MANAGER 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
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.
ANNUAL
REPORT
JUNE 30, 1998
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
ANNUAL REPORT
"ATTRACTIVE TAX-FREE RETURNS PLUS HIGH STABILITY"
August 17, 1998
Dear Investor:
In our last report letter to you, we discussed the initial impact of the
serious economic and currency problems of various countries in the Far East.
We observed that these problems have resulted in a "FLIGHT TO QUALITY."
Specifically, we pointed out that, on a comparative basis, the economy of the
United States has continued to be very strong. As a result, the U.S. dollar
as a currency, as well as U.S. securities markets, have stood out in the
world as a "BEACON OF QUALITY." Tax-Free Trust of Arizona shares in this high
quality ranking.
Therefore, in this letter to you, we wish to focus upon the level of
tax-free* return provided to you by Tax-Free Trust of Arizona in the current
marketplace.
ATTRACTIVE TAX-FREE RETURNS
The rate of inflation in the United States has continued to be relatively low
throughout the recent expansion of the economy. This has caused the level of
interest rates to decline over recent years.
This decline in interest rates has provided the opportunity for various
municipalities to finance new projects and also to refinance existing
projects at lower interest costs to them. Municipalities act much like you
and I would when refinancing home mortgages to take advantage of attractive
rates. Basically, they are acting to save money.
While interest rates generated by TAX-FREE municipal bonds have declined over
the years, they have not declined as much as rates on a taxable investment.
As a result, TAX-FREE municipal securities have become exceptionally
attractive - on a comparative basis - with other types of fixed-income
securities.
Indeed, while the benchmark 30-year maturity U.S. Treasury bond is currently
yielding approximately 5.65%, its interest income is still subject to taxes.
On the other hand, similar maturity municipal securities, of comparable
quality, are yielding roughly 5.15% and are TAX-FREE. Thus, comparable
TAX-FREE municipal bonds are yielding more than 90% of what high-quality
TAXABLE bonds are paying. Consequently, with TAX-FREE municipal securities,
you are getting to keep more of the actual return paid. Most significantly,
this level of return represents for investors one of the best for TAX-FREE
securities in recent years.
The advantage to you of owning a TAX-FREE investment such as Tax-Free Trust
of Arizona is vividly illustrated in the following chart. This chart compares
the 4.74%** average level of distribution return for Class A Shares (as
measured against the maximum public offering price) for the past twelve
months with what you would have had to earn with a taxable investment.
<PAGE>
[Graphic of bar chart with the following information:]
TAX FREE TRUST OF ARIZONA'S DOUBLE TAX-FREE DISTRIBUTION
RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN
INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
<TABLE>
<CAPTION>
TAX BRACKETS
28% 31% 36% 39.6%
<S> <C> <C> <C> <C>
DOUBLE TAX-FREE DISTRIBUTION RATE 6.92% 7.31% 7.91% 8.44%
TAXABLE EQUIVALENT RATE 4.74% 4.74% 4.74% 4.74%
</TABLE>
As you will note, you would have to find taxable fixed-income
securities that would yield you a level of return quite a bit higher than
that achieved by your investment in Tax-Free Trust of Arizona. Given the
current economic environment, such higher levels of yield would not be
possible to obtain, unless significant additional risk was taken in the form
of lesser quality securities.
You should be aware of just how attractive the TAX-FREE return
from the Trust is in today's marketplace.
STABILITY OF YOUR INVESTMENT
Additionally, what we have always tried to achieve for your
investment in Tax-Free Trust of Arizona is a high level of stability of share
value. This is one of the prime objectives that shareholders in the Trust
have indicated to us that they would like to have in addition to a good level
of tax-free return.
<TABLE>
<CAPTION>
SHARE NET ASSET VALUE (In Dollars)
<S> <C>
12/31/86 10.07
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 9.810
12/31/95 10.72
12/31/96 10.54
12/31/97 10.86
6/30/98 10.86
</TABLE>
As you will note from the above chart, the Class A share value of
the Trust has achieved a high level of stability since the Trust began.
<PAGE>
PORTFOLIO DISTRIBUTION BY QUALITY
<TABLE>
<S> <C>
AAA 54.3%
AA 28.7%
A 12.4%
BELOW A AND NOT RATED 4.6%
</TABLE>
PORTFOLIO DIVERSIFICATION BY PROJECT
<TABLE>
<S> <C>
City & County G.O. 8.0%
School Districts 21.1%
Basic Services 15.0%
Health Care 6.5%
Mortgages 6.6%
Pollution Control 6.1%
Universities 9.6%
Utilities 13.1%
Leases 8.2%
Other 5.8%
</TABLE>
PORTFOLIO DISTRIBUTION BY MATURITY
(in Years>
<TABLE>
<C> <C> <C> <C> <C> <C> <C>
0-5 6-10 11-15 16-20 21-25 26-30 OVER 30
6.5% 14.1% 34.9% 26.3% 9.7% 6.2% 2.3%
</TABLE>
SLEEPING WELL AT NIGHT
We have always been conscious of the fact that since many of our
shareholders are retirees or pre-retirees, they want comfort with regard to
obtaining a high degree of safety for their invested capital in the Trust.
Indeed, in our management of Tax-Free Trust of Arizona, we have always tried
to ensure that you are able to "SLEEP WELL AT NIGHT" knowing that your
investment dollars are being well looked after.
Achieving an attractive level of tax-free return PLUS high
stability for your investment in Tax-Free Trust of Arizona requires use of
various investment strategies.
We again want to highlight these various investment strategies
which the Trust uses to ensure that YOUR MONEY IS WELL PROTECTED.
These strategies include emphasis on municipal securities having
high quality credit ratings, broad diversification with respect to both
number and nature of securities, and an intermediate maturity level with the
various holdings in the Trust's portfolio.
The accompanying three pie charts illustrate these points.
