<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
Alan R. Stockman, 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.
ANNUAL
REPORT
JUNE 30, 1999
A TAX-FREE INCOME INVESTMENT
[Graphic for the logo of Tax-Free Trust of Arizona: Eagle sitting on top of
a flag above the words 'TAX-FREE TRUST OF ARIZONA']
ONE OF THE
AQUILAsm GROUP OF FUNDS
[Logo of the Aquila Group of Funds: an eagle's head]
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
ANNUAL REPORT
[Graphic for the logo of Tax-Free Trust of Arizona: Eagle sitting on top of
a flag above the words 'TAX-FREE TRUST OF ARIZONA']
"TAKE PRIDE IN HOW YOUR INVESTMENT IS HELPING OTHERS -
WHILE PRIMARILY HELPING YOU"
Dear Fellow Shareholders: August 20, 1999
Our surveys of shareholders of Tax-Free Trust of Arizona have shown
that you and other owners of the Trust bought your shares primarily for
TAX-FREE INCOME. And, secondarily, the knowledge - provided through the
stability of the Trust - that your money would be there when you needed it.
Additionally, our surveys showed that most of our shareholders are
pre-retirees or retirees. These are people who are looking forward to making
sure that they have the security of a sound income source from the Trust when
they are no longer in the workforce.
The point you may not have fully appreciated - when you made your
investment in the Trust - was that in the process of having the Trust provide
you with these benefits, it also provides help to a variety of others within
your community and Arizona. And, this is a factor in which you can take real
PRIDE.
The economy of Arizona is growing at a dynamic rate. As this growth
takes place, new and additional municipal projects are needed for the benefit
of the citizens of Arizona and the various communities in it. These projects
include schools, highways, recreational facilities, and a whole array of
useful public purpose projects. These projects are what help economic
development and provide a high quality of life for the citizens of Arizona.
We think it is important for you to realize this. The projects that
the Trust helped finance are all ones that you and others can reach out and
touch. We are illustrating for you some of the various kinds of municipal
projects that your investment in the Trust has helped create in Arizona.
[Photo]
Sky Harbor International Airport
[Photo]
Sandra Day O'Connor Elementary School
[Photo]
Scottsdale Civic Center
[Photo]
Tucson Medical Center
</PAGE>
<PAGE>
The tax laws of Arizona, as well as those of the Federal government,
allow you to receive income from your investment in the Trust DOUBLE
TAX-FREE. It is realized by the State and Federal governmental authorities
that it is essential that various municipal projects be built with an
advantage to the investor. This advantage is primarily one of TAX-FREE income
for you.
You can take comfort in the knowledge that your investment in the
Trust is comprised of a portfolio of municipal securities which possess
extremely high quality. Therefore, you can "SLEEP WELL AT NIGHT" knowing that
the chances of anything happening to these high quality bonds is very slight
indeed. The reason for this, of course, is that the various municipal
projects represented in the Trust have behind them a very sound stream of
taxes and revenues generated by the projects themselves.
We again wish to emphasize that while primarily helping you, Tax-Free
Trust of Arizona is also helping others in your communities and Arizona.
Consequently, you can take great PRIDE in your investment in Tax-Free
Trust of Arizona.
You can rest assured that the overall management of the Trust is
doing a very careful job of "MINDING THE STORE" for you.
We appreciate the continued confidence that you have placed in the
Trust through your investment in Tax-Free Trust of Arizona.
Sincerely,
Diana P. Herrmann
President
Lacy B. Herrmann
Chairman, Board of Trustees
</PAGE>
<PAGE>
PERFORMANCE REPORT
The following graph illustrates the value of $10,000 invested in
the Class A shares of Tax-Free Trust of Arizona for the 10-year period ended
June 30, 1999 as compared with the Lehman Brothers Quality Intermediate
Municipal Bond Index and the Consumer Price Index (a cost of living index).
The performance of each of the other classes is not shown in the graph but is
included in the table below. It should be noted that the Lehman Index does
not include any operating expenses nor sales charges and being nationally
oriented, does not reflect state specific bond market performance.
(Graphic of line chart with the following information:)
<TABLE>
<CAPTION>
Lehman Brothers Quality Trust's Class A Shares Cost of Living Index ($)
Intermediate Municipal Bond Index ($) With Sales Charge ($) Without Sales Charge ($)
</CAPTION>
<S> <C> <C> <C> <C>
6/89 10,000 9,600 10,000 10,000
6/90 10,717 10,147 10,568 10,475
6/91 11,661 10,994 11,450 10,967
6/92 12,862 12,257 12,766 11,297
6/93 14,100 13,667 14,234 11,636
6/94 14,287 13,712 14,281 11,926
6/95 15,430 14,869 15,486 12,288
6/96 16,286 15,416 16,250 12,635
6/97 17,401 16,691 17,384 12,917
6/98 18,614 17,974 18,719 13,135
6/99 19,178 18,371 19,133 13,392
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED JUNE 30, 1999
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
Class A (3/13/86)
With Sales Charge (1.84)% 5.27% 6.27% 6.79%
Without Sales Charge 2.23% 6.13% 6.70% 7.12%
Class C (4/1/96)
With CDSC 0.26% n/a n/a 4.80%
Without CDSC 1.26% n/a n/a 4.80%
Class Y (4/1/96)
No Sales Charge 2.28% n/a n/a 6.44%
Lehman Index 3.03% 6.06% 6.73% 6.63%* (Class A)
3.03% n/a n/a 5.34% (Class C&Y)
* From commencement of the index on 1/1/87.
Total return figures shown for the Trust reflect any change in price and
assume all distributions within the period were invested in additional
shares. Returns for Class A shares are calculated with and without the effect
of the initial 4% maximum sales charge. Returns for Class C shares are
calculated with and without the effect of the 1% contingent deferred sales
charge (CDSC), imposed on redemptions made within the first 12 months after
purchase. Class Y shares are sold without any sales charge. The rates of
return will vary and the principal value of an investment will fluctuate with
market conditions. Shares, if redeemed, may be worth more or less than their
original cost. A portion of each classes' income may be subject to federal
and state income taxes and/or the federal alternative minimum tax. Past
performance is not predictive of future investment results.
Previously, the Trust's performance was compared to the Lehman Brothers
Municipal Bond Index rather than the Lehman Brothers Quality Intermediate
Municipal Bond Index. A change was made by the Trust because it provides a
better basis of comparison due to the intermediate nature of the portfolio's
duration and the credit quality of the investments. During the Trust's fiscal
year ended June 30, 1999, an investment in the Trust's Class A shares
(without sales charge) increased 2.23% whereas the Lehman Brothers Quality
Intermediate Municipal Bond Index and the Lehman Brothers Municipal Bond
Index increased 3.03% and 2.76%, respectively.
