INVESTMENT ADVISER-ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
SUB-ADVISER
FIRST ASSET MANAGEMENT
a division of First Bank National Association,
a subsidiary of U.S. Bancorp
111 S.W. Fifth Avenue
U.S. Bancorp Tower
Portland, Oregon 97204
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Vernon R. Alden
Warren C. Coloney
James A. Gardner
Diana P. Herrmann
Ann R. Leven
Raymond H. Lung
Richard C. Ross
OFFICERS
Lacy B. Herrmann, President
Sue McCarthy-Jones, Senior Vice President
Nancy Kayani, Vice President
Kerry A. Lemert, Assistant Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER
SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
ANNUAL
REPORT
SEPTEMBER 30, 1997
TAX-FREE TRUST OF
OREGON
A TAX-FREE INCOME INVESTMENT
[Logo of Tax-Free Trust of Oregon: Square box with 2 fir trees in front of a
mountain and the sun]
[Logo of Aquila Group of Funds: Eagle's head]
ONE OF THE
AQUILASM GROUP OF FUNDS
<PAGE>
[Logo of Tax-Free Trust of Oregon: Square box with 2 fir trees in front of a
mountain and the sun]
SERVING OREGON INVESTORS FOR OVER A DECADE
TAX-FREE TRUST OF OREGON
ANNUAL REPORT
"INCREASED SAFETY IN NUMBERS"
November 17, 1997
Dear Investor:
A childhood lesson that is often imparted generation after
generation is "don't wander off by yourself - stick with the crowd." The
underlying premise is that there is "safety in numbers."
The idea of increased safety in numbers is also very appropriate
when discussing municipal bond funds. In fact, one of the most significant
benefits gained by owning shares of a municipal bond mutual fund is that of
"numbers."
Participating in the ownership of many different issues through
such a fund is generally less risky than purchasing individual issues.
Instead of having your money ride on a handful of securities, you can spread
the risk over a larger number of issues. And, you have the advantage of a
skilled and knowledgeable portfolio manager selecting and continuously
monitoring each security in the portfolio.
But, how does the manager decide which security to purchase?
After all, you need to know the crowd with whom you're about to associate.
Being with a large unruly group could be far worse than being alone.
KNOWING THE TERRITORY
As you are aware, First Asset Management became the Trust's
Investment Adviser on August 1, 1997 when First Bank System, Inc. merged with
USBancorp. Then, on October 31, 1997, First Asset Management became the
Trust's Investment Sub-Adviser under the new management arrangements approved
by shareholders.
First Asset Management fully recognizes the value local portfolio
management brings to the Trust and it shareholders. Specifically, the Trust's
local portfolio managers are well aware of the issues facing the State as a
whole, as well as the nuances of the cities and counties in which the Trust
invests. Thus, First Asset Management has agreed to maintain management of
the Trust's portfolio in Oregon using the Trust's current portfolio
management staff for that purpose.
FINDING THE RIGHT MIX
Unfortunately, there is no foolproof test to follow when
considering an issue for purchase. Security selection is really more art than
science. A portfolio manager needs to look for a security which meets certain
specific criteria and which fits in with the overall mix of the portfolio and
the Trust's investment objective.
Among other things, First Asset Management carefully examines a
security's yield, quality, maturity, and whether or not its inclusion in the
portfolio enhances overall diversification.
Keeping in mind the Trust's objective of providing as high a
level of current income as is consistent with preservation of capital, let's
take a look at each of these areas.
QUALITY
As you know, the Trust limits its investments to only those
securities in the top four credit ratings or equivalent. We have adopted this
policy since we have found from experience that high quality is best in the
long run. Of course, it is true that securities which possess a lower
credit rating
<PAGE>
generally produce a higher yield, since investors require compensation
for the additional potential risk. However, purchasing solely for yield can
cause feelings of unease for a risk adverse investor. Consequently, Tax-Free
Trust of Oregon looks for high quality securities which should produce
relatively good yields. Currently, 97.8% of the investment portfolio is in
the top three credit ratings - AAA, AA, AND A. Such high quality helps
preserve shareholders' capital and promotes stability.
MATURITY
The key here is to assemble a blend of maturities which offers a
reasonable level of DOUBLE TAX-FREE* return yet still avoids the problem of
excessive market price volatility. As you probably are aware, short-term
maturities tend to have very little price fluctuation, but generally produce
a substantially lesser rate of return than longer maturity securities.
Conversely, long-term maturities usually produce a higher return level, but
have a much higher price volatility factor than shorter-term issues since
they reflect the risks associated with potential interest rate changes over
the extended life of the municipal bond.
By creating a blend of maturities, the Trust attempts to provide
you with a satisfactory level of return without subjecting the share price to
excessive swings as interest rates move up and down.
The Trust utilizes a spread of maturities for the portfolio which
centers upon the relatively intermediate term average maturity of 15 years.
In constructing the portfolio, maturities of securities in the Trust range
from one year and under to over 20 years in length. However, in order to
achieve a reasonably high level of stability for the Trust's share value, in
good markets and bad and in up and down interest rate environments, the focus
has been to keep the average of maturities relatively limited in term.
DIVERSIFICATION
Having a breadth of participation in the portfolio helps to
spread risk and protect against any significant loss of principal in the
event of unforseen problems with any particular security.
Although Tax-Free Trust of Oregon is classified a
"non-diversified" fund under the Investment Company Act of 1940, the Trust
does attempt to vary its portfolio in several ways. First, there is the use
of a number of issues. At September 30, 1997, over 190 issues made up the
Trust's portfolio, with no one issue representing more than 2.4% of the
Trust's net assets. Next, there is investment among different types of
municipal projects - universities, basic services, utilities, health care,
pollution control, etc. - so that there is no undue concentration in any one
type of municipal project. And, finally, there is variety achieved through
geographic representation throughout various cities, counties, and
communities within Oregon.
Such portfolio mixture by number of issues, by geographic
distribution, and by variety of projects lends itself to a further high level
of preservation and stability for your investment in the Trust.
HOW IS OUR "GROUP" DOING?
As you have seen, selecting investments for the Trust's portfolio
is really a balancing act. On one side, you have yield and, on the other, you
have risk. The Trust strives to construct a portfolio which keeps these two
opposing forces on an even keel - accepting a reasonable level of risk to
achieve a satisfactory return.
As mentioned, the Trust strives to provide shareholders with as
high a level of DOUBLE TAX-FREE income as practicable, commensurate with the
degree of capital preservation we strive to achieve.
Is our security selection process working well for us? We believe
it is.
<PAGE>
RATE OF RETURN
From October 1, 1996 through September 30, 1997, the Trust
distributed to shareholders a DOUBLE TAX-FREE income return, as measured
against the maximum public offering price, at the annualized rate of
approximately 4.97%**.
One would have to earn an annualized taxable return of 7.58% at
the 28% Federal tax bracket and the even higher return of 9.03% at the 39.6%
Federal tax bracket in order to match the Trust's DOUBLE TAX-FREE rate. In
general, it would not have been possible for an investor to obtain such
levels of taxable return unless additional risk was taken in the form of
lesser quality and/or longer maturity securities.