At June 30, 1998, 83% of the Trust's overall portfolio was rated
AAA or AA - the two HIGHEST quality credit ratings available for securities.
There are presently 230 individual issues in the Trust's
portfolio, representing a broad diversification in number and variety of
project categories throughout the State.
<PAGE>
The average overall maturity of the portfolio is in the
intermediate range of 14.89 years. And, the duration is 5.63 years.
Basically, all these factors are designed to give you "PEACE OF
MIND" with your investment in Tax-Free Trust of Arizona - providing
attractive tax-free return PLUS high stability.
KEEPING YOU IN MIND
We want you to know, that since the inception of Tax-Free Trust
of Arizona, we have always kept in mind the level of tax-free return you
receive from your investment in the Trust.
We also keep in mind the degree of stability that we want your
investment to possess.
We achieve this through paying attention to the various areas we
have highlighted above.
These are the prime focuses that we continue to have for you with
the Trust.
YOUR CONFIDENCE VALUED
We value the opportunity to be of service to you. It is our
intent to consistently work in your interest with your investment in Tax-Free
Trust of Arizona.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Directors
* In certain circumstances, a small portion of the dividends paid
by the Trust will be subject to income taxes, including the alternative
minimum tax.
** The distribution rate shown represents that of Class A shares.
Such 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. Different classes of shares are offered by the
Trust and their distribution rate and performance will vary because of
differences in sales charges and fees paid by shareholders investing in
different classes.
<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, 1998, 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 44,000 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. Furthermore, whatever the difference in
performance of the Index versus the Trust might also be attributed to the
lack of application of annual operating expenses and initial sales charge to
the Index.
Since its inception, the Trust has been managed to provide as
stable a share value as possible consistent with producing a competitive
income return to shareholders. It has not been managed for maximum total
return, since one of the aims of management in structuring the portfolio of
the Trust is to reduce fluctuations in the price of the Trust's shares
resulting from changes in interest rates.
As can be observed, however, the pattern of the Trust's results
and that of the Index over the period since inception of the Trust track
quite similarly, even though they are not entirely comparable in character.
[Graphic of a line chart with the following information:]
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
Lehman Brothers Fund After Sales Cost of
Municipal Bond Index Charge and Expenses Living Index
<C> <C> <C> <C>
3/86 $10000 9600 $10000
6/86 9938 9714 10027
6/87 10795 10401 10412
6/88 11595 11200 10875
6/89 12915 12526 11375
6/90 13797 13137 11916
6/91 15040 14342 12466
6/92 16810 15990 12851
6/93 19230 17851 13236
6/94 19230 17801 13575
6/95 20935 19205 13978
6/96 22315 20260 14363
6/98 24161 21744 14693
6/98 26251 23445 14940
</TABLE>
TRUST'S AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED LIFE OF FUND
JUNE 30, 1998 1 YEAR 5 YEARS Since 9/10/92
<S> <C> <C> <C>
INCLUDING SALES
CHARGE AND EXPENSES 3.52% 7.23% 7.17%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
PORTFOLIO MANAGER'S ANALYSIS
PERFORMANCE
The Tax-Free Trust of Arizona Class A shares posted a total
return of 7.83% for the year ended June 30, 1998. Net asset value increased
from $10.58 to $10.86, or 2.65%. Per share dividend payments amounted to
$.526 versus $.544 during the previous fiscal year, reflecting the general
decline in interest rates. In addition, a modest capital gain of $.0024 per
share was paid in June, 1998.
The results, of a total return of 7.83%, compared favorably to
the Lipper State Specific Intermediate Muni Universe's twelve month return of
6.47%. Moreover, the Trust had an annual return which also exceeded the
Lipper Arizona Muni Index return of 7.34%. Additionally, unlike the situation
with the Trust, the index returns do not reflect any operating expenses.
In general, the Trust's performance mirrored that of the
municipal market. Interest rates showed a steady decline from July, 1997 to
the middle of January, 1998. However, since mid-January, municipal yields
have slowly inched upward (higher yields mean lower prices for bond
securities). As such, the Trust's net asset value ranged from a low of
$10.58 at the start of the fiscal year, to a high of $10.97 on January 15,
1998, before ending the year at $10.86. This is in contrast to the price
movement of the Treasury market which has remained near twelve months highs
(low yields).
Moreover, the relationship of municipals to Treasuries has
improved throughout the fiscal year and in particular since the low yields
achieved in mid-January. The following table helps illustrate the movement of
municipal yields to Treasury yields during the past year.
<TABLE>
<CAPTION>
10-YEAR 10-YEAR
AA G.O. Treasury MUNI/TREASURY
MUNI YIELD YIELD PERCENT
<S> <C> <C> <C>
7/01/97 4.90% 6.43% 76.2%
1/15/98 4.33% 5.46% 79.3%
6/30/98 4.50% 5.44% 82.7%
</TABLE>
Therefore, as an asset class, the attractiveness of purchasing
tax-exempt securities has improved during the first six months of 1998.
THE YEAR AHEAD
We believe the long term trend of declining interest rates
remains in place. The dual forces of a slowing U.S. economy and little or no
inflation provide the positive environment for lower interest rates. However,
market volatility will continue as the impact of foreign economies on
domestic growth is debated. Likewise, the Federal Reserve will remain an
inflation fighter limiting the odds of substantially lower interest rates in
the immediate future.
Positives for the tax exempt market should include the reduced
supply of municipal securities in general, the relationship of municipal
securities to Treasurys and the expected economic contraction throughout the
country. The issuance of tax exempt debt during the first half of 1998 has
been unexpectedly high and should dissipate over the coming months. In
addition, the budget surplus should result in the issuance of less Treasury
debt. Less supply versus steady to increasing demand should bring higher prices,
or in the case of the fixed income markets, lower yields.
As evidenced above, municipals have lagged Treasuries during the
first half of 1998. Although "rate shock"(tax-exempt yields below 5%) may
temper investor's demand, we believe acceptance of this fact is forthcoming
and municipals will "make-up" ground on Treasuries.