</PAGE>
<PAGE>
MANAGEMENT DISCUSSION
THIS PAST FISCAL YEAR
During the past fiscal year ended June 30, 1999 of Tax Free Trust
of Arizona, the economy of the United States continued its upward momentum.
As a result, we now expect it to achieve a new record in terms of sustained
economic growth.
Interest rates and share price movement of the Trust remained
generally quite stable over this latest fiscal year period. The net asset
value of the A shares of the Trust declined slightly from $10.86 to $10.51 as
a result of the anticipated and actual moderate interest rate increase
implemented by the Federal Reserve Board. The Federal Reserve Board increased
short-term interest rates by 1/4 of 1% on June 30, 1999 with the intent of
exerting some degree of control over the rate of expansion in the economy. It
is believed by the Fed that it is easier to take steps now to slow down
economic activity rather than having to take more aggressive steps later to
curtail increased inflation or to avoid any significant downward movement of
the economy.
We did observe a certain amount of volatility in the markets in
October, 1998 as a result of concern over international economic
developments. However, this situation passed relatively quickly as various
countries showed improvement in their business activities.
It is important to remember that interest rates do have an effect
upon the price of shares of municipal securities. As interest rates rise, the
price tends to fall. Conversely, as interest rates decline, prices rise. In
its role as central banker for the United States, the Federal Reserve pays a
great deal of attention to the level of economic activity in this country, as
well as the world. Through the power it possess, it tries to moderate the
level of exuberance or pessimism, leaning toward providing an environment of
overall stability. The length of the present upward economic activity of the
United States does not mean that we have outlived economic cycles. At some
point - as yet to be determined - consumer spending, which is the primary
driving force of the U.S. economy, will slack off. And, although business
spending has remained reasonably firm, we can also expect some amount of
retrenchment in various business indicators.
Our objective for Tax-Free Trust of Arizona over the latest
fiscal year has remained similar to that over past periods. We continue to
buy and hold high quality tax-free Arizona municipal securities having
reasonable average maturities. It is our desire to maintain as stable a net
asset value as possible, concurrent with providing investors with a
reasonably high level of income. While there will continue to be some
fluctuations in price and income, such as we have experienced during this
past year, we have tried very hard to moderate these changes for the benefit
of the shareholders of the Trust.
THE YEAR AHEAD
Just before the fiscal year ended on June 30, 1999, the Federal
Reserve Board increased short-term rates for the first time since March,
1997. There is some expectation that in the event of a more robust economic
environment or increased inflation rates, the Federal Reserve will implement
additional increases in short-term rates. Such action by the Federal Reserve,
if it does occur, will be, in their judgment, in the longer-term economic
interest of the United States. However, at present there does appear to be
some difference of opinion as to whether there will be a continuation of
upward economic momentum versus a slow down. We will be watching developments
very closely. Our goal for the coming fiscal year is to provide continuation
of a level of current income to shareholders that is reasonably stable no
matter what the course of interest rates.
We expect that one of the major challenges that the Trust will
experience during this coming fiscal year is that of a lower level of
issuance of municipal bonds in Arizona. In general, there has been a 43%
decline in the issuance of municipal securities in the first 6 months in 1999
versus the first 6 months of 1998. Our job will be to participate in whatever
level of issuance does occur as long as the quality and rate of return is in
the best interest of shareholders.
</PAGE>
<PAGE>
[KPMG logo: The letters KPMG in front of four black rectangles]
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, 1999, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of
the five years in the 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 and financial highlights. Our procedures included
confirmation of securities owned as of June 30, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Trust of Arizona as of June 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
New York, New York
July 27, 1999
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF INVESTMENTS
JUNE 30, 1999
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT ARIZONA GENERAL OBLIGATION BONDS (28.5%) S&P VALUE
</CAPTION>
<S> <C> <C> <C> <C>
Bullhead City Parkway Improvement District,
District,
$ 1,055,000 6.100%, 1-1-11 Baa2/NR $ 1,109,069
1,000,000 6.100%, 1-1-12 Baa2/NR 1,045,000
Chandler, Arizona,
450,000 7.000%, 7-1-12, FGIC Insured Aaa/AAA 474,750
1,750,000 5.125%, 7-1-14, MBIA Insured Aaa/AAA 1,734,688
Cochise Co. Unified School District No. 68
(Sierra Vista),
1,000,000 6.000%, 7-1-06, FGIC Insured Aaa/AAA 1,050,000
1,000,000 6.100%, 7-1-08, FGIC Insured Aaa/AAA 1,047,500
925,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 962,000
Coconino Co. Unified School District No. 1
(Flagstaff),
2,000,000 5.500%, 7-1-09, AMBAC Insured Aaa/AAA 2,072,500
Coconino & Yavapai Unified School Distict
(Sedona),
1,000,000 5.900%, 7-1-07 NR/A- 1,052,500
1,000,000 5.700%, 7-1-07, FGIC Insured Aaa/AAA 1,037,500
Flagstaff, Arizona,
500,000 6.300%, 7-1-06, FGIC Insured Aaa/AAA 514,050
1,000,000 5.000%, 7-1-12, FGIC Insured Aaa/AAA 990,000
Gila Co. Unified School District No. 10
(Payson),
