MANAGER AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
INVESTMENT SUB-ADVISER
U.S. BANK NATIONAL ASSOCIATION
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
David B. Frohnmayer
James A. Gardner
Diana P. Herrmann
Raymond H. Lung
Richard C. Ross
OFFICERS
Lacy B. Herrmann, President
Sue McCarthy-Jones, Senior Vice President
Diana P. Herrmann, Vice President
Kerry A. Lemert, Vice President
Christine L. Neimeth, 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, 1998
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
"ATTRACTIVE TAX-FREE RETURNS PLUS HIGH STABILITY"
November 16, 1998
Dear Investor:
In our last report letter to you, we discussed the impact of the
serious economic and currency problems of various countries in the Far East.
We observed that these problems have resulted in a "FLIGHT TO QUALITY."
Specifically, we pointed out that, on a comparative basis, the
economy of the United States has continued to be strong. As a result, the
U.S. dollar as a currency, as well as U.S. securities markets, have stood out
in the world as a "BEACON OF QUALITY." Tax-Free Trust of Oregon enjoys this
high quality ranking.
Therefore, in this letter to you, we wish to focus upon the level
of TAX-FREE* return provided to you by Tax-Free Trust of Oregon in the
current marketplace.
ATTRACTIVE TAX-FREE RETURNS
The current level of TAX-FREE return produced by Tax-Free Trust
of Oregon is EXCEPTIONALLY ATTRACTIVE compared with taxable returns in
today's marketplace.
The rate of inflation in the United States has continued to be
relatively low throughout the recent expansion of the economy. This has
caused the level of interest rates to decline over recent years, as well as
over the last few months.
This decline in interest rates has provided the opportunity for
various municipalities to finance new projects and also to refinance existing
projects at lower interest costs to them. Municipalities act much like you
and I would when refinancing home mortgages to take advantage of attractive
rates. Basically, they are acting to save money.
While interest rates generated by TAX-FREE municipal bonds have
declined over the years, they have not declined as much as rates on a taxable
investment. As a result, TAX-FREE municipal securities have become
EXCEPTIONALLY ATTRACTIVE - on a comparative basis - with other types of
fixed-income securities.
Indeed, while the benchmark 30-year maturity U.S. Treasury bond
is currently yielding approximately 5.22%, its interest income is still
subject to taxes. On the other hand, similar maturity municipal securities,
of comparable quality, are yielding roughly 5.05% - and these are TAX-FREE.
Thus, comparable TAX-FREE municipal bonds are yielding MORE THAN
95% of what high-quality TAXABLE bonds are paying. Consequently, with TAX-FREE
municipal securities, investors are getting to keep more of the actual return
paid. Most significantly, this level of return represents for investors one
of the best for TAX-FREE securities in recent years.
The advantage to you of owning a TAX-FREE investment such as
Tax-Free Trust of Oregon is vividly illustrated in the following chart. This
chart compares the 4.75%** average level of distribution return for Class A
Shares (as measured against the maximum public offering price) for the past
twelve months with what you would have had to earn with a taxable investment.
<PAGE>
[Graphic: Bar Chart with the following information:]
TAX-FREE TRUST OF OREGON'S DOUBLE TAX-FREE DISTRIBUTION
RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN
INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX RATES
<TABLE>
<CAPTION>
Tax Bracket Taxable Equivalent Rate Double Tax-Free Equivalent Rate
<C> <C> <C>
28% 7.25% 4.75%
31% 7.56% 4.75%
36% 8.29% 4.75%
39.6% 8.81% 4.75%
</TABLE>
As you will note, you would have to find taxable fixed-income
securities that would yield you a level of return quite a bit higher than that
achieved by your investment in Tax-Free Trust of Oregon. Given the current
economic environment, such higher levels of yield would not be possible to
obtain, unless you took significant additional risk in the form of lesser
quality securities.
Consequently, the current TAX-FREE return produced by Tax-Free
Trust of Oregon in today's marketplace is EXCEPTIONALLY ATTRACTIVE.
STABILITY OF YOUR INVESTMENT
Additionally, Tax-Free Trust of Oregon has always tried to
achieve a high level of STABILITY for your share value. This is one of the
prime objectives that shareholders in the Trust have indicated to us that
they would like to have - in addition to a good level of TAX-FREE return.
[Graphic: Bar Chart with the following information:]
<TABLE>
<CAPTION>
SHARE NET ASSET VALUE
In Dollars
<C> <C>
6/16/86 9.60
3/31/87 10.12
3/31/88 9.56
3/31/89 9.61
3/31/90 9.76
3/31/91 9.93
3/31/92 10.19
3/31/93 10.70
3/31/94 10.35
3/31/95 10.37
3/31/96 10.50
3/31/97 10.44
3/31/98 10.74
9/30/98 10.86
</TABLE>
As you will note from the above chart, the Class A share value of
the Trust has achieved a high level of stability since the Trust began.
<PAGE>
SLEEPING WELL AT NIGHT
We have always been conscious of the fact that many of our
shareholders are retirees or pre-retirees. Moreover, most shareholders have
indicated to us that they want the comfort of obtaining a high degree of
safety for their invested capital in the Trust.
Indeed, in our management of Tax-Free Trust of Oregon, we have
always tried to ensure that you are able to "SLEEP WELL AT NIGHT" knowing
that your investment dollars are being well looked after.
Achieving an attractive level of tax-free return PLUS high
stability for your investment in Tax-Free Trust of Oregon requires use of
various investment strategies.
We again want to highlight these various investment strategies
which the Trust uses to ensure that YOUR MONEY IS WELL PROTECTED.
These strategies include emphasis on municipal securities having
HIGH QUALITY credit ratings, BROAD DIVERSIFICATION with respect to both number
and nature of securities, and an INTERMEDIATE MATURITY level with the
various holdings in the Trust's portfolio.
The accompanying three pie charts illustrate these points.
[Graphic: Bar Chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY QUALITY RATING
(By Credit Rating)
<S> <C>
AAA 50.54%
AA 42.28%
A 5.45%
Below A and not rated 1.73%
</TABLE>
[Graphic: Bar Chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY PROJECT
<S> <C>
Veterans Welfare 2.90%
Education 34.99%
General Obligations 9.44%
Housing 4.95%
Utilitlies 4.55%
Transportation 5.48%
Convention Center 1.36%
Water/Sewer 11.38%
Hospitals 6.68%
Other Revenue 10.66%
Airports 2.30%
Correctional Facilities 3.66%
Park and Recreational 1.65%
</TABLE>
[Graphic: Bar Chart with the following information:]
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY MATURITY
(in Years)
<S> <C>
0 - 5 17.67%
6 - 10 21.73%
11 - 15 28.40%
16 - 20 17.82%
Over 20 Years 14.38%
</TABLE>
At September 30, 1998, 92.8% of the Trust's overall portfolio was
rated AAA or AA - the two HIGHEST quality credit ratings available for
securities.