COMMITMENT TO CONSISTENCY
Management is committed to providing shareholders with as
consistent investment and overall performance results from Tax-Free Trust of
Oregon as are possible to achieve, considering prevailing market forces.
You should be aware, however, that although there is indeed
increased safety in numbers, we are not able to eliminate the fluctuations
from market forces that swirl around us on a continuing basis.
However, as indicated, a number of investment management
techniques are used by the Trust to create a mix of securities which will
help moderate these forces.
OUR PLEDGE TO YOU
All associated with Tax-Free Trust of Oregon pledge to you our
continued diligence in the operation of the Trust for your benefit.
Your confidence in the Tax-Free Trust of Oregon is most valued
and appreciated.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
* A portion of dividend income may be subject to Federal and
state taxes.
** The performance shown represents that of Class A shares.
Such performance data quoted represents past performance and is not
indicative of future results. The investment return and principal
value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The average annual total return as of 9/30/97 for the past one-year
period was 2.90%; for the past five-year period was 5.11%; and for
the past ten-year period was 7.38%. These returns take into account
the maximum sales charge of 4%. As of 9/30/97, the 30-day SEC yield
was 4.04%.
<PAGE>
MANAGEMENT DISCUSSION OF TRUST PERFORMANCE
The graph below illustrates the value of $10,000 invested in
Class A shares of Tax-Free Trust of Oregon at inception of the Trust in June,
1986 and maintaining this investment through the Trust's latest fiscal year
end, September 30, 1997, as compared with a hypothetical similar size
investment in the Lehman Brothers Municipal Bond Index (the "Index") of
municipal securities and the Consumer Price Index (a cost of living index)
over that same period. The total return of the investment in the Trust is
shown after deduction of the maximum sales charge of 4% at the time of
initial investment. It also reflects deduction of the Trust's annual
operating expenses and reinvestment of monthly dividends and capital gains
distributions without sales charge. On the other hand, the Index does not
reflect any sales charge nor operating expenses but does reflect reinvestment
of interest. The performance of the Trust's other classes, first offered on
April 5, 1996, may be greater or less than the Class A shares performance
indicated on this graph, depending on whether greater or lesser sales charges
and fees were incurred by shareholders investing in the other classes.
It should also be specifically noted that the Index is nationally
oriented and consisted, over the period covered by the graph, of an unmanaged
mix of between 8,000 to 37,000 investment-grade long-term municipal
securities of issuers throughout the United States. However, the Trust's
investment portfolio consisted of a significantly lesser number of
investment-grade tax-free municipal obligations, principally of Oregon
issuers, over the same period. The maturities, market prices, and behavior of
the individual securities in the Trust's investment portfolio can be affected
by local and regional factors which might well result in variances from the
market action of the securities in the Index.
Consequently, much of the difference in performance of the Index
versus the Trust can be attributed to the lack of application of annual
operating expenses and initial sales charge to the Index. Additionally, a
portion of the difference in performance can be attributed to the different
characteristics in the single-state market of the securities in the Trust's
portfolio as compared with the national orientation of the securities in the
Index.
[Graphic of line chart with the following information:]
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
Lehman Brothers Trust After Sales Cost of
Municipal Bond Index ($) Charge and Expenses ($) Living Index ($)
<S> <C> <C> <C>
6/86 10,000 9,600 10,000
9/86 10,538 9,990 10,055
9/87 10,592 9,931 10,494
9/88 11,966 11,288 10,932
9/89 13,082 12,178 11,417
9/90 13,971 12,852 12,121
9/91 15,813 14,386 12,532
9/92 17,467 15,740 12,907
9/93 19,692 17,446 13,254
9/94 19,103 17,136 13,656
9/95 21,241 18,767 14,004
9/96 22,525 19,658 14,424
9/97 24,558 21,076 14,744
</TABLE>
[Graphic of table with the following information:]
Trust's average annual total return
<TABLE>
<CAPTION>
For the Period Ended 1 5 10 Life of Trust
September 30, 1997 Year Years Years Since 6/16/86
<S> <C> <C> <C> <C>
Including Sales
Charge and Expenses 2.90% 5.11% 7.38% 6.82%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
Since its inception, the Trust has been managed to provide as
stable a share value as possible consistent with producing a competitive
income return to shareholders. It has not been managed for maximum total
return, since one of the aims of management in structuring the portfolio of
the Trust is to reduce fluctuations in the price of the Trust's shares
resulting from changes in interest rates.
As can be observed, however, the pattern of the Trust's results
and that of the Index over the period since inception of the Trust track
quite similarly, even though they are not entirely comparable in character.
PORTFOLIO MANAGER'S ANALYSIS
As of September 30, 1997, the fiscal year-end of Tax-Free Trust
of Oregon, its assets had risen to approximately $317,000,000. During this
12-month period, we continued to see investor interest predominately focused
on the equity markets according to all those who follow the flow of money in
and out of mutual funds.
During the year, interest rates (using the 30-year U.S. Treasury
bond as a benchmark) fluctuated widely as was the case during the previous
reporting period; however, the overall trend was basically down. At the
beginning of this time frame, October, 1, 1996, rates were around 6.9%. They
then rose to about 7.1% in April, but finished the year-end period of
September 30, 1997 at 6.4%. The per share net asset value of the Trust's
Class A shares reflected the overall decline in interest rates, rising from
$10.49 to $10.68.
The rate of inflation in our country over recent months has been
declining and as investors came to recognize this, interest rates followed
the downward trend of inflation. The Federal Reserve has not recently seen a
need either to raise or to lower short-term rates. However, the constant fear
that the Fed will raise rates if the economy gains too much steam, has been a
major factor in the volatility of interest rates over the last 18 months.
During the last year we maintained a fairly positive attitude on
the direction of interest rates. We focused on purchasing current coupon and
slight discount bonds vs. premium bonds. In general, the quantity of bonds
issued in Oregon has declined, based both on economic as well as political
factors. This means that at any one time, a bond of the exact structure
desired for the Trust may not be available for purchase. We continue to
emphasize bonds rated AA and AAA which now account for about 94% of the
portfolio. In general, we have not felt that the market paid for us to dip in
quality.
One of our major goals, as you know, is the protection of the net
asset value of your shares. We have maintained a conservative approach to the
market at all times and have tried to walk the narrow path of providing
shareholders with reasonable appreciation along with maintaining a
satisfactory tax-free yield. This practice has been followed during period
like we are currently enjoying, as well as those periods of less buoyant
markets where protection of principal is paramount.