500,000 5.750%, 7-1-09, AMBAC Insured Aaa/AAA 523,125
Graham Co. Unified School District No. 1
(Safford),
300,000 5.000%, 7-1-10, FGIC Insured Aaa/NR 301,125
675,000 4.700%, 7-1-11, MBIA Insured Aaa/NR 658,125
Graham Co. Unified School District No. 4
(Thatcher),
400,000 5.000%, 7-1-10, FSA Insured Aaa/NR 401,500
LaPaz Co. Unified School District No. 27
(Parker)
800,000 6.000%, 7-1-05 Baa2/NR 839,000
</PAGE>
<PAGE>
Maricopa Co. Elementary School District No. 1
(Phoenix),
250,000 5.800%, 7-1-10, FSA Insured Aaa/AAA 262,812
Maricopa Co. Elementary School District No. 3
(Tempe),
1,000,000 5.400%, 7-1-12, FGIC Insured Aaa/AAA 1,021,250
640,000 6.000%, 7-1-13, AMBAC Insured (pre-refunded) Aaa/AAA 692,800
1,140,000 6.000%, 7-1-13, AMBAC Insured Aaa/AAA 1,222,650
Maricopa Co. Unified School District No. 4 (Mesa),
2,250,000 5.500%, 7-1-06, FGIC Insured Aaa/AAA 2,342,812
2,150,000 5.400%, 7-1-09, FSA Insured Aaa/AAA 2,230,625
2,350,000 5.000%, 7-1-09, FGIC Insured Aaa/AAA 2,370,562
Maricopa Co. School District No. 8 (Osborn),
1,945,000 6.100%, 7-1-05 A1/A 2,095,738
Maricopa Co. Unified School District No. 9
(Wickenburg)
1,030,000 5.600%, 7-1-15, AMBAC Insured Aaa/AAA 1,055,750
Maricopa Co. Unified School District No. 11 (Peoria),
500,000 9.250%, 7-1-01, FGIC Insured Aaa/AAA 548,125
2,000,000 6.100%, 7-1-10, AMBAC Insured Aaa/AAA 2,122,500
Maricopa Co. Elementary School District No. 28
(Kyrene),
1,125,000 6.000%, 7-1-14, FGIC Insured Aaa/AAA 1,189,688
Maricopa Co. School District No. 31 (Balsz)
1,000,000 5.375%, 7-1-12, AMBAC Insured NR/AAA 1,032,500
Maricopa Elementary School District No. 38
(Madison)
1,350,000 5.400%, 7-1-11, FGIC Insured Aaa/AAA 1,380,375
2,000,000 5.800%, 7-1-15, MBIA Insured Aaa/AAA 2,120,000
Maricopa Co. Unified School District No. 41
(Gilbert)
1,750,000 6.250%, 7-1-15, FSA Insured Aaa/AAA 1,879,062
Maricopa Co. Unified School District No. 48
(Scottsdale),
750,000 6.750%, 7-1-09, (pre-refunded) Aa2/AA 794,062
1,000,000 5.000%, 7-1-14 Aa2/AA 975,000
</PAGE>
<PAGE>
Maricopa Co. Elementary School District No. 68
(Alhambra),
1,335,000 6.800%, 7-1-10, AMBAC Insured Aaa/AAA 1,431,641
Maricopa Co. Unified School District No. 69
(Paradise Valley)
3,150,000 7.000%, 7-1-07 A1/A+ 3,520,125
2,400,000 5.800%, 7-1-09, AMBAC Insured Aaa/AAA 2,577,000
1,000,000 5.300%, 7-1-11, MBIA Insured Aaa/AAA 1,028,750
Maricopa Co. Unified School District No. 80
(Chandler),
715,000 5.800%, 7-1-09, FGIC Insured (pre-refunded) Aaa/AAA 765,050
Maricopa Co. Unified School District No. 97
(Deer Valley)
1,550,000 5.000%, 7-1-11, MBIA Insured Aaa/AAA 1,546,125
Maricopa Co. Unified School District No. 98
(Fountain Hills)
1,000,000 5.750%, 7-1-12, AMBAC Insured Aaa/AAA 1,052,500
Maricopa Co. High School District No. 205
(Glendale Union),
1,000,000 5.500%, 7-1-11, FGIC Insured Aaa/AAA 1,032,500
5,000,000 5.700%, 7-1-14, FGIC Insured (pre-refunded) Aaa/AAA 5,325,000
Maricopa Co. High School District No. 210
(Phoenix Union),
3,000,000 5.450%, 7-1-08, (pre-refunded) Aa3/AA 3,138,750
1,000,000 5.375%, 7-1-13, (pre-refunded) Aa3/AA 1,047,500
2,000,000 5.700%, 7-1-15, (pre-refunded) Aa3/AA 2,130,000
2,500,000 5.500%, 7-1-17, (pre-refunded) Aa3/AA 2,637,500
1,000,000 4.750%, 7-1-17, Aa3/AA 923,750
Maricopa Co. High School District No. 213 (Tempe),
705,000 6.000%, 7-1-12, FGIC Insured, (pre-refunded) Aaa/AAA 756,994
295,000 6.000%, 7-1-12, FGIC Insured Aaa/AAA 311,962
Mesa, Arizona
1,425,000 5.700%, 7-1-08, MBIA Insured (pre-refunded) Aaa/AAA 1,510,500
2,650,000 5.000%, 7-1-18, FGIC Insured Aaa/AAA 2,537,375
</PAGE>
<PAGE>
Mohave Co. Unified School District No. 1
(Lake Havasu)
1,000,000 4.900%, 7-1-13, FGIC Insured Aaa/AAA 973,750
Navajo Co. Unified School District No. 10
(Show Low),
1,000,000 5.250%, 7-1-16, FGIC Insured Aaa/NR 995,000
Navajo Co. Unified School District No. 32
(Blue Ridge),
985,000 5.900%, 7-1-08,FSA Insured Aaa/AAA 1,047,794
640,000 5.800%, 7-1-14, FGIC Insured Aaa/AAA 673,600
Phoenix, Arizona,
1,040,000 7.500%, 7-1-03 Aaa/AAA 1,157,000
1,000,000 5.800%, 7-1-07, (pre-refunded) Aa1/AA+ 1,075,000
1,000,000 6.250%, 7-1-16 Aa1/AA+ 1,108,750
1,240,000 6.250%, 7-1-17 Aa1/AA+ 1,377,950
3,000,000 5.000%, 7-1-19 Aa1/AA+ 2,857,500
Pima Co. Unified School District No. 8
(Flowing Wells),
1,090,000 5.900%, 7-1-13, (pre-refunded) A/NR 1,171,750
Pima Co. Unified School District No. 12 (Sunnyside),
1,250,000 5.500%, 7-1-10, MBIA Insured Aaa/AAA 1,289,062
Pinal Co. Unified School District No. 43
(Apache Junction),
1,500,000 5.850%, 7-1-15, FGIC Insured Aaa/AAA 1,593,750
1,000,000 5.000%, 7-1-15, FGIC Insured Aaa/AAA 972,500
Pinewood Sanitary District,
605,000 6.500%, 7-1-09 NR/NR* 632,225
Prescott, Arizona
1,120,000 4.500%, 7-1-12 Aaa/AAA 1,050,000
Prescott Valley Sewer Collection Improvement
District,
500,000 7.900%, 1-1-12 NR/BBB- 556,875
Santa Cruz Co. Unified School Distsrict No. 1
(Nogales),
400,000 7.700%, 7-1-03, (pre-refunded) Aaa/AAA 431,000
</PAGE>
<PAGE>
Scottsdale, Arizona,
1,000,000 5.500%, 7-1-10, Aa1/AA+ 1,046,250
1,250,000 6.000%, 7-1-14, (pre-refunded) Aa1/AA+ 1,318,750
Tempe, Arizona,
1,000,000 5.300%, 7-1-09 Aa1/AA+ 1,032,500
1,450,000 6.000%, 7-1-10 (pre-refunded) Aa1/AA+ 1,529,750
1,290,000 5.400%, 7-1-11 Aa1/AA+ 1,335,150
830,000 5.400%, 7-1-11 Aa1/AA+ 849,712
2,270,000 4.500%, 7-1-14 Aa1/AA+ 2,094,075
Tucson, Arizona,
500,000 5.750%, 7-1-09, FGIC Insured Aaa/AAA 526,250
2,195,000 6.100%, 7-1-12, FGIC Insured Aaa/AAA 2,318,469
2,500,000 5.750%, 7-1-20, (pre-refunded) Aa3/AA 2,656,250
2,150,000 5.000%, 7-1-18 Aa3/AA 2,047,875
Yavapai Co. Unified School District No. 28
(Camp Verde),
500,000 6.000%, 7-1-08, FGIC Insured Aaa/AAA 535,000
Yuma, Arizona,
2,000,000 6.125%, 7-1-12, AMBAC Insured (pre-refunded) Aaa/AAA 2,142,500
Total Arizona General Obligation Bonds 112,817,802
ARIZONA REVENUE BONDS (66.6%)
AIRPORT REVENUE BONDS (0.9%)
Phoenix Municipal Airport Authority,
565,000 6.400%, 7-1-12, AMT, MBIA Insured Aaa/AAA 611,612
Phoenix Civic Improvement Corp.
