N-30D 1 0001.txt 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 David B. Frohnmayer James A. Gardner Diana P. Herrmann Sterling K. Jenson Raymond H. Lung John W. Mitchell Richard C. Ross Ralph R. Shaw OFFICERS Diana P. Herrmann, President James M. McCullough, Senior 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 LLP 757 Third Avenue New York, New York 10017 Further information is contained in the Prospectus, which must precede or accompany this report. ANNUAL REPORT SEPTEMBER 30, 2000 TAX-FREE TRUST OF OREGON A TAX-FREE INCOME INVESTMENT [Logo of Tax-Free Trust of Oregon: a square containing a line drawing of mountains with two pine trees in front] [Logo of the Aquila Group of Funds: an eagle's head] ONE OF THE AQUILASM GROUP OF FUNDS [Logo of Tax-Free Trust of Oregon: a square containing a line drawing of mountains with two pine trees in front] SERVING OREGON INVESTORS FOR OVER A DECADE TAX-FREE TRUST OF OREGON ANNUAL REPORT "CONSISTENCY" November 10, 2000 Dear Fellow Shareholder: If there is one word that captures the essence of Tax-Free Trust of Oregon, that word is "CONSISTENCY." The Trust has constantly attempted to provide: * CONSISTENCY of share value, * CONSISTENCY in the TAX-FREE return produced by the Trust, * CONSISTENCY of quality of investments and, * CONSISTENCY in the type of investments for the Trust. CONSISTENCY OF SHARE VALUE As you are aware, management of the Trust cannot control interest rates or their effect upon the market. Interest rates are primarily controlled by the Federal Reserve Board (the "Fed.") The Fed increases or decreases rates as they feel is necessary in order to maintain the stability and growth potential of the economy of the United States. When the Fed feels that growth in the economy is increasing at too rapid a pace, they tend to increase interest rates and reduce the supply of money in order to slow down the rate of growth. (This is what has happened during the past year or so.) On the other hand, when the Fed feels that the economy needs stimulation, there is a tendency to decrease interest rates and increase the supply of money in order to provide an additional impetus to the overall economy. Interest rate changes have the effect in the marketplace of creating changes in the share value of fixed-income securities such as the Trust. As we have previously indicated, when interest rates go up, the share value goes down. And, when interest rates go down, the share value goes up. What we have done is to use various investment management techniques to dampen the swings that can occur in the share value of the Trust. Despite the variations in share price that have taken place since the inception of the Trust, management of the Trust has constantly strived to provide, to the maximum extent possible, CONSISTENCY in the value of the Trust's shares. This you will note from the chart below. [Graphic of a bar chart with the following information:] SHARE NET ASSET VALUE 12/31/86 $10.07 12/31/87 $9.48 12/31/88 $9.64 12/31/89 $9.91 12/31/90 $9.89 12/31/91 $10.32 12/31/92 $10.46 12/31/93 $10.92 12/31/94 $9.92 12/31/95 $10.72 12/31/96 $10.55 12/31/97 $10.77 12/31/98 $10.79 12/31/99 $10.08 9/29/2000 $10.29 Since the majority of investors using the Trust are pre-retirees or retirees, this action by the Trust of maintaining a stable share value is what we feel is in the best interest of all shareholders. We want you to know that when you need money from your investment in the Trust, it is THERE - at approximately the same value that it has been all along. CONSISTENCY IN THE TAX-FREE RETURN PRODUCED BY THE TRUST When you look at the Trust in terms of income produced on a year-by-year basis, you will observe that we have tried to provide the maximum level of yearly TAX-FREE return as can be produced by a quality-oriented portfolio of municipal securities. As you are aware, this level of return will vary from year to year as interest rate changes by the Fed affect the overall marketplace. Nevertheless, there is a CONSISTENCY to the level of return that the Trust would like to provide for you and other shareholders. Although the income level received by shareholders will vary from year to year, it does have a CONSISTENCY to it. And, this is why shareholders buy and own the Trust - for that CONSISTENCY of TAX-FREE income. During recent years, the level of SPENDABLE TAX-FREE return provided to shareholders has ranged between 4.51% to 4.98% based upon an average share value of the Trust. As we have emphasized, shareholders of Tax-Free Trust of Oregon should not buy or sell the Trust based upon capital appreciation, such as they would with an equity or stock fund. Rather, an analogy for a shareholder of Tax-Free Trust of Oregon would be a person buying a dairy cow for the steady stream of milk it supplies, not for what it might be worth when he/she sells it. What the Trust is providing is a relatively steady stream of TAX-FREE income together with a relatively stable share value. Shareholders buy and hold their position in Tax-Free Trust of Oregon for the longer term, not for a quick in and out. Therefore, shareholders do NOT and should NOT look upon the Trust for its total return - but, rather for the income stream it provides in the form of TAX-FREE dividends. Also, when you look at the level of TAX-FREE income provided by the Trust as of September 30, 2000 - 4.77% - and measure that against the taxable income required to provide the same amount of money in your pocket, here's what things look like. [Graphic of a 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 BRACKETS Rate of Return Taxable Equivalent Rate Double Tax-Free Distribution Rate Tax Bracket 28% 7.08% 4.64% 31% 7.49% 4.64% 36% 8.10% 4.64% 39.6% 8.61% 4.64% CONSISTENCY