<PAGE>
The slowing economy will improve the attractiveness of fixed
income securities versus equities. Earnings growth in corporate America
should moderate, making the kind of recent year returns of 30% in the stock
market much harder to achieve. Likewise, our long term commitment to quality
will prove beneficial in a slowing economy as an issuer's financial strength
takes on added importance.
STRATEGIES
In a declining interest rate environment, the call date on
securities within the portfolio takes on added importance. (The call date
refers to the first date on which the bond issuer can redeem outstanding
bonds before the maturity date.) When rates are falling, bond issuers want to
"call" their bonds in order to refinance their debt at lower interest rates.
As such, shorter call dates can inhibit a security's price improvement when
interest rates are declining.
Because of this, we have been actively improving the Trust's call
protection. Over the past year we have sold short-maturity, high coupon bonds
and purchased 12 to 15-year maturities at small discounts with better call
protection. The Trust's average life has remained at approximately 15.0 years
with its duration near 5.6 years. (Average life refers to the average period
for which the individual bonds held in a fund mature. Duration is a measure
of a fund's sensitivity to interest rate changes.)
Looking ahead, we plan to continue the course we have followed to
date. The portfolio will retain a laddered structure of quality issues with
an emphasis in the 12 to 20 year maturity range. Double tax-free income
remains our foremost objective with minimum change to the Trust's share
price.
<PAGE>
KPMG PEAT MARWICK LLP
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, 1998, and 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, 1998, by correspondence with the custodian.
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, 1998, 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 7, 1998
<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 $756,735
Bullhead City Parkway
Improvement District,
1,055,000 6.100%, 1-1-11 Baa/NR 1,123,575
1,000,000 6.100%, 1-1-12 Baa/NR 1,058,750
Chandler, Arizona,
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 488,250
2,000,000 5.125%, 7-1-14, MBIA Insured Aaa/AAA 2,022,500
Cochise Co. Unified School
District No. 68(Sierra Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured Aaa/AAA 1,070,000
1,000,000 6.100%, 7-1-08, FGIC Insured Aaa/AAA 1,071,250
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 982,813
Coconino Co. Unified School
District No. 1 (Flagstaff),
2,000,000 5.500%, 7-1-09, AMBAC Insured Aaa/AAA 2,125,000
Coconino & Yavapai Unified School
District (Sedona),
1,000,000 5.900%, 7/1/07 NR/AA- 1,052,500
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,055,000
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 525,000
1,580,000 6.000%, 7-1-07, FGIC Insured Aaa/AAA 1,626,831
1,000,000 5.000%, 7-1-12, FGIC Insured Aaa/AAA 1,008,750
Gila Co. Unified School District
No. 10 (Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 534,375
Graham Co. Unified School District
No. 1 (Safford),
300,000 5.000%, 7-1-10, FGIC Insured Aaa/AAA 307,500
Graham Co. Unified School
District No. 4 (Thatcher),
400,000 5.000%, 7-1-10, FSA Insured Aaa/NR 411,000
LaPaz Co. Unified School
District No. 27 (Parker)
800,000 6.000%, 7-1-05 Baa/NR 850,000
<PAGE>
Maricopa Co. Elementary School
District No. 1(Phoenix),
250,000 5.800%, 7-1-10, FSA Insured Aaa/AAA 268,438
1,000,000 5.000%, 7-1-13, FSA Insured Aaa/AAA 1,007,500
Maricopa Co. Elementary School
District No. 3
(Tempe),
500,000 8.000%, 7-1-01 A1/AA 555,625
1,000,000 5.400%, 7-1-12, FGIC Insured Aaa/AAA 1,041,250
1,780,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 1,931,300
Maricopa Co. Unified School
District No. 4 (Mesa),
2,250,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,382,188
2,150,000 5.400%, 7-1-09, FSA Insured Aaa/AAA 2,284,375
3,100,000 5.000%, 7-1-09, FGIC Insured Aaa/AAA 3,200,750
750,000 5.650%, 7-1-11, FGIC Insured Aaa/AAA 804,375
Maricopa Co. School District
No. 8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,146,794
Maricopa Co. Unified School
District No. 9(Wickenburg)
1,030,000 5.600%, 7-1-15, AMBAC Insured Aaa/AAA 1,081,500
Maricopa Co. Unified School
District No. 11 (Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 572,500
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,180,000
Maricopa Co. Unified School
District No. 25 (Liberty),
750,000 7.500%, 7-1-05, (pre-refunded) Baa3/NR 807,187
Maricopa Co. Elementary School
District No. 28 (Kyrene),
600,000 6.000%, 7-1-12, (pre-refunded) Aaa/AAA 642,000
1,125,000 6.000%, 7-1-14, FGIC Insured Aaa/AAA 1,202,345
Maricopa Co. School District
No. 31 (Balsz)
1,000,000 5.375%, 7-1-13, AMBAC Insured NR/AAA 1,062,500
<PAGE>
Maricopa Elementary School
District No. 38 (Madison)
1,350,000 5.400%, 7-1-11, FGIC Insured Aaa/AAA 1,414,125
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 1,964,375
Maricopa Co. Unified School
District No. 48 (Scottsdale),
750,000 6.750%, 7-1-09, (pre-refunded) Aa2/AA 812,813
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 1,433,003
Maricopa Co. Unified School
District No. 69 (Paradise Valley)
3,150,000 7.000%, 7-1-07 A1/A+ 3,594,938
2,400,000 5.800%, 7-1-09, AMBAC Insured Aaa/AAA 2,667,000
1,000,000 5.300%, 7-1-11, MBIA Insured Aaa/AAA 1,061,250
Maricopa Co. Unified School
District No. 80 (Chandler),
715,000 5.800%, 7-1-09, FGIC Insured Aaa/AAA 773,095
Maricopa Co. Unified School
District No. 98 (Fountain Hills)
1,000,000 5.750%, 7-1-12, AMBAC Insured Aaa/AAA 1,071,250
Maricopa Co. High School
District No. 205 (Glendale Union),
1,000,000 5.350%, 7-1-08 A1/AA- 1,046,250
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 1,056,250