Airport Revenue Bonds
1,890,000 6.300%, 7-1-14, Aa/AA+ 2,036,475
Tucson Municipal Airport Authority,
1,000,000 5.700%, 6-1-13, MBIA Insured Aaa/AAA 1,043,750
Total Airport Revenue Bonds 3,691,837
BASIC SERVICE REVENUE BONDS (13.0%)
Casa Grande Excise Tax Revenue Bonds,
365,000 6.000%, 4-1-10, FGIC Insured Aaa/AAA 384,163
440,000 5.200%, 4-1-17, MBIA Insured Aaa/AAA 432,850
</PAGE>
<PAGE>
Chandler Street & Highway User Revenue Bonds,
1,300,000 5.400%, 7-1-13, MBIA Insured Aaa/AAA 1,322,750
1,000,000 5.500%, 7-1-16 A1/A+ 1,002,500
Chandler Water & Sewer Revenue Bonds,
2,015,000 6.250%, 7-1-13, FGIC Insured Aaa/AAA 2,143,456
Gilbert Water & Sewer Revenue Bonds,
2,500,000 6.500%, 7-1-12, FGIC Insured Aaa/AAA 2,731,250
Lake Havasu City Excise Tax Revenue Bonds,
1,000,000 4.100%, 6-1-07, AMBAC Insured Aaa/AAA 951,250
Mesa Utility System Revenue Bonds,
4,000,000 5.375%, 7-1-12, FGIC Insured Aaa/AAA 4,070,000
2,750,000 5.375%, 7-1-14, FGIC Insured Aaa/AAA 2,780,938
Phoenix Civic Improvement Corp. Water System
Revenue Bonds,
1,690,000 6.000%, 7-1-03 Aa3/AA- 1,791,400
1,500,000 5.000%, 7-1-13 Aa3/A 1,466,250
1,500,000 5.400%, 7-1-14 Aa3/AA- 1,518,750
1,250,000 5.000%, 7-1-18 Aa3/A 1,181,250
2,315,000 6.000%, 7-1-19 (pre-refunded) Aaa/AA- 2,491,519
2,250,000 5.375%, 7-1-22, MBIA Insured Aaa/AAA 2,235,938
Phoenix Street & Highway User Revenue Bonds,
2,190,000 6.250%, 7-1-06 A1/AA 2,324,138
5,000,000 6.250%, 7-1-11 A2/A+ 5,250,000
3,265,000 6.250%, 7-1-11, MBIA Insured Aaa/AAA 3,481,306
Pima County Sewer Revenue Bonds,
2,000,000 6.750%, 7-1-15, FGIC Insured Aaa/AAA 2,110,000
Prescott Valley Water District Revenue Bonds,
1,000,000 4.875%, 1-1-19, MBIA Insured NR/AAA 936,250
Scottsdale Preserve Authority Excise Tax Revenue
Bonds,
1,890,000 5.625%, 7-1-18, FGIC Insured Aaa/AAA 1,923,075
Sedona Sewer Revenue Bonds,
700,000 7.400%, 7-1-11, (pre-refunded) NR/AAA 739,760
1,055,000 7.000%, 7-1-12 NR/BBB+ 1,122,256
</PAGE>
<PAGE>
Sedona Wastewater Municipal Property Corp.
Revenue Bonds,
2,275,000 5.000%, 7-1-19, MBIA Insured NR/AAA 2,166,938
Tucson Water System Revenue Bonds,
500,000 7.000%, 7-1-10, MBIA Insured Aaa/AAA 507,145
1,500,000 6.700%, 7-1-12 (pre-refunded) A1/A+ 1,597,500
2,490,000 5.750%, 7-1-18 A1/A+ 2,546,025
Total Basic Service Revenue Bonds 51,208,657
HOSPITAL REVENUE BONDS (7.6%)
Arizona Health Facilities (Northern Arizona
Healthcare System),
1,000,000 5.250%, 10-1-16, AMBAC Insured Aaa/AAA 990,000
2,190,000 4.750%, 10-1-30, AMBAC Insured Aaa/AAA 1,938,150
Arizona Health Facilities (Samaritan Health),
2,500,000 5.625%, 12-1-15, MBIA Insured Aaa/AAA 2,553,125
Chandler Industrial Development Authority
(Ahwatukee Medical Facility),
900,000 7.000%, 7-1-22 NR/NR* 947,250
Maricopa Co. Industrial Development Authority
(Mercy Health Care System-St. Joseph's Hospital)
930,000 7.750%, 11-1-10 NR/AAA 1,068,338
Maricopa Co. Industrial Development Authority
(Mayo Clinic)
7,000,000 5.250%, 11-15-37 NR/AA+ 6,650,000
Mesa Industrial Development Authority
(Lutheran Health),
2,000,000 5.000%, 1-1-19, MBIA Insured Aaa/AAA 1,895,000
Mohave Co. Industrial Development Authority
(Baptist Hospital),
1,150,000 5.700%, 9-1-15, MBIA Insured Aaa/AAA 1,188,812
Phoenix Industrial Development Authority (John C.