<PAGE>
KPMG PEAT MARWICK LLP
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Tax-Free Trust of Oregon:
We have audited the accompanying statement of assets and liabilities of
Tax-Free Trust of Oregon, including the statement of investments, as of
September 30, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1997, by correspondence with the
custodian. An audit also includes assessing the accounting principles used,
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Trust of Oregon as of September 30, 1997, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
October 31, 1997
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TRUST OF OREGON
STATEMENT OF INVESTMENTS
SEPTEMBER 30, 1997
RATING
FACE MOODY'S/
AMOUNT STATE OF OREGON GENERAL OBLIGATION BONDS (54.2%) S&P VALUE
<C> <S> <C> <C>
City of Albany (MBIA Corporation Insured)
$ 150,000 6.400%, 11/01/1999 Aaa/AAA $ 150,309
460,000 6.500%, 11/01/2000 Aaa/AAA 460,984
2,195,000 6.625%, 11/01/2009 Aaa/AAA 2,198,929
Port of Astoria (MBIA Corporation Insured)
1,250,000 6.600%, 09/01/2011 Aaa/AAA 1,360,938
410,000 6.200%, 02/01/2004 Aaa/AAA 422,300
City of Beaverton
910,000 5.950%, 04/01/2003 Aa/AA- 968,013
520,000 6.600%, 06/01/2003 NR/AA- 529,724
960,000 6.050%, 04/01/2004 Aa/AA- 1,023,600
560,000 6.600%, 06/01/2004 NR/AA- 570,472
1,020,000 6.150%, 04/01/2005 Aa/AA- 1,088,850
1,080,000 6.250%, 04/01/2006 Aa/AA- 1,152,900
Clackamas County School District #115 (AMBAC
Indemnity Corporation Insured)
600,000 5.600%, 06/01/2006 Aaa/AAA 646,500
615,000 5.700%, 06/01/2007 Aaa/AAA 664,969
1,000,000 6.150%, 06/01/2014 Aaa/AAA 1,083,750
Clackamas and Washington County School District
#3J
2,000,000 5.850%, 08/01/2006 A1/AA- 2,122,500
5,000,000 5.875%, 08/01/2009 A1/AA- 5,287,500
1,150,000 5.875%, 10/01/2009 A1/AA- 1,227,625
Clackamas, Multnomah and Washington County School
District #7J
1,000,000 7.100%, 06/15/2009 Aaa/NR 1,078,750
250,000 7.100%, 06/15/2010 Aaa/NR 269,688
1,500,000 5.700%, 06/15/2010 Aa/NR 1,571,250
Columbia Gorge Community College District
(Financial Security Assurance Insured)
1,200,000 5.400%, 06/01/2013 Aaa/AAA 1,228,500
Deschutes and Jefferson County School District
#2J (MBIA Corporation Insured)
3,700,000 5.600%, 06/01/2009 Aaa/AAA 3,857,250
<PAGE>
Hood River County School District (AMBAC
Indemnity Corporation Insured)
2,000,000 5.650%, 06/01/2008 Aaa/AAA 2,125,000
Jackson County School District #549C (Financial
Security Assurance Insured)
1,400,000 5.100%, 06/01/2005 Aaa/AAA 1,456,000
1,000,000 5.300%, 06/01/2008 Aaa/AAA 1,040,000
Josephine County School District #7 (Grants Pass)
(Financial Guaranty Insurance Corporation)
2,700,000 5.700%, 06/01/2013 Aaa/AAA 2,821,500
Jefferson County School District #509J (Financial
Security Assurance Insured)
1,750,000 5.500%, 06/15/2013 Aaa/AAA 1,811,250
Lane County School District #4J
2,000,000 5.375%, 07/01/2009 Aa/NR 2,055,000
Lane County School District #52J (Financial
Guaranty Insurance Corporation Insured)
750,000 6.400%, 12/01/2009 Aaa/AAA 848,438
Lincoln County Oregon School District (Financial
Guaranty Insurance Corporation)
1,245,000 5.250%, 06/15/2012 Aaa/AAA 1,279,238
Lincoln County (MBIA Corporation Insured)
1,000,000 5.375%, 02/01/2010 Aaa/AAA 1,021,250
Malheur County Jail Bonds (MBIA Corporation
Insured)
1,345,000 6.300%, 12/01/2012 Aaa/AAA 1,486,225
Marion and Clackamas County Union High School
District #7J (Financial Security Assurance
Insured)
1,000,000 7.000%, 06/01/2010 Aaa/AAA 1,148,750
1,340,000 6.000%, 06/01/2013 Aaa/AAA 1,443,850
Multnomah County
1,245,000 5.100%, 10/01/2007 Aa1/NR 1,282,350
1,000,000 5.200%, 10/01/2008 Aa1/NR 1,030,000
<PAGE>
Multnomah County Drainage District #1 Assessment
Bond (MBIA Corporation Insured)
1,000,000 5.250%, 07/01/2017 Aaa/AAA 1,001,250
Multnomah County School District #1
3,225,000 6.500%, 12/15/2000 Aa/A+ 3,242,189
1,180,000 6.600%, 12/15/2001 Aa/A+ 1,186,325
3,725,000 6.800%, 12/15/2004 Aa/A+ 3,744,072
Multnomah County School District #4
1,330,000 5.900%, 01/01/2005 A1/A+ 1,409,800
Multnomah County School District #40
4,100,000 5.625%, 06/01/2012 NR/AA- 4,284,500
Metropolitan Oregon Open Space Program
2,340,000 5.250%, 09/01/2013 Aa/AA+ 2,369,250
Metropolitan Service District Refunding (Oregon
Convention Center)
4,320,000 6.250%, 01/01/2013 Aa/AA+ 4,536,000
Northern Oregon Correctional (AMBAC Indemnity
Corporation Insured)
2,000,000 5.400%, 09/15/2016 Aaa/AAA 2,037,500
Oak Lodge Water District (AMBAC Indemnity
Corporation Insured)
215,000 7.300%, 12/01/2005 Aaa/AAA 253,431
215,000 7.300%, 12/01/2006 Aaa/AAA 252,894
215,000 7.400%, 12/01/2007 Aaa/AAA 253,431
State of Oregon
5,000,000 7.000%, 12/01/2011 Aa2/AA 5,275,000
State of Oregon Alternate Energy Project Series A
1,000,000 6.400%, 01/01/2008 Aa/AA 1,028,750
State of Oregon Board of Higher Education
900,000 6.200%, 10/15/2007 Aa/AA 964,125
3,195,000 6.400%, 10/01/2011 Aa/AA 3,394,687
2,000,000 6.250%, 10/15/2012 Aa/AA 2,145,000
2,150,000 6.500%, 10/01/2017 Aa/AA 2,308,562
2,890,000 6.000%, 10/15/2018 Aa/AA 3,059,788
1,655,000 5.600%, 08/01/2023 Aa/AA 1,690,169
1,500,000 5.600%, 08/01/2023 Aa/AA 1,531,875
<PAGE>
State of Oregon Elderly & Disabled Housing
725,000 6.250%, 08/01/2013 Aa/AA 784,812
State of Oregon Veterans' Welfare
900,000 11.250%, 04/01/1998 Aa/AA 932,706
505,000 9.000%, 04/01/2008 Aa/AA 611,681
700,000 9.200%, 10/01/2008 Aa/AA 964,250
565,000 8.000%, 11/01/2012 Aa/AA 580,967
7,150,000 6.875%, 12/01/2013 Aa/AA 7,507,500
500,000 6.875%, 12/01/2014 Aa/AA 525,000
1,000,000 7.000%, 12/01/2015 Aa/AA 1,056,250
Polk County School District #2 (Financial
Security Assurance Insured)
1,000,000 5.400%, 06/01/2012 Aaa/AAA 1,028,750