5,000,000 5.700%, 7-1-14, FGIC Insured Aaa/AAA 5,312,500
<PAGE>
Maricopa Co. High School
District No. 210 (Phoenix Union),
2,000,000 6.750%, 7-1-04, (pre-refunded) Aa3/AA$ 2,167,500
1,700,000 6.200%, 7-1-06, (pre-refunded) Aa3/AA 1,842,375
3,000,000 5.450%, 7-1-08 Aa3/AA 3,161,250
1,000,000 5.375%, 7-1-13 Aa3/AA 1,041,250
2,000,000 5.700%, 7-1-15 Aa3/AA 2,137,500
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 1,080,000
Mesa, Arizona
1,425,000 5.700%, 7-1-08, (pre-refunded) MBIA Insured Aaa/AAA 1,540,783
2,650,000 5.000%, 7-1-18, FGIC Insured Aaa/AAA 2,616,875
Mohave Co. Unified School District No. 1
(Lake Havasu)
1,000,000 4.900%, 7-1-13, FGIC Insured. Aaa/AAA 1,000,000
Navajo Co. Unified School District No. 10
(Show Low),
1,000,000 5.250%, 7-1-16, FGIC Insured Aaa/NR 1,018,750
Navajo Co. Unified School
District No. 32 (Blue Ridge),
985,000 5.900%, 7-1-08, FSA Insured Aaa/AAA 1,073,650
640,000 5.800%, 7-1-14, FGIC Insured Aaa/AAA 688,000
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 Aaa/AA 1,196,000
900,000 5.600%, 7-1-11 Aa1/AA+ 952,875
1,000,000 6.250%, 7/1-16 Aa1/AA+ 1,158,750
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,435,300
2,540,000 5.000%, 7-1-19 Aa1/AA+ 2,508,250
Pima Co. Unified School District
No. 1 (Tucson),
1,000,000 6.875%, 7-1-10, (pre-refunded) Aaa/AAA 1,088,750
Pima Co. Unified School District
No. 8 (Flowing Wells),
1,090,000 5.900%, 7-1-13, A/NR 1,175,838
<PAGE>
Pima Co. Unified School District
No. 12 (Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA$ 1,318,750
Pima Co. Unified School District
No. 16(Catalina Foothills),
500,000 4.600%, 7-1-10, MBIA Insured Aaa/AAA 498,125
Pinal Co. Elementary School District
No. 4 (Casa Grande),
750,000 6.000%, 7-1-04, AMBAC Insured Aaa/AAA 804,375
Pinal Co. Unified School District
No. 43 (Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,614,375
1,000,000 5.000%, 7-1-15, FGIC Insured Aaa/AAa 1,000,000
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 636,763
Prescott Valley Sewer Collection
Improvement District,
500,000 7.900%, 1-1-12 NR/BBB- 562,500
Santa Cruz Co. Unified School District
No. 1 (Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 445,000
Scottsdale, Arizona,
1,250,000 6.000%, 7-1-14, (pre-refunded) Aa1/AA+ 1,346,875
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa1/AA+ 1,073,750
1,450,000 6.000%, 7-1-10 Aa1/AA+ 1,562,375
1,290,000 5.400%, 7-1-11 Aa1/AA+ 1,389,975
830,000 5.400%, 7-1-11 Aa1/AA+ 875,650
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 538,750
2,260,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,432,325
2,500,000 5.750%, 7-1-20, (pre-refunded) Aa3/AA 2,753,125
Yavapai Co. Unified School District
No. 28(Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 547,500
<PAGE>
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, (pre-refunded)
AMBAC Insured Aaa/AAA 2,192,500
Total Arizona General Obligation Bonds 119,678,714
Arizona Revenue Bonds (65.1%)
Airport Revenue Bonds (0.4%)
Phoenix Municipal Airport Authority,
565,000 6.400%, 7-1-12, AMT, MBIA Insured Aaa/AAA 622,912
Tucson Municipal Airport Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 1,057,500
Total Airport Revenue Bonds 1,680,412
Basic Service Revenue Bonds (13.9%)
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 447,700
Chandler Street & Highway User Revenue Bonds,
1,300,000 5.400%, 7-1-13, MBIA Insured Aaa/AAA 1,355,250
1,000,000 5.500%, 7-1-16 A2/A+ 1,030,000
Chandler Water & Sewer Revenue Bonds,
2,015,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 2,183,756
Gilbert Water & Sewer Revenue Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,790,625
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 4,195,000
2,750,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 2,829,063
Phoenix Civic Improvement Corp. Water System
Revenue Bonds,
1,690,000 6.000%, 7-1-03 Aa3/AA- 1,827,312
4,200,000 5.500%, 7-1-10 (pre-refunded) Aa3/AA- 4,525,500
1,500,000 5.000%, 7-1-13 Aa3/A 1,516,875
1,500,000 5.400%, 7-1-14 Aa3/AA- 1,546,875
1,250,000 5.000%, 7-1-18 Aa3/A 1,239,063
2,315,000 6.000%, 7-1-19 (pre-refunded) Aa3/AA- 2,569,650
2,250,000 5.375%, 7-1-22, MBIA Insured Aaa/AAA 2,297,812
<PAGE>
Phoenix Street & Highway User Revenue Bonds,
750,000 6.400%, 7-1-04 A1/AA 822,187
2,490,000 6.250%, 7-1-06 A1/AA 2,704,762
5,000,000 6.250%, 7-1-11 A2/A+ 5,350,000
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 2,165,000
Scottsdale Preserve Authority Excise Tax Revenue
Bonds,
1,890,000 5.625%, 7-1-18, FGIC Insured Aaa/AAA 1,972,688
Sedona Sewer Revenue Bonds,
250,000 6.550%, 7-1-04 NR/BBB 277,187
700,000 7.400%, 7-1-11, (pre-refunded) NR/AAA 759,500
1,055,000 7.000%, 7-1-12 NR/BBB 1,159,181
Tucson Water System Revenue Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 520,625
1,500,000 6.700%, 7-1-12 A1/A+ 1,623,750
2,370,000 5.750%, 7-1-18 A1/A+ 2,449,987
500,000 6.000%, 7-1-21, MBIA Insured Aaa/AAA 560,625
Total Basic Service Revenue Bonds 54,658,954
Hospital Revenue Bonds (5.7%)
Arizona Health Facilities (Northern
Arizona Healthcare System),
1,000,000 5.250%, 10-1-16, AMBAC Insured Aaa/AAA 1,028,750
Arizona Health Facilities (Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured Aaa/AAA 2,600,000
Chandler Industrial Development Authority
(Ahwatukee Medical Facility),
900,000 7.000%, 7-1-22 NR/NR* 970,875
Maricopa Co. Industrial Development Authority
(Mercy Health Care System-St. Joseph's Hospital)
Revenue Bonds,
975,000 7.750%, 11-1-10 NR/AAA 1,167,562
<PAGE>
Mesa Industrial Development Authority
(Western Health),
$2,000,000 7.625%, 1-1-19, BIGI Insured Aaa/AAA$ 2,076,340
Mohave Co. Industrial Development Authority
(Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,226,187
Phoenix Industrial Development Authority (John C.