There are presently 202 individual issues in the Trust's
portfolio, representing a broad diversification in number and variety of
project categories throughout the State.
<PAGE>
The average overall maturity of the portfolio is in the
intermediate range of 12.3 years. And, the duration is 4.57 years.
Basically, all these factors are designed to give you "PEACE OF
MIND" with your investment in Tax-Free Trust of Oregon - providing attractive
TAX-FREE return PLUS high STABILITY.
KEEPING YOU IN MIND
We want you to know, that since the inception of Tax-Free Trust
of Oregon, we have always kept in mind the level of TAX-FREE return you
receive from your investment in the Trust.
We also keep in mind the HIGH DEGREE OF STABILITY that we want
your investment to possess.
We achieve this through paying attention to the various areas we
have highlighted above.
These are the PRIME FOCUSES that we continue to have for you with
the Trust.
YOUR CONFIDENCE VALUED
We value the opportunity to be of service to you. It is our
intent to consistently work in your interest with your investment in Tax-Free
Trust of Oregon.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
Chairman of the Board of Trustees
* In certain circumstances, a small portion of the dividends paid by
the Trust may be subject to income taxes, including the alternative
minimum tax.
** The distribution rate shown represents that of Class A shares. Such
data quoted represents past performance and is not indicative of future
results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Different classes of shares are
offered by the Trust and their distribution rate and performance will
vary because of differences in sales charges and fees paid by
shareholders investing in different classes. The Trust's Class A Shares
average annual total return as of September 30, 1998 for the past
one-year period was 2.58%; for the past five-year period was 4.39%;
for the past ten-year period was 6.72%; and since inception was 6.83%.
These returns take into consideration the maximum sales charge of 4%.
As of September 30, 1998, the Trust's Class A Shares 30-day SEC yield
was 3.60% (its taxable equivalent is 5.49% in the 28% tax bracket,
5.73% in the 31% tax bracket, 6.18% in the 36% tax bracket, and 6.55%
in the 39.6% tax bracket).
<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, 1998, as compared with a hypothetical similar size
investment in the Lehman Brothers Municipal Bond Index (the "Index") of
municipal securities and the Consumer Price Index (a cost of living index)
over that same period. The total return of the investment in the Trust is show
n 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 46,000 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. Furthermore, whatever the difference in
performance of the Index versus the Trust might also be attributed to the
lack of application of annual operating expenses and initial sales charge to
the Index.
Since its inception, the Trust has been managed to provide as
stable a share value as possible consistent with producing a competitive
income return to shareholders. It has not been managed for maximum total
return, since one of the aims of management in structuring the portfolio of
the Trust is to reduce fluctuations in the price of the Trust's shares
resulting from changes in interest rates.
As can be observed, however, the pattern of the Trust's results
and that of the Index over the period since inception of the Trust track
quite similarly, even though they are not entirely comparable in character.
[Graphic of 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
9/98 26,698 22,530 14,954
</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, 1998 Year Years Years Since 6/16/86
<S> <C> <C> <C> <C>
Including Sales
Charge and Expenses 2.58% 4.39% 6.72% 6.83%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
<PAGE>
PORTFOLIO MANAGER'S ANALYSIS
As of September 30, 1998, the assets of the Trust stood at about
$334,500,000 as compared to $317,000,000 at the end of its last fiscal year.
For most of this period, stocks continued to provide very good appreciation,
and investor focus was dominated by equities. It was not until the last
quarter of this period that world and other problems came to the fore causing
stocks to decline and investors to rethink where they wanted to be relative
to their investments.
During this 12-month period, interest rates continued their
decline causing bond prices to rise. The 30-year Treasury bond declined from
about a 6.4 percent yield on September 30, 1997 to about a 4.97 percent yield
on September 30, 1998. Part of this decline in rates was stimulated by
declining inflation and part was a result of international fears related to
economic problems in Japan, Russia and other countries.
Municipal bonds did not see the same degree of decline in
interest rates as did U.S. government securities primarily because "scared"
international money coming into our bond market moved primarily into
Treasuries causing their yields to adjust more dramatically. As of September
30, 1998 the spread between 30-year Treasury bonds and 30-year AAA Municipal
general obligation bonds was about one quarter of a percent (22 basis points)
as compared to a year earlier of about one and a quarter percent (120 basis
points).
This lag in interest rates of municipals versus Treasuries has
created a relationship between Treasuries and tax-free bonds where municipals
are trading at between 95% percent and 100% of Treasuries. We have not seen a
comparable relationship since 1986.
With interest rates declining, many municipalities have chosen to
pre-refund older issues so as to reduce their interest costs. This means that
many of the higher yielding issues in the portfolio have been "called" away
or will be "called" over the coming months. With the proceeds from "called"
bonds we are purchasing bonds with longer "call" protection but at lesser
interest rates. We have refused to purchase lower quality bonds to enhance
yield and continued our policy of emphasizing bonds rated AAA or AA, which
rated bonds account for approximately 93% of the portfolio.
One of our major goals is the protection of the net asset value
of your shares. The net asset value of a Class A share of the Tax-Free Trust
of Oregon at the end of the previous fiscal year was $10.68 as compared to
the September 30, 1998 valuation of $10.86. We have maintained a conservative
approach to the market in a period of widely fluctuating emotions. We are
continually trying to provide the shareholder with a satisfactory tax-free
yield and high stability of principal.
