<PAGE>
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
Diana P. Herrmann, President
Susan A. Cook, Senior Vice President
Kimball L. Young, Senior 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 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, 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>
<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
"THE BEST THINGS IN LIFE CAN BE TAX-FREE"
February 17, 1999
Dear Fellow Shareholder:
When you compare TAX-FREE municipal bonds with similar
maturity high quality taxable U.S. Treasuries, we think it is fair
to say, "THE BEST THINGS IN LIFE CAN BE TAX-FREE."
You may well come out way ahead owning a TAX-FREE bond,
since recently the ratio of return on TAXABLE U.S. Treasuries
versus TAX-FREE municipals has been running ahead of what has
normally been the case.
What this means to you in dollars and cents is that
when you take into consideration the effect of taxes you pay with
a TAXABLE bond, you actually get to keep more of your return with
the TAX-FREE investment.
Let us show you the mathematics of how this works out.
Let's suppose you purchase a $1,000 15-year U.S. Treasury bond
yielding 5% and a $1,000 tax-free municipal bond with a maturity of
15 years yielding 4.4%.
Your investments would look as follows*:
U.S. TREASURY TAX-FREE
Interest Income $50.00 $44.00
Federal Tax Bracket 28% 28%
Federal Tax Paid $14.00 $-0-
Net Income Retained $36.00 $44.00
Even though on the surface the U.S. Treasury appears to
be yielding higher than the TAX-FREE municipal, once the effect of
Federal taxes is taken into consideration, the TAX-FREE investment
allows you to keep more money in your pocket. State taxes are not
applicable to either investment.
Obviously, investors in higher income tax brackets will
obtain an even greater advantage.
Given the desirability of making sure you have the
right asset allocation with your investment money, the fact that
there is an increased supply of high quality municipal bonds and a
rising ratio of taxable vs. tax-free bonds, we believe it is fair
to say that,
"THE BEST THINGS IN LIFE CAN BE TAX-FREE."
This is particularly true considering the high quality
of the bonds in Tax-Free Trust of Arizona and the intermediate
maturity of the overall portfolio of the Trust. Both these factors
lend themselves to the kind of investment that allows you to "sleep
well at night."
</PAGE>
<PAGE>
You can be assured that all those associated with the
management of your investment in Tax-Free Trust of Arizona are
consistently working in your best interest. We very much value you
as a shareholder and appreciate the confidence you have shown in
the Trust.
Sincerely,
Lacy B. Herrmann
Chairman, Board of Trustees
* The examples given, while realistic, are for illustrative
purposes only, are strictly hypothetical in nature and do not
represent the performance of any particular investment. For
simplicity, a stable net asset value has been assumed over the life
of each investment and the effect of dividend reinvestment was not
taken into account. Of course, the actual rate of return and share
price of a municipal bond fund, such as Tax-Free Trust of Arizona,
will fluctuate with general interest rate changes. Thus, redemption
price may be more or less than original purchase price.
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED)
RATING
FACE
MOODY'S/
AMOUNT ARIZONA GENERAL OBLIGATION BONDS (29.6%)
S&P VALUE
</CAPTION>
<S> <C>
<C> <C>
$ 750,000 Apache Co.,
5.100%, 7-1-99
Baa/NR $ 756,487
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 1,063,750
Chandler, Arizona,
450,000 7.000%, 7-1-12, FGIC Insured
Aaa/AAA 484,312
2,000,000 5.125%, 7-1-14, MBIA Insured
Aaa/AAA 2,047,500
Cochise Co. Unified School District No. 68
(Sierra Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured
Aaa/AAA 1,072,500
1,000,000 6.100%, 7-1-08, FGIC Insured
Aaa/AAA 1,072,500
925,000 5.750%, 7-1-09, FGIC Insured
Aaa/AAA 989,750
Coconino Co. Unified School District No. 1
(Flagstaff),
2,000,000 5.500%, 7-1-09, AMBAC Insured
Aaa/AAA 2,145,000
Coconino & Yavapai Unified School District
(Sedona),
1,000,000 5.900%, 7/1/07
NR/A- 1,062,500
1,000,000 5.700%, 7-1-07, FGIC Insured
Aaa/AAA 1,060,000
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured
Aaa/AAA 522,500
1,580,000 6.000%, 7-1-07, FGIC Insured
Aaa/AAA 1,613,543
1,000,000 5.000%, 7-1-12, FGIC Insured
Aaa/AAA 1,023,750
Gila Co. Unified School District No. 10
(Payson),
500,000 5.750%, 7-1-09, AMBAC Insured
Aaa/AAA 539,375