Polk, Marion, and Benton County School
District #13J (Financial Guaranty Insurance
Corporation Insured)
1,000,000 5.500%, 12/01/2008 Aaa/AAA 1,061,250
City of Portland
1,625,000 4.500%, 11/01/2004 Aaa/NR 1,627,031
1,480,000 5.100%, 10/01/2009 Aaa/NR 1,507,750
2,000,000 7.125%, 10/01/2010 Aaa/NR 2,105,840
2,790,000 5.750%, 06/01/2013 Aaa/NR 2,926,012
2,430,000 5.250%, 06/01/2015 Aa/NR 2,469,488
2,000,000 5.600%, 06/01/2015 Aa/NR 2,077,500
Portland Community College District
3,500,000 6.000%, 07/01/2012 A1/AA 3,675,000
Port of Portland
1,000,000 4.500%, 03/01/2006 Aa/AA+ 988,750
City of Salem
1,000,000 5.875%, 01/01/2007 A1/A+ 1,042,500
Tri-County Metropolitan Transportation District
6,100,000 6.000%, 07/01/2012 Aa/AA+ 6,443,125
<PAGE>
Tualatin Hills Park and Recreation District
(MBIA Corporation Insured)
2,970,000 5.750%, 03/01/2012 Aaa/AAA 3,107,362
2,000,000 5.750%, 03/01/2015 Aaa/AAA 2,085,000
Umatilla County Oregon (Financial Guaranty
Insurance Corporation Insured)
2,000,000 5.600%, 10/01/2015 Aaa/AAA 2,065,000
Umatilla County School District #8R (AMBAC
Indemnity Corporation Insured)
700,000 6.100%, 12/01/2012 Aaa/AAA 749,875
Washington County
2,500,000 6.200%, 12/01/2007 Aa/AA 2,668,750
3,110,000 6.000%, 12/01/2013 Aa/AA 3,292,712
Washington County School District #88J
(Financial Security Assurance Insured)
2,900,000 6.100%, 06/01/2012 Aaa/AAA 3,150,125
Washington and Clackamas County School
District #23J
1,675,000 6.625%, 01/01/2005 NR/NR* 1,767,125
1,000,000 5.650%, 06/01/2015 A1/NR 1,035,000
720,000 6.625%, 01/01/2008 NR/NR* 759,600
2,000,000 5.400%, 01/01/2010 A1/NR 2,057,500
Washington & Multnomah County School
District #48J
1,175,000 5.500%, 06/01/2006 Aa/AA- 1,246,969
700,000 4.500%, 09/01/2006 Aa/AA- 693,875
1,130,000 5.600%, 06/01/2007 Aa/AA- 1,203,450
1,000,000 6.150%, 06/01/2008 Aa/AA- 1,048,750
1,415,000 5.700%, 06/01/2008 Aa/AA- 1,510,512
525,000 6.300%, 09/01/2009 Aaa/AAA 565,688
1,440,000 6.000%, 06/01/2011 Aa/AA- 1,544,400
2,010,000 6.500%, 09/01/2011 Aaa/AAA 2,180,850
<PAGE>
Washington & Yamhill County School District
#58J (AMBAC Indemnity Corporation Insured)
70,000 6.600%, 11/01/2004 Aaa/AAA 70,127
80,000 6.600%, 11/01/2005 Aaa/AAA 80,135
90,000 6.600%, 11/01/2006 Aaa/AAA 90,152
Wolf Creek Highway Water District
505,000 6.900%, 12/01/2005 NR/AA 522,044
Yamhill County School District #29J (Financial
Security Assurance Insured)
2,000,000 5.350%, 06/01/2006 Aaa/AAA 2,097,500
500,000 6.100%, 06/01/2011 Aaa/AAA 543,125
Total State of Oregon General Obligation Bonds 171,834,538
STATE OF OREGON REVENUE BONDS (44.1%)
Airport Revenue Bonds (2.4%)
Port of Portland Airport (Financial Guaranty
Insurance Corporation Insured)
500,000 5.500%, 07/01/2006 Aaa/AAA 526,250
Port of Portland Airport (MBIA Corporation
Insured)
600,000 6.400%, 07/01/2003 Aaa/AAA 649,500
3,530,000 6.750%, 07/01/2009 Aaa/AAA 3,843,287
2,425,000 6.750%, 07/01/2015 Aaa/AAA 2,637,187
Total Airport Revenue Bonds 7,656,224
Certificate of Participation Revenue Bonds (10.7%)
Multnomah County Certificate of Participation
1,000,000 5.200%, 07/01/2005 Aa/NR 1,042,500
3,100,000 6.000%, 08/01/2012 Aa/A 3,235,625
State of Oregon Certificate of Participation
(AMBAC Indemnity Corporation Insured)
2,100,000 7.500%, 09/01/2015 Aaa/AAA 2,336,250
Oregon State Department of Administration
Services (AMBAC Indemnity Corporation Insured)
1,000,000 5.750%, 05/01/2017 Aaa/AAA 1,046,250
5,805,000 5.500%, 11/01/2020 Aaa/AAA 5,913,844
1,500,000 5.800%, 05/01/2024 Aaa/AAA 1,567,500
<PAGE>
State of Oregon Certificate of Participation
(MBIA Corporation Insured)
2,150,000 7.050%, 01/15/2006 Aaa/AAA 2,316,625
1,250,000 5.700%, 01/15/2010 Aaa/AAA 1,298,437
2,750,000 6.200%, 11/01/2012 Aaa/AAA 2,928,750
1,150,000 7.200%, 01/15/2015 Aaa/AAA 1,250,625
1,000,000 5.500%, 01/15/2015 Aaa/AAA 1,011,250
550,000 5.500%, 01/15/2015 Aaa/AAA 556,187
500,000 5.800%, 03/01/2015 Aaa/AAA 514,375
600,000 7.200%, 03/01/2015 Aaa/AAA 649,500
1,000,000 5.800%, 03/01/2015 Aaa/AAA 1,028,750
1,450,000 5.375%, 11/01/2016 Aaa/AAA 1,464,500
2,000,000 6.250%, 11/01/2019 Aaa/AAA 2,125,000
Southwestern Oregon Community College District
(AMBAC Indemnity Corporation Insured)
1,000,000 5.600%, 06/01/2016 Aaa/AAA 1,023,750
City of Portland Certificate of Participation
1,100,000 7.250%, 04/01/2008 NR/NR* 1,152,250
Washington County Educational Services,
Certificates of Participation
645,000 5.625%, 06/01/2016 A1/NR 654,675
830,000 5.750%, 06/01/2025 Aaa/AAA 850,750
Total Certificate of Participation Revenue Bonds 33,967,393
Hospital Revenue Bonds (4.7%)
Clackamas Hospital Facilities Authority
(Adventist Health System/West) (MBIA
Corporation Insured)
2,000,000 6.350%, 03/01/2009 Aaa/AAA 2,170,000
Clackamas Hospital Facilities Authority
(Kaiser Permanente)
2,400,000 6.500%, 04/01/2011 Aa3/AA 2,574,000
Clackamas Hospital Facilities Authority
(Sisters of Providence Hospital)
500,000 6.375%, 10/01/2004 A1/AA- 547,500
<PAGE>
Douglas County Hospital Facilities Authority
(Catholic Health) (MBIA Corporation Insured)
535,000 5.600%, 11/15/2005 Aaa/AAA 576,462
Medford Hospital Facilities Authority (Rogue
Valley Health Services) (MBIA Corporation
Insured)
500,000 6.800%, 12/01/2011 Aaa/AAA 545,000
1,685,000 6.750%, 12/01/2020 Aaa/AAA 1,811,375
Western Lane County Hospital Facilities A
uthority (Sisters of St. Joseph Hospital)
(MBIA Corporation Insured)
1,000,000 5.625%, 08/01/2007 Aaa/AAA 1,077,500
1,450,000 7.125%, 08/01/2017 Aaa/AAA 1,556,938
3,765,000 5.750%, 08/01/2019 Aaa/AAA 3,877,950
Total Hospital Revenue Bonds 14,736,725
Housing, Educational, and Cultural Revenue Bonds (8.6%)
Clackamas Community College District Revenue
(MBIA Corporation Insured)