OF QUALITY OF INVESTMENTS Since inception of the Trust, management has CONSISTENTLY sought high-quality investments for its shareholders. We don't like surprises. Nor, do shareholders like surprises. We believe the best way to avoid surprises is to stick with quality. The pie chart below gives you a breakdown of the quality of the individual securities of the Trust as at the Annual Report date of September 30, 2000. [Graphic of a pie chart with the following information:] PORTFOLIO DISTRIBUTION BY QUALITY AAA 51.79% AA 42.23% A 4.26% Below A and not rated 1.72% As you will recall, the Trust's prospectus restricts its investments to only the top four quality securities - AAA, AA, A, Baa - although there are nine different grades of quality associated with municipal bond investing ranging from the highest to the lowest. We have always tried to make sure that shareholders know that, to the maximum extent possible, their invested money will be there when they need it. The best way we know to accomplish this objective is by sticking with quality. This is why we CONSISTENTLY seek to maintain most of the Trust's money in the upper quality securities - AAA AND AA. There was in excess of 94% of the Trust's portfolio in these two credit ratings as of the Trust's fiscal year end - September 30, 2000. As you will appreciate, the exact level of quality will vary from time to time based upon availability of securities in the marketplace to achieve the Trust's objective. CONSISTENCY IN THE TYPE OF INVESTMENTS FOR THE TRUST Management of Tax-Free Trust of Oregon has CONSISTENTLY embraced the idea that your investment should not only help shareholders financially, but also help your state and its communities. Thus, investments in the Trust are as diversified as possible. Diversification geographically and by type of project is another way of ensuring that your money is doing the best job possible for not only you, but also for your community and state. [Graphic of a pie chart with the following information:] PORTFOLIO DISTRIBUTION BY MARKET SECTOR Education 41.07% Electric Power 4.41% Healthcare 8.01% Housing 6.00% Public Facilities 11.05% Transportation 7.55% Utilities 13.33% General Purpose 7.84% Other 0.74% SUMMARY As we have tried to illustrate in this report to you, the essence of Tax-Free Trust of Oregon is CONSISTENCY. This is what we feel that shareholders are primarily interested in. And, this is exactly what we are trying to provide to you and other shareholders. CONSISTENCY OF APPRECIATION As always, we again wish to express our appreciation for the confidence you have shown by your investment in Tax-Free Trust of Oregon. We can assure you that we will CONSISTENTLY do our best to merit your continued level of trust. Sincerely, /s/ Diana P. Herrmann /s/ Lacy B. Herrmann ---------------------- --------------------- Diana P. Herrmann Lacy B. Herrmann President Chairman, Board of Trustees PERFORMANCE REPORT The following graph illustrates the value of $10,000 invested in the Class A shares of Tax-Free Trust of Oregon for the 10-year period ended September 30, 2000 as compared with the Lehman Brothers Quality Intermediate Municipal Bond Index and the Consumer Price Index (a cost of living index). The performance of each of the other classes is not shown in the graph but is included in the table below. It should be noted that the Lehman Index does not include any operating expenses nor sales charges and being nationally oriented, does not reflect state specific bond market performance. [Graphic of a line chart with the following information:] 9/90 $10,000 $ 9,600 $10,000 $10,000 9/91 $11,142 $10,726 $11,170 $10,339 9/92 $12,194 $11,736 $12,221 $10,648 9/93 $13,401 $13,014 $13,552 $10,934 9/94 $13,324 $12,794 $13,323 $11,258 9/95 $14,664 $13,894 $14,469 $11,545 9/96 $15,309 $14,648 $15,254 $11,891 9/97 $16,478 $15,720 $16,370 $12,148 9/98 $17,856 $16,736 $17,429 $12,329 9/99 $18,044 $16,694 $17,385 $12,653 9/00 $19,006 $17,573 $18,299 $13,090
Trust's Class A Shares Lehman Brothers Quality Intermediate Municipal Bond Index With Sales Charge Without Sales Charge Cost of Living Index
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED SEPTEMBER 30, 2000 SINCE 1 YEAR 5 YEARS 10 YEARS INCEPTION Class A (6/16/86) With Sales Charge 1.03% 3.81% 5.80% 6.18% Without Sales Charge 5.26% 4.66% 6.23% 6.48% Class C (4/5/96) With CDSC 3.23% n/a n/a 4.13% Without CDSC 4.27% n/a n/a 4.13% Class Y (4/5/96) No Sales Charge 5.32% n/a n/a 5.18% Lehman Index 5.33% 5.33% 6.63% 6.50%* (Class A) 5.33% n/a n/a 5.42% (Class C&Y) * From commencement of the index on 1/1/87. Total return figures shown for the Trust reflect any change in price and assume all distributions within the period were invested in additional shares. Returns for Class A shares are calculated with and without the effect of the initial 4% maximum sales charge. Returns for Class C shares are calculated with and without the effect of the 1% contingent deferred sales charge (CDSC), imposed on redemptions made within the first 12 months after purchase. Class Y shares are sold without any sales charge. The rates of return will vary and the principal value of an investment will fluctuate with market conditions. Shares, if redeemed, may be worth more or less than their original cost. A portion of each classes' income may be subject to federal and state income taxes. Past performance is not predictive of future investment results. Previously, the Trust's performance was compared to the Lehman Brothers Municipal Bond Index rather than the Lehman Brothers Quality Intermediate Municipal Bond Index. A change was made by the Trust because it provides a better basis of comparison due to the more intermediate nature of the portfolio's duration. During