Graham Co. Unified School District No. 1
(Safford),
300,000 5.000%, 7-1-10, FGIC Insured
Aaa/AAA 312,000
Graham Co. Unified School District No. 4
(Thatcher),
400,000 5.000%, 7-1-10, FSA Insured
Aaa/NR 418,000
LaPaz Co. Unified School District No. 27
(Parker),
800,000 6.000%, 7-1-05
Baa/NR 859,000
Maricopa Co. Elementary School District No. 1
(Phoenix),
250,000 5.800%, 7-1-10, FSA Insured
Aaa/AAA 270,938
1,000,000 5.000%, 7-1-13, FSA Insured
Aaa/AAA 1,021,250
</PAGE>
<PAGE>
Maricopa Co. Elementary School District No. 3
(Tempe),
500,000 8.000%, 7-1-01
A1/AA 551,875
1,000,000 5.400%, 7-1-12, FGIC Insured
Aaa/AAA 1,056,250
1,780,000 6.000%, 7-1-13, AMBAC Insured
Aaa/AAA 1,946,875
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 2,311,250
3,100,000 5.000%, 7-1-09, FGIC Insured
Aaa/AAA 3,247,250
750,000 5.650%, 7-1-11, FGIC Insured
Aaa/AAA 811,875
Maricopa Co. School District No. 8 (Osborn),
1,945,000 6.100%, 7-1-05
A1/A 2,180,831
Maricopa Co. Unified School District No. 9
(Wickenburg),
1,030,000 5.600%, 7-1-15, AMBAC Insured
Aaa/AAA 1,091,800
Maricopa Co. Unified School District No. 11
(Peoria),
500,000 9.250%, 7-1-01, FGIC Insured
Aaa/AAA 566,250
2,000,000 6.100%, 7-1-10, AMBAC Insured
Aaa/AAA 2,197,500
Maricopa Co. Elementary School District No. 28
(Kyrene),
1,125,000 6.000%, 7-1-14, FGIC Insured
Aaa/AAA 1,210,781
Maricopa Co. School District No. 31 (Balsz)
1,000,000 5.375%, 7-1-12, AMBAC Insured
NR/AAA 1,086,250
Maricopa Elementary School District No. 38
(Madison),
1,350,000 5.400%, 7-1-11, FGIC Insured
Aaa/AAA 1,429,312
2,000,000 5.800%, 7-1-15, MBIA Insured
Aaa/AAA 2,162,500
Maricopa Co. Unified School District No. 41
(Gilbert),
1,750,000 6.250%, 7-1-15, FSA Insured
Aaa/AAA 1,986,250
Maricopa Co. Unified School District No. 48
(Scottsdale),
</PAGE>
<PAGE>
750,000 6.750%, 7-1-09, (pre-refunded)
Aa2/AA 810,938
1,000,000 5.000%, 7-1-14
Aa2/AA 1,022,500
Maricopa Co. Elementary School District No. 68
(Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured
Aaa/AAA 1,434,871
Maricopa Co. Unified School District No. 69
(Paradise Valley),
3,150,000 7.000%, 7-1-07
A1/A+ 3,626,438
2,400,000 5.800%, 7-1-09, AMBAC Insured
Aaa/AAA 2,700,000
1,000,000 5.300%, 7-1-11, MBIA Insured
Aaa/AAA 1,081,250
Maricopa Co. Unified School District No. 80
(Chandler),
715,000 5.800%, 7-1-09, FGIC Insured (pre-refunded)
Aaa/AAA 781,138
Maricopa Co. Unified School District No. 97
(Deer Valley),
1,000,000 5.000%, 7-1-11, MBIA Insured
Aaa/AAA 1,036,250
Maricopa Co. Unified School District No. 98
(Fountain Hills),
1,000,000 5.750%, 7-1-12, AMBAC Insured
Aaa/AAA 1,086,250
Maricopa Co. High School District No. 205
(Glendale Union),
1,000,000 5.500%, 7-1-11, FGIC Insured
Aaa/AAA 1,066,250
5,000,000 5.700%, 7-1-14, FGIC Insured (pre-refunded)
Aaa/AAA 5,506,250
Maricopa Co. High School District No. 210
(Phoenix Union),
1,700,000 6.200%, 7-1-06, (pre-refunded)
Aa3/AA 1,846,625
3,000,000 5.450%, 7-1-08
Aa3/AA 3,183,750
1,000,000 5.375%, 7-1-13
Aa3/AA 1,050,000
2,000,000 5.700%, 7-1-15
Aa3/AA 2,157,500
2,500,000 5.500%, 7-1-17
Aa3/AA 2,618,750
Maricopa Co. High School District No. 213
(Tempe),
1,000,000 6.000%, 7-1-12, FGIC Insured
Aaa/AAA 1,091,250
Mesa, Arizona
1,425,000 5.700%, 7-1-08, MBIA Insured (pre-refunded)
Aaa/AAA 1,551,469
2,650,000 5.000%, 7-1-18, FGIC Insured
Aaa/AAA 2,640,063
Mohave Co. Unified School District No. 1
(Lake Havasu),
1,000,000 4.900%, 7-1-13, FGIC Insured
Aaa/AAA 1,016,250
Navajo Co. Unified School District No. 10
(Show Low),
1,000,000 5.250%, 7-1-16, FGIC Insured
Aaa/NR 1,028,750
Navajo Co. Unified School District No. 32
(Blue Ridge),
985,000 5.900%, 7-1-08, FSA Insured
Aaa/AAA 1,081,038
640,000 5.800%, 7-1-14, FGIC Insured
Aaa/AAA 696,800
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03
Aaa/AA 1,194,700
900,000 5.600%, 7-1-11
Aa1/AA+ 965,250
1,000,000 6.250%, 7/1-16
Aa1/AA+ 1,168,750
1,240,000 6.250%, 7-1-17
Aa1/AA+ 1,449,250
2,540,000 5.000%, 7-1-19
Aa1/AA+ 2,549,525
Pima Co. Unified School District No. 8 (Flowing
Wells),
1,090,000 5.900%, 7-1-13, (pre-refunded)
A/NR 1,219,438
Pima Co. Unified School District No. 12
(Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured
Aaa/AAA 1,332,812
Pinal Co. Unified School District No. 43
(Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured
Aaa/AAA 1,629,375
1,000,000 5.000%, 7-1-15, FGIC Insured
Aaa/AAA 1,010,000
Pinewood Sanitary District,
605,000 6.500%, 7-1-09
NR/NR* 643,569
Prescott, Arizona
1,120,000 4.500%, 7-1-12
Aaa/AAA 1,100,400
Prescott Valley Sewer Collection Improvement