<PAGE>
KPMG Peat Marwick LLP
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, 1998, and the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1998, by correspondence with the
custodian. An audit also includes assessing the accounting principles used,
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Trust of Oregon as of September 30, 1998, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
November 4, 1998
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENT OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
RATING
FACE MOODY'S/
AMOUNT STATE OF OREGON GENERAL OBLIGATION BONDS (52.3%) S&P VALUE
<C> <S> <C> <C>
City of Beaverton
$ 910,000 5.950%, 04/01/2003 Aa3/AA- $ 974,837
960,000 6.050%, 04/01/2004 Aa3/AA- 1,030,800
1,020,000 6.150%, 04/01/2005 Aa3/AA- 1,096,500
1,080,000 6.250%, 04/01/2006 Aa3/AA- 1,162,350
Clackamas County School District #115 (AMBAC
Indemnity Corporation Insured)
600,000 5.600%, 06/01/2006 Aaa/AAA 664,500
615,000 5.700%, 06/01/2007 Aaa/AAA 684,187
1,000,000 6.150%, 06/01/2014 Aaa/AAA 1,135,000
Clackamas and Washington County School
District #3J
2,000,000 5.850%, 08/01/2006 A1/AAA 2,152,500
1,150,000 5.875%, 10/01/2009 A1/A+ 1,246,312
Clackamas, Multnomah and Washington County
School District #7J
1,000,000 7.100%, 06/15/2009 Aaa/NR 1,057,500
250,000 7.100%, 06/15/2010 Aaa/NR 264,375
1,500,000 5.700%, 06/15/2010 Aa/NR 1,608,750
Columbia Gorge Community College District
(Financial Security Assurance Insured)
1,200,000 5.400%, 06/01/2013 Aaa/AAA 1,254,000
Deschutes and Jefferson County School District #2J
(MBIA Corporation Insured)
3,700,000 5.600%, 06/01/2009 Aaa/AAA 3,917,375
Hood River County School District (AMBAC
Indemnity Corporation Insured)
2,000,000 5.650%, 06/01/2008 Aaa/AAA 2,155,000
Jackson County School District #549C (Financial
Security Assurance Insured)
1,400,000 5.100%, 06/01/2005 Aaa/AAA 1,499,750
1,000,000 5.300%, 06/01/2008 Aaa/AAA 1,072,500
Jefferson County School District #509J (Financial
Security Assurance Insured)
1,750,000 5.500%, 06/15/2013 Aaa/AAA 1,863,750
Josephine County School District #7 (Grants Pass)
(Financial Guaranty Insurance Corporation)
2,700,000 5.700%, 06/01/2013 Aaa/AAA 2,939,625
Lane County School District #4J
<PAGE>
2,000,000 5.375%, 07/01/2009 Aa/NR 2,100,000
1,000,000 5.375%, 07/01/2013 Aa/NR 1,038,750
Lane County School District #52J (Financial
Guaranty Insurance Corporation Insured)
750,000 6.400%, 12/01/2009 Aaa/AAA 868,125
Lincoln County Oregon School District (Financial
Guaranty Insurance Corporation)
1,245,000 5.250%, 06/15/2012 Aaa/AAA 1,329,037
Lincoln County (MBIA Corporation Insured)
1,000,000 5.375%, 02/01/2010 Aaa/AAA 1,041,250
Malheur County Jail Bonds (MBIA Corporation
Insured)
1,345,000 6.300%, 12/01/2012 Aaa/AAA 1,519,850
Marion and Clackamas County Union High School
District #7J (Financial Security Assurance
Insured)
1,000,000 7.000%, 06/01/2010 Aaa/AAA 1,170,000
1,340,000 6.000%, 06/01/2013 Aaa/AAA 1,499,125
Metropolitan Oregon Open Space Program
2,340,000 5.250%, 09/01/2013 Aa/AA+ 2,442,375
Metropolitan Service District Refunding (Oregon
Convention Center)
4,320,000 6.250%, 01/01/2013 Aa/AA+ 4,530,600
Multnomah County
1,245,000 5.100%, 10/01/2007 Aa1/NR 1,322,812
1,000,000 5.200%, 10/01/2008 Aa1/NR 1,060,000
Multnomah County Drainage District #1
Assessment Bond (MBIA Corporation Insured)
1,000,000 5.250%, 07/01/2017 Aaa/AAA 1,036,250
Multnomah County School District #1
3,225,000 6.500%, 12/15/2000 Aa/A+ 3,243,898
1,180,000 6.600%, 12/15/2001 Aa/A+ 1,187,281
3,725,000 6.800%, 12/15/2004 Aa/A+ 3,749,101
Multnomah County School District #4
1,330,000 5.900%, 01/01/2005 A1/A+ 1,416,450
<PAGE>
Multnomah County School District #40
5,100,000 5.625%, 06/01/2012 NR/AA- 5,501,625
Northern Oregon Correctional (AMBAC Indemnity
Corporation Insured)
2,000,000 5.400%, 09/15/2016 Aaa/AAA 2,107,500
Oak Lodge Water District (AMBAC Indemnity
Corporation Insured)
215,000 7.300%, 12/01/2005 Aaa/AAA 255,581
215,000 7.300%, 12/01/2006 Aaa/AAA 255,312
215,000 7.400%, 12/01/2007 Aaa/AAA 256,119
State of Oregon
5,000,000 7.000%, 12/01/2011 Aa2/AA 5,128,150
State of Oregon Alternate Energy Project
Series A
1,000,000 6.400%, 01/01/2008 Aa2/AA 1,006,850
State of Oregon Board of Higher Education
900,000 6.200%, 10/15/2007 Aa2/AA 977,625
3,195,000 6.400%, 10/01/2011 Aa2/AA 3,402,675
2,000,000 6.250%, 10/15/2012 Aa2/AA 2,175,000
2,150,000 6.500%, 10/01/2017 Aa2/AA 2,308,562
2,890,000 6.000%, 10/15/2018 Aa2/AA 3,103,137
1,655,000 5.600%, 08/01/2023 Aa2/AA 1,766,713
1,500,000 5.600%, 08/01/2023 Aa2/AA 1,601,250
6,300,000 6.000%, 08/01/2026 Aa2/AA 6,993,000
State of Oregon Elderly & Disabled Housing
725,000 6.250%, 08/01/2013 Aa2/AA 798,406
State of Oregon Veterans' Welfare
505,000 9.000%, 04/01/2008 Aa2/AA 607,894
700,000 9.200%, 10/01/2008 Aa2/AA 987,875
5,150,000 6.875%, 12/01/2013 Aa2/AA 5,279,007
500,000 6.875%, 12/01/2014 Aa2/AA 512,510