Lincoln Hospital),
1,070,000 5.500%, 12-1-13, FSA Insured Aaa/AAA 1,095,412
</PAGE>
<PAGE>
Pima Co. Industrial Development Authority
(Tucson Medical Center),
1,000,000 6.375%, 4-1-12, MBIA Insured Aaa/AAA 1,066,250
1,000,000 5.000%, 4-1-15, MBIA Insured Aaa/AAA 968,750
Pima Co. Industrial Development Authority
(Healthpartners),
1,000,000 5.625%, 4-1-14, MBIA Insured Aaa/AAA 1,030,000
Scottsdale Industrial Development Authority
(Scottsdale Memorial Hospital),
2,000,000 6.500%, 9-1-03, AMBAC Insured Aaa/AAA 2,160,000
530,000 6.500%, 9-1-06, AMBAC Insured Aaa/AAA 587,638
2,000,000 5.500%, 9-1-12, AMBAC Insured Aaa/AAA 2,085,000
2,020,000 6.125%, 9-1-17, AMBAC Insured Aaa/AAA 2,171,500
Yavapai Co. Industrial Development Authority
(Yavapai Regional Medical Center),
1,130,000 5.125%, 12-1-13, FSA Insured Aaa/AAA 1,121,525
Yuma Co. Industrial Development Authority (Yuma
Regional Medical Center),
500,000 5.850%, 8-1-08, MBIA Insured Aaa/AAA 536,250
Total Hospital Revenue Bonds 30,053,000
LEASE REVENUE BONDS (7.7%)
Arizona Certificates of Participation Lease Revenue
Bonds,
840,000 6.625%, 9-1-08, FSA Insured Aaa/AAA 894,600
2,000,000 6.500%, 3-1-08, FSA Insured Aaa/AAA 2,140,000
Arizona Municipal Finance Program No. 20,
1,300,000 7.700%, 8-1-10, BIGI Insured Aaa/AAA 1,551,875
Arizona Municipal Finance Program No. 34,
1,000,000 7.250%, 8-1-09, MBIA Insured Aaa/AAA 1,187,500
Avondale Municipal Faciilities Lease Revenue Bonds,
350,000 7.150%, 7-1-13, MBIA Insured Aaa/AAA 355,180
1,185,000 5.200%, 7-1-13, MBIA Insured Aaa/AAA 1,187,962
1,000,000 5.000%, 7-1-19, FGIC Insured Aaa/AAA 952,500
</PAGE>
<PAGE>
Bullhead City Municipal Property Corp.
Lease Revenue Bonds,
1,670,000 5.200%, 7-1-09, MBIA Insured Aaa/NR 1,701,312
Cave Creek Certificates of Participation Lease
Revenue Bonds,
365,000 5.750%, 7-1-19 NR/BBB- 338,994
Glendale Municipal Property Corp. Lease Revenue
Bonds, MBIA Insured,
1,000,000 7.000%, 7-1-09, MBIA Insured Aaa/AAA 1,024,490
Lake Havasu City Certificates of Participation Lease
Revenue Bonds,
500,000 7.000%, 6-1-05, FGIC Insured Aaa/AAA 531,250
Maricopa Co. Certificates of Participation Lease
Revenue Bonds,
1,000,000 6.000%, 6-1-04 A2/BBB+ 1,035,000
Oro Valley Municipal Property Corp. Lease
Revenue Bonds,
2,085,000 5.375%, 7-1-26, MBIA Insured Aaa/AAA 2,064,150
Phoenix Civic Plaza Building Revenue Bonds,
1,500,000 6.000%, 7-1-14 Aa2/AA+ 1,582,500
Pinal Co. Certificates of Participation Lease Revenue
Bonds,
1,180,000 6.250%, 6-1-04 (pre-refunded) NR/AA 1,244,900
Prescott Municipal Property Corp. Lease Revenue
Bonds,
1,000,000 5.125%, 1-1-18, FGIC Insured Aaa/AAA 971,250
Scottsdale Municipal Property Corp. Lease Revenue
Bonds,
2,200,000 6.250%, 11-1-10, FGIC Insured Aaa/AAA 2,326,500
2,620,000 6.250%, 11-1-14, FGIC Insured Aaa/AAA 2,767,375
Sierra Vista Municipal Property Corp Lease Revenue
Bonds,
1,265,000 5.000%, 1-1-18, AMBAC Insured Aaa/AAA 1,211,238
Tucson Certificate of Participation Lease Revenue
Bonds,
1,000,000 6.375%, 7-1-09 Baa1/AA 1,056,250
</PAGE>
<PAGE>
Tucson Business Development Finance Corp.