District,
500,000 7.900%, 1-1-12
NR/BBB- 566,250
Santa Cruz Co. Unified School District No. 1
(Nogales),
400,000 7.700%, 7-1-03, (pre-refunded)
Aaa/AAA 442,000
</PAGE>
<PAGE>
Scottsdale, Arizona,
1,000,000 5.500%, 7-1-10,
Aa1/AA+ 1,117,500
1,250,000 6.000%, 7-1-14, (pre-refunded)
Aa1/AA+ 1,350,000
Tempe, Arizona,
1,000,000 5.300%, 7-1-09
Aa1/AA+ 1,095,000
1,450,000 6.000%, 7-1-10, (pre-refunded)
Aa1/AA+ 1,566,000
1,290,000 5.400%, 7-1-11
Aa1/AA+ 1,415,775
830,000 5.400%, 7-1-11
Aa1/AA+ 889,138
2,270,000 4.500%, 7-1-14
Aa1/AA+ 2,193,388
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured
Aaa/AAA 545,000
2,260,000 6.100%, 7-1-12, FGIC Insured
Aaa/AAA 2,447,181
2,500,000 5.750%, 7-1-20, (pre-refunded)
Aa3/AA 2,775,000
Yavapai Co. Unified School District No. 28
(Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured
Aaa/AAA 551,250
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured (pre-refunded)
Aaa/AAA 2,202,500
Total Arizona General Obligation Bonds
119,224,585
ARIZONA REVENUE BONDS (67.5%)
AIRPORT REVENUE BONDS (1.8%)
Phoenix Municipal Airport Authority,
565,000 6.400%, 7-1-12, AMT, MBIA Insured
Aaa/AAA 629,975
Phoenix Civic Improvement Corp. Airport Revenue
Bonds
5,675,000 5.000%, 7-1-25, FSA Insured
Aaa/AAA 5,639,531
Tucson Municipal Airport Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured
Aaa/AAA 1,068,750
Total Airport Revenue Bonds
7,338,256
BASIC SERVICE REVENUE BONDS (14.1%)
Casa Grande Excise Tax Revenue Bonds,
365,000 6.000%, 4-1-10, FGIC Insured
Aaa/AAA 394,200
440,000 5.200%, 4-1-17, MBIA Insured
Aaa/AAA 447,700
</PAGE>
<PAGE>
Chandler Street & Highway User Revenue Bonds,
1,300,000 5.400%, 7-1-13, MBIA Insured
Aaa/AAA 1,369,875
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 2,193,831
Gilbert Water & Sewer Revenue Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured
Aaa/AAA 2,818,750
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured
Aaa/AAA 4,210,000
2,750,000 5.375%, 7-1-14, FGIC Insured
Aaa/AAA 2,863,438
Phoenix Civic Improvement Corp. Water System
Revenue Bonds,
1,690,000 6.000%, 7-1-03
Aa3/AA- 1,835,763
3,000,000 5.500%, 7-1-10, (pre-refunded)
Aa3/AA- 3,258,750
1,500,000 5.000%, 7-1-13
Aa3/A 1,526,250
1,500,000 5.400%, 7-1-14
Aa3/AA- 1,565,625
1,250,000 5.000%, 7-1-18
Aa3/A 1,250,000
2,315,000 6.000%, 7-1-19, (pre-refunded)
Aa3/AA- 2,572,544
2,250,000 5.375%, 7-1-22, MBIA Insured
Aaa/AAA 2,306,250
Phoenix Street & Highway User Revenue Bonds,
2,190,000 6.250%, 7-1-06
A1/AA 2,376,150
5,000,000 6.250%, 7-1-11
A2/A+ 5,368,750
3,265,000 6.250%, 7-1-11, MBIA Insured
Aaa/AAA 3,542,525
Pima County Sewer Revenue Bonds,
2,000,000 6.750%, 7-1-15, FGIC Insured
Aaa/AAA 2,155,000
Prescott Valley Water District Revenue Bonds,
1,000,000 4.875%, 1-1-19, MBIA Insured+
NR/AAA 980,000
Scottsdale Water & Sewer Revenue Bonds,
2,170,000 4.500%, 7-1-20
Aa1/AA 2,023,525
Scottsdale Preserve Authority Excise Tax Revenue
Bonds,
1,890,000 5.625%, 7-1-18, FGIC Insured
Aaa/AAA 1,996,312
Sedona Sewer Revenue Bonds,
700,000 7.400%, 7-1-11, (pre-refunded)
NR/AAA 753,375
1,055,000 7.000%, 7-1-12
NR/BBB 1,159,181
</PAGE>
<PAGE>
Sedona Wastewater Municipal Property Corp.
Revenue Bonds,
2,000,000 5.000%, 7-1-19, MBIA Insured
NR/AAA 1,992,500
Tucson Water System Revenue Bonds,
500,000 7.000%, 7-1-10, MBIA Insured
Aaa/AAA 514,700
1,500,000 6.700%, 7-1-12, (pre-refunded)
A1/A+ 1,633,125
2,370,000 5.750%, 7-1-18
A1/A+ 2,482,575
Total Basic Service Revenue Bonds
56,620,694
HOSPITAL REVENUE BONDS (7.9%)
Arizona Health Facilities (Northern Arizona
Healthcare System),
1,000,000 5.250%, 10-1-16, AMBAC Insured
Aaa/AAA 1,025,000
1,350,000 4.750%, 10-1-30, AMBAC Insured
Aaa/AAA 1,299,375
Arizona Health Facilities (Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured
Aaa/AAA 2,634,375
Chandler Industrial Development Authority
(Ahwatukee Medical Facility),
900,000 7.000%, 7-1-22
NR/NR* 967,500
Maricopa Co. Industrial Development Authority
(Catholic Healthcare West)
A2/A 1,983,650
2,045,000 5.000%, 7-1-21
Maricopa Co. Industrial Development Authority
(Mercy Health Care System-St. Joseph's
Hospital)
930,000 7.750%, 11-1-10
NR/AAA 1,129,950
Maricopa Co. Industrial Development Authority
(Mayo Clinic)
7,000,000 5.250%, 11-15-37
NR/AA+ 7,052,500
Mesa Industrial Development Authority
(Lutheran Health),
1,000,000 5.000%, 1-1-19, MBIA Insured
Aaa/AAA 995,000
Mohave Co. Industrial Development Authority
(Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured
Aaa/AAA 1,236,250
Phoenix Industrial Development Authority (John
C.