1,865,000 5.700%, 06/01/2016 Aaa/AAA 1,930,275
State of Oregon Housing Finance Agency,
1,000,000 6.800%, 07/01/2013 A1/A+ 1,060,000
State of Oregon Housing and Community Services,
1,670,000 5.200%, 07/01/2009 Aa/NR 1,703,400
800,000 6.750%, 07/01/2012 Aa/NR 858,000
705,000 5.900%, 07/01/2012 Aa/NR 742,012
500,000 6.700%, 07/01/2013 Aa/NR 528,125
480,000 6.350%, 07/01/2014 Aa/NR 511,200
960,000 6.800%, 07/01/2016 Aa/NR 1,027,200
1,440,000 6.750%, 07/01/2016 Aa/NR 1,521,000
3,500,000 6.875%, 07/01/2028 Aa/NR 3,736,250
State of Oregon Housing and Community Services,
(MBIA Corporation Insured)
1,500,000 5.450%, 07/01/2024 Aaa/AAA 1,516,875
<PAGE>
State of Oregon Housing, Educational and
Cultural Facilities Authority (George Fox
University) (LOC: Bank of America)
1,000,000 5.700%, 03/01/2017 NR/AA- 1,026,250
State of Oregon Housing, Educational and
Cultural Facilities Authority (Lewis &
Clark College) (MBIA Corporation Insured)
1,130,000 7.125%, 07/01/2020 Aaa/AAA 1,240,175
State of Oregon Housing, Educational and
Cultural Facilities Authority (Reed College),
2,145,000 6.750%, 07/01/2021 NR/A+ 2,372,906
Oregon Health Sciences University Revenue
(AMBAC Indemnity Corporation Insured)
4,500,000 5.250%, 07/15/2015 Aaa/AAA 4,505,625
City of Salem Educational Facilities (Willamette
University),
1,000,000 6.000%, 04/01/2010 A/NR 1,058,750
1,740,000 6.750%, 04/01/2011 NR/NR* 1,890,075
Total Housing, Educational, and Cultural
Revenue Bonds 27,228,118
Transportation Revenue Bonds (2.8%)
Port of Morrow,
2,600,000 6.375%, 04/01/2008 Aaa/NR 2,827,500
State of Oregon Department of Transportation
(Light Rail) (MBIA Corporation Insured),
2,000,000 6.000%, 06/01/2005 Aaa/AAA 2,205,000
Port of St. Helens,
90,000 7.750%, 02/01/2006 Baa1/NR 99,450
Tri-County Metropolitan Transportation District
3,680,000 5.700%, 08/01/2013 A1/AA 3,762,800
Total Transportation Revenue Bonds 8,894,750
<PAGE>
Urban Renewal Revenue Bonds (.3%)
City of Portland Urban Renewal,
300,000 9.000%, 12/01/2002 A/NR 305,433
City of Wilsonville Urban Renewal,
500,000 5.850%, 06/01/2004 Baa1/NR 500,760
Total Urban Renewal Revenue Bonds 806,193
Utility Revenue Bonds (3.7%)
Emerald Peoples Utility District (AMBAC
Indemnity Corporation Insured),
700,000 6.700%, 11/01/2005 Aaa/AAA 760,375
Emerald Peoples Utility District Electric
Systems (Financial Security Assurance Insured)
1,000,000 6.750%, 11/01/2016 Aaa/AAA 1,097,500
City of Eugene Electric Utility
610,000 6.650%, 08/01/2009 A1/AA 654,225
660,000 6.650%, 08/01/2010 A1/AA 706,200
1,000,000 6.000%, 08/01/2011 A1/AA 1,055,000
700,000 6.700%, 08/01/2011 A1/AA 750,750
500,000 5.000%, 08/01/2017 A1/AA 481,250
1,400,000 5.800%, 08/01/2019 A1/AA 1,447,250
City of Eugene Trojan Nuclear Project
3,865,000 5.900%, 09/01/2009 Aa1/AA- 3,872,923
Northern Wasco County Public Utility
Development (AMBAC Indemnity Corporation
Insured),
1,000,000 5.625%, 12/01/2022 Aaa/AAA 1,020,000
Total Utility Revenue Bonds 11,845,473
Water and Sewer Revenue Bonds (9.7%)
City of Canby Sewer (Financial Security
Assurance Insured),
500,000 6.250%, 12/01/2017 Aaa/AAA 530,625
City of Eugene Water,
780,000 6.550%, 08/01/2004 A1/ AA- 797,737
365,000 6.600%, 08/01/2005 A1/ AA- 373,332
<PAGE>
City of Klamath Falls Water (Financial Security
Assurance Insured),
1,100,000 6.100%, 06/01/2014 Aaa/AAA 1,182,500
City of Oregon City Sewer,
750,000 6.875%, 10/01/2019 NR/NR* 783,750
City of Portland Sewer
1,500,000 6.050%, 06/01/2009 A1/A+ 1,650,000
City of Portland Sewer, (MBIA Corporation Insured)
2,500,000 5.250%, 06/01/2016 Aaa/AAA 2,515,625
City of Portland Sewer (Financial Guaranty
Insurance Corporation Insured),
2,725,000 6.000%, 10/01/2008 Aaa/AAA 2,987,281
500,000 6.000%, 10/01/2012 Aaa/AAA 548,125
2,855,000 6.250%, 06/01/2015 Aaa/AAA 3,183,325
1,000,000 5.000%, 06/01/2014 Aaa/AAA 993,750
Portland Water System Revenue
3,000,000 5.500%, 08/01/2014 Aa1/NR 3,071,250
1,440,000 5.500%, 08/01/2015 Aa1/NR 1,468,800
Washington County Unified Sewer Agency (AMBAC
Indemnity Corporation Insured),
1,040,000 6.800%, 11/01/2004 Aaa/AAA 1,098,500
2,120,000 5.900%, 10/01/2006 Aaa/AAA 2,313,450
315,000 5.900%, 10/01/2006 Aaa/AAA 340,988
800,000 5.900%, 10/01/2006 (pre-refunded) Aaa/AAA 866,000
2,195,000 7.000%, 11/01/2009 Aaa/AAA 2,329,444
2,500,000 6.125%, 10/01/2012 Aaa/AAA 2,762,500
750,000 6.125%, 10/01/2012 Aaa/AAA 828,750
Total Water and Sewer Revenue Bonds 30,625,732
Other Revenue Bonds (1.2%)
Baker County Pollution Control (Ash Grove Cement
West Project) (Small Business Administration
Insured),
355,000 6.200%, 07/01/2004 Aaa/NR 363,928
380,000 6.300%, 07/01/2005 Aaa/NR 389,553
<PAGE>
State of Oregon Bond Bank
500,000 6.800%, 01/01/2011 Aaa/NR 526,875
Oregon Economic Development Commission
(Consolidated Freightways)
1,500,000 7.000%, 04/01/2004 Aa2/BBB 1,510,515
Multnomah County School District #1J, Special
Obligations
1,000,000 5.000%, 03/01/2007 Aa/A+ 1,020,000
Total Other Revenue Bonds 3,810,871
Total State of Oregon Revenue Bonds 139,571,479
PUERTO RICO
Puerto Rico Housing Finance Corporation (GNMA
Collateralized)
15,000 7.800%, 10/15/2021 Aaa/AAA 15,547
Total Puerto Rico 15,547
Total Municipal Bonds (cost - $ 294,602,756**) 98.3% 311,421,564
Other assets in excess of liabilities 1.7 5,414,450
Net Assets 100.0% $316,836,014
<FN> (*) Any security not rated has been determined by the
Investment Adviser to have sufficient quality to be
ranked in the top four credit ratings if a credit
rating were to be assigned by a rating service. </FN>
<FN> (**) Cost for Federal tax purposes is identical. </FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
ASSETS
Investments at value (identified cost $294,602,756) $ 311,421,564