1,585,000 6.250%, 7-1-12, FGIC Insured Aaa/AAA 1,684,062
University of Arizona Certificates of Participation
Lease Revenue Bonds,
1,000,000 5.650%, 9-1-09, FSA Insured Aaa/AAA 1,040,000
Yuma Municipal Property Corp. Lease Revenue
Bonds,
1,385,000 5.250%, 7-1-12, AMBAC Insured Aaa/AAA 1,395,388
Total Lease Revenue Bonds 30,244,276
MORTGAGE REVENUE BONDS (5.5%)
Maricopa Co. Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Advantage Point Project),
1,000,000 6.500%, 7-1-16 NR/AAA 1,112,500
Maricopa Co. Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Metro Gardens Project),
1,000,000 5.150%, 7-1-29, MBIA Insured Aaa/AAA 962,500
Maricopa Co. Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Pines at Camelback Project),
450,000 5.400%, 5-1-18 NR/AA 442,125
Mohave Co. Industrial Development Authority
(Chris Ridge Village),
1,040,000 6.250%, 11-1-16 NR/AAA 1,098,500
Peoria Industrial Development Authority (Casa Del
Rio),
2,500,000 7.300%, 2-20-28 NR/AAA 2,696,875
Phoenix Industrial Development Authority Single
Family Mortgage Revenue,
1,245,000 6.300%, 12-1-12, AMT NR/AAA 1,294,800
2,000,000 5.300%, 4-1-20, AMT NR/AAA 1,937,500
1,000,000 5.350%, 6-1-20, AMT NR/AAA 975,000
</PAGE>
<PAGE>
Pima Co. Industrial Development Authority Single
Family Mortgage Revenue,
185,000 7.625%, 2-1-12 A2/NR 191,475
790,000 6.500%, 2-1-17 A/NR 818,638
1,185,000 6.750%, 11-1-27, AMT NR/AAA 1,236,844
1,625,000 6.250%, 11-1-29, AMT NR/AAA 1,696,094
1,500,000 5.200%, 5-1-31, AMT NR/AAA 1,415,625
Scottsdale Industrial Development Authority
(Westminster Village),
1,185,000 7.700%, 6-1-06 NR/NR* 1,300,538
Tempe Industrial Development Authority
(Friendship Village),
1,500,000 6.500%, 12-1-08 NR/NR* 1,509,375
Yuma Industrial Development Authority
Multi Family Mortgage Revenue Bonds
(Alexandrite Sands),
3,000,000 6.100%, 9-20-34+ NR/AAA 3,108,750
Total Mortgage Revenue Bonds 21,797,139
POLLUTION CONTROL REVENUE BONDS (6.9%)
Casa Grande Industrial Development Authority
(Frito Lay) Revenue Bonds,
250,000 6.650%, 12-1-14+ A1/lNR 270,937
Coconino Co. Pollution Control (Nevada Power)
Revenue Bonds,
5,500,000 5.350%, 10-1-22 NR/BBB- 5,204,375
Gila Co. Pollution Control (Asarco) Revenue Bonds
2,000,000 5.550%, 1-1-27 Baa3/BBB- 1,865,000
Gilbert Industrial Development Authority
Wastewater Reclamation Facility Revenue Bonds,
600,000 10.000%, 10-1-10, (pre-refunded) NR/NR* 649,500
1,000,000 6.875%, 4-1-14 NR/NR* 1,016,250
Greenlee Co. Pollution Control (Phelps Dodge)
Revenue Bonds,
7,800,000 5.450%, 6-1-09 A2/A- 7,917,000
</PAGE>
<PAGE>
Mohave Co. Industrial Development Authority
(North Star Steel) Revenue Bonds,
4,150,000 5.500%, 12-1-20, AMT NR/A+ 4,186,312
Navajo Co. Pollution Control Revenue Bonds
(Arizona Public Service),
5,000,000 5.875%, 8-15-28, MBIA Insured Aaa/AAA 5,150,000
1,000,000 5.875%, 8-15-28, Baa1/A- 1,012,500
Total Pollution Control Revenue Bonds 27,271,874
UNIVERSITY REVENUE BONDS (10.7%)
Arizona Board of Regents-Arizona State
University System Revenue Bonds,
6,750,000 5.750%, 7-1-12 A1/AA 6,935,625
7,000,000 6.125%, 7-1-15 A1/AA 7,323,750
1,000,000 5.500%, 7-1-19 A1/AA 1,007,500
3,000,000 5.500%, 7-1-19, MBIA Insured Aaa/AAA 3,018,750
Arizona Board of Regents-Northern Arizona
University System Revenue Bonds,
3,000,000 5.800%, 6-1-08, AMBAC Insured Aaa/AAA 3,127,500
1,000,000 5.150%, 6-1-12, FGIC Insured Aaa/AAA 1,003,750
3,000,000 5.200%, 6-1-13, FGIC Insured Aaa/AAA 3,011,250
Arizona Board of Regents-University of Arizona
System Revenue Bonds,
2,750,000 6.250%, 6-1-11 A1/AA 2,915,000
2,000,000 5.000%, 6-1-11, FSA Insured Aaa/AAA 1,912,500
Arizona Educational Loan Mktg Corp.,
1,000,000 6.000%, 9-1-01, AMT Aa/NR 1,035,000
450,000 7.000%, 3-1-05, AMT Aa2/NR 476,438
500,000 6.625%, 9-1-05, AMT Aa2/NR 526,875
1,720,000 5.700%, 12-1-08, AMT Aa2/NR 1,743,650
Arizona Student Loan Revenue
500,000 6.600%, 5-1-10 Aa/NR 526,875
Glendale Industrial Development Authority
(American Graduate School),
300,000 7.125%, 7-1-20, (pre-refunded) NR/AAA 341,625
2,100,000 5.625%, 7-1-20, AMBAC Insured NR/AAA 2,131,500
</PAGE>
<PAGE>
Glendale Industrial Development Authority
(Midwestern University)
2,250,000 5.375%, 5-15-28 NR/BBB+ 2,103,750
Pinal Co. Community College District
Revenue Bonds,
1,680,000 5.100%, 7-1-14, AMBAC Insured Aaa/NR 1,663,200
Yavapai Co. Community College District
Revenue Bonds,
1,070,000 5.400%, 7-1-10, FGIC Insured Aaa/AAA 1,094,075
500,000 6.000%, 7-1-12 NR/A- 514,375
Total University Revenue Bonds 42,412,988
UTILITY REVENUE BONDS (14.3%)
Arizona Power Authority (Hoover Dam Project)
Revenue Bonds,
2,720,000 5.300%, 10-1-06, MBIA Insured Aaa/AAA 2,815,200
8,500,000 5.375%, 10-1-13, MBIA Insured++ Aaa/AAA 8,595,625
2,425,000 5.250%, 10-1-17, MBIA Insured Aaa/AAA 2,400,750
Arizona Wastewater Management Authority
Revenue Bonds,
1,700,000 6.800%, 7-1-11 Aa1/AA+ 1,829,625
1,240,000 5.625%, 7-1-15, AMBAC Insured Aaa/AAA 1,278,750
Arizona Water Infrastructure Finance Authority
Revenue Bonds,
2,000,000 5.000%, 7-1-17, MBIA Insured Aaa/AAA 1,922,500
Central Arizona Water Conservation District
Revenue Bonds,
2,000,000 5.500%, 11-1-09 A1/AA- 2,090,000
1,000,000 5.500%, 11-1-10 A1/AA- 1,041,250
1,000,000 7.125%, 11-1-11, (pre-refunded) NR/AA- 1,061,250
Mohave Co. Industrial Development Authority
(Citizens Utility),
3,000,000 7.050%, 8-1-20 NR/AA- 3,111,990
Pima Co. Industrial Development Authority (Tucson
Electric), Revenue Bonds,
2,505,000 7.250%, 7-15-10, FSA Insured Aaa/AAA 2,733,581
</PAGE>
<PAGE>
Salt River Project Agricultural Improvement and
Power Revenue Bonds
4,485,000 6.200%, 1-1-12 Aa2/AA 4,754,100
650,000 6.000%, 1-1-13 Aa2/AA 682,500
2,850,000 5.000%, 1-1-13 MBIA Insured Aaa/Aaa 2,807,250
1,000,000 5.125%, 1-1-18 Aa2/AA 971,250
8,500,000 6.250%, 1-1-19 Aa2/AA 8,978,125
1,250,000 5.000%, 1-1-20 Aa2/AA 1,196,875
5,730,000 6.250%, 1-1-27 Aa2/AA 6,052,312
1,065,000 5.500%, 1-1-28 Aa2/AA 1,075,650
Santa Cruz Industrial Development Authority
(Citizens Utility),
1,220,000 7.150%, 2-1-23, AMT NR/AA- 1,252,110
Total Utility Revenue Bonds 56,650,693
Total Arizona Revenue Bonds 263,330,464
ZERO COUPON BONDS (1.2%)
Maricopa Co. Industrial Development Authority
Single Family Mortgage Revenue Bonds,
1,470,000 0.000%, 12-31-14 Aaa/AAA 648,638
2,745,000 0.000%, 12-31-16 Aaa/AAA 1,080,844
Phoenix Industrial Development Authority Single
Family Mortgage Revenue,
1,750,000 0.000%, 12-1-14 Aaa/AAA 776,562
Sedona Wastewater Municipal Property Corp.