Lincoln Hospital),
1,070,000 5.500%, 12-1-13, FSA Insured Aaa/AAA 1,127,512
Pima Co. Industrial Development
Authority (Tucson Medical Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,083,750
1,000,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 1,005,000
Pima Co. Industrial Development
Authority (Healthpartners),
1,000,000 5.625%, 4-1-14, MBIA Insured Aaa/AAA 1,068,750
Scottsdale Industrial Development
Authority (Scottsdale
Memorial Hospital),
2,000,000 6.500%, 9-1-03, AMBAC Insured Aaa/AAA 2,202,500
530,000 6.500%, 9-1-06, AMBAC Insured Aaa/AAA 601,550
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 2,177,500
2,020,000 6.125%, 9-1-17, AMBAC Insured Aaa/AAA 2,232,100
Yavapai Co. Industrial
Development Authority
(Yavapai Regional Medical Center),
1,130,000 5.125%, 12-1-13, FSA Insured Aaa/AAA 1,158,250
Yuma Co. Industrial Development
Authority (Yuma
Regional Medical Center),
500,000 5.850%, 8-1-08, MBIA Insured Aaa/AAA 551,875
Total Hospital Revenue Bonds 22,278,501
<PAGE>
Lease Revenue Bonds (8.5%)
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 2,175,000
Arizona Municipal Finance Program
No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured Aaa/AAA 1,621,750
Arizona Municipal Finance Program No. 34,
1,000,000 7.250%, 8-1-09, MBIA Insured Aaa/AAA 1,231,250
Avondale Municipal Facilities Lease
Revenue Bonds,
350,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 357,875
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,214,625
Bullhead City Municipal Property Corp.
Lease Revenue Bonds,
1,670,000 5.200%, 7-1-09, MBIA Insured Aaa/AAA 1,753,500
Cave Creek Certificates of
Participation Lease Revenue Bonds,
365,000 5.750%, 7-1-19 NR/BBB- 367,737
Glendale Municipal Property Corp.
Lease Revenue Bonds, MBIA Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,039,910
Lake Havasu City Certificates of
Participation Lease Revenue Bonds,
750,000 5.625%, 6-1-04, FGIC Insured Aaa/AAA 793,125
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 540,000
Maricopa Co. Certificates of
Participation Lease Revenue Bonds,
1,000,000 6.000%, 6-1-04 Baa1/BBB+ 1,052,500
Oro Valley Municipal Property
Corp. Lease Revenue Bonds,
2,085,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,150,156
Phoenix Civic Improvement
Revenue Bonds,
1,890,000 6.300%, 7-1-14 Aa/AA+ 2,093,175
1,500,000 6.000%, 7-1-14 Aa2/AA+ 1,625,625
<PAGE>
Pinal Co. Certificates of
Participation Lease Revenue Bonds,
1,180,000 6.250%, 6-1-04 NR/AA$ 1,272,925
Prescott Municipal Property Corp.
Lease Revenue Bonds,
1,000,000 5.125%, 1-1-18, FGIC Insured Aaa/AAA 1,016,250
Scottsdale Municipal Property Corp.
Lease Revenue Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,365,000
2,620,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 2,826,325
Sierra Vista Municipal Property Corp.
Lease Revenue Bonds,
1,265,000 5.000%, 1-1/18, AMBAC Insured Aaa/AAA 1,255,512
Tucson Certificate of Participation
Lease Revenue Bonds,
1,000,000 6.375%, 7-1-09 Baa1/AA 1,090,000
Tucson Business Development
Finance Corp.