the Trust's fiscal year ended September 30, 2000, an investment in the Trust's Class A shares (without sales charge) increased 5.26% whereas the Lehman Brothers Quality Intermediate Muncipal Bond Index increased 5.33% and the Lehman Brothers Municipal Bond Index increased 6.18%. MANAGEMENT DISCUSSION As of the fiscal year end of September 30, 2000, the total net assets of Tax-Free Trust of Oregon stood at approximately $315,600,000. This compares with the level a year earlier of approximately $328,800,000 on September 30, 1999. This slight decrease in the Trust's size was primarily due to the continued strength of the equity markets and the desire by investors to purchase stocks as opposed to bonds. The net asset value of Class A Shares of the Trust on September 30, 2000 was $10.29 as compared to the $10.27 on September 30, 1999. In the portfolio management of Tax-Free Trust of Oregon we continue to utilize various management techniques in order to maintain the share value of the Trust at as stable a price as possible. A key factor in our emphasis involves our focus upon high-quality securities in the portfolio. This is done to minimize the risk of fluctuation. In times of economic uncertainties, lower quality securities tend to fluctuate in price to a considerably greater extent. The other key factor utilized involves the maturity level of the Trust. While the portfolio of Tax-Free Trust of Oregon consists of securities ranging from one year to thirty years, the average maturity is approximately 13.76 years and the duration of maturities in the portfolio is approximately 8 years. And, of course, the Trust is broadly diversified in its ownership of securities. All these factors tend to further enhance the stability of the share value of the Trust. As you are aware, there is an inverse relationship between interest rates and share value. This means that as interest rates rise, the price of bonds in the portfolio tend to go down. Conversely, when interest rates decline, the price of bonds tend to go up. During this past fiscal year, the Federal Reserve Board continued to raise short-term interest rates. Indeed, since June, 1999, short-term interest rates have been increased 6 times. Five of these rate increases were at .25 of 1%. However, the sixth was at .50 of 1%. These increases were primarily designed to avoid inflationary pressures in our economy as well as to slow down the overall rate of economic growth in our country. It would appear that the action by the Fed is achieving these goals. Another factor influencing the rate structure of municipal bonds is governed by the level of bond issuance. The last two years have seen the volume of municipal bond issuance drop, thus, contributing to some amount of rise in the value of municipal bonds. This basically occurred throughout the country as well as in the Oregon market. During the year 2000, issuance of municipal bonds nationally dipped by 28% from the level in 1999. This decline in issuance has been fortuitous for those investors who have been insightful enough to own municipal bonds. As the interest rate situation in our country continues to evolve, management of the Trust will do all it can do to maintain the stability of the share value of the Trust. As we have indicated in previous reports, we continually strive to provide the shareholders of the Trust a satisfactory double tax-free yield as well as high stability of the principal of their investment. We feel that maintaining the disciplines you are accustomed to, will provide you the comfort needed to navigate this financial environment. [Logo of KPMG LLP: four solid rectangles with the letters KPMG in front of them] 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, 2000, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2000, 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, 2000, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ------------- New York, New York October 20, 2000 TAX-FREE TRUST OF OREGON STATEMENT OF INVESTMENTS SEPTEMBER 30, 2000 City of Beaverton $ 910,000 5.950%, 04/01/2003 Aa3/AA $ 928,200 960,000 6.050%, 04/01/2004 Aa3/AA 979,200 1,020,000 6.150%, 04/01/2005 Aa3/AA 1,042,950 1,080,000 6.250%, 04/01/2006 Aa3/AA 1,105,650 Bend Oregon Transportation Highway Systems (MBIA Corporation Insured) 1,135,000 5.300%, 09/01/17 Aaa/NR 1,113,719 Chemeketa Oregon Community College District (Financial Guaranty Insurance Corporation Insured) 1,385,000 5.500%, 06/01/2014 Aaa/AAA 1,436,938 Clackamas County School District #115 (AMBAC Indemnity Corporation Insured) 615,000 5.700%, 06/01/2007 Aaa/AAA 648,057 1,000,000 6.150%, 06/01/2014 Aaa/AAA 1,068,750 Clackamas County School District #86 (Canby) (State School Bond Guaranty Program) 3,535,000 5.250%, 06/15/2020 Aa2/AA 3,380,344 Clackamas/Washington County Oregon School District #3J (Financial Guaranty Insurance Corporation Insured) 1,620,000 5.000%, 06/01/2017 Aaa/AAA 1,536,975 Clackamas and Washington County School District #3J 1,150,000 5.875%, 10/01/2009 A1/A+ 1,183,063 Clackamas, Multnomah and Washington County School District #7J 1,500,000 5.700%, 06/15/2010 Aa2/NR 1,539,375 Deschutes and Jefferson County School District #2J (MBIA Corporation Insured) 3,700,000 5.600%, 06/01/2009 Aaa/AAA 3,774,000 Douglas County School District #116 (Winston-Dillard) State School Bond Guaranty Program 1,020,000 5.625%, 06/15/2020 NR/AA 1,021,275 Eugene Oregon (Parks & Open Space) 1,465,000 5.250%, 02/01/2018 Aa2/NR 1,419,219 1,555,000 5.250%, 02/01/2019 Aa2/NR 1,496,688 Hood River County School District (AMBAC Indemnity Corporation Insured) 2,000,000 5.650%, 06/01/2008 Aaa/AAA 2,060,000 Jackson County School District #549C, (Financial Security Assurance Insured) $ 1,000,000 5.300%, 06/01/2008 Aaa/AAA $ 1,023,750 Josephine County School District #7 (Grants Pass) (Financial Guaranty Insurance Corporation Insured) 2,700,000 5.700%, 06/01/2013 Aaa/AAA 2,797,875 Lane County School District #4J 2,000,000 5.375%, 07/01/2009 Aa3/NR 2,025,000 1,000,000 5.375%, 07/01/2013 Aa3/NR 1,003,750 Lane County School District #52J (Financial Guaranty Insurance Corporation Insured) 750,000 6.400%, 12/01/2009 Aaa/AAA 813,750 Lane and Douglas County School District 97J (Siuslaw) (State School Bond Guaranty Program) 1,000,000 5.400%, 06/15/2019 Aa2/NR 981,250 Lane County Oregon School District #040 (Creswell) (State School Bond Guaranty Program) 1,430,000 5.375%, 06/15/2020 NR/AA 1,394,250 Lincoln County Oregon School District (Financial Guaranty Insurance Corporation Insured) 1,245,000 5.250%, 06/15/2012 Aaa/AAA 1,263,675 Lincoln County (MBIA Corporation Insured) 1,000,000 5.375%, 02/01/2010 Aaa/AAA 1,012,500 Linn County Oregon School District #7 (Harrisburg) (State School Bond Guaranty Program) 1,660,000 5.500%, 06/15/2019 NR/AA 1,643,400 Malheur County Jail Bonds (MBIA Corporation Insured) 1,345,000 6.300%, 12/01/2012 Aaa/AAA 1,424,018 Marion and Clackamas County Union High School District #7J (Financial Security Assurance Insured) 1,000,000 7.000%, 06/01/2010 Aaa/AAA 1,088,750 1,340,000 6.000%, 06/01/2013 Aaa/AAA 1,415,375 Metropolitan Service District Refunding (Oregon Convention Center) 4,320,000 6.250%, 01/01/2013 Aa2/AA+ 4,374,648 Multnomah County School District #40 5,100,000 5.625%, 06/01/2012 NR/AA- 5,208,375 Northern Oregon Correctional (AMBAC Indemnity Corporation Insured) $ 1,000,000 5.400%, 09/15/2016 Aaa/AAA $ 997,500 Oak Lodge Water District (AMBAC Indemnity Corporation Insured) 215,000 7.300%, 12/01/2005 Aaa/AAA 236,500 215,000 7.300%, 12/01/2006 Aaa/AAA 235,962 215,000 7.400%, 12/01/2007 Aaa/AAA 236,231 Southwestern Oregon College General Obligation (MBIA Corporation Insured) 1,120,000 6.000%, 06/01/2025 Aaa/AAA 1,155,000 State of Oregon Board of Higher Education 900,000 6.200%, 10/15/2007 Aa2/AA 928,125 3,195,000 6.400%, 10/01/2011 Aa2/AA 3,245,449 2,000,000 6.250%, 10/15/2012 Aa2/AA 2,050,000 2,150,000 6.500%, 10/01/2017 Aa2/AA 2,179,992 2,890,000 6.000%, 10/15/2018 Aa2/AA 2,929,738 2,000,000 4.875%, 08/01/2019 Aa2/AA 1,795,000 2,560,000 5.500%, 08/01/2021 Aa2/AA 2,508,800 8,000,000 5.000%, 08/01/2022 Aa2/AA 7,190,000 1,500,000 5.000%, 08/01/2022 Aa2/AA 1,348,125 1,655,000 5.600%, 08/01/2023 Aa2/AA 1,636,381 1,500,000 5.600%, 08/01/2023 Aa2/AA 1,483,125 6,300,000 6.000%, 08/01/2026 Aa2/AA 6,804,000 State of Oregon Elderly & Disabled Housing 725,000 6.250%, 08/01/2013 Aa2/AA 754,000 State of Oregon Veterans' Welfare 505,000 9.000%, 04/01/2008 Aa2/AA 557,394 700,000 9.200%, 10/01/2008 Aa2/AA 899,500 1,190,000 5.200%, 10/01/2018 Aa2/AA 1,151,325 Polk County School District #2 (Financial Security Assurance Insured) 1,000,000 5.400%, 06/01/2012 Aaa/AAA 1,016,250 Polk, Marion, and Benton County School District #13J (Financial Guaranty Insurance Corporation Insured) 1,000,000 5.500%, 12/01/2008 Aaa/AAA 1,036,250 City of Portland $ 1,480,000 5.100%, 10/01/2009 Aaa/NR $ 1,491,100 2,790,000 5.750%, 06/01/2013 Aaa/NR 2,870,213 2,000,000 5.600%, 06/01/2015 Aa2/NR 2,017,500 500,000 5.250%, 06/01/2015 Aa2/NR 491,875 1,120,000 5.125%, 06/01/2018 Aaa/NR 1,071,000 Portland Community College District 1,000,000 6.000%, 07/01/2012 Aa3/AA 1,025,000 Salem-Keizer Oregon School District #24, (Financial Security Assurance Insured) 2,000,000 4.875%, 06/01/2014 Aaa/AAA 1,900,000 Tri-County Metropolitan Transportation District 4,600,000 6.000%, 07/01/2012 Aaa/AAA 4,761,000 Tualatin Hills Park and Recreation District (MBIA Corporation Insured) 2,470,000 5.750%, 03/01/2012 Aaa/AAA 2,581,150 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 2,030,000 Umatilla County School District #8R (AMBAC Indemnity Corporation Insured) 700,000 6.100%, 12/01/2012 Aaa/AAA 740,250 Umatilla County School District #6R (AMBAC Indemnity Corporation Insured) 2,675,000 5.050%, 06/15/2022 Aaa/NR 2,461,000 Wasco County Oregon School District #12 (Financial Security Assurance Insured) 1,135,000 6.000%, 06/15/2015 Aaa/AAA 1,213,031 Washington County 2,500,000 6.200%, 12/01/2007 Aa1/AA 2,550,000 3,110,000 6.000%, 12/01/2013 Aa1/AA 3,269,388 Washington County School District #88JT (Financial Security Assurance Insured) 585,000 6.100%, 06/01/2012 Aaa/AAA 611,325 2,315,000 6.100%, 06/01/2012 Aaa/AAA 2,456,794 2,385,000 4.650%, 06/15/2016 Aaa/NR 2,146,500 2,055,000 5.125%, 06/15/2012 Aaa/NR 2,067,844 Washington and Clackamas County School District #23J $ 2,000,000 5.400%, 01/01/2010 A1/NR $ 2,030,000 1,000,000 5.650%, 06/01/2015 A1/NR 1,008,750 Washington & Multnomah County School District #48J 1,175,000 5.500%, 06/01/2006 Aa2/AA- 1,205,844 1,130,000 5.600%, 06/01/2007 Aa2/AA- 1,161,075 1,000,000 6.150%, 06/01/2008 Aa2/AA- 1,002,560 1,415,000 5.700%, 06/01/2008 Aa2/AA- 1,455,681 1,440,000 6.000%, 06/01/2011 Aa2/AA- 1,490,400 2,010,000 6.500%, 09/01/2011 Aaa/AAA 2,047,968 Washington & Multnomah County School District #48J (Financial Guaranty Insurance Corporation Insured) 2,500,000 5.375%, 06/01/2019 Aaa/AAA 2,446,875 Washington & Yamhill County School District #58J (AMBAC Indemnity Corporation Insured) 70,000 6.600%, 11/01/2004 Aaa/AAA 70,101 80,000 6.600%, 11/01/2005 Aaa/AAA 80,130 90,000 6.600%, 11/01/2006 Aaa/AAA 90,145 Washington Multnomah & Yamhill County School District #1J 1,295,000 5.250%, 06/01/2013 Aa3/NR 1,293,381 Yamhill County School District #29J (Financial Security Assurance Insured) 2,000,000 5.350%, 06/01/2006 Aaa/AAA 2,047,500 Total State of Oregon General Obligation Bonds 152,849,796 STATE OF OREGON REVENUE BONDS - 49.9% AIRPORT REVENUE BONDS - 1.4% Port of Portland Airport (Financial Guaranty Insurance