Interest receivable 5,579,358
Receivable for Trust shares sold 269,267
Receivable for investment securities sold 508,436
Other assets 11,552
Total assets 317,790,177
LIABILITIES
Cash overdraft 255,906
Payable for Trust shares redeemed 212,174
Dividends payable 178,676
Distribution fees payable 119,700
Adviser and Administrator fees payable 103,781
Accrued expenses 83,926
Total liabilities 954,163
NET ASSETS $ 316,836,014
Net Assets consist of:
Capital Stock - Authorized an unlimited number of shares,
par value $.01 per share $ 296,623
Additional paid-in capital 299,720,583
Net unrealized appreciation on investments 16,818,808
$ 316,836,014
CLASS A
Net Assets $ 312,004,521
Capital shares outstanding 29,209,762
Net asset value and redemption price per share $ 10.68
Offering price per share (100/96 of $10.68 adjusted
to nearest cent) $ 11.13
CLASS C
Net Assets $ 800,499
Capital shares outstanding 74,991
Net asset value and offering price per share $ 10.67
Redemption price per share (*varies by length of time
shares are held) $ *
CLASS Y
Net Assets $ 4,030,994
Capital shares outstanding 377,530
Net asset value, offering and redemption price per share $ 10.68
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
INVESTMENT INCOME:
Interest income $ 17,732,812
Expenses:
Investment Adviser fees (note 3) $617,654
Administrator fees (note 3) 617,654
Distribution and service fees (note 3) 466,208
Transfer and shareholder servicing agent fees 202,778
Legal fees 84,597
Trustees' fees and expenses (note 8) 79,387
Shareholders' reports and proxy statements 71,583
Audit and accounting fees 31,028
Custodian fees (note 7) 29,529
Registration fees and dues 17,413
Insurance 7,566
Miscellaneous 42,853
2,268,250
Expenses paid indirectly (note 7) (29,529)
Net expenses 2,238,721
Net investment income 15,494,091
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities
transactions 394,005
Change in unrealized appreciation on
investments 5,718,838
Net realized and unrealized gain on
investments 6,112,843
Net increase in net assets resulting
from operations $ 21,606,934
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended
September 30,
1997 1996
OPERATIONS:
Net investment income $ 15,494,091 $ 15,805,265
Net realized gain from securities transactions 394,005 455,992
Change in unrealized appreciation on investments 5,718,838 (2,192,001)
Change in net assets resulting from operations 21,606,934 14,069,256
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6):
Class A Shares:
Net Investment Income (15,480,977) (15,347,445)
Net realized gain on investments (387,996) (677,856)
Class C Shares:
Net investment income (27,150) (3,382)
Net realized gain on investments (997) (425)
Class Y Shares:
Net investment income (87,359) (4,572)
Net realized gain on investments (5,012) (306)
Change in net assets from distributions (15,989,491) (16,033,986)
CAPITAL SHARE TRANSACTIONS (NOTE 9):
Proceeds from shares sold 33,347,126 22,749,791
Reinvested dividends and distributions 9,592,553 9,312,627
Cost of shares redeemed (37,395,842) (34,977,054)
Change in net assets from capital share
transactions 5,543,837 (2,914,636)
Change in net assets 11,161,280 (4,879,366)
NET ASSETS:
Beginning of period 305,674,734 310,554,100
End of period $ 316,836,014 $ 305,674,734
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Tax-Free Trust of Oregon (the "Trust") is a separate portfolio of the
Cascades Trust. The Cascades Trust (the "Business Trust") is an open-end
investment company, which was organized on October 17, 1985, as a
Massachusetts business trust and is authorized to issue an unlimited number
of shares. The Trust is a non-diversified portfolio which commenced
operations on June 16, 1986 and until April 5, 1996, offered only one class
of shares. On that date, the Trust began offering two additional classes of
shares, Class C and Class Y shares. All shares outstanding prior to that date
were designated as Class A shares and, as was the case since inception, are
sold with a front-payment sales charge and bear an annual service fee. Class
C shares are sold with a level-payment sales charge with no payment at time
of purchase but level service and distribution fees from date of purchase
through a period of six years thereafter. A contingent deferred sales charge
of 1% is assessed to any Class C shareholder who redeems shares of this Class
within one year from the date of purchase. The Class Y shares are only
offered to institutions acting for an investor in a fiduciary, advisory,
agency, custodian or similar capacity. They are not available to individual
retail investors. Class Y shares are sold at net asset value without any
sales charge, redemption fees, contingent deferred sales charge or
distribution or service fees. All classes of shares represent interests in
the same portfolio of investments in the Trust and are identical as to rights
and privileges. They differ only with respect to the effect of sales charges,
the distribution and/or service fees borne by the respective class, expenses
specific to each class, voting rights on matters affecting a single class and
the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value each
business day based upon information provided by a nationally
prominent independent pricing service and periodically verified
through other pricing services; in the case of securities for which
market quotations are readily available, securities are valued at
the mean of bid and asked quotations and, in the case of other
securities, at fair value determined under procedures established
by and under the general supervision of the Board of Trustees.