1,000,000 7.000%, 12/01/2015 Aa2/AA 1,025,920
1,200,000 5.200%, 10/01/2018 Aa2/AA 1,225,500
Polk County School District #2 (Financial Security
Assurance Insured)
1,000,000 5.400%, 06/01/2012 Aaa/AAA 1,048,750
<PAGE>
Polk, Marion, and Benton County School District
#13J (Financial Guaranty Insurance Corporation
Insured)
1,000,000 5.500%, 12/01/2008 Aaa/AAA 1,087,500
City of Portland
1,625,000 4.500%, 11/01/2004 Aaa/NR 1,659,531
1,480,000 5.100%, 10/01/2009 Aaa/NR 1,541,050
1,000,000 7.125%, 10/01/2010 Aaa/NR 1,020,000
2,790,000 5.750%, 06/01/2013 Aaa/NR 3,023,662
2,000,000 5.600%, 06/01/2015 Aa2/NR 2,157,500
2,050,000 5.250%, 06/01/2015 Aa2/NR 2,144,813
Portland Community College District
3,500,000 6.000%, 07/01/2012 Aa3/AA 3,771,250
Port of Portland
1,000,000 4.500%, 03/01/2006 Aa2/AA+ 1,036,250
City of Salem
1,000,000 5.875%, 01/01/2007 A1/A+ 1,050,000
Salem-Keiser Oregon School District #24,
(Financial Security Assurance Insured)
2,000,000 4.875%, 06/01/2014 Aaa/AAA 2,040,000
Tri-County Metropolitan Transportation District
6,100,000 6.000%, 07/01/2012 Aa/AA+ 6,565,125
Tualatin Hills Park and Recreation District (MBIA
Corporation Insured)
2,970,000 5.750%, 03/01/2012 Aaa/AAA 3,278,137
2,000,000 5.750%, 03/01/2015 Aaa/AAA 2,207,500
Umatilla County Oregon (Financial Guaranty
Insurance Corporation Insured)
2,000,000 5.600%, 10/01/2015 Aaa/AAA 2,130,000
Umatilla County School District #8R (AMBAC
Indemnity Corporation Insured)
700,000 6.100%, 12/01/2012 Aaa/AAA 787,500
Umatilla County School District #6R (AMBAC
Indemnity Corporation Insured)
325,000 5.050%, 06/15/2022 Aaa/AAA 351,000
2,675,000 5.050%, 06/15/2022 Aaa/AAA 2,701,750
<PAGE>
Washington County
2,500,000 6.200%, 12/01/2007 Aa1/AA 2,678,125
1,625,000 5.000%, 12/01/2011 Aa1/AA 1,706,250
3,110,000 6.000%, 12/01/2013 Aa1/AA 3,471,537
Washington County School District #88J (Financial
Security Assurance Insured)
2,315,000 6.100%, 06/01/2012 Aaa/AAA 2,618,844
585,000 6.100%, 06/01/2012 Aaa/AAA 648,619
Washington and Clackamas County School District
#23J
1,675,000 6.625%, 01/01/2005 NR/NR* 1,737,812
1,000,000 5.650%, 06/01/2015 A1/NR 1,077,500
720,000 6.625%, 01/01/2008 NR/NR* 747,000
2,000,000 5.400%, 01/01/2010 A1/NR 2,110,000
Washington & Multnomah County School District
#48J
1,175,000 5.500%, 06/01/2006 Aa2/AA- 1,267,531
1,130,000 5.600%, 06/01/2007 Aa2/AA- 1,221,812
1,000,000 6.150%, 06/01/2008 Aa2/AA- 1,040,000
1,415,000 5.700%, 06/01/2008 Aa2/AA- 1,531,737
525,000 6.300%, 09/01/2009 Aaa/AAA 563,063
1,440,000 6.000%, 06/01/2011 Aa2/AA- 1,569,600
2,010,000 6.500%, 09/01/2011 Aaa/AAA 2,165,775
Washington & Yamhill County School District #58J
(AMBAC Indemnity Corporation Insured)
70,000 6.600%, 11/01/2004 Aaa/AAA 70,151
80,000 6.600%, 11/01/2005 Aaa/AAA 80,166
90,000 6.600%, 11/01/2006 Aaa/AAA 90,180
Wolf Creek Highway Water District
505,000 6.900%, 12/01/2005 NR/AA 507,873
Yamhill County School District #29J (Financial
Security Assurance Insured)
2,000,000 5.350%, 06/01/2006 Aaa/AAA 2,145,000
500,000 6.100%, 06/01/2011 Aaa/AAA 560,625
Total State of Oregon General Obligation
Bonds 174,821,244
<PAGE>
STATE OF OREGON REVENUE BONDS - 46.0%
Airport Revenue Bonds - 2.3%
Port of Portland Airport (Financial Guaranty
Insurance Corporation Insured)
500,000 5.500%, 07/01/2006 Aaa/AAA 528,750
Port of Portland Airport (MBIA Corporation
Insured)
600,000 6.400%, 07/01/2003 Aaa/AAA 645,750
3,530,000 6.750%, 07/01/2009 Aaa/AAA 3,830,050
2,425,000 6.750%, 07/01/2015 Aaa/AAA 2,631,125
Total Airport Revenue Bonds 7,635,675
Certificate of Participation Revenue Bonds - 10.4%
Multnomah County Certificate of Participation
1,000,000 5.200%, 07/01/2005 Aa3/NR 1,057,500
3,100,000 6.000%, 08/01/2012 Aa/A 3,371,250
State of Oregon Certificate of Participation
(AMBAC Indemnity Corporation Insured)
2,100,000 7.500%, 09/01/2015 Aaa/AAA 2,291,625
Oregon State Department Of Administration
Services (AMBAC Indemnity Corporation Insured)
950,000 5.000%, 11/01/2019 Aaa/AAA 966,625
1,500,000 5.800%, 05/01/2024 Aaa/AAA 1,631,250
Oregon State Department Of Administration
Services (MBIA Corporation Insured)
1,000,000 5.750%, 05/01/2017 Aaa/AAA 1,083,750
5,805,000 5.500%, 11/01/2020 Aaa/AAA 6,131,531
1,450,000 5.375%, 11/01/2016 Aaa/AAA 1,520,688
State of Oregon Certificate of Participation (MBIA
Corporation Insured)
2,150,000 7.050%, 01/15/2006 Aaa/AAA 2,284,375
1,250,000 5.700%, 01/15/2010 Aaa/AAA 1,323,438
2,750,000 6.200%, 11/01/2012 Aaa/AAA 3,031,875
1,150,000 7.200%, 01/15/2015 Aaa/AAA 1,224,750
1,000,000 5.500%, 01/15/2015 Aaa/AAA 1,038,750
550,000 5.500%, 01/15/2015 Aaa/AAA 571,313
500,000 5.800%, 03/01/2015 Aaa/AAA 526,875
600,000 7.200%, 03/01/2015 Aaa/AAA 636,000
1,000,000 5.800%, 03/01/2015 Aaa/AAA 1,053,750
2,000,000 6.250%, 11/01/2019 Aaa/AAA 2,207,500
<PAGE>
Southwestern Oregon Community College District
(AMBAC Indemnity Corporation Insured)