Corporation Insured) 500,000 5.500%, 07/01/2006 Aaa/AAA 513,510 1,295,000 5.000%, 07/01/2028 Aaa/AAA 1,171,975 Port of Portland Airport (MBIA Corporation Insured) 600,000 6.400%, 07/01/2003 NR/AAA 614,640 Port of Portland Airport (AMBAC Indemnity Corporation Insured) 2,000,000 5.500%, 07/01/2024 Aaa/AAA 1,982,500 Total Airport Revenue Bonds 4,282,625 CERTIFICATE OF PARTICIPATION REVENUE BONDS - 11.0% Marion County Certificate of Participation (MBIA Corporation Insured) $ 1,000,000 5.000%, 06/01/2023 Aaa/AAA $ 916,250 Multnomah County Certificate of Participation 1,000,000 5.200%, 07/01/2005 Aa3/NR 1,021,250 3,100,000 6.000%, 08/01/2012 Aa/A 3,208,500 Oregon State Department of Administration Services (AMBAC Indemnity Corporation Insured) 2,000,000 4.875%, 05/01/2018 Aaa/AAA 1,845,000 950,000 5.000%, 11/01/2019 Aaa/AAA 894,188 1,500,000 5.800%, 05/01/2024 Aaa/AAA 1,601,250 2,500,000 5.000%, 05/01/2024 Aaa/AAA 2,284,375 3,500,000 6.000%, 05/01/2026 Aaa/AAA 3,631,250 Oregon State Department of Administration Services (MBIA Corporation Insured) 1,480,000 5.375%, 11/01/2016 Aaa/AAA 1,481,850 5,000,000 5.500%, 11/01/2020 Aaa/AAA 4,962,500 Oregon State Department of Administration Services (Financial Security Assurance Insured) 2,000,000 5.750%, 04/01/2014 Aaa/AAA 2,085,000 State of Oregon Certificate of Participation (MBIA Corporation Insured) 1,250,000 5.700%, 01/15/2010 Aaa/AAA 1,275,000 2,750,000 6.200%, 11/01/2012 Aaa/AAA 2,866,875 1,000,000 5.500%, 01/15/2015 Aaa/AAA 1,007,500 550,000 5.500%, 01/15/2015 Aaa/AAA 554,125 500,000 5.800%, 03/01/2015 Aaa/AAA 508,125 1,000,000 5.800%, 03/01/2015 Aaa/AAA 1,016,250 2,000,000 6.250%, 11/01/2019 Aaa/AAA 2,087,500 Washington County Educational Services Certificates of Participation 645,000 5.625%, 06/01/2016 A1/NR 648,225 Washington County Educational Services, Certificates of Participation, (MBIA Corporation Insured) 830,000 5.750%, 06/01/2025 Aaa/AAA 834,150 Total Certificate of Participation Revenue Bonds 34,729,163 HOSPITAL REVENUE BONDS - 7.6% Clackamas Hospital Facilities Authority (Adventist Health System/West) (MBIA Corporation Insured) $ 2,000,000 6.350%, 03/01/2009 Aaa/AAA $ 2,077,500 Clackamas Hospital Facilities Authority (Sisters of Providence Hospital) 500,000 6.375%, 10/01/2004 A1/AA- 520,000 Clackamas Hospital Facilities Authority (Legacy Health System) 2,000,000 5.250%, 02/15/2017 NR/AA 1,932,500 2,980,000 5.250%, 02/15/2018 NR/AA 2,857,075 Clackamas Hospital Facilities Authority (Legacy Health System) (MBIA Corporation Insured) 2,650,000 4.750%, 02/15/2011 Aaa/AAA 2,557,250 Clackamas County Oregon Hospital Facilities Authority (Mary's Woods) 3,450,000 6.625%, 05/15/2029 NR/NR* 3,398,250 Douglas County Hospital Facilities Authority (Catholic Health) (MBIA Corporation Insured) 535,000 5.600%, 11/15/2005 Aaa/AAA 556,400 Medford Hospital Authority (Asante Health Systems) (MBIA Corporation Insured) 1,000,000 5.000%, 08/15/2018 Aaa/AAA 926,250 3,000,000 5.125%, 08/15/2028 Aaa/AAA 2,718,750 Salem Oregon Hospital Facilities Authority 1,750,000 5.000%, 08/15/2018 NR/AA- 1,585,938 Western Lane County Hospital Facilities Authority (Sisters of St. Joseph Hospital) (MBIA Corporation Insured) 1,000,000 5.625%, 08/01/2007 Aaa/AAA 1,046,250 3,765,000 5.750%, 08/01/2019 Aaa/AAA 3,797,943 Total Hospital Revenue Bonds 23,974,106 HOUSING, EDUCATIONAL, AND CULTURAL REVENUE BONDS - 9.5% Clackamas Community College District Revenue (MBIA Corporation Insured) 1,865,000 5.700%, 06/01/2016 Aaa/AAA 1,960,581 Multnomah County Oregon Educational Facility (University of Portland) 1,000,000 6.000%, 04/01/2020 NR/BBB+ 982,500 Portland Oregon Housing Authority $ 5,140,000 5.100%, 01/01/2027 NR/A $ 4,491,075 State of Oregon Housing Finance Agency, 1,000,000 6.800%, 07/01/2013 AA2/A+ 1,028,270 State of Oregon Housing and Community Services, 695,000 5.900%, 07/01/2012 Aa2/NR 724,537 500,000 6.700%, 07/01/2013 Aa2/NR 515,185 405,000 6.350%, 07/01/2014 Aa2/NR 423,731 2,000,000 6.050%, 07/01/2020 Aa2/NR 2,057,500 2,000,000 5.400%, 07/01/2027 Aa2/NR 1,910,000 3,105,000 6.875%, 07/01/2028 Aa2/NR 3,217,556 1,000,000 6.000%, 07/01/2020 Aa2/NR 1,018,750 State of Oregon Housing and Community Services, (MBIA Corporation Insured) 1,500,000 5.450%, 07/01/2024 Aaa/AAA 1,447,500 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- 1,000,000 Oregon Health Sciences University Revenue (MBIA Corporation Insured) 4,500,000 5.250%, 07/01/2015 Aaa/AAA 4,471,875 8,935,000 0.000%, 07/01/2021 (zero coupon) Aaa/AAA 2,702,838 City of Salem Educational Facilities (Willamette University), 1,000,000 6.000%, 04/01/2010 A2/NR 1,041,250 Yamhill County Educational Services (AMBAC Indemnity Corporation Insurance) 1,000,000 5.150%, 07/01/2019 NR/AAA 957,500 Total Housing, Educational, and Cultural Revenue Bonds 29,950,648 TRANSPORTATION REVENUE BONDS - 3.5% State of Oregon Department of Transportation (Light Rail) (MBIA Corporation Insured), 2,000,000 6.000%, 06/01/2005 Aaa/AAA 2,120,000 Oregon State Department Transportation Highway $ 2,555,000 5.375%, 11/15/2018 Aa1/AA+ $ 2,519,868 Port St. Helens, Oregon Pollution 75,000 7.750%, 02/01/2006 A3/NR 77,719 Tri-County Metropolitan Transportation District 3,685,000 5.700%, 08/01/2013 Aa3/AA+ 3,758,700 2,500,000 5.400%, 06/01/2019 NR/AA 2,415,625 Total Transportation Revenue Bonds 10,891,912 URBAN RENEWAL REVENUE BONDS - 1.5% City of Portland Urban Renewal 300,000 9.000%, 12/01/2002 A/NR 302,082 Clackamas County Oregon, Tax Allocation 1,000,000 6.500%, 05/01/2020 NR/NR 1,000,380 Portland Oregon Arpt Way Renewal & Redev (AMBAC Indemnity Corporation Insured) 1,665,000 5.750%, 06/15/2020 Aaa/NR 1,692,056 Portland Oregon Urban Renewal Tax Allocation (AMBAC Indemnity Corporation Insured) 2,000,000 5.450%, 06/15/2019 AAA/NR 1,980,000 Total