Securities which mature in 60 days or less are valued at amortized
cost if their term to maturity at purchase was 60 days or less, or
by amortizing their unrealized appreciation or depreciation on the
61st day prior to maturity, if their term to maturity at purchase
exceeded 60 days.
In Fiscal 1997, the Trust began amortizing bond premium using the
constant yield method. Accordingly, net unrealized appreciation and
additional paid-in capital have been adjusted by equal amounts at
the beginning of the year. This change had no effect on the Trust's
net asset value or distribution policy and conforms to the
amortization policy followed by the Trust for Federal tax purposes.
<PAGE>
b) SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on the identified
cost basis. Interest income is recorded daily on the accrual basis
and is adjusted for amortization of premium and accretion of
original issue discount. Market discount is recognized upon
disposition of the security.
c) FEDERAL INCOME TAXES: It is the policy of the Trust to qualify as a
regulated investment company by complying with the provisions of
the Internal Revenue Code applicable to certain investment
companies. The Trust intends to make distributions of income and
securities profits sufficient to relieve it from all, or
substantially all, Federal income and excise taxes.
d) ALLOCATION OF EXPENSES: Expenses, other than class-specific
expenses, are allocated daily to each class of shares based on the
relative net assets of each class. Class-specific expenses, which
include distribution and service fees and any other items that are
specifically attributed to a particular class, are charged directly
to such class.
e) USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
3. FEES AND RELATED PARTY TRANSACTIONS
(a) MANAGEMENT ARRANGEMENTS:
Management affairs of the Trust are conducted through two separate
management arrangements.
Qualivest Capital Management, Inc. (the "Adviser"), became Investment
Adviser to the Trust in June, 1986. In this role, under an investment
advisory agreement (the "Former Advisory Agreement"), the Adviser supervised
the Trust's investments and provided various services to the Trust, including
maintenance of the Trust's accounting books and records, for which it was
entitled to receive a fee which was payable monthly and computed as of the
close of business each day at the annual rate of 0.20 of 1% of the net assets
of the Trust. On August 1, 1997 the parent corporation of the Adviser merged
with First Bank System, Inc. which changed its name to U.S. Bancorp. The
operations of the Adviser became part of First Asset Management, a division
of First Bank National Association, a subsidiary of U.S. Bancorp. First Asset
Management acted as the Trust's investment adviser under an interim advisory
agreement with the same terms as the Former Advisory Agreement until October
31, 1997.
On that date the shareholders of the Trust approved new agreements under
which Aquila Management Corporation (the "Manager") became Investment Adviser
and Administrator and First Asset Management became Sub-Adviser. Under the
new arrangements, the Manager has delegated all investment advisory
responsibilities to First Asset Management as Sub-Adviser and will pay it a
fee at the rate of 0.18 of 1% of the Trust's average annual net assets.
<PAGE>
The Trust also had an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Trust's founder and sponsor. Under
this Agreement, the Administrator provided all administrative services, other
than those relating to the management of the Trust's investments. These
included providing the office of the Trust and all related services as well
as overseeing the activities of all the various support organizations to the
Trust such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor. For its services, the Administrator was entitled to
receive a fee which is payable monthly and computed as of the close of
business each day at the annual rate of 0.20 of 1% of the net assets of the
Trust. Commencing October 31, 1997, the Manager will perform all of the
foregoing administrative duties under the new Investment Advisory and
Administration Agreement. The Trust pays the Manager at the rate of 0.40 of
1% of its average annual net assets; the Manager pays the Sub-Adviser at the
rate of 0.18 of 1% of the Trust's average annual net assets.
For the year ended September 30, 1997, the Trust incurred fees under the
Advisory Agreement and Administration Agreement of $617,654 and $617,654,
respectively, in effect for the periods noted above.
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 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 September 30, 1997, service fees on Class A Shares
amounted to $459,662, of which the Distributor received $12,019.
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 September 30, 1997, amounted to $4,910. 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
<PAGE>
Shares and for the year ended September 30, 1997, amounted to $1,636. The
total of these payments made with respect to Class C Shares amounted to
$6,546, of which the Distributor received $5,622.
Specific details about the Plans are more fully defined in the Trust's
Prospectus and Statement of Additional Information.
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Trust's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Trust's shares are sold primarily through the facilities of
these dealers having offices within Oregon, with the bulk of sales
commissions inuring to such dealers. For the year ended September 30, 1997,
the Distributor received sales commissions in the amount of $78,595.
4. PURCHASES AND SALES OF SECURITIES
During the year ended September 30, 1997, purchases of securities and
proceeds from the sales of securities aggregated $22,869,117 and $16,751,363,
respectively.
At September 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $16,821,363 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to $2,555
for a net unrealized appreciation of $16,818,808.
5. PORTFOLIO ORIENTATION
Since the Trust invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Oregon, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Oregon and whatever
effects these may have upon Oregon issuers' ability to meet their
obligations. Two such developments, Measure 5, a 1990 amendment to the Oregon
Constitution, as well as measures 47 and 50, limit the taxing and spending
authority of certain Oregon governmental entities. Although they may have an
adverse effect on the general financial condition of these entities and may
impair the ability of certain Oregon issuer's to pay interest and principal
on their obligations, experience over the history of such amendments would
indicate a low probability of this happening.
6. DISTRIBUTIONS
The Trust declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Trust intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders
<PAGE>
from net investment income to be exempt from regular Federal and State of
Oregon income taxes. However, due to differences between financial reporting
and Federal income tax reporting requirements, distributions made by the
Trust may not be the same as the Trust's net investment income, and/or net
realized securities gains. Further, a small portion of the dividends may,
under some circumstances, be subject to ordinary income taxes. Also, annual
capital gains distributions, if any, are taxable.
7. CUSTODIAN FEES
The Trust has negotiated an expense offset arrangement with its
custodian, wherein it receives credit toward the reduction of custodian fees
whenever there are uninvested cash balances. During the year ended September
30, 1997, the Trust's custodian fees amounted to $29,529, all of which was
offset by such credits. It is the general intention of the Trust to invest,
to the extent practicable, some or all of cash balances in income producing
assets rather than leave cash on deposit with the custodian.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were eight Trustees. Trustees' fees paid
during the year were at the average annual rate of $6,000 for carrying out
their responsibilities and attendance at regularly scheduled Board Meetings.
If additional or special meetings are scheduled for the Trust, separate
meeting fees are paid for each such meeting to those Trustees in attendance.
The Trust also reimburses Trustees for expenses such as travel,
accommodations, and meals incurred in connection with attendance at regularly
scheduled or special Board Meetings and at the Annual Meeting and outreach
meetings of Shareholders. For the fiscal year ended September 30, 1997 such
reimbursements averaged approximately $4,200 per Trustee. Two of the
Trustees, who are affiliated with the Manager, are not paid any Trustee fees.