Revenue Bonds,
2,210,000 0.000%, 7-1-24, MBIA Insured NR/AAA 563,550
Tucson & Pima Co. Single Family Mortgage
Revenue Bonds
4,030,000 0.000%, 12-1-14 Aaa/AAA 1,778,238
Total Zero Coupon Bonds 4,847,832
</PAGE>
<PAGE>
U.S. TERRITORIAL BONDS (2.8%)
Guam Housing Development Corp.
Single Family Mortgage Revenue Bonds,
1,000,000 5.350%, 9-1-18 NR/AAA 977,500
Puerto Rico General Obligation Bonds,
1,000,000 6.250%, 7-1-10 Baa1/A 1,058,750
2,035,000 6.450%, 7-1-17 (pre-refunded) Aaa/AAA 2,243,587
1,095,000 5.000%, 7-1-26 Baa1/A 1,022,456
4,000,000 5.000%, 7-1-28 Baa1/A 3,715,642
2,000,000 0.000%, 7-1-16, MBIA Insured (zero coupon) Aaa/AAA 822,500
Puerto Rico Industrial, Medical & Environmental
Revenue Bonds,
1,000,000 7.600%, 5-1-14, (Warner Lambert) Aa3/NR 1,032,760
Total U.S. Territorial Bonds 10,873,195
Total Investments (cost $380,130,942)** 99.1% 391,869,293
Other assets in excess of liabilities .9 3,509,011
Net Assets 100.0% $395,378,304
</TABLE>
* 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.
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $380,130,942) $ 391,869,293
Cash 629,967
Interest receivable 8,654,763
Receivable for Trust shares sold 492,634
Other assets 3,059
Total assets 401,649,716
LIABILITIES
Payable for investment securities purchased 5,041,870
Payable for Trust shares redeemed 530,175
Dividends payable 314,722
Distribution fees payable 152,604
Management fee payable 130,834
Accrued expenses 101,207
Total liabilities 6,271,412
NET ASSETS $ 395,378,304
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares, par value $.01 per share $ 376,308
Additional paid-in capital 382,055,088
Net unrealized appreciation on investments 11,738,351
Accumulated net realized gain on investments 1,523,280
Distributions in excess of net investment income (314,723)
$ 395,378,304
CLASS A
Net Assets $ 391,585,717
Capital shares outstanding 37,270,596
Net asset value and redemption price per share $ 10.51
Offering price per share (100/96 of $10.51 adjusted to nearest cent) $ 10.95
CLASS C
Net Assets $ 1,342,930
Capital shares outstanding 127,649
Net asset value and offering price per share $ 10.52
Redemption price per share (*a charge of 1% is imposed on the redemption
proceeds of the shares, or on the original price, whichever is lower, if redeemed
during the first 12 months after purchase) $ 10.52*
CLASS Y
Net Assets $ 2,449,657
Capital shares outstanding 232,541
Net asset value, offering and redemption price per share $ 10.53
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 21,577,286
Expenses:
Management fee (note 3) $ 1,605,996
Distribution and service fees (note 3) 610,708
Transfer and shareholder servicing agent fees 261,405
Trustees' fees and expenses (note 8) 70,423
Shareholders'meeting, reports and proxy statements 69,028
Legal fees 63,520
Custodian fees 44,280
Registration fees and dues 30,553
Audit and accounting fees 27,000
Insurance 17,135
Miscellaneous 56,252
2,856,300
Expenses paid indirectly (note 7) (21,970)
Net expenses 2,834,330
Net investment income 18,742,956
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from securities transactions 1,824,861
Change in unrealized appreciation on investments (11,997,799)
Net realized and unrealized loss on investments (10,172,938)
Net increase in net assets resulting from operations $ 8,570,018
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
</CAPTION>
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 18,742,956 $ 19,038,232
Net realized gain from securities transactions 1,824,861 3,157,634
Change in unrealized appreciation on investments (11,997,799) 7,837,854
Change in net assets resulting from operations 8,570,018 30,033,720
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net investment income (18,969,170) (19,395,494)
Net realized gain on investments (2,903,122) (88,057)
Class C Shares:
Net investment income (45,516) (18,434)
Net realized gain on investments (8,159) (178)
Class Y Shares:
Net investment income (50,079) (837)
Net realized gain on investments (1,607) (13)
Change in net assets from distributions (21,977,653) (19,503,013)
CAPITAL SHARE TRANSACTIONS (NOTE 9):
Proceeds from shares sold 49,036,624 32,337,408
Reinvested dividends and distributions 12,496,044 10,338,428
Cost of shares redeemed (47,486,728) (50,403,313)
Change in net assets from capital share transactions 14,045,940 (7,727,477)
Change in net assets 638,305 2,803,230
NET ASSETS:
Beginning of period 394,739,999 391,936,769
End of period (including distributions in excess
of net investment income of $314,723 and $294,494,
in 1999 and 1998, respectively) $ 395,378,304 $ 394,739,999
</TABLE>
See accompanying notes to financial statements.
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Tax-Free Trust of Arizona (the "Trust"), a non-diversified,
open-end investment company, was organized on October 17, 1985, as a
Massachusetts business trust and commenced operations on March 13, 1986. The
Trust is authorized to issue an unlimited number of shares and, since its
inception to April 1, 1996, offered only one class of shares. On that date,
the Trust began offering two additional classes of shares, Class C and Class
Y shares. All shares outstanding prior to that date were designated as Class
A shares and 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 and are not
offered directly to 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,
1999, there were no Class I shares outstanding. All classes of shares
represent interests in the same portfolio of investments and are identical as
to rights and privileges but differ with respect to the effect of sales
charges, the distribution and/or service fees borne by each 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 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 its portfolio, arranges for the purchases and sales of
portfolio securities, maintains the Trust's accounting books and records, and
</PAGE>
<PAGE>
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.