Lincoln Hospital),
1,070,000 5.500%, 12-1-13, FSA Insured
Aaa/AAA 1,146,238
Pima Co. Industrial Development Authority
(Tucson Medical Center),
1,000,000 6.375%, 4-1-12, MBIA Insured
Aaa/AAA 1,087,500
1,000,000 5.000%, 4-1-15, MBIA Insured
Aaa/AAA 1,003,750
Pima Co. Industrial Development Authority
(Healthpartners),
1,000,000 5.625%, 4-1-14, MBIA Insured
Aaa/AAA 1,075,000
Scottsdale Industrial Development Authority
(Scottsdale Memorial Hospital),
2,000,000 6.500%, 9-1-03, AMBAC Insured
Aaa/AAA 2,217,500
530,000 6.500%, 9-1-06, AMBAC Insured
Aaa/AAA 610,162
2,000,000 5.500%, 9-1-12, AMBAC Insured
Aaa/AAA 2,195,000
2,020,000 6.125%, 9-1-17, AMBAC Insured
Aaa/AAA 2,269,975
Yavapai Co. Industrial Development Authority
(Yavapai Regional Medical Center),
1,130,000 5.125%, 12-1-13, FSA Insured
Aaa/AAA 1,163,900
Yuma Co. Industrial Development Authority (Yuma
Regional Medical Center),
500,000 5.850%, 8-1-08, MBIA Insured
Aaa/AAA 563,125
Total Hospital Revenue Bonds
31,655,750
LEASE REVENUE BONDS (8.2%)
Arizona Certificates of Participation Lease
Revenue
Bonds,
840,000 6.625%, 9-1-08, FSA Insured
Aaa/AAA 905,100
2,000,000 6.500%, 3-1-08, FSA Insured
Aaa/AAA 2,167,500
Arizona Municipal Finance Program No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured
Aaa/AAA 1,642,875
Arizona Municipal Finance Program No. 34,
1,000,000 7.250%, 8-1-09, MBIA Insured
Aaa/AAA 1,250,000
</PAGE>
<PAGE>
Avondale Municipal Facilities Lease Revenue
Bonds,
350,000 7.150%, 7-1-13, MBIA Insured
Aaa/AAA 357,910
1,185,000 5.200%, 7-1-13, MBIA Insured
Aaa/AAA 1,220,550
Bullhead City Municipal Property Corp. Lease
Revenue Bonds,
1,670,000 5.200%, 7-1-09, MBIA Insured
Aaa/AAA 1,776,462
Cave Creek Certificates of Participation Lease
Revenue Bonds,
365,000 5.750%, 7-1-19
NR/BBB- 361,350
Glendale Municipal Property Corp. Lease Revenue
Bonds, MBIA Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured
Aaa/AAA 1,025,910
Lake Havasu City Certificates of Participation
Lease Revenue Bonds,
750,000 5.625%, 6-1-04, FGIC Insured
Aaa/AAA 796,875
500,000 7.000%, 6-1-05, FGIC Insured
Aaa/AAA 537,500
Maricopa Co. Certificates of Participation Lease
Revenue Bonds,
1,000,000 6.000%, 6-1-04
Baa1/BBB+ 1,056,250
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+ 2,093,175
1,500,000 6.000%, 7-1-14
Aa2/AA+ 1,629,375
Pinal Co. Certificates of Participation Lease
Revenue Bonds,
1,180,000 6.250%, 6-1-04, (pre-refunded)
NR/AA 1,275,875
Prescott Municipal Property Corp. Lease Revenue
Bonds,
1,000,000 5.125%, 1-1-18, FGIC Insured
Aaa/AAA 1,011,250
Scottsdale Municipal Property Corp. Lease
Revenue
Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured
Aaa/AAA 2,362,250
2,620,000 6.250%, 11-1-14, FGIC Insured
Aaa/AAA 2,832,875
</PAGE>
<PAGE>
Sierra Vista Municipal Property Corp Lease
Revenue
Bonds,
1,265,000 5.000%, 1-1/18, AMBAC Insured
Aaa/AAA 1,274,488
Tucson Certificate of Participation Lease
Revenue
Bonds,
1,000,000 6.375%, 7-1-09
Baa1/AA 1,091,250
Tucson Business Development Finance Corp.
