-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WEZtYvHOTh3d69Z+2hBLAEyRYxSZxhp4JUIH8X/JBrrfD20QUVsUnASBKgdHz9xw psPy8nVzYfUL9DftTzollg== 0000791049-98-000012.txt : 19981207 0000791049-98-000012.hdr.sgml : 19981207 ACCESSION NUMBER: 0000791049-98-000012 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASCADES TRUST CENTRAL INDEX KEY: 0000791049 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 136868231 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04626 FILM NUMBER: 98764472 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STE 2300 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126976666 MAIL ADDRESS: STREET 1: 380 MADISON AVENUE STREET 2: # 2300 CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: TAX FREE TRUST OF OREGON DATE OF NAME CHANGE: 19890810 N-30D 1 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 [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. [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
Tax Bracket Taxable Equivalent Rate Double Tax-Free Equivalent Rate 28% 7.25% 4.75% 31% 7.56% 4.75% 36% 8.29% 4.75% 39.6% 8.81% 4.75%
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:]
SHARE NET ASSET VALUE In Dollars 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
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. 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:]
PORTFOLIO DISTRIBUTION BY QUALITY RATING (By Credit Rating) AAA 50.54% AA 42.28% A 5.45% Below A and not rated 1.73%
[Graphic: Bar Chart with the following information:]
PORTFOLIO DISTRIBUTION BY PROJECT 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%
[Graphic: Bar Chart with the following information:]
PORTFOLIO DISTRIBUTION BY MATURITY (in Years) 0 - 5 17.67% 6 - 10 21.73% 11 - 15 28.40% 16 - 20 17.82% Over 20 Years 14.38%
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. 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). 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
Lehman Brothers Trust After Sales Cost of Municipal Bond Index Charge and Expenses Living Index ($) ($) ($) 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
[Graphic of table with the following information:] Trust's average annual total return
For the Period Ended 1 5 10 Life of Trust September 30, 1998 Year Years Years Since 6/16/86 Including Sales Charge and Expenses 2.58% 4.39% 6.72% 6.83%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS 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. 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 TAX-FREE TRUST OF OREGON STATEMENT OF INVESTMENTS SEPTEMBER 30, 1998
RATING FACE MOODY'S/ AMOUNT STATE OF OREGON GENERAL OBLIGATION BONDS (52.3%) S&P VALUE 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 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 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 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 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 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 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 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 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 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 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 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 (*) 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. (**) Cost for Federal tax purposes is identical.
See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 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
See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 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
See accompanying notes to financial statements. TAX-FREE TRUST OF OREGON STATEMENTS OF CHANGES IN NET ASSETS
Year Ended September 30, 1998 1997 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
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, 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. 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 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 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. 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. 9. CAPITAL SHARE TRANSACTIONS Transactions in Capital Shares of the Trust were as follows:
YEAR ENDED YEAR ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SHARES AMOUNT SHARES AMOUNT 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
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. TAX-FREE TRUST OF OREGON FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A(1) YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 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 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: 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 (1) Designated as Class A Shares on April 5, 1996.
See accompanying notes to financial statements. FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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 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+ 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: 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* (1) New Class of Shares established on April 5, 1996. (2) From April 5, 1996 to September 30, 1996. + Not annualized. * Annualized.
See accompanying notes to financial statements. 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. -----END PRIVACY-ENHANCED MESSAGE-----