1,000,000 5.600%, 06/01/2016 Aaa/AAA 1,065,000
Washington County Educational Services,
Certificates of Participation
645,000 5.625%, 06/01/2016 A1/NR 678,863
Washington County Educational Services,
Certificates of Participation, (MBIA Corporation
Insured)
830,000 5.750%, 06/01/2025 Aaa/AAA 881,875
Total Certificate of Participation Revenue Bonds 34,578,583
Hospital Revenue Bonds - 5.2%
Clackamas Hospital Facilities Authority (Adventist
Health System/West) (MBIA Corporation Insured)
2,000,000 6.350%, 03/01/2009 Aaa/AAA 2,180,000
Clackamas Hospital Facilites Authority (Kaiser
Permanente)
2,400,000 6.500%, 04/01/2011 A3/A 2,568,000
Clackamas Hospital Facilites Authority (Sisters of
Providence Hospital)
500,000 6.375%, 10/01/2004 A1/AA- 548,125
Douglas County Hospital Facilities Authority
(Catholic Health) (MBIA Corporation Insured)
535,000 5.600%, 11/15/2005 Aaa/AAA 586,494
Medford Hosptial Facilities Authority (Rogue Valley
Health Services) (MBIA Corporation Insured)
500,000 6.800%, 12/01/2011 Aaa/AAA 542,500
1,685,000 6.750%, 12/01/2020 Aaa/AAA 1,826,119
Medford Hosptial Authority (Asante Health Systems)
(MBIA Corporation Insured)
1,000,000 5.000%, 08/15/2018 NR/AAA 1,013,750
500,000 5.000%, 08/15/2024 NR/AAA 505,000
1,000,000 5.125%, 08/15/2028 NR/AAA 1,013,750
<PAGE>
Western Lane County Hospital Facilities Authority
(Sisters of St. Joseph Hospital) (MBIA Corporation
Insured)
1,000,000 5.625%, 08/01/2007 Aaa/AAA 1,092,500
1,450,000 7.125%, 08/01/2017 Aaa/AAA 1,524,588
3,765,000 5.750%, 08/01/2019 Aaa/AAA 4,061,494
Total Hospital Revenue Bonds 17,462,320
Housing, Educational, and Cultural Revenue Bonds - 9.3%
Clackamas Community College District Revenue
(MBIA Corporation Insured)
1,865,000 5.700%, 06/01/2016 Aaa/AAA 1,997,881
Portland Oregon Housing Authority
4,000,000 5.100%, 01/01/2027 NR/A 4,010,000
State of Oregon Housing Finance Agency,
1,000,000 6.800%, 07/01/2013 A1/A+ 1,062,500
State of Oregon Housing and Community Services,
1,670,000 5.200%, 07/01/2009 Aa2/NR 1,743,063
705,000 5.900%, 07/01/2012 Aa2/NR 758,756
720,000 6.750%, 07/01/2012 Aa2/NR 774,900
500,000 6.700%, 07/01/2013 Aa2/NR 528,125
445,000 6.350%, 07/01/2014 Aa2/NR 478,931
35,000 6.750%, 07/01/2016 Aa2/NR 35,306
865,000 6.800%, 07/01/2016 Aa2/NR 928,794
3,500,000 6.875%, 07/01/2028 Aa2/NR 3,749,375
State of Oregon Housing and Community Services,
(MBIA Corporation Insured)
1,500,000 5.450%, 07/01/2024 Aaa/AAA 1,552,500
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- 1,072,500
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 1,218,988
<PAGE>
State of Oregon Housing, Educational and Cultural
Facilities Authority (Reed College),
2,145,000 6.750%, 07/01/2021 NR/A+ 2,351,456
Oregon Health Sciences University Revenue (MBIA
Corporation Insured)
4,500,000 5.250%, 07/15/2015 Aaa/AAA 4,725,000
City of Salem Educational Facilities (Willamette
University),
1,000,000 6.000%, 04/01/2010 A2/NR 1,083,750
1,740,000 6.750%, 04/01/2011 NR/NR* 1,868,325
Yamhill County Educational Services (AMBAC
Indemnity Corporation Insurance)
1,000,000 5.150%, 07/01/2019 NR/AAA 1,026,250
Total Housing, Educational, and Cultural
Revenue Bonds 30,966,400
Transportation Revenue Bonds - 3.5%
Port of Morrow,
2,600,000 6.375%, 04/01/2008 Aaa/NR 2,821,000
State of Oregon Department of Transportation
(Light Rail) (MBIA Corporation Insured),
2,000,000 6.000%, 06/01/2005 Aaa/AAA 2,240,000
1,500,000 6.100%, 06/01/2007 Aaa/AAA 1,680,000
Port St. Helens, Oregon Polution Control
85,000 7.750%, 02/01/2006 A3/NR 93,713
1,000,000 4.800%, 04/01/2010 A3/A- 1,022,500
Tri-County Metropolitan Transportation District
3,680,000 5.700%, 08/01/2013 A1/AA+ 3,850,200
Total Transportation Revenue Bonds 11,707,413
Urban Renewal Revenue Bonds - .2%
City of Portland Urban Renewal,
300,000 9.000%, 12/01/2002 A/NR 304,149
City of Wilsonville Urban Renewal,
500,000 5.850%, 06/01/2004 Baa1/NR 501,275
Total Urban Renewal Revenue Bonds 805,424
<PAGE>
Utility Revenue Bonds - 4.5%
Emerald Peoples Utility District (AMBAC Indemnity
Corporation Insured),
700,000 6.700%, 11/01/2005 Aaa/AAA 749,875
Emerald Peoples Utility District Electic Systems
(Financial Security Assurance Insured)
1,000,000 6.750%, 11/01/2016 Aaa/AAA 1,088,750
City of Eugene Electric Utility (Financial Security
Assurance Insured)
1,700,000 5.000%, 08/01/2018 Aaa/AAA 1,731,875
1,340,000 5.050%, 08/01/2022 Aaa/AAA 1,365,125
City of Eugene Electric Utility
610,000 6.650%, 08/01/2009 A1/AA 658,038
660,000 6.650%, 08/01/2010 A1/AA 711,975
1,000,000 6.000%, 08/01/2011 A1/AA 1,060,000
700,000 6.700%, 08/01/2011 A1/AA 756,000
500,000 5.000%, 08/01/2017 A1/AA 504,375
1,400,000 5.800%, 08/01/2019 A1/AA 1,552,250
City of Eugene Trojan Nuclear Project
3,865,000 5.900%, 09/01/2009 Aa1/AA- 3,870,025
Northern Wasco County Public Utility Development
(AMBAC Indemnity Corporation Insured),
1,000,000 5.625%, 12/01/2022 Aaa/AAA 1,065,000