1,585,000 6.250%, 7-1-12, FGIC Insured
Aaa/AAA 1,723,687
University of Arizona Certificates of
Participation
Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured
Aaa/AAA 1,078,750
Yuma Municipal Property Corp. Lease Revenue
Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured
Aaa/AAA 1,435,206
Total Lease Revenue Bonds
33,043,588
MORTGAGE REVENUE BONDS (4.3%)
Maricopa Co. Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Advantage Point Project),
1,000,000 6.500%, 7-1-16
A/NR 1,175,000
Maricopa Co. Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Pines at Camelback Project),
450,000 5.400%, 5-1-18
NR/AA 455,062
Mohave Co. Industrial Development Authority
(Chris Ridge Village),
1,040,000 6.250%, 11-1-16
NR/AAA 1,137,500
Peoria Industrial Development Authority (Casa
Del
Rio),
2,500,000 7.300%, 2-20-28
NR/AAA 2,746,875
Phoenix Industrial Development Authority Single
Family Mortgage Revenue,
1,310,000 6.300%, 12-1-12, AMT
NR/AAA 1,398,425
2,000,000 5.300%, 4-1-20, AMT
NR/AAA 2,020,000
1,000,000 5.350%, 6-1-20, AMT
NR/AAA 1,017,500
</PAGE>
<PAGE>
Pima Co. Industrial Development Authority
(Broadway Proper),
500,000 8.150%, 12-1-25
NR/AA- 546,875
Pima Co. Industrial Development Authority Single
Family Mortgage Revenue,
225,000 7.625%, 2-1-12
A2/NR 235,125
830,000 6.500%, 2-1-17
A/NR 881,875
1,185,000 6.750%, 11-1-27, AMT
NR/AAA 1,263,506
1,625,000 6.250%, 11-1-29, AMT
NR/AAA 1,728,594
Scottsdale Industrial Development Authority
(Westminster Village),
1,185,000 7.700%, 6-1-06
NR/NR* 1,324,237
Tempe Industrial Development Authority
(Friendship Village),
1,500,000 6.500%, 12-1-08
NR/NR* 1,518,750
Total Mortgage Revenue Bonds
17,449,324
POLLUTION CONTROL REVENUE BONDS (6.3%)
Casa Grande Industrial Development Authority
(Frito Lay) Revenue Bonds,
250,000 6.650%, 12-1-14
A1/lNR 276,875
Coconino Co. Pollution Control (Nevada Power)
Revenue Bonds,
3,500,000 5.350%, 10-1-22
NR/BBB- 3,491,250
Gila Co. Pollution Control (Asarco) Revenue
Bonds
2,000,000 5.550%, 1-1-27
Baa2/BBB 1,975,000
Gilbert Industrial Development Authority
Wastewater Reclamation Facility Revenue Bonds,
600,000 10.000%, 10-1-10, (pre-refunded)
NR/NR* 670,500
1,000,000 6.875%, 4-1-14
NR/NR* 1,027,500
Greenlee Co. Pollution Control (Phelps Dodge)
Revenue Bonds,
8,000,000 5.450%, 6-1-09
A2/A 8,350,000
Mohave Co. Industrial Development Authority
(North Star Steel) Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT
NR/AA- 4,316,000
Navajo Co. Pollution Control Revenue Bonds
(Arizona Public Service),
5,000,000 5.875%, 8-15-28, MBIA Insured
Aaa/AAA 5,318,750
Total Pollution Control Revenue Bonds
25,425,875
UNIVERSITY REVENUE BONDS (10.5%)
Arizona Board of Regents-Arizona State
University
System Revenue Bonds,
6,750,000 5.750%, 7-1-12
A1/AA 7,087,500
7,000,000 6.125%, 7-1-15
A1/AA 7,437,500
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 3,082,500
Arizona State University Research Park Revenue
Bonds,
1,225,000 5.000%, 7-1-21, MBIA Insured
Aaa/AAA 1,217,344
Arizona Board of Regents-Northern Arizona
University System Revenue Bonds,
3,000,000 5.800%, 6-1-08, AMBAC Insured
Aaa/AAA 3,206,250
1,000,000 5.150%, 6-1-12, FGIC Insured
Aaa/AAA 1,041,250
3,000,000 5.200%, 6-1-13, FGIC Insured
Aaa/AAA 3,108,750
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 1,041,250
450,000 7.000%, 3-1-05, AMT
Aa2/NR 486,000
1,720,000 5.700%, 12-1-08, AMT
Aa2/NR 1,769,450
Arizona Student Loan Revenue
500,000 6.600%, 5-1-10
Aa/NR 538,750
</PAGE>
<PAGE>
Glendale Industrial Development Authority
(American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded)
NR/AAA 354,375
2,100,000 5.625%, 7-1-20, AMBAC Insured
NR/AAA 2,226,000
Glendale Industrial Development Authority
(Midwestern University)
2,250,000 5.375%, 5-15-28
NR/BBB+ 2,244,375
Pinal Co. Community College District Revenue
Bonds,
1,680,000 5.100%, 7-1-14, AMBAC Insured
Aaa/NR 1,719,900
Yavapai Co. Community College District Revenue
Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured
Aaa/AAA 1,122,162
500,000 6.000%, 7-1-12
NR/A- 525,625
Total University Bonds
42,197,419
UTILITY REVENUE BONDS (14.4%)
Arizona Power Authority (Hoover Dam Project)
Revenue Bonds,