690,000 6.250%, 7-1-12 (pre-refunded) Aaa/AAA 756,412
1,585,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 1,691,987
University of Arizona Certificates of
Participation Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured Aaa/AAA 1,071,250
Yuma Municipal Property Corp. Lease
Revenue Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,428,281
Total Lease Revenue Bonds 33,701,570
Mortgage Revenue Bonds (5.4%)
Maricopa Co. Industrial Development
Authority Single Family Mortgage
Revenue Bonds,
1,250,000 0.000%, 12-31-14 Aaa/AAA 543,750
2,215,000 0.000%, 12-31-16 Aaa/AAA 866,619
<PAGE>
Maricopa Co. Industrial Development
Authority Multi Family Mortgage
Revenue Bonds (Advantage Point Project),
$1,000,000 6.500%, 7-1-16 A/NR $ 1,148,750
Maricopa Co. Industrial Development
Authority Multi Family Mortgage
Revenue Bonds (National Health
Facilities)
1,500,000 5.100%, 1-1-33, FSA Insured Aaa/AAA 1,471,875
Maricopa Co. Industrial Development
Authority Multi Family Mortgage
Revenue Bonds (Pines at Camelback
Project),
450,000 5.400%, 5-1-18 NR/AA 451,687
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 2,771,875
Phoenix Industrial Development
Authority Single Family Mortgage
Revenue,
1,445,000 6.300%, 12-1-12, AMT NR/AAA 1,560,600
1,750,000 0.000%, 12-1-14 Aaa/AAA 756,875
1,000,000 5.350%, 6-1-20, AMT NR/AAA 1,008,750
Pima Co. Industrial Development
Authority (Broadway Proper),
500,000 8.150%, 12-1-25 NR/AA- 545,000
Pima Co. Industrial Development
Authority Single Family Mortgage
Revenue,
245,000 7.625%, 2-1-12 A2/NR 257,556
875,000 6.500%, 2-1-17 A/NR 936,250
1,225,000 6.750%, 11-1-27, AMT NR/AAA 1,319,938
2,000,000 6.250%, 11-1-29, AMT NR/AAA 2,122,500
<PAGE>
Scottsdale Industrial Development
Authority (Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,334,606
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 1,720,000
Total Mortgage Revenue Bonds 21,475,906
Pollution Control Revenue Bonds (6.1%)
Casa Grande Industrial Development
Authority (Frito Lay) Revenue Bonds,
250,000 6.650%, 12-1-14 A1/NR 275,938
Coconino Co. Pollution Control (Nevada
Power) Revenue Bonds,
2,000,000 5.350%, 10-1-22 NR/BBB- 1,992,500
Gila Co. Pollution Control (Asarco)
Revenue Bonds
2,000,000 5.550%, 1-1-27 Baa2/BBB 2,030,000
Gilbert Industrial Development Authority
Wastewater Reclamation Facility
Revenue Bonds,
600,000 10.000%, 10-1-10, (pre-refunded) NR/NR* 681,000
1,000,000 6.875%, 4-1-14 NR/NR* 1,035,000
Greenlee Co. Pollution Control
(Phelps Dodge) Revenue Bonds,
8,000,000 5.450%, 6-1-09 A2/A 8,410,000
Mohave Co. Industrial Development Authority
(North Star Steel) Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT NR/AA- 4,295,250
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 23,975,938
<PAGE>
University Revenue Bonds (9.9%)
Arizona Board of Regents-Arizona State
University System Revenue Bonds,
6,750,000 5.750%, 7-1-12 A1/AA$ 7,045,312
7,000,000 6.125%, 7-1-15 A1/AA 7,455,000
1,000,000 5.500%, 7-1-19 A1/Aa 1,015,000
3,000,000 5.500%, 7-1-19, MBIA Insured Aaa/AAA 3,067,500
Arizona State University Research Park
Revenue Bonds,
1,225,000 5.000%, 7-1-21, MBIA Insured Aaa/AAA 1,228,062
Arizona Board of Regents-Northern Arizona
University System Revenue Bonds,
3,000,000 5.800%, 6-1-08 AMBAC Insured Aaa/AAA 3,195,000
3,000,000 5.200%, 6-1-13, FGIC Insured Aaa/AAA 3,078,750
Arizona Board of Regents-University of
Arizona System Revenue Bonds,
250,000 6.500%, 6-1-08 A1/AA 272,812
2,750,000 6.250%, 6-1-11 A1/AA 2,956,250
Arizona Educational Loan Mktg Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,045,000
450,000 7.000%, 3-1-05, AMT Aa2/NR 483,750
1,720,000 5.700%, 12-1-08, AMT Aa2/NR 1,775,900
Arizona Student Loan Revenue
500,000 6.600%, 5-1-10 Aa/NR 543,125
Glendale Industrial Development Authority
(American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 354,000
2,100,000 5.625%, 7-1-20, AMBAC Insured NR/AAA 2,189,250
Pinal Co. Community College District
Revenue Bonds,
1,680,000 5.100%, 7-1-14, AMBAC Insured Aaa/NR 1,686,300
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- 526,875
Total University Revenue Bonds 39,033,361
<PAGE>
Utility Revenue Bonds (15.2%)
Arizona Power Authority (Hoover Dam
Project) Revenue Bonds,
2,720,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA$ 2,869,600
8,500,000 5.375%, 10-1-13, MBIA Insured Aaa/AAA 8,797,500
2,425,000 5.250%, 10-1-17, MBIA Insured Aaa/AAA 2,470,469
Arizona Wastewater Management Authority
Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa1/AA+ 1,884,875
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,319,050
Arizona Water Infrastructure Finance
Authority Revenue Bonds,
2,000,000 5.000%, 7-1-17, MBIA Insured Aaa/AAA 1,982,500
Central Arizona Water Conservation
District Revenue Bonds,
2,000,000 5.500%, 11-1-09 A1/AA- 2,155,000
1,000,000 5.500%, 11-1-10 A1/AA- 1,073,750
2,000,000 7.125%, 11-1-11, (pre-refunded) NR/AA- 2,172,500
1,000,000 6.500%, 11-1-11, (pre-refunded) A1/AA- 1,082,500
Mohave Co. Industrial Development
Authority (Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA- 3,180,000
Pima Co. Industrial Development Authority
(Tucson Electric), Revenue Bonds,
2,715,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 3,037,406
Salt River Project Agricultural
Improvement and Power Revenue Bonds
4,485,000 6.200%, 1-1-12 Aa2/AA 4,782,131
650,000 6.000%, 1-1-13 Aa2/AA 689,000
2,850,000 5.000%, 1-1-13 MBIA Insured Aaa/Aaa 2,885,625
1,000,000 5.125%, 1-1-18 Aa2/AA 1,005,000
8,500,000 6.250%, 1-1-19 Aa2/AA 9,063,125
1,000,000 6.250%,1-1-27, (pre-refunded) Aaa/AA 1,087,500
5,730,000 6.250%, 1-1-27 Aa2/AA 6,131,100
1,000,000 5.500%, 1-1-28 Aa2/AA 1,012,500
<PAGE>
Santa Cruz Industrial Development
Authority (Citizens Utility),
1,220,000 7.150%, 2-1-23, AMT NR/AA- 1,282,525
Total Utility Revenue Bonds 59,963,656
Total Arizona Revenue Bonds 256,768,298
U.S. Territorial Bonds (3.9%)
Guam Housing Development Corp. Single
Family Mortgage Revenue Bonds,
1,000,000 5.350%, 9-1-18 NR/AAA 1,013,750
Puerto Rico General Obligation Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,065,000
1,500,000 6.350%, 7-1-10 Aaa/AAA 1,695,000
