousands) 470 200 6 23 0.1 0.1
Ratio of Expenses to
Average Net Assets (%) 1.57* 1.57 0.40# 0.57* 0.57 0.15#
Ratio of Net Investment
Income to Average Net
Assets (%) 4.09* 4.18 1.17# 5.09* 5.18 1.42#
Portfolio Turnover
Rate (%) 8.98# 19.98 27.37 8.98# 19.98 27.37
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets withou the expense offset in custodian fees for uninvested
cash balances would have been:
<S> <C> <C> <C> <C> <C> <C>
Net Investment
Income ($) 0.22 0.43 0.04 0.32 0.70 0.15
Ratio of Expenses to
Average Net Assets (%) 1.62* 1.58 0.40# 0.62* 0.58 0.15#
Ratio of Net Investment
Income to Average Net
Assets (%) 4.04* 4.17 1.17# 5.04* 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 November 6, 1997. 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, and Anne J. Mills 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
209,443,583.02 affirmative votes (97.82%); no more than
4,662,774.25 votes (2.18%) were withheld for any Trustee),
(ii) the ratification of the selection of KPMG Peat Marwick LLP as
the Trust's independent auditors for the fiscal year ending June
30, 1998 (votes for: 202,742,349.47 (94.69%); votes against:
863,757.03 (0.40%); abstentions: 10,500,240.06 (4.90%); broker
non-votes: 0 (0.00%)),
(iii) the approval of a proposed Investment Advisory and
Administration Agreement with Aquila Management Corp. (votes for:
194,404,040.55 (90.80%); votes against: 2,667,948.29 (1.25%);
abstentions: 14,900,435.32 (6.96%); broker non-votes: 2,133,922.40
(1.00%)), and
(iv) the approval of a proposed Sub-Advisory Agreement with Banc
One Investment Advisors Corporation (votes for: 193,340,655.36
(90.30%); votes against: 3,693,707.34 (1.73%); abstentions:
14,938,061.47 (6.97%); broker non-votes: 2,133,922.40 (1.00%)).
*On the record date for the Annual Meeting, the holders of 36,858,273.997
Class A Shares, 28,009.933 Class C Shares, and 10.471 Class Y Shares were
outstanding and entitled to vote representing a total net asset value of
$394,684,190.597. The holders of shares entitled to vote representing a total
net asset value of $214,106,357.27 (54.25%) were present in person or by
proxy at the meeting.