Total Utility Revenue Bonds 15,113,288
Water and Sewer Revenue Bonds - 9.5%
City of Canby Sewer (Financial Security Assurance
Insured),
500,000 6.250%, 12/01/2017 Aaa/AAA 547,500
City of Klamath Falls Water (Financial Security
Assurance Insured),
1,100,000 6.100%, 06/01/2014 Aaa/AAA 1,214,125
City of Oregon City Sewer,
750,000 6.875%, 10/01/2019 NR/NR* 890,625
City of Portland Sewer
1,500,000 6.050%, 06/01/2009 A1/A+ 1,678,125
<PAGE>
City of Portland Sewer, (MBIA Corporation Insured)
2,500,000 5.250%, 06/01/2016 Aaa/AAA 2,593,750
City of Portland Sewer (Financial Guaranty
Insurance Corporation Insured),
2,725,000 6.000%, 10/01/2008 Aaa/AAA 3,000,906
500,000 6.000%, 10/01/2012 Aaa/AAA 550,000
1,000,000 5.000%, 06/01/2014 Aaa/AAA 1,026,250
2,000,000 5.000%, 06/01/2015 Aaa/AAA 2,047,500
2,855,000 6.250%, 06/01/2015 Aaa/AAA 3,229,719
2,000,000 4.500%, 06/02/2015 Aaa/AAA 1,952,500
Portland Water System Revenue
3,000,000 5.500%, 08/01/2014 Aa1/NR 3,161,250
1,440,000 5.500%, 08/01/2015 Aa1/NR 1,513,800
Washington County Unified Sewer Agency
(AMBAC Indemnity Corporation Insured),
1,040,000 6.800%, 11/01/2004 Aaa/AAA 1,079,125
2,120,000 5.900%, 10/01/2006 Aaa/AAA 2,355,850
800,000 5.900%, 10/01/2006 Aaa/AAA 889,000
315,000 5.900%, 10/01/2006 Aaa/AAA 346,894
2,500,000 6.125%, 10/01/2012 Aaa/AAA 2,809,375
750,000 6.125%, 10/01/2012 Aaa/AAA 842,813
Total Water and Sewer Revenue Bonds 31,729,107
Other Revenue Bonds - 1.1%
Baker County Pollution Control (Ash Grove Cement
West Project) (Small Business Administration
Insured),
355,000 6.200%, 07/01/2004 Aaa/NR 362,405
380,000 6.300%, 07/01/2005 Aaa/NR 387,923
State of Oregon Bond Bank
500,000 6.800%, 01/01/2011 Aaa/NR 514,185
Oregon Economic Development Commission
(Consolidated Freightways)
1,500,000 7.000%, 04/01/2004 Aa2/BBB- 1,502,550
Multnomah County School District #1J, Special
Obligations
1,000,000 5.000%, 03/01/2007 Aa/A+ 1,041,250
Total Other Revenue Bonds 3,808,313
Total State of Oregon Revenue Bonds 153,806,523
<PAGE>
PUERTO RICO - 1.1%
Puerto Rico Commonwealth Infrastructure, (AMBAC
Indemnity Corp. Insured)
2,100,000 5.000% , 07/01/2028 Aaa/AAA 2,118,375
Puerto Rico Commonwealth Infrastructure (MBIA
Corporation Insured)
1,500,000 4.875% , 07/01/23, 07/01/2023 Aaa/AAA 1,503,750
Puerto Rico Housing Finance Corporation (GNMA
Collateralized)
15,000 7.800%, 10/15/2021 Aaa/AAA 15,308
Total Puerto Rico 3,637,433
Total Municipal Bonds (cost $ 310,385,540**) 99.4% 332,265,200
Other assets in excess of liabilities 0.6 2,035,067
Net Assets 100.0% $334,300,267
<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, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $310,385,540) $332,265,200
Interest receivable 5,585,202
Receivable for Trust shares sold 181,671
Receivable for investment securities sold 122,009
Other assets 4,638
Total assets 338,158,720
LIABILITIES
Payable for investment securities purchased 1,943,550
Cash overdraft 1,130,289
Dividends payable 326,352
Payable for Trust shares redeemed 154,248
Distribution fees payable 123,671
Management fees payable 109,172
Accrued expenses 71,171
Total liabilities 3,858,453
NET ASSETS $334,300,267
Net Assets consist of:
Capital Stock - Authorized an unlimited number of
shares, par value $.01 per share 307,819
Additional paid-in capital 311,738,123
Net unrealized appreciation on investments 21,879,660
Undistributed net investment income 374,665
$334,300,267
CLASS A
Net Assets $322,475,311
Capital shares outstanding 29,692,537
Net asset value and redemption price per share $ 10.86
Offering price per share (100/96 of $10.86 adjusted
to nearest cent) $ 11.31
CLASS C
Net Assets $ 1,160,016
Capital shares outstanding 106,872
Net asset value and offering price per share $ 10.85
Redemption price per share (*generally, a charge of
1% is imposed on the proceeds of shares redeemed
during the first 12 months after purchase) $ 10.85*
CLASS Y
Net Assets $ 10,664,940
Capital shares outstanding 982,494
Net asset value, offering and redemption price
per share $ 10.85
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $18,104,876
Expenses:
Management fees (note 3) $ 1,307,096
Distribution and service fees (note 3) 486,450
Transfer and shareholder servicing agent fees 202,829
Trustees' fees and expenses (note 8) 86,564
Shareholders' reports and proxy statements 53,279
Legal fees 52,668
Audit and accounting fees 29,071
Custodian fees 28,130
Registration fees and dues 17,598
Insurance 5,262
Miscellaneous 43,464
2,312,411
Expenses paid indirectly (note 7) (63,505)
Net expenses 2,248,906
Net investment income 15,855,970
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from securities transactions 898,940
Change in unrealized appreciation on investments 5,060,852
Net realized and unrealized gain on investments 5,959,792
Net increase in net assets resulting from operations $21,815,762
</TABLE>
See accompanying notes to financial statements.