2,720,000 5.300%, 10-1-06, MBIA Insured
Aaa/AAA 2,900,200
8,500,000 5.375%, 10-1-13, MBIA Insured++
Aaa/AAA 8,850,625
2,425,000 5.250%, 10-1-17, MBIA Insured
Aaa/AAA 2,467,438
Arizona Wastewater Management Authority
Revenue Bonds,
1,700,000 6.800%, 7-1-11
Aa1/AA+ 1,876,375
1,240,000 5.625%, 7-1-15, AMBAC Insured
Aaa/AAA 1,340,750
Arizona Water Infrastructure Finance Authority
Revenue Bonds,
2,000,000 5.000%, 7-1-17, MBIA Insured
Aaa/AAA 2,002,500
Central Arizona Water Conservation District
Revenue Bonds,
2,000,000 5.500%, 11-1-09
A1/AA- 2,215,000
1,000,000 5.500%, 11-1-10
A1/AA- 1,103,750
2,000,000 7.125%, 11-1-11, (pre-refunded)
NR/AA- 2,165,000
</PAGE>
<PAGE>
Mohave Co. Industrial Development Authority
(Citizens Utility),
3,000,000 7.050%, 8-1-20
NR/AA- 3,146,100
Pima Co. Industrial Development Authority
(Tucson
Electric), Revenue Bonds,
2,505,000 7.250%, 7-15-10, FSA Insured
Aaa/AAA 2,780,550
Salt River Project Agricultural Improvement and
Power Revenue Bonds
4,485,000 6.200%, 1-1-12
Aa2/AA 4,821,375
650,000 6.000%, 1-1-13
Aa2/AA 695,500
2,850,000 5.000%, 1-1-13, MBIA Insured
Aaa/AAA 2,899,875
1,000,000 5.125%, 1-1-18
Aa2/AA 1,010,000
8,500,000 6.250%, 1-1-19
Aa2/AA 9,158,750
5,730,000 6.250%, 1-1-27
Aa2/AA 6,174,075
1,000,000 5.500%, 1-1-28
Aa2/AA 1,026,250
Santa Cruz Industrial Development Authority
(Citizens Utility),
1,220,000 7.150%, 2-1-23, AMT
NR/AA- 1,268,349
Total Utility Revenue Bonds
57,902,462
Total Arizona Revenue Bonds
271,633,368
ZERO COUPON BONDS (1.2%)
Maricopa Co. Industrial Development Authority
Single Family Mortgage Revenue Bonds,
1,435,000 0.000%, 12-31-14
Aaa/AAA 651,131
2,590,000 0.000%, 12-31-16
Aaa/AAA 1,071,612
Phoenix Industrial Development Authority Single
Family Mortgage Revenue,
1,750,000 0.000%, 12-1-14
Aaa/AAA 798,437
Sedona Wastewater Municipal Property Corp.
Revenue Bonds,
2,210,000 0.000%, 7-1-24, MBIA Insured
NR/AAA 599,463
</PAGE>
<PAGE>
Tucson & Pima Co. Single Family Mortgage
Revenue Bonds
4,000,000 0.000%, 12-1-14
Aaa/AAA 1,860,000
Total Zero Coupon Bonds
4,980,643
U.S TERRITORIAL BONDS (1.8%)
Guam Housing Development Corp. Single Family
Mortgage Revenue Bonds,
1,000,000 5.350%, 9-1-18
NR/AAA 1,021,250
Puerto Rico General Obligation Bonds,
1,000,000 6.250%, 7-1-10
Baa1/A 1,076,250
1,500,000 6.350%, 7-1-10, (pre-refunded)
Aaa/AAA 1,706,250
2,035,000 6.450%, 7-1-17, (pre-refunded)
Aaa/AAA 2,319,900
Puerto Rico Industrial, Medical & Environmental
Revenue Bonds,
1,000,000 7.600%, 5-1-14, (Warner Lambert)
Aa3/NR 1,041,640
Total U.S. Territorial Bonds
7,165,290
Total Investments (cost $377,805,196)**
100.1% 403,003,886
Other assets in excess of liabilities
(0.1) (434,695)
Net Assets
100.0% $402,569,191
* 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.
** Cost for Federal tax purposes is
identical.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<S> <C>
<C>
ASSETS
Investments at value (cost $377,805,196)
$ 403,003,886
Interest receivable
8,768,230
Receivable for investment securities sold
215,026
Receivable for Trust shares sold
177,797
Other assets
4,221
Total assets
412,169,160
LIABILITIES
Payable for investment securities purchased
7,647,486
Cash overdraft
935,105
Dividends payable
467,923
Payable for Trust shares redeemed
211,700
Distribution fees payable
154,964
Management fee payable
137,145
Accrued expenses
45,646
Total liabilities
9,599,969
NET ASSETS
$ 402,569,191
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par
value $.01 per share
$ 371,069
Additional paid-in capital
376,379,831
Net unrealized appreciation on investments
25,198,690
Accumulated net realized gain on investments
1,085,544
Distributions in excess of net investment income
(465,943)
$ 402,569,191
CLASS A
Net Assets
$ 401,118,575
Capital shares outstanding
36,973,451
Net asset value and redemption price per share
$ 10.85
Offering price per share (100/96 of $10.85 adjusted to nearest
cent) $ 11.30
CLASS C
Net Assets
$ 1,228,022
Capital shares outstanding
112,993
Net asset value and offering price per share
$ 10.87
Redemption price per share (*generally, a charge of 1% is
imposed
on the proceeds of shares redeemed during the first 12 months
after purchase.)