Urban Renewal Revenue Bonds 4,974,518 UTILITY REVENUE BONDS - 4.4% Emerald Peoples Utility District Electic Systems (Financial Security Assurance Insured) 1,000,000 6.750%, 11/01/2016 Aaa/AAA 1,024,900 City of Eugene Electric Utility (Financial Security Assurance Insured) 1,600,000 5.000%, 08/01/2018 Aaa/AAA 1,504,000 1,340,000 5.050%, 08/01/2022 Aaa/AAA 1,237,825 City of Eugene Electric Utility (MBIA Corporation Insured) 640,000 4.850%, 08/01/2013 Aaa/AAA 619,200 1,200,000 5.000%, 08/01/2023 Aaa/AAA 1,102,500 City of Eugene Electric Utility 610,000 6.650%, 08/01/2009 A1/AA 620,949 660,000 6.650%, 08/01/2010 A1/AA 671,847 1,000,000 6.000%, 08/01/2011 A1/AA 1,018,750 700,000 6.700%, 08/01/2011 A1/AA 712,845 500,000 5.000%, 08/01/2017 A1/AA 466,875 1,400,000 5.800%, 08/01/2019 A1/AA 1,468,250 City of Eugene Trojan Nuclear Project $ 2,310,000 5.900%, 09/01/2009 Aa1/AA- $ 2,318,131 Northern Wasco County Public Utility Development (Financial Security Assurance Insured) 1,000,000 5.625%, 12/01/2022 Aaa/AAA 997,500 Total Utility Revenue Bonds 13,763,572 WATER AND SEWER REVENUE BONDS - 10.0% City of Klamath Falls Water (Financial Security Assurance Insured) 1,100,000 6.100%, 06/01/2014 Aaa/AAA 1,144,000 City of Klamath Wastewater (AMBAC Indemnity Corporation Insured) 1,545,000 5.650%, 06/01/2020 Aaa/AAA 1,562,381 City of Portland Sewer, (MBIA Corporation Insured) 2,500,000 5.250%, 06/01/2016 Aaa/AAA 2,465,625 City of Portland Sewer (Financial Guaranty Insurance Corporation Insured) 500,000 6.000%, 10/01/2012 Aaa/AAA 523,750 2,355,000 6.250%, 06/01/2015 Aaa/AAA 2,505,131 2,500,000 5.750%, 08/01/2019 Aaa/AAA 2,550,000 Lebanon Oregon Wastewater Revenue (Financial Security Assurance Insured) 1,000,000 5.700%, 03/01/2020 Aaa/AAA 1,018,750 Portland Water System Revenue 1,440,000 5.500%, 08/01/2015 Aa1/NR 1,449,000 7,420,000 5.500%, 08/01/2019 Aa1/NR 7,438,550 Salem Oregon Water & Sewer Rev Light & Power (Financial Security Assurance Insured) 1,970,000 5.375%, 06/01/2016 Aaa/AAA 1,967,538 3,025,000 5.500%, 06/01/2020 Aaa/AAA 3,013,656 Washington County Unified Sewer Agency (AMBAC Indemnity Corporation Insured) 2,120,000 5.900%, 10/01/2006 Aaa/AAA 2,220,700 315,000 5.900%, 10/01/2006 Aaa/AAA 329,568 2,500,000 6.125%, 10/01/2012 Aaa/AAA 2,640,625 750,000 6.125%, 10/01/2012 Aaa/AAA 792,188 Total Water and Sewer Revenue Bonds 31,621,462 OTHER REVENUE BONDS - 1.0% Baker County Pollution Control (Ash Grove Cement West Project) (Small Business Administration Insured) $ 355,000 6.200%, 07/01/2004 Aaa/NR $ 356,416 380,000 6.300%, 07/01/2005 Aaa/NR 381,607 Oregon Economic Development Commission (Consolidated Freightways) 1,500,000 7.000%, 04/01/2004 A2/A- 1,502,910 Multnomah County School District #1J, Special Obligations 1,000,000 5.000%, 03/01/2007 A1/A 1,005,000 Total Other Revenue Bonds 3,245,933 Total State of Oregon Revenue Bonds 157,433,939 PUERTO RICO - 0.6% Puerto Rico Commonwealth Infrastructure, (AMBAC Indemnity Corporation Insured) 2,100,000 5.000%, 07/01/2028 Aaa/AAA 1,934,625 Total Municipal Bonds (cost $ 308,675,579**) 98.9% 312,218,361 Other assets in excess of liabilities 1.1 3,464,720 Net Assets 100.0% $ 315,683,081
RATING FACE MOODY'S/ AMOUNT STATE OF OREGON GENERAL OBLIGATION BONDS - 48.4% S&P VALUE
(*) Any security not rated has been determined by the Investment Sub-Adviser to have sufficient quality to be ranked in the top four credit ratings if a credit rating were to be assigned by a rating service. (**) Cost for Federal tax purposes is identical. PORTFOLIO ABBREVIATIONS: AMBAC - American Municipal Bond Assurance Corp. FGIC - Financial Guaranty Insurance Corp. FSA - Financial Security Assurance MBIA - Municipal Bond Investors Assurance Corp. See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2000 ASSETS Investments at value (cost $308,675,579) $ 312,218,361 Cash 167,624 Interest receivable 5,019,302 Receivable for Trust shares sold 171,410 Receivable for investment securities sold 10,000 Other assets 2,985 Total assets 317,589,682 LIABILITIES Payable for investment securities purchased 1,127,638 Dividends payable 273,267 Payable for Trust shares redeemed 213,148 Distribution fees payable 123,279 Management fees payable 103,877 Accrued expenses 65,392 Total liabilities 1,906,601 NET ASSETS $ 315,683,081 Net Assets consist of: Capital Stock - Authorized an unlimited number of shares, par value $.01 per share 306,901 Additional paid-in capital 311,570,216 Net unrealized appreciation on investments 3,542,782 Accumulated net realized gain on investments 215,754 Undistributed net investment income 47,428 $ 315,683,081 CLASS A Net Assets $ 289,371,774 Capital shares outstanding 28,130,465 Net asset value and redemption price per share $10.29 Offering price per share (100/96 of $10.29 adjusted to nearest cent) $10.72 CLASS C Net Assets $ 5,840,974 Capital shares outstanding 568,331 Net asset value and offering price per share $ 10.28 Redemption price per share (* a charge of 1% is imposed on the redemption proceeds of the shares, or on the original price, whichever is lower, if redeemed during the first 12 months after purchase) 10.28* CLASS Y Net Assets $ 20,470,333 Capital shares outstanding 1,991,339 Net asset value, offering and redemption price per share $ 10.28
See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2000 INVESTMENT INCOME: Interest income $ 17,845,180 Expenses: Management fees (note 3) $ 1,264,345 Distribution and service fees (note 3) 482,902 Transfer and shareholder servicing agent fees 178,916 Trustees' fees and expenses (note 8) 91,902 Legal fees 65,641 Shareholders' reports and proxy statements 58,703 Custodian fees 30,177 Audit and accounting fees 24,750 Insurance 13,265 Registration fees and dues 12,661 Miscellaneous 39,497 2,262,759 Expenses paid indirectly (note 7) (56,453) Net expenses 2,206,306 Net investment income 15,638,874 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from securities transactions 250,646 Change in unrealized appreciation on investments (83,191) Net realized and unrealized gain on investments 167,455 Net increase in net assets resulting from operations $ 15,806,329