<PAGE>
TAX-FREE TRUST OF OREGON
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
September 30,
1998 1997
<S> <C> <C>
OPERATIONS:
Net investment income $ 15,855,970 $ 15,494,091
Net realized gain from securities transactions 898,940 394,005
Change in unrealized appreciation on investments 5,060,852 5,718,838
Change in net assets resulting from operations 21,815,762 21,606,934
DISTRIBUTIONS TO SHAREHOLDERS (note 6):
Class A Shares:
Net investment income (15,702,552) (15,480,977)
Net realized gain on investments (222,521) (387,996)
Class C Shares:
Net investment income (40,552) (27,150)
Net realized gain on investments (571) (997)
Class Y Shares:
Net investment income (409,309) (87,359)
Net realized gain on investments (4,740) (5,012)
Change in net assets from distributions (16,380,245) (15,989,491)
CAPITAL SHARE TRANSACTIONS (note 9):
Proceeds from shares sold 34,355,105 33,347,126
Reinvested dividends and distributions 9,925,195 9,592,553
Cost of shares redeemed (32,251,564) (37,395,842)
Change in net assets from capital share
transactions 12,028,736 5,543,837
Change in net assets 17,464,253 11,161,280
NET ASSETS:
Beginning of period 316,836,014 305,674,734
End of period $334,300,267 $ 316,836,014
</TABLE>
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. On January 31, 1998 the Trust established Class
I shares, which are offered and sold only through financial intermediaries
and are not offered directly to retail investors. At September 30, 1998 there
were no Class I shares outstanding. All classes of shares represent interests
in the same portfolio of investments in the Trust and are identical as to
rights and privileges. They differ only with respect to the effect of sales
charges, the distribution and/or service fees borne by the respective class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privileges of each class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a) PORTFOLIO VALUATION: Municipal securities which have remaining
maturities of more than 60 days are valued at fair value each business day
based upon information provided by a nationally prominent independent
pricing service and periodically verified through other pricing services;
in the case of securities for which market quotations are readily
available, securities are valued at the mean of bid and asked quotations
and, in the case of other securities, at fair value determined under
procedures established by and under the general supervision of the Board
of Trustees. Securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or less,
or by amortizing their unrealized appreciation or depreciation on the 61st
day prior to maturity, if their term to maturity at purchase exceeded 60
days.
<PAGE>
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.
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 and additionally maintaining the Trust's accounting
books and records. For its services, the Manager is entitled to receive a fee
which
<PAGE>
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.
U.S. Bank National Association (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, and provides for daily pricing of the Trust's
portfolio. For its services, the Sub-Adviser is entitled to receive a fee
from the Manager which is payable monthly and computed as of the close of
business each day at the annual rate of 0.18 of 1% on the Trust's net assets.
On October 31, 1997, the Management arrangements described above
were approved by the Trust's shareholders and went into effect. From
inception of the Trust to that date, Aquila Management Corporation had served
as sub-adviser, and then administrator, and U.S. Bank National Association
and its predecessors in interest had served as investment adviser, pursuant
to agreements with the Trust for total fees at an annual rate of 0.40 of 1%
of the Trust's net assets, the same fee as under the new arrangements.
For the year ended September 30, 1998, the Trust incurred fees for
advisory and administrative services of $1,307,096.
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
September 30, 1998, service fees on Class A Shares amounted to $476,542, of
which the Distributor received $14,437.
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
<PAGE>
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, 1998,
amounted to $7,431. 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
September 30, 1998, amounted to $2,477. The total of these payments made with
respect to Class C Shares amounted to $9,908, of which the Distributor
received $4,925.
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 Oregon, with the bulk of sales commissions inuring to such dealers.
For the year ended September 30, 1998, the Distributor received commissions
of $156,496 on sales of Class A Shares.
4. PURCHASES AND SALES OF SECURITIES
During the year ended September 30, 1998, purchases of securities
and proceeds from the sales of securities aggregated $37,947,892 and
$22,829,513, respectively.
At September 30, 1998, aggregate gross unrealized appreciation for
all securities in which there is an excess of market value over tax cost
amounted to $21,879,660, for a net unrealized appreciation of $21,879,660.
There are no securities in which there is an excess of tax cost over market
value.
5. PORTFOLIO ORIENTATION
Since the Trust invests principally and may invest entirely in
double tax-free municipal obligations of issuers within 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.
<PAGE>
6. DISTRIBUTIONS
The Trust declares dividends daily from net investment income and
makes payments monthly in additional shares at the net asset value per share
or in cash, at the shareholder's option. Net realized capital gains, if any,
are distributed annually.
The Trust intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Oregon
income taxes. However, due to differences between financial statement
reporting and Federal income tax reporting requirements, distributions made
by the Trust may not be the same as the Trust's net investment income, and/or
net realized securities gains. Further, a small portion of the dividends may,
under some circumstances, be subject to ordinary income taxes. Also, annual
capital gains distributions, if any, are taxable.
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.
8. TRUSTEES' FEES AND EXPENSES
During the fiscal year there were eight Trustees. Trustees' fees
paid during the year were at the annual rate of $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, 1998 such
reimbursements averaged approximately $5,200 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, 1998 SEPTEMBER 30, 1997
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
CLASS A SHARES:
Proceeds from shares sold 2,478,110 $ 26,612,757 2,755,147 $ 29,089,742
Reinvested dividends and
distributions 907,937 9,756,708 903,248 9,535,675
Cost of shares redeemed (2,903,272) (31,179,164) (3,530,285) (37,291,993)
Net change 482,775 5,190,301 128,110 1,333,424
CLASS C SHARES:
Proceeds from shares sold 50,665 544,808 42,838 451,359
Reinvested dividends and
distributions 1,209 12,994 538 5,679
Cost of shares redeemed (19,993) (213,501) (459) (4,904)
Net change 31,881 344,301 42,917 452,134
CLASS Y SHARES:
Proceeds from shares sold 670,706 7,197,540 359,104 3,806,025
Reinvested dividends and
distributions 14,468 155,493 4,836 51,199
Cost of shares redeemed (80,210) (858,899) (9,464) (98,945)
Net change 604,964 6,494,134 354,476 3,758,279
Total transactions in Trust
shares 1,119,620 $ 12,028,736 525,503 $ 5,543,837
</TABLE>
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 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 at the beginning
of the year 2000 are ready.
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 the progress
of its suppliers, and currently see no significant cause for alarm with
respect to any of the Trust's suppliers.