$ 10.87*
CLASS Y
Net Assets
$ 222,594
Capital shares outstanding
20,465
Net asset value, offering and redemption price per share
$ 10.88
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest income
$10,773,142
Expenses:
Management fee (note 3) $
807,169
Distribution and service fees (note 3)
306,736
Transfer and shareholder servicing agent fees
136,000
Trustees' fees and expenses
40,500
Shareholders'meeting, reports and proxy statements
37,000
Legal fees
32,000
Custodian fees
19,027
Audit and accounting fees
16,000
Registration fees and dues
16,000
Insurance
3,500
Miscellaneous
30,928
1,444,860
Expenses paid indirectly (note 7)
(12,890)
Net expenses
1,431,970
Net investment income
9,341,172
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions
1,085,545
Change in unrealized appreciation on investments
1,462,540
Net realized and unrealized gain on investments
2,548,085
Net increase in net assets resulting from operations
$11,889,257
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
SIX MONTHS ENDED YEAR ENDED
DEC. 31, 1998 JUNE 30, 1998
</CAPTION>
<S> <C>
<C> <C>
OPERATIONS:
Net investment income
$9,341,172 $19,038,232
Net realized gain from securities transactions
1,085,545 3,157,634
Change in unrealized appreciation on investments
1,462,540 7,837,854
Change in net assets resulting from operations
11,889,257 30,033,720
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income
(9,489,807) (19,395,494)
Net realized gain on investments
(2,903,122) (88,057)
Class C Shares:
Net investment income
(18,757) (18,434)
Net realized gain on investments
(8,159) (178)
Class Y Shares:
Net investment income
(4,056) (837)
Net realized gain on investments
(1,607) (13)
Change in net assets from distributions
(12,425,508) (19,503,013)
CAPITAL SHARE TRANSACTIONS (NOTE 8):
Proceeds from shares sold
23,222,310 32,337,408
Reinvested dividends and distributions
5,133,034 10,338,428
Cost of shares redeemed
(19,989,901) (50,403,313)
Change in net assets from capital share transactions
8,365,443 (7,727,477)
Change in net assets
7,829,192 2,803,230
NET ASSETS:
Beginning of period
394,739,999 391,936,769
End of period
$402,569,191 $394,739,999
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 investors. At December 31, 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.
</PAGE>
<PAGE>
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME:
Securities transactions are recorded on the trade date. Realized
gains and losses from securities transactions are reported on the
identified cost basis. Interest income is recorded daily on the
accrual basis and is adjusted for amortization of premium and
accretion of original issue discount. Market discount is recognized
upon disposition of the security.
c) FEDERAL INCOME TAXES: It is the policy of the Trust to qualify
as a regulated investment company by complying with the provisions
of the Internal Revenue Code applicable to certain investment
companies. The Trust intends to make distributions of income and
securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
d) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on the
relative net assets of each class. Class-specific expenses, which
include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly
to such class.
e) 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 agreem ent, 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 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 annnual rate of 0.20 of 1% on
the Trust's net assets.
</PAGE>
<PAGE>
For the six months ended December 31, 1998, the Trust
incurred fees for advisory and administrative services of $807,169.
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, 1998, service
fees on Class A Shares amounted to $301,827, of which the
Distributor received $11,544.
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, 1998, amounted to $3,682.
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, 1998,
amounted to $1,227. The total of these payments with respect to
Class C Shares amounted to $4,909, of which the Distributor
received $3,725.
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 six
months ended December 31, 1998, the Distributor received
commissions of $105,742 on sales of Class A shares.
</PAGE>
<PAGE>
4. PURCHASES AND SALES OF SECURITIES
During the six months ended December 31, 1998, purchases
of securities and proceeds from the sales of securities aggregated
$41,833,142 and $33,152,739, respectively.
At December 31, 1998, aggregate gross unrealized
appreciation for all securities in which there is an excess of
market value over tax cost amounted to $25,352,574 and aggregate
gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value amounted to $153,884 for a
net unrealized appreciation of $25,198,690.
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 December 31, 1998, the Trust had
1.8% of its net assets invested in five 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 taxes at
ordinary income and/or capital gain rates. For certain
shareholders, some dividend income may, under some circumstances,
be subject to the alternative minimum tax.
7. EXPENSES
The Trust has negotiated an expense offset arrangement
with its custodian wherein it receives credit toward the reduction
of custodian fees and other Trust expenses whenever there are
uninvested cash balances. The Statement of Operations reflects the
total expenses before any offset, the amount of offset and the net
expenses. 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.
</PAGE>
<PAGE>
8. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
DECEMBER 31, 1998
JUNE 30, 1998
SHARES
AMOUNT SHARES AMOUNT
</CAPTION>
<S> <C> <C> <C>
<C> <C>
CLASS A SHARES:
Proceeds from shares sold 2,061,549 $
22,530,488 2,935,093 $ 31,690,705
Reinvested distributions 468,805
5,114,091 955,611 10,322,539
Cost of shares redeemed (1,820,393)
(19,880,002) (4,666,468) (50,385,170)
Net change 709,961
7,764,577 (775,764) (8,371,926)
CLASS C SHARES:
Proceeds from shares sold 48,463
529,751 54,652 591,078
Reinvested distributions 1,302
14,199 1,379 14,945
Cost of shares redeemed (9,982)
(109,899) (1,674) (18,143)
Net change 39,783
434,051 54,357 587,880
CLASS Y SHARES:
Proceeds from shares sold 14,822
162,071 5,112 55,625
Reinvested distributions 433
4,744 87 944
Cost of shares redeemed -
- - - -
Net change 15,255
166,815 5,199 56,569
Total transactions in Trust
shares 764,999 $
8,365,443 (716,208) $(7,727,477)
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A(1)
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DEC. 31, 1998
1998 1997 1996 1995 1994
</CAPTION>
<S> <C>
<C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.86
$10.58 $10.38 $10.37 $10.16 $10.84
Income from Investment Operations:
Net investment income 0.25
0.52 0.53 0.55 0.56 0.57
Net gain (loss) on securities
(both realized and unrealized) 0.08
0.29 0.22 0.01 0.21 (0.60)
Total from Investment Operations 0.33
0.81 0.75 0.56 0.77 (0.03)
Less Distributions (note 6):
Dividends from net investment income (0.26)
(0.53) (0.55) (0.55) (0.56) (0.57)
Distributions from capital gains (0.08)
- - - - (0.08)
Total Distributions (0.34)
(0.53) (0.55) (0.55) (0.56) (0.65)
Net Asset Value, End of Period $10.85
$10.86 $10.58 $10.38 $10.37 $10.16
Total Return (not reflecting sales
charge)(%) 3.05+
7.83 7.36 5.49 7.89 (0.38)
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 401,119
393,887 391,737 389,083 380,745 372,093
Ratio of Expenses to Average Net
Assets (%) 0.71*
0.73 0.73 0.73 0.74 0.71
Ratio of Net Investment Income to
Average Net Assets (%) 4.63*
4.81 5.02 5.30 5.55 5.35
Portfolio Turnover Rate (%) 8.36+
19.68 19.98 27.37 34.44 31.20
The expense ratios after giving effect to the expense offset for
uninvested
cash balances were:
Ratio of Expenses to Average Net
Assets (%) 0.71*
0.72 0.72 0.72 0.74 0.70
(1) Designated as Class A Shares on April 1, 1996.