See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENTS OF CHANGES IN NET ASSETS OPERATIONS: Net investment income $ 15,638,874 $ 15,888,152 Net realized gain from securities transactions 250,646 389,398 Change in unrealized appreciation on investments (83,191) (18,253,687) Change in net assets resulting from operations 15,806,329 (1,976,137) DISTRIBUTIONS TO SHAREHOLDERS (NOTE 6): Class A Shares: Net investment income (14,487,015) (15,357,860) Net realized gain on investments - (603,490) Class C Shares: Net investment income (178,038) (82,349) Net realized gain on investments - (2,451) Class Y Shares: Net investment income (967,824) (607,653) Net realized gain on investments - (20,435) Change in net assets from distributions (15,632,877) (16,674,238) CAPITAL SHARE TRANSACTIONS (NOTE 9): Proceeds from shares sold 38,408,984 42,624,580 Reinvested dividends and distributions 8,815,451 9,912,125 Cost of shares redeemed (60,461,271) (39,440,132) Change in net assets from capital share transactions (13,236,836) 13,096,573 Change in net assets (13,063,384) (5,553,802) NET ASSETS: Beginning of period 328,746,465 334,300,267 End of period $ 315,683,081 $ 328,746,465
YEAR ENDED SEPTEMBER 30, 2000 1999
See accompanying notes to financial statements. 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 are sold with a front-payment sales charge and bear an annual service fee. Class C shares are sold with a level-payment sales charge with no payment at time of purchase but level service and distribution fees from date of purchase through a period of six years thereafter. A contingent deferred sales charge of 1% is assessed to any Class C shareholder who redeems shares of this Class within one year from the date of purchase. The Class Y shares are only offered to institutions acting for an investor in a fiduciary, advisory, agency, custodian or similar capacity and are not offered directly to retail investors. Class Y shares are sold at net asset value without any sales charge, redemption fees, contingent deferred sales charge or distribution or service fees. On 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, 2000 there were no Class I shares outstanding. All classes of shares represent interests in the same portfolio of investments and are identical as to rights and privileges but differ with respect to the effect of sales charges, the distribution and/or service fees borne by each class, expenses specific to each class, voting rights on matters affecting a single class and the exchange privileges of each class. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Trust in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. a) PORTFOLIO VALUATION: Municipal securities which have remaining maturities of more than 60 days are valued at fair value each business day based upon information provided by a nationally prominent independent pricing service and periodically verified through other pricing services; in the case of securities for which market quotations are readily available, securities are valued at the mean of bid and asked quotations and, in the case of other securities, at fair value determined under procedures established by and under the general supervision of the Board of Trustees. Securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing their unrealized appreciation or depreciation on the 61st day prior to maturity, if their term to maturity at purchase exceeded 60 days. 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 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. For the year ended September 30, 2000, the Trust incurred fees for advisory and administrative services of $1,264,345. 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, 2000, service fees on Class A Shares amounted to $439,079, of which the Distributor received $15,277. 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, 2000, amounted to $32,867. 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, 2000, amounted to $10,956. The total of these payments made with respect to Class C Shares amounted to $43,823, of which the Distributor received $24,831. 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, 2000, total commissions on sales of Class A Shares amounted to $648,241, of which the Distributor received $131,783. 4. PURCHASES AND SALES OF SECURITIES During the year ended September 30, 2000, purchases of securities and proceeds from the sales of securities aggregated $63,677,951 and $74,404,278, respectively. At September 30, 2000, aggregate gross unrealized appreciation for all securities in which there is an excess of market value over tax cost amounted to $6,958,567, and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over market value amounted to $3,415,785, for a net unrealized appreciation of $3,542,782. 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 these amendments could have an adverse effect on the general financial condition of certain municipal entities that would 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, in cash, or in a combination of both, at the shareholder's option. Net realized capital gains, if any, are distributed annually and are taxable. The Trust intends to maintain, to the maximum extent possible, the tax-exempt status of interest payments received from portfolio municipal securities in order to allow dividends paid to shareholders from net investment income to be exempt from regular Federal and State of 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 taxes at ordinary income and/or capital gain rates. 