Unfortunately, as you can well understand, we cannot guarantee
matters beyond our control, including supplier operations. We assure you,
however, that we recognize a responsibility to inform our shareholders if in
the future we become aware of any developments which would lead us to believe
that the Trust will be significantly affected by year 2000 problems.
We will continue to keep you up-to-date through future
communications.
<PAGE>
TAX-FREE TRUST OF OREGON
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS A(1)
YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.68 $10.49 $10.55 $10.20 $10.95
Income from Investment Operations:
Net investment income 0.53 0.53 0.54 0.55 0.56
Net gain (loss) on securities (both realized and
unrealized) 0.19 0.21 (0.05) 0.39 (0.75)
Total from Investment Operations 0.72 0.74 0.49 0.94 (0.19)
Less Distributions (note 6):
Dividends from net investment income (0.53) (0.54) (0.54) (0.55) (0.56)
Distributions from capital gains (0.01) (0.01) (0.01) (0.04) -
Total Distributions (0.54) (0.55) (0.55) (0.59) (0.56)
Net Asset Value, End of Period $10.86 $10.68 $10.49 $10.55 $10.20
Total Return (not reflecting sales charge)(%) 6.90 7.21 4.76 9.52 (1.77)
Ratios/Supplemental Data
Net Assets, End of Period ($ millions) 322 312 305 311 316
Ratio of Expenses to Average Net Assets (%) 0.69 0.72 0.72 0.71 0.68
Ratio of Net Investment Income to Average Net
Assets (%) 4.85 5.02 5.16 5.38 5.28
Portfolio Turnover Rate (%) 7 5 10 13 11
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.53 0.53 0.54 0.55 0.56
Ratio of Expenses to Average Net Assets (%) 0.71 0.73 0.73 0.73 0.70
Ratio of Net Investment Income to Average Net
Assets (%) 4.83 5.01 5.15 5.37 5.26
<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 YEAR PERIOD(2) YEAR YEAR PERIOD(2)
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.67 $10.49 $10.34 $10.68 $10.49 $10.34
Income from Investment Operations:
Net investment income 0.43 0.43 0.22 0.54 0.54 0.27
Net gain (loss) on securities (both
realized and unrealized) 0.20 0.21 0.15 0.19 0.21 0.15
Total from Investment Operations 0.63 0.64 0.37 0.73 0.75 0.42
Less Distributions (note 6):
Dividends from net investment income (0.44) (0.45) (0.22) (0.55) (0.55) (0.27)
Distributions from capital gains (0.01) (0.01) - (0.01) (0.01) -
Total Distributions (0.45) (0.46) (0.22) (0.56) (0.56) (0.27)
Net Asset Value, End of Period $10.85 $10.67 $10.49 $10.85 $10.68 $10.49
Total Return (not reflecting sales charge) (%) 6.00 6.20 3.61+ 6.96 7.37 4.14+
Ratios/Supplemental Data
Net Assets, End of Period ($ millions) 1.2 .8 .3 10.7 4.0 .2
Ratio of Expenses to Average Net
Assets (%) 1.54 1.57 1.56* 0.53 0.57 0.57*
Ratio of Net Investment Income to
Average Net Assets (%) 4.00 4.15 4.18* 4.97 5.22 5.36*
Portfolio Turnover Rate (%) 7 5 10+ 7 5 10+
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the expense offset for uninvested cash balances
would have been:
<S> <C> <C> <C> <C> <C>
Net Investment Income ($) 0.43 0.44 0.22 0.54 0.54 0.27
Ratio of Expenses to Average Net Assets (%) 1.56 1.58 1.56* 0.55 0.58 0.58*
Ratio of Net Investment Income to
Average Net Assets (%) 3.98 4.14 4.17* 4.95 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>
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Annual Meeting of Shareholders of Tax-Free Trust of Oregon
(the "Trust") was held on April 20, 1998. The holders of shares representing
63% of the total net asset value of the shares entitled to vote were present
in person or by proxy. At the meeting, the following matters were voted upon
and approved by the shareholders (the resulting votes for each matter are
presented below).
1. To elect Trustees.
NUMBER OF VOTES:
TRUSTEE FOR WITHHELD
Lacy B. Herrmann 203,810,327.025 3,010,476.900
Vernon R. Alden 203,599,564.455 3,221,239.470
Warren C. Coloney 203,669,797.025 3,151,006.900
David B. Frohnmayer 203,758,125.535 3,062,678.390
James A. Gardner 203,852,161.725 2,968,642.200
Diana P. Herrmann 203,867,641.645 2,953,162.280
Raymond H. Lung 203,923,312.145 2,897,490.780
Richard C. Ross 203,923,313.145 2,897,490.780
2. To ratify the selection of KPMG Peat Marwick LLP as the Trust's
independent auditors.
NUMBER OF VOTES:
FOR AGAINST ABSTAIN
196,246,343.015 273,168.700 10,301,281.400
A special meeting of shareholders of the Trust was held on
October 31, 1997. The holders of shares representing 78% of the total net
asset value of the shares entitled to vote were present in person or by
proxy. At the meeting, the following matters were voted upon and approved by
the shareholders (the resulting votes for each matter are presented below).
1. To approve an interim Investment Advisory Agreement between the Trust and
First Bank National Association.
NUMBER OF VOTES:
FOR AGAINST ABSTAIN BROKER NON-VOTES
222,760,812.46 4,296,431.24 18,881,862.96 0.00
2. To approve a new Investment Advisory and Administration Agreement between
the Trust and Aquila Management Corporation.
NUMBER OF VOTES:
FOR AGAINST ABSTAIN BROKER NON-VOTES
223,111,178.61 4,231,613.89 18,596,292.80 0.00
3. To approve a new Sub-Advisory Agreement between Aquila Management
Corporation as Manager and First Bank National Association as Sub-Adviser.
NUMBER OF VOTES:
FOR AGAINST ABSTAIN BROKER NON-VOTES
221,268,261.97 4,559,536.25 20,111,308.48 0.00
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, 1998, of the total amount
of dividends paid by Tax-Free Trust of Oregon from net investment income,
99.98% was "exempt-interest dividends," and the balance was ordinary dividend
income.
The Trust hereby designates $15,330,352 as an exempt-interest
dividend for its fiscal year ended September 30, 1998. The Fund also
designates $898,940 as a capital gain dividend for Federal income tax
purposes, for its fiscal year ended September 30, 1998 which is taxable as a
long-term capital gain.
Prior to January 31, 1999, shareholders will be mailed IRS Form
1099-DIV which will contain information on the status of distributions paid
for the 1998 CALENDAR YEAR.