+ Not Annualized.
* Annualized.
See accompanying notes to financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C(1)
CLASS Y(1)
SIX MONTHS
PERIOD(2) SIX MONTHS PERIOD(2)
ENDED
ENDED ENDED ENDED
DEC. 31, YEAR ENDED JUNE
30, JUNE 30, DEC. 31, YEAR ENDED JUNE 30, JUNE 30
1998 1998
1997 1996 1998 1998 1997 1996
</CAPTION>
<S> <C> <C> <C>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.88 $10.60
$10.38 $10.45 $10.89 $10.59 $10.38 $10.45
Income from Investment Operations:
Net investment income 0.20 0.43
0.44 0.13 0.27 0.58 0.70 0.15
Net gain (loss) on securities
(both realized and unrealized) 0.08 0.29
0.23 (0.07) 0.07 0.31 0.21 (0.07)
Total from Investment Operations 0.28 0.72
0.67 0.06 0.34 0.89 0.91 0.08
Less Distributions (note 6):
Dividends from net investment
income (0.21) (0.44)
(0.45) (0.13) (0.27) (0.59) (0.70) (0.15)
Distributions from capital gains (0.08) -
- - (0.08) - - -
Total Distributions (0.29) (0.44)
(0.45) (0.13) (0.35) (0.59) (0.70) (0.15)
Net Asset Value, End of Period $10.87 $10.88
$10.60 $10.38 $10.88 $10.89 $10.59 $10.38
Total Return (not reflecting sales
charge) (%) 2.61+ 6.90
6.64 0.57+ 3.13+ 8.63 9.10 0.76+
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 1,228 797
200 6 223 57 0.1 0.1
Ratio of Expenses to Average Net
Assets (%) 1.56* 1.57
1.58 0.40+ 0.56* 0.58 0.58 0.15+
Ratio of Net Investment Income to
Average Net Assets (%) 3.73* 3.89
4.17 1.17+ 4.78* 4.96 5.17 1.42+
Portfolio Turnover Rate (%) 8.36+ 19.68
19.98 27.37 8.36+ 19.68 19.98 27.37
The expense ratios after giving effect to the expense offset for
uninvested
cash balnaces were:
Ratio of Expenses to Average Net
Assets (%) 1.55* 1.56
1.57 0.40+ 0.56* 0.57 0.57 0.15+
(1) New Class of Shares established on April 1, 1996.
(2) From April 1, 1996 to June 30, 1996.
+ Not annualized.
* Annualized.
See accompanying notes to financial statements.
</TABALE>
</PAGE>
<PAGE>
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Tax-Free Trust of Arizona
(the "Trust") was held on October 24, 1998. The holders of shares
representing 67% 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. To elect Trustees.
</TABLE>
<TABLE>
<S> <C>
<C>
NUMBER OF VOTES:
TRUSTEE FOR
WITHHELD
Lacy B. Herrmann 261,456,981.51
2,045,865.15
Arthur K. Carlson 261,434,956.01
2,067,890.65
Thomas W. Courtney 261,548,262.55
1,954,584.10
William L. Ensign 261,548,262.55
1,954,584.10
Diana P. Herrmann 261,548,262.55
1,954,584.10
John C. Lucking 261,548,262.55
1,954,584.10
Anne J. Mills 261,548,262.55
1,954,584.10
2. To ratify the selection of KPMG Peat Marwick LLP as the
Trust's
independent auditors.
NUMBER OF VOTES:
FOR AGAINST
ABSTAIN
256,912,968.96 403,847.85
6,186,019.00
</TABLE>
</PAGE>
<PAGE>
PREPARING FOR YEAR 2000 (UNAUDITED)
The Trustees and officers of the Trust have been
monitoring issues involving preparedness for the turn of the
century for some time in an effort to minimize or eliminate any
potential impact upon the Trust and its shareholders. Our officers
have focussed significant time and effort in order that the various
computerized functions that could affect the Trust are ready by the
beginning of the year 2000.
The Trust is highly reliant on certain mission-critical
suppliers' services. Each supplier of these services has provided
the Trust's officers with assurances that it is actively addressing
potential problems relating to the year 2000. The officers, in
turn, are monitoring and will continue to monitor the progress of
its suppliers.
As you can well understand, we cannot directly control
our supplier operations. We assure you, however, that we recognize
a responsibility to inform our shareholders if in the future we
become aware of any developments which would lead us to believe
that the Trust will be significantly affected by year 2000
problems.
We will continue to keep you up-to-date through future
communications.
</PAGE>