2,035,000 6.450%, 7-1-17 Aaa/AAA 2,309,725
2,200,000 5.000%, 7-1-26 Baa1/A 2,164,250
Puerto Rico Highway & Transportation Authority,
5,890,000 5.500%, 7-1-26 Baa1/A 6,066,700
Puerto Rico Industrial, Medical & Environmental
Revenue Bonds,
1,000,000 7.600%, 5-1-14, (Warner Lambert) Aa3/NR 1,058,960
Total U.S. Territorial Bonds 15,373,385
Total Investments (cost $368,084,247**) 99.3% 391,820,397
Other assets in excess of liabilities 0.7 2,919,602
Net Assets 100.0% 394,739,999
<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.
When-issued security. This security is pledged as collateral
for the Trust's when-issued commitments. </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, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $368,084,247) $ 391,820,397
Interest receivable 8,843,519
Receivable for investment securities sold 505,000
Receivable for Trust shares sold 366,458
Other assets 4,221
Total assets 401,539,595
LIABILITIES
Payable for investment securities purchased 3,673,370
Cash overdraft 1,989,974
Payable for Trust shares redeemed 392,861
Dividends payable 311,765
Accrued expenses 153,102
Distribution fees payable 148,509
Management fee payable 130,015
Total liabilities 6,799,596
NET ASSETS $ 394,739,999
Net Assets consist of:
Capital Stock - Authorized an unlimited number
of shares, par value $.01 per share $ 363,419
Additional paid-in capital 368,022,036
Net unrealized appreciation on investments 23,736,150
Accumulated net realized gain on investments 2,912,888
Distributions in excess of net investment income (294,494)
$ 394,739,999
CLASS A
Net Assets $ 393,886,665
Capital shares outstanding 36,263,491
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 $ 796,613
Capital shares outstanding 73,210
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 $ 56,721
Capital shares outstanding 5,209
Net asset value, offering and redemption price
per share $ 10.89
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $21,890,825
Expenses:
Management fee (note 3) $ 1,580,741
Distribution and service fees (note 3) 596,674
Transfer and shareholder servicing agent fees 282,082
Trustees' fees and expenses (note 8) 92,409
Shareholders'meeting, reports and proxy statements 67,588
Legal fees 67,357
Custodian fees (note 7) 60,807
Audit and accounting fees 33,071
Registration fees and dues 29,811
Insurance 6,291
Miscellaneous 62,594
2,879,425
Expenses paid indirectly (note 7) (26,832)
Net expenses 2,852,593
Net investment income 19,038,232
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 3,157,634
Change in unrealized appreciation on investments 7,837,854
Net realized and unrealized gain on investments 10,995,488
Net increase in net assets resulting from operations $30,033,720
</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,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,038,232 $19,724,415
Net realized gain from securities
transactions 3,157,634 1,605,406
Change in unrealized appreciation on
investments 7,837,854 6,149,411
Change in net assets resulting
from operations 30,033,720 27,479,232
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (19,395,494) (20,215,578)
Net realized gain on investments (88,057) -
Class C Shares:
Net investment income (18,434) (1,847)
Net realized gain on investments (178) -
Class Y Shares:
Net investment income (837) (7)
Net realized gain on investments (13) -
Change in net assets from distributions (19,503,013) (20,217,432)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 32,337,408 34,306,885
Reinvested dividends and distributions 10,338,428 10,454,421
Cost of shares redeemed (50,403,313) (49,175,125)
Change in net assets from capital
share transactions (7,727,477) (4,413,819)
Change in net assets 2,803,230 2,847,981
NET ASSETS:
Beginning of period 391,936,769 389,088,788
End of period $394,739,999 $ 391,936,769
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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
investors. At June 30, 1998, 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
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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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
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 the 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") 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 Trust, the investment program of the Trust and
the composition of
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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 Investment Advisors Corporation, 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 year ended June 30, 1998, the Trust incurred fees for advisory
and administrative services of $1,580,741.
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 year ended June 30, 1998,
service fees on Class A Shares amounted to $592,052, of which the Distributor
received $21,386.
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 year ended June 30, 1998, amounted to $3,466. 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, 1998, amounted to $1,156. The
total of these payments with respect to Class C Shares amounted to $4,622, of
which the Distributor received $4,330.
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Specific details about the Plans are more fully defined in the Trust's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, 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, 1998, the Distributor received sales commissions of
$150,455.
4. PURCHASES AND SALES OF SECURITIES
During the year ended June 30, 1998, purchases of securities and
proceeds from the sales of securities aggregated $77,240,313 and $90,273,491,
respectively.
At June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $23,798,196 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to $62,046
for a net unrealized appreciation of $23,736,150.
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, 1998, the Trust had 3.9% of its net assets invested in seven such
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 and are taxable.