<PAGE>
9. CAPITAL SHARE TRANSACTIONS
Transactions in Capital Shares of the Trust were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1997 September 30, 1996
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 2,755,147 $ 29,089,742 2,096,132 $ 22,163,379
Reinvested dividends and
distributions 903,248 9,535,675 882,366 9,306,631
Cost of shares redeemed (3,530,285) (37,291,993) (3,319,853) (34,956,474)
Net change 128,110 1,333,424 (341,355) (3,486,464)
<CAPTION>
Period Ended
September 30, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS C SHARES:
Proceeds from shares sold 42,838 451,359 32,006 331,098
Reinvested dividends and
distributions 538 5,679 69 724
Cost of shares redeemed (459) (4,904) - -
Net change 42,917 452,134 32,075 331,822
<CAPTION>
Period Ended
September 30, 1996*
Shares Amount
<S> <C> <C> <C> <C>
CLASS Y SHARES:
Proceeds from shares sold 359,104 3,806,025 24,548 255,314
Reinvested dividends and
distributions 4,836 51,199 505 5,272
Cost of shares redeemed (9,464) (98,945) (2,000) (20,580)
Net change 354,476 3,758,279 23,053 240,006
Total transactions in Trust
shares 525,503 $ 5,543,837 (286,227) $ (2,914,636)
<FN>
*From April 5, 1996 (date of inception) through September 30, 1996.
</FN>
</TABLE>
<PAGE>
TAX-FREE TRUST OF OREGON
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class A(1)
Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.49 $10.55 $10.20 $10.95 $10.48
Income from Investment Operations:
Net investment income 0.53 0.54 0.55 0.56 0.58
Net gain (loss) on securities
(both realized and unrealized) 0.21 (0.05) 0.39 (0.75) 0.50
Total from Investment Operations 0.74 0.49 0.94 (0.19) 1.08
Less Distributions (note 6):
Dividends from net investment
income (0.54) (0.54) (0.55) (0.56) (0.58)
Distributions from capital gains (0.01) (0.01) (0.04) - (0.03)
Total Distributions (0.55) (0.55) (0.59) (0.56) (0.61)
Net Asset Value, End of Period $10.68 $10.49 $10.55 $10.20 $10.95
Total Return (not reflecting sales
charge) (%) 7.21 4.76 9.52 (1.77) 10.64
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 312,005 305,096 310,554 316,317 331,018
Ratio of Expenses to Average
Net Assets (%) 0.72 0.72 0.71 0.68 0.66
Ratio of Net Investment Income
to Average Net Assets (%) 5.02 5.16 5.38 5.28 5.46
Portfolio Turnover Rate (%) 5 10 13 11 8
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset in custodian fees for
uninvested cash balances would have been:
<S> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.53 0.54 0.55 0.56 0.58
Ratio of Expenses to Average
Net Assets (%) 0.73 0.73 0.73 0.70 0.68
Ratio of Net Investment Income
to Average Net Assets (%) 5.01 5.15 5.37 5.26 5.44
<FN>
(1) Designated as Class A Shares on April 5, 1996.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class C(1) Class Y(1)
Year Period(2) Year Period(2)
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.49 $10.34 $10.49 $10.34
Income from Investment
Operations:
Net investment income 0.43 0.22 0.54 0.27
Net gain on securities (both
realized and unrealized) 0.21 0.15 0.21 0.15
Total from Investment
Operations 0.64 0.37 0.75 0.42
Less Distributions (note 6):
Dividends from net investment
income (0.45) (0.22) (0.55) (0.27)
Distributions from capital
gains (0.01) - (0.01) -
Total Distributions (0.46) (0.22) (0.56) (0.27)
Net Asset Value, End of Period $10.67 $10.49 $10.68 $10.49
Total Return (not reflecting
sales charge) (%) 6.20 3.61# 7.37 4.14#
Ratios/Supplemental Data
Net Assets, End of Period
($ thousands) 800 336 4,031 242
Ratio of Expenses to Average
Net Assets (%) 1.57 1.56* 0.57 0.57*
Ratio of Net Investment Income
to Average Net Assets (%) 4.15 4.18* 5.22 5.36*
Portfolio Turnover Rate (%) 5 10# 5 10#
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset in custodian fees for
uninvested cash balances would have been:
<S> <C> <C> <C> <C>
Net Investment Income ($) 0.44 0.22 0.54 0.27
Ratio of Expenses to Average
Net Assets (%) 1.58 1.56# 0.58 0.58*
Ratio of Net Investment Income
to Average Net Assets (%) 4.14 4.17* 5.21 5.35*
<FN>
(1) New Class of Shares established on April 5, 1996.
</FN>
<FN>
(2) From April 5, 1996 to September 30, 1996.
</FN>
<FN>
# Not annualized.
</FN>
<FN>
* Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of Tax-Free Trust of Oregon
(the "Trust") was held on April 21, 1997. At the meeting, the following
matters were submitted to a shareholder vote* and approved:
(i) the election of Lacy B. Herrmann, Vernon R. Alden, Warren C.
Coloney, James A. Gardner, Diana P. Herrmann, Ann R. Leven,
Raymond H. Lung, and Richard C. Ross as Trustees to hold office until
the next annual meeting of the Trust's shareholders or until his or
her successor is duly elected (each Trustee received at least
202,735,254.77 affirmative votes (97.68%); no more than 4,819,332.53
votes (2.32%) were withheld for any Trustee), and
(ii) the ratification of the selection of KPMG Peat Marwick LLP as the
Trust's independent auditors for the fiscal year ending September 30,
1997 (votes for: 199,295,146.22 (96.02%); votes against:
657,285.68 (0.32%); abstentions: 7,602,155.40 (3.66%); broker
non-votes: 0.00 (0.00%)).
________________________
* On the record date for this meeting, 28,774,839.8 Class A Shares, 53,479.9
Class C Shares, and 112,931.2 Class Y Shares were outstanding and entitled to
vote representing a total net asset value of $305,330,196.78. The holders of
shares entitled to vote representing a total net asset value of
$207,554,587.30 (67.98%) were present in person or by proxy at the meeting.
FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
This information is presented in order to comply with a
requirement of the Internal Revenue Code AND NO CURRENT ACTION ON THE PART OF
SHAREHOLDERS IS REQUIRED.
For the fiscal year ended September 30, 1997, of the total amount
of dividends paid by Tax-Free Trust of Oregon from net investment income,
99.11% was "exempt-interest dividends," and the balance was ordinary dividend
income.
The Trust hereby designates $15,456,175 as an exempt-interest
dividend for its fiscal year ended September 30, 1997. The Fund also
designates $394,005 as a capital gain dividend for Federal income tax
purposes, for its fiscal year ended September 30, 1997 which is taxable as a
long-term capital gain.
Prior to January 31, 1998, shareholders will be mailed IRS Form
1099-DIV which will contain information on the status of distributions paid
for the 1997 CALENDAR YEAR.
<PAGE>