For the year ended June 30, 1999, the Trust incurred fees for
advisory and administrative services of $1,605,996.
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, 1999,
service fees on Class A Shares amounted to $598,973, of which the Distributor
received $23,262.
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, 1999, amounted to $8,802. 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, 1999, amounted to $2,933. The
total of these payments with respect to Class C Shares amounted to $11,735,
of which the Distributor received $8,919.
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, 1999, the Distributor received commissions of
$212,007 on sales of Class A shares.
</PAGE>
<PAGE>
4. PURCHASES AND SALES OF SECURITIES
During the year ended June 30, 1999, purchases of securities and
proceeds from the sales of securities aggregated $76,514,792 and $66,252,354,
respectively.
At June 30, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $14,795,577 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to
$3,057,226 for a net unrealized appreciation of $11,738,351.
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, 1999, the Trust had 2.8% 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 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. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were seven Trustees. Trustees' fees
paid during the year were at the average annual rate of $7,300 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, 1999, such
reimbursements averaged approximately $3,900 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, 1999 JUNE 30, 1998
SHARES AMOUNT SHARES AMOUNT
</CAPTION>
<S> <C>
CLASS A SHARES: <C> <C> <C> <C>
Proceeds from shares sold 4,164,887 $ 45,185,020 2,935,093 $ 31,690,705
Reinvested distributions 1,146,007 12,417,382 955,611 10,322,539
Cost of shares redeemed (4,303,789) (46,633,346) (4,666,468) (50,385,170)
Net change 1,007,105 10,969,056 (775,764) (8,371,926)
CLASS C SHARES:
Proceeds from shares sold 107,822 1,169,532 54,652 591,078
Reinvested distributions 2,590 28,041 1,379 14,945
Cost of shares redeemed (55,973) (597,882) (1,674) (18,143)
Net change 54,439 599,691 54,357 587,880
CLASS Y SHARES:
Proceeds from shares sold 246,354 2,682,072 5,112 55,625
Reinvested distributions 4,703 50,621 87 944
Cost of shares redeemed (23,725) (255,500) - -
Net change 227,332 2,477,193 5,199 56,569
Total transactions in Trust
shares 1,288,876 $ 14,045,940 (716,208) $ (7,727,477)
</TABLE>
</PAGE>
<PAGE>
TAX-FREE TRUST OF ARIZONA
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS A (1)
YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.86 $10.58 $10.38 $10.37 $10.16
Income from Investment Operations:
Net investment income 0.51 0.52 0.53 0.55 0.56
Net gain (loss) on securities (both realized and
unrealized) (0.26) 0.29 0.22 0.01 0.21
Total from Investment Operations 0.25 0.81 0.75 0.56 0.77
Less Distributions (note 6):
Dividends from net investment income (0.52) (0.53) (0.55) (0.55) (0.56)
Distributions from capital gains (0.08) - - - -
Total Distributions (0.60) (0.53) (0.55) (0.55) (0.56)
Net Asset Value, End of Period $10.51 $10.86 $10.58 $10.38 $10.37
Total Return (not reflecting sales charge)(%) 2.23 7.83 7.36 5.49 7.89
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 391,586 393,887 391,737 389,083 380,745
Ratio of Expenses to Average Net Assets (%) 0.71 0.73 0.73 0.73 0.74
Ratio of Net Investment Income to Average Net
Assets (%) 4.66 4.81 5.02 5.30 5.55
Portfolio Turnover Rate (%) 16.66 19.68 19.98 27.37 34.44
The expense ratios after giving effect to the expense offset for uninvested
cash balances were:
Ratio of Expenses to Average Net Assets (%) 0.70 0.72 0.72 0.72 0.74
</TABLE>
(1) Designated as Class A Shares on April 1, 1996.
See accompanying notes to financial statements.
</PAGE>
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C (1) CLASS Y (1)
PERIOD (2) PERIOD (2)
YEAR ENDED JUNE 30, ENDED YEAR ENDED JUNE 30, ENDED
1999 1998 1997 JUNE 30, 1996 1999 1998 1997 JUNE 30, 1996
</CAPTION>
<S> <C> <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 0.42 0.43 0.44 0.13 0.51 0.58 0.70 0.15
Net gain (loss) on securities (both
realized and unrealized) (0.28) 0.29 0.23 (0.07) (0.26) 0.31 0.21 (0.07)
Total from Investment Operations 0.14 0.72 0.67 0.06 0.25 0.89 0.91 0.08
Less Distributions (note 6):
Dividends from net investment income (0.42) (0.44) (0.45) (0.13) (0.53) (0.59) (0.70) (0.15)
Distributions from capital gains (0.08) - - - (0.08) - - -
Total Distributions (0.50) (0.44) (0.45) (0.13) (0.61) (0.59) (0.70) (0.15)
Net Asset Value, End of Period $10.52 $10.88 $10.60 $10.38 $10.53 $10.89 $10.59 $10.38
Total Return (not reflecting sales charge) (%) 1.26 6.90 6.64 0.57 2.28 8.63 9.10 0.76
Ratios/Supplemental Data
Net Assets, End of Period ($ thousands) 1,343 797 200 6 2,450 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 (%) 3.79 3.89 4.17 1.17 4.87 4.96 5.17 1.42
Portfolio Turnover Rate (%) 16.66 19.68 19.98 27.37 16.66 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 0.55 0.57 0.57 0.15
</TABLE>
(1) New Class of Shares established on April 1, 1996.
(2) From April 1, 1996 to June 30, 1996.
+ Not annualized.
See accompanying notes to financial statements.
</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.
The Trust has NOT incurred, nor is anticipated to incur, any
costs related to Y2K. All such costs are being incurred by the respective
vendors.
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.
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a
requirement of the Internal Revenue Code AND NO ACTION ON THE PART OF
SHAREHOLDERS IS REQUIRED.
For the fiscal year ended June 30, 1999, $18,737,098 of dividends
paid by Tax-Free Trust of Arizona, constituting 98.39% of total dividends
paid during fiscal 1999, were exempt-interest dividends; $301,581 of
dividends paid, constituting 1.58% of total dividends paid during fiscal
1999, were capital gain dividends; and the balance was ordinary dividend
income.
Prior to January 31, 1999, shareholders were mailed IRS Form
1099-DIV which contained information on the status of distributions paid for
the 1998 CALENDAR YEAR.
</PAGE>