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
shareholders, some dividend income may, under some circumstances, be subject
to the alternative minimum tax.
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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 year ended June 30, 1998, the
Trust's custodian fees amounted to $60,807, of which $26,832 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, 1998 such reimbursements
averaged approximately $5,400 per Trustee. Two of the Trustees, who are
affiliated with the Manager, are not paid any Trustee fees.
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 2,935,093 $ 31,690,705 3,253,601 $ 34,112,971
Reinvested distributions 955,611 10,322,539 997,339 10,453,094
Cost of shares redeemed (4,666,468) (50,385,170) (4,693,152) (49,172,125)
Net change (775,764) (8,371,926) (442,212) (4,606,060)
CLASS C SHARES:
Proceeds from shares sold 54,652 591,078 18,424 193,914
Reinvested distributions 1,379 14,945 124 1,321
Cost of shares redeemed (1,674) (18,143) (284) (3,000)
Net change 54,357 587,880 18,264 192,235
CLASS Y SHARES:
Proceeds from shares sold 5,112 55,625 - -
Reinvested distributions 87 944 1 6
Cost of shares redeemed - - - - -
Net change 5,199 56,569 1 6
Total transactions in Trust
shares (716,208) $ (7,727,477) (423,947) $(4,413,819)
</TABLE>
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TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class A(1)
Year ended June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.58 $10.38 $10.37 $10.16 $10.84
Income from Investment Operations:
Net investment income 0.52 0.53 0.55 0.56 0.57
Net gain (loss) on securities (both
realized and unrealized) 0.29 0.22 0.01 0.21 (0.60)
Total from Investment Operations 0.81 0.75 0.56 0.77 (0.03)
Less Distributions (note 6):
Dividends from net investment income (0.53) (0.55) (0.55) (0.56) (0.57)
Distributions from capital gains - - - - (0.08)
Total Distributions (0.53) (0.55) (0.55) (0.56) (0.65)
Net Asset Value, End of Period $10.86 $10.58 $10.38 $10.37 $10.16
Total Return (not reflecting sales
charge)(%) 7.83 7.36 5.49 7.89 (0.38)
Ratios/Supplemental Data
Net Assets, End of Period ($
thousands) 393,887 391,737 389,083 380,745 372,093
Ratio of Expenses to Average Net
Assets (%) 0.72 0.72 0.72 0.74 0.70
Ratio of Net Investment Income to
Average Net Assets (%) 4.82 5.03 5.30 5.55 5.36
Portfolio Turnover Rate (%) 19.68 19.98 27.37 34.44 31.20
<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> <C>
Net Investment Income ($) 0.52 0.52 0.55 0.56 0.57
Ratio of Expenses to Average Net
Assets (%) 0.73 0.73 0.73 0.74 0.71
Ratio of Net Investment Income to
Average Net Assets (%) 4.81 5.02 5.30 5.55 5.35
<FN> (1) Designated as Class A Shares on April 1, 1996.</FN>
</TABLE>
See accompanying notes to financial statements.
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FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Ended Period(2) Year Ended Period
June 30, Ended June June 30, Ended June
1998 1997 30, 1996 1998 1997 30, 1997
<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 0.43 0.44 0.13 0.58 0.70 0.15
Net gain (loss) on securities (both
realized and unrealized) 0.29 0.23 (0.07) 0.31 0.21 (0.07)
Total from Investment Operations 0.72 0.67 0.06 0.89 0.91 0.08
Less Distributions (note 6):
Dividends from net investment income (0.44) (0.45) (0.13) (0.59) (0.70) (0.15)
Distributions from capital gains - - - - - -
Total Distributions (0.44) (0.45) (0.13) (0.59) (0.70) (0.15)
Net Asset Value, End of Period $10.88 $10.60 $10.38 $10.89 $10.59 $10.38
Total Return (not reflecting sales
charge) (%) 6.90 6.64 0.57# 8.63 9.10 0.76#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 797 200 6 57 0.1 0.1
Ratio of Expenses to Average Net Assets (%) 1.56 1.57 0.40# 0.57 0.57 0.15#
Ratio of Net Investment Income to Average
Net Assets (%) 3.90 4.18 1.17# 4.97 5.18 1.42#
Portfolio Turnover Rate (%) 19.68 19.98 27.37 19.68 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> <C> <C>
Net Investment Income ($) 0.43 0.43 0.04 0.58 0.70 0.15
Ratio of Expenses to Average Net Assets (%) 1.57 1.58 0.40# 0.58 0.58 0.15#
Ratio of Net Investment Income to Average
Net Assets (%) 3.89 4.17 1.17# 4.96 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>
</TABLE>
See accompanying notes to financial statements.
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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. The holders of shares
representing 54% of the total net asset value of the shares entitled to vote
were present in person or by proxy. At the meeting, the following matters
were voted upon and approved by the shareholders (the resulting votes for
each matter are presented below).
(1) 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; no more than 4,662,774.25 votes were
withheld for any Trustee).
(2) 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; votes against: 863,757.03;
abstentions: 10,500,240.06; broker non-votes: 0.00).
(3) The approval of a proposed Investment Advisory and Administration
Agreement with Aquila Management Corp. (votes for: 194,404,040.55;
votes against: 2,667,948.29; abstentions: 14,900,435.32; broker
non-votes: 2,133,922.40).
(4) The approval of a proposed Sub-Advisory Agreement between Aquila
Management Corporation as Manager and Banc One Investment Advisors
Corporation as Sub-Adviser (votes for: 193,340,655.36; votes against:
3,693,707.34; abstentions: 14,938,061.47; broker non-votes:
2,133,922.40).
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, 1998, of the total amount of
dividends paid by Tax-Free Trust of Arizona, 98.58% was "exempt-interest
dividends," 0.0001% was capital gain dividends, and the balance was ordinary
dividend income.
Prior to January 31, 1998, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions paid for
the 1997 CALENDAR YEAR.