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 ten Trustees, two of whom are affiliated with the Manager and are not paid any trustee fees. Trustees' fees paid during the year were at the annual rate of $7,400 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 outreach meetings of Shareholders. For the fiscal year ended September 30, 2000 such reimbursements averaged approximately $2,700 per Trustee. 9. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Trust were as follows: CLASS A SHARES: Proceeds from shares sold 2,347,715 $ 23,841,878 3,077,787 $ 32,804,150 Reinvested dividends and distributions 847,730 8,614,888 912,832 9,714,231 Cost of shares redeemed (5,114,553) (51,870,848) (3,633,583) (38,503,659) Net change (1,919,108) (19,414,082) 357,036 4,014,722 CLASS C SHARES: Proceeds from shares sold 395,539 4,011,650 211,679 2,254,086 Reinvested dividends and distributions 10,858 110,158 4,179 44,213 Cost of shares redeemed (130,442) (1,323,388) (30,354) (317,699) Net change 275,955 2,798,420 185,504 1,980,600 CLASS Y SHARES: Proceeds from shares sold 1,040,793 10,555,456 721,432 7,566,344 Reinvested dividends and distributions 8,911 90,405 14,352 153,681 Cost of shares redeemed (718,437) (7,267,035) (58,206) (618,774) Net change 331,267 3,378,826 677,578 7,101,251 Total transactions in Trust shares (1,311,886) $ (13,236,836) 1,220,118 $ 13,096,573
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SHARES AMOUNT SHARES AMOUNT
TAX-FREE TRUST OF OREGON FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Asset Value, Beginning of Period $10.27 $10.86 $10.68 $10.49 $10.55 Income from Investment Operations: Net investment income 0.50 0.50 0.53 0.53 0.54 Net gain (loss) on securities (both realized and unrealized) 0.02 (0.56) 0.19 0.21 (0.05) Total from Investment Operations 0.52 (0.06) 0.72 0.74 0.49 Less Distributions (note 6): Dividends from net investment income (0.50) (0.51) (0.53) (0.54) (0.54) Distributions from capital gains - (0.02) (0.01) (0.01) (0.01) Total Distributions (0.50) (0.53) (0.54) (0.55) (0.55) Net Asset Value, End of Period $10.29 $10.27 $10.86 $10.68 $10.49 Total Return (not reflecting sales charge)(%) 5.26 (0.62) 6.90 7.21 4.76 Ratios/Supplemental Data Net Assets, End of Period ($ millions) 289 309 322 312 305 Ratio of Expenses to Average Net Assets (%) 0.71 0.71 0.71 0.73 0.73 Ratio of Net Investment Income to Average Net Assets (%) 4.93 4.70 4.83 5.01 5.15 Portfolio Turnover Rate (%) 20 16 7 5 10 The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 0.70 0.68 0.69 0.72 0.72
CLASS A YEAR ENDED SEPTEMBER 30, 2000 1999 1998 1997 1996
TAX-FREE TRUST OF OREGON FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Asset Value, Beginning of Period $10.27 $10.85 $10.67 $10.49 $10.34 $10.27 $10.85 $10.68 $10.49 $10.34 Income from Investment Operations: Net investment income 0.41 0.41 0.43 0.43 0.22 0.52 0.52 0.54 0.54 0.27 Net gain (loss) on securities (both realized and unrealized) 0.02 (0.55) 0.20 0.21 0.15 0.01 (0.56) 0.19 0.21 0.15 Total from Investment Operations 0.43 (0.14) 0.63 0.64 0.37 0.53 (0.04) 0.73 0.75 0.42 Less Distributions (note 6): Dividends from net investment income (0.42) (0.42) (0.44) (0.45) (0.22) (0.52) (0.52) (0.55) (0.55) (0.27) Distributions from capital gains - (0.02) (0.01) (0.01) - - (0.02) (0.01) (0.01) - Total Distributions (0.42) (0.44) (0.45) (0.46) (0.22) (0.52) (0.54) (0.56) (0.56) (0.27) Net Asset Value, End of Period $10.28 $10.27 $10.85 $10.67 $10.49 $10.28 $10.27 $10.85 $10.68 $10.49 Total Return (not reflecting sales charge) (%) 4.27 (1.38) 6.00 6.20 3.61+ 5.32 (0.39) 6.96 7.37 4.14+ Ratios/Supplemental Data Net Assets, End of Period ($ millions) 5.8 3.0 1.2 .8 .3 20.5 17.0 10.7 4.0 .2 Ratio of Expenses to Average Net Assets (%) 1.55 1.56 1.56 1.58 1.56* 0.56 0.56 0.55 0.58 0.58* Ratio of Net Investment Income to Average Net Assets (%) 4.03 3.84 3.98 4.14 4.17* 5.08 4.86 4.95 5.21 5.35* Portfolio Turnover Rate (%) 20 16 7 5 10+ 20 16 7 5 10+ The expense ratios after giving effect to the expense offset for uninvested cash balances were: Ratio of Expenses to Average Net Assets (%) 1.54 1.53 1.54 1.57 1.56* 0.54 0.53 0.53 0.57 0.57*
CLASS C(1) CLASS Y(1) PERIOD(1) PERIOD(1) YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED SEPTEMBER 30, ENDED 2000 1999 1998 1997 9/30/96 2000 1999 1998 1997 9/30/96
(1) From April 5, 1996 to September 30, 1996. + Not annualized. * Annualized. See accompanying notes to financial statements. 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, 2000, $15,627,615 of dividends paid by Tax-Free Trust of Oregon, constituting 99.9965% of total dividends paid during fiscal 2000, were exempt-interest dividends. Prior to January 31, 2001, shareholders will be mailed IRS Form 1099-DIV which will contain information on the status of distributions paid for the 2000 CALENDAR YEAR. SHAREHOLDER MEETING RESULTS (UNAUDITED) The Annual Meeting of Shareholders of Tax-Free Trust of Oregon (the "Trust") was held on May 8, 2000. The holders of shares representing 65% 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 203,553,757 3,187,659 Vernon R. Alden 202,930,546 3,810,869 David B. Frohnmayer 203,605,303 3,136,112 James A. Gardner 204,225,971 2,515,444 Diana P. Herrmann 203,570,727 3,170,688 Sterling K. Jenson 203,466,251 3,275,164 Raymond H. Lung 203,840,745 2,900,671 John W. Mitchell 203,309,220 3,432,195 Richard C. Ross 203,114,140 3,627,276 Ralph R. Shaw 204,291,527 2,449,888 2. To ratify the selection of KPMG LLP as the Trust's independent auditors. Number of Votes: FOR AGAINST ABSTAIN 199,685,431 1,026,466 6,029,517